As filed with the Securities and Exchange Commission on June ___, 1996
Registration No. 33-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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15030 Avenue of Science, Suite 100
California San Diego, California 92128 33-0426859
(State of (Address of principal (I.R.S. Employer
Incorporation) executive offices) Identification No.)
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James A. Konrath
President
Accredited Home Lenders, Inc.
15030 Avenue of Science, Suite 100
San Diego, California 92128
(619) 451-7044
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
David E. Hertzel, Esq.
General Counsel
Accredited Home Lenders, Inc.
15030 Avenue of Science, Suite 100
San Diego, California 92128
Ray M. McKewon
Executive Vice President
Accredited Home Lenders, Inc.
15030 Avenue of Science, Suite 100
San Diego, California 92128
Chris DiAngelo, Esq.
Dewey Ballantine
1301 Sixth Avenue
New York, New York 10019
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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|
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CALCULATION OF REGISTRATION FEE
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Proposed Proposed
Amount Maximum Maximum Amount of
Title of Securities To be Offering Price Aggregate Registration
Being Registered Registered Per Unit(1) Offering Price(1) Fee(2)
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<S> <C> <C> <C> <C>
Mortgage Loan Asset-Backed Certificates $1,000,000 (1) $1,000,000 $345
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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.
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The Registrants hereby amend this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrants
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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<S> <C> <C>
1. Forepart of the Registration Statement and Outside Forepart of Registration Statement; Outside Front
Front Cover Page of Prospectus........................... Cover Page**
2. Inside Front and Outside Back Cover Page of Inside Front and Outside Back Cover Page**
Prospectus
3. Summary Information, Risk Factors and Ratio of Summary of Prospectus**; Risk Factors**;
Earnings to Fixed Charges................................
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**;
Certain 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
</TABLE>
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* Not applicable or answer is negative.
** To be completed from time to time by Prospectus Supplement.
<PAGE>
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").
As specified in the related Prospectus Supplement, the Certificates of a
Series will evidence undivided interests in certain assets deposited into a
trust (each, a "Trust Fund") by the Sponsor or an affiliate (references to the
"Sponsor" herein shall be deemed to include such an affiliate unless the context
otherwise requires) pursuant to a Pooling and Servicing Agreement or a Trust
Agreement, as described herein. As specified in the related Prospectus
Supplement, the Notes of a Series will be issued and secured pursuant to an
Indenture and will represent indebtedness of the related Trust Fund. The Trust
Fund for a Series of Securities will include assets originated by the Sponsor or
acquired by the Sponsor from affiliated or unaffiliated institutions (each, a
"Seller") composed of (a) Mortgage Assets, which may include one or more pools
of (i) mortgage loans, including mortgage loans secured by senior liens or
junior liens on the related mortgaged properties and closed-end and/or revolving
home equity loans or certain balances thereof, secured by mortgages primarily on
one- to four-family residential properties, unless otherwise specified in the
related Prospectus Supplement (collectively, the "Mortgage Loans") and (ii) home
improvement installment sales contracts and installment loan agreements (the
"Home Improvement Contracts") which are either unsecured or secured by mortgages
primarily on one- to four-family residential properties, unless otherwise
specified in the related Prospectus Supplement, or by purchase money security
interests in the home improvements financed thereby (the "Home Improvements"),
(b) all monies due thereunder net, if and as provided in the related Prospectus
Supplement, of certain amounts payable to the Sponsor as servicer (the
"Servicer") of the Mortgage Loans and/or Home Improvement Contracts
(collectively, the "Loans"), and (c) certain funds, Credit Enhancement (as
defined herein) and other assets as described herein and in the related
Prospectus Supplement.
Each Series of Securities will be issued in one or more classes (each, a
"Class"). Interest on and principal of the Securities of a Series will be
payable on each Distribution Date specified in the related Prospectus
Supplement, at the times, at the rates, in the amounts and in the order of
priority set forth in the related Prospectus Supplement.
If a Series includes multiple Classes, such Classes may vary with respect
to the amount, percentage and timing of distributions of principal, interest or
both and one or more Classes may be subordinated to other Classes with respect
to distributions of principal, interest or both as described herein and in the
related Prospectus Supplement. If so specified in the related Prospectus
Supplement, the Mortgage Assets and other assets comprising the Trust Fund may
be divided into one or more Asset Groups and each Class of the related Series
will evidence beneficial ownership of the corresponding Asset Group, as
applicable.
The rate of reduction of the aggregate principal balance of each Class of
a Series may depend principally upon the rate of payment (including prepayments)
with respect to the Loans. A rate of prepayment lower or higher than anticipated
will affect the yield on the Securities of a Series in the manner described
herein and in the related Prospectus Supplement. Under certain limited
circumstances described herein and in the related Prospectus Supplement, a
Series of Securities may be subject to termination or redemption under the
circumstances described herein and in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, an election may be made
to treat certain assets comprising the Trust Fund for a Series as a "real estate
mortgage investment conduit" (a "REMIC") for federal income tax purposes. See
"CERTAIN FEDERAL INCOME TAX CONSIDERATIONS".
SEE "RISK FACTORS" 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 AGREEMENT AS DESCRIBED HEREIN OR IN THE RELATED PROSPECTUS SUPPLEMENT.
SEE "RISK FACTORS" 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.
------------------------
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 Mortgage Assets, 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 Mortgage Assets; (v) information concerning any other
assets in the related Trust Fund, including any Reserve Fund; (vi) the Final
Scheduled Distribution Date of each Class of such Securities; (vii) the method
to be used to calculate the amount of principal required to be applied to the
Securities of each Class of such Series on each Distribution Date, the timing of
the application of principal and the order of priority of the application of
such principal to the respective Classes and the allocation of principal to be
so applied; (viii) the Distribution Dates and any Assumed Reinvestment Rate (as
defined herein); (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. To the extent
that the terms of this Prospectus conflict or are otherwise inconsistent with
the terms of any Prospectus Supplement, the terms of such Prospectus Supplement
shall govern.
REPORTS TO HOLDERS
Periodic and annual reports concerning the related Trust Fund for a Series
of Securities are required under the related Agreement to be forwarded to
Holders. Unless otherwise specified in the related Prospectus Supplement, such
reports will not be examined and reported on by an independent public account.
See "THE AGREEMENTS--Reports to Holders".
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).
2
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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".
Securities....................... Asset-Backed Certificates (the
"Certificates") and Asset-Backed Notes (the
"Notes"). Certificates are issuable from
time to time in Series pursuant to a Pooling
and Servicing Agreement or Trust Agreement.
Each Certificate of a Series will evidence
an interest in the Trust Fund for such
Series, or in an Asset Group specified in
the related Prospectus Supplement. Notes are
issuable from time to time in Series
pursuant to an Indenture. Each Series of
Securities will consist of one or more
Classes, 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.
The Sponsor and Servicer......... Accredited Home Lenders, Inc., a California
corporation (the "Sponsor" or the
"Servicer"). See "THE SPONSOR AND SERVICER".
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 or Underlying Loans, as
applicable, and/or as prepayments occur with
respect to such Loans or Underlying Loans,
as applicable. Interest Only Securities may
be assigned a Notional Amount set forth in
the related Prospectus Supplement which is
used solely for convenience in expressing
the calculation of interest and for certain
other purposes and does not represent the
right to receive any distributions allocable
to principal. Principal Only Securities may
not be entitled to receive any interest
payments or may be entitled to receive only
nominal interest payments. Interest payable
on the Securities of a Series on a
Distribution Date will include all interest
accrued during the period specified in the
related Prospectus
3
<PAGE>
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 may equal the
maturity date of the Mortgage Asset in the
related Trust Fund which has the latest
stated maturity or will be determined as
described herein and in the related
Prospectus Supplement. The actual final
Distribution Date of the Securities of a
Series will depend primarily upon the rate
of payment (including prepayments,
liquidations due to default, the receipt of
proceeds from casualty insurance policies
and repurchases) of the Loans in the related
Trust Fund. Unless otherwise specified in
the related Prospectus Supplement, the
actual final Distribution Date of any
Security is likely to occur earlier and may
occur substantially earlier or may occur
later than its Final Scheduled Distribution
Date as a result of the application of
prepayments to the reduction of the
principal balances of the Securities and as
a result of defaults on the Mortgage Assets.
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 "RISK
FACTORS--Prepayment and Yield
Considerations" and "DESCRIPTION OF THE
SECURITIES--Weighted Average Life of the
Securities".
Optional
Termination...................... One or more Classes of Securities of any
Series may be redeemed or repurchased in
whole or in part, at the Sponsor's or the
Servicer's option, at such time and under
the circumstances specified in the related
Prospectus Supplement, at the price set
forth therein. If so specified in the
related Prospectus Supplement for a Series
of Securities, the Sponsor, the Servicer, or
such other entity that is
4
<PAGE>
specified in the related Prospectus
Supplement, may, at its option, cause an
early termination of the related Trust Fund
by repurchasing all of the Mortgage Assets
remaining in the Trust Fund on or after a
specified date, or on or after such time as
the aggregate principal balance of the
Securities of the Series or the Mortgage
Assets relating to such Series, as specified
in the related Prospectus Supplement, is
less than the amount or percentage specified
in the related Prospectus Supplement. See
"DESCRIPTION OF THE SECURITIES--Optional
Purchase or Termination". In addition, the
Prospectus Supplement may provide other
circumstances under which Holders of
Securities of a Series could be fully paid
significantly earlier than would otherwise
be the case if payments or distributions
were solely based on the activity of the
related Mortgage Assets.
The Trust Fund................... The Trust Fund for a Series of Securities
will consist of one or more of the assets
described below, as described in the related
Prospectus Supplement.
A. Mortgage Assets........ The Mortgage Assets for a Series may consist
of any combination of the following assets,
to the extent and as specified in the
related Prospectus Supplement. The Mortgage
Assets will have been originated by the
Sponsor or purchased by the Sponsor in the
open market or in privately negotiated
transactions, including transactions with
entities affiliated with the Sponsor.
(1) Loans........... Mortgage Assets for a Series will consist,
in whole or in part, of Loans. Some Loans
may be delinquent or nonperforming as
specified in the related Prospectus
Supplement. Loans may be originated by or
acquired from an affiliate of the Sponsor
and an affiliate of the Sponsor may be an
obligor with respect to any such Loan. To
the extent provided in the related
Prospectus Supplement, additional Loans may
be periodically added to the Trust Fund, or
may be removed from time to time if certain
asset value tests are met, as described in
the related Prospectus Supplement. The
"Loans" for a Series will consist of (i)
mortgage loans, including mortgage loans
secured by senior liens or junior liens on
the related mortgaged properties and
closed-end and/or revolving home equity
loans or certain balances thereof
(collectively, "Mortgage Loans") and (ii)
home improvement installment sales contracts
and installment loan agreements (the "Home
Improvement Contracts"). The Mortgage Loans
and the Home Improvement Contracts are
collectively referred to herein as the
"Loans". Loans may, as specified in the
related Prospectus Supplement, have various
payment characteristics, including "balloon"
or other irregular payment features, and may
accrue interest at a fixed rate or an
adjustable rate. As specified in the related
Prospectus Supplement, the Loans will and
the Home Improvement Contracts may be
secured by mortgages or deeds of trust or
other similar security instruments creating
a lien on a Mortgaged Property, which may be
subordinated to one or more senior liens on
the Mortgaged Property, as described in the
related
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Prospectus Supplement. As specified in the
related Prospectus Supplement, Home
Improvement Contracts may be unsecured or
secured by purchase money security interests
in the Home Improvements financed thereby.
The Mortgaged Properties and the Home
Improvements are collectively referred to
herein as the "Properties". 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,
Home Improvements or are unsecured; (g) the
geographic distribution of any Mortgaged
Properties securing the Loans; (h) the use
and type of each Mortgaged Property securing
a Loan; (i) the lien priority of the Loans;
(j) the credit limit utilization rates of
any Revolving Credit Line Loans; and (k) the
delinquency status and year of origination
of the Loans.
B. Collection And
Distribution Accounts Unless otherwise provided in the related
Prospectus Supplement, all payments on or
with respect to the Mortgage Assets for a
Series will be remitted directly to an
account (the "Collection Account") to be
established for such Series with the Trustee
or the Servicer, in the name of the Trustee.
Unless otherwise provided in the related
Prospectus Supplement, the Trustee shall be
required to apply a portion of the amount in
the Collection Account, together with
reinvestment earnings from Eligible
Investments specified in the related
Prospectus Supplement, to the payment of
certain amounts payable to the Servicer
under the related Agreement and any other
person specified in the Prospectus
Supplement, and to deposit a portion of the
amount in the Collection Account into a
separate account (the "Distribution
Account") to be established for such Series,
each in the manner and at the times
established in the related Prospectus
Supplement. All amounts deposited in such
Distribution Account will be available,
unless otherwise specified in the related
Prospectus Supplement, 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 and (iii) any
other purpose specified in the related
Prospectus Supplement. After applying the
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funds in the Collection Account as described
above, any funds remaining in the Collection
Account may be paid over to the Servicer,
the Sponsor, any provider of Credit
Enhancement with respect to such Series (a
"Credit Enhancer") or any other person
entitled thereto in the manner and at the
times established in the related Prospectus
Supplement.
Forward Commitments;
Pre-Funding...................... A Trust Fund may enter into an agreement
(each, a "Forward Purchase Agreement") with
the Sponsor whereby the Sponsor will agree
to transfer additional Mortgage Assets to
such Trust Fund following the date on which
such Trust Fund is established and the
related Securities are issued. Any Forward
Purchase Agreement will require that any
Mortgage Assets so transferred to a Trust
Fund conform to the requirements specified
in such Forward Purchase Agreement. If a
Forward Purchase Agreement is to be
utilized, and unless otherwise specified in
the related Prospectus Supplement, the
related Trustee will be required to deposit
in a segregated account (each, a
"Pre-Funding Account") all or a portion of
the proceeds received by the Trustee in
connection with the sale of one or more
Classes of Securities of the related Series;
subsequently, the additional Mortgage Assets
will be transferred to the related Trust
Fund in exchange for money released to the
Sponsor from the related Pre-Funding Account
in one or more transfers. Each Forward
Purchase Agreement will set a specified
period during which any such transfers must
occur. The Forward Purchase Agreement or the
related Agreement will require that, if all
moneys originally deposited to such
Pre-Funding Account are not so used by the
end of such specified period, then any
remaining moneys will be applied as a
mandatory prepayment of the related Class or
Classes of Securities as specified in the
related Prospectus Supplement. Unless
otherwise specified in the related
Prospectus Supplement, the specified period
for the acquisition by a Trust Fund of
additional Mortgage Assets will not exceed
three months from the date such Trust Fund
is established.
Credit Enhancement............... If stated in the Prospectus Supplement
relating to a Series, the Sponsor will
obtain an irrevocable letter of credit,
surety bond, certificate insurance policy,
insurance policy or other form of credit
support (collectively, "Credit Enhancement")
in favor of the Trustee on behalf of the
Holders of such Series and any other person
specified in such Prospectus Supplement from
an institution acceptable to the rating
agency or agencies identified in the related
Prospectus Supplement as rating such Series
of Securities (each, a "Rating Agency") for
the purposes specified in such Prospectus
Supplement. The Credit Enhancement will
support the payments on the Securities and
may be used for other purposes, to the
extent and under the conditions specified in
such Prospectus Supplement. See "CREDIT
ENHANCEMENT". Credit Enhancement for a
Series may include one or more of the
following types of Credit Enhancement, or
such
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other type of Credit Enhancement specified
in the related Prospectus Supplement.
A. Subordinate Securities. If stated in the related Prospectus
Supplement, Credit Enhancement for a Series
may consist of one or more Classes of
Subordinate Securities. The rights of
Holders of such Subordinate Securities to
receive distributions on any Distribution
Date will be subordinate in right and
priority to the rights of Holders of Senior
Securities of the Series, but only to the
extent described in the related Prospectus
Supplement.
B. Insurance.............. If stated in the related Prospectus
Supplement, Credit Enhancement for a Series
may consist of special hazard insurance
policies, bankruptcy bonds and other types
of insurance supporting payments on the
Securities.
C. Reserve Funds.......... If stated in the Prospectus Supplement, 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 such 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 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 Assets
for such Series, to the extent described in
the related Prospectus Supplement.
D. Minimum Principal
Payment Agreement...... If stated in the Prospectus Supplement
relating to a Series of Securities, the
Sponsor will 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 such 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.......... If specified in the related Prospectus
Supplement, a Trust Fund may include in lieu
of some or all of the foregoing, or in
addition thereto, third party guarantees,
and other arrangements for maintaining
timely payments or providing additional
protection against losses on all or any
specified portion of the assets included in
such Trust Fund, paying administrative
expenses, or accomplishing such other
purpose as may be described in the
Prospectus Supplement. The 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 Mortgage Assets 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.
F. Deposit Agreement...... If stated in the Prospectus Supplement, the
Sponsor and the Trustee will enter into a
guaranteed investment contract or an
investment agreement (the "Deposit
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 a rate equal to the Assumed Reinvestment
Rate, in the manner specified in the
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Prospectus Supplement. See "CREDIT
ENHANCEMENT--Deposit Agreement".
G. Cross Collateralization Unless otherwise specified in the related
Prospectus Supplement, the source of payment
for Securities of each Series will be the
assets of the related Trust Fund only.
However, as may be described in the related
Prospectus Supplement, 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. See "CREDIT
ENHANCEMENT--Cross Collateralization".
H. Overcollateralization.. If stated in the related Prospectus
Supplement, Credit Enhancement for a Series
may include overcollateralization -- an
excess of the aggregate principal balance of
the related Mortgage Assets, 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 Mortgage Assets 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.
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, unless
otherwise specified in the related
Prospectus Supplement, reimbursable to the
Servicer from scheduled payments of
principal and interest, late collections, or
from the proceeds of liquidation of the
related Loans or from other recoveries
relating to such Loans (including any
insurance proceeds or payments from other
credit support). 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
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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").
Investors are advised to consult their tax
advisors and to review "CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS" herein and in the
related Prospectus Supplement.
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................. Unless otherwise specified in the related
Prospectus Supplement, Securities of each
Series offered by this Prospectus and the
related Prospectus Supplement will not
constitute "mortgage related securities"
under the Secondary Mortgage Market Credit
Enhancement Act of 1984 ("SMMEA"). Investors
whose investment authority is subject to
legal restrictions should consult their own
legal advisors to determine whether and to
what extent the Securities constitute legal
investments for them. See "LEGAL
INVESTMENT".
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 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. If so specified in the
related Prospectus Supplement, the purchase
of the Mortgage Assets for a Series may be
effected by an exchange of Securities with
the Seller of such Mortgage Assets. 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
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on different types of securities. A
securities rating does not address the
effect that the rate of prepayments on Loans
or Underlying Loans relating to
Mortgage-Backed Securities, as applicable,
for a Series may have on the yield to
investors in the Securities of such Series.
See "RISK FACTORS--Rating of Securities".
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RISK FACTORS
INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, THE FOLLOWING FACTORS IN
CONNECTION WITH THE PURCHASE OF THE SECURITIES.
