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PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED FEBRUARY 21, 1997)
$117,600,000
COUNTRYWIDE HOME EQUITY LOAN TRUST 1997-A
REVOLVING HOME EQUITY LOAN ASSET BACKED CERTIFICATES, SERIES 1997-A
CWABS, INC.
DEPOSITOR
[LOGO]
SELLER AND MASTER SERVICER
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Each Revolving Home Equity Loan Asset Backed Certificate, Series 1997-A
(collectively, the 'Certificates'), will represent an undivided interest in the
Countrywide Home Equity Loan Trust 1997-A (the 'Trust Fund') to be formed
pursuant to a Pooling and Servicing Agreement among Countrywide Home Loans, Inc.
('Countrywide'), as Seller and Master Servicer, CWABS, Inc., as Depositor, and
The First National Bank of Chicago, as Trustee. The property of the Trust Fund
will include a pool of adjustable rate home equity revolving credit line loans
made or to be made in the future (the 'Mortgage Loans') under certain home
equity revolving credit line loan agreements. The Mortgage Loans are secured by
either first or second deeds of trust or mortgages on one- to four-family
residential properties. See 'Index of Defined Terms' on page S-53 of this
Prospectus Supplement and on page 95 of the Prospectus for the location of the
definitions of certain capitalized terms.
The aggregate undivided interest in the Trust Fund represented by the
Certificates is expected to represent, as of February 25, 1997 (the 'Cut-off
Date'), approximately 98% of the sum of the outstanding principal balances of
the Mortgage Loans. The remaining undivided interest in the Trust Fund not
represented by the Certificates (the 'Transferor Interest') is expected to
represent approximately 2% of the outstanding principal balances of the Mortgage
Loans. Only the Certificates are offered hereby.
Distributions of principal and interest on the Certificates will be made on
the fifteenth day of each month or, if such date is not a Business Day, then on
the succeeding Business Day (each, a 'Distribution Date'), commencing April 15,
1997. On each Distribution Date, holders of the Certificates will be entitled to
receive, from and to the limited extent of funds available in the Collection
Account (as defined herein), distributions with respect to interest and
principal calculated as set forth under 'Summary -- Interest,'
'Summary -- Principal Payments from Principal Collections' and 'Description of
the Certificates -- Distributions on the Certificates' herein. The Certificates
are not guaranteed by the Depositor, Countrywide or any affiliate thereof.
However, the Certificates will be unconditionally and irrevocably guaranteed as
to the payment of the Guaranteed Distributions (as defined herein) on each
Distribution Date pursuant to the terms of a financial guaranty insurance policy
(the 'Policy') to be issued by
[Logo]
There is currently no market for the Certificates offered hereby and there
can be no assurance that such a market will develop or if it does develop that
it will continue. See 'Risk Factors' herein and in the Prospectus.
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PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER 'RISK
FACTORS' ON PAGE S-15 HEREIN AND ON PAGE 14 IN THE ACCOMPANYING PROSPECTUS.
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THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST FUND ONLY AND DO NOT REPRESENT
INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, COUNTRYWIDE, THE TRUSTEE OR
ANY AFFILIATE THEREOF, EXCEPT TO THE EXTENT PROVIDED HEREIN.
NEITHER THE CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY.
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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. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
ORIGINAL CERTIFICATE PRICE TO UNDERWRITING PROCEEDS TO
PRINCIPAL BALANCE(1) PUBLIC(2) DISCOUNT(3) THE DEPOSITOR(4)
<S> <C> <C> <C> <C>
Certificates..................................... $117,600,000 100% 0.225% 99.775%
Total............................................ $117,600,000 $117,600,000 $264,600 $117,335,400
</TABLE>
(1) Subject to the permitted variance described herein.
(2) Plus accrued interest, if any, from February 28, 1997.
(3) The Depositor has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
(4) Before deducting expenses, estimated to be $245,000.
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The Certificates are offered subject to prior sale and subject to the
Underwriters' right to reject orders in whole or in part. It is expected that
delivery of the Certificates will be made in book-entry form only through the
facilities of The Depository Trust Company, Cedel Bank, societe anonyme, and the
Euroclear System on or about February 28, 1997 (the 'Closing Date'). The
Certificates will be offered in Europe and the United States of America.
PRUDENTIAL SECURITIES INCORPORATED COUNTRYWIDE SECURITIES CORPORATION
February 21, 1997
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CERTIFICATES AT
LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS ACTING AS UNDERWRITERS TO
DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
The Certificates offered hereby constitute part of a separate series of
Revolving Home Equity Loan Asset Backed Certificates being offered by CWABS,
Inc. from time to time pursuant to its Prospectus dated February 21, 1997. This
Prospectus Supplement does not contain complete information about the offering
of the Certificates. Additional information is contained in the Prospectus and
investors are urged to read both this Prospectus Supplement and the Prospectus
in full. Sales of the Certificates may not be consummated unless the purchaser
has received both this Prospectus Supplement and the Prospectus.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In addition to the documents described under 'Incorporation of Certain
Documents by Reference' in the Prospectus, the financial statements of the
Certificate Insurer included in, or as exhibits to, the following documents,
which have been filed with the Securities and Exchange Commission by Financial
Security Assurance Holdings Ltd. ('Holdings'), are hereby incorporated by
reference in this Prospectus Supplement:
(a) The Annual Report on Form 10-K for the year ended December 31,
1995; and
(b) The Quarterly Report on Form 10-Q for the period ended September
30, 1996.
All financial statements of the Certificate Insurer (as defined herein)
included in documents filed by Holdings pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended (the 'Exchange Act'),
subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Certificates shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing such documents.
The Depositor hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, as amended, each filing of the
financial statements of the Certificate Insurer included in or as an exhibit to
the documents of Holdings referred to above and filed pursuant to Section 13(a)
or Section 15(d) of the 1934 Act that is incorporated by reference in the
Registration Statement of which this Prospectus Supplement and the accompanying
Prospectus is a part shall be deemed to be a new registration statement relating
to the Certificates offered hereby, and the offering of such Certificates at
that time shall be deemed to be the initial bona fide offering thereof.
The Trustee on behalf of the Trust Fund will provide without charge to each
person to whom this Prospectus Supplement is delivered, on the written or oral
request of such person, a copy of any or all of the documents referred to above
and in the Prospectus under 'Incorporation of Certain Documents by Reference'
that have been or may be incorporated by reference in the Prospectus (not
including exhibits to the information that is incorporated by reference unless
such exhibits are specifically incorporated by reference into the information
that the Prospectus incorporates). Such requests should be directed to the
Corporate Trust Office of the Trustee at The First National Bank of Chicago, One
First National Plaza, Suite 0126, Chicago, Illinois 60670, telephone: (312)
407-1902, facsimile number: (312) 407-1708, attention: Corporate Trust Services
Division.
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SUMMARY
The following summary of certain pertinent information is qualified in its
entirety by reference to the detailed information appearing elsewhere in this
Prospectus Supplement and the accompanying Prospectus. Certain capitalized terms
used in the Summary are defined elsewhere in the Prospectus Supplement or in the
Prospectus. See 'Index of Defined Terms' on page S-53 of this Prospectus
Supplement and on page 95 of the Prospectus for the location of the definitions
of certain capitalized terms.
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Trust Fund.......................... Countrywide Home Equity Loan Trust 1997-A (the 'Trust Fund') will be formed
pursuant to a pooling and servicing agreement (the 'Agreement') to be dated
as of February 25, 1997 (the 'Cut-off Date') among Countrywide Home Loans,
Inc. ('Countrywide'), as transferor and master servicer (together with any
successor in such capacity, the 'Seller' and the 'Master Servicer',
respectively), CWABS, Inc., as depositor (the 'Depositor'), and The First
National Bank of Chicago, as trustee (the 'Trustee'). The property of the
Trust Fund will include: a pool of adjustable rate home equity revolving
credit line loans made or to be made in the future (the 'Mortgage Loans'),
under certain home equity revolving credit line loan agreements (the
'Credit Line Agreements') and secured by either first or second deeds of
trust or mortgages on residential properties that are one- to four-family
properties, condominiums and planned unit developments (the 'Mortgaged
Properties'); the collections in respect of the Mortgage Loans received
after the Cut-off Date (exclusive of payments in respect of accrued
interest due on or prior to the Cut-off Date); property that secured a
Mortgage Loan which has been acquired by foreclosure or deed in lieu of
foreclosure; an irrevocable and unconditional limited financial guaranty
insurance policy (the 'Policy'); an assignment of the Depositor's rights
under the Purchase Agreement (as defined herein); rights under certain
hazard insurance policies covering the Mortgaged Properties; and certain
other property, as described more fully under 'Description of the
Certificates -- General' herein.
The Trust Fund property will include the unpaid principal balance of each
Mortgage Loan as of the Cut-off Date (the 'Cut-off Date Principal Balance')
plus any additions thereto as a result of new advances made pursuant to the
applicable Credit Line Agreement (the 'Additional Balances') during the
life of the Trust Fund. With respect to any date, the 'Pool Balance' will
be equal to the aggregate of the Principal Balances of all Mortgage Loans
as of such date. The aggregate Cut-off Date Principal Balance of the
Mortgage Loans is expected to be approximately $120,000,000 (the 'Cut-off
Date Pool Balance'), subject to the permitted variance described herein.
See 'Description of the Mortgage Loans' herein. The 'Principal Balance' of
a Mortgage Loan (other than a Liquidated Mortgage Loan (as defined herein))
on any day is equal to its Cut-off Date Principal Balance plus (i) any
Additional Balances in respect of such Mortgage Loan, minus (ii) all
collections credited against the Principal Balance of such Mortgage Loan in
accordance with the related Credit Line Agreement prior to such day. The
Principal Balance of a Liquidated Mortgage Loan after final recovery of
related Liquidation Proceeds (as defined herein) shall be zero.
Securities Offered.................. Each of the Revolving Home Equity Loan Asset Backed Certificates, Series
1997-A, offered hereby (the 'Certificates') represents an undivided
interest in the Trust Fund. Each Certificate represents the right to
receive payments of interest at the variable rate described below (the
'Certificate
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Rate'), payable monthly, and payments of principal at such time and to the
extent provided herein under 'Description of the Certificates --
Distributions on the Certificates'. The aggregate undivided interest in the
Trust Fund represented by the Certificates as of the Closing Date is
expected to equal $117,600,000 (the 'Original Invested Amount'), which
represents approximately 98% of the Cut-off Date Pool Balance. The
'Original Certificate Principal Balance' is expected to equal $117,600,000.
Following the Closing Date, the 'Invested Amount' with respect to any date
will be an amount equal to the Original Invested Amount minus (i) the
amount of Investor Principal Collections (as defined herein) previously
distributed to Certificateholders, and minus (ii) an amount equal to the
product of the Investor Floating Allocation Percentage and the Liquidation
Loss Amounts (each as defined herein). The Transferor (as described below)
will own the remaining undivided interest (the 'Transferor Interest') in
the Mortgage Loans, which is equal to the Pool Balance minus the Invested
Amount. The 'Original Transferor Interest' is expected to initially equal
approximately 2% of the Cut-off Date Pool Balance. The Original Invested
Amount, the Original Certificate Principal Balance and the Original
Transferor Interest will be subject to a permitted variance of plus or
minus 10%. The transferor (the 'Transferor') as of any date is the owner of
the Transferor Interest which initially will be Countrywide.
The Certificates will be issued pursuant to the Agreement. The principal
amount of the outstanding Certificates (the 'Certificate Principal
Balance') on any date is equal to the Original Certificate Principal
Balance minus the aggregate of amounts actually distributed as principal to
the Certificateholders. See 'Description of the Certificates' herein.
Removal of Certain Mortgage Loans;
Additional Balances............... In order to permit the Transferor to remove Mortgage Loans from the Trust
Fund at such times, if any, as the Transferor Interest exceeds the level
required by the Certificate Insurer and the Rating Agencies, on any
Distribution Date the Transferor may, but shall not be obligated to, remove
from the Trust Fund certain Mortgage Loans without notice to the
Certificateholders. The Transferor is permitted to designate the Mortgage
Loans to be removed. Mortgage Loans so designated will only be removed upon
satisfaction of the following conditions: (i) No Rapid Amortization Event
(as defined herein) has occurred; (ii) the Transferor Interest as of the
Transfer Date (as defined herein) (after giving effect to such removal)
exceeds the Minimum Transferor Interest (as defined below); (iii) the
transfer of any Mortgage Loans on any Transfer Date during the Managed
Amortization Period (as defined herein) shall not, in the reasonable belief
of the Transferor, cause a Rapid Amortization Event to occur or an event
which with notice or lapse of time or both would constitute a Rapid
Amortization Event; (iv) the Transferor shall have delivered to the Trustee
a 'Mortgage Loan Schedule' containing a list of all Mortgage Loans
remaining in the Trust Fund after such removal; (v) the Transferor shall
represent and warrant that no selection procedures reasonably believed by
the Transferor to be adverse to the interests of the Certificateholders or
the Certificate Insurer were used by the Transferor in selecting such
Mortgage Loans; (vi) in connection with the first such retransfer of
Mortgage Loans, the Rating Agencies (as defined herein) shall have been
notified of the proposed transfer and prior to the Transfer
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Date shall not have notified the Transferor in writing that such transfer
would result in a reduction or withdrawal of the ratings assigned to the
Certificates without regard to the Policy; and (vii) the Transferor shall
have delivered to the Trustee and the Certificate Insurer an officer's
certificate confirming the conditions set forth in clauses (i) through (vi)
above. See 'Description of the Certificates -- Optional Transfers of
Mortgage Loans to the Transferor' herein.
The 'Minimum Transferor Interest' as of any date is an amount equal to the
lesser of (a) 5% of the Pool Balance on such date and (b) the Transferor
Interest as of the Closing Date.
During the term of the Trust Fund, all Additional Balances will be
transferred to and become property of the Trust Fund. The Pool Balance at
any time will generally fluctuate from day to day because the amount of
Additional Balances and the amount of principal payments with respect to
the Mortgage Loans will usually differ from day to day. Because the
Transferor Interest is equal to the Pool Balance minus the Invested Amount,
the amount of the Transferor Interest will fluctuate from day to day as
draws are made under the Credit Line Agreements and as Principal
Collections are received.
The Mortgage Loans.................. The following sets forth certain information, as of the Cut-off Date, as to
the Mortgage Loans expected to be included in the Trust Fund. Actual
amounts and percentages may vary depending upon the actual Mortgage Loans
included in the Trust Fund.
The Mortgage Loans will be secured by first or second deeds of trust or
mortgages on Mortgaged Properties expected to be located in 44 states and
the District of Columbia as of the Cut-off Date. On the Closing Date,
Countrywide will sell the Mortgage Loans to the Depositor, pursuant to a
purchase agreement (the 'Purchase Agreement').
It is expected that the percentage of the Cut-off Date Principal Balance of
the Mortgage Loans secured by Mortgaged Properties located in the states of
California, Utah, Colorado, Florida and Washington will be no more than
approximately 28.0%, 5.8%, 5.5%, 5.5% and 5.0%, respectively. The weighted
average Combined Loan-to-Value Ratio of the Mortgage Loans is expected to
be approximately 82.0% as of the Cut-off Date. The 'Combined Loan-to-Value
Ratio' of each Mortgage Loan is the ratio of (A) the sum of (i) the maximum
amount the borrower is permitted to draw down under the related Credit Line
Agreement (the 'Credit Limit') and (ii) the amounts of any related senior
mortgage loans and any related mortgage loan of equal priority (computed
generally as of the date of origination of each such Mortgage Loan) to (B)
the lesser of (i) the appraised value of the Mortgaged Property or (ii) in
the case of a Mortgaged Property purchased within one year of the
origination of the related Mortgage Loan, the purchase price of such
Mortgaged Property.
Interest on each Mortgage Loan is payable monthly and computed on the
related daily outstanding Principal Balance for each day in the billing
cycle at a variable rate per annum (the 'Loan Rate') equal at any time
(subject to maximum rates, as described herein under 'Description of the
Mortgage Loans -- Mortgage Loan Terms,' and further subject to applicable
usury limitations) to the sum of (i) the highest prime rate published in
the 'Money Rates' section of The Wall Street Journal and (ii) a Margin
expected to be within the range of 0.000% to 5.875% as of
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the Cut-off Date. The weighted average Margin of the Mortgage Loans is
expected to be approximately 2.3% as of the Cut-off Date. Loan Rates are
adjusted monthly on the first business day of the calendar month preceding
the Due Date. As to each Mortgage Loan, the 'Due Date' is the fifteenth day
of each month. The Cut-off Date Principal Balances of the Mortgage Loans
are expected to range from zero to $500,000 and to average approximately
$22,700. Credit Limits under the Mortgage Loans as of the Cut-off Date are
expected to range from $8,500 to $500,000 and to average approximately
$34,300. Each Mortgage Loan will be originated in the period from October
31, 1996 to February 25, 1997. The maximum Credit Limit Utilization Rate
(as defined herein) of the Mortgage Loans is expected to be 100% and the
weighted average Credit Limit Utilization Rate is expected to be
approximately 67.0%, in each case as of the Cut-off Date. It is expected
that approximately 5.4% by Cut-off Date Principal Balance of the Mortgage
Loans will represent first liens on the related Mortgaged Properties, while
approximately 94.6% of such Mortgage Loans will represent second liens. It
is expected that the Mortgage Loans will have remaining terms to scheduled
maturity ranging from 153 months to 302 months and will have a weighted
average remaining term to scheduled maturity of approximately 285 months,
in each case as of the Cut-Off Date. See 'Description of the Mortgage
Loans' herein.
Denominations....................... The Certificates will be offered for purchase in denominations of $1,000
and multiples of $1 in excess thereof. The interest in the Trust Fund
evidenced by a Certificate (the 'Percentage Interest') will be equal to the
percentage derived by dividing the denomination of such Certificate by the
Original Certificate Principal Balance.
Registration of Certificates........ The Certificates will initially be issued in book-entry form. Persons
acquiring beneficial ownership interests in the Certificates ('Certificate
Owners') may elect to hold their Certificate interests through The
Depository Trust Company ('DTC'), in the United States, or Cedel Bank,
societe anonyme ('CEDEL') or the Euroclear System ('Euroclear'), in Europe.
Transfers within DTC, CEDEL or Euroclear, as the case may be, will be in
accordance with the usual rules and operating procedures of the relevant
system. So long as the Certificates are Book-Entry Certificates (as defined
herein), such Certificates will be evidenced by one or more Certificates
registered in the name of Cede & Co. ('Cede'), as the nominee of DTC or one
of the relevant depositaries (collectively, the 'European Depositaries').
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and counterparties holding directly or
indirectly through CEDEL or Euroclear, on the other, will be effected in
DTC through Citibank N.A. ('Citibank') or The Chase Manhattan Bank
('Chase'), the relevant depositaries of CEDEL or Euroclear, respectively,
and each a participating member of DTC. The Certificates will initially be
registered in the name of Cede. The interests of the Certificateholders
will be represented by book entries on the records of DTC and participating
members thereof. No Certificate Owner will be entitled to receive a
definitive certificate representing such person's interest, except in the
event that Definitive Certificates (as defined herein) are issued under the
limited circumstances described under 'Description of the Certificates --
Book-Entry Certificates' herein. All references in this Prospectus
Supplement to any Certificates reflect the
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rights of Certificate Owners only as such rights may be exercised through
DTC and its participating organizations for so long as such Certificates
are held by DTC. See 'Risk Factors -- Book-Entry Certificates',
'Description of the Certificates -- Book-Entry Certificates' herein and
'Annex I' hereto.
Depositor........................... CWABS, Inc., a Delaware corporation and a limited purpose finance
subsidiary of Countrywide Credit Industries, Inc., a Delaware corporation.
The principal executive offices of the Depositor are located at 155 North
Lake Avenue, Pasadena, California 91101 (Telephone: (818) 666-5205). See
'The Depositor' in the Prospectus.
Master Servicer of the Mortgage
Loans............................. Countrywide Home Loans, Inc., a New York corporation headquartered in
Pasadena, California. The principal executive offices of the Master
Servicer are located at 155 North Lake Avenue, Pasadena, California 91101
(Telephone: (818) 304-8400). See 'Servicing of the Mortgage Loans -- The
Master Servicer' herein.
Collections......................... All collections on the Mortgage Loans will generally be allocated in
accordance with the Credit Line Agreements between amounts collected in
respect of interest and amounts collected in respect of principal. As to
any Distribution Date, 'Interest Collections' will be equal to the amounts
collected during the related Collection Period, including without
limitation the portion of Net Liquidation Proceeds (as defined below),
allocated to interest pursuant to the terms of the Credit Line Agreements
less Servicing Fees for the related Collection Period.
As to any Distribution Date, 'Principal Collections' will be equal to the
sum of (i) the amounts collected during the related Collection Period,
including without limitation the portion of Net Liquidation Proceeds,
allocated to principal pursuant to the terms of the Credit Line Agreements
and (ii) any Transfer Deposit Amounts (as defined herein).
'Net Liquidation Proceeds' with respect to a Mortgage Loan are the proceeds
(excluding amounts drawn on the Policy) received in connection with the
liquidation of any Mortgage Loan, whether through trustee's sale,
foreclosure sale or otherwise, reduced by related expenses, but not
including the portion, if any, of such amount that exceeds the Principal
Balance of the Mortgage Loan plus any accrued and unpaid interest thereon
to the end of the Collection Period during which such Mortgage Loan became
a Liquidated Mortgage Loan.
With respect to any Distribution Date, the portion of Interest Collections
allocable to the Certificates ('Investor Interest Collections') will equal
the product of (a) Interest Collections for such Distribution Date and (b)
the Investor Floating Allocation Percentage. With respect to any
Distribution Date, the 'Investor Floating Allocation Percentage' is the
percentage equivalent of a fraction determined by dividing the Invested
Amount at the close of business on the preceding Distribution Date (or at
the Closing Date in the case of the first Distribution Date) by the Pool
Balance at the beginning of the related Collection Period. The remaining
amount of Interest Collections will be allocated to the Transferor Interest
as more fully described under 'Description of the Certificates --
Allocations and Collections' herein.
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On each Distribution Date, the Investor Interest Collections will be
applied in the following order of priority: (i) as payment to the Trustee
for its fee for services rendered pursuant to the Agreement; (ii) as
payment for the premium for the Policy; (iii) as payment for the accrued
interest due and any overdue accrued interest (with interest thereon to the
extent permitted by applicable law) on the Certificate Principal Balance of
the Certificates; (iv) to pay any Investor Loss Amount (as defined herein)
for such Distribution Date; (v) as payment for any Investor Loss Amount for
a previous Distribution Date that was not previously (a) funded by Investor
Interest Collections allocable to the Certificateholders, (b) absorbed by
the Overcollateralization Amount, (c) funded by Interest Collections and
Principal Collections allocable to the Transferor Interest up to the
Available Transferor Subordinated Amount ('Subordinated Transferor
Collections') as described under ' -- Limited Subordination of Transferor
Interest' below or (d) funded by draws on the Policy; (vi) to reimburse
prior draws made from the Policy (with interest thereon); (vii) to pay
principal on the Certificates until the Invested Amount exceeds the
Certificate Principal Balance by the Required Overcollateralization Amount,
each as defined herein (such amount, if any, paid pursuant to this clause
(vii) being referred to herein as the 'Accelerated Principal Distribution
Amount'); (viii) to any other amounts owed to the Certificate Insurer
pursuant to the Insurance Agreement; (ix) as payment of certain amounts
that may be required to be paid to the Master Servicer pursuant to the
Agreement; and (x) to the Transferor to the extent permitted as described
under 'Description of the Certificates -- Distributions on the
Certificates' herein.
