<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 17, 1999
REGISTRATION STATEMENT NO.333-80109
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------------------------------------
KEYCORP STUDENT LOAN TRUSTS
(Issuer of the Notes and the Certificates)
----------------------------------------------------
KEY BANK USA, NATIONAL ASSOCIATION
(Originator of the Trust described herein)
(Exact name of Registrant as specified in its charter)
UNITED STATES 34-1804148
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
KEY TOWER
127 PUBLIC SQUARE
CLEVELAND, OHIO 44114
(216) 689-6300
(Address, including zip code, and telephone number, including area
code, of Registrant's principal executive offices)
----------------------------------------------------
DANIEL R. STOLZER, ESQ.
VICE PRESIDENT
AND ASSOCIATE GENERAL COUNSEL
KEYCORP
KEY TOWER
127 PUBLIC SQUARE
CLEVELAND, OHIO 44114
(216) 689-6300
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
----------------------------------------------------
COPIES TO:
ROBERT A. SELAK, ESQ. REED D. AUERBACH, ESQ.
THOMPSON HINE & FLORY LLP STROOCK & STROOCK & LAVAN LLP
312 WALNUT STREET 180 MAIDEN LANE
SUITE 1400 NEW YORK, NEW YORK 10038
CINCINNATI, OHIO 45202
----------------------------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
From time to time after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. |_|
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |X|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
----------------------------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE PROPOSED MAXIMUM OFFERING AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED (1) PRICE PER UNIT (2) PRICE (2) FEE(3)
<S> <C> <C> <C> <C>
Asset Backed Notes and Asset $3,000,000,000 100% $3,000,000,000 $834,000.00(4)
Backed Certificates
</TABLE>
(1) This Registration Statement also relates to market-making transactions that
may be made by McDonald Investments Inc., a KeyCorp Company, an affiliate
of the Registrant.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Calculated pursuant to Rule 457(a) of the Securities Act.
(4) $278.00 OF WHICH WAS PREVIOUSLY PAID.
THIS REGISTRATION STATEMENT IS ALSO BEING USED TO REGISTER SECURITIES THAT MAY
BE SOLD IN MARKET-MAKING TRANSACTIONS BY AN AFFILIATE OF THE REGISTRANT. THE
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE> 2
EXPLANATORY NOTE
THIS REGISTRATION STATEMENT CONTAINS (i) A FORM OF PROSPECTUS SUPPLEMENT,
RELATING TO A PUBLIC OFFERING BY KEYCORP STUDENT LOAN TRUSTS (THE "TRUST") OF
ASSET BACKED NOTES AND ASSET BACKED CERTIFICATES (COLLECTIVELY, THE
"SECURITIES"); (ii) CERTAIN PAGES OF A SECOND FORM OF PROSPECTUS SUPPLEMENT
WHICH MAY BE USED IN CONNECTION WITH OFFERS AND SALES RELATING TO MARKET-MAKING
TRANSACTIONS IN THE SECURITIES BY AN AFFILIATE OF THE REGISTRANT AND (III) A
BASE PROSPECTUS RELATING TO THE SECURITIES. THE FORM OF PROSPECTUS SUPPLEMENT
RELATING TO THE SECURITIES FOLLOWS IMMEDIATELY AFTER THIS EXPLANATORY NOTE.
FOLLOWING SUCH FORM OF PROSPECTUS SUPPLEMENT ARE ALTERNATE PAGES OF THE
MARKET-MAKING FORM OF PROSPECTUS SUPPLEMENT RELATING TO THE SECURITIES. ALL
OTHER PAGES OF THE PUBLIC OFFERING FORM OF PROSPECTUS SUPPLEMENT FOR THE
SECURITIES ARE ALSO TO BE USED FOR THE MARKET-MAKING PROSPECTUS.
Information contained herein is subject to completion or amendment. A
registration statement relating to these Securities has been filed with the
Securities and Exchange Commission. These Securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these Securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE> 3
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED _____________
[SUBJECT TO COMPLETION DATED AUGUST 17, 1999]
$--------------
KEYCORP STUDENT LOAN TRUST _____-__
KEY BANK USA, NATIONAL ASSOCIATION
Seller and Master Servicer
FLOATING RATE ASSET-BACKED NOTES
FLOATING RATE ASSET-BACKED CERTIFICATES
-----------------------------------------
SECURITIES OFFERED
- classes of notes and certificates listed in the table below
ASSETS
- student loans
- certain student loans guaranteed by federal or private guarantors
CREDIT ENHANCEMENT
- notes
- subordination of certificates
- reserve account
- certificates
- reserve account
You should carefully consider the risk factors beginning on page S-9 of this
prospectus supplement and page 6 of the prospectus.
The securities are obligations only of the trust and are payable solely from the
student loans and other assets of the trust. The initial principal balance of
the student loans will be less than the initial principal balance of the
securities. The securities are not guaranteed by any person. The securities are
not bank deposits.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the prospectus to which it relates is truthful or
complete. Any representation to the contrary is a criminal offense.
<TABLE>
<CAPTION>
ORIGINAL FINAL
PRINCIPAL INTEREST RATE MATURITY PRICE TO UNDERWRITING PROCEEDS TO THE
AMOUNT (PER ANNUM) DATE PUBLIC (1) DISCOUNT SELLER(1)(2)
---------- ------------- ---------- ------------ -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Class A-1 Notes $ % % %
Class A-2 Notes $ % % %
Certificates $ % % %
Total.......... $ $ $ $
</TABLE>
(1) Plus accrued interest, if any, from ___________.
(2) Before deducting expenses, estimated to be $_______________.
Delivery of the securities will be made on or about ____________, 19__, against
payment in immediately available funds.
[NAMES OF UNDERWRITERS]
Prospectus Supplement dated _____________, _________
<PAGE> 4
YOU SHOULD RELY ON INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THIS
DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE
INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT.
We provide information to you about the securities in two separate
documents that progressively provide more detail: (1) the accompanying
prospectus, which provides general information, some of which may not apply to
your securities and (2) this prospectus supplement, which describes the specific
terms of your securities.
UNTIL ______________, _______ ALL DEALERS THAT EFFECT TRANSACTIONS IN
THE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED
TO DELIVER A PROSPECTUS AND PROSPECTUS SUPPLEMENT. THIS REQUIREMENT IS IN
ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS AND PROSPECTUS
SUPPLEMENT WHEN ACTING AS UNDERWRITERS WITH RESPECT TO THEIR UNSOLD ALLOTMENTS
OR SUBSCRIPTIONS.
We are not offering the securities in any state where the offer is not
permitted. We do not claim the accuracy of the information in this prospectus
supplement and the accompanying prospectus as of any date other than the dates
stated on their respective covers.
S-2
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUPPLEMENT
<S> <C>
Summary of Terms..............................S-4
Risk Factors..................................S-9
Formation of the Trust.......................S-16
Use of Proceeds..............................S-19
The Master Servicer and the Sub-Servicers....S-19
The Financed Student Loan Pool...............S-21
Description of the Securities................S-54
Description of the Transfer and Servicing
Agreements..........................S-62
Income Tax Consequences......................S-84
ERISA Considerations.........................S-85
Underwriting.................................S-86
Legal Matters................................S-88
Index of Principal Terms.....................S-89
PROSPECTUS
RISK FACTORS....................................6
INCORPORATION OF CERTAIN DOCUMENTS
BY REFERENCE................................13
FORMATION OF THE TRUSTS........................14
USE OF PROCEEDS................................15
THE SELLER, THE ADMINISTRATOR, THE MASTER
SERVICER AND THE SUB-SERVICERS..............15
THE STUDENT LOAN POOLS.........................18
THE STUDENT LOAN FINANCING
BUSINESS....................................19
WEIGHTED AVERAGE LIVES OF
THE SECURITIES..............................47
POOL FACTORS AND TRADING
INFORMATION....................................50
DESCRIPTIONS OF THE NOTES......................50
DESCRIPTION OF THE CERTIFICATES................59
CERTAIN INFORMATION REGARDING
THE SECURITIES..............................60
DESCRIPTION OF THE TRANSFER
AND SERVICING AGREEMENTS....................68
CERTAIN LEGAL ASPECTS
OF THE STUDENT LOANS........................86
INCOME TAX CONSEQUENCES........................93
PENNSYLVANIA STATE TAX
CONSEQUENCES...............................105
ERISA CONSIDERATIONS..........................106
PLAN OF DISTRIBUTION..........................108
LEGAL MATTERS.................................110
INDEX OF PRINCIPAL TERMS......................111
</TABLE>
S-3
<PAGE> 6
SUMMARY OF TERMS
This summary highlights selected information from this prospectus
supplement and does not contain all of the information that you need to consider
in making your investment decision. To understand all of the terms of the
offering of the securities, we recommend that you carefully read this entire
prospectus supplement and the accompanying prospectus.
PRINCIPAL PARTIES
THE TRUST
- KeyCorp Student Loan Trust ____-___
THE SELLER, MASTER SERVICER AND ADMINISTRATOR
- Key Bank USA, National Association
THE SUB-SERVICERS
- Pennsylvania Higher Education Assistance Agency
- Great Lakes Educational Loan Services, Inc.
THE ELIGIBLE LENDER TRUSTEE
- [The First National Bank of Chicago]
THE INDENTURE TRUSTEE
- [Bankers Trust Company]
THE GUARANTORS
- American Student Assistance
- California Student Aid Commission
- Educational Credit Management Corporation
- HEMAR Insurance Corporation of America
- Nebraska Student Loan Program
- New York State Higher Education Services
- Pennsylvania Higher Education Assistance Agency
- The Education Resources Institute, Inc.
- United Student Aid Funds, Inc.
DATES
DISTRIBUTION DATES
The 25th day of each January, April, July, and October or if the 25th is not a
business day, the next business day. The first distribution date is _________
25th, _____.
CUTOFF DATE
_______ __________ for the initial student loans and _______ __________ for the
subsequent pool student loans.
STATISTICAL CUTOFF DATE
___________, ___________. The statistical cutoff date is the date as of which
certain information with respect to student loans is presented in this
prospectus supplement.
CLOSING DATe
On or about __________.
DESCRIPTION OF THE SECURITIES
OFFERED SECURITIES
- - [Two] classes of notes and [one] class of certificates
- - Original principal amounts and interest rates are on the cover page of this
prospectus supplement
- - Securities issued in book-entry form through the Depository Trust Company,
Cedelbank and the Euroclear System
S-4
<PAGE> 7
- - Minimum denominations of $1,000
TREASURY BILL INDEXED SECURITIES
- - -----------------------------
LIBOR INDEXED SECURITIES
- - -----------------------------
INTEREST PAYMENTS
- Each interest rate is subject to an interest rate cap described in
this prospectus supplement under the caption "Description of the
Securities" herein.
- Interest calculations
- actual/360 for the LIBOR indexed securities
- actual/365 or 366 as applicable for the Treasury-Bill indexed
securities
- Interest not paid on a distribution date due to the interest rate cap
may be paid on future distribution dates as described in this
prospectus supplement under the caption "Description of the
Securities" herein.
PRINCIPAL PAYMENTS
Principal payments on the securities will be made on each distribution date in
an amount described in this prospectus supplement under the caption "Description
of the Securities" herein.
PRIORITY OF PAYMENTS
On each distribution date, the indenture trustee will make the following
distributions and deposits to the extent of available funds in the order
indicated:
1. to the master servicer certain fees;
2. to the administrator, certain fees;
3. to the holders of the notes, interest [on a pro rata basis];
4. to the holders of the certificates, interest;
5. to the reserve account, an amount, if any, necessary to reinstate the
balance of the reserve account to a specified amount;
6. to the holders of the notes, principal as follows:
[(a) first to the Class A-1 Notes until paid in full; and then
(b) to the Class A-2 Notes until paid in full;]
7. following the date on which the notes have been paid in full, to the
holders of the certificates, principal;
8. to the master servicer certain fees;
9. [to the holders of the notes, interest due in excess of the interest rate
cap, if any, on a pro rata basis;]
10. [to the holders of the certificates, interest due in excess of the
interest rate cap, if any;] and
11. to the seller, any remaining amounts.
FINAL MATURITY DATES
The unpaid principal amount of each class of securities will be payable in full
on the applicable final maturity date listed on the cover page of this
prospectus supplement.
S-5
<PAGE> 8
AUCTION SALE
Any student loans remaining in the trust as of the end of the collection period
immediately preceding the __________ distribution date will be offered for sale.
The proceeds of any sale will be used to redeem your securities. The auction
price must at least equal the unpaid principal amount of the securities, plus
accrued and unpaid interest.
OPTIONAL PURCHASE
The seller may repurchase all remaining student loans when the principal balance
of the pool of student loans is equal to [5%] [10%] or less of the initial
principal balance of the pool of student loans.
TRUST PROPERTY
THE INITIAL STUDENT LOANS
The initial student loans consist of certain graduate and undergraduate student
loans. The initial student loans have the following characteristics as of
________, _____:
- Aggregate principal
amount: $______________
- Weighted average annual
percentage rate: _____%
- Weighted average original
term: _________ mths
- Weighted average remaining
term: _________ mths
- Percent reinsured by the
Department of Education _____%
- Percent not reinsured by the
Department of Education _____%
- Percent guaranteed by federal
guarantors _____%
- Percent guaranteed by the
Pennsylvania Higher
Education Assistance
Agency _____%
- Percent guaranteed by American
Student Assistance _____%
- Percent guaranteed by Nebraska
Student Loan Program _____%
- Percent guaranteed by Educational
Credit Management Corporation _____%
- Percent guaranteed by California
Student Aid Commission _____%
- Percent guaranteed by New York
State Higher Education Services
Corporation _____%
- Percent guaranteed by United
Student Aid Funds, Inc. _____%
- Percent guaranteed by private
guarantors _____%
- Percent guaranteed by The
Educational Resources
Institute, Inc. _____%
- Percent guaranteed by HEMAR
Insurance Corporation _____%
- Percent not guaranteed by any party or
reinsured by Department of
Education _____%
- Percent of graduate school loans _____%
- Percent of undergraduate school
loans _____%
The trust will purchase the initial student loans on the closing date.
SUBSEQUENT POOL STUDENT LOANS
The subsequent pool student loans consist of certain graduate and undergraduate
student loans. The subsequent pool student loans have the following
characteristics as of ____________, ____:
- Aggregate principal
amount: $_______________
- Weighted average annual
percentage rate: ____%
S-6
<PAGE> 9
- Weighted average original
term: ______ mths
- Weighted average remaining
term: ______ mths
- Percent reinsured by the
Department of Education _____%
- Percent not reinsured by the
Department of Education _____%
- Percent guaranteed by federal
guarantors _____%
- Percent guaranteed by the
Pennsylvania Higher
Education Assistance
Agency _____%
- Percent guaranteed by American
Student Assistance _____%
- Percent guaranteed by Nebraska
Student Loan Program _____%
- Percent guaranteed by Educational
Credit Management Corporation _____%
- Percent guaranteed by California
Student Aid Commission _____%
- Percent guaranteed by New York
State Higher Education Services
Corporation _____%
- Percent guaranteed by United
Student Aid Funds, Inc. _____%
- Percent guaranteed by private
guarantors _____%
- Percent guaranteed by The
Educational Resources
Institute, Inc. _____%
- Percent guaranteed by HEMAR
Insurance Corporation _____%
- Percent not guaranteed by any
party or reinsured by Department
of Education _____%
- Percent of graduate school loans _____%
- Percent of undergraduate school
loans _____%
OTHER STUDENT LOANS
Following ________, _______ and prior to ________, ________, the trust expects
to purchase other consolidation loans and serial loans made to borrowers with
student loans previously purchased by the trust. The trust expects to purchase
these other student loans with certain collections on the pool of existing
student loans that are not required to be distributed to you or paid to the
trustee, the master servicer or the administrator.
PRE-FUNDING ACCOUNT
There will be a pre-funding account of approximately $_______________. The trust
expects to use those amounts to purchase (1) prior to __________ __, _______
subsequent pool student loans and certain other federally or privately
guaranteed student loans, and (2) prior to ________ __, ____, consolidation
loans and serial loans, to pay capitalized interest on the pool of student loans
and to pay advances for certain fees related to the student loans.
THE RESERVE ACCOUNT
There will be a reserve account to cover servicing fees, administration fees,
interest on the notes and, except as described under "Description of the
Transfer and Servicing Agreements -Credit Enhancement" herein, interest on the
certificates. Amounts on deposit in the reserve account also will be available,
if necessary, to reduce the principal balance of each class of securities to
zero on its respective final maturity date.
Initially, the amount in the reserve account will be $___________. On each
distribution date, any available funds remaining after making all prior required
distributions will be deposited into the reserve account.
S-7
<PAGE> 10
TAX STATUS
Thompson Hine & Flory LLP, as federal tax counsel to the trust, is of the
opinion that (1) the trust will not be classified as an association or a
publicly traded partnership taxable as a corporation for federal income tax
purposes and (2) the notes will be characterized as debt for federal income tax
purposes. Each noteholder, by accepting a note, will agree to treat the notes as
indebtedness.
Kirkpatrick & Lockhart LLP, as Pennsylvania tax counsel to the trust, is of the
opinion that the same characterizations of the notes and the trust would apply
for Pennsylvania state income tax purposes as for federal income tax purposes.
ERISA CONSIDERATIONS
Subject to the considerations discussed under "ERISA Considerations" herein the
notes are eligible for purchase by employee benefit plans.
The certificates may not be acquired by employee benefit plans or other
retirement arrangements subject to the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), and/or Section 4975 of the Internal Revenue Code
of 1986, as amended or by any other entity that is deemed to hold assets of such
plan or arrangement.
RATINGS
At least two nationally recognized rating agencies (each a "Rating Agency" and
together, the "Rating Agencies") must each rate the notes in the highest
investment rating category and must rate the certificates in one of the four
highest investment rating categories.
S-8
<PAGE> 11
RISK FACTORS
We recommend that you consider the following risk factors together with
all the information contained in this prospectus supplement (this "Prospectus
Supplement") and the related prospectus (the "Prospectus") in deciding whether
to purchase any of the securities.
YOU MAY HAVE DIFFICULTY
SELLING YOUR
SECURITIES The securities will not be listed on any securities
exchange. As a result, if you want to sell your
securities you must locate a purchaser that is
willing to purchase those securities. The
underwriters intend to make a secondary market for
the securities. The underwriters will do so by
offering to buy the securities from investors that
wish to sell. However, the underwriters will not be
obligated to make offers to buy the securities and
may stop making offers at any time. In addition, the
prices offered, if any, may not reflect prices that
other potential purchasers would be willing to pay,
were they to be given the opportunity. There have
been times in the past where there have been very few
buyers of asset backed securities, and there may be
such times in the future. As a result, you may not be
able to sell your securities when you want to do so
or you may not be able to obtain the price that you
wish to receive.
IF THE TRUST ASSETS ARE
INSUFFICIENT TO MAKE
PAYMENTS ON THE
SECURITIES,
YOU MAY INCUR A LOSS The trust is not permitted to have any significant
assets or sources of funds other than the student
loans, the guarantee agreements, the reserve account,
the escrow account and the pre-funding account. The
notes and the certificates will not be insured or
guaranteed by any entity. Consequently, you must rely
for repayment upon payments only from the trust's
assets. If the pre-funding account and the reserve
account are exhausted, the trust will depend solely
on payments with respect to the student loans to make
payments on the securities and you could suffer a
loss. You will have no claim to any amounts properly
distributed to Key Bank USA, National Association, in
its capacities as seller, administrator or master
servicer, or to any of the sub-servicers, from time
to time.
S-9
<PAGE> 12
THE TRUST'S PURCHASE OF
STUDENT LOANS AT A
PREMIUM MAY RESULT
IN LOSSES The original principal amount of the securities will
be equal to approximately ________% of the sum of the
outstanding principal balance of the student loans as
of the cutoff date and the amount deposited in the
pre-funding account, the reserve account and the
collection account on the closing date. In addition,
each subsequent pool student loan will be purchased
by the trust for an amount equal to _____% of the
principal balance thereof. In addition, _____% of the
initial pool of student loans and ____% of the
subsequent pool student loans have repayment terms
that require borrowers to make only interest payments
for the first two years after entry into repayment.
We cannot assure you as to when the aggregate
principal amount of the securities will be equal to
or less than the sum of the principal amount of the
pool of student loans and the amounts on deposit in
the reserve account. If the student loans were
liquidated at a time when the outstanding principal
amount of the securities exceeded the sum of the
principal amount of the student loans, the amount on
deposit in the pre-funding account and the amounts on
deposit in the reserve account, you may suffer a
loss.
THE CERTIFICATES WILL
ABSORB CASH SHORTFALLS
AND LOSSES BEFORE THE
NOTES The rights of the holders of certificates to receive
payments of interest are subordinated to the rights
of the holders of notes to receive payments of
interest. The holders of certificates will not
receive any payments of principal until the notes are
paid in full. Consequently, amounts available to
cover cash shortfalls will be applied to the payment
of interest on the notes before payment of interest
on the certificates. In addition, if the pool of
student loans is liquidated because of an event of
default under the indenture or the insolvency of Key
Bank USA, National Association, all amounts due on
the notes will be payable before any amounts are
payable on the certificates. Additionally, if the
outstanding principal balance of the notes is in
excess of a specified amount, described under
"Description of the Transfer and Servicing Agreements
- Credit Enhancement" herein, principal will be
payable to the holders of the notes in the amount of
such excess to the extent of funds available before
any amounts are payable to the holders of the
certificates. If amounts otherwise allocable to the
certificates are used to fund payments of interest or
principal on the notes, distributions on the
certificates may be delayed or reduced.
S-10
<PAGE> 13
THE CHARACTERISTICS OF
THE STUDENT LOANS
MAY CHANGE
Certain characteristics of the student loans will
vary from the characteristics of the initial student
loans and the subsequent pool student loans due to
the trust's purchase of consolidation loans and
serial loans. The distribution by weighted average
interest rates may vary as a result of variations in
the effective rates of interest applicable to the
student loans after each transfer of additional
student loans to the trust and the remaining term of
the deferral and forbearance periods.
The seller currently makes available and may in the
future make available certain incentive programs to
borrowers. The effect of these incentive programs may
be to reduce the yield on the initial pool of student
loans.
YOUR YIELD TO MATURITY
MAY BE REDUCED BY
PREPAYMENTS,
DELINQUENCIES
AND DEFAULTS The pre-tax return on your investment is uncertain
and will depend on a number of factors including the
following:
- THE RATE OF RETURN OF PRINCIPAL IS UNCERTAIN. The
amount of distributions of principal on the
securities and the time when you receive those
distributions depends on the amount and the times at
which borrowers make principal payments on the
student loans. Those principal payments may be
regularly scheduled payments or unscheduled payments
resulting from prepayments, defaults or
consolidations of the student loans.
- YOU MAY RECEIVE A LARGE PRINCIPAL PREPAYMENT ON
______ __, ___. The trust will allocate an identified
portion of the student loans to a subsequent pool to
be purchased by the trust from funds on deposit in a
subaccount of the pre-funding account. If the amount
in the applicable subaccount of the pre-funding
account is not substantially used to purchase the
student loans allocated to the subsequent pool by
_________, ___, you may receive a principal
prepayment. If the amount remaining is $___________
or less, the indenture trustee will distribute such
amount on the Class A-1 Notes; otherwise the
indenture trustee will distribute the amount on each
class of securities, pro rata, based on the initial
principal balance of each class of securities.
S-11
<PAGE> 14
- YOU MAY RECEIVE A PREPAYMENT OF PRINCIPAL AT END OF
FUNDING PERIOD. If the amount in the applicable
subaccount of the pre-funding account is not fully
used to purchase student loans that are consolidation
loans, serial loans and other student loans (that are
primarily federally or privately guaranteed student
loans) that are eligible to be purchased by the trust
by the end of the funding period, you may receive a
principal prepayment. Any such amount will be
distributed on the next distribution date.
- YOU MAY NOT BE ABLE TO REINVEST DISTRIBUTIONS IN
COMPARABLE INVESTMENTS. Asset backed securities, like
the securities offered hereby, usually produce more
returns of principal to investors when market
interest rates fall below the interest rates on the
student loans and produce less returns of principal
when market interest rates are above the interest
rates on the student loans. As a result, you are
likely to receive more money to reinvest at a time
when other investments generally are producing a
lower yield than that on the securities, and are
likely to receive less money to reinvest when other
investments generally are producing a higher yield
than that on the securities. You will bear the risk
that the timing and amount of distributions on your
securities will prevent you from attaining your
desired yield.
- AN EARLY TERMINATION WILL SHORTEN THE LIFE OF YOUR
INVESTMENT WHICH MAY REDUCE YOUR YIELD TO MATURITY.
Your investment in the securities may end before you
desire if (1) the indenture trustee successfully
conducts an auction sale or (2) the seller exercises
its option to purchase all of the assets of the
trust. Because your securities will no longer be
outstanding, you will not receive the additional
interest payments that you would have received had
the securities remained outstanding. In addition, you
may not be able to reinvest the principal you receive
at a rate comparable to that on your securities.
YOU MAY NOT RECEIVE CURRENT
PAYMENTS AT THE
APPLICABLE INTEREST
RATE You may not be paid interest at the related note rate
or certificate rate as a result of an interest rate
cap. The interest rate cap may be triggered as a
result of:
- Due to market forces, the applicable index
used to calculate interest on the securities
(plus the applicable margin) becoming
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greater than the indices used to calculate
interest on the student loans.
- The principal balance of the student loans
will initially be less than the aggregate
principal amount of the securities.
Consequently, the aggregate principal
balances of the student loans on which
interest will be collected will be less than
the principal amount of the securities.
- The interest rate cap will be reduced as a
result of the trust's obligation to pay
certain amounts to the Department of
Education or to repay certain amounts to
borrowers.
Although you may receive interest not paid
because of the interest rate cap on
subsequent distribution dates, we cannot
assure you that there will be sufficient
funds available for that purpose. If the
note rate or certificate rate is limited by
the interest rate cap, the market value and
liquidity of your securities may decline.
RELIANCE ON SUB-SERVICERS
FOR SERVICING STUDENT LOANS Although the master servicer is obligated to
cause the student loans to be serviced in
accordance with the terms of the transaction
agreements, the timing of payments will be
directly affected by the ability of the
sub-servicers to adequately service the
student loans. In addition, you will be
relying on each of the sub-servicers'
compliance with applicable, federal and
private program regulations to ensure that
the guarantors are obligated to maintain
guaranteed payments and that any reinsurance
by the Department of Education is
maintained. If a sub-servicer defaults on
its obligations and is terminated, you will
be relying on the ability of the master
servicer to find an alternative sub-servicer
to service the student loans and you may
suffer a delay in the timing of payments
until any transfer of servicing is completed
or effective.
RISK OF DEFAULT OF UNGUARANTEED
STUDENT LOANS Approximately ___% of the initial student
loans and ___% of the subsequent pool
student loans are not guaranteed or insured
by any federal or private guarantor, or by
any other party or governmental agency.
Consequently, you will bear any risk of loss
resulting from the default by any borrower
of a non-guaranteed student loan to the
extent the amount of the default is not
covered by the limited credit enhancement of
the financing structure.
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RISK OF DEFAULT BY PRIVATE
GUARANTORS
Currently, except for The Educational
Resources Institute, Inc., none of the
private guarantors has an investment grade
credit rating by any national statistical
rating organization. If a private guarantor
defaults on its guarantee obligations, you
will rely solely on payments from the
related borrower for payments on the related
private guaranteed loan. In these
circumstances, you will bear the risk of
loss resulting from the failure of any
borrower of a private guaranteed student
loan to the extent this loss is not covered
by the limited credit enhancement of the
financing structure.
COMPUTER PROBLEMS IN THE
YEAR 2000 MAY RESULT IN
LOSSES
Many computers and computer chips were not
programmed to recognize more than two digits
in a year of a date. As a result, in the
year 2000, those computers will not know
whether the '00 refers to the year 1900 or
the year 2000. To the extent that the
systems of the master servicer, any
sub-servicer, the administrator, any of the
guarantors, the eligible lender trustee or
the indenture trustee have such problems in
the year 2000 and later, the amount and
timing of distributions to noteholders and
certificateholders could be adversely
affected.
The Department of Education has undertaken a
year 2000 compliance project to address year
2000 issues. Information regarding the
Department of Education's year 2000 efforts
can be obtained at the Department of
Education's site on the World Wide Web at
http://www.ed.gov. The Office of Management
and Budget has reported that the Department
of Education has reported that it is close
to completing its work on mission critical
systems and is at least 96% year 2000
compliant; however, any failure by the
Department of Education to resolve any year
2000 issues or any adverse effect on the
Department of Education caused by a party on
which the Department of Education relies as
a result of year 2000 issues may have a
material adverse effect on the Federal
Family Education Loan Program, the federal
guarantors and you.
WITHDRAWAL OR DOWNGRADING
OF INITIAL RATINGS WILL
ADVERSELY AFFECT THE PRICES
FOR THE SECURITIES A security rating is not a recommendation to
buy, sell or hold securities. Similar
ratings on different types of securities do
not necessarily mean the same thing. We
recommend that you analyze
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<PAGE> 17
the significance of each rating
independently from any other rating. Any
rating agency may change its rating of the
securities after the securities are issued
if that rating agency believes that
circumstances have changed. Any subsequent
withdrawal or downgrading of a rating will
likely reduce the price that a subsequent
purchaser will be willing to pay for the
applicable securities. The ratings do not
address the likelihood of the ultimate
payment to you of any interest not paid as a
result of the interest rate cap.
THE SECURITIES ARE NOT
SUITABLE INVESTMENTS
FOR ALL INVESTORS The securities are not a suitable investment
if you require a regular or predictable
schedule of payments or payment on any
specific date. The securities are complex
investments that should be considered only
by investors who, either alone or with their
financial, tax and legal advisors, have the
expertise to analyze the prepayment,
reinvestment, default and market risk, the
tax consequences of an investment, and the
interaction of these factors.
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<PAGE> 18
FORMATION OF THE TRUST
THE TRUST
KeyCorp Student Loan Trust _____- ________ (the "Trust") is a trust
formed under the laws of the State of New York pursuant to the Amended and
Restated Trust Agreement dated as of ________, ____ (as amended and
supplemented from time to time, the "Trust Agreement") between Key Bank USA,
National Association (the "Seller") and The First National Bank of Chicago, as
trustee (the "Eligible Lender Trustee") for the transactions described in this
Prospectus Supplement. The assets of the Trust will include certain graduate
and undergraduate student loans (collectively "Student Loans"). Such Student
Loans will be acquired by the trust from the Seller on ____, 199_ (the "Closing
Date") and from time to time thereafter (collectively, the "Financed Student
Loans"). The Financed Student Loans will consist of (i) Financed Student Loans
that are reinsured by the United States Department of Education (the
"Department") (collectively, "Financed Federal Loans"), (ii) Financed Student
Loans that are not reinsured by the Department or any other government agency
but are guaranteed by a private guarantor (collectively, "Guaranteed Private
Loans"), and (iii) certain Financed Student Loans that are not guaranteed by
any party nor reinsured by the Department (collectively "Non-Guaranteed Private
Loans," and together with the Guaranteed Private Loans, the "Financed Private
Loans).
The Trust will not engage in any activity other than
- acquiring, holding and managing the Financed Student Loans and
the other assets of the Trust and proceeds therefrom
- issuing the Certificates and the Notes
- making payments thereon and
- engaging in other activities that are related to the
activities listed above.
The Trust will be initially capitalized with equity of $____________
excluding amounts deposited in the Reserve Account in the name of the Indenture
Trustee by the Seller on the Closing Date, representing the initial principal
balance of the Floating Rate Asset Backed Certificates (the "Certificates").
Certificates with an original principal balance of approximately $___________
will be sold to and retained by the Seller and the remaining Certificates will
be sold to third-party investors that are expected to be unaffiliated with the
Seller, the Master Servicer, the Sub-Servicers, the Guarantors, the Trust or the
Department. The equity of the Trust, together with the proceeds from the sale of
the Notes, will be used by the Eligible Lender Trustee to purchase on behalf of
the Trust the Initial Financed Student Loans from the Seller pursuant to the
Sale and Servicing Agreement dated as of ______ __, ____ among the Trust, the
Seller, the Administrator, the Master Servicer, and the Eligible Lender Trustee
(the "Sale and Servicing Agreement") and to fund the deposit of $___________
(the "Pre-Funded Amount") into an account to be maintained by the
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Indenture Trustee (the "Pre-Funding Account"). The Seller will use a portion of
the net proceeds it receives from the sale of the Initial Financed Student Loans
to make a deposit of $__________ on the Closing Date into the Reserve Account
(the "Reserve Account Initial Deposit").
Upon the consummation of such transactions, the property of the Trust
will consist of
(a) a pool of Financed Student Loans, legal title to which is held
by the Eligible Lender Trustee on behalf of the Trust,
(b) all funds collected in respect thereof on or after _______ __,
____,
(c) all Guarantee Agreements and other relevant rights under
certain collateral agreements with respect to the Guaranteed
Private Loans, to the extent guaranteed or insured by third
parties, and assigned to the Trust by the Seller (the
"Assigned Rights"), and
(d) all moneys and investments on deposit in an account in the
name of the Indenture Trustee (the "Collection Account"), the
Pre-Funding Account, an account in the name of the Indenture
Trustee (the "Escrow Account") and the Reserve Account.
To facilitate servicing and to minimize administrative burden and expense, the
Master Servicer will be appointed by the Eligible Lender Trustee as the
custodian, and the Master Servicer will then appoint the Sub-Servicers as the
custodians on its behalf, of the promissory notes representing the Financed
Student Loans that each services on behalf of the Master Servicer.
"Initial Financed Student Loans" means the Student Loans transferred by
the Seller to the Trust as of the Closing Date having an aggregate principal
balance of approximately $______________ as of ______ __, ____ (the "Statistical
Cutoff Date").
ELIGIBLE LENDER TRUSTEE
The First National Bank of Chicago is the Eligible Lender Trustee for
the Trust under the Trust Agreement pursuant to which the Eligible Lender
Trustee acts as holder of legal title to the Financed Student Loans on behalf of
the Trust. The First National Bank of Chicago principal offices are located at
One First National Plaza, Suite 0126, Chicago, Illinois 60607 and its New York
offices are located at First Chicago Trust Company of New York, 14 Wall Street,
New York, New York 10005.
The Eligible Lender Trustee will acquire on behalf of the Trust legal
title to all the Financed Student Loans acquired from time to time pursuant to
the Sale and Servicing Agreement. The Eligible Lender Trustee on behalf of the
Trust will enter into a guarantee agreement or comparable arrangement with each
of the Guarantors with respect to the Financed Student Loans that are guaranteed
or insured (each a "Guarantee Agreement" and collectively, the "Guarantee
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<PAGE> 20
Agreements"). The Eligible Lender Trustee qualifies as an eligible lender and
owner of all Student Loans that are reinsured by the Department (the "Federal
Loans") and all student loans that are not reinsured by the Department, whether
or not guaranteed by a private guarantor (the "Private Loans") for all purposes
under the Higher Education Act of 1965 (the "Higher Education Act") and the
Guarantee Agreements. Failure of the Financed Federal Loans to be owned by an
eligible lender would result in the loss of any Guarantee Payments (as defined
in the Prospectus) from any of California Student Aid Commission ("CSAC"), New
York State Higher Education Services Corporation ("HESC") United Student Aid
Funds, Inc. ("USAF") Pennsylvania Higher Education Assistance Agency ("PHEAA"),
American Student Assistance ("ASA"), Nebraska Student Loan Program ("NSLP") or
Educational Credit Management Corporation ("ECMC") (collectively, the "Federal
Guarantors") and any Federal Assistance (as defined in the Prospectus) with
respect to such Financed Federal Loans. See "The Financed Student Loan
Pool--Insurance of Student Loans; Guarantors of Student Loans" herein.
The Eligible Lender Trustee's liability in connection with the issuance
and sale of the [Floating Rate Class A-1 Asset Backed Notes (the "Class A-1
Notes") and Floating Rate Class A-2 Asset Backed Notes (the "Class A-2 Notes"
and together with the Class A-1 Notes], the "Notes") and the Certificates is
limited solely to the express obligations of the Eligible Lender Trustee set
forth in the Trust Agreement and the Sale and Servicing Agreement. See
"Description of the Securities" and "Description of the Transfer and Servicing
Agreements" herein. The Seller plans to maintain normal commercial banking
relations with the Eligible Lender Trustee.
In consideration for its performance of its obligations under the Sale
and Servicing Agreement, the Eligible Lender Trustee will be entitled to receive
an annual fee of $________.
USE OF PROCEEDS
After making the deposit of the Pre-Funded Amount to the Pre-Funding
Account, the balance of the net proceeds from the sale of the Certificates and
the Notes will be paid by the Trust to the Seller in consideration for the
purchase by the Trust of the Initial Financed Student Loans on the Closing Date.
The Seller will use such proceeds paid to it (x) to make the Reserve Account
Initial Deposit and an initial deposit into the Collection Account and (y) for
general corporate purposes.
THE MASTER SERVICER AND THE SUB-SERVICERS
KEY BANK USA, NATIONAL ASSOCIATION
Key Bank USA, National Association ("KBUSA"), in its capacity as Master
Servicer under the Sale and Servicing Agreement (the "Master Servicer"), will be
responsible for master servicing the Financed Student Loans. The Master Servicer
will arrange for and oversee the performance by
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PHEAA and Great Lakes (collectively the "Sub-Servicers" and each a
"Sub-Servicer") of their respective servicing obligations with respect to the
Financed Student Loans. The Master Servicer will be entitled to receive the
Master Servicing Fee, but will in turn be solely responsible for all
compensation due to the Sub-Servicers for the performance of their respective
obligations pursuant to the related Sub-Servicing Agreements.
PHEAA
PHEAA is a body corporate and politic constituting a public corporation
and government instrumentality created pursuant to an act of the Pennsylvania
Legislature. Under its enabling legislation, PHEAA is authorized to issue bonds
or notes, with the approval of the Governor of the Commonwealth of Pennsylvania
for the purpose of purchasing, making, or guaranteeing loans. Its enabling
legislation also authorizes PHEAA to undertake the origination and servicing of
loans made by PHEAA and others. PHEAA's headquarters are located in Harrisburg,
Pennsylvania with regional offices located throughout Pennsylvania and
additional offices located in California, Delaware and West Virginia. As of June
30, 1999 it had approximately 2300 employees.
PHEAA has been guaranteeing student loans since 1964 and has guaranteed
a total of approximately $20.4 billion principal amount of Stafford Loans (as
defined in the Prospectus) and approximately $2.1 billion principal amount of
Parent Loans for Undergraduate Students ("PLUS Loans") and SLS Loans (as defined
in the Prospectus) under the Higher Education Act. In addition to guaranteeing
loans under the Higher Education Act, PHEAA also operates certain guarantee
programs for which it receives no federal reinsurance. PHEAA has outstanding
guarantee obligations of such loans in the amount of approximately $84.7 million
as of June 30, 1999.
Pursuant to a Sub-Servicing Agreement with the Master Servicer, PHEAA
has agreed to service, and perform all other related tasks with respect to,
certain of the Financed Student Loans. PHEAA is required to perform all services
and duties customary to the servicing of such Financed Student Loans in
compliance with all applicable standards and procedures. See "Description of the
Transfer and Servicing Agreements--Servicing Procedures."
The above information relating to PHEAA has been obtained from PHEAA
and neither KBUSA nor the Underwriters have conducted any independent
verification of such information. PHEAA has agreed that it will provide a copy
of its most recent audited financial statements to holders of Notes and
Certificates (collectively, "Securityholders") upon receipt of a written request
directed to Mr. Tim Guenther, Chief Financial Officer, Financial Management,
1200 North Seventh Street, Harrisburg, Pennsylvania 17102.
GREAT LAKES
As of June 30, 1999, Great Lakes Educational Loan Services, Inc.
("Great Lakes") and its affiliates serviced 865,000 student and parental
accounts with an outstanding balance of $6.6 billion for 1,200 lenders
nationwide.
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<PAGE> 22
Pursuant to a Sub-Servicing Agreement with the Master Servicer, Great
Lakes has agreed to service, and perform all other related tasks with respect
to, certain of the Financed Student Loans. Great Lakes is required to perform
all services and duties customary to the servicing of such Financed Student
Loans in compliance with all applicable standards and procedures. See
"Description of the Transfer and Servicing Agreements--Servicing Procedures."
The above information relating to Great Lakes has been obtained from
Great Lakes and neither KBUSA nor the Underwriters have conducted any
independent verification of such information. Great Lakes has agreed that it
will provide a copy of its most recent audited financial statements on receipt
of a written request directed to 2401 International Lane, Madison, Wisconsin
53704, Attention: Vice President and Chief Financial Officer.
SERVICES AND FEES OF MASTER SERVICER AND THE SUB-SERVICERS
Pursuant to the Sale and Servicing Agreement KBUSA will act as Master
Servicer and will enter into one or more sub-servicing agreements (each a
"Sub-Servicing Agreement") with each of PHEAA and Great Lakes with respect to,
all the Financed Student Loans acquired by the Eligible Lender Trustee on behalf
of the Trust. In accordance with the Sub-Servicing Agreements, each Sub-Servicer
will service and perform all related tasks with respect to the Financed Student
Loans on behalf of the Master Servicer and the Trust. The Trust will be an
intended third-party beneficiary of each Sub-Servicing Agreement. With respect
to the Financed Student Loans it is servicing for the Master Servicer and the
Trust, each Sub-Servicer is required to perform the services and duties
customary to the servicing of Student Loans it is required to service with
reasonable care and to do so in the same manner as such Sub-Servicer has
serviced Student Loans on behalf of the Seller or the Master Servicer, as
applicable, and otherwise in compliance with all applicable standards and
procedures. In addition, each Sub-Servicer is required to maintain its
eligibility as a third-party servicer under the Higher Education Act. See
"Description of the Transfer and Servicing Agreements--Servicing Procedures"
herein.
In consideration for performing its obligations under the Sale and
Servicing Agreement, the Master Servicer will receive a monthly fee payable by
the Trust on or about the twenty-fifth day of each month (the "Monthly Servicing
Payment Date") generally equal to _____% (the "Master Servicing Fee Percentage")
of the principal balance of the Financed Student Loans as of the last day of the
preceding calendar month and certain one-time fixed fees for each Financed
Student Loan for which a forbearance period was granted or renewed or for which
a guarantee claim was filed, in each case subject to certain adjustments,
together with other administrative fees and similar charges. In consideration
for the Master Servicing Fee, the Master Servicer will be solely responsible for
the fees due to the Sub-Servicers pursuant to the terms of the related
Sub-Servicing Agreements. See "Description of Transfer and Servicing
Agreements--Master Servicing Compensation" herein.
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THE FINANCED STUDENT LOAN POOL
GENERAL
The pool of Financed Student Loans will include the Initial Financed
Student Loans purchased by the Eligible Lender Trustee on behalf of the Trust as
of the Statistical Cutoff Date and any Additional Student Loans purchased by the
Eligible Lender Trustee on behalf of the Trust from the Seller as of the
applicable Subsequent Cutoff Dates.
The Financed Student Loans will be selected from the Seller's portfolio
of Student Loans by several criteria, including, as of the Statistical Cutoff
Date or the applicable Subsequent Cutoff Date, as the case may be, the
following:
1. Each Financed Student Loan
(a) was originated in the United States or its
territories or possessions under and in accordance
with the Programs (as defined in the Prospectus)
(including, in the case of borrowers of Financed
Federal Loans, a financial need analysis and, in the
case of borrowers of Financed Private Loans, a
creditworthiness evaluation) to a borrower who (or
with respect to PLUS Loans to a parent of a student
who), with respect to the Initial Financed Student
Loans and Subsequent Pool Student Loans, (i) with
respect to undergraduate loans, has graduated or
otherwise left an undergraduate institution or is
expected to graduate or otherwise leave an
undergraduate institution by _____________, ____, and
(ii) with respect to graduate loans, has graduated or
otherwise left graduate school or is expected to
graduate or otherwise leave graduate school by
_____________, ____,
(b) contains terms in accordance with those required by
the Programs, the applicable Guarantee Agreements and
other applicable requirements, and
(c) with respect to the Initial Financed Student Loans
and Subsequent Pool Student Loans, is not more than
180 days past due as of the Cutoff Date or, with
respect to the Other Subsequent Student Loans or
Other Student Loans not more than 90 days past due as
of the applicable Subsequent Cutoff Date, as the case
may be.
2. As of the Statistical Cutoff Date, no Initial Financed Student
Loan and no Subsequent Pool Student Loan had a borrower who
was noted in the related records of the Master Servicer or a
Sub-Servicer as being currently involved in a bankruptcy
proceeding or deceased since the date the Trust was created.
Any Subsequent Pool Student Loan in respect of which a claim
is made on a Guarantor following the
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Statistical Cutoff Date and prior to the date such Student
Loan is to be transferred to the Trust will not be eligible
for transfer to the Trust.
3. No Initial Financed Student Loan as of the Statistical Cutoff
Date consists of, and no Subsequent Pool Student Loan as of
the date of its transfer to the Trust will consist of, a
Student Loan that was subject to the Seller's prior obligation
to sell such loan to a third party.
4. No selection procedures believed by the Seller to be adverse
to the Securityholders were used or will be used in selecting
the Financed Student Loans.
5. The Financed Student Loans do not and will not include any
non-prime or sub-prime Student Loans. Non-prime or sub-prime
Student Loans are Student Loans originated to individuals who
have previously defaulted on their Student Loans.
6. As of the Statistical Cutoff Date, none of the Initial
Financed Student Loans and none of the Subsequent Pool Student
Loans are non-performing Student Loans. Non-performing Student
Loans are Student Loans which are in default and the Seller
expects to write-off as a loss.
Each of the Financed Student Loans provides or will provide for the
amortization of the outstanding principal balance of such Financed Student Loan
over a series of regular payments. Each regular payment consists of an
installment of interest which is calculated on the basis of the outstanding
principal balance of such Financed Student Loan multiplied by the applicable
interest rate and further multiplied by the period elapsed (as a fraction of a
calendar year) since the preceding payment of interest was made. As payments are
received in respect of such Financed Student 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 regular installment 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. Conversely, if a borrower pays a monthly installment
after its scheduled due date, a late fee will be assessed where applicable and
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 portion of the payment applied to reduce
the unpaid principal balance will be correspondingly less. In either case,
subject to any applicable Deferral Periods (as defined in the Prospectus) or
Forbearance Periods (as defined in the Prospectus), the borrower pays a regular
installment until the final scheduled payment date, at which time the amount of
the final installment is increased or decreased as necessary to repay the then
outstanding principal balance of and any accrued but unpaid interest on such
Financed Student Loan.
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The Additional Student Loans to be conveyed to the Eligible Lender
Trustee on behalf of the Trust during the Funding Period are required to consist
of Subsequent Pool Student Loans, Other Subsequent Student Loans or Fee Advances
(as defined in the Prospectus), in each case originated by the Seller in
accordance with the Programs and other applicable requirements. The Subsequent
Pool Student Loans are identified in this Prospectus Supplement. The Other
Subsequent Student Loans and Fee Advances must be either (1) made to a borrower
who has, immediately prior to the date of any such conveyance, outstanding
Student Loans that are part of the pool of Financed Student Loans or (2) Other
Subsequent Student Loans which are primarily Financed Federal Loans or
Guaranteed Private Loans which the Trust is obligated to purchase from the
Seller until 90 days after the Closing Date. Each such Additional Student Loan
is otherwise required to comply with the criteria set forth above. See
"Description of the Transfer and Servicing Agreements--Additional Fundings"
herein.
Any Financed Student Loan guaranteed by HESC or CSAC will not be
included in either the Initial Financed Student Loans or the Subsequent Pool
Student Loans. The Seller may, but is under no obligation to, transfer Student
Loans guaranteed by HESC or CSAC to the Trust. Financed Student Loans guaranteed
by HESC or CSAC may be transferred into the Trust as Other Subsequent Student
Loans. If any Student Loans guaranteed by HESC or CSAC are transferred to the
Trust, such transfer will occur within 90 days after the Closing Date. The
outstanding principal balance of Financed Student Loans guaranteed by HESC will
be less than [1.0%] of the Initial Pool Balance. The outstanding principal
balance of Financed Student Loans guaranteed by CSAC will be less than [5.0%] of
the Initial Pool Balance.
Except for the criteria described in the preceding paragraphs, there
will be no required characteristics of the Additional Student Loans. Therefore,
following the transfer of the Subsequent Pool Student Loans and other Additional
Student Loans to the Eligible Lender Trustee on behalf of the Trust, the
aggregate characteristics of the entire pool of Financed Student Loans,
including the composition of the Financed Student Loans, the distribution by
weighted average interest rate and the distribution by principal amount
described in the following tables, may vary significantly from those of the
Initial Financed Student Loans and Subsequent Pool Student Loans as of the
Statistical Cutoff Date. In addition, the distribution by weighted average
interest rate applicable to the Financed Student Loans on any date following the
Statistical Cutoff Date may vary significantly from that set forth in the
following tables as a result of variations in the effective rates of interest
applicable to the Financed Student Loans. Moreover, the remaining term to
maturity of the Initial Financed Student Loans and Subsequent Pool Student Loans
as of the Statistical Cutoff Date may vary significantly from the actual term to
maturity of any of the Financed Student Loans as a result of the granting of
Deferral Periods and Forbearance Periods with respect thereto.
THE INITIAL FINANCED STUDENT LOANS AND SUBSEQUENT POOL STUDENT LOANS
Set forth below in the following tables is a description of certain
additional characteristics of the Initial Financed Student Loans and the
Subsequent Pool Student
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Loans as of the Statistical Cutoff Date. Regularly scheduled payments and
prepayments of such Subsequent Pool Student Loans (which are prepayable at any
time) between the Statistical Cutoff Date and the date as of which such Student
Loans are transferred to the Eligible Lender Trustee on behalf of the Trust will
affect the balances and percentages set forth herein. Moreover, such Subsequent
Pool Student Loans may become delinquent (or more delinquent) between the
Statistical Cutoff Date and the date of transfer to the Trust. While the
statistical distribution of the final characteristics of the Subsequent Pool
Student Loans when transferred to the Trust will vary somewhat from the
statistical information presented below, the Seller does not believe that the
characteristics of such Subsequent Pool Student Loans will vary materially.
COMPOSITION AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
KEYCORP STUDENT LOAN TRUST INITIAL POOL SUBSEQUENT POOL TOTAL
------------------------------- ------------ --------------- -----
<S> <C> <C> <C>
Aggregate Outstanding
Balance(1)
Number of Borrowers
Average Outstanding
Balance Per Borrower
Number of Loans
Average Outstanding
Balance Per Loan
Weighted Average
Remaining Term
to Maturity(2)
Weighted Average Annual
Borrower Interest Rate(3)
</TABLE>
(1) Includes in each case net principal balance due from borrowers, plus
accrued interest thereon to be capitalized upon commencement of
repayment, estimated to be $______________ with respect to the Initial
Financed Student Loans and $______, with respect to the Subsequent Pool
Student Loans, in each case as of the Statistical Cutoff Date.
(2) Determined from the date of origination or the Statistical Cutoff Date,
as the case may be, to the stated maturity date of the applicable
Initial Financed Student Loans or Subsequent Pool Student Loans,
assuming repayment commences promptly upon expiration of the typical
grace period following the expected graduation date and without giving
effect to any Deferral Periods or Forbearance Periods that may be
granted in the future. See "The Student Loan Financing Business" in the
Prospectus.
(3) Determined using the borrower interest rates exclusive of Special
Allowance Payments applicable to the Initial Financed Student Loans and
the Subsequent Pool Student Loans as of the Statistical Cutoff Date.
However, because all the Initial Financed Student Loans and the
Subsequent Pool Student Loans effectively bear interest at a variable
rate per annum, there can be no assurance that the foregoing rate will
remain applicable to the Initial Financed Student Loans and the
Subsequent Pool Student Loans at any time after the Statistical Cutoff
Date. See "The Student Loan Financing Business" in the Prospectus. The
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weighted average spread, with respect to the Initial Financed Student
Loans, including Special Allowance Payments, to the 91-day Treasury
Bill Rate or 52-week Treasury Bill Rate, as applicable, was ____% as of
the Statistical Cutoff Date and would have been ____% if all of the
Student Loans were in repayment as of the Statistical Cutoff Date. The
weighted average spread, with respect to the Subsequent Pool Student
Loans, including Special Allowance Payments, to the 91-day Treasury
Bill Rate or 52-week Treasury Bill Rate, as applicable, was ____% as of
the Statistical Cutoff Date and would have been ____% if all of the
Student Loans were in repayment as of the Statistical Cutoff Date.
S-25
<PAGE> 28
DISTRIBUTION BY LOAN TYPE AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL
----------------------------------- ---------------------------------------
AGGREGATE AGGREGATE PERCENT OF
OUTSTANDING PERCENT OF OUTSTANDING SUBSEQUENT
NUMBER OF PRINCIPAL INITIAL POOL NUMBER OF PRINCIPAL POOL
LOAN TYPE LOANS BALANCE(1) BALANCE LOANS BALANCE (2) BALANCE
--------- ----- ---------- ------- ----- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Stafford Subsidized Loans
Stafford Unsubsidized Loans
Federal Consolidation Loans
SLS Loans
PLUS Loans
Bar Examination Loans
Business Loans
Private Consolidation Loans
Dental Loans
Graduate Loans
Law Loans
Medical Loans
Residency Loans
ADEAL Loans
Key Alternative Loans
Total
<CAPTION>
TOTAL
-------------------------------------------------
AGGREGATE
OUTSTANDING PERCENT OF
NUMBER OF PRINCIPAL POOL BALANCE
LOAN TYPE LOANS BALANCE
--------- ----- -------
<S> <C> <C> <C>
Stafford Subsidized Loans
Stafford Unsubsidized Loans
Federal Consolidation Loans
SLS Loans
PLUS Loans
Bar Examination Loans
Business Loans
Private Consolidation Loans
Dental Loans
Graduate Loans
Law Loans
Medical Loans
Residency Loans
Key Alternative Loans
Total
</TABLE>
(1) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $________________ as of the Statistical Cutoff Date.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $________________ as of the Statistical Cutoff Date.
S-26
<PAGE> 29
DISTRIBUTION BY BORROWER INTEREST RATE AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL
----------------------------------- ---------------------------------------
AGGREGATE AGGREGATE PERCENT OF
OUTSTANDING PERCENT OF OUTSTANDING SUBSEQUENT
NUMBER OF PRINCIPAL INITIAL POOL NUMBER OF PRINCIPAL POOL
INTEREST RATE LOANS BALANCE(2) BALANCE LOANS BALANCE (3) BALANCE
------------- ----- ---------- ------- ----- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Less than 7.50%(1)
7.50% to 7.99%
8.00% to 8.49%
8.50% to 8.99%
9.00% and above
Total
<CAPTION>
TOTAL
-------------------------------------------------
AGGREGATE
OUTSTANDING PERCENT OF
NUMBER OF PRINCIPAL POOL
INTEREST RATE LOANS BALANCE BALANCE
------------- ----- ------- ------------
<S> <C> <C> <C>
Less than 7.50%(1)
7.50% to 7.99%
8.00% to 8.49%
8.50% to 8.99%
9.00% and above
Total
(1) Determined using the interest rates applicable to the Initial Financed
Student Loans and the Subsequent Pool Student Loans as of the
Statistical Cutoff Date. However, because all the Initial Financed
Student Loans and the Subsequent Pool Student Loans effectively bear
interest at a variable rate per annum, there can be no assurance that
the foregoing information will remain applicable to the Initial
Financed Student Loans or the Subsequent Pool Student Loans at any time
after the Statistical Cutoff Date. See "The Student Loan Financing
Business" in the Prospectus.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $________________as of the Statistical Cutoff Date.
(3) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $________________as of the Statistical Cutoff Date.
</TABLE>
S-27
<PAGE> 30
DISTRIBUTION BY OUTSTANDING PRINCIPAL BALANCE AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL
----------------------------------- ---------------------------------------
AGGREGATE AGGREGATE PERCENT OF
OUTSTANDING OUTSTANDING PERCENT OF OUTSTANDING SUBSEQUENT
PRINCIPAL NUMBER OF PRINCIPAL INITIAL POOL NUMBER OF PRINCIPAL POOL
BALANCE LOANS BALANCE(2) BALANCE LOANS BALANCE (3) BALANCE
-------------- ----- ---------- ------- ----- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Less than $1,000
$1,000 to $1,999
$2,000 to $2,999
$3,000 to $3,999
$4,000 to $4,999
$5,000 to $5,999
$6,000 to $6,999
$7,000 to $7,999
$8,000 to $8,999
$9,000 to $9,999
$10,000 to $10,999
$11,000 to $11,999
$12,000 to $12,999
$13,000 to $13,999
$14,000 to $14,999
$15,000 to $15,999
$16,000 to $16,999
$17,000 to $17,999
$18,000 to $18,999
$19,000 to $19,999
$20,000 to $20,999
$21,000 to $21,999
$22,000 to $22,999
$23,000 to $23,999
$24,000 to $24,999
$25,000 to $25,999
$26,000 to $26,999
$27,000 to $27,999
$28,000 to $28,999
$29,000 to $29,999
$30,000 and above
<CAPTION>
TOTAL
-------------------------------------------------
AGGREGATE
OUTSTANDING OUTSTANDING PERCENT OF
PRINCIPAL NUMBER OF PRINCIPAL POOL
BALANCE LOANS BALANCE BALANCE
------------- ----- ------- -------------
<S> <C> <C> <C>
Less than $1,000
$1,000 to $1,999
$2,000 to $2,999
$3,000 to $3,999
$4,000 to $4,999
$5,000 to $5,999
$6,000 to $6,999
$7,000 to $7,999
$8,000 to $8,999
$9,000 to $9,999
$10,000 to $10,999
$11,000 to $11,999
$12,000 to $12,999
$13,000 to $13,999
$14,000 to $14,999
$15,000 to $15,999
$16,000 to $16,999
$17,000 to $17,999
$18,000 to $18,999
$19,000 to $19,999
$20,000 to $20,999
$21,000 to $21,999
$22,000 to $22,999
$23,000 to $23,999
</TABLE>
S-28
<PAGE> 31
$24,000 to $24,999
$25,000 to $25,999
$26,000 to $26,999
$27,000 to $27,999
$28,000 to $28,999
$29,000 to $29,999
$30,000 and above
Total
(1) Borrowers generally have more than one outstanding loan. The average
aggregate outstanding principal balance of loans per borrower is
$_____, with respect to the Initial Financed Student Loans, and
$______, with respect to the Subsequent Pool Student Loans, in each
case as of the Statistical Cutoff Date. Some borrowers have both loans
which are Initial Financed Student Loans and loans which are Subsequent
Pool Student Loans. If both pools were combined, the number of
borrowers would be _____ and the average outstanding principal balance
per borrower would be $_____.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $________ as of the Statistical Cutoff Date.
(3) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $_____ as of the Statistical Cutoff Date.
S-29
<PAGE> 32
DISTRIBUTION BY REMAINING TERM TO SCHEDULED MATURITY AS OF THE STATISTICAL
CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL
------------------------------------------------- ---------------------------------------
AGGREGATE AGGREGATE PERCENT OF
MONTHS TO OUTSTANDING PERCENT OF OUTSTANDING SUBSEQUENT
SCHEDULED NUMBER OF PRINCIPAL INITIAL POOL NUMBER OF PRINCIPAL POOL
MATURITY LOANS BALANCE(2) BALANCE LOANS BALANCE (3) BALANCE
----------- -------- ----------- ----------- --------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
12 and below(1)
13 to 24
25 to 48
49 to 60
61 to 72
73 to 84
85 to 96
97 to 108
109 to 120
121 to 180
181 to 240
241 and above
Total
<CAPTION>
TOTAL
--------------------------------------
AGGREGATE
MONTHS TO OUTSTANDING PERCENT OF
SCHEDULED NUMBER OF PRINCIPAL POOL
MATURITY LOANS BALANCE BALANCE
----------- --------- ------- ------------
<S> <C> <C> <C>
12 and below(1)
13 to 24
25 to 48
49 to 60
61 to 72
73 to 84
85 to 96
97 to 108
109 to 120
121 to 180
181 to 240
241 and above
Total
</TABLE>
(1) Determined from the Statistical Cutoff Date to the stated maturity date
of the applicable Initial Financed Student Loan or Subsequent Pool
Student Loan, assuming repayment commences promptly upon expiration of
the typical grace period following the expected graduation date and
without giving effect to any deferral or forbearance periods that may
be granted in the future. See "The Student Loan Financing Business" in
the Prospectus.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $________________as of the Statistical Cutoff Date.
(3) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $________________as of the Statistical Cutoff Date.
S-30
<PAGE> 33
DISTRIBUTION BY BORROWER PAYMENT STATUS AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL
----------------------------------------- ------------------------------------------
AGGREGATE AGGREGATE PERCENT OF
OUTSTANDING PERCENT OF OUTSTANDING SUBSEQUENT
NUMBER OF PRINCIPAL INITIAL POOL NUMBER OF PRINCIPAL POOL
PAYMENT STATUS LOANS BALANCE(2) BALANCE LOANS BALANCE (3) BALANCE
- -------------- ----- ---------- ------- ----- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
In School(1)
Grace
Deferral
Forbearance
Repayment
First year in repayment
Second year in repayment
More than two years
in repayment
Total
<CAPTION>
TOTAL
------------------------------------------
AGGREGATE
OUTSTANDING PERCENT OF
NUMBER OF PRINCIPAL POOL
PAYMENT STATUS LOANS BALANCE BALANCE
- -------------- ----- ------- ------------
<S> <C> <C> <C>
In School(1)
Grace
Deferral
Forbearance
Repayment
First year in repayment
Second year in repayment
More than two years
in repayment
Total
</TABLE>
(1) Refers to the status of the borrower of each Initial Financed Student
Loan or Subsequent Pool Student Loan to be added, in each case, as of
the Statistical Cutoff Date: such borrower may still be attending an
undergraduate institution or a graduate school ("In-School"), may be in
a grace period prior to repayment commencing ("Grace"), may be repaying
such loan ("Repayment") or may have temporarily ceased repaying such
loan through a deferral ("Deferral") or a forbearance ("Forbearance")
period. See "The Student Loan Financing Business" in the Prospectus.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $________________ as of the Statistical Cutoff Date.
(3) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $________________ as of the Statistical Cutoff Date.
S-31
<PAGE> 34
SCHEDULED WEIGHTED AVERAGE MONTHS REMAINING IN STATUS
BY CURRENT BORROWER PAYMENT STATUS AS OF THE
STATISTICAL CUTOFF DATE(1)
<TABLE>
<CAPTION>
PAYMENT STATUS INITIAL POOL SUBSEQUENT POOL
- -------------------------- -------------------------------------------------- ---------------------------------------------------
IN-SCHOOL GRACE DEFERRAL FORBEARANCE REPAYMENT IN-SCHOOL GRACE DEFERRAL FORBEARANCE REPAYMENT
--------- ----- -------- ----------- --------- --------- ----- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
In-School
Grace
Deferral
Forbearance
Repayment
Total
<CAPTION>
PAYMENT STATUS TOTAL
- -------------------------- ------------------------------------------------------
IN-SCHOOL GRACE DEFERRAL FORBEARANCE REPAYMENT
--------- ----- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
In-School
Grace
Deferral
Forbearance
Repayment
Total
</TABLE>
(1) Determined without giving effect to any Deferral Periods or Forbearance
Periods that may be granted in the future.
S-32
<PAGE> 35
GEOGRAPHIC DISTRIBUTION OF STATES REPRESENTING MORE THAN 4%
OF THE AGGREGATE POOL BALANCE AS OF THE STATISTICAL CUTOFF DATE(1)
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL
-------------------------------------- -----------------------------------------
AGGREGATE AGGREGATE
OUTSTANDING PERCENT OF OUTSTANDING PERCENT OF
NUMBER PRINCIPAL INITIAL NUMBER PRINCIPAL SUBSEQUENT
OF LOANS BALANCE(2) POOL BALANCE OF LOANS BALANCE(3) POOL BALANCE
-------- ---------- ------------ -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
New York California
California Massachusetts
Virginia New York
Texas New Jersey
Pennsylvania Virginia
Florida All other
States(4)
Massachusetts
New Jersey
All Other
States(4)
Total
<CAPTION>
TOTAL
--------------------------------------------
AGGREGATE
OUTSTANDING
NUMBER PRINCIPAL PERCENT OF
OF LOANS BALANCE(2) POOL BALANCE
-------- ---------- ------------
<S> <C> <C> <C>
New York
California
Virginia
Massachusetts
Texas
Pennsylvania
Florida
New Jersey
All other
States(4)
Total
</TABLE>
(1) Based on the permanent billing addresses of the borrowers of the
Initial Financed Student Loans and the Subsequent Pool Student Loans
shown on the Master Servicer's or a Sub-Servicer's records as of the
Statistical Cutoff Date.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon of $_______ as of the Statistical Cut-Off Date to be
capitalized upon commencement of repayment.
(3) Includes net principal balance due from borrowers, plus accrued
interest thereon of $______ as of the Statistical Cut-Off Date to be
capitalized upon commencement of repayment.
(4) Includes all other states, none of which exceeds 4% of the Initial Pool
Balance or aggregate Pool Balance.
S-33
<PAGE> 36
DISTRIBUTION BY LOAN REPAYMENT TERM AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL
----------------------------------------- --------------------------------------------
AGGREGATE AGGREGATE
OUTSTANDING PERCENT OF OUTSTANDING PERCENT OF
LOAN NUMBER PRINCIPAL INITIAL NUMBER PRINCIPAL SUBSEQUENT
REPAYMENT TERMS OF LOANS BALANCE(1) POOL BALANCE OF LOANS BALANCE(2) POOL BALANCE
--------------- -------- ---------- ------------ -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Level Payment
Interest Only(3)
Graduated Payment(4)
Other (5)
Total
<CAPTION>
TOTAL
--------------------------------------------------
AGGREGATE
OUTSTANDING
LOAN NUMBER PRINCIPAL PERCENT OF
REPAYMENT TERMS OF LOANS BALANCE POOL BALANCE
--------------- -------- ------- ------------
<S> <C> <C> <C>
Level Payment
Interest Only(3)
Graduated Payment(4)
Other (5)
Total
</TABLE>
(1) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $________________ as of the Statistical Cutoff Date.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $________________ as of the Statistical Cutoff Date.
(3) Student Loans with interest only repayment terms require borrowers to
make payments of interest only for the first two years after entering
repayment and thereafter to make level payments (made up of both
principal and interest) which will amortize the then outstanding
principal balance of the loan over the then remaining term.
(4) Student Loans with graduated repayment terms require borrowers to make
payments of interest only for the first two years after entering
repayment which increase over the next three years to a level payment
amount which will amortize the then outstanding principal balance of
the loan over the then remaining term.
(5) Loan still not in repayment status.
S-34
<PAGE> 37
DISTRIBUTION OF FINANCED FEDERAL LOANS BY DATE OF DISBURSEMENT
AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL
----------------------------------------- ----------------------------------------------
AGGREGATE AGGREGATE
OUTSTANDING PERCENT OF OUTSTANDING PERCENT OF
DATE OF NUMBER PRINCIPAL INITIAL NUMBER PRINCIPAL SUBSEQUENT
DISBURSEMENT(1) OF LOANS BALANCE(2) POOL BALANCE OF LOANS BALANCE(3) POOL BALANCE
--------------- -------- ---------- ------------ -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Pre October 1, 1993
October 1, 1993 to
September 30, 1998
October 1, 1998 to
Present
Total
<CAPTION>
TOTAL
-------------------------------------------------
AGGREGATE
OUTSTANDING
DATE OF NUMBER PRINCIPAL PERCENT OF
DISBURSEMENT(1) OF LOANS BALANCE POOL BALANCE
--------------- -------- ------- ------------
<S> <C> <C> <C>
Pre October 1, 1993
October 1, 1993 to
September 30, 1998
October 1, 1998 to
Present
Total
</TABLE>
(1) Federal Loans disbursed prior to October 1, 1993 are 100% guaranteed by
the applicable Federal Guarantor, and reinsured against default by the
Department up to 100% of the Guarantee Payments. Federal Loans
disbursed on or after October 1, 1993 (but before October 1, 1998) are
98% guaranteed by the applicable Federal Guarantor, and reinsured
against default by the Department up to a maximum of 98% of the
Guarantor Payments. Federal Loans first disbursed on or after October
1, 1998 are 98% guaranteed by the applicable Federal Guarantor, and
reinsured against default by the Department up to 95% of the Guarantee
Payments. See "The Student Loan Financing Business--Description of
Federal Loans Under the Programs" and "--Insurance of Student Loans;
Guarantors of Student Loans" in the Prospectus.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $________________ as of the Statistical Cutoff Date.
(3) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $________________ as of the Statistical Cutoff Date.
S-35
<PAGE> 38
DISTRIBUTION OF FINANCED STUDENT LOANS BY
NUMBER OF DAYS OF DELINQUENCY AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL
------------------------------------------ ---------------------------------------------
AGGREGATE AGGREGATE
OUTSTANDING PERCENT OF OUTSTANDING PERCENT OF
NUMBER PRINCIPAL INITIAL NUMBER PRINCIPAL SUBSEQUENT
DAYS DELINQUENT OF LOANS BALANCE(1) POOL BALANCE OF LOANS BALANCE(2) POOL BALANCE
- --------------- -------- ---------- ------------ -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
0-30
31-60
61-90
90-120
120-150
150-180
Total
<CAPTION>
TOTAL
---------------------------------------------------
AGGREGATE
OUTSTANDING
NUMBER PRINCIPAL PERCENT OF
DAYS DELINQUENT OF LOANS BALANCE POOL BALANCE
- --------------- -------- ------- ------------
<S> <C> <C> <C>
0-30
31-60
61-90
90-120
120-150
150-180
Total
</TABLE>
(1) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $________________ as of the Statistical Cutoff Date.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $________________ as of the Statistical Cutoff Date.
S-36
<PAGE> 39
MATURITY AND PREPAYMENT ASSUMPTIONS
The rate of payment of principal of the Notes and the Certificates and
the yield on the Notes and the Certificates will be affected by prepayments of
the Financed Student Loans that may occur as described below. All the Financed
Student Loans are prepayable in whole or in part by the borrowers at any time,
including by means of Federal Consolidation Loans (as defined in the
Prospectus), Federal Direct Consolidation Loans (as defined in the Prospectus)
or Private Consolidation Loans (as defined in the Prospectus) or as a result of
a borrower's default, death, disability or bankruptcy and subsequent liquidation
or collection of Guarantee Payments with respect thereto. The rate of such
prepayments cannot be predicted and may be influenced by a variety of economic,
social and other factors, including those described below. In general, the rate
of prepayments may tend to increase to the extent that alternative financing
becomes available at prevailing interest rates which fall significantly below
the interest rates applicable to the Financed Student Loans. However, because
many of the Financed Student Loans bear interest at a rate that either actually
or effectively is floating, it is impossible to determine whether changes in
prevailing interest rates will be similar to or vary from changes in the
interest rates on the Financed Student Loans.
To the extent borrowers of Financed Student Loans elect to borrow
Consolidation Loans with respect to such Financed Student Loans from the Seller
(x) after the Loan Purchase Termination Date or (y) from another lender at any
time, Noteholders (as defined in the Prospectus ) (and after the Notes have been
paid in full, Certificateholders (as defined in the Prospectus )) will
collectively receive as a prepayment of principal the aggregate principal amount
of such Financed Student Loans; provided, that if the Seller makes any such
Consolidation Loan during the Funding Period or prior to the Loan Purchase
Termination Date (in which event the Seller will then sell that Consolidation
Loan to the Eligible Lender Trustee, to the extent that funds are available in
the Escrow Account and during the Funding Period, the Pre-Funding Account or
following the Funding Period but prior to the Loan Purchase Termination Date,
the Collection Account from amounts which constitute Available Loan Purchase
Funds, for the purchase thereof), the aggregate outstanding principal balance of
Financed Student Loans (after giving effect to the addition of such
Consolidation Loans) will be at least equal to and in most cases greater than
such balance prior to such prepayment, although the portion of the loan
guaranteed will be 98% with respect to any Federal Consolidation Loan disbursed
on or after October 1, 1993 even if the Underlying Federal Loans (as defined in
the Prospectus) were 100% guaranteed. See "The Student Loan Financing
Business--Description of Federal Loans Under the Programs--Federal Consolidation
Loans" in the Prospectus. There can be no assurance that borrowers with Financed
Student Loans will not seek to obtain Consolidation Loans with respect to such
Financed Student Loans on or after the Loan Purchase Termination Date or by
another lender at any time.
