<PAGE> 1
As Filed Pursuant to Rule 424(b)(5)
Registration No. 333-59845
THIS PROSPECTUS SUPPLEMENT RELATES TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933, AND IS SUBJECT TO COMPLETION OR AMENDMENT. THIS
PROSPECTUS SUPPLEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION
OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE
IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED SEPTEMBER 11, 1998
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED SEPTEMBER 11, 1998
$850,000,000
BANC ONE HELOC TRUST 1998-1
HELOC ASSET-BACKED CERTIFICATES, SERIES 1998-1
------------------------
BANK ONE, N.A.,
AS SERVICER
BANC ONE ABS CORPORATION,
AS DEPOSITOR
Each HELOC Asset-Backed Certificate, Series 1998-1 (collectively, the
"Certificates") will represent an undivided interest in the Banc One HELOC Trust
1998-1 (the "Trust") to be formed pursuant to a Pooling and Servicing Agreement
among Bank One, N.A. ("Bank One"), as Servicer, Banc One ABS Corporation, as
Depositor, and The Bank of New York, as Trustee. The property of the Trust will
include a pool of adjustable rate home equity revolving credit line loans
("HELOCs") made or to be made in the future (the "Mortgage Loans") under certain
home equity revolving credit line loan agreements. The Mortgage Loans are
secured by either first or second deeds of trust or mortgages on one-to
four-family residential properties. The Mortgage Loans were originated by Bank
One, Bank One, Arizona, N.A., Bank One, Wisconsin, Bank One, Indiana, N.A., Bank
One, Illinois, N.A., Bank One, Kentucky, N.A., Bank One, Colorado, N.A., Bank
One, Utah, N.A., and Bank One, West Virginia, N.A., (collectively, the
"Sellers") and will be acquired by the Depositor and transferred by the
Depositor to the Trust.
The aggregate undivided interest in the Trust represented by the Certificates as
of August 31, 1998 (the "Cut-Off Date") will represent approximately 98% of the
aggregate outstanding principal balance of the Mortgage Loans. The remaining
undivided interest in the Trust not represented by the Certificates (the
"Transferor Interest") initially will be equal to approximately $17,346,931,
which as of the Cut-Off Date is approximately 2% of the aggregate outstanding
principal balance of the Mortgage Loans. The Transferor Interest initially will
be held by Bank One. Only the Certificates are offered hereby.
Distributions of principal and interest on the Certificates will be made on the
twentieth day of each month or, if such date is not a Business Day, then on the
succeeding Business Day (each, a "Distribution Date"), commencing October 20,
1998. On each Distribution Date, holders of the Certificates will be entitled to
receive, from and to the limited extent of funds available in the Collection
Account (as defined herein), distributions with respect to interest and
principal calculated as set forth herein. The Certificates are not guaranteed by
the Depositor, Bank One, the Sellers or any affiliate thereof. However, the
Certificates will be unconditionally and irrevocably guaranteed as to the
payment of the Guaranteed Distributions (as defined herein) on each Distribution
Date pursuant to the terms of a financial guaranty insurance policy (the
"Policy") to be issued by MBIA Insurance Corporation.
[MBIA LOGO]
There currently is no market for the Certificates offered hereby and there can
be no assurance that such a market will develop or if it does develop that it
will continue. See "RISK FACTORS" herein and in the Prospectus.
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER "RISK
FACTORS" BEGINNING ON PAGE S-16 HEREIN AND ON PAGE 10 IN THE ACCOMPANYING
PROSPECTUS.
THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST ONLY AND DO NOT REPRESENT
INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, BANK ONE, THE SELLERS, THE TRUSTEE
OR ANY AFFILIATE THEREOF. NEITHER THE CERTIFICATES NOR THE MORTGAGE LOANS ARE
INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO THE
PUBLIC DISCOUNT(1) DEPOSITOR(2)
---------- ------------ ---------------
<S> <C> <C> <C>
Per Certificate............................................. % % %
Total....................................................... $ $ $
</TABLE>
(1) The Depositor has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933.
(2) Before deducting expenses, estimated to be $ .
After the initial distribution of the Certificates by the Underwriters, this
Prospectus Supplement and the Prospectus may be used by Banc One Capital
Markets, Inc., an affiliate of the Depositor, in connection with offers and
sales relating to market-making transactions in the Offered Certificates. Banc
One Capital Markets, Inc. may act as principal or agent in such transactions.
Such sales will be made at prices related to prevailing market prices at the
time of sale. Certain information in this Prospectus Supplement and the
Prospectus will be updated from time to time as described in "Incorporation of
Certain Documents by Reference" in the Prospectus.
The Certificates are offered by the several Underwriters when, as and if
issued by the Trust, delivered and accepted by the Underwriters and subject to
their right to reject orders in whole or in part. It is expected that delivery
of the Certificates in book-entry form will be made through the facilities of
The Depository Trust Company, Cedel Bank, societe anonyme and the Euroclear
System on or about September , 1998 (the "Closing Date").
CREDIT SUISSE FIRST BOSTON
BANC ONE CAPITAL MARKETS, INC.
FIRST CHICAGO CAPITAL MARKETS, INC.
LEHMAN BROTHERS
SALOMON SMITH BARNEY
The date of this Prospectus Supplement is September , 1998
<PAGE> 2
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE
CERTIFICATES, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE
SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING".
The Certificates offered hereby constitute part of a separate series of
HELOC Asset Backed Certificates being offered by Banc One ABS Corporation from
time to time pursuant to its Prospectus dated September 11, 1998. This
Prospectus Supplement does not contain complete information about the offering
of the Certificates. Additional information is contained in the Prospectus and
investors are urged to read both this Prospectus Supplement and the Prospectus
in full. Sales of the Certificates may not be consummated unless the purchaser
has received both this Prospectus Supplement and the Prospectus.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
There are incorporated herein by reference all documents filed by the
Depositor with the Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of
the 1934 Act, on or subsequent to the date of this Prospectus and prior to the
termination of the offering of the Certificates made by this Prospectus
Supplement. In addition, the financial statements of the Certificate Insurer are
hereby incorporated by reference in this Prospectus Supplement as described
under "The Certificate Insurer." The Depositor will provide without charge to
each person to whom this Prospectus Supplement and Prospectus are delivered, on
request of such person, a copy of any or all of the documents incorporated
herein by reference other than the exhibits to such documents (unless such
exhibits are specifically incorporated by reference in such documents). Written
requests for such copies should be directed to BANC ONE CORPORATION, 100 East
Broad Street, Columbus, Ohio 43271-0138, Attention: Structured Finance.
Telephone requests for such copies should be directed to BANC ONE CORPORATION at
(614) 248-5800.
S-2
<PAGE> 3
SUMMARY
The following summary of certain pertinent information is qualified in its
entirety by reference to the detailed information appearing elsewhere in this
Prospectus Supplement and the accompanying Prospectus. Certain capitalized terms
used in the Summary are defined elsewhere in the Prospectus Supplement or in the
Prospectus. Reference is made to the Glossary of Terms in the Prospectus for the
definitions of certain capitalized terms.
Trust......................... Banc One HELOC Trust 1998-1 (the "Trust") will
be formed pursuant to a pooling and servicing
agreement (the "Agreement") to be dated as of
August 31, 1998 (the "Cut-Off Date") among Bank
One, N.A. ("Bank One"), as servicer (together
with any successor in such capacity, the
"Servicer"), Banc One ABS Corporation, as
depositor (the "Depositor") and The Bank of New
York, as trustee (the "Trustee"). The property
of the Trust will include (i) a pool of
adjustable rate home equity revolving credit
line loans made or to be made in the future
(the "Mortgage Loans") under certain home
equity revolving credit line loan agreements
(the "Credit Line Agreements") and secured by
either first or second mortgages or deeds of
trust on residential properties that are
primarily one- to four-family properties (the
"Mortgaged Properties"); (ii) the collections
in respect of the Mortgage Loans received after
the Cut-Off Date; (iii) property that secured
any Mortgage Loan that has been acquired by
foreclosure or deed in lieu of foreclosure;
(iv) an irrevocable and unconditional limited
financial guaranty insurance policy (the
"Policy"); (v) an assignment of the Depositor's
rights under the Mortgage Loan Purchase
Agreement (as defined herein); (vi) rights
under certain hazard insurance policies
covering the Mortgaged Properties; and (vii)
certain other property, as described more fully
herein.
The Mortgage Loans were originated by Bank One,
Bank One, Arizona, N.A., Bank One, Wisconsin,
Bank One, Indiana, N.A., Bank One, Illinois,
N.A., Bank One, Kentucky, N.A., Bank One,
Colorado, N.A., Bank One, Utah, N.A., and Bank
One, West Virginia, N.A. (collectively, the
"Sellers") and will be acquired by the
Depositor pursuant to a Mortgage Loan Purchase
Agreement (the "Mortgage Loan Purchase
Agreement") to be dated as of the Closing Date.
The Trust property will include the unpaid
principal balance of each Mortgage Loan as of
the Cut-Off Date (the "Cut-Off Date Principal
Balance"), plus any additions thereto as a
result of new advances made pursuant to the
applicable Credit Line Agreement (the
"Additional Balances") during the life of the
Trust. With respect to any date, the "Pool
Balance" will equal the aggregate of the
Principal Balances of all Mortgage Loans as of
such date. The Pool Balance as of the Cut-Off
Date (the "Cut-Off Date Pool Balance") is
approximately $867,346,931. The "Principal
Balance" of any Mortgage Loan (other than a
Liquidated Mortgage Loan) with respect to any
date will equal the Cut-Off Date Principal
Balance of such Mortgage Loan, plus (i) any
Additional Balances in respect of such Mortgage
Loan, minus (ii) all collections credited
against the Principal Balance of such Mortgage
Loan
S-3
<PAGE> 4
in accordance with the related Credit Line
Agreement prior to such day. The Principal
Balance of any Liquidated Mortgage Loan (as
defined herein) is zero.
Securities Offered............ Each of the HELOC Asset-Backed Certificates,
Series 1998-1 offered hereby (the
"Certificates") represents an undivided
interest in the Trust. Each Certificate
represents the right to receive monthly
payments of interest at the variable rate
described below (the "Certificate Rate"), and
payments of principal at the times and to the
extent provided below. The aggregate undivided
interest in the Trust represented by the
Certificates as of the Closing Date will equal
$850,000,000 (the "Original Invested Amount"),
which represents approximately 98% of the
Cut-Off Date Pool Balance. The "Original
Certificate Principal Balance" will equal
$850,000,000. Following the Closing Date, the
"Invested Amount" with respect to any date will
be an amount equal to the Original Invested
Amount minus the sum of (i) the amount of
Investor Principal Collections previously
distributed to Certificateholders and (ii) any
Investor Loss Amounts previously applied and
not reimbursed (each as defined herein). The
remaining undivided interest (the "Transferor
Interest") in the Mortgage Loans not
represented by the Invested Amount initially
will represent approximately 2% of the Cut-Off
Date Pool Balance and initially will be held by
Bank One.
The Certificates will be issued pursuant to the
Agreement. The principal amount of the
outstanding Certificates (the "Certificate
Principal Balance") as of any date will equal
the Original Certificate Principal Balance
minus the aggregate of amounts actually
distributed as principal to the
Certificateholders. See "DESCRIPTION OF THE
CERTIFICATES -- Allocation of Collections" and
"-- Distributions on the Certificates."
Removal of Certain Mortgage
Loans; Additional Balances.... On any Distribution Date (a "Transfer Date")
the holder of the Transferor Interest may, but
will not be obligated to, remove certain
Mortgage Loans from the Trust without prior
notice to the Certificateholders, subject to
the satisfaction of certain conditions
specified in the Agreement, including, among
other things, that: (i) the Transferor Interest
as of the applicable Transfer Date (as defined
herein), after giving effect to the removal of
such Mortgage Loans, will exceed the Minimum
Transferor Interest (as defined below); (ii)
the Mortgage Loans to be removed are selected
at random and the holder of the Transferor
Interest represents and warrants that no
selection procedures adverse to the interests
of the Certificateholders or the Certificate
Insurer were used by the holder of the
Transferor Interest in selecting the Mortgage
Loans to be removed; and (iii) notice of any
such removal of Mortgage Loans be given to the
Rating Agencies (as defined herein) and the
Certificate Insurer. See "DESCRIPTION OF THE
CERTIFICATES -- Optional Transfers of Mortgage
Loans to the Holder of the Transferor
Interest."
The "Minimum Transferor Interest" with respect
to any date is an amount equal to the lesser of
(a) 5% of the Pool Balance on such
S-4
<PAGE> 5
date and (b) the Transferor Interest as of the
Closing Date. During the term of the Trust, all
Additional Balances will be transferred to, and
become property of, the Trust. The Pool Balance
at any time generally will fluctuate from day
to day because the amount of Additional
Balances and the amount of principal payments
with respect to the Mortgage Loans usually will
differ from day to day. Because the Transferor
Interest represents the excess of the Pool
Balance over the Invested Amount, the amount of
the Transferor Interest will fluctuate from day
to day as draws are made with respect to the
Mortgage Loans and as Principal Collections are
received.
The Mortgage Loans............ On the Closing Date, the Sellers will sell the
Mortgage Loans to the Depositor pursuant to the
Mortgage Loan Purchase Agreement. The Cut-Off
Date Pool Balance is approximately
$867,346,931. Unless otherwise specified, the
weighted averages described herein are weighted
on the basis of the Cut-Off Date Pool Balance.
The Mortgage Loans are secured by either first
or second mortgages or deeds of trust on
Mortgaged Properties located in fifteen states
and the District of Columbia. As of the Cut-Off
Date, approximately 27%, 17%, 14%, 12%, 9%, 7%,
7% and 6% of the Mortgage Loans by Cut-Off Date
Pool Balance are secured by Mortgaged
Properties located in the states of Arizona,
Ohio, Indiana, Wisconsin, Illinois, Colorado,
Kentucky and Utah, respectively. Except as
described in the preceding sentence, less than
1% of the Mortgage Loans are secured by
Mortgaged Properties located in any one state.
The weighted average Combined Loan-to-Value
Ratio of the Mortgage Loans was 78.18% as of
the Cut-Off Date. The "Combined Loan-to-Value
Ratio" or "CLTV" of each Mortgage Loan is the
ratio, expressed as a percentage, of (a) the
sum of (i) the maximum amount the borrower is
permitted to borrow under the related Credit
Line Agreement as of the origination of such
Mortgage Loan (the "Credit Limit") and (ii) the
principal balance of any senior mortgage loan
as of the origination of such Mortgage Loan,
over (b) the value of the related Mortgaged
Property (based on an appraisal or other
acceptable valuation method) determined at the
origination of such Mortgage Loan.
Interest on each Mortgage Loan is payable
monthly. Interest accrues on the daily
outstanding Principal Balance of each Mortgage
Loan during the related Billing Cycle (as
defined herein) at a variable rate per annum
(unless the Lock Feature as described herein is
exercised) equal to the sum of the Index (as
defined under "DESCRIPTION OF THE MORTGAGE
LOANS -- Mortgage Loan Terms") as of the first
day of the related Billing Cycle (each such
date, an "Adjustment Date") plus a fixed
percentage amount (the "Gross Margin")
specified in the related Credit Line Agreement,
calculated on the basis of the actual number of
days elapsed during the Billing Cycle and a
365-day year. Such variable rate or, if the
Lock Feature is exercised, the resulting fixed
rate, is referred to herein as the "Loan Rate".
As of the Cut-Off Date, the Loan Rates on all
of the Mortgage Loans ranged from 5.50% per
annum to 18.50% per annum, and the
S-5
<PAGE> 6
weighted average Loan Rate on all of the
Mortgage Loans was approximately 9.87% per
annum. As of the Cut-Off Date, the Gross
Margins for the Mortgage Loans (other than
Locked Balances, as described herein) ranged
from 0.00% to 10.00%, and the weighted average
Gross Margin for such Mortgage Loans was 1.38%.
Each of the Mortgage Loans is subject to a
maximum Loan Rate specified in the related
Credit Line Agreement (each, a "Maximum Rate").
As of the Cut-Off Date, the Maximum Rates
ranged from 18.00% per annum to 25.00% per
annum, and the weighted average Maximum Rate
was 22.54% per annum. As of the Cut-Off Date,
67.29% of the Mortgage Loans have a minimum
Loan Rate of 1.00% per annum. One Mortgage Loan
has a minimum Loan Rate of 7.00% per annum. The
remaining Mortgage Loans do not have a minimum
Loan Rate.
Each Mortgage Loan contains a Lock Feature (as
described under "THE DEPOSITOR, THE SERVICER
AND THE ORIGINATORS -- Home Equity Lines of
Credit" in the Prospectus) that permits the
related borrower to lock the Loan Rate at a
fixed rate with respect to all or a portion of
the principal balance thereof at certain times
during the terms of the Mortgage Loans. The
portion of the principal balance of a Mortgage
Loan as to which the Lock Feature is exercised
is referred to herein as the "Locked Balance"
and the remaining portion of the principal
balance is sometimes referred to herein as the
"HELOC Balance". As of the Cut-Off Date, the
aggregate Locked Balance was approximately
$8,574,611 (approximately 0.99% of the Cut-Off
Date Pool Balance). As of the Cut-Off Date, the
Loan Rates on the Locked Balances ranged from
6.50% per annum to 13.50% per annum, and the
weighted average Loan Rate on the Locked
Balances was 9.57%.
The Principal Balances of the Mortgage Loans as
of the Cut-Off Date ranged from $0.00 to
$245,304, and the average Principal Balance of
the Mortgage Loans as of the Cut-Off Date was
$24,249. As of the Cut-Off Date, the remaining
terms to maturity of the Mortgage Loans (other
than Locked Balances) ranged from 166 months to
244 months and the weighted average remaining
term to scheduled maturity of such Mortgage
Loans was approximately 206 months. As of the
Cut-Off Date, the weighted average remaining
term to scheduled maturity of all the Mortgage
Loans was approximately 204 months. As of the
Cut-Off Date, the remaining terms to maturity
of the Locked Balances ranged from 5 months to
167 months and the weighted average remaining
term to scheduled maturity of the Locked
Balances was approximately 80 months.
Approximately 26.58% of the Mortgage Loans were
secured by first mortgages on the related
Mortgaged Property and approximately 73.42%
were secured by second mortgages. See
"DESCRIPTION OF THE MORTGAGE LOANS."
Denominations................. The Certificates are offered in minimum
denominations of $1,000 and multiples of $1 in
excess thereof. The interest in the Trust
evidenced by a Certificate (the "Percentage
Interest") will be the percentage derived by
dividing the denomination of such Certificate
by the Original Certificate Principal Balance.
S-6
<PAGE> 7
Registration of
Certificates.................. The Certificates initially will be issued in
book-entry form. Persons acquiring beneficial
ownership interests in the Certificates
("Certificate Owners") may elect to hold their
Certificate interests through The Depository
Trust Company ("DTC"), in the United States, or
Cedel Bank, societe anonyme ("Cedel") or the
Euroclear System ("Euroclear"), in Europe.
Transfers within DTC, Cedel or Euroclear, as
the case may be, will be in accordance with the
usual rules and operating procedures of the
relevant system. So long as the Certificates
are Book-Entry Certificates (as defined
herein), such Certificates will be evidenced by
one or more Certificates registered in the name
of Cede & Co. ("Cede"), as the nominee of DTC
or one of the relevant depositories (together,
the "European Depositaries"). Cross-market
transfers between persons holding directly or
indirectly through DTC, on the one hand, and
counterparties holding directly or indirectly
through Cedel or Euroclear, on the other, will
be effected in DTC through Citibank N.A.
("Citibank") or The Chase Manhattan Bank
("Chase"), the relevant depositories of Cedel
or Euroclear, respectively, and each a
participating member of DTC. The interests of
the Certificateholders will be represented by
book entries on the records of DTC and
participating members thereof. No Certificate
Owner will be entitled to receive a definitive
certificate representing such person's
interest, except in the event that Definitive
Certificates (as defined herein) are issued
under the limited circumstances described
herein. All references in this Prospectus
Supplement to any Certificates reflect the
rights of Certificate Owners only as such
rights may be exercised through DTC and its
participating organizations for so long as such
Certificates are held by DTC. See "RISK
FACTORS -- Book-Entry Certificates,"
"DESCRIPTION OF THE CERTIFICATES -- Book-Entry
Certificates" and "ANNEX I" hereto.
Depositor..................... Banc One ABS Corporation, a Delaware
corporation. The principal executive offices of
the Depositor are located at 100 East Broad
Street, Columbus, Ohio 43271 (Telephone: (614)
248-5800). See "THE DEPOSITOR" in the
Prospectus.
Servicer...................... Bank One, N.A., a national banking association
headquartered in Columbus, Ohio. The principal
executive offices of the Servicer are located
at 100 East Broad Street, Columbus, Ohio 43271
(Telephone: (614) 248-5800). See "THE
SERVICER."
Collections................... Collections on the Mortgage Loans generally
will be allocated in accordance with the Credit
Line Agreements between amounts collected in
respect of interest and amounts collected in
respect of principal. As to any Distribution
Date, "Interest Collections" will be (i) the
amounts collected during the related Collection
Period (as defined herein), including the
portion of Net Liquidation Proceeds (as defined
below) allocated to interest pursuant to the
terms of the Credit Line Agreements less (ii)
the Servicing Fee for the related Collection
Period.
As to any Distribution Date, "Principal
Collections" will be (i) the amounts collected
during the related Collection Period, including
the portion of Net Liquidation Proceeds
allocated to principal
S-7
<PAGE> 8
pursuant to the terms of the Credit Line
Agreements and (ii) any Transfer Deposit
Amounts (as defined herein).
"Net Liquidation Proceeds" with respect to a
Mortgage Loan are the proceeds (excluding
amounts drawn on the Policy) received in
connection with the liquidation of any Mortgage
Loan, whether through trustee's sale,
foreclosure sale or otherwise, reduced by
related expenses and any amount required to pay
off any senior liens on the related Mortgaged
Property, but not including the portion, if
any, of such amount that exceeds the Principal
Balance of the Mortgage Loan plus any accrued
and unpaid interest thereon to the end of the
Collection Period during which such Mortgage
Loan became a Liquidated Mortgage Loan.
With respect to any Distribution Date, the
portion of Interest Collections allocable to
the Certificates ("Investor Interest
Collections") will equal the product of (a)
Interest Collections for such Distribution Date
and (b) the Investor Floating Allocation
Percentage. With respect to any Distribution
Date, the "Investor Floating Allocation
Percentage" is the percentage equivalent of a
fraction determined by dividing the Invested
Amount at the close of business on the
preceding Distribution Date (or on the Closing
Date, in the case of the first Distribution
Date) by the Pool Balance at the beginning of
the related Collection Period. The remaining
amount of Interest Collections will be
allocated to the Transferor Interest as more
fully described herein.
On each Distribution Date, the Investor
Interest Collections (and, to the extent
Investor Interest Collections are insufficient
to pay the amounts described in clauses (i) and
(ii) below, certain Investor Principal
Collections (the amount so applied,
"Reallocated Investor Principal Collections"))
will be applied in the following order of
priority: (i) as payment to the Trustee for its
fee for services rendered pursuant to the
Agreement; (ii) as payment of the accrued
interest due and any overdue accrued interest
(with interest thereon) on the Certificates for
such Distribution Date; (iii) as payment for
any Investor Loss Amount (as defined herein)
for such Distribution Date; (iv) as payment for
any Investor Loss Amount for a previous
Distribution Date that was not previously (a)
funded by Investor Interest Collections, (b)
absorbed by the Overcollateralization Amount or
(c) funded by draws on the Policy; (v) as
payment for the premium for the Policy; (vi) to
reimburse prior draws made on the Policy (with
interest thereon, calculated in accordance with
the Insurance Agreement (as defined herein));
(vii) to pay principal on the Certificates,
until the Invested Amount exceeds the
Certificate Principal Balance by the Required
Overcollateralization Amount, (as defined
herein) (such amount, if any, paid pursuant to
this clause (vii) being referred to herein as
the "Accelerated Principal Distribution
Amount"); (viii) as payment for any other
amounts owed to the Certificate Insurer
pursuant to the Insurance Agreement; (ix) as
payment for certain amounts that may be
required to be paid to the Servicer pursuant to
the Agreement; (x) to pay the LIBOR Interest
S-8
<PAGE> 9
Carryover (as defined herein) and (xi) to the
holder of the Transferor Interest, to the
extent permitted as described herein.
Investor Interest Collections available after
the payment of interest on the Certificates may
be insufficient to cover any Investor Loss
Amount. If such insufficiency results in the
Certificate Principal Balance exceeding the
Invested Amount, a draw in an amount equal to
such difference will be made on the Policy in
accordance with the terms of the Policy.
The "Overcollateralization Amount" with respect
to any date is the amount, if any, by which the
Invested Amount exceeds the Certificate
Principal Balance on such date. Payments to
Certificateholders pursuant to clause (ii)
above will be interest payments on the
Certificates. Payments to Certificateholders
pursuant to clauses (iii), (iv) and (vii) will
be principal payments on the Certificates and
will reduce the Certificate Principal Balance;
however, payments of the Accelerated Principal
Distribution Amount pursuant to clause (vii)
will not reduce the Invested Amount. The
Accelerated Principal Distribution Amount is
not guaranteed by the Policy.
"Liquidation Loss Amount" means, with respect
to any Liquidated Mortgage Loan, the
unrecovered Principal Balance thereof at the
end of the related Collection Period in which
such Mortgage Loan became a Liquidated Mortgage
Loan, after giving effect to the Net
Liquidation Proceeds received in connection
therewith. The "Investor Loss Amount" will be
the product of the Investor Floating Allocation
Percentage and the aggregate of any Liquidation
Loss Amounts for such Distribution Date. See
"DESCRIPTION OF THE CERTIFICATES --
Distributions on the Certificates."
Principal Collections will be allocated between
the Certificateholders and the holder of the
Transferor Interest ("Investor Principal
Collections" and "Transferor Principal
Collections," respectively) in accordance with
their percentage interests in the Mortgage
Loans as of the Cut-Off Date (or 98% and 2%,
respectively) (the "Fixed Allocation
Percentage"); provided that a lesser amount of
Principal Collections may be distributed to
Certificateholders (i) during the Managed
Amortization Period as described below or (ii)
as a result of the application of Reallocated
Investor Principal Collections or the payment
to the holder of the Transferor Interest of the
Overcollateralization Release Amount. The
"Investor Fixed Allocation Percentage" will be
98%.
Collection Period............. For any Distribution Date other than the first
Distribution Date, the "Collection Period" is
the calendar month preceding the month of such
Distribution Date. For the first Distribution
Date, the "Collection Period" is the period
beginning on the day immediately following the
Cut-Off Date and ending on September 30, 1998.
Interest...................... Interest on the Certificates will be
distributed monthly on the twentieth day of
each month or, if such day is not a Business
Day, then the next succeeding Business Day
(each, a "Distribution Date"), commencing on
October 20, 1998, at the Certificate Rate for
the related Interest Period (as defined below).
The "Certificate
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Rate" for each Interest Period generally will
equal the lesser of (i) the sum of (a) the
London Interbank Offered Rate for one-month
Eurodollar deposits ("LIBOR") appearing on the
Telerate Screen Page 3750, as of the second
LIBOR Business Day (as defined herein) prior to
the first day of such Interest Period (or as of
two LIBOR Business Days prior to the Closing
Date, in the case of the first Interest Period)
and (b) % per annum and (ii) the Net Funds
Cap Rate with respect to such Interest Period.
The "Net Funds Cap Rate" for any Interest
Period is a rate equal to the weighted average
of the Loan Rates on the Mortgage Loans as of
the first day of the related Billing Cycle less
0.65% per annum. Interest payable on the
Certificates on any Distribution Date will
accrue from the preceding Distribution Date (or
in the case of the first Distribution Date,
from the date of the initial issuance of the
Certificates (the "Closing Date") through the
day preceding such Distribution Date (each such
period, an "Interest Period") on the basis of
the actual number of days in the Interest
Period and a 360-day year.
Interest payments on the Certificates at the
Certificate Rate will be funded from Investor
Interest Collections and, to the extent
insufficient, from Reallocated Investor
Principal Collections as described herein and
draws on the Policy. If the Certificate Insurer
defaults under the Policy and the amount
otherwise available to cover such interest
payment is insufficient on any Distribution
Date to pay the total amount of interest
accrued at the Certificate Rate, any interest
due but not paid on such Distribution Date will
be due on the next succeeding Distribution
Date, together with additional interest on such
amount at a rate equal to the sum of the
applicable Certificate Rate and 2% per annum.
If on any Distribution Date the Certificate
Rate is equal to the Net Funds Cap Rate, an
amount (the "LIBOR Interest Carryover") equal
to (i) the difference between (a) the amount of
interest the Certificates would be entitled to
receive on such Distribution Date without
regard to the Net Funds Cap Rate and (b) the
amount of interest actually distributed to the
Certificates on such Distribution Date plus
(ii) the portion of the amount calculated
pursuant to clause (i) remaining unpaid from
prior Distribution Dates and interest accrued
thereon at the then-applicable Certificate
Rate, will be distributed to the Certificates
on subsequent Distribution Dates, to the extent
funds are available therefor in accordance with
the priority of distribution provisions
described herein. No LIBOR Interest Carryover
will be paid to the Certificates after the
Principal Balance of the Certificates has been
reduced to zero. The ratings assigned to the
Certificates do not address the likelihood of
the payment of the amount of any LIBOR Interest
Carryover. The Policy does not provide coverage
of the LIBOR Interest Carryover, and the amount
of any LIBOR Interest Carryover may remain
unpaid on the final Distribution Date. See
"DESCRIPTION OF THE CERTIFICATES -- Allocations
and Collections" and "-- Distributions on the
Certificates."
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<PAGE> 11
Principal Payments from
Principal Collections......... Beginning on the first Distribution Date and
(unless a Rapid Amortization Event (as defined
herein) shall have occurred) ending immediately
following the Distribution Date in September
2003 (the "Managed Amortization Period"),
Principal Collections will be payable to
Certificateholders on each Distribution Date,
to the extent funds are available therefor, in
an amount equal to the Scheduled Principal
Collections Distribution Amount for such
Distribution Date (less any Reallocated
Investor Principal Collections with respect to
such Distribution Date and less any
Overcollateralization Release Amounts with
respect to such Distribution Date). The
"Scheduled Principal Collections Distribution
Amount" for any Distribution Date during the
Managed Amortization Period will equal the
lesser of (i) the Maximum Principal Payment and
(ii) the Alternative Principal Payment. The
"Maximum Principal Payment" for any
Distribution Date will equal the product of the
Investor Fixed Allocation Percentage and
Principal Collections for such Distribution
Date. The "Alternative Principal Payment" for
any Distribution Date will be an amount, not
less than zero, equal to Principal Collections
for such Distribution Date minus the aggregate
of Additional Balances created during the
related Collection Period.
Beginning with the first Distribution Date
following the end of the Managed Amortization
Period, Principal Collections will be payable
to Certificateholders on each Distribution Date
in an amount equal to the Maximum Principal
Payment (less any Reallocated Investor
Principal Collections with respect to
such Distribution Date and less any
Overcollateralization Release Amounts
with respect to such Distribution Date).
See "DESCRIPTION OF THE CERTIFICATES --
Distributions on the Certificates."
In addition, to the extent funds (including
funds available under the Policy) are available
therefor, on the Distribution Date in January
2020, Certificateholders will be entitled to
receive as a payment of principal an amount
equal to the outstanding Certificate Principal
Balance.
Distributions of Principal Collections based on
the Investor Fixed Allocation Percentage may
result in distributions of principal to
Certificateholders in amounts that are greater,
relative to the declining Pool Balance, than
would be the case if distributions of Principal
Collections were based on the Investor Floating
Allocation Percentage. The aggregate
distributions of principal to
Certificateholders will not exceed the Original
Certificate Principal Balance.
The Certificate Insurer....... MBIA Insurance Corporation (the "Certificate
Insurer") is a New York domiciled insurance
company engaged exclusively in the business of
writing financial guaranty insurance,
principally in respect of securities offered in
domestic and foreign markets. See "THE
CERTIFICATE INSURER" in this Prospectus
Supplement.
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Policy........................ On or before the Closing Date, the Policy will
be issued by the Certificate Insurer pursuant
to the provisions of the Insurance and
Reimbursement Agreement (the "Insurance
Agreement") to be dated as of the Closing Date,
among Bank One, the Depositor, the Trustee and
the Certificate Insurer.
The Policy will irrevocably and unconditionally
guarantee payment on each Distribution Date to
the Trustee for the benefit of the
Certificateholders the full and complete
payment of (i) the Guaranteed Principal
Distribution Amount (as defined herein) with
respect to the Certificates for such
Distribution Date and (ii) accrued and unpaid
interest due on the Certificates at the
Certificate Rate (not including any LIBOR
Interest Carryover) (together, the "Guaranteed
Distributions"), with such Guaranteed
Distributions having been calculated in
accordance with the original terms of the
Certificates or the Agreement except for
amendments or modifications to which the
Certificate Insurer has given its prior written
consent. The effect of the Policy is to
guarantee the timely payment of interest on,
and the ultimate payment of the principal
amount of, all of the Certificates.
The "Guaranteed Principal Distribution Amount"
for any Distribution Date will be the amount by
which the Certificate Principal Balance (after
giving effect to all other amounts
distributable and allocable to principal on the
Certificates on such Distribution Date) exceeds
the Invested Amount for such Distribution Date.
In addition, the Policy will guarantee the
payment of the outstanding Certificate
Principal Balance on the Distribution Date in
January 2020, (after giving effect to all other
amounts distributable and allocable to
principal on such Distribution Date).
In the absence of payments under the Policy,
Certificateholders will bear directly the
credit and other risks associated with their
undivided interest in the Trust. See
"DESCRIPTION OF THE CERTIFICATES -- The
Policy."
Overcollateralization
Amount........................ As the result of the distribution of
Accelerated Principal Distribution Amounts, if
any, to Certificateholders, the Invested Amount
may be greater than the Certificate Principal
Balance, thereby creating an
Overcollateralization Amount. Any such
Overcollateralization Amount (not in excess of
the Required Overcollateralization Amount) will
be available to absorb any Investor Loss Amount
not covered by Investor Interest Collections.
Payments of Accelerated Principal Distribution
Amounts are not covered by the Policy. If the
allocation of any Investor Loss Amounts on a
Distribution Date causes the Certificate
Principal Balance (after giving effect to all
other amounts distributable and allocable to
principal on such Distribution Date) to exceed
the Invested Amount for such Distribution Date,
a draw will be made on the Policy to cover such
shortfall to the extent provided therein. If on
any Distribution Date, the
Overcollateralization Amount exceeds the
Required Overcollateralization Amount, the
amount of Investor Principal Collections
payable to Certificateholders on such
Distribution Date will be reduced by the amount
of such excess
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<PAGE> 13
(such amount, the "Overcollateralization
Release Amount") and such amount will be paid
to the holder of the Transferor Interest.
Record Date................... The last day preceding a Distribution Date or,
if the Certificates are no longer Book-Entry
Certificates, the last day of the month
preceding a Distribution Date.
Servicing..................... The Servicer will be responsible for servicing,
managing and making collections on the Mortgage
Loans. The Servicer will deposit all
collections in respect of the Mortgage Loans
into the Collection Account as described
herein. See "DESCRIPTION OF THE
CERTIFICATES -- Payments on Mortgage Loans;
Deposits to Collection Account." On the third
Business Day prior to each Distribution Date
(the "Determination Date"), the Servicer will
calculate, and instruct the Trustee regarding,
the amounts to be paid to the
Certificateholders on such Distribution Date,
as described herein. See "DESCRIPTION OF THE
CERTIFICATES -- Distributions on the
Certificates." With respect to each Collection
Period, the Servicer will receive from
collections in respect of interest on the
Mortgage Loans, on behalf of itself, a portion
of such collections as a monthly servicing fee
(the "Servicing Fee") of approximately 0.50%
per annum (the "Servicing Fee Rate") on the
aggregate Principal Balances of the Mortgage
Loans as of the first day of each such
Collection Period. See "DESCRIPTION OF THE
CERTIFICATES -- Servicing Compensation and
Payment of Expenses." In certain limited
circumstances, the Servicer may resign or be
removed, in which event either the Trustee or a
third-party servicer will be appointed as a
successor Servicer. See "DESCRIPTION OF THE
CERTIFICATES -- Certain Matters Regarding the
Servicer."
Final Payment of Principal;
Termination................. The Trust will terminate on the Distribution
Date following the later of (A) payment in full
of all amounts owing to the Certificate Insurer
and (B) the earliest of (i) the Distribution
Date on which the Certificate Principal Balance
has been reduced to zero, (ii) the final
payment or other liquidation of the last
Mortgage Loan in the Trust, (iii) the optional
transfer of the Certificates to the holder of
the Transferor Interest, as described below,
and (iv) the Distribution Date in January 2020.
The Certificates will be subject to optional
transfer to the holder of the Transferor
Interest on any Distribution Date after the
Certificate Principal Balance is reduced to an
amount less than or equal to 5% of the Original
Certificate Principal Balance and all amounts
due and owing to the Certificate Insurer and
unreimbursed draws on the Policy, together with
interest thereon, as provided under the
Insurance Agreement, have been paid. The
transfer price will equal the outstanding
Certificate Principal Balance, plus accrued and
unpaid interest thereon at the Certificate Rate
through the day preceding the final
Distribution Date, plus any unpaid LIBOR
Interest Carryover. See "DESCRIPTION OF THE
CERTIFICATES -- Termination; Retirement of the
Certificates" herein and "DESCRIPTION OF THE
SECURITIES -- Optional Purchase or Termination"
and "THE AGREEMENTS -- Termination" in the
Prospectus.
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<PAGE> 14
In addition, the Trust may be liquidated as a
result of certain events of bankruptcy,
insolvency or receivership relating to Bank
One, as holder of the Transferor Interest. See
"DESCRIPTION OF THE CERTIFICATES -- Rapid
Amortization Event."
Trustee....................... The Bank of New York, a New York banking
corporation (the "Trustee"), will act as
Trustee on behalf of the Certificateholders.
Mandatory Retransfer of
Certain Mortgage Loans........ The Sellers will make certain representations
and warranties in the Agreement with respect
to the Mortgage Loans. If a Seller breaches
certain of its representations and warranties
with respect to any Mortgage Loan and such
breach materially and adversely affects the
interests of the Certificateholders or the
Certificate Insurer and is not cured within
the specified period, the Mortgage Loan will be
removed from the Trust upon the expiration of a
specified period from the date on which such
Seller becomes aware or receives notice of such
breach and will be reassigned to such Seller.
See "DESCRIPTION OF THE CERTIFICATES --
Assignment of Mortgage Loans."
Federal Tax Considerations.... Subject to the qualifications set forth in
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES,"
special tax counsel to the Depositor is of the
opinion that, under existing law, (i) a
Certificate will be treated as a debt
instrument for Federal income tax purposes as
of the Closing Date and (ii) the Trust will not
be characterized as an association (or publicly
traded partnership) taxable as a corporation or
as a taxable mortgage pool within the meaning
of Section 7701 (i) of the Code. Under the
Agreement, the Transferor, the Depositor and
the Certificateholders will agree to treat the
Certificates as indebtedness for Federal income
tax purposes. See "CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS" herein and in the Prospectus
for additional information concerning the
application of Federal income tax laws.
ERISA Considerations.......... The Certificates may be purchased by or on
behalf of an employee benefit plan or other
retirement arrangement that is subject to the
Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or Section 4975 of
the Internal Revenue Code of 1986, as amended
(the "Code"), as well as any entity whose
source of funds for the purchase of the
Certificates includes plan assets by reason of
a plan or account investing in such entity
(each, a "Plan"), subject to the considerations
described herein. Any Plan fiduciary
considering whether to purchase any Certificate
on behalf of a Plan should consult with its
counsel regarding the applicability of the
provisions of ERISA and the Code. See "ERISA
CONSIDERATIONS" herein and in the Prospectus.
Legal Investment
Considerations................ The Certificates will not constitute "mortgage
related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") because not all of the Mortgages
securing the Mortgage Loans are first
mortgages. Accordingly, many institutions with
legal authority to invest in comparably rated
securities
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<PAGE> 15
based solely on first mortgages may not be
legally authorized to invest in the
Certificates. See "LEGAL INVESTMENT
CONSIDERATIONS" herein and "LEGAL INVESTMENT"
in the Prospectus.
Certificate Rating............ It is a condition to the issuance of the
Certificates that they be rated "Aaa" by
Moody's Investors Service, Inc. ("Moody's") and
"AAA" by Standard & Poor's, a division of the
McGraw Hill Companies, Inc. ("Standard &
Poor's") (each, a "Rating Agency"). In general,
ratings address credit risk and do not address
the likelihood of prepayments. The ratings do
not address the payment of any LIBOR Interest
Carryover. See "RATINGS" herein and "RISK
FACTORS -- Rating of the Securities" in the
Prospectus.
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<PAGE> 16
RISK FACTORS
Book-Entry Certificates. Issuance of the Certificates in book-entry form
may reduce the liquidity of such Certificates in the secondary trading market
since investors may be unwilling to purchase Certificates for which they cannot
obtain physical certificates. See "DESCRIPTION OF THE CERTIFICATES -- Book-
Entry Certificates."
Since transactions in the Certificates can be effected only through DTC,
Cedel, Euroclear, participating organizations, indirect participants and certain
banks, the ability of a Certificate Owner to pledge a Certificate to persons or
entities that do not participate in the DTC, Cedel or Euroclear system or
otherwise to take actions in respect of such Certificates may be limited due to
lack of a physical certificate representing the Certificates. See "DESCRIPTION
OF THE CERTIFICATES -- Book-Entry Certificates."
Certificate Owners may experience some delay in their receipt of
distributions of interest and principal on the Certificates since such
distributions will be forwarded by the Trustee to DTC and DTC will credit such
distributions to the accounts of its Participants (as defined herein) which will
thereafter credit them to the accounts of Certificate Owners either directly or
indirectly through indirect participants. See "DESCRIPTION OF THE
CERTIFICATES -- Book-Entry Certificates."
Cash Flow Considerations; Risk of Delays in Payment and Fluctuations in
Collections. The minimum monthly payment on a Mortgage Loan during the Draw
Period (as defined in the Prospectus) is equal to the greater of 1% of the
then-outstanding principal balance, the amount of interest accrued at the
applicable Loan Rate during the related Billing Cycle plus Assessed Fees
(defined herein) and $100. Accordingly, such minimum monthly payments may be
limited to accrued interest. Although borrowers may choose to pay down all or a
part of their outstanding principal balance during the Draw Period, they are
under no obligation to do so. During the Repayment Period, the borrower's
monthly payment will remain constant, but the amount of such payment allocated
to principal and interest will vary, depending on adjustments to the applicable
Loan Rate and any other fees. In addition, the Servicer may extend Draw Periods,
the number of monthly payments during the Repayment Period may increase or
decrease, borrowers may exercise the Lock Feature with respect to all or a
portion of the principal balance of their Mortgage Loans, and borrowers may be
given the option from time to time under certain circumstances to forego a
monthly payment (the interest portion of which will be payable on future Due
Dates to the extent described above and the principal portion of which will be
payable at maturity). Any such events will affect the rate and timing of
payments on the Certificates and may affect the weighted average life and yield
on the Certificates. See "THE DEPOSITOR, THE SERVICER AND THE
ORIGINATORS -- Home Equity Lines of Credit" in the Prospectus.
Collections on the Mortgage Loans also may vary because, among other
things, the minimum monthly payment will be adjusted on most of the Mortgage
Loans whenever the applicable Loan Rate changes by more than an amount specified
in the related Credit Line Agreement. With respect to certain of the Mortgage
Loans, the minimum monthly payment will be adjusted each time the principal
balance of such Mortgage Loans changes, including each time a draw is made by
the borrower. Collections on the Mortgage Loans also may vary due to seasonal
purchasing and payment habits of borrowers.
Even assuming that the Mortgaged Properties provide adequate security for
the Mortgage Loans, substantial delays could be encountered in connection with
the liquidation of Mortgage Loans that are delinquent, and resulting shortfalls
in distributions to Certificateholders could occur if the Certificate Insurer
were unable to perform on its obligations under the Policy. Further, liquidation
expenses (such as legal fees, real estate taxes, and maintenance and
preservation expenses) will reduce the proceeds payable to Certificateholders
and thereby reduce the security for the Mortgage Loans. If any of the Mortgaged
Properties fail to provide adequate security for the related Mortgage Loans,
Certificateholders could experience a loss if the Certificate Insurer were
unable to perform its obligations under the Policy.
Prepayment Considerations. Substantially all of the Mortgage Loans may be
prepaid in whole or in part at any time without penalty. The rate of prepayment
on the Mortgage Loans cannot be predicted. Neither the Depositor nor the
Servicer is aware of any publicly available studies or statistics on the rate of
prepayment of mortgage loans such as the Mortgage Loans. Generally, home equity
lines of credit are not viewed by
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borrowers as permanent financing. Accordingly, the Mortgage Loans may experience
a higher rate of prepayment than traditional first mortgage loans. On the other
hand, because the Mortgage Loans amortize as described herein, rates of
principal payment on the Mortgage Loans generally will be slower than those of
traditional fully-amortizing first mortgages in the absence of prepayments on
such Mortgage Loans. The prepayment experience with respect to the Mortgage
Loans may be affected by a wide variety of factors, including general economic
conditions, prevailing interest rate levels, the availability of alternative
financing, homeowner mobility, the frequency and amount of any future draws on
the Credit Line Agreements and changes affecting the deductibility for Federal
income tax purposes of interest payments on home equity lines of credit.
Substantially all of the Mortgage Loans contain "due-on-sale" provisions, and
the Servicer intends to enforce such provisions, unless such enforcement is not
permitted by applicable law. The enforcement of a "due-on-sale" provision will
have the same effect as a prepayment of the related Mortgage Loan. See "CERTAIN
LEGAL ASPECTS OF LOANS -- 'Due-on-Sale' Clauses" in the Prospectus.
Certificate Rating. The rating of the Certificates will depend primarily
on an assessment by the Rating Agencies of the Mortgage Loans and upon the
claims-paying ability of the Certificate Insurer. Any reduction in a rating
assigned to the claims-paying ability of the Certificate Insurer below the
rating initially given to the Certificates would likely result in a reduction in
the rating of the Certificates. The rating by the Rating Agencies of the
Certificates is not a recommendation to purchase, hold or sell the Certificates,
inasmuch as such rating does not comment as to the market price or suitability
for a particular investor. There is no assurance that the ratings will remain in
place for any given period of time or that the ratings will not be lowered or
withdrawn by the Rating Agencies. In general, the ratings address credit risk
and do not address the likelihood of prepayments. The ratings of the
Certificates do not address the possibility of the imposition of United States
withholding tax with respect to non-U.S. persons. The ratings do not address the
payment of any LIBOR Interest Carryover.
Yield Considerations; Limitation on Interest Payable on
Certificates. Interest payable on the Certificates will accrue at a variable
rate based on LIBOR, calculated monthly. The Mortgage Loans, however, generally
bear interest based on a variable rate based on a prime rate (the "Index"). See
"DESCRIPTION OF THE MORTGAGE LOANS -- Mortgage Loan Terms." Consequently, the
interest that becomes due on the Mortgage Loans (net of the Servicing Fee, the
premium payable to the Certificate Insurer and the fee payable to the Trustee)
during any Collection Period may not equal the amount of interest that accrues
at LIBOR plus the margin on the Certificate Principal Balance of the
Certificates during the related Interest Period. In particular, LIBOR and the
Index may respond to different economic and market factors, and there is no
necessary correspondence between them. Thus, it is possible, for example, that
LIBOR may rise during periods in which the Index is stable or is falling or
that, even if both LIBOR and the Index rise during the same period, LIBOR may
rise much more rapidly than the Index. In addition, the borrowers under certain
Mortgage Loans may exercise the option with respect to all or a portion of the
outstanding balances thereof to lock the Loan Rate at a fixed rate. See "THE
DEPOSITOR, THE SERVICER AND THE ORIGINATORS -- Home Equity Lines of Credit" in
the Prospectus. Such option may be exercised during periods of rising interest
rates as borrowers attempt to limit their risk of higher rates. The availability
of fixed rate mortgage loans at competitive interest rates during periods of
falling interest rates also may encourage borrowers to exercise such option. In
addition, subject to certain conditions set forth in the Agreement, the Servicer
may reduce the margin on certain Mortgage Loans. As a result, there may be
periods during which the weighted average net rate at which the Mortgage Loans
are accruing interest may be less than the amount of interest that would accrue
at LIBOR plus the margin on the Certificates, and a LIBOR Interest Carryover
could result. If the Net Funds Cap Rate results in a lower interest payment to
the Certificates for a Distribution Date, the value of the Certificates may be
temporarily or permanently reduced. Any LIBOR Interest Carryover will be payable
only to the extent certain amounts which would otherwise be available to be
distributed to the Transferor Interest, and such LIBOR Interest Carryover may
remain unpaid on the final Distribution Date. In addition, if the spread between
the weighted average net Loan Rate and the Certificate Rate is reduced or
eliminated, the weighted average life of the Certificates may be affected by
reducing the amount otherwise available to cover Investor Loss Amounts or to pay
the Accelerated Principal Distribution Amount.
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<PAGE> 18
Legal Considerations. The Mortgage Loans are secured by mortgages (which
are either first or second mortgages) on the Mortgaged Properties. With respect
to Mortgage Loans that are secured by first mortgages, the Servicer has the
power under certain circumstances to consent to a new mortgage lien on the
Mortgaged Property having priority over such Mortgage Loan. Mortgage Loans
secured by junior mortgages are entitled to proceeds that remain from the
liquidation or similar sale of the related Mortgaged Property upon foreclosure
or other disposition, after payment of liquidation expenses (such as legal fees,
real estate taxes, and maintenance and preservation expenses) and payments of
any related senior mortgage lien and prior statutory liens. A foreclosure action
is subject to most of the delays and expenses of other lawsuits, sometimes
requiring up to several years to complete. Accordingly, if a borrower defaults
on a Mortgage Loan and the Servicer is required to bring an action to foreclose
the related mortgage, delays in the distribution of the proceeds of such
foreclosure are likely to result. Further, since a foreclosure action is
equitable in nature and is addressed to a court of equity, the court may relieve
a mortgagor of a default and deny the Servicer foreclosure on proof that the
mortgagor's default was neither willful nor in bad faith and that the Servicer's
action was such as to establish a waiver or fraud, bad faith, or oppressive or
unconscionable conduct. Under certain circumstances, a court of equity may
relieve the mortgagor from an entirely technical default where such default was
not willful. In the event that liquidation proceeds are insufficient to satisfy
liquidation expenses, senior loans and prior liens in the aggregate and the
Certificate Insurer is unable to perform its obligations under the Policy, the
Certificateholders will bear (i) the risk of delay in distributions while a
deficiency judgment against the borrower is obtained and (ii) the risk of loss
if the deficiency judgment cannot be obtained or cannot be realized upon. In
addition, a junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to all senior liens. See "CERTAIN LEGAL
ASPECTS OF LOANS" in the Prospectus.