Investor Interest Collections available after the payment of interest on
the Certificates and Subordinated Transferor Collections may be
insufficient to cover any Investor Loss Amount. If such insufficiency
results in the Certificate Principal Balance exceeding the Invested Amount,
a draw in an amount equal to such difference will be made on the Policy in
accordance with the terms of the Policy.
The 'Overcollateralization Amount' on any date of determination is the
amount, if any, by which the Invested Amount exceeds the Certificate
Principal Balance on such day. Payments to Certificateholders pursuant to
clause (iii) above will be interest payments on the Certificates. Payments
to Certificateholders pursuant to clauses (iv), (v) and (vii) above will be
principal payments on the Certificates and will therefore reduce the
Certificate Principal Balance, however, payments pursuant to clause (vii)
will not reduce the Invested Amount. The Accelerated Principal Distribution
Amount is not guaranteed by the Policy.
'Liquidation Loss Amount' means, with respect to any Liquidated Mortgage
Loan, the unrecovered Principal Balance thereof at the end of the related
Collection Period in which such Mortgage Loan became a Liquidated Mortgage
Loan, after giving effect to the Net Liquidation Proceeds in connection
therewith. The 'Investor Loss Amount' shall be the product of the Investor
Floating Allocation Percentage and the Liquidation Loss Amount for such
Distribution Date. See 'Description of the Certificates -- Distributions on
the Certificates' herein.
Principal Collections will be allocated between the Certificateholders and
the Transferor ('Investor Principal Collections' and 'Transferor Principal
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Collections', respectively) in accordance with their percentage interests
in the Mortgage Loans of approximately 98% and 2% (each, a 'Fixed
Allocation Percentage'), respectively, as of the Closing Date without
giving effect to any collections received on or in respect thereof after
the Cut-off Date, but a lesser amount of Principal Collections may be
distributed to Certificateholders during the Managed Amortization Period,
as described below. The 'Investor Fixed Allocation Percentage' shall be
approximately 98%.
The Master Servicer will deposit Interest Collections and Principal
Collections in respect of the Mortgage Loans in an account established for
such purpose under the Agreement (the 'Collection Account'). See
'Description of the Certificates -- Payments on Mortgage Loans; Deposits to
Collection Account' herein.
Collection Period................... As to any Distribution Date, the 'Collection Period' is the calendar month
preceding the month of such Distribution Date (or, in the case of the first
Collection Period, the period beginning on February 26, 1997 through the
last day of March 1997).
Interest............................ Interest on the Certificates will be distributed monthly on the fifteenth
day of each month or, if such day is not a Business Day, then the next
succeeding Business Day (each, a 'Distribution Date'), commencing on April
15, 1997, at the Certificate Rate for the related Interest Period (as
defined below). The 'Certificate Rate' for an Interest Period will
generally equal the sum of (a) the London Interbank offered rate for one-
month United States dollar deposits ('LIBOR') appearing on the Telerate
Screen Page 3750, as of the second LIBOR Business Day (as defined herein)
prior to the first day of such Interest Period (or as of two LIBOR Business
Days prior to the Closing Date, in the case of the first Interest Period)
and (b) 0.15%. Notwithstanding the foregoing, in no event will the amount
of interest required to be distributed in respect of the Certificates on
any Distribution Date exceed a per annum rate equal to the weighted average
of the Loan Rates (net of the Servicing Fee Rate, the rate at which the fee
payable to the Trustee is calculated, the rate at which the premium payable
to the Certificate Insurer is calculated and, commencing with the
Distribution Date in October 1997, 0.50%) weighted on the basis of the
daily average balance of each Mortgage Loan during the related billing
cycle prior to the Collection Period relating to such Distribution Date.
Interest on the Certificates in respect of any Distribution Date will
accrue from the preceding Distribution Date (or in the case of the first
Distribution Date, from the date of the initial issuance of the
Certificates (the 'Closing Date')) through the day preceding such
Distribution Date (each such period, an 'Interest Period') on the basis of
the actual number of days in the Interest Period and a 360-day year.
Interest payments on the Certificates will be funded from Investor Interest
Collections, Subordinated Transferor Collections and, if necessary, from
draws on the Policy. See 'Description of the Certificates' herein.
Principal Payments from Principal
Collections....................... For the period beginning on the first Distribution Date and, unless a Rapid
Amortization Event (as defined herein) shall have earlier occurred, ending
on the Distribution Date in March 2002 (the 'Managed Amortization Period'),
the amount of Principal Collections payable to
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Certificateholders as of each Distribution Date during the Managed
Amortization Period will equal, to the extent funds are available therefor,
the Scheduled Principal Collections Distribution Amount for such
Distribution Date. On any Distribution Date during the Managed Amortization
Period, the 'Scheduled Principal Collections Distribution Amount' shall
equal the lesser of (i) the Maximum Principal Payment (as defined herein)
and (ii) the Alternative Principal Payment (as defined herein). With
respect to any Distribution Date, the 'Maximum Principal Payment' will
equal the product of the Investor Fixed Allocation Percentage and Principal
Collections for such Distribution Date. With respect to any Distribution
Date, the 'Alternative Principal Payment' will equal the amount, but not
less than zero, of Principal Collections for such Distribution Date less
the aggregate of Additional Balances created during the related Collection
Period.
Beginning with the first Distribution Date following the end of the Managed
Amortization Period, the amount of Principal Collections payable to
Certificateholders on each Distribution Date will be equal to the Maximum
Principal Payment. See 'Description of the Certificates -- Distributions on
the Certificates' herein. In addition, to the extent funds are available
therefor (including funds available under the Policy), on the Distribution
Date in February 2027 Certificateholders will be entitled to receive as
payment of principal an amount equal to the outstanding Certificate
Principal Balance.
If on any Distribution Date the Required Overcollateralization Amount is
reduced below the then existing Overcollaterialization Amount, the amount
of Principal Collections payable to Certificateholders on such Distribution
Date will be correspondingly reduced by the amount of such reduction.
Distributions of Principal Collections based upon the Investor Fixed
Allocation Percentage may result in distributions of principal to
Certificateholders in amounts that are greater relative to the declining
Pool Balance than would be the case if the Investor Floating Allocation
Percentage were used to determine the percentage of Principal Collections
distributed in respect of the Invested Amount. The aggregate distributions
of principal to Certificateholders will not exceed the Original Certificate
Principal Balance.
The Certificate Insurer............. Financial Security Assurance Inc. (the 'Certificate Insurer') is a New York
monoline insurance company engaged exclusively in the business of writing
financial guaranty insurance, principally in respect of asset-backed and
other collateralized securities offered in domestic and foreign markets.
The Certificate Insurer's claims-paying ability is rated 'Aaa' by Moody's
Investors Service, Inc. ('Moody's') and 'AAA' by each of Standard & Poor's
Ratings Services, a division of The McGraw-Hill Companies, Inc. ('Standard
& Poor's'), Nippon Investors Service, Inc. and Standard & Poor's
(Australia) Pty. Ltd. See 'The Certificate Insurer' herein.
Policy.............................. On or before the Closing Date, the Policy will be issued by the Certificate
Insurer pursuant to the provisions of the Insurance and Indemnity Agreement
(the 'Insurance Agreement') to be dated as of February 25, 1997, among the
Seller, the Depositor, the Master Servicer and the Certificate Insurer.
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The Policy will irrevocably and unconditionally guarantee payment on each
Distribution Date to the Trustee for the benefit of the Certificateholders
the full and complete payment of (i) the Guaranteed Principal Distribution
Amount (as defined herein) with respect to the Certificates for such
Distribution Date and (ii) accrued and unpaid interest due on the
Certificates (together, the 'Guaranteed Distributions'), with such
Guaranteed Distributions having been calculated in accordance with the
original terms of the Certificates or the Agreement except for amendments
or modifications to which the Certificate Insurer has given its prior
written consent. The effect of the Policy is to guarantee the timely
payment of interest on, and the ultimate payment of the principal amount
of, all of the Certificates.
The 'Guaranteed Principal Distribution Amount' for any Distribution Date on
which the Available Transferor Subordinated Amount has been reduced to or
equals zero shall be the amount by which the Certificate Principal Balance
(after giving effect to all other amounts distributable and allocable to
principal on the Certificates on such Distribution Date) exceeds the
Invested Amount for such Distribution Date. In addition, the Policy will
guarantee the payment of the outstanding Certificate Principal Balance on
the Distribution Date in February 2027 (after giving effect to all other
amounts distributable and allocable to principal on such Distribution
Date).
In the absence of payments under the Policy, Certificateholders will
directly bear the credit and other risks associated with their undivided
interest in the Trust Fund. See 'Description of the Certificates -- The
Policy' herein.
Limited Subordination of Transferor
Interest.......................... If Investor Interest Collections on any Distribution Date are insufficient
to pay (i) accrued interest due and any overdue accrued interest (with
interest thereon to the extent permitted by applicable law) on the
Certificates, and (ii) the Investor Loss Amount relating to such
Distribution Date (such insufficiency being the 'Required Amount'),
Subordinated Transferor Collections will be applied to cover the Required
Amount. The portion of the Required Amount in respect of clause (ii) above
not covered by such Subordinated Transferor Collections (up to the
remaining Available Subordinated Transferor Amount and not in excess of the
Investor Loss Amounts) will be reallocated to the Transferor Interest,
thereby reducing the Transferor Interest. If such Investor Interest
Collections plus the Subordinated Transferor Collections which have been so
applied to cover the Required Amount are together insufficient to pay the
amounts set forth in item (i) of the definition of Required Amount, then a
draw will be made on the Policy for such Distribution Date to cover the
amount of such shortfall. In addition, if on any Distribution Date on which
the Available Transferor Subordinated Amount is reduced to zero, the
Certificate Principal Balance exceeds the Invested Amount (after giving
effect to all allocations and distributions with respect to principal to be
made on the Certificates on such Distribution Date), a draw will be made on
the Policy for such Distribution Date in the amount by which the
Certificate Principal Balance exceeds the Invested Amount.
With respect to any Distribution Date, the 'Available Transferor
Subordinated Amount' shall equal the lesser of the Transferor Interest
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and the Required Transferor Subordinated Amount for such Distribution Date.
With respect to any Distribution Date, the 'Required Transferor
Subordinated Amount' shall be an amount determined as set forth in the
Insurance Agreement (as defined herein).
Overcollateralization Amount........ The distribution of Accelerated Principal Distribution Amounts, if any, to
Certificateholders may result in the Invested Amount being greater than the
Certificate Principal Balance, thereby creating the Overcollateralization
Amount. The Overcollateralization Amount, if any, will be available to
absorb any Investor Loss Amount not covered by Investor Interest
Collections. Payments of Accelerated Principal Distribution Amounts are not
covered by the Policy. Any Investor Loss Amounts not covered by such
overcollateralization, Subordinated Transferor Collections or Investor
Interest Collections will be covered by draws on the Policy to the extent
provided therein.
Record Date......................... The last day preceding a Distribution Date or, if the Certificates are no
longer Book-Entry Certificates, the last day of the month preceding a
Distribution Date.
Servicing........................... The Master Servicer will be responsible for servicing, managing and making
collections on the Mortgage Loans. The Master Servicer will deposit all
collections in respect of the Mortgage Loans into the Collection Account as
described under 'Description of the Certificates -- Payments on Mortgage
Loans; Deposits to Collection Account' herein. On the third Business Day
prior to each Distribution Date (the 'Determination Date'), the Master
Servicer will calculate, and instruct the Trustee regarding the amounts
available to be paid, as described under 'Description of the
Certificates -- Payments on Mortgage Loans; Deposits to Collection Account'
herein, to the Certificateholders on such Distribution Date. See
'Description of the Certificates -- Distributions on the Certificates'
herein. With respect to each Collection Period, the Master Servicer will
receive from collections in respect of interest on the Mortgage Loans, on
behalf of itself, a portion of such collections as a monthly servicing fee
(the 'Servicing Fee') in the amount of 0.50% per annum (the 'Servicing Fee
Rate') on the aggregate Principal Balances of the Mortgage Loans as of the
first day of each such Collection Period. See 'Description of the
Certificates -- Servicing Compensation and Payment of Expenses' herein. In
certain limited circumstances, the Master Servicer may resign or be
removed, in which event either the Trustee or a third-party servicer will
be appointed as a successor Master Servicer. See 'Description of the
Certificates -- Certain Matters Regarding the Master Servicer and the
Transferor' herein.
Final Payment of Principal;
Termination....................... The Trust Fund will terminate on the Distribution Date following the later
of (A) payment in full of all amounts owing to the Certificate Insurer and
(B) the earliest of (i) the Distribution Date on which the Certificate
Principal Balance has been reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust Fund, (iii) the optional
retransfer to the Transferor of the Certificates, as described below and
(iv) the Distribution Date in February 2027. The Certificates will be
subject to optional retransfer to the Transferor on any Distribution Date
after the Certificate Principal Balance is reduced to an amount less than
or equal to 10% of the Original Certificate Principal Balance and all
amounts due
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and owing to the Certificate Insurer and unreimbursed draws on the Policy,
together with interest thereon, as provided under the Insurance Agreement,
have been paid. The retransfer price will be equal to the sum of the
outstanding Certificate Principal Balance and accrued and unpaid interest
thereon at the Certificate Rate through the day preceding the final
Distribution Date. See 'Description of The Certificates -- Termination;
Retirement of the Certificates' herein and 'The Agreements -- Termination;
Optional Termination' in the Prospectus.
In addition, the Trust Fund may be liquidated as a result of certain events
of bankruptcy, insolvency or receivership relating to the Transferor. See
'Description of the Certificates -- Rapid Amortization Events' herein.
Trustee............................. The First National Bank of Chicago, a national banking association (the
'Trustee'), will act as Trustee on behalf of the Certificateholders.
Mandatory Retransfer of Certain
Mortgage Loans.................... The Seller will make certain representations and warranties in the
Agreement with respect to the Mortgage Loans. If the Seller breaches
certain of its representations and warranties with respect to any Mortgage
Loan and such breach materially and adversely affects the interests of the
Certificateholders or the Certificate Insurer and is not cured within the
specified period, the Mortgage Loan will be removed from the Trust Fund
upon the expiration of a specified period from the date on which the Seller
becomes aware or receives notice of such breach and will be reassigned to
the Seller. See 'Description of the Certificates -- Assignment of Mortgage
Loans' herein.
Federal Income Tax
Consequences...................... Subject to the qualifications set forth in 'Federal Income Tax Conse-
quences' herein, Brown & Wood LLP, special tax counsel to the Depositor, is
of the opinion that, under existing law, a Certificate will be treated as a
debt instrument for federal income tax purposes as of the Closing Date.
Under the Agreement, the Transferor, the Depositor and the
Certificateholders will agree to treat the Certificates as indebtedness for
federal income tax purposes. Furthermore, special tax counsel to the
Depositor is of the opinion that the Trust Fund will not be treated as
either an association or a publicly traded partnership taxable as a
corporation or as a taxable mortgage pool. See 'Federal Income Tax
Consequences' herein and in the Prospectus for additional information
concerning the application of federal income tax laws.
ERISA Considerations................ The acquisition of a Certificate by a pension or other employee benefit
plan (a 'Plan') subject to the Employee Retirement Income Security Act of
1974, as amended ('ERISA'), could, in some instances, result in a
'prohibited transaction' or other violation of the fiduciary responsibility
provisions of ERISA and Code Section 4975. Certain exemptions from the
prohibited transaction rules could be applicable to the acquisition of the
Certificates. Any Plan fiduciary considering whether to purchase any
Certificate on behalf of a Plan should consult with its counsel regarding
the applicability of the provisions of ERISA and the Code. See 'ERISA
Considerations' herein and in the Prospectus.
Legal Investment Considerations..... The Certificates will not constitute 'mortgage related securities' for
purposes of the Secondary Mortgage Market Enhancement Act of 1984
('SMMEA'), because not all of the Mortgages securing the Mortgage Loans are
first mortgages. Accordingly, many institutions with legal
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authority to invest in comparably rated securities based solely on first
mortgages may not be legally authorized to invest in the Certificates. See
'Legal Investment Considerations' herein and 'Legal Investment' in the
Prospectus.
Certificate Rating.................. It is a condition to the issuance of the Certificates that they be rated
'AAA' by Standard & Poor's and 'Aaa' by Moody's (each a 'Rating Agency').
In general, ratings address credit risk and do not address the likelihood
of prepayments. See 'Ratings' herein and 'Risk Factors -- Rating of the
Securities' in the Prospectus.
Risk Factors........................ For a discussion of certain risks associated with an investment in the
Certificates, see 'Risk Factors' on page S-15 herein and on page 14 in the
Prospectus.
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RISK FACTORS
Investors should consider the following risks in connection with the
purchase of Certificates.
Consequences of Owning Book-Entry Certificates. Issuance of the
Certificates in book-entry form may reduce the liquidity of such Certificates in
the secondary trading market since investors may be unwilling to purchase
Certificates for which they cannot obtain physical certificates. See
'Description of the Certificates -- Book-Entry Certificates' herein and 'Risk
Factors -- Book-Entry Registration' in the Prospectus.
Since transactions in the Certificates can be effected only through DTC,
CEDEL, Euroclear, participating organizations, indirect participants and certain
banks, the ability of a Certificate Owner to pledge a Certificate to persons or
entities that do not participate in the DTC, CEDEL or Euroclear system may be
limited due to lack of a physical certificate representing the Certificates. See
'Description of the Certificates -- Book-Entry Certificates' herein and 'Risk
Factors -- Book-Entry Registration' in the Prospectus.
Certificate Owners may experience some delay in their receipt of
distributions of interest and principal on the Certificates since such
distributions will be forwarded by the Trustee to DTC and DTC will credit such
distributions to the accounts of its Participants (as defined herein) which will
thereafter credit them to the accounts of Certificate Owners either directly or
indirectly through indirect participants. Certificate Owners will not be
recognized as Certificateholders as such term is used in the Agreement, and
Certificate Owners will be permitted to exercise the rights of
Certificateholders only indirectly through DTC and its Participants. See
'Description of the Certificates -- Book-Entry Certificates' herein and 'Risk
Factors -- Book-Entry Registration' in the Prospectus.
Cash Flow Considerations and Risks. Minimum required monthly payments on
the Mortgage Loans will at least equal and may exceed accrued interest thereon.
Monthly payments and the creation of Additional Balances may vary significantly
from Collection Period to Collection Period. Even assuming that the Mortgaged
Properties provide adequate security for the Mortgage Loans, substantial delays
could be encountered in connection with the liquidation of Mortgage Loans that
are delinquent and resulting shortfalls in distributions to Certificateholders
could occur if the Certificate Insurer were unable to perform its obligations
under the Policy. Further, liquidation expenses (such as legal fees, real estate
taxes, and maintenance and preservation expenses) will reduce the security for
the related Mortgage Loans and thereby reduce the proceeds payable to
Certificateholders. In the event any of the Mortgaged Properties fail to provide
adequate security for the related Mortgage Loans, Certificateholders could
experience a loss if the Certificate Insurer were unable to perform its
obligations under the Policy.
Prepayment Considerations and Risks. Substantially all of the Mortgage
Loans may be prepaid in whole or in part at any time without penalty. Neither
the Depositor nor the Master Servicer is aware of any publicly available studies
or statistics on the rate of prepayment of such loans. Generally, home equity
loans are not viewed by borrowers as permanent financing. Accordingly, the
Mortgage Loans may experience a higher rate of prepayment than traditional
loans. The Trust Fund's prepayment experience may be affected by a wide variety
of factors, including general economic conditions, interest rates, the
availability of alternative financing and homeowner mobility. In addition,
substantially all of the Mortgage Loans contain due-on-sale provisions and the
Master Servicer intends to enforce such provisions unless (i) such enforcement
is not permitted by applicable law or (ii) the Master Servicer, in a manner
consistent with reasonable commercial practice, permits the purchaser of the
related Mortgaged Property to assume the Mortgage Loan. To the extent permitted
by applicable law, such assumption will not release the original borrower from
its obligation under any such Mortgage Loan. See 'Description of the
Certificates' herein and 'Certain Legal Aspects of the Loans -- Due-on-Sale
Clauses' in the Prospectus for a description of certain provisions of the Credit
Line Agreements that may affect the prepayment experience on the Mortgage Loans.
The yield to maturity and weighted average life of the Certificates will be
affected primarily by the rate and timing of prepayments on the Mortgage Loans,
the creation and amount, if any, of Additional Balances and the realization of
Liquidation Loss Amounts. Any reinvestment risks resulting from a faster or
slower incidence of prepayment of Mortgage Loans will be borne entirely by the
Certificateholders. See 'Maturity and Prepayment Considerations' herein and
'Yield and Prepayment Considerations' in the Prospectus.
Certificate Rating. The rating of the Certificates will depend primarily
on an assessment by the Rating Agencies of the Mortgage Loans and upon the
claims-paying ability of the Certificate Insurer. Any reduction in a rating
assigned to the claims-paying ability of the Certificate Insurer below the
rating initially given to the
S-15
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Certificates may result in a reduction in the rating of the Certificates. The
rating by the Rating Agencies of the Certificates is not a recommendation to
purchase, hold or sell the Certificates, inasmuch as such rating does not
comment as to the market price or suitability for a particular investor. There
is no assurance that the ratings will remain in place for any given period of
time or that the ratings will not be lowered or withdrawn by the Rating
Agencies. In general, the ratings address credit risk and do not address the
likelihood of prepayments. The ratings of the Certificates do not address the
possibility of the imposition of United States withholding tax with respect to
non-U.S. persons.
Legal Considerations -- Lien Priority. The Mortgage Loans are secured by
mortgages (which generally are second mortgages). With respect to Mortgage Loans
that are secured by first mortgages, the Master Servicer has the power under
certain circumstances to consent to a new mortgage lien on the Mortgaged
Property having priority over such Mortgage Loan. Mortgage Loans secured by
second mortgages are entitled to proceeds that remain from the sale of the
related Mortgaged Property after any related senior mortgage loan and prior
statutory liens have been satisfied. In the event that such proceeds are
insufficient to satisfy such loans and prior liens in the aggregate and the
Certificate Insurer is unable to perform its obligations under the Policy, the
Certificateholders will bear (i) the risk of delay in distributions while a
deficiency judgment, if any, against the borrower is sought and (ii) the risk of
loss if the deficiency judgment cannot be obtained or is not realized upon. See
'Certain Legal Aspects of the Loans' in the Prospectus.
Legal Considerations -- Security Interest. Under the terms of the
Agreement, so long as Countrywide's long-term senior unsecured debt is rated at
least 'BBB-' by Standard & Poor's and 'Baa2' by Moody's, the Master Servicer
will be entitled to maintain possession of the documentation relating to each
Mortgage Loan sold by it, including the Credit Line Agreements and the Related
Documents or other evidence of indebtedness signed by the borrower, and the
assignments of the related mortgages to the Trust Fund will not be required to
be recorded. Failure to deliver the Related Documents to the Trustee will have
the result in most (if not all) of the states in which the Related Documents
will be held, and failure to record the assignments of the related mortgages to
the Trustee will have the result in certain states in which the Mortgaged
Properties are located, of making the sale of the Closing Date Pool Balance,
Additional Balances and Related Documents potentially ineffective against (i)
any creditors of Countrywide, who may have been fraudulently or inadvertently
induced to rely on the Mortgage Loans as assets of Countrywide, or (ii) any
purchaser of a Mortgage Loan who had no notice of the prior conveyance to the
Trust Fund if such purchaser perfects his interest in the Mortgage Loan by
taking possession of the Related Documents or other evidence of indebtedness or
otherwise. In such event, the Trust Fund would be an unsecured creditor of
Countrywide.