Limited Liquidity. There will be no market for the Securities of any Series
prior to the issuance thereof, and there can be no assurance that a secondary
market will develop or, if it does develop, that it will provide Holders with
liquidity of investment or will continue for the life of the Securities of such
Series. The underwriters specified in the related Prospectus Supplement may make
a secondary market in the Securities, but have no obligation to do so.
Limited Assets. The Securities of a Series will be payable solely from the
assets of the Trust Fund for such Securities. Except as described herein, there
will be no recourse to the Sponsor or any other person for any default on the
Notes or any failure to receive distributions on the Certificates. Further,
unless otherwise stated in the related Prospectus Supplement, at the times set
forth in the related Prospectus Supplement, certain Mortgage Assets and/or any
balance remaining in the Collection Account or Distribution Account immediately
after making all payments due on the Securities of such Series and other
payments specified in the related Prospectus Supplement, may be promptly
released or remitted to the Sponsor, the Servicer, the Credit Enhancer or any
other person entitled thereto and will no longer be available for making
payments to Holders. Consequently, Holders of Securities of each Series must
rely solely upon payments with respect to the Mortgage Assets 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.
Holders of Notes will be required under the Indenture to proceed only against
the Mortgage Assets and other assets constituting the related Trust Fund in the
case of a default with respect to such Notes and may not proceed against any
assets of the Sponsor. If payments with respect to the Mortgage Assets and such
other assets securing a Series of Notes, including any Credit Enhancement, were
to become insufficient to make payments on such Notes, no other assets would be
available for payment of the deficiency.
The only obligations, if any, of the Sponsor with respect to the Securities
of any Series will be pursuant to certain representations and warranties. See
"THE AGREEMENTS--Assignment of Mortgage Assets".
Credit Enhancement. 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 will be limited, as set forth in the related Prospectus
Supplement, and will decline and could be depleted under certain circumstances
prior to the payment in full of the related Series of Securities, and as a
result Holders may suffer losses. See "CREDIT ENHANCEMENT".
Prepayment and Yield Considerations. The yield to maturity experienced by a
Holder of Securities may be affected by the rate of payment of principal of the
Loans. The timing of principal payments of the Securities of a Series will be
affected by a number of factors, including the following: (i) the extent of
prepayments of the Loans, which prepayments may be influenced by a variety of
factors, (ii) the manner of allocating principal payments among the Classes of
Securities of a Series as specified in the related Prospectus Supplement and
(iii) the exercise by the party entitled thereto of any right of optional
termination. See "DESCRIPTION OF THE SECURITIES--Weighted Average Life of
Securities". Prepayments may also result from repurchases of Loans due to
material breaches of the Sponsor's or a Seller's warranties. 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. In the
event interest accrues during the calendar month prior to a Distribution Date,
the effective yield to Holders will be reduced from the yield that would
otherwise be obtainable if interest payable on the Security were to accrue
through the day
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immediately preceding each Distribution Date, and the effective yield (at par)
to Holders will be less than the indicated coupon rate. See "DESCRIPTION OF THE
SECURITIES--Payments of Interest".
Nonconforming Credit Mortgage Loans. 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 Mortgage Assets 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. 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. 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. 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
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. 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
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<PAGE>
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.
Bankruptcy of Mortgagors. 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 Mortgaged Properties. 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
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
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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. 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
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. 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
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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. Information with respect to geographic concentration of
Properties will be specified in the related Prospectus Supplement or related
current report on Form 8-K.
Status of the Mortgage Assets in the Event of Bankruptcy of the Sponsor. 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
Mortgage Assets 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 Mortgage Assets. If such an attempt were successful,
it could prevent timely payments of amounts due to the Trust Fund.
Limitations on Interest Payments and Foreclosures. Generally, under the terms
of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the "Relief
Act"), 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.
Rating of the Securities. It will be a condition to the issuance of a Series
of Securities that they be rated in one of the four highest rating categories by
each Rating Agency. Any such rating would be based on, among other things, the
adequacy of the value of the Mortgage Assets 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 Mortgage
Assets, 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.
Other Considerations. There is no assurance that the market value of the
Mortgage Assets 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. Moreover, upon an event of
default under the Indenture for a Series of Notes and a sale of the assets in
the Trust Fund or upon a sale of the assets of a Trust Fund for a Series of
Certificates, the Trustee, the Servicer, any 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.
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DESCRIPTION OF THE SECURITIES
General
Each Series of Notes will be issued pursuant to an indenture (the
"Indenture") between the related Trust Fund and the entity named in the related
Prospectus Supplement as trustee (the "Trustee") with respect to such Series. A
form of Indenture has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part. The Certificates will also be issued in
Series pursuant to separate agreements (each, a "Pooling and Servicing
Agreement" or a "Trust Agreement") among the Sponsor, the Servicer and the
Trustee. A form of Pooling and Servicing Agreement has been filed as an exhibit
to the Registration Statement of which this Prospectus forms a part.
A Series may consist of both Notes and Certificates.
The following summaries describe certain provisions in the Agreements common
to each Series of Securities. The summaries do not purport to be complete and
are subject to, and are qualified in their entirety by reference to, the
provisions of the Agreements and the Prospectus Supplement relating to each
Series of Securities. Where particular provisions or terms used in the
Agreements are referred to, the actual provisions (including definitions of
terms) are incorporated herein by reference as part of such summaries.
Each Series of Securities will consist of one or more Classes of Securities,
one or more of which may be 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.
Unless otherwise provided in the related Prospectus Supplement, payments of
principal of and interest on a Series of Securities will be made on the
Distribution Dates specified in the Prospectus Supplement relating to such
Series by check mailed to Holders of such Series, registered as such at the
close of business on the record date specified in the related Prospectus
Supplement applicable to such Distribution Dates at their addresses appearing on
the security register, except that (a) payments may be made by wire transfer (at
the expense of the Holder requesting payment by wire transfer) in certain
circumstances described in the related Prospectus Supplement and (b) final
payments of principal in retirement of each Security will be made only upon
presentation and surrender of such Security at the office of the Trustee
specified in the Prospectus Supplement. Notice of the final payment on a
Security will be mailed to the Holder of such Security before the Distribution
Date on which the final principal payment on any Security is expected to be made
to the Holder of such Security.
Payments of principal of and interest on the Securities will be made by the
Trustee, or a paying agent on behalf of the Trustee, as specified in the related
Prospectus Supplement. Unless otherwise provided in the related Prospectus
Supplement, all payments with respect to the Mortgage 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 and, net, if and as provided in
the related Prospectus Supplement, of certain amounts payable to the related
Servicer and any other person specified in the Prospectus Supplement, will
thereafter be deposited into the Distribution Account and will be available to
make payments on Securities of such Series on the next Distribution Date, as the
case may be. See "THE TRUST FUNDS--Collection and Distribution Accounts".
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Valuation of the Mortgage Assets
If specified in the related Prospectus Supplement for a Series of Notes, each
Mortgage Asset included in the related Trust Fund for a Series will be assigned
an initial "Asset Value". Unless otherwise specified in the related Prospectus
Supplement, at any time the Asset Value of the Mortgage Assets will be equal to
the product of the Asset Value Percentage as set forth in the Indenture and the
lesser of (a) the stream of remaining regularly scheduled payments on the
Mortgage Assets, net, unless otherwise provided in the related Prospectus
Supplement, of certain amounts payable as expenses, together with income earned
on each such scheduled payment received through the day preceding the next
Distribution Date at the Assumed Reinvestment Rate, if any, discounted to
present value at the highest interest rate on the Notes of such Series over
periods equal to the interval between payments on the Notes, and (b) the then
principal balance of the Mortgage Assets. Unless otherwise specified in the
related Prospectus Supplement, the initial Asset Value of the Mortgage Assets
will be at least equal to the principal amount of the Notes of the related
Series at the date of issuance thereof.
The "Assumed Reinvestment Rate", if any, for a Series will be the highest
rate permitted by the Rating Agencies or a rate insured by means of a surety
bond, guaranteed investment contract, Deposit Agreement or other arrangement
satisfactory to each Rating Agency. If the Assumed Reinvestment Rate is so
insured, the related Prospectus Supplement will set forth the terms of such
arrangement.
Payments of Interest
The Securities of each Class by their terms entitled to receive interest will
bear interest (calculated, unless otherwise specified in the related Prospectus
Supplement, on the basis of a 360-day year of twelve 30-day months) 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 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
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Scheduled Distribution Date for each Class of a Series will be specified in the
related Prospectus Supplement. Since payments on the Mortgage Assets will be
used to make distributions in reduction of the outstanding principal amount of
the Securities, it is likely that the actual final Distribution Date of any such
Class will occur earlier, and may occur substantially earlier, than its Final
Scheduled Distribution Date. Furthermore, with respect to a Series of
Certificates, unless otherwise specified in the related Prospectus Supplement,
as a result of delinquencies, defaults and liquidations of the Mortgage Assets
in the Trust Fund, the actual final Distribution Date of any Certificate may
occur later than its Final Scheduled Distribution Date. No assurance can be
given as to the actual prepayment experience with respect to a Series. See
"--Weighted Average Life of the Securities".
Special Redemption
If so specified in the Prospectus Supplement relating to a Series of
Securities having other than monthly Distribution Dates, one or more Classes of
Securities of such Series may be subject to special redemption, in whole or in
part, on the day specified in the related Prospectus Supplement (a "Special
Redemption Date") if, as a consequence of prepayments on the Loans relating to
such Securities or low yields then available for reinvestment, the entity
specified in the related Prospectus Supplement determines, based on assumptions
specified in the applicable Agreement, that the amount available for the payment
of interest that will have accrued on such Securities (the "Available Interest
Amount") through the designated interest accrual date specified in the related
Prospectus Supplement is less than the amount of interest that will have accrued
on such Securities to such date. In such event and as further described in the
related Prospectus Supplement, the Trustee will redeem a principal amount of
outstanding Securities of such Series as will cause the Available Interest
Amount to equal the amount of interest that will have accrued through such
designated interest accrual date for such Series of Securities outstanding
immediately after such redemption.
Optional Redemption, Purchase or Termination
The Sponsor or the Servicer may, at its option, redeem, in whole or in part,
one or more Classes of Notes or purchase one or more Classes of Certificates of
any Series, on any Distribution Date under the circumstances, if any, specified
in the Prospectus Supplement relating to such Series. Alternatively, if so
specified in the related Prospectus Supplement for a Series of Certificates, the
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 Mortgage Assets from such Trust Fund on or after a date
specified in the related Prospectus Supplement, or on or after such time as the
aggregate outstanding principal amount of the Certificates or Mortgage Assets,
as specified in the related Prospectus Supplement, is less than the amount or
percentage specified in the related Prospectus Supplement. Notice of such
redemption, purchase or termination must be given by the 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.
In addition, the Prospectus Supplement may provide other circumstances under
which Holders of Securities of a Series could be fully paid significantly
earlier than would otherwise be the case if payments or distributions were
solely based on the activity of the related Mortgage Assets.
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. Unless otherwise specified in the
related Prospectus Supplement, the weighted average life of the Securities of a
Class will be influenced by the rate at which
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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 and a reinvestment return
higher than the Assumed Reinvestment Rate.
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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) the Mortgage Assets, (ii) amounts
available from the reinvestment of payments on such Mortgage Assets at the
Assumed Reinvestment Rate, if any, specified in the related Prospectus
Supplement, (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 and (v) the amount, if any, initially deposited in the Collection
Account or Distribution Account for a Series as specified in the related
Prospectus Supplement.
The Securities will be 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 Mortgage Assets 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 a Pooling and Servicing Agreement, with
respect to a Series of Certificates or a servicing agreement (each, a "Servicing
Agreement") between the Trust Fund and the Servicer, with respect to a Series of
Notes.
As used herein, "Agreement" means, with respect to a Series of Certificates,
the Pooling and Servicing Agreement or Trust Agreement, and with respect to a
Series of Notes, the Indenture and the Servicing Agreement, as the context
requires.
If so specified in the related Prospectus Supplement, a Trust Fund relating
to a Series of Securities may be a business trust formed under the laws of the
state specified in the related Prospectus Supplement pursuant to a trust
agreement (each, a "Trust Agreement") between the Sponsor and the Trustee of
such Trust Fund specified in the related Prospectus Supplement.
With respect to each Trust Fund, prior to the initial offering of the related
Series of Securities, the Trust Fund will have no assets or liabilities. No
Trust Fund is expected to engage in any activities other than acquiring,
managing and holding the related Mortgage Assets 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.
Mortgage Assets 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 Mortgage Assets 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"), and revolving home equity loans or certain balances thereof
("Revolving Credit Line Loans" and, collectively with the Closed-End Loans, the
"Mortgage Loans") secured by mortgages primarily on Single Family Properties
which may be subordinated to other mortgages on the
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same Mortgaged Property. The Mortgage Loans may have fixed interest rates or
adjustable interest rates and may provide for other payment characteristics as
described below and in the related Prospectus Supplement.
As more fully described in the related Prospectus Supplement, interest on
each Revolving Credit Line Loan, excluding introductory rates offered from time
to time during promotional periods, may be computed and payable monthly on the
average daily outstanding principal balance of such loan. Principal amounts on
the Revolving Credit Line Loans may be drawn down (up to a maximum amount as set
forth in the related Prospectus Supplement) or repaid under each Revolving
Credit Line Loan from time to time. If specified in the related Prospectus
Supplement, new draws by borrowers under the Revolving Credit Line Loans will
automatically become part of the Trust Fund for a Series. As a result, the
aggregate balance of the Revolving Credit Line Loans will fluctuate from day to
day as new draws by borrowers are added to the Trust Fund and principal payments
are applied to such balances and such amounts will usually differ each day, as
more specifically described in the related Prospectus Supplement. Unless
otherwise described 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. As more fully
described in the related Prospectus Supplement, 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. Unless otherwise
described in the related Prospectus Supplement, the original terms to stated
maturity of Closed-End Loans will not exceed 360 months. Under certain
circumstances, under either a Revolving Credit Line Loan or 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.
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.
Unless otherwise specified in the Prospectus Supplement, the sole basis for a
representation that a given percentage of the Loans are secured by Single Family
Property that is owner-occupied will be 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.
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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 Mortgage Assets 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. As specified in the
related Prospectus Supplement, a Home Improvement Contract will either be
unsecured or 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. Unless otherwise specified in the applicable
Prospectus Supplement, the Home Improvement Contracts will be fully amortizing
and 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.
Unless otherwise specified in the related Prospectus Supplement, 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.
The initial Loan-to-Value Ratio of a Home Improvement Contract is computed in
the manner described in the related Prospectus Supplement.
Additional Information. The selection criteria which shall apply with respect
to the Loans, 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 Loans for a Series may include Loans that do not amortize their entire
principal balance by their stated maturity in accordance with their terms and
require a balloon payment of the remaining principal balance at maturity, as
specified in the related Prospectus Supplement. As further described in the
related Prospectus Supplement, the Loans for a Series may include Loans that do
not have a specified stated maturity.
The related Prospectus Supplement for each Series will provide information
with respect to the Loans that are Mortgage Assets 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 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, Home Improvements or are unsecured; (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; (l) the credit limit utilization rate of any
Revolving Credit Line Loans; and (m) 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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Collection and Distribution Accounts
A separate Collection Account will be established by the Trustee or the
Servicer, in the name of the Trustee, for each Series of Securities for receipt
of the amount of cash, if any, specified in the related Prospectus Supplement to
be initially deposited therein by the Sponsor, all amounts received on or with
respect to the Mortgage Assets and, unless otherwise specified in the related
Prospectus Supplement, income earned thereon. Certain amounts on deposit in such
Collection Account and certain amounts available pursuant to any Credit
Enhancement, as provided in the related Prospectus Supplement, will be deposited
in a related Distribution Account, which will also be established by the Trustee
for each such Series of Securities, for distribution to the related Holders.
Unless otherwise specified in the related Prospectus Supplement, the Trustee
will invest the funds in the Collection and Distribution Accounts in Eligible
Investments maturing, with certain exceptions, not later, in the case of funds
in the Collection Account, than the day preceding the date such funds are due to
be deposited in the Distribution Account or otherwise distributed and, in the
case of funds in the Distribution Account, than the day preceding the next
Distribution Date for the related Series of Securities. Eligible Investments
include, among other investments, obligations of the United States and certain
agencies thereof, federal funds, certificates of deposit, commercial paper,
demand and time deposits and banker's acceptances, certain repurchase agreements
of United States government securities and certain guaranteed investment
contracts, in each case, acceptable to each Rating Agency.
Notwithstanding any of the foregoing, amounts may be deposited and withdrawn
pursuant to any Deposit Agreement or Minimum Principal Payment Agreement as
specified in the related Prospectus Supplement.
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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 Mortgage Assets 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 (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, or such other form as may be specified in the related
Prospectus Supplement. If so specified in the related Prospectus Supplement, any
of such Credit Enhancement may be structured so as to protect against losses
relating to more than one Trust Fund, in the manner described therein.
Subordinate Securities
If specified in the related Prospectus Supplement, Credit Enhancement for a
Series may consist of one or more Classes of Subordinate Securities. The rights
of Holders of such Subordinate Securities to receive distributions on any
Distribution Date will be subordinate in right and priority to the rights of
Holders of Senior Securities of the Series, but only to the extent described in
the related Prospectus Supplement.
Insurance
If stated in the related Prospectus Supplement, Credit Enhancement for a
Series may consist of special hazard insurance policies, bankruptcy bonds and
other types of insurance relating to the Mortgage Assets, as described below and
in the related Prospectus Supplement.
Pool Insurance Policy. If so specified in the Prospectus Supplement relating
to a Series of Securities, the Sponsor will obtain a pool insurance policy for
the Loans in the related Trust Fund. The pool insurance policy will cover any
loss (subject to the limitations described in a related Prospectus Supplement)
by reason of default, but will not cover the portion of the principal balance of
any Loan that is required to be covered by any primary mortgage insurance
policy. The amount and terms of any such coverage will be set forth in the
related Prospectus Supplement.
Special Hazard Insurance Policy. 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.
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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 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". If so provided in the related Prospectus Supplement, the Sponsor or
other entity specified in the related Prospectus Supplement will obtain a
bankruptcy bond or similar insurance contract (the "bankruptcy bond") covering
losses resulting from proceedings with respect to borrowers under the Bankruptcy
Code. The bankruptcy bond will cover certain losses resulting from a reduction
by a bankruptcy court of scheduled payments of principal of and interest on a
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. Such amount will be reduced by payments made under such bankruptcy bond
in respect of such Loans, unless otherwise specified in the related Prospectus
Supplement, and will not be restored.
Reserve Funds
If so specified in the Prospectus Supplement relating to a Series of
Securities, the Sponsor will deposit into one or more funds to be established
with the Trustee as part of the Trust Fund for such Series or for the benefit of
any 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.
If applicable, the initial amount of the Reserve Fund and the Reserve Fund
maintenance requirements for a Series of Securities will be described in the
related Prospectus Supplement.
Amounts withdrawn from any Reserve Fund will be applied by the Trustee to
make payments on the Securities of a Series, to pay expenses, to reimburse any
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 maturing no later than the day specified in the related
Prospectus Supplement.