Each Seller warrants in the Mortgage Loan Purchase Agreement that the
transfer by it of all of its right, title and interest in and to its respective
Mortgage Loans is either a valid transfer and assignment of such Mortgage Loans
or the grant to the Trust of a security interest in such Mortgage Loans. If the
transfer of Mortgage Loans to the Trust is deemed to create a security interest
therein under the Uniform Commercial Code (the "UCC") of an applicable state,
any tax or governmental lien on property of the related Seller arising before
any Mortgage Loan comes into existence may have priority over the Trust's
interest in such Mortgage Loan. In addition, if the FDIC were appointed receiver
of the related Seller, the receiver's administrative expenses also may have
priority over the Trust's interest in such Mortgage Loan. If an Insolvency Event
were to occur with respect to any Seller, then a Rapid Amortization Event would
occur and, pursuant to the terms of the Agreement, new Additional Balances would
not be transferred to the Trust. In addition, if an Insolvency Event were to
occur with respect to Bank One, as holder of the Transferor Interest, the
Certificate Insurer or at least 50% of the Certificateholders, with the consent
of the Certificate Insurer, may direct the Trustee to sell the Mortgage Loans in
a commercially reasonable manner as described below under "DESCRIPTION OF THE
CERTIFICATES -- Rapid Amortization Events," thereby causing early termination of
the Trust. The Policy will be available to cover any shortfalls if proceeds of
such sale are insufficient to make all distributions of amounts due on the
Certificates.
The Federal Deposit Insurance Act (as amended, "FDIA") sets forth certain
powers that the FDIC could exercise if it were appointed conservator or receiver
of one of the Sellers. To the extent (i) a Seller grants a security interest in
the Mortgage Loans to the Trust, (ii) such security interest is validly
perfected before the occurrence of an Insolvency Event and (iii) such security
interest was not taken in contemplation of insolvency or with the intent to
hinder, delay or defraud such Seller or its creditors, such security interest
should not be subject to avoidance by the FDIC if the FDIC is appointed as a
conservator or receiver of such Seller. Subject to clarification by regulations
or interpretations, positions taken by the staff of the FDIC prior to the
passage of the Financial Institutions Reform, Recovery, and Enforcement Act of
1989 (as amended "FIRREA") do not suggest that the FDIC, as receiver or
conservator for a Seller, would interfere with the timely transfer to the Trust
of payments collected on the Mortgage Loans. 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 interest in
collateral granted by depository institutions, may permit the
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<PAGE> 19
FDIC to avoid such security interest, thereby resulting in possible delays and
reduction in payments to the Certificateholders. Further, if the FDIC were to
require the Trustee to comply with certain administrative claims procedures
under the FDIA before the Trust could collect, sell, dispose of or otherwise
liquidate the Mortgage Loans or if the conservator or receiver were to obtain a
stay of proceedings with respect to a Seller as provided in the FDIA, delays in
payment and possible reductions in the amount of those payments could occur.
Upon the occurrence of an Insolvency Event, if no Rapid Amortization Event other
than such Insolvency Event exists, the FDIC may have the power to continue to
require the Sellers to transfer new Additional Balances to the Trust and to
prevent the early sale, liquidation or disposition of the Mortgage Loans and the
commencement of the Rapid Amortization Period. In the event of an Event of
Servicing Termination if a conservator, receiver or liquidator is appointed for
the Servicer and no Event of Servicing Termination other than such
conservatorship, receivership, liquidation or insolvency of the Servicer exists,
the conservator, receiver or liquidator may have the power to prevent either the
Trust or the Certificateholders from appointing a successor Servicer.
Geographic Concentration. As of the Cut-Off Date, approximately 27%, 17%,
14%, 12%, 9%, 7%, 7% and 6% (by Cut-Off Date Pool Balance) of the Mortgaged
Properties are located in the States of Arizona, Ohio, Indiana, Wisconsin,
Illinois, Colorado, Kentucky and Utah, respectively. An overall decline in the
residential real estate markets in these states could adversely affect the
values of the Mortgaged Properties securing such Mortgage Loans such that the
Principal Balances of the related Mortgage Loans, together with any primary
financing on such Mortgaged Properties, could equal or exceed the value of such
Mortgaged Properties. As the residential real estate market is influenced by
many factors, including the general condition of the economy and interest rates,
no assurances may be given that the residential real estate markets in these
States will not weaken. If these residential real estate markets should
experience an overall decline in property values after the dates of origination
of the Mortgage Loans, the rates of losses on the Mortgage Loans would be
expected to increase, and could increase substantially.
Servicer's Ability to Change the Terms of the Mortgage Loans. Subject to
the terms of the Agreement, the Servicer may agree to changes in the terms of a
Credit Line Agreement, provided that such changes (i) do not adversely affect
the interest of the Certificateholders or the Certificate Insurer and (ii) are
consistent with prudent business practice. There can be no assurance that
changes in applicable law or the marketplace for HELOCs or prudent business
practice will not result in changes in the terms of the Mortgage Loans. In
addition, the Agreement permits the Servicer, within certain limitations
described therein, to increase the Credit Limit of the related Mortgage Loan
(which may increase the related CLTV), reduce the Gross Margin for such Mortgage
Loan (thereby reducing interest payments available for payments to
Certificateholders) or, if a lien senior to that of such Mortgage Loan has been
paid or otherwise satisfied or released, consent to the placing of another lien
senior to that of such Mortgage Loan (which may increase the CLTV of the
Mortgage Loan).
Year 2000. BANC ONE CORPORATION ("BANC ONE"), the parent of the Sellers
and the Servicer, like most other companies, utilizes computer programs which
process transactions based on using two digits for the year of the transaction
rather than a full four digits. Programs that process year 2000 transactions
with the year "00" may encounter significant processing inaccuracies or
inoperability. BANC ONE has determined that it, like most other companies, will
be required to modify or replace significant portions of its software so that
its information systems will be able to properly utilize dates subsequent to
December 31, 1999. The year 2000 issue will be addressed through either
modification to existing software or conversion to new software. However, if
such modifications are not made or completed on a timely basis, the year 2000
issues could have a material impact on the operations of BANC ONE.
A plan has been developed and is being followed to ensure that the
modifications and conversions are implemented and thoroughly tested on a timely
basis. Based on progress made to date, BANC ONE anticipates that software for
mission critical information systems will be year 2000 ready by the end of 1998.
Other less essential software applications will be modified or replaced during
1999 which would enable all internal software applications to become year 2000
ready prior to the year 2000.
S-19
<PAGE> 20
BANC ONE utilizes software provided by outside suppliers which must also
become year 2000 ready. Approximately 30% of all software applications used by
BANC ONE are provided by outside suppliers and commitment letters from such
suppliers that they will take the necessary actions to become year 2000 ready on
a timely basis have been required. BANC ONE is actively monitoring the progress
of outside suppliers in their efforts to become year 2000 ready, including BANC
ONE testing of the results of the outside suppliers' efforts and actions deemed
necessary will be taken to mitigate the exposure to the year 2000 issue.
However, there is no guarantee that the software of other suppliers on which
BANC ONE's information systems rely will be converted on a timely basis, or that
failure to convert would not have a material adverse effect on BANC ONE's
operations.
The date on which the year 2000 modifications are expected to be completed
are based on management's best estimates, which were derived utilizing numerous
assumptions of future events including the availability of certain resources,
third party modifications and other factors. However, there can be no guarantee
that these estimates will be achieved and actual results could differ materially
form those plans. Specific factors that might cause material difference include,
but are not limited to, the availability and cost of personnel trained in this
area, the ability to locate and correct all relevant computer codes and similar
uncertainties.
For a discussion of additional risks pertaining to the Certificates, see
"RISK FACTORS" in the Prospectus.
THE CERTIFICATE INSURER
The following information set forth in this section has been provided by
the Certificate Insurer. Accordingly, neither the Depositor nor the Servicer
makes any representation as to the accuracy and completeness of such
information.
MBIA Insurance Corporation ("MBIA") is the principal operating subsidiary
of MBIA Inc., a New York Stock Exchange listed company (the "Company"). The
Company is not obligated to pay the debts of or claims against MBIA. MBIA is
domiciled in the State of New York and licensed to do business in and subject to
regulation under the laws of all 50 states, the District of Columbia, the
Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands,
the Virgin Islands of the United States and the Territory of Guam. MBIA has two
European branches, one in the Republic of France and the other in the Kingdom of
Spain. New York has laws prescribing minimum capital requirements, limiting
classes and concentrations of investments and requiring the approval of policy
rates and forms. State laws also regulate the amount of both the aggregate and
individual risks that may be insured, the payment of dividends by MBIA, changes
in control and transactions among affiliates. Additionally, MBIA is required to
maintain contingency reserves on its liabilities in certain amounts and for
certain periods of time.
Effective February 17, 1998, the Company acquired all of the outstanding
stock of Capital Markets Assurance Corporation ("CMAC") through a merger with
its parent CapMAC Holdings Inc. Pursuant to a reinsurance agreement, CMAC has
ceded all of its net insured risks (including any amounts due but unpaid from
third party reinsurers), as well as its unearned premiums and contingency
reserves, to MBIA. The Company is not obligated to pay the debts of or claims
against CMAC.
As of December 31, 1997, MBIA had admitted assets of $5.3 billion
(audited), total liabilities of $3.5 billion (audited), and total capital and
surplus of $1.8 billion (audited) determined in accordance with statutory
accounting practices prescribed or permitted by insurance regulatory
authorities. As of June 30, 1998, MBIA had admitted assets of $6.0 billion
(unaudited), total liabilities of $3.9 billion (unaudited), and total capital
and surplus of $2.1 billion (unaudited) determined in accordance with statutory
accounting practices prescribed or permitted by insurance regulatory
authorities.
Furthermore, copies of MBIA's year end financial statements prepared in
accordance with statutory accounting practices are available without charge from
MBIA. A copy of the Annual Report on Form 10-K of
S-20
<PAGE> 21
the Company is available from MBIA or the Securities and Exchange Commission.
The address of MBIA is 113 King Street, Armonk, New York 10504. The telephone
number of MBIA is (914) 273-4545.
The Policy is not covered by the Property/Casualty Insurance Security Fund
specified in Article 76 of the New York Insurance Law.
Moody's Investors Service, Inc. rates the claims paying ability of MBIA
"Aaa."
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. rates the
claims paying ability of MBIA "AAA."
Fitch IBCA, Inc. (formerly known as Fitch Investors Service, L.P.) rates
the claims paying ability of MBIA "AAA."
Each rating of MBIA should be evaluated independently. The ratings reflect
the respective rating agency's current assessment of the creditworthiness of
MBIA and its ability to pay claims on its policies of insurance. Any further
explanation as to the significance of the above ratings may be obtained only
from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the
securities, and such ratings may be subject to revision or withdrawal at any
time by the rating agencies. Any downward revision or withdrawal of any of the
above ratings may have an adverse effect on the market price of the securities.
MBIA does not guaranty the market price of the securities nor does it guaranty
that the ratings on the securities will not be revised or withdrawn.
S-21
<PAGE> 22
THE SERVICER
GENERAL
The Servicer will service the Mortgage Loans in accordance with the terms
set forth in the Agreement. The Servicer may perform any of its obligations
under the Agreement through one or more subservicers and is permitted under the
Agreement to transfer servicing to an affiliate, provided such affiliate meets
certain standards specified in the Agreement. See "DESCRIPTION OF THE
CERTIFICATES -- Certain Matters Regarding the Servicer." Notwithstanding any
subservicing arrangements, the Servicer will remain liable for its servicing
duties and obligations under the Agreement as if the Servicer alone were
servicing the Mortgage Loans.
Bank One, N.A. ("Bank One" and, in its capacity as servicer, the
"Servicer") is a national banking association and an indirect, wholly-owned
subsidiary of BANC ONE, an Ohio corporation. As of June 30, 1998, Bank One had
consolidated total assets of approximately $25.2 billion, total deposits of
approximately $15.3 billion and total equity capital of approximately $1.9
billion. The principal executive offices of Bank One are located at 100 East
Broad Street, Columbus, Ohio.
RECENT DEVELOPMENTS
BANC ONE and First Chicago NBD Corporation ("FCN"), together with BANK ONE
CORPORATION, formerly BANC ONE CORPORATION (DE), and Hornet Reorganization
Corporation, have entered into an Agreement and Plan of Reorganization, dated as
of April 10, 1998 (as the same may be amended or otherwise modified from time to
time, the "BANC ONE/FCN Agreement"), pursuant to which BANC ONE and FCN will be
merged into BANK ONE CORPORATION, a new corporation organized to effect the
merger (the "BANC ONE/FCN Merger"). BANK ONE CORPORATION will be the surviving
corporation in the BANC ONE/FCN Merger, at which time the separate corporate
existence of BANC ONE and FCN will cease. The BANC ONE/FCN Merger is subject to
the satisfaction of the terms and conditions set forth in the BANC ONE/FCN
Agreement, which include the approval of the respective shareholders of BANC ONE
and FCN and certain regulatory approvals. Subject to the satisfaction of the
terms and conditions set forth in the BANC ONE/FCN Agreement, the BANC ONE/FCN
Merger is targeted to be completed in the fourth quarter of 1998.
THE HELOC PROGRAM
THE BANC ONE CONSUMER LENDING DIVISION HOME EQUITY PROGRAM
BANC ONE, through its affiliated banks, has originated adjustable rate home
equity revolving lines of credit since the early 1980's. During the past several
years, BANC ONE has undertaken a transition from managing its business
activities at the affiliate (legal entity) level to centralized management of
such business activities by nationally focused lines of business. As part of
this transition, all home equity lending originated directly with consumers was
centralized in early 1997 and is currently managed by the BANC ONE Retail
Group's Consumer Lending Division ("Consumer Lending"). Consumer Lending has
created national business units including marketing, product management, risk
management, credit underwriting, loan servicing and collections to manage its
credit related activities. See "THE DEPOSITOR, THE SERVICER AND THE ORIGINATORS"
as contained in the Prospectus for information concerning these business units.
SERVICING OF THE MORTGAGE LOANS
At June 30, 1998, Bank One, N.A. and its affiliates (Bank One, Arizona,
N.A., and Bank One, Wisconsin) serviced a total portfolio of approximately
257,347 home equity lines of credit having an aggregate outstanding principal
balance of approximately $5.2 billion. The foregoing figures include home equity
lines of credit that were originated or acquired by Bank One or its affiliates
and are serviced on a contractual basis.
S-22
<PAGE> 23
Servicing of HELOCs (including the Mortgage Loans) originated by Consumer
Lending through the affiliated banks is centrally managed by Consumer Lending's
Portfolio Asset Management unit at three collection sites located in Akron,
Ohio, Waukesha, Wisconsin and Tempe, Arizona. While the collection sites are
managed by Consumer Lending, they are currently owned by each of Bank One, N.A.,
Bank One Wisconsin, and Bank One, Arizona, N.A., respectively. See "THE
DEPOSITOR, THE SERVICER AND THE ORIGINATORS -- Mortgage Loan Servicing" and
"-- Collections/Portfolio Management" in the Prospectus.
Consumer Lending has established standard policies governing the collection
of serviced loans. Collections management primarily includes the monitoring and
supervision of delinquent loans, loss mitigation efforts, foreclosure
proceedings and, if applicable, the disposition of mortgaged properties and the
recovery of previously charged-off assets.
The Portfolio Asset Management unit utilizes a variety of collections
management programs and tools to monitor and collect delinquent accounts,
mitigate account losses, and recover assets previously written off. Account
monitoring begins once an account becomes past due.
Collection efforts for delinquent accounts are initiated based on
behavioral and credit risk scoring. The Portfolio Asset Management unit uses the
Triad Collection Activity Prioritization System (the "Triad System") to manage
the timing and extent of collection efforts. The Triad System uses customer and
account information to define a variety of effective and efficient collection
strategies by stratifying delinquent accounts as low, medium or high risk based
on payment history, product type, and other account characteristics. Consumer
Lending's policy is to suspend drawing privileges on overdue loans when
collection efforts are initiated. Draw privileges are permanently suspended once
an account becomes 60 days delinquent. Permanently suspended draw privileges may
be reinstated with management approval.
In accordance with industry practice, the Custodial Operations unit reports
accounts that are 30 days past due to the credit reporting bureaus. During the
period when the loan is 45 to 59 days delinquent, Consumer Lending sends notice
of default informing the borrower of intent to initiate foreclosure proceedings
on the Mortgaged Property within certain timeframes as allowed by law. Senior
lien holders, if any, may be contacted to determine the status of those liens.
Broker's price opinions, appraisals, and Mortgaged Property inspections may be
conducted once an account reaches 60 days past due.
When the notice of default to the borrower expires, the Portfolio Asset
Management unit determines whether to initiate foreclosure proceedings. Analyses
are performed and, at 90 days past due, foreclosure proceedings are initiated,
if appropriate. If accounts are determined to be collectable, collection
managers may delay foreclosure proceedings.
The Portfolio Asset Management unit will charge-off the entire loan balance
if the aforementioned analysis indicates that there is no equity in the
Mortgaged Property. If the analysis reflects that there is sufficient equity in
the Mortgaged Property, the loan is placed on nonaccrual status and foreclosure
proceedings are initiated (if deemed appropriate). Upon the earlier of
liquidation or possession of the Mortgaged Property, the portion of the loan
balance unrecovered from the liquidation proceeds or, in the case of physical
possession, the portion of the loan balance deemed unrecoverable is charged-off.
The amount charged-off takes into account all anticipated liquidation expenses
(such as legal fees, real estate taxes, and maintenance and preservation
expenses). Servicing, collection and charge-off practices may change over time
in accordance with, among other things, Consumer Lending's business judgment,
changes in the portfolio and applicable laws and regulations.
After foreclosure, if the loan is secured by a first mortgage lien, the
Servicer may liquidate the mortgaged property and charge-off the home equity
loan balance that was not recovered through proceeds of the liquidation, if any.
If the mortgaged property was subject to a senior lien, the Servicer will either
directly manage the foreclosure sale of the mortgaged property and satisfy such
lien at the time of sale or take other action as it deems necessary to protect
the interest in the mortgaged property. If, in the judgment of the Servicer, the
cost of maintaining or purchasing the senior lien exceeds the economic benefit
of such action, the
S-23
<PAGE> 24
Servicer will generally charge-off the entire unpaid principal amount of the
loan, seek a judgment against the borrower and not pursue any recovery.
DELINQUENCY AND LOSS EXPERIENCE
The following tables summarize the delinquency and loss experience of
HELOCs owned by BANC ONE and its affiliates and serviced by affiliates of BANC
ONE. The statistical information in such tables does not include HELOCs serviced
by affiliates of BANC ONE for entities other than BANC ONE and its affiliates.
The tables below present home equity revolving credit line delinquency and loss
experience applicable to substantially all of the United States operations of
BANC ONE and its affiliates, including loans managed in states which are not
represented in the mortgage pool consisting of the Mortgage Loans and real
estate acquired through foreclosure. As described in the Prospectus under "THE
DEPOSITOR, THE SERVICER AND THE ORIGINATORS -- The BANC ONE Consumer Lending
Division HELOC Program", in early 1997 BANC ONE centralized the management,
including loan servicing, of all HELOCs (including the Mortgage Loans)
originated directly with consumers. Accordingly, the delinquency and loss
figures presented below for the year ending December 31, 1997, and the six-month
period ending June 30, 1998 represent information for HELOCs directly originated
and serviced by BANC ONE and its affiliates under Consumer Lending's management
only. The delinquency and loss information for the three years prior to 1997
represent information with respect to all corporate-owned HELOCs, including
those indirectly originated by BANC ONE and its affiliates and purchased from
correspondent banks and brokers, substantially all of which HELOCs currently
would be managed by Consumer Lending.
DELINQUENCY AND FORECLOSURE EXPERIENCE
<TABLE>
<CAPTION>
SIX
MONTHS
ENDING YEAR ENDING DECEMBER 31,
JUNE 30, ------------------------------------
1998 1997 1996 1995 1994
-------- ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Principal Amount Outstanding................. $5,228 $5,114 $4,828 $4,383 $3,528
Average Principal Amount Outstanding
(year end average)......................... $5,171 $4,971 $4,606 $3,956 $3,674
Gross Loss................................... $ 6.4 $ 9.1 $ 11.5 $ 6.8 $ 5.3
Recoveries................................... $ 0.5 $ 1.4 $ 1.8 $ 1.6 $ 1.6
Net Loss..................................... $ 5.9 $ 7.7 $ 9.7 $ 5.2 $ 3.7
Net Loss as a Percent of Principal
Outstanding................................ 0.23%(1) 0.15% 0.20% 0.12% 0.10%
Net Loss as a Percent of Average Principal
Outstanding................................ 0.23%(1) 0.15% 0.21% 0.13% 0.10%
Delinquencies 30-89 days(2).................. $ 37.7 $ 40.1 $ 57.8 $ 58.5 $ 28.1
Delinquencies 90+ days(2).................... $ 3.3 $ 4.3 $ 11.2 $ 8.1 $ 7.4
------ ------ ------ ------ ------
30+ Delinquency(2)........................... $ 41.0 $ 44.4 $ 69.0 $ 66.6 $ 35.5
Non-Accruals(3).............................. $ 11.1 $ 11.1 $ 7.0 $ 13.2 $ 8.2
------ ------ ------ ------ ------
Non-Performing(4)............................ $ 52.1 $ 55.5 $ 76.0 $ 79.8 $ 43.7
30+ Delinquency as Percentage of Principal
Amount Outstanding(2)...................... 0.78% 0.87% 1.43% 1.52% 1.01%
Non-Accrual as Percentage of Principal Amount
Outstanding................................ 0.21% 0.22% 0.14% 0.30% 0.23%
Total Non-Performing as Percentage of
Principal Amount Outstanding............... 1.00% 1.09% 1.57% 1.82% 1.24%
</TABLE>
- ---------------
(1) Annualized.
(2) Delinquency calculated at calendar month end.
(3) Non-accruals include all accounts in process of foreclosure.
(4) Non-performing includes 30+ delinquencies and non-accruals.
S-24
<PAGE> 25
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
All of the Mortgage Loans will be purchased on the Closing Date by the
Depositor from the Sellers, without recourse, pursuant to the Mortgage Loan
Purchase Agreement.
All weighted averages described below are weighted on the basis of the
Cut-Off Date Pool Balance.
The Mortgage Loans were originated between July 1997 and August 1998. The
Cut-Off Date Pool Balance was approximately $867,346,931, which is equal to the
aggregate Principal Balances of the Mortgage Loans as of the close of business
on August 31, 1998 (the "Cut-Off Date"). Approximately 26.58% of the Mortgage
Loans are secured by a first mortgage on the related Mortgaged Property and
approximately 73.42% of the Mortgage Loans are secured by a second mortgage on
the related Mortgaged Property. The Mortgaged Properties are located in fifteen
states and the District of Columbia. Approximately 27%, 17%, 14%, 12%, 9%, 7%,
7% and 6% of the Mortgage Loans were secured by Mortgaged Properties in Arizona,
Ohio, Indiana, Wisconsin, Illinois, Colorado, Kentucky and Utah, respectively.
Except as described in the preceding sentence, less than 1% (by Cut-Off Date
Principal Balance) of the Mortgage Loans are secured by Mortgaged Properties
located in any one state. The weighted average Combined Loan-to-Value Ratio of
the Mortgage Loans was 78.18% as of the Cut-Off Date. The "Combined
Loan-to-Value Ratio" or "CLTV" of each Mortgage Loan is the ratio, expressed as
a percentage, of (a) the sum of (i) the Credit Limit as of the origination of
such Mortgage Loan and (ii) the principal balance of any senior mortgage loan as
of the origination of such Mortgage Loan, over (b) the value (based on an
appraised value or other acceptable valuation method in accordance with the
applicable Seller's underwriting guidelines) for the related Mortgaged Property
determined in the origination of such Mortgage Loan. No Mortgage Loan had a
Combined Loan-to-Value Ratio greater than 100.00%. The weighted average junior
mortgage ratio of the Mortgage Loans (computed by dividing the Credit Limit for
each Mortgage Loan that was in a junior lien position by the sum of such Credit
Limit and the outstanding balances at the time such Mortgage Loan was originated
of all senior mortgage loans affecting the Mortgaged Property, weighted by the
Cut-Off Date Principal Balance of the loans in the junior position) was
approximately 38.7%. The Principal Balances of the Mortgage Loans as of the
Cut-Off Date ranged from $0.00 to $245,304, and the average Principal Balance of
the Mortgage Loans as of the Cut-Off Date was $24,249. All of the Mortgage Loans
have a Lock Feature which permits the borrower to lock the Loan Rate with
respect to all or a portion of the principal balance thereof to a fixed rate.
See "THE DEPOSITOR, THE SERVICER AND THE ORIGINATORS -- Home Equity Lines of
Credit" in the Prospectus. The portion of the principal balance of a Mortgage
Loan as to which the Lock Feature is exercised is referred to herein as the
"Locked Balance". As of the Cut-Off Date, the aggregate Locked Balance was
approximately $8,574,611 (approximately 0.99% of the Cut-Off Date Pool Balance).
Loan Rates on the Locked Balances ranged from 6.50% per annum to 13.50% per
annum, and the weighted average Loan Rate on the Locked Balances was 9.57%. As
of the Cut-Off Date, the Loan Rates on all of the Mortgage Loans ranged from
5.50% per annum to 18.50% per annum and the weighted average Loan Rate on all of
the Mortgage Loans was 9.87% per annum. As of the Cut-Off Date, the Gross
Margins for the Mortgage Loans (other than the Locked Balances) ranged from
0.00% to 10.00%, and the weighted average Gross Margin for such Mortgage Loans
was 1.38%. Each of the Mortgage Loans is subject to a maximum Loan Rate
specified in the related Credit Line Agreement (each, a "Maximum Rate"). As of
the Cut-Off Date, the Maximum Rates ranged from 18.00% per annum to 25.00% per
annum, and the weighted average Maximum Rate was 22.54% per annum. As of the
Cut-Off Date, 67.29% of the Mortgage Loans have a minimum Loan Rate of 1.00% per
annum. One Mortgage Loan has a minimum Loan Rate of 7.00% per annum. The
remaining Mortgage Loans do not have a minimum Loan Rate. As of the Cut-Off
Date, the remaining terms to maturity of the Mortgage Loans (other than Locked
Balances) ranged from 166 months to 244 months and the weighted average
remaining term to scheduled maturity of such Mortgage Loans was 206 months. As
of the Cut-Off Date, the weighted average remaining term to scheduled maturity
of all of the Mortgage Loans was 204 months. As of the Cut-Off Date, the
remaining terms to maturity of the Locked Balances ranged from 5 months to 167
months and the weighted average remaining term to scheduled maturity of the
Locked Balances was 80 months. The weighted average Credit Limit Utilization
Rate
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<PAGE> 26
(determined by dividing the Cut-Off Date Principal Balance of a Mortgage Loan by
the Credit Limit of such Mortgage Loan) (weighted by Credit Limit) of the
Mortgage Loans was 59.76% as of the Cut-Off Date. The latest scheduled maturity
of any Mortgage Loan is in December 2018. As of the Cut-Off Date, 99.91% of the
Mortgage Loans were secured by Mortgaged Properties that are owner-occupied, and
0.09% of the Mortgage Loans were secured by non-owner occupied Mortgaged
Properties. As of the Cut-Off Date, no Mortgage Loan was delinquent more than 29
days.
MORTGAGE LOAN TERMS
The Mortgage Loans were originated pursuant to loan agreements (the "Credit
Line Agreements"). Under the Credit Line Agreements, the borrowers may receive
advances (each, an "Additional Balance" or a "Draw") at any time either during
the term of such Mortgage Loan or during a specified period described under
" -- Loan Terms" below (the "Draw Period"). Draws are not required to be made in
a minimum amount. The maximum amount of each Draw with respect to any Mortgage
Loan is equal to the excess, if any, of the Credit Limit over the Principal
Balance outstanding under such Mortgage Note at the time of such Draw. In some
cases, a borrower may be permitted to exceed the established Credit Limit by as
much as three percent.
The borrower's right to make a Draw under a Mortgage Loan may be suspended,
or the Credit Limit may be reduced, under a number of circumstances, including,
but not limited to, a material adverse change in the borrower's financial
circumstances, a significant decline in the Appraised Value of the Mortgaged
Property or a non-payment default by the borrower. Generally, such suspension or
reduction will not affect the payment terms for previously drawn balances. In
the event of default under a Mortgage Loan, the right of the borrower to make a
Draw may be terminated and the entire outstanding Principal Balance of such
Mortgage Loan may be declared immediately due and payable. A "default" includes,
but is not limited to, the borrower's failure to make any payment as required,
any action or inaction by the borrower that adversely affects the Mortgaged
Property or the rights in the Mortgaged Property or any fraud or material
misrepresentation by a borrower in connection with the Mortgage Loan. The Credit
Limit also may be increased, upon completion of satisfactory underwriting
review, as described below.
Interest accrues on each Mortgage Loan, payable monthly, on the related
average daily outstanding Principal Balance for each Billing Cycle at a variable
rate per annum (unless the Lock Feature is exercised) equal at any time to the
sum of the applicable Index (defined below) as of the first day of each related
Billing Cycle (such date, the "Adjustment Date") as described below plus a fixed
percentage amount (the "Gross Margin") specified in the related Credit Line
Agreement. Such variable rate or, if the Lock Feature is exercised, the
resulting fixed rate, is referred to herein as the "Loan Rate". Interest accrues
on each Mortgage Loan calculated at the Loan Rate on the basis of the actual
number of days elapsed during the related Billing Cycle and a 365-day year. The
"Billing Cycle" for each Mortgage Loan is the calendar month preceding each Due
Date. The "Due Dates" for approximately 5.89%, 3.47%, 9.30%, 6.97%, and 74.33%
(by Cut-Off Date Pool Balance) of the Mortgage Loans are the fifth, tenth,
fifteenth, twentieth and twenty-fifth days of each month, respectively.
Interest accrued each month with respect to each Mortgage Loan (other than
any Locked Balances) adjusts based on an index (the "Index"). The Index is the
average weekly Bank Prime Loan Rate as published by the Board of Governors of
the Federal Reserve System (the "Prime Rate"). The Gross Margins for the
Mortgage Loans (other than the Locked Balances) as of the Cut-Off Date ranged
from 0.00% to 10.00% and the weighted average Gross Margin for such Mortgage
Loans as of the Cut-Off Date was 1.38%. All of the Mortgage Loans are subject to
a maximum Loan Rate specified in the related Credit Line Agreements (each, a
"Maximum Rate"). As of the Cut-Off Date, the Maximum Rates ranged from 18.00%
per annum to 25.00% per annum and the weighted average Maximum Rate was 22.54%
per annum. As of the Cut-Off Date, 67.29% of the Mortgage Loans have a minimum
Loan Rate of 1.00% per annum. One Mortgage Loan has a minimum Loan Rate of 7.00%
per annum. The remaining Mortgage Loans do not have a minimum Loan Rate. No
Mortgage Loan is subject to a periodic rate cap.
S-26
<PAGE> 27
Payments made by or on behalf of the borrower for each Mortgage Loan during
the Repayment Period generally are required to be applied first, to any unpaid
Finance Charges, second, to the Principal Balance outstanding and, third, to any
unpaid Assessed Fees (as defined in the Prospectus) with respect to such
Mortgage Loan. With respect to certain of the Mortgage Loans, payments are
required to be applied to unpaid insurance premiums and late charges (in that
order) prior to application to Finance Charges, as described above.
The Mortgage Loans have various loan terms, draw periods, amortization
periods and minimum monthly payment requirements as follows:
LOAN TERMS
<TABLE>
<CAPTION>
MINIMUM MONTHLY
PAYMENT REQUIREMENT
LOAN DESIGNATION LTV LOAN TERM DRAW PERIOD REPAYMENT PERIOD DURING DRAW PERIOD
- ---------------- ----------- --------- ----------- ---------------- --------------------
<S> <C> <C> <C> <C> <C>
Option 1 80% or less 20 years 10 years 10 years The greatest of:
(1) 1% of
outstanding
Principal
Balance;
(2) Interest accrued
for the month
plus Assessed
Fees(*); and
(3) Minimum of $100
or outstanding
Principal
Balance
Option 2 81%-100% 15 years 5 years 10 years The greatest of:
(1) 1% of
outstanding
Principal
Balance;
(2) Interest accrued
for the month
plus Assessed
Fees(*); and
(3) Minimum of $100
or outstanding
Principal
Balance
</TABLE>
- ---------------
(*) Assessed Fees include late charges, administrative charges and credit and
insurance charges.
ADDITIONAL INFORMATION WITH RESPECT TO THE MORTGAGE LOANS
Set forth below is a description of certain characteristics of the Mortgage
Loans. The sum of certain percentages set forth in the following tables may not
equal exactly 100% due to differences in the rounding of percentages.
S-27
<PAGE> 28
COMBINED LOAN-TO-VALUE RATIOS (1)
<TABLE>
<CAPTION>
PERCENT OF
MORTGAGE POOL
RANGE OF COMBINED NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
LOAN-TO-VALUE RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
60.00 and below.............................. 5,616 $128,652,220.47 14.83%
60.01 to 65.00.............................. 1,122 30,384,327.11 3.50
65.01 to 70.00.............................. 1,613 42,338,212.04 4.88
70.01 to 75.00.............................. 1,964 52,613,181.69 6.07
75.01 to 80.00.............................. 9,346 234,041,938.40 26.98
80.01 to 85.00.............................. 2,208 53,912,097.36 6.22
85.01 to 90.00.............................. 3,872 97,241,012.99 11.21
90.01 to 95.00.............................. 2,158 54,613,875.07 6.30
95.01 to 100.00.............................. 7,869 173,550,066.07 20.01
------ --------------- ------
Total.............................. 35,768 $867,346,931.20 100.00%
====== =============== ======
</TABLE>
- ---------------
(1) The "Combined Loan-to-Value Ratio" or "CLTV" of each Mortgage Loan is the
ratio, expressed as a percentage, of (a) the sum of (i) the Credit Limit and
(ii) the principal balance of any senior mortgage loan as of the origination
of such Mortgage Loan, over (b) the value (based on appraised value or other
acceptable valuation method in accordance with the Sellers' underwriting
guidelines) for the related Mortgaged Property determined at origination of
such Mortgage Loan.
LIEN PRIORITY
<TABLE>
<CAPTION>
PERCENT OF
MORTGAGE POOL
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
LIEN PRIORITY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
First Lien................................... 8,128 $230,561,835.60 26.58%
Second Lien.................................. 27,640 636,785,095.60 73.42
------ --------------- ------
Total.............................. 35,768 $867,346,931.20 100.00%
====== =============== ======
</TABLE>
PROPERTY TYPE
<TABLE>
<CAPTION>
PERCENT OF
MORTGAGE POOL
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Single Family............................... 35,699 $865,361,848.79 99.77%
Other....................................... 69 1,985,082.41 0.23
----------- --------------- -----------
Total............................. 35,768 $867,346,931.20 100.00%
=========== =============== ===========
</TABLE>
OWNER OCCUPANCY STATUS
<TABLE>
<CAPTION>
PERCENT OF
MORTGAGE POOL
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
OWNER OCCUPANCY STATUS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Owner Occupied............................... 35,730 $866,608,015.91 99.91%
Other........................................ 38 738,915.29 0.09
------ --------------- ------
Total.............................. 35,768 $867,346,931.20 100.00%
====== =============== ======
</TABLE>
S-28
<PAGE> 29
PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENT OF
MORTGAGE POOL
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
RANGE OF PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
0.00 to 10,000.00..................... 8,883 $ 39,706,405.35 4.58%
10,000.01 to 20,000.00..................... 9,274 140,704,466.37 16.22
20,000.01 to 30,000.00..................... 7,630 189,840,960.30 21.89
30,000.01 to 40,000.00..................... 4,007 139,241,443.48 16.05
40,000.01 to 50,000.00..................... 2,808 127,229,988.59 14.67
50,000.01 to 60,000.00..................... 1,220 67,039,617.25 7.73
60,000.01 to 70,000.00..................... 691 45,074,961.95 5.20
70,000.01 to 80,000.00..................... 449 33,635,684.85 3.88
80,000.01 to 90,000.00..................... 278 23,602,778.55 2.72
90,000.01 to 100,000.00..................... 262 25,137,243.21 2.90
100,000.01 to 125,000.00..................... 122 13,722,461.81 1.58
125,000.01 to 150,000.00..................... 86 11,792,574.18 1.36
150,000.01 to 175,000.00..................... 27 4,368,176.07 0.50
175,000.01 to 200,000.00..................... 21 4,004,307.34 0.46
200,000.01 to 225,000.00..................... 5 1,054,363.92 0.12
225,000.01 to 250,000.00..................... 5 1,191,497.98 0.14
------ --------------- ------
Total.............................. 35,768 $867,346,931.20 100.00%
====== =============== ======
</TABLE>
CREDIT LIMITS
<TABLE>
<CAPTION>
PERCENT OF
MORTGAGE POOL
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
RANGE OF CREDIT LIMIT MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
5,000.01 to 10,000.00.................... 2,411 $ 15,649,738.35 1.80%
10,000.01 to 20,000.00.................... 6,156 76,703,087.70 8.84
20,000.01 to 30,000.00.................... 8,328 156,590,735.25 18.05
30,000.01 to 40,000.00.................... 4,353 112,099.103.65 12.92
40,000.01 to 50,000.00.................... 6,488 176,839,761.36 20.39
50,000.01 to 60,000.00.................... 2,232 74,640,016.06 8.61
60,000.01 to 70,000.00.................... 1,452 54,624,731.13 6.30
70,000.01 to 80,000.00.................... 1,296 49,907,892.55 5.75
80,000.01 to 90,000.00.................... 620 29,639,514.30 3.42
90,000.01 to 100,000.00.................... 1,615 65,594,133.76 7.56
100,000.01 to 125,000.00.................... 293 16,883,487.54 1.95
125,000.01 to 150,000.00.................... 337 21,629,189.93 2.49
150,000.01 to 175,000.00.................... 55 4,821,515.15 0.56
175,200.01 to 200,000.00.................... 69 6,121,929.91 0.71
200,000.01 to 225,000.00.................... 27 2,219,285.28 0.26
225,000.01 to 250,000.00.................... 36 3,382,809.28 0.39
----------- --------------- -----------
Total............................. 35,768 $867,346,931.20 100.00%
=========== =============== ===========
</TABLE>
S-29
<PAGE> 30
CREDIT LIMIT UTILIZATION RATES
<TABLE>
<CAPTION>
PERCENT OF
MORTGAGE POOL
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
RANGE OF CREDIT LIMIT UTILIZATION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
0.00% to 10.00%.......................... 3,782 $ 4,100,522.37 0.47%
10.01% to 20.00%.......................... 1,664 13,993,069.04 1.61
20.01% to 30.00%.......................... 1,725 22,525,110.63 2.60
30.01% to 40.00%.......................... 1,842 31,809,764.70 3.67
40.01% to 50.00%.......................... 1,951 39,563,447.50 4.56
50.01% to 60.00%.......................... 2,083 48,870,679.84 5.63
60.01% to 70.00%.......................... 2,320 64,019,744.37 7.38
70.01% to 80.00%.......................... 2,554 73,400,995.35 8.46
80.01% to 90.00%.......................... 3,635 111,523,499.26 12.86
90.01% to 100.00%.......................... 14,099 454,291,642.53 52.38
100.01% to 100.07%.......................... 113 3,248,455.61 0.37
----------- --------------- -----------
Total............................. 35,768 $867,346,931.20 100.00%
=========== =============== ===========
</TABLE>
MONTHS REMAINING TO SCHEDULED MATURITY(1)
<TABLE>
<CAPTION>
PERCENT OF
HELOC
BALANCES
RANGE OF MONTHS REMAINING NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
TO SCHEDULED MATURITY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
160 to 172................................... 12,660 $293,332,659.87 34.16%
173 to 184................................... 2,284 51,723,418.66 6.02
209 to 220................................... 1 2,475.00 0.00
221 to 232................................... 17,742 437,415,722.28 50.94
233 to 244................................... 3,081 76,298,044.39 8.88
------ --------------- ------
Total.............................. 35,768 $858,772,320.20 100.00%
====== =============== ======
</TABLE>
- ---------------
(1) Balances do not include the Locked Balances, which as of Cut-Off Date
represent 0.99% of the Cut-Off Date Pool Balance. As of the Cut-Off Date,
the weighted average months remaining to scheduled maturity for the Locked
Balances is 80.12 months. The weighted average number of months remaining to
scheduled maturity for the HELOC Balances is 205.64 months. The weighted
average number of months remaining to scheduled maturity for all Mortgage
Loans is 204.40 months.
S-30
<PAGE> 31
MONTHS SINCE ORIGINATION(1)
<TABLE>
<CAPTION>
PERCENT OF
HELOC
BALANCES
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
MONTHS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------ -------------- ----------------- -----------------
<S> <C> <C> <C>
0............................................ 132 $ 4,225,500.92 0.49%
1............................................ 114 4,414,120.38 0.51
2............................................ 25 879,501.79 0.10
3............................................ 30 1,171,186.68 0.14
4............................................ 19 553,790.45 0.06
5............................................ 3 122,209.44 0.01
6............................................ 2,369 57,390,099.25 6.68
7............................................ 2,886 66,515,308.66 7.75
8............................................ 3,597 86,499,147.43 10.07
9............................................ 3,602 84,406,245.03 9.83
10........................................... 4,335 103,444,921.60 12.05
11........................................... 5,457 130,226,261.50 15.16
12........................................... 6,803 162,868,955.57 18.97
13........................................... 6,396 156,055,071.50 18.17
------ --------------- ------
Total.............................. 35,768 $858,772,320.20 100.00%
====== =============== ======
</TABLE>
- ---------------
(1) Balances do not include the Locked Balances, which as of Cut-Off Date
represent 0.99% of the Cut-Off Date Pool Balance. As of the Cut-Off Date,
the weighted average months since origination for the Locked Balances is
7.29 months. The weighted average months since origination for the HELOC
Balances is 10.16 months. The weighted average months since origination for
all Mortgage Loans is 10.13 months.
S-31
<PAGE> 32
LOAN RATES(1)
<TABLE>
<CAPTION>
PERCENT OF
HELOC
BALANCES
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
RANGE OF LOAN RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
5.500% to 6.000%.......................... 6 $ 107,985.85 0.01%
6.001% to 6.500%.......................... 2 57,936.04 0.01
6.501% to 7.000%.......................... 39 1,498,740.56 0.17
7.001% to 7.500%.......................... 5 99,651.55 0.01
7.501% to 8.000%.......................... 27 544,435.16 0.06
8.001% to 8.500%.......................... 4,370 125,240,937.04 14.58
8.501% to 9.000%.......................... 6,055 175,621,938.37 20.45
9.001% to 9.500%.......................... 6,227 141,874,774.09 16.52
9.501% to 10.000%.......................... 5,018 116,820,581.35 13.60
10.001% to 10.500%.......................... 3,309 73,813,194.45 8.60
10.501% to 11.000%.......................... 2,448 61,843,869.37 7.20
11.001% to 11.500%.......................... 3,762 82,318,254.80 9.59
11.501% to 12.000%.......................... 1,732 27,956,719.31 3.26
12.001% to 12.500%.......................... 1,705 30,119,698.94 3.51
12.501% to 13.000%.......................... 762 14,479,124.27 1.69
13.001% to 13.500%.......................... 204 4,166,556.29 0.49
13.501% to 14.000%.......................... 45 947,920.18 0.11
14.001% to 14.500%.......................... 14 365,368.30 0.04
14.501% to 15.000%.......................... 16 403,992.60 0.05
15.001% to 15.500%.......................... 17 403,730.22 0.05
15.501% to 16.000%.......................... 3 46,119.41 0.01
17.501% to 18.000%.......................... 1 23,071.80 0.00
18.001% to 18.500%.......................... 1 17,720.25 0.00
------ --------------- -----------
Total................................ 35,768 $858,772,320.20 100.00%
====== =============== ===========
</TABLE>
- ---------------
(1) Balances do not include the Locked Balances, which as of Cut-Off Date
represent 0.99% of the Cut-Off Date Pool Balance. As of the Cut-Off Date,
the weighted average Loan Rate for the Locked Balances is 9.57%, the
weighted average Loan Rate for the HELOC Balances is 9.87% and the weighted
average Loan Rate for all Mortgage Loans is 9.87%.
S-32
<PAGE> 33
GROSS MARGIN
<TABLE>
<CAPTION>
PERCENT OF
HELOC BALANCES
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
GROSS MARGINS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
0.000% to 0.500%........................... 10,450 $301,621,880.17 35.12%
0.501% to 1.000%........................... 6,240 142,199,382.92 16.56
1.001% to 1.500%........................... 5,025 117,242,201.65 13.65
1.501% to 2.000%........................... 3,313 74,084,324.49 8.63
2.001% to 2.500%........................... 2,451 61,849,680.60 7.20
2.501% to 3.000%........................... 3,778 82,649,044.66 9.62
3.001% to 3.500%........................... 1,734 27,967,887.01 3.26
3.501% to 4.000%........................... 1,710 30,249,179.38 3.52
4.001% to 4.500%........................... 766 14,553,316.50 1.69
4.501% to 5.000%........................... 204 4,147,500.06 0.48
5.001% to 5.500%........................... 45 947,920.18 0.11
5.501% to 6.000%........................... 14 365,368.30 0.04
6.001% to 6.500%........................... 16 403,992.60 0.05
6.501% to 7.000%........................... 17 403,730.22 0.05
7.001% to 7.500%........................... 3 46,119.41 0.01
9.001% to 9.500%........................... 1 23,071.80 0.00
9.501% to 10.000%........................... 1 17,720.25 0.00
----------- --------------- -----------
Total............................. 35,768 $858,772,320.20 100.00%
=========== =============== ===========
</TABLE>
MAXIMUM RATES
<TABLE>
<CAPTION>
PERCENT OF
MORTGAGE POOL
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
MAXIMUM RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
18.0%........................................ 6,602 $169,079,188.93 19.49%
19.8%........................................ 3,447 80,026,488.45 9.23
21.0%........................................ 4,716 117,103,722.99 13.50
24.0%........................................ 2,826 62,193,226.29 7.17
25.0%........................................ 18,177 438,944,304.54 50.61
------ --------------- ------
Total.............................. 35,768 $867,346,931.20 100.00%
====== =============== ======
</TABLE>
ORIGINATION YEAR
<TABLE>
<CAPTION>
PERCENT OF
MORTGAGE POOL
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
ORIGINATION YEAR MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
1997......................................... 30,190 $731,548,563.63 84.34%
1998......................................... 5,578 135,798,367.57 15.66
------ --------------- ------
Total.............................. 35,768 $867,346,931.20 100.00%
====== =============== ======
</TABLE>
S-33
<PAGE> 34
GEOGRAPHIC DISTRIBUTION(1)
<TABLE>
<CAPTION>
PERCENT OF
MORTGAGE POOL
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----- -------------- ----------------- -----------------
<S> <C> <C> <C>
Arizona...................................... 9,283 $232,626,645.14 26.82%
Colorado..................................... 2,213 64,204,439.62 7.40
Illinois..................................... 3,450 80,033,431.78 9.23
Indiana...................................... 5,074 125,015,181.94 14.41
Kentucky..................................... 2,640 58,027,582.78 6.69
Ohio......................................... 6,952 150,441,812.03 17.35
Utah......................................... 1,772 51,129,781.46 5.89
Wisconsin.................................... 4,250 101,475,858.42 11.70
Other........................................ 134 4,392,198.03 0.51
------ --------------- ------
Total.............................. 35,768 $867,346,931.20 100.00%
====== =============== ======
</TABLE>
- ---------------
(1) Geographic location is determined by the address of the Mortgaged Property
securing the related Mortgage Loan.
DELINQUENCY DISTRIBUTION(1)
<TABLE>
<CAPTION>
PERCENT OF
HELOC BALANCES
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
NUMBER OF DAYS DELINQUENT MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Current..................................... 33,231 $789,490,677.90 91.93%
1 to 29..................................... 2,537 69,281,642.30 8.07
----------- --------------- -----------
Total............................. 35,768 $858,772,320.20 100.00%
=========== =============== ===========
</TABLE>
- ---------------
(1) Balances do not include the Locked Balances, which as of Cut-Off Date
represent 0.99% of the Cut-Off Date Pool Balance. As of the Cut-Off Date,
all Locked Balances are contractually current.
LOAN DESIGNATION
<TABLE>
<CAPTION>
PERCENT OF
MORTGAGE POOL
NUMBER OF CUT-OFF DATE BY CUT-OFF DATE
LOAN DESIGNATION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Option 1..................................... 20,794 $517,744,744.21 59.69%
Option 2..................................... 14,974 349,602,186.99 40.31
------ --------------- ------
Total.............................. 35,768 $867,346,931.20 100.00%
====== =============== ======
</TABLE>
S-34
<PAGE> 35
YIELD, MATURITY AND PREPAYMENT CONSIDERATIONS
Interest payable on the Certificates will accrue at a variable rate based
on LIBOR, calculated monthly. The Mortgage Loans, however, generally bear
interest based on a variable rate based on a prime rate (the "Index"). See
"DESCRIPTION OF THE MORTGAGE LOANS -- Mortgage Loan Terms." Consequently, the
interest that becomes due on the Mortgage Loans (net of the Servicing Fee, the
fee payable to the Trustee and premiums payable to the Certificate Insurer)
during any Collection Period may not equal the amount of interest that accrues
at LIBOR plus the margin on the Certificate Principal Balance of the
Certificates during the related Interest Period. In particular, LIBOR and the
Index may respond to different economic and market factors, and there is no
necessary correlation between them. Thus, it is possible, for example, that
LIBOR may rise during periods in which the Index is stable or is falling or
that, even if both LIBOR and the Index rise during the same period, LIBOR may
rise much more rapidly than the Index. In addition, the Loan Rates on certain
Mortgage Loans or certain portions of the outstanding balances thereof may bear
interest at a rate that is fixed as a result of the exercise of the Lock
Feature. See "THE DEPOSITOR, THE SERVICER AND THE ORIGINATORS -- Home Equity
Lines of Credit" in the Prospectus. The option may be exercised during periods
of rising interest rates as borrowers attempt to limit their risk of higher
rates. The availability of fixed rate mortgage loans at competitive interest
rates during periods of falling interest rates also may encourage borrowers to
exercise the option. As a result, there may be periods during which the weighted
average net rate at which the Mortgage Loans are accruing interest may be less
than the amount of interest that would accrue at LIBOR plus the margin on the
Certificates, and a LIBOR Interest Carryover could become payable with respect
to the Certificates. If the Net Funds Cap Rate results in a lower interest
payment to the Certificates for a Distribution Date, the value of the
Certificates may be temporarily or permanently reduced. Any LIBOR Interest
Carryover will be payable only to the extent certain amounts which would
otherwise be available to be distributed to the Transferor Interest, and such
LIBOR Interest Carryover may remain unpaid on the final Distribution Date. In
addition, if the spread between the weighted average net Loan Rate and the
Certificate Rate is reduced or eliminated, the weighted average life of the
Certificates may be affected by reducing the amount otherwise available to cover
Investor Loss Amounts or to pay the Accelerated Principal Distribution Amount.
