AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 13, 1996
REGISTRATION NO. 333-07219
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 4
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ACCREDITED HOME LENDERS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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CALIFORNIA 15030 AVENUE OF SCIENCE, SUITE 100 33-0426859
(State of Incorporation) SAN DIEGO, CALIFORNIA 92128 (I.R.S. Employer Identification
(Address of principal executive No.)
offices)
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JAMES A. KONRATH
PRESIDENT
ACCREDITED HOME LENDERS, INC.
15030 AVENUE OF SCIENCE, SUITE 100
SAN DIEGO, CALIFORNIA 92128
(619) 676-2100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES TO:
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DAVID E. HERTZEL, ESQ. RAY M. MCKEWON CHRIS DIANGELO, ESQ.
GENERAL COUNSEL EXECUTIVE VICE PRESIDENT DEWEY BALLANTINE
ACCREDITED HOME LENDERS, INC. ACCREDITED HOME LENDERS, INC. 1301 SIXTH AVENUE
15030 AVENUE OF SCIENCE, SUITE 100 15030 AVENUE OF SCIENCE, SUITE 100 NEW YORK, NEW YORK 10019
SAN DIEGO, CALIFORNIA 92128 SAN DIEGO, CALIFORNIA 92128
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. X
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
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AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
BEING REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) FEE(2)(3)
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Mortgage Loan Asset-Backed
Securities........................ $500,000,000 (1) $500,000,000 $172,413.50
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(1) The proposed maximum offering price per unit will be determined, from time
to time, by the Registrant in connection with the issuance by the Registrant
of the securities registered hereunder.
(2) Calculated pursuant to Rule 457(o) of the rules and regulations under the
Securities Act of 1933, as amended.
(3) Previously paid.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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CROSS REFERENCE SHEET
TO FORM S-3
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ITEM AND CAPTION IN FORM S-3 CAPTION OR LOCATION IN PROSPECTUS
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1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus... Forepart of Registration Statement; Outside
Front Cover Page**
2. Inside Front and Outside Back Cover Page of
Prospectus................................. Inside Front and Outside Back Cover Page**
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges............... Summary of Prospectus**; Risk Factors**;
4. Use of Proceeds............................ Use of Proceeds
5. Determination of Offering Price............ *
6. Dilution................................... *
7. Selling Security-Holders................... *
8. Plan of Distribution....................... Plan of Distribution**
9. Description of Securities to be
Registered................................. Outside Front Cover Page**;
Summary of Prospectus**;
Description of the Securities**;
Federal Income Tax Considerations**
10. Interests of Named Experts and Counsel..... **
11. Material Changes........................... *
12. Incorporation by Reference................. Incorporation of Certain Documents by
Reference
13. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................ See Page II-4
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* Not applicable or answer is negative.
** To be completed from time to time by Prospectus Supplement.
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PROSPECTUS
ACCREDITED HOME LENDERS, INC.
ASSET-BACKED NOTES
ASSET-BACKED CERTIFICATES
(ISSUABLE IN SERIES)
Accredited Home Lenders, Inc. (the "Sponsor"), 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").
The Certificates of a Series will evidence undivided interests in certain
assets deposited into a trust (each, a "Trust Fund") by the Sponsor or an
affiliate (references to the "Sponsor" herein shall be deemed to include such an
affiliate unless the context otherwise requires). The Notes of a Series will
represent indebtedness secured by the related Trust Fund. A Series may consist
of both Certificates and of Notes, in which case the Certificates will represent
the equity ownership of the assets of the related Trust Fund, which assets are
subject to the senior lien of the related Notes. In no event will the
Certificates and Notes issued in a single Series and with respect to a single
Trust Fund exceed the value of the property in such Trust Fund. See "Description
of the Securities" herein.
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 under
"Description of the Securities" and in the related Prospectus Supplement. If so
specified in the related Prospectus Supplement, the assets comprising the Trust
Fund may be divided into one or more groups, and each Class of the related
Series will evidence beneficial ownership of the corresponding group, as
applicable.
The Trust Fund for a Series of Securities will include (a) assets originated
by the Sponsor or acquired by the Sponsor from affiliated or unaffiliated
institutions (each, a "Seller") composed of (i) mortgage loans (the "Mortgage
Loans"), including mortgage loans secured by senior liens or junior liens on the
related mortgaged properties and closed-end home equity loans, secured by
mortgages primarily on one- to four-family residential or small mixed-use
properties (the "Mortgaged Properties") and/or (ii) home improvement installment
sales contracts and installment loan agreements (the "Home Improvement
Contracts") which are secured by mortgages primarily on one- to four-family
residential properties, or by purchase money security interests in the home
improvements financed thereby (the "Home Improvements"), (b) all Mortgaged
Properties and/or Home Improvements (collectively, "Properties") acquired in
respect of Mortgage Loans and/or Home Improvement Contracts, respectively
(collectively, the "Loans"), and all monies due under the Loans net, to the
extent described in the related Prospectus Supplement, of certain amounts
payable to the Servicer, and (c) certain funds, Credit Enhancement (as defined
herein) and other assets as described herein under "The Trust Funds", all as
specifically set forth in the related Prospectus Supplement.
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 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 under "Description of the Securities--Weighted Average Life of
Securities" and in the related Prospectus Supplement. Under certain
circumstances a Series of Securities may be subject to termination or redemption
under the circumstances described herein under "Description of the
Securities--Special Redemption" and "--Optional Redemption, Purchase or
Termination" to the extent described in the related Prospectus Supplement.
SEE "RISK FACTORS", COMMENCING ON PAGE 13 HEREOF, FOR A DISCUSSION OF CERTAIN
RISKS ASSOCIATED WITH AN INVESTMENT IN THE CERTIFICATES
NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS OF, AND CERTIFICATES OF A SERIES
EVIDENCE BENEFICIAL INTERESTS IN THE RELATED TRUST FUND ONLY AND ARE NOT
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR BY THE SPONSOR, 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 SPONSOR'S ONLY OBLIGATIONS WITH RESPECT TO ANY SERIES OF SECURITIES
WILL BE PURSUANT TO CERTAIN REPRESENTATIONS AND WARRANTIES SET FORTH IN THE
RELATED POOLING AND SERVICING AGREEMENT. SEE "RISK FACTORS" COMMENCING ON PAGE
HEREOF FOR CERTAIN FACTORS TO BE CONSIDERED IN PURCHASING THE SECURITIES.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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The Securities offered by this Prospectus and by the related Prospectus
Supplement are offered by the underwriters set forth in the related Prospectus
Supplement subject to prior sale, to withdrawal, cancellation or modification of
the offer without notice, to delivery to and acceptance by the 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.
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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 related Loans, any Seller and any Subservicer; (iii) the terms of
any Credit Enhancement with respect to such Series; (iv) the terms of any
insurance related to the related 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; (ix) additional information with
respect to the plan of distribution of such Securities; and (x) whether a REMIC
election will be made with respect to some or all of the Trust Fund for such
Series.
AVAILABLE INFORMATION
The Sponsor is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files
reports and other information with the Securities and Exchange Commission (the
"Commission"). Such reports and other information filed by the Sponsor can be
inspected and copied at the public reference facilities maintained by the
Commission at its Public Reference Section, 450 Fifth Street, N.W., Washington,
D.C. 20549, and its Regional Offices located as follows: Chicago Regional
Office, 500 West Madison, 14th Floor, Chicago, Illinois 60661: New York Regional
Office, Seven World Trade Center, New York, New York 10048. Copies of such
material can also be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington D.C. 20549, at prescribed rates.
The Sponsor does not intend to send any financial reports to Certificateholders.
This Prospectus does not contain all of the information set forth in the
Registration Statement (of which this Prospectus forms a part) and exhibits
thereto which the Sponsor has filed with the Commission under the Securities Act
of 1933 (the "Securities Act") and to which reference is hereby made.
REPORTS TO HOLDERS
Periodic and annual reports concerning the related Trust Fund for a Series
of Securities are required under the related Pooling and Servicing Agreement to
be forwarded to the related Holders. If the Securities of a Series are to be
issued in book-entry form, such reports will be provided to the Holder of record
and beneficial owners of such Securities will have to rely on the procedures
described herein under "Description of the Securities--Book-Entry Registration."
Such reports will not be examined and reported on by an independent public
account. See "The Pooling and Servicing Agreement--Reports to Holders". In
addition, the related Trust Fund will file certain other periodic and annual
reports with the Securities and Exchange Commission, as required by the
Securities and Exchange Act of 1934, as amended (the "Exchange Act"). Such
reports will be examined and reported on by an independent public accountant to
the extent required by the Exchange Act.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed with respect to a Trust Fund pursuant to Section 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934 subsequent to the date
of this Prospectus and prior to the termination of the offering of the
Securities of such Trust Fund offered hereby shall be deemed to be incorporated
by reference into the Prospectus when delivered with respect to such Trust Fund.
Any statement contained in a document incorporated or deemed to be incorporated
by reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
Any person receiving a copy of this Prospectus may obtain, without charge,
upon written or oral request, a copy of any of the documents incorporated by
reference herein, except for the exhibits to such documents (other than the
documents expressly incorporated therein by reference). Requests should be
directed to Accredited Home Lenders, Inc., 15030 Avenue of Science, Suite 100,
San Diego, California 92128 (telephone number (619) 451-7044).
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SUMMARY OF PROSPECTUS
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".
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THE SPONSOR AND SERVICER............ Accredited Home Lenders, Inc., a California
corporation (the "Sponsor" or the "Servicer"). See
"The Sponsor and Servicer".
SECURITIES.......................... Asset-Backed Certificates ("Certificates")
representing beneficial ownership interests in the
related Trust Fund and Asset-Backed Notes ("Notes")
representing debt secured by the assets of the
related Trust Fund, issuable in Series.
Types of Securities
Each Series of Securities will consist of one or more
Classes, one or more of which may be Classes of
Compound Interest Securities, Planned Amortization
Class ("PAC") Securities, Variable Interest
Securities, Zero Coupon Securities, Principal Only
Securities, Interest Only Securities, Participating
Securities, Senior Securities or Subordinate
Securities. Each Class 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. See
"Description of the Securities--Book-Entry
Registration".
Securities Will Be Recourse to the Assets of the
Related Trust Fund Only.
The sole source of payment for any Series of
Securities will be the assets of the related Trust
Fund. The Securities will not be obligations, either
recourse or nonrecourse (except for certain
nonrecourse debt described under "Federal Income Tax
Considerations"), of the Sponsor or any Person other
than the related Trust Fund. In the case of
Securities that represent beneficial ownership
interest in the related Trust Fund, such Securities
will represent the ownership of such Trust Fund; with
respect to Securities that represent debt issued with
respect to the related Trust Fund, such Securities
will be secured by the related Trust Fund.
Notwithstanding the foregoing, and as to be described
in the
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related Prospectus Supplement, certain types of
Credit Enhancement, such as a financial guaranty
insurance policy or a letter of credit, may
constitute a full recourse obligation of the issuer
of such Credit Enhancement.
THE TRUST FUNDS..................... The Trust Fund for a Series of Securities will
include (a) assets originated by the Sponsor or
acquired by the Sponsor from affiliated or
unaffiliated institutions (each, a "Seller") composed
of (i) mortgage loans (the "Mortgage Loans"),
including mortgage loans secured by senior liens or
junior liens on the related mortgaged properties and
closed-end home equity loans, secured by mortgages
primarily on one- to four-family residential or small
mixed-use properties (the "Mortgaged Properties")
and/or (ii) home improvement installment sales
contracts and installment loan agreements (the "Home
Improvement Contracts") which are secured by
mortgages primarily on one- to four-family
residential properties, or by purchase money security
interests in the home improvements financed thereby
(the "Home Improvements"), (b) all Mortgaged
Properties and/or Home Improvements (collectively,
"Properties") acquired in respect of Mortgage Loans
and/or Home Improvement Contracts, respectively
(collectively, the "Loans"), and all monies due under
the Loans net, to the extent described in the related
Prospectus Supplement, of certain amounts payable to
the Servicer and (c) certain funds, Credit
Enhancement (as defined herein) and other assets as
described herein under "The Trust Funds", all as
specifically set forth in the related Prospectus
Supplement.
The related Prospectus Supplement will describe
certain characteristics of the Loans for a Series,
including, without limitation, and to the extent
relevant: (a) the aggregate unpaid principal balance
of the Loans (or the aggregate unpaid principal
balance included in the Trust Fund for the related
Series) and the average outstanding principal balance
of the Loans; (b) the weighted average Loan Rate on
the Loans as of the Cut-off Date; (c) the Combined
Loan-to-Value Ratios or Loan-to-Value Ratios, as
applicable, of the Loans, computed in the manner
described in the related Prospectus Supplement; (d)
the percentage (by principal balance as of the
Cut-off Date) of Loans that accrue interest at
adjustable or fixed interest rates; (e) any Credit
Enhancement relating to the Loans; (f) the percentage
(by principal balance as of the Cutoff Date) of Loans
that are secured by Properties; (g) the geographic
distribution of any Properties securing the Loans;
(h) the use and type of each Property securing a
Loan; (i) the lien priority of the Loans; and (j) the
delinquency status and year of origination of the
Loans.
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Each Trust Fund will be established pursuant to an
agreement (each, a "Trust Agreement") by and between
the Sponsor and the Trustee named therein. Each Trust
Agreement will describe the assets of the related
Trust Fund, which will include the related Loans and,
if so specified in the related Prospectus Supplement,
may include any combination of a mortgage pool
insurance policy, letter of credit, financial
guaranty insurance policy, special hazard policy,
reserve fund or other form of Credit Enhancement.
The Loans held by each Trust Fund will be serviced by
the Servicer pursuant to a servicing agreement (each,
a "Servicing Agreement") by and between the Servicer
and the related Trustee.
With respect to Securities that represent debt
secured by the related Trust Fund, the Sponsor will
enter into an indenture (each, an "Indenture") with
the trustee named on such Indenture (the "Indenture
Trustee"), as set forth in the related Prospectus
Supplement. Securities that represent beneficial
ownership interests in the related Trust Fund will be
issued pursuant to the related Trust Agreement.
In the case of any individual Trust Fund, the
contractual arrangements relating to the
establishment of the Trust Fund, the servicing of the
related Loans and the issuance of the related
Securities may be contained in a single agreement, or
in several agreements which combine certain aspects
of the Trust Agreement, the Servicing Agreement and
the Indenture described above (for example, a pooling
and servicing agreement, or a servicing and
collateral management agreement). For purposes of
this Prospectus, the term "Pooling and Servicing
Agreement" as used with respect to a Trust Fund
means, collectively, and except as otherwise
specified, any and all agreements relating to the
establishment of the related Trust Fund, the
servicing of the related Loans and the issuance of
the related Securities.
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 variable or change with
changes in the rates of interest on the related
Loans, and/or as prepayments occur with respect to
such Loans. Interest Only Securities may be assigned
a Notional Amount set forth in the related Prospectus
Supplement for the purpose of calculating the
interest due on such Interest Only Securities. See
"Description of the Securities--Use of Notional
Amounts". Principal Only Securities may not be
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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.
FINAL SCHEDULED DISTRIBUTION DATE OF
THE SECURITIES...................... The Final Scheduled Distribution Date with respect to
each Class of Notes is the date no later than 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 will be set
forth 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 Loans in the related
Trust Fund, and, consequently, 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. The rate of payments on the Loans in the Trust
Fund for a Series will depend on a variety of
factors, including certain characteristics of such
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
"Yield and Maturity Considerations" herein.
OPTIONAL TERMINATION................ The Sponsor, 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 Loans
and/or Properties remaining in the Trust Fund on or
after the date specified in the related Prospectus
Supplement, or on or after such time as the aggregate
principal balance of the Securities of the Series or
the Mortgage Assets relating to such Series, is less
than the amount or percentage specified in the
related Prospectus Supplement. See "Description of
the Securities--Optional Purchase or Termination".
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COLLECTION AND DISTRIBUTION
ACCOUNTS............................ All payments on or with respect to the 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. All such amounts will be available
for (i) application to the payment of 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, (iii) for the purpose of reimbursing
expenses to other persons which may be supplying
services to the related Trust Fund (for example, a
subservicer or a provider of Credit Enhancement (a
"Credit Enhancer")), and to pay to such persons their
fees and (iv) for reinvestment in additional Loans,
as described below. 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 Sponsor, the related Credit
Enhancer or deposited into a Reserve Account.
In addition, and as may be described in the related
Prospectus Supplement, the related Pooling and
Servicing Agreement may provide that all or a portion
of such collected principal may be retained by the
Trustee (and held in certain temporary investments,
including Loans) for a specified period prior to
being used to fund payments of principal to Holders.
See "Yield and Maturity Considerations."
PRE-FUNDING ACCOUNT................. If so specified in the related Prospectus Supplement,
a portion of the issuance proceeds of the Securities
of a particular series (such amount, (the "Pre-Funded
Amount") will be deposited in an account (the "Pre-
Funding Account") to be established with the Trustee,
which will be used to acquire additional Loans from
time to time during the time period specified in the
related Prospectus Supplement (the "Pre-Funding
Period"). Prior to the investment of the Pre-Funded
Amount in additional Loans, such Pre-Funded Amount
will be invested in one or more Eligible Investments.
Any Eligible Investment must mature no later than the
Business Day prior to the next Distribution Date. See
"The Pooling and Servicing Agreement--Assignment of
Loans--Pre-Funding Account--Pre-Funding Account."
During any Pre-Funding Period, the Sponsor will be
obligated (subject only to the availability thereof)
to transfer to the related Trust Fund, additional
Loans from time to time during such Pre-Funding
Period. Such additional Loans will be required to
satisfy certain eligibility criteria more fully set
forth in the related Prospectus Supplement which
eligibility criteria will be consistent with the
eligibility criteria of the Loans included in the
Trust Fund as of the Closing Date subject to such
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exceptions as are expressly stated in such Prospectus
Supplement.
Although the specific parameters of the Pre-Funding
Account with respect to any issuance of Securities
will be specified in the related Prospectus
Supplement, it is anticipated that: (a) the
Pre-Funding Period will not exceed 120 days from the
related Closing Date, (b) that the additional Loans
to be acquired during the Pre-Funding Period will be
subject to the same representations and warranties as
the Loans included in the related Trust Fund on the
Closing Date (although additional criteria may also
be required to be satisfied, as described in the
related Prospectus Supplement) and (c) that the
Pre-Funded Amount will not exceed 25% of the
principal amount of the Securities issued pursuant to
a particular offering.
CREDIT ENHANCEMENT.................. If stated in the Prospectus Supplement relating to a
Series, the Sponsor will provide or obtain credit
support described below (collectively, "Credit
Enhancement") in favor of the Trustee on behalf of
the Holders of such Series. The Credit Enhancement
will support the payments on the Securities to the
extent and under the conditions specified in such
Prospectus Supplement. See "Credit Enhancement".
Credit Enhancement for a Series may include one or
more of the following types of Credit Enhancement.
A. SUBORDINATE SECURITIES....... 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.
B. INSURANCE.................... Credit Enhancement for a Series may consist of
special hazard insurance policies, bankruptcy bonds
and other types of insurance supporting payments on
the Securities.
C. RESERVE FUNDS................ The Sponsor may deposit cash, a letter or letters of
credit, short-term investments, or other instruments
acceptable to each Rating Agency in one or more
reserve funds to be established in the name of the
Trustee (each, a "Reserve Fund"), which will be used,
as specified in the related Prospectus Supplement, by
the Trustee to make required payments of principal of
or interest on the Securities of such Series, to make
adequate provision for future payments on such
Securities or for any other purpose specified in the
Pooling and Servicing Agreement with respect to such
Series, to the extent that funds are not otherwise
available. In the alternative or in addition to such
deposit, a Reserve Fund for a Series may be funded
through application of all or a portion of the excess
cash flow from the Mortgage
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Assets for such Series, to the extent described in
the related Prospectus Supplement.
D. MINIMUM PRINCIPAL PAYMENT
AGREEMENT.................... The Sponsor may enter into a minimum principal
payment agreement (the "Minimum Principal Payment
Agreement") with an entity meeting the criteria of
each Rating Agency, pursuant to which such entity
will provide funds in the event that aggregate
principal payments on the Mortgage Assets for the
related Series are not sufficient to make certain
payments, as provided in the related Prospectus
Supplement. See "Credit Enhancement-- Minimum
Principal Payment Agreement".
E. OTHER INSURANCE, GUARANTEE
AND SIMILAR INSTRUMENTS OR
AGREEMENTS.................... A Trust Fund may include a guaranteed investment
contract or reinvestment agreement pursuant to which
funds held in one or more accounts will be invested
at a specified rate. If any Class of Securities has a
floating interest rate, or if any of the Loans has a
floating interest rate, the related Trust Fund may
include an interest rate swap contract, an interest
rate cap agreement or similar contract providing
limited protection against interest rate risks.
F. DEPOSIT AGREEMENT............ The Sponsor and the Trustee may enter into a
guaranteed investment contract or an investment
agreement pursuant to which all or a portion of
amounts held in the Collection Account, the
Distribution Account or in any Reserve Fund will be
invested with the entity specified in such Prospectus
Supplement. The Trustee will be entitled to withdraw
amounts so invested, plus interest at the related and
revised rate, in the manner specified in the
Prospectus Supplement. See "Credit
Enhancement--Deposit Agreement".
G. CROSS COLLATERALIZATION...... The source of payment for Securities of each Series
will be the assets of the related Trust Fund only.
However, a Trust Fund may include the right to
receive moneys from a common pool of Credit
Enhancement which may be available for more than one
Series of Securities, such as a master reserve
account or a master insurance policy. In addition, a
Series of Securities may provide for excess cash flow
with respect to one Class of the Series to be applied
to shortfalls with respect to another Class of the
same Series. See "Credit Enhancement--Cross
Collateralization".
H. OVERCOLLATERALIZATION........ Credit Enhancement for a Series may include over-
collateralization--an excess of the aggregate
principal balance of the related Loans, or a group
thereof, over the principal balance of the related
Class of Securities. Overcollateralization is
achieved by the application of certain "excess"
portions of interest payments on Loans to the payment
of principal of one or more Classes of
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Securities. This feature may continue for the life of
the related Securities or may be limited as set forth
in the related Prospectus Supplement.
Any form of credit enhancement will have certain
limitations and exclusions from coverage thereunder,
which will be described in the related Prospectus
Supplement. See "Description of the Pooling and
Servicing Agreement-- Credit Enhancements." To the
extent that shortfalls in the proceeds of the Trust
Funds occur which exceed the amount covered by the
Credit Enhancement or which are not covered by the
Credit Enhancement available to a particular Series
or Class, Holders will bear their allocable share of
any deficiencies. See "Risk Factors--Limited Assets"
herein, and to the extent applicable, in the related
Prospectus Supplement.
SERVICING........................... The Servicer will be responsible for servicing,
managing and making collections on the 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 Loans and related documentation on
behalf of the Trustee. Advances with respect to
delinquent payments of principal or interest on a
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 not credit support for the related Securities. In
performing these functions, the Servicer will
exercise the same degree of skill and care that it
customarily exercises with respect to similar
receivables or Loans owned or serviced by it. 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".
CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS...................... Securities of each Series offered hereby will, for
federal income tax purposes, constitute either (i)
interests ("Grantor Trust Securities") in a trust
treated as a grantor trust under applicable
provisions of the Code, (ii), "regular interests"
("REMIC Regular Securities") or "residual interests"
("REMIC Residual Securities") in a trust treated as a
REMIC (or, in certain instances, containing one or
more REMIC's) under Sections 860A through 860G of the
Code, (iii) debt issued by a trust ("Debt
Securities") or (iv) interests in a trust which is
treated as a partnership ("Partnership Interests").
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Investors are advised to consult their tax advisors
with respect to individual tax advice regarding the
tax implications of an investment on any securities,
and to review "Federal Income Tax Considerations"
herein and in the related Prospectus Supplement. The
information set forth under such caption describes
the material tax aspects of the transactions
described herein, but is of general applicability and
may not apply to any individual taxpayer.
ERISA CONSIDERATIONS................ A fiduciary of any employee benefit plan subject to
the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), or the Code should carefully
review with its own legal advisors whether the
purchase or holding of Securities could give rise to
a transaction prohibited or otherwise impermissible
under ERISA or the Code. See "Erisa Considerations".
LEGAL INVESTMENT.................... Securities of each Series offered by this Prospectus
and the related Prospectus Supplement may or may not
constitute "mortgage related securities" under the
Secondary Mortgage Market Credit Enhancement Act of
1984 ("SMMEA"). Whether or not such Securities are
"mortgage related securities" will be set forth in
the related Prospectus Supplement. 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".
USE OF PROCEEDS..................... The Sponsor will use the net proceeds from the sale
of each Series for one or more of the following
purposes: (i) to purchase the related Loans, (ii) to
repay indebtedness which has been incurred to obtain
funds to acquire such 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. 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 each
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 Loans for a Series may
have on the yield to investors in the Securities of
such Series. See "Risk Factors--Rating of
Securities".
FIRST ISSUANCE OF SECURITIES........ The Sponsor intends to offer Securities entitled
Mortgage Loan Asset-Backed Certificates, Series
1996-1 (the "1996-1
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Certificates") consisting of fixed-rate 1996-1
Certificates and variable-rate 1996-1 Certificates
(the "1996-1 Senior Certificates") issued by the
Accredited Mortgage Loan Trust 1996-1 (the "1996-1
Trust"). Only the 1996-1 Senior Certificates will be
offered. In addition to the 1996-1 Senior
Certificates, the 1996-1 Trust will issue subordinate
Certificates (the "1996-1 Subordinate Certificates")
and one or more classes of REMIC "residual interest"
1996-1 Certificates (the "1996-1 Class R
Certificates"). Distributions of interest on the
1996-1 Senior Certificates will be of equal priority
to the extent described in the Prospectus Supplement
relating to the 1996-1 Trust (the "1996-1 Prospectus
Supplement") and distributions on the 1996-1
Subordinate Certificates and the 1996-1 Class R
Certificates will be subordinate to distributions on
the 1996-1 Senior Certificates to the extent
described in the 1996-1 Prospectus Supplement.
The 1996-1 Trust will be created pursuant to a
Pooling and Servicing Agreement (the "1996-1 Pooling
and Servicing Agreement") between Accredited Home
Lenders Inc., in its capacity as the sponsor of the
1996-1 Trust (the "1996-1 Sponsor") and in its
capacity as master servicer (the "1996-1 Master
Servicer") of the loans and Bankers Trust Company, as
trustee (the "1996-1 Trustee"). The obligations of
the 1996-1 Sponsor and the 1996-1 Master Servicer
with respect to the 1996-1 Certificates will be
limited to their respective contractual obligations
under the 1996-1 Pooling and Servicing Agreement. The
assets of the 1996-1 Trust will include two groups
(each, a "1996-1 Group") of closed-end mortgage loans
(the "1996-1 Mortgage Loans") secured by mortgages or
deeds of trust (the "1996-1 Mortgages") on one- to
four-family residential properties to be conveyed to
the 1996-1 Trust on the closing date. Certain of the
1996-1 Senior Certificates and certain of the 1996-1
Subordinate Certificates will represent undivided
ownership interests in the 1996-1 Group of 1996-1
Mortgage Loans with fixed rates of interest and
certain other 1996-1 Senior Certificates and certain
other of the 1996-1 Subordinate Certificates will
represent undivided ownership interests in the 1996-1
Group of 1996-1 Mortgage Loans with adjustable rates
of interest. All of the 1996-1 Mortgage Loans will
have remaining terms to maturity of 30 years or less
and will be secured by 1996-1 Mortgages which may be
in first or second lien positions.
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RISK FACTORS
INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, THE FOLLOWING FACTORS IN
CONNECTION WITH THE PURCHASE OF THE SECURITIES.
AN INVESTMENT IN ANY SECURITY MAY BE AN ILLIQUID INVESTMENT, WHICH MAY
RESULT IN THE HOLDER HOLDING SUCH INVESTMENT TO MATURITY. 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. The underwriters specified in the
related Prospectus Supplement may make a secondary market in the Securities, but
have no obligation to do so.
THE ASSETS OF EACH TRUST FUND, AS WELL AS ANY APPLICABLE CREDIT ENHANCEMENT,
WILL BE LIMITED AND, IF SUCH ASSETS AND/OR CREDIT ENHANCEMENT BECOMES
INSUFFICIENT TO SERVICE THE RELATED SECURITIES, LOSSES MAY RESULT. The
Securities of a Series will be payable solely from the assets of the Trust Fund
for such Securities. There is no assurance that the market value of the 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 of such Series then outstanding,
plus accrued interest thereon. Consequently, Holders of Securities of each
Series must rely solely upon payments with respect to the 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 only obligations, if any, of the Sponsor with respect to the Securities
of any Series will be pursuant to certain representations and warranties. See
"The Pooling and Servicing Agreement-- Assignment of Loans".
Although any Credit Enhancement for a Series of Securities will be intended
to reduce the risk of delinquent payments or losses to Holders of Securities
entitled to the benefit thereof, the amount of such Credit Enhancement may 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".
THE SECURITIES DO NOT HAVE SPECIFIED PAYMENT OR DEBT SERVICE SCHEDULES, AND
PAYMENTS ON THE SECURITIES ARE SUBJECT TO THE RATE OF PAYMENT ON THE UNDERLYING
LOANS. The yield to maturity of the Securities of each Series will depend on the
rate of payment of principal (including prepayments, liquidations due to
defaults, and repurchases due to conversion of adjustable-rate mortgage loans
("ARM Loans") to fixed-rate loans or breaches of representations and warranties)
on the Loans and the price paid by Holders. Such yield may be adversely affected
by a higher or lower than anticipated rate of prepayments on the related Loans.
The yield to maturity on Principal Only or Interest Only Securities or
Securities purchased at premiums or discounted to par will be extremely
sensitive to the rate of prepayments on the related Loans. In addition, the
yield to maturity on certain other types of classes of Securities may be
relatively more sensitive to the rate of prepayment on the related Loans than
other Classes of Securities.
The Loans may be prepayable in full or in part at any time; however, a
prepayment penalty or premium may be imposed in connection therewith. The rate
of prepayments of the Loans cannot be predicted and is influenced by a wide
variety of economic, social, and other factors, including prevailing mortgage
market interest rates, the availability of alternative financing, local and
regional economic conditions and homeowner mobility. Therefore, no assurance can
be given as to the level of prepayments that a Trust Fund will experience.
Prepayments may result from mandatory prepayments relating to unused moneys
held in Pre-Funding Accounts, if any, voluntary early payments by borrowers
(including payments in connection with refinancings of related senior liens),
sales of Properties subject to "due-on-sale" provisions and liquidations due to
default, as well as the receipt of proceeds from physical damage, credit life
and disability insurance policies. In addition, repurchases or purchases of
Loans from a Trust Fund or
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substitution adjustments required to be made under the related Pooling and
Servicing Agreement will have the same effect on the Holders as a prepayment of
such Loans. The Loans may contain "due-on-sale" provisions, and the Servicer
will be required to enforce such provisions unless (i) the "due-on-sale" clause,
in the reasonable belief of the Servicer, is not enforceable under applicable
law or (ii) the Servicer reasonably believes that to permit an assumption of the
Loans would not materially and adversely affect the interests of the Holders or
of the related Credit Enhancer, if any.
NONCONFORMING CREDIT MORTGAGE LOANS MAY EXPERIENCE HIGHER RATES OF
DELINQUENCIES AND LOSSES. In general, the Sponsor originates and acquires
mortgage loans which do not meet the credit criteria required by the Federal
National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage
Corporation ("FHLMC"), commonly referred to as "nonconforming credit" mortgage
loans. Such mortgage loans tend to exhibit higher levels of delinquency,
foreclosure and loss than mortgage loans which conform to the requirements of
FNMA and FHLMC. The interest rates and the loan-to-value ratios for such
mortgage loans are established at levels designed to compensate for and offset
the increased delinquency, foreclosure and loss risks presented by such loans,
and rating agencies take such increased risks into account in assigning ratings
to classes of securities which represent interests in such loans. No assurances
can be given, however, that the Loans in any Trust Fund will not exceed expected
delinquency, foreclosure and loss levels and adversely affect the value of the
related Securities and the interests of the Holders thereof.
JUNIOR LIENS MAY EXPERIENCE HIGHER RATES OF DELINQUENCIES AND LOSSES. To the
extent Mortgages are junior liens subordinate to the rights of the mortgagee
under the related senior mortgage or mortgages, the proceeds from any
liquidation, insurance or condemnation proceedings will be available to satisfy
the outstanding balance of such junior 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 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.
PROPERTY VALUES MAY DECLINE, LEADING TO HIGHER LOSSES. There are several
factors that could adversely affect the value of Properties such that the
outstanding balance of the related Loan, together with any senior financing on
the Properties, would equal or exceed the value of the Properties. Among the
factors that could adversely affect the value of the Properties are an overall
decline in the residential real estate market in the areas in which the
Properties are located or a decline in the general condition of the Properties
as a result of failure of borrowers to maintain adequately the 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 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 Loans could be higher than those currently
experienced in the mortgage lending industry with respect to the same types of
loans.
"BALLOON" LOANS MAY EXPERIENCE HIGHER RATES OF DELINQUENCIES AND
LOSSES. Certain of the Loans in a Trust Fund may constitute "balloon" Loans,
Loans originated with a stated maturity scheduled to occur prior to the
expiration of the corresponding amortization schedule. Upon the maturity of a
"balloon" Loan, the Mortgagor will be required to make a "balloon" payment that
will be significantly larger than such Mortgagor's previous Scheduled Payments.
The ability of such a Mortgagor to repay a "balloon" Loan at maturity frequently
will depend on such Mortgagor's ability to refinance the Loan. The ability of a
Mortgagor to refinance such a Loan will be affected by a number of factors,
including the level of available mortgage rates at the time, the value of the
related Property, the Mortgagor's equity in the related Property, the financial
condition of the Mortgagor, the tax laws and general economic conditions at the
time. A high interest rate environment may make it more difficult for the
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Mortgagor to accomplish a refinancing and may result in an increased rate of
delinquencies, foreclosures and/or losses. None of the Sponsor, the Servicer,
any Subservicer or any Trustee will be obligated to provide funds to refinance
any Loan, including "balloon" Loans.
ADJUSTABLE-RATE LOANS MAY EXPERIENCE HIGHER RATES OF DELINQUENCIES AND
LOSSES. In general, the Sponsor's underwriting guidelines provide for a
prospective borrower's repayment ability to be evaluated based on the initial
level of monthly payment required by the mortgage loan for which the borrower is
applying. However, with respect to certain types of Loans, including Loans as to
which the Loan Rate may adjust in accordance with movements in an index, the
Scheduled Payment may increase beyond the initial level of the Scheduled
Payment. To the extent the income level of the related Mortgagor may not be
sufficient to enable the Mortgagor to meet higher Scheduled Payments, the risk
of delinquency, foreclosure and loss may be increased with respect to such
Loans. In addition, certain types of these Loans may provide for "negative
amortization"--deferral of the payment of a portion of currently accrued
interest and the addition of such deferred amount to the principal balance of
the Loan. To the extent such "negative amortization" results in total liens
against a Property in excess of the value of the Property, the risk of
delinquency, foreclosure and loss with respect to the related Loan may be
further increased.
NONOWNER-OCCUPIED LOANS MAY EXPERIENCE HIGHER RATES OF DELINQUENCIES AND
LOSSES. A Loan included in a Trust Fund may be secured by a Property which is
not the primary residence of the related Mortgagor. Because the Mortgagor on
such a "nonowner-occupied" Loan may have less incentive to avoid foreclosure
than Mortgagors under Loans secured by primary residences, nonowner-occupied
Loans may experience higher rates of delinquencies and losses than
owner-occupied Loans.
BANKRUPTCY OF MORTGAGORS MAY LEAD TO HIGHER LEVELS OF LOSSES. General
economic conditions may have an impact on the ability of Mortgagors to repay
Loans. Loss of earnings, illness and other similar factors also may lead to an
increase in delinquencies and bankruptcy filings by Mortgagors. In the event of
personal bankruptcy of a Mortgagor, it is possible that a Trust Fund could
experience a loss with respect to the related Loan. In conjunction with a
Mortgagor's bankruptcy, a bankruptcy court may suspend or reduce the payments of
principal and interest to be paid with respect to such Loan or permanently
reduce the principal balance of such Loan thereby either delaying or permanently
limiting the amount received by the Trust Fund with respect to such Loan.
Moreover, in the event a bankruptcy court prevents the transfer of the related
Property to the Trust Fund, any remaining balance on such Loan may not be
recoverable. See "Certain Legal Aspects of Loans".
FORECLOSURE OF PROPERTIES MAY BE SUBJECT TO SUBSTANTIAL DELAY, RESULTING IN
LONGER MATURITY OF THE SECURITIES, AS WELL AS HIGHER LOSSES. Substantial delays
can be encountered in connection with the liquidation of defaulted Loans and
corresponding delays in the receipt of related proceeds by the related Holders
could occur. An action to foreclose on a Property securing a Loan is regulated
by state statutes, rules and judicial decisions and is subject to many of the
delays and expenses of other lawsuits if defenses or counterclaims are
interposed, sometimes requiring several years to complete. Furthermore, in some
states an action to obtain a deficiency judgment is not permitted following a
nonjudicial sale of a Property. In the event of a default by a Mortgagor, these
restrictions, among other things, may impede the ability of the Servicer to
foreclose on or sell the Property or to obtain Liquidation Proceeds sufficient
to repay all amounts due on the related Loan. The Servicer will be entitled to
deduct from Liquidation Proceeds all expenses reasonably incurred in attempting
to recover amounts due on the related liquidated Loan and not yet repaid,
including payments to prior lienholders, accrued Servicing Fees, legal fees and
costs of legal action, real estate taxes, and maintenance and preservation
expenses. In the event that any Property fails to provide adequate security for
the related Loan and insufficient funds are available from any applicable Credit
Enhancement, related Holders could experience a loss on their investment. See
"Certain Legal Aspects of Loans".
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
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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. To the extent the average outstanding principal balances of the
Loans are small relative to the size of the loans in a typical pool of first
mortgages, realizations net of liquidation expenses on defaulted Loans may also
be smaller as a percentage of the principal amount of the Loans than would such
net realizations in the case of a typical pool of first mortgage loans.
ENVIRONMENTAL RISKS. Real property pledged as security to a lender may be
subject to certain environmental risks. Under the laws of certain states,
contamination of a property may give rise to a lien on the 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 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 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 a Property.
CERTAIN OTHER LEGAL CONSIDERATIONS REGARDING THE LOANS, MAY LIMIT
ENFORCEMENT OF THE LOANS AGAINST THE RELATED MORTGAGORS. 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 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 Loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the owner of
the Loan to damages and administrative enforcement.
The Loans are also subject to federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z promulgated
thereunder and the Real Estate Settlement Procedures Act and Regulation X
promulgated thereunder, which require, among other things, certain
disclosures to have been made to a Mortgagor regarding the terms of the
related Loan;
(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 Fair Credit Reporting Act, which regulates the use and
reporting of information related to a Mortgagors' 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 Loans
and in addition could subject the Trust Fund to damages and administrative
enforcement. The 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 Loan. If the Trust Fund
includes Loans subject to the Act, it will be subject to all of the claims and
defenses which the borrower could assert against the Sponsor or a Seller. Any
violation of the Act which would result in such liability would be a breach of
the Sponsor's or a Seller's representations and warranties, and the Sponsor or a
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Seller would be obligated to cure, repurchase or, if permitted by the Agreement,
substitute for the Loan in question. See "Certain Legal Aspects of Loans".
The Home Improvement Contracts are also subject to the Preservation of
Consumers' Claims and Defenses regulations of the Federal Trade Commission and
other similar federal and state statutes and regulations (collectively, the
"Holder in Due Course Rules"), which protect the homeowner from defective
craftsmanship or incomplete work by a contractor. These laws permit the obligor
to withhold payment if the work does not meet the quality and durability
standards agreed to by the homeowner and the contractor. The Holder in Due
Course Rules have the effect of subjecting any assignee of the seller in a
consumer credit transaction to all claims and defenses which the obligor in the
credit sale transaction could assert against the seller of the goods.
GEOGRAPHIC CONCENTRATION OF MORTGAGED PROPERTIES MAY RESULT IN HIGHER
LOSSES, IF PARTICULAR REGIONS EXPERIENCE DOWNTURNS.. Certain geographic regions
from time to time will experience weaker regional economic conditions and
housing markets than will other regions, and, consequently, will experience
higher rates of delinquency, foreclosure and loss on mortgage loans generally.
The Loans underlying certain series of Securities may be concentrated in such
regions, and such concentrations may present risk considerations in addition to
those generally present for similar mortgage loan asset-backed securities
without such concentrations. Statistical information with respect to the
geographic concentration of Properties relating to a particular Series will be
specified in the related Prospectus Supplement.
BANKRUPTCY OF THE SPONSOR MAY ADVERSELY AFFECT THE INTERESTS OF HOLDERS. In
the event of the bankruptcy of the Sponsor at a time when it or any affiliate
thereof holds a Security, a trustee in bankruptcy of the Sponsor or such
affiliate, or its creditors could attempt to recharacterize the sale of the
Loans to the related Trust Fund as a borrowing by the Sponsor or such affiliate,
with the result, if such recharacterization is upheld, that the related Holders
would be deemed creditors of the Sponsor or such affiliate, secured by a pledge
of the Loans. If such an attempt were successful, it could prevent timely
payments of amounts due to the Trust Fund.
CERTAIN LIMITATIONS ON INTEREST PAYMENTS AND FORECLOSURES MAY REDUCE THE
AMOUNTS PAYABLE ON THE LOANS AND LIMIT THE ENFORCEMENT OF THE LOANS AGAINST
CERTAIN MORTGAGORS. Generally, under the terms of the Soldiers' and Sailors'
Civil Relief Act of 1940, as amended (the "Relief Act"), or similar state
legislation, a Mortgagor who enters military service after the origination of
the related Loan (including a Mortgagor who is a member of the National Guard or
is in reserve status at the time of the origination of the Loan and is later
called to active duty) may not be charged interest (including fees and charges)
above an annual rate of 6% during the period of such Mortgagor's active duty
status, unless a court orders otherwise upon application of the lender. It is
possible that such action could have an effect, for an indeterminate period of
time, on the ability of the Servicer to collect full amounts of interest on
certain of the Loans. In addition, the Relief Act imposes limitations that would
impair the ability of the Servicer to foreclose on an affected Loan during the
Mortgagor's period of active duty status. Thus, in the event that such a Loan
goes into default, there may be delays and losses occasioned by the inability to
realize upon the Property in a timely fashion.
UNCERTAINTY REGARDING ORIGINAL ISSUE DISCOUNT. Some or all classes of the
Securities may be issued with original issue discount, which generally will
result in recognition of some taxable income in advance of the receipt of the
cash attributable to such income. A Security will be considered to be issued
with original issue discount equal to the excess, if any, of its "stated
redemption price at maturity" over its "issue price." The "issue price" of a
Security is the initial offering price to the public (excluding bond houses and
brokers) at which a substantial number of the Securities was sold. See "Federal
Income Tax Considerations--Discount and Premium--Original Issue Discount."
RATINGS OF THE SECURITIES MAY BE DEPENDENT ON THE RELATED CREDIT ENHANCER,
AND FURTHER, MAY BE REDUCED OR WITHDRAWN AT ANY TIME; THERE IS NO OBLIGATION TO
MAINTAIN ANY SPECIFIC RATINGS. It will be a condition to the issuance of a
Series of Securities that they be rated in one of the four highest rating
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categories by each Rating Agency. Any such rating would be based on, among other
things, the adequacy of the value of the 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 related 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 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 Credit Enhancer or a
change in the rating of such Credit Enhancer's long term debt.
LOSSES MAY BE GREATER IN THE EVENT OF AN ACCELERATION. Upon an event of
default under the Pooling and Servicing Agreement for a Series of Securities and
a sale of the assets in the related Trust Fund, the Trustee, the Servicer, any
Credit 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.
CERTAIN RISKS RELATING TO DIFFERING UNDERWRITING CRITERIA. The Loans
included in a particular Trust Fund may have been purchased by the Sponsor from
one or more originators, and may, to the extent described in the related
Prospectus Supplement, have been originated using underwriting criteria
different from that of the Sponsor. However, the Loans included in a particular
Trust Fund will satisfy the criteria set forth in the related Prospectus
Supplement.
LACK OF HISTORICAL PREPAYMENT RATE INFORMATION MAY CREATE UNCERTAINTY AS TO
YIELDS AND MATURITIES. The Sponsor has previously sold its Loans and does not
have any information available to it regarding its prepayment experience. As a
result, its future prepayment rates may be relatively less predictable than
those of other mortgage-backed securities issuers, which may have more
information.
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DESCRIPTION OF THE SECURITIES
GENERAL
The following summaries describe certain features which will generally be
applicable to most 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 Pooling and Servicing Agreement and the Prospectus
Supplement relating to each Series of Securities.
Each Series of Securities will consist of one or more Classes of Securities,
one or more of which may be Compound Interest Securities, Variable Interest
Securities, PAC Securities, Zero Coupon Securities, Principal Only Securities,
Interest Only Securities or Participating Securities. A Series may also include
one or more Classes of 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. See "--Book-Entry Registration" below.
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. All payments with respect to the Mortgage Assets 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, net of certain amounts
payable to the related Servicer and any other person specified in the Prospectus
Supplement, and will thereafter 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".
PAYMENTS OF INTEREST
The Securities of each Class by their terms entitled to receive interest
will bear interest from the date and at the rate per annum specified, or
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 variable or may change with changes in the annual
percentage rates of the Loans included in the related Trust Fund and/or as
prepayments occur with respect to such Loans. Principal Only Securities may not
be entitled to receive any interest distributions or may be entitled to receive
only nominal interest
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distributions. Any interest on Zero Coupon Securities that is not paid on the
related Distribution Date will accrue and be added to the principal thereof on
such Distribution Date.
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 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 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, as a result of delinquencies, defaults and liquidations of the
Loans in the Trust Fund, the actual final Distribution Date of any such Class
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
"Yield and Maturity Considerations".