Bankruptcy and Insolvency Risks. The sale of the Mortgage Loans from
Countrywide to the Depositor pursuant to the Purchase Agreement will be treated
as a sale of the Mortgage Loans. However, in the event of an insolvency of
Countrywide, the trustee in bankruptcy of Countrywide may attempt to
recharacterize the sale of the Mortgage Loans as a borrowing by Countrywide,
secured by a pledge of the applicable Mortgage Loans. If the trustee in
bankruptcy decided to challenge such transfer, (i) if the Mortgage Loans have
not been delivered to the Trustee, the interest of the Trust Fund in the
Mortgage Loans will be that of an unperfected security interest and (ii) even if
the Mortgage Loans have been delivered to the Trustee, delays in payments of the
Certificates and reductions in the amounts thereof could occur. The Depositor
will warrant in the Agreement that the transfer of the Mortgage Loans by it to
the Trust Fund is either a valid transfer and assignment of such Mortgage Loans
to the Trust Fund or the grant to the Trust Fund of a security interest in such
Mortgage Loans.
If a conservator, receiver or trustee were appointed for the Transferor, or
if certain other events relating to the bankruptcy or insolvency of the
Transferor were to occur, Additional Balances would not be sold to the Trust
Fund. In such an event, the Rapid Amortization Period would commence and the
Trustee would attempt to sell the Mortgage Loans (unless Certificateholders
holding Certificates evidencing undivided interests aggregating at least 51% of
the Certificate Principal Balance instruct otherwise), thereby causing early
payment of the Certificate Principal Balance. The net proceeds of such sale will
first be paid to the Certificate Insurer to the extent of unreimbursed draws
under the Policy and other amounts owing to the Certificate Insurer pursuant to
the Insurance Agreement. The Investor Fixed Allocation Percentage of remaining
amounts will be distributed to the Certificateholders and the Policy will cover
any amount by which such remaining net proceeds are insufficient to pay the
Certificate Principal Balance or interest at the Certificate Rate in full.
In the event of a bankruptcy or insolvency of the Master Servicer, the
bankruptcy trustee or receiver may have the power to prevent the Trustee or the
Certificateholders from appointing a successor Master Servicer.
S-16
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Geographic Concentration. It is expected that no more than approximately
28.0% (by Cut-off Date Principal Balance of the Mortgage Loans) of the Mortgaged
Properties will be located in the State of California. After the Cut-off Date,
the degree of geographic concentration could change as a result of prepayments
and/or the creation of Additional Balances. An overall decline in the California
residential real estate market could adversely affect the values of the
Mortgaged Properties securing the Mortgage Loans such that the Principal
Balances of the related Mortgage Loans, together with any primary financing on
such Mortgaged Properties, could equal or exceed the value of such Mortgaged
Properties. As the residential real estate market is influenced by many factors,
including the general condition of the economy and interest rates, no assurances
may be given that the California residential real estate market will not weaken.
If the California residential real estate market should experience an overall
decline in property values after the dates of origination of the Mortgage Loans,
the rates of losses on the Mortgage Loans would be expected to increase, and
could increase substantially.
Master Servicer's Ability to Change the Terms of the Mortgage Loans. The
Master Servicer may agree to changes in the terms of a Credit Line Agreement,
provided that such changes (i) do not materially and adversely affect the
interest of the Certificateholders or the Certificate Insurer, and (ii) are
consistent with prudent business practice. There can be no assurance that
changes in applicable law or the marketplace for home equity loans or prudent
business practice will not result in changes in the terms of the Mortgage Loans.
In addition, the Agreement permits the Master Servicer, within certain
limitations described therein, to increase the Credit Limit of the related
Mortgage Loan or reduce the Loan Rate for such Mortgage Loan. Any such increase
in the Credit Limit of a Mortgage Loan would increase the Loan-to-Value Ratio of
such Mortgage Loan and, accordingly, would increase the risk of the Trust Fund's
investment in such Mortgage Loan. In addition, any reduction in the Loan Rate of
a Mortgage Loan would reduce the excess cash flow available to absorb losses.
Delinquent Mortgage Loans. The Trust Fund will include Mortgage Loans
which are 59 or fewer days delinquent as of the Cut-off Date. It is expected
that the Cut-off Date Principal Balance of Mortgage Loans which are between 30
days and 59 days delinquent as of the Cut-off Date will not exceed $250,000. If
(i) there are not sufficient funds from the Investor Interest Collections to
cover the Investor Loss Amounts for any Distribution Date, (ii) the
Overcollateralization Amount, if any, has been reduced to zero, (iii) the
Available Transferor Subordinated Amount has been reduced to zero and (iv) the
Certificate Insurer fails to perform its obligations under the Policy, the
aggregate amount of principal returned to the Certificateholders may be less
than the Certificate Principal Balance on the day the Certificates are issued.
For a discussion of additional risks pertaining to the Certificates, see
'Risk Factors' in the Prospectus.
THE CERTIFICATE INSURER
The following information set forth in this section has been provided by
the Certificate Insurer. Accordingly, none of the Depositor, the Master Servicer
or the Underwriters makes any representation as to the accuracy and completeness
of such information.
General. Financial Security Assurance Inc. (the 'Certificate Insurer' or
'Financial Security') is a monoline insurance company incorporated in 1984 under
the laws of the State of New York. The Certificate Insurer is licensed to engage
in the financial guaranty insurance business in all 50 states, the District of
Columbia and Puerto Rico.
The Certificate Insurer and its subsidiaries are engaged exclusively in the
business of writing financial guaranty insurance, principally in respect of
securities offered in domestic and foreign markets. In general, financial
guaranty insurance consists of the issuance of a guaranty of scheduled payments
of an issuer's securities thereby enhancing the credit rating of those
securities in consideration for the payment of a premium to the insurer. The
Certificate Insurer and its subsidiaries principally insure asset-backed,
collateralized and municipal securities. Asset-backed securities are generally
supported by residential mortgage loans, consumer or trade receivables,
securities or other assets having an ascertainable cash flow or market value.
Collateralized securities include public utility first mortgage bonds and
sale/leaseback obligation bonds. Municipal securities consist largely of general
obligation bonds, special revenue bonds and other special obligations of state
and local governments. The Certificate Insurer insures both newly issued
securities sold in the primary market and outstanding securities sold in the
secondary market that satisfy the Certificate Insurer's underwriting criteria.
The Certificate Insurer is a wholly owned subsidiary of Financial Security
Assurance Holdings Ltd. ('Holdings'), a New York Stock Exchange listed company.
Major shareholders of Holdings include Fund
S-17
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American Enterprises Holdings, Inc., U S WEST Capital Corporation and the Tokio
Marine and Fire Insurance Co., Ltd. No shareholder of Holdings is obligated to
pay any debt of the Certificate Insurer or any claim under any insurance policy
issued by the Certificate Insurer or to make any additional contribution to the
capital of the Certificate Insurer.
The principal executive offices of the Certificate Insurer are located at
350 Park Avenue, New York, New York 10022, and its telephone number at that
location is (212) 826-0100.
Reinsurance. Pursuant to an intercompany agreement, liabilities on
financial guaranty insurance written or reinsured from third parties by the
Certificate Insurer or any of its domestic operating insurance company
subsidiaries are reinsured among such companies on an agreed-upon percentage
substantially proportional to their respective capital, surplus and reserves,
subject to applicable statutory risk limitations. In addition, the Certificate
Insurer reinsures a portion of its liabilities under certain of its financial
guaranty insurance policies with other reinsurers under various quota share
treaties and on a transaction-by-transaction basis. Such reinsurance is utilized
by the Certificate Insurer as a risk management device and to comply with
certain statutory and rating agency requirements; it does not alter or limit the
Certificate Insurer's obligations under any financial guaranty insurance policy.
Ratings of Claims-Paying Ability. The Certificate Insurer's claims-paying
ability is rated 'Aaa' by Moody's and 'AAA' by each of Standard & Poor's, Nippon
Investors Service Inc. and Standard & Poor's (Australia) Pty. Ltd. Such ratings
reflect only the views of the respective rating agencies, are not
recommendations to buy, sell or hold securities and are subject to revision or
withdrawal at any time by such rating agencies.
Capitalization. The following table sets forth the capitalization of the
Certificate Insurer and its wholly owned subsidiaries on the basis of generally
accepted accounting principles as of September 30, 1996 (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
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(UNAUDITED)
<S> <C>
Deferred Premium Revenue
(net of prepaid reinsurance premiums)................................... $ 358,145
------------------
Shareholder's Equity:
Common Stock......................................................... 15,000
Additional Paid-In Capital........................................... 666,470
Unrealized Gain on Investments (net of deferred income taxes)........ 2,482
Accumulated Earnings................................................. 111,231
------------------
Total Shareholder's Equity................................................ $ 795,183
------------------
Total Deferred Premium Revenue and Shareholder's Equity................... $1,153,328
------------------
------------------
</TABLE>
For further information concerning the Certificate Insurer, see the
consolidated financial statements of the Certificate Insurer and Subsidiaries,
and the notes thereto, incorporated by reference herein. Copies of the statutory
quarterly and annual statements filed with the State of New York Insurance
Department by the Certificate Insurer are available upon request to the State of
New York Insurance Department.
Incorporation of Certain Documents by Reference. The consolidated
financial statements of the Certificate Insurer and Subsidiaries included as an
exhibit to the Annual Report on Form 10-K for the year ended December 31, 1995,
and the unaudited financial statements of the Certificate Insurer and
Subsidiaries for the nine-month period ended September 30, 1996 included as an
exhibit to the Quarterly Report on Form 10-Q for the period ended September 30,
1996, each of which has been filed with the Securities and Exchange Commission
by Holdings, are hereby incorporated by reference in this Prospectus Supplement.
All financial statements of the Certificate Insurer and Subsidiaries
included in documents filed by Holdings pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended (the 'Exchange Act'),
subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Certificates shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing of such documents.
Insurance Regulation. The Certificate Insurer is licensed and subject to
regulation as a financial guaranty insurance corporation under the laws of the
State of New York, its state of domicile. In addition, the Certificate
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<PAGE>
Insurer and its insurance subsidiaries are subject to regulation by insurance
laws of the various other jurisdictions in which they are licensed to do
business. As a financial guaranty insurance corporation licensed to do business
in the State of New York, the Certificate Insurer is subject to Article 69 of
the New York Insurance Law which, among other things, limits the business of
each such insurer to financial guaranty insurance and related lines, requires
that each such insurer maintain a minimum surplus to policyholders, establishes
contingency, loss and unearned premium reserve requirements for each such
insurer, and limits the size of individual transactions ('single risks') and the
volume of transactions ('aggregate risks') that may be underwritten by each such
insurer. Other provisions of the New York Insurance Law, applicable to non-life
insurance companies such as the Certificate Insurer, regulate, among other
things, permitted investments, payment of dividends, transactions with
affiliates, mergers, consolidations, acquisitions or sales of assets and
incurrence of liability for borrowings.
The Certificate Insurer does not accept any responsibility for the accuracy
or completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of information regarding the Certificate Insurer or Holdings set forth under the
heading 'The Certificate Insurer.'
THE MASTER SERVICER
GENERAL
The Master Servicer will service the Mortgage Loans in accordance with the
terms set forth in the Agreement. The Master Servicer may perform any of its
obligations under the Agreement through one or more subservicers.
Notwithstanding any such subservicing arrangement, the Master Servicer will
remain liable for its servicing duties and obligations under the Agreement as if
the Master Servicer alone were servicing the Mortgage Loans. As of the Closing
Date, the Master Servicer will service the Mortgage Loans without subservicing
arrangements.
THE MASTER SERVICER
Countrywide Home Loans, Inc. ('Countrywide'), a New York corporation and a
subsidiary of Countrywide Credit Industries, Inc., will act as Master Servicer
for the Mortgage Loans pursuant to the Agreement. Countrywide is engaged
primarily in the mortgage banking business, and as such, originates, purchases,
sells and services mortgage loans. Countrywide originates mortgage loans through
a retail branch system and through mortgage loan brokers and correspondents
nationwide. Countrywide's mortgage loans are principally first-lien, fixed or
adjustable rate mortgage loans secured by single-family residences. Countrywide
began servicing home equity lines of credit in October 1994.
At December 31, 1996, Countrywide provided servicing for approximately $154
billion aggregate principal amount of mortgage loans, substantially all of which
are being serviced for unaffiliated persons. At December 31, 1996, Countrywide
provided servicing for approximately $453 million aggregate principal amount of
first and second lien mortgage loans originated under home equity lines of
credit.
The principal executive offices of Countrywide are located at 155 North
Lake Avenue, Pasadena, California 91101-7139. Its telephone number is (818)
304-8400. Countrywide conducts operations from its headquarters in Pasadena and
from offices located throughout the nation.
THE HOME EQUITY LOAN PROGRAM
UNDERWRITING PROCEDURES RELATING TO HOME EQUITY LOANS
The following is a description of the underwriting procedures customarily
employed by the Seller with respect to home equity loans. The underwriting
process is intended to assess the applicant's credit standing and repayment
ability, and the value and adequacy of the real property security as collateral
for the proposed loan. Exceptions to the Seller's underwriting guidelines will
be made when compensating factors are present. Such factors include the
borrower's employment stability, favorable credit history, equity in the related
property and the nature of the underlying first mortgage loan.
S-19
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<PAGE>
Each applicant for a home equity loan is required to complete an
application which lists the applicant's assets, liabilities, income, credit and
employment history and other demographic and personal information. If
information in the loan application demonstrates that there is sufficient income
and equity in the real property to justify making a home equity loan, the Seller
will conduct a further credit investigation of the applicant. This investigation
includes obtaining and reviewing an independent credit bureau report on the
credit history of the applicant in order to evaluate the applicant's ability to
repay. The credit report typically contains information relating to such matters
as credit history with local merchants and lenders, installment and revolving
debt payments and any record of delinquencies, defaults, bankruptcy, collateral
repossessions, suits or judgments.
The Seller originates or acquires mortgage loans pursuant to alternative
sets of underwriting criteria under its Alternative Documentation Loan Program
(the 'Alternative Documentation Program') and its Reduced Documentation Loan
Program (the 'Reduced Documentation Program'). The Alternative Documentation
Program permits a borrower to provide W-2 forms instead of tax returns covering
the most recent two years, permits bank statements in lieu of verifications of
deposits and permits alternative methods of employment verification. Under the
Reduced Documentation Program, relatively more emphasis is placed on property
underwriting than on credit underwriting and certain credit underwriting
documentation concerning income and employment verification therefore is waived.
Mortgage loans underwritten under the Reduced Documentation Program are limited
to self-employed borrowers with credit histories that demonstrate an established
ability to repay indebtedness in a timely fashion.
Full appraisals are generally performed on all home equity loans which at
origination had a principal balance greater than $100,000. Such appraisals are
determined on the basis of a Seller-approved, independent third-party, fee-based
appraisal completed on forms approved by Federal National Mortgage Association
('FNMA') or Federal Home Loan Mortgage Corporation ('FHLMC'). For loans which
had at origination a principal balance equal to or less than $100,000, a
drive-by evaluation is generally completed by a state licensed, independent
third-party, professional appraiser on forms approved by either FNMA or FHLMC.
The drive-by evaluation is an exterior examination of the premises by the
appraiser to determine that the property is in good condition. The appraisal is
based on various factors, including the market value of comparable homes and the
cost of replacing the improvements and generally is required to have been made
not earlier than 150 days prior to the date of origination of the Mortgage Loan.
The minimum and maximum loan amounts for home equity loans are currently $10,000
and $500,000, respectively. Borrowers may draw under the home equity loans in
minimum amounts of $250 and maximum amounts up to the remaining available credit
thereunder, in each case after giving effect to all prior draws and payments
thereon.
After obtaining all applicable employment, credit and property information,
the Seller uses a debt-to-income ratio to assist in determining whether the
prospective borrower has sufficient monthly income available to support the
payments on the home equity loan in addition to any senior mortgage loan
payments (including any escrows for property taxes and hazard insurance
premiums) and other monthly credit obligations. The 'debt-to-income ratio' is
the ratio of the borrower's total monthly payments (assumed to be based on the
applicable fully indexed interest rate) to the borrower's gross monthly income.
Based on the foregoing, for loans with Combined Loan-to-Value Ratios of 90% or
less, the maximum monthly debt-to-income ratio is 45%. For loans with Combined
Loan-to-Value Ratios greater than 90%, the maximum monthly debt-to-income ratio
is generally 40%. Variations in the monthly debt-to-income ratios limits are
permitted based on compensating factors. The Seller currently offers home equity
loan products that allow maximum Combined Loan-to-Value Ratios of 70%, 80%, 90%
and 100%.
It is generally the Seller's policy to require a title search or limited
coverage policy before it makes a home equity loan for amounts less than or
equal to $100,000. In addition, if the home equity loan has an original
principal balance of $100,000 or more, the Seller requires that the borrower
obtain an American Land Title Association ('ALTA') policy, or other assurance of
title customary in the relevant jurisdiction. In addition, ALTA title policies
are generally obtained in situations where the property is on leased land or
there has been a change in title or such home equity loan is in first lien
position.
SERVICING OF THE MORTGAGE LOANS
The Master Servicer has established standard policies for the servicing and
collection of the home equity loans. Servicing includes, but is not limited to,
(i) the collection and aggregation of payments relating to the Mortgage Loans;
(ii) the supervision of delinquent Mortgage Loans, loss mitigation efforts,
foreclosure
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<PAGE>
proceedings and, if applicable, the disposition of Mortgaged Properties; and
(iii) the preparation of tax related information in connection with the Mortgage
Loans.
Billing statements are mailed monthly by the Master Servicer. The
statements detail all debits and credits and specify the minimum payment due and
the available credit line. Notice of changes in the applicable loan rate are
provided by the Master Servicer to the Mortgagor with such statements. All
payments are due by the fifteenth day of the month.
With respect to Mortgage Loans, the general policy of the Master Servicer
is to initiate foreclosure in the underlying property (i) after such loan is 60
days or more delinquent and satisfactory arrangements cannot be made with the
Mortgagor; or (ii) if a notice of default on a senior lien is received by the
Master Servicer. Foreclosure proceedings may be terminated if the delinquency is
cured. Mortgage Loans to borrowers in bankruptcy proceedings may be restructured
in accordance with law and with a view to maximizing recovery of such loans,
including any deficiencies.
Once foreclosure is initiated by the Master Servicer, a foreclosure
tracking system is used to monitor the progress of the proceedings. The system
includes state specific parameters to monitor whether proceedings are
progressing within the time frame typical for the state in which the property is
located. During the foreclosure proceeding, the Master Servicer determines the
amount of the foreclosure bid and whether to liquidate the loan.
After foreclosure, if the home equity loan is secured by a first mortgage
lien, the Master Servicer may liquidate the Mortgaged Property and charge off
the home equity loan balance which was not recovered through liquidation
proceeds. If the Mortgaged Property was subject to a senior lien, the Master
Servicer will either directly manage the foreclosure sale of the property and
satisfy such lien at the time of sale or take other action as deemed necessary
to protect the interest in the Mortgaged Property. If in the judgment of the
Master Servicer, the cost of maintaining or purchasing the senior lien position
exceeds the economic benefit of such action, the Master Servicer will generally
charge off the entire home equity loan and may seek a money judgment against the
borrower.
Servicing and charge-off policies and collection practices may change over
time in accordance with, among other things, the Master Servicer's business
judgment, changes in the portfolio and applicable laws and regulations.
FORECLOSURE AND DELINQUENCY EXPERIENCE
The following table summarizes the delinquency and foreclosure experience,
respectively, on the dates indicated, of home equity loans serviced by the
Master Servicer. Since Countrywide only began servicing home equity loans in
October 1994, the delinquency and foreclosure percentages may be affected by the
size and relative lack of seasoning of the servicing portfolio because many of
such loans were not outstanding long enough to give rise to some or all of the
periods of delinquency indicated in the chart below. Accordingly, the
information should not be considered as a basis for assessing the likelihood,
amount or severity of delinquency or losses on the Mortgage Loans and no
assurances can be given that the foreclosure and delinquency experience
presented in the table below will be indicative of such experience on the
Mortgage Loans:
DELINQUENCY AND FORECLOSURE EXPERIENCE(1)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995 AS OF DECEMBER 31, 1996
----------------------------- -----------------------------
PRINCIPAL PRINCIPAL
BALANCE PERCENTAGE BALANCE PERCENTAGE
--------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Portfolio......................................... $149,806,173.13 -- $452,944,001.14 --
Delinquency percentage(1)
30-59 Days................................... 303,577.48 0.20% 599,953.75 0.13%
60-89 Days................................... 537,731.49 0.36 444,075.12 0.10
90+ Days..................................... 13,644.96 0.01 437,162.71 0.10
--------------- ----- --------------- -----
Total(2)................................ $ 854,953.93 0.57% $ 1,481,191.58 0.33%
--------------- ----- --------------- -----
--------------- ----- --------------- -----
Foreclosure Rate(3)............................... $ 288,439.89 0.19% $ 771,389.69 0.17%
Bankruptcy Rate(4)................................ $ 212,516.75 0.14% $ 766,265.47 0.17%
</TABLE>
(footnotes on next page)
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<PAGE>
(footnotes from previous page)
(1) The period of delinquency is based on the number of days payments are
contractually past due.
(2) Certain total percentages and dollar amounts may not equal the sum of the
percentages and dollar amounts indicated in the columns due to differences
in rounding.
(3) 'Foreclosure Rate' is the dollar amount of mortgage loans in foreclosure as
a percentage of the total principal balance of mortgage loans outstanding as
of the date indicated.
(4) 'Bankruptcy Rate' is the dollar amount of mortgage loans for which the
related borrower has declared bankruptcy as a percentage of the total
principal balance of mortgage loans outstanding as of the date indicated.
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
Certain information with respect to the Mortgage Loans expected to be
included in the Trust Fund is set forth below. A detailed description of the
Mortgage Loans actually delivered (the 'Detailed Description') will be available
to purchasers of the Certificates at or before, and will be filed on Form 8-K
with the Securities and Exchange Commission within fifteen days after, delivery
of the Certificates. The Detailed Description will specify the aggregate of the
Principal Balances of the Mortgage Loans included in the Trust Fund as of the
Cut-off Date (the 'Cut-off Date Pool Balance') and will also include, among
other things, the following information regarding such Mortgage Loans: the
outstanding Principal Balances of such Mortgage Loans as of the Cut-off Date,
the lien priorities of such Mortgage Loans, the Loan Rates borne by such
Mortgage Loans as of the Cut-off Date, the Combined Loan-to-Value Ratios of such
Mortgage Loans, the remaining term to scheduled maturity of such Mortgage Loans,
the type of properties securing such Mortgage Loans, the geographical
distribution of such Mortgage Loans by state and the Credit Limits and Credit
Limit Utilization Rates of such Mortgage Loans as of the Cut-off Date. The
Mortgage Loans will have been originated pursuant to loan agreements and
disclosure statements (the 'Credit Line Agreements') and will be secured by
mortgages or deeds of trust, which are either first or second mortgages or deeds
of trust, on Mortgaged Properties expected to be located in 44 states and the
District of Columbia as of the Cut-off Date. The Mortgaged Properties securing
the Mortgage Loans will consist of residential properties that are one- to
four-family properties. See ' -- Mortgage Loan Terms' below.