The Agreement, except as otherwise described herein, provides that the
Certificateholders will be entitled to receive on each Distribution Date
distributions of principal, in the amounts described herein, until the
Certificate Principal Balance is reduced to zero. During the Managed
Amortization Period, Certificateholders will receive amounts from Principal
Collections based on their Fixed Allocation Percentage (less any Reallocated
Investor Principal Collections and Overcollateralization Release Amounts),
subject to reduction as described below. During the Rapid Amortization Period,
Certificateholders will receive amounts from Principal Collections based solely
on the Fixed Allocation Percentage (less any Reallocated Investor Principal
Collections and Overcollateralization Release Amounts). Because prior
distributions of Investor Principal Collections to Certificateholders reduce the
Investor Floating Allocation Percentage but do not change the Fixed Allocation
Percentage, allocations of Principal Collections based on the Fixed Allocation
Percentage may result in distributions of principal to the Certificateholders in
amounts that are, in most cases, greater relative to the declining balance of
the Mortgage Loans than would be the case if the Investor Floating Allocation
Percentage were used to determine the percentage of Principal Collections
distributed to Certificateholders. This is especially true during the Rapid
Amortization Period when the Certificateholders are entitled to receive Investor
Principal Collections (less any Reallocated Investor Principal Collections and
Overcollateralization Release Amounts) and not a lesser amount. In addition,
Investor Interest Collections may be distributed as principal to
Certificateholders in connection with the Accelerated Principal Distribution
Amount, if any. Moreover, to the extent of losses allocable to the
Certificateholders, Certificateholders also may receive as payment of principal
the Floating Allocation Percentage of the amount of such losses either from
Investor Interest Collections or, in some instances, draws under the Policy. The
level of losses therefore may affect the rate of payment of principal on the
Certificates.
To the extent obligors make more Draws than principal payments, the
Transferor Interest may grow. Because the Certificateholders' share of Principal
Collections is based on the Fixed Allocation Percentage (without reduction)
during the Rapid Amortization Period, an increase in the holder of the
Transferor
S-35
<PAGE> 36
Interest due to additional Draws also may result in Certificateholders receiving
principal at a greater rate than otherwise would occur if the Investor Floating
Allocation Percentage were used to determine the percentage of Principal
Collections distributed to Certificateholders. The Agreement permits the holder
of the Transferor Interest at its option, subject to the satisfaction of certain
conditions specified in the Agreement, to remove certain Mortgage Loans from the
Trust at any time during the life of the Trust, so long as the Transferor
Interest (after giving effect to such removal) is not less than the Minimum
Transferor Interest. Such removals may affect the rate at which principal is
distributed to Certificateholders by reducing the overall Pool Balance and thus
the amount of Principal Collections. See "DESCRIPTION OF THE CERTIFICATES --
Optional Transfers of Mortgage Loans to the Holder of the Transferor Interest."
All of the Mortgage Loans may be prepaid in full or in part at any time
without penalty. The prepayment experience with respect to the Mortgage Loans
will affect the weighted average life of the Certificates. In addition, the
weighted average life of the Certificates will be affected by the rate and
timing of Investor Interest Collections available to cover Investor Loss Amounts
and to pay the Accelerated Principal Distribution Amount.
The rate of prepayment on the Mortgage Loans cannot be predicted. Neither
the Depositor nor the Servicer is aware of any publicly available studies or
statistics on the rate of prepayment of mortgage loans such as the Mortgage
Loans. Generally, home equity lines of credit are not viewed by borrowers as
permanent financing. Accordingly, the Mortgage Loans may experience a higher
rate of prepayment than traditional first mortgage loans. On the other hand,
because the Mortgage Loans amortize as described herein, rates of principal
payment on the Mortgage Loans generally will be slower than those of traditional
fully-amortizing first mortgages in the absence of prepayments on such Mortgage
Loans. The prepayment experience of the Trust with respect to the Mortgage Loans
may be affected by a wide variety of factors, including general economic
conditions, prevailing interest rate levels, the availability of alternative
financing, homeowner mobility, the frequency and amount of any future draws on
the Credit Line Agreements and changes affecting the deductibility for Federal
income tax purposes of interest payments on home equity lines of credit.
Substantially all of the Mortgage Loans contain "due-on-sale" provisions, and
the Servicer intends to enforce such provisions, unless such enforcement is not
permitted by applicable law. The enforcement of a "due-on-sale" provision will
have the same effect as a prepayment of the related Mortgage Loan. See "CERTAIN
LEGAL ASPECTS OF LOANS -- 'Due-on-Sale' Clauses" in the Prospectus.
The yield to an investor who purchases the Certificates in the secondary
market at a price other than par will vary from the anticipated yield if the
rate of prepayment on the Mortgage Loans is actually different than the rate
anticipated by such investor at the time such Certificates were purchased.
Collections on the Mortgage Loans may vary because, among other things,
borrowers may make payments during any month as low as the minimum monthly
payment for such month or as high as the entire outstanding principal balance
plus accrued interest and the fees and charges thereon. It is possible that
borrowers may fail to make scheduled payments. Collections on the Mortgage Loans
may vary due to seasonal purchasing and payment habits of borrowers.
No assurance can be given as to the level of prepayments that will be
experienced by the Trust and it can be expected that a portion of borrowers will
not prepay their Mortgage Loans to any significant degree. See "DESCRIPTION OF
THE SECURITIES -- Weighted Average Life of the Certificates" in the Prospectus.
POOL FACTOR AND TRADING INFORMATION
The "Pool Factor" is a seven-digit decimal that the Servicer will compute
monthly expressing the Certificate Principal Balance of the Certificates as of
each Distribution Date (after giving effect to any distribution of principal on
such Distribution Date) as a proportion of the Original Certificate Principal
Balance. On the Closing Date, the Pool Factor will be 1.0000000. See
"DESCRIPTION OF THE CERTIFICATES -- Distributions on the Certificates."
Thereafter, the Pool Factor will decline to reflect reductions in the related
Certificate Principal Balance resulting from distributions of principal to the
Certificates and the Invested Amount of any unreimbursed Liquidation Loss
Amounts.
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Pursuant to the Agreement, monthly reports concerning the Invested Amount,
the Pool Factor and various other items of information will be made available to
the Certificateholders. In addition, within 60 days after the end of each
calendar year, information for tax reporting purposes will be made available to
each person who has been a Certificateholder of record at any time during the
preceding calendar year. See "DESCRIPTION OF THE CERTIFICATES -- Book-Entry
Certificates" and "-- Reports to Certificateholders."
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Agreement. The form of the
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus Supplement and the Prospectus are a part. The following
summaries describe certain provisions of the Agreement. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the Agreement.
GENERAL
The Certificates will evidence specified undivided interests in the Trust.
The property of the Trust will consist of: (i) the Mortgage Loans; (ii) the
collections in respect of the Mortgage Loans received after the Cut-Off Date;
(iii) property that secured any Mortgage Loan that has been acquired by
foreclosure or deed in lieu of foreclosure; (iv) the Policy; and (v) an
assignment of the Depositor's rights under the Mortgage Loan Purchase Agreement;
(vi) rights under certain hazard insurance policies covering the Mortgaged
Properties; and (vii) certain other property, as described more fully herein.
The aggregate undivided interest in the Trust represented by the
Certificates as of the Closing Date will equal $850,000,000 (the "Original
Invested Amount"), which represents approximately 98% of the Cut-Off Date Pool
Balance. In general, the Pool Balance will vary each day as principal is paid on
the Mortgage Loans, liquidation losses are incurred and Additional Balances are
drawn down by borrowers. The "Original Certificate Principal Balance" will equal
$850,000,000. Following the Closing Date, the "Invested Amount" with respect to
any Distribution Date will be an amount equal to the Original Invested Amount
minus the sum of (i) the amount of Investor Principal Collections previously
distributed to Certificateholders and (ii) Investor Loss Amounts previously
applied and not reimbursed. The principal amount of the outstanding Certificates
(the "Certificate Principal Balance") as of any Distribution Date will equal the
Original Certificate Principal Balance minus the aggregate of amounts actually
distributed as principal to the Certificateholders. See "-- Distributions on the
Certificates" below. Each Certificate represents the right to receive payments
of interest at the Certificate Rate and payments of principal as described
below.
The remaining undivided interest (the "Transferor Interest") in the
Mortgage Loans not represented by the Invested Amount initially will equal
approximately $17,346,931, or approximately 2% of the Cut-Off Date Pool Balance,
and initially will be held by Bank One. In general, the Pool Balance will vary
each day as principal is paid on the Mortgage Loans, liquidation losses are
incurred and Additional Balances are drawn down by borrowers. The holder of the
Transferor Interest has the right to sell or pledge the Transferor Interest at
any time, provided that certain conditions specified in the Agreement are
satisfied.
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of the Certificates, the Depositor will transfer to
the Trust all of its right, title and interest in and to each Mortgage Loan
(including any Additional Balances arising in the future), related Credit Line
Agreements, mortgages and other related documents (collectively, the "Related
Documents"), including all collections received on or with respect to each such
Mortgage Loan after the Cut-Off Date. The Trustee, concurrently with such
transfer, will deliver the Certificates to the Depositor and the Transferor
Certificate (as defined in the Agreement) to the holder of the Transferor
Interest. Each Mortgage Loan transferred to the Trust will be identified on a
schedule (the "Mortgage Loan Schedule") delivered to the Trustee pursuant to the
Agreement. Such schedule will include information as to the Cut-Off Date
Principal Balance of each Mortgage Loan, as well as information with respect to
the Loan Rate.
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Within 90 days of the Closing Date, the Sellers are required to deliver to
the Trustee the notes evidencing the Mortgage Loans endorsed to the Trustee or
in blank and assignments of the related mortgages in recordable form to the
Trustee or in blank. The assignments of mortgages are not required to be
recorded unless certain events set forth in the Agreement occur. Within 90 days
of such delivery, the Trustee will review the documents delivered to it and, if
any Related Document is found to be defective in any material respect and such
defect is not cured within 90 days following notification thereof to the
Servicer, the applicable Seller and the Depositor by the Trustee, the applicable
Seller will be obligated to accept the transfer of such Mortgage Loan from the
Trust. Upon such transfer, the Principal Balance of such Mortgage Loan will be
deducted from the Pool Balance, thus reducing the amount of the Transferor
Interest. If the deduction would cause the Transferor Interest to be reduced
below the Minimum Transferor Interest at such time (a "Transfer Deficiency"),
the applicable Seller will be obligated either to substitute an Eligible
Substitute Mortgage Loan or to make a deposit into the Collection Account in the
amount (the "Transfer Deposit Amount") equal to the amount of such Transfer
Deficiency. Any such deduction, substitution or deposit, will be considered for
the purposes of the Agreement a payment in full of such Mortgage Loan. Any
Transfer Deposit Amount will be treated as a Principal Collection. No such
transfer will be considered to have occurred until the required deposit to the
Collection Account is actually made. The obligation of a Seller to accept a
transfer of a Defective Mortgage Loan is the sole remedy regarding any defects
in the Related Documents available to the Trustee or the Certificateholders.
An "Eligible Substitute Mortgage Loan" is a mortgage loan substituted by
the applicable Seller for a Defective Mortgage Loan which must, on the date of
such substitution, (i) have an outstanding Principal Balance (or, in the case of
a substitution of more than one Mortgage Loan for a Defective Mortgage Loan, an
aggregate Principal Balance) that is approximately equal to the Transfer
Deficiency relating to such Defective Mortgage Loan; (ii) have a Loan Rate not
less than the Loan Rate of the Defective Mortgage Loan and not more than 1.0% in
excess of the Loan Rate of such Defective Mortgage Loan; (iii) have a Loan Rate
based on the Index with adjustments to such Loan Rate made on the same Interest
Rate Adjustment Date as that of the Defective Mortgage Loan; (iv) have a Gross
Margin that is not less than the Gross Margin of the Defective Mortgage Loan and
not more than 100 basis points higher than the Gross Margin for the Defective
Mortgage Loan; (v) have a mortgage of the same or higher level of priority as
the mortgage securing to the Defective Mortgage Loan; (vi) have a remaining term
to maturity not more than six months earlier and not more than 60 months later
than the remaining term to maturity of the Defective Mortgage Loan; (vii) comply
with each representation and warranty as to the Mortgage Loans set forth in the
Agreement (deemed to be made as of the date of substitution); (viii) in general,
have an original Combined Loan-to-Value Ratio not greater than that of the
Defective Mortgage Loan; and (ix) satisfy certain other conditions specified in
the Agreement. To the extent the Principal Balance of an Eligible Substitute
Mortgage Loan is less than the Principal Balance of the related Defective
Mortgage Loan and to the extent that the Transferor Interest would be reduced
below the Minimum Transferor Interest, the applicable Sellers will be required
to make a deposit to the Collection Account equal to such difference.
Each Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each Mortgage Loan (e.g., Cut-Off Date Principal Balance
and Loan Rate) sold by it. In addition, each Seller will represent and warrant
on the Closing Date that at the time of transfer to the Depositor, such Seller
has transferred or assigned all of its rights, title and interest in or granted
a security interest in each Mortgage Loan and the Related Documents, free of any
lien (subject to certain exceptions). Upon discovery of a breach of any such
representation and warranty that materially and adversely affects the interests
of the Certificateholders or the Certificate Insurer in the related Mortgage
Loan and Related Documents, the applicable Seller will have a period of 90 days
after discovery or notice of the breach to effect a cure. If the breach cannot
be cured within the 90-day period, the applicable Seller will be obligated to
accept a transfer of the Defective Mortgage Loan from the Trust. The same
procedure and limitations that are set forth in the second preceding paragraph
for the transfer of Defective Mortgage Loans will apply to the transfer of a
Mortgage Loan that is required to be transferred because of such breach of a
representation or warranty in the Agreement that materially and adversely
affects the interests of the Certificateholders.
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Mortgage Loans required to be transferred to the applicable Seller as
described in the preceding paragraphs are referred to as "Defective Mortgage
Loans."
Pursuant to the Agreement, the Servicer will service and administer the
Mortgage Loans as more fully set forth above.
AMENDMENTS TO CREDIT LINE AGREEMENTS
Subject to applicable law, the Servicer may change the terms of the Credit
Line Agreements at any time, provided that such changes (i) do not adversely
affect the interest of the Certificateholders or the Certificate Insurer and
(ii) are consistent with prudent business practice. In addition, the Agreement
permits the Servicer, within certain limitations set forth therein, to increase
or reduce the Credit Limit of the related Mortgage Loan, increase or reduce the
Margin for such Mortgage Loan or, if a lien senior to that of such Mortgage Loan
has been paid or otherwise satisfied or released, consent to the imposition of
another lien senior to that of such Mortgage Loan.
OPTIONAL TRANSFERS OF MORTGAGE LOANS TO THE HOLDER OF THE TRANSFEROR INTEREST
Subject to the conditions specified in the Agreement, on any Distribution
Date (a "Transfer Date") the holder of the Transferor Interest may, but will not
be obligated to, remove certain Mortgage Loans from the Trust without prior
notice to the Certificateholders. Mortgage Loans so designated will be removed
only upon satisfaction of certain conditions specified in the Agreement,
including, among other things, that: (i) the Transferor Interest as of the
applicable Transfer Date, after giving effect to the removal of such Mortgage
Loans, will exceed the Minimum Transferor Interest; (ii) the Mortgage Loans to
be removed are selected at random and the holder of the Transferor Interest
represents and warrants that no selection procedures that the holder of the
Transferor Interest reasonably believes are adverse to the interests of the
Certificateholders or the Certificate Insurer were used by the holder of the
Transferor Interest in selecting the Mortgage Loans to be removed; and (iii)
notice of such removal of Mortgage Loans is given to the Rating Agencies and the
Certificate Insurer.
With respect to any date, the "Minimum Transferor Interest" is an amount
equal to the lesser of (a) 5% of the Pool Balance on such date and (b) the
Transferor Interest as of the Closing Date.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT
The Trustee will establish and maintain on behalf of the Servicer an
account (the "Collection Account") for the benefit of the Certificateholders and
the holder of the Transferor Interest, as their interests may appear. The
Collection Account will be an Eligible Account (as defined herein). Subject to
the investment provision described in the following paragraphs, within two days
of receipt by the Servicer of amounts in respect of the Mortgage Loans
(excluding amounts representing the Servicing Fee, administrative charges,
annual fees, taxes, assessments, credit insurance charges, insurance proceeds to
be applied to the restoration or repair of a Mortgaged Property or similar
items), the Servicer will deposit such amounts in the Collection Account. Not
later than the third Business Day prior to each Distribution Date (the
"Determination Date"), the Servicer will notify the Trustee of the amount of
such deposit to be included in funds available for the related Distribution
Date.
Notwithstanding the foregoing, under the terms of the Agreement, so long as
Bank One's short-term debt obligations are rated at least "P-1" by Moody's and
"A-1" by Standard and Poor's, all amounts collected in respect of the Mortgage
Loans will be commingled with the general collections of the Servicer and
amounts collected for a Collection Period will not be required to be deposited
into the Collection Account until one Business Day prior to the related
Distribution Date. Amounts so deposited may be invested in Eligible Investments
(as described in the Agreement) maturing no later than one Business Day prior to
the date on which the amount on deposit therein is required to be deposited in
the Collection Account or on such Distribution Date if approved by the Rating
Agencies and the Certificate Insurer.
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An "Eligible Account" is an account that is (i) maintained with a
depository institution whose debt obligations at the time of any deposit therein
have the highest short-term debt rating by the Rating Agencies, (ii) one or more
accounts with a depository institution which accounts are fully insured by
either the Savings Association Insurance Fund ("SAIF") or the Bank Insurance
Fund ("BIF") of the Federal Deposit Insurance Corporation established by such
fund with a minimum long-term unsecured debt rating of "Baa1" by Moody's and
"BBB+" by Standard & Poor's, (iii) a segregated trust account maintained with
the Trustee or an Affiliate of the Trustee in its fiduciary capacity or (iv)
otherwise acceptable to each Rating Agency and the Certificate Insurer as
evidenced by a letter from each Rating Agency and the Certificate Insurer to the
Trustee, without reduction or withdrawal of their then current ratings of the
Certificates.
Eligible Investments are specified in the Agreement and are limited to
investments which meet the criteria of the Rating Agencies from time to time as
being consistent with their then current ratings of the Certificates.
ALLOCATIONS AND COLLECTIONS
All collections on the Mortgage Loans generally will be allocated in
accordance with the Credit Line Agreements between amounts collected in respect
of interest and amounts collected in respect of principal. As to any
Distribution Date, "Interest Collections" will be equal to the amounts collected
during the related Collection Period, including such portion of Net Liquidation
Proceeds, allocated to interest pursuant to the terms of the Credit Line
Agreements, less Servicing Fees for the related Collection Period.
As to any Distribution Date, "Principal Collections" will be equal to the
sum of (i) the amounts collected during the related Collection Period, including
such portion of Net Liquidation Proceeds allocated to principal pursuant to the
terms of the Credit Line Agreements and (ii) any Transfer Deposit Amounts. "Net
Liquidation Proceeds" with respect to a Mortgage Loan are equal to the
Liquidation Proceeds, reduced by related expenses and any amounts owed in
respect of any senior lien, but not including the portion, if any, of such
amount that exceeds the Principal Balance of the Mortgage Loan plus accrued and
unpaid interest thereon to the end of the Collection Period during which such
Mortgage Loan became a Liquidated Mortgage Loan. "Liquidation Proceeds" are the
proceeds (excluding any amounts drawn on the Policy) received in connection with
the liquidation of any Mortgage Loan, whether through trustee's sale,
foreclosure sale or otherwise.
With respect to any Distribution Date, the portion of Interest Collections
allocable to the Certificates ("Investor Interest Collections") will equal the
product of (a) Interest Collections for such Distribution Date and (b) the
Investor Floating Allocation Percentage. With respect to any Distribution Date,
the "Investor Floating Allocation Percentage" is the percentage equivalent of a
fraction determined by dividing the Invested Amount at the close of business on
the preceding Distribution Date (or the Closing Date in the case of the first
Distribution Date) by the Pool Balance at the beginning of the related
Collection Period. The remaining amount of Interest Collections will be
allocated to the Transferor Interest.
Principal Collections will be allocated between the Certificateholders and
the Transferor Interest ("Investor Principal Collections" and "Transferor
Principal Collections," respectively) as described herein.
The Trustee will deposit any amounts drawn under the Policy into the
Collection Account.
With respect to any date, the "Pool Balance" will be equal to the aggregate
of the Principal Balances of all Mortgage Loans as of such date. The Principal
Balance of a Mortgage Loan (other than a Liquidated Mortgage Loan) on any day is
equal to the Cut-Off Date Principal Balance of such Mortgage Loan plus (i) any
Additional Balances in respect of such Mortgage Loan, minus (ii) all collections
credited against the Principal Balance of such Mortgage Loan in accordance with
the related Credit Line Agreement prior to such day. The Principal Balance of a
Liquidated Mortgage Loan is zero.
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DENOMINATIONS; REGISTRATION
The Certificates are offered in minimum denominations of $1,000 and
multiples of $1 in excess thereof. The interest in the Trust evidenced by a
Certificate (the "Percentage Interest") will be the percentage derived by
dividing the denomination of such Certificate by the Original Certificate
Principal Balance.
The Certificates will be book-entry Certificates (the "Book-Entry
Certificates"). Persons acquiring beneficial ownership interests in the
Certificates ("Certificate Owners") may elect to hold their Certificates through
the Depository Trust Company ("DTC") in the United States, or Cedel Bank,
societe anonyme ("Cedel") or the Euroclear System ("Euroclear") (in Europe) if
they are participants of such systems, or indirectly through organizations which
are participants in such systems. The Book-Entry Certificates will be issued in
one or more certificates which equal the aggregate principal balance of the
Certificates and initially will be registered in the name of Cede & Co., the
nominee of DTC. Cedel and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in Cedel's and
Euroclear's names on the books of their respective depositories, which in turn
will hold such positions in customers' securities accounts in the depositories'
names on the books of DTC. Citibank, N.A. will act as depositary for Cedel and
The Chase Manhattan Bank will act as depositary for Euroclear (in such
capacities, individually the "Relevant Depositary" and collectively the
"European Depositaries"). Investors may hold such beneficial interests in the
Book-Entry Certificates in minimum denominations representing Certificate
Principal Balances of $1,000 and in multiples of $1 in excess thereof. Except as
described below, no person acquiring a Book-Entry Certificate (each, a
"beneficial owner") will be entitled to receive a physical certificate
representing such Certificate (a "Definitive Certificate"). Unless and until
Definitive Certificates are issued, it is anticipated that the only
"Certificateholder" of the Certificates will be Cede & Co., as nominee of DTC.
Certificate Owners will not be Certificateholders as that term is used in the
Agreement. Certificate Owners are only permitted to exercise their rights
indirectly through Participants and DTC.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC participant and on
the records of Cedel or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of, and
interest on, the Certificates from the Trustee through DTC and DTC participants.
While the Certificates are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Certificates and
is required to receive and transmit distributions of principal of, and interest
on, the Certificates. Participants and indirect participants with whom
Certificate Owners have accounts with respect to Certificates are similarly
required to make book-entry transfers and receive and transmit such
distributions on behalf of their respective Certificate Owners. Accordingly,
although Certificate Owners will not possess certificates, the Rules provide a
mechanism by which Certificate Owners will receive distributions and will be
able to transfer their interest.
Certificate Owners will not receive or be entitled to receive certificates
representing their respective interests in the Certificates, except under the
limited circumstances described below. Unless and until Definitive Certificates
are issued, Certificate Owners who are not Participants may transfer ownership
of Certificates only through Participants and indirect participants by
instructing such Participants and indirect participants to transfer
Certificates, by book-entry transfer, through DTC for the account of the
purchasers of such Certificates, which account is maintained with their
respective Participants. Under the Rules and in accordance with DTC's normal
procedures, transfers of ownership of Certificates will be executed through DTC
and the accounts of the respective Participants at DTC will be debited and
credited. Similarly, the Participants and indirect participants will make debits
or credits, as the case may be, on their records on behalf of the selling and
purchasing Certificate Owners.
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Because of time zone differences, credits of securities received in Cedel
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear 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 (as defined
below) or Euroclear Participant (as defined below) to a DTC Participant will be
received with value on the DTC settlement date but will be available in the
relevant Cedel or Euroclear cash account only as of the business day following
settlement in DTC. For information with respect to tax documentation procedures
relating to the Certificates, see "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES -- Foreign Investors" and "Backup Withholding" and "GLOBAL
CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES -- Certain U.S. Federal
Income Tax Documentation Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures. Cross-market
transfers between persons holding directly or indirectly through DTC, on the one
hand, and counterparties holding directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC
through Citibank, N.A. or The Chase Manhattan Bank in accordance with DTC rules
on behalf of the relevant European international clearing system by the Relevant
Depositary; however, such cross market transactions will require delivery of
instructions to the relevant European international clearing system by the
counterparty in such system in accordance with its rules and procedures and
within its established deadlines (European time). The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to the Relevant Depositary to take action to
effect final settlement on its behalf by delivering or receiving securities in
DTC, and making or receiving payment in accordance with normal procedures for
same day funds settlement applicable to DTC. Cedel Participants and Euroclear
Participants may not deliver instructions directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the Book-Entry Certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Certificates will be subject to the rules,
regulations and procedures governing DTC and DTC participants as in effect from
time to time.
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its participating organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book-entry changes in
accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Cedel in any of 28
currencies, including United States dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depository, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel participants are recognized financial
institutions around the world, including Underwriter, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to Cedel also is available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Cedel Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels,
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Belgium office of Morgan Guaranty Trust Company of New York (the "Euroclear
Operator"), under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation (the "Cooperative"). All operations are conducted by the
Euroclear Operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Cooperative. The Cooperative establishes policy for Euroclear on behalf of
Euroclear Participants. Euroclear Participants include banks (including central
banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the beneficial owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, beneficial owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede. Distributions with respect to Certificates
held through Cedel or Euroclear will be credited to the cash accounts of Cedel
Participants or Euroclear Participants in accordance with the relevant system's
rules and procedures, to the extent received by the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES -- Foreign Investors" and "-- Backup Withholding." Because DTC can
act only on behalf of Financial Intermediaries, the ability of a beneficial
owner to pledge Book-Entry Certificates to persons or entities that do not
participate in the Depository system, or otherwise take actions in respect of
such Book-Entry Certificates, may be limited due to the lack of physical
certificates for such Book-Entry Certificates. In addition, issuance of the
Book-Entry Certificates in book-entry form may reduce the liquidity of such
Certificates in the secondary market since certain potential investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates.
Monthly and annual reports on the Trust provided by the Servicer to CEDE,
as nominee of DTC, may be made available to beneficial owners upon request, in
accordance with the rules, regulations and procedures creating and affecting the
Depository, and to the Financial Intermediaries to whose DTC accounts the Book-
Entry Certificates of such beneficial owners are credited.
DTC has advised the Depositor and the Trustee that, unless and until
Definitive Certificates are issued, DTC will take any action permitted to be
taken by the holders of the Book-Entry Certificates under the Agreement only at
the direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Certificates. Cedel or the Euroclear Operator, as the case may be, will take any
other action permitted to be taken by a Certificateholder under the Agreement on
behalf of a Cedel Participant or Euroclear Participant only in accordance with
its relevant rules and procedures and
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subject to the ability of the Relevant Depositary to effect such actions on its
behalf through DTC. DTC may take actions, at the direction of the related
Participants, with respect to some Certificates which conflict with actions
taken with respect to other Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to the Book-Entry Certificates and the Depositor or the
Trustee is unable to locate a qualified successor, (b) the Depositor, at its
sole option, elects to terminate a book-entry system through DTC or (c) after
the occurrence of an Event of Servicing Termination (as defined herein),
beneficial owners having Percentage Interests aggregating not less than 51% of
the Certificate Principal Balance of the Book-Entry Certificates advise the
Trustee and DTC through the Financial Intermediaries and the DTC participants in
writing that the continuation of a book-entry system through DTC (or a successor
thereto) is no longer in the best interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
Certificateholders under the Agreement.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Certificates 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.
DISTRIBUTIONS ON THE CERTIFICATES
Beginning with the first Distribution Date (which will occur on October 20,
1998), distributions on the Certificates will be made by the Trustee or the
Paying Agent on each Distribution Date to the persons in whose names such
Certificates are registered at the close of business on the day prior to each
Distribution Date or, if the Certificates are no longer Book-Entry Certificates,
at the close of business on the last day of the month preceding such
Distribution Date (the "Record Date"). The term "Distribution Date" means the
twentieth day of each month or, if such day is not a Business Day, then the next
succeeding Business Day. Distributions will be made by check or money order
mailed (or upon the request of a Certificateholder owning Certificates having
denominations aggregating at least $1,000,000, by wire transfer or otherwise) to
the address of the person entitled thereto (which, in the case of Book-Entry
Certificates, will be DTC or its nominee) as it appears on the Certificate
Register in amounts calculated as described herein on the Determination Date.
However, the final distribution in respect of the Certificates will be made only
upon presentation and surrender thereof at the office or the agency of the
Trustee specified in the notice to Certificateholders of such final
distribution. For purposes of the Agreement, a "Business Day" is any day other
than (i) a Saturday or Sunday or (ii) a day on which banking institutions in the
States of Ohio or New York are required or authorized by law to be closed.
Application of Interest Collections. On each Distribution Date, the
Trustee or the Paying Agent will apply the Investor Interest Collections (and,
to the extent Investor Interest Collections are insufficient to pay the amounts
described in clauses (i) and (ii) below, certain Investor Principal Collections
(the amounts so applied, "Reallocated Investor Principal Collections")) in the
following manner and order of priority:
(i) as payment to the Trustee for its fee for services rendered
pursuant to the Agreement;
(ii) as payment for the accrued interest due and any overdue accrued
interest (with interest thereon to the extent permitted by law) on the
Certificate Principal Balance of the Certificates;
(iii) to pay Certificateholders any Investor Loss Amount for such
Distribution Date;
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(iv) as payment for any Investor Loss Amount for a previous
Distribution Date that was not previously (a) funded by Investor Interest
Collections, (b) absorbed by the Overcollateralization Amount or (c) funded
by draws on the Policy;
(v) as payment for the premium for the Policy;
(vi) to reimburse prior draws made from the Policy (with interest
thereon, calculated in accordance with the Insurance Agreement);
(vii) to pay principal on the Certificates until the Invested Amount
exceeds the Certificate Principal Balance by the Required
Overcollateralization Amount (such amount, if any, so paid, the
"Accelerated Principal Distribution Amount");
(viii) to pay any other amounts owed to the Certificate Insurer
pursuant to the Insurance Agreement;
(ix) to pay certain amounts that may be required to be paid to the
Servicer pursuant to the Agreement;
(x) to pay the LIBOR Interest Carryover; and
(xi) to the holder of the Transferor Interest to the extent permitted
as described herein.
Payments to Certificateholders pursuant to clause (ii) will be interest
payments on the Certificates. Payments to Certificateholders pursuant to clauses
(iii), (iv) and (vii) will be principal payments on the Certificates and will
reduce the Certificate Principal Balance; however, payments pursuant to clause
(vii) will not reduce the Invested Amount. All amounts remaining after
application of the Investor Interest Collections pursuant to Clauses (i) through
(ix) are "Excess Spread." Neither the Accelerated Principal Distribution Amount
nor the LIBOR Interest Carryover is guaranteed by the Policy.
To the extent that Investor Interest Collections are applied to pay the
interest on the Certificates, Investor Interest Collections may be insufficient
to cover Investor Loss Amounts. If, as a result of such insufficiency, the
Certificate Principal Balance exceeds the Invested Amount, a draw will be made
on the Policy in accordance with the terms of the Policy.
The "Required Overcollateralization Amount" will be an amount set forth in
the Insurance Agreement. "Liquidation Loss Amount" means, with respect to any
Liquidated Mortgage Loan, the unrecovered Principal Balance thereof during the
Collection Period in which such Mortgage Loan became a Liquidated Mortgage Loan,
after giving effect to the Net Liquidation Proceeds received in connection
therewith. The "Investor Loss Amount" will be the product of the Investor
Floating Allocation Percentage and the aggregate of the Liquidation Loss Amounts
for such Distribution Date.
A "Liquidated Mortgage Loan" means, as to any Distribution Date, any
Mortgage Loan in respect of which the Servicer has determined, based on the
servicing procedures specified in the Agreement, that all Liquidation Proceeds
which it expects to recover with respect to the disposition of the related
Mortgaged Property have been recovered as of the end of the preceding Collection
Period. The Investor Loss Amount will be allocated to the Certificateholders
under the circumstances described herein.
As to any Distribution Date other than the first Distribution Date, the
"Collection Period" is the calendar month preceding each Distribution Date. As
to the first Distribution Date, the "Collection Period" is the period beginning
on the day after the Cut-Off Date and ending on September 30, 1998.
Interest on the Certificates will be distributed monthly on each
Distribution Date at the Certificate Rate for the related Interest Period (as
defined below). The "Certificate Rate" for each Interest Period generally will
equal the lesser of (i) the sum of (a) LIBOR, determined as specified herein, as
of the second LIBOR Business Day prior to the first day of the related Interest
Period (or as of two LIBOR Business Days prior to the Closing Date, in the case
of the first Distribution Date) plus (b) % per annum and (ii) the Net Funds
Cap Rate with respect to such Interest Period. The "Net Funds Cap Rate" for any
Interest Period is a rate
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equal to the weighted average of the Loan Rates as of the first day of the
related Billing Cycle less 0.65% per annum.
Interest payable on the Certificates in respect of any Distribution Date
will accrue on the Certificate Principal Balance from the preceding Distribution
Date (or in the case of the first Distribution Date, from the date of the
initial issuance of the Certificates (the "Closing Date")) through the day
preceding such Distribution Date (each such period, an "Interest Period") on the
basis of the actual number of days in the Interest Period and a 360-day year.
Interest payments on the Certificates at the Certificate Rate will be funded
from Investor Interest Collections and, to the extent insufficient, from
Reallocated Investor Principal Collections and draws on the Policy. If the
Certificate Insurer defaults under the Policy and the amount otherwise available
to cover such interest payment is insufficient on any Distribution Date to pay
the total amount of interest accrued at the Certificate Rate, any interest due
but not paid on such Distribution Date will be due on the next succeeding
Distribution Date, together with additional interest on such amount at a rate
equal to the sum of the applicable Certificate Rate and 2% per annum.
If on any Distribution Date the Certificate Rate is equal to the Net Funds
Cap Rate, an amount (the "LIBOR Interest Carryover") equal to (i) the difference
between (a) the amount of interest the Certificates would be entitled to receive
on such Distribution Date without regard to the Net Funds Cap Rate and (b) the
amount of interest actually distributed to the Certificates on such Distribution
Date plus (ii) the portion of the amount calculated pursuant to clause (i)
remaining unpaid from prior Distribution Dates and interest accrued thereon at
the then applicable Certificate Rate, will be distributed on subsequent
Distribution Dates, from the amount of the Excess Spread otherwise payable to
the Transferor Interest, to the Certificates. No LIBOR Interest Carryover will
be paid to the Certificates after the Principal Balance of the Certificates has
been reduced to zero. The ratings assigned to the Certificates do not address
the likelihood of the payment of the amount of any LIBOR Interest Carryover. The
Insurance Policy does not provide coverage of the LIBOR Interest Carryover, and
the amount of any LIBOR Interest Carryover may remain unpaid on the final
Payment Date.
Calculation of the LIBOR Rate. On each Distribution Date, LIBOR shall be
established by the Trustee and as to any Interest Period, LIBOR will equal the
rate for United States dollar deposits for one month which appears on the
Telerate Screen Page 3750 as of 11:00 A.M., London time, on the second LIBOR
Business Day prior to the first day of such Interest Period. "Telerate Screen
Page 3750" means the display designated as page 3750 on the Telerate Service (or
such other page as may replace page 3750 on that service for the purpose of
displaying London interbank offered rates of major banks). If such rate does not
appear on such page (or such other page as may replace that page on that
service, or if such service is no longer offered, such other service for
displaying LIBOR or comparable rates as may be selected by the Depositor after
consultation with the Trustee), the rate will be the Reference Bank Rate. The
"Reference Bank Rate" will be determined on the basis of the rates at which
deposits in U.S. Dollars are offered by the reference banks (which shall be
three major banks that are engaged in transactions in the London interbank
market, selected by the Depositor after consultation with the Trustee) as of
11:00 A.M., London time, on the day that is two LIBOR Business Days prior to the
immediately preceding Distribution Date to prime banks in the London interbank
market for a period of one month in amounts approximately equal to the principal
amount of the Certificates then outstanding. The Trustee will request the
principal London office of each of the reference banks to provide a quotation of
its rate. If at least two such quotations are provided, the rate will be the
arithmetic mean of the quotations. If on such date fewer than two quotations are
provided as requested, the rate will be the arithmetic mean of the rates quoted
by one or more major banks in New York City, selected by the Depositor after
consultation with the Trustee, as of 11:00 A.M., New York City time, on such
date for loans in U.S. Dollars to leading European banks for a period of one
month in amounts approximately equal to the principal amount of the Certificates
then outstanding. If no such quotations can be obtained, the rate will be LIBOR
for the prior Distribution Date. "LIBOR Business Day" means any day other than
(i) a Saturday or a Sunday or (ii) a day on which banking institutions in the
State of New York or in the city of London, England are required or authorized
by law to be closed.
Transferor Collections. Collections allocable to the Transferor Interest
will be distributed to the holder of the Transferor Interest only to the extent
that such distribution will not reduce the amount of the Transferor
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Interest as of the related Distribution Date below the Minimum Transferor
Interest. Amounts not distributed to the holder of the Transferor Interest
because of such limitations will be retained in the Collection Account until the
Transferor Interest exceeds the Minimum Transferor Interest, at which time such
excess shall be released to the holder of the Transferor Interest.
Overcollateralization. As the result of the distribution of Accelerated
Principal Distribution Amounts, if any, to Certificateholders, the Invested
Amount may be greater than the Certificate Principal Balance, thereby creating
Overcollateralization Amount (but not in excess of the Required
Overcollateralization Amount). Any such Overcollateralization Amount will be
available to absorb any Investor Loss Amount not covered by Investor Interest
Collections. If on any Distribution Date the Overcollateralization Amount
exceeds the Required Overcollateralization Amount, the Investor Principal
Collections payable to Certificateholders on such Distribution Date will be
reduced by the amount of such excess (such amount, the "Overcollateralization
Release Amount"). Such amount will be paid to the holder of the Transferor
Interest.
Distributions of Principal Collections. Beginning on the first
Distribution Date and (unless a Rapid Amortization Event shall have occurred)
ending immediately following the Distribution Date in September 2003 (the
"Managed Amortization Period"), Principal Collections will be payable to
Certificateholders on each Distribution Date to the extent funds are available
therefor, in an amount equal to the Scheduled Principal Collections Distribution
Amount for such Distribution Date (less any Reallocated Investor Principal
Collections for such Distribution Date and any Overcollateralization Release
Amount for such Distribution Date). The "Scheduled Principal Collections
Distribution Amount" for any Distribution Date during the Managed Amortization
Period, will equal the lesser of (i) the Maximum Principal Payment and (ii) the
Alternative Principal Payment. The "Maximum Principal Payment" for any
Distribution Date will equal the product of the Investor Fixed Allocation
Percentage and Principal Collections for such Distribution Date. The
"Alternative Principal Payment" for any Distribution Date, will equal the
amount, not less than zero, equal to Principal Collections for such Distribution
Date minus the aggregate of Additional Balances created during the related
Collection Period.
Beginning with the first Distribution Date of the Rapid Amortization
Period, the amount of Principal Collections payable to Certificateholders on
each Distribution Date will be equal to the Maximum Principal Payment (less any
Reallocated Investor Principal Collections for such Distribution Date and any
Overcollateralization Release Amount for such Distribution Date). The "Rapid
Amortization Period" is the period beginning on the earlier of (i) the
occurrence of a Rapid Amortization Event and (ii) immediately following the
September 2003 Distribution Date, and continuing until the earlier of the dates
on which (i) the Certificate Principal Balance has been reduced to zero and all
amounts owing to the Certificate Insurer have been paid and (ii) the Trust is
terminated. See "-- Termination; Retirement of the Certificates."
In addition, to the extent of funds available therefor (including funds
available under the Policy), on the Distribution Date in January 2020,
Certificateholders will be entitled to receive as a payment of principal an
amount equal to the outstanding Certificate Principal Balance.
Distributions of Principal Collections based on the Investor Fixed
Allocation Percentage may result in distributions of principal to
Certificateholders in amounts that are greater, relative to the declining Pool
Balance, than would be the case if distributions were based on the Investor
Floating Allocation Percentage. Principal Collections not allocated to the
Certificateholders will be allocated to the Transferor Interest. The aggregate
distributions of principal to Certificateholders will not exceed the Original
Certificate Principal Balance.
The Paying Agent. The Paying Agent initially will be the Trustee, together
with any successor thereto in such capacity (the "Paying Agent"). The Paying
Agent shall have the revocable power to withdraw funds from the Collection
Account for the purpose of making distributions to the Certificateholders.
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RAPID AMORTIZATION EVENTS
As described above, the Rapid Amortization Period will commence if a Rapid
Amortization Event occurs. "Rapid Amortization Event" refers to any of the
following events:
(a) failure on the part of the Servicer (i) to make a payment or
deposit required under the Agreement within three Business Days after the
date such payment or deposit is required to be made or (ii) to observe or
perform in any material respect any other covenants or agreements of the
Servicer set forth in the Agreement, which failure continues unremedied for
a period of 60 days after written notice;
(b) any representation or warranty made by the Servicer in the
Agreement or the Sellers in the Mortgage Loan Purchase Agreement proves to
have been incorrect in any material respect when made and continues to be
incorrect in any material respect for a period of 60 days after written
notice and as a result of which the interests of the Certificateholders are
materially and adversely affected; provided, however, that a Rapid
Amortization Event shall not be deemed to occur if a Seller has purchased
or made a substitution for the related Mortgage Loan or Mortgage Loans if
applicable during such period (or within an additional 60 days with the
consent of the Trustee) in accordance with the provisions of the Agreement;
(c) the occurrence of certain events of bankruptcy, insolvency or
receivership relating to any Seller or Bank One, as holder of the
Transferor Interest;
(d) the Trust becomes subject to regulation by the Securities and
Exchange Commission as an investment company within the meaning of the
Investment Company Act of 1940, as amended; or
(e) the aggregate of all draws under the Policy exceeds 1% of the
Cut-Off Date Pool Balance.
In the case of any event described in clause (a) or (b), a Rapid
Amortization Event will be deemed to have occurred only if, after any applicable
grace period described in such clauses, either the Trustee or Certificateholders
holding Certificates evidencing more than 51% of the Percentage Interests or the
Certificate Insurer (so long as there is no default by the Certificate Insurer
in the performance of its obligations under the Policy), by written notice to
the Depositor, the holder of the Transferor Interest and the Servicer (and to
the Trustee, if given by the Certificateholders) declare that a Rapid
Amortization Event has occurred as of the date of such notice. If any event
described in clause (c), (d) or (e) occurs, a Rapid Amortization Event will be
deemed to have occurred without any notice or other action on the part of the
Trustee, the Certificate Insurer or the Certificateholders immediately upon the
occurrence of such event.
In addition to the consequences of a Rapid Amortization Event discussed
above, if a Seller voluntarily files a bankruptcy petition or goes into
liquidation or any person is appointed a receiver or bankruptcy trustee of a
Seller, on the day of any such filing or appointment no further Additional
Balances will be transferred to the Trust and, the Sellers will immediately
cease to transfer Additional Balances to the Trust. In addition, if an
Insolvency Event occurs with respect to Bank One, as holder of the Transferor
Interest, if directed by the Certificate Insurer or by Certificateholders
representing undivided interests aggregating more than 50% of the aggregate
principal amount of the Certificates, with the consent of the Certificate
Insurer, the Trustee will sell, dispose of or otherwise liquidate the Mortgage
Loans in a commercially reasonable manner and on commercially reasonable terms.
The Policy will be available to cover any shortfalls in the event the proceeds
of such sale are insufficient to make all distributions of amounts due in the
Certificates.
Notwithstanding the foregoing, if a conservator, receiver or
trustee-in-bankruptcy is appointed for a Seller or Bank One, as holder of the
Transferor Interest and no Rapid Amortization Event exists other than such
conservatorship, receivership or insolvency, the conservator, receiver or
trustee-in-bankruptcy may have the power to prevent the commencement of the
Rapid Amortization Period or the sale of Mortgage Loans described above.
THE POLICY
On or before the Closing Date, the Policy will be issued by the Certificate
Insurer pursuant to the provisions of the Agreement and the Insurance and
Reimbursement Agreement (the "Insurance Agree-
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ment") to be dated as of the Closing Date, among Bank One, the Depositor, the
Trustee and the Certificate Insurer.
The Policy will irrevocably and unconditionally guarantee payment (a) on
each Distribution Date to the Trustee for the benefit of the Certificateholders
the full and complete payment of (i) the Guaranteed Principal Distribution
Amount (as defined herein) with respect to the Certificates for such
Distribution Date and (ii) accrued and unpaid interest due on the Certificates
at the Certificate Rate (not including any LIBOR Interest Carryover) (together,
the "Guaranteed Distributions"), with such Guaranteed Distributions having been
calculated in accordance with the original terms of the Certificates or the
Agreement except for amendments or modifications to which the Certificate
Insurer has given its prior written consent and (b) of any Preference Amount (as
defined herein). The effect of the Policy is to guarantee the timely payment of
interest on, and the ultimate payment of the principal amount of, all of the
Certificates.
The "Guaranteed Principal Distribution Amount" for any Distribution Date
will be the amount by which the Certificate Principal Balance (after giving
effect to all other amounts distributable and allocable to principal on the
Certificates on such Distribution Date) exceeds the Invested Amount as of such
Distribution Date. In addition, the Policy will guarantee the payment of the
outstanding Certificate Principal Balance on the Distribution Date in January
2020 (after giving effect to all other amounts distributable and allocable to
principal on such Distribution Date).
Payment of claims on the Policy will be made by the Certificate Insurer
following Receipt by the Certificate Insurer of the appropriate notice for
payment on the later to occur of (i) 12:00 noon, New York City time, on the
second Business Day following Receipt of such notice for payment and (ii) 12:00
noon, New York City time, on the relevant Distribution Date.
If payment of any amount guaranteed by the Certificate Insurer pursuant to
the Policy is avoided as a preference payment (the "Preference Amount") under
applicable bankruptcy, insolvency, receivership or similar law in the event of
an insolvency of a Seller, the Servicer, the Depositor or the Trust, the
Certificate Insurer will pay such amount out of the funds of the Certificate
Insurer on the later of (a) the date when due to be paid pursuant to the Order
referred to below or (b) the first to occur of (i) the fourth Business Day
following Receipt by the Certificate Insurer from the Trustee of (A) a certified
copy of the order (the "Order") of the court or other governmental body which
exercised jurisdiction to the effect that the Trustee is required to return the
amount of any Guaranteed Distributions distributed with respect to the
Certificates during the term of the Policy because such distributions were
avoidable preference payments under applicable bankruptcy law, (B) a certificate
of the Certificateholder that the Order has been entered with respect to which
Order the appeal period has expired without an appeal having been filed and is
not subject to any stay and (C) an assignment duly executed and delivered by the
Certificateholder, in such form as is reasonably required by the Certificate
Insurer and provided to the Certificateholder by the Certificate Insurer,
irrevocably assigning to the Certificate Insurer all rights and claims of the
Certificateholder relating to or arising under the Certificates against the
debtor which made such preference payment or otherwise with respect to such
preference payment, or (ii) the date of Receipt by the Certificate Insurer from
the Trustee of the items referred to in clauses (A), (B) and (C) above if, at
least four Business Days prior to such date of Receipt, the Certificate Insurer
shall have Received written notice from the Trustee that such items were to be
delivered on such date and such date was specified in such notice. Such payment
shall be disbursed to the receiver, conservator, debtor-in-possession or trustee
in bankruptcy named in the Order and not to the Trustee or any Certificateholder
directly.
The terms "Receipt" and "Received", with respect to the Policy, mean actual
delivery to the Certificate Insurer and to its fiscal agent appointed by the
Certificate Insurer at its option, if any, prior to 12:00 noon, New York City
time, on a Business Day; delivery either on a day that is not a Business Day or
after 12:00 noon, New York City time, shall be deemed to be Received on the next
succeeding Business Day. If any notice or certificate given under the Policy by
the Trustee is not in proper form or is not properly completed, executed or
delivered, it shall be deemed not to have been Received, and the Certificate
Insurer or the fiscal agent shall promptly so advise the Trustee and the Trustee
may submit an amended notice.
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Under the Policy, "Business Day" means any day other than (i) a Saturday or
Sunday or (ii) a day on which banking institutions in the states of New York or
Ohio are authorized or obligated by law or executive order to be closed.
The Certificate Insurer's obligations under the Policy in respect of
Guaranteed Distributions shall be discharged to the extent funds are transferred
to the Trustee as provided in the Policy, whether or not such funds are properly
applied by the Trustee.
The Certificate Insurer shall be subrogated to the rights of each
Certificateholder to receive payments of principal and interest, as applicable,
with respect to distributions on the Certificates to the extent of any payment
by the Certificate Insurer under the Policy. To the extent the Certificate
Insurer makes Guaranteed Distributions, either directly or indirectly (as by
paying through the Trustee), to the Certificateholders, the Certificate Insurer
will be subrogated to the rights of the Certificateholders, as applicable, with
respect to such Guaranteed Distributions, shall be deemed to the extent of the
payments so made to be a registered Certificateholder for purposes of payment
and shall receive all future Guaranteed Distributions until all such Guaranteed
Distributions by the Certificate Insurer have been fully reimbursed, provided
that the Certificateholders have received the full amount of the Guaranteed
Distributions.
The terms of the Policy cannot be modified, altered or affected by any
other agreement or instrument. The Policy by its terms may not be cancelled or
revoked. The Policy is governed by the laws of the State of New York.
THE POLICY IS NOT COVERED BY THE PROPERTY CASUALTY INSURANCE SECURITY FUND
SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
Pursuant to the terms of the Agreement, and except as specified in the
Agreement, the Certificate Insurer shall be deemed to be the Holder of the
Certificates for certain purposes (other than with respect to payment on the
Certificates), will be entitled to exercise all rights of the Certificateholders
thereunder, without consent of such Holders and the Holders of the Certificates
may exercise such rights only with the prior written consent of the Certificate
Insurer. In addition, the Certificate Insurer will have certain additional
rights as third party beneficiary to the Agreement.
In the absence of payments under the Policy, Certificateholders will bear
directly the credit and other risks associated with their undivided interest in
the Trust.
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution to the Certificateholders, the Servicer
will forward to the Trustee for mailing to such Certificateholder a statement
setting forth, among other items:
(i) the Investor Floating Allocation Percentage for the preceding
Collection Period;
(ii) the amount being distributed to Certificateholders;
(iii) the amount of interest included in such distribution and the
related Certificate Rate;
(iv) the amount, if any, of overdue accrued interest included in such
distribution (and the amount of interest thereon);
(v) the amount, if any, of the remaining overdue accrued interest
after giving effect to such distribution;
(vi) the amount, if any, of principal included in such distribution;
(vii) the amount, if any, of the reimbursement of previous
Liquidation Loss Amounts included in such distribution;
(viii) the amount, if any, of the aggregate unreimbursed Liquidation
Loss Amounts after giving effect to such distribution;
(ix) the Servicing Fee for such Distribution Date;
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(x) the Invested Amount and the Certificate Principal Balance, each
after giving effect to such distribution;
(xi) the Pool Balance as of the end of the preceding Collection
Period;
(xii) the number and aggregate Principal Balances of the Mortgage
Loans as to which the minimum monthly payment is delinquent for 30-59 days,
60-89 days and 90 or more days, respectively, as of the end of the
preceding Collection Period;
(xiii) the book value of any real estate which is acquired by the
Trust through foreclosure or grant of deed in lieu of foreclosure; and
(xiv) the amount of any draws on the Policy.