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Minimum Principal Payment Agreement
If stated in the Prospectus Supplement relating to a Series of Securities,
the Sponsor will 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 Mortgage Assets
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
If specified in the related Prospectus Supplement, a Trust Fund may include
in lieu of some or all of the foregoing, or in addition thereto, third party
guarantees, and other arrangements for maintaining timely payments or providing
additional protection against losses on all or any specified portion of the
assets included in such Trust Fund, paying administrative expenses, or
accomplishing such other purpose as may be described in the Prospectus
Supplement. The 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 Mortgage Assets 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.
Deposit Agreement
If specified in a Prospectus Supplement, 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
Unless otherwise provided in the related Agreement and described in the
related Prospectus Supplement, the source of payment for Securities of each
Series will be the assets of the related Trust Fund only. However, as may be
described in the related Prospectus Supplement, 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. Notwithstanding the foregoing, unless
specifically described otherwise in the related Prospectus Supplement, no
collections on any Mortgage Assets 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
If stated in the related Prospectus Supplement, Credit Enhancement for a
Series may include overcollateralization -- an excess of the aggregate principal
balance of the related Mortgage Assets, 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 Mortgage
Assets 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, and subject to certain provisions specified in the related Prospectus
Supplement, 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 Mortgage
Assets in the Trust Fund will be provided by the Servicer pursuant to the
related Servicing Agreement or Pooling and Servicing Agreement, as the case may
be, with respect to a Series of Securities. Each Pooling and Servicing Agreement
and each 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 Mortgage Assets 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 or 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 Mortgage Assets. 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 or 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
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 Agreement, arrange
with an obligor a schedule for the liquidation of delinquencies by extending the
Due Dates for Scheduled Payments on such Loan.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer, to the extent permitted by law, will establish and maintain escrow or
impound accounts ("Escrow Accounts") with respect to 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 be
required to 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
Unless otherwise specified in the related Prospectus Supplement, the related
Trustee or the Servicer will establish a separate account (the "Collection
Account") in the name of the Trustee. Unless otherwise indicated in the related
Prospectus Supplement, the Collection Account will be an account maintained (i)
at a depository institution, the 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.
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Unless otherwise specified in the related Prospectus Supplement, the funds
held in the Collection Account may be invested, pending remittance to the
related Trustee, in Eligible Investments. If so specified in the related
Prospectus Supplement, the Servicer will be entitled to receive as additional
compensation any interest or other income earned on funds in the Collection
Account.
Unless otherwise specified in the related Prospectus Supplement, the Servicer
will deposit into the Collection Account for each Series on the Business Day
following the Closing Date any amounts representing Scheduled Payments due after
the related Cut-off Date but received by the Servicer on or before such Closing
Date, and thereafter, within two Business Days after the date of receipt
thereof, the following payments and collections received or made by it (other
than, unless otherwise provided in the related Prospectus Supplement, in respect
of principal of and interest on the related Mortgage Assets due on or before
such Cut-off Date):
(i) All payments on account of principal, including prepayments, on such
Mortgage Assets;
(ii) All payments on account of interest on such Mortgage Assets 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 Agreement, the Servicing Fee in respect of such
Mortgage Assets;
(iii) All amounts received by the Servicer in connection with the liquidation
of Mortgage Assets or property acquired in respect thereof, whether through
foreclosure sale, repossession or otherwise, including payments in connection
with such Mortgage Assets received from the obligor, other than amounts required
to be paid or refunded to the obligor pursuant to the terms of the applicable
loan documents or otherwise pursuant to law ("Liquidation Proceeds"), exclusive
of, in the discretion of the Servicer, but only to the extent of the amount
permitted to be withdrawn from the Collection Account in accordance with the
related Agreement, the Servicing Fee, if any, in respect of the related Mortgage
Asset;
(iv) All proceeds under any title insurance, hazard insurance or other
insurance policy covering any such Mortgage Asset, 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 Agreement ("Insurance Proceeds");
(v) All amounts required to be deposited therein from any applicable Reserve
Fund for such Series pursuant to the related Agreement;
(vi) All Advances required to be made by the Servicer pursuant to the related
Agreement; and
(vii) All repurchase prices of any such Mortgage Assets repurchased by the
Sponsor, the Servicer or any Seller pursuant to the related Agreement.
Unless otherwise specified in the related Prospectus Supplement, the Servicer
is permitted, from time to time, to make withdrawals from the Collection Account
for each Series for the following purposes:
(i) to reimburse itself for Advances for such Series made by it pursuant to
the related Agreement; the Servicer's right to reimburse itself 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 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;
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(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;
(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 Agreement, from any such
Scheduled Payment, late payment or such other recovery, to the extent permitted
by the related Agreement;
(v) to reimburse itself for expenses incurred by and recoverable by or
reimbursable to it pursuant to the related Agreement;
(vi) to pay to the applicable person with respect to each Mortgage Asset 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 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 deposit into the
Distribution Account, if any, or for remittance to the Holders of such Series in
the amounts and in the manner provided for in the related Agreement; and
(viii) to clear and terminate the Collection Account pursuant to the related
Agreement.
In addition, if the Servicer deposits in the Collection Account for a series
any amount not required to be deposited therein, it may, at any time, withdraw
such amount from such Collection Account.
Advances and Limitations Thereon
The related Prospectus Supplement will describe the circumstances, if any,
under which the Servicer will make Advances with respect to delinquent payments
on Loans. If specified in the related Prospectus Supplement, the Servicer will
be obligated to make Advances, and such obligations may be limited in amount, or
may not be activated until a certain portion of a specified Reserve Fund is
depleted. Advances are intended to provide liquidity and, except to the extent
specified in the related Prospectus Supplement, not to guarantee or insure
against losses. Accordingly, any funds advanced are recoverable by the Servicer
out of amounts received on particular 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 Distribution
Account, as the case may be, or from a specified Reserve Fund as applicable, to
the extent specified in the related Prospectus Supplement.
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Maintenance of Insurance Policies and Other Servicing Procedures
Standard Hazard Insurance; Flood Insurance. Except as otherwise specified in
the related Prospectus Supplement, the Servicer will be required to maintain or
to cause the obligor on each 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 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.
Unless otherwise specified in the related Prospectus Supplement, coverage
will be in an amount at least equal to the greater of (i) the amount necessary
to avoid the enforcement of any co-insurance clause contained in the policy or
(ii) the outstanding principal balance of the related Loan. Unless otherwise
specified in the related Prospectus Supplement, the Servicer will also 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
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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.
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.
The Servicer may arrange with the obligor on a defaulted Loan, a modification
of such Loan to the extent provided in the related Prospectus Supplement. Such
modifications may only be entered into if they meet the underwriting policies
and procedures employed by the Servicer in servicing receivables for its own
account and meet the other conditions set forth in the related Prospectus
Supplement.
Enforcement of Due-on-Sale Clauses
Unless otherwise specified in the related Prospectus Supplement for a Series,
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
Except as otherwise provided in the related Prospectus Supplement, the
Servicer will be entitled to a periodic fee as servicing compensation (the
"Servicing Fee") in an amount to be determined as specified in the related
Prospectus Supplement. The Servicing Fee may be fixed or variable, as specified
in the related Prospectus Supplement. In addition, unless otherwise specified in
the related Prospectus Supplement, the Servicer will be entitled to servicing
compensation in the form of assumption fees, late payment charges and similar
items, or excess proceeds following disposition of property in connection with
defaulted Loans.
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Unless otherwise specified in the related Prospectus Supplement, the Servicer
will pay certain expenses incurred in connection with the servicing of the
Loans, including, without limitation, the payment of the fees and expenses of
the Trustee and independent accountants, payment of insurance policy premiums
and the cost of credit support, if any, and payment of expenses incurred in
preparation of reports to Holders.
When an obligor makes a principal prepayment in full between Due Dates on the
related 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, a shortfall to Holders may occur.
Unless otherwise specified in the related Prospectus Supplement, the Servicer
will be entitled to reimbursement for certain expenses incurred by it in
connection with the liquidation of defaulted 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.
Unless otherwise specified in the related Prospectus Supplement, the rights
of the Servicer to receive funds from the Collection Account for a Series,
whether as the Servicing Fee or other compensation, or for the reimbursement of
Advances, expenses or otherwise, are not subordinate to the rights of Holders of
such Series.
Evidence as to Compliance
Unless otherwise specified in the related Prospectus Supplement, the
applicable Agreement for each Series will provide that each year, a firm of
independent public accountants will furnish a statement to the Trustee to the
effect that such firm has examined certain documents and records relating to the
servicing of the Loans by the Servicer and that, on the basis of such
examination, such firm is of the opinion that the servicing has been conducted
in compliance with such Agreement, except for (i) such exceptions as such firm
believes to be immaterial and (ii) such other exceptions as are set forth in
such statement.
Unless otherwise specified in the related Prospectus Supplement, the
applicable Agreement for each Series will also provide for delivery to the
Trustee for such Series of an annual statement signed by an officer of the
Servicer to the effect that the Servicer has fulfilled its obligations under
such Agreement, throughout the preceding calendar year.
Certain Matters Regarding the Servicer
In the event of an Event of Default under either a Servicing Agreement or a
Pooling and Servicing Agreement, the Servicer may be replaced by the Trustee or
a successor Servicer. Unless otherwise specified in the related Prospectus
Supplement, such Events of Default and the rights of the Trustee upon such a
default under the Agreement for the related Series will be substantially similar
to those described under "THE AGREEMENTS--Events of Default; Rights Upon Events
of Default--Pooling and Servicing Agreement; Servicing Agreement".
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Unless otherwise specified in the related Prospectus Supplement, the Servicer
does not have the right to assign its rights and delegate its duties and
obligations under the related Agreement for each Series 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 net worth of not less than the
amount specified in the related Prospectus Supplement, (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 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 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 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 obligations under the
related 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 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 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 Agreement, or the failure
to perform its obligations in compliance with any standard of care set forth in
such 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 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 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 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 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 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 AGREEMENTS
The following summaries describe certain provisions of the Agreements. The
summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the Agreements. Where
particular provisions or terms used in the Agreements are referred to, such
provisions or terms are as specified in the related Agreements.
Assignment of Mortgage Assets
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 Mortgage Assets 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 Mortgage Assets after the Cut-off Date
specified in the related Prospectus Supplement (except for any Retained
Interests). The Trustee will, concurrently with such assignment, execute and
deliver the Securities.
Assignment of Loans. Unless otherwise specified in the related Prospectus
Supplement, the Sponsor will, as to each Loan, deliver or cause to be delivered
to the Trustee, or, as specified in the related Prospectus Supplement, 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, if so specified in the related
Prospectus Supplement, the Custodian, will hold such documents in trust for the
benefit of the Holders.
Unless otherwise specified in the related Prospectus Supplement, the Sponsor
will as to each Home Improvement Contract, 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,
other than in the case of unsecured Home Improvement Contracts, the security
interest in the property securing such Home Improvement Contract. 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. Unless otherwise
specified in the related Prospectus Supplement, the Home Improvement Contracts
will not be stamped or otherwise marked to reflect their assignment to the
Trust. Therefore, if, through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the Home Improvement
Contracts without notice of such assignment, the interest of Holders in the Home
Improvement Contracts could be defeated. See "CERTAIN LEGAL ASPECTS OF THE
LOANS--The Home Improvement Contracts".
With respect to Loans secured by Mortgages, if so specified in the related
Prospectus Supplement, 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. If specified in the related Prospectus Supplement, the
Sponsor will cause such assignments to be so recorded within the time after
issuance of the Securities as is specified in the related Prospectus Supplement,
in which event, the Agreement may, as specified in the related Prospectus
Supplement, require the Sponsor to repurchase from the Trustee any Loan the
related Mortgage of which is not recorded within such time, at the price
described below with respect to repurchases by reason of defective
documentation. Unless otherwise provided in the related Prospectus Supplement,
the enforcement of the repurchase obligation would constitute the sole remedy
available to the Holders or the Trustee for the failure of a Mortgage to be
recorded.
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Each Loan will be identified in a schedule appearing as an exhibit to the
related 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.
Forward Commitments; Pre-Funding. A Trust Fund may enter into an agreement
(each, a "Forward Purchase Agreement") with the Sponsor whereby the Sponsor will
agree to transfer additional Mortgage Assets to such Trust Fund following the
date on which such Trust Fund is established and the related Securities are
issued. The Trust Fund may enter into Forward Purchase Agreements to permit the
acquisition of additional Mortgage Assets that could not be delivered by the
Sponsor or have not formally completed the origination process, in each case
prior to the Closing Date for the related Series of Securities. Any Forward
Purchase Agreement will require that any Mortgage Assets so transferred to a
Trust Fund conform to the requirements specified in such Forward Purchase
Agreement. If a Forward Purchase Agreement is to be utilized, and unless
otherwise specified in the related Prospectus Supplement, the related Trustee
will be required to deposit in a segregated account (each, a "Pre-Funding
Account") all or a portion of the proceeds received by the Trustee in connection
with the sale of one or more Classes of Securities of the related Series, and
the additional Mortgage Assets will be transferred to the related Trust Fund in
exchange for money released to the Sponsor from the related Pre-Funding Account.
Each Forward Purchase Agreement will set a specified period during which any
such transfers must occur. The Forward Purchase Agreement or the related
Agreement will require that, if all moneys originally deposited to such
Pre-Funding Account are not so used by the end of such specified period, then
any remaining moneys will be applied as a mandatory prepayment of the related
Class or Classes of Securities as specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement, the
specified period for the acquisition by a Trust Fund of additional Mortgage
Assets will not exceed three months from the date such Trust Fund is
established.
Repurchase and Substitution of Nonconforming Mortgage Assets. Unless
otherwise provided in the related Prospectus Supplement, if any document in the
file relating to the Mortgage Assets delivered by the Sponsor to the Trustee (or
Custodian) is found by the Trustee within 90 days of the execution of the
related 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 within 90
days, or within such other period specified in the related Prospectus
Supplement, the Sponsor or Seller will, not later than 90 days or within such
other period specified in the related Prospectus Supplement, after the Trustee's
notice to the Sponsor or the Seller, as the case may be, of the defect,
repurchase the related Mortgage Asset or any property acquired in respect
thereof from the Trustee at a price equal to, unless otherwise specified in the
related Prospectus Supplement, (a) the lesser of (i) the outstanding principal
balance of such Mortgage Asset and (ii) the Trust Fund's federal income tax
basis in the Mortgage Asset and (b) accrued and unpaid interest to the date of
the next Scheduled Payment on such Mortgage Asset at the rate set forth in the
related Agreement (less any unreimbursed Advances respecting such Mortgage
Asset); provided, however, the purchase price shall not be limited in (i) above
to the Trust Fund's federal income tax basis if the repurchase at a price equal
to the outstanding principal balance of such Mortgage Asset will not result in
any prohibited transaction tax under Section 860F(a) of the Code.
If provided in the related Prospectus Supplement, the Sponsor or Seller, as
the case may be, may, rather than repurchase the Mortgage Asset as described
above, remove such Mortgage Asset from the Trust Fund (the "Deleted Mortgage
Asset") and substitute in its place one or more other Mortgage Assets (each, a
"Qualifying Substitute Mortgage Asset"); provided, however, that (i) with
respect to a Trust Fund for which no REMIC election is made, such substitution
must be effected within 120 days of the date of initial issuance of the
Securities and (ii) with respect to a Trust Fund for which a REMIC election is
made, after a specified time period, the Trustee must have received a
satisfactory opinion of counsel that such substitution will not cause the Trust
Fund to lose its status as a REMIC or otherwise subject the Trust Fund to a
prohibited transaction tax.
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Unless otherwise specified in the related Prospectus Supplement, any
Qualifying Substitute Mortgage Asset will have, on the date of substitution, (i)
an outstanding principal balance, after deduction of all Scheduled Payments due
in the month of substitution, not in excess of the outstanding principal balance
of the Deleted Mortgage Asset (the amount of any shortfall to be deposited to
the Distribution Account in the month of substitution for distribution to
Holders), (ii) an Loan Rate not less than (and not more than 2% greater than)
the Loan Rate of the Deleted Mortgage Asset, (iii) a remaining term-to-stated
maturity not greater than (and not more than two years less than) that of the
Deleted Mortgage Asset; and will comply with all of the representations and
warranties set forth in the applicable Agreement as of the date of substitution.
Unless otherwise provided in the related Prospectus Supplement, the
above-described cure, repurchase or substitution obligations constitute the sole
remedies available to the Holders or the Trustee for a material defect in a
document for a Mortgage Asset.
The Sponsor or another entity will make representations and warranties with
respect to Mortgage 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 the time period specified in the related Prospectus Supplement
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 Mortgage Asset,
the Sponsor or such entity is obligated to repurchase the affected Mortgage
Asset or, if provided in the related Prospectus Supplement, provide a Qualifying
Substitute Mortgage Asset 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 Agreement for such Series
to institute any proceeding with respect to such 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 Mortgage Assets or (d) any realized losses or
Liquidation Proceeds to be allocated as reductions in the outstanding principal
balances of such Securities;
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(v) the amount received under any related Credit Enhancement, and the
remaining amount available under such Credit Enhancement;
(vi) the amount of any delinquencies with respect to payments on the
related Mortgage Assets;
(vii) the book value of any REO Property acquired by the related Trust
Fund; and
(viii) such other information as specified in the related Agreement.
In addition, within a reasonable period of time after the end of each
calendar year the Trustee, unless otherwise specified in the related Prospectus
Supplement, will furnish to each Holder of record at any time during such
calendar year: (a) the aggregate of amounts reported pursuant to (i), (ii), and
(iv)(d) above for such calendar year and (b) such information specified in the
related Agreement to enable Holders to prepare their tax returns, including,
without limitation, the amount of original issue discount accrued on the
Securities, if applicable. Information in the Distribution Date and annual
statements provided to the Holders will not have been examined and reported upon
by an independent public accountant. However, the Servicer will provide to the
Trustee a report by independent public accountants with respect to the
Servicer's servicing of the Loans. See "SERVICING OF LOANS--Evidence as to
Compliance".
Events of Default; Rights Upon Event of Default
Pooling and Servicing Agreement; Servicing Agreement. Unless otherwise
specified in the related Prospectus Supplement, Events of Default under the
Pooling and Servicing Agreement for each Series of Certificates relating to
Loans include (i) any failure by the Servicer to deposit amounts in the
Collection Account and Distribution Account to enable the Trustee to distribute
to Holders of such Series any required payment, which failure continues
unremedied for the number of days specified in the related Prospectus Supplement
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 Agreement which continues unremedied for the number of days specified
in the related Prospectus Supplement 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
Agreement for a Series of Securities relating to the servicing of Loans, unless
otherwise specified in the related Prospectus Supplement, 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 Agreement (other than its right to recovery of other expenses and
amounts advanced pursuant to the terms of such 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 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 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 net worth specified in
the related Prospectus Supplement to act as successor Servicer under the
provisions of the applicable Agreement. The successor Servicer would be entitled
to reasonable servicing compensation in an amount not to exceed the Servicing
Fee as
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set forth in the related Prospectus Supplement, together with the other
servicing compensation in the form of assumption fees, late payment charges or
otherwise, as provided in such Agreement.
During the continuance of any Event of Default of the Servicer under an
Agreement for a Series of Securities, the Trustee for such Series will have the
right to take action to enforce its rights and remedies and to protect and
enforce the rights and remedies of the Holders of such Series, and, unless
otherwise specified in the related Prospectus Supplement, Holders of Securities
evidencing not less than 51% of the aggregate voting rights of the Securities
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.