The 'Credit Limit Utilization Rate' is determined by dividing the Cut-off
Date Pool Balance by the aggregate of the Credit Limits of the related Credit
Line Agreements. The Combined Loan-to-Value Ratio for a Mortgage Loan is the
ratio (expressed as a percentage) of (A) the sum of (i) the Credit Limit of the
Credit Line Agreement relating to the Mortgage Loan and (ii) any outstanding
principal balances of related mortgage loans senior or equal in priority to such
Mortgage Loan (calculated generally at the date of origination of the Mortgage
Loan) to (B) the lesser of (i) the appraised value of the related Mortgaged
Property as set forth in the loan files at such date of origination or (ii) in
the case of a Mortgaged Property purchased within one year of the origination of
the related Mortgage Loan, the purchase price of such Mortgaged Property. It is
expected that the Cut-off Date Pool Balance will be approximately $120,000,000,
which will be equal to the aggregate Principal Balances of the Mortgage Loans
included in the Trust Fund property as of the Cut-off Date. As of the Cut-off
Date, no Mortgage Loan will be more than 59 days delinquent.
MORTGAGE LOAN TERMS
General. A borrower may access a Mortgage Loan by writing a check in a
minimum amount of $250. The Mortgage Loans bear interest at a variable rate
which changes monthly on the first business day of the related month with
changes in the applicable Index Rate. The Mortgage Loans are subject to a
maximum per annum interest rate (the 'Maximum Rate') expected to range from
12.25% to 18.00% per annum as of the Cut-off Date and subject to applicable
usury limitations. It is expected that the weighted average Maximum Rate for the
Mortgage Loans will be approximately 17.80% as of the Cut-off Date. See 'Certain
Legal Aspects of the Loans -- Applicability of Usury Laws' in the Prospectus.
The daily periodic rate on the Mortgage Loans (the 'Loan Rate') is the sum of
the Index Rate plus the spread (the 'Margin'), divided by 365 days. The Margin
is
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<PAGE>
expected to range between 0.000% and 5.875% and is expected to have a weighted
average, with respect to the Mortgage Loans as of the Cut-off Date Date, of
approximately 2.30%. The 'Index Rate' is based on the highest 'prime rate' (the
'Index') published in the 'Money Rates' table of The Wall Street Journal as of
the first business day of each calendar month.
Countrywide generally offers introductory loan rates on its home equity
lines of credit. The introductory rate applies to any payments made during the
first three months after origination. After such three month period, the Loan
Rate will adjust to the Index Rate plus the applicable Margin. It is expected
that no more than approximately 84.0% of the Mortgage Loans by Cut-off Date
Principal Balance will be subject to an introductory rate of 5.99% per annum.
In general, the home equity loans may be drawn upon for a period (the 'Draw
Period') of either five years (which may be extendible for an additional five
years, upon Countrywide's approval) or three years. Home equity loans with an
initial Draw Period of five years, which are expected to constitute at least
approximately 90.0% of the Mortgage Loans by Cut-off Date Principal Balance, are
subject to a fifteen year repayment period (the 'Repayment Period') following
the end of the Draw Period during which the outstanding principal balance of the
loan will be repaid in monthly installments equal to 1/180 of the outstanding
principal balance as of the end of the Draw Period. Mortgage Loans with a Draw
Period of three years, which are expected to constitute no more than
approximately 10.0% of the Mortgage Loans by Cut-off Date Principal Balance, are
subject to a ten year Repayment Period following the end of the Draw Period
during which the outstanding principal balance of the loan will be paid in
monthly installments equal to 1/120 of the outstanding principal balance as of
the end of the Draw Period.
The minimum payment due during the Draw Period will be equal to the finance
charges accrued on the outstanding principal balance of the home equity loan
during the related billing period. The minimum payment due during the repayment
period will be equal to the sum of the finance charges accrued on the
outstanding principal balance of the Mortgage Loan during the related billing
period and the principal payment described above.
The following information sets forth in tabular format certain information,
as of the Cut-off Date, as to the Mortgage Loans expected to be included in the
Trust Fund.
MORTGAGE LOAN STATISTICS*
<TABLE>
<S> <C>
Number of Mortgage Loans........................................................ 5,300
Cut-off Date Pool Balance....................................................... $120,000,000
Cut-off Date Principal Balance:
Range...................................................................... $0.00 to $500,000
Average.................................................................... $22,700
Months Remaining to Scheduled Maturity:
Range...................................................................... 153 to 302 months
Weighted Average........................................................... At least 284 months
Loan Rate:
Range...................................................................... 5.99% to 14.125%
Weighted Average........................................................... 6.50%
Margins:
Range...................................................................... 0.00% to 5.875%
Weighted Average........................................................... 2.30%
Weighted Average Combined Loan-to-Value Ratio................................... 82.0%
Combined Loan-to-Value Ratio over 80%........................................... No more than 56.0%
Combined Loan-to-Value Ratio over 90%........................................... No more than 11.0%
Credit Limit Utilization Rates:
Range...................................................................... 0.00% to 100%
Simple Average............................................................. 67.0%
Credit Limits:
Range...................................................................... $8,500 to $500,000
Average.................................................................... $34,300
</TABLE>
(table continued on next page)
S-23
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<PAGE>
(table continued from previous page)
<TABLE>
<S> <C>
State Distribution of Mortgaged Properties:
Located in California...................................................... No more than 28.0%
Located in Utah............................................................ No more than 5.8%
Located in Colorado........................................................ No more than 5.5%
Located in Florida......................................................... No more than 5.5%
Located in Washington...................................................... No more than 5.0%
Number of other States or District of Columbia (concentrations of 5.0% or
less per State).......................................................... 40
Types of Mortgaged Properties:
Single Family.............................................................. At least 87.0%
Condominiums............................................................... No more than 3.0%
Planned Unit Developments (PUD)............................................ No more than 9.0%
Two- to Four-Family........................................................ No more than 1.0%
Lien Priorities:
First Lien................................................................. At least 5.0%
Second Lien................................................................ No more than 95.0%
</TABLE>
- ------------
* Approximate. Actual amounts and percentages may vary depending on the actual
Mortgage Loans constituting the Mortgage Loans included in the Trust Fund.
CONVEYANCE OF MORTGAGE LOANS
The obligation of the Trust Fund to purchase Mortgage Loans on the Closing
Date is subject to the following requirements, any of which requirements may be
waived or modified in any respect by the Certificate Insurer: (i) such Mortgage
Loan may not be 59 or more days delinquent as of the Closing Date; (ii) the
remaining term to stated maturity of such Mortgage Loan will not exceed 27
years; (iii) such Mortgage Loan will be secured by a Mortgage in a first or
second lien position; (iv) such Mortgage Loan will not have a Loan Rate less
than 5.99%; (v) such Mortgage Loan will be otherwise acceptable to the
Certificate Insurer; (vi) following the purchase of such Mortgage Loan by the
Trust Fund, the Mortgage Loans as of the Closing Date (a) will have a weighted
average Loan Rate of at least 6.5%; (b) will have a weighted average remaining
term to stated maturity of not more than 300 months; (c) will have a weighted
average Combined Loan-to-Value Ratio of not more than 82.0%; (d) will have no
Mortgage Loan with a Principal Balance in excess of $500,000; (e) will have a
concentration in any one state not in excess of 28.0%; and (f) will have not
more than 3.0% in aggregate principal balance of Mortgage Loans relating to
non-owner occupied properties; (vii) such Mortgage Loan shall have a Combined
Loan-to-Value Ratio not in excess of 100%; (viii) such Mortgage Loan will have a
Credit Limit between $8,500 to $500,000; (ix) such Mortgage Loan will have a
Margin between 0.00% and 5.875%; and (x) such Mortgage Loan will comply with the
representations and warranties in the Agreement.
MATURITY AND PREPAYMENT CONSIDERATIONS
The Agreement, except as otherwise described herein, provides that the
Certificateholders will be entitled to receive on each Distribution Date
distributions of principal, in the amounts described under 'Description of the
Certificates -- Distributions on the Certificates' herein, until the Certificate
Principal Balance is reduced to zero. During the Managed Amortization Period,
Certificateholders will receive amounts from Principal Collections based upon
the Investor Fixed Allocation Percentage, subject to reduction as described
below. During the Rapid Amortization Period, Certificateholders will receive
amounts from Principal Collections based solely upon the Investor Fixed
Allocation Percentage. Because prior distributions of Principal Collections to
Certificateholders serve to reduce the Investor Floating Allocation Percentage
but do not change the Investor Fixed Allocation Percentage, allocations of
Principal Collections based on the Investor Fixed Allocation Percentage may
result in distributions of principal to the Certificateholders in amounts that
are, in most cases, greater relative to the declining balance of the Mortgage
Loans than would be the case if the Investor Floating Allocation Percentage were
used to determine the percentage of Principal Collections distributed to
Certificateholders. This is especially true during the Rapid Amortization Period
when the Certificateholders are entitled to receive Investor
S-24
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<PAGE>
Principal Collections and not a lesser amount. In addition, Investor Interest
Collections may be distributed as principal to Certificateholders in connection
with the Accelerated Principal Distribution Amount, if any. Moreover, to the
extent of losses allocable to the Certificateholders, Certificateholders may
also receive as payment of principal the amount of such losses from Investor
Interest Collections, Subordinated Transferor Collections or, in some instances,
draws under the Policy. The level of losses may therefore affect the rate of
payment of principal on the Certificates.
To the extent obligors make more draws than principal payments, the
Transferor Interest may grow. An increase in the Transferor Interest due to
additional draws may also result in Certificateholders receiving principal at a
greater rate during the Rapid Amortization Period because the
Certificateholders' share of Principal Collections is based upon the Investor
Fixed Allocation Percentage (without reduction). The Agreement permits the
Transferor, at its option, but subject to the satisfaction of certain conditions
specified in the Agreement, including the conditions described below, to remove
certain Mortgage Loans from the Trust Fund at any time during the life of the
Trust Fund, so long as the Transferor Interest (after giving effect to such
removal) is not less than the Minimum Transferor Interest. Such removals may
affect the rate at which principal is distributed to Certificateholders by
reducing the overall Pool Balance and thus the amount of Principal Collections.
See 'Description of the Certificates -- Optional Retransfers of Mortgage Loans
to the Transferor' herein.
All of the Mortgage Loans may be prepaid in full or in part at any time.
However, Mortgage Loans secured by Mortgaged Properties in California are
subject to an account termination fee equal to the lesser of $350 or six months
interest on the amount prepaid, to the extent the prepaid amount exceeds 20% of
the unpaid principal balance, if the account is terminated on or before its
fifth year anniversary. In addition, Mortgage Loans secured by Mortgaged
Properties in other jurisdictions may be subject to account termination fees to
the extent permitted by law. In general, such account termination fees do not
exceed $350 and do not apply to accounts terminated subsequent to a date
designated in the related Mortgage Note which, depending on the jurisdiction,
ranges between six months and five years following origination. The prepayment
experience with respect to the Mortgage Loans will affect the weighted average
life of the Certificates.
The rate of prepayment on the Mortgage Loans cannot be predicted. Neither
the Depositor nor the Master Servicer is aware of any publicly available studies
or statistics on the rate of prepayment of such Mortgage Loans. Generally, home
equity revolving credit lines are not viewed by borrowers as permanent
financing. Accordingly, the Mortgage Loans may experience a higher rate of
prepayment than traditional first mortgage loans. On the other hand, because the
Mortgage Loans amortize as described under 'Description of the Mortgage
Loans -- Mortgage Loan Terms' herein, rates of principal payments on the
Mortgage Loans will generally be slower than those of traditional
fully-amortizing first mortgages in the absence of prepayments on such Mortgage
Loans. The prepayment experience of the Trust Fund with respect to the Mortgage
Loans may be affected by a wide variety of factors, including general economic
conditions, prevailing interest rate levels, the availability of alternative
financing, homeowner mobility, the frequency and amount of any future draws on
the Credit Line Agreements and changes affecting the deductibility for federal
income tax purposes of interest payments on home equity credit lines.
Substantially all of the Mortgage Loans contain 'due-on-sale' provisions, and,
with respect to the Mortgage Loans, the Master Servicer intends to enforce such
provisions, unless (i) such enforcement is not permitted by applicable law or
(ii) the Master Servicer, in a manner consistent with reasonable commercial
practice, permits the purchaser of the related Mortgaged Property to assume the
Mortgage Loan. The enforcement of a 'due-on-sale' provision will have the same
effect as a prepayment of the related Mortgage Loan. See 'Certain Legal Aspects
of the Loans -- Due-on-Sale Clauses' in the Prospectus.
The yield to an investor who purchases the Certificates in the secondary
market at a price other than par will vary from the anticipated yield if the
rate of prepayment on the Mortgage Loans is actually different than the rate
anticipated by such investor at the time such Certificates were purchased.
Collections on the Mortgage Loans may vary because, among other things,
borrowers may make payments during any month as low as the minimum monthly
payment for such month or as high as the entire outstanding principal balance
plus accrued interest and the fees and charges thereon. It is possible that
borrowers may fail to make scheduled payments. Collections on the Mortgage Loans
may vary due to seasonal purchasing and payment habits of borrowers.
S-25
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<PAGE>
No assurance can be given as to the level of prepayments that will be
experienced by the Trust Fund and it can be expected that a portion of borrowers
will not prepay their Mortgage Loans to any significant degree. See 'Yield and
Prepayment Considerations' in the Prospectus.
POOL FACTOR AND TRADING INFORMATION
The 'Pool Factor' is a seven-digit decimal which the Master Servicer will
compute monthly expressing the Certificate Principal Balance of the Certificates
as of each Distribution Date (after giving effect to any distribution of
principal on such Distribution Date) as a proportion of the Original Certificate
Principal Balance. On the Closing Date, the Pool Factor will be 1.0000000. See
'Description of the Certificates -- Distributions on the Certificates' herein.
Thereafter, the Pool Factor will decline to reflect reductions in the related
Certificate Principal Balance resulting from distributions of principal to the
Certificates and the Invested Amount of any unreimbursed Liquidation Loss
Amounts.
Pursuant to the Agreement, monthly reports concerning the Invested Amount,
the Pool Factor and various other items of information will be made available to
the Certificateholders. In addition, within 60 days after the end of each
calendar year, beginning with the 1997 calendar year, information for tax
reporting purposes will be made available to each person who has been a
Certificateholder of record at any time during the preceding calendar year. See
'Description of the Certificates -- Book-Entry Certificates' and ' -- Reports to
Certificateholders' herein.
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DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Agreement. The form of the
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus Supplement and the Prospectus is a part. The following is a
description of the material provisions of the Agreement. Wherever particular
sections or defined terms of the Agreement are referred to, such sections or
defined terms are hereby incorporated herein by reference.
GENERAL
The Certificates will be issued in denominations of $1,000 and multiples of
$1 in excess thereof and will evidence specified undivided interests in the
Trust Fund. The property of the Trust Fund will consist of, to the extent
provided in the Agreement: (i) the Cut-off Date Principal Balance of each
Mortgage Loan plus any Additional Balances created in respect thereof during the
life of the Trust Fund; (ii) collections on the Mortgage Loans received after
the Cut-off Date (exclusive of payments in respect of accrued interest due on or
prior to the Cut-off Date); (iii) Mortgaged Properties relating to the Mortgage
Loans that are acquired by foreclosure or deed in lieu of foreclosure; (iv) the
Collection Account for the Certificates (excluding net earnings thereon); (v)
the Policy; and (vi) an assignment of the Depositor's rights under the Purchase
Agreement. Definitive Certificates (as defined below), if issued, will be
transferable and exchangeable at the corporate trust office of the Trustee,
which will initially maintain the Security Register for the Certificates. See
' -- Book-Entry Certificates' below. No service charge will be made for any
registration of exchange or transfer of Certificates, but the Trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge.
The aggregate undivided interest in the Trust Fund represented by the
Certificates as of the Closing Date is expected to equal approximately
$117,600,000 (the 'Original Invested Amount'), which represents approximately
98% of the Cut-off Date Pool Balance. The 'Original Certificate Principal
Balance' is expected to equal approximately $117,600,000. Following the Closing
Date, the 'Invested Amount' with respect to any Distribution Date will be an
amount equal to the Original Invested Amount minus (i) the amount of Investor
Principal Collections previously distributed to Certificateholders, and minus
(ii) an amount equal to the product of the Investor Floating Allocation
Percentage and the Liquidation Loss Amounts (each as defined herein) for such
Distribution Date. The principal amount of the outstanding Certificates (the
'Certificate Principal Balance') on any Distribution Date is equal to the
Original Certificate Principal Balance minus the aggregate of amounts actually
distributed as principal to the Certificateholders. See ' -- Distributions on
the Certificates' below. Each Certificate represents the right to receive
payments of interest at the Certificate Rate and payments of principal as
described below.
The Transferor will own the remaining undivided interest in the Mortgage
Loans (the 'Transferor Interest'), which, as of any date of determination, will
equal the Pool Balance as of the close of business on the day preceding such
date of determination, less the Invested Amount as of the close of business on
the preceding Distribution Date. The Transferor Interest is expected to
initially equal approximately $2,400,000, which represents approximately 2% of
the Cut-off Date Pool Balance. The Transferor as of any date is the owner of the
Transferor Interest and initially will be the Seller. In general, the Pool
Balance will vary each day as principal is paid on the Mortgage Loans,
liquidation losses are incurred, Additional Balances are drawn down by borrowers
and transferred to the Trust Fund.
The Transferor has the right to sell or pledge the Transferor Interest at
any time, provided (i) the Rating Agencies (as defined herein) have notified the
Transferor and the Trustee in writing that such action will not result in the
reduction or withdrawal of the ratings assigned to the Certificates, and (ii)
certain other conditions specified in the Agreement are satisfied.
BOOK-ENTRY CERTIFICATES
The Certificates will be book-entry Certificates (the 'Book-Entry
Certificates'). Persons acquiring beneficial ownership interests in the
Certificates ('Certificate Owners') may elect to hold their Certificates through
the Depository Trust Company ('DTC') in the United States, or CEDEL or Euroclear
(in Europe) if they are participants of such systems, or indirectly through
organizations which are participants in such systems. The Book-Entry
Certificates will be issued in one or more certificates which equal the
aggregate principal balance of the Certificates and will initially be registered
in the name of Cede & Co., the nominee of DTC.
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CEDEL and Euroclear will hold omnibus positions on behalf of their participants
through customers' securities accounts in CEDEL's and Euroclear's names on the
books of their respective depositaries which in turn will hold such positions in
customers' securities accounts in the depositaries' names on the books of DTC.
Citibank will act as depositary for CEDEL and Chase will act as depositary for
Euroclear (in such capacities, individually the 'Relevant Depositary' and
collectively the 'European Depositaries'). Investors may hold such beneficial
interests in the Book-Entry Certificates in minimum denominations representing
Certificate Principal Balances of $1,000 and in multiples of $1 in excess
thereof. Except as described below, no person acquiring a Book-Entry Certificate
(each, a 'beneficial owner') will be entitled to receive a physical certificate
representing such Certificate (a 'Definitive Certificate'). Unless and until
Definitive Certificates are issued, it is anticipated that the only
'Certificateholder' of the Certificates will be Cede & Co., as nominee of DTC.
Certificate Owners will not be Certificateholders as that term is used in the
Agreement. Certificate Owners are only permitted to exercise their rights
indirectly through the participating organizations that utilize the services of
DTC, including securities brokers and dealers, banks and trust companies and
clearing corporations and certain other organizations ('Participants') and DTC.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a 'Financial Intermediary') that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC participant and on
the records of CEDEL or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of, and
interest on, the Certificates from the Trustee through DTC and DTC participants.
While the Certificates are outstanding (except under the circumstances described
below), under the rules, regulations and procedures creating and affecting DTC
and its operations (the 'Rules'), DTC is required to make book-entry transfers
among Participants on whose behalf it acts with respect to the Certificates and
is required to receive and transmit distributions of principal of, and interest
on, the Certificates. Participants and organizations which have indirect access
to the DTC system, such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly ('Indirect Participants'), with whom Certificate Owners
have accounts with respect to Certificates are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess certificates, the Rules provide a mechanism by which
Certificate Owners will receive distributions and will be able to transfer their
interest.
Certificate Owners will not receive or be entitled to receive certificates
representing their respective interests in the Certificates, except under the
limited circumstances described below. Unless and until Definitive Certificates
are issued, Certificate Owners who are not Participants may transfer ownership
of Certificates only through Participants and Indirect Participants by
instructing such Participants and Indirect Participants to transfer
Certificates, by book-entry transfer, through DTC for the account of the
purchasers of such Certificates, which account is maintained with their
respective Participants. Under the Rules and in accordance with DTC's normal
procedures, transfers of ownership of Certificates will be executed through DTC
and the accounts of the respective Participants at DTC will be debited and
credited. Similarly, the Participants and Indirect Participants will make debits
or credits, as the case may be, on their records on behalf of the selling and
purchasing Certificate Owners.
Because of time zone differences, credits of securities received in CEDEL,
or Euroclear as a result of a transaction with a Participant will be made
during, subsequent securities settlement processing and dated the business day
following, the DTC settlement date. Such credits or any transactions in such
securities, settled during such processing will be reported to the relevant
Euroclear or CEDEL Participants on such business day. Cash received in CEDEL or
Euroclear, as a result of sales of securities by or through a CEDEL Participant
(as defined below) or Euroclear Participant (as defined below) to a DTC
Participant, will be received with value on the DTC settlement date but will be
available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlement in DTC. For information with respect to tax
documentation procedures relating to the Certificates, see 'Federal Income Tax
Consequences -- Foreign Investors' and ' -- Backup
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Withholding' herein and 'Global Clearance, Settlement And Tax Documentation
Procedures Certain U.S. Federal Income Tax Documentation Requirements' in Annex
I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the Book-Entry Certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Certificates will be subject to the rules,
regulations and procedures governing DTC and DTC participants as in effect from
time to time.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ('CEDEL
Participants') and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of
Euroclear ('Euroclear Participants') and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the 'Euroclear Operator'), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
'Cooperative'). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
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Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the 'Terms and Conditions'). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the beneficial owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, beneficial owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede. Distributions with respect to Certificates
held through CEDEL or Euroclear will be credited to the cash accounts of CEDEL
Participants or Euroclear Participants in accordance with the relevant system's
rules and procedures, to the extent received by the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. See 'Federal Income Tax
Consequences -- Foreign Investors' and ' -- Backup Withholding' herein. Because
DTC can only act on behalf of Financial Intermediaries, the ability of a
beneficial owner to pledge Book-Entry Certificates to persons or entities that
do not participate in the depository system, or otherwise take actions in
respect of such Book-Entry Certificates, may be limited due to the lack of
physical certificates for such Book-Entry Certificates. In addition, issuance of
the Book-Entry Certificates in book-entry form may reduce the liquidity of such
Certificates in the secondary market since certain potential investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates.
Monthly and annual reports on the Trust Fund provided by the Master
Servicer to Cede & Co., as nominee of DTC, may be made available to beneficial
owners upon request, in accordance with the rules, regulations and procedures
creating and affecting DTC or the Relevant Depositary, and to the Financial
Intermediaries to whose DTC accounts the Book-Entry Certificates of such
beneficial owners are credited.