OPTIONAL REDEMPTION, PURCHASE OR TERMINATION
The Sponsor, 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 Loans and/or Properties 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
Loans, 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 Sponsor or the Trustee prior to the related date. The redemption, purchase
or repurchase price will be set forth in the related Prospectus Supplement. If
specified in the related Prospectus Supplement, in the event that a REMIC
election has been made, the Trustee shall receive a satisfactory opinion of
counsel that the optional redemption, purchase or termination will be conducted
so as to constitute a "qualified liquidation" under Section 860F of the Code.
WEIGHTED AVERAGE LIFE OF THE SECURITIES
"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. The weighted
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average life of the Securities of a Class will be influenced by the rate at
which the amount financed under the 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 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 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 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 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 borne by such loans. In
this regard, it should be noted that the 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 Loans. If any 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. See "Yield and Maturity
Considerations".
The Sponsor, prior to 1996, engaged in whole-loan sales of its mortgage
loans on a servicing-released basis (i.e., the purchaser acts as the servicer).
Consequently, the Sponsor has limited historical information available to it
with respect to the prepayment experience of its mortgage loans.
USE OF NOTIONAL AMOUNTS
If so provided in the related Prospectus Supplement, interest on certain
Classes of Interest Only Securities may be payable based on a schedule of
Notional Amounts rather than the actual aggregate outstanding principal balances
of the related Loans. The Notional Amounts contained in such a schedule would
not be affected by prepayments on the related Loans, thereby reducing the
disproportionate impact which prepayments have on the yield of Interest Only
Securities relative to the yields of other types of Securities which are
entitled to payments of principal. See "Yield and Maturity Considerations".
The related Prospectus Supplement will set forth the Notional Amount
schedule, if any, and will describe fee prepayment spreads used in constructing
such schedule.
BOOK-ENTRY REGISTRATION
As may be described in the related Prospectus Supplement, investors in a
given Series may hold their Securities through DTC (in the United States) or
CEDEL or Euroclear (in Europe) if they are participants of such systems, or
indirectly through organizations that are participants in such systems.
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Cede, as nominee for DTC, will hold the global Securities in respect of a
given series. CEDEL and Euroclear will hold omnibus positions on behalf of the
CEDEL Participants (as defined below) and the Euroclear Participants (as defined
below) (collectively, the "Participants"), respectively, through customers'
securities accounts in CEDEL's and Euroclear's names on the books of their
respective depositaries (collectively, the "Depositaries") which in turn will
hold such positions in customers' securities accounts in the Depositaries' names
on the books of DTC.
DTC is a limited purpose trust company organized under the laws of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York UCC and a "clearing agency" registered
pursuant to Section 17A of the Exchange Act. DTC was created to hold securities
for its Participants and to facilitate the clearance and settlement of
securities transactions between Participants through electronic book-entries,
thereby eliminating the need for physical movement of notes or certificates.
Participants include securities brokers and dealers, banks, trust companies and
clearing corporations. Indirect access to the DTC system also is available to
others such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
Transfers between DTC Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
the ordinary way in accordance with their applicable rules and operating
procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by its 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 its Depositary to take action
to effect final settlement on its behalf by delivering or receiving securities
in DTC, and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities in CEDEL or
Euroclear as a result of a transaction with a DTC Participant will be made
during the subsequent securities settlement processing, dated the business day
following the DTC settlement date, and such credits or any transactions in such
securities settled during such processing will be reported to the relevant CEDEL
Participant or Euroclear Participant on such business day. Cash received in
CEDEL or Euroclear as a result of sales of securities by or through a CEDEL
Participant or a Euroclear Participant to a DTC Participant will be received
with value on the DTC settlement date but will be available in the relevant
CEDEL or Euroclear cash account only as of the business day following settlement
in DTC.
The investors in a given Series that are not Participants or Indirect
Participants but desire to purchase, sell or otherwise transfer ownership of, or
other interests in, Securities of such Series may do so only through
Participants and Indirect Participants. In addition, investors in a given Series
will receive all distributions of principal and interest through the
Participants who in turn will receive them from DTC. Under a book-entry format,
investors in a given Series may experience some delay in their receipt of
payments, since such payments will be forwarded by the applicable Trustee to
Cede, as nominee for DTC. DTC will forward such payments to its Participants,
which thereafter will forward them to Indirect Participants or such investors.
It is anticipated that the only "Holder" in respect of any Series will be Cede,
as nominee of DTC. Investors in a given Series will not be recognized as Holders
of such Series, and such investors will be permitted to exercise the rights of
Holders of such Series only indirectly through DTC and its Participants.
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Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Securities of a given Series among Participants on whose behalf it acts with
respect to such Securities and to receive and transmit distributions of
principal of, and interest on, such Securities. Participants and Indirect
Participants with which the investors in a given Series have accounts with
respect to such Securities similarly are required to make book-entry transfers
and receive and transmit such payments on behalf of their respective investors
in such Series. Accordingly, although such investors will not possess physical
certificates, the Rules provide a mechanism by which Participants will receive
payments and will be able to transfer their interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of investors in a
given Series to pledge Securities of such Series to persons or entities that do
not participate in the DTC system, or to otherwise act with respect to such
Securities, may be limited due to the lack of a physical certificate for such
Securities.
DTC will advise the Trustee in respect of each Series that it will take any
action permitted to be taken by investors in the related Series only at the
direction of one or more Participants to whose accounts with DTC the Securities
of such Series are credited. DTC may take conflicting actions with respect to
other undivided interests to the extent that such actions are taken on behalf of
Participants whose holdings include such undivided interests.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of the
Euroclear System ("Euroclear Participants") and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 28 currencies, including United
States dollars. The Euroclear System includes various other services, including
securities lending and borrowing and interfaces with domestic markets in several
countries generally similar to the arrangements for cross-market transfers with
DTC described above. Euroclear is operated by Morgan Guaranty Trust Company of
New York, Brussels, Belgium office, under contract with Euroclear Clearance
System, S.C., a Belgian cooperative corporation (the "Cooperative"). All
operations are conducted by the "Euroclear Operator" (as defined below), and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for the Euroclear System on behalf of Euroclear Participants. Euroclear
Participants include banks (including central banks), securities brokers and
dealers and other professional financial intermediaries and may include the
underwriters for a Series. Indirect access to the Euroclear System is also
available to other firms that clear through or maintain a custodial relationship
with a Euroclear Participant, either directly or indirectly.
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The "Euroclear Operator" is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within the Euroclear System, withdrawal of
securities and cash from the Euroclear System, and receipts of payments with
respect to securities in the Euroclear System. All securities in the Euroclear
System are held on a fungible basis without attribution of specific certificates
to specific securities clearance accounts. The Euroclear Operator acts under the
Terms and Conditions only on behalf of Euroclear Participants and has no record
of relationship with persons holding through Euroclear Participants.
Except as required by law, the Trustee in respect of a Series will not have
any liability for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the related Securities held by
Cede, as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
DEFINITIVE SECURITIES
As may be described in the related Prospectus Supplement, the Securities may
be issued in fully registered, certificated form ("Definitive Securities") to
the Holders of a given Series or their nominees, rather than to DTC or its
nominee, only if (i) the Trustee in respect of the related Series advises in
writing that DTC is no longer willing or able to discharge properly its
responsibilities as depository with respect to such Securities and such Trustee
is unable to locate a qualified successor, (ii) such Trustee, at its option,
elects to terminate the book-entry-system through DTC or (iii) after the
occurrence of an "Event of Default" under the related Pooling and Servicing
Agreement, Holders representing at least a majority of the outstanding principal
amount of such Securities advise the applicable Trustee through DTC in writing
that the continuation of a book-entry system through DTC (or a successor
thereto) is no longer in such Holders' best interest.
Upon the occurrence of any event described in the immediately preceding
paragraph, the applicable Trustee will be required to notify all such Holders
through Participants of the availability of Definitive Securities. Upon
surrender by DTC of the definitive certificates representing such Securities and
receipt of instructions for re-registration, the applicable Trustee will reissue
such Securities as Definitive Securities to such Holders.
Distributions of principal of, and interest on, such Securities will
thereafter be made by the applicable Trustee in accordance with the procedures
set forth in the related Indenture or Trust Agreement directly to Holders of
Definitive Securities in whose names the Definitive Securities were registered
at the close of business on the applicable Record Date specified for such
Securities in the related Prospectus Supplement. Such distributions will be made
by check mailed to the address of such Holder as it appears on the register
maintained by the applicable Trustee. The final payment on any such Security,
however, will be made only upon presentation and surrender of such Security at
the office or agency specified in the notice of final distribution to the
applicable Holders.
Definitive Securities in respect of a given Series of Securities will be
transferable and exchangeable at the offices of the applicable Trustee or of a
certificate registrar named in a notice delivered to Holders of such Definitive
Securities. No service charge will be imposed for any registration of transfer
or exchange, but the applicable Trustee may require payment of a sum sufficient
to cover any tax or other governmental charge imposed in connection therewith.
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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 originated by the Sponsor or acquired from affiliated or
unaffiliated institutions composed of (i) Loans, (ii) amounts available from the
reinvestment of payments on such Loans, (iii) any Credit Enhancement, (iv) any
Property that secured a Loan but which is acquired by foreclosure or deed in
lieu of foreclosure or repossession.
The Securities will be nonrecourse 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 Sponsor or the related Trust Fund
not pledged to secure such Notes.
The Loans for a Series will be originated by the Sponsor or acquired by the
Sponsor in the open market or in privately negotiated transactions, which may
include transactions with affiliates and will be transferred by the Sponsor to
the Trust Fund. Loans relating to a Series will be serviced by the Servicer
pursuant to the related Pooling and Servicing Agreement.
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 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.
Loans included in the Trust Fund for a Series may consist of any combination
of Mortgage Loans and Contracts, to the extent and as specified in the related
Prospectus Supplement.
THE LOANS
Mortgage Loans. The Loans for a Series may consist, in whole or in part, of
closed-end mortgage loans, including closed-end home equity loans (the
"Closed-End Loans" or the "Mortgage Loans") secured by mortgages on Single
Family Properties and small mixed-use properties, which mortgages 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.
The full principal amount of a Closed-End Loan is advanced at origination of
the loan and generally is repayable in equal (or substantially equal)
installments of an amount sufficient to fully amortize such loan at its stated
maturity. Interest on each Closed-End Loan is calculated on the basis of the
outstanding principal balance of such loan multiplied by the Loan Rate thereon
and further multiplied by a fraction, the numerator of which is the number of
days in the period elapsed since the preceding payment of interest was made and
the denominator is the number of days in the annual period for which interest
accrues on such loan. Under certain circumstances, under a Closed-End Loan, 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.
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The Mortgaged Properties will include primarily Single Family Property
(i.e., one- to four-family residential housing, including Condominium Units and
Cooperative Dwellings). The Mortgaged Properties may consist of detached
individual dwellings, individual condominiums, townhouses, duplexes, row houses,
individual units in planned unit developments and other attached dwelling units.
Each Single Family 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 five years
(unless otherwise provided in the related Prospectus Supplement) greater than
the term of the related 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 Loans secured by Mortgaged Properties
that are owner-occupied will be disclosed in the related Prospectus Supplement.
Such statistic will be based on either (i) the making of a representation by the
Mortgagor at origination of the 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 nonowner-occupied investment properties and
vacation and second homes.
The initial Combined Loan-to-Value Ratio of a Loan is computed in the manner
described in the related Prospectus Supplement, taking into account the amounts
of any related senior mortgage loans.
Home Improvement Contracts. The Loans for a Series may consist, in whole or
part, of home improvement installment sales contracts and installment loan
agreements (the "Home Improvement Contracts") originated by a home improvement
contractor in the ordinary course of business. A Home Improvement Contract will
be secured by a Mortgage, primarily on Single Family Properties, which will
generally be subordinate to other mortgages on the same Mortgaged Property or by
a purchase money security interest in the home improvements (the "Home
Improvements") financed thereby.
The Home Improvements securing the Home Improvement Contracts include, but
are not limited to, replacement windows, house siding, new roofs, swimming
pools, satellite dishes, kitchen and bathroom remodeling goods and solar heating
panels.
Additional Information. The selection criteria which shall apply with
respect to the Loans relating to a particular 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 related Prospectus Supplement for each Series will provide information
with respect to the related Loans as of the Cut-off Date, including, among other
things, and to the extent relevant (a) the aggregate unpaid principal balance of
the Loans (or the aggregate unpaid principal balance included in the Trust Fund
for the related Series); (b) the range and weighted average Loan Rate on the
Loans, and, in the case of adjustable-rate 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 Loans; (d) the weighted average
original and remaining term-to-stated maturity of the 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 Loans, as applicable; (f) the percentage (by outstanding principal
balance as of the Cut-off Date) of Loans that accrue interest at adjustable
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or fixed interest rates; (g) any special hazard insurance policy or bankruptcy
bond or other credit enhancement relating to the Loans; (h) the percentage (by
principal balance as of the Cut-off Date) of Loans that are secured by Mortgaged
Properties or Home Improvements; (i) the geographic distribution of any
Mortgaged Properties securing the Loans; (j) the percentage of Loans (by
principal balance as of the Cut-off Date) that are secured by Single Family
Properties, shares relating to Cooperative Dwellings, Condominium Units,
investment property and vacation or second homes; (k) the lien priority of the
Loans; and (l) the delinquency status and year of origination of the Loans. The
related Prospectus Supplement will also specify any other limitations on the
types or characteristics of Loans for a Series.
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CREDIT ENHANCEMENT
If stated in the Prospectus Supplement relating to a Series of Securities,
simultaneously with the Sponsor's assignment of the related Loans to the
Trustee, the Sponsor will obtain an irrevocable letter of credit, surety bond or
insurance policy, issue Subordinate Securities or obtain any other form of
credit enhancement or combination thereof described below (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 each 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. Any of such Credit Enhancement may be structured so as
to protect against losses relating to more than one Trust Fund.
SUBORDINATE SECURITIES
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.
INSURANCE
Credit Enhancement for a Series may consist of special hazard insurance
policies, bankruptcy bonds and other types of insurance relating to the Loans,
as described below and in the related Prospectus Supplement.
Pool Insurance Policy. The Sponsor may obtain an insurance policy for
certain of the Securities issued with respect to the related Trust Fund. The
amount and terms of any such coverage will be set forth in the related
Prospectus Supplement.
Special Hazard Insurance Policy. Although the terms of such policies vary to
some degree, a special hazard insurance policy typically provides that, where
there has been damage to Property securing a defaulted or foreclosed 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 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 Property or (ii)
upon transfer of such Property to the special hazard insurer, the unpaid
principal balance of such Loan at the time of acquisition of such 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 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 Property. Any amount paid as the cost of
repair of such 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 Property with the proceeds described under (i) above is
expected to satisfy the condition under any pool insurance policy that such
Property be restored before a claim under such pool insurance policy may be
validly presented with respect to the defaulted Loan secured by such Property.
The payment described under (ii) above will render unnecessary presentation of a
claim in respect of
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such 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 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 Property securing the related Loan at an
amount less than the then outstanding principal balance of such Loan. The amount
of the secured debt could be reduced to such value, and the holder of such Loan
thus would become an unsecured creditor to the extent the outstanding principal
balance of such Loan exceeds the value so assigned to the Property by the
bankruptcy court. In addition, certain other modifications of the terms of a
Loan can result from a bankruptcy proceeding. See "Certain Legal Aspects of
Loans". The Sponsor or other entity specified in the related Prospectus
Supplement may 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 Loan or a reduction by such court of the
principal amount of a 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 Loans in the Trust Fund for such
Series.
RESERVE FUNDS
The Sponsor may 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
Credit 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 Agency 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 Assets for such
Series, to the extent 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
Credit 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.
MINIMUM PRINCIPAL PAYMENT AGREEMENT
The Sponsor may enter into a Minimum Principal Payment Agreement with an
entity meeting the criteria of each Rating Agency pursuant to which such entity
will provide certain payments on the Securities of such Series in the event that
aggregate scheduled principal payments and/or prepayments on the Loans for such
Series are not sufficient to make certain payments on the Securities of such
Series, as provided in the Prospectus Supplement.
OTHER INSURANCE, GUARANTEE AND SIMILAR INSTRUMENTS OR AGREEMENTS
Trust Fund may include a guaranteed investment contract or reinvestment
agreement pursuant to which funds held in one or more accounts will be invested
at a specified rate. If any Class of Securities has a floating interest rate, or
if any of the Loans has a floating interest rate, the Trust may include an
interest rate swap contract, an interest rate cap agreement or similar contract
providing limited protection against interest rate risks.
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DEPOSIT AGREEMENT
The Sponsor and the Trustee for such Series of Securities will enter into a
Deposit Agreement with the entity specified in such Prospectus Supplement on or
before the sale of such Series of Securities. The purpose of a Deposit Agreement
would be to accumulate available cash for investment so that such cash, together
with income thereon, can be applied to future distributions on one or more
Classes of Securities. The Prospectus Supplement for a Series of Securities
pursuant to which a Deposit Agreement is used will contain a description of the
terms of such Deposit Agreement.
CROSS COLLATERALIZATION
The source of payment for Securities of each Series will be the assets of
the related Trust Fund only. However, a Trust Fund may include the right to
receive moneys from a common pool of Credit Enhancement which may be available
for more than one Series of Securities, such as a master reserve account or a
master insurance policy. In addition, a Series of Securities may provide for
excess cash flow with respect to one Class of the Series to be applied to
shortfalls with respect to another Class of the same Series. Notwithstanding the
foregoing, unless specifically described otherwise in the related Prospectus
Supplement, no collections on any Loans held by any Trust Fund may be applied to
the payment of Securities issued by any other Trust Fund (except to the limited
extent that certain collections in excess of amounts needed to pay the related
Securities may be deposited in a common, master reserve account that provides
Credit Enhancement for more than one Series of Securities).
OVERCOLLATERALIZATION
Credit Enhancement for a Series may include overcollateralization -- an
excess of the aggregate principal balance of the related Loans, or a group
thereof, over the principal balance of the related Class of Securities.
Overcollateralization is achieved by the application of certain "excess"
portions of interest payments on Loans to the payment of principal of one or
more Classes of Securities. This feature may continue for the life of the
related Securities or may be limited as set forth in the related Prospectus
Supplement. In the case of limited overcollateralization, once the required
level of overcollateralization is reached, such limited acceleration feature may
cease, unless necessary to maintain the required level of overcollateralization.
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SERVICING OF LOANS
GENERAL
Customary servicing functions with respect to Loans comprising the Loans in
the Trust Fund will be provided by the Servicer pursuant to the related Pooling
and Servicing Agreement, with respect to a Series of Securities. Each Pooling
and Servicing Agreement will authorize the Servicer, and the Servicer expects,
to enter into one or more subservicing agreements (each, a "Subservicing
Agreement") with one or more subservicers (each, a "Subservicer") pursuant to
which the Subservicer will agree to perform all or a portion of the Servicer's
servicing responsibilities with respect to the Loans in a Trust Fund. Any
Subservicer will be an experienced servicer of loans of the type to be
subserviced by such Subservicer and will have been approved by each Rating
Agency and any Credit Enhancer.
Notwithstanding the Servicer's engagement of any Subservicer, the Servicer
shall not be relieved of its obligations under the related Pooling and Servicing
Agreement, and the Servicer shall be obligated to the same extent and under the
same terms and conditions as if it alone were servicing and administering the
Loans. The Servicer shall be entitled to include in any Subservicing Agreement
provisions for indemnification of the Servicer by the related Subservicer, and
nothing contained in the related Pooling and Servicing Agreement shall be deemed
to limit or modify such indemnification.
COLLECTION PROCEDURES; ESCROW ACCOUNTS
The Servicer will make reasonable efforts to collect all payments required
to be made under the Loans and will, consistent with the terms of the related
Pooling and Servicing 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 Loan and (ii) to the extent
provided in the related Pooling and Servicing Agreement, arrange with an obligor
a schedule for the liquidation of delinquencies by extending the due dates for
Scheduled Payments on such Loan.
The Servicer may establish and maintain escrow or impound accounts ("Escrow
Accounts") with respect to Loans in which payments by obligors to pay taxes,
assessments, mortgage and hazard insurance premiums, and other comparable items
will be deposited. Loans may not require such payments under the loan related
documents, in which case the Servicer would not establish any Escrow Account
with respect to such Loans. Withdrawals from the Escrow Accounts are to be made
to effect timely payment of taxes, assessments, mortgage and hazard insurance
premiums and such other comparable items; 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
related Property; 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
The related Trustee or the Servicer will establish a separate account (the
"Collection Account") in the name of the Trustee. The Collection Account will be
an account maintained (i) at a depository institution, the short- and/or
long-term unsecured debt obligations of which at the time of any deposit therein
are rated at levels satisfactory to each Rating Agency or (ii) in an account or
accounts the deposits in which are otherwise secured in a manner meeting
requirements established by each Rating Agency.
The funds held in the Collection Account may be invested, pending remittance
to the related Trustee, in Eligible Investments. The Servicer may be entitled to
receive as additional compensation any interest or other income earned on funds
in the Collection Account.
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The Servicer will deposit into the Collection Account for each Series the
following payments and collections received or made by it:
(i) All payments on account of principal, including prepayments, on such
Loans;
(ii) All payments on account of interest on such Loans after deducting
therefrom, at the discretion of the Servicer but only to the extent of the
amount permitted to be withdrawn or withheld from the Collection Account in
accordance with the related Pooling and Servicing Agreement, the Servicing
Fee in respect of such Loans;
(iii) All amounts received by the Servicer in connection with the
liquidation of Loans or property acquired in respect thereof, whether
through foreclosure sale, repossession or otherwise, including payments in
connection with such 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 Pooling and Servicing Agreement, the
Servicing Fee, if any, in respect of the related Loans;
(iv) All proceeds under any title insurance, hazard insurance or other
insurance policy covering any such Loan, other than proceeds to be applied
to the restoration or repair of the related Property or released to the
obligor in accordance with the related Pooling and Servicing Agreement
("Insurance Proceeds");
(v) All amounts required to be deposited therein from any applicable
Reserve Fund for such Series pursuant to the related Pooling and Servicing
Agreement;
(vi) All Advances required to be made by the Servicer pursuant to the
related Pooling and Servicing Agreement; and
(vii) All repurchase prices of any such Loans repurchased by the
Sponsor, the Servicer or any Seller pursuant to the related Pooling and
Servicing Agreement.