Indenture. Unless otherwise specified in the related Prospectus Supplement,
Events of Default under the Indenture for each Series of Notes include: (i) a
default for thirty (30) days or more in the payment of any principal of or
interest on any Note of such Series; (ii) failure to perform any other covenant
of the Sponsor or the Trust Fund in the Indenture which continues for a period
of sixty (60) days after notice thereof is given in accordance with the
procedures described in the related Prospectus Supplement; (iii) any
representation or warranty made by the Sponsor or the Trust Fund in the
Indenture or in any certificate or other writing delivered pursuant thereto or
in connection therewith with respect to or affecting such Series having been
incorrect in a material respect as of the time made, and such breach is not
cured within sixty (60) days after notice thereof is given in accordance with
the procedures described in the related Prospectus Supplement; (iv) certain
events of bankruptcy, insolvency, receivership or liquidation of the 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, either the Trustee or the Holders of a
majority of the then aggregate outstanding amount of the Notes of such Series
may declare the principal amount (or, if the Notes of that Series are Zero
Coupon Securities, such portion of the principal amount as may be specified in
the terms of that Series, as provided in the related Prospectus Supplement) of
all the Notes of such Series to be due and payable immediately. Such declaration
may, under certain circumstances, be rescinded and annulled by the Holders of a
majority in aggregate outstanding amount of the Notes of such Series.
If, following an Event of Default with respect to any Series of Notes, the
Notes of such Series have been declared to be due and payable, the Trustee may,
in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such Series as they would
have become due if there had not been such a declaration. In addition, the
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a Series following an Event of Default, other than a default in the payment of
any principal or interest on any Note of such Series for thirty (30) days or
more, unless (a) the Holders of 100% of the then aggregate outstanding amount of
the Notes of such Series consent to such sale, (b) the proceeds of such sale or
liquidation are sufficient to pay in full the principal of and accrued interest,
due and unpaid, on the outstanding Notes of such Series at the date of such sale
or (c) the Trustee determines 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.
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In the event that the Trustee liquidates the collateral in connection with an
Event of Default involving a default for thirty (30) days or more in the payment
of principal of or interest on the Notes of a Series, the Indenture provides
that the Trustee will have a prior lien on the proceeds of any such liquidation
for unpaid fees and expenses. As a result, upon the occurrence of such an Event
of Default, the amount available for distribution to the Noteholders would be
less than would otherwise be the case. However, the Trustee may not institute a
proceeding for the enforcement of its lien except in connection with a
proceeding for the enforcement of the lien of the Indenture for the benefit of
the Noteholders after the occurrence of such an Event of Default.
Unless otherwise specified in the related Prospectus Supplement, in the event
the principal of the Notes of a Series is declared due and payable, as described
above, the Holders of any such Notes issued at a discount from par may be
entitled to receive no more than an amount equal to the unpaid principal amount
thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing with respect
to a Series of Notes, the Trustee shall be under no obligation to exercise any
of the rights or powers under the Indenture at the request or direction of any
of the Holders of Notes of such Series, unless such Holders 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 Indenture, the Holders of a majority of the then
aggregate outstanding amount of the Notes of such Series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee with respect to the Notes of such Series, and the Holders of a majority
of the then aggregate outstanding amount of the Notes of such Series may, in
certain cases, waive any default with respect thereto, except a default in the
payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all the Holders of the outstanding Notes of such Series affected thereby.
The Trustee
The identity of the commercial bank, savings and loan association or trust
company named as the Trustee for each Series of Securities will be set forth in
the related Prospectus Supplement. The entity serving as Trustee may have normal
banking relationships with the 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 Agreement relating to such Series will be
conferred or imposed upon the Trustee and each such separate trustee or
co-trustee jointly, or, in any jurisdiction in which the Trustee shall be
incompetent or unqualified to perform certain acts, singly upon such separate
trustee or co-trustee who shall exercise and perform such rights, powers, duties
and obligations solely at the direction of the Trustee. The Trustee may also
appoint agents to perform any of the responsibilities of the Trustee, which
agents shall have any or all of the rights, powers, duties and obligations of
the Trustee conferred on them by such appointment; provided that the Trustee
shall continue to be responsible for its duties and obligations under the
Agreement.
Duties of the Trustee
The Trustee makes no representations as to the validity or sufficiency of the
Agreement, the Securities or of any Mortgage Asset or related documents. If no
Event of Default (as defined in the related Agreement) has occurred, the Trustee
is required to perform only those duties specifically required of it under the
Agreement. Upon receipt of the various certificates, statements, reports or
other instruments required to be furnished to it, the Trustee is required to
examine them to determine whether they are in the form required by the related
Agreement; however,
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the Trustee will not be responsible for the accuracy or content of any such
documents furnished by it or the Holders to the Servicer under the Agreement.
The Trustee may be held liable for its own negligent action or failure to
act, or for its own misconduct; provided, however, that the Trustee will not be
personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction of the Holders in an
Event of Default. The Trustee is not required to expend or risk its own funds or
otherwise incur any financial liability in the performance of any of its duties
under the Agreement, or in the exercise of any of its rights or powers, if it
has reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
Resignation of Trustee
The Trustee may, upon written notice to the 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
Agreement, (ii) if the Trustee becomes insolvent or (iii) by the Holders of
Securities evidencing over 50% of the aggregate voting rights of the Securities
in the Trust Fund upon written notice to the Trustee and to the 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
Unless otherwise specified in the Prospectus Supplement, the Agreement for
each Series of Securities 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 (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 Agreement or related Credit Enhancement, (v) to add or amend
any provisions of such Agreement as required by a Rating Agency in order to
maintain or improve the rating of the Securities, or (vi) to comply with any
requirements imposed by the Code; provided that any such amendment except
pursuant to clause (vi) above will not adversely affect in any material respect
the interests of any Holders of such Series, as evidenced by an opinion of
counsel. Any such amendment, except pursuant to clause (vi) of the preceding
sentence, shall be deemed not to adversely affect in any material respect the
interests of any Holder if the Trustee receives written confirmation from each
Rating Agency that such amendment will not cause such Rating Agency to reduce
the then current rating thereof. Unless otherwise specified in the Prospectus
Supplement, the Agreement for each Series may also be amended by the Trustee,
the Servicer, if applicable, and the Sponsor with respect to such Series with
the consent of the Holders possessing not less than 66 2/3% of the aggregate
outstanding principal amount of the Securities of such Series or, if only
certain Classes of such Series are affected by such amendment, 66 2/3% of the
aggregate outstanding principal amount of the Securities of each Class of such
Series affected thereby, for the purpose of adding any provisions to or changing
in any manner or eliminating any of the provisions of such Agreement or
modifying in any manner the rights of Holders of such Series; provided, however,
that no such amendment may (a) reduce the amount or delay the timing of payments
on any Security without the consent of the Holder of such Security; or (b)
reduce the aforesaid percentage of the aggregate outstanding principal amount of
Securities of each Class, the Holders of which are required to consent to any
such amendment without the consent of the Holders of 100% of the aggregate
outstanding principal amount of each Class of Securities affected thereby.
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Voting Rights
The related Prospectus Supplement will set forth the method of determining
allocation of voting rights with respect to a Series.
List of Holders
Upon written request of three or more Holders of record of a Series for
purposes of communicating with other Holders with respect to their rights under
the Agreement, which request is accompanied by a copy of the communication which
such Holders propose to transmit, the Trustee will afford such Holders access
during business hours to the most recent list of Holders of that Series held by
the Trustee.
No Agreement will provide for the holding of any annual or other meeting of
Holders.
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
Pooling and Servicing Agreement; Trust Agreement. The obligations created by
the Pooling and Servicing Agreement or Trust Agreement for a Series will
terminate upon the distribution to Holders of all amounts distributable to them
pursuant to such Agreement after the earlier of (i) the later of (a) the final
payment or other liquidation of the last Mortgage Asset 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
Mortgage Asset or (ii) the repurchase, as described below, by the Servicer or
other entity specified in the related Prospectus Supplement from the Trustee for
such Series of all Mortgage Assets and other property at that time subject to
such Agreement. The Agreement for each Series permits, but does not require, the
Servicer or other entity specified in the related Prospectus Supplement to
purchase from the Trust Fund for such Series all remaining Mortgage Assets at a
price equal to, unless otherwise specified in the related Prospectus Supplement,
100% of the aggregate principal balance of such Mortgage Assets plus, with
respect to any property acquired in respect of a Mortgage Asset, if any, the
outstanding principal balance of the related Mortgage Asset at the time of
foreclosure, less, in either case, related unreimbursed Advances (in the case of
the Mortgage Assets, only to the extent not already reflected in the computation
of the aggregate principal balance of such Mortgage Assets) 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 Mortgage Assets 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
Mortgage Assets, plus accrued interest thereon at the applicable interest rates
on the Mortgage Assets through the last day of the month of such repurchase and
(b) the aggregate fair market value of such Mortgage Assets plus the fair market
value of any property acquired in respect of a Mortgage Asset 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 Mortgage Assets at the time of repurchase
being less than a fixed percentage, to be set forth in the related Prospectus
Supplement, of the aggregate principal balance of the Mortgage Assets as of the
Cut-off Date. In no event, however, will the trust created by the Agreement
continue beyond the expiration of 21 years from the death of the last survivor
of certain persons identified therein. For each Series, the Servicer or the
Trustee, as applicable, will give written notice of termination of the Agreement
to each Holder, and the final distribution will be made only upon surrender and
cancellation of the Securities at an office or agency
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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".
Indenture. The Indenture will be discharged with respect to a Series of Notes
(except with respect to certain continuing rights specified in the Indenture)
upon the delivery to the Trustee for cancellation of all the Notes of such
Series or, with certain limitations, upon deposit with the Trustee of funds
sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such Series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such Series, to replace stolen, lost or mutilated Notes of such Series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the 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 Indenture and the Notes of such Series. In
the event of any such defeasance and discharge of Notes of such Series, Holders
of Notes of such Series would be able to look only to such money and/or direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
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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. 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 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
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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 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
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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 comprising
or underlying the Mortgage Assets 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.
The form of credit line trust deed or mortgage used by most institutional
lenders which make revolving home equity loans typically contains a "future
advance" clause, which provides, in essence, that additional amounts advanced to
or on behalf of the borrower by the beneficiary or lender are to be secured by
the deed of trust or mortgage. The priority of the lien securing any advance
made under the clause may depend in most states on whether the deed of trust or
mortgage is called and recorded as a credit line deed of trust or mortgage. If
the beneficiary or lender advances additional amounts, the advance is entitled
to receive the same priority as amounts initially advanced under the trust deed
or mortgage, notwithstanding the fact that there may be junior trust deeds or
mortgages and other liens which intervene between the date of recording of the
trust deed or mortgage and the date of the future advance, and notwithstanding
that the beneficiary or lender had actual knowledge of such intervening junior
trust deeds or mortgages and other liens at the time of the advance. In most
states, the trust deed or mortgage
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lien securing mortgage loans of the type which includes revolving home equity
credit lines applies retroactively to the date of the original recording of the
trust deed or mortgage, provided that the total amount of advances under the
home equity credit line does not exceed the maximum specified principal amount
of the recorded trust deed or mortgage, except as to advances made after receipt
by the lender of a written notice of lien from a judgment lien creditor of the
trustor.
Anti-Deficiency Legislation and Other Limitations on Lenders. Certain states
have imposed statutory prohibitions which limit the remedies of a beneficiary
under a deed of trust or a mortgagee under a mortgage. In some states, statutes
limit the right of the beneficiary or mortgagee to obtain a deficiency judgment
against the borrower following foreclosure or sale under a deed of trust. A
deficiency judgment is a personal judgment against the former borrower equal in
most cases to the difference between the net amount realized upon the public
sale of the real 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
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court-approved financing. The bankruptcy court can, in effect, invalidate
due-on-sale clauses through confirmed Chapter 11 plans of reorganization.
The Bankruptcy Code provides priority to certain tax liens over the lender's
security. This may delay or interfere with the enforcement of rights in respect
of a defaulted 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
financing affecting the property. Finally, some courts
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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 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.
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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. 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
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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.
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 15040 Avenue of Science, Suite
100, San Diego, California 92128, and its telephone number is (619) 451-7044.
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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. If so specified in the related
Prospectus Supplement, the purchase of the Mortgage Assets for a Series may be
effected by an exchange of Securities with the Seller of such Mortgage Assets.
CERTAIN 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.
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
underlying Mortgage Assets. 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 Mortgage Assets
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
Mortgage Assets 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 Mortgage Assets
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
Unless otherwise disclosed in a related Prospectus Supplement, 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)
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"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) 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 Mortgage Assets (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 "CERTAIN 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 "CERTAIN 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 "CERTAIN 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 underlying Mortgage Assets 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
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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 underlying Mortgage Assets 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 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 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
Mortgage Assets 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
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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 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 "CERTAIN 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 "CERTAIN
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
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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 "CERTAIN 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 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 Mortgage Asset 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 Mortgage
Asset expressed as a percentage of the outstanding principal amount of that
Mortgage Asset, 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
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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 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 "CERTAIN 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.
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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.
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 Asset 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
"CERTAIN FEDERAL INCOME TAX CONSIDERATIONS--Discount and Premium". The adjusted
basis of a REMIC Residual Security is determined as described above under
"CERTAIN 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.
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
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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 "CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS--Discount and Premium".
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 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 "CERTAIN 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
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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 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 "CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS --Discount and Premium" and "CERTAIN 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
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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.
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 Mortgage Assets. Consequently, the Debt
Securities will not be treated as ownership interests in the Mortgage Assets 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 "CERTAIN 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 underlying
Mortgage Assets. 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 "CERTAIN 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.
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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 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 Mortgage
Assets 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 Mortgage Assets 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.
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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.
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
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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 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 "CERTAIN 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"
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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 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 "CERTAIN 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 "CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS," potential investors should consider the
state and local income tax consequences of the acquisition, ownership, and
disposition of the Securities. State and local income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state or locality.
Therefore, potential investors should consult their own tax advisors with
respect to the various state and local tax consequences of an investment in the
Securities.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA") and
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 Mortgage Assets 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 Mortgage Assets (but would not include, for
example, Home Improvement Contracts that are unsecured). 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.
PLAN OF DISTRIBUTION
The Sponsor will offer each Series of Securities through one or more
underwriters to be designated at the time of each offering of such Securities.
The Prospectus Supplement relating to each Series of Securities will set forth
the specific terms of the offering of such Series of Securities and of each
Class within such Series, the names of the underwriters, the purchase price of
the Securities, the proceeds to the Sponsor from such sale, any securities
exchange on which the Securities may be listed, and, if applicable, the initial
public offering prices, the discounts and commissions to the underwriters and
any discounts and concessions allowed or reallowed to certain dealers. The
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place and time of delivery of each Series of Securities will also be set forth
in the Prospectus Supplement relating to such Series.
LEGAL MATTERS
Unless otherwise specified in the related Prospectus Supplement, certain
legal matters in connection with the Securities will be passed upon for the
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.
"Agreement" means, with respect to a Series of Certificates, the Pooling and
Servicing Agreement or Trust Agreement, and, with respect to a Series of Notes,
the Indenture and the Servicing Agreement, as the context requires.
"Asset Group" means, with respect to the Mortgage Assets and other assets
comprising the Trust Fund of a Series, a group of such Mortgage Assets and other
assets having the characteristics described in the related Prospectus
Supplement.
"Assumed Reinvestment Rate" means, with respect to a Series, the per annum
rate or rates specified in the related Prospectus Supplement for a particular
period or periods as the "Assumed Reinvestment Rate" for funds held in any fund
or account for the Series.
"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 Mortgage Assets.
"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.
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"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.
"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.
"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, and Regular Interest Securities.
"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 Mortgage Assets.
"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 Mortgage Asset pursuant to the terms thereof.
"Eligible Investments" means any one or more of the obligations or securities
described as such in the related Agreement.
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"Credit Enhancement" means the 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.
"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.
"Home Improvement Contract" means any home improvement installment sales
contracts and installment loan agreements which may be unsecured or secured by
purchase money security interests in the Home Improvements financed thereby.
"HUD" means the United States Department of Housing and Urban Development.
"Indenture" means the indenture relating to a Series of Notes between the
Trust Fund and the Trustee.
"Index" means the index applicable to any adjustments in the 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.
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"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 Assets" means the Mortgage-Backed Securities and/or Loans, as the
case may be, which are included in the Trust Fund for such Series. A Mortgage
Asset refers to a specific Mortgage-Backed Security or Loan, as the case may be.
"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 and/or revolving home equity loan or balance thereof
secured by a Mortgaged Property.
"Mortgage Note" means the note or other evidence of indebtedness of a
Mortgagor under the 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.
"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 the pooling and servicing agreement
relating to a Series of Certificates among the Sponsor, the Servicer (if such
Series relates to Loans) and the Trustee.
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"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 Agreement.
"Retained Interest" means, with respect to a Mortgage Asset, 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 Mortgage Assets 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 Mortgage Assets.
"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, 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.
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"Treasury" or "Treasury Department" means the United States Department of the
Treasury.
"Trustee" means the trustee under the applicable Agreement and its
successors.
"Trust Fund" means, with respect to any Series of Securities, the trust
holding all money, instruments, securities and other property, including all
proceeds thereof, which are, with respect to a Series of Certificates, held for
the benefit of the Holders by the Trustee under the Pooling and Servicing
Agreement or Trust Agreement, or, with respect to a Series of Notes, pledged to
the Trustee under the Indenture as a security for such Notes, including, without
limitation, the Mortgage Assets (except any Retained Interests), all amounts in
the Distribution Account, Collection Account or Reserve Funds, distributions on
the Mortgage Assets (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 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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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............................................. $ 345.00
Trustee's Fees and Expenses*...............................
Legal Fees and Expenses*...................................
Accounting Fees and Expenses*..............................
Printing and Engraving Expenses*...........................
Blue Sky Qualification and Legal
Investment Fees and Expenses*..............................
Rating Agency Fees*........................................
Certificate Insurer's Fee*.................................
Miscellaneous*.............................................
------------------
TOTAL $ 345.00
========
- ----------
* To be provided by amendment.
Item 15. Indemnification of Directors and Officers.
Each 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
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
II-1
<PAGE>
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-2
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Item 16. Exhibits.
1.1* - Form of Underwriting Agreement (single class).
1.2* - Form of Underwriting Agreement (multi class).
3.1 - Articles of Incorporation of the Registrant.
3.2 - Bylaws of the Registrant.
4.1* - Form of Pooling and Servicing Agreement (senior and subordinated
certificate classes) among the Sponsor, the Master Servicer and
the Trustee.
4.2* - Form of Indenture.
4.3* - 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).
- -------------------------
* To Be Filed.
II-3
<PAGE>
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;
(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.
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(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-5
<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 Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Diego, State of California on June __, 1996.
ACCREDITED HOME LENDERS, INC.