In addition, the Seller is obligated to repurchase any Financed Student
Loan pursuant to the Sale and Servicing Agreement as a result of a breach of any
of its representations and warranties, and the Master Servicer is obligated to
purchase any Financed Student Loan pursuant to the Sale and Servicing Agreement
as a result of a breach of certain covenants with respect to
S-37
<PAGE> 40
such Financed Student Loan, in each case where such breach materially adversely
affects the interests of the Certificateholders or the Noteholders in that
Financed Student Loan and is not cured within the applicable cure period (it
being understood that with respect to any Financed Student Loan that has the
benefit of a Guarantee Agreement, any such breach that does not affect any
Guarantor's obligation to guarantee payment of such Financed Student Loan will
not be considered to have a material adverse effect for this purpose). See
"Description of the Transfer and Servicing Agreements--Sale of Student Loans;
Representations and Warranties" and "--Servicer Covenants" in the Prospectus.
See also "Description of the Transfer and Servicing Agreements--Additional
Fundings" herein and in the Prospectus regarding the prepayment of principal to
Noteholders and Certificateholders if as of ________ ____, ____ (the "Special
Determination Date") the Subsequent Pool Pre-Funded Amount has not been reduced
to zero and the prepayment of principal to Noteholders as a result of excess
funds remaining on deposit in the Pre-Funding Account at the end of the Funding
Period. See also, "--Insolvency Event" in the Prospectus regarding the sale of
the Financed Student Loans if a Seller Insolvency Event (as defined in the
Prospectus) occurs and "--Termination" herein and in the Prospectus regarding
the Seller's option to purchase the Financed Student Loans when the aggregate
Pool Balance is less than or equal to [5%] [10%] of the Initial Pool Balance and
the auction of the Financed Student Loans occurs on or after the ____ 20__
Distribution Date. Any reinvestment risk from such accelerated payment of
principal will be borne by the holders of Notes and Certificates receiving such
prepayment.
On the other hand, scheduled payments with respect to, and maturities
of, the Financed Student Loans may be extended, including pursuant to Grace
Periods (as defined in the Prospectus, each a "Grace Period"), Deferral Periods
and, under certain circumstances, Forbearance Periods or as a result of the
conveyance of Serial Loans to the Eligible Lender Trustee on behalf of the Trust
prior to the Loan Purchase Termination Date or of refinancings through
Consolidation Loans to the extent such Consolidation Loans are sold to the
Eligible Lender Trustee on behalf of the Trust as described above. In that
event, the fact that such Consolidation Loans will likely have longer maturities
than the Financed Student Loans they are replacing may lengthen the remaining
term of the Financed Student Loans and the average life of the Notes and the
Certificates. The rate of payment of principal of the Notes and the Certificates
and the yield on the Notes and the Certificates may also be affected by the rate
of defaults resulting in losses on defaulted Student Loans which have been
liquidated, by the severity of those losses and by the timing of those losses,
which may affect the ability of the Guarantors to make Guarantee Payments with
respect thereto. In addition, the maturity of many of the Financed Student Loans
will extend well beyond the Final Maturity Dates of the Notes and the
Certificates.
The rate of prepayment on the Financed Student Loans cannot be
predicted. You will bear any reinvestment risks resulting from a faster or
slower incidence of prepayment of Financed Student Loans. Reinvestment risks may
include the risk that interest rates and the relevant spreads above particular
interest rate bases are lower at the time you receive payments from the Trust
than the interest rates and the spreads that would otherwise have been had
prepayments not been made or had prepayments been made at a different time.
S-38
<PAGE> 41
"Available Loan Purchase Funds" means with respect to any Collection
Period and any Transfer Date after the Funding Period, the excess of Available
Funds (with certain exceptions) for the Collection Period relating to the
Distribution Date next succeeding such Transfer Date that are on deposit in the
Collection Account on such Transfer Date (before giving effect to any
application thereof) over the accrued expected expense payment for such
Distribution Date as specified in the Sale and Servicing Agreement.
The "Initial Pool Balance" will equal $_____________ plus the aggregate
increase in the Pool Balance during the Funding Period (by the Special
Determination Date) occurring as a result of the purchase of Subsequent Pool
Student Loans.
"Loan Purchase Termination Date" means ____________, ___________.
INSURANCE OF STUDENT LOANS; GUARANTORS OF STUDENT LOANS
Each Financed Federal Loan will be required to be guaranteed by one of
the Federal Guarantors and reinsured by the Department under the Higher
Education Act and must be eligible for Special Allowance Payments (as defined in
the Prospectus) and, with respect to each Financed Federal Loan that is a
Stafford Loan (excluding any Unsubsidized Stafford Loan (as defined in the
Prospectus, each an Unsubsidized Stafford Loan )) or Consolidation Loan where
none of the Underlying Federal Loans were Unsubsidized Stafford Loans, must be
eligible for Interest Subsidy Payments (as defined in the Prospectus) paid by
the Department. As of the Statistical Cutoff Date, approximately ___% (by
aggregate principal balance) of the Initial Financed Student Loans are and
approximately ___% of the Subsequent Pool Student Loans will be Financed Federal
Loans. As of the Statistical Cutoff Date, approximately ___% (by aggregate
principal balance) of the Initial Financed Student Loans are and approximately
___% of the Subsequent Pool Student Loans will be Guaranteed Private Loans that
are required to be guaranteed or insured as to principal and interest by The
Educational Resources Institute, Inc. ("TERI") or HEMAR Insurance Corporation of
America ("HICA" and together with TERI, the "Private Guarantors") As of the
Statistical Cutoff Date, approximately ___% (by aggregate principal balance) of
the Initial Financed Student Loans are (and approximately ___% of the Subsequent
Pool Student Loans will be) Non-Guaranteed Private Loans.
S-39
<PAGE> 42
The following tables provide information with respect to the portion of
the Financed Student Loans guaranteed by each Guarantor:
DISTRIBUTION BY GUARANTORS AS OF THE STATISTICAL CUTOFF DATE
<TABLE>
<CAPTION>
INITIAL POOL SUBSEQUENT POOL
----------------------------------------- --------------------------------------------
AGGREGATE PERCENT OF AGGREGATE
OUTSTANDING INITIAL OUTSTANDING PERCENT OF
NUMBER PRINCIPAL POOL NUMBER PRINCIPAL SUBSEQUENT
OF LOANS BALANCE(1) BALANCE(3) OF LOANS BALANCE(2) POOL BALANCE(3)
-------- ---------- ---------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
ASA
CSAC
ECMC
HESC
HICA
PHEAA
NSLP
TERI
USAF
Total (3)
</TABLE>
<TABLE>
<CAPTION>
TOTAL
----------------------------------------------------
AGGREGATE PERCENT OF
OUTSTANDING TOTAL
NUMBER PRINCIPAL POOL
OF LOANS BALANCE BALANCE(3)
-------- ------- ------------------
<S> <C> <C> <C>
ASA
CSAC
ECMC
HESC
HICA
PHEAA
NSLP
TERI
USAF
Total (3)
</TABLE>
(1) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $________________ as of the Statistical Cutoff Date.
(2) Includes net principal balance due from borrowers, plus accrued
interest thereon to be capitalized upon commencement of repayment,
estimated to be $________________ as of the Statistical Cutoff Date.
(3) May not equal 100% due to the Non-Guaranteed Private Loans in the pool
of Financed Student Loans.
S-40
<PAGE> 43
Federal Reinsurance. Under the Higher Education Act, each Federal
Guarantor is reimbursed by the Department pursuant to certain agreements between
the Department and such Federal Guarantor for amounts paid under its Guarantee
Agreement. The amount of such reimbursement is subject to reduction. See "The
Student Loan Financing Business--Insurance of Student Loans; Guarantors of
Student Loans" in the Prospectus for a description of the federal reinsurance
program and factors affecting the Federal Guarantors.
Guarantors for the Financed Federal Loans. The Higher Education Act
requires every state to designate a guarantee agency, either by establishing its
own or by designating another guarantee agency. A Guarantor who has been
designated by a particular state is obligated to guarantee loans for students
who reside or attend school in such state and must agree to provide loans to any
such students who are otherwise unable to obtain a loan from any other lender.
Guarantee agencies may guarantee a loan made to any eligible borrower and are
not limited to guaranteeing loans for students attending institutions in their
particular state or region or for their residents attending schools in another
state or region.
The Eligible Lender Trustee has entered into a Guarantee Agreement with
each of PHEAA, ASA, CSAC, HESC, USAF, NSLP and ECMC by which each such Federal
Guarantor has agreed to serve as Guarantor for certain Financed Federal Loans.
PHEAA is the designated Student Loan guarantor for Pennsylvania, West Virginia
and Delaware, and has an established operating center in Harrisburg,
Pennsylvania. For more information concerning PHEAA, see "The Master Servicer
and the Sub-Servicers--PHEAA" herein. ASA is the designated Student Loan
guarantor for Massachusetts and the District of Columbia and has an established
operating center in Boston, Massachusetts. CSAC is the designated Student Loan
guarantor for California, Arizona and Washington and has established an
operating center in Rancho Cordova, California. HESC is the designated guarantor
for New York, and has established an operating center in Albany, New York. USAF
is the designated Student Loan guarantor for Indiana, Kansas, Alaska, Nevada,
Wyoming, Maryland, Hawaii and Mississippi and has established an operating
center in Fishers, Indiana. NSLP is the designated Student Loan guarantor for
Nebraska and has established an operating center in Lincoln, Nebraska. ECMC is
the designated Student Loan guarantor for Virginia and has established operating
centers in St. Paul, Minnesota and Richmond, Virginia. As of the Statistical
Cutoff Date, approximately ____%, ____%, ____%, ____%, ____%, ____% and ____% of
the aggregate outstanding principal balance of the Initial Financed Student
Loans which are Financed Federal Loans and approximately ____%, ____%, ____%,
____%, ____%, ____% and ____% of the Subsequent Pool Student Loans which are
Financed Federal Loans were guaranteed by PHEAA, ASA, CSAC, HESC, USAF, NSLP and
ECMC, respectively.
Pursuant to its respective Guarantee Agreement, each Federal Guarantor
guarantees payment of 100% of the principal (including any interest capitalized
from time to time) and accrued interest for each Financed Federal Loan
guaranteed by it as to which any one of the following events has occurred:
S-41
<PAGE> 44
(a) failure by the borrower thereof to make monthly principal
or interest payments on such Financed Federal Loan when due, provided
such failure continues for a period of 180 days (or 270 days with
respect to Financed Federal Loans for which the first date of
delinquency occurs on or after October 7, 1998) (except that such
guarantee against such failures will be 98% of principal and accrued
interest for loans first disbursed on or after October 1, 1993);
(b) any filing by or against the borrower thereof of a
petition in bankruptcy pursuant to any chapter of the Bankruptcy Code
(as defined in the Prospectus);
(c) the closure of, or false certification of borrower
eligibility by, the school;
(d) the death of the borrower thereof;
(e) the total and permanent disability of the borrower thereof
to work and earn money or attend school, as certified by a qualified
physician; or
(f) the failure of the borrower's school to pay a refund owed
to the borrower, to the extent of the amount of the refund that is
allocable to the loan.
When these conditions are satisfied, the Higher Education Act requires
the Guarantor generally to pay the claim within 90 days of its submission by the
lender. The obligations of each Federal Guarantor pursuant to their respective
Guarantee Agreements are obligations solely of each such Federal Guarantor
respectively, and are not supported by the full faith and credit of any state
government.
Each of the Federal Guarantors' guarantee obligations with respect to
any Financed Federal Loan are conditioned upon the satisfaction of all the
conditions set forth in the applicable Guarantee Agreement. These conditions
include, but are not limited to, the following:
- the origination and servicing of such Financed Federal Loan
being performed in accordance with the Programs, the Higher
Education Act and other applicable requirements,
- the timely payment to the applicable Federal Guarantor, as the
case may be, of the guarantee fee payable with respect to such
Financed Federal Loan,
- the timely submission to the applicable Federal Guarantor, as
the case may be, of all required pre-claim delinquency status
notifications and of the claim with respect to such Financed
Federal Loan, and
- the transfer and endorsement of the promissory note evidencing
such Financed Federal Loan to the applicable Federal
Guarantor, upon and in connection with making a claim to
receive Guarantee Payments thereon.
S-42
<PAGE> 45
Failure to comply with any of the applicable conditions, including the
foregoing, may result in the refusal of the applicable Federal Guarantor to
honor their Guarantee Agreements with respect to such Financed Federal Loan, in
the denial of guarantee coverage with respect to certain accrued interest
amounts with respect thereto or in the loss of certain Interest Subsidy Payments
and Special Allowance Payments with respect thereto. Under the Sale and
Servicing Agreement, such failure to comply would constitute a breach of the
Master Servicer's covenants or the Seller's representations and warranties, as
the case may be, and would create an obligation of the Seller or the Master
Servicer, as the case may be, to repurchase or purchase such Financed Federal
Loan or to reimburse the Trust for such non-guaranteed interest amounts or such
lost Interest Subsidy Payments and Special Allowance Payments with respect
thereto. See "Description of the Transfer and Servicing Agreements--Sale of
Financed Student Loans; Representations and Warranties" and "-- Master Servicer
Covenants" herein.
Set forth below is certain current and historical information with
respect to each of the Federal Guarantors excluding ECMC [and ______________] as
of the Statistical Cutoff Date. No such information is provided with respect to
ECMC [and _____________] because the aggregate principal amount of Financed
Student Loans guaranteed by ECMC [and __________] is less than 5% of the sum of
the Initial Financed Student Loans and the Subsequent Pool Student Loans.
Guaranty Volume. The following table sets forth the approximate
aggregate principal amount of federally reinsured education loans (including
loans under the Parent Loans for Undergraduate Students program but excluding
Federal Consolidation Loans) that have first become guaranteed by each Federal
Guarantor (excluding ____) and by all federal guarantors in each of the last
five federal fiscal years:*
STAFFORD, SLS AND PLUS LOANS GUARANTEED
----------------------------------------------------------
(DOLLARS IN MILLIONS)
---------------------
<TABLE>
<CAPTION>
FEDERAL FISCAL
YEAR PHEAA ASA NSLP
---- ----- --- ----
<S> <C> <C> <C>
1994 $1,747 $1,100 $378
1995 1,808 906 351
1996 1,794 716 316
1997 1,869 682 397
1998 1,784 667 629
</TABLE>
S-43
<PAGE> 46
<TABLE>
<CAPTION>
FEDERAL FISCAL
YEAR HESC USAF CSAC ALL GUARANTORS
-------------- ---- ---- ---- ---------------
<S> <C> <C> <C> <C>
1994 $1,667 $2,070 $1,909
1995 1,554 2,404 1,600
1996 1,411 2,748 1,430
1997 1,550 3,135 1,583
1998 1,571 3,514 1,963
</TABLE>
* The information set forth in the table above for all guarantors has
been obtained from the Department of Education's Federal Student Loan
Programs Data Books (each, a "DOE Data Book"). Information for each
Federal Guarantor was provided by such Federal Guarantor.
Reserve Ratio. Each Federal Guarantor's reserve ratio is determined by
dividing its cumulative cash reserves by the original principal amount of the
outstanding loans it has agreed to guarantee. The term "cumulative cash
reserves" refers to cash reserves plus (a) sources of funds (including insurance
premiums, state appropriations, federal advances, federal reinsurance payments,
administrative cost allowances, collections on claims paid and investment
earnings) minus (b) uses of funds (including claims paid to lenders, operating
expenses, lender fees, the Department's share of collections on claims paid,
returned advances and reinsurance fees). The "original principal amount of
outstanding loans" consists of the original principal amount of loans guaranteed
by such Federal Guarantor minus (x) the original principal amount of loans
canceled, claims paid, loans paid in full and loan guarantees transferred from
such Federal Guarantor to other guarantors, plus (y) the original principal
amount of loan guarantees transferred to such Federal Guarantor from other
guarantors. ECMC has advised the Seller that ECMC's Agreements with the
Department require that on an annual basis, ECMC calculate the amount of reserve
funds and the amount of its expenses during the fiscal year in accordance with
directions of the Secretary. Unless the Secretary directs otherwise, if the
amount of ECMC's reserve funds exceeds 60 percent of the expenses, ECMC shall
return the excess reserves to the Secretary at the time of submitting the annual
report. The following tables set forth for each Federal Guarantor excluding ECMC
[and _________], their respective cumulative cash reserves and corresponding
reserve ratios and the national average reserve ratio for all federal guarantors
for the last five federal fiscal years:*
S-44
<PAGE> 47
<TABLE>
<CAPTION>
PHEAA ASA NSLP
----------------------- ------------------------- ------------------------
FEDERAL CUMULATIVE CUMULATIVE CUMULATIVE
FISCAL CASH RESERVE CASH RESERVE CASH RESERVE
YEAR RESERVES RATIO RESERVES RATIO RESERVES RATIO
---- -------- ----- -------- ----- -------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
1994 $133.63 1.3 $38.16 0.7 $16.44 1.3
1995 166.31 1.5 43.06 0.8 18.53 1.3
1996 214.74 1.6 51.08 0.9 21.17 1.3
1997 189.35 1.4 39.29 0.7 24.07 1.2
1998 190.65 1.3 39.02 0.6 30.99 1.3
</TABLE>
<TABLE>
<CAPTION>
HESC USAF CSAC
----------------------- ------------------------- ------------------------
FEDERAL CUMULATIVE CUMULATIVE CUMULATIVE
FISCAL CASH RESERVE CASH RESERVE CASH RESERVE NATIONAL
YEAR RESERVES RATIO RESERVES RATIO RESERVES RATIO AVERAGE
---- -------- ----- -------- ----- -------- ----- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
1994 $106.83 1.1 $485.71 2.89 $175.70 1.9 --
1995 115.18 1.1 338.83 1.49 236.38 2.3 --
1996 114.28 1.0 777.35 2.73 251.46 2.4 --
1997 158.00 1.4 492.26 1.48 278.70 2.5 --
1998 134.03 1.1 526.00 1.43 209.89 1.8 --
</TABLE>
* The information set forth in the tables above with respect to each
Federal Guarantor has been obtained from such Federal Guarantor,
respectively, and the information with respect to the national average
has been obtained from the DOE Data Books.
Recovery Rates. A Federal Guarantor's recovery rate, which provides a
measure of the effectiveness of the collection efforts against defaulting
borrowers after the guarantee claim has been satisfied, is determined by
dividing the amount recovered from borrowers by the Federal Guarantor by the
aggregate amount of default claims paid by the Federal Guarantor during the
applicable federal fiscal year with respect to borrowers. The table below sets
forth the recovery rates for each Federal Guarantor, excluding ECMC [and
_______] for the last five federal fiscal years:*
S-45
<PAGE> 48
<TABLE>
<CAPTION>
FEDERAL
FISCAL RECOVERY RATE
YEAR -------------------------------------------------------------------
PHEAA ASA NSLP
<S> <C> <C> <C>
1994 52.9 43.3 19.8
1995 53.3 43.4 21.3
1996 55.0 41.3 26.6
1997 54.8 42.7 31.5
1998 59.2 49.0 38.4
<CAPTION>
FEDERAL
FISCAL
YEAR
RECOVERY RATE
------------------------------------------------------------------
HESC USAF CSAC
<S> <C> <C> <C>
1994 41.9 30.3 33.5
1995 43.9 34.9 35.6
1996 46.2 38.7 37.6
1997 49.4 40.9 39.2
1998 53.0 40.1 41.8
</TABLE>
* The information set forth in the tables above with respect to
each Federal Guarantor was provided by such Federal Guarantor.
Loan Loss Reserve. In the event that a Federal Guarantor receives less
than full reimbursement of its guarantee obligations from the Department (see
"--Federal Reinsurance" above), such Federal Guarantor would be forced to look
to its existing assets to satisfy any such guarantee obligations not so
reimbursed. Because federal guarantors are no longer reinsured by the Department
at 100% (98% for loans disbursed between October 1, 1993 and October 1, 1998 and
95% for loans disbursed on and after October 1, 1998), many federal guarantors
have begun to maintain reserves for the 2% to 5% "risk-sharing" associated with
these guarantees. In general, the Federal Guarantors use historical default and
recovery rates to attempt to predict the reserves that should be maintained for
this purpose. As of June 30, 1999, PHEAA has not specifically provided for this
risk. PHEAA does have deferred guaranty fees of $____ million and cash reserves
of $____ million to cover this risk. As of May 31, 1999 ASA has a loan loss
reserve in the amount of $6.5 million and as of September 30, 1998, 1999 NSLP
maintains a reserve of $3.96 million.
Claims Rate. For the past five federal fiscal years, none of PHEAA's,
ASA's, NSLP's, CSAC's, HESC's or USAF's claims rate has exceeded 5.0%, and as a
result, all claims of PHEAA, ASA, NSLP, CSAC, HESC and USAF have been reimbursed
by the Department at the maximum reinsurance rate permitted by the Higher
Education Act. See "--Federal Reinsurance" above. The most recent national
default rate reported by the Department of Education was 9.6% for the federal
fiscal year 1996. As recently as federal fiscal year 1990 this national default
rate was over 22%. This trend, coupled with the claims and recovery information
listed in this section, shows improvement in the repayment of Student Loans by
borrowers. While, the Seller is not
S-46
<PAGE> 49
currently aware of any circumstances which would cause the reimbursement levels
for these Federal Guarantors to be less than the maximum levels permitted,
nevertheless, there can be no assurance that any Federal Guarantor will continue
to receive such maximum reimbursement for such claims. The following table sets
forth the claims rates of each Federal Guarantor, excluding ECMC [and _________]
for each of the last five federal fiscal years:*
<TABLE>
<CAPTION>
FEDERAL
FISCAL CLAIMS RATE
YEAR --------------------------------------------------------------------
PHEAA ASA NSLP
<S> <C> <C> <C>
1994 2.2 3.5 3.0
1995 2.0 3.5 4.1
1996 1.6 3.1 3.1
1997 1.9 3.5 3.2
1998 2.0 2.8 3.2
</TABLE>
<TABLE>
FEDERAL
FISCAL
YEAR CLAIMS RATE
-------------------------------------------------------------------
HESC USAF CSAC
<S> <C> <C> <C>
1994 2.8% 4.9% 4.1%
1995 3.0% 4.7% 3.4%
1996 2.9% 4.6% 4.4%
1997 2.5% 4.6% 4.5%
1998 2.7% 3.9% 3.1%
</TABLE>
* The information set forth in the tables above with respect to each Federal
Guarantor was provided by such Federal Guarantor.
Guarantors for the Guaranteed Private Loans. The Eligible Lender
Trustee will enter into a Guarantee Agreement with TERI and the Seller will
assign to the Eligible Lender Trustee, on behalf of the Trust, its rights under
surety bonds issued by HICA applicable to the Financed Student Loans insured by
HICA. As a result TERI and HICA, respectively, will agree to guarantee or insure
a portion of the Guaranteed Private Loans.
Pursuant to its respective Guarantee Agreement, each of TERI and HICA
guarantees or insures payment of 100% of the principal (including any interest
or fees capitalized from time to time) and accrued interest for each Guaranteed
Private Loan guaranteed or insured by it as to which any one of the following
events has occurred:
(a) failure by the borrower thereof to make monthly principal
or interest payments on such Guaranteed Private Loan when due, provided
such failure continues for a period of 120 days (150 days for HICA);
S-47
<PAGE> 50
(b) any filing by or against the borrower thereof of a
petition in bankruptcy pursuant to any chapter of the Bankruptcy Code,
(with respect to the Guaranteed Private Loans insured by HICA, subject
to the restrictions contained in the HICA Surety Bonds);
(c) the death of the borrower thereof; or
(d) the total and permanent disability of the borrower thereof
to be employed on a full-time basis, as certified by two qualified
physicians, (with respect to the Guaranteed Private Loans insured by
HICA, subject to the restrictions contained in the HICA Surety Bonds).
TERI's and HICA's guarantee/insurance obligation with respect to any
Guaranteed Private Loan is conditioned upon the satisfaction of all the
conditions set forth in its respective Guarantee Agreement. These conditions
include, but are not limited to, the following:
- the origination and servicing of such Guaranteed
Private Loan being performed in accordance with the
Programs and other applicable requirements,
- the timely payment to TERI or HICA, as the case may
be, of all guarantee fees or premiums payable with
respect to such Guaranteed Private Loan,
- the timely submission to TERI or HICA, as the case
may be, of all required pre-claim delinquency status
notifications and of the claim with respect to such
Guaranteed Private Loan, and
- the transfer and endorsement of the promissory note
evidencing such Guaranteed Private Loan to TERI or
HICA, as the case may be, upon and in connection with
making a claim to receive Guarantee Payments thereon.
Failure to comply with any of the applicable conditions, including the
foregoing, may result in the refusal of TERI or HICA, as the case may be, to
honor its Guarantee Agreement with respect to such Guaranteed Private Loan. In
addition, in the event that any Guaranteed Private Loan is determined to be
unenforceable because the terms of such Guaranteed Private Loan or the forms of
the application or promissory note related thereto violate any provisions of
applicable state law, TERI's guarantee obligation is reduced to 50% and HICA's
insurance obligation is reduced to 0% of principal (including capitalized
interest and fees) and accrued interest with respect to such Guaranteed Private
Loan. Under the Sale and Servicing Agreement, such failure to comply or such
unenforceability would constitute a breach of the Master Servicer's covenants or
the Seller's representations and warranties, as the case may be, and would
create an obligation of the Seller to repurchase such Guaranteed Private Loan or
of the Master Servicer to purchase such Guaranteed Private Loan. See
"Description of the Transfer and Servicing Agreements--Sale of Financed Student
Loans; Representations and Warranties" and "--Master Servicer Covenants" herein.
S-48
<PAGE> 51
TERI and HICA, as Guarantors of Private Loans, are not entitled to any
federal reinsurance or assistance from the Department or any other governmental
entity. Although each Private Guarantor maintains a loan loss reserve intended
to absorb losses arising from its guarantee/insurance commitments, there can be
no assurance that the amount of such reserve will be sufficient to cover the
obligations of TERI or HICA over the term of the Guaranteed Private Loan.
Certain organizational and summary financial information with respect
to each of TERI and HICA in its capacity as a Guarantor is set forth below. The
information set forth below relating to TERI and HICA is not guaranteed as to
accuracy or completeness and is not to be construed as a representation by the
Seller, the Master Servicer, any of the Underwriters, or any of their respective
affiliates:
TERI
TERI was incorporated in 1985 to guarantee Student Loans and is not an
insurance company. TERI is a Massachusetts non-profit corporation headquartered
in Boston, Massachusetts and employs approximately 175 people, as of December
31, 1998.
Guaranty Volume. The following table sets forth the non-federally
reinsured education loans that have first become guaranteed by TERI in each of
the five calendar years referred to below; such information is not guaranteed as
to accuracy or completeness and is not to be construed as a representation by
the Seller, the Master Servicer, any of the Underwriters or any of their
respective affiliates:
<TABLE>
<CAPTION>
PRIVATE LOANS
CALENDAR YEAR GUARANTEED BY YEAR
------------ ---------------------
(DOLLARS IN MILLIONS)
<S> <C>
1994 $292.2
1995 303.4
1996 339.7
1997 332.6
1998 380.4
</TABLE>
Proprietary School Loans. Default rates for Student Loans made to
students attending proprietary or vocational schools are significantly higher
than those made to students attending other 2-year and 4-year institutions.
Except for a few selected, accredited proprietary schools which grant degrees,
TERI does not guarantee student loans made to students attending proprietary or
vocational schools.
Reserve Ratio. Unlike the Federal Guarantors, TERI computes its reserve
ratio by dividing the "Total Amounts Available To Meet Guarantee Commitments" by
the "total loans outstanding." TERI defines "Total Amounts Available to Meet
Guarantee Commitments" as the sum of the
S-49
<PAGE> 52
amounts set forth below under the caption "Amounts Available To Meet Guarantee
Commitments" (which amounts include for this purpose the segregated reserves
described below under the caption "Segregated Reserves for Private Loans Under
the Programs Guaranteed by TERI"). TERI defines "total loans outstanding" as the
total outstanding principal amount of all loans it has agreed to guarantee as of
December 31 of each year. Consequently, the reserve ratio information provided
above for the Federal Guarantors is not comparable to that provided for TERI
below. The following table sets forth TERI's reserve ratio as of December 31 for
the five calendar years referred to below; such information is not guaranteed as
to accuracy or completeness and is not to be construed as a representation by
the Seller, the Master Servicer, any of the Underwriters, or any of their
respective affiliates:
<TABLE>
<CAPTION>
AMOUNTS
AVAILABLE
TO MEET
GUARANTEE RESERVE
CALENDAR YEAR COMMITMENTS RATIO
- ------------- ----------- -----
(DOLLARS IN (UNAUDITED)
THOUSANDS)
(UNAUDITED)
<S> <C> <C>
1994 $73,624 6.1%
1995 83,937 5.7%
1996 96,362 5.7%
1997 102,201 5.4%
1998 104,170 5.0%
</TABLE>
Amounts Available To Meet Guarantee Commitments. As part of guarantee
agreements with lending institutions, with certain such agreements being revised
in 1997, TERI has agreed to hold as security for its guarantees a percentage of
the amount of unpaid principal on outstanding loans which ranges from 0.0% to
4.5% in total TERI funds available as security for the performance of TERI
obligations. At December 31, 1998, and December 31, 1997 the balance of loans
outstanding guaranteed directly by TERI amounted to approximately $2.1 billion
and $1.9 billion, respectively. At December 31, 1998, TERI was required to have
approximately $94.9 million in reserves (consisting of loan loss reserves,
deferred revenue and unrestricted and/or board designated unrestricted net
assets) available as security for TERI's performance as guarantor.
As of the end of each of the five calendar years referred to below,
TERI had available the following funds and reserves to meet its loan guarantee
commitments; such information is not guaranteed as to accuracy or completeness
and is not to be construed as a representation by the Seller, the Master
Servicer, any of the Underwriters or any of their respective affiliates:
S-50
<PAGE> 53
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(AS RESTATED)
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Deferred Guarantee Fees $ 5,269 $ 5,234 $ 5,140 $ 5,032 $ 4,899
Loan Loss Reserve 29,629 29,092 57,006 56,999 54,186
Unrestricted--Board Designated 33,151 46,063 31,169 33,951 33,929
Unrestricted--Undesignated 5,579 3,548 3,047 6,219 11,156
------- ------- ------- -------- --------
Total Amounts Available To Meet
Guarantee Commitments $73,624 $83,937 $96,362 $102,201 $104,170
======= ======= ======= ======== ========
</TABLE>
Subject to the minimum restrictions imposed by lending institutions and
the segregated reserves discussed below under "Segregated Reserves for Private
Loans Under the Programs Guaranteed by TERI," TERI establishes its loan loss
reserve based on its management's estimates of probable losses arising from its
guarantee commitments, based on the historical experience of TERI and those of
other lending institutions and programs, and based on the results of a
semi-annual actuarial study provided by an independent third party. TERI has
advised the Seller that it is currently in compliance with all operating
reserves requirements contained in guarantee agreements TERI has in place with
other student loan lenders and other trustees under prior securitizations of
student loans. However, there can be no assurance that such compliance will
continue.
Recovery Rate. Unlike the Federal Guarantors' calculation of recovery
rates discussed above, which consists of an annual measure of recoveries as
compared to default claims, the recovery rate for TERI is determined by dividing
the cumulative amount recovered from borrowers by the cumulative amount of
default claims paid by TERI as a guarantor for the year when the loan defaulted.
Consequently, the recovery rate information provided above for the Federal
Guarantors is not comparable to that provided for TERI below. TERI's recovery
rates as of December 31, 1998, with respect to loans defaulting in each of the
five calendar years referred to below are as follows; such information is not
guaranteed as to accuracy or completeness and is not to be construed as a
representation by the Seller, the Master Servicer, any of the Underwriters or
any of their respective affiliates:
<TABLE>
<CAPTION>
CUMULATIVE
PERIOD OF CASH RECOVERY RATE
DEFAULT (UNAUDITED)
------- -----------
<S> <C>
1994 46% (January 1, 1994--December 31, 1998)
1995 41% (January 1, 1995--December 31, 1998)
1996 31% (January 1, 1996--December 31, 1998)
1997 26% (January 1, 1997--December 31, 1998)
1998 11% (January 1, 1998--December 31, 1998)
</TABLE>
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<PAGE> 54
The appearance of a declining trend in the foregoing recovery rates can
largely be attributed to the fact that each succeeding default year listed above
includes one fewer year in which to obtain recoveries for the amounts paid out
on guarantee claims in the default year.
Claims Rate. Unlike the Federal Guarantors' calculation of claims rates
discussed above, which consists of an annual measure of claims made to
outstanding loan balances guaranteed at the start of that year, the claims rate
for TERI set forth below is based on the aggregate amount of claims, whenever
paid, on loans guaranteed by TERI in a particular year or period. The "Cohort
Default Rate" refers to the total principal amount of defaulted loans for which
guarantee payments were made by TERI (exclusive of any subsequent recoveries by
TERI) for the cohort year (or period) as a percentage of the aggregate principal
amount of loans guaranteed by TERI for the cohort year (or period). As a result,
the claims rate information provided above for the Federal Guarantors is not
comparable to that provided for TERI below. The following table sets forth the
total loans guaranteed, total defaults paid and the cohort default rate as of
December 31, for each of the five calendar years referred to below; such
information is not guaranteed as to accuracy or completeness and is not to be
construed as a representation by the Seller, the Master Servicer, any of the
Underwriters or any of their respective affiliates:
<TABLE>
<CAPTION>
TOTAL TOTAL DEFAULTS
LOANS PAID FOR LOANS COHORT
GUARANTEED GUARANTEED IN DEFAULT
COHORT YEAR IN COHORT YEAR COHORT YEAR RATE
----------- -------------- ----------- ----
(DOLLARS IN (DOLLARS IN (UNAUDITED)
THOUSANDS) THOUSANDS)
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
1994 $292,289 $14,978 5.12%
1995 303,369 12,044 3.97%
1996 339,675 5,663 1.67%
1997 332,530 2,020 0.61%
1998 380,357 182 0.05%
</TABLE>
The declining trend reflected above in the claims rates experienced by
TERI can largely be attributed to the fact that in each succeeding cohort year
fewer loans guaranteed by TERI were in repayment. As the number of loans
entering repayment increases, the percentage of loans becoming delinquent and
subsequently defaulting also tends to increase. There can be no assurance that
the claims rate experience of TERI for any future year will be similar to the
historical claims rate experience set forth above.
Segregated Reserves for Private Loans Under the Programs Guaranteed by
TERI. A portion of the reserves described above that are maintained by TERI have
been segregated solely to support its guarantee obligations under the Programs.
These segregated reserves, which are not available to cover TERI guaranteed
loans outside of the Programs, are equally available to all
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<PAGE> 55
holders of TERI guaranteed Private Loans made under the Programs since
1990-1991, which include both the Seller and third-party purchasers of the
Seller's TERI guaranteed Private Loans under the Programs, including but not
limited to the Eligible Lender Trustee on behalf of the Trust. Draws on such
segregated reserves will be paid in the order received, to the extent of amounts
remaining in the segregated reserve account. Consequently, there may be one or
more owners of such Private Loans for which a claim could, in the event of a
default by a student borrower, be filed against such segregated reserves. As a
result, there can be no assurance that amounts in these segregated reserves will
be available to support Guarantee Payments by TERI owing in respect of the
Guaranteed Private Loans made under the aforementioned Programs, or that such
amounts, if available, will be sufficient to satisfy all existing Guarantee
Payments due with respect to Guaranteed Private Loans. The Seller will assign
the portion of its rights under the agreement implementing these segregated
reserves that is attributable to such Guaranteed Private Loans to the Trust.
TERI has agreed that it will provide a copy of its most recent audited
financial statements to Securityholders upon receipt of a written request
directed to its Chief Financial Officer, 330 Stuart Street, Suite 500, Boston,
Massachusetts 02116.
HICA
The Eligible Lender Trustee will take an assignment of Surety Bonds by
which HICA has insured certain Guaranteed Private Loans. HICA was incorporated
in 1986 to provide insurance coverage to lenders against credit losses on
education-related, non-federally insured loans to students attending
post-secondary educational institutions. HICA is a licensed, regulated insurance
company incorporated in South Dakota and headquartered in Sioux Falls, and
employs approximately 29 people as of June 30, 1999. HICA is an indirect
subsidiary of SLM Holding Corporation.
Insurance Volume. The following table sets forth the amount of loans
that have first become insured by HICA in each of the five calendar years
referred to below; such information is not guaranteed as to accuracy or
completeness and is not to be construed as a representation by the Seller, the
Master Servicer, any of the Underwriters or any of their respective affiliates:
<TABLE>
<CAPTION>
PRIVATE LOANS
INSURED
CALENDAR YEAR BY YEAR
- ------------- -------
(DOLLARS IN MILLIONS)
<S> <C>
1994 $161
1995 173
1996 256
1997 286
</TABLE>
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<PAGE> 56
<TABLE>
<S> <C>
1998 267
1999* 113
</TABLE>
* For six-month period ending June 30, 1999.
HICA has agreed that it will provide a copy of its most recent audited
financial statements to Securityholders upon receipt of a written request
directed to Mr. Mark Bielen, Treasurer, 3900 West Technology Circle, Suite 7,
Sioux Falls, South Dakota 57106.
NON-GUARANTEED PRIVATE LOANS
Approximately ___% of the Initial Financed Student Loans are, and
approximately ___% of the Subsequent Pool Student Loans will be, Non-Guaranteed
Private Loans. The Non-Guaranteed Private Loans were originated in accordance
with the criteria set forth in the Prospectus under "The Student Loan Financing
Business--Description of the Private Loans Under the Programs." See also the
discussion of the Key Alternative Loan Program in the Prospectus under "The
Student Loan Financing Business--Description of the Private Loans Under the
Programs."
DESCRIPTION OF THE SECURITIES
Terms used in this section and not previously defined and not defined
herein are defined under "Description of the Transfer and Servicing Agreements
- --Distributions" herein.
GENERAL
The Notes will be issued pursuant to the terms of the Indenture, dated
_____ ___, ____ between the Trust and the Indenture Trustee (the "Indenture").
The Certificates will be issued pursuant to the terms of the Trust Agreement.
The following information supplements the summary of the material terms of the
Notes, the Certificates, the Indenture and the Trust Agreement set forth in the
Prospectus. The summary does not purport to be complete and is qualified in its
entirety by reference to the provisions of the Notes, the Certificates, the
Indenture and the Trust Agreement.
Each class of Notes and Certificates (collectively, the "Securities")
will initially be represented by one or more Notes and Certificates,
respectively, in each case registered in the name of the nominee of the
Depository Trust Company ("DTC") (together with any successor depository
selected by the Administrator, the "Depository"), except as set forth below. The
Securities will be available for purchase in denominations of $1,000 and
integral multiples of $1,000 in excess thereof in book-entry form only. The
Trust has been informed by DTC that DTC's nominee will be Cede & Co. ("Cede").
Accordingly, Cede is expected to be the holder of record of the Securities.
Unless and until Definitive Notes or Definitive Certificates are issued under
the limited circumstances described herein, no Noteholder or Certificateholder
will be entitled to receive a physical certificate representing a Note or
Certificate. All references herein to actions by
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<PAGE> 57
Noteholders or Certificateholders refer to actions taken by DTC upon
instructions from its participating organizations (the "Participants") and all
references herein to distributions, notices, reports and statements to
Noteholders or Certificateholders refer to distributions, notices, reports and
statements to DTC or Cede, as the registered holder of the Notes or the
Certificates, as the case may be, for distribution to Noteholders or
Certificateholders in accordance with DTC's procedures with respect thereto. See
"Certain Information Regarding the Securities--Book-Entry Registration" and
"--Definitive Securities" in the Prospectus.
THE NOTES
Distributions of Interest. Interest will accrue on the principal
balance of each class of Notes at a rate per annum equal to the lesser of the
Formula Rate for such Notes and the Student Loan Rate (each such interest rate
being a "Note Interest Rate"). Interest will accrue from and including the
Closing Date or from the most recent Distribution Date on which interest has
been paid to but excluding the current Distribution Date (each, an "Interest
Period") and will be payable to the Noteholders on each Distribution Date.
Interest accrued as of any Distribution Date but not paid on such Distribution
Date will be due on the next Distribution Date together with an amount equal to
interest on such amount at the applicable Note Interest Rate. Interest payments
on the Notes for any Distribution Date will generally be funded from Available
Funds and amounts on deposit in the Reserve Account and, under certain limited
circumstances, the Pre-Funding Account remaining after the distribution of the
Master Servicing Fee for each of the two immediately preceding Monthly Servicing
Payment Dates and of the Master Servicing Fee, and the Administration Fee for
each Distribution Date. See "Description of the Transfer and Servicing
Agreements -- Distributions" and "--Credit Enhancement" herein. If such sources
are insufficient to pay the Noteholders' Interest Distribution Amount for such
Distribution Date, such shortfall will be allocated pro rata to the Noteholders
(based upon the total amount of interest then due on each class of Notes).
"Collection Period" means each period of three calendar months from and
including the date following the end of the preceding Collection Period (or,
with respect to the first Collection Period, the period beginning on the
Statistical Cutoff Date and ending on _______ __, ____).
"Formula Rate" means for any class of Securities, the applicable
Investor Index plus the applicable Margin.
"Investor Index" means (x) in the case of the Treasury Bill Indexed
Securities, the daily weighted average of the 91-day Treasury Bill Rates within
such Interest Period (determined as described under "--Determination of the
91-day Treasury Bill Rate" below) or (y) in the case of the LIBOR Indexed
Securities, Three Month LIBOR (determined as described under "--Determination of
LIBOR" below).
In the case of any LIBOR Indexed Securities and the initial Interest
Period, interest will accrue for the period from the Closing Date to but
excluding ______ __, ____ based on Three Month LIBOR as determined on the
initial LIBOR Determination Date and for the period from
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<PAGE> 58
______ ___, ____ to but excluding ______ __, ____ based on Three Month LIBOR as
determined on the LIBOR Determination Date in _______ ____. See "--Determination
of LIBOR" below.
The "Margin" for each class of Securities is [___% for the Class A-1
Notes, ___% for the Class A-2 Notes] and ___% for the Certificates.
The "Student Loan Rate" for any class of Securities for any Interest
Period will equal the product of (a) the quotient obtained by dividing (x) 365
(or 366 in a leap year) by (y) the actual number of days elapsed in such
Interest Period and (b) the percentage equivalent of a fraction, the numerator
of which is equal to Expected Interest Collections for the Collection Period
relating to such Interest Period less the Master Servicing Fees and the
Administration Fee and payable on the related Distribution Date and any Master
Servicing Fees paid on the two preceding Monthly Servicing Payment Dates during
the related Collection Period and the denominator of which is the outstanding
principal balance of the Securities as of the first day of such Interest Period.
"Expected Interest Collections" means, with respect to any Collection
Period, the sum of
- the amount of interest accrued, net of amounts
required by the Higher Education Act to be paid to
the Department or to be repaid to borrowers, with
respect to the Financed Student Loans for such
Collection Period (whether or not such interest is
actually paid),
- all Interest Subsidy Payments and Special Allowance
Payments expected to be received by the Eligible
Lender Trustee for such Collection Period (whether or
not actually received) with respect to the Financed
Federal Loans and
- Investment Earnings for such Collection Period.
To the extent that for any Interest Period the rate for the Notes
calculated on the basis of the Formula Rate exceeds the Student Loan Rate, the
amount of the excess ("Noteholders' Interest Index Carryover") (together with
the unpaid portion of any such Noteholders' Interest Index Carryover from prior
Distribution Dates and interest accrued thereon at the Formula Rate for the
Notes) will be paid on such Distribution Date or any subsequent Distribution
Date to the extent funds are allocated and available therefor after making all
required prior allocations and distributions on such Distribution Date, as
described under "Description of the Transfer and Servicing Agreements--
Distributions" herein. Any Noteholders' Interest Index Carryover due on the
Notes that may exist on any Distribution Date will be payable to holders of the
Notes on that Distribution Date on a pro rata basis, based on the amount of the
Noteholders' Interest Index Carryover then owing on the Notes, and on any
succeeding Distribution Dates, solely out of the amount of Available Funds
remaining in the Collection Account on any such Distribution Date after
distribution of the amounts set forth in "Description of the Transfer and
Servicing Agreements--Distributions" herein. No amounts on deposit in the
Reserve Account or the Pre-Funding Account will be available to pay any
Noteholders' Interest Index Carryover. Any
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<PAGE> 59
amount of Noteholders' Interest Index Carryover due on the Notes remaining
after distribution of all Available Funds on the applicable Final Maturity Date
will never become due and payable and will be discharged on such date.
Distributions of Principal. Principal payments will be made to the
holders of the Notes on each Distribution Date in an amount generally equal to
the Principal Distribution Amount for such Distribution Date, until the
principal balance of the Notes is reduced to zero. Principal payments on the
Notes will generally be derived from Available Funds remaining after the
distribution of the amounts set forth in "Description of the Transfer and
Servicing Agreements--Distributions" herein, provided, that, on any Distribution
Date that the principal balance of the Notes exceeds the Note Collateralization
Amount, an amount equal to the Noteholders' Priority Principal Distribution
Amount will be distributed to Noteholders prior to any payments to
Certificateholders. If the remaining amount of Available Funds is insufficient
to pay the Noteholders' Priority Principal Distribution Amount, for any
Distribution Date, the remaining shortfall will be distributable to the
Noteholders on subsequent Distribution Dates and (except with respect to the
Final Maturity Date for such classes of Notes), the remaining shortfall will not
constitute an Event of Default (as defined in the Prospectus). In addition, in
the event the Financed Student Loans are not sold pursuant to the auction
process described under "Description of the Transfer and Servicing
Agreements--Termination," with respect to any Distribution Date occurring on or
after the ______ _____ Distribution Date, the Specified Collateral Balance will
be reduced to zero and all amounts on deposit in the Collection Account (after
distribution of the Master Servicing Fee for each of the two immediately
preceding Monthly Servicing Payment Dates and the Master Servicing Fee, the
Administration Fee, the Noteholders' Interest Distribution Amount, any
Noteholders' Priority Principal Distribution Amount, the Certificateholders'
Interest Distribution Amount and any amounts necessary to reinstate the balance
of the Reserve Account to the Specified Reserve Account Balance on such
Distribution Date) will be distributed to the Noteholders and then to the
Certificateholders as principal until the outstanding principal balance of the
Notes and Certificates has been reduced to zero. See "Description of the
Transfer and Servicing Agreements--Termination" herein.
Principal payments on the Notes will be applied on each Distribution
Date, first, to the principal balance of the [Class A-1] Notes until the
principal balance is reduced to zero and then to the principal balance of the
[Class A-2] Notes until the principal balance is reduced to zero. The aggregate
outstanding principal amount of each class of Notes will be payable in full on
the Final Maturity Date for that class of Notes. The dates on which the Final
Maturity Dates occur for each class of Notes are set forth on the cover page. On
the Final Maturity Date for each class of Notes, amounts on deposit in the
Reserve Account, if any, will be available, if necessary, to be applied to
reduce the principal balance of the Notes to zero. Although the maturity of many
of the Financed Student Loans will extend well beyond the Final Maturity Dates,
the actual date on which the aggregate outstanding principal and accrued
interest of any class of Notes are paid may be earlier than the Final Maturity
Date for the related class of Notes, based on a variety of factors. See "The
Financed Student Loan Pool--Maturity and Prepayment Assumptions" herein.
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<PAGE> 60
Mandatory Redemption. If, as of the Special Determination Date, the
Subsequent Pool Pre-Funded Amount has not been reduced to zero, then the
remaining Subsequent Pool Pre-Funded Amount, if greater than $_____, will be
distributed on the first Distribution Date thereafter to redeem each class of
Notes and prepay the Certificates on a pro rata basis, based on the initial
principal amount of each class of Notes and the initial Certificate Balance of
the Certificates. If the remaining Subsequent Pool Pre-Funded Amount is $_______
or less, it will be distributed on the first Distribution Date thereafter only
to holders of the [Class A-1] Notes.
The Indenture Trustee. _______________, a ___________ banking
corporation, will be the Indenture Trustee under the Indenture. The Seller
maintains normal commercial banking relations with the Indenture Trustee.
THE CERTIFICATES
Distributions of Interest. Interest will accrue on the Certificate
Balance at a rate per annum equal to the lesser of the Formula Rate for the
Certificates and the Student Loan Rate (such interest rate being the
"Certificate Rate"). Interest on the Certificates will be distributable
quarterly on each Distribution Date. Interest distributions due for any
Distribution Date but not distributed on such Distribution Date will be due on
the next Distribution Date, increased by an amount equal to interest on such
amount at the Certificate Rate. Interest distributions with respect to the
Certificates for any Distribution Date will generally be funded from the portion
of the Available Funds and the amounts on deposit in the Reserve Account and,
under certain limited circumstances, the Pre-Funding Account remaining after
distribution of the amounts set forth in "Description of the Transfer and
Servicing Agreements--Distributions" herein for such Distribution Date. See
"Description of the Transfer and Servicing Agreements--Distributions," "--Credit
Enhancement--Reserve Account" and "--Additional Fundings" herein.
To the extent that for any Interest Period the rate for the
Certificates calculated on the basis of the Formula Rate exceeds the Student
Loan Rate, the amount of such excess (together with the unpaid portion of any
such excess from prior Distribution Dates and interest accrued thereon at the
Formula Rate for the Certificates) will be paid on such Distribution Date or any
subsequent Distribution Date on a subordinated basis to the extent funds are
allocated and available therefor after making all required prior allocations and
distributions on such Distribution Dates, as described under "Description of the
Transfer and Servicing Agreements -- Distributions" herein. The payment of such
amounts due to Certificateholders on any Distribution Date (such amount, the
"Certificateholders' Interest Index Carryover") is further subordinated to the
payment of Noteholders' Interest Index Carryover. To the extent funds are
available therefor, the Certificateholders' Interest Index Carryover may be paid
prior to the time that the Notes are paid in full. Any Certificateholders'
Interest Index Carryover due on the Certificates that may exist on any
Distribution Date will be payable on that Distribution Date on a pro rata basis
and any succeeding Distribution Dates solely out of the amount of Available
Funds remaining in the Collection Account on any such Distribution Date after
distribution of the amounts set forth in "Description of the Transfer and
Servicing Agreements--Distributions" herein. No amounts on deposit in the
Reserve Account or Pre-Funding Account will be available to pay any
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<PAGE> 61
Certificateholders' Interest Index Carryover. Any amount of Certificateholders'
Interest Index Carryover due on the Certificates remaining after distribution of
all Available Funds on the Final Maturity Date for the Certificates will never
become due and payable and will be discharged on such date.
Distributions of Principal. The Certificates will be entitled to
distributions on each Distribution Date on and after which the Notes are paid in
full in an amount generally equal to the Principal Distribution Amount for such
Distribution Date. Distributions with respect to principal payments on the
Certificates for such Distribution Date will generally be funded from the
portion of Available Funds remaining after distribution of the amounts set forth
in "Description of the Transfer and Servicing Agreements--Distributions" herein.
See "Description of the Transfer and Servicing Agreements--Distributions" and
"--Credit Enhancement--Reserve Account" herein.
The outstanding Certificate Balance will be payable in full on the
Final Maturity Date for the Certificates. The Final Maturity Date for the
Certificates is set forth on the cover page. On the Final Maturity Date for the
Certificates, amounts on deposit in the Reserve Account, if any, will be
available, if necessary, to be applied to reduce the Certificate Balance to
zero. The actual date on which the aggregate outstanding Certificate Balance and
accrued interest of the Certificates will be paid may be earlier than the Final
Maturity Date for the Certificates, however, based on a variety of factors. See
"The Financed Student Loan Pool--Maturity and Prepayment Assumptions" herein.
Subordination of the Certificates. The rights of the holders of the
Certificates to receive payments of interest are subordinated to the rights of
the holders of the Notes to receive payments of interest (and in certain
circumstances, principal) and the rights of the holders of the Certificates to
receive payments of principal are subordinated to the rights of the holders of
the Notes to receive payments of interest and principal. Consequently, amounts
on deposit in the Collection Account and to the extent necessary, the Reserve
Account and, during the Funding Period, the Other Additional Pre-Funding
Subaccount, will be applied to the payment of interest on the Notes before
payment of interest on the Certificates. Moreover, the holders of the
Certificates will not be entitled to any payments of principal until the Notes
are paid in full. In addition, if an Event of Default occurs and is continuing
under the Indenture or a Seller Insolvency Event occurs and the Financed Student
Loans are liquidated, all amounts due on the Notes will be payable before any
amounts are payable on the Certificates. Additionally, if on any Distribution
Date the outstanding principal balance of the Notes (prior to giving effect to
distributions on such Distribution Date) is in excess of the Note
Collateralization Amount, principal will be payable to the holders of the Notes
in the amount of such excess to the extent of funds available before any amounts
are payable to the holders of the Certificates. If amounts otherwise allocable
to the Certificates are used to fund payments of interest or principal on the
Notes, distributions with respect to the Certificates may be delayed or reduced.
DETERMINATION OF THE TREASURY BILL RATE
"91-day Treasury Bill Rate" means, on any day, the weighted average per
annum discount rate (expressed on a bond equivalent basis and applied on a daily
basis) for 91-day Treasury Bills
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<PAGE> 62
sold at the most recent 91-day Treasury Bill auction prior to such date, as
reported by the U.S. Department of the Treasury. In the event that the results
of the auctions of 91-day Treasury Bills cease to be reported as provided above,
or that no such auction is held in a particular week, then the 91-day Treasury
Bill Rate in effect as a result of the last such publication or report will
remain in effect until such time, if any, as the results of auctions of 91-day
Treasury Bills shall again be reported or such an auction is held, as the case
may be. The 91-day Treasury Bill Rate will be subject to a Lock-In Period of six
business days.
"Lock-In Period" means the number of days preceding any Distribution
Date during which the Note Interest Rate or Certificate Rate, as applicable, in
effect on the first day of such period will remain in effect until the end of
the accrual period related to such Distribution Date.
Accrued interest on any class of Notes (and the Certificates) which are
Treasury Bill Indexed Securities from and including the Closing Date or the
preceding Distribution Date, as applicable, to but excluding the current
Distribution Date is calculated by multiplying the principal amount of the Notes
(or the Certificate Balance) by an "accrued interest factor." This factor is
calculated by adding the interest rates applicable to each day on which each
Note has been outstanding since the Closing Date or the preceding Distribution
Date, as applicable, and dividing the sum by 365 (or by 366 in the case of
accrued interest which is payable on a Distribution Date in a leap year) and
rounding the resulting number to nine decimal places.
The following table sets forth the accrued interest factors that would
have been applicable to any Notes which are Treasury Bill Indexed Securities
bearing interest at the indicated rates, assuming a 365-day year:
<TABLE>
<CAPTION>
ASSUMED INTEREST
----------------
SETTLEMENT DAYS RATE ON INTEREST
DATE OUTSTANDING THE NOTES FACTOR
---- ----------- --------- ------
<S> <C> <C> <C>
1st
2nd 1
3rd 2
4th 3
5th* 4
6th 5
7th 6
8th 7
9th 8
10th 9
</TABLE>
* First interest rate adjustment (91-day Treasury Bills are generally auctioned
weekly).
The numbers in this table are examples given for information purposes
only and are in no way a prediction of interest rates on any Notes which are
Treasury Bill Indexed Securities. A similar factor calculated in the same manner
is applicable to the return on Certificates which are Treasury Bill Indexed
Securities.
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<PAGE> 63
The Administrator makes information concerning the current 91-day
Treasury Bill Rate and the accrued interest factor available through Bloomberg
L.P.
DETERMINATION OF LIBOR
Pursuant to the Sale and Servicing Agreement, the Administrator will
determine Three-Month LIBOR for purposes of calculating the interest due on the
Notes and Certificates which are LIBOR Indexed Securities and the Noteholders'
Interest Index Carryover and the Certificateholders' Interest Index Carryover,
in each case, for each given Interest Period on (x) the second business day
prior to the commencement of each Interest Period and (y) with respect to the
initial Interest Period, as determined pursuant to clause (x) for the period
from the Closing Date to but excluding ______ __, ____ and as determined on the
second business day prior to _______ __, ____ for the period from ________ __,
____ to but excluding _____ __, ____ (each, a "LIBOR Determination Date"). For
purposes of calculating Three-Month LIBOR, a business day is any day on which
banks in London and New York City are open for the transaction of business.
Interest due for any Interest Period will be determined based on the actual
number of days in such Interest Period over a 360-day year.
"Three-Month LIBOR" means the London interbank offered rate ("LIBOR")
for deposits in U.S. dollars having a maturity of three months commencing on the
related LIBOR Determination Date (the "Index Maturity") which appears on
Telerate Page 3750 as of 11:00 a.m., London time, on such LIBOR Determination
Date. If such rate does not appear on Telerate Page 3750, the rate for that day
will be determined on the basis of the rates at which deposits in U.S. dollars,
having the Index Maturity and in a principal amount of not less than U.S.
$1,000,000, are offered at approximately 11:00 a.m., London time, on such LIBOR
Determination Date to prime banks in the London interbank market by the
Reference Banks. The Administrator will request the principal London office of
each of such 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, the rate for that
day will be the arithmetic mean of the rates quoted by major banks in New York
City, selected by the Administrator, at approximately 11:00 a.m., New York City
time, on such LIBOR Determination Date for loans in U.S. dollars to leading
European banks having the Index Maturity and in a principal amount equal to an
amount of not less than U.S. $1,000,000; provided that if the banks selected as
aforesaid are not quoting as mentioned in this sentence, Three-Month LIBOR in
effect for the applicable reset period will be Three-Month LIBOR in effect for
the previous reset period.
"Telerate Page 3750" means the display page so designated on the Bridge
Telerate Service (or such other page as may replace that page on that service
for the purpose of displaying comparable rates or prices).
"Reference Bank" means a leading bank (a) engaged in transactions in
Eurodollar deposits in the international Eurocurrency market, (b) not
controlling, controlled by or under common control with the Administrator and
(c) having an established place of business in London.
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<PAGE> 64
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
GENERAL
The following information supplements the summary set forth in the
Prospectus of the material terms of the Sale and Servicing Agreement, pursuant
to which the Eligible Lender Trustee on behalf of the Trust will purchase, the
Master Servicer will service (or will cause the Sub-Servicers to service) and
the Administrator will perform certain administrative functions with respect to
the Financed Student Loans; the Administration Agreement, dated _____ __, ____
among the Administrator, the Trust and the Indenture Trustee (the
"Administration Agreement"), pursuant to which the Administrator will undertake
certain other administrative duties with respect to the Trust and the Financed
Student Loans; and the Trust Agreement, pursuant to which the Trust will be
created and the Certificates will be issued (collectively, the "Transfer and
Servicing Agreements"). However, the summary does not purport to be complete and
is qualified in its entirety by reference to the provisions of such Transfer and
Servicing Agreements.
SALE OF FINANCED STUDENT LOANS; REPRESENTATIONS AND WARRANTIES
On or prior to the Closing Date, the Seller will sell and assign to the
Eligible Lender Trustee on behalf of the Trust, without recourse, its entire
interest in the Initial Financed Student Loans, all collections received and to
be received with respect thereto for the period on and after _______ __, ____
and all the Assigned Rights pursuant to the Sale and Servicing Agreement. Each
Initial Financed Student Loan will be identified in schedules appearing as an
exhibit to the Sale and Servicing Agreement. The Eligible Lender Trustee will,
concurrently with such sale and assignment, execute, authenticate and deliver
the Notes. The net proceeds received from the sale of the Notes and the
Certificates will be applied to the purchase of the Financed Student Loans and
the Assigned Rights and to the deposit of the Pre-Funded Amount in the
Pre-Funding Account and the Reserve Account Initial Deposit to the Reserve
Account. See "--Additional Fundings" below for a description of the application
of funds on deposit in the Pre-Funding Account during the Funding Period.
In the Sale and Servicing Agreement, the Seller will make certain
representations and warranties with respect to the Financed Student Loans to the
Trust for the benefit of the Certificateholders and the Noteholders and will
have certain cure, repurchase and reimbursement obligations with respect to any
breaches. See "Description of the Transfer and Servicing Agreements" in the
Prospectus.
The "Purchase Price" of any Financed Student Loan will be (1) in the
case of Initial Financed Student Loans, an amount equal to _______ of the
aggregate principal balance of such Initial Financed student Loan as of the
Statistical Cutoff Date, (2) in the case of Subsequent Pool Student Loans, an
amount equal to _______ of the aggregate principal balance thereof as of the
related Subsequent Cutoff Date and (3) in the case of Other Subsequent Student
Loans, an
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amount equal to ________ of the aggregate principal balance thereof as
of its Subsequent Cutoff Date. For purposes of the foregoing calculations, the
aggregate principal balance of each Financed Student Loan includes accrued
interest thereon from the date of origination to, with respect to each Initial
Financed Student Loan, the Statistical Cutoff Date, and to, with respect to each
Additional Student Loan, the related Subsequent Cutoff Date, in each case
expected to be capitalized upon entry into repayment.
To assure uniform quality in servicing and to reduce administrative
costs, each Sub-Servicer will be appointed custodian of the promissory notes
representing the Financed Student Loans which such Sub-Servicer is servicing on
behalf of the Master Servicer and with respect to the Trust. The Seller's, the
Master Servicer's and the each Sub-Servicers' accounting and other records will
reflect the sale and assignment of the Financed Student Loans to the Eligible
Lender Trustee on behalf of the Trust, and Uniform Commercial Code financing
statements reflecting such sale and assignment will be filed.
ACCOUNTS
The Administrator will establish and maintain four separate segregated
accounts as follows: the "Collection Account", the "Pre-Funding Account", the
"Escrow Account" and the "Reserve Account." Each such account will be
established in the name of the Indenture Trustee on behalf of the Noteholders
and the Certificateholders.
Funds in the Collection Account, the Pre-Funding Account, the Escrow
Account and the Reserve Account (collectively, the "Trust Accounts") will be
invested as provided in the Sale and Servicing Agreement in Eligible
Investments. "Eligible Investments" are generally limited to short-term U.S.
government backed securities, certain highly rated commercial paper and money
market funds and other investments acceptable to the Rating Agencies as being
consistent with the rating of the Notes. Subject to certain conditions, Eligible
Investments may include securities or other obligations issued by the Seller or
its affiliates, or trusts originated by the Seller or its affiliates, or shares
of investment companies for which the Seller or its affiliates may serve as the
investment advisor. Eligible Investments are limited to obligations or
securities that mature not later than the business day immediately preceding the
next Distribution Date. Investment earnings on funds deposited in the Trust
Accounts, net of losses and investment expenses (collectively, "Investment
Earnings"), will be deposited in the Collection Account on each Distribution
Date and will be treated as collections of interest on the Financed Student
Loans.
The Trust Accounts will be maintained as Eligible Deposit Accounts.
"Eligible Deposit Account" means either (a) a segregated account with an
Eligible Institution or (b) a segregated trust account with the corporate trust
department of a depository institution organized under the laws of the United
States of America or any one of the states thereof or the District of Columbia
(or any domestic branch of a foreign bank), having corporate trust powers and
acting as trustee for funds deposited in such account, so long as any of the
securities of such depository institution have a credit rating from each Rating
Agency in one of its generic rating categories which signifies investment grade.
Any such accounts may be maintained with the Seller or any of its affiliates, if
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such accounts meet the requirements described in clause (a) of the preceding
sentence. "Eligible Institution" means a depository institution (which may be,
without limitation, the Seller or an affiliate thereof, the Eligible Lender
Trustee, or an affiliate thereof, or the Indenture Trustee or an affiliate
thereof) organized under the laws of the United States of America or any one of
the states thereof or the District of Columbia (or any domestic branch of a
foreign bank) which has a long-term unsecured debt rating and/or a short-term
unsecured debt rating acceptable to the two nationally recognized rating
agencies rating the Securities and the deposits of which are insured by the
Federal Deposit Insurance Corporation ("FDIC").
ADDITIONAL FUNDINGS
The Trust may make expenditures (each, an "Additional Funding") from
the Pre-Funding Account and the Escrow Account on Transfer Dates during the
Funding Period and from the Escrow Account and Available Loan Purchase Funds on
Transfer Dates during the period which begins on the day following the end of
the Funding Period and ends on the Loan Purchase Termination Date, in each case
consisting of amounts paid to the Seller to acquire Additional Student Loans as
of the applicable Subsequent Cutoff Dates, to pay capitalized interest on the
Financed Student Loans and to pay Fee Advances as provided in the Sale and
Servicing Agreement.
On the Closing Date, the Seller will deposit $__________ (the "Initial
Pre-Funded Amount") into the Pre-Funding Account from the proceeds of the sale
of the Securities. For administrative convenience, a portion of the Initial
Pre-Funded Amount equal to $__________ (the "Subsequent Pool Pre-Funded Amount")
will be allocated to an administrative subaccount of the Pre-Funding Account
(the "Subsequent Pool Pre-Funding Subaccount"). The remaining portion of the
Initial Pre-Funded Amount equal to $__________ (the "Other Additional Pre-Funded
Amount") will be allocated to an administrative subaccount of the Pre-Funding
Account (the "Other Additional Pre-Funding Subaccount"). The Subsequent Pool
Pre-Funded Amount may only be used by the Trust on or prior to the Special
Determination Date to purchase from the Seller Subsequent Pool Student Loans.
The Subsequent Pool Pre-Funded Amount will be reduced on each date Subsequent
Pool Student Loans are transferred to the Trust by the aggregate Purchase Price
of such Subsequent Pool Student Loans transferred on such date.
The Trust intends to use funds on deposit in the Subsequent Pool
Pre-Funding Subaccount on or prior to the Special Determination Date to acquire
the Subsequent Pool Student Loans. In the event that the Subsequent Pool
Pre-Funded Amount is insufficient to pay the Purchase Price of the Subsequent
Pool Student Loans, then the amount of such deficiency may be withdrawn from the
Other Additional Pre-Funding Subaccount.
Pursuant to the Sale and Servicing Agreement, the Seller is obligated
to sell, and the Eligible Lender Trustee on behalf of the Trust is obligated to
purchase during the Funding Period, Other Subsequent Student Loans having an
aggregate principal balance (net of the aggregate principal balance of the
Financed Student Loans repaid by any Other Subsequent Student Loans that are
Consolidation Loans) of not less than $__________ (less the amount thereof, if
any, used by the Trust to fund shortfalls in the payment of interest on the
Securities as described herein) to the
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extent that such Other Subsequent Student Loans are available. Funds on deposit
in the Other Additional Pre-Funding Subaccount will be used from time to time
during the Funding Period, subject to certain limitations described below,
together with any amounts on deposit in the Escrow Account, to purchase from the
Seller, for an amount equal to ___% of the aggregate principal balance thereof
plus accrued interest (to the extent capitalized or to be capitalized), Other
Subsequent Student Loans made by the Seller to those eligible borrowers who have
Student Loans that are part of the pool of Initial Financed Student Loans as of
the Statistical Cutoff Date or Subsequent Pool Student Loans as of the related
Subsequent Cutoff Date, to pay capitalized interest on any Financed Student Loan
and to pay Fee Advances. See "The Student Loan Financing Business--Description
of Federal Loans Under the Programs--Federal Consolidation Loans" and
"--Description of Private Loans Under the Programs--Private Consolidation Loans"
in the Prospectus.
The Seller expects that the total amount of Additional Fundings from
the Pre-Funding Account will approximate 100% of the Initial Pre-Funded Amount
by the last day of the Collection Period preceding the _______ ____ Distribution
Date; however, there can be no assurance that a sufficient amount of Additional
Fundings will be made during such time. If, on the Special Determination Date,
the Subsequent Pool Pre-Funded Amount has not been reduced to zero, then such
amounts will be distributed to Securityholders as described in "Description of
the Securities--The Notes--Mandatory Redemption" herein. If the Pre-Funded
Amount has not been reduced to zero by the end of the Funding Period, any
amounts remaining in the Pre-Funding Account will be deposited into the
Collection Account for distribution on the immediately following Distribution
Date. Such reduction in the Pre-Funded Amount will result in a corresponding
increase in the amount of principal distributable to the Securities on such
Distribution Date.
The Other Additional Pre-Funded Amount will also be available on each
Monthly Servicing Payment Date to cover any shortfalls in payments of the Master
Servicing Fee and on each Distribution Date to cover any shortfalls in payments
of the Master Servicing Fee, the Administration Fee, interest amounts payable in
respect of the Notes and the Certificates (other than the Noteholders' Interest
Index Carryover and the Certificateholders' Interest Index Carryover) for such
Distribution Date for which funds otherwise available therefor on such
Distribution Date are insufficient to make such distributions and after giving
effect to the application of funds on deposit in the Reserve Account to cover
such shortfalls; provided, however, that the Other Additional Pre-Funded Amount
will only be available to cover shortfalls in interest payments on the
Certificates to the extent that the Note Collateralization Amount (after giving
effect to such reductions in the Other Additional Pre-Funded Amount) would not
be less than the outstanding principal balance of the Notes. Amounts withdrawn
from the Pre-Funding Account for the purposes described in this paragraph will
not be replenished with future available funds.
In addition to the conditions set forth under "The Financed Student
Loan Pool--General" herein, the obligation to purchase any Additional Student
Loan (including a Subsequent Pool Student Loan) by the Eligible Lender Trustee
on behalf of the Trust is subject to the following conditions, among others:
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(a) such Additional Student Loan must satisfy all applicable
origination requirements and all other requirements specified
in the Sale and Servicing Agreement or related agreements;
(b) the Seller will not select such Additional Student Loan in a
manner that it believes is adverse to the interests of the
Securityholders; and
(c) the Seller will deliver certain opinions of counsel to the
Indenture Trustee and the Rating Agencies with respect to the
validity of the conveyance of such Additional Student Loan.
In addition, (a) no Consolidation Loan will be transferred to the Trust unless
at least one underlying Student Loan was held by the Eligible Lender Trustee on
behalf of the Trust at the time of consolidation and (b) no Serial Loan will be
transferred to the Trust unless the borrower of such loan is the borrower for
one or more Financed Student Loans already owned by the Trust.
On the fifteenth day (or, if such day is not a business day, the next
succeeding business day) of each month or on certain other dates designated by
the Seller during the Funding Period and during the period which begins
following the end of the Funding Period and ends on the Loan Purchase
Termination Date (each, a "Transfer Date"), the Seller will sell and assign,
without recourse, to the Eligible Lender Trustee on behalf of the Trust, its
entire interest in the Other Subsequent Student Loans or Other Student Loans, as
applicable, made or, with respect to Subsequent Pool Student Loans, owned during
the period preceding the applicable Transfer Date, in each case as of the date
specified in the applicable Transfer Agreement to be delivered on such Transfer
Date (each, a "Subsequent Cutoff Date"). Subject to the satisfaction of the
foregoing conditions, the Seller will convey the Additional Student Loans to the
Eligible Lender Trustee on behalf of the Trust on each such Transfer Date
pursuant to the Sale and Servicing Agreement and the applicable Transfer
Agreement (a "Transfer Agreement") executed by the Seller, the applicable
Servicer, the Eligible Lender Trustee and the Administrator on such Transfer
Date. Each such Transfer Agreement will include as an exhibit a schedule
identifying each Additional Student Loan transferred on such Transfer Date. Upon
such conveyance of Additional Student Loans to the Eligible Lender Trustee on
behalf of the Trust, the Pool Balance will increase in an amount equal to the
aggregate principal balances of such Additional Student Loans (less any existing
Financed Student Loans being repaid pursuant to any Consolidation Loans included
within such Additional Student Loans) and an amount equal to the Purchase Price
of such Additional Student Loans will be withdrawn first from the Escrow Account
to the extent amounts are available therein and then (x) with respect to
Subsequent Pool Student Loans and Other Subsequent Student Loans, during the
Funding Period, from the Pre-Funding Account and (y) with respect to Other
Student Loans, during the period following the end of the Funding Period until
the Loan Purchase Termination Date, from Available Loan Purchase Funds on
deposit in the Collection Account, in each case on such date and transferred to
the Seller. Amounts in the Escrow Account will not be available to purchase any
Subsequent Pool Student Loan.