DTC has advised the Transferor and the Trustee that, unless and until
Definitive Certificates are issued, DTC will take any action permitted to be
taken by the holders of the Book-Entry Certificates under the Agreement only at
the direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Certificates. CEDEL or the Euroclear Operator, as the case may be, will take any
other action permitted to be taken by a Certificateholder under the Agreement on
behalf of a CEDEL Participant or Euroclear Participant only in accordance with
its relevant rules and procedures and subject to the ability of the Relevant
Depositary to effect such actions on its behalf through DTC. DTC may take
actions, at the direction of the related Participants, with respect to some
Certificates which conflict with actions taken with respect to other
Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Transferor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depositary with respect to the Book-Entry Certificates and the Transferor or the
Trustee is unable to locate a qualified successor, (b) the Transferor, at its
sole option, elects to terminate a book-entry system through DTC or (c) after
the occurrence of an Event of Servicing Termination (as defined herein),
beneficial owners having Percentage Interests aggregating not less than 51% of
the Certificate Principal Balance of the Book-Entry Certificates advise the
Trustee and DTC through the Financial Intermediaries and the DTC participants in
writing that the continuation of a book-entry system through DTC (or a successor
thereto) is no longer in the best interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-
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Entry Certificates and instructions for re-registration, the Trustee will issue
Definitive Certificates, and thereafter the Trustee will recognize the holders
of such Definitive Certificates as Certificateholders under the Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Certificates among participants of DTC,
CEDEL and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of the Certificates, the Depositor will transfer to
the Trust Fund all of its right, title and interest in and to each Mortgage Loan
(including any Additional Balances arising in the future), related Credit Line
Agreements, mortgages and other related documents (collectively, the 'Related
Documents'), including all collections received on or with respect to each such
Mortgage Loan after the Cut-off Date (exclusive of payments in respect of
accrued interest due on or prior to the Cut-off Date). The Trustee, concurrently
with such transfer, will deliver the Certificates to the Depositor and the
Transferor Certificate (as defined in the Agreement) to the Transferor. Each
Mortgage Loan transferred to the Trust Fund will be identified on a schedule
(the 'Mortgage Loan Schedule') delivered to the Trustee pursuant to the
Agreement. Such schedule will include information as to the Cut-off Date
Principal Balance of each Mortgage Loan as well as information with respect to
the Loan Rate.
The Agreement will permit Countrywide to maintain possession of the Related
Documents and certain other documents relating to the Mortgage Loans (the
'Mortgage Files') and assignments of the Mortgage Loans to the Trustee will not
be required to be recorded for so long as the long-term senior unsecured debt of
Countrywide is rated at least 'BBB-' by Standard & Poor's and 'Baa2' by Moody's.
In the event that Countrywide's long-term senior unsecured debt rating does not
satisfy the above-described standards (an 'Assignment Event'), Countrywide will
have 90 days to record assignments of the mortgages for each such Mortgage Loan
in favor of the Trustee and 60 days to deliver the Mortgage Files pertaining to
each such Mortgage Loan to the Trustee (unless opinions of counsel satisfactory
to the Rating Agencies and the Certificate Insurer to the effect that
recordation of such assignments or delivery of such documentation is not
required in the relevant jurisdiction to protect the interest of Countrywide and
the Trustee in the Mortgage Loans). In lieu of delivery of original
documentation, Countrywide may deliver documents which have been imaged
optically upon delivery of an opinion of counsel that such documents are
enforceable to the same extent as the originals and do not impair the
enforceability of the transfer to the Trust Fund of the Mortgage Loans.
Within 90 days of an Assignment Event, the Trustee will review the Mortgage
Loans and the Related Documents and if any Mortgage Loan or Related Document is
found to be defective in any material respect and such defect is not cured
within 90 days following notification thereof to the Seller and the Depositor by
the Trustee, the Seller will be obligated to accept the transfer of such
Mortgage Loan from the Trust Fund. Upon such transfer, the Principal Balance of
such Mortgage Loan will be deducted from the Pool Balance, thus reducing the
amount of the Transferor Interest. If the deduction would cause the Transferor
Interest to become less than the Minimum Transferor Interest at such time (a
'Transfer Deficiency'), the Seller will be obligated to either substitute an
Eligible Substitute Mortgage Loan or make a deposit into the Collection Account
in the amount (the 'Transfer Deposit Amount') equal to the amount by which the
Transferor Interest would be reduced to less than the Minimum Transferor
Interest at such time. Any such deduction, substitution or deposit, will be
treated under the Agreement as a payment in full of such Mortgage Loan. Any
Transfer Deposit Amount will be treated as a Principal Collection.
Notwithstanding the foregoing, however, no such transfer shall be considered to
have occurred unless and until all required deposits to the Collection Account
are actually made. The obligation of the Seller to accept a transfer of a
Defective Mortgage Loan and to make any required deposits are the sole remedies
regarding any defects in the Mortgage Loans and Related Documents available to
the Trustee or the Certificateholders.
An 'Eligible Substitute Mortgage Loan' is a mortgage loan substituted by
the Seller for a Defective Mortgage Loan which must, on the date of such
substitution, (i) have an outstanding Principal Balance (or in the case of a
substitution of more than one Mortgage Loan for a Defective Mortgage Loan, an
aggregate Principal Balance), not 10% more or less than the Transfer Deficiency
relating to such Defective Mortgage Loan; (ii) have a Loan Rate not less than
the Loan Rate of the Defective Mortgage Loan and not more than 1% in excess of
the Loan Rate of such Defective Mortgage Loan; (iii) have a Loan Rate based on
the same Index with adjustments to such Loan Rate made on the same Interest Rate
Adjustment Date as that of the Defective Mortgage Loan; (iv)
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have a Margin that is not less than the Margin of the Defective Mortgage Loan
and not more than 100 basis points higher than the Margin for the Defective
Mortgage Loan; (v) have a mortgage of the same or higher level of priority as
the mortgage relating to the Defective Mortgage Loan; (vi) have a remaining term
to maturity not more than six months earlier and not more than 60 months later
than the remaining term to maturity of the Defective Mortgage Loan; (vii) comply
with each representation and warranty as to the Mortgage Loans set forth in the
Agreement (deemed to be made as of the date of substitution); (viii) in general,
have an original Combined Loan-to-Value Ratio not greater than that of the
Defective Mortgage Loan; and (ix) satisfy certain other conditions specified in
the Agreement. To the extent the Principal Balance of an Eligible Substitute
Mortgage Loan is less than the Principal Balance of the related Defective
Mortgage Loan and to the extent that the Transferor Interest would be reduced
below the Minimum Transferor Interest, the Seller will be required to make a
deposit to the Collection Account equal to such difference.
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each Mortgage Loan (e.g., Cut-off Date Principal Balance
and the Loan Rate). In addition, the Seller will represent and warrant on the
Closing Date that at the time of transfer to the Depositor, the Seller has
transferred or assigned all of its rights, title and interest in each Mortgage
Loan and the Related Documents, free of any lien (subject to certain
exceptions). Upon discovery of a breach of any such representation and warranty
which materially and adversely affects the interests of the Certificateholders
or the Certificate Insurer in the related Mortgage Loan and Related Documents,
the Seller will have a period of 90 days after discovery or notice of the breach
to effect a cure. If the breach cannot be cured within the 90-day period, the
Seller will be obligated to accept a transfer of the Defective Mortgage Loan
from the Trust Fund. The same procedure and limitations that are set forth in
the second preceding paragraph for the transfer of Defective Mortgage Loans will
apply to the transfer of a Mortgage Loan that is required to be transferred
because of such breach of a representation or warranty in the Agreement that
materially and adversely affects the interests of the Certificateholders.
Mortgage Loans required to be transferred to the Seller as described in the
preceding paragraphs are referred to as 'Defective Mortgage Loans.'
Pursuant to the Agreement, the Master Servicer will service and administer
the Mortgage Loans as more fully set forth above.
AMENDMENTS TO CREDIT LINE AGREEMENTS
Subject to applicable law and to certain limitations described in the
Agreement, the Master Servicer may change the terms of the Credit Line
Agreements at any time provided that such changes (i) do not materially and
adversely affect the interest of the Certificateholders or the Certificate
Insurer, and (ii) are consistent with prudent business practice. In addition,
the Agreement permits the Master Servicer, within certain limitations described
therein, to increase the Credit Limit of the related Mortgage Loan or reduce the
Margin for such Mortgage Loan.
OPTIONAL TRANSFERS OF MORTGAGE LOANS TO THE TRANSFEROR
In order to permit the Transferor to remove Mortgage Loans from the Trust
Fund at such times, if any, as the Transferor Interest exceeds the level
required by the Certificate Insurer and the Rating Agencies, on any Distribution
Date the Transferor may, but shall not be obligated to, remove on such
Distribution Date (the 'Transfer Date') from the Trust Fund, certain Mortgage
Loans without notice to the Certificateholders. The Transferor is permitted to
designate the Mortgage Loans to be removed. Mortgage Loans so designated will
only be removed upon satisfaction of the following conditions: (i) No Rapid
Amortization Event (as defined herein) has occurred; (ii) the Transferor
Interest as of such Transfer Date (after giving effect to such removal) exceeds
the Minimum Transferor Interest; (iii) the transfer of any Mortgage Loans on any
Transfer Date during the Managed Amortization Period (as defined herein) shall
not, in the reasonable belief of the Transferor, cause a Rapid Amortization
Event to occur or an event which with notice or lapse of time or both would
constitute a Rapid Amortization Event; (iv) the Transferor shall have delivered
to the Trustee a 'Mortgage Loan Schedule' containing a list of all Mortgage
Loans remaining in the Trust Fund after such removal; (v) the Transferor shall
represent and warrant that no selection procedures which the Transferor
reasonably believes are adverse to the interests of the Certificateholders or
the Certificate Insurer were used by the Transferor in selecting such
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Mortgage Loans; (vi) in connection with the first such retransfer of Mortgage
Loans, the Rating Agencies shall have been notified of the proposed transfer and
prior to the Transfer Date shall not have notified the Transferor in writing
that such transfer would result in a reduction or withdrawal of the ratings
assigned to the Certificates without regard to the Policy; and (vii) the
Transferor shall have delivered to the Trustee and the Certificate Insurer an
officer's certificate confirming the conditions set forth in clauses (i) through
(vi) above.
As of any date of determination, the 'Minimum Transferor Interest' is an
amount equal to the lesser of (a) 5% of the Pool Balance on such date and (b)
the Transferor Interest as of the Closing Date.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT
The Trustee shall establish and maintain on behalf of the Master Servicer
an account (the 'Collection Account') for the benefit of the Certificateholders
and the Transferor, as their interests may appear. The Collection Account will
be an Eligible Account (as defined herein). Subject to the investment provision
described in the following paragraphs, within two Business Days of receipt by
the Master Servicer of amounts in respect of the Mortgage Loans (excluding
amounts representing administrative charges, annual fees, taxes, assessments,
credit insurance charges, insurance proceeds to be applied to the restoration or
repair of a Mortgaged Property or similar items), the Master Servicer will
deposit such amounts in the Collection Account. Amounts so deposited may be
invested in Eligible Investments (as described in the Agreement) maturing no
later than one Business Day prior to the next Distribution Date or on such
Distribution Date if approved by the Rating Agencies and the Certificate
Insurer. Not later than the third Business Day prior to each Distribution Date
(the 'Determination Date'), the Master Servicer will notify the Trustee of the
amount of such deposit to be included in funds available for the related
Distribution Date.
An 'Eligible Account' is (i) an account that is maintained with a
depository institution whose debt obligations throughout the time of any deposit
therein have the highest short-term debt rating by the Rating Agencies, (ii) one
or more accounts with a depository institution having a minimum long-term
unsecured debt rating of 'BBB-' by Standard & Poor's and 'Baa3' by Moody's,
which accounts are fully insured by either the Savings Association Insurance
Fund ('SAIF') or the Bank Insurance Fund ('BIF') of the Federal Deposit
Insurance Corporation established by such fund, (iii) a segregated trust account
maintained with the Trustee or an Affiliate of the Trustee in its fiduciary
capacity or (iv) otherwise acceptable to each Rating Agency and the Certificate
Insurer as evidenced by a letter from each Rating Agency and the Certificate
Insurer to the Trustee, without reduction or withdrawal of their then current
ratings of the Certificates without regard to the Policy.
Eligible Investments are specified in the Agreement and are limited to (i)
obligations of the United States or any agency thereof, provided the timely
payment of such obligations are backed by the full faith and credit of the
United States; (ii) general obligations of or obligations guaranteed by any
state of the United States or the District of Columbia receiving the highest
long-term debt rating of each Rating Agency, or such lower rating as will not
result in the downgrading or withdrawal of the ratings then assigned to the
Certificates by each Rating Agency without regard to the Policy; (iii)
commercial paper issued by Countrywide Home Loans, Inc. or any of its
affiliates; provided that such commercial paper is rated no lower than A-1 and
P-2 and the long-term debt of Countrywide Home Loans, Inc. is rated at least A3
by Moody's, or such lower ratings as will not result in the downgrading or
withdrawal of the rating then assigned to the Certificates by any Rating Agency
without regard to the Policy; (iv) commercial or finance company paper which is
then receiving the highest commercial or finance company paper rating of each
Rating Agency, or such lower rating as will not result in the downgrading or
withdrawal of the ratings then assigned to the Certificates by any Rating Agency
without regard to the Policy; (v) certificates of deposit, demand or time
deposits, or bankers' acceptances issued by any depository institution or trust
company incorporated under the laws of the United States or of any state thereof
and subject to supervision and examination by federal and/or state banking
authorities, provided that the commercial paper and/or long term unsecured debt
obligations of such depository institution or trust company (or in the case of
the principal depository institution in a holding company system, the commercial
paper or long-term unsecured debt obligations of such holding company, but only
if Moody's is not a Rating Agency) are then rated one of the two highest
long-term and the highest short-term ratings of each Rating Agency for such
securities, or such lower ratings as will not result in the downgrading or
withdrawal of the rating then assigned to the Certificates by any Rating Agency
without regard to the Policy; (vi) demand or time deposits or certificates of
deposit issued by any bank or trust company or savings institution to the extent
that such deposits are fully insured by the FDIC; (vii) guaranteed reinvestment
agreements issued by any bank, insurance company or other corporation
containing, at
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the time of the issuance of such agreements, such terms and conditions as will
not result in the downgrading or withdrawal of the rating then assigned to the
Certificates by any Rating Agency without regard to the Policy; (viii)
repurchase obligations with respect to any security described in clauses (i) and
(ii) above, in either case entered into with a depository institution or trust
company (acting as principal) described in clause (v) above; (ix) securities
(other than stripped bonds, stripped coupons or instruments sold at a purchase
price in excess of 115% of the face amount thereof) bearing interest or sold at
a discount issued by any corporation incorporated under the laws of the United
States or any state thereof which, at the time of such investment, have one of
the two highest ratings of each Rating Agency (except if the Rating Agency is
Moody's, such rating shall be the highest commercial paper rating of Moody's for
any such securities), or such lower rating as will not result in the downgrading
or withdrawal of the rating then assigned to the Certificates by any Rating
Agency without regard to the Policy, as evidenced by a signed writing delivered
by each Rating Agency; (x) interests in any money market fund which at the date
of acquisition of the interests in such fund and throughout the time such
interests are held in such fund has the highest applicable rating by each Rating
Agency or such lower rating as will not result in the downgrading or withdrawal
of the ratings then assigned to the Certificates by each Rating Agency without
regard to the Policy; (xi) short term investment funds sponsored by any trust
company or national banking association incorporated under the laws of the
United States or any state thereof which on the date of acquisition has been
rated by each Rating Agency in their respective highest applicable rating
category or such lower rating as will not result in the downgrading or
withdrawal of the ratings then assigned to the Certificates by each Rating
Agency without regard to the Policy; and (xii) such other investments having a
specified stated maturity and bearing interest or sold at a discount acceptable
to each Rating Agency as will not result in the downgrading or withdrawal of the
rating then assigned to the Certificates by any Rating Agency without regard to
the Policy, as evidenced by a signed writing delivered by each Rating Agency;
provided that no such instrument shall be an Eligible Investment if such
instrument evidences the right to receive (a) interest only payments with
respect to the obligations underlying such instrument or (b) both principal and
interest payments derived from obligations underlying such instrument and the
interest and principal payments with respect to such instrument provide a yield
to maturity at par greater than 120% of the yield to maturity at par of the
underlying obligations; and provided, further, that no instrument described
hereunder may be purchased at a price greater than par if such instrument may be
prepaid or called at a price less than its purchase price prior to its stated
maturity.
ALLOCATIONS AND COLLECTIONS
All collections on the Mortgage Loans will generally be allocated in
accordance with the Credit Line Agreements between amounts collected in respect
of interest and amounts collected in respect of principal. As to any
Distribution Date, 'Interest Collections' will be equal to the amounts collected
during the related Collection Period, including without limitation such portion
of Net Liquidation Proceeds, allocated to interest pursuant to the terms of the
Credit Line Agreements less (i) Servicing Fees for the related Collection Period
and (ii) amounts payable to the Master Servicer pursuant to the Agreement as
reimbursement of optional advances of the interest component of any delinquent
monthly payments on the Mortgage Loans.
As to any Distribution Date, 'Principal Collections' will be equal to the
sum of (i) the amounts collected during the related Collection Period, including
without limitation such portion of Net Liquidation Proceeds, allocated to
principal pursuant to the terms of the Credit Line Agreements and (ii) any
Transfer Deposit Amounts. 'Net Liquidation Proceeds' with respect to a Mortgage
Loan are equal to the Liquidation Proceeds, reduced by related expenses, but not
including the portion, if any, of such amount that exceeds the Principal Balance
of the Mortgage Loan plus accrued and unpaid interest thereon to the end of the
Collection Period during which such Mortgage Loan became a Liquidated Mortgage
Loan. 'Liquidation Proceeds' are the proceeds (excluding any amounts drawn on
the Policy) received in connection with the liquidation of any Mortgage Loan,
whether through trustee's sale, foreclosure sale or otherwise.
With respect to any Distribution Date, the portion of Interest Collections
allocable to the Certificates ('Investor Interest Collections') will equal the
product of (a) Interest Collections for such Distribution Date and (b) the
Investor Floating Allocation Percentage. With respect to any Distribution Date,
the 'Investor Floating Allocation Percentage' is the percentage equivalent of a
fraction determined by dividing the Invested Amount at the close of business on
the preceding Distribution Date (or the Closing Date in the case of the first
Distribution Date) by the Pool Balance at the beginning of the related
Collection Period. The remaining amount of Interest Collections will be
allocated to the Transferor Interest.
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Principal Collections will be allocated between the Certificateholders and
the Transferor ('Investor Principal Collections' and 'Transferor Principal
Collections', respectively) as described herein.
The Trustee will deposit any amounts drawn under the Policy into the
Collection Account.
With respect to any date, the 'Pool Balance' will be equal to the aggregate
of the Principal Balances of all Mortgage Loans as of such date. The Principal
Balance of a Mortgage Loan (other than a Liquidated Mortgage Loan) on any day is
equal to its Cut-off Date Principal Balance, plus (i) any Additional Balances in
respect of such Mortgage Loan minus (ii) all collections credited against the
Principal Balance of such Mortgage Loan in accordance with the related Credit
Line Agreement prior to such day. The Principal Balance of a Liquidated Mortgage
Loan after final recovery of related Liquidation Proceeds shall be zero.
DISTRIBUTIONS ON THE CERTIFICATES
Beginning with the first Distribution Date (which will occur on April 15,
1997), distributions on the Certificates will be made by the Trustee or the
Paying Agent on each Distribution Date to the persons in whose names such
Certificates are registered at the close of business on the day prior to each
Distribution Date or, if the Certificates are no longer Book-Entry Certificates,
at the close of business on the last day of the month preceding such
Distribution Date (the 'Record Date'). The term 'Distribution Date' means the
fifteenth day of each month or, if such day is not a Business Day, then the next
succeeding Business Day. Distributions will be made by check or money order
mailed (or upon the request of a Certificateholder owning Certificates having
denominations aggregating at least $1,000,000, by wire transfer or as otherwise
agreed by such Certificateholder and the Trustee) to the address of the person
entitled thereto (which, in the case of Book-Entry Certificates, will be DTC or
its nominee) as it appears on the Certificate Register in amounts calculated as
described herein on the Determination Date. However, the final distribution in
respect of the Certificates will be made only upon presentation and surrender
thereof at the office or the agency of the Trustee specified in the notice to
Certificateholders of such final distribution. For purposes of the Agreement, a
'Business Day' is any day other than (i) a Saturday or Sunday or (ii) a day on
which banking institutions in the states of New York, California or Illinois are
required or authorized by law to be closed.
Application of Interest Collections. On each Distribution Date, the Trustee
or the Paying Agent will apply the Investor Interest Collections in the
following manner and order of priority:
(i) as payment to the Trustee for its fee for services rendered
pursuant to the Agreement;
(ii) as payment to the Certificate Insurer for the premium for the
Policy;
(iii) as payment to Certificateholders for the accrued interest due
and any overdue accrued interest (with interest thereon to the
extent permitted by applicable law) on the Certificate
Principal Balance of the Certificates;
(iv) to pay to Certificateholders the Investor Loss Amount for such
Distribution Date;
(v) as payment to Certificateholders for any Investor Loss Amount
for a previous Distribution Date that was not previously (a)
funded by Investor Interest Collections, (b) absorbed by the
Overcollateralization Amount, (c) funded by Subordinated
Transferor Collections as described below or (d) funded by draws
on the Policy;
(vi) to reimburse the Certificate Insurer for prior draws made from
the Policy (with interest thereon);
(vii) to pay to Certificateholders principal on the Certificates
until the Invested Amount exceeds the Certificate Principal
Balance by the Required Overcollateralization Amount (such
amount so paid, the 'Accelerated Principal Distribution
Amount');
(viii) in respect of any other amounts owed to the Certificate Insurer
pursuant to the Insurance Agreement;
(ix) as payment to the Master Servicer for certain amounts that may
be required to be paid to the Master Servicer pursuant to the
Agreement; and
(x) to pay to the Transferor to the extent permitted as described
herein.
Payments to Certificateholders pursuant to clause (iii) will be interest
payments on the Certificates. Payments to Certificateholders pursuant to clauses
(iv), (v) and (vii) will be principal payments on the
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Certificates and will therefore reduce the Certificate Principal Balance;
however, payments pursuant to clause (vii) will not reduce the Invested Amount.
The Accelerated Principal Distribution Amount is not guaranteed by the Policy.
The 'Overcollateralization Amount' on any date of determination is the amount,
if any, by which the Invested Amount exceeds the Certificate Principal Balance
on such day. The 'Required Overcollateralization Amount' shall be an amount set
forth in the Insurance Agreement (as defined herein).
To the extent that Investor Interest Collections are applied to pay the
interest on the Certificates, Investor Interest Collections may be insufficient
to cover Investor Loss Amounts. If such insufficiency exists after the Available
Transferor Subordinated Amount has been reduced to zero and results in the
Certificate Principal Balance exceeding the Invested Amount, a draw will be made
on the Policy in accordance with the terms of the Policy.
'Liquidation Loss Amount' means with respect to any Liquidated Mortgage
Loan, the unrecovered Principal Balance thereof at the end of the Collection
Period in which such Mortgage Loan became a Liquidated Mortgage Loan, after
giving effect to the Net Liquidation Proceeds in connection therewith. The
'Investor Loss Amount' shall be the product of the Investor Floating Allocation
Percentage and the Liquidation Loss Amount for such Distribution Date.
A 'Liquidated Mortgage Loan' means, as to any Distribution Date, any
Mortgage Loan in respect of which the Master Servicer has determined, based on
the servicing procedures specified in the Agreement, as of the end of the
preceding Collection Period, that all Liquidation Proceeds which it expects to
recover with respect to the disposition of the Mortgage Loan or the related
Mortgaged Property have been recovered. The Investor Loss Amount will be
allocated to the Certificateholders.
As to any Distribution Date, the 'Collection Period' is the calendar month
preceding each Distribution Date (or, in the case of the first Collection
Period, the period beginning on February 26, 1997 through the last day of March
1997).