By: /s/________________________
James A. Konrath
President
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints James A. Konrath, Ray W.McKewon and
Robert A. Prentice, and each of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for and in his name,
place and stead, in any and all capacities on sign any and all amendments
(including post-effective amendments) to this Registration Statement and any or
all other documents in connection therewith, and to file the same, with all
exhibits thereto, with the Securities and Exchange Commission, granting unto
said authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as might or could be done in person, hereby ratifying and confirming
all said attorneys-in-fact and agents or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons on June
__, 1996 in the capacities indicated.
Signature Capacity
--------- --------
/s/__________________________ Director and President
James A. Konrath (Principal Executive Officer)
/s/__________________________ Director, Executive Vice President and
Ray W. McKewon Secretary
/s/__________________________ Director
James P. Gauer
/s/__________________________ Director
Martin P. Harding
/s/__________________________ Director
Robert A. Hoff
<PAGE>
/s/__________________________ Director
John M. Robbins, Jr.
/s/__________________________ Chief Financial Officer
Robert A. Prentice (Principal Financial Officer and
Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
Location of Exhibit
Exhibit in Sequential
Number Description of Document Numbering System
- ------ ----------------------- ----------------
1.1* - Form of Underwriting Agreement (single class).
1.2* - Form of Underwriting Agreement (multi class).
3.1 - Articles of Incorporation of the Registrant.
3.2 - Bylaws of the Registrant.
4.1* - Form of Pooling and Servicing Agreement (senior and
subordinated certificate classes) among the Sponsor, the
Master Servicer and the Trustee.
4.2* - Form of Indenture.
4.3* - 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 signature page to this Registration
Statement).
- -------------------------
* To Be Filed.
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
James A. Konrath and Ray W. McKewon certify that:
1. We are the President and Secretary, respectively, of MSK Financial
Services, Inc., a California Corporation.
2. We hereby adopt the following amendment of the Articles of
Incorporation of this corporation.
Article I. NAME is hereby amended to read as follows:
The name of this corporation is ACCREDITED HOME LENDERS, INC.
3. The foregoing amendment of Articles of Incorporation has been duly
approved by the Board of Directors.
4. The foregoing amendment of Articles of Incorporation has been duly
approved by the required vote of shareholders in accordance with
Section 902 of the Corporations Code. The corporation has two classes
of shares outstanding, each of which is entitled to vote with respect
to the amendment. The number of outstanding shares of each class is
5,000,000 shares of Series A Preferred Stock and 4,255,320 shares of
Common Stock. The number of shares voting in favor of the amendment
equaled or exceeded the vote required. The percentage vote required was
more than 50% of each class.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this Certificate are true and correct
of our own knowledge.
Date: October 23, 1995.
/s/_______________________________
James A. Konrath, President
/s/_____________________________
Ray W. McKewon, Secretary
<PAGE>
RESTATED ARTICLES OF INCORPORATION
OF
MSK FINANCIAL SERVICES, INC.
The undersigned, James A. Konrath and Ray W. McKewon, hereby certify that:
ONE: They are the duly elected and acting President and Secretary,
respectively, of said corporation.
TWO: The Articles of Incorporation of said corporation shall be amended and
restated to read in full as follows:
ARTICLE I. NAME
The name of this corporation is MSK FINANCIAL SERVICES, INC.
ARTICLE II. PURPOSES
The purpose of this corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
ARTICLE III. CAPITAL STOCK
A. CLASSES OF STOCK. This corporation is authorized to issue two classes of
stock to be designated, respectively, "Common Stock" and "Preferred Stock." The
total number of shares which the corporation is authorized to issue is Twenty
Million (20,000,000) shares, par value of $.001 per share. Fifteen Million
(15,000,000) shares shall be Common Stock, par value $.001 per share, and Five
Million (5,000,000) shares shall be Preferred Stock, par value $.001 per share.
B. STOCK SPLIT. Upon the filing of these Restated Articles of Incorporation
with the Secretary of State of the State of California and the effectiveness
thereof (the "Effective Time"), each share of Common Stock of the corporation
which is issued and outstanding immediately prior to the Effective Time will
automatically be converted, without any further action on the part of the holder
thereof, into 141.844 shares of Common Stock authorized under these Restated
Articles of Incorporation, each having a par value of $.001 per share.
C. RIGHTS, PREFERENCES AND RESTRICTIONS OF PREFERRED STOCK. The Preferred
Stock authorized by these Restated Articles
<PAGE>
of Incorporation may be issued from time to time in one or more series. The
rights, preferences, privileges, and restrictions granted to and imposed on the
Series A Preferred Stock, which series shall consist of Five Million (5,000,000)
shares, are as set forth below in this Article III(C). The Board of Directors is
hereby authorized to fix or alter the rights, preferences, privileges and
restrictions granted to or imposed upon additional series of Preferred Stock,
and the number of shares constituting any such series and the designation
thereof, or of any of them. Subject to compliance with applicable protective
voting rights which have been or may be granted to the Preferred Stock or series
thereof in Certificates of Determination or the corporation's Restated Articles
of Incorporation ("Protective Provisions"), but notwithstanding any other rights
of the Preferred Stock or any series thereof, the rights, privileges,
preferences and restrictions of any such additional series may be subordinated
to, pari passu with (including, without limitation, with respect to liquidation
and acquisition preferences, redemption and/or approval of matters by vote or
written consent), or senior to any of those of any present or future class or
series of Preferred or Common Stock. Subject to compliance with applicable
Protective Provisions, the Board of Directors is also authorized to increase or
decrease the number of shares of any series (other than the Series A Preferred
Stock), prior or subsequent to the issue of that series, but not below the
number of shares of such series then outstanding. In case the number of shares
of any series shall be so decreased, the shares constituting such decrease shall
resume the status which they had prior to the adoption of the resolution
originally fixing the number of shares of such series.
1. DIVIDEND PROVISIONS. Subject to the rights of series of Preferred Stock
which may from time to time come into existence, the holders of shares of Series
A Preferred Stock shall be entitled to receive dividends, out of any assets
legally available therefor, prior and in preference to any declaration or
payment of any dividend (payable other than in Common Stock or other securities
and rights convertible into or entitling the holder thereof to receive, directly
or indirectly, additional shares of Common Stock of this corporation) on the
Common Stock of this corporation, at the rate of $.06 per share per annum or, if
greater (as determined on a per annum basis and an as converted basis for the
Series A Preferred Stock), an amount equal to that paid on any other outstanding
shares of this corporation, payable quarterly when, as and if declared by the
Board of Directors. Such dividends shall not be cumulative.
Unless full dividends on the Series A Preferred Stock for all past dividend
periods and the then current dividend period shall have been paid as declared or
a sum sufficient for the payment thereof set apart: (A) no dividend whatsoever
(other than a dividend payable solely in Common Stock or other securities and
rights convertible into or entitling the holder
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thereof to receive, directly or indirectly, additional shares of Common Stock)
shall be paid or declared, and no distribution shall be made, on any Common
Stock, and (B) no shares of Common Stock shall be purchased, redeemed, or
acquired by the corporation and no funds shall be paid into or set aside or made
available for a sinking fund for the purchase, redemption, or acquisition
thereof; provided, however, that this restriction shall not apply to the
repurchase of shares of Common Stock held by employees, officers, directors,
consultants or other persons performing services for the corporation or any
wholly-owned subsidiary (including, but not by way of limitation, distributors
and sales representatives) that are subject to restrictive stock purchase
agreements under which the corporation has the option to repurchase such shares
at cost upon the occurrence of certain events, such as the termination of
employment; and provided further, however, that without the approval, by vote or
written consent of the holders of at least two-thirds of the then outstanding
Series A Preferred Stock, the total amount applied to the repurchase of such
Common Stock shall not exceed $100,000 in any twelve-month period.
Once full dividends on the Series A Preferred Stock for all past dividend
periods and the then current dividend period shall have been paid as declared or
a sum sufficient for the payment thereof set apart, then, subject to the rights
of series of Preferred Stock which may from time to time come into existence,
the corporation may (when, as and if declared by the Board of Directors) declare
and distribute dividends among the holders of Series A Preferred Stock and
Common Stock pro rata based on the number of shares of Common Stock held by each
(assuming full conversion of all such Series A Preferred Stock).
Any dividend or distribution which is declared by the corporation and
payable with assets of the corporation other than cash shall be governed by the
provisions of subsections 4(c)(iii) and 4(d), as applicable, of this Article
III.
2. LIQUIDATION PREFERENCE.
(a) In the event of any liquidation, dissolution or winding up of this
corporation, either voluntary or involuntary, subject to the rights of series of
Preferred Stock that may from time to time come into existence, the holders of
Series A Preferred Stock shall be entitled to receive, prior and in preference
to any distribution of any of the assets of this corporation to the holders of
Common Stock by reason of their ownership thereof, an amount per share equal to
the sum of (i) $1.00 for each outstanding share of Series A Preferred Stock, as
adjusted for any stock dividends, combinations or splits with respect to such
shares (the "Series A Issue Price") and (ii) an amount equal to declared but
unpaid dividends on such shares (such amount of declared by unpaid dividends
being referred to herein as the "Premium"). If upon the occurrence of such
event,
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the assets and funds thus distributed among the holders of the Series A
Preferred Stock shall be insufficient to permit the payment to such holders of
the full aforesaid preferential amounts, then, subject to the rights of series
of Preferred Stock that may from time to time come into existence, the entire
assets and funds of the corporation legally available for distribution shall be
distributed ratably among the holders of the Series A Preferred Stock in
proportion to the amount of such stock owned by each such holder.
Notwithstanding the foregoing provisions of this Section 2(a), in the event of
any liquidation, dissolution or winding up of this corporation in which the
holders of Series A Preferred Stock would receive a distribution of $10.00 or
more per share of Series A Preferred Stock (as adjusted for stock dividends,
combinations or splits with respect to such shares) pursuant to Section 2(b)
below, assuming no preferential payment pursuant to this Section 2(a), then the
right of such holders to receive the preferential amount provided by this
Section 2(a) shall terminate and the holders of Series A Preferred Stock shall
receive only those amounts provided for in Section 2(b) below.
(b) Upon the completion of the distribution required by subparagraph (a) of
this Section 2 and any other distribution that may be required with respect to
series of Preferred Stock that may from time to time come into existence, the
remaining assets of the corporation available for distribution to stockholders
shall be distributed among the holders of Series A Preferred Stock and Common
Stock pro rata based on the number of shares of Common Stock held by each
(assuming conversion of all such Series A Preferred Stock).
(c) (i) For purposes of this Section 2, a liquidation, dissolution or
winding up of this corporation shall be deemed to be occasioned by, or to
include, (A) the acquisition of the corporation by another entity by means of
any transaction or series of related transactions (including, without
limitation, any reorganization, merger or consolidation); or (B) a sale of all
or substantially all of the assets of the corporation; unless the corporation's
shareholders of record as constituted immediately prior to such acquisition or
sale will, immediately after such acquisition or sale (by virtue of securities
issued as consideration for the corporation's acquisition or sale or otherwise)
hold at least 50% of the voting power of the surviving or acquiring entity.
(i) In any of such events, if the consideration received by the corporation
is other than cash, its value will be deemed its fair market value. Any
securities shall be valued as follows:
(A) Securities not subject to investment letter or other similar
restrictions on free marketability:
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(1) If traded on a securities exchange or through Nasdaq National
Market, the value shall be deemed to be the average of the closing
sales prices of the securities on such exchange over the thirty-day
period ending three days prior to the closing;
(2) If actively traded over-the-counter, the value shall be
deemed to be the average of the closing bid or sale prices (whichever
is applicable) over the 30-day period ending three days prior to the
closing; and
(3) If there is no active public market, the value shall be the
fair market value thereof, as determined by a majority vote of the
Board of Directors of the corporation and the affirmative vote of the
Directors elected by the holders of the Series A Preferred Stock
pursuant to subsection 5(b) hereof.
(B) The method of valuation of securities subject to investment letter
or other restrictions on free marketability (other than restrictions
arising solely by virtue of a share holder's status as an affiliate or
former affiliate) shall be to make an appropriate discount from the market
value determined as above in (A) (1), (2) or (3) to reflect the approximate
fair market value thereof, as determined by a majority vote of the Board of
Directors of the corporation and the affirmative vote of the Directors
elected by the holders of the Series A Preferred Stock pursuant to
subsection 5(b) hereof.
(ii) In the event the requirements of this subsection 2(c) are not complied
with, this corporation shall forthwith either:
(A) cause such closing to be postponed until such time as the
requirements of this Section 2 have been complied with; or
(B) cancel such transaction, in which event the rights, preferences
and privileges of the holders of the Series A Preferred Stock shall revert
to and be the same as such rights, preferences and privileges existing
immediately prior to the date of the first notice referred to in subsection
2(c)(iv) hereof.
(iii) The corporation shall give each holder of record of Series A
Preferred Stock written notice of such impending transaction not later than 20
days prior to the shareholders' meeting called to approve such transaction, or
20 days prior to the closing of such transaction, whichever is earlier, and
shall also notify such holders in writing of the final approval of such
transaction. The first of such notices shall describe the material terms and
conditions of the impending transaction and the provisions of this Section 2,
and the corporation shall thereafter give such holders prompt notice of any
material changes. The transaction shall in no event take place sooner
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than 20 days after the corporation has given the first notice provided for
herein or sooner than 10 days after the corporation has given notice of any
material changes provided for herein; provided, however, that such periods may
be shortened upon the written consent of the holders of Preferred Stock that are
entitled to such notice rights or similar notice rights and that represent at
least a majority of the voting power of all then outstanding shares of such
Preferred Stock.
3. REDEMPTION. At any time after January 1, 2000, but within 30 days (the
"Series A Redemption Date") after the receipt by this corporation of a written
request from the holders of not less than two-thirds of the then outstanding
Series A Preferred Stock that all or some of such holders' shares be redeemed,
and concurrently with surrender by such holders of the certificates representing
such shares, this corporation shall, to the extent it may lawfully do so, redeem
up to one-third of the then outstanding Series A Preferred Stock in each of the
years 2000, 2001 and 2002 specified in such request by paying in cash therefor a
sum per share equal to $1.00 (as adjusted for any stock dividends, combinations
or splits with respect to such shares) plus all declared but unpaid dividends on
such shares (the "Series A Redemption Price"). Any redemption effected pursuant
to this subsection 3 shall be made on a pro rata basis among the holders of the
Series A Preferred Stock in proportion to the number of shares of Series A
Preferred Stock then held by such holders.
4. CONVERSION. The holders of the Series A Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):
(a) RIGHT TO CONVERT.
(i) Each share of Series A Preferred Stock shall be convertible, at the
option of the holder thereof, at any time after the date of issuance of such
share at the office of this corporation or any transfer agent for the Series A
Preferred Stock, into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing the Original Series A Issue Price by
the Conversion Price (as defined below) applicable to such shares, determined as
hereafter provided, in effect on the date the certificate is surrendered for
conversion. The initial Conversion Price per share for shares of Series A
Preferred Stock shall be the original Series A Issue Price; provided, however,
that the Conversion Price for the Series A Preferred Stock shall be subject to
adjustment as set forth in subsection 4(c).
(ii) Each share of Series A Preferred Stock shall automatically be
converted into such number of fully paid and nonassessable shares of Common
Stock as is determined by dividing the Original Series A Issue Price by the
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Conversion Price (as defined below) then in effect applicable to such shares,
determined as hereafter provided, immediately upon the earlier of (A) except as
provided below in subsection 4(b), the corporation's sale of its Common Stock in
a firm commitment underwritten public offering pursuant to a registration
statement under the Securities Act of 1933, as amended, the public offering
price of which was not less than Twelve Million Dollars ($12,000,000), in the
aggregate, at a price per share of not less than Four Dollars ($4.00) adjusted
to reflect stock dividends, stock splits or recapitalization after the Purchase
Date (as defined below)) or (B) the date specified by written consent or
agreement of the holders of the majority of the then outstanding shares of
Series A Preferred Stock.
(b) MECHANICS OF CONVERSION. Before any holder of Series A Preferred shall
be entitled to convert the same into shares of Common Stock, such holder shall
surrender the certificate or certificates therefor, duly endorsed, at the office
of this corporation or of any transfer agent for the Series A Preferred Stock
and shall give written notice to this corporation at its principal corporate
office, of the election to convert the same and shall state therein the name or
names in which the certificate or certificates for shares of Common Stock are to
be issued. This corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Series A Preferred Stock, or to the
nominee or nominees of such holder, a certificate or certificates for the number
of shares of Common Stock to which such holder shall be entitled as aforesaid.
Such conversion shall be deemed to have been made immediately prior to the close
of business on the date of such surrender of the shares of Series A Preferred
Stock to be converted, and the person or persons entitled to receive the shares
of Common Stock issuable upon such conversion shall be treated for all purposes
as the record holder or holders of such shares of Common Stock as of such date.
If the conversion is in connection with an underwritten offer of securities
registered pursuant to the Securities Act of 1933, the conversion shall be
conditioned upon the closing with the underwriter of the sale of securities
pursuant to such offering, in which event the person(s) entitled to receive the
Common Stock issuable upon such conversion of the Series A Preferred Stock shall
not be deemed to have converted such Series A Preferred Stock until immediately
prior to the closing of such sale of securities.
(f) CONVERSION PRICE ADJUSTMENTS OF PREFERRED STOCK FOR CERTAIN DILUTIVE
ISSUANCES, SPLITS AND COMBINATIONS. The Conversion Price of the Series A
Preferred Stock shall be subject to adjustment from time to time as follows:
(i) (A) Upon each issuance by the corporation of any Additional Stock (as
defined below), after the date upon which any shares of Series A Preferred Stock
were first issued
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(the "Purchase Date"), without consideration or for a consideration per share
less than the Conversion Price for the Series A Preferred Stock in effect
immediately prior to the issuance of such Additional Stock, the Conversion Price
for the Series A Preferred Stock in effect immediately prior to each such
issuance shall forthwith (except as otherwise provided in this clause (i)) be
adjusted to a price determined by multiplying such Conversion Price by a
fraction, the numerator of which shall be the number of shares of Common Stock
outstanding immediately prior to such issuance (including, without limitation,
the number of shares of Common Stock issuable upon the conversion of the
Preferred Stock) plus the number of shares of Common Stock which the aggregate
consideration received by the corporation for such issuance would purchase at
such Conversion Price; and the denominator of which shall be the number of
shares of Common Stock outstanding immediately prior to such issuance
(including, without limitation, the number of shares of Common Stock issuable
upon the conversion of the Preferred Stock) plus the number of shares of such
Additional Stock.
(A) No adjustment of the Conversion Price for the Series A Preferred Stock
shall be made in an amount less than one cent per share, provided that any
adjustments which are not required to be made by reason of this sentence shall
be carried forward and shall be either taken into account in any subsequent
adjustment made prior to three years from the date of the event giving rise to
the adjustment being carried forward, or shall be made at the end of three years
from the date of the event giving rise to the adjustment being carried forward.
Except to the limited extent provided for in subsections (E)(3) and (E)(4), no
adjustment of such Conversion Price pursuant to this subsection 4(c)(i) shall
have the effect of increasing the Conversion Price above the Conversion Price in
effect immediately prior to such adjustment.
(B) In the case of the issuance of Common Stock for cash, the consideration
shall be deemed to be the amount of cash paid therefor before deducting any
reasonable discounts, commissions or other expenses allowed, paid or incurred by
this corporation for any underwriting or otherwise in connection with the
issuance and sale thereof.