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With respect to any Consolidation Loan to be made by the Seller to a
given borrower, the Eligible Lender Trustee on behalf of the Trust will convey
to the Seller all Underlying Federal Loans and Underlying Private Loans, as
applicable (each as defined under "The Student Loan Financing Business" in the
Prospectus, the "Underlying Federal Loans" and the "Underlying Private Loans,"
respectively), held by it with respect to that borrower, as specified in a
notice delivered by or on behalf of the Seller. In exchange for and
simultaneously with such conveyance, the Seller will deposit into the Escrow
Account an amount of cash equal to the principal balances of all such Underlying
Federal Loans and Underlying Private Loans, plus accrued interest thereon to the
date of such conveyance. Each purchase of a Serial Loan will be funded by means
of a transfer from (a) during the Funding Period, the Pre-Funding Account and
(b) after the end of the Funding Period until the Loan Purchase Termination
Date, from Available Loan Purchase Funds on deposit in the Collection Account,
in each case, of an amount equal to the Purchase Price of such Serial Loan.
Amounts on deposit in the Escrow Account will be invested in Eligible
Investments (see "--Accounts" above) and will be used on the succeeding Transfer
Date, as described above, to purchase Additional Student Loans from the Seller.
Any of such amounts remaining in the Escrow Account on the Transfer Date after
giving effect to the conveyance of all such Additional Student Loans on such
Transfer Date will be deposited into the Collection Account and distributed as
Available Funds on the Distribution Date immediately following such Transfer
Date.
For purposes of the foregoing, the following terms have the respective
meanings set forth below:
"Additional Student Loans" means collectively the Subsequent
Pool Student Loans, the Other Subsequent Student Loans, the Other
Student Loans and Fee Advances.
The "Funding Period" means the period from the Closing Date
until the first to occur of:
(1) an Event of Default occurring under the
Indenture, a Master Servicer Default (as defined in the
Prospectus) occurring under the Sale and Servicing Agreement
or an Administrator Default occurring under the Sale and
Servicing Agreement or the Administration Agreement;
(2) certain events of insolvency with respect to the
Seller;
(3) the date on which the amounts on deposit in the
Pre-Funding Account would be reduced to zero after giving
effect to purchases of Other Subsequent Student Loans on such
date; or
(4) the last day of the Collection Period preceding
the ______ ____ Distribution Date.
"Loan Purchase Termination Date" means __________,
__________.
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"Other Student Loans" means Serial Loans and Consolidation
Loans made to a borrower who is also a borrower under at least one
outstanding Financed Student Loan which the Trust is obligated to
purchase from the Seller during the period which begins following the
end of the Funding Period and ends on the Loan Purchase Termination
Date, from amounts on deposit in the Escrow Account and Available Loan
Purchase Funds (as defined below) to the extent permitted by the Sale
and Servicing Agreement.
"Other Subsequent Student Loans" means (x) Consolidation Loans
and Serial Loans made to a borrower which is also a borrower under at
least one outstanding Financed Student Loan which the Trust is
obligated to purchase from the Seller during the Funding Period with
funds on deposit in the Escrow Account and funds on deposit in the
Pre-Funding Account and allocated to the Other Additional Pre-Funding
Subaccount, and (y) primarily Financed Federal Loans or Guaranteed
Private Loans that the Trust is obligated to purchase from the Seller
until 90 days after the Closing Date with funds on deposit in the
Pre-Funding Account and allocated to the Other Additional Pre-Funding
Subaccount.
"Serial Loans" constitute Student Loans which are made to a
borrower who is also a borrower under at least one outstanding Initial
Financed Student Loan or Subsequent Pool Student Loan.
"Subsequent Pool Student Loans" means the Student Loans
included in the Subsequent Pool.
"Subsequent Pool" means the pool of Student Loans currently
owned by the Seller and having, as of the Statistical Cutoff Date, the
characteristics described herein under "The Financed Student Loan
Pool," to be purchased from funds on deposit in the Subsequent Pool
Pre-Funding Subaccount.
SERVICING PROCEDURES
Pursuant to the Sale and Servicing Agreement, the Master Servicer has
agreed to service and perform all other related tasks (or to cause the
Sub-Servicers to service and perform all other related tasks) with respect to
the Financed Student Loans acquired from time to time. So long as no claim is
being made against a Guarantor for any Financed Student Loan, the Master
Servicer (or a Sub-Servicer on its behalf) will hold, as custodian on behalf of
the Trust, the notes evidencing, and other documents relating to, that Financed
Student Loan. The Master Servicer is required pursuant to the Sale and Servicing
Agreement (or shall cause a Sub-Servicer) to perform all services and duties
customary to the servicing of Student Loans (including all collection practices)
with reasonable care, and in compliance with all standards and procedures
provided for in the Higher Education Act, the Guarantee Agreements and all other
applicable federal and state laws.
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Without limiting the foregoing, the responsibilities of the Master
Servicer under the Sale and Servicing Agreement (or of a Sub-Servicer pursuant
to a Sub-Servicing Agreement) include, but are not limited to, the following:
collecting and depositing into the Collection Account (or, in the event that
daily deposits into the Collection Account are not required, paying to the
Administrator) all payments with respect to the Financed Student Loans the
Master Servicer (or a Sub-Servicer) is servicing, including claiming and
obtaining any Guarantee Payments (subject to the Maximum TERI Payments Amount)
with respect thereto but excluding such tasks with respect to Interest Subsidy
Payments and Special Allowance Payments (as to which the Administrator and the
Eligible Lender Trustee have agreed to perform, see "--Administrator" below),
responding to inquiries from borrowers on such Financed Student Loans,
investigating delinquencies and sending out statements, payment coupons and tax
reporting information to borrowers. In addition, the Master Servicer will (or
will cause each Sub-Servicer to) keep ongoing records with respect to such
Financed Student Loans and collections thereon and will furnish periodic
statements to the Administrator with respect to such information, in accordance
with the Master Servicer's (or such Sub-Servicer's) customary practices with
respect to the Seller and as otherwise required in the Sale and Servicing
Agreement. Without being released from its obligations under the Sale and the
Servicing Agreement, the Master Servicer may cause the Sub-Servicers to perform
some or all of its duties listed above on its behalf pursuant to the
Sub-Servicing Agreements, and in the event that any such duties require
consents, approvals or licenses under the Higher Education Act or otherwise, the
Master Servicer shall appoint one or more Sub-Servicer that possesses such
consents, approvals and licenses to act on its behalf; provided, however, that
the Master Servicer shall remain responsible for the failure of any Sub-Servicer
to perform these activities. In its capacity as a Sub-Servicer, PHEAA will from
time to time be required on behalf of the Trust to file claims against, and
pursue the receipt of Guarantee Payments from, itself as a Federal Guarantor.
PAYMENTS ON FINANCED STUDENT LOANS
Except as provided below, the Master Servicer or a Sub-Servicer, as
applicable, will deposit all payments on Financed Student Loans (from whatever
source), and all proceeds of Financed Student Loans collected by it during each
Collection Period into the Collection Account within two business days of
receipt thereof. Except as provided below, the Eligible Lender Trustee will
deposit all Interest Subsidy Payments and all Special Allowance Payments with
respect to the Financed Student Loans received by it during each Collection
Period into the Collection Account within two business days of receipt thereof.
However, in the event that KBUSA satisfies certain requirements for
quarterly remittances and the rating agencies affirm their ratings of the Notes
and the Certificates at the initial level, then so long as KBUSA is the
Administrator and provided that (x) there exists no Administrator Default (as
described below) and (y) each other condition to making quarterly deposits as
may be specified by the rating agencies is satisfied, the Master Servicer, each
Sub-Servicer and the Eligible Lender Trustee will pay all the amounts referred
to in the preceding paragraph that would otherwise be deposited into the
Collection Account to the Administrator, and the Administrator will not be
required to deposit such amounts into the Collection Account until on or before
the business day immediately preceding each Monthly Servicing Payment Date (to
the extent of the Master
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Servicing Fee payable on such date) and on or before the business day
immediately preceding each Distribution Date (to the extent of the remainder of
such amounts). In such event, the Administrator will deposit the aggregate
Purchase Amount of Financed Student Loans repurchased by the Seller and
purchased by the Master Servicer into the Collection Account on or before the
business day preceding each Distribution Date. Pending deposit into the
Collection Account, collections may be invested by the Administrator at its own
risk and for its own benefit, and will not be segregated from funds of the
Administrator.
MASTER SERVICER COVENANTS
In the Sale and Servicing Agreement, the Master Servicer covenants
that:
(a) it will or will cause each Sub-Servicer to duly satisfy
all obligations on its part to be fulfilled under or in connection with
the Financed Student Loans the Master Servicer or a Sub-Servicer is
servicing, maintain in effect all qualifications required in order to
service such Financed Student Loans and comply in all material respects
with all requirements of law in connection with servicing such Financed
Student Loans, the failure to comply with which would have a materially
adverse effect on the Certificateholders or the Noteholders;
(b) it will not permit nor permit a Sub-Servicer to permit any
rescission or cancellation of a Financed Student Loan the Master
Servicer or a Sub-Servicer is servicing except as ordered by a court of
competent jurisdiction or other government authority or as otherwise
consented to by the Eligible Lender Trustee and the Indenture Trustee;
(c) it will do nothing nor permit a Sub-Servicer to impair the
rights of the Certificateholders and the Noteholders in such Financed
Student Loans; and
(d) it will not nor permit a Sub-Servicer to reschedule,
revise, defer or otherwise compromise with respect to payments due on
any such Financed Student Loan except pursuant to any applicable
deferral or forbearance periods or otherwise in accordance with its
guidelines for servicing student loans in general and those of the
Seller in particular and any applicable Programs requirements.
Under the terms of the Sale and Servicing Agreement, if the Seller or
the Master Servicer discovers, or receives written notice, that any covenant of
the Master Servicer (or covenants made by the Master Servicer relating to either
of the Sub-Servicers), set forth above has not been complied with by the Master
Servicer (or a Sub-Servicer) in all material respects and such noncompliance has
not been cured within 60 days thereafter and has a materially adverse effect on
the interest of the Certificateholders or the Noteholders in any Financed
Student Loan (it being understood that in the case of any Financed Federal Loan
any such breach that does not affect any Guarantor's obligation to guarantee or
insure payment of such Financed Student Loan will not be considered to have such
a material adverse effect), unless such breach is cured, the Master Servicer
will purchase such Financed Student Loan as of the first day following the end
of such 60-day period that is the last day of a Collection Period. In that
event, the Master Servicer will be obligated
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to deposit into the Collection Account an amount equal to the Purchase Amount of
such Financed Student Loan and the Trust's interest in any such purchased
Financed Student Loan will be automatically assigned to the Master Servicer. In
addition, the Master Servicer will reimburse the Trust with respect to any
Financed Federal Loan for any accrued interest amounts that a Federal Guarantor
refuses to pay pursuant to its Guarantee Agreement due to, or for any Interest
Subsidy Payments and Special Allowance Payments that are lost or that must be
repaid to the Department as a result of, a breach of any such covenant of the
Master Servicer.
INCENTIVE PROGRAMS
Certain incentive programs currently or hereafter made available by the
Seller to borrowers may also be made available by the Master Servicer or a
Sub-Servicer to borrowers with Financed Student Loans. As of _________, ____,
the Seller offers ____ incentive programs to certain Financed Student Loan
borrowers. Any such incentive program not in existence as of _________, ____,
that effectively reduces borrower payments on Financed Student Loans and, with
respect to Financed Federal Loans, is not required by the Higher Education Act
will be applicable to the Financed Student Loans only if and to the extent that
the Master Servicer or a Sub-Servicer receives payment on behalf of the Trust
from the Seller in an amount sufficient to offset such effective yield
reductions. See "The Student Loan Financing Business -- Incentive Programs" in
the Prospectus.
SERVICING COMPENSATION
The Master Servicer will be entitled to receive, subject to the
limitations set forth in the following paragraph, the Master Servicing Fee
monthly in an amount equal to the Master Servicing Fee Percentage of the Pool
Balance as of the last day of the immediately preceding calendar month and
certain one-time fixed fees for each Financed Student Loan for which a
forbearance period was granted or renewed or for which a guarantee claim was
filed, in each case subject to adjustment, together with other administrative
fees, late fees and similar charges, as compensation for performing the
functions as master servicer for the Trust described above. The Master Servicing
Fee Percentage may be subject to reasonable increase agreed to by the
Administrator, the Eligible Lender Trustee and the Master Servicer to the extent
that a demonstrable and significant increase occurs in the costs incurred by the
Master Servicer in providing the services to be provided under the Sale and
Servicing Agreement, whether due to changes in applicable governmental
regulations, guarantor program requirements or regulations, United States Postal
Service postal rates or some other identifiable cost increasing event with
respect to the Master Servicer or a Sub-Servicer. The Master Servicing Fee
(together with any portion of the Master Servicing Fee that remains unpaid from
prior Distribution Dates) will be payable on each Monthly Servicing Payment Date
and will be paid solely out of Available Funds and amounts on deposit in the
Reserve Account on such Monthly Servicing Payment Date. In return for receiving
the Master Servicing Fee, the Sub-Servicers will be paid solely by the Master
Servicer, pursuant to the Sub-Servicing Agreements.
Notwithstanding the foregoing, in the event that the aggregate fees
payable to the Master Servicer as defined above for any Monthly Servicing
Payment Date would exceed 0.50% per annum of the Pool Balance as of the last day
of the preceding calendar month (other than any
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deconversion fees) (the "Capped Amount"), then the "Master Servicing Fee" for
such Monthly Servicing Payment Date will instead be the Capped Amount for such
date plus any deconversion fees referred to below. The remaining amount in
excess of such Master Servicing Fee, together with any such excess amounts from
prior Monthly Servicing Payment Dates that remain unpaid (the aggregate amounts
being the "Excess Master Servicing Fee"), will be payable to the Master Servicer
on each succeeding Distribution Date out of Available Funds after payment on
such Distribution Date of the amounts set forth in "Description of the Transfer
and Servicing Agreements--Distributions" herein. The Master Servicer will only
be entitled to receive the Excess Master Servicing Fee if and to the extent that
Available Funds exist to make such payments after making all prior distributions
and deposits.
The Master Servicing Fee and the Excess Master Servicing Fee will
compensate the Master Servicer for performing (or for arranging the performance
by the Sub-Servicers of) the functions of a third party servicer of student
loans as agent for their beneficial owner, including collecting and posting all
payments, responding to inquiries of borrowers on the Financed Student Loans,
investigating delinquencies, pursuing, filing and collecting any Guarantee
Payments, accounting for collections and furnishing monthly and annual
statements to the Administrator. The Master Servicing Fee and the Excess Master
Servicing Fee also will reimburse the Master Servicer for certain taxes,
accounting fees, outside auditor fees, data processing costs and other costs
incurred in connection with administering the Financed Student Loans.
In the event of (x) any sale of the Financed Student Loans on behalf of
the Trust to any person (other than the Seller, the Administrator, the Master
Servicer, PHEAA or Great Lakes) in which the purchaser elects to deconvert the
Financed Student Loans and not retain PHEAA or Great Lakes, as the case may be,
as the servicer of such Financed Student Loans or (y) any termination by the
Master Servicer of PHEAA or Great Lakes, as the case may be, as a Sub-Servicer
of the Financed Student Loans, except for any termination for cause or as a
result of any Sub-Servicer default by PHEAA or Great Lakes, as the case may be,
the Trust shall pay to the Master Servicer, but only in the event that the
Master Servicer is also obligated to pay to PHEAA or Great Lakes, as the case
may be, as a part of the Master Servicing Fee (not subject to the Capped Amount)
a deconversion fee, per loan, based on the status of the loan at the time of
deconversion.
DISTRIBUTIONS
Deposits to Collection Account. On or about the third business day
prior to each Distribution Date (the "Determination Date"), the Administrator
will provide the Indenture Trustee with certain information with respect to the
distributions to be made on such Distribution Date.
On or before the business day preceding each Monthly Servicing Payment
Date that is not a Distribution Date, the Administrator will cause (or will
cause the Master Servicer and the Eligible Lender Trustee to cause) (x) any
Guaranteed Payments made by TERI in excess of the Maximum TERI Payments Amount
and (y) a portion of the amount of the Available Funds equal to the Master
Servicing Fee, payable on such date to be deposited into the Collection Account
for payment to the Seller in the case of such excess Guarantee Payments and to
the Master Servicer in the case of the
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Master Servicing Fee. On or before the business day prior to each Distribution
Date, the Administrator will cause (or will cause the Master Servicer and the
Eligible Lender Trustee to cause) the amount of Available Funds to be deposited
into the Collection Account.
For purposes hereof, the term "Available Funds" means, with respect to
a Distribution Date or any Monthly Servicing Payment Date, the sum of the
following amounts received with respect to the related Collection Period (or, in
the case of a Monthly Servicing Payment Date, the applicable portion thereof) to
the extent not previously distributed:
(1) all collections received by Master Servicer (or the
Sub-Servicers) on the Financed Student Loans (including any Guarantee
Payments (subject to the Maximum TERI Payments Amount) received with
respect to such Financed Student Loans) but net of (x) any Federal
Origination Fee (as defined in the Prospectus) and Federal
Consolidation Loan Rebate (as defined in the Prospectus) payable to the
Department on Federal Consolidation Loans disbursed after October 1,
1993, (y) any applicable administrative fees, late fees or similar fees
received from a borrower, and (z) any collections in respect of
principal on the Financed Student Loans applied by the Trust to
repurchase guaranteed loans from the Guarantors in accordance with the
Guarantee Agreements;
(2) any Interest Subsidy Payments and Special Allowance
Payments received by the Eligible Lender Trustee during the then
elapsed portion of such Collection Period with respect to the Financed
Federal Loans;
(3) all proceeds of the Financed Student Loans which were
liquidated ("Liquidated Student Loans") during the then elapsed portion
of such Collection Period in accordance with the Master Servicer's (or
the Sub-Servicers') respective customary servicing procedures, net of
expenses incurred by the Master Servicer (or the Sub-Servicers) in
connection with such liquidation and any amounts required by law to be
remitted to the borrower on such Liquidated Student Loans ("Liquidation
Proceeds"), and all recoveries in respect of Liquidated Student Loans
which were written off in prior Collection Periods or prior months of
such Collection Period;
(4) the aggregate Purchase Amounts received for those Financed
Student Loans repurchased by the Seller or purchased by the Master
Servicer under an obligation which arose during the elapsed portion of
such Collection Period;
(5) the aggregate amounts, if any, received from the Seller or
the Master Servicer (or a Sub-Servicer), as the case may be, as
reimbursement of non-guaranteed interest amounts, or lost Interest
Subsidy Payments and Special Allowance Payments;
(6) amounts deposited by the Seller into the Collection
Account in connection with the making of Consolidation Loans;
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(7) with respect to the first Distribution Date, the initial
deposit into the Collection Account;
(8) Investment Earnings for such Distribution Date;
(9) amounts withdrawn from the Reserve Account in excess of
the Specified Reserve Account Balance and deposited into the Collection
Account;
(10) amounts withdrawn from the Escrow Account and deposited
into the Collection Account; and
(11) with respect to the Distribution Date on or immediately
after the end of the Funding Period, the amount transferred from the
Pre-Funding Account to the Collection Account;
Available Funds will exclude (A) all payments and proceeds (including
Liquidation Proceeds) of any Financed Student Loans, the Purchase Amount of
which has been included in Available Funds for a prior Distribution Date and (B)
following the end of the Funding Period and prior to the Loan Purchase
Termination Date, amounts withdrawn from the Collection Account to purchase
Other Student Loans or pay Fee Advances during the period following the
preceding Distribution Date and ending on or prior to such Distribution Date. If
on any Distribution Date there would not be sufficient funds, after application
of Available Funds amounts available from the Reserve Account and the
Pre-Funding Account (x) to pay any of the items specified in clauses (1) through
(3), respectively, under "--Distributions from the Collection Account" below,
for such Distribution Date and (y) if the principal balance of the Notes (after
giving effect to any distributions thereon on such Distribution Date) is less
than or equal to the Note Collateralization Amount, to pay the
Certificateholders' Interest Distribution Amount for such Distribution Date,
then Available Funds for such Distribution Date will include, in addition to the
Available Funds on deposit in the Collection Account on the Determination Date
relating to such Distribution Date which would have constituted Available Funds
for the Distribution Date succeeding such Distribution Date up to the amount
necessary to pay, in the case of clause (x) above such items specified in
clauses (1) through (3) respectively and in the case of clause (y) above the
Certificateholders' Interest Distribution Amount and the Available Funds for
such succeeding Distribution Date will be adjusted accordingly.
Distributions from the Collection Account. On each Monthly Servicing
Payment Date that is not a Distribution Date, the Administrator will instruct
the Indenture Trustee to pay to (a) the Seller, any amounts on deposit in the
Collection Account which consist of Guarantee Payments made by TERI in excess of
the Maximum TERI Payments Amount and (b) the Master Servicer, the Master
Servicing Fee due with respect to the period from and including the preceding
Monthly Servicing Payment Date from amounts on deposit in the Collection
Account.
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On each Distribution Date, the Administrator will instruct the
Indenture Trustee to make the following deposits and distributions, in the
amounts and in the order of priority specified below, to the extent of Available
Funds for the related Collection Period:
(1) to the Seller, any amounts on deposit in the Collection
Account which consist of Guarantee Payments made by TERI in excess of
the Maximum TERI Payments Amount;
(2) to the Master Servicer, the Master Servicing Fee due on
such Distribution Date and all prior unpaid Master Servicing Fees;
(3) to the Administrator, the Administration Fee and all
unpaid Administration Fees from prior Collection Periods;
(4) to the holders of the Notes, the Noteholders' Interest
Distribution Amount;
(5) to the holders of the Certificates, the
Certificateholders' Interest Distribution Amount;
(6) to the Reserve Account, an amount, up to the amount, if
any, necessary to reinstate the balance of the Reserve Account to the
Specified Reserve Account Balance;
(7) to the holders of the Notes, the Noteholders' Principal
Distribution Amount;
(8) on each Distribution Date on and after which the Notes
have been paid in full, to the holders of the Certificates, the
Certificateholders' Principal Distribution Amount;
(9) to the Master Servicer, the aggregate unpaid amount, if
any, of the Excess Master Servicing Fee;
(10) to the holders of the Notes on a pro rata basis, based on
the amount of the Noteholders' Interest Index Carryover owing on each
class of Notes, the aggregate unpaid amount of the Noteholders'
Interest Index Carryover, if any;
(11) to the holders of the Certificates, the aggregate unpaid
amount of the Certificateholders' Interest Index Carryover, if any; and
(12) to the Seller, any remaining amounts after application of
clauses (1) through (11).
Additionally, if on any Distribution Date the outstanding principal
balance of the Notes (after giving effect to distributions on such Distribution
Date) is in excess of the Note Collateralization Amount, the principal will be
payable to the Noteholders in the amount of the Noteholders' Priority Principal
Distribution Amount to the extent of funds available before any amounts are
payable to the holders of the Certificates.
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Upon any distribution to the Seller of any amounts included as
Available Funds, neither the Noteholders nor the Certificateholders will have
any rights in, or claims to, such amounts.
For purposes hereof, the following terms have the following meanings:
"Certificate Balance" equals $__________ as of the Closing Date and
thereafter, equals the initial Certificate Balance, reduced by all amounts
allocable to principal subsequently distributed to the Certificateholders.
"Certificateholders' Distribution Amount" means, with respect to any
Distribution Date, the Certificateholders' Interest Distribution Amount for such
Distribution Date plus, for each Distribution Date on and after which the Notes
have been paid in full, the Certificateholders' Principal Distribution Amount
for such Distribution Date.
"Certificateholders' Interest Carryover Shortfall" means with respect
to any Distribution Date, the excess of (x) the sum of the Certificateholders'
Interest Distribution Amount on the preceding Distribution Date over (y) the
amount of interest actually distributed to the holders of the Certificates on
such preceding Distribution Date, plus interest on the amount of such excess
interest due to the holders of the Certificates, to the extent permitted by law,
at the Certificate Rate from such preceding Distribution Date to the current
Distribution Date.
"Certificateholders' Interest Distribution Amount" means with respect
to any Distribution Date, the sum of (a) the amount of interest accrued at the
Certificate Rate for the related Interest Period on the outstanding Certificate
Balance on the immediately preceding Distribution Date, after giving effect to
all distributions of principal to holders of the Certificates on such
Distribution Date (or, in the case of the first Distribution Date, on the
Closing Date) and (b) the Certificateholders' Interest Carryover Shortfall for
such Distribution Date; provided, that the Certificateholders' Interest
Distribution Amount will not include any Certificateholders' Interest Index
Carryover.
"Certificateholders' Principal Distribution Amount" means on each
Distribution Date on and after which the principal balance of the Notes has been
paid in full, the Principal Distribution Amount for such Distribution Date (or,
in the case of the Distribution Date on which the principal balance of the Notes
is paid in full, any remaining Principal Distribution Amount not otherwise
distributed to the holders of the Notes on such Distribution Date); provided
that the Certificateholders' Principal Distribution Amount will in no event
exceed the Certificate Balance. In addition, on the Final Maturity Date for the
Certificates, the principal required to be distributed to the holders of the
Certificates will include the amount required to reduce the outstanding
Certificate Balance to zero.
"Maximum TERI Payments Amount" means 19% of the Initial Pool Balance.
"Monthly Servicing Payment Date" means the 25th day of each month (or
if such day is not a Business Day, the next succeeding Business Day).
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"Net Government Receivable" means, with respect to any Distribution
Date, the sum of the amount of Interest Subsidy Payments and Special Allowance
Payments due from the Department less the amount owed to the Department for
Federal Origination Fee and Federal Consolidation Loan Rebate as of the end of
the related Collection Period.
"Note Collateralization Amount" means, with respect to any Distribution
Date, the sum of
(a) the Pool Balance as of the end of the related Collection
Period;
(b) the Pre-Funded Amount, as of the end of the related
Collection Period;
(c) the amount on deposit in the Reserve Account after giving
effect to distributions on such Distribution Date; and
(d) the Net Government Receivable.
"Noteholders' Distribution Amount" means, with respect to any
Distribution Date, the sum of the Noteholders' Interest Distribution Amount and
the Noteholders' Principal Distribution Amount for such Distribution Date.
"Noteholders' Interest Carryover Shortfall" means, with respect to any
Distribution Date, the excess of (x) the sum of the Noteholders' Interest
Distribution Amount on the preceding Distribution Date over (y) the amount of
interest actually distributed to the holders of the Notes on such preceding
Distribution Date, plus interest on the amount of such excess interest due to
the holders of the Notes, to the extent permitted by law, at the weighted
average of the Note Interest Rates from such preceding Distribution Date to the
current Distribution Date.
"Noteholders' Interest Distribution Amount" means, with respect to any
Distribution Date, the sum of (a) the aggregate amount of interest accrued at
the respective Note Interest Rate for the related Interest Period on the
outstanding principal balance of each class of the Notes on the immediately
preceding Distribution Date after giving effect to all principal distributions
to Noteholders on such date (or, in the case of the first Distribution Date, on
the Closing Date) and (b) the Noteholders' Interest Carryover Shortfall for such
Distribution Date; provided, that the Noteholders' Interest Distribution Amount
will not include any Noteholders' Interest Index Carryover.
"Noteholders' Principal Distribution Amount" means, with respect to any
Distribution Date, the Principal Distribution Amount for such Distribution Date;
provided, however, that the Noteholders' Principal Distribution Amount will not
exceed the outstanding principal balance of the Notes. In addition, (a) on the
Final Maturity Date for each class of Notes, the principal required to be
distributed to the class of Notes will include the amount required to reduce the
outstanding principal balance of such class of Notes to zero, and (b) on the
related Distribution Date following a sale of the Financed Student Loans in the
manner described under "--Termination" below, the
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principal required to be distributed to the holders of Class A-2 Notes will
include the amount required to reduce the outstanding principal balance of such
Class A-2 Notes to zero. In the event that the outstanding balance of the Notes
is in excess of the Note Collateralization Amount, the Noteholders' Principal
Distribution Amount for the Notes will be reduced by the amount of any
Noteholders' Priority Principal Distribution Amount.
"Noteholders' Priority Principal Distribution Amount" means, with
respect to any Distribution Date, the excess of (x) the aggregate outstanding
principal balance of such Notes (after giving effect to any distributions on
such Distribution Date) over (y) the Note Collateralization Amount.
"Pool Balance" means, at any time, the aggregate principal balance of
the Financed Student Loans at the end of the preceding Collection Period
(including accrued interest thereon for such Collection Period to the extent
such interest will be capitalized upon commencement of repayment), after giving
effect to the following without duplication:
- all payments received by the Trust related to the Financed
Student Loans during such Collection Period from or on behalf
of borrowers, Guarantors (except with respect to any guarantee
payments made by TERI in excess of the Maximum TERI Payments
Amount) and, with respect to certain payments on certain
Financed Federal Loans, the Department (collectively,
"Obligors"),
- all Purchase Amounts received by the Trust related to the
Financed Student Loans for such Collection Period from the
Seller, the Master Servicer or the Sub-Servicers,
- all Additional Fundings made from the Escrow Account and the
Pre-Funding Account or the Available Loan Purchase Funds with
respect to such Collection Period, and
- all losses realized on Financed Student Loans liquidated
during such Collection Period.
"Principal Distribution Amount" means, with respect to any Distribution
Date, the amount by which the sum of the outstanding principal balance of the
Notes and the Certificate Balance exceeds the Specified Collateral Balance for
such Distribution Date.
"Specified Collateral Balance" means, with respect to any Distribution
Date, the sum of (a) the Pool Balance as of the last day of the related
Collection Period plus (b) the Pre-Funded Amount as of the last day of the
related Collection Period for such Distribution Date. In the event that the
Financed Student Loans are not sold pursuant to the auction process described
under "--Termination" below, with respect to any Distribution Date occurring on
or after the _________ ______ Distribution Date, the Specified Collateral
Balance will be zero.
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CREDIT ENHANCEMENT
Reserve Account. Pursuant to the Sale and Servicing Agreement, the
Reserve Account will be created with an initial deposit by the Seller on the
Closing Date of cash or Eligible Investments in an amount equal to $__________
(the "Reserve Account Initial Deposit"). On the Closing Date, the Reserve
Account Initial Deposit will equal the Specified Reserve Account Balance as of
the Closing Date. The amounts on deposit in the Reserve Account to the extent
used will be replenished up to the Specified Reserve Account Balance on each
Distribution Date by deposit therein of the amount, if any, necessary to
reinstate the balance of the Reserve Account to the Specified Reserve Account
Balance from the amount of Available Funds remaining after payment of the prior
amounts set forth under "--Distributions" above, all for such Distribution Date.
"Specified Reserve Account Balance" means, with respect to any
Distribution Date will be equal to the greater of (x) ____% of the aggregate
outstanding principal amount of the Notes and the Certificate Balance on such
Distribution Date before giving effect to any distribution on such Distribution
Date, and (y) $________; provided, however, that in no event will such balance
exceed the sum of the outstanding principal amount of the Notes and the
outstanding principal balance of the Certificates.
Funds will be withdrawn from the Reserve Account to the extent that the
amount of Available Funds is insufficient to pay the Master Servicing Fee on any
Monthly Servicing Payment Date and any of the items specified in clauses (2)
through (5) under "--Distributions--Distributions from Collection Account" above
on any Distribution Date; provided that amounts on deposit in the Reserve
Account shall only be available to cover shortfalls in interest payments on the
Certificates to the extent that the Note Collateralization Amount (after giving
effect to such withdrawals from the Reserve Account) is not less than the
outstanding principal balance of the Notes. Such funds will be paid from the
Reserve Account to the Master Servicer on a Monthly Servicing Payment Date, and
to the persons and in the order of priority specified for distributions out of
the Collection Account in such clauses (2) through (5) on a Distribution Date.
In addition, on the Final Maturity Dates for the Securities, amounts on deposit
in the Reserve Account, if any, will be available, if necessary, to be applied
to reduce the principal balance of the Securities to zero. Amounts on deposit in
the Reserve Account will not be available to cover any reimbursement for unpaid
Excess Master Servicing Fees, Noteholders' Interest Index Carryover or
Certificateholders' Interest Index Carryover.
If the amount on deposit in the Reserve Account on any Distribution
Date (after giving effect to all deposits or withdrawals therefrom on such
Distribution Date) is greater than the Specified Reserve Account Balance for
such Distribution Date, subject to certain limitations, the Administrator will
instruct the Indenture Trustee to deposit the amount of the excess into the
Collection Account for distribution as Available Funds on such Distribution
Date. Upon any distribution to the Seller of any amounts included as Available
Funds, neither the Noteholders nor the Certificateholders will have any rights
in, or claims to, such amounts. Subject to the limitation described in the
preceding sentence, amounts held from time to time in the Reserve Account will
continue to be held for the benefit of the Trust.
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The Reserve Account is intended to enhance the likelihood of timely
receipt by the holders of Notes and the holders of Certificates of the full
amount of interest due them and to decrease the likelihood that such holders
will experience losses. In certain circumstances, however, the Reserve Account
could be depleted.
Subordination of the Certificates. The rights of the holders of
Certificates to receive payments of interest are subordinated to the rights of
the holders of Notes to receive payments of interest (and, in certain
circumstances, principal) and the rights of the holders of Certificates to
receive payments of principal are subordinated to the rights of the holders of
Notes to receive payments of interest and principal. Consequently, amounts on
deposit in the Collection Account, the Reserve Account and the Pre-Funding
Account will be applied to the payment of interest on the Notes before payment
of interest on the Certificates and will be applied to the payment of principal
on the Notes before payment of principal on the Certificates. In addition if (x)
an Event of Default should occur and be continuing under the Indenture or (y) an
Insolvency Event should occur and the Financed Student Loans were liquidated,
all amounts due on the Notes will be payable before any amounts are payable on
the Certificates. Also if the outstanding principal balance of the Notes is in
excess of the Note Collateralization Amount, principal will be payable to
holders of Notes in the amount of such excess to the extent of funds available
before any amounts are payable to holders of Certificates. See "Description of
the Securities--The Certificates--Subordination of the Certificates" herein.
STATEMENTS TO INDENTURE TRUSTEE AND TRUST
Prior to each Distribution Date, the Administrator (based on the
periodic statements and other information provided to it by the Master Servicer
or the Sub-Servicers) will provide to the Indenture Trustee and the Trust, as of
the close of business on the last day of the preceding Collection Period, a
statement which will include the following information with respect to such
Distribution Date or the preceding Collection Period as to the Notes and the
Certificates, to the extent applicable:
(1) the amount of the distribution allocable to principal of
each class of Securities;
(2) the amount of the distribution allocable to interest on
each class of Securities, together with the interest rates applicable
with respect thereto (indicating whether such interest rates are based
on the Formula Rate or on the Student Loan Rate and specifying what
each such interest rate would have been if it had been calculated using
the alternate basis; provided that no such calculation of the Student
Loan Rate will be required to be made unless the Investor Index for
such Interest Period is 100 basis points greater than the Investor
Index of the preceding Determination Date or, with respect to Treasury
Bill Indexed Securities only, the 52-week Treasury Bill Rate is 100
basis points less than the 91-day Treasury Bill Rate as of such
Determination Date);
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(3) the amount of the distribution, if any, allocable to any
Noteholders' Interest Index Carryover and any Certificateholders'
Interest Index Carryover, together with the outstanding amount, if any,
of each thereof after giving effect to any such distribution;
(4) the Pool Balance as of the close of business on the last
day of the preceding Collection Period, after giving effect to payments
allocated to principal reported as described in clause (1) above;
(5) the aggregate outstanding principal balance of each Class
of Notes, the Certificate Balance and each Pool Factor as of such
Distribution Date, after giving effect to payments allocated to
principal reported under clause (1) above;
(6) the amount of the Master Servicing Fee and any Excess
Master Servicing Fee paid to the Master Servicer and the amount of the
Administration Fee paid to the Administrator with respect to such
Collection Period, and the amount, if any, of the Master Servicing Fee
and the Excess Master Servicing Fee remaining unpaid after giving
effect to any such payments;
(7) the amount of the aggregate Realized Losses, if any, for
such Collection Period and the balance of Financed Student Loans that
are delinquent in each delinquency period as of the end of such
Collection Period;
(8) the balance of the Reserve Account on such Distribution
Date, after giving effect to changes therein on such Distribution Date;
(9) for Distribution Dates during the Funding Period, the
remaining Pre-Funded Amount on such Distribution Date, after giving
effect to changes therein during the related Collection Period;
(10) for the first Distribution Date, the amount, if any, of
the Subsequent Pool Pre-Funded Amount remaining in the Subsequent Pool
Pre-Funding Subaccount that has not been used to acquire Subsequent
Pool Student Loans and is being paid out to the Noteholders and
Certificateholders;
(11) for the first Distribution Date on or following the end
of the Funding Period, the amount of any remaining Pre-Funded Amount
that has not been used to make Additional Fundings and is being paid
out to the Noteholders; and
(12) the aggregate amount of TERI's Guarantee Payments
deposited into the Collection Account (net of any amounts paid to the
Seller under clause (1) of "--Distributions from the Collection
Account" above) expressed as a percentage of the Initial Pool Balance.
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"Realized Losses" means, the excess of the principal balance of the
Liquidated Student Loans over the Liquidation Proceeds to the extent allocable
to principal.
"52-week Treasury Bill Rate" means, on any date of determination, the
bond equivalent rate of 52-week Treasury Bills auctioned at the final auction
held prior to the preceding June 1.
TERMINATION
The obligations of the Master Servicer, the Seller, the Administrator,
the Eligible Lender Trustee and the Indenture Trustee pursuant to the Transfer
and Servicing Agreements will terminate upon (a) the maturity or other
liquidation of the last Financed Student Loan and the disposition of any amount
received upon liquidation of any remaining Financed Student Loans and (b) the
payment to the holders of Notes and the holders of Certificates of all amounts
required to be paid to them pursuant to the Transfer and Servicing Agreements.
In order to avoid excessive administrative expense, the Seller is permitted at
its option to repurchase from the Eligible Lender Trustee, as of the end of any
Collection Period immediately preceding a Distribution Date, if the then
outstanding Pool Balance is [5%] [10%] or less than the Initial Pool Balance,
all remaining Financed Student Loans at a price sufficient to retire the
Certificates concurrently therewith. Upon termination of the Trust, all right,
title and interest in the Financed Student Loans and other funds of the Trust,
after giving effect to any final distributions to holders of Notes and holders
of Certificates therefrom, will be conveyed and transferred to the Seller.
Any Financed Student Loans remaining in the Trust as of the end of the
Collection Period immediately preceding the _______ _____ Distribution Date will
be offered for sale by the Indenture Trustee. KeyCorp, its affiliates (other
than the Seller and the Master Servicer), PHEAA, TERI and unrelated third
parties may offer bids to purchase such Financed Student Loans on such
Distribution Date. If at least two bids are received, the Indenture Trustee will
solicit and resolicit bids from all participating bidders until only one bid
remains or the remaining bidders decline to resubmit bids. The Indenture Trustee
will accept the highest of such remaining bids if it is equal to or in excess of
an amount (the "Minimum Purchase Amount") equal to the greatest of
(1) the Auction Purchase Amount;
(2) the fair market value of such Financed Student Loans
as of the end of the Collection Period immediately
preceding such Distribution Date; and
(3) the aggregate unpaid principal amount of the Notes
and principal balance of the Certificates plus, in
each case, accrued and unpaid interest thereon
payable on such Distribution Date (other than any
Noteholders' Interest Index Carryover and
Certificateholders' Interest Index Carryover).
If at least two bids are not received or the highest bid after the
resolicitation process is completed is not equal to or in excess of the Minimum
Purchase
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Amount, the Indenture Trustee will not consummate such sale. In
connection with the determination of the Minimum Purchase Amount, the Indenture
Trustee may consult and, at the direction of the Seller, shall consult, with a
financial advisor, including the Underwriters or the Administrator, to determine
if the fair market value of the Financed Student Loans has been offered. The net
proceeds of any such sale will be used to redeem any outstanding Notes and to
retire any outstanding Certificates on such Distribution Date. If the sale is
not consummated in accordance with the foregoing, the Indenture Trustee may, but
shall not be under any obligation to, solicit bids to purchase the Financed
Student Loans on future Distribution Dates upon terms similar to those described
above. No assurance can be given as to whether the Indenture Trustee will be
successful in soliciting acceptable bids to purchase the Financed Student Loans
on either the ______ _____ Distribution Date or any subsequent Distribution
Date. In the event the Financed Student Loans are not sold in accordance with
the foregoing, on each Distribution Date on and after the _____ ____
Distribution Date the Specified Collateral Balance shall be reduced to zero and
all Available Funds remaining after applying such amounts to pay the Master
Servicing Fee, the Administration Fee, the Noteholders' Interest Distribution
Amount, the Noteholders' Priority Principal Distribution Amount, if any, and the
Certificateholders' Interest Distribution Amount will be paid as principal to
the holders of Notes and then to the holders of Certificates until the
outstanding principal balance of the Notes and the Certificates has been reduced
to zero.
"Auction Purchase Amount" with respect to the Financed Student Loans
means the aggregate unpaid principal balance owed by the applicable borrowers
thereon plus accrued interest thereon to the date of purchase less the amount on
deposit in the Reserve Account as for such date.
ADMINISTRATOR
The Seller, in its capacity as Administrator, will enter into the
Administration Agreement with the Trust and the Indenture Trustee, and the Sale
and Servicing Agreement with the Trust, the Seller, the Master Servicer and the
Eligible Lender Trustee. For a description of the Administrator's duties, see
"Description of the Transfer and Servicing Agreements - Administrator" in the
Prospectus.
As compensation for the performance of the Administrator's obligations
under the Administration Agreement and the Sale and Servicing Agreement and as
reimbursement for its expenses related thereto, the Administrator will be
entitled to an administration fee in an amount equal to $______ per quarter (the
"Administration Fee").
INCOME TAX CONSEQUENCES
Thompson Hine & Flory LLP, federal tax counsel to the Trust ("Federal
Tax Counsel"), is of the opinion that the Trust will not be classified as an
association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes and that the Notes will be characterized as debt for
federal income tax purposes.
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Kirkpatrick & Lockhart LLP, Pennsylvania tax counsel ("Pennsylvania Tax
Counsel") is of the opinion that the same characterizations of the Notes and the
Trust would apply for Pennsylvania state income tax purposes as for federal
income tax purposes.
The Seller and the Master Servicer will agree, and the
Certificateholders will agree by their purchase of Certificates, to treat the
Trust as a partnership for purposes of federal, state and local income and
franchise tax with the assets of the partnership being the assets held by the
Trust, the partners of the partnership being the Certificateholders (including
the Seller both in its capacity as owner of Certificates and as recipient of
distributions from the Reserve Account), and the Notes being debt of the
partnership.
If the Trust were held to be an association (or publicly traded
partnership) taxable as a corporation for federal income tax purposes, rather
than a partnership, the Trust would be subject to a corporate level income tax.
Any such corporate income tax could materially reduce or eliminate cash that
would otherwise be available to make payments on the Notes and the Certificates
(and the Certificateholders could be liable for any such tax that is unpaid by
the Trust).
We recommend that investors carefully review the information under the
caption "Income Tax Consequences" in the Prospectus.
ERISA CONSIDERATIONS
Section 406 of ERISA, and/or Section 4975 of the Internal Revenue Code
of 1986, as amended (the "Code"), prohibit a pension, profit-sharing or other
employee benefit plan, as well as individual retirement accounts, and certain
types of Keogh Plans, and other plans subject to Section 4975 of the Code (each
a "Benefit Plan") from engaging in certain transactions with persons that are
"parties in interest" under ERISA or "disqualified persons" under the Code with
respect to such Benefit Plan. A violation of these "prohibited transaction"
rules may result in an excise tax or other penalties and liabilities under ERISA
and the Code for such persons. Title I of ERISA also requires that fiduciaries
of a Benefit Plan subject to ERISA make investments that are prudent,
diversified (except if prudent not to do so) and in accordance with governing
plan documents.
Certain transactions involving the purchase, holding or transfer of the
Notes might be deemed to constitute prohibited transactions under ERISA and the
Code if assets of the Trust were deemed to be assets of a Benefit Plan. Under a
regulation issued by the United States Department of Labor (the "Plan Assets
Regulation"), the assets of the Trust would be treated as plan assets of a
Benefit Plan for the purposes of ERISA and the Code only if the Benefit Plan
acquires an "Equity Interest" in the Trust and none of the exceptions contained
in the Plan Assets Regulation is applicable. An equity interest is defined under
the Plan Assets Regulation as an interest other than an instrument which is
treated as indebtedness under applicable local law and which has no substantial
equity features. The Notes should be treated as indebtedness without substantial
equity features for purposes of the Plan Assets Regulation. However, without
regard to whether the Notes
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are treated as an Equity Interest for such purposes, the acquisition or holding
of Notes by or on behalf of a Benefit Plan could be considered to give rise to a
prohibited transaction if the Trust, the Trustee or the Indenture Trustee, the
Seller, the owner of collateral, or any of their respective affiliates is or
becomes a party in interest or a disqualified person with respect to such
Benefit Plan. In such case, certain exemptions from the prohibited transaction
rules could be applicable depending on the type and circumstances of the plan
fiduciary making the decision to acquire a Note. Included among these exemptions
are: Prohibited Transaction Class Exemption ("PTCE") 90-1, regarding investments
by insurance company pooled separate accounts; PTCE 95-60, regarding investments
by insurance company general accounts; PTCE 91-38, regarding investments by bank
collective investment funds; PTCE 96-23, regarding transactions effected by
in-house asset managers; and PTCE 84-14, regarding transactions effected by
"qualified professional asset managers."
Employee benefit plans that are governmental plans (as defined in
Section 3(32) of ERISA) and certain church plans (as defined in Section 3(33) of
ERISA) are not subject to ERISA requirements.
A plan fiduciary considering the purchase of Notes should consult its
tax and/or legal advisors regarding whether the assets of the Trust would be
considered plan assets, the possibility of exemptive relief from the prohibited
transaction rules and other issues and their potential consequences.
No Certificates may be purchased for, or on behalf of, any Benefit Plan
or any entity whose underlying assets are deemed to be plan assets of such
Benefit Plan.
The purchaser of a Certificate is deemed to have represented that it is
not acquiring the Certificates directly or indirectly for, or on behalf of, a
Benefit Plan or any entity whose underlying assets are deemed to be plan assets
of such Benefit Plan. The purchaser of Notes is deemed to have represented that
either: (A) the purchaser is not acquiring the Notes directly or indirectly for,
or on behalf of, a Benefit Plan or any entity whose underlying assets are deemed
to be plan assets of such Benefit Plan, or (B) the acquisition and holding of
the Notes by the purchaser qualifies for prohibited transaction exemptive relief
under PTCE 95-60, PTCE 96-23, PTCE 91-38, PTCE 90-1, PTCE 84-14 or some other
applicable exemption.
UNDERWRITING
Subject to the terms and conditions set forth in the respective
Underwriting Agreements relating to the Notes and the Certificates (the
"Underwriting Agreements"), the Seller has agreed to cause the Trust to sell to
the underwriters named below (the "Underwriters"), and each of the Underwriters
has severally agreed to purchase, the principal amount of [Class A-1] Notes,
[Class A-2 Notes] and Certificates set forth opposite its name:
S-85
<PAGE> 88
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF PRINCIPAL
[CLASS A-1] [CLASS A-2] AMOUNT OF
UNDERWRITER NOTES NOTES CERTIFICATES TOTAL
----------- ----- ----- ------------ -----
<S> <C> <C> <C> <C>
- -------------
McDonald Investments
Total
</TABLE>
In the respective Underwriting Agreements, the Underwriters have
agreed, subject to the terms and conditions set forth therein, to purchase (x)
all the Notes offered hereby if any of the Notes are purchased and (y) all the
Certificates offered hereby if any of the Certificates are purchased. The Seller
has been advised by the Underwriters that the Underwriters propose initially to
offer the Securities to the public at the respective public offering prices set
forth on the cover page of this Prospectus Supplement, and to certain dealers at
such prices less a concession not in excess of _____% per [Class A-1] Note,
_____% per [Class A-2] Note and _____% per Certificate. The Underwriters may
allow and such dealers may reallow to other dealers a discount not in excess of
_____% per [Class A-1] Note, _____% per [Class A-2] Note and _____% per
Certificate. After the initial public offering, such public offering prices,
concessions and reallowances may be changed.
The representative, on behalf of the underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bides in accordance with Regulation M under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Over-allotment involves syndicate
sales in excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so long
as the stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the Securities in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the representative to reclaim a selling concession from a
syndicate member when the Securities originally sold by such syndicate member
are purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the Securities to be higher than it would
otherwise be in the absence of such transactions. These transactions, if
commenced, may be discontinued at any time.
The Seller does not intend to apply for listing of the Securities on a
national securities exchange, but has been advised by ____________________ that
it intends to, and by McDonald Investments Inc. ("McDonald Investments") that it
may, make a market in the Securities. The Underwriters are not obligated,
however, to make a market in the Securities and may discontinue market-making at
any time without notice. No assurance can be given as to the liquidity of the
trading market for the Securities.
S-86
<PAGE> 89
The Underwriting Agreements provide that the Seller will indemnify the
Underwriters against certain liabilities, including liabilities under applicable
securities laws, or contribute to payments the Underwriters may be required to
make in respect thereof.
The Trust may, from time to time, invest the funds in the Trust
Accounts in Eligible Investments acquired from the Underwriters.
The closing of the sale of the Certificates is conditioned on the
closing of the sale of the Notes and the closing of the sale of the Notes is
conditioned on the closing of the sale of the Certificates.
____________________ is engaged from time to time by KeyCorp, the
parent corporation of the Seller, to provide investment banking services.
After the initial distribution of the Securities by the Underwriters,
this Prospectus Supplement may be used by McDonald Investments, an affiliate of
the Seller and KeyCorp, or its successors, in connection with offers and sales
relating to market-making transactions in the Securities. McDonald Investments
may act as principal or agent in such transactions, but has no obligation to do
so. McDonald Investments is a member of the New York Stock Exchange, Inc. Such
transactions will be at prices related to prevailing market prices at the time
of sale.
Pursuant to an Agreement and Plan of Merger dated as of June 15, 1998
between KeyCorp and McDonald & Company Investment, Inc. ("McDonald"), a
full-service investment banking and securities brokerage company headquartered
in Cleveland, Ohio, on October 23, 1998, McDonald was merged with and into
KeyCorp. On November 9, 1998, the merger of Key Capital Markets, Inc., a
wholly-owned broker-dealer subsidiary of KeyCorp, into McDonald & Company
Securities, Inc. (a wholly-owned subsidiary of the former McDonald) was
completed and the surviving entity was renamed McDonald Investments Inc.
McDonald Investments may engage in market-making transactions as described
above.
The Seller has also agreed to pay the Underwriters a structuring fee
equal to $_____.
LEGAL MATTERS
Certain legal matters relating to the Securities will be passed upon
for the Trust, the Seller and the Administrator by Forrest F. Stanley, Esq.,
General Counsel and Assistant Secretary of the Seller, as counsel for the
Seller, and by Thompson Hine & Flory LLP, Cleveland, Ohio and for the
Underwriters by Stroock & Stroock & Lavan LLP, New York, New York. Certain
federal income tax and other matters will be passed upon for the Trust by
Thompson Hine & Flory LLP. Certain Pennsylvania state income tax matters will be
passed upon for the Trust by Kirkpatrick & Lockhart LLP.
S-87
<PAGE> 90
INDEX OF PRINCIPAL TERMS
Set forth below is a list of the defined terms used in this Prospectus
Supplement and the pages on which the definitions of such terms may be found
herein.
<TABLE>
<CAPTION>
PAGE
<S> <C>
52-week Treasury Bill Rate...................................................82
91-day Treasury Bill Rate....................................................59
Additional Funding...........................................................64
Additional Student Loans.....................................................67
Administration Agreement.....................................................62
Administration Fee...........................................................83
ASA..........................................................................18
Assigned Rights..............................................................17
Auction Purchase Amount......................................................83
Available Funds..............................................................73
Available Loan Purchase Funds................................................39
Bankruptcy Code..............................................................42
Benefit Plan.................................................................84
Capped Amount................................................................72
Cede.........................................................................54
Certificate Balance..........................................................76
Certificate Rate.............................................................58
Certificateholders...........................................................37
Certificateholders' Distribution Amount......................................76
Certificateholders' Interest Carryover Shortfall.............................76
Certificateholders' Interest Distribution Amount.............................76
Certificateholders' Interest Index Carryover.................................58
Certificateholders' Principal Distribution Amount............................76
Certificates.................................................................16
Class A-1 Notes..............................................................18
Class A-2 Notes..............................................................18
Closing Date.................................................................16
Code.........................................................................84
Cohort Default Rate..........................................................52
Collection Account...........................................................17
Collection Period............................................................55
CSAC.........................................................................18
Deferral.....................................................................31
Deferral Period..............................................................22
Department...................................................................16
Depository...................................................................54
Determination Date...........................................................72
</TABLE>
S-88
<PAGE> 91
<TABLE>
<S> <C>
Distribution Dates...........................................................4
DOE Data Book................................................................44
DTC..........................................................................54
ECMC.........................................................................18
Eligible Deposit Account.....................................................63
Eligible Institution.........................................................64
Eligible Investments.........................................................63
Eligible Lender Trustee......................................................16
Equity Interest..............................................................84
ERISA........................................................................8
Escrow Account...............................................................17
Event of Default.............................................................57
Excess Master Servicing Fee..................................................72
Exchange Act.................................................................86
Expected Interest Collections................................................56
FDIC.........................................................................64
Federal Assistance...........................................................18
Federal Consolidation Loan...................................................37
Federal Consolidation Loan Rebate............................................73
Federal Direct Consolidation Loans...........................................37
Federal Guarantors...........................................................18
Federal Loans................................................................18
Federal Origination Fee......................................................73
Federal Tax Counsel..........................................................83
Fee Advance..................................................................23
Final Maturity Dates.........................................................5
Financed Federal Loans.......................................................16
Financed Private Loans.......................................................16
Financed Student Loans.......................................................16
Forbearance..................................................................31
Forbearance Periods..........................................................22
Formula Rate.................................................................55
Funding Period...............................................................67
Grace........................................................................31
Grace Period.................................................................38
Great Lakes..................................................................19
Guarantee Agreement..........................................................17
Guarantee Payments...........................................................18
Guaranteed Private Loans.....................................................16
Guarantors...................................................................4
HESC.........................................................................18
HICA.........................................................................39
Higher Education Act.........................................................18
Indenture....................................................................54
</TABLE>
S-89
<PAGE> 92
<TABLE>
<S> <C>
Indenture Trustee............................................................4
Index Maturity...............................................................61
Initial Financed Student Loans...............................................17
Initial Pool Balance.........................................................39
Initial Pre-Funded Amount....................................................64
In-School....................................................................31
Interest Period..............................................................55
Interest Subsidy Payments....................................................39
Investment Earnings..........................................................63
Investor Index...............................................................55
KBUSA........................................................................18
LIBOR........................................................................61
LIBOR Determination Date.....................................................61
LIBOR Indexed Securities.....................................................5
Liquidated Student Loans.....................................................73
Liquidation Proceeds.........................................................73
Loan Purchase Termination Date...............................................39
Lock-In Period...............................................................60
Margin.......................................................................56
Master Servicer..............................................................18
Master Servicer Default......................................................67
Master Servicing Fee.........................................................72
Master Servicing Fee Percentage..............................................20
Maximum TERI Payments Amount.................................................76
McDonald.....................................................................87
McDonald Investments.........................................................86
Minimum Purchase Amount......................................................82
Monthly Servicing Payment Date...............................................20
Net Government Receivable....................................................77
Non-Guaranteed Private Loans.................................................16
Note Collateralization Amount................................................77
Note Interest Rate...........................................................55
Noteholders..................................................................37
Noteholders' Distribution Amount.............................................77
Noteholders' Interest Carryover Shortfall....................................77
Noteholders' Interest Distribution Amount....................................77
Noteholders' Interest Index Carryover........................................56
Noteholders' Principal Distribution Amount...................................77
Noteholders' Priority Principal Distribution Amount..........................78
Notes........................................................................18
NSLP.........................................................................18
Obligors.....................................................................78
Other Additional Pre-Funded Amount...........................................64
Other Additional Pre-Funding Subaccount......................................64
</TABLE>
S-90
<PAGE> 93
<TABLE>
<S> <C>
Other Student Loans..........................................................68
Other Subsequent Student Loans...............................................68
Participants.................................................................55
Pennsylvania Tax Counsel.....................................................84
PHEAA........................................................................18
Plan Assets Regulation.......................................................84
PLUS Loans...................................................................19
Pool Balance.................................................................78
Pre-Funded Amount............................................................16
Pre-Funding Account..........................................................17
Principal Distribution Amount................................................78
Private Consolidation Loans..................................................37
Private Guarantors...........................................................39
Private Loans................................................................18
Programs.....................................................................21
Prospectus...................................................................9
Prospectus Supplement........................................................9
PTCE.........................................................................85
Purchase Price...............................................................62
Rating Agencies..............................................................8
Rating Agency................................................................8
Realized Losses..............................................................82
Reference Bank...............................................................61
Repayment....................................................................31
Reserve Account..............................................................7
Reserve Account Initial Deposit..............................................17
Sale and Servicing Agreement.................................................16
Securities...................................................................54
Securityholders..............................................................19
Seller.......................................................................16
Seller Insolvency Event......................................................38
Serial Loans.................................................................68
SLS Loans....................................................................19
Special Allowance Payments...................................................39
Special Determination Date...................................................38
Specified Collateral Balance.................................................78
Specified Reserve Account Balance............................................79
Stafford Loans...............................................................19
Statistical Cutoff Date......................................................17
Student Loan Rate............................................................56
Student Loans................................................................16
Subsequent Cutoff Date.......................................................66
Subsequent Pool..............................................................68
Subsequent Pool Pre-Funded Amount............................................64
</TABLE>
S-91
<PAGE> 94
<TABLE>
<S> <C>
Subsequent Pool Pre-Funding Subaccount.......................................64
Subsequent Pool Student Loans................................................68
Sub-Servicer.................................................................19
Sub-Servicers................................................................19
Sub-Servicing Agreement......................................................20
Telerate Page 3750...........................................................61
TERI.........................................................................39
Three-Month LIBOR............................................................61
Transfer Agreement...........................................................66
Transfer and Servicing Agreements............................................62
Transfer Date................................................................66
Treasury Bill Indexed Securities.............................................55
Trust........................................................................16
Trust Accounts...............................................................63
Trust Agreement..............................................................16
Underlying Federal Loans.....................................................37
Underlying Private Loans.....................................................67
Underwriters.................................................................85
Underwriting Agreements......................................................85
Unsubsidized Stafford Loan...................................................39
USAF.........................................................................18
</TABLE>
S-92
<PAGE> 95
[Alternate Page]
Prospectus supplement to prospectus dated _________, _____
$--------------
KEYCORP STUDENT LOAN TRUST _____-__
KEY BANK USA, NATIONAL ASSOCIATION
Seller
FLOATING RATE ASSET-BACKED NOTES
FLOATING RATE ASSET-BACKED CERTIFICATES
--------------
SECURITIES OFFERED
- classes of notes and certificates
listed in the table below
ASSETS
- student loans
- certain student loans guaranteed by federal or
private guarantors
CREDIT ENHANCEMENT
- notes
- subordination of certificates
- reserve account
- certificates
- reserve account
-----------------------------------
You should carefully consider the risk factors beginning on page S-_ of this
prospectus supplement and page 2 of the prospectus.
The securities are obligations only of the trust and are payable solely from the
student loans and other assets of the trust. The securities are not guaranteed
by any person.
The securities are not bank deposits.
- ----------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the prospectus to which it relates is truthful or
complete. Any representation to the contrary is a criminal offense.
<TABLE>
<CAPTION>
ORIGINAL FINAL
PRINCIPAL INTEREST RATE MATURITY PRICE TO UNDERWRITING PROCEEDS TO THE
AMOUNT (PER ANNUM) DATE PUBLIC (1) DISCOUNT SELLER(1)(2)
------ ----------- ---- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Class A-1 Notes $ % % %
Class A-2 Notes $ % % %
Certificates $ % % %
Total.......... $ $ $ $
</TABLE>
(1) Plus accrued interest, if any, from ___________.
(2) Before deducting expenses, estimated to be $_______________.
Delivery of the securities will be made on or about ____________, 19__, against
payment in immediately available funds.
This prospectus supplement and the prospectus to which it relates are to be used
by McDonald Investments Inc., a wholly-owned subsidiary of KeyCorp and an
affiliate of the Seller, in connection with offers and sales related to
market-making transactions in the securities in which it acts as principal
and/or agent. Sales will be made at prices related to the prevailing prices at
the time of sale.
[NAMES OF UNDERWRITERS]
Prospectus supplement dated _____________, _________
<PAGE> 96
[ALTERNATE PAGE]
PLAN OF DISTRIBUTION
This Prospectus Supplement and the Prospectus to which it relates are
to be used by McDonald Investments Inc., a wholly-owned subsidiary of KeyCorp
and an affiliate of the Seller ("McDonald"), in connection with offers and sales
related to market-making transactions in the Securities in which McDonald acts
as principal. McDonald may also act as agent in such transactions. Sales will be
made at prices related to prevailing prices at the time of sale. Any obligations
of McDonald are the sole obligations of McDonald and do not create any
obligations on the part of any affiliate of McDonald.
In connection with the offering, McDonald may engage in transactions
that stabilize, maintain or otherwise affect the price of the Notes and the
Certificates. Specifically, McDonald may overallot the offering, creating a
short position in the Notes and the Certificates for its own account. McDonald
may bid for and purchase Notes and Certificates in the open market to cover such
short positions. In addition, McDonald may bid for and purchase Notes and
Certificates in the open market to stabilize the price of the Notes and the
Certificates. These activities may stabilize or maintain the market price of the
Notes and the Certificates above independent market levels. McDonald is not
required to engage in these activities, and may end these activities at any
time.
<PAGE> 97
PROSPECTUS
[SUBJECT TO COMPLETION
DATED AUGUST 17, 1999]
KEYCORP STUDENT LOAN TRUSTS
Issuer
KEY BANK USA, NATIONAL ASSOCIATION
Seller and Master Servicer
Asset Backed Notes
Asset Backed Certificates
SECURITIES OFFERED
- asset backed notes and asset backed certificates
- rated in one of four highest rating categories by at least one nationally
recognized rating organization
- not listed on any trading exchange
- obligations only of the related trust
ASSETS
- student loans
- may include one or more forms of credit enhancement
- --------------------------------------------------------------------------------
You should carefully consider the risk factors beginning on page 6.
The securities are not bank deposits and are not insured by the Federal Deposit
Insurance Corporation.
This prospectus must be accompanied by a prospectus supplement for the
particular series.
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. MAKING ANY CONTRARY REPRESENTATION IS A
CRIMINAL OFFENSE.
The seller may offer securities through underwriters or by other methods
described under the caption "Plan of Distribution."
The date of this Prospectus is ______, ____
<PAGE> 98
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
RISK FACTORS......................................................................................................6
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE..................................................................13
FORMATION OF THE TRUSTS..........................................................................................14
The Trusts..............................................................................................14
Eligible Lender Trustee.................................................................................14
USE OF PROCEEDS..................................................................................................15
THE SELLER, THE ADMINISTRATOR, THE MASTER SERVICER AND THE SUB-SERVICERS.........................................15
The Seller, Administrator and Master Servicer...........................................................15
General........................................................................................15
Services and Fees of Administrator.............................................................15
Master Servicer................................................................................16
The Sub-Servicers.......................................................................................17
THE STUDENT LOAN POOLS...........................................................................................18
General.................................................................................................18
THE STUDENT LOAN FINANCING BUSINESS..............................................................................19
Programs Offered by the Seller..........................................................................19
Description of Federal Loans Under the Programs.........................................................21
General........................................................................................21
Stafford Loan Program..........................................................................21
(1) Eligibility Requirements...................................................................22
(2) Loan Limits................................................................................22
(3) Interest...................................................................................23
(4) Repayment..................................................................................24
(5) Grace Periods, Deferral Periods, Forbearance Periods.......................................25
(6) Interest Subsidy Payments..................................................................25
(7) Special Allowance Payments.................................................................26
SLS Loan Program...............................................................................27
PLUS Loan Program..............................................................................28
Federal Consolidation Loan Program.............................................................29
Undergraduate Federal Loans....................................................................32
Graduate Federal Loans.........................................................................33
Description of Private Loans Under the Programs.........................................................34
General........................................................................................34
Private Undergraduate Loans....................................................................34
</TABLE>
2
<PAGE> 99
<TABLE>
<CAPTION>
<S> <C>
Eligibility Requirements.......................................................................35
Loan Limits....................................................................................35
Interest ......................................................................................36
Repayment......................................................................................36
Grace Periods Deferral Periods, Forbearance Periods............................................36
Private Graduate Loans.........................................................................36
Payment Terms..................................................................................37
Private Consolidation Loans....................................................................40
Insurance of Student Loans; Guarantors of Student Loans.................................................41
Federal Guarantors.............................................................................41
Federal Insurance and Reinsurance of Federal Guarantors........................................42
Private Guarantors.............................................................................45
Claims and Recovery Rates...............................................................................45
Origination Process.....................................................................................45
Servicing and Collections Process.......................................................................47
Incentive Programs......................................................................................48
WEIGHTED AVERAGE LIVES OF THE SECURITIES.........................................................................49
POOL FACTORS AND TRADING INFORMATION.............................................................................51
DESCRIPTION OF THE NOTES.........................................................................................51
General.................................................................................................51
Principal of and Interest on the Notes..................................................................52
The Indenture...........................................................................................53
Modification of Indenture......................................................................53
Events of Default; Rights upon Event of Default................................................54
Certain Covenants..............................................................................58
Annual Compliance Statement....................................................................59
Indenture Trustee's Annual Report..............................................................59
Satisfaction and Discharge of Indenture........................................................60
The Indenture Trustee..........................................................................60
DESCRIPTION OF THE CERTIFICATES..................................................................................60
General.................................................................................................60
Principal and Interest in Respect of the Certificates...................................................61
CERTAIN INFORMATION REGARDING THE SECURITIES.....................................................................62
Fixed Rate Securities...................................................................................62
</TABLE>
3
<PAGE> 100
<TABLE>
<CAPTION>
<S> <C>
Floating Rate Securities................................................................................62
Book-Entry Registration.................................................................................63
Definitive Securities...................................................................................67
List of Securityholders.................................................................................68
Reports to Securityholders..............................................................................69
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS.............................................................69
General.................................................................................................69
Sale of Student Loans; Representations and Warranties...................................................70
Additional Fundings.....................................................................................70
Accounts................................................................................................70
Servicing Procedures....................................................................................71
Payments on Student Loans...............................................................................72
Master Servicer Covenants...............................................................................73
Master Servicing Compensation...........................................................................74
Distributions...........................................................................................75
Credit and Cash Flow Enhancement........................................................................75
General........................................................................................75
Reserve Account................................................................................76
Statements to Indenture Trustee and Trust...............................................................76
Evidence as to Compliance...............................................................................78
Certain Matters Regarding the Master Servicer and the Sub-Servicers.....................................79
Master Servicer Default; Administrator Default..........................................................80
Rights Upon Master Servicer Default and Administrator Default...........................................81
Waiver of Past Defaults.................................................................................82
Insolvency Event........................................................................................82
Amendment...............................................................................................83
Payment of Notes........................................................................................84
Seller Liability........................................................................................84
Termination.............................................................................................84
Administrator...........................................................................................85
CERTAIN LEGAL ASPECTS OF THE STUDENT LOANS.......................................................................86
Transfer of Student Loans...............................................................................86
Certain Matters Relating to Receivership................................................................87
Consumer Protection Laws................................................................................88
Loan Origination and Servicing Procedures Applicable to Student Loans...................................88
Failure to Comply with Third-Party Servicer Regulations May Adversely Affect
Loan Servicing........................................................................................89
Bankruptcy Considerations...............................................................................90
Recent Developments.....................................................................................90
Emergency Student Loan Consolidation Act of 1997...............................................90
FY 1998 Budget.................................................................................91
1998 Amendment.................................................................................91
1998 Reauthorization Bill......................................................................91
INCOME TAX CONSEQUENCES..........................................................................................93
FEDERAL TAX CONSEQUENCES FOR TRUSTS FOR WHICH A PARTNERSHIP ELECTION IS MADE.....................................94
Tax Characterization of the Trust.......................................................................94
Tax Consequences to Holders of the Notes................................................................94
Treatment of the Notes as Indebtedness.........................................................94
</TABLE>
4
<PAGE> 101
<TABLE>
<CAPTION>
<S> <C>
Original Issue Discount........................................................................95
Interest Income on the Notes...................................................................95
Sale or Other Disposition......................................................................95
Foreign Holders................................................................................96
Backup Withholding.............................................................................97
Possible Alternative Treatments of the Notes...................................................97
FASITs..................................................................................................98
Tax Consequences to Holders of the Certificates.........................................................98
Classification as a Partnership.........................................................................98
Treatment of the Trust as a Partnership........................................................98
Partnership Taxation...........................................................................99
Guaranteed Payments............................................................................99
Allocation of Tax Items........................................................................99
Computation of Income.........................................................................100
Section 708 Termination.......................................................................100
Discount and Premium..........................................................................101
Disposition of Certificates...................................................................101
Allocations Between Transferors and Transferees...............................................102
Section 754 Election..........................................................................102
Administrative Matters........................................................................102
Tax Consequences to Foreign Certificateholders................................................103
Backup Withholding............................................................................104
FEDERAL TAX CONSEQUENCES FOR TRUSTS IN WHICH ALL CERTIFICATES ARE RETAINED BY THE SELLER........................104
Tax Characterization of the Trust......................................................................104
Tax Consequences to Holders of the Notes...............................................................105
Treatment of the Notes as Indebtedness........................................................105
PENNSYLVANIA STATE TAX CONSEQUENCES.............................................................................105
Pennsylvania Income and Franchise Tax Consequences with Respect to the Notes...........................105
Pennsylvania Income and Franchise Tax Consequences with Respect to the
Certificates.........................................................................................105
ERISA CONSIDERATIONS............................................................................................106
The Notes..............................................................................................106
The Certificates.......................................................................................107
PLAN OF DISTRIBUTION............................................................................................108
LEGAL MATTERS...................................................................................................110
INDEX OF PRINCIPAL TERMS........................................................................................111
</TABLE>
5
<PAGE> 102
RISK FACTORS
We recommend that you consider the following factors and the additional
factors described under "Risk Factors" in the related prospectus supplement
before purchasing the securities.
CREDIT ENHANCEMENT
MAY NOT PROTECT YOU
FROM ALL LOSSES Although every trust will include
some form of credit enhancement,
that credit enhancement may not
cover every class of securities
issued by a trust. In addition,
every form of credit enhancement
will have certain limitations on,
and exclusions from coverage. As a
result, there is always a risk that
you may not recover the full
amount of your investment.
GUARANTEES OF STUDENT
LOANS MAY NOT PREVENT
LOSSES A significant number of the student
loans in a trust will be guaranteed
by either a federal or a private
guarantor. However, those guarantees
may not protect you against all
losses for several reasons,
including:
- federal guarantees are
generally limited to 98% of the
principal amount of the student
loan;
- if Key Bank USA, National
Association fails to follow
prescribed origination
procedures or if the master
servicer or any sub-servicers
fail to follow required
servicing procedures, the
applicable guarantors may
refuse to make guarantee
payments to the applicable
trust and if the loans are
federally insured, the
Department may refuse to make
interest subsidy or special
allowance payments to the
trust; and
- private guarantors are not
reinsured by or entitled to any
assistance from the Department.