The Servicer will be 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 Pooling and Servicing Agreement; the Servicer's right to
reimburse itself being limited to amounts received on or in respect of
particular Loans (including, for this purpose, Liquidation Proceeds and
Insurance Proceeds) which represent late recoveries of Scheduled Payments
respecting which any such Advance was made;
(ii) to the extent provided in the related Pooling and Servicing
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 Insurance Proceeds;
(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 a damaged 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 Loan, together with accrued and unpaid
interest thereon to the Due Date for such 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 Loan;
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(iv) in the event 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 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 Pooling
and Servicing Agreement, from any such Scheduled Payment, late payment or
such other recovery, to the extent permitted by the related Pooling and
Servicing Agreement;
(v) to reimburse itself for expenses incurred by and recoverable by or
reimbursable to it pursuant to the related Pooling and Servicing Agreement;
(vi) to pay to the applicable person with respect to each Loan or REO
Property acquired in respect thereof that has been repurchased or removed
from the Trust by the Sponsor, the Servicer or any Seller pursuant to the
related Pooling and Servicing Agreement, all amounts received thereon and
not distributed as of the date on which the related repurchase price was
determined;
(vii) to make payments to the Trustee of such Series for remittance to
the Holders of such Series in the amounts and in the manner provided for in
the related Pooling and Servicing Agreement; and
(viii) to clear and terminate the Collection Account pursuant to the
related Pooling and Servicing 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
To the extent 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, not to
guarantee or insure against losses. Accordingly, any funds advanced will be
recoverable by the Servicer out of amounts received on particular Loans which
represent late recoveries of principal or interest, Insurance Proceeds or
Liquidation Proceeds respecting which any such Advance was made. If an Advance
is made and subsequently determined to be nonrecoverable from late collections,
Insurance Proceeds or Liquidation Proceeds from the related Loan, the Servicer
may be entitled to reimbursement from other funds in the Collection Account or
from a specified Reserve Fund as applicable, to the extent specified in the
related Prospectus Supplement; such reimbursement to the Servicer will reduce
amounts available for distribution to the Holders, but since such reimbursement
will only relate to amounts previously advanced by the Servicer, such
reimbursment will not result in a net reduction of funds available for
distribution to Holders.
Reports received by Holders generally will not disclose amounts advanced, or
subject to reimbursement to the Servicer in respect of Advances, although such
reports will disclose loss and delinquency information. See "The Pooling and
Servicing Agreement--Reports to Holders."
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES
Standard Hazard Insurance; Flood Insurance. The Servicer will be required to
maintain or to cause the obligor on each 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 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 property of the type
securing the related Loans. In general, the standard form of fire and extended
coverage policy will cover physical damage to or destruction of, the related
Property caused by
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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 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 will adversely affect distributions to
Holders. When a Property securing a 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 Property, to the extent available.
The standard hazard insurance policies covering Properties securing 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 Property, including
the improvements on any 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 Property, including the
improvements, if any, 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 Property and
improvements. Since the amount of hazard insurance to be maintained on the
improvements securing the 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 Property.
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 Loan. The
Servicer will also be required to maintain, on REO Property that secured a
defaulted 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 Property. No
earthquake or other additional insurance will be required of any obligor or will
be maintained on REO Property acquired in respect of a defaulted 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 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 Loans, written by an insurer then acceptable to each Rating Agency, it will
conclusively be deemed to have satisfied its obligations to cause to be
maintained a standard hazard insurance policy for each Loan or related REO
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.
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REALIZATION UPON DEFAULTED 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 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 the
Property unless it determines that: (i) such restoration or foreclosure will
increase the Liquidation Proceeds in respect of the related 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
Insurance Proceeds. Notwithstanding anything to the contrary herein, in the case
of a Trust Fund for which a REMIC election has been made, the Servicer shall
liquidate any Property acquired through foreclosure within two years after the
acquisition of the beneficial ownership of such Property. While the holder of a
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 Sponsor will be required to
do so.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
When any 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 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 property has been or is about to be conveyed, pursuant
to which such person becomes liable under the 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 Loan. Any fee collected in connection
with an assumption will be retained by the Servicer as additional servicing
compensation. The terms of a Loan may not be changed in connection with an
assumption.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
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 and will generally consist of a percentage
(to be specified in the related Prospectus Supplement) of the then-outstanding
principal amount of the related Loans, and may include the right to recover
additional servicing compensation in the form of assumption fees, late payment
charges and similar items, or excess proceeds following disposition of property
in connection with defaulted Loans.
When an obligor makes a principal prepayment in full between Due Dates on
the related 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 Loan
(less the Servicing Fee). If the aggregate amount of such shortfalls in a month
exceeds the Servicing Fee for such month, the amount of funds available for
distribution to the related Holders may be reduced.
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To the extent 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 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 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 property securing a defaulted Loan, such
right of reimbursement being prior to the rights of the Holders to receive any
related Insurance Proceeds, Liquidation Proceeds or amounts derived from other
Credit Enhancement. The Servicer is generally also entitled to reimbursement
from the Collection Account for Advances.
EVIDENCE AS TO COMPLIANCE
The related Pooling and Servicing 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 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 Pooling and Servicing
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.
The applicable Pooling and Servicing 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 Pooling and Servicing Agreement, throughout
the preceding calendar year.
CERTAIN MATTERS REGARDING THE SERVICER
In the event of an Event of Default under a Pooling and Servicing Agreement,
the Servicer may be replaced by the related Credit Enhancer, if and, or the
Trustee or a successor Servicer. Such Events of Default and the rights of the
Trustee upon such a default under the related Pooling and Servicing Agreement
for the related Series will be substantially similar to those described under
"The Pooling and Servicing--Events of Default; Rights Upon Events of Default".
The Servicer will not have the right to assign its rights and delegate its
duties and obligations under the related Pooling and Servicing Agreement unless
the successor Servicer accepting such assignment or delegation (i) services
similar loans in the ordinary course of its business, (ii) is reasonably
satisfactory to the Trustee for the related Series, (iii) has a specified
minimum net worth, (iv) would not cause any Rating Agency's rating of the
Securities for such Series in effect immediately prior to such assignment, sale
or transfer to be qualified, downgraded or withdrawn as a result of such
assignment, sale or transfer and (v) executes and delivers to the Trustee an
agreement, in form and substance reasonably satisfactory to the Trustee, which
contains an assumption by such Servicer of the due and punctual performance and
observance of each covenant and condition to be performed or observed by the
Servicer under the related Pooling and Servicing Agreement from and after the
date of such agreement. No such assignment will become effective until the
Trustee or a successor Servicer has assumed the Servicer's obligations and
duties under the related Pooling and Servicing Agreement. To the extent that the
Servicer transfers its obligations to a wholly owned subsidiary or affiliate,
such subsidiary or affiliate need not satisfy the criteria set forth above;
however, in such instance, the assigning Servicer will remain liable for the
servicing obligations under the related Pooling and Servicing Agreement. Any
entity into which the Servicer is merged or consolidated or any successor
corporation resulting from any merger, conversion or consolidation will succeed
to the Servicer's
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obligations under the related Pooling and Servicing Agreement, provided that
such successor or surviving entity meets the requirements for a successor
Servicer set forth above.
Except to the extent otherwise provided therein, each Pooling and Servicing
Agreement will provide that neither the Servicer, nor any director, officer,
employee or agent of the Servicer, will be under any liability to the related
Trust Fund, the Sponsor or the Holders for any action taken or for failing to
take any action in good faith pursuant to the related Pooling and Servicing
Agreement, or for errors in judgment; provided, however, that neither the
Servicer nor any such person will be protected against any breach of warranty or
representation made under such Pooling and Servicing Agreement, or the failure
to perform its obligations in compliance with any standard of care set forth in
such Pooling and Servicing Agreement, or liability which would otherwise be
imposed by reason of willful misfeasance, bad faith or negligence in the
performance of their duties or by reason of reckless disregard of their
obligations and duties thereunder. Each Pooling and Servicing Agreement will
further provide that the Servicer and any director, officer, employee or agent
of the Servicer is entitled to indemnification from the related Trust Fund and
will be held harmless against any loss, liability or expense incurred in
connection with any legal action relating to the Pooling and Servicing Agreement
or the Securities, other than any loss, liability or expense incurred by reason
of willful misfeasance, bad faith or negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. In addition, the related Pooling and Servicing Agreement will
provide that the Servicer is not under any obligation to appear in, prosecute or
defend any legal action which is not incidental to its servicing
responsibilities under such Pooling and Servicing Agreement which, in its
opinion, may involve it in any expense or liability. The Servicer may, in its
discretion, undertake any such action which it may deem necessary or desirable
with respect to the related Pooling and Servicing Agreement and the rights and
duties of the parties thereto and the interests of the Holders thereunder. In
such event, the legal expenses and costs of such action and any liability
resulting therefrom may be expenses, costs, and liabilities of the Trust Fund
and the Servicer may be entitled to be reimbursed therefor out of the Collection
Account.
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THE POOLING AND SERVICING AGREEMENT
The following summaries describe certain provisions of the Pooling and
Servicing Agreement. The summaries do not purport to be complete and are subject
to, and qualified in their entirety by reference to, the provisions of the
Pooling and Servicing Agreements. Where particular provisions or terms used in
the Pooling and Servicing Agreements are referred to, such provisions or terms
are as specified in the related Pooling and Servicing Agreements.
ASSIGNMENT OF LOANS
General. At the time of issuance of the Securities of a Series, the Sponsor
will transfer, convey and assign to the Trust Fund all right, title and interest
of the Sponsor in the Loans and other property to be transferred to the Trust
Fund for a Series. Such assignment will include all principal and interest due
on or with respect to the Loans after the Cut-off Date specified in the related
Prospectus Supplement. The Trustee will, concurrently with such assignment,
execute and deliver the Securities.
Assignment of Loans. The Sponsor will, as to each Loan, deliver or cause to
be delivered to the Trustee, or, a custodian on behalf of the Trustee (the
"Custodian"), the Mortgage Note endorsed without recourse to the order of the
Trustee or in blank, the original Mortgage with evidence of recording indicated
thereon (except for any Mortgage not returned from the public recording office,
in which case a copy of such Mortgage will be delivered, together with a
certificate that the original of such Mortgage was delivered to such recording
office) and an assignment of the Mortgage in recordable form. The Trustee or,
the Custodian will hold such documents in trust for the benefit of the Holders.
The Sponsor will, as to each Home Improvement Contract, either deliver or
cause to be delivered to the Trustee (or the Custodian) the original Home
Improvement Contract and copies of documents and instruments related to each
Home Improvement Contract and the security interest in the property securing
such Home Improvement Contract, or maintain possession (or cause the Servicer to
maintain possession) of such Home Improvement Contracts and other documents, as
custodian on behalf of the related Trust Fund. In order to give notice of the
right, title and interest of Holders to the Home Improvement Contracts, the
Sponsor will cause a UCC-1 financing statement to be executed by the Sponsor or
the Seller identifying the Trustee as the secured party and identifying all Home
Improvement Contracts as collateral. See "Certain Legal Aspects of the
Loans--The Home Improvement Contracts".
With respect to Loans secured by Mortgages, the Sponsor will, at the time of
issuance of the Securities, cause assignments to the Trustee of the Mortgages
relating to the Loans for a Series to be recorded in the appropriate public
office for real property records, except in states where, in the opinion of
counsel acceptable to the Trustee, such recording is not required to protect the
Trustee's interest in the related Loans. The Sponsor will cause such assignments
to be so recorded within a specified time period after issuance of the
Securities in which event, the Pooling and Servicing Agreement may require the
Sponsor to repurchase from the Trustee any Loan the related Mortgage of which is
not recorded within such time period, at the price described below with respect
to repurchases by reason of defective documentation. Such repurchase obligation
would constitute the sole remedy available to the Holders or the Trustee for the
failure of a Mortgage to be recorded.
Each Loan will be identified in a schedule appearing as an exhibit to the
related Pooling and Servicing Agreement (the "Loan Schedule"). Such Loan
Schedule will specify with respect to each Loan: the original principal amount
and unpaid principal balance as of the Cut-off Date; the current Loan Rate; the
current Scheduled Payment; the maturity date, if any, of the related Mortgage
Note; if the Loan is an adjustable-rate Loan, the lifetime rate cap, if any, and
the current index.
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Pre-Funding Account. If so specified in the related Prospectus Supplement, a
portion of the issuance proceeds of the Securities of a particular series (such
amount, (the "Pre-Funded Amount") will be deposited in an account (the
"Pre-Funding Account") to be established with the Trustee, which will be used to
acquire Additional Loans from time to time during the time period specified in
the related Prospectus Supplement (the "Pre-Funding Period"). Prior to the
investment of the Pre-Funded Amount in additional Loans, such Pre-Funded Amount
will be invested in one or more Eligible Investments. An "Eligible Investment"
is any of the following, in each case as determined at the time of the
investment or contractual commitment to invest therein (to the extent such
investments would not require registration of the Trust Fund as an investment
company pursuant to the Investment Company Act of 1940): (a) negotiable
instruments or securities represented by instruments in bearer or registered or
book-entry form which evidence: (i) obligations which have the benefit of the
full faith and credit of the United States of America, including depository
receipts issued by a bank as custodian with respect to any such instrument or
security held by the custodian for the benefit of the holder of such depository
receipt, (ii) demand deposits or time deposits in, or bankers' acceptances
issued by, any depositary institution or trust company incorporated under the
laws of the United States of America or any state thereof and subject to
supervision and examination by Federal or state banking or depositary
institution authorities; provided that at the time of the Trustee's investment
or contractual commitment to invest therein, the certificates of deposit or
short-term deposits (if any) or long-term unsecured debt obligations (other than
such obligations whose rating is based on collateral or on the credit of a
Person other than such institution or trust company) of such depositary
institution or trust company has a credit rating in the highest rating category
from each Rating Agency, (iii) certificates of deposit having a rating in the
highest rating category from each Rating Agency, or (iv) investments in money
market funds which are (or which are composed of instruments or other
investments which are) rated in the highest rating category from each Rating
Agency; (b) demand deposits in the name of the Trustee in any depositary
institution or trust company referred to in clause (a)(ii) above; (c) commercial
paper (having original or remaining maturities of no more than 270 days) having
a credit rating in the highest rating category from each Rating Agency; (d)
Eurodollar time deposits that are obligations of institutions whose time
deposits carry a credit rating in the highest rating category from each Rating
Agency; (e) repurchase agreements involving any Eligible Investment described in
any of clauses (a)(i), (a)(iii) or (d) above, so long as the other party to the
repurchase agreement has its long-term unsecured debt obligations rated in the
highest rating category from each Rating Agency; and (f) any other investment
with respect to which each Rating Agency rating such Securities indicates will
not result in the reduction or withdrawal of its then-existing rating of the
Securities. Any Eligible Investment must mature no later than the Business Day
prior to the next Distribution Date.
During any Pre-Funding Period, the Sponsor will be obligated (subject only
to the availability thereof) to transfer to the related Trust Fund, additional
Loans from time to time during such Pre-Funding Period. Such additional Loans
will be required to satisfy certain eligibility criteria more fully set forth in
the related Prospectus Supplement which eligibility criteria will be consistent
with the eligibility criteria of the Loans included in the Trust Fund as of the
Closing Date subject to such exceptions as are expressly stated in such
Prospectus Supplement.
Although the specific parameters of the Pre-Funding Account with respect to
any issuance of Securities will be specified in the related Prospectus
Supplement, it is anticipated that: (a) the Pre-Funding Period will not exceed
120 days from the related Closing Date, (b) that the additional loans to be
acquired during the Pre-Funding Period will be subject to the same
representations and warranties as the Loans included in the related Trust Fund
on the Closing Date (although additional criteria may also be required to be
satisfied, as described in the related Prospectus Supplement) and (c) that the
Pre-Funded Amount will not exceed 25% of the principal amount of the Securities
issued pursuant to a particular offering.
Repurchase and Substitution of Defective Loans. If any document in the file
relating to a Loan delivered by the Sponsor to the Trustee (or Custodian) is
found by the Trustee within a specified time
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period following the execution of the related Pooling and Servicing Agreement
(or promptly after the Trustee's receipt of any document permitted to be
delivered after the Closing Date) to be defective in any material respect and
the Sponsor or Seller does not cure such defect, the Sponsor or Seller will be
required to repurchase the related Loan or any property acquired in respect
thereof from the Trustee at a price equal to, (a) the outstanding principal
balance of such Loan and (b) accrued and unpaid interest to the date of the next
Scheduled Payment on such Loan at the rate set forth in the related Pooling and
Servicing Agreement (less any unreimbursed Advances respecting such Loan).
The Sponsor or Seller, as the case may be, may, rather than repurchase the
Loan as described above, remove such Loan from the Trust Fund (the "Deleted
Loan") and substitute in its place one or more other Loans (each, a "Qualifying
Substitute Loan"); provided, however, that such substitution may only occur
during a specified period.
The Sponsor or another entity will make representations and warranties with
respect to the Loans Assets for a Series. If the Sponsor or such entity cannot
cure a breach of any such representations and warranties in all material
respects within a specified time period after notification by the Trustee of
such breach, and if such breach is of a nature that materially and adversely
affects the value of such Loan, the Sponsor or such entity is obligated to
repurchase the affected Loan or, provide a Qualifying Substitute Loan therefor,
subject to the same conditions and limitations on purchases and substitutions as
described above.
No Holder of Securities of a Series, solely by virtue of such Holder's
status as a Holder, will have any right under the applicable Pooling and
Servicing Agreement for such Series to institute any proceeding with respect to
such Pooling and Servicing Agreement, unless such Holder previously has given to
the Trustee for such Series written notice of default and unless the Holders of
Securities evidencing not less than 51% of the aggregate voting rights of the
Securities for such Series have made written request 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.
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 Loans or (d) any realized losses
or Liquidation Proceeds to be allocated as reductions in the outstanding
principal balances of such Securities;
(v) the amount received under any related Credit Enhancement, and the
remaining amount available under such Credit Enhancement;
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(vi) the amount of any delinquencies with respect to payments on the
related Loans;
(vii) the book value of any REO Property acquired by the related Trust
Fund; and
(viii) such other information as specified in the related Pooling and
Servicing Agreement.
In addition, within a reasonable period of time after the end of each
calendar year the Trustee, or other specified person, will furnish to each
Holder of record at any time during such calendar year: (a) the aggregate of
amounts reported pursuant to (i), (ii), and (iv)(d) above for such calendar year
and (b) such information specified in the related Pooling and Servicing
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
Loans. See "Servicing of Loans--Evidence as to Compliance".
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Certificates. Events of Default under the Pooling and Servicing Agreement
for each Series of Certificates include (i) any failure by the Servicer to
deposit amounts in the Collection Account to enable the Trustee to distribute to
Holders of such Series any required payment, which failure continues unremedied
for a specified number of days after the giving of written notice of such
failure to the Servicer by the Trustee for such Series, or to the Servicer and
the Trustee by the Holders of such Series evidencing not less than 25% of the
aggregate voting rights of the Holders for such Series, (ii) any failure by the
Servicer duly to observe or perform in any material respect any other of its
covenants or agreements in the applicable Pooling and Servicing Agreement which
continues unremedied for a specified number of 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 Holders of such Series evidencing not less than 25% of the
aggregate voting rights of the Holders and (iii) certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings and certain actions by the Servicer indicating its insolvency,
reorganization or inability to pay its obligations.
So long as an Event of Default remains unremedied under the applicable
Pooling and Servicing Agreement for a Series of Securities relating to the
servicing of Loans, the related Credit Enhancer or, the Trustee for such Series
or Holders of Securities of such Series evidencing not less than 51% of the
aggregate voting rights of the Securities for such Series may terminate all of
the rights and obligations of the Servicer as the "Servicer" under the
applicable Pooling and Servicing Agreement (other than its right to recovery of
other expenses and amounts advanced pursuant to the terms of such Pooling and
Servicing Agreement which rights the Servicer will retain under all
circumstances), whereupon the Trustee will succeed to all the responsibilities,
duties and liabilities of the "Servicer" under such Pooling and Servicing
Agreement and will be entitled to reasonable servicing compensation not to
exceed the applicable Servicing Fee, together with other servicing compensation
in the form of assumption fees, late payment charges or otherwise as provided in
such Pooling and Servicing Agreement.
In the event that the Trustee is unwilling or unable so to act, it may
select, or petition a court of competent jurisdiction to appoint, a finance
institution, bank or loan servicing institution with a specified minimum net
worth to act as successor Servicer under the provisions of the applicable
Pooling and Servicing Agreement. The successor Servicer would be entitled to
reasonable servicing compensation in an amount not to exceed the related
Servicing Fee, together with the other servicing compensation in the form of
assumption fees, late payment charges or otherwise, as provided in such Pooling
and Servicing Agreement.
During the continuance of any Event of Default of the Servicer under a
Pooling and Servicing Agreement, the Trustee for such Series will have the right
to take action to enforce its rights and
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remedies and to protect and enforce the rights and remedies of the Holders of
such Series, and, the related Credit Enhancer or the Holders of Securities
evidencing not less than 51% of the aggregate voting rights of the Securities
(with the consent of the related Credit Enhancer, if any) for such Series may
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred upon that
Trustee. However, the Trustee will not be under any obligation to pursue any
such remedy or to exercise any of such trusts or powers unless such Holders have
offered the Trustee reasonable security or indemnity against the cost, expenses
and liabilities which may be incurred by the Trustee therein or thereby. Also,
the Trustee may decline to follow any such direction if the Trustee determines
that the action or proceeding so directed may not lawfully be taken or would
involve it in personal liability or be unjustly prejudicial to the nonassenting
Holders.
Notes. Events of Default 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 Sponsor
or the Trust Fund in the related Pooling and Servicing Agreement which continues
for a specified period after notice thereof is given in accordance with the
procedures specified in the related Pooling and Servicing Agreement; (iii) any
representation or warranty made by the Sponsor or the Trust Fund in the related
Pooling and Servicing Agreement 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 as of the time made, and such
breach is not cured within a specified period after notice thereof is given in
accordance with the procedures described in the related Pooling and Servicing
Agreement; (iv) certain events of bankruptcy, insolvency, receivership or
liquidation of the Sponsor 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, the related Credit Enhancer or either the
Trustee or the Holders of a majority of the then aggregate outstanding amount of
the Notes of such Series (with the consent of the related Credit Enhancer, if
any) may declare the principal amount 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 related Credit Enhancer or 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 related
Credit Enhancer or the Trustee (with the consent of the related Credit Enhancer,
if any) 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,
unless (a) the related Credit Enhancer or the Holders of 100% of the then
aggregate outstanding amount of the Notes of such Series (with the consent of
the related Credit Enhancer, if any) 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 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 2/3% 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 in the payment of principal of or
interest on the Notes of a Series, the Trustee will
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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 related Pooling and Servicing Agreement for the
benefit of the Noteholders after the occurrence of such an Event of Default.
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 related Pooling and Servicing Agreement
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 related Pooling
and Servicing Agreement at the request or direction of any of the Holders of
Notes of such Series, unless such Holders offer 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
related Pooling and Servicing Agreement, the related Credit Enhancer or the
Holders of a majority of the then aggregate outstanding amount of the Notes of
such Series (with the consent of the related Credit Enhancer, if any) 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 related Credit
Enhancer or the Holders of a majority of the then aggregate outstanding amount
of the Notes of such Series (with the consent of the related Credit Enhancer, if
any) 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 Sponsor 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 related Pooling and Servicing 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 related Pooling and Servicing Agreement.