In the case of information furnished pursuant to clauses (iii), (iv), (v),
(vi), (vii) and (viii) above, the amounts shall be expressed as a dollar amount
per Certificate with a $1,000 denomination.
COLLECTION AND OTHER SERVICING PROCEDURES ON MORTGAGE LOANS
The Servicer will make reasonable efforts to collect all payments called
for under the Mortgage Loans and will, consistent with the Agreement, follow
such collection procedures as it follows from time to time with respect to the
home equity lines of credit in its servicing portfolio comparable to the
Mortgage Loans. Consistent with the above, the Servicer may in its discretion
waive any late payment charge or any assumption or other fee or charge that may
be collected in the ordinary course of servicing the Mortgage Loans.
With respect to the Mortgage Loans, the Servicer may arrange with a
borrower a schedule for the payment of interest due and unpaid for a period,
provided that any such arrangement is consistent with the Servicer's policies
with respect to the home equity lines of credit it owns or services. In
accordance with the terms of the Agreement, the Servicer may consent under
certain circumstances to the placing of a subsequent senior lien in respect of a
Mortgage Loan.
HAZARD INSURANCE
The Agreement provides that the Servicer maintain certain hazard insurance
on the Mortgaged Properties relating to the Mortgage Loans. While the terms of
the related Credit Line Agreements generally require borrowers to maintain
certain hazard insurance, the Servicer will not monitor the maintenance of such
insurance.
The Agreement requires the Servicer to maintain for any Mortgaged Property
relating to a Mortgage Loan acquired upon foreclosure of a Mortgage Loan, or by
deed in lieu of such foreclosure, hazard insurance with extended coverage in an
amount equal to the lesser of (a) the maximum insurable value of such Mortgaged
Property or (b) the outstanding balance of such Mortgage Loan plus the
outstanding balance on any mortgage loan senior to such Mortgage Loan at the
time of foreclosure or deed in lieu of foreclosure, plus accrued interest and
the Servicer's good faith estimate of the related liquidation expenses to be
incurred in connection therewith. The Agreement provides that the Servicer may
satisfy its obligation to cause hazard policies to be maintained by maintaining
a blanket policy insuring against losses on such Mortgaged Properties. If such
blanket policy contains a deductible clause, the Servicer will be obligated to
deposit in the Collection Account the sums that would have been deposited
therein but for such clause. The Servicer initially will satisfy these
requirements by maintaining a blanket policy. As set forth above, all amounts
collected by the Servicer (net of any reimbursements to the Servicer) under any
hazard policy (except for amounts to be applied to the restoration or repair of
the Mortgaged Property) ultimately will be deposited in the Collection Account.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements on the property by fire,
lightning, explosion, smoke, windstorm and hail, and the like, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Mortgage Loans will be underwritten by
different insurers and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by state laws and most of such
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policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mudflows), nuclear
reactions, wet or dry rot, vermin, rodents, insects or domestic animals, theft
and, in certain cases vandalism. The foregoing list is merely indicative of
certain kinds of uninsured risks and is not intended to be all-inclusive or an
exact description of the insurance policies relating to the Mortgaged
Properties.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Mortgage Loans as come into
default when, in accordance with applicable servicing procedures under the
Agreement, no satisfactory arrangements can be made for the collection of
delinquent payments. In connection with such foreclosure or other conversion,
the Servicer will follow such practices as it deems necessary or advisable and
as are in keeping with its general subordinate mortgage servicing activities,
provided the Servicer will not be required to expend its own funds in connection
with foreclosure or other conversion, correction of default on a related senior
mortgage loan or restoration of any property unless, in its sole judgment, such
foreclosure, correction or restoration will increase Net Liquidation Proceeds.
The Servicer will be reimbursed out of Liquidation Proceeds for advances of its
own funds as liquidation expenses before any Net Liquidation Proceeds are
distributed to Certificateholders or the holder of the Transferor Interest.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Collection Period, the Servicer will receive from
interest collections in respect of the Mortgage Loans a portion of such interest
collections as a monthly Servicing Fee in the amount equal to approximately
0.50% per annum ("Servicing Fee Rate") on the aggregate Principal Balances of
the Mortgage Loans as of the first day of the related Collection Period (or at
the Cut-Off Date for the first Collection Period). All assumption fees, late
payment charges and other fees and charges, to the extent collected from
borrowers, will be retained by the Servicer as additional servicing
compensation.
The Servicer will pay certain ongoing expenses associated with the Trust
and incurred by it in connection with its responsibilities under the Agreement.
In addition, the Servicer will be entitled to reimbursement for certain expenses
incurred by it in connection with defaulted Mortgage Loans and in connection
with the restoration of Mortgaged Properties, such right of reimbursement being
prior to the rights of Certificateholders to receive any related Net Liquidation
Proceeds.
EVIDENCE AS TO COMPLIANCE
The Agreement provides for delivery in each year, beginning in 1999, to the
Trustee of an annual statement signed by an officer of the Servicer to the
effect that the Servicer has fulfilled its material obligations under the
Agreement throughout the preceding fiscal year, except as specified in such
statement.
CERTAIN MATTERS REGARDING THE SERVICER
The Agreement provides that the Servicer may not resign from its
obligations and duties thereunder, except in connection with a permitted
transfer of servicing, unless (i) such duties and obligations are no longer
permissible under applicable law or are in material conflict by reason of
applicable law with any other activities of a type and nature presently carried
on by it or its affiliate or (ii) upon the satisfaction of the following
conditions: (a) the Servicer has proposed a successor servicer to the Trustee in
writing and such proposed successor servicer is reasonably acceptable to the
Trustee; (b) the Rating Agencies have confirmed to the Trustee that the
appointment of such proposed successor servicer as the Servicer will not result
in the reduction or withdrawal of the then current rating of the Certificates;
and (c) such proposed successor servicer is reasonably acceptable to the
Certificate Insurer. No such resignation will become effective until the Trustee
or a successor servicer has assumed the Servicer's obligations and duties under
the Agreement. Notwithstanding the foregoing, Bank One may transfer its
servicing obligations to any other direct or indirect wholly-owned subsidiary of
BANC ONE or another entity that meets certain eligibility standards set forth in
the Agreement and be relieved of its obligations and duties under the Agreement
and related agreements.
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The Servicer may perform any of its duties and obligations under the
Agreement through one or more subservicers or delegates, which may be affiliates
of the Servicer. Notwithstanding any such arrangement, the Servicer will remain
liable and obligated to the Trustee and the Certificateholders for the
Servicer's duties and obligations under the Agreement, without any diminution of
such duties and obligations and as if the Servicer itself were performing such
duties and obligations.
Any person into which, in accordance with the Agreement, Bank One or the
Servicer may be merged or consolidated or any person resulting from any merger
or consolidation to which Bank One or the Servicer is a party, or any person
succeeding to the business of Bank One or the Servicer, will be the successor to
Bank One as servicer, or the Servicer, as the case may be, under the Agreement.
The Agreement provides that the Servicer will indemnify the Trust and the
Trustee from and against any loss, liability, expense, damage or injury suffered
or sustained as a result of the Servicer's actions or omissions in connection
with the servicing and administration of the Mortgage Loans that are not in
accordance with the provisions of the Agreement. If an Event of Servicing
Termination (as defined below) occurs, resulting in the assumption of servicing
obligations by a successor Servicer, the successor Servicer will indemnify the
Trust and the Trustee for any losses, claims, damages and liabilities of the
Trust and the Trustee as described in this paragraph arising from the successor
Servicer's actions or omissions. The Agreement provides that neither the
Depositor, the holder of the Transferor Interest nor the Servicer nor their
directors, officers, employees or agents will be under any other liability to
the Trust, the Trustee, the Certificateholders or any other person for any
action taken or for refraining from taking any action pursuant to the Agreement.
However, neither the Depositor, the holder of the Transferor Interest nor the
Servicer will be protected against any liability which otherwise would be
imposed by reason of willful misconduct, bad faith or gross negligence of the
Depositor, the holder of the Transferor Interest or the Servicer in the
performance of its duties under the Agreement or by reason of reckless disregard
of its obligations thereunder. In addition, the Agreement provides that the
Servicer will not be under any obligation to appear in, prosecute or defend any
legal action which is not incidental to its servicing responsibilities under the
Agreement and which in its opinion may expose it to any expense or liability.
The Servicer may, in its sole discretion, undertake any such legal action which
it may deem necessary or desirable with respect to the Agreement and the rights
and duties of the parties thereto and the interest of the Certificateholders
thereunder.
Any corporation into which the Servicer may be merged or consolidated, or
any corporation resulting from any merger, conversion or consolidation to which
the Servicer shall be a party, or any corporation succeeding to the business of
the Servicer shall be the successor of the Servicer hereunder, without the
execution or filing of any paper or any further act on the part of any of the
parties hereto, anything in the Agreement to the contrary notwithstanding.
EVENTS OF SERVICING TERMINATION
"Events of Servicing Termination" will consist of: (i) any failure by the
Servicer to deposit in the Collection Account any deposit required to be made
under the Agreement, which failure continues unremedied for five Business Days
after the giving of written notice of such failure to the Servicer by the
Trustee, or to the Servicer and the Trustee by the Certificate Insurer or
Certificateholders evidencing an aggregate, undivided interest in the Trust of
at least 25% of the Certificate Principal Balance; (ii) any failure by the
Servicer duly to observe or perform in any material respect any other of its
covenants or agreements in the Agreement which, in each case, materially and
adversely affects the interests of the Certificateholders or the Certificate
Insurer and continues unremedied for 60 days after the giving of written notice
of such failure to the Servicer by the Trustee, or to the Servicer and the
Trustee by the Certificate Insurer or Certificateholders evidencing an
aggregate, undivided interest in the Trust of at least 25% of the Certificate
Principal Balance; or (iii) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings relating to the
Servicer and certain actions by the Servicer indicating insolvency,
reorganization or inability to pay its obligations. Under certain other
circumstances, the Certificate Insurer may deliver written notice to the
Servicer terminating all the rights and obligations of the Servicer under the
Agreement.
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Notwithstanding the foregoing, a delay in or failure of performance
referred to under clause (i) above for a period of ten Business Days or referred
to under clause (ii) above for a period of 60 Business Days, will not constitute
an Event of Servicing Termination if such delay or failure could not be
prevented by the exercise of reasonable diligence by the Servicer and such delay
or failure was caused by an act of God or other similar occurrence. Upon the
occurrence of any such event the Servicer will not be relieved from using its
best efforts to perform its obligations in a timely manner in accordance with
the terms of the Agreement and the Servicer shall provide the Trustee, the
Depositor, the holder of the Transferor Interest, the Certificate Insurer and
the Certificateholders prompt notice of such failure or delay by it, together
with a description of its efforts to so perform its obligations.
RIGHTS UPON AN EVENT OF SERVICING TERMINATION
So long as an Event of Servicing Termination remains unremedied, either the
Trustee, or Certificateholders evidencing an aggregate, undivided interest in
the Trust of at least 51% of the Certificate Principal Balance, with the consent
of the Certificate Insurer, or the Certificate Insurer, may terminate all of the
rights and obligations of the Servicer under the Agreement and in and to the
Mortgage Loans, whereupon the Trustee will succeed to all the responsibilities,
duties and liabilities of the Servicer under the Agreement and will be entitled
to similar compensation arrangements. In the event that the Trustee would be
obligated to succeed the Servicer but is unwilling or unable so to act, it may
appoint, or petition a court of competent jurisdiction for the appointment of, a
housing and home finance institution or other mortgage loan or home equity loan
servicer with all licenses and permits required to perform its obligations under
the Agreement and having a net worth of at least $15,000,000 and acceptable to
the Certificate Insurer to act as successor to the Servicer under the Agreement.
Pending such appointment, the Trustee will be obligated to act in such capacity
unless prohibited by law. Such successor will be entitled to receive the same
compensation that the Servicer would otherwise have received (or such lesser
compensation as the Trustee and such successor may agree). A receiver or
conservator for the Servicer may be empowered to prevent the termination and
replacement of the Servicer where the only Event of Servicing Termination that
has occurred is an Insolvency Event.
AMENDMENT
The Agreement may be amended from time to time by the Servicer, the
Depositor and the Trustee and with the consent of the Certificate Insurer, but
without the consent of the Certificateholders, to cure any ambiguity, to correct
or supplement any provisions therein which may be inconsistent with any other
provisions of the Agreement, to add to the duties of the Depositor or the
Servicer or to add or amend any provisions of the Agreement as required by the
Rating Agencies in order to maintain or improve any rating of the Certificates
(it being understood that, after obtaining the ratings in effect on the Closing
Date, neither the Trustee nor the Servicer is obligated to obtain, maintain, or
improve any such rating) or to add any other provisions with respect to matters
or questions arising under the Agreement which shall not be inconsistent with
the provisions of the Agreement, provided that such action will not, as
evidenced by an opinion of counsel, materially and adversely affect the
interests of any Certificateholder or the Certificate Insurer; provided that any
such amendment will not be deemed to materially and adversely affect the
Certificateholders and no such opinion will be required to be delivered if the
person requesting such amendment obtains a letter from the Rating Agencies
stating that such amendment would not result in a downgrading of the then
current rating of the Certificates. The Agreement may also be amended from time
to time by the Servicer, the Depositor, and the Trustee, with the consent of
Certificateholders evidencing an aggregate, undivided interest in the Trust of
at least 51% of the Certificate Principal Balance and the Certificate Insurer
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the Agreement or of modifying in any manner
the rights of the Certificateholders, provided that no such amendment will (i)
reduce in any manner the amount of, or delay the timing of, collections of
payments on the Certificates or distributions or payments under the Policy which
are required to be made on any Certificate without the consent of the holder of
such Certificate or (ii) reduce the aforesaid percentage required to consent to
any such amendment, without the consent of the holders of all Certificates then
outstanding.
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TERMINATION; RETIREMENT OF THE CERTIFICATES
The Trust will terminate on the Distribution Date following the later of
(A) payment in full of all amounts owing to the Certificate Insurer and (B) the
earliest of (i) the Distribution Date on which the Certificate Principal Balance
has been reduced to zero, (ii) the final payment or other liquidation of the
last Mortgage Loan in the Trust, (iii) the optional transfer the Certificates to
the holder of the Transferor Interest, as described below, and (iv) the
Distribution Date in January 2020.
The Certificates will be subject to optional transfer to the holder of the
Transferor Interest on any Distribution Date after the Certificate Principal
Balance is reduced to an amount less than or equal to 5% of the Original
Certificate Principal Balance and all amounts due and owing to the Certificate
Insurer and unreimbursed draws on the Policy, together with interest thereon, as
provided under the Insurance Agreement, have been paid. The transfer price will
equal the outstanding Certificate Principal Balance, plus accrued and unpaid
interest thereon at the Certificate Rate through the day preceding the final
Distribution Date, plus any unpaid LIBOR Interest Carryover. In no event,
however, will the Trust created by the Agreement continue for more than 21 years
after the death of certain individuals named in the Agreement. Written notice of
termination of the Agreement will be given to each Certificateholder, and the
final distribution will be made only upon surrender and cancellation of the
Certificates at an office or agency appointed by the Trustee which will be
specified in the notice of termination.
In addition, the Trust may be liquidated as a result of certain events of
bankruptcy, insolvency or receivership relating to Bank One, as holder of the
Transferor Interest. See "-- Rapid Amortization Events."
THE TRUSTEE
The Bank of New York, a New York banking corporation with its principal
place of business in New York, New York, has been named Trustee pursuant to the
Agreement.
The commercial bank or trust company serving as Trustee may own
Certificates and have normal banking relationships with the Depositor, the
holder of the Transferor Interest, the Servicer, the Sellers and the Certificate
Insurer and/or their affiliates.
The Trustee may resign at any time, in which event the Depositor will be
obligated to appoint a successor Trustee, as approved by the Certificate
Insurer. The Depositor also may remove the Trustee if the Trustee ceases to be
eligible to continue as such under the Agreement or if the Trustee becomes
insolvent. Upon becoming aware of such circumstances, the Depositor will be
obligated to appoint a successor Trustee, with the approval of the Certificate
Insurer. Any resignation or removal of the Trustee and appointment of a
successor Trustee will not become effective until acceptance of the appointment
by the successor Trustee.
No holder of a Certificate will have any right under the Agreement to
institute any proceeding with respect to the Agreement unless such holder
previously has given to the Trustee written notice of default and unless
Certificateholders evidencing an aggregate, undivided interest in the Trust of
at least 51% of the Certificate Principal Balance have made written requests
upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity and the Trustee
for 60 days has neglected or refused to institute any such proceeding. The
Trustee will be under no obligation to exercise any of the trusts or powers
vested in it by the Agreement or to make any investigation of matters arising
thereunder or to institute, conduct or defend any litigation thereunder or in
relation thereto at the request, order or direction of any of the
Certificateholders, unless such Certificateholders have offered to the Trustee
reasonable security or indemnity against the cost, expenses and liabilities
which may be incurred therein or thereby.
DESCRIPTION OF THE MORTGAGE LOAN PURCHASE AGREEMENT
The Mortgage Loans to be transferred to the Trust by the Depositor will be
purchased by the Depositor from the Sellers pursuant to the Mortgage Loan
Purchase Agreement to be entered into between the Depositor, as purchaser of the
Mortgage Loans, and each Seller. Under the Mortgage Loan Purchase
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Agreement, the Sellers will agree to transfer the Mortgage Loans and related
Additional Balances to the Depositor. Pursuant to the Agreement, the Mortgage
Loans will be immediately transferred by the Depositor to the Trust, and the
Depositor will assign its rights in, to and under the Mortgage Loan Purchase
Agreement to the Trust. The following summary describes certain terms of the
form of the Mortgage Loan Purchase Agreement and is qualified in its entirety by
reference to the Mortgage Loan Purchase Agreement.
TRANSFER OF MORTGAGE LOANS
Pursuant to the Mortgage Loan Purchase Agreement, each Seller will transfer
and assign to the Depositor, all of its right, title and interest in and to the
Mortgage Loans sold by it and all of the Additional Balances thereafter created.
The purchase price of the Mortgage Loans is a specified percentage of the face
amount thereof as of the time of transfer. The purchase price of each Additional
Balance comprising the Principal Balance of a Mortgage Loan is the amount of the
related new advance.
REPRESENTATIONS AND WARRANTIES
Each Seller will represent and warrant to the Depositor that, among other
things, as of the Closing Date, it is duly organized and in good standing and
that it has the authority to consummate the transactions contemplated by the
Mortgage Loan Purchase Agreement. Each Seller also will represent and warrant to
the Depositor that, among other things, immediately prior to the sale of the
Mortgage Loans to the Depositor, such Seller was the sole owner and holder of
the Mortgage Loans free and clear of any and all liens and security interests.
Each Seller also will represent and warrant to the Depositor that, among other
things, as of the Closing Date, (a) the Mortgage Loan Purchase Agreement
constitutes a legal, valid and binding obligation of such Seller and (b) the
transfer of the Mortgage Loans pursuant to the Mortgage Loan Purchase Agreement
constitutes a valid sale of or grant of a security interest in all right, title
and interest of such Seller in and to the Mortgage Loans and the proceeds
thereof.
ASSIGNMENT TO TRUST
Each Seller expressly acknowledges and consents to the Depositor's transfer
of its rights relating to the Mortgage Loans under the Agreement to the Trust.
Each Seller also agrees to perform its obligations under the Mortgage Loan
Purchase Agreement for the benefit of the Trust.
TERMINATION
The Mortgage Loan Purchase Agreement will terminate upon the termination of
the Trust.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates will be
applied by the Depositor towards the purchase of the Mortgage Loans.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Subject to the qualifications described herein, special tax counsel to the
Depositor is of the opinion that, under existing law, (i) a Certificate will be
treated as a debt instrument for Federal income tax purposes as of the Closing
Date and (ii) the Trust will not be characterized as an association (or publicly
traded partnership) taxable as a corporation or as a taxable mortgage pool
within the meaning of Section 7701 (i) of the Code. Under the Agreement, the
Transferor, the Depositor and the Certificateholders will agree to treat the
Certificates as indebtedness for Federal income tax purposes. See "CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS" in the Prospectus for additional information
concerning the application of Federal income tax laws.
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STATE TAXES
The Depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Certificates under the tax laws of any
state. Investors considering an investment in the Certificates should consult
their own tax advisors regarding such tax consequences.
ALL INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE FEDERAL,
STATE, LOCAL OR FOREIGN INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE CERTIFICATES.
ERISA CONSIDERATIONS
The purchase by or transfer to an employee benefit plan or other retirement
arrangement, including and individual retirement account or a Keogh plan, which
is subject to Title I of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), or Section 4975 of the Code, or a governmental plan (as
defined in Section 3(32) of ERISA) that is subject to any federal, state or
local law ("Similar Law") which is, to a material extent, similar to the
foregoing provisions of ERISA or the Code (each, a "Plan"), or a collective
investment fund in which such Plans are invested, an insurance company using the
assets of separate accounts or general accounts which include assets of Plans
(or which are deemed pursuant to ERISA or any Similar Law to include assets of
Plans) or other Persons acting on behalf of any such Plan or using the assets of
any such Plan to acquire the Certificates is restricted. Accordingly, except as
specifically referenced herein, the following discussion does not purport to
discuss the considerations under ERISA, Section 4975 of the Code or Similar Law
with respect to the purchase, holding or disposition of the Certificates.
As described in the Prospectus under "ERISA Considerations," ERISA and the
Code impose certain duties and restrictions on Plans and certain persons who
perform services for Plans. For example, unless exempted, investment by a Plan
in the Certificates may constitute or give rise to a prohibited transaction
under ERISA or the Code. The are certain exemptions issued by the United States
Department of Labor (the "Department") that may be applicable to an investment
by a Plan in the Certificates. The Department has granted Credit Suisse First
Boston Corporation an individual prohibited transaction exemption, Prohibited
Transaction Exemption ("PTE") 89-90, 54 Fed. Reg. 42597 (Oct. 17, 1989) (as
amended by PTE 97-34, 62 Fed. Reg. 39021 (July 21, 1997), the "Exemption"), for
certain mortgage-backed and asset-backed certificates underwritten, in whole or
in part, by Credit Suisse First Boston Corporation. The Exemption might be
applicable to the initial purchase, the holding, and the subsequent resale by a
Plan of certain certificates, such as the Certificates, underwritten by the
Underwriters, representing interests in pass-through trusts that consist of
certain receivables, loans and other obligations, provided that the conditions
and requirements of the Exemption are satisfied. The loans described in the
Exemption include mortgage loans such as the Mortgage Loans.
Among the conditions that must be satisfied for the Exemption to apply to
the acquisition, holding and resale of the Certificates are the following:
(1) The acquisition of Certificates by a Plan is on terms (including
the price for the Certificates) that are at least as favorable to the Plan
as they would be in an arm's-length transaction with an unrelated party;
(2) The rights and interests evidenced by Certificates acquired by the
Plan are not subordinate to the rights and interests evidenced by the other
securities of the Trust Fund;
(3) The Certificates acquired by the Plan have received a rating at
the time of such acquisition that is one of the three highest generic
rating categories from any of S&P, Moody's, Fitch IBCA, Inc. ("Fitch IBCA")
or Duff & Phelps Crediting Rating Co. ("DCR");
(4) The Trustee is not an affiliate of any other member of the
Restricted Group (as defined below);
(5) The sum of all payments made to and retained by the Underwriters
in connection with the distribution of Certificates represents not more
than reasonable compensation for underwriting the Certificates. The sum of
all payments made to and retained by the Depositor pursuant to the
assignment
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of the Mortgage Loans to the Trust Fund represents not more than the fair
market value of such Mortgage Loans. The sum of all payments made to and
retained by the Servicer and any other servicer represents not more than
reasonable compensation for such person's services under the Pooling and
Servicing Agreement and reimbursement of such person's reasonable expenses
in connection therewith; and
(6) The Plan investing in the certificates in an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933.
The Trust Fund must also meet the following requirement:
(a) the corpus of the Trust Fund must consist solely of assets of the
type that have been include in other investment pools;
(b) certificates in such other investment pool must have been rated in
one of the three highest rating categories of S&P, Moody's, Fitch IBCA or
DCR for at least one year prior to the Plan's acquisition of the
Certificates pursuant to the Exemption; and
(c) certificates evidencing interests in such other investment pools
must have been purchased by investors other than Plans for a least one year
prior to any Plan's acquisition of the Certificates pursuant to the
Exemption.
If all of the conditions of the Exemption are met, whether or not a Plan's
assets would be deemed to include an ownership interest in the Mortgage Loans,
the acquisition, holding and resale of the Certificates by Plans would be exempt
from the prohibited transaction provisions of ERISA and Section 4975 of the
Code.
Moreover, the Exemption can provide relief from certain
self-dealing/conflict of interest prohibited transactions that may occur if a
Plan fiduciary causes a Plan to acquire certificates in a trust in which the
fiduciary (or its affiliate) is an obligor on the receivables, loans or
obligations held in the trust, provided that, among other requirements, (a) in
the case of an acquisition in connection with the initial issuance of
certificates, at least fifty percent of each class of certificates in which
Plans have invested in acquired by persons independent of the Restricted Group
(as defined below) and at least fifty percent of the aggregate interest in the
trust is acquired by persons independent of the Restricted Group (as defined
below); (b) such fiduciary (or its affiliate) is an obligor with respect to five
percent or less of the fair market value of the obligations contained in the
trust; (c) the Plan's investment in certificates of any class does not exceed
twenty-five percent of all of the certificates of that class outstanding at the
time of the acquisitions; and (d) immediately after the acquisition no more than
twenty-five percent of the assets of the Plan with respect to which such person
is a fiduciary are invested in certificates representing an interest in one or
more trusts containing assets sold or served by the same entity.
The Exemption does not apply to the purchasing or holding of Certificates
by Plans sponsored by the Depositor, the Underwriters, the Trustee, the
Servicer, any obligor with respect to Mortgage Loans included in the Trust Fund
constituting more than five percent of the aggregate unamortized principal
balance of the assets in the Trust Fund, or any affiliate of such parties (the
"Restricted Group").
The Underwriters believe that the conditions to the applicability of the
Exemption will generally be met with respect to the Certificates, other than
possibly those conditions which are dependent on facts unknown to the
Underwriters or which they cannot control, such as those relating to the
circumstances of the Plan purchaser or the Plan fiduciary making the decision to
purchase any such Certificates. However, before purchasing a Certificate, a
fiduciary of a Plan should make its own determination as to the availability of
the exemptive relief provided by the Exemption or the availability of any other
prohibited transaction exemptions, and whether the conditions of any such
exemption will be applicable to the Certificates. A fiduciary of a Plan that is
a governmental Plan should make its own determination as to the need for and the
availability of any exemptive relief under any Similar Law.
Any fiduciary of a Plan considering whether to purchase a Certificate
should also carefully review with its own legal advisors the applicability of
the fiduciary duty and prohibited transaction provisions of ERISA and the Code
of such investment. See "ERISA CONSIDERATIONS" in the Prospectus.
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The sale of Certificates to a Plan is in no respect a representation by the
Depositor or the Underwriters that this investment meets all relevant legal
requirements with respect to investments by Plans generally or any particular
Plan, or that this investment is appropriate for Plans generally or any
particular Plan.
LEGAL INVESTMENT CONSIDERATIONS
Although, as a condition to their issuance, the Certificates will be rated
in the highest rating category of the Rating Agencies, the Certificates will not
constitute "mortgage related securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA"), because not all of the Mortgages
securing the Mortgage Loans are first mortgages. Accordingly, many institutions
with legal authority to invest in comparably rated securities based on first
mortgage loans may not be legally authorized to invest in the Certificates,
which because they evidence interests in a pool that includes junior mortgage
loans are not "mortgage related securities" under SMMEA. See "LEGAL INVESTMENT"
in the Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated September , 1998 (the "Underwriting Agreement"), among the
Depositor and Credit Suisse First Boston Corporation, as representative of the
several underwriters listed on Schedule I thereto, (collectively, the
"Underwriters"), the Depositor has agreed to sell to the Underwriters, and the
Underwriter have agreed to purchase from the Depositor, the principal amounts of
the Certificates set forth below:
<TABLE>
<CAPTION>
UNDERWRITER
----------- PRINCIPAL
<S> <C>
Credit Suisse First Boston Corporation...................... $
Banc One Capital Markets, Inc. ............................. $
First Chicago Capital Markets, Inc. ........................ $
Lehman Brothers Inc. ....................................... $
Salomon Brothers Inc........................................ $
--------
Total............................................. $
========
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all the Certificates offered
hereby if any of the Certificates are purchased.
The Depositor has been advised by the Underwriters that they propose
initially to offer the Certificates to the public in Europe and the United
States at the offering price set forth herein and to certain dealers at such
price less a discount not in excess of % of the Certificate denominations.
The Underwriters may allow and such dealers may reallow a discount not in excess
of % of the Certificate denominations to certain other dealers. After the
initial public offering, the public offering price, such concessions and such
discounts may be changed.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under 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 Certificates in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the Underwriters to reclaim a selling concession from a
syndicate member when the Certificates originally sold by such syndicate member
are purchased in a syndicate covering transaction and penalty bids may cause the
price of the Certificate to be higher than they would otherwise be in the
absence of such transactions. These transactions, if commenced, may be
discontinued at any time.
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Banc One Capital Markets, Inc., an Underwriter, is a wholly-owned
subsidiary of BANC ONE and an affiliate of the Servicer. See "THE SERVICER"
herein and "THE DEPOSITOR, THE SERVICER AND THE ORIGINATORS" in the Prospectus.
After the initial distribution of the Certificates by the Underwriters,
this Prospectus Supplement and the Prospectus may be used by Banc One Capital
Markets, Inc. in connection with offers and sales relating to market-making
transactions in Certificates. Banc One Capital Markets, Inc. may act as
principal or agent in such transactions. Such sales will be made at prices
related to prevailing market prices at the time of sale. Banc One Capital
Markets, Inc. has no obligation to make a market in the Certificates and any
such market-marking may be discontinued by Banc One Capital Markets, Inc. at any
time without notice, in its sole discretion. Banc One Capital Markets, Inc. is
among the Underwriters participating in the initial distribution of the
Certificates.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter against certain civil liabilities, including liabilities under the
Act.
LEGAL MATTERS
Certain legal matters with respect to the Certificates will be passed upon
for the Depositor by Orrick, Herrington & Sutcliffe, LLP and for the
Underwriters by Stroock & Stroock & Lavan LLP.
EXPERTS
The consolidated balance sheets of MBIA Insurance Corporation and
Subsidiaries as of December 31, 1997 and 1996 and the related consolidated
statements of income, changes in shareholder's equity, and cash flows for each
of the three years in the period ended December 31, 1997, incorporated by
reference in this Prospectus Supplement, have been incorporated herein in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of that firm as experts in accounting and auditing.
RATINGS
It is a condition to issuance that the Certificates be rated "Aaa" by
Moody's and "AAA" by Standard & Poor's.
A securities rating addresses the likelihood of the receipt by
Certificateholders of distributions on the Mortgage Loans. The rating takes into
consideration the characteristics of the Mortgage Loans and the structural,
legal and tax aspects associated with the Certificates. The ratings on the
Certificates do not, however, constitute statements regarding the likelihood or
frequency of prepayments on the Mortgage Loans or the possibility that
Certificateholders might realize a lower than anticipated yield.
The ratings assigned to the Certificates will depend primarily upon the
creditworthiness of the Certificate Insurer. Any reduction in a rating assigned
to the claims-paying ability of the Certificate Insurer below the ratings
initially assigned to the Certificates may result in a reduction of one or more
of the ratings assigned to the Certificates.
A securities rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each securities rating should be evaluated independently of
similar ratings on different securities.
S-60
<PAGE> 61
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT
AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered HELOC
Asset-Backed Certificates, Series 1998-1 (the "Global Securities") will be
available only in book-entry form. Investors in the Global Securities may hold
such Global Securities through any of The Depository Trust Company ("DTC"),
Cedel or Euroclear. The Global Securities will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Cedel and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior Home Equity Loan Asset-Backed
Certificates issues.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedel and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Cedel and Euroclear will hold
positions on behalf of their participants through their respective Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to prior Home Equity Loan Asset-Backed
Certificates issues. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and Sellers's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior Home
Equity Loan Asset-Backed Certificates issues in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
I-1
<PAGE> 62
Trading between DTC Sellers and Cedel or Euroclear purchaser. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a Cedel Participant or a Euroclear Participant, the purchaser will
send instructions to Cedel or Euroclear through a Cedel Participant or Euroclear
Participant at least one business day prior to settlement. Cedel or Euroclear
will instruct the respective Depositary, as the case may be, to receive the
Global Securities against payment. Payment will include interest accrued on the
Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
respective Depositary of the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the Cedel Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Cedel or Euroclear cash debt
will be valued instead as of the actual settlement date.
Cedel Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to
them, Cedel Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon the finance settlement. Under
this procedure, Cedel Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each Cedel Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of Cedel Participants or
Euroclear Participants. The sale proceeds will be available to the DTC Sellers
on the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
Trading between Cedel or Euroclear Sellers and DTC Purchaser. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The Sellers will send instructions
to Cedel or Euroclear through a Cedel Participant or Euroclear Participant at
least one business day prior to settlement. In these cases Cedel or Euroclear
will instruct the respective Depositary, as appropriate, to deliver the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in such accrual period and a year assumed to consist of 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of the Cedel Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
Cedel Participant's or Euroclear Participant's account would be back-valued to
the value date (which would be the preceding day, when settlement occurred in
New York). Should the Cedel Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended
I-2
<PAGE> 63
value date (i.e., the trade fails), receipt of the cash proceeds in the Cedel
Participant's or Euroclear Participant's account would instead be valued as of
the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC Participants for delivery to Cedel Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action were taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedel or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedel or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the Cedel Participant
or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. Persons resident in treaty countries
(Form 1001). Non-U.S. Persons that are Certificate Owners residing in a country
that has a tax treaty with the United States can obtain an exemption or reduced
tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Certificate Owners
or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
I-3
<PAGE> 64
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof or (iii) an estate or trust
the income of which is includible in gross income for United States tax
purposes, regardless of its source. This summary does not deal with all aspects
of U.S. Federal income tax withholding that may be relevant to foreign holders
of the Global Securities. Investors are advised to consult their own tax
advisors for specific tax advice concerning their holding and disposing of the
Global Securities.
Recently enacted regulations modify the rules described above in certain
non-substantive ways beginning January 1, 2000. Prospective investors should
consult their own U.S. tax advisors regarding the requirements for avoiding U.S.
withholding taxes.
I-4
<PAGE> 65
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<PAGE> 66
- ------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
DEPOSITOR OR THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO
NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH THEY RELATE
OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THEIR RESPECTIVE
DATES.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Incorporation of Certain Documents By
Reference..................................... S-2
Summary......................................... S-3
Risk Factors.................................... S-16
The Certificate Insurer......................... S-20
The Servicer.................................... S-22
Description of the Mortgage Loans............... S-25
Yield, Maturity and Prepayment Considerations... S-35
Pool Factor and Trading Information............. S-36
Description of the Certificates................. S-37
Description of the Mortgage Loan Purchase
Agreement..................................... S-55
Use of Proceeds................................. S-56
Certain Federal Income Tax Consequences......... S-56
State Taxes..................................... S-57
ERISA Considerations............................ S-57
Legal Investment Considerations................. S-59
Underwriting.................................... S-59
Legal Matters................................... S-60
Experts......................................... S-60
Ratings......................................... S-60
Annex I......................................... I-1
PROSPECTUS
Prospectus Supplement........................... 2
Available Information........................... 2
Reports to Holders.............................. 2
Summary of Terms................................ 3
Risk Factors.................................... 10
Description of the Securities................... 15
The Trust Funds................................. 19
Credit Enhancement.............................. 22
The Depositor, The Servicer and The
Originators................................... 24
Servicing of Mortgage Loans..................... 30
The Agreements.................................. 37
Certain Legal Aspects of Mortgage Loans......... 43
Use of Proceeds................................. 50
Certain Federal Income Tax Considerations....... 51
State Tax Considerations........................ 63
ERISA Considerations............................ 63
Legal Investment................................ 66
Plan of Distribution............................ 66
Legal Matters................................... 66
Glossary of Terms............................... 66
</TABLE>
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS ACTING AS UNDERWRITER TO
DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- ------------------------------------------------------------
- ------------------------------------------------------------
BANC ONE
HELOC TRUST 1998-1
$850,000,000
HELOC
ASSET-BACKED CERTIFICATES
SERIES 1998-1
BANK ONE, N.A.,
as Servicer
BANC ONE ABS CORPORATION,
as Depositor
PROSPECTUS SUPPLEMENT
CREDIT SUISSE FIRST BOSTON
BANC ONE CAPITAL MARKETS, INC.
FIRST CHICAGO CAPITAL MARKETS, INC.
LEHMAN BROTHERS
SALOMON SMITH BARNEY
SEPTEMBER , 1998
- ------------------------------------------------------------
<PAGE> 67
PROSPECTUS
BANC ONE ABS CORPORATION
Asset-Backed Certificates
Asset-Backed Notes
(Issuable in Series)
------------------
Banc One ABS Corporation (the "Depositor") may offer from time to time under
this Prospectus and related Prospectus Supplements the Asset-Backed Notes (the
"Notes") and the Asset-Backed Certificates (the "Certificates" and, together
with the Notes, the "Securities") which may be sold from time to time in one or
more series (each, a "Series"). A Series of Securities may consist of Notes,
Certificates or both.
As specified in the related Prospectus Supplement, the Certificates of a Series
will evidence undivided interests in certain assets deposited into a trust
(each, a "Trust Fund") by the Depositor pursuant to a Pooling and Servicing
Agreement or a Trust Agreement, as described herein. As specified in the related
Prospectus Supplement, the Notes of a Series will be issued and secured pursuant
to an Indenture and will represent indebtedness of the related Trust Fund. The
Trust Fund for a Series of Securities will include assets purchased from one or
more bank or non-bank direct or indirect subsidiaries of BANC ONE CORPORATION
("BANC ONE") specified in the related Prospectus Supplement (each, a "Seller"
and collectively, the "Sellers") composed of one or more pools of revolving home
equity loans and lines of credit (collectively, the "Mortgage Loans"), secured
by mortgages primarily on one- to four-family residential properties, (b) all
monies due thereunder net, if and as provided in the related Prospectus
Supplement, of certain amounts payable to Bank One, N.A., as servicer of the
Mortgage Loans or other servicer specified in the related Prospectus Supplement
(the "Servicer"), and (c) certain funds, Credit Enhancement (as defined herein)
and other assets as described herein and in the related Prospectus Supplement.
Each Series of Securities will be issued in one or more classes (each, a
"Class"). Interest on and principal of the Securities of a Series will be
payable on each Distribution Date specified in the related Prospectus
Supplement, at the times, at the rates, in the amounts and in the order of
priority set forth in the related Prospectus Supplement.
If a Series includes multiple Classes, such Classes may vary with respect to the
amount, percentage and timing of distributions of principal, interest or both
and one or more Classes may be subordinated to other Classes with respect to
distributions of principal, interest or both as described herein and in the
related Prospectus Supplement. If so specified in the related Prospectus
Supplement, the Mortgage Loans and other assets comprising the Trust Fund may be
divided into one or more Asset Groups and each Class of the related Series will
evidence beneficial ownership of the corresponding Asset Group, as applicable.
The rate of reduction of the aggregate principal balance of each Class of a
Series may depend principally upon the rate of payment (including prepayments)
with respect to the Mortgage Loans. A rate of prepayment lower or higher than
anticipated will affect the yield on the Securities of a Series in the manner
described herein and in the related Prospectus Supplement. Under certain limited
circumstances described herein and in the related Prospectus Supplement, a
Series of Securities may be subject to termination or redemption under the
circumstances described herein and in the related Prospectus Supplement.
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
SECURITIES,
SEE "RISK FACTORS" ON PAGE 10.
NOTES OF A SERIES REPRESENT OBLIGATIONS OF, AND CERTIFICATES OF A SERIES
EVIDENCE BENEFICIAL INTERESTS IN, THE RELATED TRUST FUND ONLY AND ARE NOT
DEPOSITS AND NEITHER THE NOTES OR THE CERTIFICATES ARE INSURED OR GUARANTEED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY OR BY
THE DEPOSITOR, ANY SELLER, THE TRUSTEE, THE SERVICER OR BY ANY OF THEIR
RESPECTIVE AFFILIATES OR, UNLESS OTHERWISE SPECIFIED IN THE RELATED PROSPECTUS
SUPPLEMENT, BY ANY OTHER PERSON OR ENTITY. THE DEPOSITOR'S ONLY OBLIGATIONS WITH
RESPECT TO ANY SERIES OF SECURITIES WILL BE PURSUANT TO CERTAIN REPRESENTATIONS
AND WARRANTIES SET FORTH IN THE RELATED AGREEMENT AS DESCRIBED HEREIN OR IN THE
RELATED PROSPECTUS SUPPLEMENT.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
The Securities offered by this Prospectus and by the related Prospectus
Supplement are offered by the underwriters set forth in the related Prospectus
Supplement, if any, subject to prior sale, to withdrawal cancellation or
modification of the offer without notice, to delivery to and acceptance by such
underwriters and certain further conditions. Retain this Prospectus for future
reference. This Prospectus may not be used to consummate sales of the Securities
offered hereby unless accompanied by a Prospectus Supplement.
CREDIT SUISSE FIRST BOSTON
Prospectus dated September 11, 1998
<PAGE> 68
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Securities to be offered
hereunder will, among other things, set forth with respect to such Series of
Securities: (i) the aggregate principal amount, interest rate, and authorized
denominations of each Class of such Securities; (ii) certain information
concerning the Mortgage Loans, the Seller and any Servicer; (iii) the terms of
any Credit Enhancement with respect to such Series; (iv) the terms of any
insurance related to the Mortgage Loans; (v) information concerning any other
assets in the related Trust Fund, including any Reserve Fund; (vi) the Final
Scheduled Distribution Date of each Class of such Securities; (vii) the method
to be used to calculate the amount of principal required to be applied to the
Securities of each Class of such Series on each Distribution Date, the timing of
the application of principal and the order of priority of the application of
such principal to the respective Classes and the allocation of principal to be
so applied; (viii) the Distribution Dates and any Assumed Reinvestment Rate (as
defined herein); and (ix) additional information with respect to the plan of
distribution of such Securities. To the extent that the terms of this Prospectus
conflict or are otherwise inconsistent with the terms of any Prospectus
Supplement, the terms of such Prospectus Supplement shall govern.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Securities. This Prospectus, which forms a part of
the Registration Statement, omits certain information contained in such
Registration Statement pursuant to the Rules and Regulations of the Commission.
The Registration Statement and the exhibits thereto may be inspected and copied
at the public reference facilities maintained by the Commission at a 450 Fifth
Street, N.W., Washington, D.C. 20549, and at its Regional Offices located as
follows: Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511; and New York Regional Office, 7 World Trade Center, 3rd
Floor, New York, New York 10007. Copies of such material may also be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. In addition, the Commission
maintains a public access site on the Internet through the World Wide Web at
which site reports, information statements and other information, including all
electronic filings, regarding the Depositor may be viewed. The Internet address
of such World Wide Web site is http://www.sec.gov.
REPORTS TO HOLDERS
Periodic and annual reports concerning the related Trust Fund for a Series
of Securities are required under the related Agreement to be forwarded to
Holders. Unless otherwise specified in the related Prospectus Supplement, such
reports will not be examined and reported on by an independent public
accountant. If so specified in the Prospectus Supplement for a Series of
Securities, such Series or one or more Classes of such Series will be issued in
book-entry form. In such event (i) owners of beneficial interests in such
Securities will not be considered "Holders" under the Agreements and will not
receive such reports directly from the related Trust Fund; rather, such reports
will be furnished to such owners through the participants and indirect
participants of the applicable book-entry system and (ii) references herein to
the rights of "Holders" shall refer to the rights of such owners as they may be
exercised indirectly through such participants. See "THE AGREEMENTS -- Reports
to Holders" herein.
2
<PAGE> 69
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each Series of Securities contained in the
Prospectus Supplement to be prepared and delivered in connection with the
offering of Securities of such Series. Capitalized terms used and not otherwise
defined herein or in the related Prospectus Supplement shall have the meanings
set forth in the "GLOSSARY OF TERMS".
Securities Offered............ Asset-Backed Certificates (the "Certificates")
and Asset-Backed Notes (the "Notes").
Certificates are issuable from time to time
in Series pursuant to a Pooling and Servicing
Agreement or Trust Agreement. Each
Certificate of a Series will evidence an
interest in the Trust Fund for such Series,
or in an Asset Group specified in the related
Prospectus Supplement. Notes are issuable
from time to time in Series pursuant to an
Indenture. Each Series of Securities will
consist of one or more Classes, each of which
may differ in, among other things, the
amounts allocated to and the priority of
principal and interest payments, Final
Scheduled Distribution Dates, Distribution
Dates and interest rates. The Securities of
each Class will be issued in fully registered
form in the denominations specified in the
related Prospectus Supplement. If so
specified in the related Prospectus
Supplement, the Securities or certain Classes
of such Securities offered thereby may be
available in book-entry form only.
Depositor..................... Banc One ABS Corporation (the "Depositor") was
incorporated in the State of Ohio on May 7,
1996, and is a wholly-owned, special purpose
subsidiary of BANC ONE CORPORATION ("BANC
ONE"). None of BANC ONE, nor any other
affiliate of the Depositor, the Servicer, the
Trustee or any Seller has guaranteed or is
otherwise obligated with respect to the
Securities of any Series. See "THE
DEPOSITOR."
Sellers....................... One or more bank or non-bank, direct or
indirect, subsidiaries of BANC ONE identified
in the Prospectus Supplement for a Series of
Securities, each of which is an affiliate of
the Depositor (each, a "Seller" and together,
the "Sellers").
Servicer...................... Bank One, N.A. ("Bank One"), an affiliate of
the Depositor, or such other servicer as
specified in the related Prospectus
Supplement.
Trustee....................... The Trustee for a Series of Securities
identified in the related Prospectus
Supplement.
Interest Payments............. Interest payments on the Securities of a Series
entitled by their terms to receive interest
will be made on each Distribution Date, to
the extent set forth in, and at the
applicable rate specified in (or determined
in the manner set forth in), the related
Prospectus Supplement. The interest rate on
Securities of a Series may be fixed or may be
variable or change with changes in the rates
of interest on the related Mortgage Loans
and/or as prepayments occur with respect to
such Mortgage Loans. Interest Only Securities
may be assigned a "Notional Amount" set forth
in the related Prospectus Supplement which is
used solely for convenience in expressing the
calculation of interest and for certain
3
<PAGE> 70
other purposes and does not represent the
right to receive any distributions allocable
to principal. Principal Only Securities may
not be entitled to receive any interest
payments or may be entitled to receive only
nominal interest payments. Interest payable
on the Securities of a Series on a
Distribution Date will include all interest
accrued during the period specified in the
related Prospectus Supplement. See
"DESCRIPTION OF THE SECURITIES -- Payments of
Interest."
Principal Payments............ All payments of principal of a Series of
Securities will be made in an aggregate
amount determined as set forth in the related
Prospectus Supplement and will be paid at the
times and will be allocated among the Classes
of such Series in the order and amounts, and
will be applied either on a pro rata or a
random lot basis among all Securities of any
such Class, all as specified in the related
Prospectus Supplement. A Series of Securities
may provide for a period during which no or
only specified payments of principal are made
except upon the occurrence of certain
conditions, all as specified in the related
Prospectus Supplement.
Final Scheduled Distribution
Date of the Securities........ The Final Scheduled Distribution Date with
respect to each Class of Notes is the date on
or before which principal thereof will be
fully paid and, with respect to each Class of
Certificates, is the date after which no
Certificates of such Class are expected to
remain outstanding, in each case calculated
on the basis of the assumptions applicable to
such Series described in the related
Prospectus Supplement. The Final Scheduled
Distribution Date of a Class may equal the
maturity date of the Mortgage Loan in the
related Trust Fund which has the latest
stated maturity or will be determined as
described herein and in the related
Prospectus Supplement.
The actual final Distribution Date of the
Securities of a Series will depend primarily
upon the rate of payment (including
prepayments, liquidations due to default, the
receipt of proceeds from casualty insurance
policies and repurchases) of the Mortgage
Loans in the related Trust Fund. Unless
otherwise specified in the related Prospectus
Supplement, the actual final Distribution
Date of any Security is likely to occur
earlier and may occur substantially earlier
or may occur later than its Final Scheduled
Distribution Date as a result of the
application of prepayments to the reduction
of the principal balances of the Securities
and as a result of defaults on the Mortgage
Loans. The rate of payments on the Mortgage
Loans in the Trust Fund for a Series will
depend on a variety of factors, including
certain characteristics of such Mortgage
Loans and the prevailing level of interest
rates from time to time, as well as on a
variety of economic, demographic, tax, legal,
social and other factors. No assurance can be
given as to the actual prepayment experience
with respect to a Series. See "RISK
FACTORS -- Prepayment and Yield
Considerations" and "DESCRIPTION OF THE
SECURITIES -- Weighted Average Life of the
Securities" herein.
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Optional Termination.......... One or more Classes of Securities of any Series
may be redeemed or repurchased in whole or in
part, at the Depositor's or the Servicer's
option, at such time and under the
circumstances specified in the related
Prospectus Supplement, at the price set forth
therein. If so specified in the related
Prospectus Supplement for a Series of
Securities, the Depositor, the Servicer, or
such other entity that is specified in the
related Prospectus Supplement, may, at its
option, cause an early termination of the
related Trust Fund by repurchasing all of the
Mortgage Loans remaining in the Trust Fund on
or after a specified date, or on or after
such time as the aggregate principal balance
of the Securities of the Series or the
Mortgage Loans relating to such Series, as
specified in the related Prospectus
Supplement, is less than the amount or
percentage specified in the related
Prospectus Supplement. See "DESCRIPTION OF
THE SECURITIES -- Optional Purchase or
Termination."
In addition, the Prospectus Supplement may
provide other circumstances under which
Holders of Securities of a Series could be
fully paid significantly earlier than would
otherwise be the case if payments or
distributions were solely based on the
activity of the related Mortgage Loans.
The Transferor Interest....... If so specified in the related Prospectus
Supplement, interests in a Trust Fund not
represented by the related Series of
Securities may be represented by a Transferor
Interest, which initially will be retained by
the related Seller or an affiliate thereof
and which will not be offered hereby. If so
specified in the related Prospectus
Supplement, the principal amount of the
Transferor Interest will fluctuate as draws
are made with respect to the Mortgage Loans
and as Principal Collections are received.
The related Prospectus Supplement may specify
a minimum interest (the "Minimum Transferor
Interest") required to be maintained with
respect to a Trust Fund; provided that unless
otherwise specified in the related Prospectus
Supplement, the Minimum Transferor Interest
may be reduced or eliminated without the
consent of the Holders of the Securities of
the applicable Series.
The Trust Fund................ The Trust Fund for a Series of Securities will
consist of one or more of the assets
described below, as described in the related
Prospectus Supplement.
A. Mortgage Loans........... The Mortgage Loans for a Series will consist of
revolving home equity loans and lines of
credit originated or purchased by the Seller
or Sellers specified in the related
Prospectus Supplement, each of which is an
affiliate of the Depositor, and sold each
such Seller to the Depositor.