If the loan loss reserves of a
private guarantor are not
sufficient, that private
guarantor may not be able to
honor its obligations to make
guarantee payments.
DEFAULTS ON STUDENT LOANS
WITHOUT GUARANTEES MAY
RESULT IN LOSSES A trust may include student loans
that are not guaranteed by any
federal or private guarantor, or by
any other party or
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governmental agency. Since all
student loans, whether guaranteed or
not, are unsecured, if a borrower
under one of these student loans
defaults, the applicable trust may
suffer a loss.
THE FINANCIAL CONDITION OF
FEDERAL GUARANTORS MAY BE
ADVERSELY AFFECTED BY SEVERAL
FACTORS The financial condition of the
federal guarantors may be adversely
affected by a number of factors
including:
- the amount of claims made
against such federal guarantor
as a result of borrower
defaults;
- the amount of claims reimbursed
to such federal guarantor from
the Department;
- changes in legislation that
may reduce expenditures from
the Department that support
federal guarantors or that may
require federal guarantors to
pay more of their reserves to
the Department;
- loss of reinsurance benefits
due to the master servicer's or
a sub-servicer's failure to
follow required servicing
procedures; and
- expansion of the federal direct
student loan program.
If the financial status of the
guarantors deteriorates, the
guarantors may fail to make
guarantee payments to the trustee.
In such event, you may suffer delays
in the payment of principal and
interest on your securities.
REINSURANCE OF FEDERAL
GUARANTORS MAY NOT
PREVENT DELAYS OR LOSSES If a federal guarantor fails to make
guarantee payments, the applicable
trust may submit claims directly to
the Department. However, the
Department may determine that the
federal guarantor is able to meet
its obligations, and the Department
will not make those payments. Even
if the Department determines to make
those payments, there may be delays
in making the necessary
determination. Loss or delay of any
such guarantee payments, interest
subsidy payments or special
allowance payments could adversely
affect the related trust's ability
to pay timely interest and
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principal. In such event, you may
suffer a loss on your investment.
THE TRUST IS DEPENDENT UPON
THE PERFORMANCE BY VARIOUS
PARTIES OF THEIR OBLIGATIONS The trust is relying, and the
performance of the securities
depends, on the performance of the
seller, the master servicer and the
sub-servicers of their respective
obligations. Any failure to perform
could have material adverse
consequences as follows:
- FAILURE TO HONOR PURCHASE
OBLIGATIONS MAY CAUSE LOSSES.
Key Bank USA, National
Association, as seller and
master servicer, or the
applicable sub-servicer, will
be obligated to purchase
student loans from a trust with
respect to which it materially
breaches representations,
warranties or covenants. You
can not be assured, however,
that Key Bank USA, National
Association, or the applicable
sub-servicer, will have the
financial resources to purchase
such student loans. The failure
to so purchase a student loan
would not constitute an event
of default under the related
indenture or permit the
exercise of remedies
thereunder. However, the breach
of such representations,
warranties or covenants may
cause you to suffer a loss on
your investment.
- FAILURE TO COMPLY WITH
THIRD-PARTY SERVICER
REGULATIONS MAY ADVERSELY
AFFECT LOAN SERVICING. The
Department regulates each
servicer of federal student
loans. Under certain of these
regulations, a third-party
servicer (such as one of the
sub-servicers) is jointly and
severally liable with its
client lenders for liabilities
to the Department arising from
the sub-servicer's violation of
applicable requirements. In
addition, if a sub-servicer
fails to meet standards of
financial responsibility or
administrative capability
included in the regulations, or
violates other requirements,
the Department may fine the
sub-servicer and/or limit,
suspend, or terminate such
sub-servicer's eligibility to
contract to service federal
student loans. If a
sub-servicer were so fined or
held liable, or its eligibility
were limited, suspended, or
terminated, its ability to
properly service the federal
loans and to satisfy its
obligation to purchase federal
loans with respect to
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which it breaches its
representations, warranties or
covenants could be adversely
affected. Moreover, if the
Department terminates a
sub-servicer's eligibility, a
servicing transfer will take
place and there will be delays
in collections and temporary
disruptions in servicing. Any
servicing transfer will at
least temporarily adversely
affect payments to you.
- THE TRUST'S INTEREST IN ITS
STUDENT LOANS COULD BE DEFEATED
BY ACTIONS OF THE SUB-SERVICERS
AS CUSTODIANS. The applicable
sub-servicer, as custodian on
behalf of the master servicer
with respect to each trust,
will have custody of the
promissory notes evidencing the
student loans it services.
Although the accounts of the
seller will be marked to
indicate the sale and although
the seller will cause UCC
financing statements to be
filed with the appropriate
authorities, the student loans
will not be physically
segregated, stamped or
otherwise marked to indicate
that such student loans have
been sold to the eligible
lender trustee. If, through
inadvertence or otherwise, any
of the student loans were sold
to another party, or a security
interest therein were granted
to another party that purchased
(or took such security interest
in) any of such student loans
in the ordinary course of its
business and took possession of
such student loans, then the
purchaser (or secured party)
would acquire an interest in
the student loans superior to
the interest of the eligible
lender trustee, if the
purchaser (or secured party)
acquired such student loans
without knowledge of the
eligible lender trustee's
interest.
- INSOLVENCY OF THE MASTER
SERVICER, A SUB-SERVICER OR THE
ADMINISTRATOR MAY CAUSE LOSSES.
In the event of default by the
master servicer, a sub-servicer
or the administrator resulting
solely from certain events of
insolvency or bankruptcy, a
court, conservator, receiver or
liquidator may have the power
to prevent either the indenture
trustee or the noteholders from
appointing a successor master
servicer or administrator, or
prevent the master servicer
from appointing a new
sub-servicer, as the case may
be, and delays in collections
in respect of the student loans
may occur. Any delay in the
collections of student loans
may delay or reduce payments to
you.
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CHANGES IN LEGISLATION MAY
ADVERSELY AFFECT STUDENT
LOANS AND FEDERAL GUARANTORS You can not be certain that the
Higher Education Act or other
relevant federal or state laws,
rules and regulations will not be
amended or modified in the future in
a manner that will adversely affect
the federal student loan programs
described in this prospectus, the
student loans made thereunder or the
financial condition of the federal
guarantors.
In addition, if the direct student
loan program expands, the
sub-servicers may experience
increased costs due to reduced
economies of scale or other adverse
effects on their business to the
extent the volume of loans serviced
by the sub-servicers is reduced.
Such cost increases could reduce the
ability of the sub-servicers to
satisfy their obligations to service
the student loans or to purchase
student loans in the event of
certain breaches of its covenants.
CERTAIN POLICIES OF THE
DEPARTMENT MAY REDUCE
AMOUNTS AVAILABLE
FOR PAYMENTS ON
YOUR SECURITIES Each trust will be obligated to pay
to the Department a monthly rebate
at an annualized rate of generally
1.05% of the outstanding principal
balance on each federal
consolidation loan which is a part
of the related trust. This rebate
will be payble prior to
distributions made to you. In
addition, the trust must pay to the
Department a 0.50% origination fee
on the initial principal balance of
each student loan which is
originated on its behalf by the
eligible lender trustee after the
applicable closing date. This fee
will be deducted by the Department
out of interest subsidy payments and
special allowance payments otherwise
payable to the trust(s). In such
event the amount available to be
distributed to you will be reduced.
Under certain circumstances, the
related trust is obligated to pay
any portion of the unpaid fee from
other assets of that trust prior to
making distributions to you. As a
result, the payment of the rebate
fee and origination fee to the
Department will affect the rate and
timing of payments to you. Moreover,
if the origination fee is deducted
from interest subsidy payments and
special allowance payments the
interest rate
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payable on your securities may be
capped at a lower rate. In such
event, the value of your investment
may be impaired.
Due to a Department policy limiting
the granting of new lender
identification numbers, all of the
trusts established by the seller to
securitize federal student loans may
use a common Department lender
identification number. The
Department regards the eligible
lender trustee as the party
primarily responsible to the
Department for any liabilities owed
to the Department or federal
guarantors resulting from the
eligible lender trustee's activities
in the federal student loan program.
If the Department or a federal
guarantor determines such a
liability exists in connection with
a trust using the shared lender
identification number, the
Department or such federal guarantor
may collect that liability or offset
such liability from amounts due the
eligible lender trustee under the
shared lender identification number.
Because the trust agreements for the
trusts established by the seller,
which share a lender identification
number, will require each such trust
to indemnify the other trusts for a
shortfall or an offset by the
Department or a federal guarantor,
if the amount available for
indemnification by one trust to
another trust is insufficient, you
may suffer a loss on your investment
as a result of the performance of
another trust.
NOTEHOLDERS' RIGHT TO CONTROL
UPON CERTAIN DEFAULTS
MAY ADVERSELY AFFECT
CERTIFICATEHOLDERS In the event of a default by the
master servicer or the
administrator, the indenture trustee
or the noteholders, may remove the
master servicer or the
administrator, as the case may be,
without the consent of the eligible
lender trustee or any of the
certificateholders. In addition, the
noteholders have the ability, with
certain specified exceptions, to
waive defaults by the master
servicer or the administrator,
including defaults that could
materially adversely affect the
certificateholders.
CONSUMER PROTECTION LAWS
MAY AFFECT ENFORCEABILITY OF
STUDENT LOANS Numerous federal and state consumer
protection laws and related
regulations impose substantial
requirements upon
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lenders and servicers involved in
consumer finance. Also, some state
laws impose finance charge ceilings
and other restrictions on certain
consumer transactions and require
contract disclosures in addition to
those required under federal law.
These requirements impose specific
statutory liability that could
affect an assignee's ability to
enforce consumer finance contracts
such as the student loans. In
addition, the remedies available to
the indenture trustee or the
noteholders upon an event of default
under the indenture may not be
readily available or may be limited
by applicable state and federal
laws.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Key Bank USA, National Association, as originator of each trust, has
filed with the Securities and Exchange Commission (the "Commission") a
Registration Statement (together with all amendments and exhibits thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the securities offered pursuant to this
prospectus. The Registration Statement, contains information which is not
contained in this prospectus. Prospective investors may read the Registration
Statement and make copies of it at the public reference facilities maintained by
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; and at the
Commission's regional offices at Seven World Trade Center, New York, New York
10048, and 500 West Madison Street, 14th Floor, Chicago, Illinois 60661. Copies
of the Registration Statement may be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Commission maintains a Web site at http://www.sec.gov
containing registration statements and other information regarding registrants,
including Key Bank USA, National Association, that file electronically with the
Commission.
All documents filed by Key Bank USA, National Association, as
originator of any trust, pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), subsequent to
the date of this prospectus and prior to the termination of the offering of the
securities shall be deemed to be incorporated by reference in this prospectus.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this prospectus to the extent that a statement contained herein
or in any subsequently filed document which also is 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.
Key Bank USA, National Association will provide without charge to each
person, including any beneficial owner of securities, to whom a copy of this
prospectus is delivered, on the written or oral request of any such person, a
copy of any or all of the documents incorporated herein or in any related
prospectus supplement by reference, except the exhibits to such documents
(unless such exhibits are specifically incorporated by reference in such
documents). Requests for such copies should be directed to Key Bank USA,
National Association, Education Resources, 800 Superior Avenue, 4th Floor,
Cleveland, Ohio 44114, Attention: Education Loan Trust Administrator (Telephone:
(800) 523-7248).
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FORMATION OF THE TRUSTS
THE TRUSTS
With respect to each series of Securities, the Seller will establish a
separate trust (each a "Trust") pursuant to the respective trust agreement (each
a "Trust Agreement"), for the transactions described herein and in the related
Prospectus Supplement. The property of each Trust will consist of
(a) a pool of undergraduate loans and/or graduate school student
loans (the "Student Loans"), legal title to which is held by
the related eligible lender trustee (the "Eligible Lender
Trustee") on behalf of each Trust,
(b) all funds collected or to be collected in respect thereof
(including any Guarantee Payments with respect thereto) on or
after the applicable date specified in the related Prospectus
Supplement (the "Cutoff Date"),
(c) any other rights under certain collateral agreements with
respect to certain Private Graduate Loans to the extent
assigned to each Trust by the Seller, and
(d) all moneys and investments on deposit in any Collection
Account, any Pre-Funding Account, any Escrow Account, any
Negative Carry Account, any Reserve Account and any other
trust accounts or any other form of credit or cash flow
enhancement that may be obtained for the benefit of holders of
one or more classes of such Securities. To the extent provided
in the applicable Prospectus Supplement, the Notes will be
collateralized by the property of the related Trust. To
facilitate servicing and to minimize administrative burden and
expense, the Master Servicer will be appointed by the Eligible
Lender Trustee as the custodian, and the Master Servicer will
then appoint the Sub-Servicers as the custodians on its
behalf, of the promissory notes representing the Student Loans
that each services.
The principal offices of each Trust and the related Eligible Lender
Trustee will be specified in the applicable Prospectus Supplement.
If specified in a Prospectus Supplement, an election may be made to
treat a Trust as a "financial asset securitization improvement trust" (a
"FASIT") for federal income tax purposes. See "Federal Tax Consequences For
Trusts For Which a Partnership Election is Made--FASITs" herein.
ELIGIBLE LENDER TRUSTEE
The Eligible Lender Trustee for each Trust will be such entity as is
specified in the related Prospectus Supplement. The Eligible Lender Trustee on
behalf of the related Trust will acquire legal title to all the related Student
Loans acquired pursuant to the related Sale and Servicing
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Agreement and will enter into a Guarantee Agreement or comparable arrangement,
if applicable, with each of the Guarantors with respect to the Student Loans
which are guaranteed or insured. Each Eligible Lender Trustee will qualify as an
eligible lender and owner of all Federal Loans and Private Loans for all
purposes under the Higher Education Act and the Guarantee Agreements. Failure of
the Federal Loans to be owned by an eligible lender would result in the loss of
any Federal Guarantee Payments from any Federal Guarantor and any Federal
Assistance with respect to such Federal Loans. See "The Student Loan Financing
Business--Description of Federal Loans Under the Programs." An Eligible Lender
Trustee's liability in connection with the issuance and sale of the Notes and
the Certificates is limited solely to the express obligations of the Eligible
Lender Trustee as set forth in the related Trust Agreement and the related Sale
and Servicing Agreement. See "Description of the Transfer and Servicing
Agreements." The Seller plans to maintain normal commercial banking relations
with the Eligible Lender Trustee.
USE OF PROCEEDS
The net proceeds from the sale of Securities of a given series will be
used by the applicable Trust to purchase the related Student Loans on the
Closing Date from the Seller and to make the initial deposit into the Reserve
Account, Pre-Funding Account or Negative Carry Account, if any. The Seller will
use such net proceeds paid to it with respect to any such Trust for general
corporate purposes.
THE SELLER, THE ADMINISTRATOR, THE MASTER SERVICER
AND THE SUB-SERVICERS
THE SELLER, ADMINISTRATOR AND MASTER SERVICER
General. Key Bank USA, National Association ("KBUSA"), will act as
seller (the "Seller") and as master servicer (the "Master Servicer"), pursuant
to the related Sale and Servicing Agreement, and as administrator (the
"Administrator") pursuant to the related Administration Agreement. KBUSA, a
wholly owned subsidiary of KeyCorp, is a national banking association providing
consumer financial services nationwide, including credit cards, student loans,
home equity loans, and indirect automobile, marine and recreational vehicle
loans.
As of June 30, 1999, KBUSA had total assets of approximately $5.829
billion, total liabilities of approximately $4.788 billion and approximately
$1.040 billion in stockholder's equity. As of such date, the Seller had an
aggregate principal amount of student loans outstanding of approximately $1.895
billion. The principal executive offices of KBUSA are located at Key Tower, 127
Public Square, Cleveland, Ohio 44114 and its telephone number is (216) 689-6300.
Services and Fees of Administrator. Pursuant to the related
Administration Agreement, the Administrator will be responsible for preparing
and filing claim forms on behalf of the Eligible Lender Trustee for Interest
Subsidy Payments and Special Allowance Payments from the United States
Department of Education (the "Department") and is required to provide notices
and reports and to perform other administrative obligations required by the
related Indenture, the
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Trust Agreement and the Sale and Servicing Agreement. See "Description of the
Transfer and Servicing Agreements--Administrator."
Master Servicer. KBUSA, in its capacity as Master Servicer will be
responsible for master servicing the Student Loans. The Master Servicer will
arrange for and oversee the performance of each Sub-Servicer of its respective
servicing obligations with respect to the Student Loans. In consideration for
performing its obligations under the applicable Sale and Servicing Agreement,
the Master Servicer will receive in the aggregate, subject to certain
limitations described herein, a monthly fee payable by each Trust as specified
in the related Prospectus Supplement and certain one-time fixed fees for each
Student Loan for which a forbearance period was granted or renewed or for which
a guarantee claim was filed, in each case subject to certain adjustments,
together with other administrative fees and similar charges. The Master Servicer
will in turn be solely responsible for all compensation due to the Sub-Servicers
for the performance of their respective obligations pursuant to the related
Sub-Servicing Agreements. See "Description of Transfer and Servicing
Agreements--Servicing Compensation."
Year 2000. The Year 2000 ("Year 2000") issue refers to the fact that
many computer systems were originally programmed using two digits rather than
four digits to identify the applicable year. When the year 2000 occurs, these
systems could interpret the year as 1900 rather than 2000. Unless hardware,
system software and applications are corrected to be Year 2000 compliant,
computers and the devices they control could generate miscalculations and create
operational problems. Various systems could be affected ranging from complex
computer systems to telephone systems, automatic teller machines ("ATMs") and
elevators.
To address this issue, KeyCorp ("KeyCorp"), the parent of KBUSA, for
the operations of KBUSA, as well as its other operating subsidiaries, developed
an extensive plan in 1995, including the formation of a team consisting of
internal resources and third-party experts. The plan, has been in implementation
since that time and consists of five major phases: awareness--ensuring a common
understanding of the issue throughout KeyCorp; assessment--identifying and
prioritizing the systems and third parties with whom KeyCorp has exposure to
Year 2000 issues; renovation--enhancing, replacing or retiring hardware,
software and systems applications; validation--testing modifications made; and
implementation--certifying Year 2000 compliance and user understanding and
acceptance. The awareness and assessment phases have been completed. The
remaining phases are substantially complete. As of June 30, 1999, KeyCorp had
completed all phases of Year 2000 readiness testing for its mission critical
systems and is well along in completing the remaining steps for which regulatory
deadlines have been established.
As a financial institution, KeyCorp may experience increases in problem
loans and credit losses in the event that borrowers fail to properly respond to
this issue. In addition, financial institutions may incur higher funding costs
if consumers react to publicity about the issue by withdrawing deposits. They
also could be impacted if third parties they deal with in conducting their
business, such as foreign banks, governmental agencies, clearing houses,
telephone companies, and other service providers, fail to properly address this
issue.
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Accordingly, KeyCorp has formed a separate internal team charged with
the task of identifying critical business interfaces; assessing potential
problems relating to credit, liquidity and counterparty risk; and where
appropriate, developing contingency plans. This team has been surveying
significant credit clients to determine their Year 2000 readiness and to
evaluate the level of potential credit risk to KeyCorp. Based on the information
obtained, specific follow-up programs have been established and the adequacy of
the allowance for loan losses is being assessed on an ongoing basis. The results
of the assessment will be reflected in the assignment of an appropriate risk
rating in KeyCorp's loan grading system. On an ongoing basis, KeyCorp is also
contacting other significant parties with which it conducts business to
determine the status of their Year 2000 compliance efforts.
Despite the actions taken by KeyCorp, there can be no assurance that
significant clients or other critical parties will adequately address their Year
2000 issues. Consequently, KeyCorp has developed contingency plans to help
mitigate the risks associated with potential delays in completing the
renovation, validation and implementation phases of its Year 2000 plan, as well
as the potential failure of external parties to adequately address their Year
2000 issues. In accordance with regulatory guidelines, these plans had been
completed as of June 30, 1999 and address primarily contingency solutions for
KeyCorp's core systems and the identification of alternative business partners.
In addition, during the first half of 1999, KeyCorp increased its borrowing
capacity with the Federal Reserve Bank to address the potential need for
additional funding as the Year 2000 approaches. Because the Year 2000 issue has
never occurred, it is not possible to foresee or quantify the possible overall
financial and operational impact and/or to determine whether it will be material
to the financial condition or operations of KeyCorp.
As of June 30, 1999, KeyCorp has recognized approximately $47 million
of its total estimated project cost of up to $50 million. It is currently
expected that the estimated remaining cost of up to $3 million will be
recognized in 1999 and the first half of 2000. The total cost of the project is
being funded through operating cash flows of KeyCorp and its affiliates.
THE SUB-SERVICERS
The sub-servicers (the "Sub-Servicers") under each Sale and Servicing
Agreement will be the entity or entities specified in the related Prospectus
Supplement.
With respect to the Student Loans it is servicing on behalf of the
Master Servicer and with respect to each Trust, each Sub-Servicer will be
required by the related sub-servicing agreement between such Sub-Servicer and
the Master Servicer (each a "Sub-Servicing Agreement") to perform the services
and duties customary to the servicing of Student Loans it is required to service
and to do so in the same manner as such Sub-Servicer has serviced Student Loans
on behalf of the Seller and/or the Master Servicer and otherwise in compliance
with all applicable standards and procedures. In addition, each Sub-Servicer is
required to maintain its eligibility as a third-party servicer under the Higher
Education Act. See "Description of the Transfer and Servicing
Agreements--Servicing Procedures." Each Sub-Servicer will be paid directly by
the Master Servicer for its services rendered under each Sub-Servicing
Agreement.
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The Trust will be an intended third-party beneficiary of each Sub-Servicing
Agreement. See "Description of the Transfer and Servicing Agreements--Master
Servicer Default; Administrator Default."
THE STUDENT LOAN POOLS
GENERAL
The Student Loans to be sold by the Seller to the Eligible Lender
Trustee on behalf of a Trust pursuant to the related Sale and Servicing
Agreement will be selected from the Seller's portfolio of Student Loans by
several criteria, including that each Student Loan:
- was originated in the United States or its territories or possessions
under and in accordance with the Programs (including, in the case of
borrowers of Federal Loans, a financial need analysis and, in the case
of borrowers of Private Loans, a creditworthiness evaluation);
- contains terms in accordance with those required by the Programs, the
Guarantee Agreements (with respect to those Student Loans that are
guaranteed or insured) and other applicable requirements;
- no selection procedures believed by the Seller to be adverse to the
Securityholders of any series will be used in selecting the related
Student Loans; and
- satisfies the other criteria, if any, set forth in the related
Prospectus Supplement.
The Student Loans that comprise assets of each Trust will be held by
the related Eligible Lender Trustee, as trustee on behalf of such Trust. The
Eligible Lender Trustee will also enter into, on behalf of such Trust (with
respect to those Student Loans that are guaranteed or insured), Guarantee
Agreements with the Guarantors pursuant to which each of such Student Loans will
be guaranteed by one of such Guarantors. See "Formation of the Trusts--Eligible
Lender Trustee."
Information with respect to each pool of Student Loans for a given
Trust will be set forth in the related Prospectus Supplement, including, to the
extent appropriate, the composition, the distribution by loan type, loan payment
status, and states of borrowers' residence and the portion of such Student Loans
guaranteed by the specified Guarantors.
In the case of each series for which the related Trust may acquire
Student Loans from the Seller after the related Cutoff Date ("Additional
Fundings"), information with respect to the Student Loans eligible to be
acquired by the related Trust will be set forth in the related Prospectus
Supplement as will information regarding the duration and conditions of any
related funding period (a "Funding Period") or revolving period (a "Revolving
Period"), the circumstances under which Additional Fundings will be made during
such period, and, if
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Additional Fundings may continue to be made after such period, the circumstances
under which such Additional Fundings will be made.
Each of the Student Loans provides or will provide for the amortization
of the outstanding principal balance of such Student Loan over a series of
regular payments. Each regular payment consists of an installment of interest
which is calculated on the basis of the outstanding principal balance of such
Student Loan multiplied by the applicable interest rate and further multiplied
by the period elapsed (as a fraction of a calendar year) since the preceding
payment of interest was made. As payments are received in respect of such
Student 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 regular installment 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.
Conversely, if a borrower pays a monthly installment after its scheduled due
date, a late fee, where applicable, will be assessed and the portion of the
payment allocable to the late fee and 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 portion of the payment applied to reduce
the unpaid principal balance will be correspondingly less. In either case,
subject to any applicable Deferral Periods or Forbearance Periods, the borrower
pays a regular installment until the final scheduled payment date, at which time
the amount of the final installment is increased or decreased as necessary to
repay the then outstanding principal balance of and any accrued but unpaid
interest on such Student Loan.
THE STUDENT LOAN FINANCING BUSINESS
PROGRAMS OFFERED BY THE SELLER
The Student Loans to be sold by the Seller to an Eligible Lender
Trustee on behalf of a Trust pursuant to the related Sale and Servicing
Agreement will be selected from Student Loans originated or acquired by the
Seller under various loan programs (the "Programs"). The proceeds of the loans
are used to finance a portion of the costs of
(1) undergraduate education ("Undergraduate Loans"),
(2) graduate education ("Graduate Loans") or
(3) post-graduate activities such as studying for bar exams or
participating in residency programs ("Post-Graduate Loans").
Undergraduate Loans and Graduate Loans may be originated through the
Federal Family Education Loan Program ("FFELP"). As described herein and in the
related Prospectus Supplement, substantially all payments of principal and
interest with respect to loans originated through FFELP (collectively, the
"Federal Loans") will be guaranteed against default, death,
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bankruptcy or disability of the applicable borrower by certain federal
guarantors pursuant to a guarantee agreement to be entered into between such
federal guarantors specified in the related Prospectus Supplement (each a
"Federal Guarantor" and collectively, the "Federal Guarantors") and the
applicable Eligible Lender Trustee (such agreements, each as amended or
supplemented from time to time, the "Federal Guarantee Agreements"). Each of the
Federal Guarantors is entitled, subject to certain conditions, to be reimbursed
by the Department for all or substantially all Guarantee Payments it makes
pursuant to a program of federal reinsurance under the Higher Education Act of
1965, as amended (such act, together with all rules and regulations promulgated
thereunder by the Department and/or the Federal Guarantors, the "Higher
Education Act"). In addition, each Eligible Lender Trustee, as a holder of the
Federal Loans on behalf of the related Trust, is entitled to receive from the
Department certain Interest Subsidy Payments and Special Allowance Payments with
respect to certain of such Federal Loans as described herein. See "--Description
of Federal Loans Under the Programs" below.
Payments of principal and interest with respect to the Private Loans
may be (1) unguaranteed by any federal or private guarantor, or by any other
party or governmental agency ("Private Unguaranteed Loans") or (2) guaranteed
against default, death, bankruptcy or disability of the applicable borrower
("Private Guaranteed Loans") by certain private guarantors pursuant to a
guarantee agreement to be entered into among private guarantors specified in the
related Prospectus Supplement (each a "Private Guarantor" and collectively,
"Private Guarantors," and together with the Federal Guarantors, the "Guarantors"
or individually a "Guarantor"), the Seller and the Eligible Lender Trustee, or
by Private Guarantors pursuant to surety bonds issued to the Seller and assigned
to each Eligible Lender Trustee on behalf of the related Trust (such agreement
and surety bonds, each as amended or supplemented from time to time, the
"Private Guarantee Agreements" and, together with the Federal Guarantee
Agreements, the "Guarantee Agreements"). Payments under the Private Guarantee
Agreements are referred to as "Private Guarantee Payments" and payments under
Federal Guarantee Agreements are referred to as "Federal Guarantee Payments."
Private Guarantee Payments and Federal Guarantee Payments are together referred
to as "Guarantee Payments." See "--Description of Private Loans Under the
Programs" below.
DESCRIPTION OF FEDERAL LOANS UNDER THE PROGRAMS
General. The following descriptions of Federal Stafford Loan Program
(the "Stafford Loan Program"), Federal Supplemental Loans for Students Program
(the "SLS Loan Program"), the Federal Parental Loans For Undergraduate Students
Loan Program (the "PLUS Loan Program"), and Federal Consolidation Loan Program
(the "Federal Consolidation Loan Program") (such programs being collectively
referred to herein as the "Federal Programs") as authorized under the Higher
Education Act are qualified in their entirety by reference to the Higher
Education Act. Since its original enactment in 1965, the Higher Education Act
has been amended and reauthorized several times, including by the Higher
Education Amendments of 1992 (the "1992 Amendments") and the Higher Education
Amendments of 1998 (the "1998 Amendments"). The 1992 Amendments extended the
principal provisions of the Federal Programs to September 30, 1998 (or, in the
case of borrowers who have received Federal Loans
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<PAGE> 117
prior to that date, September 30, 2002), and the 1998 Amendments further
extended the principal provisions of the Federal Programs through June 30, 2003.
There can be no assurance that the Higher Education Act or other
relevant federal or state laws, rules and regulations and the programs
implemented thereunder will not be amended or modified in the future in a manner
that will adversely impact the programs described in this Prospectus, the
related Prospectus Supplement and the student loans made thereunder, including
the Student Loans, or the Guarantors. In addition, future measures to reduce any
future federal budget deficit or for other purposes may adversely affect the
amount and nature of federal financial assistance available with respect to
these programs. In recent years, federal legislation has provided for the
recovery of certain funds held by guarantee agencies in order to achieve
reductions in federal spending. There can be no assurance that future federal
legislation or administrative actions will not adversely affect expenditures by
the Department or the financial condition of the Federal Guarantors. For a
discussion of each Federal Guarantor's claims-paying ability, see the related
Prospectus Supplement.
The Stafford Loan Program. "Stafford Loans" are loans made by eligible
lenders in accordance with the Higher Education Act to Eligible Students, based
on financial need, to finance a portion of the costs of attending an eligible
institution of higher education or a vocational school. The Higher Education Act
limits the amount of Stafford Loans that may be made to a student in any given
academic year, the amount a student may have outstanding in the aggregate and
specifies certain payment terms, including the interest rates that may be
charged on Stafford Loans. Holders of Stafford Loans complying with these
limitations and the other conditions specified in the Higher Education Act will
be entitled to the benefits of:
1. a guarantee of the payment of principal and interest with
respect to such Stafford Loans by a guarantee agency (the Federal
Guarantors in the case of the Federal Loans), which guarantee will be
supported by federal reinsurance of all or most of such guaranteed
amounts as described herein;
2. federal interest subsidy payments equal to the interest
payable on such Stafford Loans prior to the time the borrower begins
repayment of such Stafford Loans and during any applicable Deferral
Periods, together with interest on any such amounts not paid by the
Department when due ("Interest Subsidy Payments"); and
3. federal special allowance payments, in varying amounts,
during the term of such Stafford Loans to ensure that interest payable
on such Stafford Loans approximates current market interest rates,
together with interest on any such amounts not paid by the Department
when due ("Special Allowance Payments"), (such federal reinsurance
obligations, together with those obligations referred to in clauses (2)
and (3) above, being collectively referred to herein as "Federal
Assistance").
Certain Stafford Loans do not qualify for Interest Subsidy Payments but
otherwise qualify for all other forms of Federal Assistance ("Unsubsidized
Stafford Loans"). These loans are identical to Stafford Loans in all material
respects, except that interest accruing thereon during
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<PAGE> 118
periods when the borrower is in school or in a Deferral Period or Grace Period
is either paid periodically by the borrower during such periods or added
periodically to the principal balance of the loan by the holder thereof. A
borrower qualifies for an Unsubsidized Stafford Loan if, and to the extent that,
the borrower's need for a Stafford Loan, as calculated pursuant to the Higher
Education Act, is more than the maximum subsidized Stafford Loan authorized by
statute.
(1) Eligibility Requirements. Subject to the annual and aggregate
limits on the amount of Stafford Loans that a student can borrow discussed
below, Stafford Loans are available to Eligible Students in amounts not
exceeding their unmet need for financing as determined in accordance with the
provisions of the Higher Education Act. "Eligible Students" are students that
are:
1. enrolled in, or admitted for enrollment in, an approved or
accredited undergraduate or graduate school;
2. enrolled in, or admitted for enrollment in, an acceptable
degree program;
3. attending at least half-time;
4. making satisfactory progress toward the completion of that
program according to the standards of the school;
5. U.S. citizens, U.S. nationals or eligible non-citizens;
6. not borrowers under Federal Loans, including the requested
loan, that exceed the applicable annual and aggregate limits;
and
7. not in default on any education loan or not required to refund
an educational grant.
Each Stafford Loan:
- must be unsecured;
- must provide for deferral of the obligation of the borrower to make
(x) interest payments for as long as the Department makes Interest
Subsidy Payments and (y) principal payments so long as the borrower
remains an Eligible Student and thereafter during any applicable Grace
Periods, Deferral Periods or Forbearance Periods; and
- must provide for repayment over a period not to exceed 10 years
(excluding any Deferral Periods or Forbearance Periods) from the date
repayment commences.
(2) Loan Limits. In order to qualify for assistance under the
Stafford Loan Program, the Higher Education Act imposes an annual limit on the
amount of Stafford Loans and other Federal Loans that may be made to any single
student and an aggregate limit on the amount of such Federal Loans such student
may have outstanding.
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<PAGE> 119
<TABLE>
<CAPTION>
The following chart sets forth the current and historic loan limits.
ALL STUDENTS (1) INDEPENDENT STUDENTS(1)
---------------- ------------------------
BASE AMOUNT ADDITIONAL
SUBSIDIZED SUBSIDIZED AND UNSUBSIDIZED MAXIMUM
SUBSIDIZED ON OR UNSUBSIDIZED ON ONLY ON OR AGGREGATE
ON OR AFTER AFTER OR AFTER AFTER TOTAL
1/1/87 1/1/87 10/1/93(2) 7/1/94(3) AMOUNT IN
----------- ---------- --------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Undergraduate (per year)
1st year. $ 2,500 $ 2,625 $ 2,625 $ 4,000 $ 6,625
2nd year. $ 2,500 $ 2,625 $ 3,500 $ 4,000 $ 7,500
3rd year and above $ 2,500 $ 4,000 $ 5,500 $ 5,000 $10,500
Graduate (per year) $ 5,000 $ 7,500 $ 8,500 $10,000 $18,500
Aggregate Limit;
Undergraduate $12,500 $17,250 $23,000 $23,000 $46,000
Graduate (including
undergraduate) $25,000 $54,750 $65,500 $73,000 $138,500
</TABLE>
- ----------------
(1) The loan limits are inclusive of both Stafford Loans and Student Loans.
(2) These amounts represent the combined maximum loan amount per year for
Stafford Loans and unsubsidized Stafford Loans. Accordingly, the
maximum amount that a student may borrow under an Unsubsidized Stafford
Loan is the difference between the combined maximum loan amount and the
amount the student received in the form of a Stafford Loan.
(3) Independent undergraduate students, graduate students or professional
students may borrow these additional amounts. In addition, dependent
undergraduate students may also receive these additional loan amounts
if the parents of such students are unable to provide the family
contribution amount and it is unlikely that the student's parents will
qualify for a PLUS Loan.
The annual loan limits are reduced in some instances where the student
is enrolled in a program that is less than one academic year or has less than a
full academic year remaining in his or her program. The Department has
discretion to raise these limits to accommodate highly specialized or
exceptionally expensive course of study.
(3) Interest. The borrower's interest rate on a Stafford Loan may
be fixed or variable. Stafford Loan interest rates are summarized in the chart
below.
<TABLE>
<CAPTION>
TRIGGER DATE(1) BORROWER RATE(2) MAXIMUM RATE INTEREST RATE MARGIN
- ------------------ ------------------------ ----------------- --------------------------------
<S> <C> <C> <C>
Prior to 01/01/81 7% 7% N/A
01/01/81-09/12/83 9% 9% N/A
09/13/83-06/30/88 8% 8% N/A
07/01/88-09/30/92 8% for 48 months; 8% for 48 months, 3.25%
thereafter, 91-Day then 10%
Treasury + Interest Rate
Margin
10/01/92-06/30/94 91-Day Treasury + 9% 3.10%
Interest Rate Margin
07/01/94-06/30/95 91-Day Treasury + 8.25% 3.10%
Interest Rate Margin
07/01/95-06/30/98 91-Day Treasury + 8.25% 2.50% (In-School, Grace or
Interest Rate Margin Deferment); 3.10% (in repayment)
On or after 07/01/98 91-Day Treasury + 8.25% 1.70% (In-School, Grace or
Interest Rate Margin Deferment); 2.30% (in repayment)
</TABLE>
- ----------------
(1) The Trigger Date for Stafford Loans made before October 1, 1992 is the
first day of enrollment period for which a borrower's first Stafford
Loan in made and for Stafford Loans made on October 1, 1992 and after
the Trigger Date is the date of the disbursement of a borrower's first
Stafford Loan.
(2) The rate for variable rate Stafford Loans applicable for any 12-month
period beginning on July 1 and ending on June 30, is determined on the
preceding June 1 and is equal to the lesser of (a) the applicable
Maximum Rate or (b) the sum of (i) the bond
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<PAGE> 120
equivalent rate of 91-day Treasury Bills auctioned at the final auction
held prior to such June 1 and (ii) the applicable Interest Rate Margin.
The 1992 Amendments provide that, for fixed rate loans made on or after
July 23, 1992 and for certain loans made to new borrowers on or after July 1,
1988, the lender must have converted by January 1, 1995 the interest rate on
such loans to an annual interest rate adjusted each July 1 equal to (a) for
certain loans made between July 1, 1988 and July 23, 1992, the 91-day Treasury
Bill rate at the final auction prior to the preceding June 1 plus 3.25%, (b) for
loans made on or after July 23, 1992 and prior to July 1, 1998, the 91-day
Treasury Bill rate at the final auction prior to the preceding June 1 plus
3.10%, and (c) for loans made on or after July 1, 1998, the 91-day Treasury Bill
rate at the final auction prior to the preceding June 1 plus 2.2%
(during-school, grace or deferment) or 2.8% (in repayment) in each case capped
at the applicable interest rate for such loan existing prior to the conversion.
The variable interest rate does not apply to loans made prior to July 23, 1992
during the first 48 months of repayment.
Interest is payable on each Stafford Loan monthly in arrears until the
principal amount thereof is paid in full. However, prior to the date the
borrower begins repaying the principal of such Stafford Loan and during any
applicable Deferral Period, the borrower has no obligation to make interest
payments. Instead, the Department makes quarterly Interest Subsidy Payments to
the holder of the Subsidized Stafford Loans on behalf of the borrower during
such periods, in amounts equal to the accrued and unpaid interest for the
previous quarter with respect to such Stafford Loan. During a Forbearance
Period, the Department will not make any Interest Subsidy Payments; instead, at
the borrower's option, interest on each Stafford Loan may be paid currently or
capitalized and added to the outstanding principal balance of such Stafford Loan
at the end of such Forbearance Period. See "--(6) Interest Subsidy Payments"
below.
"91-day Treasury Bill Rate" means, on any date of determination, the
weighted average per annum discount rate (expressed on a bond equivalent basis
and applied on a daily basis) for 91-day Treasury Bills at the most recent
91-day Treasury Bills auction prior to such date as published by the Board of
Governors of the Federal Reserve System or as reported by the U.S. Treasury
Department.
(4) Repayment. No principal and/or interest payments with respect
to a Stafford Loan are required to be made during the time a borrower remains an
Eligible Student and during the existence of an applicable Grace Period,
Deferral Period or Forbearance Period. In general, a borrower must repay each
Stafford Loan in monthly installments over a period of not more than 10 years
(excluding any Deferral Period or Forbearance Period) after commencement of
repayment. New borrowers on or after October 7, 1998 who accumulate outstanding
loans under the Student Assistance General Provisions and FFELP totaling more
than $30,000, are entitled to extended repayment schedules of up to 25 years
subject to certain minimum repayment amounts. Any borrower may voluntarily
prepay without premium or penalty any Federal Loan and in connection therewith
may waive any Grace Period or Deferral Period. The Higher Education Act
presently requires a minimum annual principal and interest payment with respect
to a Stafford Loan of $600 in the aggregate (but in no event less than accrued
interest), unless the borrower and the lender agree to a lesser amount. For
Stafford Loans and SLS Loans first disbursed on or after July 1, 1993 to a
borrower who has no outstanding Federal Loans on the date such loan is
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<PAGE> 121
made, the borrower must be offered the opportunity to repay the loan according
to a graduated or income-sensitive repayment schedule established in accordance
with Department regulations. For Stafford Loans entering repayment on or after
October 1, 1995, borrowers may choose among several repayment options, including
the option to make interest only payments for limited periods.
(5) Grace Periods, Deferral Periods, Forbearance Periods.
Borrowers of Stafford Loans must generally commence repaying the loans following
a period of (a) not less than 9 months nor more than 12 months (with respect to
loans for which the applicable interest rate is 7% per annum) and (b) not more
than 6 months (with respect to loans for which the applicable interest rate is
other than 7% per annum) (a "Grace Period") after the borrower ceases to be an
Eligible Student. However, subject to certain conditions, no principal
repayments need be made with respect to Stafford Loans during periods when the
borrower has returned to an eligible educational institution on at least a
half-time basis or is pursuing studies pursuant to an approved graduate
fellowship program, during certain other periods (varying from six months to
three years) when the borrower has joined the military or certain volunteer
organizations (for all loans made prior to July 1, 1993, or loans made after
such date to borrowers with loans already outstanding on such date), for periods
when the borrower is unable to secure employment (up to three years) or for
periods during which the borrower is experiencing economic hardship (for loans
made after July 1, 1993, to borrowers with no outstanding loans on such date)
(each, a "Deferral Period"). In addition, the lender may, and in some
circumstances must, allow, in accordance with standards and guidelines approved
by the applicable Federal Guarantor and the Department, periods of forbearance
during which the borrower may defer principal and/or interest payments because
of temporary financial hardship (a "Forbearance Period").
(6) Interest Subsidy Payments. Interest Subsidy Payments are
payments made quarterly to the holder of a subsidized Stafford Loan by the
Department with respect to those Stafford Loans as to which the applicable
conditions of the Higher Education Act have been satisfied, in an amount equal
to the accrued and unpaid interest on the outstanding principal amount of each
Stafford Loan for such quarter, commencing from the date such Stafford Loan is
made until the end of the applicable Grace Period after the borrower ceases to
be an Eligible Student and during any applicable Deferral Period. The Department
will not make Interest Subsidy Payments during any Forbearance Period. The
Higher Education Act provides that the holder of such a qualifying Stafford Loan
has a contractual right against the United States, to receive Interest Subsidy
Payments from the Department (including the right to receive interest on any
Interest Subsidy Payments not timely paid). Receipt of Interest Subsidy Payments
is conditioned on compliance with the requirements of the Higher Education Act,
including satisfaction of certain need-based criteria (and the delivery of
sufficient information by the borrower and the lender to the Department to
confirm the foregoing) and continued eligibility of the Stafford Loan for
federal reinsurance. Such eligibility may be lost, however, if the loans are not
originated and serviced, or are not held by an eligible lender, in accordance
with the requirements of the Higher Education Act and the applicable guarantee
agreements. See "--(1) Eligibility Requirements"; "Formation of the
Trusts--Eligible Lender Trustee" and "Description of the Transfer and Servicing
Agreements--Servicing Procedures." The Seller expects that each
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<PAGE> 122
of the subsidized Stafford Loans that are part of a pool of Student Loans will
be eligible to receive Interest Subsidy Payments.
(7) Special Allowance Payments. The Higher Education Act requires,
subject to certain conditions, the Department to make quarterly Special
Allowance Payments to holders of qualifying Federal Loans (including Stafford
Loans), in an amount equal to a specified percentage of the average outstanding
principal amount of each such Federal Loan during each quarter.
The percentage or rate used to determine the Special Allowance Payments
for a particular loan varies based on a number of factors, including when the
loan was disbursed and the period of enrollment with respect to which it was
made. Generally, the Special Allowance Payment with respect to a Federal Loan
for a quarter will be equal to the excess, if any, of (1) the amount of interest
that would be payable on such loan at a rate per annum equal to the average bond
equivalent rates of (x) 91-day Treasury Bills auctioned for such quarter plus
3.25% (3.10% for loans first disbursed on or after October 1, 1992) or (y) for
loans first disbursed on or after July 1, 1998, 91-day Treasury Bills auctioned
for such quarter plus 2.2% while borrowers are in-school, grace or deferment
status, or 2.8% while borrowers are in the repayment period, over (2) the stated
amount of interest payable on such loan.
The Higher Education Act provides that a holder of a qualifying loan
who is entitled to receive Special Allowance Payments has a contractual right
against the United States to receive those Special Allowance Payments (including
the right to receive interest on any Special Allowance Payments not timely
paid). Receipt of Special Allowance Payments, however, is conditioned on
compliance with the requirements of the Higher Education Act, including
satisfaction of certain need-based criteria (and the delivery of sufficient
information by the borrower and the lender to the Department to confirm the
foregoing) and continued eligibility for federal reinsurance. Such eligibility
may be lost, however, if the loans are not originated and serviced, or are not
held by an eligible lender, in accordance with the requirements of the Higher
Education Act and the applicable guarantee agreement. See "--(1) Eligibility
Requirements;" "Formation of the Trusts--Eligible Lender Trustee" and
"Description of the Transfer and Servicing Agreements--Servicing Procedures."
The Seller expects that each of the Stafford Loans that are part of a pool of
Student Loans will be eligible to receive Special Allowance Payments, if any are
payable from time to time.
Interest Subsidy Payments and Special Allowance Payments are generally
received within 45 to 60 days after submission to the Department of the
applicable claims forms for any given calendar quarter, although there can be no
assurance that such payments will in fact be received from the Department within
that period. For each Trust, the related Administrator will agree to prepare and
file with the Department all such claims forms and any other required documents
or filings on behalf of the applicable Eligible Lender Trustee as owner of the
related Federal Loans on behalf of such Trust. The Administrator will also agree
to assist the Eligible Lender Trustee in monitoring, pursuing and obtaining such
Interest Subsidy Payments and Special Allowance Payments, if any, with respect
to such Federal Loans. Except under certain conditions described herein, each
Eligible Lender Trustee will be required to remit Interest Subsidy Payments and
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<PAGE> 123
Special Allowance Payments it receives with respect to the Federal Loans within
two business days of receipt thereof to the related Collection Account.
The SLS Loan Program. In addition to the Stafford Loan Program, the
Higher Education Act provides a separate program to facilitate additional loans
to graduate and professional students and independent undergraduate students.
This program is referred to as the "Supplemental Loans for Students Program"
(the "SLS Loan Program"). As of July 1, 1994, the SLS Loan Program was
discontinued and SLS Loans are no longer made. The basic framework and principal
provisions of the Stafford Loan Program as described above are similar in many
respects to those that are applicable to loans under the SLS Loan Program ("SLS
Loans"). In particular, SLS Loans are subject to similar eligibility
requirements and, provided that such requirements are satisfied, are entitled to
the same guarantee and federal reinsurance arrangements. SLS Loans differ
significantly from Stafford Loans, however, in the context of the Interest
Subsidy Payments and Special Allowance Payments discussed above.
The annual and aggregate limitations that are applicable to SLS Loans
in the case of those constituting Student Loans are as follows: SLS Loans to a
single borrower cannot exceed $4,000 per academic year (or $10,000 for loans
first disbursed on or after July 1, 1993) and $20,000 in aggregate principal
amount (or $73,000 for loans first disbursed on or after July 1, 1993)
(exclusive of any capitalized interest) at any one time outstanding. SLS Loans
are also limited, generally, to the cost of attendance minus other financial aid
for which the borrower is eligible. A determination of a borrower's eligibility
for the Stafford Loan Program, among other programs, is a condition to the
making of an SLS Loan.
As specified by the Higher Education Act, the applicable interest rate
for an SLS Loan depends upon the date of issuance of the loan and the period of
enrollment for which the loan is made. The interest rate per annum for SLS Loans
made and disbursed on or after July 1, 1987 is fixed each July 1 for each
succeeding 12-month period at a rate equal to the sum of
(1) the bond equivalent rate of 52-week Treasury Bills auctioned
at the final auction held prior to the preceding June 1; and
(2) 3.25% (3.10% for loans first disbursed on and after October 1,
1992), with a maximum rate of 12% per annum (11% for loans
first disbursed on or after October 1, 1992).
Although holders of SLS Loans are not entitled to receive Interest
Subsidy Payments, interest on such SLS Loans accrues from the date each such SLS
Loan is made and may either be paid currently by a borrower or may be
capitalized and added to the outstanding principal amount of such SLS Loan at
the time the borrower begins repayment. SLS Loans are eligible for Special
Allowance Payments only if and to the extent that the interest rate for such SLS
Loans calculated based on the 52-week Treasury Bill rate referred to above would
exceed the applicable maximum borrower interest rate. Because the basis for
determining the amount, if any, of Special Allowance Payments due to lenders is
based on the 91-day Treasury Bill Rate while the interest rate for SLS Loans is
based on the 52-week Treasury Bill rate (which may differ from the 91-day
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<PAGE> 124
Treasury Bill Rate), there can be no assurance that any Special Allowance
Payments will be due and payable with respect to SLS Loans even though such SLS
Loans are deemed to be eligible therefor. See "--(7) Special Allowance Payments"
above.
A borrower of an SLS Loan is required to begin repayment of the
principal of such SLS Loan within 60 days after the date the last installment of
such SLS Loan is advanced, subject to deferral so long as such borrower remains
an Eligible Student or as a result of any applicable Deferral Period or
Forbearance Period. In addition, any borrower of an SLS Loan made and advanced
after July 23, 1992, who also has Stafford Loans outstanding may defer
commencing repayment of such SLS Loan for the Grace Period applicable to such
Stafford Loans. For SLS Loans entering repayment on or after October 1, 1995,
borrowers may choose among several repayment options, including the option to
make interest only payments for limited periods.
The PLUS Loan Program The Higher Education Act authorizes Federal
Parental Loans For Undergraduate Students Loans ("PLUS Loans") to be made to
parents of eligible dependent students (the "PLUS Loan Program"). After July 1,
1993, only parents who do not have an adverse credit history or who can secure
an endorser without an adverse credit history are eligible for PLUS Loans. The
basic provisions applicable to Federal PLUS Loans are similar to those of
Stafford Loans with respect to the federal insurance and reinsurance on the
loans. However, PLUS Loans differ from Stafford Loans, particularly because
Interest Subsidy Payments are not available under the PLUS Loan Program and in
some instances Special Allowance Payments are more restricted.
PLUS Loans disbursed prior to July 1, 1993 are limited to $4,000 per
academic year with a maximum aggregate amount of $20,000. The only limit on the
annual and aggregate amounts of PLUS Loans first disbursed on or after July 1,
1993 is the cost of the student's education less other financial aid received,
including scholarship, grants and other student loans.
The interest rate determination for a PLUS Loan is dependent on when
the PLUS Loan was originally made and disbursed and the period of enrollment.
The interest rates for PLUS Loans are summarized in the following chart.
<TABLE>
<CAPTION>
INTEREST
TRIGGER DATE BORROWER RATE(1) MAXIMUM RATE(2) RATE MARGIN
- -------------------------- -------------------------------- --------------- -----------
<S> <C> <C> <C>
Prior to 10/01/81......... 9% 9% N/A
10/01/81-10/30/82......... 14% 14% N/A
11/01/82-06/30/87......... 12% 12% N/A
07/01/87-09/30/92......... 52-Week Treasury + Interest Rate 12% 3.25%
Margin
10/01/92-06/30/94......... 52-Week Treasury + Interest Rate 10% 3.10%
Margin
07/01/94-06/30/98......... 52-Week Treasury + Interest Rate 9% 3.10%
Margin
After 6/30/98............. 91-Day Treasury + Interest Rate 9% 3.10%
Margin
</TABLE>
- ---------------------
(1) The Trigger Date for PLUS Loans made before October 1, 1992 is the
first day of enrollment period for which the PLUS Loan is made, and for
PLUS Loans made on October 1, 1992 and after the Trigger Date is the
date of the disbursement of the PLUS Loan, respectively.
(2) For PLUS Loans that carry a variable rate, the rate is set annually for
12-month periods beginning on July 1 and ending on June 30 on the
preceding June 1 and is equal to the lesser of (a) the applicable
maximum rate and (b) the sum of (i) the bond equivalent rate of 52-week
Treasury Bills auctioned at the final auction held prior to such June 1
and (ii) the applicable Interest Rate Margin.
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<PAGE> 125
A holder of a PLUS Loan is eligible to receive Special Allowance
Payments during any quarter if (a) the sum of (i) the average of the bond
equivalent rates of 91-day Treasury Bills auctioned during such quarter and (ii)
the Interest Rate Margin exceeds (b) the Maximum Rate.
Repayment of principal of a PLUS Loan is required to commence no later
than 60 days after the date of disbursement of such loan, subject to certain
deferral and forbearance provisions. The deferral provisions which apply are
more limited than those which apply to Stafford Loans and although Interest
Subsidy Payments are not available for such deferments, interest may be
capitalized during such periods upon agreement of the lender and borrower during
certain periods of educational enrollments and periods of unemployment or
hardship as specified under the Higher Education Act. Maximum loan repayment
periods and minimum payment amounts are the same as for Stafford Loans.
A borrower may refinance all outstanding PLUS Loans under a single
repayment schedule for principal and interest, with the new repayment period
calculated from the date of repayment of the most recent included loan. The
interest rate of such refinanced loan shall be the weighted average of the rates
of all PLUS Loans being refinanced. A second type of refinancing enables an
eligible lender to reissue a PLUS Loan which was initially originated at a fixed
rate prior to July 1, 1987 in order to permit the borrower to obtain the
variable interest rate available on PLUS Loans on and after July 1, 1987. If a
lender is unwilling to refinance the original PLUS Loan, the borrower may obtain
a loan from another lender for the purpose of discharging the loan and obtaining
a variable interest rate.
The Federal Consolidation Loan Program. The Higher Education Act
established a program to facilitate the ability of eligible borrowers of
Stafford Loans or SLS Loans (each, an "Underlying Federal Loan") to consolidate
such Underlying Federal Loans, together with such borrowers' other education
loans that are made or guaranteed by the federal government, into a single loan
(a "Federal Consolidation Loan"). Subject to the satisfaction of certain
conditions set forth in the Higher Education Act, including limitations on the
timing and payment of principal and interest with respect to Federal
Consolidation Loans and a requirement that the proceeds of Federal Consolidation
Loans are to be used to repay the respective Underlying Federal Loans (and any
other loans consolidated thereunder) of any borrower, each holder of a Federal
Consolidation Loan will be entitled to substantially the same guarantee and
federal reinsurance arrangements as are available on Stafford Loans and SLS
Loans. Federal Consolidation Loans, like Stafford Loans, are also eligible for
Interest Subsidy Payments and Special Allowance Payments. Under this program, an
eligible borrower of Federal Consolidation Loans means a borrower (i) with
outstanding Underlying Federal Loans and (ii) who has begun repaying, who is in
a grace period preceding repayment of, or who is a delinquent or defaulted
borrower who will, through such loan consolidation, recommence repayment of,
such Underlying Federal Loans. A married couple, each of whom has outstanding
Underlying Federal Loans, may apply for and obtain a single Federal
Consolidation Loan so long as both individuals agree to be held jointly and
severally liable on such Federal Consolidation Loan.
Under this program, a lender may make a Federal Consolidation Loan to
an eligible borrower at the request of the borrower if the lender holds an
outstanding Underlying Federal
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<PAGE> 126
Loan of the borrower or the borrower certifies that he or she has been unable to
obtain a Federal Consolidation Loan from any of the holders of the outstanding
Underlying Federal Loans of the borrower. The lender making any Federal
Consolidation Loan will pay the amount thereof to the various lenders of the
respective Underlying Federal Loans and other loans being consolidated thereby.
The 1998 Amendments allows lenders to make Federal Consolidation Loans to
borrowers with multiple holders even if the lender does not own an Underlying
Federal Loan.
The Federal Direct Consolidation Loan Program (the "Federal Direct
Consolidation Loan Program") provides borrowers with the opportunity to
consolidate outstanding student loans at interest rates below, and
income-contingent repayment terms that some borrowers may find preferable to,
those that would be available from the Seller on a loan originated by the Seller
under the Federal Consolidation Loan Program. Borrowers generally make smaller
payments based on their earnings than in the standard ten-year plan, and the
government forgives loans that are not repaid in twenty-five years. For
applications received after October 1, 1998 and before January 31, 1999, the
Federal Direct Consolidation Loan Program established borrower rates at levels
lower than the statutory rate established by the 1998 Reauthorization Bill under
the Federal Family Loan Program. The 1998 Reauthorization Bill also reduced the
lender paid monthly fee on Federal Consolidation Loans from 1.05% to 0.62% per
annum for loans made pursuant to applications received on or after October 1,
1998 and on or before January 31, 1999. The lower rate applies only to borrowers
who applied before February 1, 1999. The availability of such lower-rate,
income-contingent loans may decrease the likelihood that the Seller would be the
originator of a Federal Consolidation Loan, as well as increase the likelihood
that a Federal Loan in a Trust will be prepaid through the issuance of a Federal
Direct Consolidation Loan (a "Federal Direct Consolidation Loan").
In accordance with the Higher Education Act, Federal Consolidation
Loans may bear interest, as negotiated between the individual borrower and
lender, at a rate per annum up to the weighted average of the interest rates on
the Underlying Federal Loans (rounded up to the nearest whole percent) or, for
loans made before July 1, 1994, 9%, whichever is greater. However, Federal
Consolidation Loans made on or after November 13, 1997 through September 30,
1998 will bear interest at the annual variable rate applicable to Stafford Loans
capped at 8.25%. Federal Consolidation Loans for which the application is
received on or after October 1, 1998 bear interest at a rate equal to the
weighted average interest rate of the loans consolidated, rounded up to the
nearest one-eighth percent and capped at 8.25%. Interest on Federal
Consolidation Loans accrues and, for applications received prior to January 1,
1993, is to be paid without Interest Subsidy Payments by the Department. For
Federal Consolidation Loans received on or after January 1, 1993, all interest
of the borrower is paid during all Deferral Periods. However, Federal
Consolidation Loan applications received on or after August 10, 1993 will only
be subsidized if all of the underlying loans being consolidated were subsidized
Stafford Loans; provided that, in the case of Federal Consolidation Loans made
on or after November 13, 1997, that portion of the Federal Consolidation Loan
that is comprised of subsidized Stafford Loans will retain its subsidy benefits
during Deferral Periods. In general, a borrower must repay each Federal
Consolidation Loan in scheduled monthly installments over a period of not more
than 10 to 30 years (excluding any Deferral Period and any Forbearance Period),
depending on the original principal amount of such Federal Consolidation Loan.
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<PAGE> 127
Borrowers may voluntarily prepay all or a portion of any Federal Consolidation
Loan without premium or penalty. Repayment of a Federal Consolidation Loan must
commence within 60 days after all holders of Underlying Federal Loans have
discharged the liability of the borrower thereon; provided, however, that such
repayment obligation is deferred for as long as the borrower remains an Eligible
Student and during any applicable Deferral Period and Forbearance Period. For
Federal Consolidation Loans entering repayment on or after October 1, 1995,
borrowers may choose among several repayment options, including the option to
make interest only payments for limited periods. Special Allowance Payments are
made on Federal Consolidation Loans whenever the rate charged the borrower is
limited by the applicable fixed percentage rate cap. However, for applications
received on or after October 1, 1998, Special Allowance Payments are paid in
order to afford the lender a yield equal to the 91-day Treasury Bill Rate plus
3.1% whenever that formula exceeds the borrower's interest rate.
The Omnibus Budget Reconciliation Act of 1993 made a number of changes
to the Federal Consolidation Loan Program, including (i) requiring holders of
Federal Consolidation Loans made on or after October 1, 1993, to pay to the
Department a monthly fee equal to 1.05% per annum on the outstanding balance of
such loans (the "Federal Consolidation Loan Rebate"), (ii) requiring lenders of
Federal Consolidation Loans made on or after July 1, 1994, to offer borrowers
income-sensitive repayment schedules, (iii) repealing the $7,500 minimum
indebtedness requirement, and (iv) removing the 9% interest rate floor for
Federal Consolidation Loans made on or after July 1, 1994. In addition, with
respect to any Federal Loan (including Federal Consolidation Loans) made on or
after October 1, 1993, the lender must pay to the Department an origination fee
equal to 0.50% on the initial principal balance of such loan (the "Federal
Origination Fee"). With respect to any Federal Consolidation Loan originated by
the Seller and purchased by the Eligible Lender Trustee on behalf of the related
Trust, the related Trust must pay to the Department the Federal Origination Fee,
which fee will be deducted by the Department out of Interest Subsidy Payments
and Special Allowance Payments. If sufficient Interest Subsidy Payments and
Special Allowance Payments are not due to the applicable Trust to cover the
amount of the Federal Origination Fee, the balance of such Federal Origination
Fee may be deferred by the Department until sufficient Interest Subsidy Payments
and Special Allowance Payments accrue to cover such fee. If such amounts never
accrue, the applicable Trust would be obligated to pay any remaining fee from
other assets of that Trust prior to making distributions to Noteholders or
Certificateholders.
Undergraduate Federal Loans. The Seller originates or acquires
Stafford Loans and Federal Consolidation Loans for students attending eligible
schools.
Eligible schools include institutions of higher education and
proprietary institutions. Institutions of higher education must meet certain
standards, which generally provide that the institution
- only admits persons who have a high school diploma or its
equivalent,
- is legally authorized to operate within a state,
- provides not less than a two-year program with credit acceptable
toward a bachelor's degree,
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<PAGE> 128
- is a public or non-profit institution
- and is credited by a nationally recognized accrediting agency or
is determined by the Department to meet the standards of an
accredited institution.
Eligible proprietary institutions of higher education include business,
trade and vocational schools meeting standards which provide that the
institution
- only admits persons who have a high school diploma or its
equivalent, or persons who are beyond the age of compulsory school
attendance and have the ability to benefit from the training
offered (as defined in the 1993 Act),
- is authorized by a state to provide a program of vocational
education designed to fit individuals for useful employment in
recognized occupations,
- has been in existence for at least two years,
- provides at least a six-month training program to prepare students
for gainful employment in a recognized occupation and
- is accredited by a nationally recognized accrediting agency or is
specially accredited by the Department.
With specified exceptions, institutions are excluded from consideration
as educational institutions if the institution
- offers more than 50 percent of its courses by correspondence,
- enrolls 50 percent or more of its students in correspondence
courses,
- has a student enrollment in which more than 25 percent of the
students are incarcerated or
- has a student enrollment in which more than 50 percent of the
students are admitted without a high school diploma or its
equivalent on the basis of their ability to benefit from the
education provided (as defined by statute and regulation).
Further, schools are specifically excluded from participation if
- the educational institution has filed for bankruptcy,
- the owner, or its chief executive officer, has been convicted or
pleaded "nolo contendere" or "guilty" to a crime involving the
acquisition, use or expenditure of federal student aid funds, or
has been judicially determined to have committed fraud involving
funds under the student aid program or
- the educational institution has a cohort default rate in excess
of the rate prescribed by the Act. In order to participate in the
program, the eligibility of a school must be approved by the
Department under standards established by regulation.
Graduate Federal Loans. The Seller originates or acquires Federal Loans
under loan programs (the "Federal Graduate Programs") to provide educational
financing to graduate and professional students enrolled in or recently
graduated from approved or accredited law schools, medical schools, dental
schools, graduate business schools and other graduate schools. The
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<PAGE> 129
Federal Graduate Programs originally targeted law school students but have been
expanded over the years to include virtually all graduate level fields of study.
The Seller (or its predecessors) has been originating loans under the Federal
Graduate Programs since 1990.
The following table sets forth the approved or accredited schools and
the acceptable degree programs for each graduate field of study:
<TABLE>
<CAPTION>
FIELD OF STUDY APPROVED/ACCREDITED SCHOOLS ACCEPTABLE DEGREE PROGRAMS
- -------------- --------------------------- --------------------------
<S> <C> <C>
Law American Bar Association approved law schools that are Juris Doctor of Law or other
members of LSAC joint degree program
Medical Liaison Committee on Medical Education or American Medical Doctor or Doctor of
Osteopathic Association accredited graduate medical Osteopathy
schools
Dental American Dental Association accredited dental schools Graduate dental program
Business American Assembly of Collegiate Schools of Business Graduate business program
("AACSB") accredited graduate business schools; or
AACSB candidate schools accredited by the New England
Association of Schools and Colleges, the Middle States
Association of Colleges and Schools, the North Central
Association of Colleges and Schools, the Southern
Association of Colleges and Schools, the Western
Association of Schools and Colleges, or the North West
Association of Schools and Colleges
Graduate Schools accredited by the New England Association of Graduate level certificate or
Schools and Colleges, the Middle States Association of degree program
Colleges and Schools, The North Central Association of
Colleges and Schools, the Southern Association of
Colleges and Schools, the Western Association of Schools
and Colleges, or the North West Association of Schools
and Colleges
</TABLE>
DESCRIPTION OF PRIVATE LOANS UNDER THE PROGRAMS
General. In addition to the Federal Loans originated under the Higher
Education Act, the Seller has developed student loan programs that are not
federally guaranteed for undergraduate students and/or their parents ("Private
Undergraduate Loans") and graduate students ("Private Graduate Loans"), that can
be used by borrowers to supplement their Federal Loans in situations where the
Federal Loans do not cover the cost of education. In addition, a law student may
also receive a bar examination loan (a "Bar Exam Loan") to finance the costs of
preparing for and taking one or more state bar examinations if such student has
applied for the loan within a limited period before or after graduation. A
medical or dental student may also receive a residency loan (a "Residency Loan")
to finance the cost of participating in one or more medical or dental residency
programs if such student has applied for the loan within a limited period or
after graduation.
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<PAGE> 130
The Private Undergraduate Loans, Private Graduate Loans, Bar Exam Loans
and Residency Loans are sometimes referred to collectively as the "Private
Loans." The holders of Private Loans are not entitled to receive any Federal
Assistance with respect thereto.
Private Undergraduate Loans. The Seller originates Key Alternative
Loans ("Key Alternative Loans"). Key Alternative Loans provide undergraduate
students supplemental fundings that allows such students the opportunity to
share the responsibility of education financing with or without a cosigner. Key
Alternative Loans were introduced to students in 1995 and are serviced on behalf
of the Seller by Great Lakes Educational Loan Services Inc. ("Great Lakes"). Key
Alternative Loans are not guaranteed by any federal or private guarantor, or by
any other party or governmental agency.
(1) Eligibility Requirements. In order to qualify for a Key
Alternative Loan, the borrower must meet the following eligibility
requirements:
- At least half-time undergraduate student at a Title IV
eligible institution (Prior to the 1998-1999 program year, the
borrower had to be a full-time student.)
- U.S. citizen/national or an eligible non-citizen
- Must meet the following credit criteria:
(a) No account has been 90 or more days delinquent in the
past two years.
(b) No record of bankruptcy, foreclosure, repossession,
skips or wages garnishment.
(c) No record of unpaid collections, charged-off accounts
or written-off accounts.
(d) No record of an open judgment or suit, unsatisfied
tax lien, unpaid prior educational loan default or
other negative public record items in the past seven
years.
(e) Applicant can be approved without cosigner if the
applicant meets credit criteria, has acceptable
credit bureau score and sufficient credit history.
(f) If applicant does not meet the criteria applicant
will be declined.
(g) If applicant meets the criteria but has unacceptable
credit bureau score, a creditworthy cosigner will be
required for approval.
(h) Cosigner, if any, must pass the credit review process
that considers the above criteria and must score well
compared with other applicants.
(i) The credit bureau score requirements apply to both
applicant and cosigner.
A creditworthy cosigner may be required if the borrower has
insufficient credit history and/or is not a US citizen.
If a cosigner is required, the cosigner must also be a US
citizen/national or permanent resident and meet minimum credit criteria. The
cosigner does not have to be the borrower's parent or guardian.
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<PAGE> 131
(2) Loan Limits. The minimum annual loan amount for a Key
Alternative Loan is $1,000. The annual and aggregate maximum loan
limits are as follows:
<TABLE>
<CAPTION>
PROGRAM YEAR YEAR IN SCHOOL ANNUAL MAXIMUM AGGREGATE MAXIMUM
- ------------ -------------- -------------- -----------------
<S> <C> <C> <C>
1995-1996
through First year $5,000 $35,000
1997-1998 Second - Fifth years $7,500
1998-1999 First year $7,500 $47,500
Second - Fifth years $10,000
</TABLE>
(3) Interest. Interest is payable by on each Key Alternative Loan on a
monthly basis until the principal amount is repaid in full. The
interest rate is calculated based on the 52-week Treasury Bill rate
plus a margin in the range of 2.85% to 3.10% during the interim period
and a margin in the range of 3.25% to 3.50% during the repayment
period. (The interest rate for the 1995-1996 program year was
calculated based on the 91-Day Treasury Bill Rate plus 3.50% during the
interim period and 3.65% during the repayment period). The rate varies
quarterly and is determined based on the most recent Treasury Bill
auction prior to each January, April, July, and October. Borrowers may
defer interest payments during the interim period. The deferred
interest will be capitalized once on the last day of the interim
period. (For loans originated during the 1995-1996 program year,
deferred interest was capitalized once annually every November 30th and
once on the last day of the interim period.)
(4) Repayment. In general, borrowers must repay each Key Alternative
Loan in monthly installments until the loan is paid in full. The
repayment term is 10 years if the balance at repayment is less than
$15,000 or 15 years if the balance at repayment is $15,000 or more.
There is a minimum payment amount of $50 per month and there is no
prepayment penalty.
(5) Grace Periods Deferral Periods, Forbearance Periods. The repayment
period on a Key Alternative Loan generally begins after the Grace
Period, defined as six months after the student graduates or ceases to
be enrolled at least half-time at an accredited institution or five
years from the date of the first Key Alternative Loan disbursement. In
general, deferral periods are not permitted other than during the in
school and grace periods, when the borrower is still responsible for
the capitalization of the deferred interest. Borrowers may request
periods of forbearance related to the following areas: unemployment,
underemployment, hardship, practical and graduate school enrollment.
Forbearances are generally granted in 6 month increments except for
graduate school forbearance which is granted in 12 month increments.
Private Graduate Loans. The Seller originates or acquires Private
Graduate Loans to provide educational financing to help pay for the costs of:
- attending law, medical, dental, graduate, business, or other
graduate school,
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<PAGE> 132
- taking/passing one or more state bar examinations upon
graduation from law school, or
- participating in one or more medical or dental residency
programs upon graduating from medical or dental school.
Private Graduate Loans consist of loans associated with the
above-mentioned fields of study (including Bar Exam and Residency Loans) and
Private Consolidation Loans. Subject to the satisfaction of the conditions
imposed by the applicable Program and the applicable Guarantee Agreement, the
Private Graduate Loans that are Private Guaranteed Loans are fully guaranteed
against nonpayment of principal and interest as a result of a borrower's
default, death, disability or bankruptcy by the Private Guarantors. These
Private Guarantors are not reinsured by the Department or any other governmental
entity. In order to qualify for the guarantee from the Private Guarantors, such
Private Graduate Loans may not be made to a single borrower in excess of the
annual and aggregate limits imposed by the applicable loan Program and may only
be made to Eligible Students who qualify pursuant to credit underwriting
standards established by the Seller and approved by the Private Guarantors. The
following table summarizes the annual, aggregate and cumulative loan limits for
each Private Graduate Loan:
<TABLE>
<CAPTION>
ANNUAL AGGREGATE CUMULATIVE
PROGRAM YEAR TYPE OF LOAN MAXIMUM MAXIMUM MAXIMUM(2)
------------ ------------ ------- --------- ----------
<S> <C> <C> <C> <C>
1991-1992 Law Loan $14,500 $43,500 $ 78,000
Bar Exam Loan $ 5,000 $ 5,000 $ 83,000
1992-1993 Law Loan $15,000 $45,000 $ 79,500
Bar Exam Loan $ 5,000 $ 5,000 $ 84,500
1993-1994 Law Loan $15,000 $45,000 $ 87,500
Bar Exam Loan $ 5,000 $ 5,000 $ 87,500
1994-1995 Law Loan $15,000 $45,000 $ 92,000
Bar Exam Loan $ 5,000 $ 5,000 $ 92,000
1995-1996 through
1997-1998 Law Loan Up to the cost of attendance N/A $120,000
Business Loan Up to the cost of attendance (1) N/A $120,000
Dental Loan Up to the cost of attendance N/A $135,000
Graduate Loan Up to the cost of attendance N/A $120,000
Medical Loan Up to the cost of attendance N/A $165,000
Bar Exam Loan $5,000 $5,000 $5,000
Residency Loan $8,000 $8,000 $8,000
1998-1999 Law Loan Up to the cost of attendance N/A $130,000
Business Loan Up to the cost of attendance N/A $130,000
Dental Loan Up to the cost of attendance N/A $175,000;
$200,000
(post-doctoral)
Graduate Loan Up to the cost of attendance N/A $130,000
Medical Loan Up to the cost of attendance N/A None
Bar Exam Loan $7,500 $7,500 $7,500
Residency Loan $8,000 $8,000 $8,000
</TABLE>
- ----------------
(1) Students enrolled less than half-time can borrow a maximum annual
amount of the combined cost of tuition, fees, and a maximum of $500 for
books and supplies.