(C) In the case of the issuance of the Common Stock for a consideration in
whole or in part other than cash, the consideration other than cash shall be
deemed to be the fair value thereof as determined by the Board of Directors
irrespective of any accounting treatment.
(D) In the case of the issuance (whether before, on or after the Purchase
Date) of options to purchase or rights to subscribe for Common Stock, securities
by their terms convertible into or exchangeable for Common Stock or options to
purchase or rights to subscribe for such convertible or
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exchangeable securities, the following provisions shall apply for all purposes
of this subsection 4(c)(i) and subsection 4(c)(ii):
(1) The aggregate maximum number of shares of Common Stock deliverable
upon exercise (assuming the satisfaction of any conditions to
exercisability, including, without limitation, the passage of time, but
without taking into account potential antidilution adjustments) of such
options to purchase or rights to subscribe for Common Stock shall be deemed
to have been issued at the time such options or rights were issued and for
a consideration equal to the consideration (determined in the manner
provided in subsections 4(c)(i)(C) and (c)(i)(D)), if any, received by the
corporation upon the issuance of such options or rights plus the exercise
price provided in such options or rights (without taking into account
potential antidilution adjustments) for the Common Stock covered thereby.
(2) The aggregate maximum number of shares of Common Stock deliverable
upon conversion of or in exchange (assuming the satisfaction of any
conditions to convertibility or exchangeability, including, without
limitation, the passage of time, but without taking into account potential
antidilution adjustments) for any such convertible or exchangeable
securities or upon the exercise of options to purchase or rights to
subscribe for such convertible or exchangeable securities and subsequent
conversion or exchange thereof shall be deemed to have been issued at the
time such securities were issued or such options or rights were issued and
for a consideration equal to the consideration, if any, received by the
corporation for any such securities and related options or rights
(excluding any cash received on account of accrued interest or accrued
dividends), plus the additional consideration, if any, to be received by
the corporation (without taking into account potential antidilution
adjustments) upon the conversion or exchange of such securities or the
exercise of any related options or rights (the consideration in each case
to be determined in the manner provided in subsections 4(c)(i)(C) and
(c)(i)(D)).
(3) In the event of any change in the number of shares of Common Stock
deliverable or in the consideration payable to this corporation upon
exercise of such options or rights or upon conversion of or in exchange for
such convertible or exchangeable securities, including, without limitation,
a change resulting from the antidilution provisions thereof, the Conversion
Price of the Series A Preferred Stock to the extent in any way affected by
or computed using such options, rights or securities, shall be recomputed
to reflect such change, but no further adjustment shall be made for the
actual issuance of Common Stock or any payment of such consideration upon
the exercise of any such options or rights or the conversion or exchange of
such securities.
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(4) Upon the expiration of any such options or rights, the termination
of any such rights to convert or exchange or the expiration of any options
or rights related to such convertible or exchangeable securities, the
Conversion Price of the Series A Preferred Stock to the extent in any way
affected by or computed using such options, rights or securities or options
or rights related to such securities, shall be recomputed to reflect the
issuance of only the number of shares of Common Stock (and convertible or
exchangeable securities which remain in effect) actually issued upon the
exercise of such options or rights, upon the conversion or exchange of such
securities or upon the exercise of the options or rights related to such
securities.
(5) The number of shares of Common Stock deemed issued and the
consideration deemed paid therefor pursuant to subsections 4(c)(i)(E)(1)
and (2) shall be appropriately adjusted to reflect any change, termination
or expiration of the type described in either subsection 4(c)(i)(E)(3) or
(4).
(ii) "Additional Stock" shall mean any shares of Common Stock issued (or
deemed to have been issued pursuant to subsection 4(c)(i)(E)) by this
corporation after the Purchase Date other than
(A) shares of Common Stock issued pursuant to a transaction described in
subsection 4(c)(iii) hereof,
(B) shares of Series A Preferred Stock issued pursuant to the Series A
Preferred Stock Purchase Agreement,
(C) shares of Common Stock issued upon conversion of the Series A Preferred
Stock,
(D) shares of Common Stock issuable or issued to employees, consultants,
directors or vendors (if in transactions with primarily non-financing purposes)
of this corporation directly or pursuant to a stock option plan or restricted
stock plan approved by the shareholders and Board of Directors, of this
corporation, at any time when the total number of shares of Common Stock so
issuable or issued (and not repurchased at cost by the corporation in connection
with the termination of employment) does not exceed 1,382,977 shares,
(E) shares of Common Stock issued or issuable (I) in a public offering
before or in connection with which all outstanding shares of Series A Preferred
Stock will be converted to Common Stock, or
(F) warrants issued pursuant to commercial relationships as approved by a
majority vote of the Board of Directors of the corporation and the affirmative
vote of the
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Directors elected by the holders of the Series A Preferred Stock pursuant to
subsection 5(b) hereof.
(iii) In the event the corporation should at any time or from time to time
after the Purchase Date fix a record date for the effectuation of a split or
subdivision of the outstanding shares of Common Stock or the determination of
holders of Common Stock entitled to receive a dividend or other distribution
payable in additional shares of Common Stock or other securities or rights
convertible into, or entitling the holder thereof to receive directly or
indirectly, additional shares of Common Stock (hereinafter referred to as
"Common Stock Equivalents") without payment of any consideration by such holder
for the additional shares of Common Stock or the Common Stock Equivalents
(including the additional shares of Common Stock issuable upon conversion or
exercise thereof), then, as of such record date (or the date of such dividend
distribution, split or subdivision if no record date is fixed), the Conversion
Price of the Series A Preferred Stock shall be appropriately decreased so that
the number of shares of Common Stock issuable on conversion of each share of
such series shall be increased in proportion to such increase of the aggregate
of shares of Common Stock outstanding and those issuable with respect to such
Common Stock Equivalents.
(iv) If the number of shares of Common Stock outstanding at any time after
the Purchase Date is decreased by a combination of the outstanding shares of
Common Stock, then, following the record date of such combination, the
Conversion Price for the Series A Preferred Stock shall be appropriately
increased so that the number of shares of Common Stock issuable on conversion of
each share of such series shall be decreased in proportion to such decrease in
outstanding shares.
(d) OTHER DISTRIBUTIONS. In the event this corporation shall declare a
dividend or distribution payable in securities of other persons, evidences of
indebtedness issued by this corporation or other persons, assets (excluding cash
dividends) or Common Stock Equivalents not referred to in subsection 4(c)(iii),
then, in each such case, the holders of the Series A Preferred Stock shall be
entitled to a proportionate share of any such distribution as though they were
the holders of the number of shares of Common Stock of the corporation into
which their shares of Series A Preferred Stock are convertible as of the record
date fixed for the determination of the holders of Common Stock of the
corporation entitled to receive such distribution.
(e) RECAPITALIZATIONS. If at any time or from time to time there shall be a
recapitalization of the Common Stock (other than a subdivision, combination or
merger or sale of assets transaction provided for elsewhere in this Section 4),
provision shall be made so that the holders of the Series A Preferred Stock
shall thereafter be entitled to receive upon conversion of the
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Series A Preferred Stock, the number of shares of stock or other securities or
property of the Company or otherwise, to which a holder of Common Stock
deliverable upon conversion would have been entitled on such recapitalization.
In any such case, appropriate adjustment shall be made in the application of the
provisions of this Section 4 with respect to the rights of the holders of the
Series A Preferred Stock after the recapitalization to the end that the
provisions of this Section 4 (including adjustment of the Conversion Price then
in effect for each series and the number of shares purchasable upon conversion
of the Preferred Stock) shall be applicable after that event as nearly
equivalent as may be practicable.
(f) NO IMPAIRMENT. This corporation shall not, by amendment of its Articles
of Incorporation or through any reorganization, recapitalization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by this corporation, but
shall at all times in good faith assist in the carrying out of all the
provisions of this Section 4 and in the taking of all such action as may be
necessary or appropriate in order to protect the Conversion Rights of the
holders of the Series A Preferred Stock against impairment.
(g) NO FRACTIONAL SHARES AND CERTIFICATE AS TO ADJUSTMENTS.
(i) No fractional shares shall be issued upon conversion of the Series A
Preferred Stock and the number of shares of Common Stock to be issued shall be
rounded to the nearest whole share. Whether or not fractional shares are
issuable upon such conversion shall be determined on the basis of the total
number of shares of Series A Preferred Stock the holder is at the time
converting into Common Stock and the number of shares of Common Stock issuable
upon such aggregate conversion.
(ii) Upon the occurrence of each adjustment or readjustment of the
Conversion Price of Series A Preferred Stock pursuant to this Section 4, this
corporation, at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of Series A Preferred Stock a certificate setting forth such adjustment
or readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. This corporation shall, upon the written request at any
time of any holder of Series A Preferred Stock, furnish or cause to be furnished
to such holder a like certificate setting forth (A) such adjustment and
readjustment, (B) the applicable Conversion Price at the time in effect, and (C)
the number of shares of Common Stock and the amount, if any, of other property
which at
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the time would be received upon the conversion of a share of Series A Preferred
Stock.
(h) NOTICES OF RECORD DATE. In the event of any taking by this corporation
of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend (other
than a cash dividend) or other distribution, any right to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right, this corporation shall
mail to each holder of Series A Preferred Stock, at least 20 days prior to the
date specified therein, a notice specifying the date on which any such record is
to be taken for the purpose of such dividend, distribution or right, and the
amount and character of such dividend, distribution or right.
(i) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. This corporation shall
at all times reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of the
shares of the Series A Preferred Stock, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
outstanding shares of Series A Preferred Stock; and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of Series A Preferred Stock, in
addition to such other remedies as shall be available to the holder of such
Series A Preferred Stock, this corporation shall take such corporate action as
may, in the opinion of its counsel, be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be sufficient
for such purposes, including, without limitation, engaging in best efforts to
obtain the requisite shareholder approval of any necessary amendment to these
Articles.
(j) NOTICES. Any notice required by the provisions of this Section 4 to be
given to the holders of shares of Series A Preferred Stock shall be deemed given
if deposited in the United States mail, postage prepaid, and addressed to each
holder of record at such holder's address appearing on the books of this
corporation.
5. VOTING RIGHTS.
(a) The holder of each share of Series A Preferred Stock shall have the
right to one vote for each share of Common Stock into which such holder's shares
of Series A Preferred Stock could then be converted, and with respect to such
vote, such holder shall have full voting rights and powers equal to the voting
rights and powers of the holders of Common Stock, except as provided in
subsection 5(b) below and as required by law, and shall be entitled,
notwithstanding any provision hereof, to
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notice of any shareholders' meeting in accordance with the bylaws of this
corporation, and shall be entitled to vote, together with holders of Common
Stock, with respect to any question upon which holders of Common Stock have the
right to vote. Fractional votes shall not, however, be permitted and any
fractional voting rights available on an as-converted basis (after aggregating
all shares into which shares of Series A Preferred Stock held by each holder
could be converted) shall be rounded to the nearest whole number (with one-half
being rounded upward).
(b) The corporation shall have six authorized directors. The holders of the
Series A Preferred Stock shall be entitled, voting as a separate class, to elect
two directors to the Board of Directors at each meeting or consent of
shareholders for the election of directors and, to the exclusion of the vote of
the holders of Common Stock or any other series of Preferred Stock, to remove
from office any director so elected and to fill any vacancy caused by the
resignation, death or removal of any director so elected. The holders of Series
A Preferred Stock and Common Stock voting together shall elect two additional
directors.
(c) If at any time any directorship to be filled by the holders of Series A
Preferred Stock, voting separately as one class pursuant to subsection 5(b)
above, has been vacant for a period of 10 days, the Secretary of the corporation
shall, upon the written request of the holders of record of shares representing
at least ten percent (10%) of the voting power of the Series A Preferred Stock
then outstanding, call a special meeting of the holders of Series A Preferred
Stock for the purpose of electing the director or directors to fill such vacancy
or vacancies. Such meeting shall be held at the earliest practicable date at
such place as is specified in or determined in accordance with the Bylaws of the
corporation. If such meeting shall not be called by the Secretary of the
corporation within 10 days after personal service of said written request on
him, then the holders of record of shares representing at least ten percent
(10%) of the voting power of the Series A Preferred Stock then outstanding may
designate in writing one of their number to call such meeting at the expense of
the corporation, and such meeting may be called by such person so designated
upon the notice required for annual meetings of shareholders and shall be held
at the place specified in the notice. Any holder of the Series A Preferred Stock
so designated shall have access to the stock books of the corporation relating
to the Series A Preferred Stock for the purpose of calling a meeting of the
shareholders pursuant to these provisions.
6. PROTECTIVE PROVISIONS. Subject to the rights of series of Preferred
Stock which may from time to time come into existence, so long as any shares of
Series A Preferred Stock are
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outstanding, this corporation shall not, without first obtaining the approval
(by vote or written consent, as provided by law) of the holders of at least a
majority of the then outstanding shares of Series A Preferred Stock, voting as a
class:
(a) sell, convey, lease or otherwise dispose of all or substantially all of
its property or business; liquidate, dissolve or wind up the corporation's
business; or merge into or consolidate with any other corporation (other than a
wholly-owned subsidiary corporation); or effect any transaction or series of
related transactions in which more than 50% of the voting power of the
corporation is disposed of (a "Corporate Transaction"), unless either (i) the
corporation's shareholders of record as constituted immediately prior to such
Corporate Transaction will, immediately after such Corporate Transaction, hold
at least 50% of the voting power of the surviving or acquiring entity or (ii)
the holders of the Series A Preferred Stock receive an amount from such
Corporate Transaction at a price per share (as adjusted for subsequent stock
dividends, stock splits or recapitalization) of no less than $10.00, with the
value of any securities received in such Corporate Transaction determined in
accordance with Section 2(c)(ii) of this Article III;
(b) alter or change the rights, preferences or privileges of the shares of
Series A Preferred Stock so as to affect adversely the shares;
(c) increase or decrease (other than by redemption or conversion) the total
number of authorized shares of Series A Preferred Stock;
(d) authorize or issue, or obligate itself to issue, any other equity
security, including any other security convertible into or exercisable for any
equity security (i) having a preference over, or being on a parity with, the
Series A Preferred Stock with respect to voting, dividends or upon liquidation,
or (ii) having rights similar to any of the rights of the Series A Preferred
Stock under this Section 6; or
(e) redeem, purchase or otherwise acquire (or pay into or set aside for a
sinking fund for such purpose) any share or shares of Preferred Stock or Common
Stock; provided, however, that this restriction shall not apply to (i) the
repurchase of shares of Common Stock from employees, officers, directors,
consultants or other persons performing services for the Company or any
subsidiary pursuant to agreements under which the Company has the option to
repurchase such shares at cost or at cost upon the occurrence of certain events,
such as the termination of employment provided further, however, that the total
amount applied to the repurchase of shares of Common Stock shall not exceed
$100,000 during any 12 month period or (ii) the redemption of any share or
shares of Preferred Stock pursuant to a redemption under Section 3 of this
Article III; or
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(f) amend the corporation's Articles of Incorporation or bylaws;
(g) change the authorized number of directors of the corporation;
(h) permit any subsidiary of the corporation to issue or sell, except to
the corporation or any wholly-owned subsidiary of the corporation, any equity
security, including any other security convertible into or exercisable for any
equity security, of such subsidiary;
(i) declare or pay any dividends on or declare or make any other
distributions, direct or indirect (other than a dividend payable solely in
shares of Common Stock or dividends declared prior to the Purchase Date), on any
shares of its Common Stock, or set apart any sum for any such purpose; or
(j) do any act or thing which would result in taxation of the holders of
shares of the Series A Preferred Stock under Section 305 of the Internal Revenue
Code of 1986, as amended (or any comparable provision of the Internal Revenue
Code as hereafter from time to time amended).
7. STATUS OF CONVERTED OR REDEEMED STOCK. In the event any shares of Series
A Preferred Stock shall be redeemed or converted pursuant to Section 3 or
Section 4 hereof, the shares so converted or redeemed shall be cancelled and
shall not be issuable by the corporation. The Articles of Incorporation of this
corporation shall be appropriately amended to effect the corresponding reduction
in the corporation's authorized capital stock.
8. REPURCHASE OF SHARES. In connection with repurchases by this corporation
of its Common Stock pursuant to its agreements with certain of the holders
thereof, Sections 502 and 503 of the California Corporations Code shall not
apply in whole or in part with respect to such repurchases.
D. COMMON STOCK.
1. DIVIDEND RIGHTS. Subject to the provisions of Section 1 of Division (C)
of this Article III, the holders of the Common Stock shall be entitled to
receive, when and as declared by the Board of Directors, out of any assets of
the corporation legally available therefor, such dividends as may be declared
from time to time by the Board of Directors.
2. LIQUIDATION RIGHTS. Upon the liquidation, dissolution or winding up of
the corporation, the assets of the corporation shall be distributed as provided
in Section 2 of Division (B) of this Article III hereof.
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<PAGE>
3. REDEMPTION. The Common Stock is not redeemable.
4. VOTING RIGHTS.
(a) The holder of each share of Common Stock shall have the right to one
vote, and shall be entitled to notice of any shareholders' meeting in accordance
with the bylaws of this corporation, and shall be entitled to vote upon such
matters and in such manner as may be provided by law, Section 4(b) and Section
5(b) of Division C of Article III.
(b) The holders of the Common Stock shall be entitled, voting as a separate
class, to elect two directors to the Board of Directors at each meeting or
consent of shareholders for the election of directors and, to the exclusion of
the vote of the holders of Preferred Stock, to remove from office any director
so elected and to fill any vacancy caused by the resignation, death or removal
of any director so elected.
ARTICLE IV INDEMNIFICATION
A. DIRECTORS. The liability of the directors of this corporation for
monetary damages shall be eliminated to the fullest extent permissible under
California law.
B. AGENTS. This corporation is authorized to provide indemnification of
agents (as defined in Section 317 of the California Corporations Code) through
bylaws provisions, agreements with the agents, vote of shareholders or
disinterested directors, or otherwise in excess of the indemnification otherwise
permitted by Section 317 of the California Corporations Code, subject only to
applicable limits set forth in Section 204 of the California Corporations Code
with respect to actions for breach of duty to the corporation and its
shareholders.
* * *
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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THREE: The foregoing amendment has been approved by the Board of Directors
of said corporation.
FOUR: The foregoing amendment was approved by the holders of the requisite
number of shares of said corporation in accordance with Sections 902 and 903 of
the California Corporations Code; the total number of outstanding shares of each
class entitled to vote with respect to the foregoing amendment was 30,000 shares
of Common Stock. The number of shares voting in favor of the foregoing amendment
equaled or exceeded the vote required, such required vote being a majority of
the outstanding shares of Common Stock.
The undersigned further declare under penalty of perjury under the laws of
the State of California that the matters set forth in this certificate are true
and correct of their own knowledge.
IN WITNESS WHEREOF, the undersigned have executed this certificate on
December 15, 1994.
/s/
---------------------------
James A. Konrath, President
/s/
---------------------------
Ray W. McKewon, Secretary
18
EXHIBIT 3.2
BYLAWS
OF
ACCREDITED HOME LENDERS, INC.