Interest will be distributed on each Distribution Date at the Certificate
Rate for the related Interest Period (as defined below). The 'Certificate Rate'
for a Distribution Date will generally equal a per annum rate equal to the sum
of (a) LIBOR, calculated as specified below, as of the second LIBOR Business Day
prior to the first day of such Interest Period (or as of two LIBOR Business Days
prior to the Closing Date, in the case of the first Distribution Date) plus (b)
0.15%. Notwithstanding the foregoing, in no event will the amount of interest
required to be distributed in respect of the Certificates on any Distribution
Date exceed a per annum rate equal to the weighted average of the Loan Rates
(net of the Servicing Fee Rate, the rate at which the fee payable to the Trustee
is calculated, the rate at which the premium payable to the Certificate Insurer
is calculated and, commencing with the Distribution Date in October 1997, 0.50%)
weighted on the basis of the daily average balance of each Mortgage Loan during
the related billing cycle prior to the Collection Period relating to such
Distribution Date.
Interest on the Certificates in respect of any Distribution Date will
accrue on the Certificate Principal Balance from the preceding Distribution Date
(or in the case of the first Distribution Date, from the date of the initial
issuance of the Certificates (the 'Closing Date')) through the day preceding
such Distribution Date (each such period, an 'Interest Period') on the basis of
the actual number of days in the Interest Period and a 360-day year. Interest
payments on the Certificates will be funded from Investor Interest Collections,
Subordinated Transferor Collections and, if necessary, from draws on the Policy.
Calculation of the LIBOR Rate. On the second LIBOR Business Day immediately
preceding each Distribution Date, the Trustee shall determine LIBOR for the
Interest Period commencing on such Distribution Date. LIBOR for the first
Interest Period will be determined on the second LIBOR Business Day preceding
the Closing Date. LIBOR will equal the rate for United States dollar deposits
for one month which appears on the Telerate Screen Page 3750 as of 11:00 A.M.,
London time, on the second LIBOR Business Day prior to the first day of such
Interest Period. 'Telerate Screen Page 3750' means the display designated as
page 3750 on the Telerate Service (or such other page as may replace page 3750
on that service for the purpose of displaying London interbank offered rates of
major banks). If such rate does not appear on such page (or such other page as
may replace that page on that service, or if such service is no longer offered,
such other service for displaying LIBOR or comparable rates as may be selected
by the Depositor after consultation with the Trustee), the rate will be the
Reference Bank Rate. The 'Reference Bank Rate' will be determined on the basis
of the rates at which deposits in United States dollars are offered by the
reference banks (which shall be three major banks that
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are engaged in transactions in the London interbank market, selected by the
Depositor after consultation with the Trustee) as of 11:00 A.M., London time, on
the day that is two LIBOR Business Days prior to the first day of such Interest
Period to prime banks in the London interbank market for a period of one month
in amounts approximately equal to the principal amount of the Certificates then
outstanding. The Trustee will request the principal London office of each of the
reference banks to provide a quotation of its rate. If at least two such
quotations are provided, the rate will be the arithmetic mean of the quotations.
If on such date fewer than two quotations are provided as requested, the rate
will be the arithmetic mean of the rates quoted by one or more major banks in
New York City, selected by the Depositor after consultation with the Trustee, as
of 11:00 A.M., New York City time, on such date for loans in United States
dollars to leading European banks for a period of one month in amounts
approximately equal to the principal amount of the Certificates then
outstanding. If no such quotations can be obtained, the rate will be LIBOR for
the preceding Interest Period. 'LIBOR Business Day' means any day other than (i)
a Saturday or a Sunday or (ii) a day on which banking institutions in the State
of New York or in the city of London, England are required or authorized by law
to be closed.
Transferor Collections. Collections allocable to the Transferor Interest
will be distributed to the Transferor only to the extent that such distribution
will not reduce the amount of the Transferor Interest as of the related
Distribution Date below the Minimum Transferor Interest. Amounts not distributed
to the Transferor because of such limitations will be retained in the Collection
Account until the Transferor Interest exceeds the Minimum Transferor Interest,
at which time such excess shall be released to the Transferor. If any such
amounts are still retained in the Collection Account upon the commencement of
the Rapid Amortization Period, such amounts will be paid to the
Certificateholders as a reduction of the Certificate Principal Balance.
Overcollateralization. The distribution of the aggregate Accelerated
Principal Distribution Amount, if any, to Certificateholders may result in the
Invested Amount being greater than the Certificate Principal Balance, thereby
creating overcollateralization. The Overcollateralization Amount, if any, will
be available to absorb any Investor Loss Amount that is not covered by Investor
Interest Collections or the Available Transferor Subordinated Amount.
Distributions of Principal Collections. For the period beginning on the
Closing Date and, unless a Rapid Amortization Event shall have earlier occurred,
ending on the Distribution Date in March 2002 (the 'Managed Amortization
Period'), the amount of Principal Collections payable to Certificateholders as
of each Distribution Date during the Managed Amortization Period will equal, to
the extent funds are available therefor, the Scheduled Principal Collections
Distribution Amount for such Distribution Date. On any Distribution Date during
the Managed Amortization Period, the 'Scheduled Principal Collections
Distribution Amount' shall equal the lesser of (i) the Maximum Principal Payment
and (ii) the Alternative Principal Payment. With respect to any Distribution
Date, the 'Maximum Principal Payment' will equal the product of the Investor
Fixed Allocation Percentage and Principal Collections for such Distribution
Date. With respect to any Distribution Date, the 'Alternative Principal Payment'
will equal the amount, but not less than zero, of Principal Collections for such
Distribution Date less the aggregate of Additional Balances created during the
related Collection Period.
Beginning with the first Distribution Date following the end of the Managed
Amortization Period, the amount of Principal Collections payable to
Certificateholders on each Distribution Date will be equal to the Maximum
Principal Payment.
If on any Distribution Date the Required Overcollateralization Amount is
reduced below the then existing Overcollaterialization Amount, the amount of
Principal Collections payable to Certificateholders on such Distribution Date
will be correspondingly reduced by the amount of such reduction.
The amount of Principal Collections to be distributed to Certificateholders
on the first Distribution Date will reflect Principal Collections and Additional
Balances during the first Collection Period which is the period beginning on
February 26, 1997 through the last day of March 1997.
Distributions of Principal Collections based upon the Investor Fixed
Allocation Percentage may result in distributions of principal to
Certificateholders in amounts that are greater relative to the declining Pool
Balance than would be the case if the Investor Floating Allocation Percentage
were used to determine the percentage of Principal Collections distributed in
respect of the Invested Amount. Principal Collections not allocated to the
Certificateholders will be allocated to the Transferor Interest. The aggregate
distributions of principal to the Certificateholders will not exceed the
Original Certificate Principal Balance.
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In addition, to the extent of funds available therefor (including funds
available under the Policy), on the Distribution Date in February 2027,
Certificateholders will be entitled to receive as a payment of principal an
amount equal to the outstanding Certificate Principal Balance.
The Paying Agent. The Paying Agent shall initially be the Trustee, together
with any successor thereto in such capacity (the 'Paying Agent'). The Paying
Agent shall have the revocable power to withdraw funds from the Collection
Account for the purpose of making distributions to the Certificateholders.
LIMITED SUBORDINATION OF TRANSFEROR INTEREST
If Investor Interest Collections on any Distribution Date are insufficient
to pay (i) accrued interest due and any overdue accrued interest (with interest
thereon to the extent permitted by applicable law) on the Certificates and (ii)
the Investor Loss Amount on such Distribution Date (such insufficiency being the
'Required Amount'), a portion of the Interest Collections and Principal
Collections allocable to the Transferor Interest (but not in excess of the
Available Transferor Subordinated Amount)(the 'Subordinated Transferor
Collections') will be applied to cover the Required Amount. The portion of the
Required Amount in respect of clause (ii) above not covered by such Subordinated
Transferor Collections will be reallocated to the Transferor Interest, thereby
reducing the Transferor Interest (up to the remaining Available Transferor
Subordinated Amount and not in excess of the Investor Loss Amounts). If such
Investor Interest Collections plus the amount of Subordinated Transferor
Collections which have been so applied to cover the Required Amount are together
insufficient to pay the amounts set forth in item (i) of the definition of
Required Amount, then a draw will be made on the Policy to cover the amount of
such shortfall. In addition, if on any Distribution Date on which the Available
Transferor Subordinated Amount is reduced to zero the Certificate Principal
Balance exceeds the Invested Amount (after giving effect to all allocations and
distributions with respect to principal to be made on the Certificates on such
Distribution Date), a draw will be made on the Policy in the amount of such
excess for such Distribution Date. See ' -- The Policy.'
With respect to any Distribution Date, the 'Available Transferor
Subordinated Amount' shall equal the lesser of the Transferor Interest and the
Required Transferor Subordinated Amount for such Distribution Date. With respect
to any Distribution Date, the 'Required Transferor Subordinated Amount' shall be
an amount determined as set forth in the Insurance Agreement (as defined
herein).
RAPID AMORTIZATION EVENTS
As described above, the Managed Amortization Period will continue through
the Distribution Date in March 2002, unless a Rapid Amortization Event occurs
prior to such date. 'Rapid Amortization Event' refers to any of the following
events:
(a) failure on the part of the Seller (i) to make a payment or deposit
required under the Agreement within three Business Days after the date such
payment or deposit is required to be made, (ii) to record assignments of
Mortgage Loans when required pursuant to the Agreement or (iii) to observe
or perform in any material respect any other covenants or agreements of the
Seller set forth in the Agreement, which failure materially and adversely
affects the interests of the Certificateholders or the Certificate Insurer
and, with certain exceptions, continues unremedied for a period of 60 days
after written notice;
(b) any representation or warranty made by the Seller or the Depositor
in the Agreement proves to have been incorrect in any material respect when
made and continues to be incorrect in any material respect for a period of
60 days after written notice and as a result of which the interests of the
Certificateholders or the Certificate Insurer are materially and adversely
affected; provided, however, that a Rapid Amortization Event shall not be
deemed to occur if the Seller has purchased or made a substitution for the
related Mortgage Loan or Mortgage Loans if applicable during such period
(or within an additional 60 days with the consent of the Trustee) in
accordance with the provisions of the Agreement;
(c) the occurrence of certain events of bankruptcy, insolvency or
receivership relating to the Transferor;
(d) the Trust Fund becomes subject to regulation by the Securities and
Exchange Commission as an investment company within the meaning of the
Investment Company Act of 1940, as amended; or
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(e) the aggregate of all draws under the Policy incurred during the
Managed Amortization Period exceeds 1% of the Cut-off Date Pool Balance.
In the case of any event described in clause (a) or (b), a Rapid
Amortization Event will be deemed to have occurred only if, after the applicable
grace period, if any, described in such clauses, either the Trustee or
Certificateholders holding Certificates evidencing more than 51% of the
aggregate principal amount of the Certificates or the Certificate Insurer (so
long as there is no default by the Certificate Insurer in the performance of its
obligations under the Policy), by written notice to the Transferor, the
Depositor and the Master Servicer (and to the Trustee, if given by either the
Certificate Insurer or the Certificateholders) declare that a Rapid Amortization
Event has occurred as of the date of such notice. In the case of any event
described in clause (c), (d) or (e), a Rapid Amortization Event will be deemed
to have occurred without any notice or other action on the part of the Trustee,
the Certificate Insurer or the Certificateholders immediately upon the
occurrence of such event.
In addition to the consequences of a Rapid Amortization Event discussed
above, if the Transferor voluntarily files a bankruptcy petition or goes into
liquidation or any person is appointed a receiver or bankruptcy trustee of the
Transferor, on the day of any such filing or appointment no further Additional
Balances will be transferred to the Trust Fund, the Transferor will immediately
cease to transfer Additional Balances to the Trust Fund and the Transferor will
promptly give notice to the Trustee of any such filing or appointment. Within 15
days, the Trustee will publish a notice of the liquidation or the filing or
appointment stating that the Trustee intends to sell, dispose of or otherwise
liquidate the Mortgage Loans in a commercially reasonable manner and to the best
of its ability. Unless otherwise instructed within a specified period by
Certificateholders representing undivided interests aggregating at least 51% of
the aggregate principal amount of the Certificates, the Trustee will sell,
dispose of or otherwise liquidate the Mortgage Loans in a commercially
reasonable manner and on commercially reasonable terms. Any proceeds will first
be paid to the Certificate Insurer to the extent of any unreimbursed draws under
the Policy and other amounts owing to the Certificate Insurer pursuant to the
Insurance Agreement. The Investor Fixed Allocation Percentage of remaining
amounts will be distributed to the Certificateholders on the date such amounts
are received (the 'Dissolution Distribution Date'). If the portion of such
amounts allocable to the Certificateholders are not sufficient to pay in full
the remaining amount due on the Certificates, the Policy will cover such
shortfall.
Notwithstanding the foregoing, if a conservator, receiver or
trustee-in-bankruptcy is appointed for the Transferor and no Rapid Amortization
Event exists other than such conservatorship, receivership or insolvency of the
Transferor, the conservator, receiver or trustee-in-bankruptcy may have the
power to prevent the commencement of the Rapid Amortization Period or the sale
of Mortgage Loans described above.
THE POLICY
On or before the Closing Date, the Policy will be issued by the Certificate
Insurer pursuant to the provisions of the Agreement and the Insurance and
Indemnity Agreement (the 'Insurance Agreement') to be dated as of February 25,
1997, among the Seller, the Depositor, the Master Servicer, the Trustee and the
Certificate Insurer.
The Policy will irrevocably and unconditionally guarantee payment (a) on
each Distribution Date to the Trustee for the benefit of the Certificateholders
the full and complete payment of (i) the Guaranteed Principal Distribution
Amount (as defined herein) with respect to the Certificates for such
Distribution Date and (ii) accrued and unpaid interest due on the Certificates
(together, the 'Guaranteed Distributions'), with such Guaranteed Distributions
having been calculated in accordance with the original terms of the Certificates
or the Agreement except for amendments or modifications to which the Certificate
Insurer has given its prior written consent and (b) of any Preference Amount (as
defined herein). The effect of the Policy is to guarantee the timely payment of
interest on, and the ultimate payment of the principal amount of, all of the
Certificates.
The 'Guaranteed Principal Distribution Amount' for any Distribution Date on
which the Available Transferor Subordinated Amount has been reduced to or equals
zero shall be the amount, if any, by which the Certificate Principal Balance
(after giving effect to all other amounts distributable and allocable to
principal on the Certificates) exceeds the Invested Amount as of such
Distribution Date (after giving effect to all other amounts distributable and
allocable to principal on the Certificates for such Distribution Date). In
addition, the Policy will guarantee the payment of the outstanding Certificate
Principal Balance on the Distribution Date in
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February, 2027 (after giving effect to all other amounts distributable and
allocable to principal on such Distribution Date).
Payment of claims on the Policy will be made by the Certificate Insurer
following Receipt by the Certificate Insurer of the appropriate notice for
payment on the later to occur of (i) 12:00 noon, New York City time, on the
second Business Day following Receipt of such notice for payment and (ii) 12:00
noon, New York City time, on the relevant Distribution Date.
If payment of any amount guaranteed by the Certificate Insurer pursuant to
the Policy is avoided as a preference payment (the 'Preference Amount') under
applicable bankruptcy, insolvency, receivership or similar law, the Certificate
Insurer will pay such amount out of the funds of the Certificate Insurer on the
later of (a) the date when due to be paid pursuant to the Order referred to
below or (b) the first to occur of (i) the fourth Business Day following Receipt
by the Certificate Insurer from the Trustee of (A) a certified copy of the order
(the 'Order') of the court or other governmental body which exercised
jurisdiction to the effect that the Certificateholder is required to return the
amount of any Guaranteed Distributions distributed with respect to the
Certificates during the term of the Policy because such distributions were
avoidable preference payments under applicable bankruptcy law, (B) a certificate
of the Certificateholder that the Order has been entered and is not subject to
any stay and (C) an assignment duly executed and delivered by the
Certificateholder, in such form as is reasonably required by the Certificate
Insurer and provided to the Certificateholder by the Certificate Insurer,
irrevocably assigning to the Certificate Insurer all rights and claims of the
Certificateholder relating to or arising under the Certificates against the
debtor which made such preference payment or otherwise with respect to such
preference payment, or (ii) the date of Receipt by the Certificate Insurer from
the Trustee of the items referred to in clauses (A), (B) and (C) above if, at
least four Business Days prior to such date of Receipt, the Certificate Insurer
shall have Received written notice from the Trustee that such items were to be
delivered on such date and such date was specified in such notice. Such payment
shall be disbursed to the receiver, conservator, debtor-in-possession or trustee
in bankruptcy named in the Order and not to the Trustee or any Certificateholder
directly (unless a Certificateholder has previously paid such amount to the
receiver, conservator, debtor-in-possession or trustee in bankruptcy named in
the Order, in which case such payment shall be disbursed to the Trustee for
distribution to such Certificateholder upon proof of such payment reasonably
satisfactory to the Certificate Insurer).
The terms 'Receipt' and 'Received', with respect to the Policy, mean actual
delivery to the Certificate Insurer and to its fiscal agent appointed by the
Certificate Insurer at its option, if any, prior to 12:00 noon, New York City
time, on a Business Day; delivery either on a day that is not a Business Day or
after 12:00 noon, New York City time, shall be deemed to be Received on the next
succeeding Business Day. If any notice or certificate given under the Policy by
the Trustee is not in proper form or is not properly completed, executed or
delivered, it shall be deemed not to have been Received, and the Certificate
Insurer or the fiscal agent shall promptly so advise the Trustee and the Trustee
may submit an amended notice.
Under the Policy, 'Business Day' means any day other than (i) a Saturday or
Sunday or (ii) a day on which banking institutions in the states of New York,
California or Illinois are authorized or obligated by law or executive order to
be closed.
The Certificate Insurer's obligations under the Policy in respect of
Guaranteed Distributions shall be discharged to the extent funds are transferred
to the Trustee as provided in the Policy, whether or not such funds are properly
applied by the Trustee.
The Certificate Insurer shall be subrogated to the rights of each
Certificateholder to receive payments of principal and interest, as applicable,
with respect to distributions on the Certificates to the extent of any payment
by the Certificate Insurer under the Policy. To the extent the Certificate
Insurer makes Guaranteed Distributions, either directly or indirectly (as by
paying through the Trustee), to the Certificateholders, the Certificate Insurer
will be subrogated to the rights of the Certificateholders, as applicable, with
respect to such Guaranteed Distributions, shall be deemed to the extent of the
payments so made to be a registered Certificateholder for purposes of payment
and shall receive all future Guaranteed Distributions until all such Guaranteed
Distributions by the Certificate Insurer have been fully reimbursed, provided
that the Certificateholders have received the full amount of the Guaranteed
Distributions.
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The terms of the Policy cannot be modified, altered or affected by any
other agreement or instrument, or by the merger, consolidation or dissolution of
the Seller. The Policy by its terms may not be cancelled or revoked. The Policy
is governed by the laws of the State of New York.
The Policy is not covered by the Property/Casualty Insurance Security fund
specified in Article 76 of the New York Insurance Law. The Policy is not covered
by the Florida Insurance Guaranty Association created under Part II of Chapter
631 of the Florida Insurance Code. In the event the Certificate Insurer were to
become insolvent, any claims arising under the Policy are excluded from coverage
by the California Insurance Guaranty Association, established pursuant to
Article 14.2 of Chapter 1 of part 2 of Division 1 of the California Insurance
Code.
Pursuant to the terms of the Agreement, unless a Certificate Insurer
default exists, the Certificate Insurer shall be deemed to be the Holder of the
Certificates for certain purposes (other than with respect to payment on the
Certificates), will be entitled to exercise all rights of the Certificateholders
thereunder, without the consent of such Holders and the Holders of the
Certificates may exercise such rights only with the prior written consent of the
Certificate Insurer. In addition, the Certificate Insurer will have certain
additional rights as third party beneficiary to the Agreement.
In the absence of payments under the Policy, Certificateholders will bear
directly the credit and other risks associated with their undivided interest in
the Trust Fund.
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution to the Certificateholders, the Master
Servicer will forward to the Trustee for mailing to such Certificateholder a
statement setting forth among other items:
(i) the Investor Floating Allocation Percentage for the preceding
Collection Period;
(ii) the amount being distributed to Certificateholders;
(iii) the amount of interest included in such distribution and the
related Certificate Rate;
(iv) the amount, if any, of overdue accrued interest included in such
distribution (and the amount of interest thereon to the extent
permitted by applicable law);
(v) the amount, if any, of the remaining overdue accrued interest
after giving effect to such distribution;
(vi) the amount, if any, of principal included in such distribution;
(vii) the amount, if any, of the reimbursement of previous Investor
Loss Amounts included in such distribution;
(viii) the amount, if any, of the aggregate unreimbursed Investor Loss
Amounts after giving effect to such distribution;
(ix) the Servicing Fee for such Distribution Date;
(x) the Invested Amount, the Certificate Principal Balance and the
Pool Factor, each after giving effect to such distribution;
(xii) the Pool Balance as of the end of the preceding Collection
Period;
(xii) the number and aggregate Principal Balances of the Mortgage
Loans as to which the minimum monthly payment is delinquent for
30-59 days, 60-89 days and 90 or more days, respectively, as of
the end of the preceding Collection Period;
(xiii) the book value of any real estate which is acquired by the
Trust Fund through foreclosure or grant of deed in lieu of
foreclosure; and
(xiv) the amount of any draws on the Policy.
In the case of information furnished pursuant to clauses (iii), (iv), (v),
(vi), (vii) and (viii) above, the amounts shall be expressed as a dollar amount
per Certificate with a $1,000 denomination.
Within 60 days after the end of each calendar year commencing in 1997, the
Master Servicer will be required to forward to the Trustee a statement
containing the information set forth in clauses (iii) and (vi) above aggregated
for such calendar year.
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COLLECTION AND OTHER SERVICING PROCEDURES ON MORTGAGE LOANS
The Master Servicer will make reasonable efforts to collect all payments
called for under the Mortgage Loans and will, consistent with the Agreement,
follow such collection procedures as it follows from time to time with respect
to the home equity loans in its servicing portfolio comparable to the Mortgage
Loans. Consistent with the above, the Master Servicer may in its discretion
waive any late payment charge or any assumption or other fee or charge that may
be collected in the ordinary course of servicing the Mortgage Loans.
With respect to the Mortgage Loans, the Master Servicer may arrange with a
borrower a schedule for the payment of interest due and unpaid for a period,
provided that any such arrangement is consistent with the Master Servicer's
policies with respect to the mortgage loans it owns or services. In accordance
with the terms of the Agreement, the Master Servicer may consent under certain
circumstances to the placing of a subsequent senior lien in respect of a
Mortgage Loan.
HAZARD INSURANCE
The Agreement provides that the Master Servicer maintain certain hazard
insurance on the Mortgaged Properties relating to the Mortgage Loans. While the
terms of the related Credit Line Agreements generally require borrowers to
maintain certain hazard insurance, the Master Servicer will not monitor the
maintenance of such insurance.