(2) Including graduate and undergraduate debt.
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<PAGE> 133
Payment Terms. Each Private Graduate Loan earns interest at a rate per
annum, reset quarterly, equal to the 91-day Treasury Bill Rate plus a margin,
depending on the type of loan. The following table sets forth the applicable
interest rate for each type of Private Graduate Loan:
<TABLE>
<CAPTION>
INTEREST MARGIN
OVER 91-DAY
PROGRAM YEAR TYPE OF LOAN TREASURY BILL RATE
------------ ------------ ------------------
<S> <C> <C> <C>
Interim (1) Repayment (2)
1991-1992 Law & Bar Exam Loans 3.25% 3.25%
1992-1993 Law & Bar Exam Loans 3.25% 3.40%
1993-1994 Law & Bar Exam Loans 3.25% 3.40%
1994-1995 Law & Bar Exam Loans 3.25% 3.40%
1995-1996 through
1997-1998 Law Loan 3.25% 3.40%
Medical Loan 2.50% 2.75%
Dental Loan 2.50% 3.00%
Business Loan 3.25% 3.40%
Graduate Loan 3.25% 3.40%
Bar Exam Loan 3.25% 3.40%
Residency Loan 2.50% 2.75%
1998-1999(3) Law Loan 2.90%-3.25% 2.50%-3.25%
Medical Loan 2.50% 2.25%-2.85%
Dental Loan 2.50%-2.75% 2.25%-3.00%
Business Loan 3.25%-3.00% 2.50%-3.25%
Graduate Loan 3.25%-3.40% 2.50%-3.40%
Bar Exam Loan 2.90%-3.25% 2.50%-3.25%
Residency Loan 2.50% 2.25%-2.85%
Dental Residency Loan 2.50%-2.75% 2.25%-3.00%
</TABLE>
- ------------------
(1) "Interim" represents any period while the borrower is attending school
or during a specified grace period.
(2) "Repayment" represents the period after the specified grace period, in
which the borrower is required to make payments or enter into some type
of deferment or forbearance period.
(3) For 1998-1999, two separate loan programs apply. In one program, the
margin is determined based on the borrower's choice of repayment terms,
which range from 10 to 25 years (the "Keys2Repay Program"). The other
program has one margin regardless of interim, repayment period, or
repayment term.
Interest accrues on the outstanding principal amount of each Private
Graduate Loan from the date the lender makes such Private Graduate Loan and is
payable monthly by each borrower commencing a certain number of months after the
borrower graduates or otherwise ceases to be enrolled at least half-time in an
approved institution (the "Private Loan Repayment Commencement Date"). In the
case of Private Graduate Loans made during the 1990-1991 program year that
period is approximately six months. For all other Private Graduate Loans, the
period is approximately nine months, except that in the case of Medical or
Residency Loans, the period, generally, is extended to nine months after the
borrower completes any required residency (generally, up to a maximum of 57
months after graduation), subject to deferral or forbearance as discussed below.
Subject to certain conditions, borrowers of Private Graduate Loans (other than
Private Consolidation Loans) may receive the benefits of certain deferral
periods (either prior to commencing repayment or thereafter) similar to those
applicable to Stafford Loans, during which borrowers are permitted to defer
principal payments and to capitalize the interest accruing on
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<PAGE> 134
such Private Graduate Loans. In addition, borrowers of Private Graduate Loans
(other than Private Consolidation Loans) may, subject to certain conditions,
qualify, at the discretion of the lender (in accordance with standards and
guidelines approved by the Private Guarantors if applicable), for periods of
forbearance because of temporary financial hardship, during which borrowers may
defer or make reduced principal payments on such Private Graduate Loans.
Interest on each Private Graduate Loan that accrues prior to the Private Loan
Repayment Commencement Date may, at the option of the borrower, be paid
currently or be capitalized and added to the principal amount outstanding for
such Private Graduate Loan on that date. Each student with outstanding Private
Graduate Loans (other than Private Consolidation Loans) is obligated to make
scheduled payments of principal at the same time that he or she makes interest
payments in an amount sufficient to repay such Private Graduate Loan in full
over a period not to exceed 15 years (or, with respect to each Private Graduate
Loan made since the commencement of the 1990-1991 program year, 20 years, except
with respect to Private Graduate Loans made under the Keys2Repay Program, where
the repayment term can be 10, 15 or 25 years at the borrower's option) after the
Private Loan Repayment Commencement Date with respect to such Private Graduate
Loan. Repayment of principal and interest on Business Loans commences no later
than 36 months after the date of the first disbursement of the first Business
Loan to a specific borrower. Any student may at any time voluntarily prepay all
or any portion of his or her outstanding Private Loans (including paying accrued
interest prior to the Private Loan Repayment Commencement Date quarterly in lieu
of capitalizing such amounts) without premium or penalty. Private Graduate Loans
presently require a minimum annual principal and interest payment of $600 in the
aggregate (but in no event less than accrued interest), unless the borrower and
the lender agree to a lesser amount. For Private Graduate Loans entering
repayment on or after October 1, 1995, borrowers may choose among several
repayment options, including the option to make interest only payments for
limited periods.
With respect to each Private Loan (other than Private Consolidation
Loans) made to a student since the commencement of the 1992-1993 program year, a
fee equal to a percentage of the original principal amount of such Private
Graduate Loan is charged to such student on the last day preceding the
applicable Private Loan Repayment Commencement Date.
Unless the student pays such fee, the Seller will make an additional
loan (a "Fee Advance") to such student in an amount equal to such fee, which
will be added to the principal balance of such Private Graduate Loan and repaid
over the term thereof. See "Description of the Transfer and Servicing
Agreements--Additional Fundings" for a discussion of the transfer of such Fee
Advance to the related Trust.
<TABLE>
<CAPTION>
PROGRAM YEAR TYPE OF LOAN SUPPLEMENTAL FEE
------------ ------------ ----------------
<S> <C> <C>
1990-1991 through
1995-1996 Law Loan 2%
Bar Exam Loan 2%
1996-1997 Law Loan 4%
Medical Loan 2%
Dental Loan 2%
Business Loan 2%
Graduate Loan 3%
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
Bar Exam Loan 3%
Residency Loan 2%
1997-1998 Law Loan 1.5%-6.9%
Medical Loan 1.5%-6.9%
Dental Loan 1.5%-6.9%
Business Loan 1.5%-6.9%
Graduate Loan 1.5%-6.9%
Bar Exam Loan 1.5%-6.9%
Residency Loan 1.5%-2.0%
1998-1999(1) Law Loan 1.5%-6.9%
Medical Loan 1.5%-2.0%
Dental Loan 1.5%-6.9%
Business Loan 1.5%-6.9%
Graduate Loan 1.5%-6.9%
Bar Exam Loan 1.5%-6.9%
Residency Loan 1.5%-2.0%
Dental Residency Loan 1.5%-6.9%
</TABLE>
- --------------------
(1) For 1998-1999, two separate loan programs apply. One program determines
the fee based on the loan type. The other program determines the fee
based on the borrower's past credit behavior, except the Medical and
Residency Loans, which are 1.5%.
Private Consolidation Loans. The Seller has established a private
consolidation loan program (the "Private Consolidation Loan Program") to
facilitate the ability of eligible borrowers of Private Graduate Loans
("Underlying Private Graduate Loans") to consolidate such Underlying Private
Graduate Loans into a single loan (a "Private Consolidation Loan"; together with
Federal Consolidation Loans, sometimes referred to herein as "Consolidation
Loans"). The Private Consolidation Loan Program commenced in November, 1994.
Subject to the satisfaction of certain conditions set forth in the programs
relating to Private Graduate Loans, including limitations on the timing and
payment of principal and interest with respect to Private Consolidation Loans
and a requirement that the proceeds of a Private Consolidation Loan be used to
repay the respective Underlying Private Graduate Loans of any borrower, each
holder of a Private Consolidation Loan will be entitled to substantially the
same guarantee arrangements, if any, as are available on the Underlying Private
Graduate Loans. Currently, all of the Underlying Private Graduate Loans that are
consolidated under the Private Consolidation Program are Private Graduate Loans
that were guaranteed by TERI against default, death, bankruptcy or disability of
the applicable borrower, and the resulting Private Consolidation Loan is
similarly guaranteed by TERI. Under this program, an eligible borrower of a
Private Consolidation Loan guaranteed by TERI means a borrower (i) with
outstanding Underlying Private Graduate Loans of at least $7,500 and (ii) who
has begun repaying and is not more than 45 days delinquent in required payments
on any Underlying Private Graduate Loan. A borrower of a guaranteed Private
Consolidation Loan must consolidate all of his or her eligible loans and in
doing so will generally forgo all opportunities for deferment or forbearance.
Private Consolidation Loans that are guaranteed will bear interest at
the rate applicable to the type of Underlying Graduate Loan for which the
greatest principal amount of Underlying Graduate Loans to be consolidated is
outstanding. Such Private Consolidation Loans made prior to May 1, 1997 are
repayable over a period of 15-25 years and such Private Consolidation Loans made
on or after May 1, 1997 are or will be repayable over a period of 25 to 30
years, in each
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case, depending on the original principal amount of such Private Consolidation
Loan. The Private Loan Repayment Commencement Date with respect to a Private
Consolidation Loan will occur immediately upon disbursement, with no provision
for deferment or forbearance. The borrower of a Private Consolidation Loan will
be offered repayment options similar to those available for other Private
Graduate Loans. With respect to each such Private Consolidation Loan, a fee
equal to 1% of the amount paid to discharge the Underlying Private Graduate
Loans will be charged to the borrower and included in the original principal
amount of such Private Consolidation Loan (a "Private Consolidation Fee
Advance").
The Seller currently intends to expand the Private Consolidation Loan
Program to allow the consolidation of unguaranteed Underlying Private Graduate
Loans, and/or other unguaranteed private undergraduate and graduate student loan
debt and any other education related debt (excluding credit card debt) used for
education purposes, into a single Private Consolidation Loan that is similarly
not guaranteed by any federal or private guarantor, or by any other party or
governmental agency. The Seller anticipates that it will commence such expanded
Program on or about January 1, 2000. Borrowers of such unguaranteed Private
Consolidation Loans will be required to satisfy certain conditions, including
limitations on the timing and payment of principal and interest with respect to
such Private Consolidation Loans and a requirement that the proceeds of the
Private Consolidation Loan be used to repay all the Underlying Private Graduate
Loans and any other student or education loans of the borrower that were
consolidated.
To be eligible for an unguaranteed Private Consolidation Loan, the
borrower must (i) have outstanding Underlying Private Graduate Loans or other
private undergraduate and/or graduate student loan debt and/or other education
related debt (excluding credit card debt) used for education purposes, (ii) have
begun repaying and is not more than 45 days delinquent in required payments on
any such student loan, and (iii) meet credit eligibility requirements similar to
those applicable to Private Graduate Loans. A borrower of an unguaranteed
Private Consolidation Loan must consolidate all of his or her eligible
Underlying Private Graduate Loans and in doing so will generally forego all
opportunities for deferment or forbearance.
INSURANCE OF STUDENT LOANS; GUARANTORS OF STUDENT LOANS
Federal Guarantors. The Higher Education Act authorizes Federal
Guarantors to support education financing and credit needs of students at
post-secondary schools. The Higher Education Act encourages every state either
to establish its own agency or to designate another Federal Guarantor in
cooperation with the Secretary. Under various programs throughout the United
States of America, Federal Guarantors insure and sometimes service guaranteed
student loans. The Federal Guarantors are reinsured by the federal government
for from 80% to 100% of each default claim paid, depending on their claims
experience, for loans disbursed prior to October 1, 1993, from 78% to 98% of
each default claim paid for loans disbursed on or after October 1, 1993 and
prior to October 1, 1998, and from 75% to 95% of each default claim paid for
loans disbursed on or after October 1, 1998. Federal Guarantors are reinsured by
the federal government for 100% of death, disability, bankruptcy, closed school
and false certification claims paid. Loans guaranteed under the lender of last
resort provisions of the Higher Education
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Act are also 100% guaranteed and reinsured. See"--Federal Insurance and
Reinsurance of Federal Guarantors" below.
Federal Guarantors collect a one-time insurance premium ranging from 0%
to 3% of the principal amount of each guaranteed loan, depending on the Federal
Guarantor. Federal Guarantors are prohibited from charging insurance premiums on
loans made under the Unsubsidized Stafford Loan Program (the "Unsubsidized
Stafford Loan Program") prior to July 1, 1994. On such loans made prior to July
1, 1994, the Higher Education Act requires that a 6.5% combined loan origination
fee and insurance premium be paid by the borrower on Unsubsidized Stafford
Loans. This fee is passed through to the Department by the originating lender.
Effective July 1, 1994, the maximum insurance premium and origination fee for
Stafford Loans and Unsubsidized Stafford Loans are 1% and 3%, respectively.
Each Federal Loan to be sold to an Eligible Lender Trustee on behalf of
a Trust will be guaranteed as to principal and interest by a Federal Guarantor
pursuant to a Federal Guarantee Agreement between such Federal Guarantor and the
applicable Eligible Lender Trustee. The applicable Prospectus Supplement for
each Trust will identify each related Federal Guarantor for the Federal Loans
held by such Trust as of the applicable Closing Date and the amount of such
Federal Loans it is guaranteeing for such Trust.
Federal Insurance and Reinsurance of Federal Guarantors. A Federal Loan
is considered to be in default for purposes of the Higher Education Act when the
borrower fails to make an installment payment when due or to comply with other
terms of the loan, and if the failure persists for 180 days in the case of a
loan repayable in monthly installments or for 240 days in the case of a loan
repayable in less frequent installments. Under certain circumstances a loan
deemed ineligible for federal reinsurance may be restored to eligibility.
Procedures for such restoration of eligibility are discussed below.
If the loan in default is covered by federal loan insurance in
accordance with the provisions of the Higher Education Act, the Department is to
pay the applicable Federal Guarantor, as insurance beneficiary, the amount of
the loss sustained thereby, upon notice and determination of such amount, within
90 days of such notification, subject to reduction as described below.
If the loan is guaranteed by a Federal Guarantor, the eligible lender
is reimbursed by the Federal Guarantor for 100% (or not less than 98% for loans
disbursed on or after October 1, 1993) of the unpaid principal balance of the
defaulted loan plus accrued and unpaid interest thereon so long as the eligible
lender has properly originated and serviced such loan. Under the Higher
Education Act, the Department enters into a guarantee agreement with each
Federal Guarantor, which provides for federal reinsurance for amounts paid to
eligible lenders by the Federal Guarantor with respect to defaulted loans.
Pursuant to such agreements, the Department also agrees to reimburse a
Federal Guarantor for 100% of the amounts expended in connection with a claim
resulting from the death, bankruptcy, total and permanent disability of a
borrower, the death of a student whose
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parent is the borrower of a PLUS Loan or claims by borrowers who received loans
on or after January 1, 1986 and who are unable to complete the programs in which
they are enrolled due to school closure or borrowers whose borrowing eligibility
was falsely certified by the eligible institution; such claims are not included
in calculating a Federal Guarantor's claims rate experience for federal
reinsurance purposes. The Department also agrees to reimburse a Federal
Guarantor for 100% of the amounts expended in connection with claims on loans
made under the lender of last resort provisions. The Department is also required
to repay the unpaid balance of any loan if the borrower files for relief under
Chapter 12 or 13 of the Bankruptcy Code or files for relief under Chapter 7 or
11 of the Bankruptcy Code and has been in repayment for more than 7 years or
commences an action for a determination of dischargeability under Section
523(a)(8)(b) of the Bankruptcy Code, and is authorized to acquire the loans of
borrowers who are at high risk of default and who request an alternative
repayment option from the Department.
The amount of such reinsurance payment to the Federal Guarantor for
default claims is subject to reduction based upon the annual default claims rate
of the Federal Guarantor, calculated to equal the amount of federal reinsurance
claims paid by the Department to the Federal Guarantor during any fiscal year as
a percentage of the original principal amount of guaranteed loans in repayment
at the end of the prior federal fiscal year.
The formula is summarized as follows:
<TABLE>
<CAPTION>
CLAIMS RATE OF FEDERAL GUARANTORS REIMBURSEMENT BY THE DEPARTMENT OF EDUCATION (1)
- --------------------------------- ------------------------------------------------
<S> <C>
0% to and including 5% 98%
Greater than 5% to and including 9% 98% of claims to and including 5%; 88% of claims greater
than 5%
Greater than 9% 98% of claims to and including 5%; 88% of claims greater
than 5% to and including 9%; and 78% of claims greater
than 9%
</TABLE>
- -------------------
(1) Each of the reimbursement percentages listed above is increased by two
percentage points for a loan made prior to October 1, 1993 and
decreased by three percentage points for a loan made on or after
October 1, 1998.
The claims experience for any Federal Guarantor is not accumulated from
year to year for purposes of this test but is determined solely on the basis of
claims filed in any one federal fiscal year. The Higher Education Act provides
that, subject to compliance with the Higher Education Act, Federal Guarantors
are deemed to have a contractual right against the United States to receive
reinsurance in accordance with its provisions.
On August 10, 1993 President Clinton signed the Omnibus Budget
Reconciliation Act of 1993 (the "1993 Act"), which made a number of changes that
may adversely affect the financial condition of the Federal Guarantors,
including reducing to 98% the maximum percentage of Guarantee Payments the
Department will reimburse for loans first disbursed on or after October 1, 1993,
reducing substantially the premiums and default collections that Federal
Guarantors are entitled to receive and/or retain and giving the Department broad
powers over Federal Guarantors and their reserves. These powers include the
authority to require a Federal
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Guarantor to return all reserve funds to the Department if the Department
determines such action is necessary to serve the best interests of the student
loan programs or to ensure the proper maintenance of such Federal Guarantor's
funds or assets. The Department is also now authorized to direct a Federal
Guarantor to return a portion of its reserve funds which the Department
determines is unnecessary to pay the program expenses and contingent liabilities
of the Federal Guarantor and/or to cease any activities involving the use of the
Federal Guarantor's reserve funds or assets which the Department determines is a
misapplication or otherwise improper. The Department may also terminate a
Federal Guarantor's reinsurance agreement if the Department determines that such
action is necessary to protect the federal fiscal interest. These various
changes create a risk that the resources available to the Federal Guarantors to
meet their guarantee obligations will be significantly reduced. Such changes
could result in a reduction of a Trust's ability to pay principal and interest
on the related Notes and Certificates, as a result of a reduction in the ability
of the Federal Guarantors to make Guarantee Payments to the Eligible Lender
Trustee with respect to the related Student Loans. In addition, this legislation
sought to greatly expand the loan volume under the direct lending program (the
"Federal Direct Student Loan Program") to a target of approximately 60% of
student loan demand in academic year 1998-1999, although only about 35% of such
loan demand is currently being met by the direct lending program. The expansion
of this program in the future could result in increasing reductions in the
volume of Federal Loans made by the Seller. Such changes could have an adverse
effect on the financial condition of the Federal Guarantors and on the ability
of a Federal Guarantor to satisfy its obligations under its Guarantee Agreement
with respect to the Federal Loans. See "Risk Factors--Changes in Legislation May
Adversely Affect Student Loans and Federal Guarantors." The 1998 Reauthorization
Bill created additional risks that the resources available to the Federal
Guarantors to meet their guarantee obligations will be further reduced in the
future, by mandating additional recall of guarantor reserves and reducing
reinsurance to guarantors from 98% to 95%.
Pursuant to the 1992 Amendments and additional changes made in 1997 and
1998, each Federal Guarantor is required to maintain a current minimum reserve
level of at least .25% of the aggregate principal amount of all outstanding
Federal Loans guaranteed by such Federal Guarantor. Annually, the Department
will collect information from each Federal Guarantor to determine the amount of
such Federal Guarantor's reserves and other information regarding its solvency.
If a Federal Guarantor's current reserve level falls below the required minimum
for any two consecutive years, that Federal Guarantor's annual claims rate
exceeds 5% or the Department determines that a Federal Guarantor's
administrative or financial condition jeopardizes that Federal Guarantor's
continued ability to perform its responsibilities, then that Federal Guarantor
must submit and implement a management plan acceptable to the Department. The
1992 Amendments also provide that under certain circumstances the Department is
authorized, on terms and conditions satisfactory to the Department, but is not
obligated, to terminate its reimbursement agreement with any Federal Guarantor.
In that event, however, the Department is required to assume the functions of
such Federal Guarantor and in connection therewith is authorized to do one or
more of the following: to assume the guarantee obligations of, to assign to
other guarantors the guarantee obligations of, or to make advances to, a Federal
Guarantor in order to assist such Federal Guarantor in meeting its immediate
cash needs and to ensure uninterrupted payment of default claims to lenders or
to take any other action the Department deems necessary to ensure the continued
availability of student loans and the full honoring of
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guarantee claims thereunder. In addition, the 1992 Amendments provide that if
the Department determines that a Federal Guarantor is unable to meet its
guarantee obligations, holders of Federal Loans covered thereby may submit
guarantee claims directly to the Department until such time as such guarantee
obligations are transferred to a new guarantor capable of meeting such
obligations or until a successor guarantor assumes such obligations. There can
be no assurance that the Department would under any given circumstances assume
such obligation to ensure satisfaction of a guarantee obligation by exercising
its right to terminate a reimbursement agreement with a Federal Guarantor or by
making a determination that such Federal Guarantor is unable to meet its
guarantee obligations.
Private Guarantors. Private Loans are not entitled to any federal
reinsurance or assistance from the Department or any other governmental entity.
Although each Private Guarantor maintains a loan loss reserve intended to absorb
losses arising from its guarantee commitments, there can be no assurance that
the amount of such reserve will be sufficient to cover the obligations of such
Private Guarantor over the term of the related Private Loans.
CLAIMS AND RECOVERY RATES
Certain historical information concerning guarantee claims and recovery
rates of the Guarantors for the Student Loans held by the related Trust as of
the applicable Closing Date with respect to each series of Securities will be
set forth in each Prospectus Supplement. There can be no assurance that the
claim and recovery experience on any pool of Student Loans with respect to a
given Trust will be comparable to prior experience or to any such information.
ORIGINATION PROCESS
The Higher Education Act specifies rules regarding loan origination
practices, which lenders must comply with in order for their Federal Loans to be
guaranteed and to be eligible to receive Federal Assistance. Lenders are
prohibited from offering points, premiums, payments or other inducements,
directly or indirectly, to any educational institution, guarantee agency or
individual in order to secure loan applications, and no lender may conduct
unsolicited mailings of student loan applications to students who have not
previously received student loans from that lender.
With respect to all Student Loans, whether Federal Loans or Private
Loans (other than Consolidation Loans and Key Alternative Loans discussed
below), the Seller forwards each application for such Student Loans (which
should include an executed promissory note) to either a marketing agent or the
Seller's origination department. On behalf of the Seller, either the marketing
agent or the origination department reviews each application to confirm its
completeness, to confirm that the applicant is an Eligible Student and that such
loan complies with certain other conditions of the applicable Program. In
addition, a credit report of each applicant for Private Graduate Loans is
obtained from an authorized credit reporting service, which the Seller then uses
to determine, in consultation with the Private Guarantors, if applicable,
whether such applicant satisfies certain specified credit underwriting criteria.
The credit-underwriting criteria for Private Guaranteed Loans are as follows:
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- No account that has been 90 or more days delinquent in the past
two years, and no more than one account is currently more than 60
days delinquent.
- No record of bankruptcy, foreclosure, repossession, skips or
wages garnishment.
- No record of unpaid collections, charged-off accounts or
written-off accounts.
- No record of an open judgment or suit, unsatisfied tax lien,
unpaid prior educational loan default or other negative public
record items in the past six years.
- No record of bankruptcy in the past seven years.
- Credit criteria for the 1993-1994 program year also includes the
requirement that no account has been delinquent 90 or more days in
the past two years.
- Credit criteria for the 1994-1995 and subsequent program years
also include requirements that no account has been delinquent 90
or more days in the past five years (or two years with respect to
any borrower who obtained a loan in 1993-1994), and there have
been no more than three inquiries and none with respect to any
previous borrower to an authorized credit reporting agency in the
past six months.
- Credit criteria for the 1995-1996 and subsequent program years
include the additional requirement that no more than two accounts
have been more than 60 days delinquent in the past two years.
The credit-underwriting criteria for Private Unguaranteed Loans are as follows:
1. No more than 3 accounts rated 30 days are more delinquent in the
past 2 years.
2. No more than one account is currently rated 60 days or more
delinquent.
3. No more than 2 accounts rated 60 or more days delinquent in the
past 2 years.
4. No account more than 90 days delinquent in the past five years.
5. No record of bankruptcy discharge in the past 7 years.
6. No record of foreclosure, repossession, open judgment or suit,
unsatisfied tax lien, unpaid prior educational loan default or
other negative public credit in the past 6 years.
7. No record of unpaid collections, charged-off accounts or
written-off accounts.
8. No more than 3 authorized inquiries in the past 6 months.
9. Applicants with no credit history will be approved.
10. Applicants who meet the criteria 2-8, but do not meet the minimum
credit score determined by the Seller must obtain a co-signer to be
eligible.
11. Applicants with credit card balances greater than $20,000 must have
a credit worthy co-signer.
12. No single or combination of paid charged-off or paid collection
accounts totaling more than $100 reported within last 2 years.
13. If revolving credit balances are greater than $8,000, total credit
card usage cannot exceed 75% (a negative decision can be overridden
if applicant has minimum credit bureau score).
14. A credit bureau score may be used to enhance applicants position
for all other criteria.
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The origination of Federal Loans must comply with the provisions of the
Higher Education Act, and therefore does not consider the creditworthiness of
borrowers applying for Stafford Loans.
Any borrower inquiries concerning Federal Consolidation Loans or
Private Consolidation Loans are forwarded to the appropriate Sub-Servicer, who
contacts the borrower, prepares and sends to the borrower an application (which
includes a promissory note) for a Consolidation Loan for the borrower's review
and signature. Each Sub-Servicer is required to obtain certifications from the
lenders of the loans to be consolidated and to review the loan application and
the certifications to confirm that the borrower is eligible for a Federal
Consolidation Loan or Private Consolidation Loan, as the case may be. Upon
approval of an application for a Consolidation Loan, the applicable lender
causes the proceeds of such Consolidation Loan to be disbursed to each lender of
the loans being consolidated in amounts sufficient to retire each of such loans.
For each Consolidation Loan that is made by the Seller, a Sub-Servicer retains
the completed loan application and executed promissory note as custodian.
Applications for Key Alternative Loans are entered into the processing
system and are checked for completeness. If the borrower is ineligible for the
loan due to a processing denial reason an ineligibility letter is sent to the
borrower. Great Lakes sends an electronic transmission of applicant information
on each complete application to the Seller's system for credit review. Approved
applications are transmitted back to Great Lakes on a daily basis, where an
approval letter is generated and sent to the applicant, cosigner and the school.
Denied applicants are sent an adverse action letter from the credit department
the day the application is denied. If an applicant feels they have been denied
based on inaccurate or incomplete information contained in a credit report, they
can request a review (within 60 days of initial denial). Denied applicants may
have their loan reconsidered with a written request and supporting
documentation. A credit representative will review denied loan applicants
documentation and approve or deny the request. Each appeal is handled based on
its individual merits.
SERVICING AND COLLECTIONS PROCESS
The Higher Education Act, the programs relating to Private Loans and
the applicable Guarantee Agreements require the holder of Student Loans to cause
specified procedures, including due diligence procedures and the taking of
specific steps at specific intervals, to be performed with respect to the
servicing of the Student Loans that are designed to ensure that such Student
Loans are repaid on a timely basis by or on behalf of borrowers. Each
Sub-Servicer performs such procedures on behalf of the Seller and the Master
Servicer and will agree, pursuant to the related Sub-Servicing Agreement, to
perform specified and detailed servicing and collection procedures with respect
to the Student Loans on behalf of the related Trust. Such procedures generally
include periodic attempts to contact any delinquent borrower by telephone and by
mail, commencing with a written notice at the tenth day of delinquency and
including multiple written notices and telephone calls to the borrower
thereafter at specified times during any such delinquency. All telephone calls
and letters are automatically registered, and a synopsis of each call or the
mailing of each letter is noted in each Sub-Servicer's loan file for the
borrower. Each Sub-Servicer also will be required to perform skip tracing
procedures on delinquent
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borrowers whose current location is unknown, including contacting such
borrowers' schools and references. Failure to comply with the established
procedures could adversely affect the ability of the applicable Eligible Lender
Trustee, as holder of legal title to the applicable Student Loans on behalf of
the related Trust, to realize the benefits of any Guarantee Agreement or to
receive the benefits of Federal Assistance from the Department with respect
thereto. Failure to comply with certain of the established procedures with
respect to a Federal Loan may also result in the denial of coverage under a
Guarantee Agreement for certain accrued interest amounts, in circumstances where
such failure has not caused the loss of the guarantee of the principal of such
Federal Loan.
At prescribed times prior to submitting a claim for payment under a
Guarantee Agreement for a delinquent Student Loan, each Sub-Servicer is required
to notify the applicable Guarantor of the existence of such delinquency. These
requests notify the Guarantors of seriously delinquent accounts and allow the
Guarantors to make additional attempts to collect on such loans prior to the
filing of claims. If a loan is delinquent for 180 days (in the case of Federal
Loans made prior to the enactment date of the 1998 Reauthorization Bill), 240
days (in the case of Federal Loans made on or after October 7, 1998), or 150
days (in the case of Private Guaranteed Loans), the applicable Sub-Servicer may
file a default claim with the respective Guarantor. Failure to file a claim
within 270 days (in the case of Federal Loans made prior to the enactment date
of the 1998 Reauthorization Bill), 330 days (in the case of Federal Loans made
on or after October 7, 1998), or 180 days (in the case of Private Guaranteed
Loans) of delinquency may result in denial of the guarantee claim with respect
to such loan. A Sub-Servicer's failure to file a guarantee claim in a timely
fashion would constitute a breach of its covenants and create an obligation of
such Sub-Servicer to purchase the applicable Student Loan. See "Description of
the Transfer and Servicing Agreements--Master Servicer Covenants."
INCENTIVE PROGRAMS
The Seller has offered, and may continue to offer, incentive programs
to certain Student Loan borrowers. If any incentive programs are applicable to
the Student Loans in a Trust, such incentive programs will be described in the
related Prospectus Supplement Any incentive program not in existence as of the
date of such Prospectus Supplement, or not described in the related Prospectus
Supplement, that effectively reduces borrower payments on Financed Student Loans
and, with respect to Financed Federal Loans, is not required by the Higher
Education Act, will be applicable to the Financed Student Loans only if and to
the extent that the applicable Trust receives payment from the Seller (or the
Seller deposits or causes a deposit to be made into the related Collection
Account) in an amount sufficient to offset such effective yield reductions.
WEIGHTED AVERAGE LIVES OF THE SECURITIES
The rate of payment of principal of the Notes and the Certificates of
any series and the yield on the Notes and the Certificates of any series will be
affected by prepayments of the Student Loans that may occur as described below.
All the Student Loans are prepayable in whole or in part by the borrowers at any
time (including by means of Federal Consolidation Loans, Private Consolidation
Loans or consolidation loans made under the Federal Direct Student Loan
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Program as discussed below) or as a result of a borrower's default, death,
disability or bankruptcy and subsequent liquidation or collection of Guarantee
Payments with respect thereto. The rate of such prepayments cannot be predicted
and may be influenced by a variety of economic, social and other factors,
including those described below. In general, the rate of prepayments may tend to
increase to the extent that alternative financing becomes available at
prevailing interest rates which fall significantly below the interest rates
applicable to the Student Loans. However, because many of the Student Loans bear
interest at a rate that either actually or effectively is floating, it is
impossible to determine whether changes in prevailing interest rates will be
similar to or vary from changes in the interest rates on the Student Loans.
To the extent borrowers of Student Loans elect to borrow Consolidation
Loans with respect to such Student Loans:
(1) from the Seller, after the Funding Period but not beyond the
end of the Revolving Period, and collections on the Student
Loans are not available to purchase such Consolidation Loans,
(2) from the Seller, after the end of the Revolving Period, or
(3) from another lender at any time,
Noteholders of a series (and after the Notes have been paid in full,
Certificateholders of such series) will collectively receive as a prepayment of
principal the aggregate principal amount of such Student Loans. Any such
prepayments will result in a more rapid amortization of the Securities of a
series then would otherwise be the case. The volume of existing loans that may
be repaid in this fashion is not determinable at this time. However, if the
Seller makes any such Consolidation Loan during a Funding Period or prior to the
end of the Revolving Period (in which event the Seller will then sell that
Consolidation Loan to the applicable Eligible Lender Trustee, to the extent that
funds are available in the applicable Escrow Account and during the Funding
Period, the Pre-Funding Account or following the Funding Period but prior to the
end of the Revolving Period, the applicable Collection Account from amounts
which constitute available loan purchase funds, for the purchase thereof), the
aggregate outstanding principal balance of Student Loans (after giving effect to
the addition of such Consolidation Loans) will be at least equal to and in most
cases greater than such balance prior to such prepayment, although the portion
of the loan guaranteed will be 98% with respect to any Federal Consolidation
Loan made on or after October 1, 1993, even if the Underlying Federal Loans were
100% guaranteed. See "The Student Loan Financing Business--Description of
Federal Loans Under the Programs--Federal Consolidation Loans." There can be no
assurance that borrowers with Student Loans will not seek to obtain
Consolidation Loans with respect to such Student Loans or, if they do so, that
such Consolidation Loans will not be made by the Seller after the end of a
Funding Period when collections on the Student Loans are not available to
purchase such Consolidation Loans, on or after the end of the Revolving Period
or by another lender at any time.
In addition, the Seller will be obligated to repurchase any Student
Loan pursuant to the applicable Sale and Servicing Agreement as a result of a
breach of any of its representations and
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warranties, and the Master Servicer will be obligated to purchase any Student
Loan pursuant to the Sale and Servicing Agreement as a result of a breach of
certain covenants with respect to such Student Loan, in each case where such
breach materially adversely affects the interests of the Certificateholders or
the Noteholders of a series in that Student Loan and is not cured within the
applicable cure period (it being understood that any such breach that does not
affect any Guarantor's obligation to guarantee payment of such Student Loan will
not be considered to have a material adverse effect for this purpose). See
"Description of the Transfer and Servicing Agreements--Sale of Student Loans;
Representations and Warranties" and "--Servicer Covenants." See also
"Description of the Transfer and Servicing Agreements---Additional Fundings"
regarding the prepayment of principal to Noteholders and Certificateholders of a
series if as of the date specified in the applicable Prospectus Supplement the
amount on deposit in the related Pre-Funding Account has not been reduced to
zero and the prepayment of principal to Noteholders of a series as a result of
excess funds remaining on deposit in the Pre-Funding Account at the end of the
Funding Period, "--Insolvency Event" regarding the sale of the Student Loans if
a Seller Insolvency Event occurs and "--Termination" regarding the Seller's
option to purchase the Student Loans when the aggregate Pool Balance is less
than or equal to 5% of the initial Pool Balance of a series and the auction of
the Student Loans occurs on or after the date specified in the related
Prospectus Supplement.
On the other hand, scheduled payments with respect to, and maturities
of, the Student Loans may be extended, including pursuant to Grace Periods,
Deferral Periods and, under certain circumstances, Forbearance Periods prior to
the end of the Revolving Period or of refinancings through Consolidation Loans
to the extent such Consolidation Loans are sold to an Eligible Lender Trustee on
behalf of a Trust as described above. In that event, the fact that such
Consolidation Loans will likely have longer maturities than the Student Loans
they are replacing may lengthen the remaining term of the Student Loans and the
average life of the Notes and the Certificates of a series. The rate of payment
of principal of the Notes and the Certificates of a series and the yield on the
Notes and the Certificates of a series may also be affected by the rate of
defaults resulting in losses on defaulted Student Loans which have been
liquidated, by the severity of those losses and by the timing of those losses,
which may affect the ability of the Guarantors to make Guarantee Payments with
respect thereto. In addition, the maturity of many of the Student Loans will
extend well beyond the final scheduled Distribution Dates of the Notes and the
Certificates of a series.
The rate of prepayment on the Student Loans cannot be predicted, and
any reinvestment risks resulting from a faster or slower incidence of prepayment
of Student Loans will be borne entirely by the Securityholders of a series. Such
reinvestment risks may include the risk that interest rates and the relevant
spreads above particular interest rate bases are lower at the time
Securityholders of a series receive payments from the related Trust than such
interest rates and such spreads would otherwise have been had such prepayments
not been made or had such prepayments been made at a different time.
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POOL FACTORS AND TRADING INFORMATION
Each of the "Note Pool Factor" for each class of Notes and the
"Certificate Pool Factor" for each class of Certificates (each, a "Pool Factor")
will be a seven-digit decimal which the Administrator will compute for each
Distribution Date indicating the remaining outstanding principal amount of such
class of Notes or the remaining principal balance for such class of Certificates
(the "Certificate Balance"), respectively, as of that Distribution Date (after
giving effect to distributions to be made on such Distribution Date), as a
fraction of the initial outstanding principal amount of such class of the Notes
or the initial Certificate Balance for such class of Certificates, respectively.
Each Pool Factor will be 1.0000000 as of the Closing Date, and thereafter will
decline to reflect reductions in the outstanding principal amount of the
applicable class of Notes or reductions of the Certificate Balance of the
applicable class of Certificates, as applicable. A Securityholder's portion of
the aggregate outstanding principal amount of the related class of Notes or of
the aggregate outstanding Certificate Balance for the related class of
Certificates, as applicable, is the product of (x) the original denomination of
that Securityholder's Note or Certificate and (y) the applicable Pool Factor.
Pursuant to the related Indenture and the related Trust Agreement, the
Securityholders will receive reports on or about each Distribution Date
concerning the payments received on the Student Loans, the Pool Balance (as such
term is defined in the related Prospectus Supplement, the "Pool Balance"), the
applicable Pool Factor and various other items of information. Securityholders
of record during any calendar year will be furnished information for tax
reporting purposes not later than the latest date permitted by law. See "Certain
Information Regarding the Securities--Reports to Securityholders."
DESCRIPTION OF THE NOTES
GENERAL
With respect to each Trust, one or more classes of notes (the "Notes")
of a given series will be issued pursuant to the terms of an indenture (an
"Indenture") between the Trust and the trustee under such Indenture (the
"Indenture Trustee"), a form of which has been filed as an exhibit to the
Registration Statement of which this Prospectus (this "Prospectus") is a part.
The following summary describes the material terms of the Notes and the
Indenture. The summary does not purport to be complete and is qualified in its
entirety by reference to all the provisions of the Notes and the Indenture.
Unless otherwise specified in the related Prospectus Supplement (each a
"Prospectus Supplement"), each class of Notes will initially be represented by
one or more Notes, in each case registered in the name of the nominee of The
Depository Trust Company ("DTC") (together with any successor depository
selected by the Administrator, the "Depository") except as set forth below.
Unless otherwise specified in the related Prospectus Supplement, the Notes will
be available for purchase in denominations of $1,000 and integral multiples
thereof in book-entry form only. The Trust has been informed by DTC that DTC's
nominee will be Cede & Co.
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("Cede"), unless another nominee is specified in the related Prospectus
Supplement. Accordingly, such nominee is expected to be the holder of record of
the Notes of each class. Unless and until Definitive Notes are issued under the
limited circumstances described herein, no Noteholder will be entitled to
receive a physical certificate representing a Note. All references herein and in
the related Prospectus Supplement to actions by Noteholders of Notes held in
book-entry form refer to actions taken by DTC upon instructions from its
participating organizations (the "Participants") and all references herein to
distributions, notices, reports and statements to Noteholders refer to
distributions, notices, reports and statements to DTC or its nominee, as the
case may be, as the registered holder of the Notes for distribution to
Noteholders in accordance with DTC's procedures with respect thereto. See
"Certain Information Regarding the Securities--Book-Entry Registration"
and"--Definitive Securities."
PRINCIPAL OF AND INTEREST ON THE NOTES
The timing and priority of payment, seniority, allocations of losses,
interest as a per annum interest rate (the "Interest Rate") and amount of or
method of determining payments of principal and interest on each class of Notes
of a given series will be described in the related Prospectus Supplement. The
right of holders of any class of Notes to receive payments of principal and
interest may be senior or subordinate to the rights of holders of any other
class or classes of Notes of such series, as described in the related Prospectus
Supplement. Payments of interest on the Notes of such series will be made prior
to payments of principal thereon. Each class of Notes may have a different
Interest Rate, which may be a fixed, variable or adjustable Interest Rate or any
combination of the foregoing. The related Prospectus Supplement will specify the
Interest Rate for each class of Notes of a given series or the method for
determining such Interest Rate See also "Certain Information Regarding the
Securities--Fixed Rate Securities" and "--Floating Rate Securities". One or more
classes of the Notes of a series may be redeemable in whole or in part under the
circumstances specified in the related Prospectus Supplement, including as a
result of the exercise by the Seller, or such other party as may be named in the
related Prospectus Supplement, of its option to purchase the related Student
Loans.
Unless otherwise specified in the related Prospectus Supplement,
Noteholders of all classes within a series will have the same priority with
respect to payments of interest. Under certain circumstances, the amount
available for such payments could be less than the amount of interest payable on
the Notes on any of the dates specified for payments in the related Prospectus
Supplement (each, a "Distribution Date"), in which case each class of
Noteholders will receive its ratable share (based upon the aggregate amount of
interest due to such class of Noteholders) of the aggregate amount available to
be distributed in respect of interest on the Notes of such series. See
"Description of the Transfer and Servicing Agreements--Distributions" and
"--Credit and Cash Flow Enhancement."
In the case of a series of Notes which includes two or more classes of
Notes, the sequential order and priority of payment in respect of principal and
interest, and any schedule or formula or other provisions applicable to the
determination thereof, of each such class will be set forth in the related
Prospectus Supplement. Payments in respect of principal and interest of any
class of Notes will be made on a pro rata basis among all the Noteholders of
such class.
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In the case of a series of Notes relating to a Trust having a
Pre-Funding Account or Escrow Account, the Notes of such series will be redeemed
in part on the Distribution Date on or immediately following the last day of the
related Funding Period or Revolving Period, respectively, in the event that any
amount remains on deposit in the applicable account after giving effect to all
Additional Fundings on or prior to such date, in an aggregate principal amount
described in the related Prospectus Supplement.
See "Description of the Transfer and Servicing Agreements--Credit and
Cash Flow Enhancement--Reserve Account" for a description of the Reserve Account
and the distribution of amounts in excess of the Specified Reserve Account
Balance (as defined in the related Prospectus Supplement, the "Specified Reserve
Account Balance").
THE INDENTURE
Modification of Indenture. With respect to each Trust, with the consent
of the holders of a majority of the outstanding Notes of the related series, the
Indenture Trustee and the Trust may execute a supplemental indenture to add
provisions to, or change in any manner or eliminate any provisions of, the
Indenture with respect to the Notes, or to modify (except as provided below) in
any manner the rights of the related Noteholders.
Unless otherwise specified in the related Prospectus Supplement with
respect to a series of Notes, however, without the consent of the holder of each
such outstanding Note affected thereby, no supplemental indenture will:
(1) change the due date of any installment of principal of or
interest on any such Note or reduce the principal amount
thereof, the interest rate specified thereon or the redemption
price with respect thereto or change any place of payment
where or the coin or currency in which any such Note or any
interest thereon is payable,
(2) impair the right to institute suit for the enforcement of
certain provisions of the related Indenture regarding payment,
(3) reduce the percentage of the aggregate amount of the
outstanding Notes of such series, the consent of the holders
of which is required for any such supplemental indenture or
the consent of the holders of which is required for any waiver
of compliance with certain provisions of the related Indenture
or of certain defaults thereunder and their consequences as
provided for in such Indenture,
(4) modify or alter the provisions of the related Indenture
regarding the voting of Notes held by the applicable Trust,
the Seller, an affiliate of either of them or any obligor on
such Notes,
(5) reduce the percentage of the aggregate outstanding amount of
such Notes, the consent of the holders of which is required to
direct the related Eligible Lender
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Trustee on behalf of the applicable Trust to sell or liquidate
the Student Loans if the proceeds of such sale would be
insufficient to pay the principal amount and accrued but
unpaid interest on the outstanding Notes of such series,
(6) decrease the percentage of the aggregate principal amount of
such Notes required to amend the sections of the related
Indenture which specify the applicable percentage of aggregate
principal amount of such Notes necessary to amend the related
Indenture or certain other related agreements, or
(7) permit the creation of any lien ranking prior to or on a
parity with the lien of the related Indenture with respect to
any of the collateral for the Notes of such series or, except
as otherwise permitted or contemplated in such Indenture,
terminate the lien of such Indenture on any such collateral or
deprive the holder of any Note of the security afforded by the
lien of such Indenture.
The applicable Trust and the related Indenture Trustee may also enter
into supplemental indentures without obtaining the consent of Noteholders of
such series, for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of the related Indenture or of
modifying in any manner the rights of Noteholders of such series so long as such
action will not, in the opinion of counsel satisfactory to the applicable
Indenture Trustee, materially and adversely affect the interest of any
Noteholder of such series.
Events of Default; Rights upon Event of Default. With respect to the
Notes of a given series, an "Event of Default" under the related Indenture will
include the following:
(a) a default for five days or more in the payment of any interest
on any such Note after the same becomes due and payable;
(b) a default in the payment of the principal of or any
installment of the principal of any such Note when the same
becomes due and payable;
(c) a default in the observance or performance of any covenant or
agreement of the applicable Trust made in the related
Indenture and the continuation of any such default for a
period of 30 days after notice thereof is given to the
applicable Trust by the applicable Indenture Trustee or to the
applicable Trust and the applicable Indenture Trustee by the
holders of at least 25% in principal amount of such Notes then
outstanding;
(d) any representation or warranty made by the applicable Trust in
the related Indenture or in any certificate delivered pursuant
thereto or in connection therewith having been incorrect in a
material respect as of the time made, and such breach is not
cured within 30 days after notice thereof is given to such
Trust by the applicable Indenture Trustee or to such Trust and
the applicable Indenture Trustee by the holders of at least
25% in principal amount of the Notes of such series then
outstanding; or
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(e) certain events of bankruptcy, insolvency, receivership or
liquidation of such Trust.
However, the amount of principal required to be distributed to
Noteholders of such series under the related Indenture on any Distribution Date
will generally be limited to amounts available after payment of all prior
obligations of such Trust. Therefore, the failure to pay principal on a class of
Notes generally will not result in the occurrence of an Event of Default until
the final scheduled Distribution Date for such class of Notes.
If, with respect to any series of Notes, interest is paid at a variable
rate based on an index, the related Prospectus Supplement may provide that, in
the event that, for any Distribution Date, the Interest Rate as calculated based
on the index is less than an alternate rate calculated for such Distribution
Date based on interest collections on the Student Loans (the amount of such
difference, the "Index Shortfall Carryover"), the Interest Rate for such
Distribution Date will be such alternate rate and the Index Shortfall Carryover
shall be payable as described in such Prospectus Supplement. Payment of the
Index Shortfall Carryover generally will be lower in priority than payment of
interest on the Notes at the Interest Rate (whether the Interest Rate is based
on the index or such alternate rate) and, accordingly, the nonpayment of the
Index Shortfall Carryover on any Distribution Date will not generally constitute
a default in the payment of interest on such Notes.
If an Event of Default should occur and be continuing with respect to
the Notes of any series, the related Indenture Trustee or holders of a majority
in principal amount of such Notes then outstanding may declare the principal of
such Notes to be immediately due and payable. Unless otherwise specified in the
related Prospectus Supplement, such declaration may be rescinded by the holders
of a majority in principal amount of such Notes then outstanding if (x) the
related Trust has paid or deposited with the Indenture Trustee a sum equal to
all amounts then due with respect to the Notes (without giving effect to such
acceleration) and (y) all Events of Default, other than the nonpayment of the
principal of the Notes that has become due solely by such acceleration, have
been cured or, under the circumstances described below, waived.
If the Notes of any series have been declared to be due and payable
following an Event of Default with respect thereto, the related Indenture
Trustee may, in its discretion, exercise remedies as a secured party, require
the related Eligible Lender Trustee to sell the Student Loans or elect to have
the related Eligible Lender Trustee maintain possession of the Student Loans and
continue to apply collections with respect to such Student Loans as if there had
been no declaration of acceleration. Unless otherwise specified in the related
Prospectus Supplement, however, the related Indenture Trustee is prohibited from
directing the related Eligible Lender Trustee to sell the Student Loans
following an Event of Default, other than a default in the payment of any
principal or a default for five days or more in the payment of any interest on
any Note with respect to any series, unless:
(1) the holders of all such outstanding Notes consent to such
sale;
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(2) the proceeds of such sale are sufficient to pay in full the
principal of and the accrued interest on such outstanding
Notes at the date of such sale; or
(3) the related Indenture Trustee determines that the collections
on the Student Loans would not be sufficient on an ongoing
basis to make all payments on such Notes as such payments
would have become due if such obligations had not been
declared due and payable, and the related Indenture Trustee
obtains the consent of the holders of 66 2/3% of the aggregate
principal amount of such Notes then outstanding;
provided, that the Indenture Trustee may not sell or otherwise liquidate the
Student Loans following an Event of Default, other than a default in the payment
of any principal on the final scheduled Distribution Date for a class of Notes
or a default of five days or more on the payment of any interest on any Note,
unless:
(a) the proceeds of the sale or liquidation of the Student Loans
distributable to the Certificateholders are sufficient to pay
to the Certificateholders the outstanding Certificate Balance
plus accrued and unpaid interest thereon; or
(b) after receipt of notice from the Eligible Lender Trustee that
the proceeds of such sale or liquidation distributable to the
Certificateholders would not be sufficient to pay to the
Certificateholders the outstanding Certificate Balance plus
accrued and unpaid interest thereon, the Certificateholders of
at least a majority of the outstanding Certificate Balance
consent thereto;
provided, further that the Indenture Trustee may not sell or otherwise liquidate
the Student Loans following an Event of Default, other than a default in the
payment of any principal on the final scheduled Distribution Date for a class of
Notes or a default of five days or more on the payment of any interest on any
Note unless:
(x) proceeds of the sale or liquidation of the Student Loans
distributable from such sale are sufficient (1) to pay to
Noteholders, the outstanding principal balance of the Notes
(other than the Noteholders' Index Shortfall Carryover) and
(2) to pay to Certificateholders, the outstanding Certificate
Balance plus accrued and unpaid interest thereon (other than
the Certificateholders' Index Shortfall Carryover); or
(y) after receipt of notice from the Eligible Lender Trustee that
the proceeds of such sale or liquidation would not be
sufficient (1) to pay to Noteholders, the outstanding
principal balance of the Notes (other than the Noteholders'
Index Shortfall Carryover) and (2) to pay to
Certificateholders the outstanding Certificate Balance plus
accrued and unpaid interest thereon (other than the
Certificateholders' Index Shortfall Carryover).
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If the proceeds of any such sale are insufficient to pay the then outstanding
principal amount of the Notes and any accrued interest, such proceeds shall be
distributed to the holders of Notes on a pro rata basis, based on the amount
then owing on each class of Notes.
Subject to the provisions of the applicable Indenture relating to the
duties of the related Indenture Trustee, if an Event of Default should occur and
be continuing with respect to a series of Notes, the related Indenture Trustee
will be under no obligation to exercise any of the rights or powers under the
applicable Indenture at the request or direction of any of the holders of such
Notes, if such Indenture Trustee reasonably believes it will not be adequately
indemnified against the costs, expenses and liabilities which might be incurred
by it in complying with such request. Subject to such provisions for
indemnification and certain limitations contained in the related Indenture, the
holders of a majority in principal amount of the outstanding Notes of a given
series will have the right to direct the time, method and place of conducting
any proceeding or any remedy available to such Indenture Trustee and the holders
of a majority in principal amount of such Notes then outstanding may, in certain
cases, waive any default with respect thereto, except a default in the payment
of principal or interest or a default in respect of a covenant or provision of
the applicable Indenture that cannot be modified without the waiver or consent
of all the holders of such outstanding Notes.
Unless otherwise specified in the related Prospectus Supplement, no
holder of Notes of any series will have the right to institute any proceeding
with respect to the related Indenture, unless:
(a) such holder previously has given to the applicable Indenture
Trustee written notice of a continuing Event of Default,
(b) the holders of not less than 25% in principal amount of such
outstanding Notes have requested in writing that such
Indenture Trustee institute such proceeding in its own name as
Indenture Trustee,
(c) such holder or holders have offered such Indenture Trustee
reasonable indemnity,
(d) such Indenture Trustee has for 60 days failed to institute
such proceeding, and
(e) no direction inconsistent with such written request has been
given to such Indenture Trustee during such 60-day period by
the holders of a majority in principal amount of such
outstanding Notes.
In addition, each Indenture Trustee and the related Noteholders will
covenant that they will not at any time institute against the applicable Trust
any bankruptcy, reorganization or other proceeding under any federal or state
bankruptcy or similar law.
With respect to any Trust, none of the related Indenture Trustee, the
Seller, the Administrator, the Master Servicer, the Sub-Servicers or the
Eligible Lender Trustee in its individual capacity, or any holder of a
Certificate representing an ownership interest in the
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applicable Trust, or any of their respective owners, beneficiaries, agents,
officers, directors, employees, successors or assigns will, in the absence of an
express agreement to the contrary, be personally liable for the payment of the
principal of or interest on the Notes or for the agreements of the Trust
contained in the Indenture.
Certain Covenants. Each Indenture will provide that the related Trust
may not consolidate with or merge into any other entity, unless:
(a) the entity formed by or surviving such consolidation or merger
is organized under the laws of the United States of America,
any state thereof or the District of Columbia,
(b) such entity expressly assumes such Trust's obligation to make
due and punctual payments upon the Notes of the related series
and the performance or observance of every agreement and
covenant of such Trust under the related Indenture,
(c) no Event of Default shall have occurred and be continuing
immediately after such merger or consolidation,
(d) such Trust has been advised that the ratings of the Notes and
the Certificates of the related series would not be reduced or
withdrawn by the Rating Agencies (as such term is defined in
the related Prospectus Supplement, each a "Rating Agency" and
collectively, the "Rating Agencies") as a result of such
merger or consolidation, and
(e) such Trust has received an opinion of counsel to the effect
that such consolidation or merger would have no material
adverse federal or Pennsylvania state tax consequence to such
Trust or to any Certificateholder or Noteholder of the related
series.
Each Trust will not, among other things:
- except as expressly permitted by the applicable Indenture, the
applicable Transfer and Servicing Agreements or certain related
documents (collectively, the "Related Documents"), sell, transfer,
exchange or otherwise dispose of any of the assets of such Trust,
- claim any credit on or make any deduction from the principal and
interest payable in respect of the Notes of the related series
(other than amounts withheld under the Code or applicable state
law) or assert any claim against any present or former holder of
such Notes because of the payment of taxes levied or assessed upon
such Trust,
- except as contemplated by the Related Documents, dissolve or
liquidate in whole or in part,
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- permit the validity or effectiveness of the applicable Indenture
to be impaired or permit any person to be released from any
covenants or obligations with respect to such Notes under the
applicable Indenture except as may be expressly permitted thereby,
or
- permit any lien, charge, excise, claim, security interest,
mortgage or other encumbrance to be created on or extend to or
otherwise arise upon or burden the assets of the Trust or any part
thereof, or any interest therein or the proceeds thereof, except
as expressly permitted by the Related Documents.
No Trust may engage in any activity other than financing, purchasing,
owning, selling and managing Student Loans and the other assets of the Trust and
making Additional Fundings, in each case in the manner contemplated by the
Related Documents and activities incidental thereto. No Trust will incur, assume
or guarantee any indebtedness other than indebtedness incurred pursuant to the
Notes of the related series and the applicable Indenture or otherwise in
accordance with the Related Documents.
Annual Compliance Statement. Each Trust will be required to file
annually with the applicable Indenture Trustee a written statement as to the
fulfillment of its obligations under the related Indenture.
Indenture Trustee's Annual Report. Each Indenture Trustee will be
required to mail each year to all related Noteholders a brief report relating
to, among other things, its eligibility and qualification to continue as such
Indenture Trustee under the applicable Indenture, any amounts advanced by it
under the Indenture, the amount, interest rate and maturity date of certain
indebtedness owing by such Trust to the applicable Indenture Trustee in its
individual capacity, the property and funds physically held by the applicable
Indenture Trustee as such and any action taken by it that materially affects the
related Notes and that has not been previously reported.
Satisfaction and Discharge of Indenture. An Indenture will be
discharged with respect to the collateral securing the related Notes upon the
delivery to the related Indenture Trustee for cancellation of all such Notes or,
with certain limitations, upon deposit with such Indenture Trustee of funds
sufficient for the payment in full of all such Notes.
The Indenture Trustee. The Indenture Trustee for a series of Notes will
be specified in the related Prospectus Supplement. The Indenture Trustee for any
series may resign at any time, in which event the Trust will be obligated to
appoint a successor trustee for such series. The Trust may also remove any such
Indenture Trustee if such Indenture Trustee ceases to be eligible to continue as
such under the related Indenture or if such Indenture Trustee becomes insolvent.
In such circumstances, the Trust will be obligated to appoint a successor
trustee for the applicable series of Notes. Any resignation or removal of the
Indenture Trustee and appointment of a successor trustee for any series of Notes
does not become effective until acceptance of the appointment by the successor
trustee for such series.
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DESCRIPTION OF THE CERTIFICATES
GENERAL
With respect to each Trust, one or more classes of certificates
("Certificates" and together with the Notes, the "Securities") of a given series
will, unless otherwise specified in the related Prospectus Supplement, be issued
pursuant to the terms of a Trust Agreement, a form of which has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part. The
following summary describes the material terms of the Certificates and the Trust
Agreement. The summary does not purport to be complete and is qualified in its
entirety by reference to all the provisions of the Certificates and the Trust
Agreement.
Unless otherwise specified in the related Prospectus Supplement, each
class of Certificates will initially be represented by a single Certificate
registered in the name of the Depository, except as set forth below. Unless
otherwise specified in the related Prospectus Supplement and except for the
Certificates of a given series purchased by the Seller or an affiliate of the
Seller specified in the related Prospectus Supplement, the Certificates will be
available for purchase in minimum denominations of $1,000 and integral multiples
of $1,000 in excess thereof in book-entry form only. The Seller has been
informed by DTC that DTC's nominee will be Cede, unless another nominee is
specified in the related Prospectus Supplement. Accordingly, such nominee is
expected to be the holder of record of the Certificates of any series that are
not purchased by the Seller or an affiliate of the Seller. Unless and until
Definitive Certificates are issued under the limited circumstances described
herein or in the related Prospectus Supplement, no Certificateholder (other than
the Seller or an affiliate of the Seller) will be entitled to receive a physical
certificate representing a Certificate. All references herein and in the related
Prospectus Supplement to actions by Certificateholders (other than the Seller or
an affiliate of the Seller) refer to actions taken by DTC upon instructions from
the Participants and all references herein and in the related Prospectus
Supplement to distributions, notices, reports and statements to
Certificateholders (other than the Seller or an affiliate of the Seller) refer
to distributions, notices, reports and statements to DTC or its nominee, as the
case may be, as the registered holder of the Certificates, for distribution to
Certificateholders in accordance with DTC's procedures with respect thereto. See
"Certain Information Regarding the Securities--Book-Entry Registration" and
"--Definitive Securities." Unless otherwise specified in the related Prospectus
Supplement, Certificates of a given series owned by the Seller or its affiliates
will be entitled to equal and proportionate benefits under the applicable Trust
Agreement, except that, assuming that all Certificates of a given series are not
all owned by the Seller and its affiliates, the Certificates owned by the Seller
and its affiliates will be deemed not to be outstanding for the purpose of
determining whether the requisite percentage of Certificateholders has given any
request, demand, authorization, direction, notice, consent or other action under
the Related Documents (other than the commencement by the related Trust of a
voluntary proceeding in bankruptcy as described under "Description of the
Transfer and Servicing Agreements--Insolvency Event").
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PRINCIPAL AND INTEREST IN RESPECT OF THE CERTIFICATES
The timing and priority of distributions, seniority, allocations of
losses, interest at a per annum interest rate (the "Pass-Through Rate") and
amount of or method of determining distributions with respect to principal and
interest of each class of Certificates of a given series will be described in
the related Prospectus Supplement. Distributions of interest on such
Certificates will be made on each Distribution Date and will be made prior to
distributions with respect to principal of such Certificates. Each class of
Certificates may have a different Pass-Through Rate, which may be a fixed,
variable or adjustable Pass-Through Rate or any combination of the foregoing.
The related Prospectus Supplement will specify the Pass-Through Rate for each
class of Certificates of a given series or the method for determining such
Pass-Through Rate. See also "Certain Information Regarding the Securities--Fixed
Rate Securities" and "--Floating Rate Securities." Distributions in respect of
the Certificates of a given series may be subordinate to payments in respect of
the Notes of such series as more fully described in the related Prospectus
Supplement. Distributions in respect of interest on and principal of any class
of Certificates will be made on a pro rata basis among all the
Certificateholders of such class.
In the case of a series of Certificates which includes two or more
classes of Certificates, the timing, sequential order, priority of payment or
amount of distributions in respect of interest and principal, and any schedule
or formula or other provisions applicable to the determination thereof, of each
such class shall be as set forth in the related Prospectus Supplement.
See "Description of the Transfer and Servicing Agreements--Credit and
Cash Flow Enhancement--Reserve Account" for a description of the Reserve Account
and the distribution of amounts in excess of the Specified Reserve Account
Balance.
CERTAIN INFORMATION REGARDING THE SECURITIES
FIXED RATE SECURITIES
Each class of Securities may bear interest at a fixed rate per annum
("Fixed Rate Securities") or at a variable or adjustable rate per annum
("Floating Rate Securities"), as more fully described below and in the
applicable Prospectus Supplement. Each class of Fixed Rate Securities will bear
interest at the applicable per annum Interest Rate or Pass-Through Rate, as the
case may be, specified in the applicable Prospectus Supplement. Interest on each
class of Fixed Rate Securities will be computed on the basis of a 360-day year
of twelve 30-day months. See "Description of the Notes--Principal of and
Interest on the Notes" and "Description of the Certificates--Principal and
Interest in Respect of the Certificates."
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FLOATING RATE SECURITIES
Each class of Floating Rate Securities will bear interest for each
applicable Interest Reset Period (as such term is defined in the related
Prospectus Supplement with respect to a class of Floating Rate Securities,
"Interest Reset Period") at a rate per annum determined by reference to an
interest rate basis (the "Base Rate"), plus or minus the Spread, if any, or
multiplied by the Spread Multiplier, if any, in each case as specified in the
related Prospectus Supplement. The "Spread" is the number of basis points (one
basis point equals one one-hundredth of a percentage point) that may be
specified in the applicable Prospectus Supplement as being applicable to such
class, and the "Spread Multiplier" is the percentage that may be specified in
the applicable Prospectus Supplement as being applicable to such class.
The applicable Prospectus Supplement will designate a Base Rate for a
given Floating Rate Security based on the London interbank offered rate
("LIBOR"), commercial paper rates, Federal funds rates, U.S. Government treasury
securities rates, negotiable certificates of deposit rates or another rate or
rates as set forth in such Prospectus Supplement.
As specified in the applicable Prospectus Supplement, Floating Rate
Securities of a given class may also have either or both of the following (in
each case expressed as a rate per annum): (a) a maximum limitation, or ceiling,
on the rate at which interest may accrue during any interest period and (b) a
minimum limitation, or floor, on the rate at which interest may accrue during
any interest period. In addition to any maximum interest rate that may be
applicable to any class of Floating Rate Securities, the interest rate
applicable to any class of Floating Rate Securities will in no event be higher
than the maximum rate permitted by applicable law, as the same may be modified
by United States law of general application.
Each Trust with respect to which a class of Floating Rate Securities
will be issued will appoint, and enter into agreements with, a calculation agent
(each, a "Calculation Agent") to calculate interest rates on each such class of
Floating Rate Securities issued with respect thereto. The applicable Prospectus
Supplement will set forth the identity of the Calculation Agent for each such
class of Floating Rate Securities of a given series, which may be the
Administrator, the Eligible Lender Trustee or the Indenture Trustee with respect
to such series. All determinations of interest by the Calculation Agent shall,
in the absence of manifest error, be conclusive for all purposes and binding on
the holders of Floating Rate Securities of a given class. Unless otherwise
specified in the applicable Prospectus Supplement, all percentages resulting
from any calculation of the rate of interest on a Floating Rate Security will be
rounded, if necessary, to the nearest 1/100,000 of 1% (.0000001), with five
one-millionths of a percentage point rounded upward.
BOOK-ENTRY REGISTRATION
Persons acquiring beneficial ownership interests in the Notes may hold
their interests through DTC in the United States or Cedelbank ("Cedel") or The
Euroclear System ("Euroclear") in Europe and persons acquiring beneficial
ownership interests in the Certificates may hold their interests through DTC.
Securities will be registered in the name of Cede as nominee for DTC.
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Cedel and Euroclear will hold omnibus positions with respect to the Notes on
behalf of Cedel Participants and the Euroclear Participants, respectively,
through customers' securities accounts in Cedel's and Euroclear's name on the
books of their respective depositaries (collectively, the "Depositories") which
in turn will hold such positions in customers' securities accounts in the
Depositories' names on the books of DTC.
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the UCC and a "clearing agency" registered
pursuant to Section 17A of the Exchange Act. DTC was created to hold securities
for its Participants and to facilitate the clearance and settlement of
securities transactions between Participants through electronic book-entries,
thereby eliminating the need for physical movement of certificates.
"Participants" include securities brokers and dealers, banks, trust companies
and clearing corporations. Indirect access to the DTC system also is available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
Noteholders and Certificateholders (collectively, "Securityholders")
that are not Participants or Indirect Participants but desire to purchase, sell
or otherwise transfer ownership of, or other interests in, Securities held
through DTC may do so only through Participants and Indirect Participants. In
addition, Securityholders will receive all distributions of principal and
interest from the related Indenture Trustee or the related Eligible Lender
Trustee, as applicable (the "Applicable Trustee"), through Participants and
Indirect Participants. Under a book-entry format, Securityholders may experience
some delay in their receipt of payments, since such payments will be forwarded
by the Applicable Trustee to DTC's nominee. DTC will forward such payments to
its Participants, which thereafter will forward them to Indirect Participants or
Securityholders. Except for the Seller or an affiliate of the Seller with
respect to any series of Securities, it is anticipated that the only
"Securityholder," "Certificateholder" and "Noteholder" will be DTC's nominee.
Securityholders will not be recognized by the Applicable Trustee as Noteholders
or Certificateholders, as such terms are used in each Indenture and each Trust
Agreement, respectively, and Securityholders will be permitted to exercise the
rights of Securityholders only indirectly through DTC and its Participants.
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.
Because of time-zone differences, credits of securities received in
Cedel or Euroclear as a result of a transaction with a DTC Participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear Participants or Cedel Participants on such business day. Cash received
in Cedel or Euroclear as a result of sales of securities by or through a Cedel
Participant or a Euroclear Participant to a Participant will be received with
value on the DTC settlement date but will be
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available in the relevant Cedel or Euroclear cash account only as of the
business day following settlement in DTC.
Cross-market transfers between persons holding Notes directly or
indirectly through DTC, on the one hand, and directly or indirectly through
Cedel Participants or Euroclear Participants, on the other, will be effected in
DTC in accordance with DTC Rules on behalf of the relevant European
international clearing system by its Depository; 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 securities in DTC, and making or receiving payment in accordance
with normal procedures for same-day funds settlement applicable to DTC. Cedel
Participants and Euroclear Participants may not deliver instructions directly to
the Depositaries.
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
of Securities among Participants on whose behalf it acts with respect to the
Securities and to receive and transmit distributions of principal of, and
interest on, the Securities. Participants and Indirect Participants with which
Securityholders have accounts with respect to the Securities similarly are
required to make book-entry transfers and receive and transmit such payments on
behalf of their respective Securityholders. Accordingly, although
Securityholders will not possess Securities, the Rules provide a mechanism by
which Participants will receive payments and will be able to transfer their
interests.
Because DTC can only act on behalf of Participants, which in turn act
on behalf of Indirect Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or to otherwise act with respect to such
Securities, may be limited due to the lack of a physical certificate for such
Securities.
Management of DTC is aware that some computer applications, systems and
the like for processing data ("Systems") that are dependent upon calendar dates,
including dates before, on, and after January 1, 2000, may encounter "Year 2000
problems" DTC has informed Participants and Indirect Participants and other
members of the financial community (the "Industry") that it has developed and is
implementing a program so that its Systems, as the same relate to the timely
payment of distributions (including principal and interest payments) to
securityholders, book-entry deliveries, and settlement of trades within DTC
("Depository Services"), continue to function appropriately. This program
includes a technical assessment and a remediation plan, each of which is
complete. Additionally, DTC's plan includes a testing phase, which is expected
to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also
dependent upon other parties, including, but not limited to, issuers and their
agents, as well as DTC's Participants and Indirect Participants, third party
vendors from whom DTC licenses software and hardware, and
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third party vendors on whom DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed the Industry that it is contacting (and will
continue to contact) third party vendors from whom DTC acquires services to: (i)
impress upon them the importance of such services being Year 2000 compliant; and
(ii) determine the extent of their efforts for Year 2000 remediation (and, as
appropriate, testing) of their services. In addition, DTC is in the process of
developing such contingency plans as it deems appropriate.
Appropriate to DTC, the information in the preceding two paragraphs
with respect to DTC has been provided to the Industry for informational purposes
only and is not intended to serve as a representation, warranty, or contract
modification of any kind.
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its participating organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book-entry changes in
accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Cedel in any of 32
currencies, including United States dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depository, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel Participants are recognized financial
institutions around the world including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations and may include any underwriters, agents or dealers with respect
to the Notes offered hereby. Indirect access to Cedel is also available to
others, such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Cedel Participant, either directly
or indirectly.
The Euroclear System was created in 1968 to hold securities for
participants of the Euroclear System ("Euroclear Participants") and to clear and
settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need for
physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Transactions may be settled in any of 32
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 Systems, S.C., a Belgian cooperative corporation (the "Cooperative").
All operations are conducted by the Euroclear Operator, and all Euroclear
securities clearance accounts and Euroclear cash accounts are accounts with the
Euroclear Operator, not the Cooperative. The Cooperative establishes policy for
the Euroclear System on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries and may include any underwriters,
agents or dealers with respect to the Notes offered
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hereby. Indirect access to the Euroclear System is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawals of
securities and cash from the Euroclear System and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific certificates
to specific securities clearance accounts. The Euroclear Operator acts under the
Terms and Conditions only on behalf of Euroclear Participants and has no record
of or relationship with persons holding through Euroclear Participants.
Distributions with respect to Notes held through Cedel or Euroclear
will be credited to the cash accounts of Cedel Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by its Depository. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
Cedel or the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a beneficial holder of Notes under the Indenture on
behalf of a Cedel Participant or Euroclear Participant only in accordance with
its relevant rules and procedures and subject to its Depository's ability to
effect such actions on its behalf through DTC.