DUTIES OF THE TRUSTEE
The Trustee makes no representations as to the validity or sufficiency of
the related Pooling and Servicing Agreement, the Securities or of any Loan or
related documents. If no Event of Default (as
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defined in the related Agreement) has occurred, the Trustee is required to
perform only those duties specifically required of it under the related Pooling
and Servicing 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 related Pooling and Servicing 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 Sponsor, resign at any time, in
which event the Sponsor 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 related
Pooling and Servicing Agreement, (ii) if the Trustee becomes insolvent or (iii)
related Credit Enhancer or by the Holders of Securities evidencing over 50% of
the aggregate voting rights of the Securities in the Trust Fund (with the
consent of the related Credit Enhancer, if any) upon written notice to the
Trustee and to the Sponsor. 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
The related Pooling and Servicing Agreement may be amended by the Sponsor,
the Servicer (with respect to a Series relating to Loans), and the Trustee with
respect to such Series, without notice to or consent of the Holders, but with
the consent of the related Credit Enhancer (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 Sponsor, the Trust Fund or Servicer,
(iv) to add any other provisions with respect to matters or questions arising
under such Pooling and Servicing Agreement or related Credit Enhancement, (v) to
add or amend any provisions of such Pooling and Servicing 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 that such amendment will not cause such Rating Agency to
reduce the then current rating thereof. Supplement, the Pooling and Servicing
Agreement for each Series may also be amended by the Trustee, the Servicer, if
applicable, and the Sponsor (with the consent of the related Credit Enhancer, if
any) with respect to such Series with the consent of the Holders possessing not
more than 50% 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, more than 50% 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 Pooling and Servicing 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
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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.
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 related Pooling and Servicing 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 Pooling and Servicing Agreement will provide for the holding of any
annual or other meeting of Holders.
REMIC ADMINISTRATOR
For any Series with respect to which a REMIC election is made, preparation
of certain reports and certain other administrative duties with respect to the
Trust Fund may be performed by a REMIC administrator, who may be the Servicer.
TERMINATION
Certificates. The obligations created by the Pooling and Servicing Agreement
for a Series of Certificates will terminate upon the distribution to Holders of
all amounts distributable to them pursuant to such Pooling and Servicing
Agreement after the earlier of (i) the later of (a) the final payment or other
liquidation of the last Loan remaining in the Trust Fund for such Series and (b)
the disposition of all property acquired upon foreclosure or deed in lieu of
foreclosure or repossession in respect of any 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 Loans and other
property at that time subject to such Pooling and Servicing Agreement. The
Pooling and Servicing 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 Loans at a price
equal to, unless otherwise specified in the related Prospectus Supplement, 100%
of the aggregate principal balance of such Loans plus, with respect to any
property acquired in respect of a Loan, if any, the outstanding principal
balance of the related Loan at the time of foreclosure, less, in either case,
related unreimbursed Advances (in the case of the Loans, only to the extent not
already reflected in the computation of the aggregate principal balance of such
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 interest rate on the related Loans through the
last day of the month in which such repurchase occurs; provided, however, that
if an election is made for treatment as a REMIC under the Code, the repurchase
price may equal the greater of (a) 100% of the aggregate principal balance of
such Loans, plus accrued interest thereon at the applicable interest rates on
the Loans through the last day of the month of such repurchase and (b) the
aggregate fair market value of such Loans plus the fair market value of any
property acquired in respect of a Loan and remaining in the Trust Fund. 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 Loans at the time of repurchase being less than a fixed
percentage, to be set forth in the related
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Prospectus Supplement, of the aggregate principal balance of the Loans as of the
Cut-off Date. In no event, however, will the trust created by Pooling and
Servicing 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 Pooling and Servicing 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 Sponsor 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".
Notes. The Pooling and Servicing Agreement will be discharged with respect
to a Series of Notes (except with respect to certain continuing rights specified
in the Pooling and Servicing Agreement) 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 related Pooling
and Servicing Agreement 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 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 Final Scheduled Distribution Date for such Notes and any installment of
interest on such Notes in accordance with the terms of the Pooling and Servicing
Agreement 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.
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YIELD AND MATURITY CONSIDERATIONS
The yield to maturity of a Security will depend on the price paid by the
Holder for such Security, the interest rate on such Security (which interest
rate may vary if so specified in the related Prospectus Supplement), the rate of
payment of principal on such Security (or the rate at which the Notional Amount
thereof is reduced if such Security is not entitled to payments of principal)
and other factors.
In general, if a Class of Securities is purchased at initial issuance at a
premium and payments of principal on the related Loans occur at a rate faster
than anticipated at the time of purchase, the purchaser's actual yield to
maturity will be lower than that assumed at the time of purchase. In addition,
if a Class of Securities is purchased at initial issuance at a discount and
payments of principal on the related Loans occur at a rate slower than that
assumed at the time of purchase, the purchaser's actual yield to maturity will
be lower than that originally anticipated. The effect of principal prepayments,
liquidations and purchases on yield will be particularly significant in the case
of a Series of Securities having a Class entitled to payments of interest only
or to payments of interest that are disproportionately high relative to the
principal payments to which such Class is entitled. Such a Class will likely be
sold at a substantial premium to its principal balance, if any, and any faster
than anticipated rate of prepayments will adversely affect the yield to Holders
thereof. In certain circumstances, rapid prepayments may result in the failure
of such Holders to recoup their original investment. In addition, the yield to
maturity on certain other types of Classes of Securities, may be relatively more
sensitive to the rate of prepayment on the related Loans than other Classes of
Securities.
The timing of changes in the rate of principal payments on or repurchases of
the Loans may significantly affect an investor's actual yield to maturity, even
if the average rate of principal payments experienced over time is consistent
with an investor's expectation. In general, the earlier a prepayment of
principal on the underlying Loans or a repurchase thereof, the greater will be
the effect on an investor's yield to maturity. As a result, the effect on an
investor's yield of principal payments and repurchases occurring at a rate
higher (or lower) than the rate anticipated by the investor during the period
immediately following the issuance of a Series of Securities would not be fully
offset by a subsequent like reduction (or increase) in the rate of principal
payments.
When a full prepayment is made on a Loan, the Mortgagor is charged interest
on the principal amount of the Loan so prepaid for the number of days in the
month actually elapsed up to the date of the prepayment, at a daily rate
determined by dividing the Loan Rate by 365. A Series of Securities may provide
that the Servicer is obligated to deposit into the Distribution Account, for
distribution to Holders of the Series, an amount, not to exceed the Servicer's
aggregate Servicing Fee for such Series for the related month, equal to the
difference between (a) a full months' interest (net of the Servicing Fee) on a
Loan which has prepaid in full and (b) the amount of interest actually paid with
such prepayment in full. See "Servicing of Loans--Servicing Compensation and
Payment of Expenses". To the extent the Servicer is not obligated to deposit for
distribution to the related Holders the full amount of such difference, the
effect of prepayments in full will be to reduce the amount of interest paid in
the next succeeding month to Holders of Securities entitled to payments of
interest because interest on the principal amount of any Loan so prepaid will be
paid only to the date of prepayment rather than for a full month. A partial
prepayment of principal is applied so as to reduce the outstanding principal
balance of the related Loan as of the first day of the month in which such
partial prepayment is received. As a result, the effect of a partial prepayment
on a Loan will be to reduce the amount of interest passed through to Holders of
Securities on the Distribution Date following the receipt of such partial
prepayment by an amount equal to one month's interest at the applicable
pass-through rate, as the case may be, on the prepaid amount. Neither full nor
partial principal prepayments are passed through until the month following
receipt.
A number of factors affect principal prepayment rates, including homeowner
mobility, economic conditions, mortgage market interest rates, the availability
of mortgage funds and the enforceability of due-on-sale clauses. Many Loans will
contain due-on-sale provisions permitting the mortgagee to
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accelerate the maturity of the Loan upon sale or certain transfers by the
Mortgagor of the underlying Property. The Servicer will generally enforce any
due-on-sale clause to the extent it has knowledge of the conveyance or proposed
conveyance of the underlying Property and it is entitled to do so under
applicable law; provided, however, that the Servicer will not take any action in
relation to the enforcement of any due-on-sale provision which would adversely
affect the interests of the Holders or adversely affect or jeopardize coverage
under any applicable insurance policy. The extent to which the Loans are assumed
by purchasers of the Properties rather than prepaid by the related Mortgagors in
connection with the sales of the Properties will affect the yield of the related
Series of Securities.
The yield on the Securities also will be effected by liquidations of Loans
following Mortgagor defaults and by purchases of Loans required by the Pooling
and Servicing Agreement in the event of breaches of representations made in
respect of such Mortgage Loans by the Sponsor, the related Seller if any, the
Servicer and others, or repurchases due to conversions of ARM Loans to a fixed
interest rate. See "Descriptions of the Securities--Assignment of Loans" above.
Under certain circumstances, the Servicer, the Sponsor or, if specified in the
related Prospectus Supplement, the Holders of the REMIC residual interest or the
Credit Enhancer may have the option to purchase the Loans in a Trust Fund. See
"Description of the Securities--Optional Termination."
The rate of prepayments with respect to fixed-rate mortgage loans has
fluctuated significantly in recent years. In general, if prevailing interest
rates fall significantly below the interest rates on fixed-rate mortgage loans,
such mortgage loans are likely to be subject to higher prepayment rates than if
prevailing rates remain at or above the interest rate on such mortgage loans.
Conversely, if prevailing interest rates rise appreciably above the interest
rates on fixed-rate mortgage loans, such mortgage loans are likely to experience
a lower prepayment rate than if prevailing rates remain at or below the interest
rates on such mortgage loans.
Although the Loan Rates on ARM Loans will be subject to periodic
adjustments, such adjustments will, generally, (i) not increase or decrease such
Loan Rates by more than a fixed percentage amount on each adjustment date, (ii)
not increase such Loan Rates over a fixed percentage amount during the life of
any ARM Loan and (iii) be based on an index (which may not rise and fall
consistently with mortgage interest rates) plus the related margin (which may be
different from margins being used at the time for newly originated adjustable
rate mortgage loans). As a result, the Loan Rates on the ARM Loans in a Trust
Fund at any time may not equal the prevailing rates for similar, newly
originated adjustable-rate mortgage loans. In certain rate environments, the
prevailing rates on fixed-rate mortgage loans may be sufficiently low in
relation to the then-current Loan Rates on ARM Loans that the rate of prepayment
may increase as a result of refinancings.
In addition, and as may be described in the related Prospectus Supplement,
the related Pooling and Servicing Agreement may provide that all or a portion of
such collected principal may be retained by the Trustee (and held in certain
temporary investments, including Loans) for a specified period prior to being
used to fund payments of principal to Holders. The result of such retention and
temporary investment by the Trustee of such principal would be to slow the
amortization rate of the related Securities relative to the amortization rate of
the related Loans, or to attempt to match the amortization rate of the related
Securities to an amortization schedule established at the time such Securities
are issued. Any such feature applicable to any Securities may terminate upon the
occurrence of events to be described in the related Prospectus Supplement,
resulting in the current funding of principal payments to the related Holders
and an acceleration of the amortization of such Securities.
In addition to its impact on a Security's yield to maturity the rate of
principal prepayments on the Loans related to the Security will affect the
weighted average life of the Security. "Weighted average life" refers to the
average amount of time from the date of issuance of a security until each dollar
of principal of the security is repaid to the investor.
There can be no assurance as to the rate of prepayment of the Loans. The
Sponsor is not aware of any reliable, publicly available statistics relating to
the principal prepayment experience of diverse
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portfolios of mortgage loans such as the Loans over an extended period of time.
All statistics known to the Sponsor that have been compiled with respect to
prepayment experience on mortgage loans indicate that while some mortgage loans
may remain outstanding until their stated maturities, a substantial number will
be paid prior to their respective stated maturities.
The effective yield to maturity to each Holder of fixed-rate Securities
entitled to payments of interest will be below that otherwise produced by the
applicable interest rate and purchase price of such Security because, while
interest will accrue on each Loan from the first day of each month, the payment
of such interest to the Holders will be made on a specified day (for example,
the twenty-fifth day) of the month (or, in the case of quarterly pay Securities,
the twenty-fifth day of every third month, or, in the case of semiannually pay
Securities, the twenty-fifth day of every sixth month) following the month of
accrual.
The Loan Rates on certain ARM Loans subject to negative amortization adjust
monthly and their amortization schedules adjust less frequently. During a period
of rising interest rates as well as immediately after origination (initial Loan
Rates are generally lower than the sum of the indices applicable at origination
and the related Loan margins) the amount of interest accruing on the principal
balance of such Loans may exceed the amount of the minimum scheduled monthly
payment thereon. As a result, a portion of the accrued interest on negatively
amortizing Loans may become deferred interest that will be added to the
principal balance thereof and will bear interest at the applicable Loan Rate.
The addition of any such deferred interest to the principal balance will
lengthen the weighted average life of the Securities evidencing interests in
such Loans and may adversely affect yield to Holders thereof depending upon the
price at which such Securities were purchased. In addition, with respect to
certain ARM Loans subject to negative amortization, during a period of declining
interest rates, it might be expected that each minimum scheduled monthly payment
on such a Loan would exceed the amount of scheduled principal and accrued
interest on the principal balance thereof, and since such excess will be applied
to reduce such principal balance, the weighted average life of such Securities
will be reduced and may adversely affect yield to Holders thereof depending upon
the price at which such Securities were purchased.
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CERTAIN LEGAL ASPECTS OF LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans, home improvement installment sales contracts and home
improvement installment loan agreements 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 Loans are situated. In the event that a
particular Trust Fund contains Loans with a concentration in a particular state,
and such state's laws vary materially from the general discussion below, the
related Prospectus Supplement will elaborate on the relevant laws of such state.
The summaries are qualified in their entirety by reference to the applicable
federal and state laws governing the Loans.
MORTGAGES
General. The Loans for a Series will and certain Home Improvement Contracts
for a Series may be secured by either mortgages or deeds of trust or deeds to
secure debt (such Mortgage Loans and Home Improvement Contracts are hereinafter
referred to in this Section as "mortgage loans"), depending upon the prevailing
practice in the state in which the 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 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/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 property is held by a land
trustee under a land trust agreement of which the borrower/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/property owner; the
beneficiary, who is the lender, and the trustee, a third-party grantee. Under a
deed of trust, the trustor grants the property, irrevocably until the debt is
paid, in trust, generally with a power of sale, to the trustee to secure payment
of the obligation. The 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 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 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 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
nonjudicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a nonjudicial
trustee's sale under a specific provision in the deed of trust which authorizes
the trustee to sell the property upon any default
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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 a notice of default and notice of sale. In
addition, the trustee in some states must provide notice to any other individual
having an interest in the real 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 property and sent to
all parties having an interest of record in the 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 the 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 property, recorded and sent to all parties having an interest in the real
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 counter claims 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 property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the 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 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
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the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property. Any
loss may be 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 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 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
property and pay the expenses of ownership until the redemption period has run.
In some states, there is no right to redeem 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
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 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 property are damaged or destroyed by fire or other
casualty, or in the event the 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 property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the 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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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 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 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' 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 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
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 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.
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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 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 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. The Garn-St. Germain Sponsory
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.
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 the borrower's default under the loan documents. Such equitable
relief has included court-imposed requirements that the lender undertake
affirmative and sometimes costly 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 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 its security if the default under
the security agreement is not monetary, such as the borrower's failure to
adequately maintain the property or the borrower's execution of secondary
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financing affecting the property. Finally, some courts have considered whether
federal or state constitutional requirements of "due process" 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 Sponsory 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.
THE HOME IMPROVEMENT CONTRACTS
General. Home Improvement Contracts that are secured by the Home
Improvements financed thereby grant to the originator of such contracts a
purchase money security interest in such Home Improvements to secure all or part
of the purchase price of such Home Improvements and related services. A
financing statement generally is not required to be filed to perfect a purchase
money security interest in consumer goods. Such purchase money security
interests are assignable. In general, a purchase money security interest grants
to the holder a security interest that has priority over a conflicting security
interest in the same collateral and the proceeds of such collateral. However, to
the extent that the collateral subject to a purchase money security interest
becomes a fixture, in order for the related purchase money security interest to
take priority over a conflicting interest in the fixture, the holder's interest
in such collateral must generally be perfected by a timely fixture filing. In
general, under the Uniform Commercial Code (the "UCC"), a security interest does
not exist under the UCC in ordinary building material incorporated into an
improvement on land. Home Improvement Contracts that finance lumber, bricks,
other types of ordinary building material or other goods that are deemed to lose
such characterization, upon incorporation of such materials into the related
property, will not be secured by a purchase money security interest in the Home
Improvement being financed.
Enforcement of Security Interest in Home Improvements. So long as Home
Improvements have not become fixtures subject to real property laws, a creditor
can repossess Home Improvements securing a Home Improvement Contract by
voluntary surrender, by "self-help" repossession that is peaceful (i.e., without
breach of the peace) or, in the absence of voluntary surrender and the ability
to repossess without breach of the peace, by judicial process. The holder of
such a Home Improvement Contract must give the debtor a number of days' notice,
which varies from 10 to 30 days depending on the state, prior to commencement of
any repossession. The UCC and consumer protection laws in most states place
restrictions on repossession sales, including requiring prior notice to the
debtor and commercial
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reasonableness in effecting such a sale. The laws in most states also require
that the debtor be given notice of any sale prior to resale of the unit so that
the debtor may redeem it at or before such resale.
Under the laws applicable in most states, a creditor is entitled to obtain a
deficiency judgement from a debtor for any deficiency following repossession and
resale of the property securing the debtor's loan. However, some states impose
prohibitions or limitations on deficiency judgements, and in many cases the
defaulting borrower would have no assets with which to pay a judgement.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
Consumer Protection Laws. The so-called "Holder-in-Due-Course" rule of the
Federal Trade Commission is intended to defeat the ability of the transferor of
a consumer credit contract, if such transferor is the seller of the goods which
gave rise to the transaction (and certain related lenders and assignees), to
transfer such contract free of notice of claims by the debtor thereunder. The
effect of the rule is to subject the assignee of such a contract to all claims
and defenses which the debtor could assert against the seller of goods.
Liability under this rule is limited to amounts paid under a contract; however,
the obligor also may be able to assert the rule to offset remaining amounts due
as a defense against a claim brought by the assignee against such obligor.
Numerous other federal and state consumer protection laws impose requirements
applicable to the Home Improvement Contracts, including the Truth in Lending
Act, the Federal Trade Commission Act, the Fair Credit Billing Act, the Fair
Credit Reporting Act, the Equal Credit Opportunity Act, the Fair Debt Collection
Practices Act and the Uniform Consumer Credit Code. In the case of some of these
laws, the failure to comply with their provisions may affect the enforceability
of the related contract.
Applicability of Usury Laws. Title V provides that, subject to certain
conditions, state usury limitations shall not apply to any contract which is
secured by a first lien on certain kinds of consumer goods. In the case of Home
Improvement Contracts secured by Home Improvements which have not become
fixtures, such conditions include, among other things, restrictions on
prepayment fees, late charges and deferral fees and a 30-day notice period prior
to instituting any action leading to repossession of the related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
INSTALLMENT CONTRACTS
The Loans may also consist of installment contracts (each, an "Installment
Contract"). Under an Installment Contract, the seller retains legal title to the
property and enters into an agreement with the purchaser for the payment of the
purchase price, plus interest, over the term of such contract. Only after full
performance by the purchaser of the contract is the seller obligated to convey
title to the property to the purchaser. As with mortgage or deed of trust
financing, during the term of the Installment Contract, the purchaser is
generally responsible for maintaining the property in good condition and for
paying real estate taxes, assessments and hazard insurance premiums associated
with the property.
The method of enforcing the rights of the seller under an Installment
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to the terms. The terms of Installment Contracts
generally provide that upon a default by the purchaser, the purchaser loses his
or her right to occupy the property, the entire indebtedness is accelerated, and
the purchaser's equitable interest in the property is forfeited.
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The seller in such a situation does not have to foreclose in order to obtain
title to the property, although in some cases, a quiet title action is in order
if the purchaser has filed the Installment Contract in local land records, and
an ejectment action may be necessary to recover possession. In a few states,
particularly in cases of a purchaser default during the early years of an
Installment Contract, the courts will permit ejectment of the purchaser and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
purchasers under Installment Contracts from the harsh consequences of
forfeiture. Under such statutes, a judicial or nonjudicial foreclosure may be
required, the seller may be required to give notice of default, the purchaser
may be granted some grace period during which the Installment Contract may be
reinstated upon full payment of the default amount, and the purchaser may have a
post-foreclosure statutory redemption right. In other states, courts in equity
may permit a purchaser with significant investment in the property under an
Installment Contract for the sale of real estate to share in the proceeds of
sale of the property after the indebtedness is repaid or may otherwise refuse to
enforce the forfeiture clause. Nevertheless, generally speaking, the seller's
procedures for obtaining possession and clear title under an Installment
Contract in a given state are simpler and less time-consuming and costly than
are the procedures for foreclosing and obtaining clear title to a property
subject to one or more liens.
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 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 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
Sponsor nor the Trustee will be required to advance such amounts, and any loss
in respect 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 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 Loans in
proportion to the interest that each such Class of Securities would have
otherwise been entitled to receive in respect of such Loans had such interest
shortfall not occurred.
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THE SPONSOR AND SERVICER
Accredited Home Lenders, Inc. ("Accredited"), is a California corporation
engaged primarily in the origination and sale of nonconforming mortgage loans.
Accredited commenced operations in 1990 as a retail mortgage broker, and now
operates primarily as a wholesale mortgage banker, funding mortgage loans to
borrowers who are direct clients of mortgage brokers or other mortgage lenders
with which Accredited cultivates and maintains relationships. Accredited also
purchases funded mortgage loans which have been originated by other lenders in
accordance with Accredited's underwriting guidelines or which have been
reunderwritten by Accredited to ensure conformance to Accredited's underwriting
criteria. Accredited currently funds or purchases mortgage loans in over twenty
different states.
In 1996, Accredited began retaining the servicing rights to its mortgage
loan production, but it currently subcontracts substantially all of its
servicing obligations.
Accredited's headquarters are located at 15030 Avenue of Science, Suite 100,
San Diego, California 92128, and its telephone number is (619) 676-2100.
The related Holders will not have the right to direct the day-to-day
operations of the Sponsor or of the Servicer with respect to the related
Mortgage Assets. The Holders or, if specified in the related Prospectus
Supplement, the related Credit Enhancer, will have the right to terminate the
Servicer in connection with a Servicer default. See "The Pooling and Servicing
Agreement--Events of Default; Rights Upon Events of Default".
USE OF PROCEEDS
The Sponsor 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 Assets, (ii) to repay indebtedness which has
been incurred to obtain funds to acquire such Mortgage Assets, (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.
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FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of the material anticipated federal
income tax considerations to investors of the purchase, ownership and
disposition of the Securities offered hereby. The discussion is based upon laws,
regulations, rulings and decisions now in effect, all of which are subject to
change. The discussion below does not purport to deal with all federal tax
considerations applicable to all categories of investors, some of which may be
subject to special rules. Investors should consult their own tax advisors in
determining the federal, state, local and any other tax consequences to them of
the purchase, ownership and disposition of the Securities.
Dewey Ballantine, New York, New York, or other counsel specified in the
related Prospectus Supplement will serve as special tax counsel with respect to
each Series. In connection with each offering of Securities, such tax counsel
will deliver an opinion to the effect that the following discussion (together
with any supplementary discussion in the related Prospectus Supplement) is
materially accurate, insofar as its relates to the offered Securities
The following discussion addresses securities of three general types: (i)
securities ("Grantor Trust Securities") representing interests in a Trust Fund(a
"Grantor Trust Fund") which the Sponsor will covenant not to elect to have
treated as a real estate mortgage investment conduit (a "REMIC"); (ii)
securities ("REMIC Securities") representing interests in a Trust Fund, or a
portion thereof, which the Sponsor will covenant to elect to have treated as a
REMIC under Sections 860A through 860G of the Internal Revenue Code of 1986, as
amended (the "Code"); and (iii) securities ("Debt Securities") that are intended
to be treated for federal income tax purposes as indebtedness secured by the
Loans. This Prospectus does not address the tax treatment of partnership
interests. Such a discussion will be set forth in the related Prospectus
Supplement for any Trust Fund issuing Securities characterized as partnership
interests. The Prospectus Supplement for each Series of Securities will indicate
whether a REMIC election (or elections) will be made for the related Trust Fund
and, if a REMIC election is to be made, will identify all "regular interests"
and "residual interests" in the REMIC.