Mortgage Loans may, as specified in the related
Prospectus Supplement, have various payment
characteristics, including balloon or other
irregular payment features, and may accrue
interest at a fixed rate or an adjustable
rate. To the extent provided in the related
Prospectus Supplement, additional Mortgage
Loans may be periodically added to the Trust
Fund, or may be removed from time to time if
certain conditions are met, as described in
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the related Prospectus Supplement. If so
specified in the related Prospectus
Supplement, during the term of a Trust Fund,
all Additional Balances will be transferred
to and become Mortgaged Property of the Trust
Fund. As a result, the Pool Balance of a
Trust Fund may fluctuate from day to day
because the amount of Additional Balances and
the amount of principal payments with respect
to the Mortgage Loans will usually differ
from day to day.
The Mortgage Loans will be secured by mortgages
or deeds of trust or other similar security
instruments creating a lien on a Mortgaged
Property, which may be subordinated to one or
more senior liens on the Mortgaged Property,
as described in the related Prospectus
Supplement.
The related Prospectus Supplement will describe
certain characteristics of the Mortgage Loans
for a Series, including, without limitation,
and to the extent relevant: (a) the aggregate
unpaid principal balance of the Mortgage
Loans (or the aggregate unpaid principal
balance included in the Trust Fund for the
related Series) and the average outstanding
principal balance of the Mortgage Loans; (b)
the weighted average Loan Rate on the
Mortgage Loans as of the Cut-off Date; (c)
the Combined Loan-to-Value Ratios or
Loan-to-Value Ratios, as applicable, of the
Mortgage Loans, computed in the manner
described in the related Prospectus
Supplement; (d) the percentage (by principal
balance as of the Cut-off Date) of Mortgage
Loans that accrue interest at adjustable or
fixed interest rates; (e) any Credit
Enhancement relating to the Mortgage Loans;
(f) the geographic distribution of any
Mortgaged Properties securing the Mortgage
Loans; (g) the lien priority of the Mortgage
Loans; (h) the credit limit utilization rates
of the Mortgage Loans; and (i) the
delinquency status and year of origination of
the Mortgage Loans.
B. Collection and
Distribution Accounts.......... Unless otherwise provided in the related
Prospectus Supplement, all payments on or
with respect to the Mortgage Loans for a
Series will be remitted directly to an
account (the "Collection Account") to be
established for such Series with the Trustee
or the Servicer, in the name of the Trustee.
Unless otherwise provided in the related
Prospectus Supplement, the Trustee shall be
required to apply a portion of the amount in
the Collection Account, together with
reinvestment earnings from eligible
investments specified in the related
Prospectus Supplement, to the payment of
certain amounts payable to the Servicer under
the related Agreement and any other person
specified in the Prospectus Supplement, and
to deposit a portion of the amount in the
Collection Account into a separate account
(the "Distribution Account") to be
established for such Series, each in the
manner and at the times established in the
related Prospectus Supplement. All amounts
deposited in the Distribution Account will be
available, unless otherwise specified in the
related Prospectus Supplement, for (i)
application to the payment of
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<PAGE> 73
principal of and interest on such Series of
Securities on the next Distribution Date,
(ii) the making of adequate provision for
future payments on certain Classes of
Securities and (iii) any other purpose
specified in the related Prospectus
Supplement. After applying the funds in the
Collection Account as described above, any
funds remaining in the Collection Account may
be paid over to the Servicer, the Depositor,
any provider of Credit Enhancement with
respect to such Series (a "Credit Enhancer")
or any other person entitled thereto in the
manner and at the times established in the
related Prospectus Supplement.
Credit Enhancement............ If specified in the Prospectus Supplement
relating to a Series, the Depositor may
obtain an irrevocable letter of credit,
surety bond, securities insurance policy,
pool or special hazard insurance policy or
other form of credit support or will provide
for overcollateralization or one or more
classes of subordinate securities or reserve
funds funded by an initial deposit and/or
application of all or a part of excess cash
flow for such Series (collectively, "Credit
Enhancement") in favor of the Trustee on
behalf of the Holders of such Series and any
other person specified in such Prospectus
Supplement from an institution acceptable to
the rating agency or agencies identified in
the related Prospectus Supplement as rating
such Series of Securities (collectively, the
"Rating Agency") for the purposes specified
in such Prospectus Supplement. Credit
Enhancement will support the payments on the
Securities and may be used for other
purposes, to the extent and under the
conditions specified in such Prospectus
Supplement. See "CREDIT ENHANCEMENT".
Servicing..................... The Servicer will be responsible for servicing,
managing and making collections on the
Mortgage Loans for a Series. In addition, the
Servicer, if so specified in the related
Prospectus Supplement, will act as custodian
and will be responsible for maintaining
custody of the Mortgage Loans and related
documentation on behalf of the Trustee.
Advances with respect to delinquent payments
of principal or interest on a Mortgage Loan
will be made by the Servicer only to the
extent described in the related Prospectus
Supplement. Such advances will be intended to
provide liquidity only and, if required with
respect to a Series, will generally be made
only if the Servicer determines such Advances
to be recoverable. Unless otherwise specified
in the related Prospectus Supplement, will be
reimbursable to the Servicer from scheduled
payments of principal and interest, late
collections, or from the proceeds of
liquidation of the related Mortgage Loans or
from other recoveries relating to such
Mortgage Loans (including any insurance
proceeds or payments from other credit
support). Under certain limited
circumstances, the Servicer may resign or be
removed, in which event either the Trustee or
a third-party servicer will be appointed as
successor servicer. The Servicer will receive
a periodic fee as servicing compensation (the
"Servicing Fee") and may, as specified herein
and in the related Prospectus Supplement,
receive certain additional compensation. See
"SERVICING OF LOANS -- Servicing Compensation
and Payment of Expenses".
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Federal Income Tax Considerations
A. Debt Securities............. If so described in the related Prospectus
Supplement, a Series of Securities will
include one or more Classes of taxable debt
obligations under the Internal Revenue Code
of 1986, as amended (the "Code"). Stated
interest with respect to such Classes of
Securities will be reported by a Holder in
accordance with the Holder's method of
accounting. Certain Classes of Securities
may, if specified in the related Prospectus
Supplement, be issued with original issue
discount that is not de minimis. In such
cases, the Holder will be required to
include original issue discount in gross
income as it accrues, which may be prior to
the receipt of cash attributable to such
income. If a Security is issued at a
premium, the Holder may be entitled to make
an election to amortize such premium on a
constant yield method. See "CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS."
B. Grantor Trust............... If so specified in the Prospectus Supplement,
the Trust Fund will be treated as a grantor
trust for federal income tax purposes. A
Certificateholder, by its acceptance of a
Certificate, will agree to treat the
related Trust as a grantor trust in which
such Certificateholder is a grantor for
federal income tax purposes.
C. Owner Trust Securities...... If so specified in the Prospectus Supplement,
the Trust Fund will be treated as a
partnership for purposes of federal income
tax. Each Noteholder, by the acceptance of
a Note of a given series, will agree to
treat such Note as indebtedness, and each
Certificateholder, by the acceptance of a
Certificate of a given series, will agree
to treat the related Trust as a partnership
in which such Certificateholder is a
partner for federal income tax purposes. In
the event the Trust Fund will be treated as
a partnership, the Certificates may not be
transferred to non-U.S. holders, and any
such transfer shall be void. Alternative
characterizations of such Trust and such
Certificates are possible. See "CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS."
ERISA Considerations............. A fiduciary of any employee benefit or other\
plan subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code
should carefully review with its own legal
advisors whether the purchase or holding of
Securities could give rise to a transaction
prohibited or otherwise impermissible under
ERISA or the Code. See "ERISA
CONSIDERATIONS."
Legal Investment................. Unless otherwise specified in the related
Prospectus Supplement, Securities of each
Series offered by this Prospectus and the
related Prospectus Supplement will not
constitute "mortgage related securities"
under the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA").
Investors whose investment authority is
subject to legal restrictions should
consult their own legal advisors to
determine whether and to what extent the
Securities constitute legal investments for
them. See "LEGAL INVESTMENT."
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Use of Proceeds............... The Depositor will use the net proceeds from
the sale of each Series for one or more of
the following purposes: (i) to purchase the
related Mortgage Loans, (ii) to repay
indebtedness which has been incurred to
obtain funds to acquire such Mortgage Loans,
(iii) to establish any Reserve Funds
described in the related Prospectus
Supplement and (iv) to pay costs of
structuring and issuing such Securities,
including the costs of obtaining Credit
Enhancement, if any. If so specified in the
related Prospectus Supplement, the purchase
of the Mortgage Loans for a Series may be
effected by an exchange of Securities with
the Seller of such Mortgage Loans. See "USE
OF PROCEEDS."
Ratings....................... It will be a requirement for issuance of any
Series that the Securities offered by this
Prospectus and the related Prospectus
Supplement be rated by at least one Rating
Agency in one of its four highest applicable
rating categories. The rating or ratings
applicable to Securities of each Series
offered hereby and by the related Prospectus
Supplement will be as set forth in the
related Prospectus Supplement. A securities
rating should be evaluated independently of
similar ratings on different types of
securities. A securities rating does not
address the effect that the rate of
prepayments on Mortgage Loans for a Series
may have on the yield to investors in the
Securities of such Series. See "RISK
FACTORS -- Rating of Securities."
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<PAGE> 76
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities.
SECURITIES
Limited Liquidity. There will be no market for the Securities of any
Series prior to the issuance thereof, and there can be no assurance that a
secondary market will develop or, if it does develop, that it will provide
Holders with liquidity of investment or will continue for the life of the
Securities of such Series. If so specified in the related Prospectus Supplement,
the underwriters for a Series specified in the related Prospectus Supplement,
may make a secondary market in the Securities, but have no obligation to do so.
None of the Securities will be listed on any securities exchange. Issuance of
any of the Securities in book-entry form may reduce the liquidity of such
Securities in the secondary trading market because investors may be unwilling to
purchase Securities for which they cannot obtain physical certificates. In
addition, because transactions in Securities of a Series in book-entry form may
be effected only through a depositary and its direct and indirect participants,
the ability of a Holder to pledge Securities to persons or entities that do not
participate in the depositary system may be limited.
Limited Obligations. The Securities of a Series will not represent an
interest in or an obligation of the Depositor, BANC ONE, any Seller, the
Servicer or any of their affiliates and will be payable solely from the assets
of the Trust Fund for such Securities. There will be no recourse to the
Depositor or any other person for any default on the Notes or any failure to
receive distributions on the Certificates. Consequently, Holders of Securities
of each Series must rely solely upon payments with respect to the Mortgage Loans
and the other assets constituting the Trust Fund for a Series of Securities,
including, if applicable, any amounts available pursuant to any Credit
Enhancement for such Series, for the payment of principal of and interest on the
Securities of such Series. The Depositor does not have, nor is it expected to
have, any significant assets.
Holders of Notes will be required under the Indenture to proceed only
against the Mortgage Loans and other assets constituting the related Trust Fund
in the case of a default with respect to such Notes and may not proceed against
any assets of the Depositor. If payments with respect to the Mortgage Loans and
such other assets securing a Series of Notes, including any Credit Enhancement,
were to become insufficient to make payments on such Notes, no other assets
would be available for payment of the deficiency.
The only obligations, if any, of the Depositor with respect to the
Securities of any Series will be to purchase, or substitute substantially
similar mortgage loans for, or cause the related Seller to purchase or
substitute, any Mortgage Loans as to which there is defective documentation or a
breach of certain representations and warranties. See "THE
AGREEMENTS -- Assignment of Mortgage Loans". The Depositor does not have, and is
not expected in the future to have, any significant assets with which to meet
any obligation to repurchase Mortgage Loans with respect to which there has been
a breach of any representation or warranty.
Credit Enhancement. Although Credit Enhancement, if any, with respect to a
Series of Securities is intended to reduce the risk of delinquent payments or
losses to Holders of the Class or Classes of Securities entitled to the benefit
thereof, the amount of such Credit Enhancement will be limited, as set forth in
the related Prospectus Supplement, and will decline and could be depleted under
certain circumstances prior to the payment in full of the related Series of
Securities, and as a result Holders may suffer losses. See "CREDIT ENHANCEMENT."
Prepayment and Yield Considerations. The yield to maturity experienced by
a Holder of Securities may be affected by the rate of payment of principal of
the Mortgage Loans. The timing of principal payments of the Securities of a
Series will be affected by a number of factors, including the following: (i) the
extent of prepayments of the Mortgage Loans, which prepayments may be influenced
by a variety of factors, (ii) the manner of allocating principal payments among
the Classes of Securities of a Series as specified in the related Prospectus
Supplement and (iii) the exercise by the party entitled thereto of any right of
optional termination. See "DESCRIPTION OF THE SECURITIES -- Weighted Average
Life of Securities; Prepayment and
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Yield Considerations." Prepayments may also result from repurchases of loans due
to material breaches of the Seller's or the Depositor's warranties. The
effective yield to Holders will also be affected by the timing of interest
accrual and payments and other factors specific to the Mortgage Loans underlying
a Series or the structural characteristics of the Securities of a Series, all as
more particularly described in the related Prospectus Supplement.
The Depositor is not aware of any publicly available studies or statistics
on the rate of prepayment of mortgage loans such as the Mortgage Loans.
Generally, home equity loans and lines of credit are not viewed by mortgagors as
permanent financing. Accordingly, the Mortgage Loans may experience higher rates
of prepayment than traditional mortgage loans. On the other hand, it may be
expected that a portion of the borrowers will not prepay their Mortgage Loans to
any significant degree.
Rating of the Securities. It will be a condition to the issuance of a
Series of Securities that they be rated in one of the four highest rating
categories by one or more Rating Agencies identified in the related Prospectus
Supplement. Any such rating would be based on, among other things, the adequacy
of the value of the Mortgage Loans and any Credit Enhancement with respect to
such Series. Such rating should not be deemed a recommendation to purchase, hold
or sell Securities, inasmuch as it does not address market price or suitability
for a particular investor. There is also no assurance that any such rating will
remain in effect for any given period of time or may not be lowered or withdrawn
entirely by the applicable Rating Agency if in its judgment circumstances in the
future so warrant. In addition to being lowered or withdrawn due to any erosion
in the adequacy of the value of the Mortgage Loans, such rating might also be
lowered or withdrawn, among other reasons, because of an adverse change in the
financial or other condition of an Enhancer or a change in the rating of such
Enhancer's long term debt.
RISKS OF THE MORTGAGE LOANS
Nature of Mortgage Loans and Mortgaged Properties. The Mortgage Loans are
expected to be secured by Mortgages which consist primarily of junior liens
subordinate to the rights of the mortgagee under the related senior mortgage or
mortgages. As a result, the proceeds from any liquidation, insurance or
condemnation proceedings will be available to satisfy the outstanding balance of
such Mortgage only to the extent that the claims of such senior mortgagees have
been satisfied in full, including any related foreclosure costs. In addition, a
junior mortgagee may not foreclose on the Mortgaged Property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees at or prior to the foreclosure sale or undertake the obligation to
make payments on the senior mortgages in the event the mortgagor is in default
thereunder. The Trust Fund will not have any source of funds to satisfy the
senior mortgages or make payments due to the senior mortgagees.
There are several factors that could adversely affect the value of
Mortgaged Properties such that the outstanding balance of the related Mortgage
Loan, together with any senior financing on the Mortgaged Properties, would
equal or exceed the value of the Mortgaged Properties. Among such factors are an
overall decline in the residential real estate market in the areas in which the
Mortgaged Properties are located or a decline in the general condition of the
Mortgaged Properties as a result of failure of borrowers to maintain adequately
the Mortgaged Properties or of natural disasters that are not necessarily
covered by insurance, such as earthquakes and floods. Any such decline could
extinguish the value of a junior interest in a Mortgaged Property before having
any effect on the related senior interest therein. If such a decline occurs, the
actual rates of delinquencies, foreclosure and losses on the junior Mortgage
Loans could be higher than those currently experienced in the mortgage lending
industry in general.
Minimum monthly payments on the Mortgage Loans may be limited to accrued
interest. Although borrowers under certain of the Mortgage Loans may choose to
pay down all or a part of their outstanding principal balance prior to maturity,
such borrowers are under no obligation to do so and, if such balances have not
been substantially paid down prior to maturity, some borrowers may be unable to
pay the required final payment.
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Environmental Risks. Real Mortgaged Property pledged as security to a
lender may be subject to certain environmental risks. Under the laws of certain
states, contamination of a Mortgaged Property may give rise to a lien on the
Mortgaged Property to assure the costs of clean-up. In several states, such a
lien has priority over the lien of an existing mortgage or owner's interest
against such Mortgaged Property. In addition, under the laws of some states and
under the federal Comprehensive Environmental Response, Compensation, and
Liability Act of 1980 ("CERCLA"), a lender may be liable, as an "owner" or
"operator," for costs of addressing releases or threatened releases of hazardous
substances that require remedy at a Mortgaged Property, if agents or employees
of the lender have become sufficiently involved in the operations of the
borrower, regardless of whether or not the environmental damage or threat was
caused by a prior owner. A lender also risks such liability on foreclosure of
the Mortgaged Property.
Certain Other Legal Considerations Regarding the Mortgage
Loans. Applicable state laws generally regulate interest rates and other
charges and require certain disclosures. In addition, other state laws, public
policy and general principles of equity relating to the protection of consumers,
unfair and deceptive practices and debt collection practices may apply to the
origination, servicing and collection of the Mortgage Loans. Depending on the
provisions of the applicable law and the specific facts and circumstances
involved, violations of these laws, policies and principles may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Mortgage Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the owner of the Mortgage Loan
to damages and administrative enforcement.
The Mortgage Loans are also subject to Federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding
the terms of the Mortgage Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit
Protection Act, in the extension of credit; and
(iii) the Americans with Disabilities Act, which, among other things,
prohibits discrimination on the basis of disability in the full and equal
enjoyment of the goods, services, facilities, privileges, advantages or
accommodations of any place of public accommodation;
(iv) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience.
Violations of certain provisions of these Federal laws may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Mortgage Loans and in addition could subject the Trust Fund to damages
and administrative enforcement. The Mortgage Loans may be subject to the Home
Ownership and Equity Protection Act of 1994 (the "Act") which amended the Truth
in Lending Act as it applies to mortgages subject to the Act. The Act requires
certain additional disclosures, specifies the timing of such disclosures and
limits or prohibits inclusion of certain provisions in mortgages subject to the
Act. The Act also provides that any purchaser or assignee of a mortgage covered
by the Act is subject to all of the claims and defenses which the borrower could
assert against the original lender. The maximum damages that may be recovered
under the Act from an assignee is the remaining amount of indebtedness plus the
total amount paid by the borrower in connection with the Mortgage Loan. If the
Trust Fund includes Mortgage Loans subject to the Act, it will be subject to all
of the claims and defenses which the borrower could assert against the Seller.
Any violation of the Act which would result in such liability would be a breach
of the Seller's representations and warranties, and the Seller would be
obligated to cure, repurchase or, if permitted by the Agreement, substitute for
the Mortgage Loan in question. In addition, numerous other federal and state
statutory provisions, including the federal bankruptcy laws, the Soldiers' and
Sailors' Civil Relief Act of 1940 and state debtor relief laws, also may
adversely affect the Servicer's ability to collect the principal of or interest
on the Mortgage Loans and also would affect the interests of the Holders in such
Mortgage Loans if such laws result in the Mortgage Loans being uncollectible.
See "CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS".
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Transfer of Mortgage Loans. If so specified in the related Prospectus
Supplement, the Servicer may be entitled to maintain possession of the
documentation relating to each Mortgage Loan, including the Credit Line
Agreements and related documents or other evidence of indebtedness signed by the
borrower, and assignments of the related mortgage to the Trust Fund may not be
required to be recorded, in each case until the occurrence of the events
(generally related to the rating assigned to unsecured debt of the Servicer)
specified in the related Prospectus Supplement. Failure to deliver such
documents to the related Trustee (or a third-party custodian on behalf of the
Trustee) will have the result in most, if not all, states, and failure to record
the assignments of the related mortgages to the related Trustee will have the
result in certain states in which the Mortgaged Properties are located, of
making the sale of the Principal Balances as of the Cut-off Date, Additional
Balances and related documents potentially ineffective against certain creditors
of the related Seller or the purchaser of a Mortgage Loan who had no notice of
the prior conveyance to the Trust Fund if such purchaser perfects his interest
by taking possession of the evidence of indebtedness.
Each Seller will be required to represent in the related Purchase Agreement
that the transfer by it of all of its right, title and interest in the Mortgage
Loans underlying a Series of Securities is either a valid transfer and
assignment of such Mortgage Loans or the grant to the Trust Fund of a security
interest in the Mortgage Loans. If the transfer of the related Mortgage Loans to
the Trust Fund is deemed to create a security interest under the applicable
Uniform Commercial Code ("UCC"), tax or other governmental liens on the
Mortgaged Property of the Seller arising before any Mortgage Loan comes into
existence may have priority over the Trust's interest in such Mortgage Loan. In
addition, if the FDIC were appointed receiver of a Seller, the receiver's
administrative expenses might also have priority over the Trust Fund's interest
in the Mortgage Loans, but under the Federal Deposit Insurance Act, to the
extent such Seller grants a security interest in the related Mortgage Loans to
the Trust Fund, such security interest is perfected prior to the insolvency of
such Seller and such security interest was not taken in contemplation of
insolvency or with the intent to hinder, delay or defraud creditors, such
security interest should not be subject to avoidance by the FDIC, as conservator
or receiver. The insolvency of a Seller may also have other potential
consequences described in the related Prospectus Supplement, including, for
example, an early termination of the related Trust Fund.
Geographic Concentration and Local Real Estate Markets. The Prospectus
Supplement related to a Series of Securities will contain information with
respect to the geographic concentration of Mortgaged Properties securing the
related Mortgage Loans. Any concentration of the Mortgage Loans relating to any
Series of Securities in a particular region may present risk considerations in
addition to those generally present for similar securities without such
concentration. Certain geographic regions of the United States from time to time
will experience weaker regional economic conditions and housing markets and
consequently will experience higher rates of loss and delinquency on mortgage
loans generally. Declines in values of the Mortgaged Properties in any region
may particularly affect the position of a junior mortgagee, and could extinguish
the interest of the holder of such junior lien.
In many cases, home equity revolving credit line borrowers have primary
residences with above average values, and those properties may experience
greater relative declines in value than other properties with lower values. A
rise in interest rates over a period of time and the general condition of the
Mortgaged Property as well as other factors may have the effect of reducing the
value of the Mortgaged Property from the appraised value at the time the
Mortgage Loan was originated. Such reduction may reduce the likelihood of
liquidation or other proceeds being sufficient to satisfy the related Mortgage
Loan after satisfaction of any senior liens. In addition, if the borrower has an
adjustable rate first mortgage loan, any increase in the interest rate thereon
may adversely affect the borrower's ability to make payments on the related
Mortgage Loan.
Servicer's Ability to Change the Terms of the Mortgage Loans. If and under
the terms specified in the related Prospectus Supplement, the Servicer may have
the ability to agree to changes in the terms of a Credit Line Agreement or other
document evidencing the Mortgage Loan indebtedness. No assurance can be given
that changes in applicable law or the market for home equity loans or prudent
business practice will not result in changes in the terms of the Mortgage Loans
after transfer to the related Trust Fund.
Other Considerations. There is no assurance that the market value of the
Mortgage Loans or any other assets for a Series will at any time be equal to or
greater than the aggregate principal amount of the Securities
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of such Series then outstanding, plus accrued interest thereon. Moreover, upon
an event of default under the Indenture for a Series of Notes and a sale of the
assets in the Trust Fund or upon a sale of the assets of a Trust Fund for a
Series of Certificates, the Trustee, the Servicer, any Enhancer and any other
service provider specified in the related Prospectus Supplement generally will
be entitled to receive the proceeds of any such sale to the extent of unpaid
fees and other amounts owing to such persons under the related Agreement prior
to distributions to holders of Securities. Upon any such sale, the proceeds
thereof may be insufficient to pay in full the principal of and interest on the
Securities of such Series.
Liquidation expenses with respect to defaulted loans do not vary directly
with the outstanding principal balance of the loan at the time of default.
Therefore, assuming that a servicer took the same steps in realizing upon a
defaulted loan having a small remaining principal balance as it would in the
case of a defaulted loan having a larger principal balance, the amount realized
after expenses of liquidation would be smaller as a percentage of the
outstanding principal balance of the smaller loan than would be the case with a
larger loan. Because the average outstanding principal balances of the Mortgage
Loans are small relative to the size of the loans in a typical pool of first
mortgages, realizations net of liquidation expenses on defaulted Mortgage Loans
may also be smaller as a percentage of the principal amount of the Mortgage
Loans than would such net realizations in the case of a typical pool of first
mortgage loans.
Further, foreclosure and similar actions are subject to delays and may take
several years to complete, resulting in delays in the receipt of proceeds
available for distribution to Holders of the related Securities. Such delays may
depend upon, among other things, the required procedures for foreclosure in the
jurisdiction in which the related Mortgaged Property is located, the
availability of defenses to such action, the timing of the foreclosure action
and other factors. See "CERTAIN LEGAL ASPECTS OF THE MORTGAGE
LOANS -- Foreclosure on Mortgages".
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DESCRIPTION OF THE SECURITIES
GENERAL
Each Series of Notes will be issued pursuant to an indenture (the
"Indenture") between the related Trust Fund and the entity named in the related
Prospectus Supplement as trustee (the "Trustee") with respect to such Series. A
form of Indenture has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part. The Certificates will also be issued in
Series pursuant to separate agreements (each, a "Pooling and Servicing
Agreement" or a "Trust Agreement") among the Depositor, the Servicer and the
Trustee. A form of Pooling and Servicing Agreement has been filed as an exhibit
to the Registration Statement of which this Prospectus forms a part. A Series
may consist of Notes, Certificates or both.
The applicable Seller or Sellers may agree to reimburse the Depositor for
certain fees and expenses of the Depositor incurred in connection with the
offering of the Securities.
The following summaries describe certain provisions in the Agreements
common to each Series of Securities. The summaries do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, the
provisions of the Agreements and the Prospectus Supplement relating to each
Series of Securities. Where particular provisions or terms used in the
Agreements are referred to, the actual provisions (including definitions of
terms) are incorporated herein by reference as part of such summaries.
Each Series of Securities will consist of one or more Classes of
Securities, one or more of which may be Subordinate Securities. The Securities
of each Series will be issued only in fully registered form, without coupons, in
the authorized denominations for each Class specified in the related Prospectus
Supplement. Upon satisfaction of the conditions, if any, applicable to a Class
of a Series, as described in the related Prospectus Supplement, the transfer of
the Securities may be registered and the Securities may be exchanged at the
office of the Trustee specified in the Prospectus Supplement without the payment
of any service charge other than any tax or governmental charge payable in
connection with such registration of transfer or exchange. If specified in the
related Prospectus Supplement, one or more Classes of a Series may be available
in book-entry form only.
Unless otherwise provided in the related Prospectus Supplement, payments of
principal of and interest on a Series of Securities will be made on the
Distribution Dates specified in the Prospectus Supplement relating to such
Series by check mailed to Holders of such Series, registered as such at the
close of business on the record date specified in the related Prospectus
Supplement applicable to such Distribution Dates at their addresses appearing on
the security register, except that (a) payments may be made by wire transfer (at
the expense of the Holder requesting payment by wire transfer) in certain
circumstances described in the related Prospectus Supplement and (b) final
payments of principal in retirement of each Security will be made only upon
presentation and surrender of such Security at the office of the Trustee
specified in the Prospectus Supplement. Notice of the final payment on a
Security will be mailed to the Holder of such Security before the Distribution
Date on which the final principal payment on any Security is expected to be made
to the Holder of such Security.
Payments of principal of and interest on the Securities will be made by the
Trustee, or a paying agent on behalf of the Trustee, as specified in the related
Prospectus Supplement. Unless otherwise provided in the related Prospectus
Supplement, all payments with respect to the Mortgage Loans for a Series,
together with reinvestment income thereon, amounts withdrawn from any Reserve
Fund, and amounts available pursuant to any other Credit Enhancement will be
deposited directly into the Collection Account and, net, if and as provided in
the related Prospectus Supplement, of certain amounts payable to the related
Servicer and any other person specified in the Prospectus Supplement will
thereafter be deposited into the Distribution Account and will be available to
make payments on Securities of such Series on the next Distribution Date, as the
case may be. See "THE TRUST FUNDS -- Collection and Distribution Accounts."
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VALUATION OF THE MORTGAGE LOANS
If specified in the related Prospectus Supplement for a Series of Notes,
each Mortgage Loan included in the related Trust Fund for a Series may be
assigned an initial "Asset Value." Unless otherwise specified in the related
Prospectus Supplement, at any time the Asset Value of the Mortgage Loans will be
equal to the product of the Asset Value Percentage as set forth in the Indenture
and the lesser of (a) the stream of remaining regularly scheduled payments on
the Mortgage Loans, net, unless otherwise provided in the related Prospectus
Supplement, of certain amounts payable as expenses, together with income earned
on each such scheduled payment received through the day preceding the next
Distribution Date at the Assumed Reinvestment Rate, if any, discounted to
present value at the highest interest rate on the Notes of such Series over
periods equal to the interval between payments on the Notes, and (b) the then
principal balance of the Mortgage Loans. Unless otherwise specified in the
related Prospectus Supplement, the initial Asset Value of the Mortgage Loans
will be at least equal to the principal amount of the Notes of the related
Series at the date of issuance thereof.
The "Assumed Reinvestment Rate", if any, for a Series will be the highest
rate permitted by the Rating Agency or a rate insured by means of a surety bond,
guaranteed investment contract, Deposit Agreement or other arrangement
satisfactory to the Rating Agency. If the Assumed Reinvestment Rate is so
insured, the related Prospectus Supplement will set forth the terms of such
arrangement.
THE TRANSFEROR INTEREST
If so specified in the related Prospectus Supplement, interests in a Trust
Fund not represented by the related Series of Certificates may be represented by
the Transferor Interest, which initially will be retained by the related Sellers
or one or more affiliates thereof and which will not be offered hereby. If so
specified in the related Prospectus Supplement, the principal amount of the
Transferor Interest will fluctuate as draws are made with respect to the
Mortgage Loans and as Principal Collections are received. The related Prospectus
Supplement may specify a minimum interest (the "Minimum Transferor Interest")
required to be maintained with respect to a Trust Fund.
If so specified in the related Prospectus Supplement, the holder of the
Transferor Interest may have the right to remove Mortgage Loans from the related
Trust Fund, under the circumstances described therein.
ALLOCATIONS; APPLICATION OF COLLECTIONS
The related Prospectus Supplement will describe the allocation or means of
allocation of collections on the Mortgage Loans available to pay interest on and
principal of a Series of Securities. In general, except as otherwise described
in the related Prospectus Supplement, collections will generally be allocated in
accordance with the related Credit Line Agreements or other Loan Documents
between amounts collected in respect of interest ("Interest Collections") and
amounts collected with respect to principal ("Principal Collections" and, with
Interest Collections, "Collections"). With respect to a Series of Securities in
which a Transferor Interest represents the interests in the related Trust Fund
not represented by such Series of Securities, Collections will be allocated
between the Transferor Interest and the Classes of such Series of Securities as
specified in the related Prospectus Supplement. The related Prospectus
Supplement will also describe the allocation or means of allocation of losses,
if any, on the related Mortgage Loans, among the Classes of Securities and, if
applicable, the Transferor Interest. Unless otherwise specified in the related
Prospectus Supplement, the Transferor Interest in a Trust Fund will not be
subordinated to the related Series of Securities.
Interest Collections and Principal Collections on Mortgage Loans underlying
a Series of Securities will each be applied in the manner and priority described
in the related Prospectus Supplement. Certain fees and expenses of the Trust
Fund or the Servicer may be payable prior to payments due on one or more Classes
of a Series of Securities, as specified in the related Prospectus Supplement.
PAYMENTS OF INTEREST
The Securities of each Class by their terms entitled to receive interest
will bear interest (generally calculated as specified in the related Prospectus
Supplement on the basis of a 360-day year of twelve 30-day months or a 360-day
year and actual days elapsed) from the date and at the rate per annum specified,
or
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calculated in the method described, in the related Prospectus Supplement.
Interest on such Securities of a Series will be payable on the Distribution Date
specified in the related Prospectus Supplement. The rate of interest on
Securities of a Series may be fixed or may be variable or may change with
changes in the annual percentage rates of the Mortgage Loans included in the
related Trust Fund and/or as prepayments occur with respect to such Mortgage
Loans. A Class of Securities may be entitled to receive interest distributions
only, may not be entitled to receive any interest distributions or may be
entitled to receive only nominal interest distributions, as specified in the
related Prospectus Supplement. A Series of Securities may provide for a period
during which no or a specified amount of principal is payable except upon the
occurrence of certain events, as specified in the related Prospectus Supplement.
Interest payable on the Securities on a Distribution Date will include all
interest accrued during the period specified in the related Prospectus
Supplement. In the event interest accrues during the calendar month preceding a
Distribution Date, the effective yield to Holders will be reduced from the yield
that would otherwise be obtainable if interest payable on the Securities were to
accrue through the day immediately preceding such Distribution Date.
PAYMENTS OF PRINCIPAL
On each Distribution Date for a Series, principal payments will be made to
the Holders of the Securities of such Series on which principal is then payable,
to the extent set forth in the related Prospectus Supplement. Such payments will
be made in an aggregate amount determined as specified in the related Prospectus
Supplement and will be allocated among the respective Classes of a Series in the
manner, at the times and in the priority (which may, in certain cases, include
allocation by random lot) set forth in the related Prospectus Supplement.
FINAL SCHEDULED DISTRIBUTION DATE
The Final Scheduled Distribution Date with respect to each Class of Notes
of a Series is the date no later than which principal thereof will be fully paid
and, with respect to each Class of a Series of Certificates, will be the date on
which the entire aggregate principal balance of such Class is expected to be
reduced to zero, in each case calculated on the basis of the assumptions
applicable to such Series described in the related Prospectus Supplement. The
Final Scheduled Distribution Date for each Class of a Series will be specified
in the related Prospectus Supplement. Since payments on the Mortgage Loans will
be used to make distributions in reduction of the outstanding principal amount
of the Securities, it is likely that the actual final Distribution Date of any
such Class will occur earlier, and may occur substantially earlier, than its
Final Scheduled Distribution Date. Furthermore, with respect to a Series of
Certificates, unless otherwise specified in the related Prospectus Supplement,
as a result of delinquencies, defaults and liquidations of the Mortgage Loans in
the Trust Fund, the actual final Distribution Date of any Certificate may occur
later than its Final Scheduled Distribution Date. No assurance can be given as
to the actual prepayment experience with respect to a Series. See "-- Weighted
Average Life of the Securities; Maturity and Prepayment Considerations".
SPECIAL REDEMPTION
If so specified in the Prospectus Supplement relating to a Series of
Securities having other than monthly Distribution Dates, one or more Classes of
Securities of such Series may be subject to special redemption, in whole or in
part, on the day specified in the related Prospectus Supplement (a "Special
Redemption Date") if, as a consequence of prepayments on the Mortgage Loans
relating to such Securities or low yields then available for reinvestment, the
entity specified in the related Prospectus Supplement determines, based on
assumptions specified in the applicable Agreement, that the amount available for
the payment of interest that will have accrued on such Securities (the
"Available Interest Amount") through the designated interest accrual date
specified in the related Prospectus Supplement is less than the amount of
interest that will have accrued on such Securities to such date. In such event
and as further described in the related Prospectus Supplement, the Trustee will
redeem a principal amount of outstanding Securities of such Series as will cause
the Available Interest Amount to equal the amount of interest that will have
accrued through such designated interest accrual date for such Series of
Securities outstanding immediately after such redemption.
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OPTIONAL REDEMPTION, PURCHASE OR TERMINATION
The Depositor or the Servicer may, at its option, redeem, in whole or in
part, one or more Classes of Notes or purchase one or more Classes of
Certificates of any Series, on any Distribution Date under the circumstances, if
any, specified in the Prospectus Supplement relating to such Series.
Alternatively, if so specified in the related Prospectus Supplement for a Series
of Certificates, the Depositor, the Servicer, or another entity designated in
the related Prospectus Supplement may, at its option, cause an early termination
of a Trust Fund by repurchasing all of the Mortgage Loans from such Trust Fund
on or after a date specified in the related Prospectus Supplement, or on or
after such time as the aggregate outstanding principal amount of the
Certificates or Mortgage Loans, as specified in the related Prospectus
Supplement, is less than the amount or percentage specified in the related
Prospectus Supplement. Notice of such redemption, purchase or termination must
be given by the Depositor or the Trustee prior to the related date. The
redemption, purchase or repurchase price will be set forth in the related
Prospectus Supplement.
In addition, the Prospectus Supplement may provide other circumstances
under which Holders of Securities of a Series could be fully paid significantly
earlier than would otherwise be the case if payments or distributions were
solely based on the activity of the related Mortgage Loans.
WEIGHTED AVERAGE LIFE OF THE SECURITIES; MATURITY AND PREPAYMENT CONSIDERATIONS
Weighted average life refers to the average amount of time that will elapse
from the date of issue of a security until each dollar of principal of such
security will be repaid to the investor. Unless otherwise specified in the
related Prospectus Supplement, the weighted average life of the Securities of a
Class will be influenced by the rate at which the amount financed under the
Mortgage Loans included in the Trust Fund for a Series is paid, which may be in
the form of scheduled amortization or prepayments.
Prepayments on loans and other receivables can be measured relative to a
prepayment standard or model. The Prospectus Supplement for a Series of
Securities will describe the prepayment standard or model, if any, used therein
and may contain tables setting forth the projected weighted average life of each
Class of Securities of such Series and the percentage of the original principal
amount of each Class of Securities of such Series that would be outstanding on
specified Distribution Dates for such Series based on the assumptions stated in
such Prospectus Supplement, including assumptions that prepayments on the
Mortgage Loans included in the related Trust Fund are made at rates
corresponding to various percentages of the prepayment standard or model
specified in such Prospectus Supplement.
There is, however, no assurance that prepayment of the Mortgage Loans
included in the related Trust Fund will conform to any level of any prepayment
standard or model specified in the related Prospectus Supplement. The rate of
principal prepayments on pools of loans is influenced by a variety of economic,
demographic, geographic, legal, tax, social and other factors.
The rate of prepayments of conventional housing loans and other receivables
has fluctuated significantly in recent years. In general, however, if prevailing
interest rates fall significantly below the interest rates on the Mortgage Loans
for a Series, such loans are likely to prepay at rates higher than if prevailing
interest rates remain at or above the interest rates home by such loans. In this
regard, it should be noted that the Mortgage Loans for a Series may have
different interest rates. In addition, the weighted average life of the
Securities may be affected by the varying maturities of the Mortgage Loans. If
any Mortgage Loans for a Series have actual terms-to-stated maturity of less
than those assumed in calculating the Final Scheduled Distribution Date of the
related Securities, one or more Classes of the Series may be fully paid prior to
their respective Final Scheduled Distribution Dates, even in the absence of
prepayments and a reinvestment return higher than the Assumed Reinvestment Rate.
The related Prospectus Supplement may describe additional prepayment and
yield considerations with respect to the characteristics of the Mortgage Loans
included in the related Trust Fund and the Classes of Securities of the related
Series offered thereby.
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THE TRUST FUNDS
GENERAL
The Notes of each Series will be secured by the pledge of the assets of the
related Trust Fund, and the Certificates of each Series will represent interests
in the assets of the related Trust Fund. The Trust Fund of each Series will
include assets purchased from the Seller composed of (i) the Mortgage Loans,
(ii) amounts available from the reinvestment of payments on such Mortgage Loans
at the Assumed Reinvestment Rate, if any, specified in the related Prospectus
Supplement, (iii) any Credit Enhancement, (iv) any Mortgaged Property that
secured a Mortgage Loan but which is acquired by foreclosure or deed in lieu of
foreclosure or repossession and (v) the amount, if any, initially deposited in
the Collection Account or Distribution Account for a Series as specified in the
related Prospectus Supplement.
The Securities will be non-recourse obligations of the related Trust Fund.
The assets of the Trust Fund specified in the related Prospectus Supplement for
a Series of Securities, unless otherwise specified in the related Prospectus
Supplement, will serve as collateral only for that Series of Securities. Holders
of a Series of Notes may only proceed against such collateral securing such
Series of Notes in the case of a default with respect to such Series of Notes
and may not proceed against any assets of the Depositor or the related Trust
Fund not pledged to secure such Notes.
The Mortgage Loans for a Series will be sold to the Depositor by one or
more bank or non-bank direct or indirect subsidiaries of BANC ONE CORPORATION
("BANC ONE") specified in the related Prospectus Supplement (each, a "Seller"
and collectively, the "Sellers") and will be transferred by the Depositor to the
Trust Fund. The Mortgage Loans will be originated by the related Seller or
purchased by such Seller in the open market or in privately negotiated
transactions. Mortgage Loans relating to a Series will be serviced by Bank One,
N.A. or other servicer, which may be the related Seller, specified in the
related Prospectus Supplement (the "Servicer"), pursuant to a Pooling and
Servicing Agreement, with respect to a Series of Certificates or a servicing
agreement (each, a "Servicing Agreement") between the Trust Fund and Servicer,
with respect to a Series of Notes.
As used herein, "Agreement" means, with respect to a Series of
Certificates, the Pooling and Servicing Agreement or Trust Agreement, and with
respect to a Series of Notes, the Indenture and the Servicing Agreement, as the
context requires.
If so specified in the related Prospectus Supplement, a Trust Fund relating
to a Series of Securities may be a business trust formed under the laws of the
state specified in the related Prospectus Supplement pursuant to a trust
agreement (each, a "Trust Agreement") between the Depositor and the trustee of
such Trust Fund specified in the related Prospectus Supplement.
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or liabilities.
No Trust Fund is expected to engage in any activities other than acquiring,
managing and holding the related Mortgage Loans and other assets contemplated
herein and in the related Prospectus Supplement and the proceeds thereof,
issuing Securities and making payments and distributions thereon and certain
related activities. No Trust Fund is expected to have any source of capital
other than its assets and any related Credit Enhancement.
THE MORTGAGE LOANS
The Mortgage Loans for a Series will consist of revolving home equity loans
and lines of credit (the "Mortgage Loans") secured by mortgages primarily on
single family properties (the "Mortgaged Properties") which may be subordinated
to other mortgages on the same Mortgaged Property. The Mortgage Loans may have
fixed interest rates or adjustable interest rates and may provide for other
payment characteristics, as described below and in the related Prospectus
Supplement.
As more fully described in the related Prospectus Supplement, interest on
each Mortgage Loan, excluding introductory rates offered from time to time
during promotional periods, may be computed and payable monthly on the average
daily outstanding principal balance of such loan. Principal amounts on the
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Mortgage Loans may be drawn down (up to a maximum amount as set forth in the
related Prospectus Supplement) or repaid under each Mortgage Loan from time to
time. If so specified in the related Prospectus Supplement, new draws by
borrowers under the Mortgage Loans will automatically become part of the Trust
Fund for a Series. As a result, the aggregate balance of the Mortgage Loans will
fluctuate from day to day as new draws by borrowers are added to the Trust Fund
and principal payments are applied to such balances and such amounts will
usually differ each day, as more specifically described in the related
Prospectus Supplement. Under certain circumstances, a borrower may choose an
interest only payment option and is obligated to pay only the amount of interest
which accrues on the loan during the billing cycle. An interest only payment
option may be available for a specified period before the borrower must begin
paying at least the minimum monthly payment of a specified percentage of the
average outstanding balance of the loan or, if so specified in the related
Prospectus Supplement, such interest only period may be extended for one or more
additional periods.
The Mortgaged Properties will include primarily one- to four-family
residential housing, including Condominium Units and Cooperative Dwellings and
may consist of detached individual dwellings, individual condominiums,
townhouses, duplexes, row houses, individual units in planned unit developments
and other attached dwelling units. Each Mortgaged Property will be located on
land owned in fee simple by the borrower or on land leased by the borrower for a
term at least ten years (unless otherwise provided in the related Prospectus
Supplement) longer than the term of the related Mortgage Loan. Attached
dwellings may include owner-occupied structures where each borrower owns the
land upon which the unit is built, with the remaining adjacent land owned in
common or dwelling units subject to a proprietary lease or occupancy agreement
in a cooperatively owned apartment building.
Unless otherwise specified in the related Prospectus Supplement, Mortgages
on Cooperative Dwellings consist of a lien on the shares issued by such
Cooperative Dwelling and the proprietary lease or occupancy agreement relating
to such Cooperative Dwelling.
The aggregate principal balance of Mortgage Loans secured by Mortgaged
Properties that are owner-occupied will be disclosed in the related Prospectus
Supplement. Unless otherwise specified in the Prospectus Supplement, the sole
basis for a representation that a given percentage of the Mortgage Loans are
secured by Mortgaged Property that is owner-occupied will be either (i) the
making of a representation by the Mortgagor at origination of the Mortgage Loan
either that the underlying Mortgaged Property will be used by the Mortgagor for
a period of at least six months every year or that the Mortgagor intends to use
the Mortgaged Property as a primary residence, or (ii) a finding that the
address of the underlying Mortgaged Property is the Mortgagor's mailing address
as reflected in the Servicer's records. To the extent specified in the related
Prospectus Supplement, the Mortgaged Properties may include non-owner occupied
investment properties and vacation and second homes.
Unless otherwise specified in the related Prospectus Supplement, the
initial Combined Loan-to-Value Ratio of a Mortgage Loan is computed in the
manner described in the related Prospectus Supplement, taking into account the
amounts of any related senior mortgage loans.
Additional Information. The selection criteria which shall apply with
respect to the Mortgage Loans for a Series, including, but not limited to, the
Combined Loan-to-Value Ratios or Loan-to-Value Ratios, as applicable, original
terms to maturity and delinquency information, will be specified in the related
Prospectus Supplement.
The Mortgage Loans for a Series may include Mortgage Loans that do not
amortize their entire principal balance by their stated maturity in accordance
with their terms and require a balloon payment of the remaining principal
balance at maturity, as specified in the related Prospectus Supplement. As
further described in the related Prospectus Supplement, the Mortgage Loans for a
Series may include Mortgage Loans that do not have a specified stated maturity.
The related Prospectus Supplement for each Series will provide information
with respect to the Mortgage Loans as of the Cut-off Date, including, among
other things, (a) the aggregate unpaid principal balance of the Mortgage Loans;
(b) the range and weighted average Loan Rate on the Mortgage Loans and, in the
case of
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adjustable rate Mortgage Loans, the range and weighted average of the current
Loan Rates and the Lifetime Rate Caps, if any; (c) the range and average
outstanding principal balance of the Mortgage Loans; (d) the weighted average
original and remaining term-to-stated maturity of the Mortgage Loans and the
range of original and remaining terms-to-stated maturity, if applicable; (e) the
range and weighted average of Combined Loan-to-Value Ratios or Loan-to-Value
Ratios for the Mortgage Loans, as applicable; (f) the percentage (by outstanding
principal balance as of the Cut-off Date) of Mortgage Loans that accrue interest
at adjustable or fixed interest rates; (g) any special hazard insurance policy
or bankruptcy bond or other enhancement relating to the Mortgage Loans; (h) the
geographic distribution of the Mortgaged Properties securing the Mortgage Loans;
(i) the lien priority of the Mortgage Loans; (j) the credit limit utilization
rate of the Mortgage Loans; and (k) the delinquency status and year of
origination of the Mortgage Loans. The related Prospectus Supplement will also
specify any other limitations on the types or characteristics of Mortgage Loans
for a Series.
If information of the nature described above respecting the Mortgage Loans
is not known to the Depositor at the time the Securities are initially offered,
approximate or more general information of the nature described above will be
provided in the Prospectus Supplement and additional information will be set
forth in a Current Report on Form 8-K to be available to investors on the date
of issuance of the related Series and to be filed with the Commission within 15
days after the initial issuance of such Securities.
COLLECTION AND DISTRIBUTION ACCOUNTS
A separate Collection Account will be established by the Trustee or the
Servicer, in the name of the Trustee, for each Series of Securities for receipt
of the amount of cash, if any, specified in the related Prospectus Supplement to
be initially deposited therein by the Depositor, all amounts received on or with
respect to the Mortgage Loans and, unless otherwise specified in the related
Prospectus Supplement, income earned thereon. Certain amounts on deposit in such
Collection Account and certain amounts available pursuant to any Credit
Enhancement, as provided in the related Prospectus Supplement, will be deposited
in a related Distribution Account, which will also be established by the Trustee
for each such Series of Securities, for distribution to the related Holders.
Unless otherwise specified in the related Prospectus Supplement, the Trustee
will invest the funds in the Collection and Distribution Accounts in Eligible
Investments maturing, with certain exceptions, not later, in the case of funds
in the Collection Account, than the day preceding the date such funds are due to
be deposited in the Distribution Account or otherwise distributed and, in the
case of funds in the Distribution Account, than the day preceding the next
Distribution Date for the related Series of Securities. Eligible Investments
include, among other investments, obligations of the United States and certain
agencies thereof, federal funds, certificates of deposit, commercial paper,
demand and time deposits and banker's acceptances, certain repurchase agreements
of United States government securities and certain guaranteed investment
contracts, in each case, acceptable to the Rating Agency.
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CREDIT ENHANCEMENT
If stated in the Prospectus Supplement relating to a Series of Securities,
simultaneously with the assignment by the Depositor of the Mortgage Loans to the
Trustee, the Depositor will obtain an irrevocable letter of credit, surety bond
or insurance policy, issue Subordinate Securities or obtain any other form of
enhancement or combination thereof (collectively, "Credit Enhancement") in favor
of the Trustee on behalf of the holders of the related Series or designated
Classes of such Series from an institution or by other means acceptable to the
Rating Agency. The Credit Enhancement will support the payment of principal and
interest on the Securities, and may be applied for certain other purposes to the
extent and under the conditions set forth in such Prospectus Supplement. Credit
Enhancement for a Series may include one or more of the following forms, or such
other form as may be specified in the related Prospectus Supplement. If so
specified in the related Prospectus Supplement, any of such Credit Enhancement
may be structured so as to protect against losses relating to more than one
Trust Fund, in the manner described therein.
SUBORDINATE SECURITIES
If specified in the related Prospectus Supplement, Credit Enhancement for a
Series may consist of one or more Classes of Subordinate Securities. The rights
of Holders of such Subordinate Securities to receive distributions on any
Distribution Date will be subordinate in right and priority to the rights of
Holders of Senior Securities of the Series, but only to the extent described in
the related Prospectus Supplement.
FINANCIAL GUARANTY INSURANCE POLICY
If so specified in the related Prospectus Supplement, a financial guaranty
insurance policy or surety bond (a "Securities Insurance Policy") may be
obtained and maintained for a Class or Series of Securities. The issuer of the
Securities Insurance Policy (the "Insurer") will be described in the related
Prospectus Supplement and a copy of the form of Securities Insurance Policy will
be filed with the related Current Report on Form 8-K.
Unless otherwise specified in the related Prospectus Supplement, a
Securities Insurance Policy will be unconditional and irrevocable and will
guarantee to Holders of the applicable Securities that an amount equal to the
full amount of distributions due to such Holders will be received by the Trustee
or its agent on behalf of such Holders for distribution on each Payment Date.