DTC has advised the Administrator that it will take any action
permitted to be taken by a Securityholder under the related Indenture or the
related Trust Agreement, as the case may be, only at the direction of one or
more Participants to whose accounts with DTC the Securities are credited. DTC
may take conflicting actions with respect to other undivided interests to the
extent that such actions are taken on behalf of Participants whose holdings
include such undivided interests.
Although DTC, Cedel and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of interests in the Notes among
Participants of DTC, Cedel and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
NONE OF THE TRUST, THE SELLER, THE MASTER SERVICER, ANY SUB-SERVICERS,
THE ADMINISTRATOR, THE ELIGIBLE LENDER TRUSTEE, THE INDENTURE TRUSTEE NOR THE
UNDERWRITERS WILL HAVE ANY RESPONSIBILITY OR OBLIGATION TO ANY PARTICIPANTS,
CEDEL PARTICIPANTS OR EUROCLEAR PARTICIPANTS OR THE PERSONS FOR WHOM THEY ACT AS
NOMINEES WITH RESPECT TO (1) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC,
CEDEL
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OR EUROCLEAR OR ANY PARTICIPANT, (2) THE PAYMENT BY DTC, CEDEL OR EUROCLEAR OR
ANY PARTICIPANT OF ANY AMOUNT DUE TO ANY BENEFICIAL OWNER IN RESPECT OF THE
PRINCIPAL AMOUNT OF OR INTEREST ON THE SECURITIES, (3) THE DELIVERY BY ANY
PARTICIPANT, CEDEL PARTICIPANT OR EUROCLEAR PARTICIPANT OF ANY NOTICE TO ANY
BENEFICIAL OWNER WHICH IS REQUIRED OR PERMITTED UNDER THE TERMS OF THE INDENTURE
OR THE TRUST AGREEMENT TO BE GIVEN TO SECURITYHOLDERS OR (4) ANY OTHER ACTION
TAKEN BY DTC AS THE SECURITYHOLDER.
DEFINITIVE SECURITIES
Except with respect to the Certificates of a given series that may be
purchased by the Seller or an affiliate of the Seller, the Notes and the
Certificates of a given series will be issued in fully registered, certificated
form ("Definitive Notes" and "Definitive Certificates", respectively, and
collectively referred to herein as "Definitive Securities") to Noteholders or
Certificateholders or their respective nominees, rather than to DTC or its
nominee, only if:
(a) the related Administrator advises the Applicable Trustee in
writing that DTC is no longer willing or able to discharge
properly its responsibilities as depository with respect to
the Securities and the Administrator is unable to locate a
qualified successor,
(b) the Administrator, at its option, elects to terminate the
book-entry system through DTC, or
(c) after the occurrence of an Event of Default or a Master
Servicer Default, Securityholders representing at least a
majority of the outstanding principal amount of the Notes or
the Certificates, as the case may be, of such series advise
the Applicable Trustee through DTC in writing that the
continuation of a book-entry system through DTC (or a
successor thereto) with respect to such Notes or Certificates
is no longer in the best interest of the holders of such
Securities.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Applicable Trustee will be required to notify all applicable
Securityholders of a given series through Participants of the availability of
Definitive Securities. Upon surrender by DTC of the Definitive Securities
representing the corresponding Securities and receipt of instructions for
re-registration, the Applicable Trustee will reissue such Securities as
Definitive Securities to such Securityholders.
Distributions of principal of, and interest on, such Definitive
Securities will thereafter be made by the Applicable Trustee in accordance with
the procedures set forth in the related Indenture or the related Trust
Agreement, as the case may be, directly to holders of Definitive Securities in
whose names the Definitive Securities were registered at the close of business
on the applicable Record Date which will be the business day preceding each
Distribution Date, unless otherwise specified in the related Prospectus
Supplement (the "Record Date") specified for
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such Securities in the related Prospectus Supplement. Such distributions will be
made by check mailed to the address of such holder as it appears on the register
maintained by the Applicable Trustee. The final payment on any such Definitive
Security, however, will be made only upon presentation and surrender of such
Definitive Security at the office or agency specified in the notice of final
distribution to applicable Securityholders.
Definitive Securities will be transferable and exchangeable at the
offices of the Applicable Trustee or of a registrar named in a notice delivered
to holders of Definitive Securities. No service charge will be imposed for any
registration of transfer or exchange, but the Applicable Trustee may require
payment of a sum sufficient to cover any tax or other governmental charge
imposed in connection therewith.
LIST OF SECURITYHOLDERS
Three or more holders of Notes or one or more holders of Notes
evidencing not less than 25% of the aggregate outstanding principal balance of
such Notes may, by written request to the related Indenture Trustee, obtain
access to the list of all Noteholders maintained by such Indenture Trustee for
the purpose of communicating with other Noteholders with respect to their rights
under the related Indenture or such Notes. Such Indenture Trustee may elect not
to afford the requesting Noteholders access to the list of Noteholders if it
agrees to mail the desired communication or proxy, on behalf and at the expense
of the requesting Noteholders, to all Noteholders of such series.
Three or more Certificateholders of such series or one or more holders
of such Certificates evidencing not less than 25% of the Certificate Balance of
such Certificates may, by written request to the related Eligible Lender
Trustee, obtain access to the list of all Certificateholders for the purpose of
communicating with other Certificateholders with respect to their rights under
the related Trust Agreement or under such Certificates.
REPORTS TO SECURITYHOLDERS
With respect to each series of Securities, on each Distribution Date,
the Applicable Trustee will provide to Securityholders of record as of the
related Record Date a statement setting forth substantially the same information
as is required to be provided on the periodic report provided to the related
Indenture Trustee and the related Trust described under "Description of the
Transfer and Servicing Agreements--Statements to Indenture Trustee and Trust".
Such statements will be filed with the Commission during the period required by
Rule 15d-1 under the Exchange Act and will not be filed with the Commission
thereafter. The statements provided to Securityholders will not constitute
financial statements prepared in accordance with generally accepted accounting
principles.
Unless and until Definitive Notes or Definitive Certificates are
issued, quarterly and annual unaudited reports containing information concerning
the Student Loans will be prepared by Key Bank USA, National Association and
sent on behalf of the related Trust only to Cede, as nominee
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of DTC and registered holder of the Notes and the Certificates, but will not be
sent to any beneficial holder of the Securities.
Within the prescribed period of time for tax reporting purposes after
the end of each calendar year during the term of each Trust, the Applicable
Trustee will mail to each person who at any time during such calendar year was a
Securityholder with respect to such Trust and received any payment thereon, a
statement containing certain information for the purposes of such
Securityholder's preparation of federal income tax returns. See "Income Tax
Consequences."
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
GENERAL
The following is a summary of the material terms of each Sale and
Servicing Agreement (each a "Sale and Servicing Agreement"), pursuant to which
the related Eligible Lender Trustee on behalf of a Trust will purchase Student
Loans from the Seller and the Master Servicer will (or will cause the related
Sub-Servicers to) service the same; each Administration Agreement, pursuant to
which the Administrator will undertake certain administrative duties with
respect to a Trust and the Student Loans; and each Trust Agreement, pursuant to
which a Trust will be created and the related Certificates will be issued
(collectively, the "Transfer and Servicing Agreements"). Forms of each of the
Transfer and Servicing Agreements have been filed as exhibits to the
Registration Statement of which this Prospectus is a part. However, this summary
does not purport to be complete and is qualified in its entirety by reference to
all of the provisions of the Transfer and Servicing Agreements.
In addition, and if so provided in the related Prospectus Supplement,
the Master Servicer may directly assume servicing responsibilities for some or
all of a pool of Financed Student Loans without a sub-servicer, or the related
Trust may contract directly with one or more Sub-Servicers, pursuant to the
related Sale and Servicing Agreement, to perform all of the requisite servicing
responsibilities with respect to the related pool of Financed Student Loans
without the appointment of a master servicer, on the terms and conditions set
forth herein and therein.
Notwithstanding the foregoing, and if so provided in the related
Prospectus Supplement, KBUSA may also choose not to act as Master Servicer with
respect to a Trust. In such instance, the related Sub-Servicer (or
Sub-Servicers) will enter into the Sale and Servicing Agreement, as servicer (or
servicers), with the related Trust directly and will undertake to perform all of
the obligations and responsibilities of the Master Servicer set forth herein and
in the related Prospectus Supplement with respect to the Student Loans it is
responsible for servicing on the terms and conditions set forth in the related
Prospectus Supplement and such Sale and Servicing Agreement.
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SALE OF STUDENT LOANS; REPRESENTATIONS AND WARRANTIES
On or prior to the Closing Date specified with respect to any given
Trust in the related Prospectus Supplement (the "Closing Date"), the Seller will
sell and assign to the related Eligible Lender Trustee on behalf of such Trust,
without recourse, except as provided in the Sale and Servicing Agreement, its
entire interest in the Student Loans, all collections received and to be
received with respect thereto for the period on and after the Cutoff Date and
all the Assigned Rights pursuant to the Sale and Servicing Agreement. Each
Student Loan will be identified in a schedule appearing as an exhibit to such
Sale and Servicing Agreement. Each Eligible Lender Trustee will, concurrently
with such sale and assignment, execute, authenticate and deliver the related
Certificates and Notes. The net proceeds received from the sale of the related
Notes and Certificates will be applied to the purchase of the Student Loans.
In each Sale and Servicing Agreement, the Seller will make certain
representations and warranties with respect to the Student Loans to a Trust for
the benefit of the Certificateholders and the Noteholders of a given series,
including, among other things, that:
- each Student Loan, on the date on which it is transferred to
such Trust, is free and clear of all security interests,
liens, charges and encumbrances and no offsets, defenses or
counterclaims with respect thereto have been asserted or
threatened;
- the information provided with respect to the Student Loans is
true and correct as of the Cutoff Date; and
- each Student Loan, at the time it was originated, complied
and, at the Closing Date, complies in all material respects
with applicable federal and state laws (including, without
limitation, the Higher Education Act) and applicable
restrictions imposed by the Programs or any Guarantee
Agreement.
Following the discovery by or notice to the Seller of a breach of any
representation or warranty with respect to any Student Loan that materially and
adversely affects the interests of the related Certificateholders or the
Noteholders in such Student Loan (it being understood that any such breach that
does not affect any Guarantor's obligation to guarantee payment of such Student
Loan will not be considered to have such a material adverse effect), the Seller
will, unless such breach is cured within 60 days, repurchase such Student Loan
from the related Eligible Lender Trustee, as of the first day following the end
of such 60-day period that is the last day of a Collection Period (as such term
is defined in the related Prospectus Supplement, the "Collection Period") at a
price equal to the unpaid principal balance owed by the applicable borrower plus
accrued interest thereon to the day of repurchase (the "Purchase Amount"). In
addition, the Seller will reimburse the related Trust with respect to a Federal
Loan for any accrued interest amounts that a Federal Guarantor refuses to pay
pursuant to its Guarantee Agreement due to, or for any Interest Subsidy Payments
and Special Allowance Payments that are lost or that must be repaid to the
Department as a result of, a breach of any such representation or warranty by
the Seller. The repurchase and reimbursement obligations of the Seller will
constitute the sole remedy available to or on behalf of the related Trust, the
Certificateholders or the Noteholders for any such
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uncured breach. The Seller's repurchase and reimbursement obligations are
contractual obligations pursuant to the Sale and Servicing Agreement that may be
enforced against the Seller, but the breach of which will not constitute an
Event of Default.
To assure uniform quality in servicing and to reduce administrative
costs, the Master Servicer will appoint each Sub-Servicer the custodian of the
promissory notes representing the Student Loans which such Sub-Servicer is
servicing and any other related documents on behalf of the Master Servicer with
respect to each Trust. The Seller's, the Master Servicer's and the
Sub-Servicers' records and computer systems will reflect the sale and assignment
by the Seller of the Student Loans to the related Eligible Lender Trustee on
behalf of the related Trust, and UCC financing statements reflecting such sale
and assignment will be filed.
ADDITIONAL FUNDINGS
In the case of a Trust having a Pre-Funding Account or an Escrow
Account, such Trust will use funds on deposit in such account from time to time
during the related Funding Period or Revolving Period, respectively, (x) to make
interest payments to Noteholders and Certificateholders in lieu of collections
of interest on certain of the Student Loans to the extent such interest is not
paid currently but is capitalized and added to the principal balance of such
Student Loans and (y) to fund the addition of Student Loans to the Trust under
the circumstances and having the characteristics described in the related
Prospectus Supplement ("Additional Fundings"). Such additional Student Loans may
be purchased by the Trust from the Seller or may be originated by the Trust, if
and to the extent specified in the related Prospectus Supplement.
There can be no assurance that substantially all of the amounts on
deposit in any Pre-Funding Account or Escrow Account will be expended during the
related Funding Period or Revolving Period, respectively. If the amount
initially deposited into a Pre-Funding Account or an Escrow Account for a series
has not been reduced to zero by the end of the related Funding Period or
Revolving Period, respectively, the amounts remaining on deposit therein will be
distributed to the related Securityholders in the amounts described in the
related Prospectus Supplement.
If and to the extent specified in the related Prospectus Supplement,
the related Trust may use distributions on the Student Loans, or may exchange
Student Loans with the Seller, in order to pay for Additional Fundings after any
Funding Period or Revolving Period.
ACCOUNTS
With respect to each Trust, the Administrator will establish and
maintain one or more accounts entitled the "Collection Account", the
"Pre-Funding Account", the "Escrow Account", the "Negative Carry Account" and
the "Reserve Account" (collectively, the "Trust Accounts"), in the name of the
Indenture Trustee on behalf of the Noteholders and the Certificateholders.
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For any series of Securities funds in the Trust Accounts will be
invested as provided in the related Sale and Servicing Agreement in Eligible
Investments. "Eligible Investments" are generally limited to short-term U.S.
government backed securities, certain highly rated commercial paper and money
market funds and other investments acceptable to the Rating Agencies as being
consistent with the rating of the Securities. Subject to certain conditions,
Eligible Investments may include securities or other obligations issued by the
Seller or its affiliates, or trusts originated by the Seller or its affiliates,
or shares of investment companies for which the Seller or its affiliates may
serve as the investment advisor. Eligible Investments are limited to obligations
or securities that mature not later than the business day immediately preceding
the next Distribution Date. Investment earnings on funds deposited in the Trust
Accounts, net of losses and investment expenses (collectively, "Investment
Earnings"), will be deposited in the Collection Account on each Distribution
Date and will be treated as collections of interest on the related Student
Loans.
The Trust Accounts will be maintained as Eligible Deposit Accounts.
"Eligible Deposit Account" means either (a) a segregated account with an
Eligible Institution or (b) a segregated trust account with the corporate trust
department of a depository institution organized under the laws of the United
States of America or any one of the states thereof or the District of Columbia
(or any domestic branch of a foreign bank), having corporate trust powers and
acting as trustee for funds deposited in such account, so long as any of the
securities of such depository institution have a credit rating from each Rating
Agency in one of its generic rating categories which signifies investment grade.
Any such accounts may be maintained with the Seller or any of its affiliates, if
such accounts meet the requirements described in clause (a) of the preceding
sentence. "Eligible Institution" means a depository institution (which may be,
without limitation, the Seller or an affiliate thereof, or the Indenture Trustee
or an affiliate thereof) organized under the laws of the United States of
America or any one of the states thereof or the District of Columbia (or any
domestic branch of a foreign bank), which has a long-term unsecured debt rating
acceptable and/or a short-term unsecured debt rating or certificate of deposit
rating acceptable to the Rating Agencies, and the deposits of which are insured
by the Federal Deposit Insurance Corporation (the "FDIC").
SERVICING PROCEDURES
Pursuant to each Sale and Servicing Agreement, the Master Servicer will
agree to service, and perform all other related tasks with respect to, all the
Student Loans acquired from time to time on behalf of each Trust. So long as no
claim is being made against a Guarantor for any Student Loan, the Master
Servicer will designate the related Sub-Servicer to hold as custodian on its
behalf and on behalf of the Trust, the notes evidencing, and other documents
relating to, that Student Loan. Pursuant to the related Sale and Servicing
Agreement, the Master Servicer is responsible for performing all services and
duties customary to the servicing of Student Loans (including all collection
practices), and to do so (or to cause the Sub-Servicers to do so) with
reasonable care and in compliance with, and to otherwise comply with, all
standards and procedures provided for in the Higher Education Act, the Guarantee
Agreements and all other applicable federal and state laws. Notwithstanding the
foregoing, the Master Servicer may designate one or more Sub-Servicers to
perform some or all of the requisite duties listed above; provided, however,
that irrespective of the performance or non-performance by a Sub-Servicer,
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the Master Servicer shall not be relieved of its responsibilities and
obligations under the Sale and Servicing Agreement.
Without limiting the foregoing, the duties of the Master Servicer (any
or all of which may be delegated by the Master Servicer to a Sub-Servicer) with
respect to each Trust under the related Sale and Servicing Agreement will
include, but not be limited to, the following: collecting and depositing into
the Collection Account (or in the event that daily deposits are not required,
paying to the Administrator) all payments, including claiming and obtaining any
Guarantee Payments, but excluding such tasks with respect to any Interest
Subsidy Payments and Special Allowance Payments with respect to the Student
Loans (as to which the Administrator and the Eligible Lender Trustee will
perform, see "--Administrator" below, responding to inquiries from borrowers
under the Student Loans, investigating delinquencies and sending out statements,
payment coupons and tax reporting information to borrowers. Notwithstanding the
foregoing, if any of the foregoing activities requires any consents, approvals
or licenses under the Higher Education Act or otherwise, the Master Servicer
shall designate one or more Sub-Servicers that possess such required consents,
approvals and licenses to perform some or all of the requisite duties listed
above; provided, however, that irrespective of the performance or
non-performance by such Sub-Servicer, the Master Servicer shall be responsible
for any failure of a Sub-Servicer to perform such activities. In addition, the
Master Servicer will (or will cause each Sub-Servicer to) keep ongoing records
with respect to such Student Loans and collections thereon and will furnish
quarterly and annual statements with respect to such information to the
Administrator, in accordance with the Master Servicer's or such Sub-Servicer's
customary servicing practices, as applicable, with respect to Student Loans and
as otherwise required in the related Sale and Servicing Agreement.
PAYMENTS ON STUDENT LOANS
With respect to each Trust, except as provided below, the Master
Servicer will (or will cause each Sub-Servicer to) deposit all payments on
Student Loans (from whatever source), and all proceeds of Student Loans
collected by it during each Collection Period into the Collection Account within
two business days of receipt thereof. Except as provided below, the Eligible
Lender Trustee will deposit all Interest Subsidy Payments and all Special
Allowance Payments with respect to the Student Loans received by it during each
Collection Period into the Collection Account within two business days of
receipt thereof.
However, in the event that KBUSA satisfies certain requirements for
quarterly remittances and the Rating Agencies affirm their ratings of the Notes
and the Certificates of each series at the initial level, then so long as KBUSA
is the Administrator and provided that (x) there exists no Administrator Default
and (y) each other condition to making quarterly deposits as may be specified by
the Rating Agencies is satisfied, the Eligible Lender Trustee and the Master
Servicer will (and the Master Servicer will cause each Sub-Servicer to) pay all
the amounts referred to in the preceding paragraph that would otherwise be
deposited into the Collection Account to the Administrator, and the
Administrator will not be required to deposit such amounts into the Collection
Account until on or before the business day immediately preceding each Monthly
Servicing Payment Date (as such term is defined in the related Prospectus
Supplement, the
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"Monthly Servicing Payment Date") (to the extent of the Master Servicing Fee
payable on such date) and on or before the business day immediately preceding
each Distribution Date (to the extent of the remainder of such amounts). In such
event, the Administrator will deposit the aggregate Purchase Amount of each
Student Loans repurchased by the Seller and purchased by the Master Servicer (or
a Sub-Servicer) into the Collection Account on or before the business day
preceding each Distribution Date. Pending deposit into the Collection Account,
collections may be invested by the Administrator at its own risk and for its own
benefit, and will not be segregated from funds of the Administrator.
MASTER SERVICER COVENANTS
With respect to each Trust, the Master Servicer will covenant in the
related Sale and Servicing Agreement that:
(a) it will (or will cause each Sub-Servicer to) duly satisfy all
obligations on its part to be fulfilled under or in connection
with the Student Loans, maintain in effect all qualifications
required in order to service the Student Loans and comply in
all material respects with all requirements of law in
connection with servicing the Student Loans, the failure to
comply with which would have a materially adverse effect on
the related Certificateholders or Noteholders;
(b) it will not permit (nor will it allow any Sub-Servicer to
permit) any rescission or cancellation of a Student Loan
except as ordered by a court of competent jurisdiction or
other government authority or as otherwise consented to by the
related Eligible Lender Trustee and the related Indenture
Trustee;
(c) it will do nothing to (nor will it permit any Sub-Servicer to)
impair the rights of the related Certificateholders and the
related Noteholders in the Student Loans; and
(d) it will not (nor will it permit any Sub-Servicer to)
reschedule, revise, defer or otherwise compromise with respect
to payments due on any Student Loan except pursuant to any
applicable deferral or forbearance periods or otherwise in
accordance with its guidelines for servicing student loans in
general and those of the Seller in particular and any
applicable Program requirements.
If specified in the related Prospectus Supplement, certain incentive
programs currently or hereafter made available by the Seller to borrowers may
also be made available by the Master Servicer (or a Sub-Servicer) to borrowers
with Financed Student Loans and if an incentive program is not in existence as
of the date of the related Prospectus Supplement or not described in such
Prospectus Supplement, then any such incentive program that effectively reduces
borrower payments on Financed Student Loans and, with respect to Financed
Federal Loans, is not required by the Higher Education Act, will be applicable
to the Financed Student Loans only if and to the extent that the Master Servicer
(or a Sub-Servicer) receives payment on behalf of the Trust from the
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Seller in an amount sufficient to offset such effective yield reductions. See
"The Student Loan Financing Business--Incentive Programs" herein.
Under the terms of the related Sale and Servicing Agreement, unless
otherwise specified in the related Prospectus Supplement, if the Seller or the
Master Servicer discovers, or receives written notice, that any covenant of
Master Servicer set forth above has not been complied with by the Master
Servicer in all material respects and such noncompliance has not been cured
within 60 days thereafter and has a materially adverse effect on the interest of
the related Certificateholders or Noteholders in any Student Loan (it being
understood that any such breach that does not affect any Guarantor's obligation
to guarantee payment of such Student Loan will not be considered to have such a
material adverse effect), unless such breach is cured, the Master Servicer will
purchase such Student Loan as of the first day following the end of such 60-day
period that is the last day of a Collection Period. In that event, the Master
Servicer will be obligated to deposit into the Collection Account an amount
equal to the Purchase Amount of such Student Loan and the related Trust's
interest in any such purchased Student Loan will be automatically assigned to
the Master Servicer. In addition, the Master Servicer will reimburse the related
Trust with respect to any Federal Loan for any accrued interest amounts that a
Federal Guarantor refuses to pay pursuant to its Guarantee Agreement due to, or
for any Interest Subsidy Payments and Special Allowance Payments that are lost
or that must be repaid to the Department as a result of, a breach of any such
covenant of the Master Servicer.
MASTER SERVICING COMPENSATION
With respect to any Trust, the Master Servicer will be entitled to
receive, a servicing fee monthly in an amount in the aggregate equal to a
specified amount per annum of the Pool Balance as of the last day of the
preceding calendar month as set forth in the related Prospectus Supplement and
certain one-time fixed fees for each Student Loan, together with other
administrative fees, late fees and similar charges specified in the related
Prospectus Supplement as compensation for performing the functions as servicers
for the related Trust described above (the "Master Servicing Fee"). The Master
Servicing Fee (together with any portion of the Master Servicing Fee that
remains unpaid from prior Distribution Dates) will be paid as specified in the
applicable Prospectus Supplement.
The Master Servicing Fee will compensate the Master Servicer for
performing (or causing the Sub-Servicers to perform) the functions of third
party servicers of student loans as agents for their beneficial owner, including
collecting and posting all payments, responding to inquiries of borrowers on the
Student Loans, investigating delinquencies, pursuing, filing and collecting any
Guarantee Payments, accounting for collections and furnishing monthly and annual
statements to the Administrator. The Master Servicing Fee also will reimburse
the Master Servicer for certain taxes, accounting fees, outside auditor fees,
data processing costs and other costs incurred by the Master Servicer or the
Sub-Servicers in connection with administering the Student Loans. The monthly
fees of the Sub-Servicers will be paid solely by the Master Servicer pursuant to
the terms of the applicable Sub-Servicing Agreement.
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In the event of (x) any sale of the Student Loans on behalf of the
Trust to any person (other than the Seller, the Master Servicer, the
Administrator, or the Sub-Servicers) in which the purchaser elects to deconvert
the Student Loans and not retain the applicable Sub-Servicer as the servicer of
such Student Loans, or (y) any termination of the applicable Sub-Servicer of the
Student Loans, except for any termination for cause or as a result of any
unremedied defaults by the applicable Sub-Servicer, the Trust shall pay to the
Master Servicer, as a part of the Master Servicing Fee, a deconversion fee per
loan based on the status of the loan at the time of deconversion, in the amount
set forth in the related Prospectus Supplement, but only to the extent that the
Master Servicer is so obligated to the applicable Sub-Servicer.
DISTRIBUTIONS
With respect to each series of Securities, beginning on the
Distribution Date specified in the related Prospectus Supplement, distributions
of principal and interest on each class of such Securities entitled thereto will
be made by the applicable Trustee to the Noteholders and the Certificateholders
of such series. The timing, calculation, allocation, order, source, priorities
of and requirements for all payments to each class of Noteholders and all
distributions to each class of Certificateholders of such series will be set
forth in the related Prospectus Supplement.
With respect to each Trust, collections on the related Student Loans
will be distributed from the Collection Account on each Distribution Date to
Noteholders and Certificateholders to the extent provided in the related
Prospectus Supplement. Credit and cash flow enhancement, such as a Reserve
Account, will be available to cover any shortfalls in the amount available for
distribution on such date to the extent specified in the related Prospectus
Supplement. As more fully described in the related Prospectus Supplement, and
unless otherwise specified therein, distributions in respect of principal and/or
interest of a class of Securities of a given series will be subordinate to
distributions in respect of interest on one or more other classes of such
series, and distributions in respect of the Certificates of such series may be
subordinate to payments in respect of the Notes of such series.
CREDIT AND CASH FLOW ENHANCEMENT
General. The amounts and types of credit enhancement arrangements and
the provider thereof, if applicable, with respect to each class of Securities of
a given series, if any, will be set forth in the related Prospectus Supplement.
If and to the extent provided in the related Prospectus Supplement, credit
enhancement may be in the form of subordination of one or more classes of
Securities, Reserve Accounts, over-collateralization, letters of credit, credit
or liquidity facilities, surety bonds, guaranteed investment contracts,
repurchase obligations, interest rate swaps, interest rate caps, interest rate
floors, currency swaps, other agreements with respect to third party payments or
other support, cash deposits or such other arrangements as may be described in
the related Prospectus Supplement or any combination of two or more of the
foregoing. If specified in the applicable Prospectus Supplement, credit
enhancement for a class of Securities may cover one or more other classes of
Securities of the same series, and credit enhancement for a series of Securities
may cover one or more other series of Securities.
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The presence of a Reserve Account and other forms of credit enhancement
for the benefit of any class or series of Securities is intended to enhance the
likelihood of receipt by the Securityholders of such class or series of the full
amount of principal and interest due thereon and to decrease the likelihood that
such Securityholders will experience losses. The credit enhancement for a class
or series of Securities generally will not provide protection against all risks
of loss and will not guarantee repayment of the entire principal balance and
interest thereon. If losses occur which exceed the amount covered by any credit
enhancement or which are not covered by any credit enhancement, Securityholders
of any class or series will bear their allocable share of deficiencies, as
described in the related Prospectus Supplement. In addition, if a form of credit
enhancement covers more than one series of Securities, Securityholders of any
such series will be subject to the risk that such credit enhancement will be
exhausted by the claims of Securityholders of other series.
Reserve Account. If so provided in the related Prospectus Supplement,
pursuant to the related Sale and Servicing Agreement, the Seller will establish
for a series or class of Securities a Reserve Account, as specified in the
related Prospectus Supplement, which will be maintained in the name of the
applicable Indenture Trustee. Unless otherwise provided in the related
Prospectus Supplement, the Reserve Account will be funded by an initial deposit
by the Seller on the Closing Date in the amount set forth in the related
Prospectus Supplement. As further described in the related Prospectus
Supplement, the amount on deposit in the Reserve Account will be increased on
each Distribution Date thereafter up to the Specified Reserve Account Balance by
the deposit therein of the amount of collections on the related Student Loans
remaining on each such Distribution Date after the payment of all other required
payments and distributions on such date. Amounts in the Reserve Account will be
available to cover shortfalls in amounts due to the holders of those classes of
Securities specified in the related Prospectus Supplement in the manner and
under the circumstances specified therein. The related Prospectus Supplement
will also specify to whom and the manner and circumstances under which amounts
on deposit in the Reserve Account (after giving effect to all other required
distributions to be made by the applicable Trust) in excess of the Specified
Reserve Account Balance will be distributed.
The Reserve Account is intended to enhance the likelihood of timely
receipt by the holders of Notes and the holders of Certificates of the full
amount of interest due them and to decrease the likelihood that such holders
will experience losses. In certain circumstances, however, the Reserve Account
could be depleted.
STATEMENTS TO INDENTURE TRUSTEE AND TRUST
Prior to each Distribution Date with respect to each series of
Securities, the Administrator (based on the periodic statements and other
information provided to it by the Master Servicer or the Sub-Servicers) will
provide to the Indenture Trustee and the Trust, as of the close of business on
the last day of the preceding Collection Period, a statement which will include
the following information (and any other information so specified in the related
Prospectus Supplement) with respect to such Distribution Date or the preceding
Collection Period as to the Notes and the Certificates of such series, to the
extent applicable:
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1. the amount of the distribution allocable to principal
of each class of Securities;
2. the amount of the distribution allocable to interest
on each class of Securities;
3. the amount of the distribution, if any, allocable to
any Index Shortfall Carryover together with the outstanding amount, if
any, thereof after giving effect to any such distribution;
4. the Pool Balance as of the close of business on the
last day of the preceding Collection Period, after giving effect to
payments allocated to principal reported as described in clause (1.)
above;
5. the aggregate outstanding principal balance of each
class of Notes, the Certificate Balance and each Pool Factor as of such
Distribution Date, after giving effect to payments allocated to
principal reported under clause (1.) above;
6. the amount of the Master Servicing Fee and any Excess
Master Servicing Fee paid to the Master Servicer and the amount of the
Administration Fee paid to the Administrator with respect to such
Collection Period;
7. the Interest Rate or Pass-Through Rate applicable for
any class of Notes or Certificates of such series with variable or
adjustable rates;
8. the amount of the aggregate realized losses, if any,
for such Collection Period and the balance of Student Loans that are
delinquent in each delinquency period as of the end of such Collection
Period;
9. the Certificateholders' Index Carryover Shortfall,
the Noteholders' Index Carryover Shortfall, the Noteholders' Interest
Carryover Shortfall, the Noteholders' Principal Carryover Shortfall,
the Certificateholders' Interest Carryover Shortfall and the
Certificateholders' Principal Carryover Shortfall (each as defined in
the related Prospectus Supplement), if any, in each case as applicable
to each class of Securities, and the change in such amounts from the
preceding statement;
10. the aggregate Purchase Amounts for Student Loans, if
any, that were purchased in such Collection Period;
11. the balance of the Reserve Account (if any) on such
Distribution Date, after giving effect to changes therein on such
Distribution Date;
12. for Distribution Dates during the Funding Period (if
any), the remaining Pre-Funded Amount (as such term is defined in the
related Prospectus Supplement, the "Pre-
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Funded Amount") on such Distribution Date, after giving effect to
changes therein during the related Collection Period or for each
Distribution date during the Revolving Period (if any), the amount on
deposit in the Escrow Account; and
13. the aggregate amount of TERI Guarantee Payments
deposited into the Collection Account expressed as a percentage of the
Initial Pool Balance.
Each amount set forth pursuant to subclauses (1), (2) (5) and (6) with respect
to the Notes or the Certificates of any series will be expressed as a dollar
amount per $1,000 of the initial principal amount of such Notes or the initial
Certificate Balance of such Certificates, as applicable.
EVIDENCE AS TO COMPLIANCE
Each Sale and Servicing Agreement will provide that a firm of
independent public accountants will furnish to the Trust and the Indenture
Trustee annually a statement (based on a limited examination of certain
documents and records and on such accounting and auditing procedures considered
appropriate under the circumstances) as to compliance by the Master Servicer and
the Sub-Servicers during the preceding calendar year (or, in the case of the
first such certificate, the period from the applicable Closing Date) with
certain standards under the related Sale and Servicing Agreement relating to the
servicing of the Student Loans.
Each Sale and Servicing Agreement will further provide that a firm of
independent public accountants (which may be the same firm referred to in the
immediately preceding paragraph) will furnish to the Trust and the Indenture
Trustee annually a statement (based on the examination of certain documents and
records and on such accounting and auditing procedures considered appropriate
under the circumstances) as to compliance by the Administrator during the
preceding calendar year (or, in the case of the first such certificate, the
period from the applicable Closing Date) with all applicable standards under the
related Sale and Servicing Agreement and the Administration Agreement relating
to the administration of the Trust and the Student Loans.
Each Sale and Servicing Agreement will also provide for delivery to the
Trust and the Indenture Trustee, concurrently with the delivery of each
statement of compliance referred to above, of a certificate signed by an officer
of the Master Servicer or the Administrator, as the case may be, stating that,
to his knowledge, the Master Servicer or the Administrator, as the case may be,
has fulfilled its obligations under the Sale and Servicing Agreement throughout
the preceding calendar year (or, in the case of the first such certificate, the
period from the applicable Closing Date) or, if there has been a default in the
fulfillment of any such obligation, describing each such default. Each of the
Master Servicer, the Administrator and the Sub-Servicers will agree to give the
Indenture Trustee and the Eligible Lender Trustee notice of certain Master
Servicer Defaults and Administrator Defaults under the Sale and Servicing
Agreement.
Copies of such statements and certificates may be obtained by
Securityholders by a request in writing addressed to the Applicable Trustee.
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CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE SUB-SERVICERS
Each Sale and Servicing Agreement will provide that the Master Servicer
may not resign from its obligations and duties as Master Servicer thereunder,
except upon determination that the Master Servicer's performance of such duties
is no longer permissible under applicable law. No such resignation will become
effective until the related Indenture Trustee or a successor servicer has
assumed such Master Servicer's servicing obligations and duties under the Sale
and Servicing Agreement.
Each Sub-Servicing Agreement will provide that the Sub-Servicer may not
resign from its obligations and duties as Sub-Servicer thereunder without the
consent of the Master Servicer, except upon determination that a Sub-Servicer's
performance of such duties is no longer permissible under applicable law. No
such resignation will become effective until the Master Servicer, the related
Indenture Trustee or a successor servicer has assumed such Sub-Servicer's
servicing obligations and duties under the Sub-Servicing Agreement. The Master
Servicer may remove a Sub-Servicer at its discretion and either may undertake
such servicing responsibilities itself or substitute one or more new
Sub-Servicers, with the consent, but only to the extent provided in the related
Prospectus Supplement and required by the related Sale and Servicing Agreement,
of the Eligible Lender Trustee and each Rating Agency; provided, however, the
Master Servicer shall be solely responsible for any termination payments due to
such removed Sub-Servicer.
Each Sale and Servicing Agreement will further provide that neither the
Master Servicer nor any of its directors, officers, employees or agents will be
under any liability to the related Trust or the related Noteholders or
Certificateholders for taking any action or for refraining from taking any
action pursuant to the related Sale and Servicing Agreement, or for errors in
judgment; provided, however, that, unless otherwise limited in the related
Prospectus Supplement, neither the Master Servicer nor any such person will be
protected against any liability that would otherwise be imposed by reason of
willful misfeasance, bad faith or negligence in the performance of the Master
Servicer's duties thereunder or by reason of reckless disregard of its
obligations and duties thereunder. In addition, each Sale and Servicing
Agreement will provide that the Master Servicer is under no obligation to appear
in, prosecute, or defend any legal action that is not incidental to its
servicing responsibilities under such Sale and Servicing Agreement and that, in
its opinion, may cause it to incur any expense or liability.
Under the circumstances specified in each Sale and Servicing Agreement,
any entity into which the Master Servicer may be merged or consolidated, or any
entity resulting from any merger or consolidation to which the Master Servicer
is a party, or any entity succeeding to the business of the Master Servicer,
which corporation or other entity in each of the foregoing cases assumes the
obligations of the Master Servicer, will be the successor of the Master Servicer
under such Sale and Servicing Agreement; and under the circumstances specified
in each Sub-Servicing Agreement, any entity into which a Sub-Servicer may be
merged or consolidated, or any entity resulting from any merger or consolidation
to which the Sub-Servicer is a party, or any entity succeeding to the business
of the Sub-Servicer, which corporation or other entity in each of
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the foregoing cases assumes the obligations of the Sub-Servicer, will be the
successor of the Sub-Servicer under such Sub-Servicing Agreement.
MASTER SERVICER DEFAULT; ADMINISTRATOR DEFAULT
Except as otherwise provided in the related Prospectus Supplement, a
"Master Servicer Default" under each Sale and Servicing Agreement will consist
of:
(1) any failure by the Master Servicer to deliver (or to cause a
Sub-Servicer to deliver) to the Indenture Trustee for deposit
in any of the Trust Accounts (or, in the event that daily
deposits into the Collection Account are not required, to the
Administrator) any collections, Guarantee Payments or other
amounts received with respect to the Student Loans, which
failure continues unremedied for three business days after
written notice from the Indenture Trustee or the Eligible
Lender Trustee is received by the Master Servicer or after
discovery by the Master Servicer;
(2) any failure by the Master Servicer to duly observe or perform
in any material respect any other covenant or agreement in the
related Sale and Servicing Agreement, which failure materially
and adversely affects the rights of Noteholders or
Certificateholders and which continues unremedied for 60 days
after the giving of written notice of such failure (x) to the
Master Servicer by the Indenture Trustee, the Eligible Lender
Trustee, the Master Servicer or the Administrator or (y) to
the Master Servicer and to the Indenture Trustee and the
Eligible Lender Trustee by holders of Notes or Certificates,
as applicable, evidencing not less than 25% in principal
amount of the outstanding Notes or Certificates;
(3) certain events of insolvency, readjustment of debt, marshaling
of assets and liabilities, or similar proceedings with respect
to the Master Servicer and certain actions by the Master
Servicer indicating its insolvency, reorganization pursuant to
bankruptcy proceedings or inability to pay its obligations;
and
(4) failure by the Master Servicer to comply with any requirements
under the Higher Education Act resulting in a loss of its
eligibility as a third-party servicer.
Except as otherwise provided in the related Prospectus Supplement,
"Administrator Default" under each Sale and Servicing Agreement or each
Administration Agreement will consist of
(1) (A) in the event that daily deposits into the Collection
Account are not required, any failure by the Administrator to
deliver to the Indenture Trustee for deposit in any of the
Trust Accounts any required payment on or before the business
day prior to any monthly servicing payment date or
Distribution Date, as applicable, or (B) any failure by the
Administrator to direct the Indenture Trustee to make any
required distributions from any of the Trust Accounts on any
monthly servicing payment date or any Distribution Date, which
failure in case of either clause (A) or (B) continues
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unremedied for three business days after written notice from
the Indenture Trustee or the Eligible Lender Trustee is
received by the Administrator or after discovery by the
Administrator;
(2) any failure by the Administrator duly to observe or perform in
any material respect any other covenant or agreement in each
Administration Agreement or each Sale and Servicing Agreement
which failure materially and adversely affects the rights of
Noteholders or Certificateholders and which continues
unremedied for 60 days after the giving of written notice of
such failure (x) to the Administrator by the Indenture Trustee
or the Eligible Lender Trustee or (y) to the Administrator,
the Master Servicer and to the Indenture Trustee and the
Eligible Lender Trustee by holders of Notes or Certificates,
as applicable, evidencing not less than 25% in principal
amount of the outstanding Notes or Certificates; and
(3) certain events of insolvency, readjustment of debt, marshaling
of assets and liabilities, or similar proceedings with respect
to the Administrator and certain actions by the Administrator
indicating its insolvency or inability to pay its obligations.
RIGHTS UPON MASTER SERVICER DEFAULT AND ADMINISTRATOR DEFAULT
As long as a Master Servicer Default under a Sale and Servicing
Agreement or an Administrator Default under a Sale and Servicing Agreement or an
Administration Agreement, as the case may be, remains unremedied, the Indenture
Trustee or holders of Notes evidencing not less than 25% in principal amount of
then outstanding Notes may terminate all the rights and obligations of the
Master Servicer under such Sale and Servicing Agreement and/or the Administrator
under such Sale and Servicing Agreement or such Administration Agreement, as the
case may be, whereupon a successor servicer or administrator appointed by the
related Indenture Trustee, or such Indenture Trustee, will succeed to all of the
responsibilities, duties and liabilities of the applicable Master Servicer under
such Sale and Servicing Agreement or the Administrator under such Sale and
Servicing Agreement and such Administration Agreement, as the case may be, and
will be entitled to similar compensation arrangements. If, however, a bankruptcy
trustee or similar official has been appointed for the Master Servicer or the
Administrator, as applicable, and no Master Servicer Default or Administrator
Default, as the case may be, other than such appointment has occurred, such
trustee or official may have the power to prevent the Indenture Trustee or the
Noteholders from effecting such a transfer. In the event that such Indenture
Trustee is unwilling or unable to so act, it may appoint, or petition a court of
competent jurisdiction for the appointment of, a successor servicer whose
regular business includes the servicing of student loans or a successor
administrator whose regular business includes administering trusts containing
pools of loans or receivables. The Indenture Trustee may make such arrangements
for compensation to be paid, which in no event may be greater than the
compensation to the Master Servicer under such Sale and Servicing Agreement or
the Administrator under such Sale and Servicing Agreement and such
Administration Agreement, as the case may be, unless such compensation
arrangements will result in a downgrading of such Notes and Certificates by any
Rating Agency. In the event a Master Servicer Default or an Administrator
Default, as the case may be, occurs and is continuing, such
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Indenture Trustee or the holders of Notes, as described above, may cause the
removal of the Master Servicer or the Administrator, as the case may be, without
the consent of the related Eligible Lender Trustee or any of the holders of
Certificates. Moreover, only the Indenture Trustee or the holders of Notes, and
not the Eligible Lender Trustee or the holders of Certificates, have the ability
to remove the Master Servicer or the Administrator, as the case may be, if a
Master Servicer Default or an Administrator Default, as the case may be, occurs
and is continuing.
WAIVER OF PAST DEFAULTS
With respect to each Trust, the holders of Notes evidencing at least a
majority in principal amount of the then outstanding Notes (or the holders of
Certificates evidencing not less than a majority of the outstanding Certificate
Balance, in the case of any Master Servicer Default, which does not adversely
affect the Indenture Trustee or the Noteholders of the related series) may, on
behalf of all Noteholders and Certificateholders, waive any default by the
Master Servicer, in the performance of its obligations under the related Sale
and Servicing Agreement, or any default by the Administrator of its obligations
under the related Sale and Servicing Agreement and the related Administration
Agreement, as the case may be, and their respective consequences, except a
default in making any required deposits to or payments from any of the Trust
Accounts or giving instructions regarding the same in accordance with such Sale
and Servicing Agreement. Therefore, the Noteholders have the ability, except as
noted above, to waive defaults by the Master Servicer or the Administrator, as
the case may be, which could materially adversely affect the Certificateholders.
No such waiver will impair the Noteholders' or the Certificateholders' rights
with respect to subsequent defaults.
Unless and until Definitive Securities are issued, holders of Notes and
Certificates will not be recognized by the Indenture Trustee or the Eligible
Lender Trustee as "Noteholders" or "Certificateholders," as the case may be (as
such terms are used in the Indenture and the Trust Agreement, respectively).
Hence, until Definitive Securities are issued, holders of such Securities will
only be able to exercise the rights of Securityholders indirectly through DTC,
Cedel or Euroclear and their respective participating organizations.
INSOLVENCY EVENT
If any of certain events of insolvency or receivership, readjustment of
debt, marshaling of assets and liabilities, or similar proceedings with respect
to the Seller or certain actions by the Seller indicating its insolvency or
inability to pay its obligations (each, a "Seller Insolvency Event") occurs, the
Student Loans will be liquidated and the related Trust will be terminated 90
days after the date of such Seller Insolvency Event, unless, before the end of
such 90-day period, the Eligible Lender Trustee shall have received written
instructions from the holders of the Certificates (other than the Seller)
representing more than 50% of the aggregate unpaid principal amount of the
Certificates (not including the principal amount of Certificates held by the
Seller) to the effect that such group disapproves of the liquidation of the
Student Loans and termination of the related Trust. Promptly after the
occurrence of any Seller Insolvency Event, notice thereof is required to be
given to Noteholders and Certificateholders; provided that any failure to give
such required notice will not prevent or delay termination of the related Trust.
Upon termination of the related Trust, the Eligible
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Lender Trustee will direct the Indenture Trustee promptly to sell the assets of
the related Trust (other than the Trust Accounts) in a commercially reasonable
manner and on commercially reasonable terms. Each of the Guarantors and certain
other unrelated third parties will be given the opportunity, upon 30 days' prior
notice of any such proposed sale, to bid to purchase the Student Loans and, if
any such entity is the highest bidder, the Student Loans must be sold to that
entity. The proceeds from any such sale, disposition or liquidation of the
Student Loans will be treated as collections thereon and deposited in the
Collection Account. If the proceeds from the liquidation of the Student Loans
and any amounts on deposit in the Reserve Account (if any) are not sufficient to
pay the Notes in full, the amount of principal returned to the holders of Notes
will be delayed and the holders of Notes will incur a loss. If such amounts are
not sufficient to pay the Notes and the Certificates in full, the amount of
principal returned to the holders of Certificates will be delayed and the
holders of Certificates will incur a loss.
Each Trust Agreement will provide that the Eligible Lender Trustee does
not have the power to commence a voluntary proceeding in bankruptcy relating to
the Trust without the unanimous prior approval of all holders of Certificates
and the delivery to the Eligible Lender Trustee by each holder of Certificates
of a certificate certifying that such holder reasonably believes that the
related Trust is insolvent.
AMENDMENT
Each of the Transfer and Servicing Agreements may be amended by the
parties thereto, without the consent of the related Noteholders or the
Certificateholders, for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of such Transfer and Servicing
Agreements or of modifying in any manner the rights of such Noteholders or
Certificateholders; provided that such action will not, in the opinion of
counsel satisfactory to the related Indenture Trustee and the related Eligible
Lender Trustee, materially and adversely affect the interest of any such
Noteholder or Certificateholder. Each of the Transfer and Servicing Agreements
may also be amended by the Seller, the Administrator, the Master Servicer, the
related Eligible Lender Trustee and the related Indenture Trustee, as
applicable, with the consent of the holders of Notes of the related series
evidencing at least a majority in principal amount of the then outstanding Notes
and the holders of Certificates of the related series evidencing at least a
majority of the Certificate Balance for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of such Transfer
and Servicing Agreements or of modifying in any manner the rights of the holders
of Notes or the holders of Certificates; provided, that no such amendment may
(x) increase or reduce in any manner the amount of, or accelerate or delay the
timing of, collections of payments (including any Guarantee Payments) with
respect to the Student Loans or distributions that are required to be made for
the benefit of the holders of Notes or the holders of Certificates or (y) reduce
the aforesaid percentage of the Notes or Certificates which are required to
consent to any such amendment, without the consent of the holders of all the
outstanding Notes and Certificates.
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PAYMENT OF NOTES
Upon the payment in full of all outstanding Notes of a given series and
the satisfaction and discharge of the related Indenture, the Eligible Lender
Trustee will succeed to all the rights of the Indenture Trustee, and the
Certificateholders of such series will succeed to all the rights of the
Noteholders of such series, under the related Sale and Servicing Agreement,
except as otherwise provided therein.
SELLER LIABILITY
Under each Trust Agreement, the Seller will agree to be liable directly
to an injured party for the entire amount of any losses, claims, damages or
liabilities (other than those incurred by a holder of Notes or a holder of
Certificates in the capacity of an investor) arising out of or based on the
arrangement created by the Trust Agreement as though such arrangement created a
partnership under the Delaware Revised Uniform Limited Partnership Act in which
the Seller was a general partner.
TERMINATION
With respect to each Trust, the obligations of the Seller, the Master
Servicer, the Administrator, the related Eligible Lender Trustee and the related
Indenture Trustee pursuant to the related Transfer and Servicing Agreements will
terminate upon (x) the maturity or other liquidation of the last related Student
Loan and the disposition of any amount received upon liquidation of any such
remaining Student Loans and (y) the payment to the Noteholders and the
Certificateholders of the related series of all amounts required to be paid to
them pursuant to such Transfer and Servicing Agreements.
If so specified in the related Prospectus Supplement, in order to avoid
excessive administrative expense, the Seller or another party will be permitted
at its option to purchase from the related Eligible Lender Trustee, as of the
end of any Collection Period immediately preceding a Distribution Date, if the
then outstanding Pool Balance is less than the percentage specified in the
related Prospectus Supplement of the Initial Pool Balance (as defined in the
related Prospectus Supplement, the "Initial Pool Balance"), all remaining
related Student Loans at a price equal to the aggregate Purchase Amounts thereof
as of the end of such Collection Period, which amounts will be used to retire
the related Notes and Certificates concurrently therewith. Upon termination of a
Trust, as more fully described in the related Prospectus Supplement, all right,
title and interest in the Student Loans and other funds of such Trust, after
giving effect to any final distributions to Noteholders and Certificateholders
of the related series therefrom, will be conveyed and transferred to the Seller
or such other party.
If so provided in the related Prospectus Supplement, any Student Loans
remaining in the related Trust as of the end of the Collection Period
immediately preceding the Distribution Date which occurs immediately after the
10th anniversary of the Closing Date (the "Auction Date") will be offered for
sale by the related Indenture Trustee. Affiliates of the Seller, the Master
Servicer, the related Sub-Servicers and unrelated third parties may offer bids
to purchase such Student Loans on
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such Distribution Date. If at least two bids are received, the Indenture Trustee
will solicit and resolicit bids from all participating bidders until only one
bid remains or the remaining bidders decline to resubmit bids. The Indenture
Trustee will accept the highest of such remaining bids if it is equal to or in
excess of an amount (the "Minimum Purchase Amount") equal to the greatest of:
- the Auction Purchase Amount (as such term is defined in the
related Prospectus Supplement, the "Auction Purchase Amount"),
- the fair market value of such Student Loans as of the end of
the Collection Period immediately preceding such Distribution
Date, and
- the aggregate unpaid principal amount of the related Notes and
principal balance of the related Certificates plus, in each
case, accrued and unpaid interest thereon payable on such
Distribution Date (other than any Index Shortfall Carryover).
If at least two bids are not received or the highest bid after the
resolicitation process is completed is not equal to or in excess of the Minimum
Purchase Amount, the Indenture Trustee will not consummate such sale. In
connection with the determination of the Minimum Purchase Amount, the Indenture
Trustee may consult and, at the direction of the Seller, shall consult, with a
financial advisor, including the Underwriters or the Administrator, to determine
if the fair market value of the Student Loans has been offered. The net proceeds
of any such sale will be used to redeem any outstanding Notes and to retire any
outstanding Certificates on such Distribution Date. If the sale is not
consummated in accordance with the foregoing, the Indenture Trustee may, but
shall not be under any obligation to, solicit bids to purchase the Student Loans
on future Distribution Dates upon terms similar to those described above. No
assurance can be given as to whether the Indenture Trustee will be successful in
soliciting acceptable bids to purchase the Student Loans on either the Auction
Date or any subsequent Distribution Date. The related Prospectus Supplement will
specify what will happen in the event the Student Loans are not sold in
accordance with the foregoing.
ADMINISTRATOR
The Administrator will enter into an agreement (as amended and
supplemented from time to time, an "Administration Agreement") with each Trust
and the related Indenture Trustee and a Sale and Servicing Agreement with the
related Trust, the Seller, the Master Servicer and the Eligible Lender Trustee,
pursuant to which the Administrator will agree, to the extent provided therein,
(a) in the event that daily deposits into the Collection Account
are not required, to deliver to the Indenture Trustee for
deposit in any of the Trust Accounts any required payment on
or before the business day prior to any monthly servicing
payment date or any Distribution Date, as applicable,
(b) to direct the Indenture Trustee to make the required
distributions from the Trust Accounts on each monthly
servicing payment date and each Distribution Date,
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(c) to prepare and file with the Department all appropriate claim
forms and other documents and filings on behalf of the
Eligible Lender Trustee in order to claim any Interest Subsidy
Payments and Special Allowance Payments that may be payable in
respect of each Collection Period with respect to the Federal
Loans,
(d) to prepare (based on the periodic reports received from the
Master Servicer or the Sub-Servicers) and provide periodic
statements to the Eligible Lender Trustee and the Indenture
Trustee with respect to distributions to Noteholders and
Certificateholders and any related federal income tax
reporting information as required by the related Sale and
Servicing Agreement, and
(e) to provide the notices and to perform other administrative
obligations required by the Indenture, the Trust Agreement and
the Sale and Servicing Agreement. As compensation for the
performance of the Administrator's obligations under the
Administration Agreement and the Sale and Servicing Agreement
and as reimbursement for its expenses related thereto, the
Administrator will be entitled to an administration fee in an
amount set forth in the related Prospectus Supplement (the
"Administration Fee").
CERTAIN LEGAL ASPECTS OF THE STUDENT LOANS
TRANSFER OF STUDENT LOANS
The Seller intends that the transfer of the Student Loans by it to the
related Eligible Lender Trustee on behalf of each Trust will constitute a valid
sale and assignment of such Student Loans. In addition, the Seller has taken and
will take all actions that are required under applicable state law to perfect
the Eligible Lender Trustee's ownership interest in the Financial Statement
Loans and the collection with respect thereto. Notwithstanding the foregoing, if
the transfer of the Student Loans is deemed to be an assignment of collateral as
security for the benefit of a Trust, a security interest in the Student Loans
may, pursuant to the provisions of 20 U.S.C. ss. 1087-2(d)(3), be perfected
either through the taking of possession of such loans or by the filing of notice
of such security interest in the manner provided by the applicable Uniform
Commercial Code ("UCC") for perfection of security interests in accounts. A
financing statement or statements covering the Student Loans will be filed under
the UCC to protect the interest of the Eligible Lender Trustee in the event the
transfer by the Seller is deemed to be an assignment of collateral as security
for the benefit of the Trust.
If the transfer of the Student Loans is deemed to be an assignment as
security for the benefit of a Trust, there are certain limited circumstances
under the UCC in which prior or subsequent transferees of Student Loans coming
into existence after the Closing Date could have an interest in such Student
Loans with priority over the related Eligible Lender Trustee's interest. A tax
or other government lien on property of the Seller arising prior to the time a
Student Loan comes into existence may also have priority over the interest of
the related Eligible Lender Trustee in such Student Loan. Furthermore, if the
FDIC were appointed as a receiver or
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conservator of the Seller, the FDIC's administrative expenses may also have
priority over the interest of the Eligible Lender Trustee in such Student Loans.
Under the related Sale and Servicing Agreement, however, the Seller will warrant
that it has caused the Student Loans to be transferred to the related Eligible
Lender Trustee on behalf of a Trust free and clear of the lien of any third
party. In addition, the Seller will covenant that it will not sell, pledge,
assign, transfer or grant any lien on any Student Loan held by a Trust (or any
interest therein) other than to the related Eligible Lender Trustee on behalf of
a Trust, except as provided below.
Pursuant to each Sale and Servicing Agreement, the Sub-Servicer as
custodian on behalf of the Master Servicer and the related Trust will have
custody of the promissory notes evidencing the Student Loans following the sale
of the Student Loans to the related Eligible Lender Trustee. Although the
accounts and computer records of the Seller and, the Master Servicer and the
related Sub-Servicer will be marked to indicate the sale and although the Seller
will cause UCC financing statements to be filed with the appropriate
authorities, the Student Loans will not be physically segregated, stamped or
otherwise marked to indicate that such Student Loans have been sold to such
Eligible Lender Trustee. If, through inadvertence or otherwise, any of the
Student Loans were sold to another party, or a security interest therein were
granted to another party, that purchased (or took such security interest in) any
of such Student Loans in the ordinary course of its business and took possession
of such Student Loans, then the purchaser (or secured party) might acquire an
interest in the Student Loans superior to the interest of the Eligible Lender
Trustee if the purchaser (or secured party) acquired (or took a security
interest in) the Student Loans for new value and without actual knowledge of the
related Eligible Lender Trustee's interest. See "Description of the Transfer and
Servicing Agreements--Sale of Student Loans; Representations and Warranties."
With respect to each Trust, in the event of a Master Servicer Default
resulting solely from certain events of insolvency or bankruptcy that may occur
with respect to the Seller, the Master Servicer, a court, trustee-in-bankruptcy,
conservator, receiver or liquidator may have the power to prevent either the
related Indenture Trustee or Noteholders of the related series from appointing a
successor Master Servicer. See "Description of the Transfer and Servicing
Agreements--Rights Upon Master Servicer Default; Administrator Default."
CERTAIN MATTERS RELATING TO RECEIVERSHIP
The Federal Deposit Insurance Act ("FDIA"), as amended by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), sets forth
certain powers that the FDIC could exercise if it were appointed as receiver or
conservator of the Seller.
Subject to clarification by FDIC regulations or interpretations, it
would appear from the positions taken by the FDIC that the FDIC, in its capacity
as a receiver or conservator for the Seller, would not interfere with the timely
transfer to the Trust of collections with respect to the Student Loans. To the
extent that the transfer of the Student Loans is deemed to create a security
interest, and that interest was validly perfected before the Seller's insolvency
and was not taken in contemplation of insolvency or with the intent to hinder,
delay or defraud the Seller or its creditors, based upon opinions and statements
of policy issued by the general counsel of the FDIC addressing
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the enforceability against the FDIC, as conservator or receiver for a depository
institution, of a security interest in collateral granted by such depository
institution, such security interest should not be subject to avoidance and
payments to the Trust with respect to the Student Loans should not be subject to
recovery by the FDIC as receiver or conservator of the Seller. If, however, the
FDIC were to assert a contrary position, certain provisions of the FDIA which,
at the request of the FDIC, have been applied in recent lawsuits to avoid
security interests in collateral granted by depository institutions, would
permit the FDIC to avoid such security interest, thereby resulting in possible
delays and reductions in payments on the Notes and the Certificates. In
addition, if the FDIC were to require the Indenture Trustee or the Eligible
Lender Trustee to establish its right to such payments by submitting to and
completing the administrative claims procedure under the FDIA, as amended by
FIRREA, delays in payments on the Notes and the Certificates and possible
reductions in the amount of those payments could occur.
In the event of a Master Servicer Default or an Administrator Default
resulting solely from certain events of insolvency or bankruptcy that may occur
with respect to the Master Servicer or the Administrator, a court, conservator,
receiver or liquidator may have the power to prevent either the Indenture
Trustee or Noteholders from appointing a successor Master Servicer or
Administrator, as the case may be. See "Description of the Transfer and
Servicing Agreements--Rights Upon Master Servicer Default; Administrator
Default."
CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws and related
regulations impose substantial requirements upon lenders and servicers involved
in consumer finance. Also, some state laws impose finance charge ceilings and
other restrictions on certain consumer transactions and require contract
disclosures in addition to those required under federal law. These requirements
impose specific statutory liabilities upon lenders who fail to comply with their
provisions. These requirements are generally inapplicable to Federal Loans, but
in certain circumstances, a Trust may be liable for certain violations of
consumer protection laws that may apply to the Student Loans, either as assignee
or as the party directly responsible for obligations arising after the transfer.
For a discussion of a Trust's rights if the Student Loans were not originated or
serviced in compliance in all material respects with applicable laws, see
"Description of the Transfer and Servicing Agreements--Sale of Student Loans;
Representations and Warranties" and "--Master Servicer Covenants."
LOAN ORIGINATION AND SERVICING PROCEDURES APPLICABLE TO STUDENT LOANS
The Higher Education Act, including the implementing regulations
thereunder, imposes specified requirements, guidelines and procedures with
respect to originating and servicing student loans such as the Federal Loans.
Generally, those procedures require that completed loan applications be
processed, a determination of whether an applicant is an eligible borrower under
applicable standards (including a review of a financial need analysis) be made,
the borrower's responsibilities under the loan be explained to him or her, the
promissory note evidencing the loan be executed by the borrower and then that
the loan proceeds be disbursed in a specified manner by the lender. After the
loan is made, the lender or servicing agent must establish
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repayment terms with the borrower, properly administer deferrals and
forbearances and credit the borrower for payments made thereon. If a borrower
becomes delinquent in repaying a loan, a lender or a servicing agent must
perform certain collection procedures (primarily telephone calls and demand
letters) which vary depending upon the length of time a loan is delinquent. The
Master Servicer has agreed pursuant to the related Sale and Servicing Agreement
to perform (or to cause a Sub-Servicer to perform) collection and servicing
procedures on behalf of the related Trust. However, failure to follow these
procedures or failure of the originator of the loan to follow procedures
relating to the origination of any Federal Loans could result in adverse
consequences. Any such failure could result in the Department's refusal to make
reinsurance payments to the Federal Guarantors or to make Interest Subsidy
Payments and Special Allowance Payments to the Eligible Lender Trustee with
respect to such Federal Loans or in the Federal Guarantors' refusal to honor
their Guarantee Agreements with the Eligible Lender Trustee with respect to such
Federal Loans. Failure of the Federal Guarantors to receive reinsurance payments
from the Department could adversely affect the Federal Guarantors' ability or
legal obligation to make Guarantee Payments to the related Eligible Lender
Trustee with respect to such Federal Loans.
Loss of any such Guarantee Payments, Interest Subsidy Payments or
Special Allowance Payments could adversely affect the amount of Available Funds
(as such term is defined in the related Prospectus Supplement, the "Available
Funds") on any Distribution Date and the related Trust's ability to pay
principal and interest on the Notes of the related series and to make
distributions in respect of the Certificates of the related series. Under
certain circumstances, unless otherwise specified in the related Prospectus
Supplement, the related Trust has the right, pursuant to the related Sale and
Servicing Agreement, to cause the Seller to repurchase any Student Loan, or to
cause the Master Servicer to arrange for the purchase of any Student Loan, if a
breach of the representations, warranties or covenants of the Seller or the
Master Servicer, as the case may be, with respect to such Student Loan has a
material adverse effect on the interest of the Trust therein and such breach is
not cured within any applicable cure period. See "Description of the Transfer
and Servicing Agreements--Sale of Student Loans; Representations and Warranties"
and "--Servicer Covenants." The failure of the Seller to so purchase, or of the
Master Servicer to arrange for the purchase of, a Student Loan, if so required,
would constitute a breach of the related Sale and Servicing Agreement,
enforceable by the related Eligible Lender Trustee on behalf of the related
Trust or by the related Indenture Trustee on behalf of the Noteholders of the
related series, but would not constitute an Event of Default under the
Indenture.
FAILURE TO COMPLY WITH THIRD-PARTY SERVICER REGULATIONS MAY ADVERSELY AFFECT
LOAN SERVICING
On November 29, 1994, the Secretary of the Department of Education (the
"Secretary") published final regulations amending FFELP. These regulations,
among other things, establish requirements governing contracts between holders
of federal loans and third-party servicers, establish standards of
administrative and financial responsibility for third-party servicers that
administer any aspect of a guarantee agency's or lender's participation in the
FFELP and establish sanctions for third-party servicers.
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Under these regulations, a third-party servicer (such as one of the
Sub-Servicers) is jointly and severally liable with its client lenders for
liabilities to the Department arising from the servicer's violation of
applicable requirements. In addition, if the servicer fails to meet standards of
financial responsibility or administrative capability included in the
regulations, or violates other FFELP requirements, the regulations authorize the
Department to fine the servicer and/or limit, suspend, or terminate the
servicer's eligibility to contract to service FFELP loans. The effect of such a
limitation or termination on the servicer's eligibility to service loans already
on its system, or to accept new loans for servicing under existing contracts, is
unclear. There can be no assurance that a Sub-Servicer will not be fined or held
liable by the Department liabilities arising out of its FFELP activities for the
Master Servicer or other client lenders, or that its eligibility will not be
limited, suspended, or terminated in the future. If a Sub-Servicer were so fined
or held liable, or its eligibility were limited, suspended, or terminated, its
ability to properly service the federal loans and to satisfy its obligation to
purchase federal loans with respect to which it breaches its representations,
warranties or covenants under its related Sub-Servicing Agreement could be
adversely affected. However, in the event of a termination of eligibility, each
Sub-Servicing Agreement will provide for the removal of the applicable
Sub-Servicer and the appointment of a successor sub-servicer.
BANKRUPTCY CONSIDERATIONS
Federal Loans are generally not dischargeable by a borrower in
bankruptcy pursuant to the United States Bankruptcy Code, as amended, as
codified in 11 U.S.C. ss.ss.101-1330 (the "Bankruptcy Code"), unless excepting
such debt from discharge will impose an undue hardship on the debtor and the
debtor's dependents. However, Private Loans are generally dischargeable by a
borrower in bankruptcy unless such Private Loan has been made under any program
funded in whole or in part by a governmental unit or non-profit institution.
RECENT DEVELOPMENTS
Emergency Student Loan Consolidation Act of 1997. On November 13, 1997,
President Clinton signed into law the Emergency Student Loan Consolidation Act
of 1997, which made significant changes to the Federal Consolidation Loan
Program. These changes include:
(1) providing that federal direct student loans are eligible to be
included in a Federal Consolidation Loan;
(2) changing the borrower interest rate on new Federal
Consolidation Loans (previously a fixed rate based on the
weighted average of the loans consolidated, rounded up to the
nearest whole percent) to the annually variable rate
applicable to Stafford Loans (i.e., the bond equivalent rate
at the last auction in May of 91-day Treasury Bills plus
3.10%, not to exceed 8.25% per annum);
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(3) providing that the portion of a Federal Consolidated Loan that
is comprised of subsidized Stafford Loans retains its subsidy
benefits during periods of deferment; and
(4) establishing prohibitions against various forms of
discrimination in the making of Federal Consolidation Loans.
Except for the last of the above changes, all such provisions expired on
September 30, 1998. The combination of the change to a variable rate and the
8.25% interest cap reduced the lender's yield in most cases below the rate that
would have been applicable under the previous weighted average formula.
FY 1998 Budget. In the 1997 Budget Reconciliation Act (P.L. 105-33),
several changes were made to the Higher Education Act that impact the FFELP.
These provisions include, among other things, requiring federal guarantors to
return $1 billion of their reserves to the U.S. Treasury by September 1, 2002
(to be paid in annual installments), greater restrictions on use of reserves by
federal guarantors and a continuation of the administrative cost allowance
payable to federal guarantors (which is a fee paid to federal guarantors equal
to 0.85% of new loans guaranteed).
1998 Amendments. On May 22, 1998, Congress passed, and on June 9, 1998,
the President signed into law, a temporary measure relating to the Higher
Education Act and FFELP loans as part of the Intermodal Surface Transportation
Efficiency Act of 1998 that revised interest rate changes under the FFELP that
were scheduled to become effective on July 1, 1998. For loans made during the
period July 1, 1998 through September 30, 1998, the borrower interest rate for
Stafford Loans and Unsubsidized Stafford Loans is reduced to a rate of 91-day
Treasury Bill Rate plus 2.30% (1.70% during school, grace and deferment),
subject to a maximum rate of 8.25%. As described below, The formula for Special
Allowance Payments on Stafford Loans and Unsubsidized Stafford Loans is
calculated to produce a yield to the loan holder of 91-day Treasury Bill Rate
plus 2.80% (2.20% during school, grace and deferment).
1998 Reauthorization Bill. On October 7, 1998, President Clinton signed
into law the Higher Education Amendments of 1998 (the "1998 Reauthorization
Bill"), which enacted significant reforms in FFELP. The major provisions of the
1998 Reauthorization Bill include the following:
- All references to a "transition" to full implementation of the
Federal Direct Student Loan Program were deleted from the
FFELP statute.
- Guarantor reserve funds were restructured so that federal
guarantors are provided with additional flexibility in
choosing how to spend certain funds they receive.
- Additional recall of reserve funds by the Secretary was
mandated, amounting to $85 million in fiscal year 2002, $82.5
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million in fiscal year 2006, and $82.5 million in fiscal year
2007. However, certain minimum reserve levels are protected
from recall.
- The administrative cost allowance was replaced by two (2) new
payments, a Student Loan processing and issuance fee equal to
65 basis points (40 basis points for loans made on or after
October 1, 2003) paid at the time a loan is guaranteed, and an
account maintenance fee of 12 basis points (10 basis points
for fiscal years 2001-2003) paid annually on outstanding
guaranteed Student Loans.
- The percentage of collections on defaulted Student Loans a
federal guarantor is permitted to retain is reduced from 27%
to 24% (23% beginning on October 1, 2003) plus the complement
of the reinsurance percentage applicable at the time a claim
was paid to the lender on the Student Loan.
- Federal reinsurance provided to federal guarantors is reduced
from 98% to 95% for Student Loans first disbursed on or after
October 1, 1998.
- The delinquency period required for a loan to be declared in
default is increased from 180 days to 240 days for loans on
which the first day of delinquency occurs on or after the date
of enactment of the 1998 Reauthorization Bill.
- Interest rates charged to borrowers on Stafford Loans, and the
yield for Stafford Loan holders established by the 1998
Amendments, were made permanent.
- Federal Consolidation Loan interest rates were revised to
equal the weighted average of the loans consolidated rounded
up to the nearest one-eighth of 1%, capped at 8.25%. When the
91-day Treasury Bill Rate plus 3.1% exceeds the borrower's
interest rate, Special Allowance Payments are made to make up
the difference.
- The lender-paid offset fee on Federal Consolidation Loans of
1.05% is reduced to .62% for loans made pursuant to
applications received on or after October 1, 1998 and on or
before January 31, 1999.
- The Federal Consolidation Loan interest rate calculation was
revised to reflect the rate for Federal Consolidation Loans,
and will be effective for loans on which applications are
received on or after February 1, 1999.
- Lenders are required to offer extended repayment schedules to
new borrowers after the enactment of the 1998 Reauthorization
Bill who accumulate after such date outstanding loans under
FFELP totaling more than $30,000, under these extended
schedules the repayment period may extend up to 25 years
subject to certain minimum repayment amounts.
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- The Secretary is authorized to enter into six (6) voluntary
flexible agreements with federal guarantors under which
various statutory and regulatory provisions can be waived.
- Federal Consolidation Loan lending restrictions are revised to
allow lenders who do not hold one of the borrower's Underlying
Federal Loans to issue a Federal Consolidation Loan to a
borrower whose Underlying Federal Loans are held by multiple
holders.
- Inducement restrictions were revised to permit federal
guarantors and lenders to provide assistance to schools
comparable to that provided to schools by the Secretary under
the Federal Direct Student Loan Program.
- The Secretary is now required to pay off Student Loan amounts
owed by borrowers due to failure of the borrower's school to
make a tuition refund allocable to the Student Loan.
- Discharge of FFELP and certain other Student Loans in
bankruptcy is now limited to cases of undue hardship
regardless of whether the Student Loan has been due for more
than seven (7) years prior to the bankruptcy filing.
INCOME TAX CONSEQUENCES
Set forth below is a general summary of the material federal and
Pennsylvania state income tax consequences of the purchase, ownership and
disposition of the Notes and the Certificates. Thompson Hine & Flory LLP
("Federal Tax Counsel") has reviewed this summary with respect to federal income
tax matters and is of the opinion that the descriptions of the law and legal
conclusions contained herein are correct in all material respects and the
discussions hereunder fairly summarize the federal income tax considerations
that are likely to be material to Noteholders and Certificateholders.