<PAGE>
TABLE OF CONTENTS
ARTICLE PAGE
- ------- ----
I
OFFICES 1
1. Principal Executive Offices 1
2. Other Offices 1
II
MEETINGS OF SHAREHOLDERS 1
1. Place of Meetings 1
2. Annual Meetings 1
3. Special Meetings 1
4. Adjourned Meetings 2
5. Notice and Waiver 2
6. Validation of Meetings Held Without
Proper Call or Notice 3
7. Quorum 3
8. Action Without a Meeting 4
9. Elections of Directors 5
10. Proxies 5
11. Inspectors of Election 5
III
DIRECTORS 6
1. Powers 6
2. Number and Qualifications of Directors 6
3. Election and Term of Office 6
4. Vacancies 7
5. Place of Meetings 7
6. Telephonic Meetings 7
7. Organization Meeting 8
8. Other Regular Meetings 8
9. Special Meetings 8
10. Notice of Directors' Meetings 8
11. Quorum 8
12. Voting 9
13. Validation of Meetings Held Without Proper
Call or Notice 9
14. Adjournment 9
15. Unanimous Written Consent to Actions Taken 9
16. Fees and Compensation 9
17. Executive Committee 9
<PAGE>
IV
OFFICERS 10
1. Officers 10
2. Election 10
3. Subordinate Officers 10
4. Removal 11
5. Resignation 11
6. Vacancies 11
7. Chairman of the Board 11
8. President 11
9. Vice-Presidents 11
10. Secretary 11
11. Chief Financial Officer 12
V
MISCELLANEOUS 13
1. Record Date 13
2. Director Inspection of Corporate Records 13
3. Shareholder Inspection of Corporate Records 13
4. Annual and Financial Reports 14
5. Share Certificates 15
6. Representation of Shares of Other
Corporations 15
7. Registrars and Transfer Agents 16
8. Fiscal Year 16
9. Checks, Drafts and Other Instruments 16
10. Execution of Contracts and Instruments 16
11. Construction and Definitions 16
12. Indemnification and Liability Insurance 16
VI
AMENDMENTS 17
1. Power of Shareholders 17
2. Power of Directors 17
<PAGE>
BYLAWS
OF
ACCREDITED HOME LENDERS, INC.
ARTICLE I
OFFICES
1. PRINCIPAL EXECUTIVE OFFICES. The principal executive office of the
Corporation is hereby fixed and located at 15030 Avenue of Science, Suite 100,
San Diego, California 92128 or at such other location as determined by
resolution of the Board of Directors.
2. OTHER OFFICES. Other offices of the Corporation may be established by
the Board of Directors at any place or places where the Corporation is qualified
to do business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
1. PLACE OF MEETINGS. All meetings of shareholders shall be held at the
principal executive office of the Corporation, at the place specified in the
notice or at any other place within or without the State of California
designated either by the Board of Directors or by the written consent of all
persons entitled to vote thereat and not present at the meeting, given either
before or after the meeting and filed with the Secretary of the Corporation.
2. ANNUAL MEETINGS. The annual meetings of shareholders shall be held on an
approximately annual basis; provided, however, that should said day fall on a
legal holiday then any such annual meeting of shareholders shall be held at the
same time and place on the next full business day thereafter ensuing. At annual
meetings of shareholders, Directors shall be elected, reports of the affairs of
the Corporation shall be considered, and any other business may be transacted
which is within the powers of the shareholders.
3. SPECIAL MEETINGS. Special meetings of shareholders may be called for the
purposes of taking any action permitted by shareholders under the California
General Corporations Law and the Articles of Incorporation at any time by the
Chairman of the Board or the President, or by the Board of Directors, or by one
(1) or more shareholders holding not less than ten percent (10%) of the shares
entitled to vote at the meeting. Upon request in writing that a special meeting
of shareholders be called for
<PAGE>
any proper purpose, directed to the Chairman of the Board, President,
vice-president or Secretary by any person or persons (other than the Board)
entitled to call a special meeting of the shareholders, the officer shall cause
notice to be given to shareholders entitled to vote at the meeting as set forth
in Article II, Section 5 hereinbelow. In the event such notice has not been
given within twenty (20) days after receipt of the request, the person or
persons entitled to call the meeting may give the notice. No business other than
that described in the notice of the meeting may be transacted at a special
meeting of shareholders.
4. ADJOURNED MEETINGS. Any meeting of shareholders, whether or not a quorum
is present or has been established, may be adjourned from time to time by the
vote of a majority of the shares the holders of which are either present in
person or represented by proxy. When any meeting of shareholders is adjourned
for forty-five (45) days or more, or a new record date for the adjourned meeting
is fixed, notice of the adjourned meeting shall be given as in the case of an
original meeting as specified in Article II, Section 5 hereof. If a meeting of
shareholders is adjourned for a total of less than forty-five (45) days, notice
of the time and place of the adjourned meeting or the business to be transacted
need not be given in the event the time and place thereof are announced at the
meeting at which the adjournment is taken. At the adjourned meeting the
Corporation may transact any business which might have been transacted at the
original meeting.
5. NOTICE AND WAIVER. Written notice of every meeting of shareholders shall
be given to each shareholder entitled to vote at such meeting, either personally
or by mail, telegram or other means of written communication, charges prepaid,
addressed to such shareholder at his address appearing on the books of the
Corporation or given by him to the Corporation for the purpose of notice. In the
event any notice or report addressed to a shareholder at the address of such
shareholder appearing on the books of the Corporation is returned to the
Corporation by United States Postal Service marked to indicate that the United
States Postal Service is unable to deliver the notice or report to the
shareholder at such address, all future notices or reports shall be deemed to
have been fully given without further mailing if the same shall be available for
the shareholder upon written demand of the shareholder at the principal
executive office of the Corporation for a period of one (1) year from the date
of the giving of the notice or report to any other shareholder. If no address
appears on the books of the Corporation and a shareholder gives no address,
notices shall be deemed to have been given to such shareholder if sent by mail,
telegram or other means of written communication addressed to the place where
the principal executive office of the Corporation is located, or if published at
least once in a newspaper of general circulation in the County in which the
principal executive office of the Corporation is located.
All notices shall be personally delivered, deposited in the mail, or sent
by other means of written communication to each shareholder entitled thereto not
less than ten (10) nor more than sixty (60) days before such meeting. An
affidavit of
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<PAGE>
mailing of any such notice in accordance with the foregoing provisions, executed
by the Secretary, assistant secretary or any transfer agent of the Corporation
shall be prima facie evidence of the giving of the notice.
Except in special cases where other express provision is made by statute,
notice of meetings shall contain the following information:
a. The place, the date, and the hour of the meeting;
b. The general nature of the business to be transacted or proposed, if
any, including but not limited to actions with respect to the approval of
(i) a contract or other transaction with an interested Director, (ii) the
amendment of the Articles of Incorporation, (iii) a merger, exchange or
sale of assets reorganization as defined by Section 181 of the California
General Corporations Law, (iv) the voluntary dissolution of the
Corporation, or (v) a distribution and dissolution other than in accordance
with the rights of outstanding preferred shares, if any;
c. If Directors are to be elected, the names of nominees intended at
the time of the notice to be presented by management for election, if any;
and
d. In the case of an annual meeting, those matters which the Board of
Directors at the time of the mailing of the notice intends to present for
action by the shareholders.
6. VALIDATION OF MEETINGS HELD WITHOUT PROPER CALL OR NOTICE. The
transactions of any meeting of shareholders, however called and noticed, and
wherever held, shall be valid as though had at a meeting duly held after regular
call and notice, if a quorum is present either in person or by proxy, and if
either before or after the meeting, each of the persons entitled to vote and not
present in person or by proxy, or who though present has at the beginning of the
meeting objected to the transaction of any business because the meeting was not
lawfully called or convened or has objected to the consideration of particular
matters of business required to have been included in the notice of the meeting
but not so included, signs a written waiver of notice, a consent to the holding
of such meeting, or an approval of the minutes thereof. All such waivers,
consents and approvals shall be filed with the corporate records or made a part
of the minutes of the meeting.
7. QUORUM. The presence in person or by proxy of the holders of a majority
of the shares entitled to vote at any meeting shall constitute a quorum for the
transaction of business. Shareholders present at a duly called or held meeting
at which a quorum is present may continue to do business until adjournment,
notwithstanding a withdrawal of enough shareholders to leave less than a quorum,
if any
3
<PAGE>
action taken (other than adjournment) is approved by at least a majority of the
shares required to constitute a quorum.
8. ACTION WITHOUT A MEETING. Except with respect to the election of
Directors as hereinafter provided, any action which may be taken at a meeting of
the shareholders may be taken without a meeting and without prior notice except
as hereinafter set forth, if a consent or consents in writing, setting forth the
action so taken, is signed by the holders of shares having not less than the
minimum number of votes that would be necessary to authorize such action at a
meeting at which all shareholders entitled to vote thereon were present and
voted. In the event the consents of all shareholders entitled to vote have not
been solicited in writing, notices shall be given in the manner as provided in
Section 5 of Article II of these Bylaws as follows:
a. At least ten (10) days before consummation of the action authorized
by shareholder approval, notice shall be given of shareholder approval of
(i) a contract or other transaction with an interested Director, (ii)
indemnification of an agent of the Corporation, (iii) a merger, exchange or
sale of assets reorganization as defined in Section 181 of the California
General Corporations Law, or (iv) a distribution in dissolution other than
in accordance with the rights of outstanding preferred shares, if any; and
b. Promptly with respect to any other corporate action approved by
shareholders without a meeting by less than unanimous written consent, to
those shareholders entitled to vote who have not consented in writing.
In the event the Board of Directors has not fixed a record date as provided
in Section 1 of Article V of these Bylaws, for the determination of shareholders
entitled to give such written consent, the record date for determining
shareholders entitled to give consent to corporate action in writing without a
meeting shall be at the close of business on the day on which the Board adopts
the resolution relating thereto, or the sixtieth (60th) day prior to the date of
such action, whichever is later, and in the event no prior action by the Board
has been taken the day on which the first written consent is given. All such
written consents shall be filed with the Secretary of the Corporation.
Any shareholder giving a written consent, or the shareholder's proxyholders
or a transferee of the shares or personal representative of the shareholder or
their respective proxyholders, may revoke the consent by a writing received by
the Corporation prior to the time that written consents of the number of shares
required to authorize the proposed action have been filed with the Secretary of
the Corporation, but may not do so thereafter. Such revocation is effective upon
its receipt by the Secretary of the Corporation.
4
<PAGE>
Directors may be elected without a meeting by unanimous written consent of
the persons who would be entitled to vote for the election of Directors;
provided that in the event a vacancy on the Board of Directors exists and has
not been filled by the Directors, a Director may be elected at any time without
prior notice by the written consent of persons holding a majority of the
outstanding shares entitled to vote for the election of Directors.
9. ELECTIONS OF DIRECTORS. In any election of Directors, the candidates
receiving the highest number of votes of the shares entitled to be voted for
them up to the number of Directors to be elected by such shares are elected.
Elections for Directors need not be by ballot unless a shareholder demands
election by ballot at the meeting and before the voting begins.
Every shareholder entitled to vote at any election of Directors may
cumulate such shareholder's votes and give one (1) candidate a number of votes
equal to the number of Directors to be elected multiplied by the number of votes
to which the shareholder's shares are entitled, or distribute the shareholder's
votes on the same principle among as many candidates as the shareholder thinks
fit, provided, however, that no shareholder shall be entitled to cumulate votes
unless the name of each such candidate has been placed in nomination prior to
the voting and a shareholder has given notice at the meeting prior to the voting
of such shareholder's intention to cumulate such shareholder's votes.
10. PROXIES. Every person entitled to vote shares shall have the right to
do so in person or by one (1) or more agents authorized by a written proxy
executed by such person or his duly authorized agent and filed with the
Secretary of the Corporation. Any proxy executed is not revoked and continues in
full force and effect until (i) a writing stating that the proxy is revoked or a
duly executed proxy bearing a later date is filed with the Secretary of the
Corporation prior to the vote pursuant thereto, (ii) the person executing the
proxy attends the meeting and votes in person, or (iii) written notice of the
death or incapacity of the maker of such proxy is received by the Corporation
before the vote pursuant thereto is counted; provided that no proxy shall be
valid after the expiration of eleven (11) months from the date of its execution,
unless the person executing it specifies therein the length of time for which
such proxy is to continue in force.
11. INSPECTORS OF ELECTION. In advance of any meeting of shareholders the
Board may appoint inspectors of election to act at the meeting and any
adjournment thereof. If inspectors of election are not so appointed, or if any
person so appointed fails to appear or refuses to act, the chairman of any
meeting of shareholders may, and on the request of any shareholder or a
shareholder's proxy shall, appoint inspectors of election (or persons to replace
those who so fail or refuse) at the meeting. The number of inspectors shall
either be one (1) or three (3). If appointed at a meeting on the request of one
(1) or more shareholders or proxies, the majority of shares represented
5
<PAGE>
in person or by proxy shall determine whether one (1) or three (3) inspectors
are to be appointed.
The inspectors of election shall determine the number of shares outstanding
and the voting power of each, the shares represented at the meeting, the
existence of a quorum and the authenticity, validity and effectiveness of
proxies, receive votes, ballots or consents, hear and determine all challenges
and questions in any way arising in connection with the right to vote, count and
tabulate all votes or consents, determine when the polls shall close, determine
the result and do such acts as may be proper to conduct the election or vote
with fairness to all shareholders. In the determination of the validity and
effect of proxies, the dates contained on the forms of proxy shall presumptively
determine the order of execution, regardless of the postmark dates on the
envelopes in which they are mailed.
The inspectors of election shall perform their duties impartially, in good
faith, to the best of their ability and as expeditiously as is practical. If
there are three (3) inspectors of election, the decision, act or certificate of
a majority is effective in all respects as the decision, act, or certificate of
all. Any report or certificate made by the inspectors of election is prima facie
evidence of the facts stated therein.
ARTICLE III
DIRECTORS
1. POWERS. Subject to the limitations of the Articles of Incorporation and
of the California General Corporations Law as to action to be authorized or
approved by the shareholders, the business and affairs of the Corporation shall
be managed and all the corporate powers shall be exercised by or under the
direction of the Board of Directors. The Board of Directors may delegate the
management of the day-to-day operation of the business of the Corporation to a
management company or other person or persons provided that the business and
affairs of the Corporation shall be managed and all corporate powers shall be
exercised under the ultimate direction of the Board of Directors.
2. NUMBER AND QUALIFICATIONS OF DIRECTORS. The authorized number of
Directors shall be six until such time as the Articles of Incorporation
otherwise designate, at which time the number of authorized directors shall be
as set forth in the Articles of Incorporation.
3. ELECTION AND TERM OF OFFICE. The Directors shall be elected at each
annual meeting, but if any such annual meeting is not held or the Directors are
not elected thereat, the Directors may be elected at any special meeting of
shareholders held for that purpose. All Directors shall hold office until the
next annual meeting of shareholders and until their respective successors have
been elected and qualified, subject
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<PAGE>
to the California General Corporations Law and the provisions of these Bylaws
with respect to vacancies on the Board of Directors.
4. VACANCIES. A vacancy in the Board of Directors shall be deemed to exist
in the event of the death, resignation or removal of any Director, an increase
of the authorized number of Directors, or the failure of the shareholders at any
annual or special meeting of shareholders at which any Director or Directors are
to be elected to elect the full authorized number of Directors to be voted for
at that meeting. The Board of Directors may declare vacant the office of a
Director who has been declared of unsound mind by an order of court or convicted
of a felony.
A vacancy or vacancies in the Board of Directors, except for a vacancy
created by the removal of a Director, may be filled by a majority of the
remaining Directors, though less than a quorum, or by a sole remaining Director,
and each Director so elected shall hold office until his successor is elected in
an annual or special meeting of shareholders called for that purpose. A vacancy
in the Board of Directors created by the removal of a Director may be filled
only by the vote of the majority of the shares entitled to vote represented at a
duly held meeting at which a quorum is present, or by the written consent of the
holders of the majority of the outstanding shares. The shareholders may elect a
Director or Directors at any time to fill any vacancy or vacancies not filled by
the Directors. Any such election by written consent shall require the consent of
holders of a majority of the outstanding shares entitled to vote.
Any Director may resign effective upon giving written notice to the
Chairman of the Board, the President, the Secretary or the Board of Directors of
the Corporation, unless the notice specifies a later time for the effectiveness
of such resignation. If the resignation is effective at a future time, a
successor may be elected to take office when the resignation becomes effective.
No reduction of the authorized number of Directors shall have the effect of
removing any Director prior to the expiration of his term of office.
5. PLACE OF MEETINGS. All meetings of the Board of Directors shall be held
at any place within or without California which has been designated in the
notice of the meeting, or if not stated in the notice or if there is no notice,
at any place designated from time to time by resolution of the Board or by
written consent of all members of the Board. In the absence of such designation,
meetings shall be held at the principal executive office of the Corporation.
6. TELEPHONIC MEETINGS. The members of the Board may participate in a
meeting through use of conference telephone or similar communications equipment,
so long as all members participating in the meeting can hear one another.
Participation in a meeting as permitted in the preceding sentence constitutes
presence in person at such meeting.
7
<PAGE>
7. ORGANIZATION MEETING. Immediately following each annual meeting of
shareholders, the Board of Directors shall hold a regular meeting at the place
of the annual meeting of shareholders or at such other place as shall be fixed
by the Board of Directors, for the purpose of organization, election of
officers, and the transaction of other business.
8. OTHER REGULAR MEETINGS. Other regular meetings of the Board of Directors
shall be held from time to time as deemed necessary by the Board. Provided
however, should said day fall on a legal holiday, then the meeting shall be held
at the same time on the next day thereafter ensuing which is a full business
day.
9. SPECIAL MEETINGS. Special meetings of the Board of Directors for any
purpose or purposes may be called at any time by the Chairman of the Board, the
President, any vice-president, the Secretary or any two (2) Directors.
10. NOTICE OF DIRECTORS' MEETINGS. Call and notice of the annual
organization meeting and other regular meetings of the Board of Directors are
hereby dispensed with. Notice of the time and place of special meetings shall be
personally delivered to each Director or communicated to each Director by
telephone, telegraph or mail, charges prepaid, addressed to him at his address
as is shown upon the records of the Corporation, or if it is not so shown on
such records or is not readily ascertainable, at the place at which the meetings
of Directors are regularly held. In the case notice is mailed, it shall be
deposited in the United States mail at least ninety-six (96) hours prior to the
time of the holding of the meeting. In the event notice is communicated by
telegraph, it shall be delivered to the telegraph company at least forty-eight
(48) hours prior to the time of the holding of the meeting. In the event notice
is delivered personally or communicated by telephone, it shall be so delivered
or communicated at least forty-eight (48) hours prior to the time of the holding
of a meeting.
A notice need not specify the purpose of any regular or special meeting of
the Board of Directors. Whenever any Director has been absent from any meeting
of the Board of Directors for which notice has not been dispensed with, an entry
in the minutes to the effect that notice has been duly given shall be conclusive
and incontrovertible evidence that due notice of such meeting was given to such
Director.