The specific terms of any Securities Insurance Policy will be set forth in
the related Prospectus Supplement. A Securities Insurance Policy may have
limitations and generally will not insure the obligation of the Depositors or
any Originator to purchase or substitute for a defective Mortgage Loan and will
not guarantee any specific rate of principal prepayments.
Unless otherwise specified in the related Prospectus Supplement, the
Insurer will be subrogated to the rights of each Holder to the extent the
Insurer makes payments under the Securities Insurance Policy.
INSURANCE
If stated in the related Prospectus Supplement, Credit Enhancement for a
Series may consist of special hazard insurance policies, bankruptcy bonds and
other types of insurance relating to the Mortgage Loans, as described below and
in the related Prospectus Supplement.
Pool Insurance Policy. If so specified in the Prospectus Supplement
relating to a Series of Securities, the Depositor will obtain a pool insurance
policy for the Mortgage Loans in the related Trust Fund. The pool insurance
policy will cover any loss (subject to the limitations described in a related
Prospectus Supplement) by reason of default, but will not cover the portion of
the principal balance of any Mortgage Loan that is required to be covered by any
primary mortgage insurance policy. The amount and terms of any such coverage
will be set forth in the related Prospectus Supplement.
Special Hazard Insurance Policy. If so specified in the Prospectus
Supplement relating to a Series of Securities, the Depositor will obtain a
special hazard insurance policy for the Mortgage Loans in the related
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Trust Fund. Although the terms of such policies vary to some degree, a special
hazard insurance policy typically provides that, where there has been damage to
the Mortgaged Property securing a defaulted or foreclosed Mortgage Loan (title
to which has been acquired by the insured) and to the extent such damage is not
covered by the standard hazard insurance policy or any flood insurance policy,
if applicable, required to be maintained with respect to such Mortgaged
Property, or in connection with partial loss resulting from the application of
the coinsurance clause in a standard hazard insurance policy, the special hazard
insurer will pay the lesser of (i) the cost of repair or replacement of such
Mortgaged Property or (ii) upon transfer of such Mortgaged Property to the
special hazard insurer, the unpaid principal balance of such Mortgage Loan at
the time of acquisition of such Mortgaged Property by foreclosure or deed in
lieu of foreclosure, plus accrued interest to the date of claim settlement and
certain expenses incurred by the Servicer with respect to such Mortgaged
Property. If the unpaid principal balance plus accrued interest and certain
expenses is paid by the special hazard insurer, the amount of further coverage
under the special hazard insurance policy will be reduced by such amount less
any net proceeds from the sale of such Mortgaged Property. Any amount paid as
the cost of repair of such Mortgaged Property will reduce coverage by such
amount. Special hazard insurance policies typically do not cover losses
occasioned by war, civil insurrection, certain governmental actions, errors in
design, faulty workmanship or materials (except under certain circumstances),
nuclear reaction, flood (if the Mortgaged Property is in a federally designated
flood area), chemical contamination and certain other risks.
Restoration of the Mortgaged Property with the proceeds described under (i)
above is expected to satisfy the condition under any pool insurance policy that
such Mortgaged Property be restored before a claim under such pool insurance
policy may be validly presented with respect to the defaulted Mortgage Loan
secured by such Mortgaged Property. The payment described under (ii) above will
render unnecessary presentation of a claim in respect of such Mortgage Loan
under any pool insurance policy. Therefore, so long as such pool insurance
policy remains in effect, the payment by the special hazard insurer of the cost
of repair or of the unpaid principal balance of the related Mortgage Loan plus
accrued interest and certain expenses will not affect the total insurance
proceeds paid to Holders of the Securities, but will affect the relative amounts
of coverage remaining under the special hazard insurance policy and pool
insurance policy.
Bankruptcy Bond. In the event of a bankruptcy of a borrower, the
bankruptcy court may establish the value of the Mortgaged Property securing the
related Mortgage Loan at an amount less than the then outstanding principal
balance of such Mortgage Loan. The amount of the secured debt could be reduced
to such value, and the holder of such Mortgage Loan thus would become an
unsecured creditor to the extent the outstanding principal balance of such
Mortgage Loan exceeds the value so assigned to the Mortgaged Property by the
bankruptcy court. In addition, certain other modifications of the terms of a
Mortgage Loan can result from a bankruptcy proceeding. See "CERTAIN LEGAL
ASPECTS OF MORTGAGE LOANS." If so provided in the related Prospectus Supplement,
the Depositor or other entity, specified in the related Prospectus Supplement
will obtain a bankruptcy bond or similar insurance contract (the "bankruptcy
bond") covering losses resulting from proceedings with respect to borrowers
under the Bankruptcy Code. The bankruptcy bond will cover certain losses
resulting from a reduction by a bankruptcy court of scheduled payments of
principal of and interest on a Mortgage Loan or a reduction by such court of the
principal amount of a Mortgage Loan and will cover certain unpaid interest on
the amount of such a principal reduction from the date of the filing of a
bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount specified
in the related Prospectus Supplement for all Mortgage Loans in the Trust Fund
for such Series. Such amount will be reduced by payments made under such
bankruptcy bond in respect of such Mortgage Loans, unless otherwise specified in
the related Prospectus Supplement, and will not be restored.
RESERVE FUNDS
If so specified in the Prospectus Supplement relating to a Series of
Securities, the Depositor will deposit into one or more funds to be established
with the Trustee as part of the Trust Fund for such Series or for the benefit of
any Enhancer with respect to such Series (the "Reserve Funds") cash, a letter or
letters of credit, cash collateral accounts, Eligible Investments, or other
instruments meeting the criteria of each Rating
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Agency rating any Series of the Securities in the amount specified in such
Prospectus Supplement. In the alternative or in addition to such deposit, a
Reserve Fund for a Series may be funded over time through application of all or
a portion of the excess cash flow from the Mortgage Loans for such Series, to
the extent described in the related Prospectus Supplement. If applicable, the
initial amount of the Reserve Fund and the Reserve Fund maintenance requirements
for a Series of Securities will be described in the related Prospectus
Supplement.
Amounts withdrawn from any Reserve Fund will be applied by the Trustee to
make payments on the Securities of a Series, to pay expenses, to reimburse any
Enhancer or for any other purpose, in the manner and to the extent specified in
the related Prospectus Supplement.
Amounts deposited in a Reserve Fund will be invested by the Trustee, in
Eligible Investments maturing no later than the day specified in the related
Prospectus Supplement.
OVERCOLLATERALIZATION
If so specified in the related Prospectus Supplement, Credit Enhancement
may be provided by overcollateralization created by the application of a portion
of interest collections to the payment of principal of the related Securities or
otherwise. The reduction of the principal balance of the Securities relative to
the outstanding balance of the underlying Mortgage Loans creates
overcollateralization and provides additional protection to the Holders of such
Securities.
OTHER CREDIT ENHANCEMENT
Credit enhancement may also be provided for a Series of Securities in the
form of overcollateralization, surety bond, insurance policy or other type of
credit enhancement approved by the applicable Rating Agencies to cover one or
more risks with respect to the Mortgage Loans or the Securities, as specified in
the related Prospectus Supplement.
THE DEPOSITOR, THE SERVICER AND THE ORIGINATORS
GENERAL
The Depositor was incorporated in the State of Ohio on May 7, 1996 for the
limited purpose of purchasing mortgage loans, automobile loans and other
receivables, transferring such loans or receivables to third parties, forming
trusts and engaging in related activities. All of the outstanding common stock
of the Depositor is owned by BANC ONE.
THE BANC ONE CONSUMER LENDING DIVISION HOME EQUITY PROGRAM
BANC ONE, through its affiliated Banks, has originated variable rate home
equity revolving lines of credit since the early 1980's. During the past several
years BANC ONE has undertaken a transition from managing its business activities
at the affiliate (legal entity) level to centralized management of such business
activities by nationally focused lines of business. As part of this transition,
all home equity lending originated directly with consumers was centralized in
early 1997 and is currently managed by the Banc One Retail Group's Consumer
Lending Division ("Consumer Lending"). Consumer Lending has created national
business units including marketing, product management, risk management, credit
underwriting, loan servicing and collections to manage its credit related
activities. To the extent material, the related Prospectus Supplement will
specify the amount of outstanding home equity revolving lines of credit and home
equity loans managed by Consumer Lending.
HOME EQUITY LINES OF CREDIT
Home equity lines of credit ("HELOCs") consist of variable or fixed rate,
open-ended, revolving lines of credit secured by a lien position against the
available equity of a borrower's related residential real estate Mortgaged
Property. A borrower may draw on a HELOC by writing a check, telephoning a
customer service
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representative and requesting funds to be transferred to a pre-authorized
depository account, requesting a cashier's check at a BANC ONE banking center,
or, with respect to certain HELOCs, credit card purchase authorization.
HELOCs originated by Consumer Lending are secured by a lien on the related
Mortgaged Property subject to maximum loan-to-value ("LTV") limitations.
Currently, Consumer Lending offers its customers credit lines that allow them to
borrow against the value of the real estate up to either an 80% LTV (Option 1)
or a 100% LTV (Option 2) limit. The contractual term of a HELOC consists of a
revolving open-ended period (the "Draw Period"), during which borrowings may be
made periodically, and a period during which the contract converts to a fixed
payment, variable rate, amortizing closed-ended loan (the "Repayment Period").
The contractual term of the Draw Period is based upon the LTV provided by the
HELOC loan agreement. For Mortgage Loans with LTVs equal to or less than 80%,
the Draw and Repayment Periods are 10 years and 10 years, respectively. For
Mortgage Loans with LTVs greater than 80% and less than or equal to 100%, the
Draw and Repayment Periods are 5 years and 10 years, respectively. Draw periods
may, at the election of Consumer Lending, be extended.
During the Draw Period, the required minimum monthly payment is equal to
the greater of: i) 1% of the outstanding balance; ii) $100.00; or iii) the
interest accrued plus any annual fee assessments, late charges, administrative
charges, and credit or other insurance charges ("Assessed Fees"). At the
beginning of the Repayment Period, the required monthly payment is calculated
based on principal, interest, and Assessed Fees related to the amortization of
the outstanding balance due using the APR. Although the monthly amount due will
remain constant throughout the repayment period, the number of monthly payments
can either increase or decrease according to fluctuations in the variable annual
percentage rate and Assessed Fees. Payments are applied to a customer's account
first to interest, then to principal due, and then to Assessed Fees. Accounts
are generally identified as delinquent when less than 90% of the required
payment is remitted to the servicing agent.
Consumer Lending customers have several channels through which payments can
be made to their account including i) payment by check to lockbox remittance
processing centers, ii) payments by check submitted to tellers at the local BANC
ONE banking center, iii) automated debits to pre-authorized depository accounts,
and iv) automated teller machines.
Interest rates for HELOCs are established at a product level and are the
responsibility of a national pricing committee of Consumer Lending. Factors
considered in the price setting process include, among other things, targeted
product profitability and related returns, market competition, market
penetration, trends in market interest rates, and potential credit losses.
Pricing tiers are based on credit/bureau scoring techniques and the balance size
of the account being originated. This accommodates setting prices based on
credit risk characteristics ("risk-adjusted pricing") and the cost to acquire
new customers.
Consistent with industry practice, Consumer Lending utilizes introductory
offerings including interest rates ("Promo Rates") and waiving closing costs to
acquire new accounts. Promo rates are occasionally offered by Consumer Lending,
which may either be a variable introductory discount or fixed introductory rate.
The term of a Promo Rate may range from 1 to 12 months; however, the majority of
Promo Rates are offered for 6 months beginning at the inception of the Mortgage
Loan.
In general, HELOCs bear interest at a variable rate and generally are
subject to a maximum per annum interest rate of between 18% to 25%, depending
upon governing state laws. The interest rate on all HELOCs originated after
April 1, 1997 adjusts monthly. The daily periodic rate is 1/365th (1/366th in
the case of leap years) of the APR, which represents the sum of a contractual
defined index (the "Index") plus a fixed percentage specified in the related
Agreement (the "Gross Margin"). Interest is calculated at a rate applied to the
daily balance of the account for each day of the billing cycle (the "Loan
Rate"). The index for all loans originated after April 1, 1997 is the average
weekly Bank Prime Loan Rate as published by the Board of Governors of the
Federal Reserve System (the "Index"). When a variable introductory discount
("Promo Discount") is offered, the Promo Rate is equal to the Loan Rate less the
Promo Discount.
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The HELOCs may permit the customer to convert either the entire outstanding
balance due or any portion thereof, to a fixed rate closed-end loan ("Lock
Feature"). The Lock Feature, if any, may be exercised during the Draw Period,
subject to certain limitations. The Lock Feature allows for a repayment schedule
of up to but not exceeding 10 years. When the Lock Feature is exercised, the
utilized portion of the HELOC credit line is equal to the amortizing "locked"
principal balance plus the revolving principal balance, the combination of which
can not exceed the established credit limit under the loan.
PRODUCT MANAGEMENT & MARKETING ACTIVITIES
The Mortgage Loans were or will be originated by one or more of the Sellers
(managed by Consumer Lending) utilizing a variety of marketing strategies and
product delivery channels. Product management and marketing activities are
conducted on a national level, with adjustments in response to local market
competitive offerings and pricing practices as reported by field marketing
managers and the banking center network. Marketing strategies are developed on
an annual basis and may include a combination of television, radio, newspaper
and outdoor media, direct mailings to existing and prospective customers,
banking center merchandising and other sales supporting tools. Consumer Lending
also develops various types of promotions to activate accounts or increase
utilization, including special balance transfer offers, sweepstakes, promotional
Lock Feature rates and related programs. Loans may be originated through BANC
ONE's banking center distribution network or Consumer Lending's Loan-by-Phone
("LBP") call centers. LBP centers are located in Milwaukee, Wisconsin, Houston,
Texas, and Tempe, Arizona, and are intended to provide sales and service to
Consumer Lending's customers, utilizing technology and scoring techniques to
reduce turnaround time to approve applications, expedite processing and provide
convenient customer-oriented closings. Additionally, Consumer Lending may
originate HELOCs within the banking center distribution network or as part of a
national equity lending program throughout the United States. Additionally,
Consumer Lending may utilize a variety of brand names to promote its HELOC
products, including Bank One or First USA.
UNDERWRITING
HELOCs originated through Consumer Lending are subject to standardized
underwriting criteria and approval processes. HELOCs are underwritten at a
minimum of $5,001 up to $250,000, with LTVs up to 100%. Single family residences
may be financed up to 100% LTV; attached single family (condo, townhouse, patio
homes) residences may be financed up to 70% LTV; mobile homes and lots may be
financed up to 80% LTV if the mobile homes are permanently affixed to the
Mortgaged Property; and second homes may be financed up to 70% LTV. HELOCs are
not available on any non-owner occupied properties or owner-occupied 2-4 family
properties. Generally all HELOCs are in a second lien position; however, some
non-purchase first position liens and third positions may exist. All third lien
positions are reviewed by a senior lender.
Each applicant for a HELOC is required to complete an application, which
generally lists the applicant's mortgage liabilities, income, employment history
and other demographic and personal information. A customer may submit an
application through one of several distribution channels such as with a
relationship banker at a local banking center, telephoning a LBP call center, or
telephoning a customer service representative at a teleservicing center. If the
application indicates sufficient income and equity in the related real estate
Mortgaged Property to justify extending a HELOC, a further credit investigation
will be conducted. This investigation is part of Consumer Lending's underwriting
activities managed by Consumer Lending's Credit Services unit and performed at
one of three processing sites located in Milwaukee, Wisconsin, Houston, Texas,
or Tempe, Arizona, utilizing policies developed and monitored jointly with
Consumer Lending's Risk Management group.
The credit approval process utilizes credit scoring and related techniques
and subjective assessments by experienced underwriters. Underwriters analyze the
equity position of the requested loan (including both the priority of the lien
and the combined loan-to-value ratio) and the applicant's creditworthiness. The
evaluation of creditworthiness is designed to assess the applicant's ability and
willingness to repay the loan. This evaluation primarily consists of (i)
reviewing and verifying customer and demographic information; (ii) obtaining and
reviewing an independent credit bureau report; (iii) reviewing the applicant's
credit bureau score and, if applicable, a BANC ONE proprietary custom credit
score; (iv) reviewing and verifying the
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applicant's employment and reported income through a review of recent W-2's, pay
stubs or telephone verification by the applicant's current employer or
assessments of tax returns and financial statements; (v) evaluating the
applicant's gross debt to income ratio; (vi) reviewing the title status either
by a written title search or insured title policy to ensure that all liens
(including Mortgaged Property taxes), except for senior liens, are paid off
prior to or at time of settlement of the loan; (vii) obtaining and evaluating
the value of the real estate through independent appraisals or valuations; and
(viii) evaluating flood risk and verifying flood insurance coverage, if
applicable.
Credit bureau information is reviewed for minimum acceptable credit scores
and consistent record of timely payments and to identify any major negative
events such as bankruptcy, repossession, foreclosure or a delinquency of greater
than 90 days, that have occurred within the past 5 years. Minimum acceptable
credit bureau scores are established by state through an on-going risk
management and credit scoring process. Applicants with a recent negative event
may be eligible for an exception, but any loans made pursuant to such exception
are limited to a maximum LTV of 80%. In some regions, a custom scorecard is used
in addition to credit bureau reports. Each area or region may have different
cutoffs based on specific data or market indicators determined through risk
analysis. The existing credit scoring process and related scorecards are
reviewed on a regular basis. Beginning in April 1998 and staggered in phases
thereafter, a national scorecard will be implemented, standardizing the data
gathering and assigning scores. Each applicant is assigned a grade or tier based
on their score(s) and associated risk. Most policies are linked to the tiers as
a risk factor.
Beginning in 1998, Consumer Lending implemented processes allowing certain
applicants to receive final loan approval through expedited real estate
appraisal, income, title searches and other related verifications ("FASTRAC").
FASTRAC applications are identified during the initial process based on the
completeness of documentation provided with the application. Although subject to
all of the policies, procedures and authorization controls required by Consumer
Lending underwriting standards, the process is intended to improve turnaround
and overall customer service.
The extent of required income verification is determined based on an
applicant's assessed credit risk, loan amount, whether or not self-employed, and
the extent of unearned income. If salaried, income is verified through W-2's or
current pay stubs. For applicants with superior credit risk assessments (Tier
A1), income is verified if the requested amount exceeds $250,000. Income
verification is required for requests greater than $50,000 when an applicant's
credit risk assessment meets pre-defined score cutoffs (Tier A2 or A3). Income
for all other applicants is verified (Tier A4 or below). If unearned income is
greater than 50% of declared income or if the source of income is
self-employment and the requested loan amount exceeds $20,000, current
year-to-date and two previous year's financial statements, accompanied by
federal tax returns, are required.
A gross debt to income ratio test is applied to each applicant by dividing
the applicant's monthly payments on all existing obligations, including the
proposed HELOC payment (based on a fully funded balance), by the applicant's
gross monthly income. Maximum ratios are assigned by tier as follows: 55% (Tier
A1); 50% (Tier A2); 45% (Tier A3); and 40% (Tier A4).
Valuation methods are based upon the amount requested by the applicant and
the expected loan-to-value ratio ("LTV"). Appraisal values are generally
determined in one of several methods: (i) an appraisal completed on Fannie Mae
("FNMA") form 1004 ("Uniform Residential Appraisal Request" or "URAR"),
consisting of a complete inspection by a qualified appraiser which is usually
performed if the amount of the HELOC requested by the applicant is greater than
$100,000 with an LTV of greater than 80% or for any HELOC if the amount
requested is greater than $250,000 or is secured by certain types of Mortgaged
Property, (ii) by reference to the assessed value of the related real estate
Mortgaged Property shown on the tax records of applicable governing units, if
the Mortgaged Property is located in a county and State in which Consumer
Lending, in its discretion, has determined is a reliable indicator of the
appraised value of the Mortgaged Property, (iii) a "drive-by" appraisal,
completed on Freddie Mac ("FHLMC") form 704, consisting of an evaluation of
comparable properties on the basis of a visual inspection of the exterior of the
related real estate Mortgaged Property, (iv) a broker's opinion of value or
HUD-1 Settlement Statement that are less than 12 months old; or (v) through
automated appraisal techniques utilizing pre-approved national vendors to
validate and verify valuations of the related real estate properties. To qualify
for automated
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appraisals, the requested loan amount must be less than $100,000 and meet
certain criteria, including Mortgaged Property type classification.
A title search is performed covering at least the period from the
conveyance of the related real estate Mortgaged Property to the applicant from
the last owner before the applicant. A full title search may be requested
depending upon the size of the amount requested by the applicant. Title
insurance is not required to be obtained by the borrower unless title defects
are identified or the requested loan amount exceeds $150,000. An insured title
policy (ALTA policy or its equivalent) which insures title for both lender and
owner is required on newly constructed homes less than six months old on which
the lien will be in first position and on all purchase money transactions.
Consumer Lending requires a flood determination on all improved Mortgaged
Property. Flood insurance, with the appropriate Affiliated Bank named as loss
payee, is required on all properties located in a Special Flood Hazard Area as
determined by the Federal Emergency Management Agency (FEMA), in an amount at
least equal to the lesser of the total encumbrances up to the maximum allowed
under the National Flood Insurance Program (NFIP), or replacement coverage or
value of the dwelling and improvements as defined by the evaluation method used.
Proof of flood insurance is required by providing either a copy of the existing
flood insurance policy or a copy of the application for flood insurance and
related proof of payment. Any Mortgaged Property located in a flood zone is
monitored until maturity.
In addition, adequate fire and casualty insurance coverage is required on
all dwellings and structural improvements with the appropriate Affiliated Bank
named as loss payee on all policies. The minimum coverage is the lesser of total
encumbrances or replacement coverage, or value of the dwelling and improvements.
No HELOC may close without a properly completed agreement to provide insurance
coverage. Verbal confirmation from the agent is required. Once verification has
taken place, no additional monitoring or forced placement is performed.
Consumer Lending has implemented an internal quality control process to
ensure adherence to policies and underwriting standards. The quality control
process includes self-audits of underwriting decisions, real estate verification
processes, documentation and other activities on samples of applications and
approved loans. Credit policy exceptions are monitored regularly by senior
management of Credit Services and Consumer Lending, as appropriate.
MORTGAGE LOAN SERVICING
As part of BANC ONE's transition from managing its business activities on
an Affiliate (legal entity) level to centralized, nationally focused, lines of
business, loan servicing activities were consolidated and centralized. Consumer
Lending continues to standardize and redesign operational processes to improve
customer service and internal controls.
HELOCs are serviced by one of four regional processing centers operated by
Banc One Services Corporation ("BOSC"), a wholly-owned subsidiary of BANC ONE,
and located in Louisville and Lexington, Kentucky; Fort Worth, Texas; and Mesa,
Arizona. BOSC carries out loan servicing operations for most BANC ONE
subsidiaries under various servicing contracts between BOSC and the applicable
subsidiary. Consumer Lending's Loan Servicing unit ("Custodial Operations") is
currently responsible for management of the processing centers. Custodial
Operations has established practices and procedures governing the servicing of
owned and serviced accounts related to: funding and recordation of originated
loans, note and collateral documentation, filing verification and control,
statement and payment processing and preparation of tax related information.
Billing statements are mailed monthly which detail an account credit limit,
loan balance, interest rate applied, payment due date, minimum payment amount,
past due amounts, interest rate changes, and the available credit line.
Customers may utilize several payment methods such as by submitting checks to a
lock-box located at one of the loan processing centers; submitting checks to a
teller at a local banking center; pre-authorized automated debit from a
depository account; wire transfers; or automated teller machines.
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COLLECTIONS/PORTFOLIO MANAGEMENT
Collections of HELOCs originated by Consumer Lending through the Affiliated
Banks is centrally managed by Consumer Lending's Portfolio Asset Management unit
("PAM") at three collection sites located in Akron, Ohio, Waukesha, Wisconsin
and Tempe, Arizona. While the collection sites are managed by Consumer Lending,
they are currently owned by each of Bank One, N.A., Bank One Wisconsin, and Bank
One, Arizona, N.A., respectively. Collection management for receivables
originated by Bank One, N.A. and its predecessor banks located in the state of
Ohio are provided by Bank One, N.A. During the period from mid-1995 through
early-1997, the collections functions for HELOCs originated by the Ohio banks
was transferred to Bank One, N.A. Bank One, Wisconsin currently performs
collections functions for HELOCs originated by Bank One, Wisconsin and its
predecessor banks located in the state of Wisconsin, HELOCs originated by Bank
One, Indiana, N.A. and its predecessor banks located in the state of Indiana,
HELOCs originated by Bank One, Illinois, N.A. and its predecessor banks located
in the state of Illinois, HELOCs originated by Bank One, Kentucky, N.A. and its
predecessor banks located in the state of Kentucky and HELOCs originated by Bank
One, Louisiana, N.A. and its predecessor banks located in the state of
Louisiana. During the period from late 1995 through early 1998, the collections
functions of the HELOCs originated by these Wisconsin, Indiana, Illinois,
Kentucky and Louisiana banks was transferred to Bank One, Wisconsin. Bank One,
Arizona, N.A. currently performs collections functions for HELOCs originated by
Bank One, Arizona, N.A. and its predecessor banks located in the state of
Arizona, HELOCs originated by Bank One, Oklahoma, N.A. and its predecessor banks
located in the state of Oklahoma, HELOCs originated by Bank One, Utah, N.A. and
its predecessor banks located in the state of Utah, HELOCs originated by Bank
One, Colorado, N.A. and its predecessor banks located in the state of Colorado,
and HELOCs originated by Bank One, Texas, N.A. and its predecessor banks located
in the State of Texas. During 1997, the collections functions of HELOCs
originated by the Arizona, Oklahoma, Utah, Colorado and Texas banks was
transferred to Bank One, Arizona, N.A. The transfers of collection management
functions are substantially complete. In addition, BANC ONE and its affiliates
from time to time may acquire portfolios, which may be serviced by one of these
affiliates. Although Consumer Lending does not contemplate any servicing
disruptions developing as a result of these acquisitions, there can be no
assurance that such interruptions will not occur.
The PAM has established standard policies governing the collection of owned
and serviced loans. Collections management primarily includes the supervision of
delinquent loans, loss mitigation efforts, foreclosure proceedings and, if
applicable, the disposition of mortgaged properties.
The PAM utilizes a variety of collections management programs and tools to
monitor and collect delinquent accounts, mitigate account losses, and recover
assets previously written off. Account monitoring begins once an account becomes
past due.
Collection efforts for delinquent accounts are initiated based on
behavioral and credit risk scoring. PAM uses the Triad Collection Activity
Prioritization System (the "Triad System") to manage the timing and extent of
collection efforts. The Triad System uses customer and account information to
define a variety of effective and efficient collection strategies by stratifying
delinquent accounts as low, medium or high risk based on payment history,
product type, and other account characteristics. Consumer Lending's policy is to
suspend drawing privileges on overdue loans when collection efforts are
initiated. Draw privileges are permanently suspended once an account becomes 60
days delinquent. Permanently suspended draw privileges may be reinstated with
management approval.
In accordance with industry practice, the Custodial Operations reports
accounts that are 30 days past due to the credit reporting bureaus. During the
period when the loan is 45 to 59 days delinquent, Consumer Lending sends notice
of default informing the borrower of intent to initiate foreclosure proceedings
on the Mortgaged Property within certain timeframes as allowed by law. Senior
lien holders, if any, may be contacted to determine the status of those liens.
Broker's price opinions, appraisals, and Mortgaged Property inspections may be
conducted once an account reaches 60 days past due.
When the notice of default to the borrower expires, the PAM determines
whether to initiate foreclosure proceedings. Analyses are performed and, at 90
days past due, foreclosure proceedings are initiated, if appropriate. If
accounts are determined to be collectable, collection managers may delay
foreclosure proceedings.
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SERVICING OF MORTGAGE LOANS
GENERAL
Customary servicing functions with respect to Mortgage Loans comprising the
Mortgage Loans in the Trust Fund will be provided by the Servicer directly
pursuant to the related Servicing Agreement or Pooling and Servicing Agreement,
as the case may be, with respect to a Series of Securities.
COLLECTION PROCEDURES; ESCROW ACCOUNTS
The Servicer will make reasonable efforts to collect all payments required
to be made under the Mortgage Loans and will, consistent with the terms of the
related Agreement for a Series and any applicable Credit Enhancement, follow
such collection procedures as it follows with respect to comparable loans held
in its own portfolio. Consistent with the above, the Servicer may, in its
discretion, (i) waive any assumption fee, late payment charge, or other charge
in connection with a Mortgage Loan and (ii) to the extent provided in the
related HELOC agreement, arrange with an obligor a schedule for the liquidation
of delinquencies by extending the Due Dates for Scheduled Payments on such
Mortgage Loan.
If specified in the related Prospectus Supplement, the Servicer, to the
extent permitted by law, will establish and maintain escrow or impound accounts
("Escrow Accounts") with respect to Mortgage Loans in which payments by obligors
to pay taxes, assessments, mortgage and hazard insurance premiums, and other
comparable items will be deposited. Mortgage Loans may not require such payments
under the loan related documents, in which case the Servicer would not be
required to establish any Escrow Account with respect to such Mortgage Loans.
Withdrawals from the Escrow Accounts are to be made to effect timely payment of
taxes, assessments and mortgage and hazard insurance, to refund to obligors
amounts determined to be overages, to pay interest to obligors on balances in
the Escrow Account to the extent required by law, to repair or otherwise protect
the Mortgaged Property securing the related Mortgage Loan and to clear and
terminate such Escrow Account. The Servicer will be responsible for the
administration of the Escrow Accounts and generally will make advances to such
account when a deficiency exists therein.
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT
Unless otherwise specified in the related Prospectus Supplement, the
Trustee or the Servicer will establish a separate account (the "Collection
Account") in the name of the Trustee. Unless otherwise indicated in the related
Prospectus Supplement, the Collection Account will be an account maintained (i)
at a depository institution, the unsecured debt obligations of which at the time
of any deposit therein are rated by each Rating Agency rating the Securities of
such Series at levels satisfactory to each Rating Agency or (ii) in an account
or accounts the deposits in which are insured to the maximum extent available by
the FDIC or which are secured in a manner meeting requirements established by
each Rating Agency.
Unless otherwise specified in the related Prospectus Supplement, the funds
held in the Collection Account may be invested, pending remittance to the
Trustee, in Eligible Investments. If so specified in the related Prospectus
Supplement, the Servicer will be entitled to receive as additional compensation
any interest or other income earned on funds in the Collection Account.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer, the Depositor, the Trustee or the applicable Seller, as appropriate,
will deposit into the Collection Account for each Series on the Business Day
following the Closing Date any amounts representing Scheduled Payments due after
the related Cut-off Date but received by the Servicer on or before the Closing
Date, and thereafter, within two business days after the date of receipt
thereof, the following payments and collections received or made by it (other
than, unless otherwise provided in the related Prospectus Supplement, in respect
of principal of and interest on the related Mortgage Loans due on or before such
Cut-off Date):
(i) All payments on account of principal, including prepayments, on
such Mortgage Loans;
(ii) All payments on account of interest on such Mortgage Loans after
deducting therefrom, at the discretion of the Servicer but only to the
extent of the amount permitted to be withdrawn or withheld
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from the Collection Account in accordance with the related Agreement, the
Servicing Fee in respect of such Mortgage Loans;
(iii) All amounts received by the Servicer in connection with the
liquidation of Mortgage Loans or Mortgaged Property acquired in respect
thereof, whether through foreclosure sale, repossession or otherwise,
including payments in connection with such Mortgage Loans received from the
obligor, other than amounts required to be paid or refunded to the obligor
pursuant to the terms of the applicable loan documents or otherwise
pursuant to law ("Liquidation Proceeds"), exclusive of, in the discretion
of the Servicer, but only to the extent of the amount permitted to be
withdrawn from the Collection Account in accordance with the related
Agreement, the Servicing Fee, if any, in respect of the related Primary
Asset;
(iv) All proceeds under any title insurance, hazard insurance or other
insurance policy covering any Mortgage Loan, other than proceeds to be
applied to the restoration or repair of the related Mortgaged Property or
released to the obligor in accordance with the related Agreement;
(v) All amounts required to be deposited therein from any applicable
Reserve Fund for such Series pursuant to the related Agreement;
(vi) All Advances made by the Servicer required pursuant to the
related Agreement; and
(vii) All repurchase prices of any such Mortgage Loans purchased or
repurchased by the Depositor, the Servicer or the Seller pursuant to the
related Agreement.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer is permitted, from time to time, to make withdrawals from the
Collection Account for each Series for the following purposes:
(i) to reimburse itself for Advances for such Series made by it
pursuant to the related Agreement; the Servicer's right to reimburse itself
is limited to amounts received on or in respect of particular Mortgage
Loans (including, for this purpose, Liquidation Proceeds and amounts
representing proceeds of insurance policies covering the related Mortgaged
Property) which represent late recoveries of Scheduled Payments respecting
which any such Advance was made;
(ii) to the extent provided in the related Agreement, to reimburse
itself for any Advances for such Series that the Servicer determines in
good faith it will be unable to recover from amounts representing late
recoveries of Scheduled Payments respecting which such Advance was made or
from Liquidation Proceeds or the proceeds of insurance policies;
(iii) to reimburse itself from Liquidation Proceeds for liquidation
expenses and for amounts expended by it in good faith in connection with
the restoration of damaged Mortgaged Property and, in the event deposited
in the Collection Account and not previously withheld, and to the extent
that Liquidation Proceeds after such reimbursement exceed the outstanding
principal balance of the related Mortgage Loan, together with accrued and
unpaid interest thereon to the Due Date for such Mortgage Loan next
succeeding the date of its receipt of such Liquidation Proceeds, to pay to
itself out of such excess the amount of any unpaid Servicing Fee and any
assumption fees, late payment charges, or other charges on the related
Mortgage Loan;
(iv) if it has elected not to pay itself the Servicing Fee out of the
interest component of any Scheduled Payment, late payment or other recovery
with respect to a particular Mortgage Loan prior to the deposit of such
Scheduled Payment, late payment or recovery into the Collection Account, to
pay to itself the Servicing Fee, as adjusted pursuant to the related
Agreement, from any such Scheduled Payment, late payment or such other
recovery, to the extent permitted by the related Agreement;
(v) to reimburse itself for expenses incurred by and recoverable by or
reimbursable to it pursuant to the related Agreement;
(vi) to pay to the applicable person with respect to each Mortgage
Loan or REO Mortgaged Property acquired in respect thereof that has been
repurchased or removed from the Trust Fund by the Depositor, the Servicer
or the Seller pursuant to the related Agreement, all amounts received
thereon and not distributed as of the date on which the related repurchase
price was determined;
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(vii) to make payments to the Trustee of such Series for deposit into
the Distribution Account, if any, or for remittance to the Holders of such
Series in the amounts and in the manner provided for in the related
Agreement; and
(viii) to clear and terminate the Collection Account pursuant to the
related Agreement.
In addition, if the Servicer deposits in the Collection Account for a
Series any amount not required to be deposited therein, it may, at any time,
withdraw such amount from such Collection Account.
ADVANCES AND LIMITATIONS THEREON
The related Prospectus Supplement will describe the circumstances, if any,
under which the Servicer will make Advances with respect to delinquent payments
on Mortgage Loans. If specified in the related Prospectus Supplement, the
Servicer will be obligated to make Advances, and such obligations may be limited
in amount, or may not be activated until a certain portion of a specified
Reserve Fund is depleted. Advances are intended to provide liquidity and, except
to the extent specified in the related Prospectus Supplement, not to guarantee
or insure against losses. Accordingly, any funds advanced are recoverable by the
Servicer out of amounts received on particular Mortgage Loans which represent
late recoveries of principal or interest, proceeds of insurance policies or
Liquidation Proceeds respecting which any such Advance was made. If an Advance
is made and subsequently determined to be nonrecoverable from late collections,
proceeds of insurance policies, or Liquidation Proceeds from the related
Mortgage Loan, the Servicer may be entitled to reimbursement from other funds in
the Collection Account or Distribution Account, as the case may be, or from a
specified Reserve Fund, as applicable, to the extent specified in the related
Prospectus Supplement.
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES
Standard Hazard Insurance; Flood Insurance. Except as otherwise specified
in the related Prospectus Supplement, the Servicer will be required to maintain
or to cause the obligor on each Mortgage Loan to maintain a standard hazard
insurance policy providing coverage of the standard form of fire insurance with
extended coverage for certain other hazards as is customary in the state in
which the related Mortgaged Property is located. The standard hazard insurance
policies will provide for coverage at least equal to the applicable state
standard form of fire insurance policy with extended coverage for Mortgaged
Property of the type securing the related Mortgage Loans. In general, the
standard form of fire and extended coverage policy will cover physical damage
to, or destruction of, the related Mortgaged Property caused by fire, lightning,
explosion, smoke, windstorm, hail, riot, strike and civil commotion, subject to
the conditions and exclusions particularized in each policy. Because the
standard hazard insurance policies relating to the Mortgage Loans will be
underwritten by different hazard insurers and will cover Properties located in
various states, such policies will not contain identical terms and conditions.
The basic terms, however, generally will be determined by state law and
generally will be similar. Most such policies typically will not cover any
physical damage resulting from war, revolution, governmental actions, floods and
other water-related causes, earth movement (including earthquakes, landslides,
and mudflows), nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all inclusive. Uninsured risks not covered by a special hazard insurance policy
or other form of Credit Enhancement may adversely affect distributions to
Holders. When a Mortgaged Property securing a Mortgage Loan is located in a
flood area identified by HUD pursuant to the Flood Disaster Protection Act of
1973, as amended, the Servicer will be required to cause flood insurance to be
maintained with respect to such Mortgaged Property, to the extent available.
The standard hazard insurance policies covering Properties securing
Mortgage Loans typically will contain a coinsurance clause which, in effect,
will require the insured at all times to carry hazard insurance of a specified
percentage (generally 80% to 90%) of the full replacement value of the Mortgaged
Property, including the improvements on any Mortgaged Property, in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, such clause will provide that the hazard
insurer's liability in the event of partial loss will not exceed the greater of
(i) the actual cash value (the replacement cost less physical depreciation) of
the Mortgaged Property, including the improvements, if any,
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damaged or destroyed or (ii) such proportion of the loss, without deduction for
depreciation, as the amount of insurance carried bears to the specified
percentage of the full replacement cost of such Mortgaged Property and
improvements. Since the amount of hazard insurance to be maintained on the
improvements securing the Mortgage Loans declines as the principal balances
owing thereon decrease, and since the value of the Properties will fluctuate in
value over time, the effect of this requirement in the event of partial loss may
be that hazard insurance proceeds will be insufficient to restore fully the
damage to the affected Mortgaged Property.
Unless otherwise specified in the related Prospectus Supplement, coverage
will be in an amount at least equal to the greater of (i) the amount necessary
to avoid the enforcement of any co-insurance clause contained in the policy or
(ii) the outstanding principal balance of the related Mortgage Loan. Unless
otherwise specified in the related Prospectus Supplement, the Servicer will also
maintain on REO Mortgaged Property that secured a defaulted Mortgage Loan and
that has been acquired upon foreclosure, deed in lieu of foreclosure, or
repossession, a standard hazard insurance policy in an amount that is at least
equal to the maximum insurable value of such REO Mortgaged Property. No
earthquake or other additional insurance will be required of any obligor or will
be maintained on REO Mortgaged Property acquired in respect of a defaulted
Mortgage Loan, other than pursuant to such applicable laws and regulations as
shall at any time be in force and shall require such additional insurance.
Any amounts collected by the Servicer under any such policies of insurance
(other than amounts to be applied to the restoration or repair of the Mortgaged
Property, released to the obligor in accordance with normal servicing procedures
or used to reimburse the Servicer for amounts to which it is entitled to
reimbursement) will be deposited in the Collection Account. In the event that
the Servicer obtains and maintains a blanket policy insuring against hazard
losses on all of the Mortgage Loans, written by an insurer then acceptable to
each Rating Agency which assigns a rating to such Series, it will conclusively
be deemed to have satisfied its obligations to cause to be maintained a standard
hazard insurance policy for each Mortgage Loan or related REO Mortgaged
Property. This blanket policy may contain a deductible clause, in which case the
Servicer will, in the event that there has been a loss that would have been
covered by such policy absent such deductible clause, deposit in the Collection
Account the amount not otherwise payable under the blanket policy because of the
application of such deductible clause.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Servicer will use its reasonable best efforts to foreclose upon,
repossess or otherwise comparably convert the ownership of the Properties
securing the related Mortgage Loans as come into and continue in default and as
to which no satisfactory arrangements can be made for collection of delinquent
payments. In connection with such foreclosure or other conversion, the Servicer
will follow such practices and procedures as it deems necessary or advisable and
as are normal and usual in its servicing activities with respect to comparable
loans serviced by it. However, the Servicer will not be required to expend its
own funds in connection with any foreclosure or towards the restoration of any
Mortgaged Property unless it determines that: (i) such restoration or
foreclosure will increase the Liquidation Proceeds in respect of the related
Mortgage Loan available to the Holders after reimbursement to itself for such
expenses and (ii) such expenses will be recoverable by it either through
Liquidation Proceeds or the proceeds of insurance. While the holder of a
Mortgaged Property acquired through foreclosure can often maximize its recovery
by providing financing to a new purchaser, the Trust Fund, if applicable, will
have no ability to do so and neither the Servicer nor the Depositor will be
required to do so.
The Servicer may arrange with the obligor on a defaulted Mortgage Loan, a
modification of such Mortgage Loan (a "Modification") to the extent provided in
the related Prospectus Supplement. Such Modifications may only be entered into
if they meet the underwriting policies and procedures employed by the Servicer
in servicing receivables for its own account and meet the other conditions set
forth in the related Prospectus Supplement.
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ENFORCEMENT OF DUE-ON-SALE CLAUSES
Unless otherwise specified in the related Prospectus Supplement for a
Series, when any Mortgaged Property is about to be conveyed by the obligor, the
Servicer will, to the extent it has knowledge of such prospective conveyance and
prior to the time of the consummation of such conveyance, exercise its rights to
accelerate the maturity of the related Mortgage Loan under the applicable
"due-on-sale" clause, if any, unless it reasonably believes that such clause is
not enforceable under applicable law or if the enforcement of such clause would
result in loss of coverage under any primary mortgage insurance policy. In such
event, the Servicer is authorized to accept from or enter into an assumption
agreement with the person to whom such Mortgaged Property has been or is about
to be conveyed, pursuant to which such person becomes liable under the Mortgage
Loan and pursuant to which the original obligor is released from liability and
such person is substituted as the obligor and becomes liable under the Mortgage
Loan. Any fee collected in connection with an assumption will be retained by the
Servicer as additional servicing compensation. The terms of a Mortgage Loan may
not be changed in connection with an assumption.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Except as otherwise provided in the related Prospectus Supplement, the
Servicer will be entitled to a periodic fee as servicing compensation (the
"Servicing Fee") in an amount to be determined as specified in the related
Prospectus Supplement. The Servicing Fee may be fixed or variable, as specified
in the related Prospectus Supplement. In addition, unless otherwise specified in
the related Prospectus Supplement, the Servicer will be entitled to servicing
compensation in the form of assumption fees, late payment charges and similar
items, or excess proceeds following disposition of Mortgaged Property in
connection with defaulted Mortgage Loans.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will pay certain expenses incurred in connection with the servicing of
the Mortgage Loans, including, without limitation, the payment of the fees and
expenses of the Trustee and independent accountants, payment of insurance policy
premiums and the cost of credit support, if any, and payment of expenses
incurred in preparation of reports to Holders.
When an obligor makes a principal prepayment in full between Due Dates on
the related Mortgage Loan, the obligor will generally be required to pay
interest on the amount prepaid only to the date of prepayment. If and to the
extent provided in the related Prospectus Supplement, in order that one or more
Classes of the Holders of a Series will not be adversely affected by any
resulting shortfall in interest, the amount of the Servicing Fee may be reduced
to the extent necessary to include in the Servicer's remittance to the Trustee
for deposit into the Distribution Account an amount equal to one month's
interest on the related Mortgage Loan (less the Servicing Fee). If the aggregate
amount of such shortfalls in a month exceeds the Servicing Fee for such month, a
shortfall to Holders may occur.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will be entitled to reimbursement for certain expenses incurred by it
in connection with the liquidation of defaulted Mortgage Loans. The related
Holders will suffer no loss by reason of such expenses to the extent expenses
are covered under related insurance policies or from excess Liquidation
Proceeds. If claims are either not made or paid under the applicable insurance
policies or if coverage thereunder has been exhausted, the related Holders will
suffer a loss to the extent that Liquidation Proceeds, after reimbursement of
the Servicer's expenses, are less than the outstanding principal balance of and
unpaid interest on the related Mortgage Loan which would be distributable to
Holders. In addition, the Servicer will be entitled to reimbursement of
expenditures incurred by it in connection with the restoration of Mortgaged
Property securing a defaulted Mortgage Loan, such right of reimbursement being
prior to the rights of the Holders to receive any related proceeds of insurance
policies, Liquidation Proceeds or amounts derived from other Credit Enhancement.
The Servicer is generally also entitled to reimbursement from the Collection
Account for Advances.
Unless otherwise specified in the related Prospectus Supplement, the rights
of the Servicer to receive funds from the Collection Account for a Series,
whether as the Servicing Fee or other compensation, or for the reimbursement of
Advances, expenses or otherwise, are not subordinate to the rights of Holders of
such Series.
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EVIDENCE AS TO COMPLIANCE
If so specified in the related Prospectus Supplement, the applicable
Agreement for each Series will provide that each year a firm of independent
public accountants will furnish a statement to the Trustee to the effect that
such firm has examined certain documents and records relating to the servicing
of the Mortgage Loans by the Servicer and that, on the basis of such
examination, such firm is of the opinion that the servicing has been conducted
in compliance with such Agreement, except for (i) such exceptions as such firm
believes to be immaterial and (ii) such other exceptions as are set forth in
such statement.
If so specified in the related Prospectus Supplement, the applicable
Agreement for each Series will also provide for delivery to the Trustee for such
Series of an annual statement signed by an officer of the Servicer to the effect
that the Servicer has fulfilled its obligations under such Agreement, throughout
the preceding calendar year.
CERTAIN MATTERS REGARDING THE SERVICER
The Agreement provides that the Servicer may resign from its obligations
and duties thereunder, except in connection with a permitted transfer of
servicing, unless (i) such duties and obligations are no longer permissible
under applicable law or are in material conflict by reason of applicable law
with any other activities of a type and nature presently carried on by it or its
affiliate or (ii) upon the satisfaction of the following conditions: (a) the
Servicer has proposed a successor servicer to the Trustee in writing and such
proposed successor servicer is reasonably acceptable to the Trustee; (b) the
Rating Agencies have confirmed to the Trustee that the appointment of such
proposed successor servicer as the Servicer will not result in the reduction or
withdrawal of the then current rating of the Certificates; and (c) such proposed
successor servicer is reasonably acceptable to the Enhancer, if any. No such
resignation will become effective until the Trustee or a successor servicer has
assumed the Servicer's obligations and duties under the Agreement.
Notwithstanding the foregoing, Bank One may transfer its servicing obligations
to any other direct or indirect wholly-owned subsidiary of BANC ONE or another
entity (which meets certain eligibility standards set forth in the Agreement)
and be relieved of its obligations and duties under the Agreement and related
agreements.
The Servicer may perform any of its duties and obligations under the
Agreement through one or more subservicers or delegates, which may be affiliates
of the Servicer. Notwithstanding any such arrangement, the Servicer will remain
liable and obligated to the Trustee and the Certificateholders for the
Servicer's duties and obligations under the Agreement, without any diminution of
such duties and obligations and as if the Servicer itself were performing such
duties and obligations.
Any person into which, in accordance with the Agreement, the Servicer may
be merged or consolidated or any person resulting from any merger or
consolidation to which the Servicer is a party, or any person succeeding to the
business of the Servicer, will be the successor to Bank One as servicer, under
the Agreement.
The Agreement provides that the Servicer will indemnify the Trust and the
Trustee from and against any loss, liability, expense, damage or injury suffered
or sustained as a result of the Servicer's actions or omissions in connection
with the servicing and administration of the Mortgage Loans which are not in
accordance with the provisions of the Agreement. Under the Agreement, the
applicable Seller will indemnify an injured party for the entire amount of any
losses, claims, damages or liabilities arising out of or based on the Agreement
(other than losses resulting from defaults under the Mortgage Loans). The
Agreement provides that neither the Depositor, any Seller nor the Servicer nor
their directors, officers, employees or agents will be under any other liability
to the Trust, the Trustee, the Certificateholders or any other person for any
action taken or for refraining from taking any action pursuant to the Agreement.
However, neither the Depositor, any Seller nor the Servicer will be protected
against any liability which would otherwise be imposed by reason of willful
misconduct, bad faith or gross negligence of the Depositor, such Seller or the
Servicer in the performance of its duties under the Agreement or by reason of
reckless disregard of its obligations thereunder. In addition, the Agreement
provides that the Servicer will not be under any obligation to appear in,
prosecute or defend any legal action which is not incidental to its servicing
responsibilities under the Agreement and which in its opinion may expose it to
any expense or liability. The Servicer may, in its sole discretion, undertake
any such
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legal action which it may deem necessary or desirable with respect to the
Agreement and the rights and duties of the parties thereto and the interest of
the Certificateholders thereunder.
Any corporation into which the Servicer may be merged or consolidated, or
any corporation resulting from any merger, conversion or consolidation to which
the Servicer shall be a party, or any corporation succeeding to the business of
the Servicer shall be the successor of the Servicer hereunder, without the
execution or filing of any paper or any further act on the part of any of the
parties.
EVENTS OF SERVICING TERMINATION
Unless otherwise specified in the related Prospectus Supplement, "Events of
Servicing Termination" with respect to a Series will consist of (i) any failure
by the Servicer to deposit in the Collection Account any deposit required to be
made under the Agreement, which failure continues unremedied for five Business
Days after the giving of written notice of such failure to the Servicer by the
Trustee, or to the Servicer and the Trustee by the Enhancer, if any, or Holders
owning in the aggregate at least 25% of the Principal Balance of all outstanding
Securities; (ii) any failure by the Servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the Agreement
which, in each case, materially and adversely affects the interests of the
Holders or the Enhancer, if any, and continues unremedied for 60 days after the
giving of written notice of such failure to the Servicer by the Trustee, or to
the Servicer and the Trustee by the Enhancer, if any, or Holders owning in the
aggregate at least 25% of the Principal Balance of all outstanding Securities;
or (iii) certain events of insolvency, readjustment of debt, marshaling of
assets and liabilities or similar proceedings relating to the Servicer and
certain actions by the Servicer indicating insolvency, reorganization or
inability to pay its obligations. Under certain other circumstances, the
Enhancer, if any, with the consent of Holders owning in the aggregate at least
51% of the Principal Balance of all outstanding Securities may deliver written
notice to the Servicer terminating all the rights and obligations of the
Servicer under the Agreement.
Notwithstanding the foregoing, the Agreement provides that a delay in or
failure of performance referred to under clause (i) above for a period of ten
Business Days or referred to under clause (ii) above for a period of 60 Business
Days, will not constitute an Event of Servicing Termination if such delay or
failure could not be prevented by the exercise of reasonable diligence by the
Servicer or such delay or failure was caused by an act of God or other similar
occurrence. Under the Agreement, upon the occurrence of any such event, the
Servicer will not be relieved from using reasonable efforts to perform its
obligations in a timely manner in accordance with the terms of the Agreement and
the Servicer will provide the Trustee, the Depositor, the applicable Sellers,
any Enhancer and the Holders prompt notice of such failure or delay by it,
together with a description of its efforts to so perform its obligations.