GRANTOR TRUST SECURITIES
With respect to each series of Grantor Trust Securities, special tax counsel
to the Sponsor will deliver its opinion to the Sponsor that (unless otherwise
limited in the related Prospectus Supplement) the related Grantor Trust Fund
will be classified as a grantor trust and not as a partnership or an association
taxable as a corporation. Accordingly, each Holder of a Grantor Trust Security
will generally be treated as the owner of an interest in the Loans included in
the Grantor Trust Fund.
For purposes of the following discussion, a Grantor Trust Security
representing an undivided equitable ownership interest in the principal of the
Loans constituting the related Grantor Trust Fund, together with interest
thereon at a pass-through rate, will be referred to as a "Grantor Trust
Fractional Security." A Grantor Trust Security representing ownership of all or
a portion of the difference between interest paid on the Loans constituting the
related Grantor Trust Fund and interest paid to the Holders of Grantor Trust
Fractional Interest Securities issued with respect to such Grantor Trust Fund
will be referred to as a "Grantor Trust Strip Security."
SPECIAL TAX ATTRIBUTES
Special tax counsel to the Sponsor will deliver its opinion to the Sponsor
that (a) Grantor Trust Fractional Interest Securities will represent interests
in (i) "qualifying real property loans" within the meaning of Section 593(d) of
the Code; (ii) "loans . . . secured by an interest in real property" within the
meaning of Section 7701(a)(19)(C)(v) of the Code; and (iii) "obligation[s]
(including any participation or certificate of beneficial ownership therein)
which . . . [are] principally secured by an interest in real property" within
the meaning of Section 860G(a)(3)(A) of the Code; and (b) interest on Grantor
Trust Fractional Interest Securities will be considered "interest on obligations
secured by mortgages on real property or on interests in real property" within
the meaning of Section 856(c)(3)(B)
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of the Code. In addition, the Grantor Trust Strip Securities will be
"obligation[s] (including any participation or certificate of beneficial
ownership therein) . . . principally secured by an interest in real property"
within the meaning of Section 960G(a)(3)(A) of the Code.
TAXATION OF HOLDERS OF GRANTOR TRUST SECURITIES
Holders of Grantor Trust Fractional Interest Securities generally will be
required to report on their federal income tax returns their respective shares
of the income from the Loans (including amounts used to pay reasonable servicing
fees and other expenses but excluding amounts payable to Holders of any
corresponding Grantor Trust Strip Securities) and, subject to the limitations
described below, will be entitled to deduct their shares of any such reasonable
servicing fees and other expenses. If a Holder acquires a Grantor Trust
Fractional Interest Security for an amount that differs from its outstanding
principal amount, the amount includible in income on a Grantor Trust Fractional
Interest Security may differ from the amount of interest distributable thereon.
See "Federal Income Tax Considerations-- Discount and Premium". Individuals
holding a Grantor Trust Fractional Interest Security directly or through certain
pass-through entities will be allowed a deduction for such reasonable servicing
fees and expense only to the extent that the aggregate of such Holder's
miscellaneous itemized deductions exceeds 2% of such Holder's adjusted gross
income. Further, Holders (other than corporations) subject to the alternative
minimum tax may not deduct miscellaneous itemized deductions in determining
alternative minimum taxable income.
Holders of Grantor Trust Strip Securities generally will be required to
treat such Securities as "stripped coupons" under Section 1286 of the Code.
Accordingly, such a Holder will be required to treat the excess of the total
amount of payments on such a Security over the amount paid for such Security as
original issue discount and to include such discount in income as it accrues
over the life of such Security. See "Federal Income Tax Considerations--Discount
and Premium".
Grantor Trust Fractional Interest Securities may also be subject to the
coupon stripping rules if a Class of Grantor Trust Strip Securities is issued as
part of the same Series of Securities. The consequences of the application of
the coupon stripping rules would appear to be that any discount arising upon the
purchase of such a Security (and perhaps all stated interest thereon) would be
classified as original issue discount and includible in the Holder's income as
it accrues (regardless of the Holder's method of accounting), as described below
under "Federal Income Tax Considerations--Discount and Premium." The coupon
stripping rules will not apply, however, if (i) the pass-through rate is no more
than 100 basis points lower than the gross rate of interest payable on the
related Loans and (ii) the difference between the outstanding principal balance
on the Security and the amount paid for such Security is less than 0.25% of such
principal balance times the weighted average remaining maturity of the Security.
SALES OF GRANTOR TRUST SECURITIES
Any gain or loss recognized on the sale of a Grantor Trust Security (equal
to the difference between the amount realized on the sale and the adjusted basis
of such Grantor Trust Security) will be capital gain or loss, except to the
extent of accrued and unrecognized market discount, which will be treated as
ordinary income, and in the case of banks and other financial institutions
except as provided under Section 582(c) of the Code. The adjusted basis of a
Grantor Trust Security will generally equal its cost, increased by any income
reported by the seller (including original issue discount and market discount
income) and reduced (but not below zero) by any previously reported losses, any
amortized premium and by any distributions of principal.
GRANTOR TRUST REPORTING
The related Trustee will furnish to each Holder of a Grantor Trust
Fractional Interest Security with each distribution a statement setting forth
the amount of such distribution allocable to principal on the Loans and to
interest thereon at the rate at which interest is payable on such Security. In
addition, within a reasonable time after the end of each calendar year, based on
information provided by the
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Servicer, the related Trustee will furnish to each Holder during such year such
customary factual information as the Servicer deems necessary or desirable to
enable Holders of Grantor Trust Securities to prepare their tax returns and will
furnish comparable information to the Internal Revenue Service (the "IRS") as
and when required to do so by law.
REMIC SECURITIES
If provided in a related Prospectus Supplement, an election will be made to
treat a Trust Fund as a REMIC under the Code. Qualification as a REMIC requires
ongoing compliance with certain conditions. With respect to each Series of
Securities for which such an election is made, special tax counsel to the
Sponsor will deliver its opinion to the Sponsor that (unless otherwise limited
in the related Prospectus Supplement), assuming compliance with the Pooling and
Servicing Agreement, the Trust Fund will be treated as a REMIC for federal
income tax purposes. A Trust Fund for which a REMIC election is made will be
referred to herein as a "REMIC Trust." The Securities of each class will be
designated as "regular interests" in the REMIC Trust except that a separate
class will be designated as the "residual interest" in the REMIC Trust. The
Prospectus Supplement for each series of Securities will state whether
Securities of each Class will constitute a regular interest (a "REMIC Regular
Security") or a residual interest (a "REMIC Residual Security").
A REMIC Trust will not be subject to federal income tax except with respect
to income from prohibited transactions and in certain other instances described
below. See "--Taxes on a REMIC Trust." Generally, the total income from the
Loans in a REMIC Trust will be taxable to the Holders of the Securities of that
Series, as described below.
Regulations issued by the Treasury Department on December 23, 1992 (the
"REMIC Regulations") provide some guidance regarding the federal income tax
consequences associated with the purchase, ownership and disposition of REMIC
Securities. While certain material provisions of the REMIC Regulations are
discussed below, investors should consult their own tax advisors regarding the
possible application of the REMIC Regulations in their specific circumstances.
SPECIAL TAX ATTRIBUTES
REMIC Regular Securities and REMIC Residual Securities will be "regular or
residual interests in a REMIC" within the meaning of Section 7701(a)(19)(C)(xi)
of the Code, "qualifying real property loans" within the meaning of Section
593(d) of the Code and "real estate assets" within the meaning of Section
856(c)(5)(A) of the Code. If at any time during a calendar year less than 95% of
the assets of a REMIC Trust consist of "qualified mortgages" (within the meaning
of Section 860G(a)(3) of the Code) then the portion of the REMIC Regular
Securities and REMIC Residual Securities that are qualifying assets under those
Sections during such calendar year may be limited to the portion of the assets
of such REMIC Trust that are qualified mortgages. Similarly, income on the REMIC
Regular Securities and REMIC Residual Securities will be treated as "interest on
obligations secured by mortgages on real property" within the meaning of Section
856(c)(3)(B) of the Code, subject to the same limitation as set forth in the
preceding sentence. For purposes of applying this limitation, a REMIC Trust
should be treated as owning the assets represented by the qualified mortgages.
REMIC Regular Securities and REMIC Residual securities held by a financial
institution to with Section 585, 586 or 593 of the Code applies will be treated
as evidences of indebtedness for purposes of Section 582(c)(1) of the Code.
REMIC Regular Securities will also be qualified mortgages with respect to other
REMICs.
TAXATION OF HOLDERS OF REMIC REGULAR SECURITIES
Except as indicated below in this federal income tax discussion, the REMIC
Regular Securities will be treated for federal income tax purposes as debt
instruments issued by the REMIC Trust on the date such Securities are first sold
to the public (the "Closing Date") and not as ownership interests in the REMIC
Trust or its assets. Holders of REMIC Regular Securities that otherwise report
income
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under a cash method of accounting will be required to report income with respect
to such Securities under an accrual method. For additional tax consequences
relating to REMIC Regular Securities purchased at a discount or with premium,
see "Federal Income Tax Considerations--Discount and Premium," below.
TAXATION OF HOLDERS OF REMIC RESIDUAL SECURITIES
Daily Portions. Except as indicated below, a Holder of a REMIC Residual
Security for a REMIC Trust generally will be required to report its daily
portion of the taxable income or net loss of the REMIC Trust for each day during
a calendar quarter that the Holder owned such REMIC Residual Security. For this
purpose, the daily portion shall be determined by allocating to each day in the
calendar quarter its ratable portion of the taxable income or net loss of the
REMIC Trust for such quarter and by allocating the amount so allocated among all
related Holders of REMIC Residual Securities (on such day) in accordance with
their percentage interests on such day. Any amount included in the gross income
or allowed as a loss of any Holder of a REMIC Residual Security by virtue of
this paragraph will be treated as ordinary income or loss.
The requirement that each Holder of a REMIC Residual Security report its
daily portion of the taxable income or net loss of the REMIC Trust will continue
until there are no Securities of any related Class outstanding, even though the
Holder of the REMIC Residual Security may have received full payment of the
stated interest and principal on its REMIC Residual Security.
The Trustee will provide to Holders of REMIC Residual Securities of each
Series of Securities (i) such information as is necessary to enable them to
prepare their federal income tax returns and (ii) any reports regarding the
Securities of such Series that may be required under the Code.
Taxable Income or Net Loss of a REMIC Trust. The taxable income or net loss
of a REMIC Trust will be the income from the qualified mortgages it holds and
any reinvestment earnings less deductions allowed to the REMIC Trust. Such
taxable income or net loss for a given calendar quarter will be determined in
the same manner as for an individual having the calendar year as the taxable
year and using the accrual method of accounting, with certain modifications.
First, a deduction will be allowed for accruals of interest (including any
original issue discount, but without regard to the investment interest
limitation in Section 163(d) of the Code) on the REMIC Regular Securities (but
not the REMIC Residual securities), even though REMIC Regular Securities are for
non-tax purposes evidences of beneficial ownership rather than indebtedness of a
REMIC Trust. Second, market discount or premium equal to the difference between
the total stated principal balances of the qualified mortgages and the basis of
the REMIC Trust therein generally will be included in income (in the case of
discount) or deductible (in the case of premium) by the REMIC Trust as it
accrues under a constant yield method, taking into account the "Prepayment
Assumption" (as defined in the related Prospectus Supplement, see "Federal
Income Tax Considerations--Discount and Premium--Original Issue Discount,"
below). The basis of a REMIC Trust in the qualified mortgages is the aggregate
of the issue prices of all the REMIC Regular Securities and REMIC Residual
Securities in the REMIC Trust on the related Closing Date. If, however, a
substantial amount of a Class of REMIC Regular Securities or REMIC Residual
Securities has not been sold to the public, then the fair market value of all
the REMIC Regular Securities or REMIC Residual Securities in that Class as of
the related Closing Date should be substituted for the issue price.
Third, no item of income, gain, loss or deduction allocable to a prohibited
transaction (see "Federal Income Tax Considerations--REMIC Securities--Taxes on
a REMIC Trust--Prohibited Transactions") will be taken into account. Fourth, a
REMIC Trust generally may not deduct any item that would not be allowed in
calculating the taxable income of a partnership by virtue of Section 703(a)(2)
of the Code. Finally, the limitation on miscellaneous itemized deductions
imposed on individuals by Section 67 of the Code will not be applied at the
REMIC Trust level to any servicing and guaranty fees (see, however,
"--Pass-Through of Servicing and Guaranty fees to Individuals"). In addition,
under the REMIC Regulations, any expenses that are incurred in connection with
the formation of a REMIC
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Trust and the issuance of the REMIC Regular Securities and REMIC Residual
Securities are not treated as expenses of the REMIC Trust for which a deduction
is allowed. If the deductions allowed to a REMIC Trust exceed its gross income
for a calendar quarter, such excess will be a net loss for the REMIC Trust for
that calendar quarter. The REMIC Regulations also provide that any gain or loss
to a REMIC Trust from the disposition of any asset, including a qualified
mortgage or "permitted investment" (as defined in Section 860G(a)(5) of the
Code) will be treated as ordinary gain or loss.
A Holder of a REMIC Residual Security may be required to recognize taxable
income without being entitled to receive a corresponding amount of cash. This
could occur, for example, if the qualified mortgages are considered to be
purchased by the REMIC Trust at a discount, some or all of the REMIC Regular
Securities are issued at a discount, and the discount included as a result of a
prepayment on a Loan that is used to pay principal on the REMIC Regular
Securities exceeds the REMIC Trust's deduction for unaccrued original issue
discount relating to such REMIC Regular Securities. Taxable income may also be
greater in earlier years because interest expense deductions, expressed as a
percentage of the outstanding principal amount of the REMIC Regular Securities,
may increase over time as the earlier classes of REMIC Regular Securities are
paid, whereas interest income with respect to any given Loan expressed as a
percentage of the outstanding principal amount of that Loan, will remain
constant over time.
Basis Rules and Distributions. A Holder of a REMIC Residual security has an
initial basis in its Security equal to the amount paid for such REMIC Residual
Security. Such basis is increased by amounts included in the income of the
Holder and decreased by distributions and by any net loss taken into account
with respect to such REMIC Residual Security. A distribution on a REMIC Residual
Security to a Holder is not included in gross income to the extent it does not
exceed such Holder's basis in the REMIC Residual Security (adjusted as described
above) and, to the extent it exceeds the adjusted basis of the REMIC Residual
Security, shall be treated as gain from the sale of the REMIC Residual Security.
A Holder of a REMIC Residual Security is not allowed to take into account
any net loss for any calendar quarter to the extent such net loss exceeds such
Holder's adjusted basis in its REMIC Residual Security as of the close of such
calendar quarter (determined without regard to such net loss). Any loss
disallowed by reason of this limitation may be carried forward indefinitely to
future calendar quarters and, subject to the same limitation, may be used only
to offset income from the REMIC Residual Security.
Excess Inclusions. Any "excess inclusions" with respect to a REMIC Residual
Security are subject to certain special tax rules. With respect to a Holder of a
REMIC Residual Security, the "excess inclusions" for any calendar quarter is
defined as the excess (if any) of the daily portions of taxable income over the
sum of the "daily accruals" for each day during such quarter that such REMIC
Residual Security was held by such Holder. The "daily accruals" are determined
by allocating to each day during a calendar quarter its ratable portion of the
product of the "adjusted issue price" of the REMIC Residual Security at the
beginning of the calendar quarter and 120% of the "federal long-term rate" in
effect on the related Closing Date, based on quarterly compounding and properly
adjusted for the length of such quarter. For this purpose, the "adjusted issue
price" of a REMIC Residual Security as of the beginning of any calendar quarter
is equal to the "issue price" of the REMIC Residual Security, increased by the
amount of daily accruals for all prior quarters and decreased by any
distributions made with respect to such REMIC Residual Security before the
beginning of such quarter. The "issue price" of a REMIC Residual Security is the
initial offering price to the public (excluding bond houses and brokers) at
which a substantial number of the REMIC Residual Security was sold. The "federal
long-term rate" is a blend of current yields on Treasury securities having a
maturity of more than nine years, computed and published monthly by the IRS.
For Holders of REMIC Residual Securities that are thrift institutions
described in Section 593 of the Code, income from a REMIC Residual Security
generally may be offset by losses from other
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activities. Under the REMIC Regulations, such an organization is treated as
having applied its allowable deductions for the year first to offset income that
is not an excess inclusion and then to offset that portion of its income that is
an excess inclusion. For other Holders of REMIC Residual Securities, any excess
inclusions cannot be offset by losses from other activities. For Holders that
are subject to tax only on unrelated business taxable income (as defined in
Section 511 of the Code), an excess inclusion of such Holder is treated as
unrelated business taxable income. With respect to variable contracts (within
the meaning of Section 817 of the Code), a life insurance company cannot adjust
its reserve to the extent of any excess inclusion, except as provided in
regulations. The REMIC Regulations indicate that if a Holder of a REMIC Residual
Security is a member of an affiliated group filing a consolidated income tax
return, the taxable income of the affiliated group cannot be less than the sum
of the excess inclusions attributable to all residual interests in REMICS held
by members of the affiliated group. For a discussion of the effect of excess
inclusions on certain foreign investors that own REMIC Residual Securities, see
"Federal Income Tax Considerations--Foreign Investors" below.
The REMIC Regulations provide that an organization to which Section 593 of
the Code applies and which is the Holder of a REMIC Residual Security may not
use its allowable deductions to offset any excess inclusions with respect to
such Security if such Security does not have "significant value." For this
purpose, a REMIC Residual Security has "significant value" under the REMIC
Regulations if (i) its issue price is at least 2% of the aggregate of the issue
prices of all the REMIC Regular Securities and REMIC Residual Securities in that
REMIC Trust and (ii) its "anticipated weighted average life" is at least 20% of
the anticipated weighted average life of such REMIC Trust.
In determining whether a REMIC Residual Security has significant value, the
"anticipated weighted average life" of such Security is based in part on the
Prepayment Assumption, except that all anticipated payments on such Security are
taken into account, regardless to their designation as principal or interest.
The anticipated weighted average life of a REMIC Trust is the weighted average
of the anticipated weighted average lives of the Securities.
The Treasury Department also has the authority to issue regulations that
would treat all taxable income of a REMIC Trust as excess inclusions if the
REMIC Residual Security does not have significant value. Although the Treasury
Department did not exercise this authority in the REMIC Regulations, future
regulations may contain such a rule. If such a rule were adopted, it is unclear
whether the test for significant value that is contained in the REMIC
Regulations and discussed in the two preceding paragraphs would be applicable.
If no such rule is applicable, excess inclusions would be calculated as
discussed above.
In the case of any REMIC Residual Securities that are held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Securities reduced (but not below zero) by the real estate investment
trust taxable income (within the meaning of Section 857(b)(2) of the Code,
excluding any net capital gain) will be allocated among the shareholders of such
trust in proportion to the dividends received by such shareholders from such
trust, and any amount so allocated will be treated as an excess inclusion with
respect to a REMIC Residual Security as if held directly by such shareholder.
Similar rules will apply in the case of regulated investment companies, common
trust funds and certain cooperatives that hold a REMIC Residual Security.
Pass-Through of Servicing and Guaranty Fees to Individuals. A Holder of a
REMIC Residual Security who is an individual will be required to include in
income a share of any servicing and guaranty fees. A deduction for such fees
will be allowed to such Holder only to the extent that such fees, along with
certain of such Holder's other miscellaneous itemized deductions exceed 2% of
such Holder's adjusted gross income. In addition, a Holder of a REMIC Residual
Security may not be able to deduct any portion of such fees in computing such
Holder's alternative minimum tax liability. A Holder's share of such fees will
generally be determined by (i) allocating the amount of such expenses for each
calendar quarter on a pro rata basis to each day in the calendar quarter, and
(ii) allocating the daily amount among the Holders in proportion to their
respective holdings on such day.
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TAXES ON A REMIC TRUST
Prohibited Transactions. The Code imposes a tax on a REMIC equal to 100% of
the net income derived from "prohibited transactions." In general, a "prohibited
transaction" means the disposition of a qualified mortgage other than pursuant
to certain specified exceptions, the receipt of investment income from a source
other than a qualified mortgage or certain other permitted investments, the
receipt of compensation for services, or the disposition of an asset purchased
with payments on qualified mortgages for temporary investment pending
distributions on the regular and residual interests.
Contributions to a REMIC after the Startup Day. The Code imposes a tax on a
REMIC equal to 100% of the value of any property contributed to the REMIC after
the "startup day" (generally the same as the related Closing Date). Exceptions
are provided for cash contributions to a REMIC (i) during the three-month period
beginning on the startup day, (ii) made to a qualified reserve fund by a Holder
of a residual interest, (iii) in the nature of a guarantee, (iv) made to
facilitate a qualified liquidation or clean-up call, and (v) as otherwise
permitted by Treasury regulations.
Net Income from Foreclosure Property. The Code imposes a tax on a REMIC
equal to the highest corporate rate on "net income from foreclosure property."
The terms "foreclosure property" (which includes property acquired by deed in
lieu of foreclosure) and "net income from foreclosure property" are defined by
reference to the rules applicable to real estate investment trusts. Generally,
foreclosure property would be treated as such for a period of two years, with
possible extensions. Net income from foreclosure property generally means gain
from the sale of foreclosure property that is inventory property and gross
income from foreclosure property other than qualifying rents and other
qualifying income for a real estate investment trust.
SALES OF REMIC SECURITIES
General. Except as provided below, if a REMIC Regular or Residual Security
is sold, the seller will recognize gain or loss equal to the difference between
the amount realized on the sale and its "adjusted basis" in the Security. The
"adjusted basis" of a REMIC Regular Security generally will equal the cost of
such Security to the seller, increased by any original issue discount or market
discount included in the seller's gross income with respect to such Security and
reduced by distribution on such Security previously received by the seller of
amounts included in the stated redemption price at maturity and by any premium
that has reduced the seller's interest income with respect to such Security. See
"Federal Income Tax Considerations--Discount and Premium". The adjusted basis of
a REMIC Residual Security is determined as described above under "Federal Income
Tax Considerations--REMIC Securities--Taxation of Holder of REMIC Residual
Securities--Basis Rules and Distributions". Except as provided in the following
paragraphs or under Section 582(c) of the Code, any such gain or loss will be
capital gain or loss, provided such Security is held as a "capital asset"
(generally, property held for investment) within the meaning of Section 1221 of
the Code. Section 1221 of the Code provides that capital gain or loss can be
recognized only if there has been a sale or exchange of a capital asset. Capital
assets include all property except inventory and property held primarily for
sale, depreciable property, receivables acquired in the ordinary course of
business, and certain government obligations.