The Agreement requires the Master Servicer to maintain for any Mortgaged
Property relating to a Mortgage Loan acquired upon foreclosure of a Mortgage
Loan, or by deed in lieu of such foreclosure, hazard insurance with extended
coverage in an amount equal to the lesser of (a) the maximum insurable value of
such Mortgaged Property or (b) the outstanding balance of such Mortgage Loan
plus the outstanding balance on any mortgage loan senior to such Mortgage Loan
at the time of foreclosure or deed in lieu of foreclosure, plus accrued interest
and the Master Servicer's good faith estimate of the related liquidation
expenses to be incurred in connection therewith. The Agreement provides that the
Master Servicer may satisfy its obligation to cause hazard policies to be
maintained by maintaining a blanket policy insuring against losses on such
Mortgaged Properties. If such blanket policy contains a deductible clause, the
Master Servicer will be obligated to deposit in the Collection Account the sums
which would have been deposited therein but for such clause. The Master Servicer
will satisfy these requirements by maintaining a blanket policy. As set forth
above, all amounts collected by the Master Servicer (net of any reimbursements
to the Master Servicer) under any hazard policy (except for amounts to be
applied to the restoration or repair of the Mortgaged Property) will ultimately
be deposited in the Collection Account.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements on the property by fire,
lightning, explosion, smoke, windstorm and hail, and the like, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Mortgage Loans will be underwritten by
different insurers and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by state laws and most of such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mudflows), nuclear
reactions, wet or dry rot, vermin, rodents, insects or domestic animals, theft
and, in certain cases, vandalism. The foregoing list is merely indicative of
certain kinds of uninsured risks and is not intended to be all-inclusive or an
exact description of the insurance policies relating to the Mortgaged
Properties.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Master Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Mortgage Loans as come into
default when, in accordance with applicable servicing procedures under the
Agreement, no satisfactory arrangements can be made for the collection of
delinquent payments. In connection with such foreclosure or other conversion,
the Master Servicer will follow such practices as it deems necessary or
advisable and as are in keeping with its general mortgage servicing activities,
provided the Master Servicer will not be required to expend its own funds in
connection with foreclosure or other conversion, correction of default on a
related senior mortgage loan or restoration of any property unless, in its sole
judgment, such foreclosure, correction or restoration will increase Net
Liquidation Proceeds. The Master Servicer will be reimbursed out of Liquidation
Proceeds and, if necessary, from other
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collections on or in respect of the Mortgage Loans, for advances of its own
funds as liquidation expenses before any Net Liquidation Proceeds are
distributed to Certificateholders or the Transferor.
OPTIONAL PURCHASE OF DEFAULTED LOAN
The Master Servicer may, at its option, purchase from the Trust Fund any
Mortgage Loan which is delinquent in payment for 91 days or more. Any such
purchase shall be at a price equal to 100% of the Principal Balance of such
Mortgage Loan plus accrued interest thereon at the applicable Loan Rate from the
date through which interest was last paid by the related mortgagor to the first
day of the month in which such amount is to be distributed to
Certificateholders.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Collection Period, the Master Servicer will receive
from Interest Collections in respect of the Mortgage Loans a portion of such
Interest Collections as a monthly Servicing Fee in the amount equal to 0.50% per
annum ('Servicing Fee Rate') on the aggregate Principal Balances of the Mortgage
Loans as of the first day of the related Collection Period. All assumption fees,
late payment charges and other fees and charges, to the extent collected from
borrowers, will be retained by the Master Servicer as additional servicing
compensation.
The Master Servicer will pay certain ongoing expenses associated with the
Trust Fund and incurred by it in connection with its responsibilities under the
Agreement. In addition, the Master Servicer will be entitled to reimbursement
for certain expenses incurred by it in connection with defaulted Mortgage Loans
and in connection with the restoration of Mortgaged Properties, such right of
reimbursement being prior to the rights of Certificateholders to receive any
related Net Liquidation Proceeds and, if necessary, other collections on or in
respect of the Mortgage Loans.
EVIDENCE AS TO COMPLIANCE
The Agreement provides for delivery on or before May 31 in each year,
beginning May 31, 1998, to the Trustee of an annual statement signed by an
officer of the Master Servicer to the effect that the Master Servicer has
fulfilled its material obligations under the Agreement throughout the preceding
fiscal year, except as specified in such statement.
On or before May 31 of each year, beginning May 31, 1998, the Master
Servicer will furnish a report prepared by a firm of nationally recognized
independent public accountants (who may also render other services to the Master
Servicer or the Transferor) to the Trustee, the Certificate Insurer and the
Rating Agencies to the effect that such firm has examined certain documents and
the records relating to servicing of the Mortgage Loans under the Agreement and
that, on the basis of such examination, such firm believes that such servicing
was conducted in compliance with the Agreement except for (a) such exceptions as
such firm believes to be immaterial and (b) such other exceptions as shall be
set forth in such report.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE TRANSFEROR
The Agreement provides that the Master Servicer may not resign from its
obligations and duties thereunder, except in connection with a permitted
transfer of servicing, unless (i) such duties and obligations are no longer
permissible under applicable law or are in material conflict by reason of
applicable law with any other activities of a type and nature presently carried
on by it or its affiliate or (ii) upon the satisfaction of the following
conditions: (a) the Master Servicer has proposed a successor servicer to the
Trustee in writing and such proposed successor servicer is reasonably acceptable
to the Trustee; (b) the Rating Agencies have confirmed to the Trustee that the
appointment of such proposed successor servicer as the Master Servicer will not
result in the reduction or withdrawal of the then current rating of the
Certificates without regard to the Policy; and (c) such proposed successor
servicer is reasonably acceptable to the Certificate Insurer. No such
resignation will become effective until the Trustee or a successor servicer has
assumed the Master Servicer's obligations and duties under the Agreement.
The Master Servicer may perform any of its duties and obligations under the
Agreement through one or more subservicers or delegates, which may be affiliates
of the Master Servicer. Notwithstanding any such
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arrangement, the Master Servicer will remain liable and obligated to the Trustee
and the Certificateholders for the Master Servicer's duties and obligations
under the Agreement, without any diminution of such duties and obligations and
as if the Master Servicer itself were performing such duties and obligations.
The Agreement provides that the Master Servicer will indemnify the Trust
Fund and the Trustee from and against any loss, liability, expense, damage or
injury suffered or sustained as a result of the Master Servicer's actions or
omissions in connection with the servicing and administration of the Mortgage
Loans which are not in accordance with the provisions of the Agreement. Under
the Agreement, the Transferor will indemnify an injured party for the entire
amount of any losses, claims, damages or liabilities arising out of or based on
the Agreement to the extent described therein (other than losses resulting from
defaults under the Mortgage Loans). In the event of an Event of Servicing
Termination (as defined below) resulting in the assumption of servicing
obligations by a successor Master Servicer, the successor Master Servicer will
indemnify the Transferor for any losses, claims, damages and liabilities of the
Transferor as described in this paragraph arising from the successor Master
Servicer's actions or omissions. The Agreement provides that neither the
Depositor, the Transferor nor the Master Servicer nor their directors, officers,
employees or agents will be under any other liability to the Trust Fund, the
Trustee, the Certificateholders or any other person for any action taken or for
refraining from taking any action pursuant to the Agreement. However, neither
the Depositor, the Transferor nor the Master Servicer will be protected against
any liability which would otherwise be imposed by reason of willful misconduct,
bad faith or gross negligence of the Depositor, the Transferor or the Master
Servicer in the performance of its duties under the Agreement or by reason of
reckless disregard of its obligations thereunder. In addition, the Agreement
provides that the Master Servicer will not be under any obligation to appear in,
prosecute or defend any legal action which is not incidental to its servicing
responsibilities under the Agreement and which in its opinion may expose it to
any expense or liability. The Master Servicer may, in its sole discretion,
undertake any such legal action which it may deem necessary or desirable with
respect to the Agreement and the rights and duties of the parties thereto and
the interest of the Certificateholders thereunder.
Any corporation into which the Master Servicer may be merged or
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Master Servicer shall be a party, or any corporation
succeeding to the business of the Master Servicer shall be the successor of the
Master Servicer under the Agreement, without the execution or filing of any
paper or any further act on the part of any of the parties thereto, anything in
the Agreement to the contrary notwithstanding.
EVENTS OF SERVICING TERMINATION
'Events of Servicing Termination' will consist of: (i) any failure by the
Master Servicer to deposit in the Collection Account any deposit required to be
made under the Agreement, which failure continues unremedied for five Business
Days after the giving of written notice of such failure to the Master Servicer
by the Trustee, or to the Master Servicer and the Trustee by the Certificate
Insurer or Certificateholders evidencing an aggregate, undivided interest in the
Trust Fund of at least 25% of the Certificate Principal Balance; (ii) any
failure by the Master Servicer duly to observe or perform in any material
respect any other of its covenants or agreements in the Certificates or the
Agreement which, in each case, materially and adversely affects the interests of
the Certificateholders or the Certificate Insurer and continues unremedied for
60 days after the giving of written notice of such failure to the Master
Servicer by the Trustee, or to the Master Servicer and the Trustee by the
Certificate Insurer or Certificateholders evidencing an aggregate, undivided
interest in the Trust Fund of at least 25% of the Certificate Principal Balance;
or (iii) certain events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings relating to the Master Servicer
and certain actions by the Master Servicer indicating insolvency, reorganization
or inability to pay its obligations. Under certain other circumstances, the
Certificate Insurer with the consent of holders of Certificates evidencing an
aggregate, undivided interest in the Trust Fund of at least 51% of the
Certificate Principal Balance may deliver written notice to the Master Servicer
terminating all the rights and obligations of the Master Servicer under the
Agreement.
Notwithstanding the foregoing, a delay in or failure of performance
referred to under clause (i) above for a period of ten Business Days or referred
to under clause (ii) above for a period of 60 Business Days, shall not
constitute an Event of Servicing Termination if such delay or failure could not
be prevented by the exercise of reasonable diligence by the Master Servicer and
such delay or failure was caused by an act of God or other similar occurrence.
Upon the occurrence of any such event the Master Servicer shall not be relieved
from using
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its best efforts to perform its obligations in a timely manner in accordance
with the terms of the Agreement and the Master Servicer shall provide the
Trustee, the Depositor, the Transferor, the Certificate Insurer and the
Certificateholders prompt notice of such failure or delay by it, together with a
description of its efforts to so perform its obligations.
RIGHTS UPON AN EVENT OF SERVICING TERMINATION
So long as an Event of Servicing Termination remains unremedied, either the
Trustee, or Certificateholders evidencing an aggregate, undivided interest in
the Trust Fund of at least 51% of the Certificate Principal Balance or the
Certificate Insurer, may terminate all of the rights and obligations of the
Master Servicer under the Agreement, whereupon the Trustee will succeed to all
the responsibilities, duties and liabilities of the Master Servicer under the
Agreement and will be entitled to similar compensation arrangements. In the
event that the Trustee would be obligated to succeed the Master Servicer but is
unwilling or unable so to act, it may appoint, or petition a court of competent
jurisdiction for the appointment of, a housing and home finance institution or
other mortgage loan or home equity loan servicer with all licenses and permits
required to perform its obligations under the Agreement and having a net worth
of at least $15,000,000 and acceptable to the Certificate Insurer to act as
successor to the Master Servicer under the Agreement. Pending such appointment,
the Trustee will be obligated to act in such capacity unless prohibited by law.
Such successor will be entitled to receive the same compensation that the Master
Servicer would otherwise have received (or such lesser compensation as the
Trustee and such successor may agree). A receiver or conservator for the Master
Servicer may be empowered to prevent the termination and replacement of the
Master Servicer where the Event of Servicing Termination that has occurred is an
Insolvency Event.
AMENDMENT
The Agreement may be amended from time to time by the Seller, the Master
Servicer, the Depositor and the Trustee and with the consent of the Certificate
Insurer, but without the consent of the Certificateholders, to cure any
ambiguity, to correct any defective provision or to correct or supplement any
provisions therein which may be inconsistent with any other provisions of the
Agreement, to add to the duties of the Depositor, the Seller, the Transferor or
the Master Servicer or to add or amend any provisions of the Agreement as
required by the Rating Agencies in order to maintain or improve any rating of
the Certificates (it being understood that, after obtaining the ratings in
effect on the Closing Date, neither the Transferor, the Seller, the Depositor,
the Trustee nor the Master Servicer is obligated to obtain, maintain, or improve
any such rating) or to add any other provisions with respect to matters or
questions arising under the Agreement or the Policy which shall not be
inconsistent with the provisions of the Agreement, to comply with any
requirement imposed by the Code (as defined herein) or to increase the limits
set forth in the Agreement as to the amount of senior liens which the Master
Servicer may consent to, provided that such action will not, as evidenced by an
opinion of counsel, materially and adversely affect the interests of any
Certificateholder or the Certificate Insurer; provided, that any such amendment
will not be deemed to materially and adversely affect the Certificateholders and
no such opinion will be required to be delivered if the person requesting such
amendment obtains a letter from the Rating Agencies stating that such amendment
would not result in a downgrading of the then current rating of the Certificates
without regard to the Policy. The Agreement may also be amended from time to
time by the Seller, the Master Servicer, the Depositor, and the Trustee, and the
Master Servicer and the Certificate Insurer may from time to time consent to the
amendment of the Policy, with the consent of Certificateholders evidencing an
aggregate, undivided interest in the Trust Fund of at least 51% of the
Certificate Principal Balance and the Certificate Insurer for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of the Agreement or of modifying in any manner the rights of the
Certificateholders, provided that no such amendment will (i) reduce in any
manner the amount of, or delay the timing of, payments on the Certificates or
distributions or payments under the Policy which are required to be made on any
Certificate without the consent of the holder of such Certificate, (ii) reduce
the aforesaid percentage required to consent to any such amendment, without the
consent of the holders of all Certificates then outstanding or (iii) adversely
affect in any material respect the interests of the Certificate Insurer.
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TERMINATION; RETIREMENT OF THE CERTIFICATES
The Trust Fund will terminate on the Distribution Date following the later
of (A) payment in full of all amounts owing to the Certificate Insurer and (B)
the earliest of (i) the Distribution Date on which the Certificate Principal
Balance has been reduced to zero, (ii) the final payment or other liquidation of
the last Mortgage Loan in the Trust Fund, (iii) the optional transfer to the
Transferor of the Certificates, as described below and (iv) the Distribution
Date in February 2027.
The Certificates will be subject to optional retransfer to the Transferor
on any Distribution Date after the Certificate Principal Balance is reduced to
an amount less than or equal to 10% of the Original Certificate Principal
Balance and all amounts due and owing to the Certificate Insurer and
unreimbursed draws on the Policy, together with interest thereon, as provided
under the Insurance Agreement, have been paid. The transfer price will be equal
to the sum of the outstanding Certificate Principal Balance and accrued and
unpaid interest thereon at the Certificate Rate through the day preceding the
final Distribution Date. In no event, however, will the Trust Fund created by
the Agreement continue for more than 21 years after the death of certain
individuals named in the Agreement. Written notice of termination of the
Agreement will be given to each Certificateholder, and the final distribution
will be made only upon surrender and cancellation of the Certificates at an
office or agency appointed by the Trustee which will be specified in the notice
of termination.
In addition, the Trust Fund may be liquidated as a result of certain events
of bankruptcy, insolvency or receivership relating to the Transferor. See
' -- Rapid Amortization Events' herein.
THE TRUSTEE
The First National Bank of Chicago, a national banking association with its
principal place of business in Illinois, has been named Trustee pursuant to the
Agreement.
The commercial bank or trust company serving as Trustee may own
Certificates and have normal banking relationships with the Depositor, the
Master Servicer, the Seller and the Certificate Insurer and/or their affiliates.
The Trustee may resign at any time, in which event the Depositor will be
obligated to appoint a successor Trustee, as approved by the Certificate
Insurer. The Depositor may also remove the Trustee if the Trustee ceases to be
eligible to continue as such under the Agreement or if the Trustee becomes
insolvent. Upon becoming aware of such circumstances, the Depositor will be
obligated to appoint a successor Trustee, as approved by the Certificate
Insurer. Any resignation or removal of the Trustee and appointment of a
successor Trustee will not become effective until acceptance of the appointment
by the successor Trustee.
No holder of a Certificate will have any right under the Agreement to
institute any proceeding with respect to the Agreement unless such holder
previously has given to the Trustee written notice of default and unless
Certificateholders evidencing an aggregate, undivided interest in the Trust Fund
of at least 51% of the Certificate Principal Balance have made written requests
upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity and the Trustee
for 60 days has neglected or refused to institute any such proceeding. The
Trustee will be under no obligation to exercise any of the trusts or powers
vested in it by the Agreement or to make any investigation of matters arising
thereunder or to institute, conduct or defend any litigation thereunder or in
relation thereto at the request, order or direction of any of the
Certificateholders, unless such Certificateholders have offered to the Trustee
reasonable security or indemnity against the cost, expenses and liabilities
which may be incurred therein or thereby.
CERTAIN ACTIVITIES
The Trust Fund will not: (i) borrow money; (ii) make loans; (iii) invest in
securities for the purpose of exercising control; (iv) underwrite securities;
(v) except as provided in the Agreement, engage in the purchase and sale (or
turnover) of investments; (vi) offer securities in exchange for property (except
Certificates for the Mortgage Loans); or (vii) repurchase or otherwise reacquire
its securities. See ' -- Evidence as to Compliance' above for information
regarding reports as to the compliance by the Master Servicer with the terms of
the Agreement.
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DESCRIPTION OF THE PURCHASE AGREEMENT
The Mortgage Loans to be transferred to the Trust Fund by the Depositor
will be purchased by the Depositor from Countrywide pursuant to the Purchase
Agreement to be entered into between the Depositor, as purchaser of the Mortgage
Loans, and Countrywide, as Seller of the Mortgage Loans. Under the Purchase
Agreement, the Seller will agree to transfer the Mortgage Loans and related
Additional Balances to the Depositor. Pursuant to the Agreement, the Mortgage
Loans will be immediately transferred by the Depositor to the Trust Fund, and
the Depositor will assign its rights in, to and under the Purchase Agreement to
the Trust Fund. The following is a description of the material provisions of the
Purchase Agreement.
TRANSFERS OF MORTGAGE LOANS
Pursuant to the Purchase Agreement, the Seller will transfer and assign to
the Depositor, all of its right, title and interest in and to the Mortgage Loans
and all of the Additional Balances thereafter created. The purchase price of the
Mortgage Loans is a specified percentage of the face amount thereof as of the
time of transfer and is payable by the Depositor in cash. The purchase price of
each Additional Balance comprising the Principal Balance of a Mortgage Loan is
the amount of such Additional Balance.
REPRESENTATIONS AND WARRANTIES
The Seller will represent and warrant to the Depositor that, among other
things, as of the Closing Date, it is duly organized and in good standing and
that it has the authority to consummate the transactions contemplated by the
Purchase Agreement. The Seller will also represent and warrant to the Depositor
that, among other things, immediately prior to the sale of the Mortgage Loans to
the Depositor, the Seller was the sole owner and holder of the Mortgage Loans
free and clear of any and all liens and security interests. The Seller will make
similar representations and warranties in the Agreement. The Seller will also
represent and warrant to the Depositor that, among other things, as of the
Closing Date, (a) the Purchase Agreement constitutes a legal, valid and binding
obligation of the Seller and (b) the Purchase Agreement constitutes a valid sale
to the Depositor of all right, title and interest of the Seller in and to the
Mortgage Loans and the proceeds thereof.
ASSIGNMENT TO TRUST FUND
The Seller will expressly acknowledge and consent to the Depositor's
transfer of its rights relating to the Mortgage Loans under the Agreement to the
Trust Fund. The Seller also will agree to perform its obligations under the
Purchase Agreement for the benefit of the Trust Fund.
TERMINATION
The Purchase Agreement will terminate upon the termination of the Trust
Fund.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates will be
applied by the Depositor towards the purchase of the Mortgage Loans.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion, which summarizes the material U.S. federal income
tax aspects of the purchase, ownership and disposition of the Certificates, is
based on the provisions of the Internal Revenue Code of 1986, as amended (the
'Code'), the Treasury Regulations thereunder, and published rulings and court
decisions in effect as of the date hereof, all of which are subject to change,
possibly retroactively. This discussion does not address every aspect of the
U.S. federal income tax laws which may be relevant to Certificate Owners in
light of their personal investment circumstances or to certain types of
Certificate Owners subject to special treatment under the U.S. federal income
tax laws (for example, banks and life insurance companies). Accordingly,
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investors should consult their tax advisors regarding U.S. federal, state,
local, foreign and any other tax consequences to them of investing in the
Certificates.
CHARACTERIZATION OF THE CERTIFICATES AS INDEBTEDNESS
Based on the application of existing law to the facts as set forth in the
Agreement and other relevant documents and assuming compliance with the terms of
the Agreement as in effect on the date of issuance of the Certificates, Brown &
Wood LLP, special tax counsel to the Depositor ('Tax Counsel'), is of the
opinion that the Certificates will be treated as debt instruments for federal
income tax purposes as of such date. Accordingly, upon issuance, the
Certificates will be treated as 'Debt Securities' as described in the
Prospectus. See 'Federal Income Tax Consequences' in the Prospectus.
The Transferor and the Certificateholders express in the Agreement their
intent that, for applicable tax purposes, the Certificates will be indebtedness
secured by the Mortgage Loans. The Transferor, the Depositor and the
Certificateholders, by accepting the Certificates, and each Certificate Owner by
its acquisition of a beneficial interest in a Certificate, have agreed to treat
the Certificates as indebtedness for U.S. federal income tax purposes. However,
because different criteria are used to determine the non-tax accounting
characterization of the transaction, the Transferor intends to treat this
transaction as a sale of an interest in the Principal Balances of the Mortgage
Loans for financial accounting purposes.
In general, whether for U.S. federal income tax purposes a transaction
constitutes a sale of property or a loan, the repayment of which is secured by
property, is a question of fact, the resolution of which is based upon the
economic substance of the transaction rather than its form or the manner in
which it is labeled. While the Internal Revenue Service (the 'IRS') and the
courts have set forth several factors to be taken into account in determining
whether the substance of a transaction is a sale of property or a secured loan,
the primary factor in making this determination is whether the transferee has
assumed the risk of loss or other economic burdens relating to the property and
has obtained the benefits of ownership thereof. Tax Counsel has analyzed and
relied on several factors in reaching its opinion that the weight of the
benefits and burdens of ownership of the Mortgage Loans has been retained by the
Transferor and has not been transferred to the Certificate Owners.
In some instances, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. Tax Counsel has advised that the
rationale of those cases will not apply to this transaction, because the form of
the transaction as reflected in the operative provisions of the documents either
accords with the characterization of the Certificates as debt or otherwise makes
the rationale of those cases inapplicable to this situation.
TAXATION OF INTEREST INCOME OF CERTIFICATE OWNERS
Assuming that the Certificate Owners are holders of debt obligations for
U.S. federal income tax purposes, the Certificates generally will be taxable as
Debt Securities. See 'Federal Income Tax Consequences' in the Prospectus.
While it is not anticipated that the Certificates will be issued at a
greater than de minimis discount, under Treasury regulations (the 'OID
Regulations') it is possible that the Certificates could nevertheless be deemed
to have been issued with original issue discount ('OID') if the interest were
not treated as 'unconditionally payable' under the OID Regulations. If such
regulations were to apply, all of the taxable income to be recognized with
respect to the Certificates would be includible in income of Certificate Owners
as OID, but would not be includible again when the interest is actually
received. See 'Federal Income Tax Consequences -- Taxation of Debt Securities;
Interest and Acquisition Discount' in the Prospectus for a discussion of the
application of the OID rules if the Certificates are in fact issued at a greater
than de minimis discount or are treated as having been issued with OID under the
OID Regulations. For purposes of calculating OID, it is likely that the
Certificates will be treated as Pay-Through Securities.
POSSIBLE CLASSIFICATION OF THE CERTIFICATES AS A PARTNERSHIP OR ASSOCIATION
TAXABLE AS A CORPORATION
The opinion of Tax Counsel is not binding on the courts or the IRS. It is
possible that the IRS could assert that, for purposes of the Code, the
transaction contemplated by this Prospectus Supplement and the accompanying
Prospectus with respect to the Certificates constitutes a sale of the Mortgage
Loans (or an interest
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therein) to the Certificate Owners and that the proper classification of the
legal relationship between the Transferor and the Certificate Owners resulting
from this transaction is that of a partnership, a publicly traded partnership
treated as a corporation, or an association taxable as a corporation. Since Tax
Counsel has advised that the Certificates will be treated as indebtedness in the
hands of the Certificateholders for U.S. federal income tax purposes, the
Transferor will not attempt to comply with U.S. federal income tax reporting
requirements applicable to partnerships or corporations.