RIGHTS UPON AN EVENT OF SERVICING TERMINATION
Unless otherwise specified in the related Prospectus Supplement, so long as
an Event of Servicing Termination remains unremedied, either the Trustee, or
Holders owning in the aggregate at least 51% of the Principal Balance of all
outstanding Securities or any Credit Enhancer, may terminate all of the rights
and obligations of the Servicer under the Agreement and in and to the Mortgage
Loans, whereupon the Trustee will succeed to all the responsibilities, duties
and liabilities of the Servicer under the Agreement and will be entitled to
similar compensation arrangements. If the Trustee would be obligated to succeed
the Servicer but is unwilling or unable so to act, it may appoint, or petition a
court of competent jurisdiction for the appointment of, a housing and home
finance institution or other mortgage loan or home equity servicer with all
licenses and permits required to perform its obligations under the Agreement and
having a net worth of at least $15,000,000 and acceptable to any Credit Enhancer
to act as successor to the Servicer under the Agreement. Pending such
appointment, the Trustee will be obligated to act in such capacity unless
prohibited by law. Such successor will be entitled to receive the same
compensation that the Servicer would otherwise have received (or such lesser
compensation as the Trustee and such successor may agree). A receiver or
conservator for the Servicer may be empowered to prevent the termination and
replacement of the Servicer where the only Event of Servicing Termination that
has occurred is an Insolvency Event.
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THE AGREEMENTS
The following summaries describe certain provisions of the Agreements. The
summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the Agreements. Where
particular provisions or terms used in the Agreements are referred to, such
provisions or terms are as specified in the related Agreements.
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of the Certificates, the Depositor will transfer to
the Trust all of its right, title and interest in and to each Mortgage Loan
(including any Additional Balances arising in the future), related Credit Line
Agreements, mortgages and other related documents (collectively, the "Related
Documents"), including all collections received on or with respect to each such
Mortgage Loan after the Cut-off Date (exclusive of payments in respect of
accrued interest due on or prior to the Cut-off Date). The Trustee, concurrently
with such transfer, will deliver the Securities to the Depositor and any
Transferor Certificate (as defined in the Agreement) to the related Seller or
Sellers. Each Mortgage Loan transferred to the Trust will be identified on a
schedule (the "Mortgage Loan Schedule") delivered to the Trustee pursuant to the
Agreement. Such schedule will include information as to the Cut-off Date
Principal Balance of each Mortgage Loan, as well as information with respect to
the Loan Rate.
Unless otherwise specified in the related Prospectus Supplement, the
Agreement will permit the applicable Seller to maintain possession of the
Related Documents and certain other documents relating to the Mortgage Loans
(the "Mortgage Files") and assignments of the related mortgages to the Trustee
will not be required to be recorded for so long as the senior unsecured debt of
Bank One is rated at levels satisfactory to each Rating Agency rating the
related Securities. If such rating does not satisfy such standards (an
"Assignment Event"), Bank One will have 90 days to record assignments of the
mortgages for each such Mortgage Loan in favor of the Trustee and will have 60
days to deliver the Mortgage File pertaining to each such Mortgage Loan to the
Trustee (unless opinions of counsel satisfactory to the Rating Agencies and any
Enhancer to the effect that recordation of such assignments or delivery of such
documentation is not required in the relevant jurisdiction to protect the
interest of the Trustee in the Mortgage Loans). In lieu of delivery of original
documentation, Bank One may deliver documents which have been imaged optically
upon delivery of an opinion of counsel that (i) such documents do not impair the
enforceability of the transfer to the Trust of the Mortgage Loans and (ii) the
optical image of such documents are enforceable in the relevant jurisdictions to
the same extent as the original documents.
Within 90 days of an Assignment Event, the Trustee will review the Mortgage
Files and if any Related Document is found to be defective in any material
respect and such defect is not cured within 90 days following notification
thereof to the applicable Seller and the Depositor by the Trustee, the
applicable Seller will be obligated to accept the transfer of such Mortgage Loan
from the Trust. Upon such transfer, the Principal Balance of such Mortgage Loan
will be deducted from the Pool Balance. If the related Series includes a
Transferor Interest, such deduction would reduce the Transferor Interest. If the
deduction would cause the Transferor Interest to become less than the Minimum
Transferor Interest at such time (a "Transfer Deficiency"), the Seller will be
obligated to either substitute an Eligible Substitute Mortgage Loan or make a
deposit into the Collection Account in the amount (the "Transfer Deposit
Amount") equal to the amount by which the Transferor Interest would be reduced
to less than the Minimum Transferor Interest at such time. Any such deduction,
substitution or deposit, will be considered for the purposes of the Agreement a
payment in full of such Mortgage Loan. Any Transfer Deposit Amount will be
treated as a Principal Collection. No such transfer shall be considered to have
occurred until the required deposit to the Collection Account is actually made.
The obligation of a Seller to accept a transfer of a Defective Mortgage Loan is
the sole remedy regarding any defects in the Mortgage File and Related Documents
available to the Trustee or the Certificateholders.
Unless otherwise specified in the related Prospectus Supplement, an
"Eligible Substitute Mortgage Loan" is a mortgage loan substituted by the
Depositor for a Defective Mortgage Loan which must, on the date of such
substitution, (i) have an outstanding Principal Balance (or in the case of a
substitution of more than
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one Mortgage Loan for a Defective Mortgage Loan, an aggregate principal Balance)
that is approximately equal to the Transfer Deficiency relating to such
Defective Mortgage Loan: (ii) have a Loan Rate not less than the Loan Rate of
the Defective Mortgage Loan and not more than 1% in excess of the Loan Rate of
such Defective Mortgage Loan; (iii) have a Loan Rate based on the same Index
with adjustments to such Loan Rate made on the same Interest Rate Adjustment
Date as that of the Defective Mortgage Loan; (iv) have a Margin that is not less
than the Margin of the Defective Mortgage Loan and not more than 100 basis
points higher than the Margin for the Defective Mortgage Loan; (v) have a
mortgage of the same or higher level of priority as the mortgage relating to the
Defective Mortgage Loan; (vi) have a remaining term to maturity not more than
six months earlier and not more than 60 months later than the remaining term to
maturity of the Defective Mortgage Loan; (vii) comply with each representation
and warranty as to the Mortgage Loans set forth in the Agreement (deemed to be
made as of the date of substitution); (viii) in general, have an original
Combined Loan-to-Value Ratio not greater than that of the Defective Mortgage
Loan; and (ix) satisfy certain other conditions specified in the Agreement. To
the extent the Principal Balance of an Eligible Substitute Mortgage Loan is less
than the Principal Balance of the related Defective Mortgage Loan and to the
extent that the Transferor Interest, if any, would be reduced below the Minimum
Transferor Interest, the applicable Seller will be required to make a deposit to
the Collection Account equal to such difference.
The applicable Seller will make certain representations and warranties as
to the accuracy in all material respects of certain information furnished to the
Trustee with respect to each Mortgage Loan. In addition, the applicable Seller
will represent and warrant on the Closing Date that at the time of transfer to
the Depositor, such Seller has transferred or assigned all of its rights, title
and interest in or granted a security interest in each Mortgage Loan sold by it
and the Related Documents, free of any lien (subject to certain exceptions).
Upon discovery of a breach of any such representation and warranty which
materially and adversely affects the interests of the Holders or any Credit
Enhancer in the related Mortgage Loan and Related Documents, the applicable
Seller will have a period of 90 days after discovery or notice of the breach to
effect a cure. If the breach cannot be cured within the 90-day period, such
Seller will be obligated to accept a transfer of the Defective Mortgage Loan
from the Trust. The same procedure and limitations that are set forth in the
second preceding paragraph for the transfer of Defective Mortgage Loans will
apply to the transfer of a Mortgage Loan that is required to be transferred
because of such breach of a representation or warranty in the Agreement that
materially and adversely affects the interests of the Certificateholders.
Mortgage Loans required to be transferred to the Seller as described in the
preceding paragraphs are referred to as "Defective Mortgage Loans."
REPORTS TO HOLDERS
The Trustee or other entity specified in the related Prospectus Supplement
will prepare and forward to each Holder on each Distribution Date, or as soon
thereafter as is practicable, a statement setting forth, to the extent
applicable to any Series, among other things:
(i) the amount of principal distributed to Holders of the related
Securities and the outstanding principal balance of such Securities
following such distribution;
(ii) the amount of interest distributed to Holders of the related
Securities and the current interest on such Securities;
(iii) the amounts of (a) any overdue accrued interest included in such
distribution, (b) any remaining overdue accrued interest with respect to
such Securities or (c) any current shortfall in amounts to be distributed
as accrued interest to holders of such Securities;
(iv) the amounts of (a) any overdue payments of scheduled principal
included in such distribution, (b) any remaining overdue principal amounts
with respect to such Securities, (c) any current shortfall in receipt of
scheduled principal payments on the related Mortgage Loans or (d) any
realized losses or Liquidation Proceeds to be allocated as reductions in
the outstanding principal balances of such Securities;
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(v) the amount received under any related Credit Enhancement, and the
remaining amount available under such Credit Enhancement;
(vi) the amount of any delinquencies with respect to payments on the
related Mortgage Loans;
(vii) the book value of any REO Mortgaged Property acquired by the
related Trust Fund; and
(viii) such other information as specified in the related Agreement.
In addition, within a reasonable period of time after the end of each
calendar year the Trustee, unless otherwise specified in the related Prospectus
Supplement, will furnish to each Holder of record at any time during such
calendar year: (a) the aggregate of amounts reported pursuant to clauses (i),
(ii), and (iv)(d) above for such calendar year and (b) such information
specified in the related Agreement to enable Holders to prepare their tax
returns including, without limitation, the amount of original issue discount
accrued on the Securities, if applicable. Information in the Distribution Date
and annual statements provided to the Holders will not have been examined and
reported upon by an independent public accountant. However, the Servicer will
provide to the Trustee a report by independent public accountants with respect
to the Servicer's servicing of the Mortgage Loans. See "SERVICING OF
LOANS -- Evidence as to Compliance".
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Pooling and Servicing Agreement; Servicing Agreement. Unless otherwise
specified in the related Prospectus Supplement, Events of Default under the
Pooling and Servicing Agreement or Servicing Agreement for each Series of
Certificates are limited to the Events of Servicing Termination described under
"Servicing of the Mortgage Loans -- Events of Servicing Termination."
Indenture. Unless otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for thirty (30) days or more in the payment of any
principal of or interest on any Note of such Series; (ii) failure to perform any
other covenant of the Depositor or the Trust Fund in the Indenture which
continues for a period of sixty (60) days after notice thereof is given in
accordance with the procedures described in the related Prospectus Supplement;
(iii) any representation or warranty made by the Depositor in the Indenture or
in any certificate or other writing delivered pursuant thereto or in connection
therewith with respect to or affecting such Series having been incorrect in a
material respect of the time made, and such breach is not cured within sixty
(60) days after notice thereof is given in accordance with the procedures
described in the related Prospectus Supplement; (iv) certain events of
bankruptcy, insolvency, receivership or liquidation of the Depositor or the
Trust Fund; or (v) any other Event of Default provided with respect to Notes of
that Series.
If an Event of Default with respect to the Notes of any Series at the time
outstanding occurs and is continuing, either the Trustee or the holders of a
majority of the then aggregate outstanding amount of the Notes of such Series
may declare the principal amount (or, if the Notes of that Series are Zero
Coupon Securities, such portion of the principal amount as may be specified in
the terms of that Series, as provided in the related Prospectus Supplement) of
all the Notes of such Series to be due and payable immediately. Such declaration
may, under certain circumstances, be rescinded and annulled by the Holders of a
majority in aggregate outstanding amount of the Notes of such Series.
If, following an Event of Default with respect to any Series of Notes, the
Notes of such Series have been declared to be due and payable, the Trustee may,
in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such Series as they would
have become due if there had not been such a declaration. In addition, the
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a Series following an Event of Default, other than a default in the payment of
any principal or interest on any Note of such Series for thirty (30) days or
more, unless (a) the Holders of 100% of the then aggregate outstanding amount of
the Notes of such Series consent to such sale, (b) the proceeds of such sale or
liquidation are sufficient to pay in full the principal of and accrued interest,
due and unpaid, on the outstanding Notes of such Series at the date of such sale
or (c) the Trustee determines
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that such collateral would not be sufficient on an ongoing basis to make all
payments on such Notes as such payments would have become due if such Notes had
not been declared due and payable, and the Trustee obtains the consent of the
Holders of 66% of the then aggregate outstanding amount of the Notes of such
Series.
In the event that the Trustee liquidates the collateral in connection with
an Event of Default involving a default for thirty (30) days or more in the
payment of principal of or interest on the Notes of a Series, the Indenture
provides that the Trustee will have a prior lien on the proceeds of any such
liquidation for unpaid fees and expenses. As a result, upon the occurrence of
such an Event of Default, the amount available for distribution to the
Noteholders would be less than would otherwise be the case. However, the Trustee
may not institute a proceeding for the enforcement of its lien except in
connection with a proceeding for the enforcement of the lien of the Indenture
for the benefit of the Noteholders after the occurrence of such an Event of
Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a Series is declared due and payable, as
described above, the holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing with respect
to a Series of Notes, the Trustee shall be under no obligation to exercise any
of the rights or powers under the Indenture at the request or direction of any
of the Holders of Notes of such Series, unless such Holders offered to the
Trustee security or indemnity satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in complying with such request or
direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, the Holders of a majority of the then
aggregate outstanding amount of the Notes of such Series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee with respect to the Notes of such Series, and the Holders of a majority
of the then aggregate outstanding amount of the Notes of such Series may, in
certain cases, waive any default with respect thereto, except a default in the
payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all the Holders of the outstanding Notes of such Series affected thereby.
THE TRUSTEE
The identity of the commercial bank, savings and loan association or trust
company named as the Trustee for each Series of Securities will be set forth in
the related Prospectus Supplement. The entity serving as Trustee may have normal
banking relationships with the Depositor or the Servicer. In addition, for the
purpose of meeting the legal requirements of certain local jurisdictions, the
Trustee will have the power to appoint co-trustees or separate trustees of all
or any part of the Trust Fund relating to a Series of Securities. In the event
of such appointment, all rights, powers, duties and obligations conferred or
imposed upon the Trustee by the Agreement relating to such Series will be
conferred or imposed upon the Trustee and each such separate trustee or
co-trustee jointly, or, in any jurisdiction in which the Trustee shall be
incompetent or unqualified to perform certain acts, singly upon such separate
trustee or co-trustee who shall exercise and perform such rights, powers, duties
and obligations solely at the direction of the Trustee. The Trustee may also
appoint agents to perform any of the responsibilities of the Trustee, which
agents shall have any or all of the rights, powers, duties and obligations of
the Trustee conferred on them by such appointment; provided that the Trustee
shall continue to be responsible for its duties and obligations under the
Agreement.
DUTIES OF THE TRUSTEE
The Trustee will make no representations as to the validity or sufficiency
of the Agreement, the Securities or of any Mortgage Loan or related documents.
If no Event of Default (as defined in the related Agreement) has occurred, the
Trustee is required to perform only those duties specifically required of it
under the Agreement. Upon receipt of the various certificates, statements,
reports or other instruments required to be
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furnished to it, the Trustee is required to examine them to determine whether
they are in the form required by the related Agreement; however, the Trustee
will not be responsible for the accuracy or content of any such documents
furnished by it or the Holders to the Servicer under the Agreement.
The Trustee may be held liable for its own negligent action or failure to
act, or for its own misconduct; provided, however, that the Trustee will not be
personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction of the Holders in an
Event of Default. The Trustee is not required to expend or risk its own funds or
otherwise incur any financial liability in the performance of any of its duties
under the Agreement, or in the exercise of any of its rights or powers, if it
has reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
RESIGNATION OF TRUSTEE
The Trustee may, upon written notice to the Depositor, resign at any time,
in which event the Depositor will be obligated to use its best efforts to
appoint a successor Trustee. If no successor Trustee has been appointed and has
accepted the appointment within 30 days after giving such notice of resignation,
the resigning Trustee may petition any court of competent jurisdiction for
appointment of a successor Trustee. The Trustee may also be removed at any time
(i) if the Trustee ceases to be eligible to continue as such under the
Agreement, (ii) if the Trustee becomes insolvent or (iii) by the Holders of
Securities evidencing over 50% of the aggregate voting rights of the Securities
in the Trust Fund upon written notice to the Trustee and to the Depositor. Any
resignation or removal of the Trustee and appointment of a successor Trustee
will not become effective until acceptance of the appointment by the successor
Trustee.
AMENDMENT OF AGREEMENT
Unless otherwise specified in the Prospectus Supplement, the Agreement for
each Series of Securities may be amended by the Depositor, the Servicer (with
respect to a Series relating to Mortgage Loans), and the Trustee with respect to
such Series, without notice to or consent of the Holders (i) to cure any
ambiguity, (ii) to correct any defective provisions or to correct or supplement
any provision therein, (iii) to add to the duties of the Depositor, the Trust
Fund or Servicer, (iv) to add any other provisions with respect to matters or
questions arising under such Agreement or related Credit Enhancement, (v) to add
or amend any provisions of such Agreement as required by a Rating Agency in
order to maintain or improve the rating of the Securities, or (vi) to comply
with any requirements imposed by the Code; provided that any such amendment
except pursuant to clause (vi) above will not adversely affect in any material
respect the interests of any Holders of such Series, as evidenced by an opinion
of counsel. Any such amendment except pursuant to clause (vi) of the preceding
sentence shall be deemed not to adversely affect in any material respect the
interests of any Holder if the Trustee receives written confirmation from each
Rating Agency rating such Securities that such amendment will not cause such
Rating Agency to reduce the then current rating of each Class thereof. Unless
otherwise specified in the Prospectus Supplement, the Agreement for each Series
may also be amended by the Trustee, the Servicer, if applicable, and the
Depositor with respect to such Series with the consent of the Holders possessing
not less than 66 2/3% of the aggregate outstanding principal amount of the
Securities of such Series or, if only certain Classes of such Series are
affected by such amendment, 66 1/3% of the aggregate outstanding principal
amount of the Securities of each Class of such Series affected thereby, for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of such Agreement or modifying in any manner the rights of
Holders of such Series; provided, however, that no such amendment may (a) reduce
the amount or delay the timing of payments on any Security without the consent
of the Holder of such Security; or (b) reduce the aforesaid percentage of the
aggregate outstanding principal amount of Securities of each Class, the Holders
of which are required to consent to any such amendment without the consent of
the Holders of 100% of the aggregate outstanding principal amount of each Class
of Securities affected thereby.
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VOTING RIGHTS
The related Prospectus Supplement will set forth the method of determining
allocation of voting rights with respect to a Series.
LIST OF HOLDERS
Upon written request of three or more Holders of record of a Series for
purposes of communicating with other Holders with respect to their rights under
the Agreement, which request is accompanied by a copy of the communication which
such Holders propose to transmit, the Trustee will afford such Holders access
during business hours to the most recent list of Holders of that Series held by
the Trustee.
No Agreement will provide for the holding of any annual or other meeting of
Holders.
TERMINATION
Pooling and Servicing Agreement; Trust Agreement. The obligations created
by the Pooling and Servicing Agreement or Trust Agreement for a Series will
terminate upon the distribution to Holders of all amounts distributable to them
pursuant to such Agreement after the earlier of (i) the later of (a) the final
payment or other liquidation of the last Mortgage Loan remaining in the Trust
Fund for such Series and (b) the disposition of all Mortgaged Property acquired
upon foreclosure or deed in lieu of foreclosure or repossession in respect of
any Mortgage Loan or (ii) the repurchase, as described below, by the Servicer or
other entity specified in the related Prospectus Supplement from the Trustee for
such Series of all Mortgage Loans and other Mortgaged Property at that time
subject to such Agreement. The Agreement for each Series permits, but does not
require, the Servicer or other entity specified in the related Prospectus
Supplement to purchase from the Trust Fund for such Series all remaining
Mortgage Loans at a price equal to, unless otherwise specified in the related
Prospectus Supplement, 100% of the aggregate Principal Balance of such Mortgage
Loans plus, with respect to any Mortgaged Property acquired in respect of a
Mortgage Loan, if any, the outstanding Principal Balance of the related Mortgage
Loan at the time of foreclosure, less, in either case, related unreimbursed
Advances (in the case of the Mortgage Loans, only to the extent not already
reflected in the computation of the aggregate Principal Balance of such Mortgage
Loans) and unreimbursed expenses (that are reimbursable pursuant to the terms of
the Pooling and Servicing Agreement) plus, in either case, accrued interest
thereon at the weighted average rate on the related Mortgage Loans through the
last day of the Due Period in which such repurchase occurs. The exercise of such
right will effect early retirement of the Securities of such Series, but such
entity's right to so purchase is subject to the aggregate Principal Balance of
the Mortgage Loans at the time of repurchase being less than a fixed percentage,
to be set forth in the related Prospectus Supplement, of the aggregate Principal
Balance of the Mortgage Loans as of the Cut-off Date. In no event, however, will
the trust created by the Agreement continue beyond the expiration of 21 years
from the death of the last survivor of certain persons identified therein. For
each Series, the Servicer or the Trustee, as applicable, will give written
notice of termination of the Agreement to each Holder, and the final
distribution will be made only upon surrender and cancellation of the Securities
at an office or agency specified in the notice of termination. If so provided in
the related Prospectus Supplement for a Series, the Depositor or another entity
may effect an optional termination of the Trust Fund under the circumstances
described in such Prospectus Supplement. See "DESCRIPTION OF THE
SECURITIES -- Optional Purchase or Termination".
Indenture. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes of
such Series or, with certain limitations, upon deposit with the Trustee of funds
sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such Series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such Series, to replace stolen, lost or mutilated Notes of such Series, to
maintain paying agencies and to-hold monies for payment in trust) upon the
deposit with the
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Trustee, in trust, of money and/or direct obligations of or obligations
guaranteed by the United States of America which through the payment of interest
and principal in respect thereof in accordance with their terms will provide
money in an amount sufficient to pay the principal of and each installment of
interest on the Notes of such Series on the Last Scheduled Distribution Date for
such Notes and any installment of interest on such Notes in accordance with the
terms of the Indenture and the Notes of such Series. In the event of any such
defeasance and discharge of Notes of such Series, holders of Notes of such
Series would be able to look only to such money and/or direct obligations for
payment of principal and interest, if any, on their Notes until maturity.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans which are general in nature. Because certain of such legal
aspects are governed by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor reflect the laws
of any particular state, nor encompass the laws of all states in which the
properties securing the Mortgage Loans are situated. The summaries are qualified
in their entirety by reference to the applicable federal and state laws
governing the Mortgage Loans.
MORTGAGES
The Mortgage Loans for a Series will be secured by either mortgages or
deeds of trust or deeds to secure debt, depending upon the prevailing practice
in the state in which the Mortgaged Property subject to a mortgage loan is
located. The filing of a mortgage, deed of trust or deed to secure debt creates
a lien or title interest upon the real Mortgaged Property covered by such
instrument and represents the security for the repayment of an obligation that
is customarily evidenced by a promissory note. It is not prior to the lien for
real estate taxes and assessments or other charges imposed under governmental
police powers and may also be subject to other liens pursuant to the laws of the
jurisdiction in which the Mortgaged Property is located. Priority with respect
to such instruments depends on their terms, the knowledge of the parties to the
mortgage and generally on the order of recording with the applicable state,
county or municipal office. There are two parties to a mortgage, the mortgagor,
who is the borrower/Mortgaged Property owner or the land trustee (as described
below), and the mortgagee, who is the lender. Under the mortgage instrument, the
mortgagor delivers to the mortgagee a note or bond and the mortgage. In the case
of a land trust, there are three parties because title to the Mortgaged Property
is held by a land trustee under a land trust agreement of which the
borrower/Mortgaged Property owner is the beneficiary; at origination of a
mortgage loan, the borrower executes a separate undertaking to make payments on
the mortgage note. A deed of trust transaction normally has three parties, the
trustor, who is the borrower/Mortgaged Property owner; the beneficiary, who is
the lender, and the trustee, a third-party grantee. Under a deed of trust, the
trustor grants the Mortgaged Property, irrevocably until the debt is paid, in
trust, generally with a power of sale, to the trustee to secure payment of the
obligation. The mortgagee's authority under a mortgage and the trustee's
authority under a deed of trust are governed by the law of the state in which
the real Mortgaged Property is located, the express provisions of the mortgage
or deed of trust, and, in some cases, in deed of trust transactions, the
directions of the beneficiary.
FORECLOSURE ON MORTGAGES
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real Mortgaged Property. Delays in
completion of the foreclosure occasionally may result from difficulties in
locating necessary parties defendant. When the mortgagee's right to foreclosure
is contested, the legal proceedings necessary to resolve the issue can be
time-consuming and expensive. After the completion of a judicial foreclosure
proceeding, the court may issue a judgment of foreclosure and appoint a receiver
or other officer to conduct the sale of the Mortgaged Property. In some states,
mortgages may also be foreclosed by advertisement, pursuant to a power of sale
provided in the mortgage. Foreclosure of a mortgage by advertisement is
essentially similar to foreclosure of a deed of trust by non-judicial power of
sale.
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Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust which authorizes
the trustee to sell the Mortgaged Property upon any default by the borrower
under the terms of the note or deed of trust. In certain states, such
foreclosure also may be accomplished by judicial action in the manner provided
for foreclosure of mortgages. In some states, the trustee must record a notice
of default and send a copy to the borrower-trustor and to any person who has
recorded a request for a copy of the notice of sale. In addition, the trustee in
some states must provide notice of default to any other individual having an
interest in the real Mortgaged Property, including any junior lienholders. If
the deed of trust is not reinstated within any applicable cure period, a notice
of sale must be posted in a public place and, in most states, published for a
specified period of time in one or more newspapers. In addition, some state laws
require that a copy of the notice of sale be posted on the Mortgaged Property
and sent to all parties having an interest of record in the Mortgaged Property.
The trustor, borrower, or any person having a junior encumbrance on the real
estate, may, during a reinstatement period, cure the default by paying the
entire amount in arrears plus costs and expenses incurred in enforcing the
obligation. Generally, state law controls the amount of foreclosure expenses and
costs, including attorney's fees, which may be recovered by a lender. If the
deed of trust is not reinstated, a notice of sale must be posted in a public
place and, in most states, published for a specified period of time in one or
more newspapers. In addition, some state laws require that a copy of the notice
of sale be posted on the Mortgaged Property, recorded and sent to all parties
having an interest in the real Mortgaged Property.
An action to foreclose a mortgage is an action to recover the mortgage debt
by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the related mortgage note and
the mortgage as made and cannot be relieved from his default if the mortgagee
has exercised his rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature, the court may exercise
equitable powers to relieve a mortgagor of a default and deny the mortgagee
foreclosure on proof that either the mortgagor's default was neither willful nor
in bad faith or the mortgagee's action established a waiver, fraud, bad faith,
or oppressive or unconscionable conduct such as to warrant a court of equity to
refuse affirmative relief to the mortgagee. Under certain circumstances a court
of equity may relieve the mortgagor from an entirely technical default where
such default was not willful.
A foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses or counterclaims are interposed, sometimes requiring up to
several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of the
parties' intent, if a court determines that the sale was for less than fair
consideration and such sale occurred while the mortgagor was insolvent and
within one year (or within the state statute of limitations if the trustee in
bankruptcy elects to proceed under state fraudulent conveyance law) of the
filing of bankruptcy. Similarly, a suit against the debtor on the related
mortgage note may take several years and, generally, is a remedy alternative to
foreclosure, the mortgagee being precluded from pursuing both at the same time.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty potential third party purchasers at the
sale have in determining the exact status of title and because the physical
condition of the Mortgaged Property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the Mortgaged Property
at a foreclosure sale. Rather, it is common for the lender to purchase the
Mortgaged Property from the trustee or referee for an amount which may be equal
to the unpaid principal amount of the mortgage note secured by the mortgage or
deed of trust plus accrued and unpaid interest and the expenses of foreclosure,
in which event the mortgagor's debt will be extinguished or the lender may
purchase for a lesser amount in order to preserve its right against a borrower
to seek a deficiency judgment in states where such a judgment is available.
Thereafter, subject to the right of the borrower in some states to remain in
possession during the redemption period, the lender will assume the burdens of
ownership, including obtaining hazard insurance, paying taxes and making such
repairs at its own expense as are necessary to render the Mortgaged Property
suitable for sale. The lender will commonly obtain the services of a real estate
broker and pay the broker's commission in connection with the sale of the
Mortgaged Property. Depending upon market conditions, the ultimate proceeds of
the sale of the Mortgaged Property may not
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equal the lender's investment in the Mortgaged Property. Any loss may be reduced
by the receipt of any mortgage guaranty insurance proceeds.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the trustor or mortgagor and foreclosed junior lienors are given a
statutory period in which to redeem the Mortgaged Property from the foreclosure
sale. The right of redemption should be distinguished from the equity of
redemption, which is a non-statutory right that must be exercised prior to the
foreclosure sale. In some states, redemption may occur only upon payment of the
entire principal balance of the loan, accrued interest and expenses of
foreclosure. In other states, redemption may be authorized if the former
borrower pays only a portion of the sums due. The effect of a statutory right of
redemption is to diminish the ability of the lender to sell the foreclosed
Mortgaged Property. The exercise of a right of redemption would defeat the title
of any purchaser at a foreclosure sale, or of any purchaser from the lender
subsequent to foreclosure or sale under a deed of trust. Consequently, the
practical effect of a right of redemption is to force the lender to retain the
Mortgaged Property and pay the expenses of ownership until the redemption period
has run. In some states, there is no right to redeem Mortgaged Property after a
trustee's sale under a deed of trust.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGES
The mortgage loans included in the Trust Fund for a Series will be secured
by mortgages or deeds of trust which may be second or more junior mortgages to
other mortgages held by other lenders or institutional investors. The rights of
the Trust Fund (and therefore the Holders), as mortgagee under a junior
mortgage, are subordinate to those of the mortgagee under the senior mortgage,
including the prior rights of the senior mortgagee to receive hazard insurance
and condemnation proceeds and to cause the Mortgaged Property securing the
mortgage loan to be sold upon default of the mortgagor, thereby extinguishing
the junior mortgagee's lien unless the junior mortgagee asserts its subordinate
interest in the Mortgaged Property in foreclosure litigation and, possibly,
satisfies the defaulted senior mortgage. A junior mortgagee may satisfy a
defaulted senior loan in full and, in some states, may cure such default and
bring the senior loan current, in either event adding the amounts expended to
the balance due on the junior loan. In most states, absent a provision in the
mortgage or deed of trust, no notice of default is required to be given to a
junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage, in such order as the mortgagee may determine. Thus, in the
event improvements on the Mortgaged Property are damaged or destroyed by fire or
other casualty, or in the event the Mortgaged Property is taken by condemnation,
the mortgagee or beneficiary under underlying senior mortgages will have the
prior right to collect any insurance proceeds payable under a hazard insurance
policy and any award of damages in connection with the condemnation and to apply
the same to the indebtedness secured by the senior mortgages. Proceeds in excess
of the amount of senior mortgage indebtedness, in most cases, may be applied to
the indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the Mortgaged Property and, when due,
all encumbrances, charges and liens on the Mortgaged Property which appear prior
to the mortgage or deed of trust, to provide and maintain fire insurance on the
Mortgaged Property, to maintain and repair the Mortgaged Property and not to
commit or permit any waste thereof, and to appear in and defend any action or
proceeding purporting to affect the Mortgaged Property or the rights of the
mortgagee under the mortgage. Upon a failure of the mortgagor to perform any of
these obligations, the mortgagee is given the right under certain mortgages to
perform the obligation itself, at its election, with the mortgagor agreeing to
reimburse the mortgagee for any sums expended by the mortgagee on behalf of the
mortgagor. All sums so expended by the mortgagee become part of the indebtedness
secured by the mortgage.
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The form of credit line trust deed or mortgage used by most institutional
lenders which make revolving home equity loans typically contains a "future
advance" clause, which provides, in essence, that additional amounts advanced to
or on behalf of the borrower by the beneficiary or lender are to be secured by
the deed of trust or mortgage. The priority of the lien securing any advance
made under the clause may depend in most states on whether the deed of trust or
mortgage is called and recorded as a credit line deed of trust or mortgage. If
the beneficiary or lender advances additional amounts, the advance is entitled
to receive the same priority as amounts initially advanced under the trust deed
or mortgage, notwithstanding the fact that there may be junior trust deeds or
mortgages and other liens which intervene between the date of recording of the
trust deed or mortgage and the date of the future advance, and notwithstanding
that the beneficiary or lender had actual knowledge of such intervening junior
trust deeds or mortgages and other liens at the time of the advance. In most
states, the trust deed or mortgage lien securing mortgage loans of the type
which includes revolving home equity credit lines applies retroactively to the
date of the original recording of the trust deed or mortgage, provided that the
total amount of advances under the home equity credit line does not exceed the
maximum specified principal amount of the recorded trust deed or mortgage,
except as to advances made after receipt by the lender of a written notice of
lien from a judgment lien creditor of the trustor.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the real Mortgaged Property and the amount due to the
lender. Other statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
In certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, when applicable, is that lenders
will usually proceed first against the security rather than bringing a personal
action against the borrower. Finally, other statutory provisions limit any
deficiency judgment against the former borrower following a foreclosure sale to
the excess of the outstanding debt over the fair market value of the Mortgaged
Property at the time of the public sale. The purpose of these statutes is
generally to prevent a beneficiary or a mortgagee from obtaining a large
deficiency judgment against the former borrower as a result of low or no bids at
the foreclosure sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws, the Federal
Soldiers' and Sailors' Civil Relief Act, and state laws affording relief to
debtors, may interfere with or affect the ability of the secured lender to
realize upon collateral and/or enforce a deficiency judgment. For example, with
respect to federal bankruptcy law, the filing of a petition acts as a stay
against the enforcement of remedies for collection of a debt. Moreover, a court
with federal bankruptcy jurisdiction may permit a debtor through a Chapter 13
Bankruptcy Code rehabilitative plan to cure a monetary default with respect to a
loan on a debtor's residence by paying arrearages within a reasonable time
period and reinstating the original loan payment schedule even though the lender
accelerated the loan and the lender has taken all steps to realize upon his
security (provided no sale of the Mortgaged Property has yet occurred) prior to
the filing of the debtor's Chapter 13 petition. Some courts with federal
bankruptcy jurisdiction have approved plans, based on the particular facts of
the reorganization case, that effected the curing of a loan default by
permitting the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan may be modified if the borrower has filed a petition
under Chapter 13. These courts have suggested that such modifications may
include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
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outstanding balance of the loan. Federal bankruptcy law and limited case law
indicate that the foregoing modifications could not be applied to the terms of a
loan secured by Mortgaged Property that is the principal residence of the
debtor. In all cases, the secured creditor is entitled to the value of its
security plus post-petition interest, attorney's fees and costs to the extent
the value of the security exceeds the debt.
In a Chapter 11 case under the Bankruptcy Code, the lender is precluded
from foreclosing without authorization from the bankruptcy court. The lender's
lien may be transferred to other collateral and/or be limited in amount to the
value of the lender's interest in the collateral as of the date of the
bankruptcy. The loan term may be extended, the interest rate may be adjusted to
market rates and the priority of the loan may be subordinated to bankruptcy
court-approved financing. The bankruptcy court can, in effect, invalidate due-
on-sale clauses through confirmed Chapter 11 plans of reorganization.
The Bankruptcy Code provides priority to certain tax liens over the
lender's security. This may delay or interfere with the enforcement of rights in
respect of a defaulted Mortgage Loan. In addition, substantive requirements are
imposed upon lenders in connection with the organization and the servicing of
mortgage loans by numerous federal and some state consumer protection laws. The
laws include the federal Truth-in-Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act and related statutes and regulations. These federal laws impose
specific statutory liabilities upon lenders who originate loans and who fail to
comply with the provisions of the law. In some cases, this liability may affect
assignees of the loans.
DUE-ON-SALE CLAUSES IN MORTGAGE LOANS
Due-on-sale clauses permit the lender to accelerate the maturity of the
loan if the borrower sells or transfers, whether voluntarily or involuntarily,
all or part of the real Mortgaged Property securing the loan without the
lender's prior written consent. The enforceability of these clauses has been the
subject of legislation or litigation in many states, and in some cases,
typically involving single family residential mortgage transactions, their
enforceability has been limited or denied. In any event, the Garn-St. Germain
Depository Institutions Act of 1982 (the "Garn-St. Germain Act") preempts state
constitutional, statutory and case law that prohibits the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to certain exceptions. As a result, due-on-sale
clauses have become generally enforceable except in those states whose
legislatures exercised their authority to regulate the enforceability of such
clauses with respect to mortgage loans that were (i) originated or assumed
during the "window period" under the Garn-St. Germain Act which ended in all
cases not later than October 15, 1982, and (ii) originated by lenders other than
national banks, federal savings institutions and federal credit unions. FHLMC
has taken the position in its published mortgage servicing standards that, out
of a total of eleven "window period states," five states (Arizona, Michigan,
Minnesota, New Mexico and Utah) have enacted statutes extending, on various
terms and for varying periods, the prohibition on enforcement of due-on-sale
clauses with respect to certain categories of window period loans. Also, the
Garn-St. Germain Act does "encourage" lenders to permit assumption of loans at
the original rate of interest or at some other rate less than the average of the
original rate and the market rate.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from such bankruptcy proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon the late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if the
loan is prepaid. Late charges and prepayment fees are typically retained by
servicers as additional servicing compensation.
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EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security, courts
have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his defaults
under the loan documents. Examples of judicial remedies that have been fashioned
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon his
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the Mortgaged Property or the
borrower's execution of secondary financing affecting the Mortgaged Property.
Finally, some courts have been faced with the issue of whether or not federal or
state constitutional provisions reflecting due process concerns for adequate
notice require that borrowers under security agreements receive notices in
addition to the statutorily-prescribed minimums. For the most part, these cases
have upheld the notice provisions as being reasonable or have found that, in
cases involving the sale by a trustee under a deed of trust or by a mortgagee
under a mortgage having a power of sale, there is insufficient state action to
afford constitutional protections to the borrower.
Most conventional single-family mortgage loans may be prepaid in full or in
part without penalty. The regulations of the Federal Home Loan Bank Board
prohibit the imposition of a prepayment penalty or equivalent fee for or in
connection with the acceleration of a loan by exercise of a due-on-sale clause.
A mortgagee to whom a prepayment in full has been tendered may be compelled to
give either a release of the mortgage or an instrument assigning the existing
mortgage. The absence of a restraint on prepayment, particularly with respect to
mortgage loans having higher mortgage rates, may increase the likelihood of
refinancing or other early retirements of such mortgage loans.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. Similar federal statutes
were in effect with respect to mortgage loans made during the first three months
of 1980. The Federal Home Loan Bank Board is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title V.
Title V authorizes any state to reimpose interest rate limits by adopting,
before April 1, 1983, a state law, or by certifying that the voters of such
state have voted in favor of any provision, constitutional or otherwise, which
expressly rejects an application of the federal law. Fifteen states adopted such
a law prior to the April 1, 1983 deadline. In addition, even where Title V is
not so rejected, any state is authorized by the law to adopt a provision
limiting discount points or other charges on mortgage loans covered by Title V.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service, (i) are entitled to have interest rates reduced and capped at
6% per annum, on obligations (including Mortgage Loans) incurred prior to the
commencement of military service for the duration of military service, (ii) may
be entitled to a stay of proceedings on any kind of foreclosure or repossession
action in the case of defaults on such obligations entered into prior to
military service for the duration of military service and (iii) may have the
maturity of such obligations incurred prior to military service extended, the
payments lowered and the payment schedule readjusted for a period of time after
the completion of military service. However, the benefits of (i), (ii), or (iii)
above are subject to challenge by creditors and if, in the opinion of the court,
the ability of a person to comply with such obligations is not materially
impaired by military service, the court may apply equitable principles
accordingly. If a borrower's obligation to repay amounts otherwise due on a
Mortgage Loan included in a Trust Fund for a Series is relieved pursuant to the
Soldiers' and Sailors' Civil Relief Act of 1940, none of the Trust Fund, the
Servicer, the Depositor nor the Trustee will be required to advance such
amounts, and any loss in respect
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thereof may reduce the amounts available to be paid to the Holders of the
Securities of such Series. Unless otherwise specified in the related Prospectus
Supplement, any shortfalls in interest collections on Mortgage Loans included in
a Trust Fund for a Series resulting from application of the Soldiers' and
Sailors' Civil Relief Act of 1940 will be allocated to each Class of Securities
of such Series that is entitled to receive interest in respect of such Mortgage
Loans in proportion to the interest that each such Class of Securities would
have otherwise been entitled to receive in respect of such Mortgage Loans had
such interest shortfall not occurred.
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USE OF PROCEEDS
The Depositor will apply all or substantially all of the net proceeds from
the sale of each Series of Securities for one or more of the following purposes:
(i) to purchase the related Mortgage Loans, (ii) to repay indebtedness which has
been incurred to obtain funds to acquire such Mortgage Loans, (iii) to establish
any Reserve Funds described in the related Prospectus Supplement and (iv) to pay
costs of structuring and issuing such Securities, including the costs of
obtaining Credit Enhancement, if any. If so specified in the related Prospectus
Supplement, the purchase of the Mortgage Loans for a Series may be effected by
an exchange of Securities with the Seller of such Mortgage Loans.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a summary of certain United States federal income tax
consequences of an investment in the Securities by Holders that acquire their
Securities in their initial offering. This summary is based on the Internal
Revenue Code of 1986 (the "Code") as well as Treasury regulations and
administrative and judicial rulings and practice. Legislative, judicial and
administrative changes may occur, possibly with retroactive effect, that could
alter or modify the continued validity of the statements and conclusions set
forth herein. This summary does not purport to address all federal income tax
matters that may be relevant to particular holders. For example, it generally is
addressed only to original purchasers of the Securities that are "U.S. holders"
(as defined below), deals only with Securities held as capital assets within the
meaning of Section 1221 of the Code, and does not address tax consequences to
holders that may be relevant to investors subject to special rules, such as
non-U.S. investors, banks, insurance companies, tax-exempt organizations,
dealers in securities or currencies, electing large partnerships, mutual funds,
REITs, RICs, natural persons, cash method taxpayers, S corporations, estates and
trusts, investors that hold the Securities as part of a hedge, straddle or
integrated or conversion transaction, or holders whose "functional currency" is
not the United States dollar. Further, it does not address alternative minimum
tax consequences or the indirect effects on the holders of equity interests in a
Holder of Securities. Investors should consult their own tax advisors to
determine the United States federal, state, local and other tax consequences of
the purchase, ownership and disposition of the Securities.
For these purposes, a U.S. holder is (i) a citizen or resident of the
United States, (ii) a corporation or partnership organized in or under the laws
of the United States, any state thereof or the District of Columbia (except, in
the case of a partnership, to the extent provided in Treasury regulations) or
(iii) an estate or trust defined in Section 7701(a)(30)(D) or (E) of the Code,
respectively. "Non-U.S. holder" means any holder that is not a United States
holder.
Prospective investors should note that no rulings have been or will be
sought from the Internal Revenue Service ("IRS") with respect to any of the U.S.
federal income tax consequences discussed herein and opinions of counsel are not
binding on the IRS or the courts. Thus, no assurance can be given that the IRS
will not take positions contrary to those described below. The opinions of
Orrick, Herrington & Sutcliffe LLP, special counsel to the Depositor, described
herein will be based upon certain representations and assumptions, including,
but not limited to, the assumption that all relevant parties will comply with
the terms of the Trust Agreement and related documents.
This summary is intended as an explanatory discussion of the possible
effects of the classification of the securities as debt or equity and of the
Trust as a grantor trust or as a partnership for U.S. federal income tax
purposes on investors generally and related tax matters affecting investors
generally, but does not purport to furnish information in the level of detail or
with the attention to the investor's specific tax circumstances that would be
provided by an investor's own tax adviser. Accordingly, each investor is advised
to consult its own advisers with regard to the tax consequences to it of
investing in the Securities.
For purposes of the following discussion, except as otherwise provided
herein, the terms "Holder," "Noteholder" and "Certificateholder" refer,
respectively, to the beneficial owner of a Note or Certificate.
The federal income tax consequences to Holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness; (ii) the
Securities represent an ownership interest in some or all of the assets included
in the Trust Fund for a Series; or (iii) the Trust Fund relating to a particular
Series of Certificates is treated as a partnership. The Prospectus Supplement
for each Series of Securities will specify how the Securities will be treated
for federal income tax purposes.
PASS-THROUGH DEBT CERTIFICATES
The related Prospectus Supplement may provide that the Transferor will
express in the Pooling and Servicing Agreement the intent that for federal,
state and local income and franchise tax purposes, the
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Certificates will be debt secured by the Receivables. Any such Certificates are
referred to as "Pass-Through Debt Certificates." The Transferor, by entering
into the Pooling and Servicing Agreement, and each Holder, by the acceptance of
a beneficial interest in a Pass-Through Debt Certificate, will agree to treat
Pass-Through Debt Certificates as debt for federal, state and local income and
franchise tax purposes. However, the Pooling and Servicing Agreement generally
refers to the transfer of Receivables as a "transfer" and "sale," and because
different criteria are used in determining the non-tax accounting treatment of
the transaction, the Transferor will treat the Pooling and Servicing Agreement
for certain non-tax accounting purposes as causing a transfer of an ownership
interest in the Receivables and not as creating a debt obligation.
A basic premise of federal income tax law is that the economic substance of
a transaction generally determines its tax consequences. The form of a
transaction, while a relevant factor, is not conclusive evidence of its economic
substance. In appropriate circumstances, the courts have allowed taxpayers as
well as the Internal Revenue Service (the "IRS") to treat a transaction in
accordance with its economic substance, as determined under federal income tax
law, even through the participants in the transaction have characterized it
differently for non-tax purposes.
The determination of whether the economic substance of a purchase of an
interest in property is instead a loan secured by the transferred property has
been made by the IRS and the courts on the basis of numerous factors designed to
determine whether the transferor has relinquished (and the purchaser has
obtained) substantial incidents of ownership in the property. Among those
factors, the primary ones examined are whether the purchaser has the opportunity
to gain if the property increases in value, and has the risk of loss if the
property decreases in value. The related Prospectus Supplement may indicate that
Orrick, Herrington & Sutcliffe LLP, special federal income tax counsel to the
Transferors ("Tax Counsel") is of the opinion that, under current law, although
no transaction closely comparable to that contemplated herein has been the
subject of any Treasury regulation, revenue ruling or judicial decision, for
federal income tax purposes the Pass-Through Debt Certificates offered hereunder
will properly be characterized as debt. Assuming that such securities are
characterized as debt for federal income tax purposes, the discussion below
under "Taxation of Debt Securities" will apply.
Assuming that the Pass-Through Debt Certificates are characterized as debt,
the Trust would be disregarded for federal income tax purposes. Alternatively,
if there is more than one Holder of Transferor's Interest, the Trust might be
characterized as a separate entity owning the Receivables, issuing its own debt,
and jointly owned by the holders of the Transferor's Interest. However, Tax
Counsel is of the opinion that any such entity constituted by the Trust will not
be an association or publicly traded partnership taxable as a corporation.
Possible Treatment of the Trust as a Partnership or a Publicly Traded
Partnership. Although as described above, Tax Counsel is of the opinion that
the Certificates will properly be treated as debt for federal income tax
purposes and that the Trust will not be treated as an association or publicly
traded partnership taxable as a corporation, such opinion does not bind the IRS
or the courts and thus no assurance can be given that such treatment will
prevail. Further, such opinion is made with respect to current law, which is
subject to change. If the IRS were to contend successfully that the Pass-Through
Debt Certificates were equity in the Trust for federal income tax purposes, the
Trust could be classified as a partnership or as a publicly traded partnership
taxable as a corporation for such purposes. Because Tax Counsel is of the
opinion that the Pass-Through Debt Certificates will be characterized as debt
for federal income tax purposes and because any holder of an interest in a
Pass-Through Debt Certificate will agree to treat that interest as debt for such
purposes, no attempt will be made to comply with any tax reporting requirements
that would apply as a result of such alternative characterizations.
If the Trust were treated in whole or in part as a partnership in which
some or all holders of interests in the publicly offered Pass-Through Debt
Certificates were partners, that partnership could be classified as a publicly
traded partnership, and so could be treated as a corporation. If the Trust were
classified as a publicly traded partnership it would avoid treatment as a
corporation if its income was not derived in the conduct of a "financial
business"; however, whether the income of the Trust would be so classified is
unclear.
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If the arrangement created by the Pooling and Servicing Agreement were
treated in whole or in part as a publicly traded partnership treated as a
corporation, that entity would be subject to federal income tax at corporate tax
rates on its taxable income generated by ownership of the Receivables. That tax
could result in reduced distributions to Holders. No distributions from the
Trust would be deductible in computing the taxable income of the corporation,
except to the extent that any Certificates were treated as debt of the
corporation and distributions to the related Certificate Holders were treated as
payments of interest thereon. In addition, distributions to Certificate Holders
not treated as holding debt would be dividend income to the extent of the
current and accumulated earnings and profits of the corporation and Certificate
Holders may not be entitled to any dividends received deduction in respect of
such income and non-U.S. persons would be subject to withholding tax on such
dividend.
If the Trust were treated as a partnership other than a publicly traded
partnership treated as a corporation, the Holders would be taxed in a manner
similar to that described below under "Tax Consequences to Holders of the
Certificates."
TAXATION OF DEBT SECURITIES
Interest and Acquisition Discount. Interest (other than original issue
discount) on Securities that are characterized as indebtedness for federal
income tax purposes, including those denominated as Certificates (as described
above under "Pass-Through Debt Certificates"), will be includible in income by
holders thereof in accordance with their usual methods of accounting. Securities
characterized as debt for federal income tax purposes will be referred to
hereinafter collectively as "Debt Securities."
Debt Securities that are Compound Interest Securities will, and certain of
the other Debt Securities may, be issued with "original issue discount" ("OID").
The following discussion is based in part on the rules governing OID which are
set forth in Sections 1271-1275 of the Code and the Treasury regulations issued
thereunder (the "OID Regulations"). A Holder should be aware, however, that the
OID Regulations do not adequately address certain issues relevant to, and in
some instances provide that they are not applicable to, prepayable securities
such as the Debt Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. A holder of
a Debt Security must include such OID in gross income as ordinary interest
income as it accrues. In general, OID is included in income in advance of (or
concurrent with) the receipt of the cash representing that income. The amount of
OID on a Debt Security will be considered to be zero if it is less than a de
minimis amount determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that class are sold to the public
(excluding sales to bond houses, brokers, underwriters or wholesalers). If less
than a substantial amount of a particular class of Debt Securities is sold for
cash on or prior to the Closing Date, the issue price for such class will be
treated as the fair market value of such class on the Closing Date. The issue
price of a Debt Security will also include the amount paid by an initial Debt
Security holder for accrued interest that relates to a period prior to the issue
date of the Debt Security.