Kirkpatrick & Lockhart LLP ("Pennsylvania Tax Counsel") has reviewed this
summary with respect to Pennsylvania income and franchise tax matters and is of
the opinion that the descriptions of the law and legal conclusions contained
herein are correct in all material respects and the discussions hereunder fairly
summarize the Pennsylvania income and franchise tax considerations that are
likely to be material to Noteholders and Certificateholders. The summary is
intended as an explanatory discussion of the possible effects of certain federal
and Pennsylvania income tax consequences to holders generally, but does not
purport to furnish information in the level of detail or with the attention to a
holder's specific tax circumstances that would be provided by a holder's own tax
advisor. For example, it does not discuss the tax treatment of Noteholders or
Certificateholders that are insurance companies, regulated investment companies
or dealers in securities. In addition, any discussion regarding the Notes is
limited to the federal and Pennsylvania income tax consequences of the initial
Noteholders and not a purchaser in the secondary market. Moreover, there are no
cases or Internal Revenue Service ("IRS") rulings on similar transactions
involving both debt and equity interests issued by a trust with terms similar to
those of the Notes and the Certificates. As a result, the IRS may disagree with
all or a part of the discussion below. Prospective investors are
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urged to consult their own tax advisors in determining the federal, state,
local, foreign and any other tax consequences to them of the purchase, ownership
and disposition of the Notes and the Certificates.
With respect to federal tax matters, the following summary is based
upon current provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), the Treasury Regulations promulgated thereunder and judicial or ruling
authority, all of which are subject to change, which change may be retroactive.
Each Trust will be provided with an opinion of Federal Tax Counsel regarding
certain federal income tax matters discussed below and an opinion of
Pennsylvania Tax Counsel regarding certain Pennsylvania State income tax matters
discussed below, which opinions will be filed with the Commission on a Form 8-K
prior to the sale of the securities issued by such Trust. An opinion of Federal
Tax Counsel, however, is not binding on the IRS or the courts. No ruling on any
of the issues discussed below will be sought from the IRS. For purposes of the
following summary, references to the Trust, the Notes, the Certificates and
related terms, parties and documents shall be deemed to refer, unless otherwise
specified herein, to each Trust and the Notes, Certificates and related terms,
parties and documents applicable to such Trust. EACH PROSPECTIVE INVESTOR SHOULD
CONSULT WITH ITS TAX ADVISOR AS TO THE FEDERAL, STATE, LOCAL, FOREIGN AND ANY
OTHER TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF SECURITIES
SPECIFIC TO SUCH PROSPECTIVE INVESTOR.
FEDERAL TAX CONSEQUENCES FOR TRUSTS
FOR WHICH A PARTNERSHIP ELECTION IS MADE
TAX CHARACTERIZATION OF THE TRUST
Federal Tax Counsel will deliver its opinion that the Trust will not be
an association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the Trust Agreement and related documents will be complied with.
There is, however, no specific authority with respect to the characterization
for federal income tax purposes of securities having the same terms as the Notes
and the Certificates.
Possible Alternative Treatment of the Trust. If, contrary to the
opinion of Federal Tax Counsel, the Trust were taxable for federal income tax
purposes as a corporation, the income from the Student Loans (reduced by
deductions, possibly including interest on the Notes) would be subject to
federal income tax at corporate rates, which could materially reduce or
eliminate the cash that would otherwise be available to make payments on the
Notes and the Certificates (and the Certificateholders could be liable for any
such tax that is unpaid by the Trust).
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. Federal Tax Counsel will
deliver an opinion to the Trust that the Notes will be classified as debt for
federal income tax purposes. The Seller will agree, and the Noteholders will
agree by their purchase of Notes, to treat the Notes as debt
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for federal income tax purposes. The discussion below assumes this
characterization of the Notes is correct.
Original Issue Discount. The discussion below assumes that all payments
on the Notes are denominated in U.S. dollars, that the interest formula for the
Notes meets the requirements for "qualified stated interest" under Treasury
Regulations (the "OID Regulations") relating to original issue discount ("OID"),
and that any OID on the Notes (i.e., any excess of the stated redemption price
at maturity of the Notes, generally the principal amount of the Notes, over
their issue price) is less than a de minimis amount (i.e., 0.25% of their
principal amount multiplied by the weighted number of full years included in
their term), all within the meaning of the OID Regulations. If these conditions
are not satisfied with respect to any given series of Notes, additional tax
considerations with respect to such Notes will be disclosed in the related
Prospectus Supplement.
Interest Income on the Notes. The stated interest on the Notes will be
taxable to a Noteholder as ordinary income when received or accrued in
accordance with the Noteholder's method of tax accounting. Based on the above
assumptions, the Notes will not be considered issued with OID. However, because
of limitations on the payment of interest on the Notes to the extent of the
Trust's having insufficient Available Funds, the IRS may contend that the Notes
should be treated as having been issued with OID. In such case, Noteholders
(regardless of whether they otherwise use the cash or accrual method of
accounting) would be required to include interest on the Notes in taxable income
on a constant-yield accrual basis. However, until the IRS determines otherwise,
the Trust intends to take the position that the Notes are not issued with OID.
Under the OID Regulations, a holder of a Note that was issued with a de
minimis amount of OID must include such OID generally in income, on a pro rata
basis, as principal payments are made on the Note. Alternatively, a Noteholder
may elect to accrue all interest, discount (including de minimis market discount
or OID) and premium in income as interest, based on a constant-yield method. A
purchaser who buys a Note for more or less than its principal amount will
generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
Sale or Other Disposition. If a Noteholder sells a Note, the holder
will recognize gain or loss in an amount equal to the difference between the
amount realized on the sale and the holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the holder's
cost for the Note, increased by any market discount, acquisition discount, OID
and gain previously included by such Noteholder in income with respect to the
Note and decreased by the amount of bond premium (if any) previously amortized
and by the amount of principal payments previously received by such Noteholder
with respect to such Note. Any such gain or loss will be capital gain or loss if
the Note was held as a capital asset, except for gain representing accrued
interest and accrued market discount not previously included in income. Any such
gain or loss would be long-term capital gain or loss if the Noteholder's holding
period exceeded one year. Capital losses generally may be used by a corporate
taxpayer only to offset
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capital gains, and by an individual taxpayer only to the extent of capital gains
plus $3,000 of other income.
Foreign Holders. Interest paid (or accrued) to a Noteholder who is a
nonresident alien, foreign corporation or other person that is not a United
States person as such term is defined in the Code and the Treasury Regulations
thereunder (a "foreign person") generally will be considered "portfolio
interest", and generally will not be subject to United States federal income tax
and withholding tax, provided, that
(a) the interest is not effectively connected with the conduct of
a trade or business within the United States by the foreign
person
(b) the foreign person is not actually or constructively a "10
percent shareholder" of the Trust or the Seller (including a
holder of 10% of the outstanding Certificates) or a
"controlled foreign corporation" with respect to which the
Trust or the Seller is a "related person" within the meaning
of the Code, and
(c) the foreign person provides the Trustee or other person who is
otherwise required to withhold U.S. tax with respect to the
Notes with an appropriate statement (on Form W-8, new Form
W-8BEN or a similar form), signed under penalty of perjury,
certifying that the beneficial owner of the Note is a foreign
person and providing the foreign person's name and address.
If a Note is held through a securities clearing organization or certain other
financial institutions, the organization or institution may provide the relevant
signed statement to the withholding agent; in that case, however, the signed
statement must be accompanied by a Form W-8, new Form W-8BEN or substitute form
provided by the foreign person that owns the Note. If such interest is not
portfolio interest, then it will be subject to United States federal income and
withholding tax at a rate of 30%, unless reduced or eliminated pursuant to an
applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person generally will be exempt from
United States federal income and withholding tax, provided that (x) such gain is
not effectively connected with the conduct of a trade or business in the United
States by the foreign person and (y) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
If the interest, gain or income on a Note held by a foreign person is
effectively connected with the conduct of a trade or business in the United
States by the foreign person (although exempt from the withholding tax
previously discussed if the holder provides an appropriate statement on Form
4224 or new Form W-8ECI), the holder generally will be subject to United States
federal income tax on the interest, gain or income at regular federal income tax
rates. In addition, if the foreign person is a foreign corporation, it may be
subject to a branch profits tax equal to 30% of its "effectively connected
earnings and profits" within the meaning of the Code
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for the taxable year, as adjusted for certain items, unless it qualifies for a
lower rate under an applicable tax treaty (as modified by the branch profits tax
rules).
Final regulations dealing with backup withholding and information
reporting on income paid to foreign persons and related matters (the "New
Withholding Regulations") were published in the Federal Register in October
1997. In general, the New Withholding Regulations do not significantly alter the
substantive withholding and information reporting requirements, but do unify
current certification procedures and forms and clarify reliance standards.
Generally, those persons currently required to file Form W-8 or Form 1001 (to
claim tax treaty benefits) will be required to file new Form W-8BEN or W-8IMY
(in the case of certain foreign intermediaries, partnerships and look-through
entities), while those persons currently required to file Form 4224 will be
required to file new Form W-8ECI. The New Withholding Regulations generally are
effective for payments of interest due after December 31, 2000, subject to
certain transition rules. PROSPECTIVE NOTEHOLDERS WHO ARE FOREIGN PERSONS ARE
STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE NEW
WITHHOLDING REGULATIONS.
Backup Withholding. Each holder of a Note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalty of perjury, a certificate setting forth the holder's
name, address, correct federal taxpayer identification number and a statement
that the holder is not subject to backup withholding. Should a nonexempt
Noteholder fail to provide the required certification, the related Trust will be
required to withhold 31% of the amount otherwise payable to the holder and remit
the withheld amount to the IRS as a credit against the holder's federal income
tax liability. As previously mentioned, the New Withholding Regulations
generally will be effective for payments made after December 31, 2000, subject
to certain transition rules, and all Noteholders should consult their own tax
advisors regarding the certifications, if any, that must be made in order to
avoid backup withholding after such date.
Possible Alternative Treatments of the Notes. If, contrary to the
opinion of Federal Tax Counsel, the IRS successfully asserted that one or more
classes of Notes did not represent debt for federal income tax purposes, such
class or classes of Notes might be treated as equity interests in the Trust. If
so treated, the Trust might be treated as a publicly traded partnership but it
would not be taxable as a corporation because it would meet certain qualifying
income tests.
Nonetheless, even if the Trust were not taxable as a corporation, the
treatment of Notes as equity interests in such a publicly traded partnership
could have adverse tax consequences to certain holders of such Notes. For
example, income from certain classes of Notes to certain tax-exempt entities
(including pension funds) might be "unrelated business taxable income," income
to foreign holders may be subject to U.S. withholding tax and U.S. tax return
filing requirements, and individual holders might be subject to certain
limitations on their ability to deduct their share of Trust expenses. In the
event one or more classes of Notes were treated as interests in a partnership,
the consequences governing the Certificates as equity interests in a partnership
described above under "Federal Tax Consequences For Trusts For Which a
Partnership Election
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is Made--Tax Consequences to Holders of the Certificates" would generally apply
to the holders of such Notes.
FASITS
Sections 860H through 860L to the Code (the "FASIT Provisions") provide
for a new type of entity for federal income tax purposes known as a "financial
asset securitization investment trust" (a "FASIT"). Many technical issues
relating to the taxation of FASITs and the holders of FASIT interests are to be
addressed in Treasury regulations yet to be issued. In general, the FASIT
legislation enables trusts such as the Trust to elect to be treated as a
pass-through entity not subject to federal entity-level income tax (except with
respect to certain prohibited transactions) and to issue securities that would
be treated as debt for federal income tax purposes. If a Trust is intended to
qualify as a FASIT for federal income tax purposes, the Prospectus Supplement
will so indicate and will describe the tax consequences of such election
therein.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
The following discussion only applies to a Trust which issues one or
more classes of Certificates and assumes that all payments on the Certificates
are denominated in U.S. dollars, that a series of Securities includes a single
class of Certificates and that the Certificates are sold to both the Seller and
to persons other than the Seller. If these conditions are not satisfied with
respect to any given series of Certificates, any additional tax considerations
with respect to such Certificates will be disclosed in the applicable Prospectus
Supplement.
CLASSIFICATION AS A PARTNERSHIP
Treatment of the Trust as a Partnership. The Seller and the Master
Servicer will agree, and the Certificateholders will agree by their purchase of
Certificates, to treat the Trust as a partnership for purposes of federal, state
and local income and franchise tax and any other tax measured in whole or in
part by income, with the assets of the partnership being the assets held by the
Trust, the partners of the partnership being the Certificateholders (including
the Seller both in its capacity as owner of Certificates and as recipient of
distributions from the Reserve Account, if any), and the Notes being debt of the
partnership. There is, however, no specific authority with respect to the proper
characterization of the arrangement involving the Trust, the Certificateholders,
the Noteholders, the Seller and the Master Servicer.
Under the provisions of Subchapter K of the Code, a partnership is not
considered a separate taxable entity. Instead, partnership income is taxed
directly to the partners and each partner generally is viewed as owning a direct
undivided interest in each partnership asset. The partnership is generally
treated as an entity, however, for computing partnership income, determining the
tax consequences of transactions between a partner and the partnership, and
characterizing the gain on the sale or exchange of a partnership interest.
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Partnership Taxation. As a partnership, the Trust will not be subject
to federal income tax. Rather, each Certificateholder will be required to
separately take into account the holder's allocated share of income, gains,
losses, deductions and credits of the Trust. The Trust's income will consist
primarily of interest and finance charges earned on the Student Loans (including
appropriate adjustments for market discount, OID and bond premium), investment
income from investments of amounts on deposit in any related Trust Accounts and
any gain upon collection or disposition of Student Loans. The Trust's deductions
will consist primarily of interest accruing with respect to the Notes, servicing
and other fees, and losses or deductions upon collection or disposition of
Student Loans.
Guaranteed Payments. Under the Trust Agreement, payments on the
Certificates at the Pass-Through Rate (including accruals on amounts previously
due on the Certificates but not yet distributed) will be treated as "guaranteed
payments" under Section 707(c) of the Code. Guaranteed payments are payments to
partners for the use of their capital and, in the present circumstances, are
treated as deductible to the Trust and ordinary income to the
Certificateholders. The Trust will have a calendar year and will deduct the
guaranteed payments under the accrual method of accounting. Certificateholders
with a calendar tax year are required to include the payments in income in their
taxable year that corresponds to the year in which the Trust deducts the
payments, and the Certificateholders with a different taxable year are required
to include the payments in income in their taxable year that includes the
December 31st of the year in which the Trust deducts the payments. It is
possible that guaranteed payments will not be treated as interest for all
purposes of the Code.
Allocation of Tax Items. The tax items of a partnership are allocable
to the partners in accordance with the Code, Treasury Regulations and the
partnership agreement (here, the Trust Agreement and related documents). The
Trust Agreement will provide, in general, that in addition to the guaranteed
payments described above, the Certificateholders will be allocated the following
tax items of the Trust for each Interest Period (as defined in the applicable
Prospectus Supplement, an "Interest Period"):
(a) any Trust income attributable to discount on the Student Loans
that corresponds to any excess of the principal amount of the
Certificates over their initial issue price;
(b) any Trust expense attributable to the amortization by the
Trust of premium on Student Loans that corresponds to any
excess of the issue price of Certificates over their principal
amount; and
(c) all other amounts of income payable to the Certificateholders
for such Interest Period.
All remaining taxable income of the Trust will be allocated to the Seller.
Losses will generally be allocated in the manner in which they are borne. Based
on the economic arrangement of the parties, this approach for allocating Trust
tax items should be permissible under applicable Treasury Regulations, although
no assurance can be given that the IRS would not require a greater amount of
income to be allocated to Certificateholders. Moreover, even under the
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foregoing method of allocation, Certificateholders may be allocated income equal
to the entire amount of interest accruing on the Certificates for an Interest
Period, based on the Pass-Through Rate plus the other items described above,
even though the Trust might not make (or have sufficient cash to make) current
cash distributions of such amount. Thus, cash basis holders will, in effect, be
required to report income from the Certificates on the accrual basis, and
Certificateholders may become liable for taxes on Trust income even if they have
not received cash from the Trust to pay such taxes. In addition, because tax
allocations and tax reporting will be done on a uniform basis for all
Certificateholders but Certificateholders may be purchasing Certificates at
different times and at different prices, Certificateholders may be required to
report on their tax returns taxable income that is greater or less than the
amount reported to them by the Trust.
Additionally, all of the guaranteed payments and the taxable income
allocated to a Certificateholder that is a tax-exempt entity may constitute
"unrelated business taxable income," which, under the Code, is generally taxable
to such a holder despite the holder's tax exempt status.
An individual taxpayer's share of expenses of the Trust (including fees
to the Master Servicer but not interest expenses) are miscellaneous itemized
deductions which are deductible only to the extent they exceed two percent of
the individual's adjusted gross income (and not at all for alternative minimum
tax purposes). Accordingly, such deductions might be disallowed to the
individual in whole or in part and might result in such holder being taxed on an
amount of income that exceeds the amount of cash actually distributed to such
holder over the life of the Trust. These deductions may also be subject to
reduction under Section 68 of the Code if an individual taxpayer's adjusted
gross income exceeds certain limits.
The Trust intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each of the Student Loans,
the Trust might be required to incur additional expense, but it is believed that
there would not be a material adverse effect on Certificateholders.
Computation of Income. Taxable income of the Trust will be computed at
the Trust level and the portion allocated to the Certificateholders will be
allocated to them pro rata. Consequently, the method of accounting for taxable
income will be chosen by, and any elections (such as those described below with
respect to the market discount rules) will be made by the Trust rather than the
Certificateholders. The Trust intends, to the extent possible, to (x) have the
taxable income of the Trust computed under the accrual method of accounting and
(y) adopt a calendar-year taxable year for computing the taxable income of the
Trust. The tax year of the Trust, however, is generally determined by reference
to the tax years of the Certificateholders. An owner of a Certificate is
required to include its pro rata share of Trust income for a taxable year as
determined by the Trust in such Certificateholder's gross income for its taxable
year in which the taxable year of the Trust ends.
Section 708 Termination. Under Section 708 of the Code, if 50% or more
of the outstanding interests in the Trust are sold or exchanged within any
12-month period, the Trust
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will be deemed to terminate and then be reconstituted for federal income tax
purposes. If a termination occurs, the Trust will be considered to contribute
all of its assets and liabilities to the Trust, as a new partnership, for an
interest in the new partnership; and immediately thereafter, the Trust, as the
former partnership, will be considered to distribute interests in the new
partnership to the Certificateholders in proportion to their respective
interests in the former partnership in liquidation of the former partnership. If
a sale of the Certificates terminates the Trust under Section 708 of the Code, a
Certificateholder's basis in its ownership interest would not change. The
Trust's taxable year would also terminate as a result of a constructive
termination and, if the Certificateholder's taxable year is different from the
Trust's, the termination could result in the "bunching" of more than 12 month's
income or loss of the Trust in such Certificateholder's income tax return for
the year in which the Trust was deemed to terminate. A liquidation of interests
is not considered a sale or exchange of interests for purposes of applying this
constructive termination rule.
The Trust will not comply with certain technical requirements that
might apply if a constructive termination were to occur. As a result, the Trust
may be subject to certain tax penalties and may incur additional expenses if it
is required to comply with those requirements. Furthermore, the Trust might not
be able to comply due to a lack of data.
Discount and Premium. To the extent that OID, if any, on the Student
Loans exceeds a de minimis amount, the Trust would have OID income. As indicated
above, a portion of such OID income may be allocated to the Certificateholders.
Moreover, the purchase price paid by the Trust for the Student Loans
may be greater or less than the remaining aggregate principal balances of the
Student Loans at the time of purchase. If so, the Student Loans will have been
acquired at a premium or discount, as the case may be. (As indicated above, the
Trust will make this calculation on an aggregate basis, but might be required to
recompute it on a loan by loan basis.)
If the Trust acquires the Student Loans at a market discount or
premium, the Trust will elect to include any such discount in income currently
as it accrues over the life of the Student Loans or to offset any such premium
against interest income over the life of the Student Loans. As indicated above,
a portion of such market discount income or premium deduction may be allocated
to Certificateholders.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
Any such gain or loss would be long-term capital gain or loss if the
Certificateholder's holding period exceeded one year. A Certificateholder's tax
basis in a Certificate will generally equal the holder's cost increased by the
holder's share of Trust income (includible in gross income) and decreased by any
distributions received or losses allocated with respect to such Certificate. In
addition, both the tax basis in the Certificate and the amount realized on a
sale of a Certificate would include the holder's share of the Notes and other
liabilities of the Trust. A holder acquiring Certificates at different prices
may be required to maintain a single aggregate adjusted tax basis in the
Certificates and, upon sale or other
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disposition of some of the Certificates, allocate a pro rata portion of such
aggregate tax basis to the Certificates sold (rather than maintaining a separate
tax basis in each Certificate for purposes of computing gain or loss on a sale
of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's
share of unrecognized accrued market discount on the Student Loans would
generally be treated as ordinary income to the holder. Since the Trust will make
an election to include market discount, if any, in income currently as it
accrues over the life of the Student Loans, there may be little, if any,
unrecognized accrued market discount at the time a Certificate is sold.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the
Trust's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificateholders
in proportion to the principal amount of Certificates owned by them as of the
close of the last day of such month. As a result, a holder purchasing
Certificates may be allocated tax items (which will affect the tax liability and
tax basis of the holder) attributable to periods before the actual purchase
takes place.
The use of such a monthly convention may not be permitted by existing
laws and regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust might be reallocated among the Certificateholders. The Seller is
authorized to revise the Trust's method of allocation between transferors and
transferees to conform to a method permitted by future laws, regulations or
other IRS guidance.
Section 754 Election. In the event that a Certificateholder sells a
Certificate at a profit (or loss), the purchasing Certificateholder will have a
higher (or lower) basis in the Certificate than the selling Certificateholder
had. The tax basis of the Trust's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust were to file an election under Section
754 of the Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Trust will not make such election. As a
result, Certificateholders might be allocated a greater or lesser amount of
Trust income than would be appropriate based on their own purchase price for
Certificates.
Administrative Matters. The Eligible Lender Trustee is required to keep
or cause to be kept complete and accurate books of the Trust. The Eligible
Lender Trustee will file a partnership information return (IRS Form 1065) with
the IRS for each taxable year of the Trust and will report each
Certificateholder's allocable share of items of Trust income and expense to
holders and the IRS on Schedule K-1. The Trust will provide the Schedule K-1
information to nominees that fail to provide the Trust with the information
statement described below and such
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nominees will be required to forward such information to the beneficial owners
of the Certificates. Generally, holders must file tax returns that are
consistent with the information returns filed by the Trust or be subject to
penalties unless the holder timely notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust with
a statement containing certain information on the nominee, the beneficial owners
and the Certificates so held. Such information includes (1) the name, address
and taxpayer identification number of the nominee and (2) as to each beneficial
owner (a) the name, address and taxpayer identification number of such person,
(b) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (c) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust information as
to themselves and their ownership of Certificates. A clearing agency registered
under Section 17A of the Exchange Act that holds Certificates as a nominee is
not required to furnish any such information statement to the Trust. The
information referred to above for any calendar year must be furnished to the
Trust on or before the following January 31st. Nominees, brokers and financial
institutions that fail to provide the Trust with the information described above
may be subject to penalties.
The Seller will be designated as "tax matters partner" in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in certain disputes with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before the later of three years after the date
on which the partnership information return is filed or the last day for filing
such return for such year (determined without regard to extensions). Any adverse
determination following an audit of the return of the Trust by the appropriate
taxing authorities could result in an adjustment of the returns of the
Certificateholders, and, under certain circumstances, a Certificateholder may be
precluded from separately litigating a proposed adjustment to the items of the
Trust. An adjustment could also result in an audit of a Certificateholder's
returns and adjustments of items not related to the income and losses of the
Trust.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust would be considered to be engaged in a trade or business in the United
States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Accordingly, the Trust will
withhold as if it were so engaged in order to protect the Trust from possible
adverse consequences of a failure to withhold. The Trust expects to withhold on
the portion of its taxable income that is allocable to foreign
Certificateholders pursuant to Section 1446 of the Code, as if such income were
effectively connected to a U.S. trade or business, at a rate of 35% for foreign
holders that are taxable as corporations and 39.6% for all other foreign
holders. Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may
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require the Trust to change its withholding procedures. In determining a
holder's withholding status, the Trust may rely on Form W-8, new Form W-8BEN,
Form W-9 or the holder's certification of non-foreign status signed under
penalty of perjury.
As previously mentioned, the New Withholding Regulations generally will
be effective for payments made after December 31, 2000, subject to certain
transition rules. Under the New Withholding Regulations, generally, those
persons currently required to file Form W-8 or Form 1001 (to claim tax treaty
benefits) will be required to file new Form W-8BEN or W-8IMY (in the case of
certain foreign intermediaries, partnerships and look-through entities), while
those persons currently required to file Form 4224 will be required to file new
Form W-8ECI. PROSPECTIVE CERTIFICATEHOLDERS WHO ARE FOREIGN PERSONS ARE STRONGLY
URGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE NEW WITHHOLDING
REGULATIONS.
Each foreign holder may be required to file a U.S. individual or
corporate income tax return (including in the case of a corporation, the branch
profits tax) on its share of the Trust's income. Each foreign holder must obtain
a taxpayer identification number from the IRS and submit that number to the
Trust in order to assure appropriate crediting of the taxes withheld. Each
foreign holder will be subject to United States federal income tax and
withholding tax at a rate of 30 percent on the holder's share of guaranteed
payments, unless reduced or eliminated pursuant to an applicable treaty. A
foreign holder generally would be entitled to file with the IRS a claim for
refund with respect to taxes withheld by the Trust in excess of those that are
withheld with respect to guaranteed payments, taking the position that those
taxes were not due because the Trust was not engaged in a U.S. trade or
business. EACH POTENTIAL FOREIGN CERTIFICATEHOLDER SHOULD CONSULT ITS TAX
ADVISOR AS TO WHETHER THE TAX CONSEQUENCES OF HOLDING A CERTIFICATE MAKE IT AN
UNSUITABLE INVESTMENT.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code. As previously mentioned, the New Withholding
Regulations generally will be effective for payments made after December 31,
2000, subject to certain transition rules and all Certificateholders should
consult their own tax advisors regarding the certifications, if any, that must
be made in order to avoid backup withholding after such date.
FEDERAL TAX CONSEQUENCES FOR TRUSTS IN WHICH ALL
CERTIFICATES ARE RETAINED BY THE SELLER
TAX CHARACTERIZATION OF THE TRUST
Federal Tax Counsel will deliver its opinion that a Trust, which issues
one or more classes of Notes to investors and all the Certificates of which are
retained by the Seller, will not be an association (or publicly traded
partnership) taxable as a corporation for federal income tax purposes, assuming
that no election will be made to treat the Trust as a corporation for federal
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income tax purposes. In such a case, the Seller and the Master Servicer will
agree to treat the Trust as a division of the Seller for purposes of federal,
state and local income and franchise tax and any other tax measured in whole or
in part by income; consequently, the Trust will be disregarded as an entity
separate from the Seller.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. As discussed above, Federal Tax
Counsel will deliver an opinion to the Trust that the Notes will be classified
as debt for federal income tax purposes. The Seller will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Assuming such characterization of the Notes is
correct, the federal income tax consequences to Noteholders described above
under "Federal Tax Consequences For Trusts For Which a Partnership Election is
Made--Tax Consequences to Holders of the Notes" would apply to the Noteholders.
PENNSYLVANIA STATE TAX CONSEQUENCES
PENNSYLVANIA INCOME AND FRANCHISE TAX CONSEQUENCES WITH RESPECT TO THE NOTES
If a majority of the Student Loans of a Trust are serviced by the
Pennsylvania Higher Education Assistance Agency ("PHEAA"), it may be argued that
the principal place of business of such Trust will be in the Commonwealth of
Pennsylvania. There is no authority in Pennsylvania addressing the question of
whether the Notes will be treated as debt or equity for Pennsylvania purposes.
Furthermore, Pennsylvania does not necessarily adopt Federal income tax
definitions in characterizing income for state tax purposes. Nonetheless,
subject to the foregoing uncertainties, if a majority of the Student Loans of a
Trust are serviced by PHEAA, Pennsylvania Tax Counsel will, prior to the
issuance of the Notes and Certificates, deliver its opinion to the Trust that,
assuming the Notes are treated as debt for Federal income tax purposes, the
Notes will be treated as debt for Pennsylvania income tax purposes. Noteholders
not otherwise subject to taxation in Pennsylvania should not become subject to
taxation in Pennsylvania solely because of a holder's ownership of Notes.
However, for Pennsylvania resident Noteholders otherwise subject to Pennsylvania
tax, the interest on the Notes will be included in Pennsylvania taxable income.
PENNSYLVANIA INCOME AND FRANCHISE TAX CONSEQUENCES WITH RESPECT TO THE
CERTIFICATES
Because state and local income and franchise tax laws vary greatly, it
is impossible to predict the income and franchise tax consequences to the
Certificateholders in all of the state and local taxing jurisdictions in which
they are already subject to tax. Certificateholders are urged to consult their
own advisors with respect to state and local income and franchise taxes.
However, Pennsylvania Tax Counsel will, prior to the issuance of the Notes and
Certificates, deliver its opinion that the Trust will not be subject to
Pennsylvania corporate net income tax or capital stock franchise tax or any
other Pennsylvania entity level income or franchise tax. There is no assurance,
however, that this conclusion will not be challenged by the Pennsylvania taxing
authorities or, if challenged, that the taxing authorities will not be
successful. If the Trust were subject to an entity level tax in Pennsylvania,
any such tax could materially reduce or eliminate cash that would
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otherwise be distributable with respect to the Certificates (and
Certificateholders could be liable for any such tax that is unpaid by the
Trust). Certificateholders not otherwise subject to taxation in Pennsylvania
should not become subject to taxation in Pennsylvania solely because of a
holding ownership of Certificates. However, for Pennsylvania resident
Certificateholders otherwise subject to Pennsylvania tax, the distributions on
the Certificates will be included in Pennsylvania taxable income.
THE FEDERAL AND PENNSYLVANIA TAX DISCUSSIONS SET FORTH ABOVE ARE
INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A
NOTEHOLDER'S OR CERTIFICATEHOLDER'S PARTICULAR TAX SITUATION. PROSPECTIVE
PURCHASERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF SECURITIES,
INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS
AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL, PENNSYLVANIA OR OTHER TAX LAWS.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and/or the Code impose certain requirements on employee benefit plans
and on certain other retirement plans and arrangements, including individual
retirement accounts and annuities, Keogh plans and collective investment funds
and separate accounts (and, as applicable, insurance company general accounts)
in which such plans, accounts or arrangements are invested that are subject to
the fiduciary responsibility provisions of ERISA and Section 4975 of the Code
("Plans") and on persons who are fiduciaries with respect to such Plans in
connection with the investment of Plan assets. Certain employee benefit plans,
such as governmental plans (as defined in ERISA Section 3(32)), and, if no
election has been made under Section 410(d) of the Code, church plans (as
defined in Section 3(33) of ERISA) are not subject to ERISA requirements.
Accordingly, assets of such plans may be invested in Notes without regard to the
ERISA considerations described below, subject to the provisions of other
applicable federal and state law. Any such plan which is qualified and exempt
from taxation under Sections 401(a) and 501(a) of the Code, however, is subject
to the prohibited transaction rules set forth in Section 503 of the Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan. In addition, Section 406 of ERISA and Section 4975 of the
Code prohibit a broad range of transactions involving assets of Plan and persons
(parties in interest under ERISA and disqualified persons under the Code,
collectively, "Parties in Interest") who have certain specified relationships to
the Plan unless a statutory, regulatory or administrative exemption is
available. Certain Parties in Interest that participate in a prohibited
transaction may be subject to an excise tax imposed pursuant to Section 4975 of
the Code or a penalty imposed pursuant to Section 502(i) of ERISA, unless a
statutory, regulatory or administrative exemption is available. These prohibited
transactions generally are set forth in Section 406 of ERISA and Section 4975 of
the Code.
THE NOTES
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<PAGE> 203
Unless otherwise specified in the related Prospectus Supplement, the
Notes of each series may be purchased by a Plan. The Trust, any underwriter, the
Eligible Lender Trustee, the Indenture Trustee, the Master Servicer, the
Administrator, any provider of credit support or any of their affiliates may be
considered to be or may become Parties in Interest with respect to certain
Plans. Prohibited transactions under Section 406 of ERISA and Section 4975 of
the Code may arise if a Note is acquired by a Plan with respect to which such
persons are Parties in Interest unless such transactions are subject to one or
more statutory or administrative exemptions, such as:
- Prohibited Transaction Class Exemption ("PTCE") 96-23, which
exempts certain transactions effected on behalf of a Plan by
an "in-house asset manager";
- PTCE 90-1, which exempts certain transactions between
insurance company separate accounts and Parties in Interest;
- PTCE 91-38, which exempts certain transactions between bank
collective investment funds and Parties in Interest;
- PTCE 95-60, which exempts certain transactions between
insurance company general accounts and Parties in Interest; or
- PTCE 84-14, which exempts certain transactions effected on
behalf of a Plan by a "qualified professional asset manager".
There can be no assurance that any of these class exemptions will apply with
respect to any particular Plan investment in Notes or, even if it were deemed to
apply, that any exemption would apply to all prohibited transactions that may
occur in connection with such investment. Accordingly, prior to making an
investment in the Notes, investing Plans should determine whether the Trust, any
underwriter, the Eligible Lender Trustee, the Indenture Trustee, the Master
Servicer, the Administrator, or any provider of credit support or any of their
affiliates is a Party in Interest with respect to such Plan and, if so, whether
such transaction is subject to one or more statutory, regulatory or
administrative exemptions.
Any Plan fiduciary considering whether to invest in Notes on behalf of
a Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to such investment. Each Plan fiduciary also should determine whether,
under the general fiduciary standards of investment prudence and
diversification, an investment in the Notes is appropriate for the Plan,
considering the overall investment policy of the Plan and the composition of the
Plan's investment portfolio, as well as whether such investment is permitted
under the governing Plan instruments.
THE CERTIFICATES
Unless otherwise specified in the Prospectus Supplement, the
Certificates of each series may not be purchased by a Plan or by any entity
whose underlying assets include plan assets by
107
<PAGE> 204
reason of a plan's investment in the entity (each, a "Benefit Plan"). Such
purchase of an equity interest in the Trust will result in the assets of the
Trust being deemed assets of a Benefit Plan for the purposes of ERISA and the
Code and certain transactions involving the Trust may then be deemed to
constitute prohibited transactions under Section 406 of ERISA and Section 4975
of the Code. A violation of the "prohibited transaction" rules may result in an
excise tax or other penalties and liabilities under ERISA and the Code for such
persons.
By its acceptance of a Certificate, each Certificateholder will be
deemed to have represented and warranted that it is not a Benefit Plan.
If a given series of Certificates may be acquired by a Benefit Plan
because of the application of an exception contained in a regulation or
administrative exemption issued by the United States Department of Labor, such
exception will be discussed in the related Prospectus Supplement.
* * *
A plan fiduciary considering the purchase of Securities of a given
series should consult its tax and/or legal advisors regarding whether the assets
of the related Trust would be considered plan assets, the possibility of
exemptive relief from the prohibited transaction rules and other issues and
their potential consequences.
PLAN OF DISTRIBUTION
On the terms and conditions set forth in an underwriting agreement with
respect to the Notes of a given series and an underwriting agreement with
respect to the Certificates of such series (collectively, the "Underwriting
Agreements"), the Seller will agree to cause the related Trust to sell to the
underwriters named therein and in the related Prospectus Supplement, and each of
such underwriters will severally agree to purchase, the principal amount of each
class of Notes and Certificates, as the case may be, of the related series set
forth therein and in the related Prospectus Supplement.
In each of the Underwriting Agreements with respect to any given series
of Securities, the several underwriters will agree, subject to the terms and
conditions set forth therein, to purchase all the Notes and Certificates, as the
case may be, described therein which are offered hereby and by the related
Prospectus Supplement if any of such Notes and Certificates, as the case may be,
are purchased.
Each Prospectus Supplement will either (x) set forth the price at which
each class of Notes and Certificates, as the case may be, being offered thereby
will be offered to the public and any concessions that may be offered to certain
dealers participating in the offering of such Notes and Certificates, as the
case may be, or (y) specify that the related Notes and Certificates, as the case
may be, are to be resold by the underwriters in negotiated transactions at
varying prices to be determined at the time of such sale. After the initial
public offering of any such Notes and
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<PAGE> 205
Certificates, as the case may be, such public offering prices and such
concessions may be changed.
Until the distribution of the Securities is completed, rules of the
Commission may limit the ability of the underwriters and certain selling group
members to bid for and purchase the Securities. As an exception to these rules,
the underwriters are permitted to engage in certain transactions that stabilize
the price of the Securities. Such transactions consist of bids or purchases for
the purpose of pegging, fixing or maintaining the price of the Securities.
If an underwriter creates a short position in the Securities in
connection with the offering (i.e., if it sells more Securities than are set
forth on the cover page of the related Prospectus Supplement), the underwriter
may reduce that short position by purchasing Securities in the open market.
An underwriter may also impose a penalty bid on certain underwriters
and selling group members. This means that if the underwriter purchases
Securities in the open market to reduce the underwriters' short position or to
stabilize the price of the Securities, it may reclaim the amount of the selling
concession from the underwriters and selling group members who sold those
Securities as part of the offering.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
discourages resales of the security.
Neither the Seller nor the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the prices of the Securities. In addition, neither
the Seller nor the underwriters make any representation that the underwriters
will engage in such transactions or that such transactions, once commenced, will
not be discontinued without notice.
Each Underwriting Agreement will provide that the Seller will indemnify
the underwriters against certain civil liabilities, including liabilities under
the Securities Act, or contribute to payments the several underwriters may be
required to make in respect thereof.
Each Trust may, from time to time, invest the funds in its Trust
Accounts in Eligible Investments acquired from such underwriters.
Pursuant to each of the Underwriting Agreements with respect to a given
series of Securities, the closing of the sale of any class of Securities subject
to either thereof will be conditioned on the closing of the sale of all other
such classes subject to either thereof.
This Prospectus may be used by McDonald Investments Inc. ("McDonald
Investments"), a wholly-owned subsidiary of KeyCorp and an affiliate of the
Seller and the Master Servicer, or its successors, in connection with offers and
sales related to market-making transactions in the
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Securities in which McDonald Investments acts as a principal. McDonald
Investments may also act as agent in such transactions. McDonald Investments is
a member of the New York Stock Exchange, Inc. McDonald Investments is not a bank
or thrift, is an entity separate from the Seller and the Master Servicer, and is
solely responsible for its own contractual obligations and commitments.
The place and time of delivery for the Securities in respect of which
this Prospectus is delivered will be set forth in the related Prospectus
Supplement.
LEGAL MATTERS
Certain legal matters relating to the Securities of any series will be
passed upon for the related Trust, the Seller and the Administrator by Forrest
F. Stanley, Esq., General Counsel and Assistant Secretary of the Seller, as
counsel for the Seller, and by Thompson Hine & Flory LLP, Cleveland, Ohio.
Certain federal income tax and other matters will be passed upon for the Trust
by Thompson Hine & Flory LLP. Certain Pennsylvania state income tax matters will
be passed upon for each Trust by Kirkpatrick & Lockhart LLP.
110
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<TABLE>
<CAPTION>
INDEX OF PRINCIPAL TERMS
Page
<S> <C>
10 percent shareholder...........................................................................................96
1992 Amendments..................................................................................................20
1993 Act.........................................................................................................42
1998 Amendments..................................................................................................20
1998 Reauthorization Bill........................................................................................91
91-day Treasury Bill Rate........................................................................................24
AACSB............................................................................................................33
Additional Fundings..............................................................................................18
Administration Agreement.........................................................................................85
Administration Fee...............................................................................................86
Administrator....................................................................................................15
Administrator Default............................................................................................80
Applicable Trustee...............................................................................................62
Auction Date.....................................................................................................84
Auction Purchase Amount..........................................................................................85
Available Funds..................................................................................................89
Bankruptcy Code..................................................................................................90
Bar Exam Loan....................................................................................................33
Base Rate........................................................................................................61
Benefit Plan....................................................................................................108
bunching........................................................................................................101
Calculation Agent................................................................................................61
Cede.............................................................................................................51
Cedel............................................................................................................61
Cedel Participants...............................................................................................64
Certificate Balance..............................................................................................50
Certificate Pool Factor..........................................................................................50
Certificateholder................................................................................................62
Certificates.....................................................................................................59
Closing Date.....................................................................................................69
Code.............................................................................................................94
Collection Account...............................................................................................70
Collection Period................................................................................................69
Commission.......................................................................................................13
Consolidation Loans..............................................................................................39
controlled foreign corporation...................................................................................96
Cooperative......................................................................................................64
Cutoff Date......................................................................................................14
Deferral Period..................................................................................................25
Definitive Certificates..........................................................................................66
Definitive Notes.................................................................................................66
</TABLE>
111
<PAGE> 208
<TABLE>
<CAPTION>
<S> <C>
Definitive Securities............................................................................................66
Department.......................................................................................................15
Depositories.....................................................................................................62
Depository.......................................................................................................50
Depository Services..............................................................................................63
Distribution Date................................................................................................51
DTC..............................................................................................................50
effectively connected earnings and profits.......................................................................96
Eligible Deposit Account.........................................................................................71
Eligible Institution.............................................................................................71
Eligible Investments.............................................................................................71
Eligible Lender Trustee..........................................................................................14
Eligible Students................................................................................................22
ERISA...........................................................................................................106
Escrow Account...................................................................................................70
Euroclear........................................................................................................61
Euroclear Operator...............................................................................................64
Euroclear Participants...........................................................................................64
Event of Default.................................................................................................53
Exchange Act.....................................................................................................13
FASIT............................................................................................................98
FDIA.............................................................................................................87
FDIC.............................................................................................................71
Federal Assistance...............................................................................................21
Federal Consolidation Loan.......................................................................................29
Federal Consolidation Loan Program...............................................................................20
Federal Consolidation Loan Rebate................................................................................31
Federal Direct Consolidation Loan................................................................................30
Federal Direct Consolidation Loan Program........................................................................30
Federal Direct Student Loan Program..............................................................................43
Federal Graduate Programs........................................................................................32
Federal Guarantee Agreements.....................................................................................20
Federal Guarantee Payments.......................................................................................20
Federal Guarantors...............................................................................................20
Federal Loans....................................................................................................19
Federal Origination Fee..........................................................................................31
Federal Programs.................................................................................................20
Federal Tax Counsel..............................................................................................93
Fee Advance......................................................................................................38
FFELP............................................................................................................24
FIRREA...........................................................................................................87
Fixed Rate Securities............................................................................................60
Floating Rate Securities.........................................................................................60
Forbearance Period...............................................................................................25
foreign person...................................................................................................96
</TABLE>
112
<PAGE> 209
<TABLE>
<CAPTION>
<S> <C>
Funding Period...................................................................................................18
Grace Period.....................................................................................................25
Graduate Loans...................................................................................................19
Great Lakes......................................................................................................34
Guarantee Agreements.............................................................................................20
Guarantee Payments...............................................................................................20
Guarantors.......................................................................................................20
Higher Education Act.............................................................................................20
Indenture........................................................................................................50
Indenture Trustee................................................................................................50
Index Shortfall Carryover........................................................................................54
Indirect Participants............................................................................................62
Industry.........................................................................................................63
in-house asset manager..........................................................................................107
Initial Pool Balance.............................................................................................84
Interest Period..................................................................................................99
Interest Rate....................................................................................................51
Interest Reset Period............................................................................................61
Interest Subsidy Payments........................................................................................21
Investment Earnings..............................................................................................71
IRS..............................................................................................................93
KBUSA............................................................................................................15
Key Alternative Loan.............................................................................................34
KeyCorp..........................................................................................................16
Keys2Repay Program...............................................................................................37
LIBOR............................................................................................................61
Master Servicer..................................................................................................15
Master Servicer Default..........................................................................................80
Master Servicing Fee.............................................................................................74
Minimum Purchase Amount..........................................................................................85
Monthly Servicing Payment Date...................................................................................73
Negative Carry Account...........................................................................................70
New Withholding Regulations......................................................................................97
Note Pool Factor.................................................................................................50
Noteholder.......................................................................................................62
Notes............................................................................................................50
OID..............................................................................................................95
OID Regulations..................................................................................................95
Participants.....................................................................................................51
Parties in Interest.............................................................................................106
Pass-Through Rate................................................................................................60
Pennsylvania Tax Counsel.........................................................................................93
PHEAA...........................................................................................................105
Plans...........................................................................................................106
PLUS Loan........................................................................................................42
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
PLUS Loan Program................................................................................................20
PLUS Loans.......................................................................................................28
Pool Balance.....................................................................................................50
Pool Factor......................................................................................................50
portfolio interest...............................................................................................96
Post-Graduate Loans..............................................................................................19
Pre-Funded Amount................................................................................................78
Pre-Funding Account..............................................................................................70
Private Consolidation Fee Advance................................................................................40
Private Consolidation Loan.......................................................................................39
Private Consolidation Loan Program...............................................................................39
Private Graduate Loans...........................................................................................33
Private Guarantee Agreements.....................................................................................20
Private Guarantee Payments.......................................................................................20
Private Guaranteed Loans.........................................................................................20
Private Guarantors...............................................................................................20
Private Loan Repayment Commencement Date.........................................................................37
Private Loans....................................................................................................34
Private Undergraduate Loans......................................................................................33
Private Unguaranteed Loans.......................................................................................20
Programs.........................................................................................................19
Prospectus.......................................................................................................50
Prospectus Supplement............................................................................................50
PTCE............................................................................................................107
Purchase Amount..................................................................................................69
qualified professional asset manager............................................................................107
Rating Agency....................................................................................................57
Record Date......................................................................................................66
Registration Statement...........................................................................................13
Related Documents................................................................................................57
related person...................................................................................................96
Reserve Account..................................................................................................70
Residency Loan...................................................................................................33
Revolving Period.................................................................................................18
Rules............................................................................................................63
Sale and Servicing Agreement.....................................................................................68
Secretary........................................................................................................89
Securities.......................................................................................................59
Securityholders..................................................................................................62
Seller...........................................................................................................15
Seller Insolvency Event..........................................................................................82
SLS Loan Program.................................................................................................20
SLS Loans........................................................................................................27
Special Allowance Payments.......................................................................................21
Specified Reserve Account Balance................................................................................52
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
Spread...........................................................................................................61
Spread Multiplier................................................................................................61
Stafford Loan Program............................................................................................20
Stafford Loans...................................................................................................21
Student Loans....................................................................................................14
Sub-Servicers....................................................................................................17
Sub-Servicing Agreement..........................................................................................17
Systems..........................................................................................................63
tax matters partner.............................................................................................103
Terms and Conditions.............................................................................................65
Transfer and Servicing Agreements................................................................................68
Trust............................................................................................................14
Trust Accounts...................................................................................................70
Trust Agreement..................................................................................................14
UCC..............................................................................................................86
Undergraduate Loans..............................................................................................19
Underlying Federal Loan..........................................................................................29
Underlying Private Graduate Loans................................................................................39
Underwriting Agreements.........................................................................................108
unrelated business taxable income................................................................................97
Unsubsidized Stafford Loan Program...............................................................................41
Unsubsidized Stafford Loans......................................................................................21
YEAR 2000........................................................................................................16
YEAR 2000 problems...............................................................................................63
</TABLE>
115
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<S> <C> <C>
Page $___________
Summary of Terms..................................S-4
Risk Factors......................................S-9
Formation of the Trust...........................S-16
Use of Proceeds..................................S-18
The Master Servicer KEYCORP STUDENT LOAN TRUST ___-_
and the Sub-Servicers..........................S-18
The Financed Student Loan Pool...................S-21
Description of the Securities....................S-54
Description of the Transfer and
Servicing Agreements...........................S-62 $___________
Certain Federal Income Tax Consequences..........S-83 FLOATING RATE CLASS A-1
ERISA Considerations.............................S-84 ASSET BACKED NOTES
Underwriting.....................................S-85
Legal Matters....................................S-87
Index of Principal Terms.........................S-88
Annex I
$___________
Prospectus FLOATING RATE CLASS A-2
Table of Contents...................................2 ASSET BACKED NOTES
Risk Factors........................................6
Incorporation of Certain Documents
by Reference.....................................13
Formation of the Trusts............................14
Use of Proceeds....................................15 $___________
The Seller, the Administrator FLOATING RATE
the Master Servicer and the Sub-Servicers........15 ASSET BACKED CERTIFICATES
The Student Loan Pools.............................18
The Student Loan Financing Business................19
Weighted Average Lives of the Securities...........47
Pool Factors and Trading Information...............50
Description of the Notes...........................50 KEY BANK USA, NATIONAL ASSOCIATION
Description of the Certificates....................59 SELLER AND MASTER SERVICER
Certain Information Regarding the Securities.......60
Description of the Transfer and Servicing
Agreements.......................................68
Certain Legal Aspects of the Student Loans.........86
Income Tax Consequences............................93
Pennsylvania State Tax Consequences...............105 PROSPECTUS
ERISA Considerations..............................106
Plan of Distribution..............................108
Legal Matters.....................................110
Index of Principal Terms..........................111
[UNDERWRITERS]
UNTIL ________, ALL DEALERS THAT EFFECT TRANSACTIONS
IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN
THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TOO THE DEALERS'
OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
</TABLE>
116
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117
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Expenses in connection with the offering of the Notes and the
Certificates being registered herein are estimated as follows:
<TABLE>
<S> <C>
SEC registration fee............................................. $278,000
Legal fees and expenses.......................................... $290,000
Accounting fees and expenses..................................... $175,000
Rating agency fees............................................... $180,000
Eligible Lender Trustee fees and expenses........................ $ 15,000
Indenture Trustee fees and expenses.............................. $ 13,000
Printing and engraving........................................... $150,000
Servicer conversion fees......................................... $ 10,000
Miscellaneous.................................................... $ 50,000
---------------
Total................................................. $1,161,000.00
</TABLE>
- -----------------
* All amounts are estimates of expenses incurred or to be incurred in
connection with the issuance and distribution of a Series of Securities
in an aggregate principal amount assumed for these purposes to be
one-third of the principal amount of Securities registered hereby.
Accordingly, only one-third of the SEC Registration Fee paid upon the
filing of this Registration Statement is included in the table above.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Paragraph (a) of Article Tenth of the Articles of Association of the
Registrant (this "Association") provides as follows:
(a) This Association shall indemnify, to the full extent
permitted or authorized by the Ohio General Corporation Law as it may
from time to time be amended, any person made or threatened to be made
a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative, or investigative,
by reason of the fact that he is or was a director, officer, or
employee of this Association, or is or was serving at the request of
this Association as a director, trustee, officer, or employee of
another association, corporation, partnership, joint venture, trust, or
other enterprise; in the case of a person serving at the request of
this Association, such request shall be evidenced by a resolution of
the Board of Directors or a duly authorized committee thereof or by a
writing executed by an officer of this Association pursuant to a
resolution of the Board of Directors or a duly authorized committee
thereof. In the case of a merger into this Association of a constituent
association which, if its separate existence had continued, would have
been required to indemnify directors, officers, or
<PAGE> 215
employees in specified situations prior to the merger, any person who
served as a director, officer, or employee of the constituent
association, or served at the request of the constituent association as
a director, trustee, officer, or employee of another association,
corporation, partnership, joint venture, trust, or other enterprise,
shall be entitled to indemnification by this Association (as the
surviving association) for acts, omissions, or other events or
occurrences prior to the merger to the same extent he would have been
entitled to indemnification by the constituent association if its
separate existence had continued. The indemnification provided by this
Article Tenth shall not be deemed exclusive of any other rights to
which any person seeking indemnification may be entitled by law or
under these Articles or the Bylaws of this Association, or any
agreement, vote of shareholders or disinterested directors, or
otherwise, both as to action in his official capacity and as to action
in another capacity while holding such office, and shall continue as to
a person who has ceased to be a director, trustee, officer, or employee
and shall inure to the benefit of the heirs, executors, and
administrators of such a person.
(b) Notwithstanding division (a) of this [Article Tenth], no
director, officer, or employee of this Association shall be indemnified
against expenses, including attorneys' fees, penalties or other
payments incurred in an administrative proceeding or action instituted
by the Comptroller of the Currency or other appropriate bank regulatory
agency when such proceeding or action results in a final order
assessing civil money penalties against, or requiring affirmative
action of, such director, officer, or employee in the form of payments
to this Association.
Reference is made to Section 1701.13(E) of the General Corporation Law
of the State of Ohio relating to indemnification of directors, officers and
employees of an Ohio corporation. For the full text of Article Tenth of the
Registrant's Articles of Association, reference is hereby made to Exhibit 3(a)
hereto.
The Registrant also maintains insurance on behalf of each director and
certain officers against any loss arising from any claim asserted against him in
any such capacity, subject to certain exclusions.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
Exhibit
No. Description Of Exhibit
- -------- ----------------------
<S> <C>
1.1. Form of Underwriting Agreement for Notes*
1.2. Form of Underwriting Agreement for Certificates*
3.1. Articles of Association of Key Bank USA, National Association**
3.2. Bylaws of Key Bank USA, National Association**
</TABLE>
<PAGE> 216
4.1. Form of Indenture between KeyCorp Student Loan Trust ____-__
(the "Trust") and the Indenture Trustee (including as exhibits
thereto a form of Asset Backed Note)*
4.2. Form of Amended and Restated Trust Agreement between Key Bank
USA, National Association and the Eligible Lender Trustee
(including as an exhibit thereto a form of Asset Backed
Certificate)*
5.1. Opinion of Forrest F. Stanley, Esq. with respect to legality**
8.1. Opinion of Thompson Hine & Flory LLP with respect to federal
tax matters **
8.2. Opinion of Kirkpatrick & Lockhart with respect to Pennsylvania
tax matters**
10.1. Form of Sale and Servicing Agreement among Key Bank USA,
National Association (in its capacity as the Seller and the
Administrator) the Master Servicer (or the Servicers), the
Trust and the Eligible Lender Trustee*
10.2. Form of Administration Agreement among the Administrator, the
Master Servicer (or the Servicers), the Trust and the
Indenture Trustee*
23.1 Consent of Forrest F. Stanley, Esq. (included as
Exhibit 5.1)**
23.2. Consent of Thompson Hine & Flory LLP (included as
Exhibit 8.1)**
23.3. Consent of Kirkpatrick & Lockhart (included as Exhibit 8.2)**
24.1. Powers of Attorney of directors and officers of Key Bank USA,
National Association***
24.2 Certified Board of Directors Resolutions of Key Bank USA,
National Association***
24.3 Additional Board of Directors Resolutions of Key Bank USA,
National Association**
25.1. Statement of Eligibility under the Trust Indenture Act of
1939, as amended, of the Indenture Trustee (Form T-1)**
- ------------------
* Filed Previously in connection with Form S-3 Registration Statement
No. 333-58073 and incorporated herein by reference.
** Filed herewith.
*** Filed previously.
<PAGE> 217
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that:
(1) To provide to the Underwriters at the closing specified in
the Underwriting Agreements Notes and Certificates in such
denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
(2) Insofar as indemnification for liabilities arising under
the Securities Act of 1933, as amended (the "Securities Act") may be
permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 15, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
(3) For purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the Registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this Registration Statement as of the time it was
declared effective.
(4) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating
to the securities offered therein, and the offering of such securities
at the time shall be deemed to be the initial bona fide offering
thereof.
(5) For purposes of determining any liability under the
Securities Act, each filing of the Registrant's annual report pursuant
to section 13(a) or section 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act") that is incorporated by reference
in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering
of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(6) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
<PAGE> 218
(i) To include any prospectus required by Section
10(a) (3) of the Securities Act;
(ii) To reflect in the Prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement; and
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in the registration statement or any material change to such
information in the registration statement.
(7) That, for the purpose of determining any liability under
the Securities Act, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(8) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
<PAGE> 219
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3, it believes that the securities
rating requirement for use of Form S-3 will be met by the time of sale of the
securities and it has duly caused this Amendment No. 1 to Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Cleveland, State of Ohio, on August 16, 1999.
KEY BANK USA, NATIONAL ASSOCIATION
By: /s/ Forrest F. Stanley
-------------------------------------
Forrest F. Stanley, Assistant Secretary
and General Counsel
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to Registration Statement has been signed on August 16, 1999, by
the following persons in the capacities indicated.
Signature Title
--------- -----
* Principal Executive Officer and Director
- --------------------------------
James A. Fishell
* Principal Financial Officer and Director
- --------------------------------
Michael W. Dvorak
* Principal Accounting Officer
- --------------------------------
Joseph A. Pampush
* Director
- --------------------------------
Patrick J. Swanick
* Director
- --------------------------------
Kevin M. Blakely
/s/ FORREST F. STANLEY Director
- --------------------------------
Forrest F. Stanley
*By: /s/ FORREST F. STANLEY
--------------------------
Forrest F. Stanley
Attorney-in-Fact
<PAGE> 220
EXHIBIT INDEX
Exhibit
No. Description Of Exhibit
- ------ ----------------------
1.1. Form of Underwriting Agreement for Notes*
1.2. Form of Underwriting Agreement for Certificates*
3.1. Articles of Association of Key Bank USA, National Association**
3.2. Bylaws of Key Bank USA, National Association**
4.1. Form of Indenture between KeyCorp Student Loan Trust ____-__ (the
"Trust") and the Indenture Trustee (including as exhibits thereto a
form of Asset Backed Note)*
4.2. Form of Amended and Restated Trust Agreement between Key Bank USA,
National Association and the Eligible Lender Trustee (including as an
exhibit thereto a form of Asset Backed Certificate)*
5.1. Opinion of Forrest F. Stanley, Esq. with respect to legality**
8.1. Opinion of Thompson Hine & Flory LLP with respect to federal tax
matters **
8.2. Opinion of Kirkpatrick & Lockhart with respect to Pennsylvania tax
matters**
10.1. Form of Sale and Servicing Agreement among Key Bank USA, National
Association (in its capacity as the Seller and the Administrator) the
Master Servicer (or the Servicers), the Trust and the Eligible Lender
Trustee*
10.2. Form of Administration Agreement among the Administrator, the Master
Servicer (or the Servicers), the Trust and the Indenture Trustee*
23.1. Consent of Forrest F. Stanley, Esq. (included as Exhibit 5.1)**
23.2. Consent of Thompson Hine & Flory LLP (included as Exhibit 8.1)**
23.3. Consent of Kirkpatrick & Lockhart (included as Exhibit 8.2)**
24.1. Powers of Attorney of directors and officers of Key Bank USA, National
Association***
24.2 Certified Board of Directors Resolutions of Key Bank USA, National
Association***
24.3 Additional Board of Directors Resolutions of Key Bank USA,
National Association**
25.1. Statement of Eligibility under the Trust Indenture Act of 1939, as
amended, of the Indenture Trustee (Form T-1)**
- ------------------
* Filed Previously in connection with Form S-3 Registration Statement No.
333-58073 and incorporated herein by reference.
** Filed herewith.
*** Filed previously.
<PAGE> 221
REGISTRATION STATEMENT NO. 333-80109
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 17, 1999
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------------------------
EXHIBITS TO
AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------------------------------------
KEYCORP STUDENT LOAN TRUSTS
(Issuer of the Notes and the Certificates)
----------------------------------------------------
KEY BANK USA, NATIONAL ASSOCIATION
(Originator of the Trust described herein)
(Exact name of Registrant as specified in its charter)
UNITED STATES 34-1804148
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
KEY TOWER
127 PUBLIC SQUARE
CLEVELAND, OHIO 44114
(216) 689-6300
(Address, including zip code, and telephone number, including area
code, of Registrant's principal executive offices)
------------------------------------------------
DANIEL R. STOLZER, ESQ.
VICE PRESIDENT
AND ASSOCIATE GENERAL COUNSEL
KEYCORP
KEY TOWER
127 PUBLIC SQUARE
CLEVELAND, OHIO 44114
(216) 689-6300
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
------------------------------------------------
COPIES TO:
ROBERT A. SELAK, ESQ. REED D. AUERBACH, ESQ.
THOMPSON HINE & FLORY LLP STROOCK & STROOCK & LAVAN LLP
312 WALNUT STREET 180 MAIDEN LANE
SUITE 1400 NEW YORK, NEW YORK 10038
CINCINNATI, OHIO 45202
-----------------------------
<PAGE> 1
EXHIBIT 3.1
-----------
ARTICLES OF ASSOCIATION OF
KEYBANK USA, NATIONAL ASSOCIATION.
<PAGE> 2
Exhibit 3.1
KEY BANK USA, NATIONAL ASSOCIATION
ARTICLES OF ASSOCIATION
FIRST. The title of this Association shall be Key Bank USA, National
Association.
SECOND. The main office of this Association shall be in Cleveland,
County of Cuyahoga, State of Ohio. The general business of this Association
shall be conducted at its main office: 127 Public Square, Cleveland, Ohio 44114.
THIRD. The Board of Directors of this Association shall consist of not
less than five nor more than twenty-five members, the exact number of Directors
within such minimum and maximum limits to be fixed and determined from time to
time by resolution of a majority of the full Board of Directors or by
resolution of the shareholders at any annual or special meeting thereof. In
accordance with 12 U.S.C. Section 72, each director; during the full term of his
or her directorship, shall own in his or her own right either shares of capital
stock of the Association the aggregate par value of which is not less than
$1,000 or an equivalent interest, as determined by the Comptroller of the
Currency, in any company which has control over the Association within the
meaning of 12 U.S.C. Section 1841. Unless otherwise provided by the laws of the
United States, any vacancy in the Board of Directors for any reason, including
an increase in the number thereof, may be filled by action of the Board of
Directors.
FOURTH. The annual meeting of the shareholders for the election of
Directors and the transaction of whatever other business may be brought before
said meeting shall be held at the main office or such other place as the Board
of Directors may designate, on the day of each year specified therefor in the
Bylaws, but if no election is held on that day, it may be held on any subsequent
day according to the provisions of law, and all elections shall be held
according to such lawful regulations as may be prescribed by the Board of
Directors.
FIFTH. The authorized amount of capital stock of this Association shall
be 659,305 shares of common stock of the par value of One Hundred Dollars ($100)
per share but said capital stock may be increased or decreased from time to
time, in accordance with the provisions of the laws of the United States.
No holder of shares of capital stock of any class of this Association
shall have any preemptive or preferential right of subscription to any shares
of any class of stock of this Association, whether now or hereafter authorized,
or to any obligations convertible into stock of this Association, issued or
sold, nor any right of subscription to any thereof other than such, if any, as
the Board of Directors, in its discretion, may from time to time determine and
at such price as the Board of Directors may from time to time fix.
This Association, at any time and from time to time, may authorize and
issue debt obligations, whether or not subordinated, without the approval of
shareholders.
-1-
<PAGE> 3
SIXTH. The Board of Directors shall appoint one of its members
President of this Association, who shall be Chairman of the Board, unless the
Board appoints another Director to be the Chairman. The Board of Directors shall
have the power to appoint one or more Vice Presidents and to appoint a Cashier
and such other officers and employees as may be required to transact the
business of this Association.
The Board of Directors shall have the power to define the duties of the
officers and employees of this Association; to fix the salaries to be paid to
them; to dismiss them; to require bonds from them and to fix the penalty
thereof; to regulate the manner in which any increase of the capital of this
Association shall be made; to manage and administer the business and affairs of
this Association; to make all Bylaws that it may be lawful for them to make; and
generally to do and perform all acts that it may be legal for a Board of
Directors to do and perform.
SEVENTH. The Board of Directors shall have the power to change the
location of the main office to any other place within the limits of Cleveland,
Ohio, without the approval of the shareholders but subject to the approval of
the Comptroller of the Currency, and shall have the power to establish or change
the location of any branch or branches of the Association to any other location,
without the approval of the shareholders but subject to the approval of the
Comptroller of the Currency.
EIGHTH. The corporate existence of this Association shall continue
until terminated in accordance with the laws of the United States.
NINTH. The Board of Directors of this Association, or any shareholders
owning, in the aggregate, not less tan ten percent (10%) of the stock of this
Association, may call a special meeting of shareholders at any time. Unless
otherwise provided by the laws of the United States, a notice of time, place,
and purpose of every annual and special meeting of the shareholders shall be
given by first-class mail, postage prepaid, mailed at least ten days prior to
the date of such meeting to each shareholder of record at his address as shown
upon the books of this Association, except as to any shareholder who has
specifically waived notice of such meeting.
TENTH. (a) This Association shall indemnify, to the full extent
permitted or authorized by the Ohio General Corporation Law as it may from time
to time be amended, any person made or threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative, or investigative, by reason of the fact that he is or
was a director, officer, or employee of this Association, or is or was serving
at the request of this Association as a director, trustee, officer, or employee
of another association, corporation, partnership, joint venture, trust, or other
enterprise; in the case of a person serving at the request of this Association,
such request shall be evidenced by a resolution of the Board of Directors or a
duly-authorized committee thereof or by a writing executed by an officer of this
Association pursuant to a resolution of the Board of Directors or a
duly-authorized committee thereof. In the case of a merger into this Association
of a constituent association which, if its separate existence had continued,
would have been required to indemnify directors, officers, or employees in
specified situations prior to the merger, any
-2-
<PAGE> 4
person who served as a director, officer, or employee of the constituent
association, or served at the request of the constituent association as a
director, trustee, officer, or employee of another association, corporation,
partnership, joint venture, trust, or other enterprise, shall be entitled to
indemnification by this Association (as the surviving association) for acts,
omissions, or other events or occurrences prior to the merger to the same extent
he would have been entitled to indemnification by the constituent association if
its separate existence had continued. The indemnification provided by this TENTH
shall not be deemed exclusive of any other rights to which any person seeking
indemnification may be entitled by law or under these Articles or the Bylaws, or
any agreement, vote of shareholders or disinterested directors, or otherwise,
both as to action in his official capacity and as to action in another capacity
while holding such office, and shall continue as to a person who has ceased to
be a director, trustee, officer, or employee and shall inure to the benefit of
the heirs, executors, and administrators of such a person.
(b) Notwithstanding division (a) of this TENTH, no director, officer,
or employee of this Association shall be indemnified against expenses, including
attorneys' fees, penalties or other payments incurred in an administrative
proceeding or action instituted by the Comptroller of the Currency or other
appropriate bank regulatory agency when such proceeding or action results in a
final order assessing civil money penalties against, or requiring affirmative
action of, such director, officer, or employee in the form of payments to this
Association.
(c) This Association may purchase and maintain insurance or furnish
similar protection, including but not limited to trust funds, letters of credit,
or self-insurance on behalf of or for any person who is or was a director,
officer, employee, or agent of this Association, or is or was serving at the
request of this Association as a director, trustee, officer, employee, or agent
of another association, corporation, partnership, joint venture, trust, or other
enterprise, against any liability asserted against him and incurred by him in
any capacity, or arising out of his status as such, whether or not this
Association would have the power to indemnify him against liability under the
provisions of this TENTH or of the Ohio General Corporation Law; provided,
however, such insurance shall explicitly exclude insurance coverage for a formal
order assessing civil money penalties against a director, officer, or employee
of this Association as a result of an administrative proceeding or action
instituted by the Comptroller of the Currency or other appropriate bank
regulatory agency. Insurance may be purchased from or maintained with a person
in which this Association has a financial interest.
(d) Expenses (including attorney's fees) incurred by a director in
defending any action, suit, or proceeding referred to in division (a) of this
TENTH commenced or threatened against the director for any action or failure to
act as a director shall be paid by this Association, as they are incurred, in
advance of final disposition of the action, suit, or proceeding upon receipt of
an undertaking by or on behalf of the director in which he agrees both (i) to
repay the amount if it is proved by clear and convincing evidence in a court of
competent jurisdiction that his action or failure to act involved an act or
omission undertaken with deliberate intent to cause injury to this Association
or undertaken with reckless disregard for the best interests of this Association
and (ii) to reasonably cooperate with this Association
-3-
<PAGE> 5
concerning the action, suit, or proceeding. The provisions of this paragraph
shall not apply if the only liability asserted against the director in such
action, suit, or proceeding is for (i) the payment of a dividend or
distribution, or the making of a distribution of assets to shareholders, or the
purchase or redemption of this Association's own shares, contrary in any such
case to law or these Articles of Association, or (ii) a distribution of assets
to shareholders during the winding up of the affairs of the Association, on
dissolution or otherwise, without the payment of all known obligations of the
Association, or without making adequate provision therefor.
Expenses (including attorney's fees) incurred by a director (to the extent the
expenses are not required to be advanced pursuant to the preceding paragraph),
officer, or employee in defending any action, suit, or proceeding referred to in
division (a) of this TENTH may be paid by this Association, as they are
incurred, in advance of final disposition of the action, suit, or proceeding, as
authorized by the Board of Directors in the specific case, upon receipt of an
undertaking by or on behalf of the director, officer, or employee to repay the
amount if it is ultimately determined that he is not entitled to be indemnified
by this Association.
(e) Notwithstanding division (d) of this TENTH, expenses, including
attorneys' fees, incurred by a present or former director, officer, or employee
of this Association in defending an administrative proceeding or action
instituted by the Comptroller of the Currency or other appropriate bank
regulatory agency that seeks a final order assessing civil money penalties or
requiring affirmative action by an individual or individuals in the form of
payments to this Association, may be paid by this Association as they are
incurred in advance of the final disposition of the action, suit, or proceeding,
only in the event that:
(i) the Board of Directors of this Association, in good faith, determines in
writing that all of the following conditions are met:
(A) the director, officer, or employee has a substantial likelihood of
prevailing on the merits;
(B) in the event the director, officer, or employee does not prevail, he will
have the financial capability to reimburse this Association;
(C) all applicable laws and regulations affecting loans to the director,
officer, or employee will be complied with in the event reimbursement is
required;
(D) payment of expenses by this Association will not adversely affect this
Association's safety and soundness; and
(ii) the director, officer, or employee enters into an agreement with this
Association to repay such amount if:
(A) such administrative proceeding or action instituted by the Comptroller of
the Currency or other appropriate bank regulatory agency results in a final
order assessing civil money
-4-
<PAGE> 6
penalties against, or requiring affirmative action of, such director, officer,
or employee in the form of payments to this Association; or
(B) the Board of Directors of this Association finds that the director, officer,
or employee willfully misrepresented factors relevant to the Board of Directors'
determination of conditions (A) or (B) set forth in (i), above.
If at any time the Board of Directors of this Association believes that
any of the conditions set forth in (i) above are no longer met, such expenses
will no longer be paid by this Association.
(f) Notwithstanding divisions (a) through (e) of this TENTH, all of the
provisions of this TENTH are subject to the authority of the Office of the
Comptroller of the Currency to direct a modification of a specific
indemnification by a national bank through appropriate administrative action.
ELEVENTH. These Articles of Association may be amended at any regular
or special meeting of the shareholders by the affirmative vote of the holders of
a majority of the stock of this Association, unless the vote of the holders of a
greater amount of stock is required by law, and in that case by the vote of the
holders of such greater amount.
In witness whereof, we have hereunto set our hands this 12th day of
May, 1995.
/s/ Lee Irving /s/ Jeanne B. Krips
- ------------------------------------- -------------------------------------
Lee Irving Jeanne B. Krips
/s/ John H. Mancuso /s/ A. Jay Meyerson
- ------------------------------------ -------------------------------------
John H. Mancuso A. Jay Meyerson
/s/ Frederick E. Wolfert
-------------------------
Frederick E. Wolfert
-5-
<PAGE> 1
EXHIBIT 3.2
-----------
BY LAWS OF
KEYBANK USA, NATIONAL ASSOCIATION
<PAGE> 2
Exhibit 3.2
The following Bylaws were adopted on February 18, 1999 by the Board of Directors
of Key Bank USA, National Association.
BYLAWS OF
KEY BANK USA, NATIONAL ASSOCIATION
ARTICLE I
MEETING OF SHAREHOLDERS
Section 1. Annual Meeting. The annual meeting of shareholders for the election
of Directors, and the transaction of whatever other business may properly come
before the meeting, shall be held at the main office of the Bank, or such other
place authorized by the Board of Directors or the Chairperson of the Board, on
such date authorized by the Board of Directors or the Chairperson of the Board.
If, for any cause, the election of Directors is not held on that day, the Board
of Directors shall order the election to be held on some subsequent day, as soon
thereafter as practicable, according to the provisions of law, and notice
thereof shall be given in the manner herein provided for the annual meeting.