Gains from the sale of a REMIC Regular Security that might otherwise be
capital gain will be treated as ordinary income to the extent that such gain
does not exceed the excess, if any, of (i) the amount that would have been
includible in the income of the Holder of a REMIC Regular Security had income
accrued at a rate equal to 110% of the "applicable federal rate" (generally, an
average of current yields on Treasury securities) as of the date of purchase
over (ii) the amount actually includible in such Holder's income. In addition,
gain recognized on such a sale by a Holder of a REMIC Regular Security who
purchased such a Security at a market discount would also be taxable as ordinary
income in an amount not exceeding the portion of such discount that accrued
during the period such Security was held by such Holder, reduced by any market
discount includible in income under the rules described below under "Federal
Income Tax Considerations--Discount and Premium".
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If a Holder of a REMIC Residual Security sells such Security at a loss, the
loss will not be recognized if, within six months before or after the sale of
the REMIC Residual Security, such Holder purchases another residual interest in
any REMIC or any interest in a taxable mortgage pool (as defined in Section
7701(i) of the Code) comparable to a residual interest in a REMIC. Such
disallowed loss would be allowed upon the sale of the other residual interest
(or comparable interest) if the rule referred to in the preceding sentence does
not apply to that sale. While this rule may be modified by Treasury regulations,
to date such regulations have not been published.
Transfer of REMIC Residual Securities. Section 860E(c) of the Code imposes a
substantial tax, payable by the transferor (or, if a transfer is through a
broker, nominee or other middleman as the transferee's agent, payable by that
agent) upon any transfer of a REMIC Residual Security to a "disqualified
organization" and upon a pass-through entity (including regulated investment
companies, real estate investment trusts, common trust funds, partnerships,
trusts, estates, certain cooperatives, and nominees) that owns a REMIC Residual
Security if such pass-through entity has a disqualified organization as a
record-holder. For purposes of the preceding sentence, a transfer includes any
transfer of record or beneficial ownership, whether pursuant to a purchase, a
default under a secured lending agreement or otherwise.
The term "disqualified organization" includes the United States, any state
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of the foregoing (other than
certain taxable instrumentalities), any cooperative organization furnishing
electric energy or providing telephone service to persons in rural areas, or any
organization (other than a farmers' cooperative) that is exempt from federal
income tax, unless such organization is subject to the tax on unrelated business
income. Moreover, an entity will not qualify as a REMIC unless there are
reasonable arrangements designed to ensure that (i) residual interests in such
entity are not held by disqualified organizations and (ii) information necessary
for the application of the tax described herein will be made available.
Restrictions on the transfer of a REMIC Residual Security and certain other
provisions that are intended to meet this requirement will be described in the
related Pooling and Servicing Agreement, and will be discussed more fully in the
related Prospectus Supplement relating to the offering of any REMIC Residual
Security. In addition, a pass-through entity (including a nominee) that holds a
REMIC Residual Security may be subject to additional taxes if a disqualified
organization is a record-holder therein. A transferor of a REMIC Residual
Security (or an agent of a transferee of a REMIC Residual Security, as the case
may be) will be relieved of such tax liability with respect to a transfer if (i)
the transferee furnishes to the transferor an affidavit that the transferee is
not a disqualified organization, and (ii) the transferor (or the transferee's
agent) does not have actual knowledge that the affidavit is false at the time of
the transfer. Similarly, no such tax will be imposed on a pass-through entity
for a period with respect to an interest therein owned by a disqualified
organization if (i) the record-holder of such interest furnishes to the
pass-through entity an affidavit that it is not a disqualified organization, and
(ii) during such period, the pass-through entity has no actual knowledge that
the affidavit is false.
Under the REMIC Regulations, a transfer of a "noneconomic residual interest"
to a U.S. Person (as defined below under "Federal Income Tax
Considerations--Foreign Investors--Grantor Trust Securities and REMIC Regular
Securities") will be disregarded for all federal tax purposes unless no
significant purpose of the transfer is to impede the assessment or collection of
tax. A REMIC Residual Security would be treated as constituting a "noneconomic
residual interest" unless, at the time of the transfer, (i) the present value of
the expected future distributions on the REMIC Residual Securities is no less
than the product of the present value of the "anticipated excess inclusions"
with respect to such Security and the highest corporate rate of tax for the year
in which the transfer occurs, and (ii) the transferor reasonably expects that
the transferee will receive distributions from the applicable REMIC Trust in an
amount sufficient to satisfy the liability for income tax on any excess
inclusions at or after the time when such liability accrues. "Anticipated excess
inclusions" are the excess inclusions that are anticipated to be allocated to
each calendar quarter (or portion thereof) following the transfer of a
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REMIC Residual Security, determined as of the date such Security is transferred
and based on events that have occurred as of that date and on the Prepayment
Assumption. See "Federal Income Tax Considerations--Discount and Premium" and
"Federal Income Tax Considerations--REMIC Securities--Taxation of Holders of
REMIC Residual Securities--Excess Inclusions".
The REMIC Regulations provide that a significant purpose to impede the
assessment or collection of tax exists if, at the time of the transfer, a
transferor of a REMIC Residual Security has "improper knowledge" (i.e., either
knew, or should have known, that the transferee would be unwilling or unable to
pay taxes due on its share of the taxable income of the REMIC Trust). A
transferor is presumed not to have improper knowledge if (i) the transferor
conducts, at the time of a transfer, a reasonable investigation of the financial
condition of the transferee and, as a result of the investigation, the
transferor finds that the transferee has historically paid its debts as they
come due and finds no significant evidence to indicate that the transferee will
not continue to pay its debts as they come due in the future, and (ii) the
transferee makes certain representations to the transferor in the affidavit
relating to disqualified organizations discussed above. Transferors of a REMIC
Residual Security should consult with their own tax advisors for further
information regarding such transfers.
REPORTING AND OTHER ADMINISTRATIVE MATTERS.
For purposes of the administrative provisions of the Code, each REMIC Trust
will be treated as a partnership and the Holders of REMIC Residual Securities
will be treated as partners. Unless otherwise specified in the related
Prospectus Supplement, the related Trustee will prepare, sign and file federal
income tax returns for each REMIC Trust, which returns are subject to audit by
the IRS. Moreover, within a reasonable time after the end of each calendar year,
the related Trustee will furnish to each Holder that received a distribution
during such year a statement setting forth the portions of any such
distributions that constitute interest distributions, original issue discount,
and such other information as is required by Treasury regulations and, with
respect to Holders of REMIC Residual Securities in a REMIC Trust, information
necessary to compute the daily portions of the taxable income (or net loss) of
such REMIC Trust for each day during such year. Unless otherwise specified in
the related Prospectus Supplement, the Trustee will also act as the tax matters
partner for each REMIC Trust, either in its capacity as a Holder of a REMIC
Residual Security or in a fiduciary capacity. Each Holder of a REMIC Residual
Security, by the acceptance of its REMIC Residual Security, will be agreeing
that the Trustee will act as its fiduciary in the performance of any duties
required of it in the event that it is the tax matters partner.
Each Holder of a REMIC Residual Security is required to treat items on its
return consistently with the treatment on the return of the REMIC Trust, unless
the Holder either files a statement identifying the inconsistency or establishes
that the inconsistency resulted from incorrect information received from the
REMIC Trust. The IRS may assert a deficiency resulting from a failure to comply
with the consistency requirement without instituting an administrative
proceeding at the REMIC Trust level. Unless otherwise specified in the related
Prospectus Supplement, the Trustee does not intend to register any REMIC Trust
as a tax shelter pursuant to Section 6111 of the Code.
TERMINATION
In general, no special tax consequences will apply to a Holder of a REMIC
Regular Security upon the termination of a REMIC Trust by virtue of the final
payment or liquidation of the last of the Mortgage Assets remaining in the Trust
Fund. If a Holder's adjusted basis in its REMIC Residual Security at the time
such termination occurs exceeds the amount of cash distributed to such Holder in
liquidation of its interest, although the matter is not entirely free from
doubt, it would appear that the Holder of the REMIC Residual Security is
entitled to a loss equal to the amount of such excess.
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DEBT SECURITIES
GENERAL
With respect to each Series of Debt Securities, special tax counsel to the
Sponsor will deliver its opinion to the Sponsor that (unless otherwise limited
in the related Prospectus Supplement ) the Securities will be classified as debt
of the Sponsor secured by the related Loans. Consequently, the Debt Securities
will not be treated as ownership interests in the Loans or the Trust Fund.
Holders will be required to report income received with respect to the Debt
Securities in accordance with their normal method of accounting. For additional
tax consequences relating to Debt Securities purchased at a discount or with
premium, see "Federal Income Tax Considerations--Discount and Premium," below.
SPECIAL TAX ATTRIBUTES
As described above, Grantor Trust Securities will possess certain special
tax attributes by virtue of their being ownership interests in the related
Loans. Similarly, REMIC Securities will possess similar attributes by virtue of
the REMIC provisions of the Code. In general, Debt Securities will not possess
such special tax attributes. Investors to whom such attributes are important
should consult their own tax advisors regarding investment in Debt Securities.
SALE OR EXCHANGE
If a Holder of a Debt Security sells or exchanges such Security, the Holder
will recognize gain or loss equal to the difference, if any, between the amount
received and the Holder's adjusted basis in the Security. The adjusted basis in
the Security generally will equal its initial cost, increased by any original
issue discount or market discount previously included in the seller's gross
income with respect to the Security and reduced by the payments previously
received on the Security, other than payments of qualified stated interest, and
by any amortized premium.
In general (except as described under "Federal Income Tax
Considerations--Discount and Premium--Market Discount," below), except for
certain financial institutions subject to Section 582(c) of the Code, any gain
or loss on the sale or exchange of a Debt Security recognized by a Holder who
holds the Security as a capital asset (within the meaning of Section 1221 of the
Code), will be capital gain or loss and will be long-term or short-term
depending on whether the Security has been held for more than one year.
DISCOUNT AND PREMIUM
A Security purchased for an amount other than its outstanding principal
amount will be subject to the rules governing original issue discount, market
discount or premium. In addition, all Grantor Trust Strip Securities and certain
Grantor Trust Fractional Interest Securities will be treated as having original
issue discount by virtue of the coupon stripping rules in Section 1286 of the
Code. In very general terms, (i) original issue discount is treated as a form of
interest and must be included in a Holder's income as it accrues (regardless of
the Holder's regular method of accounting) using a constant yield method; (ii)
market discount is treated as ordinary income and must be included in a Holder's
income as principal payments are made on the Security (or upon a sale of a
Security); and, (iii) if a Holder so elects, premium may be amortized over the
life of the Security and offset against inclusions of interest income. These tax
consequences are discussed in greater detail below.
ORIGINAL ISSUE DISCOUNT
In general, a Security will be considered to be issued with original issue
discount equal to the excess, if any, of its "stated redemption price at
maturity" over its "issue price." The "issue price" of a Security is the initial
offering price to the public (excluding bond houses and brokers) at which a
substantial number of the Securities was sold. The issue price also includes any
accrued interest attributable to the period between the beginning of the first
remittance period and the related Closing Date. The stated redemption price at
maturity of a Security that has a notional principal amount or
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receives principal only, or that is or may be a Security with respect to which
certain accrued interest is not distributed but added to the principal or
notional amount, is equal to the sum of all distributions to be made under such
Security. The "stated redemption price at maturity" of any other Security is its
stated principal amount, plus an amount equal to the excess (if any) of the
interest payable on the first Distribution Date for the Security over the
interest that accrues for the period from the related Closing Date to such first
Distribution Date.
Notwithstanding the general definition, original issue discount will be
treated as zero if such discount is less than 0.25 % of the stated redemption
price at maturity multiplied by its weighted average life. The weighted average
life of a Security is apparently computed for this purpose as the sum, for all
distributions included in the stated redemption price at maturity of the amounts
determined by multiplying (i) the number of complete years (rounding down for
partial years) from the related Closing Date until the date on which each such
distribution is expected to be made under the assumption that the Loans prepay
at the rate specified in the related Prospectus Supplement (the "Prepayment
Assumption"), by (ii) a fraction, the numerator of which is the amount of such
distribution and the denominator of which is the Security's stated redemption
price at maturity. If original issue discount is treated as zero under this
rule, the actual amount of original issue discount must be allocated to the
principal distributions on the Security and, when each such distribution is
received, gain equal to the discount allocated to such distribution will be
recognized.
Section 1272(a)(6) of the Code contains special original issue discount
rules directly applicable to REMIC Securities and Debt Securities and applicable
by analogy to Grantor Trust Securities. Investors in Grantor Trust Securities
should be aware that there can be no assurance that the rules described below
will be applied to such Securities. In particular with respect to Grantor Trust
Strip Securities, on June 12, 1996 the Treasury issued regulations concerning
the tax treatment of debt instruments that provide for one or more contingent
payments (the "Contingent Payment Regulations"). Investors should be aware that
while the Contingent Payment Regulations do not specifically address the
taxation of Grantor Trust Strip Securities, the IRS may take the position that
Grantor Trust Strip Securities should be taxed under the methods described in
those regulations. In the absence of specific guidance, however, the Trustee
will apply the rules of Section 1272(a)(2) to calculate accruals of original
issue discount on the Grantor Trust Securities. Under these rules (described in
greater detail below), (i) the amount and rate of accrual of original issue
discount on each Series of Securities will be based on (x) the Prepayment
Assumption, and (y) in the case of a Security calling for a variable rate of
interest, an assumption that the value of the index upon which such variable
rate is based remains equal to the value of that rate on the related Closing
Date, (and (ii) adjustments will be made in the amount of discount accruing in
each taxable year in which the actual prepayment rate differs from the
Prepayment Assumption.
Section 1272(A)(6)(b)(iii) of the Code requires that the prepayment
assumption used to calculate original issue discount be determined in the manner
prescribed in Treasury regulations. To date, no such regulations have been
promulgated. The legislative history of this Code provision indicates that the
assumed prepayment rate must be the rate used by the parties in pricing the
particular transaction. The Sponsor anticipates that the Prepayment Assumption
for each Series of Securities will be consistent with this standard. The Sponsor
makes no representation, however, that the Loans for a given Series will prepay
at the rate reflected in the Prepayment Assumption for that Series or at any
other rate. Each investor must make its own decision as to the appropriate
prepayment assumption to be used in deciding whether or not to purchase any of
the Securities.
Each Holder of a Security must include in gross income the sum of the "daily
portions" of original issue discount on its Security for each day during its
taxable year on which it held such Security. For this purpose, in the case of an
original Holder, the "daily portions" of original issue discount will be
determined as described in the following paragraph.
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A calculation will first be made of the portion of the original issue
discount that accrued during each "accrual period." The related Trustee will
supply, at the time and in the manner required by the IRS, to Holders of
Securities, brokers and middlemen information with respect to the original issue
discount accruing on the Securities. Unless otherwise disclosed in the related
Prospectus Supplement, the Trustee will report original issue discount based on
accrual periods of one month, each beginning on a Distribution Date (or, in the
case of the first such period, the related Closing Date) and ending on the day
before the next Distribution Date. Under Section 1727(a)(6) of the Code, the
portion of original issue discount treated as accruing for any accrual period
will equal the excess, if any, of (i) the sum of (A) the present values of all
the distributions remaining to be made on the Security, if any, as of the end of
the accrual period and (B) the distribution made on such Security during the
accrual period of amounts included in the stated redemption price at maturity
over (ii) the "adjusted issue price" of such Security at the beginning of the
accrual period. The present value of the remaining distributions referred to in
the preceding sentence will be calculated based on (i) the yield to maturity of
the Security, calculated as of the related Closing Date, giving effect to the
Prepayment Assumption, (ii) events (including actual prepayments) that have
occurred prior to the end of the accrual period, (iii) the Prepayment
Assumption, and (iv) in the case of a Security calling for a variable rate of
interest, and assumption that the value of the index upon which such variable
rate is based remains the same as its value on the related Closing Date over the
entire life of such Security. The "adjusted issued price" of a Security at any
time will equal the issue price of such Security, increased by the aggregate
amount of previously accrued original issue discount with respect to such
Security, and reduced by the amount of any distributions made on such Security
as of that time of amounts included in the stated redemption price at maturity.
The original issue discount accruing during any accrual period will then be
allocated ratably to each day during the period to determine the daily portion
of original issue discount.
In the case of Grantor Trust Strip Securities and certain REMIC Securities,
the calculation described in the preceding paragraph may produce a negative
amount of original issue discount for one or more accrual periods. No definitive
guidance has been issued regarding the treatment of such negative amounts. The
legislative history of Section 1272(a)(6) indicates that such negative amounts
may be used to offset subsequent positive accruals, but may not offset prior
accruals and may not be allowed as a deduction item in a taxable year in which
negative accruals exceed positive accruals. Holders of such Securities should
consult their own tax advisors concerning the treatment of such negative
accruals.
A subsequent purchaser of a Security that purchases such Security at a cost
less than its remaining stated redemption price at maturity also will be
required to include in gross income for each day on which its holds such
Security, the daily portion of original issue discount with respect to such
Security (but reduced, if the cost of such Security to such purchaser exceeds
its adjusted issue price, by an amount equal to the product of (i) such daily
portion and (ii) a constant fraction, the numerator of which is such excess and
the denominator of which is the sum of the daily portions of original issue
discount on such Security for all days on or after the day of purchase).
MARKET DISCOUNT
A Holder that purchases a Security at a market discount, that is, at a
purchase price less than the remaining stated redemption price at maturity of
such Security (or, in the case of a Security with original issue discount, its
adjusted issue price), will be required to allocate each principal distribution
first to accrued market discount on the Security, and recognize ordinary income
to the extent that such distribution does not exceed the aggregate amount of
accrued market discount on such Security not previously included in income. With
respect to Securities that have unaccrued original issue discount, such market
discount must be included in income in addition to any original issue discount.
A Holder that incurs or continues indebtedness to acquire a Security at a market
discount may also be required to defer the deduction of all or a portion of the
interest on such indebtedness until the corresponding amount of market discount
is included in income. In general terms, market discount on a Security may be
treated as accruing either (i) under a constant yield method or (ii) in
proportion to remaining
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accruals of original issue discount, if any, or if none, in proportion to
remaining distributions of interest on the Security, in any case taking into
account the Prepayment Assumption. The Trustee will make available, as required
by the IRS, to Holders of Securities information necessary to compute the
accrual of market discount.
Notwithstanding the above rules, market discount on a Security will be
considered to be zero if such discount is less than 0.25% of the remaining
stated redemption price at maturity of such Security multiplied by its weighted
average remaining life. Weighted average remaining life presumably would be
calculated in a manner similar to weighted average life, taking into account
payments (including prepayments) prior to the date of acquisition of the
Security by the subsequent purchaser. If market discount on a Security is
treated as zero under this rule, the actual amount of market discount must be
allocated to the remaining principal distributions on the Security and, when
each such distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
SECURITIES PURCHASED AT A PREMIUM
A purchaser of a Security that purchases such Security at a cost greater
than its remaining stated redemption price at maturity will be considered to
have purchased such Security (a "Premium Security") at a premium. Such a
purchaser need not include in income any remaining original issue discount and
may elect, under Section 171(c)(2) of the Code, to treat such premium as
"amortizable bond premium." If a Holder makes such an election, the amount of
any interest payment that must be included in such Holder's income of each
period ending on a Distribution Date will be reduced by the portion of the
premium allocable to such period based on the Premium Security's yield to
maturity. The legislative history of the Tax Reform Act of 1986 states that such
premium amortization should be made under principles analogous to those
governing the accrual of market discount (as discussed above under "Federal
Income Tax Considerations--Discount and Premium--Market Discount"). If such
election is made by the Holder, the election will also apply to all bonds the
interest on which is not excludible from gross income ("fully taxable bonds")
held by the Holder at the beginning of the first taxable year to which the
election applies and to all such fully taxable bonds thereafter acquired by it,
and is irrevocable without the consent of the IRS. If such an election is not
made, (i) such a Holder must include the full amount of each interest payment in
income as it accrues, and (ii) the premium must be allocated to the principal
distributions on the Premium Security and, when each such distribution is
received, a loss equal to the premium allocated to such distribution will be
recognized. Any tax benefit from the premium not previously recognized will be
taken into account in computing gain or loss upon the sale or disposition of the
Premium Security.
Some Securities may provide for only nominal distributions of principal in
comparison to the distributions of interest thereon. It is possible that the IRS
or the Treasury Department may issue guidance excluding such Securities from the
rules generally applicable to debt instruments issued at a premium. In
particular, it is possible that such a Security will be treated as having
original issue discount equal to the excess of the total payments to be received
thereon over its issue price. In such event, Section 1272(a)(6) of the Code
would govern the accrual of such original issue discount, but a Holder would
recognize substantially the same income in any given period as would be
recognized if an election were made under Section 171(e)(2) of the Code. Unless
and until the Treasury Department or the IRS publishes specific guidance
relating to the tax treatment of such Securities, the Trustee intends to furnish
tax information to Holders of such Securities in accordance with the rules
described in the preceding paragraph.
SPECIAL ELECTION
For any Security acquired on or after April 4, 1994, a Holder may elect to
include in gross income all "interest" that accrues on the Security by using a
constant yield method. For purposes of the election, the term "interest"
includes stated interest, acquisition discount, original issue discount, de
minimis original issue discount, market discount, de minimus market discount and
unstated interest as adjusted by any amortizable bond premium or acquisition
premium. A Holder should consult it own tax
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advisor regarding the time and manner of making and the scope of the election
and the implementation of the constant yield method.
BACKUP WITHHOLDING
Distributions of interest and principal, as well as distributions of
proceeds from the sale of Securities, may be subject to the "backup withholding
tax" under Section 3406 of the Code at rate of 31% if recipients of such
distributions fail to furnish to the payor certain information, including their
taxpayer identification numbers, or otherwise fail to establish an exemption
from such tax. Any amounts deducted and withheld from a distribution to a
recipient would be allowed as a credit against such recipient's federal income
tax. Furthermore, certain penalties may be imposed by the IRS on a recipient of
distributions that is required to supply information but that does not do so in
the proper manner.
FOREIGN INVESTORS
GRANTOR TRUST SECURITIES AND REMIC REGULAR SECURITIES
Distributions made on a Grantor Trust Security or a REMIC Regular Security
to, or on behalf of, a Holder that is not a "U.S. Person" generally will be
exempt from United States federal income and withholding taxes. The term "U.S.
Person" means a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof, or an estate trust that is
subject to United States federal income tax regardless of the source of its
income. This exemption is applicable provided (a) the Holder is not subject to
United States tax as a result of a connection to the United States other than
ownership of the Security, (b) the Holder signs a statement under penalties of
perjury that certifies that such Holder is not a U.S. Person, and provides the
name and address of such Holder, and (c) the last U.S. Person in the chain of
payment to the Holder receives such statement from such Holder or a financial
institution holding on its behalf and does not have actual knowledge that such
statement is false. Holders should be aware that the IRS might take the position
that this exemption does not apply to a Holder that also owns 10% or more of the
REMIC Residual Securities of any REMIC Trust, or to a Holder that is a
"controlled foreign corporation" described in Section 881(c)(3)(C) of the Code.