11. QUORUM. The presence of a majority of the number of Directors then
authorized by the Bylaws of this Corporation at a meeting of the Board of
Directors shall constitute a quorum for the transaction of business. A meeting
at which a quorum is initially present may continue to transact business
notwithstanding the withdrawal of enough Directors to leave less than a quorum,
provided that any action taken is approved by at least a majority of the
required quorum for such meeting.
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12. VOTING. Every act or decision done or made by a majority of the
Directors present at a meeting duly held at which a quorum is present shall be
regarded as the act of the Board of Directors, unless a greater number, or the
same number after disqualifying one (1) or more Directors from voting, is
required by law, by the Articles of Incorporation or by these Bylaws.
13. VALIDATION OF MEETINGS HELD WITHOUT PROPER CALL OR NOTICE. The
transactions of any meeting of the Board of Directors, however called and
noticed or wherever held, shall be valid as though had at a meeting duly held
after regular call and notice, if a quorum is initially present, and if, either
before or after the meeting, each of the Directors not present or who though
present has prior to the meeting or at its commencement protested the lack of
proper notice to him signs a written waiver of notice, a consent to holding of
such meeting or an approval of the minutes thereof. All such waivers, consents
and approvals shall be filed with the corporate records or made a part of the
minutes of the meeting.
14. ADJOURNMENT. A majority of the Directors present, whether or not a
quorum is present, may adjourn any Directors' meeting to meet again at another
time or place. In the event a meeting of the Board of Directors is adjourned for
more than twenty-four (24) hours, notice of any adjournment to another time or
place shall be given prior to the time of the adjourned meeting to the Directors
who were not present at the time of the adjournment. Otherwise, notice of the
time and place of holding an adjourned meeting need not be given to absent
Directors if the time and place is fixed and announced at the meeting so
adjourned.
15. UNANIMOUS WRITTEN CONSENT TO ACTIONS TAKEN. Any action required or
permitted to be taken by the Board of Directors may be taken without a meeting
if all the members of the Board of Directors shall individually or collectively
consent in writing to such action. Such consent or consents shall be filed with
the minutes of the proceedings of the Board of Directors and shall have the same
force and effect as a unanimous vote of the Directors.
16. FEES AND COMPENSATION. Directors and members of committees may receive
such compensation, if any, for their services and such reimbursement for
expenses as may be fixed or determined by resolution of the Board of Directors.
Nothing herein shall be considered to preclude any Director from serving the
Corporation in any other capacity, including as an officer, agent, employee or
otherwise, and receiving compensation therefor.
17. EXECUTIVE COMMITTEE. In the event the Board of Directors shall appoint
an executive committee and shall not provide otherwise, regular meetings of the
executive committee shall be held at such times as are determined by the Board
or by such committee as appointed, and notice of such regular meetings is hereby
dispensed with. Meetings of the executive committee shall be held at the place
designated in the
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notice of the meeting, or if not stated in the notice or if there is no notice,
at any place which has been designated from time to time by resolution of the
executive committee or by written consent of all the members thereof, or in the
absence of such designation, at the principal executive office of the
Corporation. Special meetings of the executive committee may be called by the
Chairman of the Board, the President, any vice-president who is a member of the
executive committee, or any two (2) members thereof, upon written notice to the
members of the executive committee of the time and place of such special meeting
given in the manner and within the time provided for giving of notice to members
of the Board of Directors of the time and place of special meetings thereof.
Minutes shall be recorded of each meeting of the executive committee and kept in
the book of minutes of the Corporation. Vacancies in the membership of the
executive committee may be filled only by the Board of Directors. Only members
of the Board of Directors shall serve as members of the executive committee. A
majority of the authorized number of members of the executive committee shall
constitute a quorum for the transaction of business. The provisions of this
Article III of these Bylaws also apply to the executive committee and action by
the executive committee, mutatis mutandis. The Board of Directors may designate
one (1) or more Directors as alternate members of the executive committee, who
may replace and act in the stead of any absent members at any meeting of such
committee.
ARTICLE IV
OFFICERS
1. OFFICERS. The officers of the Corporation shall be a President, a
Secretary and a Chief Financial Officer (who may be called the Treasurer). The
Corporation may also have, at the discretion of the Board of Directors, a
Chairman of the Board, one (1) or more vice-presidents, one (1) or more
assistant secretaries, one (1) or more assistant financial officers, and such
other officers as may be appointed in accordance with the provisions of Section
3 of this Article IV. Any number of offices may be held by the same person.
2. ELECTION. The officers of the Corporation, except such officers as may
be appointed in accordance with the provisions of Section 3 of this Article IV,
shall be chosen by the Board of Directors, and each shall hold his office until
he shall resign or shall be removed by the Board of Directors or otherwise
disqualified to serve, or his successor shall be elected and qualified.
3. SUBORDINATE OFFICERS. The Board of Directors may appoint, and may
empower the Chairman of the Board or the President to appoint, such other
officers as the business of the Corporation may require, each of whom shall hold
office for such period, have such authority and perform such duties as the
appointing authority may designate, subject to any limitations imposed by
resolution of the Board of Directors.
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4. REMOVAL. Any officer may be removed, either with or without cause, by
the Board of Directors, at any regular or special meeting thereof or, except in
case of an officer chosen by the Board of Directors, by any officer upon whom
such power of removal may be conferred by the Board of Directors (subject, in
each case, to the rights, if any, of an officer under any contract of
employment).
5. RESIGNATION. Any officer may resign at any time by giving written notice
to the Board of Directors or to the President or to the Secretary of the
Corporation, without prejudice however to the rights, if any, of the Corporation
under any contract to which such officer is a party. Any such resignation shall
take effect at the date of the receipt of such notice or any later time
specified therein; and, unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
6. VACANCIES. A vacancy in any office because of death, resignation,
removal, disqualification or any other cause shall be filled in the manner
prescribed in these Bylaws for regular appointments to such office.
7. CHAIRMAN OF THE BOARD. The Chairman of the Board, if there shall be such
an officer, shall, if present, preside at all meetings of the Board of Directors
and shareholders and exercise and perform such other powers and duties as may be
from time to time assigned to him by the Board of Directors or prescribed by
these Bylaws.
8. PRESIDENT. Subject to such powers, if any, as may be given by the Board
of Directors to the Chairman of the Board, if there be such an officer, the
President shall be the chief executive officer of the Corporation and shall,
subject to the control of the Board of Directors, have general supervision,
direction and control of the business and officers of the Corporation. In the
absence of the Chairman of the Board, or if there be none, he shall preside at
all meetings of the shareholders and the Board of Directors. He shall have the
general powers and duties of management usually vested in the office of the
President of a corporation, and shall have such other powers and duties as may
be prescribed by the Board of Directors or these Bylaws.
9. VICE-PRESIDENTS. In the absence or disability of the President, the
vice-presidents, if there be any, in order of their rank as fixed by the Board
of Directors, or, if not ranked, the vice-president designated by the Board of
Directors, shall perform all the duties of the President, and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
President. The vice-presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
Board of Directors or these Bylaws.
10. SECRETARY. The Secretary shall record or cause to be recorded, and
shall keep or cause to be kept, at the principal executive office of the
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Corporation and such other place or places as the Board of Directors may order,
a book of minutes of actions taken at all meetings of Directors, committees and
shareholders, with the time and place of holding, whether regular or special,
and, if special, how authorized, the notice thereof given, the names of those
present at Directors' and committee meetings, the number of shares present or
represented at shareholders' meetings, and the proceedings thereof.
The Secretary shall keep, or cause to be kept, at the principal executive
office or at the office of the Corporation's transfer agent, a share register,
or a duplicate share register, showing the names of the shareholders and their
addresses, the number and classes of shares held by each, the number and date of
certificates issued for the same, and the number and date of cancellation of
every certificate surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all the meetings
of the shareholders and the Board of Directors required by these Bylaws or by
law to be given, and he shall keep the seal of the Corporation in safe custody,
and shall have such other powers and perform such other duties as may be
prescribed by the Board of Directors or by these Bylaws.
The Secretary shall keep at the principal executive office, and if the
Corporation's principal executive office is not in California, at the
Corporation's principal business office in California, the original or a copy of
these Bylaws as amended to date.
11. CHIEF FINANCIAL OFFICER. The Chief Financial Officer (who may be called
the Treasurer) shall keep and maintain, or cause to be kept and maintained,
adequate and correct accounts of the properties and business transactions of the
Corporation, including accounts of its assets, liabilities, receipts,
disbursements, income, losses, changes in financial position, capital stock,
retained earnings and shares.
The Chief Financial Officer shall deposit all moneys and other valuables in
the name and to the credit of the Corporation with such depositories as may be
designated by the Board of Directors. He shall disburse the funds of the
Corporation as may be ordered by the Board of Directors, shall render to the
President and the Directors, whenever they request it, an account of all of his
transactions as Chief Financial Officer and of the financial condition of the
Corporation, and shall have such other powers and perform such other duties as
may be prescribed by the Board of Directors or these Bylaws.
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ARTICLE V
MISCELLANEOUS
1. RECORD DATE. The Board of Directors may fix a time in the future as a
record date for the determination of the shareholders entitled to notice of and
to vote at any meeting of shareholders, give consent to corporate action in
writing without a meeting, receive any report, receive any dividend or other
distribution or any allotment of rights, or exercise rights in respect to any
change, conversion or exchange of shares. The record date so fixed shall not be
more than sixty (60) days nor less than ten (10) days prior to the date of any
meeting, nor more than sixty (60) days prior to any other event for the purposes
of which it is fixed. In the event the Board of Directors does not fix a record
date, the record date for determining shareholders entitled to notice of or to
vote at a meeting of shareholders shall be the close of business on the business
day next preceding the day on which notice is given, or if notice is waived, at
the close of business on the business day next preceding the day on which the
meeting is held; the record date for determining shareholders entitled to give
consent to corporate action in writing without a meeting, when no prior action
by the Board of Directors has been taken, shall be the day on which the first
written consent is given; and the record date for determining shareholders for
any other purpose shall be the close of business on the day on which the Board
adopts the resolution relating thereto, or the sixtieth (60th) day prior to the
date of such other action, whichever is later. Only shareholders of record on
the record date are entitled to notice of and to vote at any such meeting, give
consent without a meeting, receive any report, receive a dividend, distribution
or allotment of rights, or exercise the rights, as the case may be,
notwithstanding any transfer of shares on the books of the Corporation after the
record date, except as otherwise provided in the Articles of Incorporation or
these Bylaws. A determination of shareholders of record entitled to notice of or
to vote at a meeting of shareholders shall apply to any adjournment of the
meeting unless the Board of Directors fixes a new record date for the adjourned
meeting. In the event such a meeting is adjourned for more than forty-five (45)
days from the date set for the original meeting, the Board of Directors shall
fix a new record date.
2. DIRECTOR INSPECTION OF CORPORATE RECORDS. Every Director shall have the
absolute right at any reasonable time to inspect all books of account, records
and documents of every kind and to inspect the physical properties of the
Corporation and all of its subsidiaries, both domestic and foreign. Inspection
by a Director may be made in person or by agent or attorney and the right of
inspection includes the right to copy and make extracts.
3. SHAREHOLDER INSPECTION OF CORPORATE RECORDS. The accounting books and
records and minutes of proceedings of the shareholders and the Board of
Directors and committees of the Board of this Corporation and all of its
subsidiaries shall be open to inspection upon the written demand on the
Corporation of any shareholder or holder of a voting trust certificate at any
reasonable time during usual
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business hours for a purpose reasonably related to such holder's interest as a
shareholder or as a holder of such voting trust certificate. Inspection by a
shareholder or a holder of a voting trust certificate may be made in person or
by an agent or attorney and the right of inspection includes the right to copy
and make extracts.
A shareholder or shareholders who hold at least five percent (5%) in the
aggregate of the outstanding voting shares of the Corporation, or hold at least
one percent (1%) of such voting shares and have filed a Schedule 14B with the
United States Securities and Exchange Commission relating to the election of
Directors of the Corporation shall have the right, exercisable in person or by
agent or attorney, to inspect and copy the record of shareholders' names and
addresses and shareholdings, as of the most recent record date for which it has
been compiled or as of a date specified by the shareholder subsequent to the
date of demand. The list shall be made available on or before the later of five
(5) business days after the demand is received or the date specified therein as
the date as of which the list is to be compiled.
Every shareholder shall have the absolute right to inspect at all
reasonable times during office hours the original or a copy of these Bylaws as
amended to date, at the Corporation's principal executive office, or if its
principal executive office is not in California, then at its principal business
office in California. In the event the principal executive office of the
Corporation is outside California and the Corporation has no principal business
office in California, it shall upon the written request of any shareholder
furnish to such shareholder a copy of the Bylaws as amended to date.
4. ANNUAL AND FINANCIAL REPORTS.
a. The requirement for the sending of an annual report to the shareholders,
except upon proper request as set forth below, is hereby expressly waived.
b. A shareholder or shareholders holding in the aggregate at least five
percent (5%) of the outstanding shares of any class of the Corporation may make
a written request to the Corporation for an income statement of the Corporation
for the three (3) month, six (6) month, or nine (9) month period of the current
fiscal year ended not less than thirty (30) days prior to the date of the
request and a balance sheet of the Corporation as of the end of such period, and
in addition, if no annual report for the last fiscal year has been sent to
shareholders, the annual report for the last fiscal year. The income statement,
balance sheet, and if applicable the annual report, shall be delivered to the
person making the request within thirty (30) days thereafter. In addition, the
Corporation shall upon a written request of any shareholder mail to the
shareholder a copy of the last annual, semiannual or quarterly income statement
which it has prepared and a balance sheet as of the end of the period. The
annual report, quarterly income statements and balance sheets and other
financial statements referred to in this section shall be accompanied by the
report thereon, if any,
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of any independent accountants engaged by the Corporation, or the certificate of
the Chief Financial Officer or any other officer authorized by the Board of
Directors that such financial statements were prepared without audit from the
books and records of the Corporation. A copy of any of such statements and
reports shall be kept on file in the principal executive office of the
Corporation for twelve (12) months and they shall be exhibited at all reasonable
times to any shareholder demanding an examination of them or a copy shall be
mailed to such shareholder.
5. SHARE CERTIFICATES. Every holder of shares in the Corporation shall be
entitled to have a certificate signed in the name of the Corporation by the
Chairman or Vice-Chairman of the Board or the President or any vice-president
and by the Chief Financial Officer or any assistant financial officer or the
Secretary or any assistant secretary, certifying the number of shares and the
class or series of shares owned by the shareholder. Any of the signatures on the
certificate may be a facsimile, provided that in such event at least one (1)
signature, including that of any of the aforementioned officers or the
Corporation's registrar or transfer agent, if any, shall be manually signed. In
the event any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed upon a certificate, shall have ceased to be
such officer, transfer agent or registrar before such certificate is issued, the
certificate may be issued by the Corporation with the same effect as if such
person were an officer, transfer agent or registrar at the date of issue.
There shall appear on certificates for shares of the Corporation all
legends required by California law.
No new certificate for shares shall be issued in lieu of an old certificate
unless the latter is surrendered and cancelled at the same time; provided,
however, that the Board of Directors may authorize the issuance of a new share
certificate in the place of any certificate theretofore issued by the
Corporation and alleged to be lost, stolen or destroyed in the event that: (i)
the request for the issuance of the new certificate is made within a reasonable
time after the holder of the old certificate has notice of its loss, destruction
or theft and prior to the receipt of notice by the Corporation that the old
certificate has been acquired by a bona fide purchaser or holder in due course;
and (ii) the holder of the old certificate files a sufficient indemnity bond
with or provides other adequate security to the Corporation and satisfies any
other reasonable requirements imposed by the Board. In the event of the issuance
of a new certificate, the rights and liabilities of the Corporation and the
holders of the old and new certificates shall be governed by the provisions of
Sections 8104 and 8405 of the California Commercial Code.
6. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The Chairman of the
Board, the President or any vice-president, or the Chief Financial Officer, or
any assistant financial officer, and the Secretary or any assistant secretary of
this Corporation are authorized to vote, represent and exercise on behalf of
this
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Corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of the Corporation. The authority herein
granted to said officers to vote or represent on behalf of this Corporation any
and all shares held by this Corporation in any other corporation or corporations
may be exercised either by such officers in person or by any other person
authorized to do so by proxy or power of attorney duly executed by any of said
officers.
7. REGISTRARS AND TRANSFER AGENTS. The Board of Directors may appoint one
(1) or more registrars of transfers, which shall be incorporated banks or trust
companies, either domestic or foreign, and one (1) or more transfer agents or
transfer clerks, who shall be appointed at such times and places as the Board of
Directors shall determine.
8. FISCAL YEAR. The fiscal year of the Corporation shall be determined by
the Board of Directors, and having been so determined, is subject to change from
time to time as the Board of Directors shall determine.
9. CHECKS, DRAFTS AND OTHER INSTRUMENTS. All checks, drafts, or other
orders for payment of money, notes or other evidences of indebtedness, issued in
the name of or payable to the Corporation, shall be signed or endorsed by such
person or persons and in such manner as from time to time shall be determined by
resolution of the Board of Directors.
10. EXECUTION OF CONTRACTS AND INSTRUMENTS. The Board of Directors, except
as these Bylaws may otherwise provide, may authorize one (1) or more officers or
agents of the Corporation to enter into any contract or execute any instrument
in the name of and on behalf of the Corporation, and such authority may be
general or confined to specific instances. Any instrument may also be executed
on behalf of and in the name of the Corporation by the Chairman of the Board,
the President, or any vice-president, and the Secretary or any assistant
secretary, Chief Financial Officer or any assistant financial officer.
11. CONSTRUCTION AND DEFINITIONS. Unless the context otherwise requires,
the general provisions, rules of construction and definitions contained in the
California General Corporations Law shall govern the construction of these
Bylaws. Without limiting the generality of the foregoing, the masculine gender
includes the feminine and neuter, the singular number includes the plural and
the plural number includes the singular, and the term "person" includes a
corporation, partnership and trust, as well as a natural person.
12. INDEMNIFICATION AND LIABILITY INSURANCE. This Corporation shall
indemnify any director (including any director who is also an officer of this
Corporation) who was or is a party or is threatened to be made a party to any
proceeding by reason of the fact that such director is or was an agent of this
Corporation, against
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expenses, judgments, fines, settlements and other amounts incurred in connection
with such proceeding to the fullest extent expressly permitted under Section 317
of the California Corporations Code. Further, pursuant to provisions in this
Corporation's Articles of Incorporation, this Corporation may provide
indemnification in excess of that expressly permitted by Section 317 for any
agents (as defined in Section 317 of the California Corporations Code) of the
Corporation for breach of duty to the Corporation or its stockholders to the
fullest extent permitted by applicable law, as such law exists from time to
time.
ARTICLE VI
AMENDMENTS
1. POWER OF SHAREHOLDERS. New Bylaws may be adopted or these Bylaws may be
amended or repealed by the affirmative vote of a majority of the shares entitled
to vote or by the written consent of shareholders entitled to vote such shares,
except as otherwise provided by law or by the Articles of Incorporation.
2. POWER OF DIRECTORS. Subject to the right of shareholders as provided in
Section 1 of this Article VI to adopt, amend or repeal Bylaws, the Board of
Directors may adopt, amend or repeal these Bylaws, except as otherwise provided
by law or by the Articles of Incorporation.
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