Section 2. Special Meetings. Except as otherwise specifically provided by
statute, special meetings of the shareholders may be called for any purpose at
any time by the Chairperson of the Board, the President, the Board of Directors,
or by any shareholder or shareholders owning, in the aggregate, not less than
ten per centum (10%) of the stock of the Bank.
Section 3. Notice of Meetings. Unless otherwise provided by law, these Bylaws,
or the Articles of Association, a notice of the time, place, and purpose of
every annual meeting and every special meeting of the shareholders shall be
given by first-class mail, postage prepaid, mailed not less than ten days nor
more than sixty days prior to the date of such meeting, to each shareholder of
record at such shareholder's address as shown upon the books of the Bank. A sole
shareholder may waive notice of a shareholder meeting at any time prior to or
after the meeting.
Section 4. Proxies. Shareholders may vote at any meeting of the shareholders by
proxies duly authorized in writing, but no officer or employee of this Bank may
act as a proxy. Proxies shall be valid only for one meeting, to be specified
therein, and any adjournments of such meeting. Proxies shall be dated and shall
be filed in the Bank's records. The person appointed as proxy need not be a
shareholder. Unless the writing appointing a proxy otherwise provides, the
presence at a meeting of the person who appointed a proxy shall not operate to
revoke the appointment. Notice to the Bank, in writing or in open meeting, of
the revocation of the appointment of a proxy shall not affect any vote or act
previously taken or authorized by such proxy.
<PAGE> 3
Section 5. Quorum; Adjournment. Except as may otherwise be provided by law, at
any meeting of the shareholders, the holders of shares entitling them to
exercise a majority of the voting power of the Bank present in person or by
proxy shall constitute a quorum for such meeting; provided, however, that no
action required by law to be authorized or taken by a designated proportion of
the shares may be authorized or taken by a lesser proportion; provided, further,
that, if a quorum is not present, the holders of a majority of the voting shares
represented thereat may adjourn such meeting or any adjournment thereof. If any
meeting is adjourned, notice of such adjournment need not be given if the time
and place to which such meeting is adjourned are fixed and announced at such
meeting.
Section 6. Voting Power; Cumulative Voting. In voting on issues at meetings of
shareholders, except on the election of Directors, each shareholder shall be
entitled to one vote for each share of stock held. A majority of votes cast
shall decide each issue submitted to the shareholders at any meeting, except in
cases where by law or by the Articles of Association a larger vote is required.
In all elections of Directors, each shareholder shall have the right to vote the
number of shares owned by such shareholder for as many persons as there are
Directors to be elected, or to cumulate such shares and give one candidate as
many votes as the number of Directors multiplied by the number of such
shareholder's shares shall equal, or to distribute them on the same principle
among as many candidates as such shareholder chooses.
Section 7. Record of Shareholders and Votes. At any meeting of the shareholders,
a record showing the names of shareholders present and the number of shares of
stock held by each, the names of shareholders represented by proxy and the
number of shares held by each, and the names of the proxies shall be made. This
record also shall show the number of shares voted on each action taken,
including the number of shares voted for each candidate for the Board of
Directors. This record shall be included in the minute book of the Bank.
ARTICLE II
BOARD OF DIRECTORS
Section 1. Authority. The Board of Directors shall have power to manage and
administer the business and affairs of the Bank. Except as expressly limited by
law, all corporate powers of the Bank shall be vested in and exercised by or
under the authority of the Board of Directors.
Section 2. Number. The Board of Directors shall consist of not less than five
nor more than twenty-five members; the exact number within such minimum and
maximum limits shall be fixed and determined from time to time by resolution of
a majority of the full Board of Directors or by resolution of the shareholders
at any meeting thereof; provided, however, that a majority of the full Board of
Directors may not increase the number of Directors to a number which exceeds by
more than: (i) two the number of Directors last fixed and
<PAGE> 4
determined by the shareholders where such number was fifteen or less, or (ii)
four the number of Directors last fixed and determined by the shareholders where
such number was sixteen or more.
Section 3. Election of Directors; Vacancies. The Directors shall be elected at
each annual meeting of shareholders or at a special meeting called for the
purpose of electing Directors. Any vacancy or vacancies occurring in the Board
of Directors, including vacancies created by an increase in the numbers of
Directors, shall be filled by appointment by the remaining Directors at any
regular or special meeting of the Board or by the shareholders at any meeting
thereof, and any Director or Directors so appointed shall hold office until the
next election. Each person elected or appointed a Director must take the oath of
such office in the form prescribed by the Comptroller of the Currency. No person
elected or appointed a Director shall exercise the functions of such office
until he or she has taken such oath. The Bank shall transmit evidence of such
oath or oaths to the Comptroller of the Currency.
Section 4. Term of Office; Resignations. Directors shall hold office until the
next annual meeting of shareholders or until their successors are elected and
have qualified, or until their earlier resignation, removal from office, or
death. Any Director may resign at any time by oral statement to that effect made
at a meeting of the Board of Directors, or in a writing to that effect delivered
to the Secretary or an Assistant Secretary of the Bank; such resignation shall
take effect immediately or at such other time as the Director may specify at
such meeting or in such writing. At a meeting of shareholders called expressly
for that purpose, any director or the entire Board of Directors may be removed,
with or without cause, by a vote of the holders of a majority of the shares then
entitled to vote at an election of directors. If permitted by law, the majority
of the Board of Directors may remove a director for cause.
Section 5. Organization Meeting. Following the annual meeting of shareholders,
the Directors-elect shall hold an organization meeting for the purpose of
appointing officers and transacting such other business as properly may come
before the meeting. Such organization meeting shall be held on the day of the
election or as soon thereafter as practicable and, in any event, within thirty
days thereof. Notice of such meeting need not be given if held on the day of the
election.
Section 6. Regular Meetings. Regular meetings of the Board of Directors shall be
held at the main office of the Bank or at such other place authorized by the
Board of Directors or the Chairperson of the Board, on such date authorized by
the Board of Directors, the Chairperson of the Board, the President, or the
Secretary. When any regular meeting of the Board falls upon a holiday, the
meeting shall be held on the next banking business day unless the Board shall
designate some other day.
Section 7. Special Meetings. Special meetings of the Board of Directors may be
called by the Chairperson of the Board, by the President, by the Secretary, or
at the request of two or more Directors. Notice of special meetings, stating the
time and place thereof, shall be given in person or by mailing, telephoning, or
telegraphing such notice at least 24 hours prior
<PAGE> 5
to the meeting; provided, however, that attendance of any Director at such
meeting without protesting, prior to or at the commencement of the meeting, the
lack of proper notice, shall be deemed a waiver by such Director of notice of
such meeting. Notice of a meeting may be waived in writing or by telegram either
before or after such meeting. Unless otherwise indicated in the notice of the
meeting, any business may be transacted at such meeting.
Section 8. Quorum; Adjournment. A quorum of the Board of Directors shall consist
of a majority of the Directors then in office; provided that a majority of the
Directors then present at a meeting duly held, whether or not a quorum is
present, may adjourn such meeting from time to time. If any meeting is
adjourned, notice of such adjournment need not be given if the time and place to
which such meeting is adjourned are fixed and announced at such meeting. At each
meeting of the Board of Directors at which a quorum is present, all issues shall
be determined by a majority vote of those present except as otherwise expressly
provided in these Bylaws or by law. A Director cannot vote or otherwise act by
proxy at a meeting of the Board of Directors.
ARTICLE III
OFFICERS
Section 1. Election and Designation of Officers. The Board of Directors shall
elect or appoint a Chairperson of the Board, a President, one or more Vice
Presidents, a Secretary, and such other officers as the Board may deem necessary
all with such titles, authorities, and duties as the Board of Directors may from
time to time determine. The Chairperson of the Board and the President shall be
members of the Board of Directors. The Board of Directors may delegate the
authority to appoint and dismiss officers to officers of the Bank or to a
committee composed of such officers. Any two or more offices may be held by the
same person, but no officer shall execute, acknowledge, or verify any instrument
in more than one capacity if the instrument is required to be executed,
acknowledged, or verified by two or more officers.
Section 2. Term of Office; Vacancies. The officers of the Bank shall hold office
until their successors are elected or appointed and qualified, except in the
case of resignation, dismissal or removal from office, or death. The Board of
Directors may dismiss or remove any officer at any time, with or without cause,
by a majority vote of the Directors then in office, without prejudice to the
contract rights of such officer; an election or appointment of an officer shall
not of itself create any contract rights. Any vacancy in any office may be
filled in the manner provided herein for the election or appointment of office.
The Board of Directors is not required to annually elect or appoint officers.
Section 3. Chairperson. The Chairperson of the Board shall preside at all
meetings of shareholders and the Board of Directors. In the absence of, or at
the direction of, the Chairperson of the Board, the President, or such other
Director designated by the Chairperson of the Board, shall preside at a meeting
of the shareholders or the Board of Directors, as the case may be.
<PAGE> 6
Section 4. President. The President shall have general executive powers over the
management and business of the Bank, subject to the direction of the Board of
Directors and the Chairperson of the Board.
Section 5. Vice Presidents. Each Vice President shall have such powers and
duties as may be assigned to him or her by the Board of Directors or as
otherwise provided for herein; the Board of Directors may authorize one of the
Vice Presidents to perform the duties of the President in the President's
absence or if the President is unable to act.
Section 6. Secretary. The Board of Directors shall appoint a Secretary or other
designated officer who shall be Secretary of the Board and of the Bank. The
Secretary shall give or provide for giving of all notices required by law or
these Bylaws to be given, shall be custodian of the corporate seal, records,
documents, and papers of the Bank, shall keep accurate minutes of all meetings
covered by these Bylaws, and shall perform such other duties as may be assigned
from time to time by the Board of Directors.
Section 7. Duties of Officers. The officers of the Corporation shall have such
authority and perform such duties as are customarily incident to their
respective offices, or as may be determined by the Board of Directors,
regardless of whether such authority and duties are customarily incident to such
offices.
ARTICLE IV
COMMITTEES
Section 1. Executive Committee. The Board of Directors may appoint an Executive
Committee which shall consist of the Chairperson of the Board and not less than
two other Directors. Each member of the Board of Directors who is not a member
of the Committee shall be an alternate and, at the request of the officer who is
to preside at the meeting, may serve in the place of any regular member who is
unable to attend a committee meeting for any reason. The Chairperson of the
Board shall preside at all meetings of the Committee; if such officer is absent,
another Committee member shall preside.
Section 2. Powers of Executive Committee. The Executive Committee shall have and
may exercise, as far as permitted by law, all the powers and authority of the
Board of Directors and other committees of the Board of Directors between
meetings of such Board or such committees.
Section 3. Other Committees. The Board of Directors may, by resolutions adopted
by a majority of the full Board, establish one or more other committees; each
committee shall consist of three or more members of the Board of Directors
which, to the extent provided in such resolution or resolutions or in these
Bylaws, shall have and may exercise the powers of the Board of Directors in the
management of the business and affairs of the Bank and may have the power to
authorize the seal of the Bank to be affixed to all papers which may require it.
Such committee or committees shall have such name or names as may be stated in
these Bylaws or as may be determined from time to time by resolution adopted by
the Board of
<PAGE> 7
Directors. The Board of Directors may designate one or more Directors as
alternate members of any committee, who may serve in the place of any regular
member who is unable to attend a committee meeting for any reason. Each
committee shall keep regular minutes of its meetings and present such minutes
for review to the Board of Directors.
Section 4. Notice of Meetings. Meetings of the Board committees shall be held at
the principal office of the Bank in the City of Cleveland, or at such other
place as may be designated in the notice of the meeting at any time upon call by
the Chairperson of the Board, the President, the Secretary or the Chairperson of
the Committee. Notice of each such meeting shall be given to each member of the
Committee in person or by mailing, telephoning, or telegraphing such notice at
least 24 hours prior to the meeting; provided, however, that attendance by any
Director at such meeting, without protesting prior to or at the commencement of
such meeting, the lack of proper notice shall be deemed a waiver by such
Director of the notice of such meeting. Notice of the meeting may be waived in
writing or by telegram by any member either before or after such meeting. Unless
otherwise indicated in the notice of the meeting, any business may be transacted
at such meeting.
ARTICLE V
RECORD DATES
The Board of Directors may fix, or authorize the Chairperson of the Board or the
President to fix, a record date for any lawful purpose. The record date for the
purpose of the determination of the shareholders who are entitled to receive
notice of or to vote at a meeting of shareholders shall continue to be the
record date for all adjournments of such meeting. The Board of Directors may
close the share transfer books against transfer of shares during the whole or
any part of the period provided for in this Article, including the date of the
meeting of shareholders and the period ending with the date, if any, to which
the meeting is adjourned.
ARTICLE VI
CERTIFICATES FOR SHARES
Section 1. Form of Certificates and Signatures. Each holder of shares shall be
entitled to one or more certificates signed by the Chairperson of the Board, the
President or a Vice President, and by the Secretary or an Assistant Secretary.
The signature of any of such officers of the Bank may be a facsimile, engraved,
stamped, or printed. In case any such officer whose legal or facsimile signature
has been placed upon such certificate ceases to be such officer before the
certificate is delivered, such certificate nevertheless shall be effective in
all respects when delivered.
Section 2. Transfer of Shares. Shares of the Bank shall be transferable upon the
books of the Bank by the holders thereof, in person, or by a duly authorized
attorney, upon surrender and cancellation of certificates for a like number of
shares of the same class, with duly executed assignment and power of transfer
endorsed thereon or attached thereto, and with
<PAGE> 8
such proof of the authenticity of such signatures to such certificates and power
of transfer as the Bank or its agents may reasonably require.
Section 3. Corporate Seal. The following is an impression of the seal adopted by
the Board of Directors of the Bank.
(to be inserted)
Any officer shall have authority to affix the corporate seal to any document
requiring such seal and to attest the same. Failure to affix the seal to any
instrument executed on behalf of the Bank shall not affect the validity of such
instrument unless such action is required by law.
ARTICLE VII
BANKING HOURS
The main office and branch offices of the Bank shall be open for business upon
such days of the year and for such hours as the Board of Directors or the
officers of the Bank may from time to time determine.
ARTICLE VIII
MISCELLANEOUS
Section 1. Fiscal Year. The fiscal year of the Bank shall be the calendar year.
Section 2. Definitions. The word "person" wherever used in these Bylaws shall be
taken to mean and include individuals, partnerships, associations, and
corporations when the text so requires. "Vice President", as used in these
Bylaws, shall include Vice Chairperson and such titles as Senior Executive Vice
President, Executive Vice President, and Senior Vice President. Words of the
singular number shall be taken to include the plural and those of the plural
number shall be taken to include the singular whenever appropriate.
Section 3. Execution of Instruments. The Chief Executive Officer may from time
to time prescribe in writing the authority of the officers, employees, and
agents of the Bank with respect to the making, execution, and delivery in the
name and on behalf of the Bank of documents and instruments in writing necessary
to the transaction of its business, whether in a fiduciary capacity or
otherwise, and with respect to the approval orally, or by conduct other than
signing of agreements, of transactions in the name and on behalf of the Bank
necessary to the carrying out of the business of the Bank; provided, however,
that if the Chief Executive Officer fails to take such action, the Board of
Directors shall, by resolution, establish such authorities in writing. Where any
such resolution or any such writing has been certified by the Secretary or an
Assistant Secretary as to its full force and effect, any instrument executed or
transaction effected in conformity with such resolution or such writing may be
relied upon
<PAGE> 9
by any person. Authority granted to officers, employees, and agents of the Bank,
pursuant to this Section 3 shall apply to all documents, instruments, and
conduct relating to any entity for which the Bank is a successor in interest,
whether by merger or otherwise.
Section 4. Use of Communications Equipment at Meetings. Members of the Board of
Directors may participate in regular or special meetings of the Board of
Directors, and members of committees appointed by the Board of Directors may
participate in regular or special meetings of those committees, through use of
conference telephone or similar communications equipment, as long as all members
participating in such meeting can hear one another.
Section 5. Action Without a Meeting. Any action which may be taken at a meeting
of the Bank's shareholders, Board of Directors, or committee of the Board of
Directors, may be taken without a meeting by the unanimous vote of approval of,
and in a writing or writings signed by, all of the Bank's shareholders,
Directors, or committee members, respectively, entitled to notice of such
meeting; such writing or writings shall be included in the minute book of the
Bank.
Section 6. Waivers of Notice. Any Director may waive the giving of any notice
required to be given to him or her under these Bylaws before or after the time
when such notice may be required to be given.
Section 7. Telegram. Any action required or permitted to be taken hereunder by
telegram may be taken by telex, fax, or similar communication equipment.
Section 8. Records. The Articles of Association, these Bylaws, and the
proceedings of all meetings of the shareholders, the Board of Directors, and
committees of the Board, shall be recorded in appropriate minute books provided
for that purpose. The minutes of each meeting shall be signed by the Secretary,
an Assistant Secretary, or other officer appointed to act as secretary of the
meeting.
Section 9. Ohio Law. To the extent not inconsistent with applicable Federal
banking statutes and regulations, the Bank shall follow the corporate governance
procedures set forth in the Ohio General Corporation Law as it may be amended
from time to time.
Section 10. Interest Rates and Assessments and Loans. The Bank may assess and
collect from borrowers interest at any rate agreed upon by the Bank and the
borrower as specified in the loan agreement. In addition to such interest, the
Bank may assess and collect any dues, fines, premiums, or other assessments on
loans made in such amount as may be agreed upon in the loan agreement,
including, but not limited to, the following: origination fees; guarantee fees
or charges for any insurance protecting a creditor against a borrower's default
or other credit loss; late, default, or delinquency charges; deferment charges;
annual or other periodic membership fees; charges for returned checks and other
forms of payment; overlimit charges; cash advance fees; stop payment fees; ATM,
electronic, or similar interchange access fees; transaction fees; currency
conversion charges; fees for replacement of credit
<PAGE> 10
cards, access checks, or other access devices; minimum charges; research
charges; charges for providing documentation or other evidence; credit,
property, or other types of insurance premiums, including premiums for insurance
in lieu of perfecting a security interest; collection costs; court costs;
attorney's fees; applications fees; credit report fees; investigation fees;
commitment fees; finder's fees; broker fees; assumption fees; processing fees;
credit report fees; investigation fees; points; survey and appraisal fees; title
examination and report fees; title insurance premiums; abstract of title fees;
escrow fees; trustee fees; official fees and taxes; filing and recording fees;
fees for taking or releasing a security interest; document preparation and
notarization fees; prepayment fees.
ARTICLE IX
AMENDMENTS
These Bylaws may be amended, altered, or repealed, at any regular or special
meeting of the Board of Directors, by a vote of a majority of the whole number
of the Directors or by the shareholders by the affirmative vote of the holders
of shares entitling them to exercise a majority of the voting power of the Bank.
<PAGE> 1
EXHIBIT 5.1
OPINION AND CONSENT OF FOREST F. STANLEY, ESQ.
WITH RESPECT TO LEGALITY
KEY BANK USA, NATIONAL ASSOCIATION
August 17, 1999
Key Bank USA, National Association
127 Public Square
Cleveland, Ohio 44114
Re: Key Bank USA, National Association
Registration Statement on Form S-3
File No. 333-80109
-----------------------------------
Gentlemen:
I am the General Counsel of Key Bank USA, National Association (the
"Bank") and have acted as counsel to the Bank in connection with the above
referenced Registration Statement (together with the exhibits and any amendments
thereto, the "Registration Statement") filed by the Bank with the Securities and
Exchange Commission in connection with the registration by the Bank of Floating
Rate Asset Backed Notes and Floating Rate Asset Backed Certificates (the "Notes"
and "Certificates" and each "Securities") to be sold from time to time in one or
more series in amounts to be determined at the time of sale and to be set forth
in one or more Supplements (each a "Prospectus Supplement") to the Prospectus
(the "Prospectus") included in the Registration Statement.
I am familiar with the proceedings to date in connection with the
proposed issuance and sale of the Notes and Certificates, and in order to
express my opinion hereinafter stated, I, or attorneys working at my direction,
have examined and relied upon the Registration Statement and, in each case as
filed with the Registration Statement, the forms of Sale and Servicing
Agreement, Trust Agreement, Indenture, Amended and Restated Trust Agreement,
Notes, Certificates and Statement of Eligibility under the Trust Indenture Act
of 1939 of the Indenture Trustee (the "Operative Documents"). Terms used herein
without definition have the meanings given to such terms in the Registration
Statement. I, or attorneys working at my direction, have also examined such
statutes, corporate records and other instruments as I have deemed necessary for
the purposes of this opinion.
This Opinion Letter is governed by, and shall be interpreted in
accordance with, the Legal Opinion Accord (the "Accord") of the ABA Section of
Business Law (1991). As a consequence,
<PAGE> 2
it is subject to a number of qualifications, exceptions, definitions,
limitations on coverage, and other limitations, all as more particularly
described in the Accord, and this Opinion Letter should be read in conjunction
therewith. The Law covered by the opinions expressed herein is limited to the
Laws of the State of Ohio and Federal Law.
Based upon and subject to the foregoing, I am of the opinion that, with
respect to the Notes and/or Certificates of any series, when: (a) the
Registration Statement becomes effective pursuant to the provisions of the
Securities Act of 1933, as amended, (b) the amount, price, interest rate and
other principal terms of such Securities have been fixed by or pursuant to
authorization of the Board of Directors of the Bank, (c) the Operative Documents
relating to such series have each been duly completed, authorized, executed and
delivered by the parties thereto, substantially in the form filed as an exhibit
to the Registration Statement reflecting the terms established as described
above, (d) in the case of any Trust that issues Notes, the related Indenture has
been duly qualified under the Trust Indenture Act of 1939, as amended, (e) such
Securities have been duly executed and issued by the related Trust and
authenticated by the Eligible Lender Trustee, and sold by the Bank or the Trust,
at the direction of the Bank, as applicable, and (f) payment of the agreed
consideration for such Securities shall have been received by the Trust, all in
accordance with the terms and conditions of the related Operative Documents, and
a definitive purchase, underwriting or similar agreement with respect to such
Securities and in the manner described in the Registration Statement: (i) such
Notes will have been duly authorized by all necessary action of the Trust and
will be legally issued and binding obligations of the Trust and entitled to the
benefits afforded by the related Indenture and (ii) such Certificates will have
been duly authorized by all necessary action of the Trust and will be legally
issued, fully paid and non-assessable.
I hereby consent to the filing of this Opinion Letter as an Exhibit to
the Registration Statement and to the references to me under the caption "Legal
Matters" in the Prospectus.
Very truly yours,
/s/ FORREST F. STANLEY
Forrest F. Stanley
General Counsel
-2-
<PAGE> 1
EXHIBIT 8.1
OPINION AND CONSENT OF THOMPSON HINE & FLORY LLP
WITH RESPECT TO FEDERAL TAX MATTERS
THOMPSON HINE & FLORY LLP
August 17, 1999
Key Bank USA, National Association
Key Tower
127 Public Square
Cleveland, Ohio 44114-1306
Re: Key Bank USA, National Association Registration Statement on Form S-3
(No. 333-80109)
Ladies and Gentlemen:
We have acted as special tax counsel for Key Bank USA, National Association (the
"Seller"), in connection with the above-referenced Registration Statement
(together with the exhibits and any amendments thereto, the "Registration
Statement"), filed by the Seller with the Securities and Exchange Commission in
connection with the registration by the Seller of Asset Backed Notes (the
"Notes") and Asset Backed Certificates (the "Certificates") to be sold from time
to time in one or more series in amounts to be determined at the time of sale
and to be set forth in one or more Supplements (each, a "Prospectus Supplement")
to the Prospectus (the "Prospectus") included in the Registration Statement.
We are familiar with the proceedings to date in connection with the proposed
issuance and sale of the Notes and Certificates and in order to express our
opinion hereinafter stated, (a) we have examined copies of the forms of (i) the
Trust Agreement, (ii) the Sale and Servicing Agreement, (iii) the Indenture, and
(iv) the Notes and Certificates filed as exhibits to the Registration Statement
(collectively the "Operative Documents") and (b) we have examined such other
records and documents and such matters of law, and we have satisfied ourselves
as to such matters of fact, as we have considered relevant for purposes of this
opinion.
The opinions set forth in this letter concerning Federal income tax matters and
ERISA matters are based upon the applicable provisions of the Internal Revenue
Code of 1986, as amended, Treasury Regulations promulgated and proposed
thereunder, current positions of the Internal Revenue Service (the "IRS")
including those contained in published Revenue Rulings and Revenue Procedures,
the applicable provisions of the Employee Retirement Income Security Act of
1974, as amended, Department of Labor ("DOL") Regulations promulgated
thereunder,
<PAGE> 2
prohibited transaction exemptions granted by the DOL, and existing judicial
decisions. This opinion is subject to the explanations and qualifications set
forth under the captions "Income Tax Consequences" and "ERISA Considerations" in
the Prospectus and the Prospectus Supplements which constitute a part of the
Registration Statement.
Based on the foregoing and assuming that the Operative Documents are executed
and delivered in substantially the form we have examined, we hereby confirm our
opinion with respect to the Federal income tax characterization of the
Certificates and the Notes and the Federal income tax treatment of the issuance
of such Certificates and Notes set forth under the caption "Income Tax
Consequences" in the Prospectus and each Prospectus Supplement. In our opinion,
for Federal income tax purposes, the Notes will be characterized as debt, and
the Trust will not be classified as a separate entity that is an association (or
publicly traded partnership) taxable as a corporation. Moreover, we are of the
opinion that the statements regarding federal income tax matters and ERISA
matters set forth in the Prospectus and the Prospectus Supplements under the
headings "Summary of Terms -- Tax Status", "Summary of Terms -- ERISA
Considerations," "Income Tax Consequences" and "ERISA Considerations" are a fair
and accurate summary of the material federal income tax and ERISA consequences
of the issuance of the holding of the Notes and the Certificates. There can be
no assurance, however, that the legal conclusions presented therein will not be
successfully challenged by the relevant administrative authorities, or
significantly altered by new legislation, changes in administrative positions,
or judicial decisions, any of which challenges or alterations may be applied
retroactively with respect to completed transactions.
We note that the Prospectus does not relate to a specific transaction.
Accordingly, the above-referenced description of federal income tax consequences
and ERISA considerations may, under certain circumstances, require modification
in the context of an actual transaction.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm in the Prospectus and
Prospectus Supplements under the caption "Income Tax Consequences" and "Legal
Matters."
Very truly yours,
/s/ THOMPSON HINE & FLORY LLP
Thompson Hine & Flory LLP
-2-
<PAGE> 1
EXHIBIT 8.2
OPINION AND CONSENT OF KIRKPATRICK & LOCKHART
WITH RESPECT TO PENNSYLVANIA TAX MATTERS
KIRPATRICK & LOCKHART LLP
August 17, 1999
Key Bank USA, National Association
Key Tower
127 Public Square
Cleveland, Ohio 44114
RE: KEY BANK USA, NATIONAL ASSOCIATION
ASSET BACKED NOTES
AND ASSET BACKED CERTIFICATES
Ladies & Gentlemen:
We have been retained by Key Bank USA, National Association
("Key Bank") as special Pennsylvania tax counsel to render an opinion as to
certain Pennsylvania tax consequences in connection with the issuance and sale
of Asset Backed Notes (the "Notes") and Asset Backed Certificates (the
"Certificates") to be sold from time to time in one or more series in amounts to
be determined at the time of sale and to be set forth in one or more Supplements
(each, a "Prospectus Supplement") to the prospectus ("the "Prospectus") included
in the Registration Statement on Form S-3 (Registration No.: 333-80109), as
amended, as filed with the Securities and Exchange Commission (the "Registration
Statement").
In rendering this opinion, we have examined the Prospectus,
the Pennsylvania Tax Reform Code of 1972, as amended (the "Code"), Regulations
promulgated under the Code, Pennsylvania Department of Revenue rulings, judicial
decisions, and such other documents, records, and questions of law, as we have
deemed necessary or appropriate for the purposes of this opinion. All
capitalized terms used herein and not otherwise defined have the respective
meanings specified in the Prospectus.
Based upon our examination of the Prospectus and subject to
the assumptions, exceptions, limitations and qualifications set forth in said
Prospectus and herein, if the transactions are consummated in accordance with
the terms of the Prospectus (and without any waiver, breach or amendment of any
of the provisions thereof), we are of the opinion that the statements set forth
in the Prospectus under the headings "Pennsylvania Income and Franchise Tax
Consequences with Respect to the Notes" and "Pennsylvania Income and Franchise
<PAGE> 2
Tax Consequences with Respect to the Certificates" accurately reflect our
opinion.
This opinion is based on the Code, Regulations promulgated
under the Code, Pennsylvania Department of Revenue rulings, judicial decisions,
and the applicable authority, all as in effect on the date of this opinion. The
legal authorities on which this opinion is based may be changed at any time. Any
such changes may be retroactively applied and could modify the opinions
expressed above. This opinion is limited solely to the Pennsylvania state tax
consequences of the Notes and Certificates set forth in the Prospectus and does
not address any other tax considerations under foreign, federal, local or other
Pennsylvania law.
This opinion is being furnished to you specifically in
connection with the Notes and Certificates being offered under the Prospectus,
and solely for your information and benefit. It may not be relied on by you in
any other connection, and it may not be relied on by any other person for any
purpose. This opinion may not be assigned, used or quoted, other than in the
Prospectus, without our prior written consent.
Very truly yours,
/s/ Kirkpatrick & Lockhart LLP
KIRKPATRICK & LOCKHART LLP
<PAGE> 1
EXHIBIT 24.3
------------
ADDITIONAL BOARD OF DIRECTORS RESOLUTIONS OF
KEY BANK USA, NATIONAL ASSOCIATION
UNANIMOUS ACTION OF THE
BOARD OF DIRECTORS
ACTING WITHOUT A MEETING
The Board of Directors of Key Bank USA, National Association (the
"Bank") by the unanimous written consent of its members in lieu of a meeting,
does hereby consent to and adopt the following resolutions:
WHEREAS, the Board of Directors of the Bank, on May 24, 1999,
adopted resolutions authorizing the Bank to establish one or more
trusts ("Student Loan Trusts") for the purpose of securitizing, from
time to time, (the "Securitization") and selling, from time to time,
(the "Sale") up to $1,900,000,000 aggregate principal amount of the
Bank's student loans (the "Student Loans"); and
WHEREAS, the Bank desires to increase the authority for the
Securitization and for the Sale up to $3,100,000,000 aggregate
principal amount of Student Loans.
NOW, THEREFORE, BE IT RESOLVED, that the Bank is authorized to
establish one or more Student Loan Trusts for the Sale and the
Securitization of up to $3,100,000,000 aggregate principal amount of
Student Loans.
FURTHER RESOLVED, that, except as amended hereby, the
resolutions of May 24, 1999 relating to the Securitization and Sale are
hereby ratified and confirmed.
IN WITNESS WHEREOF, the undersigned have hereunto signed their names as
of the 16th day of August, 1999.
/s/ KEVIN M. BLAKELY /s/ JAMES A. FISHELL
- -------------------------------------- -------------------------------
Kevin M. Blakely James A. Fishell
/s/ MICHAEL W. DVORAK /s/ PATRICK J. SWANICK
- -------------------------------------- -------------------------------
Michael W. Dvorak Patrick J. Swanick
/s/ FORREST F. STANLEY
------------------------
Forrest F. Stanley
<PAGE> 1
EXHIBIT 25.1
STATEMENT OF ELIGIBILITY AND QUALIFICATION
UNDER THE TRUST INDENTURE ACT OF 1939,
AS AMENDED, OF THE INDENTURE TRUSTEE (FORM T-1)
<PAGE> 2
------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE
PURSUANT TO SECTION 305(b)(2)
------------------------------
BANKERS TRUST COMPANY
(Exact name of trustee as specified in its charter)
NEW YORK 13-4941247
(Jurisdiction of Incorporation or (I.R.S. Employer
organization if not a U.S. national bank) Identification no.)
FOUR ALBANY STREET, 10TH FLOOR
NEW YORK, NEW YORK 10006
(Address of principal (Zip Code)
executive offices)
BANKERS TRUST COMPANY
LEGAL DEPARTMENT
130 LIBERTY STREET, 31ST FLOOR
NEW YORK, NEW YORK 10006
(212) 250-2201
(Name, address and telephone number of agent for service)
--------------------------------------
<TABLE>
KEY BANK USA, UNITED STATES 34-1804148
NATIONAL ASSOCIATION
<S> <C> <C>
(Exact name of Registrants as (State or other jurisdiction of (I.R.S. employer
specified in its Charter) Incorporation or organization) identification no.)
</TABLE>
KEY TOWER
127 PUBLIC SQUARE
CLEVELAND ______, OHIO 44114
(216) 689-6300
(Address, including zip code, and telephone number of Registrants principal
executive offices)
KEYCORP STUDENT LOAN TRUSTS ASSET BACKED NOTES
(Title of the indenture securities)
<PAGE> 3
ITEM 1. GENERAL INFORMATION.
Furnish the following information as to the trustee.
(a) Name and address of each examining or supervising
authority to which it is subject.
<TABLE>
<CAPTION>
Name Address
---- -------
<S> <C> <C>
Federal Reserve Bank (2nd District) New York, NY
Federal Deposit Insurance Corporation Washington, D.C.
New York State Banking Department Albany, NY
</TABLE>
(b) Whether it is authorized to exercise corporate trust
powers. Yes.
ITEM 2. AFFILIATIONS WITH OBLIGOR.
If the obligor is an affiliate of the Trustee, describe each
such affiliation. None.
ITEM 3. -15. NOT APPLICABLE
ITEM 16. LIST OF EXHIBITS.
EXHIBIT 1 - Restated Organization Certificate of
Bankers Trust Company dated August 7, 1990,
Certificate of Amendment of the Organization
Certificate of Bankers Trust Company dated
June 21, 1995 - Incorporated herein by
reference to Exhibit 1 filed with Form T-1
Statement, Registration No. 33-65171,
Certificate of Amendment of the Organization
Certificate of Bankers Trust Company dated
March 20, 1996, incorporate by referenced to
Exhibit 1 filed with Form T-1 Statement,
Registration No. 333-25843 and Certificate
of Amendment of the Organization Certificate
of Bankers Trust Company dated June 19,
1997, incorporated by reference to Exhibit 1
filed with Form T-1 Statement, Registration
No. 333-45229, Certificate of Amendment of
the Organization Certificate of Bankers
Trust Company dated March 26, 1998, copy
attached and Certificate of Amendment of the
Organization Certificate of Bankers Trust
Company dated June 19, 1999, copy attached.
EXHIBIT 2- Certificate of Authority to commence
business Incorporated herein by reference to
Exhibit 2 filed with Form T-1 Statement,
Registration No. 33-21047.
EXHIBIT 3- Authorization of the Trustee to exercise
corporate trust powers - Incorporated herein
by reference to Exhibit 2 filed with Form
T-1 Statement, Registration No. 33-21047.
EXHIBIT 4- Existing By-Laws of Bankers Trust
Company, as amended on June 22, 1999, copy
attached.
-2-
<PAGE> 4
EXHIBIT 5 - Not applicable.
EXHIBIT 6 - Consent of Bankers Trust Company
required by Section 321(b) of the Act. -
Incorporated herein by reference to Exhibit
4 filed with Form T-1 Statement,
Registration No. 22-18864.
EXHIBIT 7 - The latest report of condition of
Bankers Trust Company dated as of March 31,
1999. Copy attached.
EXHIBIT 8 - Not Applicable.
EXHIBIT 9 - Not Applicable.
-3-
<PAGE> 5
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, Bankers Trust Company, a corporation organized and
existing under the laws of the State of New York, has duly caused this statement
of eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in The City of New York, and State of New York, on this 12th day
of August, 1999.
BANKERS TRUST COMPANY
/s/ Christopher D. Lew
---------------------------------
By: Christopher D. Lew
Assistant Treasurer
-4-
<PAGE> 6
State of New York,
BANKING DEPARTMENT
I, MANUEL KURSKY, Deputy Superintendent of Banks of the State of New
York, DO HEREBY APPROVE the annexed Certificate entitled "CERTIFICATE OF
AMENDMENT OF THE ORGANIZATION CERTIFICATE OF BANKERS TRUST COMPANY UNDER SECTION
8005 OF THE BANKING LAW," dated June 19, 1997, providing for an increase in
authorized capital stock from $1,601,666,670 consisting of 100,166,667 shares
with a par value of $10 each designated as Common Stock and 600 shares with a
par value of $1,000,000 each designated as Series Preferred Stock to
$2,001,666,670 consisting of 100,166,667 shares with a par value of $10 each
designated as Common Stock and 1,000 shares with a par value of $1,000,000 each
designated as Series Preferred Stock.
WITNESS, my hand and official seal of the Banking Department at the
City of New York,
this 27TH day of JUNE in the Year of our Lord
one thousand nine hundred and NINETY-SEVEN.
MANUEL KURSKY
--------------------------------
Deputy Superintendent of Banks
<PAGE> 7
CERTIFICATE OF AMENDMENT
OF THE
ORGANIZATION CERTIFICATE
OF BANKERS TRUST
Under Section 8005 of the Banking Law
-----------------------------
We, James T. Byrne, Jr. and Lea Lahtinen, being respectively a Managing
Director and an Assistant Secretary of Bankers Trust Company, do hereby certify:
1. The name of the corporation is Bankers Trust Company.
2. The organization certificate of said corporation was filed by the
Superintendent of Banks on the 5th of march, 1903.
3. The organization certificate as heretofore amended is hereby amended
to increase the aggregate number of shares which the corporation shall have
authority to issue and to increase the amount of its authorized capital stock in
conformity therewith.
4. Article III of the organization certificate with reference to the
authorized capital stock, the number of shares into which the capital stock
shall be divided, the par value of the shares and the capital stock outstanding,
which reads as follows:
"III. The amount of capital stock which the corporation is hereafter to
have is One Billion, Six Hundred and One Million, Six Hundred Sixty-Six
Thousand, Six Hundred Seventy Dollars ($1,601,666,670), divided into
One Hundred Million, One Hundred Sixty-Six Thousand, Six Hundred
Sixty-Seven (100,166,667) shares with a par value of $10 each
designated as Common Stock and 600 shares with a par value of One
Million Dollars ($1,000,000) each designated as Series Preferred
Stock."
is hereby amended to read as follows:
"III. The amount of capital stock which the corporation is hereafter to
have is Two Billion One Million, Six Hundred Sixty-Six Thousand, Six
Hundred Seventy Dollars ($2,001,666,670), divided into One Hundred
Million, One Hundred Sixty-Six Thousand, Six Hundred Sixty-Seven
(100,166,667) shares with a par value of $10 each designated as Common
Stock and 1000 shares with a par value of One Million Dollars
($1,000,000) each designated as Series Preferred Stock."
<PAGE> 8
5. The foregoing amendment of the organization certificate was
authorized by unanimous written consent signed by the holder of all outstanding
shares entitled to vote thereon.
IN WITNESS WHEREOF, we have made and subscribed this certificate this
19th day of June, 1997.
James T. Byrne, Jr.
------------------------------
James T. Byrne, Jr.
Managing Director
LEA LAHTINEN
------------------------------
Lea Lahtinen
Assistant Secretary
State of New York )
) ss:
County of New York )
Lea Lahtinen, being fully sworn, deposes and says that she is an
Assistant Secretary of Bankers Trust Company, the corporation described in the
foregoing certificate; that she has read the foregoing certificate and knows the
contents thereof, and that the statements herein contained are true.
Lea Lahtinen
------------------------------
Lea Lahtinen
Sworn to before me this 19th day
of June, 1997.
Sandra L. West
- -------------------------------
Notary Public
SANDRA L. WEST
Notary Public State of New York
No. 31-4942101
Qualified in New York County
Commission Expires September 19, 1998
<PAGE> 9
BY-LAWS
JUNE 22, 1999
BANKERS TRUST CORPORATION
(INCORPORATED UNDER THE NEW YORK BUSINESS CORPORATION LAW)
<PAGE> 10
BANKERS TRUST CORPORATION
---------------------------------------------
BY-LAWS
---------------------------------------------
ARTICLE I
SHAREHOLDERS
SECTION 1.01 Annual Meetings. The annual meetings of shareholders for the
election of directors and for the transaction of such other business as may
properly come before the meeting shall be held on the third Tuesday in April of
each year, if not a legal holiday, and if a legal holiday then on the next
succeeding business day, at such hour as shall be designated by the Board of
Directors. If no other hour shall be so designated such meeting shall be held at
3 P.M.
SECTION 1.02 Special Meetings. Special meetings of the shareholders, except
those regulated otherwise by statute, may be called at any time by the Board of
Directors, or by any person or committee expressly so authorized by the Board of
Directors and by no other person or persons.
SECTION 1.03 Place of Meetings. Meetings of shareholders shall be held at such
place within or without the State of New York as shall be determined from time
to time by the Board of Directors or, in the case of special meetings, by such
person or persons as may be authorized to call a meeting. The place in which
each meeting is to be held shall be specified in the notice of such meeting.
SECTION 1.04 Notice of Meetings. A copy of the written notice of the place, date
and hour of each meeting of shareholders shall be given personally or by mail,
not less than ten nor more than fifty days before the date of the meeting, to
each shareholder entitled to vote at such meeting. Notice of a special meeting
shall indicate that it is being issued by or at the direction of the person or
persons calling the meeting and shall also state the purpose or purposes for
which the meeting is called. Notice of any meeting at which is proposed to take
action which would entitle shareholders to receive payment for their shares
pursuant to statutory provisions must include a statement of that purpose and to
that effect. If mailed, such notices of the annual and each special meeting are
given when deposited in the United States mail, postage prepaid, directed to the
shareholder at his address as it appears in the record of shareholders unless he
shall have filed with the Secretary of the corporation a written request that
notices intended for him shall be mailed to some other address, in which case it
shall be directed to him at such other address.
SECTION 1.05 Record Date. For the purpose of determining the shareholders
entitled to notice of or to vote any meeting of shareholders or any adjournment
thereof, or to express consent to or dissent from any proposal without a
meeting, or for the purpose of determining shareholders entitled to receive
payment of any dividend or the allotment of
<PAGE> 11
any rights, or for the purpose of any other action, the Board of Directors may
fix, in advance, a date as the record date for any such determination of
shareholders. Such date shall not be more than fifty nor less than ten days
before the date of such meeting, nor more than fifty days prior to any other
action.
SECTION 1.06 Quorum. The presence, in person or by proxy, of the holders of a
majority of the shares entitled to vote thereat shall constitute a quorum at a
meeting of shareholders for the transaction of business, except as otherwise
provided by statute, by the Certificate of Incorporation or by the By-Laws. The
shareholders present in person or by proxy and entitled to vote at any meeting,
despite the absence of a quorum, shall have power to adjourn the meeting from
time to time, to a designated time and place, without notice other than by
announcement at the meeting, and at any adjourned meeting any business may be
transacted that might have been transacted on the original date of the meeting.
However, if after the adjournment the Board of Directors fixes a new record date
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each shareholder of record on the new record date entitled to notice.
SECTION 1.07 Notice of Shareholder Business at Annual Meeting. At an annual
meeting of shareholders, only such business shall be conducted as shall have
been brought before the meeting (a) by or at the direction of the Board of
Directors or (b) by any shareholder of the corporation who complies with the
notice procedures set forth in this Section 1.07. For business to be properly
brought before an annual meeting by a shareholder, the shareholder must have
given timely notice thereof in writing to the Secretary of the corporation. To
be timely, a shareholder's notice must be delivered to or mailed and received at
the principal executive offices of the corporation not less than thirty days nor
more than fifty days prior to the meeting; provided, however, that in the event
that less than forty days' notice or prior public disclosure of the date of the
meeting is given or made to shareholders, notice by the shareholder to be timely
must be received not later than the close of business on the tenth day following
the day on which such notice of the date of the annual meeting was mailed or
such public disclosure was made. A shareholder's notice to the Secretary shall
set forth as to each matter the shareholder proposes to bring before the annual
meeting (a) a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at the annual
meeting, (b) the name and address, as they appear on the corporation's books, of
the shareholder proposing such business, (c) the class and number of shares of
the corporation which are beneficially owned by the shareholder and (d) any
material interest of the shareholder in such business. Notwithstanding anything
in these By-Laws to the contrary, no business shall be conducted at an annual
meeting except in accordance with the procedures set forth in this Section 1.07
and Section 2.03. The Chairman of an annual meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting and in accordance with the provisions of this Section 1.07
and Section 2.03, and if he should so determine, he shall so declare to the
meeting and any such business not properly brought before the meeting shall not
be transacted.
ARTICLE II
BOARD OF DIRECTORS
SECTION 2.01 Number and Qualifications. The business of the corporation shall be
managed by its Board of Directors. The number of directors constituting the
entire Board of Directors shall be not less than seven nor more than fifteen, as
shall be fixed from time to time by vote of a majority of the entire Board of
Directors. Each director shall be at least
<PAGE> 12
21 years of age. Directors need not be shareholders. No Officer-Director who
shall have attained age 65, or earlier relinquishes his responsibilities and
title, shall be eligible to serve as a director.
SECTION 2.02 Election. At each annual meeting of shareholders, directors shall
be elected by a plurality of the votes to hold office until the next annual
meeting. Subject to the provisions of the statute, of the Certificate of
Incorporation and of the By-Laws, each director shall hold office until the
expiration of the term for which elected, and until his successor has been
elected and qualified.
SECTION 2.03 Nomination and Notification of Nomination. Subject to the rights of
holders of any class or series of stock having a preference over the Common
Stock as to dividends or upon liquidation, nominations for the election of
directors may be made by the Board of Directors or to any committee appointed by
the Board of Directors or by any shareholder entitled to vote in the election of
directors generally. However, any shareholder entitled to vote in the election
of directors generally may nominate one or more persons for election as
directors at a meeting only if written notice of such shareholder's intent to
make such nomination or nominations has been given, either by personal delivery
or by United States mail, postage prepaid, to the Secretary of the corporation
not later than (i) with respect to an election to be held at an annual meeting
of shareholders ninety days in advance of such meeting, and (ii) with respect to
an election to be held at a special meeting of shareholders for the election of
directors, the close of business on the seventh day following the date on which
notice of such meeting is first given to shareholders. Each such notice shall
set forth: (a) the name and address of the shareholder who intends to make the
nomination and of the person or persons to be nominated; (b) a representation
that the shareholder is a holder of record of stock of the corporation entitled
to vote at such meeting and intends to appear in person or by proxy at the
meeting to nominate the person or persons specified in the notice; (c) a
description of all arrangements or understandings between the shareholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the
shareholder; (d) such other information regarding each nominee proposed by such
shareholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Securities and Exchange Commission, had the
nominee been nominated, or intended to be nominated, by the Board of Directors;
and (e) the consent of each nominee to serve as a director of the corporation if
so elected. At the request of the Board of Directors, any person nominated by
the Board of Directors for election as a director shall furnish to the Secretary
of the corporation that information required to be set forth in a shareholder's
notice of nomination which pertains to the nominee. No person shall be eligible
for election as a director of the corporation unless nominated in accordance
with the procedures set forth in the By-Laws. The Chairman of the meeting shall,
if the facts warrant, determine and declare to the meeting that a nomination was
not made in accordance with the procedures prescribed by these By-Laws, and if
he should so determine, he shall so declare to the meeting and the defective
nomination shall be disregarded.
SECTION 2.04 Regular Meetings. Regular meetings of the Board of Directors may be
held without notice at such places and times as may be fixed from time to time
by resolution of the Board and a regular meeting for the purpose of organization
and transaction of other business shall be held each year after the adjournment
of the annual meeting of shareholders.
<PAGE> 13
SECTION 2.05 Special Meetings. The Chairman of the Board, the Chief Executive
Officer, the President, the Senior Vice Chairman or any Vice Chairman may, and
at the request of three directors shall, call a special meeting of the Board of
Directors, two days' notice of which shall be given in person or by mail,
telegraph, radio, telephone or cable. Notice of a special meeting need not be
given to any director who submits a signed waiver of notice whether before or
after the meeting, or who attends the meeting without protesting, prior thereto
or at its commencement, the lack of notice to him.
SECTION 2.06 Place of Meeting. The directors may hold their meetings, have one
or more offices, and keep the books of the corporation (except as may be
provided by law) at any place, either within or without the State of New York,
as they may from time to time determine.
SECTION 2.07 Quorum and Vote. At all meetings of the Board of Directors the
presence of one-third of the entire Board, but not less than two directors,
shall constitute a quorum for the transaction of business. Any one or more
members of the Board of Directors or of any committee thereof may participate in
a meeting of the Board of Directors or a committee thereof by means of a
conference telephone or similar communications equipment which allows all
persons participating in the meeting to hear each other at the same time.
Participation by such means shall constitute presence in person at such a
meeting. The vote of a majority of the directors present at the time of the
vote, if a quorum is present at such time, shall be the act of the Board of
Directors, except as may be otherwise provided by statute or the By-Laws.
SECTION 2.08 Vacancies. Newly created directorships resulting from increase in
the number of directors and vacancies in the Board of Directors, whether caused
by resignation, death, removal or otherwise, may be filled by vote of a majority
of the directors then in office, although less than a quorum exists.
ARTICLE III
EXECUTIVE AND OTHER COMMITTEES
SECTION 3.01 Designation and Authority. The Board of Directors, by resolution
adopted by a majority of the entire Board, may designate from among its members
an Executive Committee and other committees, each consisting of three or more
directors. Each such committee, to the extent provided in the resolution or the
By-Laws, shall have all the authority of the Board, except that no such
committee shall have authority as to:
(i) the submission to shareholders of any action as to which
shareholders' authorization is required by law.
(ii) the filling of vacancies in the Board of Directors or any committee.
(iii) the fixing of compensation of directors for serving on the Board or
on any committee.
(iv) the amendment or appeal of the By-Laws, or the adoption of new
By-Laws.
(v) the amendment or repeal of any resolution of the Board which by its
terms shall not be so amendable or repealable.
<PAGE> 14
The Board may designate one or more directors as alternate members of any such
committee, who may replace any absent member or members at any meeting of such
committee. Each such committee shall serve at the pleasure of the Board of
Directors.
SECTION 3.02 Procedure. Except as may be otherwise provided by statute, by the
By-Laws or by resolution of the Board of Directors, each committee may make
rules for the call and conduct of its meetings. Each committee shall keep a
record of its acts and proceedings and shall report the same from time to time
to the Board of Directors.
ARTICLE IV
OFFICERS
SECTION 4.01 Titles and General. The Board of Directors shall elect from among
their number a Chairman of the Board and a Chief Executive Officer, and may also
elect a President, a Senior Vice Chairman, one or more Vice Chairmen, one or
more Executive Vice Presidents, one or more Senior Vice Presidents, one or more
Principals, one or more Vice Presidents, a Secretary, a Controller, a Treasurer,
a General Counsel, a General Auditor, and a General Credit Auditor, who need not
be directors. The officers of the corporation may also include such other
officers or assistant officers as shall from time to time be elected or
appointed by the Board. The Chairman of the Board or the Chief Executive Officer
or, in their absence, the President, the Senior Vice Chairman or any Vice
Chairman, may from time to time appoint assistant officers. All officers elected
or appointed by the Board of Directors shall hold their respective offices
during the pleasure of the Board of Directors, and all assistant officers shall
hold office at the pleasure of the Board or the Chairman of the Board or the
Chief Executive Officer or, in their absence, the President, the Senior Vice
Chairman or any Vice Chairman. The Board of Directors may require any and all
officers and employees to give security for the faithful performance of their
duties.
SECTION 4.02 Chairman of the Board. The Chairman of the Board shall preside at
all meetings of the shareholders and of the Board of Directors. Subject to the
Board of Directors, he shall exercise all the powers and perform all the duties
usual to such office and shall have such other powers as may be prescribed by
the Board of Directors or the Executive Committee or vested in him by the
By-Laws.
SECTION 4.03 Chief Executive Officer. The Board of Directors shall designate the
Chief Executive Officer of the corporation, which person may also hold the
additional title of Chairman of the Board, President, Senior Vice Chairman or
Vice Chairman. Subject to the Board of Directors, he shall exercise all the
powers and perform all the duties usual to such office and shall have such other
powers as may be prescribed by the Board of Directors or the Executive Committee
or vested in him by the By-Laws.
SECTION 4.04 Chairman of the Board, President, Senior Vice Chairman, Vice
Chairmen, Executive Vice Presidents, Senior Vice Presidents, Principals and Vice
Presidents. The Chairman of the Board or, in his absence or incapacity the
President or, in his absence or incapacity, the Senior Vice Chairman, the Vice
Chairmen, the Executive Vice Presidents, or in their absence, the Senior Vice
Presidents, in the order established by the Board of Directors shall, in the
absence or incapacity of the Chief Executive Officer perform the duties of the
Chief Executive Officer. The President, the Senior Vice Chairman, the Vice
Chairmen, the Executive Vice Presidents, the Senior Vice Presidents, the
Principals, and the Vice Presidents shall also perform such other duties and
have such other powers as may
<PAGE> 15
be prescribed or assigned to them, respectively, from time to time by the Board
of Directors, the Executive Committee, the Chief Executive Officer, or the
By-Laws.
SECTION 4.05 Controller. The Controller shall perform all the duties customary
to that office and except as may be otherwise provided by the Board of Directors
shall have the general supervision of the books of account of the corporation
and shall also perform such other duties and have such powers as may be
prescribed or assigned to him from time to time by the Board of Directors, the
Executive Committee, the Chief Executive Officer, or the By-Laws.
SECTION 4.06 Secretary. The Secretary shall keep the minutes of the meetings of
the Board of Directors and of the shareholders and shall have the custody of the
seal of the corporation. He shall perform all other duties usual to that office,
and shall also perform such other duties and have such powers as may be
prescribed or assigned to him from time to time by the Board of Directors, the
Executive Committee, the Chairman of the Board, the Chief Executive Officer, or
the By-Laws.
ARTICLE V
INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHERS
SECTION 5.01 The corporation shall, to the fullest extent permitted by Section
721 of the New York Business Corporation Law, indemnify any person who is or was
made, or threatened to be made, a party to an action or proceeding, whether
civil or criminal, whether involving any actual or alleged breach of duty,
neglect or error, any accountability, or any actual or alleged misstatement,
misleading statement or other act or omission and whether brought or threatened
in any court or administrative or legislative body or agency, including an
action by or in the right of the corporation to procure a judgment in its favor
and an action by or in the right of any other corporation of any type or kind,
domestic or foreign, or any partnership, joint venture, trust, employee benefit
plan or other enterprise, which any director or officer of the corporation is
serving or served in any capacity at the request of the corporation by reason of
the fact that he, his testator or intestate, is or was a director or officer of
the corporation, or is serving or served such other corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise in any capacity,
against judgments, fines, amounts paid in settlement, and costs, charges and
expenses, including attorneys' fees, or any appeal therein; provided, however,
that no indemnification shall be provided to any such person if a judgment or
other final adjudication adverse to the director or officer establishes that (i)
his acts were committed in bad faith or were the result of active and deliberate
dishonesty and, in either case, were material to the cause of action so
adjudicated, or (ii) he personally gained in fact a financial profit or other
advantage to which he was not legally entitled.
SECTION 5.02 The corporation may indemnify any other person to whom the
corporation is permitted to provide indemnification or the advancement of
expenses by applicable law, whether pursuant to rights granted pursuant to, or
provided by, the New York Business Corporation Law or other rights created by
(i) a resolution of shareholders, (ii) a resolution of directors, or (iii) an
agreement providing for such indemnification, it being expressly intended that
these By-Laws authorize the creation of other rights in any such manner.
<PAGE> 16
SECTION 5.03 The corporation shall, from time to time, reimburse or advance to
any person referred to in Section 5.01 the funds necessary for payment of
expenses, including attorneys' fees, incurred in connection with any action or
proceeding referred to in Section 5.01, upon receipt of a written undertaking by
or on behalf of such person to repay such amount(s) if a judgment or other final
adjudication adverse to the director or officer establishes that (i) his acts
were committed in bad faith or were the result of active and deliberate
dishonesty and, in either case, were material to the cause of action so
adjudicated, or (ii) he personally gained in fact a financial profit or other
advantage to which he was not legally entitled.
SECTION 5.04 Any director or officer of the corporation serving (i) another
corporation, of which a majority of the shares entitled to vote in the election
of its directors is held by the corporation, or (ii) any employee benefit plan
of the corporation or any corporation referred to in clause (i), in any capacity
shall be deemed to be doing so at the request of the corporation. In all other
cases, the provisions of this Article V will apply (i) only if the person
serving another corporation or any partnership, joint venture, trust, employee
benefit plan or other enterprise so served at the specific request of the
corporation, evidenced by a written communication signed by the Chairman of the
Board, the Chief Executive Officer, the President, the Senior Vice Chairman or
any Vice Chairman, and (ii) only if and to the extent that, after making such
efforts as the Chairman of the Board, the Chief Executive Officer, or the
President shall deem adequate in the circumstances, such person shall be unable
to obtain indemnification from such other enterprise or its insurer.
SECTION 5.05 Any person entitled to be indemnified or to the reimbursement or
advancement of expenses as a matter of right pursuant to this Article V may
elect to have the right to indemnification (or advancement of expenses)
interpreted on the basis of the applicable law in effect at the time of the
occurrence of the event or events giving rise to the action or proceeding, to
the extent permitted by law, or on the basis of the applicable law in effect at
the time indemnification is sought.
SECTION 5.06 The right to be indemnified or to the reimbursement or advancement
of expenses pursuant to this Article V (i) is a contract right pursuant to which
the person entitled thereto may bring suit as if the provisions hereof were set
forth in a separate written contract between the corporation and the director or
officer, (ii) is intended to be retroactive and shall be available with respect
to events occurring prior to the adoption hereof, and (iii) shall continue to
exist after the rescission or restrictive modification hereof with respect to
events occurring prior thereto.
SECTION 5.07 If a request to be indemnified or for the reimbursement or
advancement of expenses pursuant hereto is not paid in full by the corporation
within thirty days after a written claim has been received by the corporation,
the claimant may at any time thereafter bring suit against the corporation to
recover the unpaid amount of the claim and, if successful in whole or in part,
the claimant shall be entitled also to be paid the expenses of prosecuting such
claim. Neither the failure of the corporation (including its Board of Directors,
independent legal counsel, or its shareholders) to have made a determination
prior to the commencement of such action that indemnification of or
reimbursement or advancement of expenses to the claimant is proper in the
circumstances, nor an actual determination by the corporation (including its
Board of Directors, independent legal counsel, or its shareholders) that the
claimant is not entitled to indemnification or to the reimbursement or
advancement of expenses, shall be a defense to the action or create a
presumption that the claimant is not so entitled.
<PAGE> 17
SECTION 5.08 A person who has been successful, on the merits or otherwise, in
the defense of a civil or criminal action or proceeding of the character
described in Section 5.01 shall be entitled to indemnification only as provided
in Sections 5.01 and 5.03, notwithstanding any provision of the New York
Business Corporation Law to the contrary.
ARTICLE VI
SEAL
SECTION 6.01 Corporate Seal. The corporate seal shall contain the name of the
corporation and the year and state of its incorporation. The seal may be altered
from time to time at the discretion of the Board of Directors.
ARTICLE VII
SHARE CERTIFICATES
SECTION 7.01 Form. The certificates for shares of the corporation shall be in
such form as shall be approved by the Board of Directors and shall be signed by
the Chairman of the Board, the Chief Executive Officer, the President, the
Senior Vice Chairman or any Vice Chairman and the Secretary or an Assistant
Secretary, and shall be sealed with the seal of the corporation or a facsimile
thereof. The signatures of the officers upon the certificate may be facsimiles
if the certificate is countersigned by a transfer agent or registered by a
registrar other than the corporation itself or its employees.
ARTICLE VIII
CHECKS
SECTION 8.01 Signatures. All checks, drafts and other orders for the payment of
money shall be signed by such officer or officers or agent or agents as the
Board of Directors may designate from time to time.
ARTICLE IX
AMENDMENT
SECTION 9.01 Amendment of By-Laws. The By-Laws may be amended, repealed or added
to by vote of the holders of the shares at the time entitled to vote in the
election of any directors. The Board of Directors may also amend, repeal or add
to the By-Laws, but any By-Laws adopted by the Board of Directors may be amended
or repealed by the shareholders entitled to vote thereon as provided herein. If
any By-Law regulating an impending election of directors is adopted, amended or
repealed by the Board, there shall be set forth in the notice of the next
meeting of shareholders for the election of directors the By-Laws so adopted,
amended or repealed, together with concise statement of the changes made.
<PAGE> 18
ARTICLE X
SECTION 10.01 Construction. The masculine gender, when appearing in these
By-Laws, shall be deemed to include the feminine gender.
<PAGE> 19
I, Christopher D. Lew, Assistant Treasurer of Bankers Trust Company, New York,
New York, hereby certify that the foregoing is a complete, true and correct copy
of the By-Laws of Bankers Trust Company, and that the same are in full force and
effect at this date.
/s/ Christopher D. Lew
--------------------------
Christopher D. Lew
Assistant Treasurer
DATED: August 12, 1999
<PAGE> 20
<TABLE>
<S> <C> <C> <C> <C>
Legal Title of Bank: Bankers Trust Company Call Date: 03/31/99 ST-BK: 36-4840 FFIEC 031
Address: 130 Liberty Street Vendor ID: D CERT: 00623 Page RC-1
City, State Zip: New York, NY 10006 11
FDIC Certificate No.: | 0 | 0 | 6 | 2 | 3
</TABLE>
CONSOLIDATED REPORT OF CONDITION FOR INSURED COMMERCIAL
AND STATE-CHARTERED SAVINGS BANKS FOR MARCH 31, 1999
All schedules are to be reported in thousands of dollars. Unless otherwise
indicated, reported the amount outstanding as of the last business day of the
quarter.
SCHEDULE RC - BALANCE SHEET
<TABLE>
<CAPTION>
-------------
| C400 |
------------------------------
Dollar Amounts in Thousands | RCFD Bil Mil Thou |
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS |
1. Cash and balances due from depository institutions (from Schedule RC-A):|
a. Noninterest-bearing balances and currency and coin (1) ...........| 0081 1,695,000 |1.a.
b. Interest-bearing balances (2) ....................................| 0071 1,308,000 |1.b.
2. Securities: | |
a. Held-to-maturity securities (from Schedule RC-B, column A) .......| 1754 0 |2.a.
b. Available-for-sale securities (from Schedule RC-B, column D)......| 1773 6,150,000 |2.b.
3. Federal funds sold and securities purchased under agreements to resell...| 1350 29,512,000 |3.
4. Loans and lease financing receivables: |
a. Loans and leases, net of unearned income
(from Schedule RC-C) RCFD 2122 18,869,000 |4.a.
b. LESS: Allowance for loan and lease
losses........................ RCFD 3123 571,000 |4.b.
c. LESS: Allocated transfer risk reserve ..RCFD 3128 0 | |4.c.
d. Loans and leases, net of unearned income, |
allowance, and reserve (item 4.a minus 4.b and 4.c) ...............| 2125 18,298,000 |4.d.
5. Trading Assets (from schedule RC-D) ....................................| 3545 34,815,000 |5.
6. Premises and fixed assets (including capitalized leases) ................| 2145 916,000 |6.
7. Other real estate owned (from Schedule RC-M) ............................| 2150 88,000 |7.
8. Investments in unconsolidated subsidiaries and associated companies
(from Schedule RC-M).....................................................| 2130 883,000 |8.
9. Customers' liability to this bank on acceptances outstanding ........... | 2155 307,000 |9.
10. Intangible assets (from Schedule RC-M) ................................. | 2143 302,000 |10.
11. Other assets (from Schedule RC-F) ...................................... | 2160 4,645,000 |11.
12. Total assets (sum of items 1 through 11) ............................... | 2170 98,919,000 |12.
</TABLE>
- --------------------------
(1) Includes cash items in process of collection and unposted debits.
(2) Includes time certificates of deposit not held for trading.
<PAGE> 21
<TABLE>
<S> <C> <C> <C> <C>
Legal Title of Bank: Bankers Trust Company Call Date: 03/31/99 ST-BK: 36-4840 FFIEC 031
Address: 130 Liberty Street Vendor ID: D CERT: 00623 Page RC-2
City, State Zip: New York, NY 10006 12
FDIC Certificate No.: | 0 | 0 | 6 | 2 | 3
</TABLE>
Schedule RC--Continued
<TABLE>
<CAPTION>
------------------------------
Dollar Amounts in Thousands | RCFD Bil Mil Thou |
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LIABILITIES |
13. Deposits: |
a. In domestic offices (sum of totals of columns A and C from Schedule |
RC-E, part I) | RCON 2200 17,829,000 |13.a.
(1) Noninterest-bearing(1) ..............RCON 6631 2,939,000....| |13.a.(1)
(2) Interest-bearing ....................RCON 6636 14,890,000....| |13.a.(2)
b. In foreign offices, Edge and Agreement subsidiaries, and IBFs (from | |
Schedule RC-E part II) | RCFN 2200 20,634,000 |13.b.
(1) Noninterest-bearing .................RCFN 6631 1,878,000 | |13.b.(1)
(2) Interest-bearing ....................RCFN 6636 18,756,000 | |13.b.(2)
14. Federal funds purchased and securities sold under agreements to | |
repurchase | RCFD 2800 13,513,000 |14.
15. a. Demand notes issued to the U.S. Treasury ...........................| RCON 2840 0 |15.a.
b. Trading liabilities (from Schedule RC-D)............................| RCFD 3548 22,010,000 |15.b.
16. Other borrowed money (includes mortgage indebtedness and obligations | |
under capitalized leases): | |
a. With a remaining maturity of one year or less ......................| RCFD 2332 6,400,000 |16.a.
b. With a remaining maturity of more than one year through three years| A547 2,347,000 |16.b.
c. With a remaining maturity of more than three years..................| A548 2,321,000 | 16.c
17. Not Applicable. | |17.
18. Bank's liability on acceptances executed and outstanding ................| RCFD 2920 307,000 |18.
19. Subordinated notes and debentures (2)....................................| RCFD 3200 438,000 |19.
20. Other liabilities (from Schedule RC-G) ..................................| RCFD 2930 6,129,000 |20.
21. Total liabilities (sum of items 13 through 20) ..........................| RCFD 2948 91,928,000 |21.
22. Not Applicable | |
| |22.
EQUITY CAPITAL | |
23. Perpetual preferred stock and related surplus ...........................| RCFD 383 1,500,000 |23.
24. Common stock ............................................................| RCFD 3230 2,127,000 |24.
25. Surplus (exclude all surplus related to preferred stock) ................| RCFD 3839 541,000 |25.
26. a. Undivided profits and capital reserves .............................| RCFD 3632 3,291,000 |26.a.
b. Net unrealized holding gains (losses) on available-for-sale | |
securities .........................................................| RCFD 8434 (59,000) |26.b.
c. Accumulated net gains (losses) on cash flow hedges..................| RCFD 4336 0 | 26.c.
27. Cumulative foreign currency translation adjustments .....................| RCFD 3284 (409,000) |27.
28. Total equity capital (sum of items 23 through 27) .......................| RCFD 3210 6,991,000 |28.
29. Total liabilities and equity capital (sum of items 21 and 28)............| RCFD 3300 98,919,000 |29
------------------------------
Memorandum
To be reported only with the March Report of Condition.
1. Indicate in the box at the right the number of the statement
below that best describes the most comprehensive level of auditing
work performed for the bank by independent external auditors as of Number
any date during 1998....................................................| RCFD 6724 1 | M.1
1 = Independent audit of the bank conducted in accordance 4 = Directors' examination of the bank performed by other
with generally accepted auditing standards by a certified external auditors (may be required by state chartering
public accounting firm which submits a report on the bank authority)
2 = Independent audit of the bank's parent holding company 5 = Review of the bank's financial statements by external
conducted in accordance with generally accepted auditing auditors
standards by a certified public accounting firm which 6 = Compilation of the bank's financial statements by
submits a report on the consolidated holding company external auditors
(but not on the bank separately) 7 = Other audit procedures (excluding tax preparation work)
3 = Directors' examination of the bank conducted in 8 = No external audit work
accordance with generally accepted auditing standards
by a certified public accounting firm (may be required
by state chartering authority)
</TABLE>
- ------------------
(1) Including total demand deposits and noninterest-bearing time and savings
deposits.
(2) Includes limited-life preferred stock and related surplus.
<PAGE> 22
State of New York,
BANKING DEPARTMENT
I, MANUEL KURSKY, Deputy Superintendent of Banks of the State of New
York, DO HEREBY APPROVE the annexed Certificate entitled "CERTIFICATE OF
AMENDMENT OF THE ORGANIZATION CERTIFICATE OF BANKERS TRUST COMPANY UNDER SECTION
8005 OF THE BANKING LAW," dated March 18, 1998, providing for an increase in
authorized capital stock from $2,351,666,670 consisting of 135,166,667 shares
with a par value of $10 each designated as Common Stock and 1000 shares with a
par value of $1,000,000 each designated as Series Preferred Stock to
$2,501,666,670 consisting of 150,166,667 shares with a par value of $10 each
designated as Common Stock and 1,000 shares with a par value of $1,000,000 each
designated as Series Preferred Stock.
WITNESS, my hand and official seal of the Banking Department at the City of New
York, this 18th day of March in the Year of our Lord one thousand nine
hundred and ninety-eight.
Manuel Kursky
-------------------------------
Deputy Superintendent of Banks
<PAGE> 23
CERTIFICATE OF AMENDMENT
OF THE
ORGANIZATION CERTIFICATE
OF BANKERS TRUST
Under Section 8005 of the Banking Law
-----------------------------
We, James T. Byrne, Jr. and Lea Lahtinen, being respectively a Managing
Director and an Assistant Secretary of Bankers Trust Company, do hereby certify:
1. The name of the corporation is Bankers Trust Company.
2. The organization certificate of said corporation was filed by the
Superintendent of Banks on the 5th of March, 1903.
3. The organization certificate as heretofore amended is hereby amended
to increase the aggregate number of shares which the corporation shall have
authority to issue and to increase the amount of its authorized capital stock in
conformity therewith.
4. Article III of the organization certificate with reference to the
authorized capital stock, the number of shares into which the capital stock
shall be divided, the par value of the shares and the capital stock outstanding,
which reads as follows:
"III. The amount of capital stock which the corporation is hereafter to
have is Two Billion, Three Hundred and Fifty One Million, Six Hundred
Sixty-Six Thousand, Six Hundred Seventy Dollars ($2,351,666,670),
divided into One Hundred Thirty Five Million, One Hundred Sixty-Six
Thousand, Six Hundred Sixty-Seven (135,166,667) shares with a par value
of $10 each designated as Common Stock and 1000 shares with a par value
of One Million Dollars ($1,000,000) each designated as Series Preferred
Stock."
is hereby amended to read as follows:
"III. The amount of capital stock which the corporation is hereafter to
have is Two Billion Five Hundred and One Million, Six Hundred Sixty-Six
Thousand, Six Hundred Seventy Dollars ($2,501,666,670), divided into
One Hundred Fifty Million, One Hundred Sixty-Six Thousand, Six Hundred
Sixty-Seven (150,166,667) shares with a par value of $10 each
designated as Common Stock and 1000 shares with a par value of One
Million Dollars ($1,000,000) each designated as Series Preferred
Stock."
<PAGE> 24
6. The foregoing amendment of the organization certificate was
authorized by unanimous written consent signed by the holder of all outstanding
shares entitled to vote thereon.
IN WITNESS WHEREOF, we have made and subscribed this certificate this
18th day of March, 1998.
James T. Byrne, Jr.
-------------------------------------
James T. Byrne, Jr.
Managing Director and Secretary
Lea Lahtinen
-------------------------------------
Lea Lahtinen
Vice President and Assistant Secretary
State of New York )
) ss:
County of New York )
Lea Lahtinen, being fully sworn, deposes and says that she is a Vice
President and an Assistant Secretary of Bankers Trust Company, the corporation
described in the foregoing certificate; that she has read the foregoing
certificate and knows the contents thereof, and that the statements herein
contained are true.
Lea Lahtinen
-----------------------
Lea Lahtinen
Sworn to before me this 18th day of March, 1998.
Sandra L. West
- ----------------------------
Notary Public
SANDRA L. WEST
Notary Public State of New York
No. 31-4942101
Qualified in New York County
Commission Expires September 19, 1998