REMIC RESIDUAL SECURITIES
Amounts distributed to a Holder of a REMIC Residual Security that is not a
U.S. Person generally will be treated as interest for purposes of applying the
30% (or lower treaty rate) withholding tax on income that is not effectively
connected with a United States trade or business. Temporary Treasury regulations
clarify that amounts not constituting excess inclusions that are distributed on
a REMIC Residual Security to a Holder that is not a U.S. Person generally will
be exempt from United States federal income and withholding tax, subject to the
same conditions applicable to distributions on Grantor Trust Securities and
REMIC Regular Securities, as described above, but only to the extent that the
obligations directly underlying the REMIC Trust that issued the REMIC Residual
Security (e.g., Loans or regular interests in another REMIC) were issued after
July 18, 1984. In no case will any portion of REMIC income that constitutes an
excess inclusion be entitled to any exemption from the withholding tax or a
reduced treaty rate for withholding. See "Federal Income Tax
Considerations--REMIC Securities--Taxation of Holders of REMIC Residual
Securities--Excess Inclusions".
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STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "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 the Code impose certain restrictions on employee benefit plans subject to
ERISA and on plans and other 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,
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 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 non-exempt 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 to be assets of the Plan unless
certain exceptions apply.
Under the terms of the 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 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 Title I of ERISA, including the prohibited
transaction provisions of Section 406 of ERISA (and of Section 4975 of the
Code), with respect to transactions involving such assets unless such
transactions are subject to a statutory or administrative exemption.
Under the regulation, a Plan will not be considered to have invested in an
"equity interest" if the interest described 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 property
and a beneficial ownership interest in a trust are deemed to be "equity
interests" under the final 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 such purchase, the underlying assets of the Trust Fund.
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An 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 Sponsor
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 regulation provides that if at all times more than 75% of the value of all
classes of equity interests in the Sponsor or the Trust Fund are held by
investors other than benefit plan investors (which is defined as including plans
subject to ERISA, government plans and individual retirement accounts), the
investing Plan's assets will not include any of the underlying assets of the
Trust Fund.
If an investing Plan's assets are considered to include the underlying
assets of the Trust Fund, an exemption may be available. Various underwriters
and placement agents have been granted individual exemptions by the DOL from
certain of the prohibited transaction rules of ERISA with respect to the initial
purchase, the holding and the subsequent resale by Plans of securities
representing interests in, and the operation of, asset-backed pass-through
trusts that consist of certain receivables, loans and other obligations that
meet the conditions and requirements of such exemptions (each such exemption is
referred to hereafter as the "Exemption"). These securities may include the
Certificates. The obligations that may be held in trust covered by the Exemption
include obligations such as the Loans. The Exemption will 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 Exemption to apply are
the following:
(i) The acquisition of the 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;
(ii) The rights and interests evidenced by the Certificates acquired by
the Plan are not subordinated to the rights and interests evidenced by other
securities of the trust;
(iii) The Certificates 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 Group ("Standard &
Poor's"), Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps Inc.
("D&P") or Fitch Investors Service, Inc. ("Fitch");
(iv) The sum of all payments made to the underwriter in connection with
the distribution of the Certificates represents not more than reasonable
compensation for underwriting the Certificates. 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 is not an affiliate of any other member of the
Restricted Group (as defined below); and
(vi) The Plan investing in the Certificates 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.
The trust also must meet the following requirements:
(i) the corpus of the trust must consist solely of assets of the type
which have been included in other investment pools;
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(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 Exemption provides 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 Certificates, at least fifty (50) percent of each Class
of Certificates 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 Certificates does not exceed twenty-five
(25) percent of all of the Certificates 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 Sponsor, the underwriters of the Certificates, the
Trustee, the Servicer, any obligor with respect to obligations included in a
Trust Fund 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
regulation described above or the Exemption 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. In this regard, purchasers that
are insurance companies should consult with their counsel with respect to the
recent United States Supreme Court case interpreting the fiduciary
responsibility rules of ERISA, John Hancock Mutual Life Insurance Co. v. Harris
Trust and Savings Bank (114 S. Ct. 517 (1993)). In John Hancock, the Supreme
Court ruled that assets held in an insurance company's general account may be
deemed to be "plan assets" for purposes of ERISA under certain circumstances.
Prospective purchasers should determine whether the decision affects their
ability to purchase the Securities.
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.
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PLAN OF DISTRIBUTION
The Securities offered hereby and by the related Prospectus Supplement will
be offered in Series through one or more of the methods described below. The
Prospectus Supplement prepared for each Series will describe the method of
offering being utilized for that Series and will state the public offering or
purchase price of such Series and the net proceeds to the Sponsor from such
sale.
The Sponsor intends that Securities will be offered through the following
methods from time to time and that offerings may be made concurrently through
more than one of these methods or that an offering of a particular Series of
Securities may be made through a combination of two or more of these methods.
Such methods are as follows:
1. By negotiated firm commitment or best efforts underwriting and
public re-offering by underwriters;
2. By placements by the Sponsor with institutional investors through
dealers;
3. By direct placements by the Sponsor with institutional investors;
and
4. By competitive bid.
If underwriters are used in a sale of any Securities (other than in
connection with an underwriting on a best efforts basis), such Securities will
be acquired by the underwriters for their own account and may be resold from
time to time in one or more transactions, including negotiated transactions, at
fixed public offering prices or at varying prices to be determined at the time
of sale or at the time of commitment therefor. The Securities will be set forth
on the cover of the Prospectus Supplement relating to such Series and the
members of the underwriting syndicate, if any, will be named in such Prospectus
Supplement.
In connection with the sale of the Securities, underwriters may receive
compensation from the Sponsor or from purchasers of the Securities in the form
of discounts, concessions or commissions. Underwriters and dealers participating
in the distribution of the Securities may be deemed to be underwriters in
connection with such Securities, and any discounts or commissions received by
them from the Sponsor and any profit on the resale of Securities by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended (the "Securities Act"). The Prospectus Supplement will describe
any such compensation paid by the Sponsor.
It is anticipated that the underwriting agreement pertaining to the sale of
any Series of Securities will provide that the obligations of the underwriters
will be subject to certain conditions precedent, that the underwriters will be
obligated to purchase all such Securities if any are purchased (other than in
connection with an underwriting on a best efforts basis) and that, in limited
circumstances, the Sponsor will indemnify the several underwriters and the
underwriters will indemnify the Sponsor against certain civil liabilities,
including liabilities under the Securities Act or will contribute to payments
required to be made in respect thereof.
The Prospectus Supplement with respect to any Series offered by placements
through dealers will contain information regarding the nature of such offering
and any agreements to be entered into between the Sponsor and purchasers of
Securities of such Series.
Purchasers of Securities, including dealers, may, depending on the facts and
circumstances of such purchases, be deemed to be "underwriters" within the
meaning of the Securities Act in connection with reoffers and sales by them of
Securities. Holders of Securities should consult with their legal advisors in
this regard prior to any such reoffer or sale.
LEGAL MATTERS
Certain legal matters in connection with the Securities will be passed upon
for the Sponsor by Dewey Ballantine, New York, New York.
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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 Loan, and for any other purposes
specified in the related Prospectus Supplement.
"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.
"Certificateholder" means a Holder of a Certificate.
"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, as amended, and regulations
(including proposed regulations) or other pronouncements of the IRS promulgated
thereunder.
"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 Loans.
"Combined Loan-to-Value Ratio" means, with respect to a 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.
"Compound Interest Security" means any Security of a Series on which all or
a portion of the interest accrued thereon is added to the principal balance of
such Security on each Distribution Date, through the accrual termination date
specified in the related Prospectus Supplement, and with respect to which no
interest shall be payable until such accrual termination date, after which
interest payments will be made on the Compound Value thereof.
"Compound Value" means, with respect to a Class of Compound Interest
Securities, the original principal balance of such Class, plus all accrued and
unpaid interest, if any, previously added to the principal balance thereof and
reduced by any payments of principal previously made on such Class of Compound
Interest Securities.
"Condominium" means a form of ownership of real 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 Building" means a multi-unit building or buildings, or a group
of buildings whether or not attached to each other, located on property subject
to Condominium ownership.
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"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.
"Credit Enhancement" means the credit enhancement for a Series, if any,
specified in the related Prospectus Supplement.
"Credit Enhancer" means the provider of the Credit Enhancement for a Series
specified in the related Prospectus Supplement.
"Cut-off Date" means the date designated as such in the related Prospectus
Supplement for a Series.
"Debt Securities" means Securities characterized as indebtedness for federal
income tax purposes.
"Deposit Agreement" means a guaranteed investment contract or reinvestment
agreement providing for the investment of funds held in a fund or account,
guaranteeing a minimum or a fixed rate of return on the investment of moneys
deposited therein.
"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 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 Loan pursuant to the terms thereof.
"Eligible Investments" means any one or more of the obligations or
securities described as such in the related Agreement.
"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 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.
"Home Improvements" means the home improvements financed by a Home
Improvement Contract.
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"Home Improvement Contract" means any home improvement installment sales
contracts and installment loan agreements which may be secured by purchase money
security interests in the Home Improvements financed thereby.
"HUD" means the United States Department of Housing and Urban Development.
"Index" means the index applicable to any adjustments in the Loan Rates of
any adjustable-rate Loans.
"Insurance Policies" means certain mortgage insurance, hazard insurance and
other insurance policies required to be maintained with respect to Loans.
"Insurance Proceeds" means amounts paid by the insurer under any of the
Insurance Policies covering any Loan or 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 Loan Rate
during the life of each adjustable-rate Loan.
"Liquidation Proceeds" means amounts received by the Servicer in connection
with the liquidation of a Loan, net of liquidation expenses.
"Loan Rate" means, unless otherwise indicated herein or in the Prospectus
Supplement, the interest rate borne by a Loan.
"Loans" means Mortgage Loans and/or Home Improvement Contracts,
collectively.
"Loan-to-Value Ratio" means, with respect to a Loan, the ratio determined as
set forth in the related Prospectus Supplement.
"Minimum Principal Payment Agreement" means a minimum principal payment
agreement with an entity meeting the criteria of each Rating Agency.
"Mortgage" means the mortgage, deed of trust or other similar security
instrument securing a Mortgage Note.
"Mortgage Loan" means a mortgage loan included in a Trust Fund, including a
mortgage loan secured by a senior lien or junior lien on the related Mortgaged
Property and a closed-end home equity loan secured by a Mortgaged Property.
"Mortgage Note" means the note or other evidence of indebtedness of a
Mortgagor under the Loan.
"Mortgaged Property" means the real property securing a Mortgage Loan.
"Mortgagor" means the obligor on a Mortgage Note.
"Noteholder" means the Holder of a Note.
"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.
"PAC" ("Planned Amortization Class Securities") means a Class of Securities
of a Series on which payments of principal are made in accordance with a
schedule specified in the related Prospectus Supplement, based on certain
assumptions stated therein.
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"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, limited liability
company, 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 collectively, any and all agreements
relating to the establishment of the related Trust Fund, the servicing of the
related Loans and the issuance of the related Securities.
"Principal Only Securities" means a Class of Securities entitled solely or
primarily to distributions of principal and identified as such in the Prospectus
Supplement.
"Property" means either a Home Improvement or a Mortgaged Property securing
a Loan, as the context requires.
"Rating Agency" means a nationally recognized statistical rating
organization which was requested by the Sponsor to rate the Securities upon the
original issuance thereof.
"REMIC" means a real estate mortgage investment conduit.
"REMIC Administrator" means the Person, if any, specified in the related
Prospectus Supplement for a Series for which a REMIC election is made, to serve
as administrator of the Series.
"REO Property" means real property which secured a defaulted 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 Pooling and Servicing Agreement.
"Retained Interest" means, with respect to a Loan, the amount or percentaged
specified in the related Prospectus Supplement which is not included in the
Trust Fund for the related Series.
"Scheduled Payment" means the scheduled payment of principal and interest
required to be made by the Mortgagor on a Loan.
"Securities" means the Notes or the Certificates.
"Seller" means a seller of Loans to the Sponsor identified in the related
Prospectus Supplement for a Series.
"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 Accredited Home Lenders, Inc.
"Servicing Fee" means the periodic fee payable to the Servicer as
compensation for servicing Loans.
"Single Family Property" means property securing a Loan consisting of one-to
four-family attached or detached residential housing, including Cooperative
Dwellings.
"Sponsor" means Accredited Home Lenders, Inc.
"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,
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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.
"Treasury" or "Treasury Department" means the United States Department of
the Treasury.
"Trustee" means the trustee under the applicable Pooling and Servicing
Agreement and its successors.
"Trust Fund" means, with respect to any Series of Securities, the trust
holding all money, instruments, securities and other property, including all
proceeds thereof, which are, with respect to a Series of Certificates, held for
the benefit of the Holders by the Trustee or, with respect to a Series of Notes,
pledged to the Trustee as a security for such Notes, including, without
limitation, the Loans (except any Retained Interests), all amounts in the
Distribution Account, Collection Account or Reserve Funds, distributions on the
Loans (net of Servicing Fees), and reinvestment earnings on such net
distributions and any Credit Enhancement and all other property and interests
held by or pledged to the Trustee pursuant to the related Pooling and Servicing
Agreement for such Series.
"UCC" means the Uniform Commercial Code.
"Variable Interest Security" means a Security on which interest accrues at a
rate that is adjusted, based upon a predetermined index, at fixed periodic
intervals, all as set forth in the related Prospectus Supplement.
"Zero Coupon Security" means a Security entitled to receive payments of
principal only.
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below is an estimate of the amount of fees and expenses (other
than underwriting discounts and commissions) to be incurred in connection with
the issuance and distribution of the Offered Certificates.
SEC Filing Fee.............................................. $ 172,413.50
Trustee's Fees and Expenses*................................ 25,000.00
Legal Fees and Expenses*.................................... 150,000.00
Accounting Fees and Expenses*............................... 75,000.00
Printing and Engraving Expenses*............................ 150,000.00
Blue Sky Qualification and Legal Investment Fees and
Expenses*................................................... 30,000.00
Rating Agency Fees*......................................... 60,000.00
Certificate Insurer's Fee*.................................. 50,000.00
Miscellaneous*.............................................. 20,000.00
------------
TOTAL..................................................... $ 732,415.50
------------
------------
- ------------
* Estimated in accordance with Item 511 of Regulation S-K.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Each Pooling and Servicing Agreement will provide that no director, officer,
employee or agent of the Registrant is liable to the Trust Fund or the Holders,
except for such person's own willful misfeasance, bad faith or gross negligence
in the performance of duties or reckless disregard of obligations and duties.
Each Pooling and Servicing Agreement will further provide that, with the
exceptions stated above, a director, officer, employee or agent of the
Registrant is entitled to be indemnified against any loss, liability or expense
incurred in connection with legal action relating to such and related
Securities.
Section 317 of the California Corporations Code allows for the
indemnification of officers, directors and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act of 1933, as amended (the "Act"). Article IV of the Registrant's
Restated Articles of Incorporation (Exhibit 3.1 hereto) and Section 12 Article V
of the Registrant's Bylaws (Exhibit 3.2 hereto) provide for indemnification of
the Registrant's directors, officers, employees and other agents to the extent
and under the circumstances permitted by the California Corporations Code.
The forms of the Underwriting Agreement, to be incorporated by reference as
Exhibit 1.1 and Exhibit 1.2 to this Registration Statement, provide that the
registrant will indemnify and reimburse the underwriter(s) and each director,
officer and controlling person of the underwriter(s) with respect to certain
expenses and liabilities, including liabilities under the 1933 Act or other
federal or state regulations or under the common law, which arise out of or are
based on certain material misstatements or omissions in the Registration
Statement. In addition, the Underwriting Agreements provide that the
underwriter(s) will similarly indemnify and reimburse the registrant and each
director, officer and controlling person of the registrant with respect to
certain material misstatements or omission in the Registration Statement which
are based on certain written information furnished by the underwriter(s) for use
in connection with the preparation of the Registration Statement.
II-1
<PAGE>
ITEM 16. EXHIBITS.
1.1++ --Form of Underwriting Agreement.
3.1+ --Articles of Incorporation of the Registrant.
3.2+ --Bylaws of the Registrant.
4.1++ --Form of Pooling and Servicing Agreement among the Sponsor, the
Servicer and the Trustee.
4.2++ --Form of Indenture.
4.3++ --Form of Trust Agreement.
4.4++ --Form of Surety Bond.
4.5++ --Form of Prospectus Supplement.
5.1* --Opinion of Dewey Ballantine with respect to validity.
8.1* --Opinion of Dewey Ballantine with respect to tax matters.
23.1 --Consents of Dewey Ballantine are included in its opinions filed as
Exhibit 5.1 and 8.1 hereof.
24.1+ --Power of Attorney (included on the signature page to this
Registration Statement).
- ------------
* Filed herewith.
+ Filed with Pre-Effective Amendment No. 1.
++ Filed with Pre-Effective Amendment No. 3.
ITEM 17. UNDERTAKINGS.
A. Undertaking in respect of indemnification
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions described above
in Item 15, or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by the registrant is against public policy as expressed in
the Act and will be governed by the final adjudication of such issue.
B. Undertaking pursuant to Rule 415.
The registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Act;
(ii) to reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the Registration Statement;
II-2
<PAGE>
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change of such information in the Registration Statement;
provided, however, that paragraphs (i) and (ii) do not apply if the
information required to be included in the post-effective amendment is
contained in periodic reports filed by the registrant pursuant to Section
13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
C. Undertaking pursuant to Rule 430A.
The registrant hereby undertakes:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Pre-Effective
Amendment No. 4 to Registration Statement No. 333-07219 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Diego,
State of California on September 13, 1996.
ACCREDITED HOME LENDERS, INC.
By: /s/ JAMES A. KONRATH
..................................
James A. Konrath
President
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
LOCATION OF EXHIBIT
EXHIBIT IN SEQUENTIAL
NUMBER DESCRIPTION OF DOCUMENT NUMBERING SYSTEM
- ------ ------------------------------------------------------------------- -------------------
<S> <C> <C>
1.1++ --Form of Underwriting Agreement.
3.1+ --Articles of Incorporation of the Registrant.
3.2+ --Bylaws of the Registrant.
4.1++ --Form of Pooling and Servicing Agreement among the Sponsor, the
Servicer and the Trustee.
4.2++ --Form of Indenture.
4.3++ --Form of Trust Agreement.
4.4++ --Form of Surety Bond
4.5++ --Form of Prospectus Supplement.
5.1* --Opinion of Dewey Ballantine with respect to validity.
8.1* --Opinion of Dewey Ballantine with respect to tax matters.
23.1 --Consents of Dewey Ballantine are included in its opinions filed
as Exhibit 5.1 and 8.1 hereof.
24.1+ --Power of Attorney.
</TABLE>
- ------------
* Filed herewith.
+ Filed with Pre-Effective Amendment No. 1.
++ Filed with Pre-Effective Amendment No. 3.
EXHIBIT 5.1
Dewey Ballantine
1301 Avenue of the Americas
New York, New York 10019
September 13, 1996
Accredited Home Lenders, Inc.
15030 Avenue of Science, Suite 100
San Diego, California 92128
Re: Accredited Home Lenders, Inc.
Mortgage Loan Asset-Backed Securities
-------------------------------------
Gentlemen:
We have acted as counsel to Accredited Home Lenders, Inc. (the
"Registrant") in connection with the preparation and filing of the registration
statement on Form S-3 (such registration statement, the "Registration
Statement") being filed today with the Securities and Exchange Commission
pursuant to the Securities Act of 1933, as amended (the "Act"), in respect of
$500,000,000 of Mortgage Loan Asset-Backed Securities ("Securities") which the
Registrant plans to offer in series, each series to be issued under a separate
pooling and servicing agreement, trust agreement or indenture (each, a "Trust
Agreement"), in substantially one of the forms incorporated by reference as
Exhibits to the Registration Statement, among Accredited Home Lenders, Inc.,
(the "Company") or a trust (a "Trust") as issuer or depositor and a trustee to
be identified in the prospectus supplement for such series of Securities (the
"Trustee" for such series).
We have examined and relied on the originals or copies certified or
otherwise identified to our satisfaction of all such documents and records of
the Company and such other instruments and other certificates of public
officials, officers and representatives of the Company and such other persons,
and we have made such investigations of law, as we have deemed appropriate as a
basis for the opinions expressed below.
The opinions expressed below are subject to bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or affecting creditors'
rights generally and to general equity principles.
We are admitted to the Bar of the States of California and New York
and we express no opinion as to the laws of any other
<PAGE>
jurisdiction except as to matters that are governed by Federal law or the laws
of the States of California and New York. All opinions expressed herein are
based on laws, regulations and policy guidelines currently in force and may be
affected by future regulations.
Based upon the foregoing, we are of the opinion that:
1. When, in respect of a series of Securities, a Trust Agreement has
been duly authorized by all necessary action and duly executed and
delivered by the Company or a Trust, the Trustee and any other party
thereto for such series, such will be a valid and legally binding
obligation of the Company or such Trust, as the case may be; and
2. When a Trust Agreement for a series of Securities has been duly
authorized by all necessary action and duly executed and delivered by the
Company or a Trust, the Trustee for such series and the other parties
thereto, and when the Securities of such series have been duly executed and
authenticated in accordance with the provisions of such Trust Agreement,
and issued and sold as contemplated in the Registration Statement, the
prospectus and the related Prospectus Supplement, as amended or
supplemented and delivered pursuant to Section 5 of the Act in connection
therewith, such Securities will be legally and validly issued, fully paid
and nonassessable, and the holders of such Securities will be entitled to
the benefits of such Trust Agreement.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to Dewey Ballantine in the
Registration Statement and the related prospectus under the heading "Legal
Matters." In giving this opinion we do not concede we are experts within the
meaning of the Act or the rules and regulations therewith, or that this consent
is required by Section 7 of the Act.
This opinion is furnished by us as counsel to the Registrant for
inclusion as an Exhibit to the Registration Statement. It may not be relied
upon by any other person for any other purpose without our prior written
consent.
Very truly yours,
DEWEY BALLANTINE
2
EXHIBIT 8.1
Dewey Ballantine
1301 Avenue of the Americas
New York, New York 10019
September 13, 1996
Accredited Home Lenders, Inc.
15030 Avenue of Science, Suite 100
San Diego, California 92128
Re: Accredited Home Lenders, Inc.
Mortgage Loan Asset-Backed Securities
-------------------------------------
Gentlemen:
We have acted as counsel to Accredited Home Lenders, Inc. (the
"Registrant") in connection with the preparation and filing of a registration
statement on Form S-3 (the "Registration Statement") being filed today with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
amended (the "Act"), in respect of $500,000,000 Mortgage Loan Asset-Backed
Securities ("Securities") which the Registrant plans to offer in series.
We hereby confirm our opinion with respect to the Federal income tax
characterization of the Investor Certificates and the Federal income tax
treatment of the issuance of such Investor Certificates set forth under the
caption "Federal Income Tax Considerations" subject to the limitations expressed
therein. Moreover, it is our opinion that, subject to the limitations expressed
therein, the discussion of certain Federal tax matters within the Prospectus is
an accurate description of the material tax aspects of owning (including the
purchase and sale of) Certificates or Notes.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to this opinion within the
Prospectus. In giving this consent, we do not concede that we are experts
within the meaning of the Act or the rules and regulations therewith, or that
this consent is required by Section 7 of the Act.
Very truly yours,
DEWEY BALLANTINE