The stated redemption price at maturity of a Debt Security is equal to the
total of all payments to be made on such Debt Security other than "qualified
stated interest." In addition, that portion of the first interest payment in
excess of interest accrued from the Closing Date to the first Distribution Date
will be treated for federal income tax reporting purposes as includible in the
stated redemption price at maturity, and as excludible from income when received
as a payment of interest on the first Distribution Date (except to the extent of
any accrued market discount as of that date). The OID Regulations suggest,
however, that some or all of this pre-issuance accrued interest may be treated
as a separate asset (and hence not includible in a Debt Securities' issue price
or stated redemption price at maturity), whose cost is recovered entirely out of
interest paid on the first Distribution Date. It is unclear how an election to
do so would be made under the OID Regulations and whether such election could be
unilaterally made by a Holder. Under the OID Regulations, qualified stated
interest generally means interest payable at a single fixed rate that
appropriately takes into account the length of the interval between payments or
certain qualified variable rates provided that such interest payments are
unconditionally payable at intervals of one year or less during the entire term
of the Debt
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Security. In the case of Compound Interest Securities, certain Interest Weighted
Securities, and certain of the other Debt Securities, none of the payments under
the instrument will be considered qualified stated interest, and thus the
aggregate amount of all payments will be included in the stated redemption price
at maturity.
Under the de minimis rule, OID on a Debt Security will be considered to be
zero if such OID is less an 0.25% of the stated redemption price at maturity of
the Debt Security multiplied by the weighted average maturity of the Debt
Security. For this purpose, the weighted average maturity of the Debt Security
is computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the Debt Security and the
denominator of which is the stated redemption price at maturity of the Debt
Security. The IRS may take the position that this rule should be applied taking
into account the Prepayment Assumption (defined below). Under the OID
Regulations, Debt Securities bearing only qualified stated interest except for
any "teaser" rate, interest holiday or other similar provision are treated as
subject to the de minimis rule if the greater of the foregone interest (as
described in such regulations) or any excess of the Debt Securities' stated
principal amount over their issue price is less than such de minimis amount.
Holders generally must report de minimis OID pro rata as principal payments are
received, and such income will be capital gain if the Debt Security is held as a
capital asset. However, accrual method holders may elect to accrue all de
minimis OID as well as market discount under a constant interest method.
The holder of a Debt Security issued with OID must include in gross income,
for all days during its taxable year on which it holds such Debt Security, the
sum of the "daily portions" of such original issue discount. The amount of OID
includible in income by a holder will be computed by allocating to each day
during a taxable year a pro rata portion of the original issue discount that
accrued during the relevant accrual period. In the case of a Debt Security the
principal payments on which are not subject to acceleration resulting from
prepayments on the Mortgage Loans, the amount of OID includible in income of a
Holder for an accrual period (generally the period over which interest accrues
on the debt instrument) will equal the product of the yield to maturity of the
Debt Security and the adjusted issue price of the Debt Security, reduced by any
payments of qualified stated interest. The adjusted issue price is the sum of
its issue price plus prior accruals or OID, reduced by the total payments made
with respect to such Debt Security in all prior periods, other than qualified
stated interest payments.
The amount of OID to be included in income by a holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a "Pay-Through Security"), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
"Prepayment Assumption"). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of (i) the sum of (a)
the present value of all payments remaining to be made on the Pay-Through
Security as of the close of the accrual period and (b) the payments during the
accrual period of amounts included in the stated redemption price of the
Pay-Through Security, over (ii) the adjusted issue price of the Pay-Through
Security at the beginning of the accrual period. The present value of the
remaining payments referred to in the preceding sentence will be determined on
the basis of three factors: (i) the original yield to maturity (giving effect to
the Prepayment Assumption) of the Pay-Through Security (determined on the basis
of compounding at the end of each accrual period and properly adjusted for the
length of the accrual period), (ii) events (including actual prepayments) that
have occurred before the end of the accrual period and (iii) the assumption that
the remaining payments will be made in accordance with the original Prepayment
Assumption. The effect of this method is to increase the portions of OID
required to be included in income by a Holder to take into account prepayments
with respect to the Mortgage Loans at a rate that exceeds the Prepayment
Assumption, and to decrease (but not below zero for any period) the portions of
original issue discount required to be included in income by a Holder of a
Pay-Through Security to take into account prepayments with respect to the
Mortgage Loans at a rate that is slower than the Prepayment Assumption. Although
original issue discount will be reported to Holders of Pay-Through Securities
based on the Prepayment Assumption, no representation is made to Holders that
Mortgage Loans will be prepaid at that rate or at any other rate.
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A subsequent holder of a Debt Security will also be required to include OID
in gross income, but such a holder who purchases a Debt Security for an amount
that exceeds its adjusted issue price will be entitled (as will an initial
holder who pays more than a Debt Security's issue price) to offset such OID by
comparable economic accruals of portions of such excess.
Effects of Defaults and Delinquencies. Holders will be required to report
income with respect to the related Securities under an accrual method without
giving effect to delays and reductions in distributions attributable to a
default or delinquency on the Mortgage Loans, except possibly to the extent that
it can be established that such amounts are uncollectible. As a result, the
amount of income (including OID) reported by a holder of a Debt Security in any
period could significantly exceed the amount of cash distributed to such holder
in that period. The holder will eventually be allowed a loss (or will be allowed
to report a lesser amount of income) to the extent that the aggregate amount of
distributions on the Securities is reduced as a result of a Mortgage Loan
default. However, the timing and character of such losses or reductions in
income are uncertain and, accordingly, holders of Securities should consult
their own tax advisors on this point.
Interest Weighted Securities. It is not clear how income should be accrued
with respect to Stripped Securities (as defined under "-- Tax Status as a
Grantor Trust; General" herein) the payments on which consist solely or
primarily of a specified portion of the interest payments on mortgages held by
the Trust Fund ("Interest Weighted Securities"). The Depositor intends to take
the position that all of the income derived from an Interest Weighted Security
should be treated as OID and that the amount and rate of accrual of such OID
should be calculated by treating the Interest Weighted Security as a Compound
Interest Security. Alternatively, the IRS could assert that an Interest Weighted
Security should be taxable under the rules governing bonds issued with
contingent payments.
Variable Rate Debt Securities. In the case of Debt Securities bearing
interest at a rate that varies directly, according to a fixed formula, with an
objective index, it appears that (i) the yield to maturity of such Debt
Securities and (ii) in the case of Pay-Through Securities, the present value of
all payments remaining to be made on such Debt Securities, should be calculated
as if the interest index remained at its value as of the issue date of such
Securities. Because the proper method of adjusting accruals of OID on a variable
rate Debt Security is uncertain, holders of variable rate Debt Securities should
consult their own tax advisers regarding the appropriate treatment of such
Securities for federal income tax purposes.
Market Discount. A purchaser of a Security may be subject to the market
discount rules of Sections 1276-1278 of the Code. A Holder that acquires a Debt
Security with more than a prescribed de minimis amount of "market discount"
(generally, the excess of the principal amount of the Debt Security or, in the
case of a Debt security issued with OID, the Debt Securities' adjusted issue
price, over the purchaser's purchase price) will be required to include accrued
market discount in income as ordinary income in each month, but limited to an
amount not exceeding the principal payments on the Debt Security received in
that month and, if the Securities are sold, the gain realized. Such market
discount would accrue in a manner to be provided in Treasury regulations but,
until such regulations are issued, such market discount would, in general,
accrue either (i) on the basis of a constant yield, or (ii) in the ratio of (a)
in the case of Securities (or in the case of a Pass-Through Security, as set
forth below, the Mortgage Loans underlying such Security) not originally issued
with original issue discount, stated interest payable in the relevant period to
total stated interest remaining to be paid at the beginning of the period or (b)
in the case of Securities (or, in the case of a Pass-Through Security, as
described below, the Mortgage Loans underlying such Security) originally issued
with original issue discount, OID in the relevant period to total OID remaining
to be paid as of the beginning of such period. The Prepayment Assumption, if
any, used in calculating the accrual of OID is to be used in calculating the
accrual of market discount under any of the above methods.
Section 1277 of the Code provides that the excess of interest paid or
accrued to purchase or carry a Security (or, in the case of a Pass-Through
Security, as described below, the underlying Mortgage Loans) with market
discount over interest received on such Security is allowed as a current
deduction only to the extent such excess is greater than the market discount
that accrued during the taxable year in which such interest expense was
incurred. In general, the deferred portion of any interest expense will be
deductible when such market discount is included in income, including upon the
sale, disposition, or repayment of the Security
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(or in the case of a Pass-Through Security, an underlying Mortgage Loan). A
holder may elect to include market discount in income currently as it accrues,
on all market discount obligations acquired by such holder during the taxable
year such election is made and thereafter, in which case the interest deferral
rule will not apply. Any such election is irrevocable without the consent of the
IRS.
Premium. A holder who purchases a Debt Security (other than an Interest
Weighted Security at a cost greater than its stated redemption price at
maturity, generally will be considered to have purchased the Security at a
premium, which it may elect to amortize as an offset to interest income on such
Security (and not as a separate deduction item) on a constant yield method.
Although no regulations addressing the computation of premium accrual on
securities similar to the Securities have been issued, the legislative history
of the 1986 Act indicates that premium is to be accrued in the same manner as
market discount. Accordingly, it appears that the accrual of premium on a Class
of Pay-Through Securities will be calculated using the prepayment assumption (if
any) used in pricing such Class. If a holder makes an election to amortize
premium on a Debt Security, such election will apply to all taxable debt
instruments (including all REMIC regular interests and all pass-through
certificates representing ownership interests in a trust holding debt
obligations) held by the holder at the beginning of the taxable year in which
the election is made, and to all taxable debt instruments acquired thereafter by
such holder, and will be irrevocable without the consent of the IRS. Purchasers
who pay a premium for the Securities should consult their tax advisers regarding
the election to amortize premium and the method to be employed.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a holder of a Debt Security to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method. If such an election were
to be made with respect to a Debt Security with market discount, the holder of
the Debt Security would be deemed to have made an election to include in income
currently market discount with respect to all other debt instruments having
market discount that such holder of the Debt Security acquires during the year
of the election or thereafter. Similarly, a holder of a Debt Security that makes
this election for a Debt Security that is acquired at a premium will be deemed
to have made an election to amortize bond premium with respect to all debt
instruments having amortizable bond premium that such holder owns or acquires.
The election to accrue interest, discount and premium on a constant yield method
with respect to a Debt Security is irrevocable without the consent of the IRS.
TAX STATUS AS A GRANTOR TRUST
General. The related Prospectus Supplement may provide that Orrick,
Herrington & Sutcliffe LLP, special counsel to the Depositor, will deliver an
opinion generally to the effect that the Trust Fund relating to a Series of
Securities will be classified for federal income tax purposes as a grantor trust
under Subpart E, Part 1 of Subchapter J of the Code and not as an association
taxable as (or a publicly traded partnership treated as) a corporation (the
Securities of such Series, "Pass-Through Securities"). In some Series there will
be no separation of the principal and interest payments on the Mortgage Loans.
In such circumstances, a Holder will be considered to have purchased a pro rata
undivided interest in each of the Mortgage Loans. In other cases ("Stripped
Securities"), sale of the Securities will produce a separation in the interest
payments on the ownership of all or a portion of the principal payments from all
or a portion of Mortgage Loans.
Each Holder must report on its federal income tax return its share of the
gross income derived from the Mortgage Loans (not reduced by the amount payable
as fees to the Trustee and the Servicer and similar fees (collectively, the
"Servicing Fee")), at the same time and in the same manner as such items would
have been reported under the Holder's tax accounting method had it held its
interest in the Mortgage Loans directly, received directly its share of the
amounts received with respect to the Mortgage Loans, and paid directly its share
of the Servicing Fees. In the case of Pass-Through Securities other than
Stripped Securities, such income will consist of a pro rata share of all of the
income derived from all of the Mortgage Loans and, in the case of Stripped
Securities, such income will consist of a pro rata share of the income derived
from each stripped bond or stripped coupon in which the Holder owns an interest.
The holder of a Security will generally be entitled to deduct such Servicing
Fees under Section 162 or Section 212 of the Code to the extent that such
Servicing Fees represent "reasonable" compensation for the services rendered by
the Trustee and the Servicer
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(or third parties that are compensated for the performance of services). In the
case of a noncorporate holder, however, Servicing Fees (to the extent not
otherwise disallowed, e.g., because they exceed reasonable compensation) will be
deductible in computing such holder's regular tax liability only to the extent
that such fees, when added to other miscellaneous itemized deductions, exceed 2%
of adjusted gross income and may not be deductible to any extent in computing
such holder's alternative minimum tax liability.
Discount or Premium on Pass-Through Securities. The holder's purchase
price of a Pass-Through Security is to be allocated among the Mortgage Loans in
proportion to their fair market values, determined as of the time of purchase of
the Securities. In the typical case, the Trustee (to the extent necessary to
fulfill its reporting obligations) will treat each Mortgage Loan as having a
fair market value proportional to the share of the aggregate principal balances
of all of the Mortgage Loans that it represents, since the Securities, unless
otherwise specified in the applicable Prospectus Supplement, will have a
relatively uniform interest rate and other common characteristics. To the extent
that the portion of the purchase price of a Pass-Through Security allocated to a
Mortgage Loan (other than to a right to receive any accrued interest thereon and
any undistributed principal payments) is less than or greater than the principal
balance of the Mortgage Loan, the interest in the Mortgage Loan allocable to the
Pass-Through Security will be deemed to have been acquired at a discount or
premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a Mortgage Loan with OID in
excess of a prescribed de minimis amount or a Stripped Security (see below), a
holder of a Security will be required to report as interest income in each
taxable year its share of the amount of OID that accrues during that year in the
manner described above. OID with respect to a Mortgage Loan could arise, for
example, by virtue of the financing of points by the originator of the Mortgage
Loan, or by virtue of the charging of points by the originator of the Mortgage
Loan in an amount greater than a statutory de minimis exception, in
circumstances under which the points are not currently deductible pursuant to
applicable Code provisions. Any market discount or premium on a Mortgage Loan
will be includible in income, generally in the manner described above, except
that in the case of Pass-Through Securities, market discount is calculated with
respect to the Mortgage Loans underlying the Certificate, rather than with
respect to the Security.
Stripped Securities. A Stripped Security may represent a right to receive
only a portion of the interest payments on the Mortgage Loans, a right to
receive only principal payments on the Mortgage Loans, or a right to receive
certain payments of both interest and principal. Certain Stripped Securities
("Ratio Strip Securities") may represent a right to receive differing
percentages of both the interest and principal on each Loan. Pursuant to Section
1286 of the Code, the separation of ownership of the right to receive some or
all of the interest payments on an obligation from ownership of the right to
receive some or all of the principal payments results in the creation of
"stripped bonds" with respect to principal payments and "stripped coupons" with
respect to interest payments. Section 1286 of the Code applies the OID rules to
stripped bonds and stripped coupons. For purposes of computing original issue
discount, a stripped bond or a stripped coupon is treated as a debt instrument
issued on the date that such stripped interest is purchased with an issue price
equal to its purchase price or, if more than one stripped interest is purchased,
the ratable share of the purchase price allocable to such stripped interest.
Servicing fees in excess of reasonable servicing fees ("excess servicing")
will be treated under the stripped bond rules. Under such rules, excess
servicing will be treated as a stripped coupon. If the excess servicing fee is
no more than 100 basis points (i.e. 1% interest on the Mortgage Loan principal
balance) or the Securities are initially sold with a de minimis discount
(assuming no prepayment assumption is required), any non-de minimis discount
arising from a subsequent transfer of the Securities should be treated as market
discount. The IRS appears to require that reasonable servicing fees be
calculated on a Loan by Loan basis, which could result in some Mortgage Loans
being treated as having more than 100 basis points of interest stripped off.
The Code, OID Regulations and judicial decisions provide no direct guidance
as to how the interest and original issue discount rules are to apply to
Stripped Securities and other Pass-Through Securities. Under the method
described above for Pay-Through Securities (the "Cash Flow Bond Method"), a
prepayment
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assumption is used and periodic recalculations are made which take into account
with respect to each accrual period the effect of prepayments during such
period. It is believed, however, that the Cash Flow Bond Method is a reasonable
method of reporting income for such Securities, and it is expected that OID will
be reported on that basis unless otherwise specified in the related Prospectus
Supplement. In applying the calculation to Pass-Through Securities, the Trustee
will treat all payments to be received by a holder with respect to the
underlying Mortgage Loans as payments on a single installment obligation. The
IRS could, however, assert that original issue discount must be calculated
separately for each Mortgage Loan underlying a Security.
Under certain circumstances, if the Mortgage Loans prepay at a rate faster
than the Prepayment Assumption, the use of the Cash Flow Bond Method may
accelerate a Holder's recognition of income. If, however, the Mortgage Loans
prepay at a rate slower than the Prepayment Assumption, the use of this method
may decelerate a Holder's recognition of income.
In the case of a Stripped Security that is an Interest Weighted Security,
the Trustee intends, absent contrary authority, to report income to Security
holders as OID, in the manner described above for Interest Weighted Securities.
Possible Alternative Characterizations. The characterizations of the
Stripped Securities described above are not the only possible interpretations of
the applicable Code provisions. Given the variety of alternatives for treatment
of the Stripped Securities and the different federal income tax consequences
that result from each alternative, potential purchasers are urged to consult
their own tax advisers regarding the proper, treatment of the Securities for
federal income tax purposes.
SALE OR EXCHANGE
Subject to the discussion below with respect to Trust Funds treated as a
partnership, a Holder's tax basis in its Security is the price such holder pays
for a Security, plus amounts of original issue or market discount included in
income and reduced by any payments received (other than qualified stated
interest payments), and any amortized premium. Gain or loss recognized on a
sale, exchange, or redemption of a Security, measured by the difference between
the amount realized and the Security's basis as so adjusted, will generally be
capital gain or loss, assuming that the Security is held as a capital asset.
TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to Trust Funds treated as a
partnership, unless interest (including OID) paid on a Security is considered to
be "effectively connected" with a trade or business conducted in the United
States by a nonresident alien individual, foreign partnership or foreign
corporation ("Nonresidents"), such interest will normally qualify as portfolio
interest (except where (i) the recipient is a holder, directly or by
attribution, of 10% or more of the capital or profits interest in the issuer or
any of the beneficial owners of the issuer (or, with respect to any beneficial
owner that is a corporation, 10% or more of the total combined voting power of
all classes of stock entitled to vote), or (ii) the recipient is a controlled
foreign corporation to which the issuer is a related person) and will be exempt
from federal income tax. Upon receipt of appropriate ownership statements, the
issuer normally will be relieved of obligations to withhold tax from such
interest payments. These provisions supersede the generally applicable
provisions of United States law that would otherwise require the issuer to
withhold at a 30% rate (unless such rate were reduced or eliminated by an
applicable tax treaty) on, among other things, interest and other fixed or
determinable, annual or periodic income paid to Nonresidents.
Interest and OID of Holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the Holder. They will, however, generally be subject to the regular
United States income tax.
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
The related Prospectus Supplement may provide that Orrick, Herrington &
Sutcliffe LLP, special counsel to the Depositor, will deliver its opinion
generally to the effect that the Trust Fund relating to a
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specific Series of Securities will be a partnership (or possibly a grantor
trust) and not an association (or publicly traded partnership) taxable as a
corporation for federal income tax purposes. This opinion will be based on the
assumption that the terms of the Trust Agreement and related documents will be
complied with, and on counsel's conclusions that either the nature of the income
of the Trust Fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the Certificates has
been structured as a private placement under an IRS safe harbor, so that the
Trust Fund will not be characterized as a publicly traded partnership taxable as
a corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, the Trust Fund would be subject to corporate income tax on its taxable
income. The Trust Fund's taxable income would include all its income, possibly
reduced by its interest expense on the Notes. Any such corporate income tax
could materially reduce cash available to make payments on the Notes and
distributions on the Certificates, and Certificateholders could be liable for
any such tax that is unpaid by the Trust Fund.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Special counsel to the Depositor will, except
as otherwise provided in the related Prospectus Supplement, advise the Depositor
that the Notes will be classified as debt for federal income tax purposes. The
discussion below assumes this characterization of the Notes is correct.
OID, Stripped Securities, etc. The discussion below assumes that all
payments on the Notes are denominated in U.S. dollars, and that the Notes are
not Stripped Securities. Moreover, the discussion assumes that the interest
formula for the Notes meets the requirements for "qualified stated interest"
under the OID regulations, and that any OID on the Notes does not exceed a de
minimis amount, all within the meaning of the OID regulations. If these
conditions are not satisfied with respect to any given series of Notes,
additional tax considerations with respect to such Notes will be disclosed in
the applicable Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with such
Noteholder's method of tax accounting. Under the OID regulations, a holder of a
Note issued with a de minimis amount of OID must include such OID in income, on
a pro rata basis, as principal payments are made on the Note. A purchaser who
buys a Note for more or less than its principal amount will generally be
subject, respectively, to the premium amortization or market discount rules of
the Code.
Sale or Other Disposition. If a Noteholder sells a Note, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the holder's
cost for the Note, increased by any market discount, acquisition discount, OID
and gain previously included by such Noteholder in income with respect to the
Note and decreased by the amount of bond premium (if any) previously amortized
and by the amount of principal payments previously received by such Noteholder
with respect to such Note. Any such gain or loss will be capital gain or loss if
the Note was held as a capital asset, except for gain representing accrued
interest and accrued market discount not previously included in income. Capital
losses generally may be used only to offset capital gains.
Foreign Holders. Interest payments made (or accrued) to a Noteholder who
is a nonresident alien, foreign corporation or other non-United States person (a
"foreign person") generally will be considered "portfolio interest", and
generally will not be subject to United States federal income tax and
withholding tax, if the interest is not effectively connected with the conduct
of a trade or business within the United States by the foreign person and the
foreign person (i) is not actually or constructively a "10% shareholder" (within
the meaning of Section 871(h)(3)(B) of the Code) of the Trust or of any
beneficial owner therein or a "controlled foreign corporation" with respect to
which the Trust or any beneficial owner is a "related person" within the meaning
of the Code and (ii) provides the proper certifications. If such interest is not
portfolio
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interest, then it will be subject to United States federal income and
withholding tax at a rate of 30 percent, unless reduced or eliminated pursuant
to an applicable tax treaty.
Any capital gain realized on the- sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of special counsel to the Depositor, the IRS successfully asserted that one or
more of the Notes did not represent debt for federal income tax purposes, the
Notes might be treated as equity interests in the Trust Fund. If so treated, the
Trust Fund might be a publicly traded partnership treated as a corporation, with
the adverse consequences described above (and the publicly traded partnership
would not be able to reduce its taxable income by deductions for interest
expense on Notes recharacterized as equity). Further, treatment of the Notes as
equity interests in such a publicly traded partnership could have adverse tax
consequences to certain holders. For example, income to certain tax-exempt
entities (including pension funds) would be "unrelated business taxable income",
income to foreign holders generally would be subject to U.S. tax and U.S. tax
return filing and withholding requirements, and individual holders might be
subject to certain limitations on their ability to deduct their share of the
Trust Fund's expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
Treatment of the Trust Fund as a Partnership. The Trust Fund and the
Servicer will agree, and the Certificateholders will agree by their purchase of
Certificates, to treat the Trust Fund as a partnership for purposes of federal
and state income tax, franchise tax and any other tax measured in whole or in
part by income, with the assets of the partnership being the assets held by the
Trust Fund, the partners of the partnership being the Certificateholders, and
the Notes being debt of the partnership. However, the proper characterization of
the arrangement involving the Trust Fund, the Certificates, the Notes and the
Servicer is not clear because there is no authority on transactions closely
comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates (while unlikely) might be considered debt of the Trust Fund. The
following discussion assumes that the Certificates represent equity interests in
a partnership.
Stripped Securities, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Stripped Securities, and that a Series of Securities includes a
single class of Certificates. If these conditions are not satisfied with respect
to any given Series of Certificates, additional tax considerations with respect
to such Certificates will be disclosed in the applicable Prospectus Supplement.
Partnership Taxation. As a partnership, the Trust Fund will not be subject
to federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust Fund. Such items generally will have
the same character (ordinary or capital, short-term or long-term) and source in
the hands of each Certificateholder as they have in the hands of the Trust Fund.
The Trust Fund's income will consist primarily of interest and finance charges
earned on the Mortgage Loans (including appropriate adjustments for market
discount, OID and bond premium) and any gain upon collection or disposition of
Mortgage Loans. The Trust Fund'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 Mortgage Loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust Fund for each month equal to the sum of (i) the interest that accrues on
the Certificates in accordance with their terms for such month, including
interest accruing at the Pass Through Rate for such month and interest
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on amounts previously due on the Certificates but not yet distributed; (ii) any
Trust Fund income attributable to discount on the Mortgage Loans that
corresponds to any excess of the principal amount of the Certificates over their
initial issue price; (iii) prepayment premium payable to the Certificateholders
for such month; and (iv) any other amounts of income payable to the
Certificateholders for such month. Such allocation will be reduced by any
amortization by the Trust Fund of premium on Mortgage Loans that corresponds to
any excess of the issue price of Certificates over their principal amount. All
remaining taxable income of the Trust Fund may be allocated to the Depositor or
may be allocated pro rata among the Certificateholders. Based on the economic
arrangement of the parties, this approach for allocating Trust Fund income
should be permissible under applicable Treasury regulations, although no
assurance can be given that the IRS would not require a greater amount of income
to be allocated to the Certificateholders. Moreover, even under the foregoing
method of allocation, Certificateholders may be allocated income equal to the
entire Pass Through Rate plus the other items described above even though the
Trust Fund might not have sufficient cash to make current cash distributions of
such amount. Thus, cash basis holders will in effect be required to report
income from the Certificates on the accrual basis and Certificateholders may
become liable for taxes on Trust Fund income even if they have not received cash
from the Trust Fund 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 Fund. In addition, if the Trust Fund's payments on the Certificates
is payable to the Certificateholders without regard to the income of the Trust
Fund, the Trust Fund's payment of such amounts to Certificateholders may be
treated as "guaranteed payments" within the meaning of Section 707(c) of the
Code, and not as a distributive share of the Trust Fund's income. Such
guaranteed payments will constitute ordinary income to a Certificateholder but
may not be considered interest income for U.S. federal income tax purposes.
All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute "unrelated business
taxable income generally taxable to such a holder under the Code.
An individual taxpayer's share of expenses of the Trust Fund (including
fees to the Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual in whole or in
part and might result in such holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to such holder over the life of
the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Mortgage Loan, the
Trust Fund might be required to incur additional expense but it is believed that
there would not be a material adverse effect on Certificateholders.
Discount and Premium. The trust may have OID income, since the Mortgage
Loans may have been issued with OID. In addition, the purchase price paid by the
Trust Fund for the Mortgage Loans may be greater or less than the remaining
principal balance of the Mortgage Loans at the time of purchase. If so, the
Mortgage Loan will have been acquired at a premium or discount, as the case may
be. (As indicated above, the Trust Fund will make this calculation on an
aggregate basis, but might be required to recompute it on a Loan by Loan basis.)
If the Trust Fund acquires the Mortgage Loans at a market discount or
premium, the Trust Fund will elect to include any such discount in income
currently as it accrues over the life of the Mortgage Loans or to offset any
such premium against interest income on the Mortgage Loans. As indicated above,
a portion of such market discount income or premium deduction may be allocated
to Certificateholders.
Section 708 Termination. Under Section 708 of the Code, the Trust Fund
will be deemed to terminate for federal income tax purposes if 50% or more of
the capital and profits interests in the Trust Fund are sold or exchanged within
a 12-month period. If such a termination occurs, the Trust Fund will be
considered to have transferred all of its assets and liabilities to a new
partnership and then to have immediately liquidated and distributed the
interests in the new partnership to the continuing Certificateholders. The Trust
Fund will not comply with certain technical requirements that might apply when
such a constructive termination occurs. As
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a result, the Trust Fund may be subject to certain tax penalties and may incur
additional expenses if it is required to comply with those requirements.
Furthermore, the Trust Fund might not be able to comply due to lack of data.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
holder's cost increased by the holder's share of Trust Fund income and decreased
by any distributions received with respect to such Certificate. In addition,
both the tax basis in the Certificates and the amount realized on a sale of a
Certificate would include the holder's share of the Notes and other liabilities
of the Trust Fund. A holder acquiring Certificates at different prices may be
required to maintain a single aggregate adjusted tax basis in such Certificates,
and, upon sale or other disposition of some of the Certificates, allocate a
portion of such aggregate tax basis to the Certificates sold (rather than
maintaining a separate tax basis in each Certificate for purposes of computing
gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's share of
unrecognized accrued market discount on the Mortgage Loans would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Trust Fund does not expect to have any other assets
that would give rise to such special reporting requirements. Thus, to avoid
those special reporting requirements, the Trust Fund will elect to include
market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificateholders
in proportion to the principal amount of Certificates owned by them as of the
close of the last day of such month. As a result, a holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before it purchased its Certificates.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the Certificateholders. The Trust
Fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust Fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust Fund 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 Fund will not make such
election. As a result, Certificateholders might be allocated a greater or lesser
amount of Trust Fund income than would be appropriate based on their own
purchase price for Certificates.
Administrative Matters. The Owner Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust Fund and will report each Certificateholder's allocable share of items of
Trust Fund income and expense to holders and the IRS on Schedule K-1. The Trust
Fund will provide the Schedule K-1 information to nominees that fail to provide
the Trust Fund with the information statement described below and such nominees
will be required to forward such information to the beneficial owners of the
Certificates. Generally, holders must file tax returns that are
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consistent with the information return filed by the Trust Fund or be subject to
penalties unless the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust Fund
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of such person,
(y) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust Fund information
as to themselves and their ownership of Certificates. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such information statement to the Trust Fund. The information referred to above
for any calendar year must be furnished to the Trust Fund on or before the
following January 31. Nominees, brokers and financial institutions that fail to
provide the Trust Fund with the information described above may be subject to
penalties.
It is expected that the Depositor will be designated as (or the
attorney-in-fact for) the tax matters partner in the related Trust Agreement
and, as such, will be responsible for representing the Certificateholders in any
dispute with the IRS. The Code provides for administrative examination of a
partnership as if the partnership was a separate and distinct taxpayer.
Generally, the statute of limitations for partnership items does not expire
before three years after the date on which the partnership information return is
filed. Any adverse determination following an audit of the return of the Trust
Fund 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 Fund. 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 Fund.
If and to the extent that the recognition of a Certificateholder's
distributive share of the partnership's losses reduces the Certificateholder's
adjusted tax basis in its Certificate below zero, the recognition of such losses
by the Certificateholder will be deferred until such time as the recognition of
such losses will not reduce its basis below zero. To the extent that the
partnership's cash distributions (or constructive cash distributions, as
described above) reduce a Certificateholder's adjusted tax basis in its
Certificate below zero, such distributions will constitute income to such holder
and will be treated as gain derived from the sale or exchange of the holder's
interest in the partnership.
Tax Consequences to Foreign Certificateholders. Under the terms of the
Trust Agreement, the Certificates may not be acquired by or for the account of
an individual or entity that is not a U.S. person as defined in Section
7701(a)(30) of the Code, and any transfer of a Certificate to a person that is
not a U.S. person shall be void.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Considerations," potential investors should consider the
state and local income tax consequences of the acquisition, ownership, and
disposition of the Securities. State and local income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state or locality.
Therefore, potential investors should consult their own tax advisors with
respect to the various state and local tax consequences of an investment in the
Securities.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA")
and Section 4975 of the Code impose certain restrictions on employee benefit
plans subject to ERISA and on plans and other
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arrangements subject to Section 4975 of the Code ("Plans"), and on persons who
are parties in interest or disqualified persons ("parties in interest") with
respect to such Plans. Certain employee benefit plans, such as governmental
plans and church plans (if no election has been made under Section 410(d) of the
Code), are not subject to the restrictions of ERISA or Section 4975 of the Code
, and assets of such plans may be invested in the Securities without regard to
the ERISA considerations described below, subject to other applicable federal
and state law. However, any such governmental or church plan which is qualified
under Section 401(a) of the Code and exempt from taxation under Section 501(a)
of the Code is subject to the prohibited transaction rules set forth in Section
503 of the Code.
Investments by most Plans are subject to ERISA's general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan.
Section 406 of ERISA prohibits parties in interest with respect to a Plan
from engaging in certain transactions ("prohibited transactions") involving a
Plan and its assets unless a statutory or administrative exemption applies to
the transaction. Section 4975 of the Code imposes certain excise taxes (or, in
some cases, a civil penalty may be assessed pursuant to Section 502(i) of ERISA)
on parties in interest which engage in nonexempt prohibited transactions.
The United States Department of Labor ("DOL") has issued a final regulation
(29 C.F.R. Section 2510.3-101) containing rules for determining what constitutes
the assets of a Plan. This regulation provides that, as a general rule, the
underlying assets and properties of corporations, partnerships, trusts and
certain other entities in which a Plan makes an investment in an "equity
interest" will be deemed, for purposes of ERISA and Section 4975 of the Code to
be assets of the Plan ("plan assets") unless certain exceptions apply.
Under the terms of the DOL regulation, the Trust Fund may be deemed to hold
plan assets by reason of a Plan's investment in a Security; such plan assets
would include an undivided interest in the Mortgage Loans and any other assets
held by the Trust Fund. In such an event, persons providing services with
respect to the assets of the Trust Fund may be parties in interest, subject to
the fiduciary responsibility provisions of ERISA, including the prohibited
transaction provisions of Section 406 of ERISA and Section 4975 of the Code,
with respect to transactions involving such assets unless such transactions are
subject to a statutory or administrative exemption.
One such exception applies if the interest acquired by a Plan is treated as
indebtedness under applicable local law and has no substantial equity features.
Generally, a profits interest in a partnership, an undivided ownership interest
in Mortgaged Property and a beneficial ownership interest in a trust are deemed
to be "equity interests" under the DOL regulation. If Notes of a particular
Series were deemed to be indebtedness under applicable local law without any
substantial equity features, an investing Plan's assets would include such
Notes, but not, by reason of the Plan's investment, the underlying assets of the
Trust Fund.
Another such exception applies if the class of equity interests in question
is: (i) "widely held" (held by 100 or more investors who are independent of the
Depositor and each other); (ii) freely transferable; and (iii) sold as part of
an offering pursuant to (A) an effective registration statement under the
Securities Act of 1933, and then subsequently registered under the Securities
Exchange Act of 1934 or (B) an effective registration statement under Section
12(b) or 12(g) of the Securities Exchange Act of 1934 ("Publicly Offered
Securities"). In addition, the DOL regulation provides that if at all times more
than 75% of the value of each class of equity interests in the Trust Fund are
held by investors other than benefit plan investors (which is defined as
including Plans, government, church and foreign plans and individual retirement
accounts), the investing Plan's assets will not include any of the underlying
assets of the Depositor or the Trust Fund.
An additional exemption may also be available. The DOL has granted to many
underwriters substantially similar administrative exemptions from certain of the
prohibited transaction rules of ERISA and Section 4975 of the Code with respect
to the initial purchase, the holding and the subsequent resale by Plans of
securities representing interests in asset-backed pass-through trusts that
consist of certain receivables, loans and other
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obligations that meet the conditions and requirements of the exemption. These
securities may include the Certificates of a Series, and depending upon the
particular characteristics of a Series, may include the Notes. The obligations
covered by such exemptions include obligations such as the Mortgage Loans. The
exemptions may apply to the acquisition, holding and resale of the Securities by
a Plan, provided that certain conditions (certain of which are described below)
are met.
Among the conditions which must be satisfied for the exemptions to apply
are the following:
(i) The acquisition of the Securities by a Plan is on terms (including
the price for the Securities) that are at least as favorable to the Plan as
they would be in an arm's-length transaction with an unrelated party;
(ii) The rights and interests evidenced by the Securities acquired by
the Plan are not subordinated to the rights and interests evidenced by
other securities of the Trust Fund;
(iii) The Securities acquired by the Plan have received a rating at
the time of such acquisition that is in one of the three highest generic
rating categories from either Standard & Poor's Ratings Services ("Standard
& Poor's"), Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps
Credit Rating Co. ("D&P") or Fitch IBCA, Inc. ("Fitch");
(iv) The sum of all payments made to the underwriter in connection
with the distribution of the Securities represents not more than reasonable
compensation for underwriting the Securities. The sum of all payments made
to and retained by the Seller pursuant to the sale of the obligations to
the Trust represents not more than the fair market value of such
obligations. The sum of all payments made to and retained by the Servicer
represents not more than reasonable compensation for the Servicer's
services under the related servicing agreement and reimbursement of the
Servicer's reasonable expenses in connection therewith;
(v) The Trustee must not be an affiliate of any other member of the
Restricted Group (as defined below); and
(vi) The Plan investing in the Securities is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933.
In order for the exemptions to apply, the Trust Fund also must meet the
following requirements:
(i) the corpus of the Trust Fund must consist solely of assets of the
type which have been included in other investment pools;
(ii) securities in such other investment pools must have been rated in
one of the three highest rating categories of Standard & Poor's, Moody's,
D&P or Fitch for at least one year prior to the Plan's acquisition of
securities; and
(iii) securities evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at least one
year prior to any Plan's acquisition of Securities.
Moreover, the exemptions provide relief from certain self-dealing/conflict
of interest prohibited transactions that may occur when the Plan fiduciary
causes a Plan to acquire securities in a trust in which the fiduciary (or its
affiliate) is an obligor on the receivables held in the trust, provided that,
among other requirements, (i) in the case of an acquisition in connection with
the initial issuance of Securities, at least fifty (50) percent of each Class of
Securities in which Plans have invested is acquired by persons independent of
the Restricted Group and at least fifty (50) percent of the aggregate interest
in the trust is acquired by persons independent of the Restricted Group; (ii)
such fiduciary (or its affiliate) is an obligor with respect to five (5) percent
or less of the fair market value of the obligations contained in the trust;
(iii) the Plan's investment in Securities does not exceed twenty-five (25)
percent of all of the Securities issued by the Trust Fund outstanding after the
acquisition; and (iv) no more than twenty-five (25) percent of the assets of the
Plan are invested in securities representing an interest in one or more trusts
containing assets sold or serviced by the same entity. The Exemption does not
apply to Plans sponsored by the Depositor, the underwriters of the Securities,
the Trustee, the Servicer, any obligor with respect to obligations included in a
Trust Fund
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constituting more than five (5) percent of the aggregate unamortized principal
balance of the assets in a Trust Fund, or any affiliate of such parties (the
"Restricted Group").
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the potential application of the
exemptions described above to the purchase and holding of the Securities, and
the potential consequences to their specific circumstances, prior to making an
investment in the Securities. Moreover, each Plan fiduciary should determine
whether, under the general fiduciary standards of investment procedure and
diversification, an investment in the Securities is appropriate for the Plan,
taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
LEGAL INVESTMENT
Unless otherwise specified in the related Prospectus Supplement, the
Securities will not constitute "mortgage-related securities" within the meaning
of SMMEA. Accordingly, investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether and to
what extent the Securities constitute legal investments for them.
PLAN OF DISTRIBUTION
The Depositor may offer each Series of Securities through one or more firms
(including, if so specified, certain affiliates of Banc One Corporation)
designated at the time of each offering of such Securities and identified in the
related Prospectus Supplement. The Prospectus Supplement relating to each Series
of Securities will set forth the specific terms of the offering of such Series
of Securities and of each Class within such Series, the names of the
underwriters, the purchase price of the Securities, the proceeds to the
Depositor from such sale, any securities exchange on which the Securities may be
listed, and, if applicable, the initial public offering prices, the discounts
and commissions to the underwriters and any discounts and concessions allowed or
reallowed to certain dealers. The place and time of delivery of each Series of
Securities will also be set forth in the Prospectus Supplement relating to such
Series.
LEGAL MATTERS
Unless otherwise specified in the related Prospectus Supplement, certain
legal matters in connection with the Securities will be passed upon for the
Company by Orrick, Herrington & Sutcliffe LLP, New York, New York.
GLOSSARY OF TERMS
The following are abbreviated definitions of certain capitalized terms used
in this Prospectus. Unless otherwise provided in a "Supplemental Glossary" in
the Prospectus Supplement for a Series, such definitions shall apply to
capitalized terms used in such Prospectus Supplement. The definitions may vary
from those in the related Agreement for a Series and the related Agreement for a
Series generally provides a more complete definition of certain of the terms.
Reference should be made to the related Agreement for a Series for a more
compete definition of such terms.
"Advance" means cash advanced by the Servicer in respect of delinquent
payments of principal of and interest on a Mortgage Loan, and for any other
purposes specified in the related Prospectus Supplement.
"Agreement" means, with respect to a Series of Certificates, the Pooling
and Servicing Agreement or Trust Agreement, and, with respect to a Series of
Notes, the Indenture and the Servicing Agreement, as the context requires.
"Appraised Value" means, with respect to Mortgaged Property securing a
Mortgage Loan, the lesser of the appraised value determined in an appraisal
obtained at origination of the Mortgage Loan or sales price of such Mortgaged
Property at such time.
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"Assumed Reinvestment Rate" means, with respect to a Series, the per annum
rate or rates specified in the related Prospectus Supplement for a particular
period or periods as the "Assumed Reinvestment Rate" for funds held in any fund
or account for the Series.
"Available Distribution Amount" means the amount in the Distribution
Account (including amounts deposited therein from any reserve fund or other fund
or account) eligible for distribution to Holders on a Distribution Date.
"Bankruptcy Code" means the federal bankruptcy code, 11 United States Code
101 et seq., and related rules and regulations promulgated thereunder.
"Business Day" means a day that, in the City of New York or in the city or
cities in which the corporate trust office of the Trustee are located, is
neither a legal holiday nor a day on which banking institutions are authorized
or obligated by law, regulations or executive order to be closed.
"Certificate" means the Asset-Backed Certificates.
"Class" means a Class of Securities of a Series.
"Closing Date" means, with respect to a Series, the date specified in the
related Prospectus Supplement as the date on which Securities of such Series are
first issued.
"Code" means the Internal Revenue Code of 1986.
"Collection Account" means, with respect to a Series, the account
established in the name of the Servicer for the deposit by the Servicer of
payments received from the Mortgage Loans.
"Combined Loan-to-Value Ratio" means, with respect to a Mortgage Loan, the
ratio determined as set forth in the related Prospectus Supplement taking into
account the amounts of any related senior mortgage loans on the related
Mortgaged Property.
"Commission" means the Securities and Exchange Commission.
"Condominium" means a form of ownership of real Mortgaged Property wherein
each owner is entitled to the exclusive ownership and possession of his or her
individual Condominium Unit and also owns a proportionate undivided interest in
all parts of the Condominium Building (other than the individual Condominium
Units) and all areas or facilities, if any, for the common use of the
Condominium Units.
"Condominium Association" means the person(s) appointed or elected by the
Condominium Unit owners to govern the affairs of the Condominium.
"Condominium Building" means a multi-unit building or buildings, or a group
of buildings whether or not attached to each other, located on Mortgaged
Property subject to Condominium ownership.
"Condominium Loan" means a Loan secured by a Mortgage on a Condominium Unit
(together with its appurtenant interest in the common elements).
"Condominium Unit" means an individual housing unit in a Condominium
Building.
"Cooperative" means a corporation owned by tenant-stockholders who, through
the ownership of stock, shares or membership securities in the corporation,
receive proprietary leases or occupancy agreements which confer exclusive rights
to occupy specific units and which is described in Section 216 of the Code.
"Cooperative Dwelling" means an individual housing unit in a building owned
by a Cooperative.
"Cooperative Loan" means a housing loan made with respect to a Cooperative
Dwelling and secured by an assignment by the borrower (tenant-stockholder) or
security interest in shares issued by the applicable Cooperative.
"Credit Enhancement" means the enhancement for a Series, if any, specified
in the related Prospectus Supplement.
"Cut-off Date" means the date designated as such in the related Prospectus
Supplement for a Series.
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"Debt Securities" means Securities characterized as indebtedness for
federal income tax purposes, and Regular Interest Securities.
"Deferred Interest" means the excess of the interest accrued on the
outstanding principal balance of a Mortgage Loan during a specified period over
the amount of interest required to be paid by an obligor on such Mortgage Loan
on the related Due Date.
"Depositor" means Banc One ABS Corporation.
"Distribution Account" means, with respect to a Series, the account
established in the name of the Trustee for the deposit of remittances received
from the Servicer with respect to the Mortgage Loans.
"Distribution Date" means, with respect to a Series or Class of Securities,
each date specified as a distribution date for such Series or Class in the
related Prospectus Supplement.
"Due Date" means each date, as specified in the related Prospectus
Supplement for a Series, on which any payment of principal or interest is due
and payable by the obligor on any Primary Asset pursuant to the terms thereof.
"Eligible Investments" means any one or more of the obligations or
securities described as such in the related Agreement.
"Enhancer" means the provider of the Credit Enhancement for a Series
specified in the related Prospectus Supplement.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Account" means an account, established and maintained by the
Servicer for a Mortgage Loan, into which payments by borrowers to pay taxes,
assessments, mortgage and hazard insurance premiums and other comparable items
required to be paid to the mortgagee are deposited.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"Final Scheduled Distribution Date" means, with respect to a Class of Notes
of a Series, the date no later than which principal thereof will be fully paid
and with respect to a Class of Certificates of a Series, the date after which no
Certificates of such Class will remain outstanding, in each case based on the
assumptions set forth in the related Prospectus Supplement.
"FNMA" means the Federal National Mortgage Association.
"Holder" means the person or entity in whose name a Security is registered.
"HUD" means the United States Department of Housing and Urban Development.
"Indenture" means the indenture relating to a Series of Notes between the
Trust Fund and the Trustee.
"Index" means the index applicable to any adjustments in the Mortgage Loan
Rates of any adjustable rate Mortgage Loans.
"Insurance Policies" means certain mortgage insurance, hazard insurance and
other insurance policies required to be maintained with respect to Mortgage
Loans.
"Insurance Proceeds" means amounts paid by the insurer under any of the
Insurance Policies covering any Mortgage Loan or Mortgaged Property.
"Interest Only Securities" means a Class of Securities entitled solely or
primarily to distributions of interest and which is identified as such in the
related Prospectus Supplement.
"IRS" means the Internal Revenue Service.
"Lifetime Rate Cap" means the lifetime limit, if any, on the Mortgage Loan
Rate during the life of each adjustable rate Mortgage Loan.
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"Liquidation Proceeds" means amounts received by the Servicer in connection
with the liquidation of a Mortgage Loan, net of liquidation expenses.
"Loan Rate" means, unless otherwise indicated herein or in the Prospectus
Supplement, the interest rate borne by a Mortgage Loan.
"Loan-to-Value Ratio" means, with respect to a Mortgage Loan, the ratio
determined as set forth in the related Prospectus Supplement.
"Minimum Rate" means the lifetime minimum Loan Rate during the life of each
adjustable rate Mortgage Loan.
"Modification" means a change in any term of a Mortgage Loan.
"Mortgage" means the mortgage, deed of trust or other similar security
instrument securing a Mortgage Note.
"Mortgage Loan" means a revolving home equity loan or line of credit
secured by a Mortgaged Property.
"Mortgage Loan Group" means, with respect to the Mortgage Loans and other
assets comprising the Trust Fund of a Series, a group of such Mortgage Loans and
other assets having the characteristics described in the related Prospectus
Supplement.
"Mortgage Note" means the note or other evidence of indebtedness of a
Mortgagor under the Mortgage Loan.
"Mortgaged Property" means a Mortgaged Property securing a Mortgage Loan.
"Mortgagor" means the obligor on a Mortgage Note.
"1986 Act" means the Tax Reform Act of 1986.
"Notes" means the Asset-Backed Notes.
"Notional Amount" means the amount set forth in the related Prospectus
Supplement for a Class of Interest Only Securities.
"Participating Securities" means Securities entitled to receive payments of
principal and interest and an additional return on investment as described in
the related Prospectus Supplement.
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust (including any beneficiary thereof),
unincorporated organization, or government or any agency or political
subdivision thereof.
"Pooling and Servicing Agreement" means the pooling and servicing agreement
relating to a Series of Certificates among the Depositor, the Servicer and the
Trustee.
"Principal Balance" means, with respect to a Mortgage Loan and as of a Due
Date, the original principal amount of the Mortgage Loan, plus the amount of any
Deferred Interest added to such principal amount, reduced by all payments, both
scheduled or otherwise, received on such Mortgage Loan prior to such Due Date
and applied to principal in accordance with the terms of the Mortgage Loan.
"Principal Only Securities" means a Class of Securities entitled solely or
primarily to distributions of principal and identified as such in the Prospectus
Supplement.
"Qualified Insurer" means a mortgage guarantee or insurance company duly
qualified as such under the laws of the states in which the Mortgaged Properties
are located duly authorized and licensed in such states to transact the
applicable insurance business and to write the insurance provided.
"Rating Agency" means the nationally recognized statistical rating
organization (or organizations) which was (or were) requested by the Depositor
to rate the Securities upon the original issuance thereof.
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"REO Mortgaged Property" means real Mortgaged Property which secured a
defaulted Mortgage Loan, beneficial ownership of which has been acquired upon
foreclosure, deed in lieu of foreclosure, repossession or otherwise.
"Reserve Fund" means, with respect to a Series, any Reserve Fund
established pursuant to the related Agreement.
"Retained Interest" means, with respect to a Mortgage Loan, the amount or
percentage specified in the related Prospectus Supplement which is not included
in the Trust Fund for the related Series.
"Scheduled Payments" means the scheduled payments of principal and interest
to be made by the borrower on a Mortgage Loan.
"Securities" means the Notes or the Certificates.
"Seller" means the seller of the Mortgage Loans to the Depositor identified
in the related Prospectus Supplement for a Series.
"Senior Securityholder" means a holder of a Senior Security.
"Senior Securities" means a Class of Securities as to which the Holders'
rights to receive distributions of principal and interest are senior to the
rights of Holders of Subordinate Securities, to the extent specified in the
related Prospectus Supplement.
"Series" means a separate series of Securities sold pursuant to this
Prospectus and the related Prospectus Supplement.
"Servicer" means, with respect to a Series, the Person if any, designated
in the related Prospectus Supplement to service Mortgage Loans for that Series,
or the successors or assigns of such Person.
"Single Family Mortgaged Property" means Mortgaged Property securing a
Mortgage Loan consisting of one- to four-family attached or detached residential
housing, including Cooperative Dwellings.
"Subordinate Securityholder" means a Holder of a Subordinate Security.
"Subordinated Securities" means a Class of Securities as to which the
rights of holders to receive distributions of principal, interest or both is
subordinated to the rights of holders of Senior Securities, and may be allocated
losses and shortfalls prior to the allocation thereof to other Classes of
Securities, to the extent and under the circumstances specified in the related
Prospectus Supplement.
"Trustee" means the trustee under the applicable Agreement and its
successors.
"Trust Fund" means, with respect to any Series of Securities, the trust
holding all money, instruments, securities and other Mortgaged Property,
including all proceeds thereof, which are, with respect to a Series of
Certificates, held for the benefit of the Holders by the Trustee under the
Pooling and Servicing Agreement or Trust Agreement, or, with respect to a Series
of Notes, pledged to the Trustee under the Indenture as a security for such
Notes, including, without limitation, the Mortgage Loans (except any Retained
Interests), all amounts in the Distribution Account, Collection Account or
Reserve Funds, distributions on the Mortgage Loans (net of servicing fees), and
reinvestment earnings on such net distributions and any Credit Enhancement and
all other Mortgaged Property and interests held by or pledged to the Trustee
pursuant to the related Agreement for such Series.
"UCC" means the Uniform Commercial Code.
"Zero Coupon Security" means a Security entitled to receive payments of
principal only.
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