If it were determined that this transaction created an entity classified as
a corporation (including a publicly traded partnership taxable as a
corporation), the Trust Fund would be subject to U.S. federal income tax at
corporate income tax rates on the income it derives from the Mortgage Loans,
which would reduce the amounts available for distribution to the Certificate
Owners. Cash distributions to the Certificate Owners generally would be treated
as dividends for tax purposes to the extent of such corporation's earnings and
profits.
If the transaction were treated as creating a partnership between the
Certificate Owners and the Transferor, the partnership itself would not be
subject to U.S. federal income tax (unless it were to be characterized as a
publicly traded partnership taxable as a corporation); rather, the Transferor
and each Certificate Owner would be taxed individually on their respective
distributive shares of the partnership's income, gain, loss, deductions and
credits. The amount and timing of items of income and deductions of the
Certificate Owner could differ if the Certificates were held to constitute
partnership interests rather than indebtedness. Assuming that all of the
provisions of the Agreement, as in effect on the date of the issuance, are
complied with, it is the opinion of Tax Counsel that the Trust Fund will not be
treated as either an association or a partnership taxable as a corporation or as
a taxable mortgage pool.
POSSIBLE CLASSIFICATION AS A TAXABLE MORTGAGE POOL
In relevant part, Section 7701(i) of the Code provides that any entity (or
a portion of an entity) that is a 'taxable mortgage pool' will be classified as
a taxable corporation and will not be permitted to file a consolidated U.S.
federal income tax return with another corporation. Any entity (or a portion of
any entity) will be a taxable mortgage pool if (i) substantially all of its
assets consist of debt instruments, more than 50% of which are real estate
mortgages, (ii) the entity is the obligor under debt obligations with two or
more maturities, and (iii) under the terms of the entity's debt obligations (or
an underlying arrangement), payments on such debt obligations bear a
relationship to the debt instruments held by the entity.
Assuming that all of the provisions of the Agreement, as in effect on the
date of issuance, are complied with, Tax Counsel is of the opinion that the
arrangement created by the Agreement will not be a taxable mortgage pool under
Section 7701(i) of the Code because only one class of indebtedness secured by
the Mortgage Loans is being issued.
The opinion of Tax Counsel is not binding on the IRS or the courts. If the
IRS were to contend successfully (or future regulations were to provide) that
the arrangement created by the Agreement is a taxable mortgage pool, such
arrangement would be subject to U.S. federal corporate income tax on its taxable
income generated by ownership of the Mortgage Loans. Such a tax might reduce
amounts available for distributions to Certificate Owners. The amount of such a
tax would depend upon whether distributions to Certificate Owners would be
deductible as interest expense in computing the taxable income of such an
arrangement as a taxable mortgage pool.
FOREIGN INVESTORS
In general, subject to certain exceptions, interest (including OID) paid on
a Certificate to a nonresident alien individual, foreign corporation or other
non-United States person is not subject to U.S. federal income tax, provided
that such interest is not effectively connected with a trade or business of the
recipient in the United States and the Certificate Owner provides the required
foreign person information certification. See 'Federal Income Tax
Consequences -- Tax Treatment of Foreign Investors' in the Prospectus.
If the interests of the Certificate Owners were deemed to be partnership
interests, the partnership would be required, on a quarterly basis, to pay
withholding tax equal to the product, for each foreign partner, of such foreign
partner's distributive share of 'effectively connected' income of the
partnership multiplied by the highest rate of tax applicable to that foreign
partner. In addition, such foreign partner would be subject to branch profits
tax. Each non-foreign partner would be required to certify to the partnership
that it is not a foreign
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person. The tax withheld from each foreign partner would be credited against
such foreign partner's U.S. income tax liability.
If the Trust Fund were taxable as a corporation, distributions to foreign
persons, to the extent treated as dividends, would generally be subject to
withholding at the rate of 30%, unless such rate were reduced by an applicable
tax treaty.
BACKUP WITHHOLDING
Certain Certificate Owners may be subject to backup withholding at the rate
of 31% with respect to interest paid on the Certificates if the Certificate
Owners, upon issuance, fail to supply the Trustee or his broker with his
taxpayer identification number, furnish an incorrect taxpayer identification
number, fail to report interest, dividends, or other 'reportable payments' (as
defined in the Code) properly, or, under certain circumstances, fail to provide
the Trustee or his broker with a certified statement, under penalty of perjury,
that he is not subject to backup withholding.
The Trustee will be required to report annually to the IRS, and to each
Certificateholder of record, the amount of interest paid (and OID accrued, if
any) on the Certificates (and the amount of interest withheld for U.S. federal
income taxes, if any) for each calendar year, except as to exempt holders
(generally, holders that are corporations, certain tax-exempt organizations or
nonresident aliens who provide certification as to their status as
nonresidents). As long as the only 'Certificateholder' of record is Cede, as
nominee for DTC, Certificate Owners and the IRS will receive tax and other
information including the amount of interest paid on the Certificates owned from
Participants and Indirect Participants rather than from the Trustee. (The
Trustee, however, will respond to requests for necessary information to enable
Participants, Indirect Participants and certain other persons to complete their
reports.) Each non-exempt Certificate Owner will be required to provide, under
penalty of perjury, a certificate on IRS Form W-9 containing his or her name,
address, correct federal taxpayer identification number and a statement that he
or she is not subject to backup withholding. Should a nonexempt Certificate
Owner fail to provide the required certification, the Participants or Indirect
Participants (or the Paying Agent) will be required to withhold 31% of the
interest (and principal) otherwise payable to the holder, and remit the withheld
amount to the IRS as a credit against the holder's federal income tax liability.
STATE TAXES
The Depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Certificates under the tax laws of any
state. Investors considering an investment in the Certificates should consult
their own tax advisors regarding such tax consequences.
ALL INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE FEDERAL,
STATE, LOCAL OR FOREIGN INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE CERTIFICATES.
ERISA CONSIDERATIONS
Any Plan fiduciary which proposes to cause a Plan to acquire any of the
Certificates should consult with its counsel with respect to the potential
consequences under the Employee Retirement Income Security Act of 1974, as
amended ('ERISA'), and the Code, of the Plan's acquisition and ownership of such
Certificates. See 'ERISA Considerations' in the Prospectus.
The U.S. Department of Labor has granted to Prudential Securities
Incorporated an administrative exemption (Prohibited Transaction Exemption
90-32; Exemption Application No. D-8145, 55 Fed. Reg. 23147 (1990)) (the
'Exemption') which exempts from the application of the prohibited transaction
rules transactions relating to (1) the acquisition, sale and holding by Plans of
certain certificates representing an undivided interest in certain asset-backed
pass-through trusts, with respect to which Prudential Securities Incorporated or
any of its affiliates is the sole underwriter or the manager or co-manager of
the underwriting syndicate; and (2) the servicing, operation and management of
such asset-backed pass-through trusts, provided that the general conditions and
certain other conditions set forth in the Exemption are satisfied. The Exemption
will apply to the acquisition, holding and resale of the Certificates by a Plan
provided that certain conditions are met.
Among the conditions which must be satisfied for the Exemption to apply are
the following:
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(1) The acquisition of the Certificates by a Plan is on terms
(including the price for such Certificates) that are at least as favorable
to the investing Plan as they would be in an arm's-length transaction with
an unrelated party;
(2) The rights and interests evidenced by the Certificates acquired by
the Plan are not subordinated to the rights and interests evidenced by
other certificates of the Trust;
(3) 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 Standard & Poor's, Moody's, or Duff & Phelps;
(4) The sum of all payments made to and retained by the Underwriters
in connection with the distribution of the Certificates represents not more
than reasonable compensation for underwriting such Certificates; the sum of
all payments made to and retained by the Depositor pursuant to the sale of
the Mortgage Loans to the Trust Fund represents not more than the fair
market value of such Mortgage Loans; the sum of all payments made to and
retained by the Master Servicer represent not more than reasonable
compensation for the Master Servicer's services under the Agreement and
reimbursement of the Master Servicer's reasonable expenses in connection
therewith;
(5) The Trustee is not an affiliate of either Underwriter, the Seller,
the Depositor, the Master Servicer, the Certificate Insurer, any borrower
whose obligations under one or more Mortgage Loans constitute more than 5%
of the aggregate unamortized principal balance of the assets in the Trust
Fund, or any of their respective affiliates (the 'Restricted Group'); and
(6) 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, as amended.
The Underwriters believe that the Exemption will apply to the acquisition
and holding of the Certificates by Plans and that all conditions of the
Exemption other than those within the control of the investors will be met.
Any Plan fiduciary considering whether to purchase any Certificates on
behalf of a Plan should consult with its counsel regarding the applicability of
the fiduciary responsibility and prohibited transaction provisions of ERISA and
the Code to such investment. Among other things, before purchasing any
Certificates, a fiduciary of a Plan subject to the fiduciary responsibility
provisions of ERISA or an employee benefit plan subject to the prohibited
transaction provisions of the Code should make its own determination as to the
availability of the exemptive relief provided in the Exemption, and also
consider the availability of any other prohibited transaction exemptions.
LEGAL INVESTMENT CONSIDERATIONS
Although, as a condition to their issuance, the Certificates will be rated
in the highest rating category of the Rating Agencies, the Certificates will not
constitute 'mortgage related securities' for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ('SMMEA'), because not all of the Mortgages
securing the Mortgage Loans are first mortgages. Accordingly, many institutions
with legal authority to invest in comparably rated securities based on first
mortgage loans may not be legally authorized to invest in the Certificates,
which because they evidence interests in a pool that includes junior mortgage
loans are not 'mortgage related securities' under SMMEA. See 'Legal Investment'
in the Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated February 21, 1997 (the 'Underwriting Agreement'), among the
Depositor, Prudential Securities Incorporated and Countrywide Securities
Corporation (an affiliate of the Depositor, the Seller and the Master Servicer
and, together with Prudential Securities Incorporated, the 'Underwriters'), the
Depositor has agreed to sell to the Underwriters, and Prudential Securities
Incorporated and Countrywide Securities Corporation have respectively agreed to
purchase from the Depositor, $58,800,000 and $58,800,000 initial Certificate
Principal Balance of the Certificates.
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all the Certificates offered
hereby if any of the Certificates are purchased.
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The Depositor has been advised by the Underwriters that they propose
initially to offer the Certificates to the public in Europe and the United
States at the offering price set forth on the cover page hereof and to certain
dealers at such price less a discount not in excess of 0.135% of the Certificate
denominations. The Underwriters may allow and such dealers may reallow a
discount not in excess of 0.0675% of the Certificate denominations to certain
other dealers. After the initial public offering, the public offering price,
such concessions and such discounts may be changed.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriters against certain civil liabilities, including liabilities under the
Act.
LEGAL MATTERS
Certain legal matters with respect to the Certificates will be passed upon
for the Depositor by Brown & Wood LLP, New York, New York. Stroock & Stroock &
Lavan LLP, New York, New York, will pass upon certain legal matters on behalf of
the Underwriters.
EXPERTS
The consolidated balance sheets of Financial Security Assurance Inc. and
Subsidiaries as of December 31, 1995 and 1994 and the related consolidated
statements of income, changes in shareholder's equity, and cash flows for each
of the three years in the period ended December 31, 1995, incorporated by
reference in this Prospectus Supplement, have been incorporated herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
RATINGS
It is a condition to issuance that the Certificates be rated 'AAA' by
Standard & Poor's and 'Aaa' by Moody's.
A securities rating addresses the likelihood of the receipt by
Certificateholders of distributions on the Mortgage Loans. The rating takes into
consideration the characteristics of the Mortgage Loans and the structural,
legal and tax aspects associated with the Certificates. The ratings on the
Certificates do not, however, constitute statements regarding the likelihood or
frequency of prepayments on the Mortgage Loans or the possibility that
Certificateholders might realize a lower than anticipated yield.
The ratings assigned to the Certificates will depend primarily upon the
creditworthiness of the Certificate Insurer. Any reduction in a rating assigned
to the claims-paying ability of the Certificate Insurer below the ratings
initially assigned to the Certificates may result in a reduction of one or more
of the ratings assigned to the Certificates.
A securities rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each securities rating should be evaluated independently of
similar ratings on different securities.
The Depositor has not requested a rating of the Certificates by any rating
agency other than the Rating Agencies; there can be no assurance, however, as to
whether any other rating agency will rate the Certificates or, if it does, what
rating would be assigned by such other rating agency. The rating assigned by
such other rating agency to the Certificates could be lower than the respective
ratings assigned by the Rating Agencies.
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<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
----------------
<S> <C>
Accelerated Principal Distribution
Amount.......................... S-8, S-35
Additional Balances............... S-3
Agreement......................... S-3
ALTA.............................. S-20
Alternative Documentation
Program......................... S-20
Alternative Principal Payment..... S-10, S-37
Assignment Event.................. S-31
Available Transferor Subordinated
Amount.......................... S-11, S-38
Bankruptcy Rate................... S-22
BIF............................... S-33
Book-Entry Certificates........... S-27
Business Day...................... S-35, S-40
Cede.............................. S-6
CEDEL............................. S-6
CEDEL Participants................ S-29
Certificate Insurer............... S-10, S-17
Certificate Owners................ S-6, S-27
Certificate Principal Balance..... S-4, S-27
Certificate Rate.................. S-3, S-9, S-36
Certificateholder................. S-28, S-50
Certificates...................... S-1, S-3
Chase............................. S-6
Citibank.......................... S-6
Closing Date...................... S-1, S-9, S-36
Code.............................. S-47
Collection Account................ S-9, S-33
Collection Period................. S-9, S-36
Combined Loan-to-Value Ratio...... S-5
Cooperative....................... S-29
Countrywide....................... S-1, S-3, S-19
Credit Limit...................... S-5
Credit Limit Utilization Rate..... S-22
Credit Line Agreements............ S-3, S-22
Cut-off Date...................... S-1, S-3
Cut-off Date Pool Balance......... S-3, S-22
Cut-off Date Principal Balance.... S-3
Defective Mortgage Loans.......... S-32
Definitive Certificate............ S-28
Depositor......................... S-3
Detailed Description.............. S-22
Determination Date................ S-12, S-33
Dissolution Distribution Date..... S-39
Distribution Date................. S-1, S-9, S-35
Draw Period....................... S-23
DTC............................... S-6, S-27, S-55
Due Date.......................... S-6
Eligible Account.................. S-33
Eligible Substitute Mortgage
Loan............................ S-31
ERISA............................. S-13, S-50
<CAPTION>
PAGE
----------------
<S> <C>
Euroclear......................... S-6
Euroclear Operator................ S-29
Euroclear Participants............ S-29
European Depositaries............. S-6, S-28
Exchange Act...................... S-2, S-18
Events of Servicing Termination... S-44
Exemption......................... S-50
FHLMC............................. S-20
Financial Intermediary............ S-28
Financial Security................ S-17
Fixed Allocation Percentage....... S-9
Foreclosure Rate.................. S-22
FNMA.............................. S-20
Global Securities................. S-55
Guaranteed Distributions.......... S-11, S-39
Guaranteed Principal Distribution
Amount.......................... S-11, S-39
Holdings.......................... S-2, S-17
Index............................. S-23
Index Rate........................ S-23
Indirect Participants............. S-28
Insurance Agreement............... S-10, S-39
Interest Collections.............. S-7, S-34
Interest Period................... S-9, S-36
Invested Amount................... S-4, S-27
Investor Fixed Allocation
Percentage...................... S-9
Investor Floating Allocation
Percentage...................... S-7, S-34
Investor Interest Collections..... S-7, S-34
Investor Loss Amount.............. S-8, S-36
Investor Principal Collections.... S-8, S-35
IRS............................... S-48
LIBOR............................. S-9
LIBOR Business Day................ S-37
Liquidated Mortgage Loan.......... S-36
Liquidation Loss Amount........... S-8, S-36
Liquidation Proceeds.............. S-34
Loan Rate......................... S-5, S-22
Managed Amortization Period....... S-9, S-37
Margin............................ S-22
Master Servicer................... S-3
Maximum Principal Payment......... S-10, S-37
Maximum Rate...................... S-22
Minimum Transferor Interest....... S-5, S-33
Money Rates....................... S-5, S-23
Moody's........................... S-10
Mortgage Files.................... S-31
Mortgage Loan Schedule............ S-4, S-31, S-32
Mortgage Loans.................... S-1, S-3
Mortgaged Properties.............. S-3
Net Liquidation Proceeds.......... S-7, S-34
</TABLE>
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<PAGE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
----------------
<S> <C>
OID............................... S-48
OID Regulations................... S-48
Order............................. S-40
Original Certificate Principal
Balance......................... S-4, S-27
Original Invested Amount.......... S-4, S-27
Original Transferor Interest...... S-4
Overcollateralization Amount...... S-8, S-36
Participants...................... S-28
Paying Agent...................... S-38
Percentage Interest............... S-6
Plan.............................. S-13
Policy............................ S-1, S-3
Pool Balance...................... S-3, S-35
Pool Factor....................... S-26
Preference Amount................. S-40
Principal Balance................. S-3
Principal Collections............. S-7, S-34
Purchase Agreement................ S-5
Rapid Amortization Event.......... S-38
Rating Agency..................... S-14
Receipt........................... S-40
Received.......................... S-40
Record Date....................... S-35
Reduced Documentation Program..... S-20
Reference Bank Rate............... S-36
Related Documents................. S-31
Relevant Depositary............... S-28
Repayment Period.................. S-23
Required Amount................... S-11, S-38
<CAPTION>
PAGE
----------------
<S> <C>
Required Transferor Subordinated
Amount.......................... S-12, S-38
Required Overcollateralization
Amount.......................... S-36
Restricted Group.................. S-51
Rules............................. S-28
SAIF.............................. S-33
Scheduled Principal Collections
Distribution Amount............. S-10, S-37
Seller............................ S-3
Servicing Fee..................... S-12
Servicing Fee Rate................ S-12, S-43
SMMEA............................. S-13, S-51
Standard & Poor's................. S-10
Subordinated Transferor
Collections..................... S-8, S-38
Tax Counsel....................... S-48
Telerate Screen Page 3750......... S-36
Terms and Conditions.............. S-30
Transfer Date..................... S-32
Transfer Deficiency............... S-31
Transfer Deposit Amount........... S-31
Transferor........................ S-4
Transferor Interest............... S-1, S-4, S-27
Transferor Principal Collections.. S-8, S-35
Trust Fund........................ S-1, S-3
Trustee........................... S-3, S-13
Underwriters...................... S-51
Underwriting Agreement............ S-51
U.S. Person....................... S-57
</TABLE>
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<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Revolving
Home Equity Loan Asset Backed Certificates, Series 1997-A (the 'Global
Securities') will be available only in book-entry form. Investors in the Global
Securities may hold such Global Securities through any of The Depository Trust
Company ('DTC'), CEDEL or Euroclear. The Global Securities will be tradeable as
home market instruments in both the European and U.S. domestic markets. Initial
settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through CEDEL and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional Eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior revolving home equity loan asset
backed certificate issues.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, CEDEL and Euroclear will hold
positions on behalf of their participants through their respective Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to other home equity loan asset backed
certificate issues. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional Eurobonds, except that there will be no temporary global security
and no 'lock-up' or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior revolving
home equity loan asset backed certificate issues in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional Eurobonds in same-day funds.
Trading between DTC Seller and CEDEL or Euroclear Purchaser. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a CEDEL Participant or a Euroclear Participant, the purchaser will
send instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. CEDEL or Euroclear
will instruct the respective Depositary, as the case may be, to receive the
Global Securities against payment. Payment will include interest accrued on the
Global Securities from and including the last coupon payment date to and
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<PAGE>
excluding the settlement date, on the basis of the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
respective Depositary of the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the CEDEL Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the CEDEL or Euroclear cash debt
will be valued instead as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon the finance settlement. Under
this procedure, CEDEL Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each CEDEL Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of CEDEL Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
Trading between CEDEL or Euroclear Seller and DTC Purchaser. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to CEDEL or Euroclear through a CEDEL Participant or Euroclear Participant at
least one business day prior to settlement. In these cases CEDEL or Euroclear
will instruct the respective Depositary, as appropriate, to deliver the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in such accrual period and a year assumed to consist of 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of the CEDEL Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
CEDEL Participant's or Euroclear Participant's account would be back-valued to
the value date (which would be the preceding day, when settlement occurred in
New York). Should the CEDEL Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the CEDEL Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase Global
Securities from DTC Participants for delivery to CEDEL Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action were taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the day trade is reflected in their CEDEL or Euroclear
accounts) in accordance with the clearing system's customary procedures;
S-56
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(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their CEDEL or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the CEDEL Participant
or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through CEDEL or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. Persons resident in treaty countries
(Form 1001). Non-U.S. Persons that are Certificate Owners residing in a country
that has a tax treaty with the United States can obtain an exemption or reduced
tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Certificate Owners
or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
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
whose income is subject to U.S. federal income tax regardless of its source of
income, or a trust if a court within the United States is able to exercise
primary supervision of the administration of the trust and one or more United
States fiduciaries have the authority to control all substantial decisions of
the trust. This summary does not deal with all aspects of U.S. federal income
tax withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for specific
tax advice concerning their holding and disposing of the Global Securities.
S-57
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<PAGE>
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_______________________________ _______________________________
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON. THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS DO NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH THEY RELATE OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THEIR RESPECTIVE DATES.
------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Incorporation of Certain Documents by
Reference............................. S-2
Summary................................. S-3
Risk Factors............................ S-15
The Certificate Insurer................. S-17
The Master Servicer..................... S-19
The Home Equity Loan Program............ S-19
Description of the Mortgage Loans....... S-22
Maturity and Prepayment
Considerations........................ S-24
Pool Factor and Trading Information..... S-26
Description of the Certificates......... S-27
Description of the Purchase Agreement... S-47
Use of Proceeds......................... S-47
Federal Income Tax Consequences......... S-47
State Taxes............................. S-50
ERISA Considerations.................... S-50
Legal Investment Considerations......... S-51
Underwriting............................ S-51
Legal Matters........................... S-52
Experts................................. S-52
Ratings................................. S-52
Index of Defined Terms.................. S-53
Annex I................................. S-55
PROSPECTUS
Prospectus Supplement or Current Report
on Form 8-K........................... 3
Available Information................... 3
Incorporation of Certain Documents by
Reference............................. 3
Reports to Securityholders.............. 4
Summary of Terms........................ 5
Risk Factors............................ 14
The Trust Fund.......................... 20
Use of Proceeds......................... 24
The Depositor........................... 24
Loan Program............................ 24
Description of the Securities........... 27
Credit Enhancement...................... 39
Yield and Prepayment Considerations..... 44
The Agreements.......................... 46
Certain Legal Aspects of the Loans...... 58
Federal Income Tax Consequences......... 71
State Tax Considerations................ 89
ERISA Considerations.................... 89
Legal Investment........................ 92
Method of Distribution.................. 93
Legal Matters........................... 94
Financial Information................... 94
Rating.................................. 94
Index of Defined Terms.................. 95
</TABLE>
$117,600,000
COUNTRYWIDE HOME
EQUITY LOAN TRUST 1997-A
CWABS, INC.
DEPOSITOR
[LOGO]
SELLER AND MASTER SERVICER
REVOLVING HOME
EQUITY LOAN ASSET
BACKED CERTIFICATES,
SERIES 1997-A
-----------------------------------
PROSPECTUS SUPPLEMENT
-----------------------------------
PRUDENTIAL SECURITIES
INCORPORATED
COUNTRYWIDE SECURITIES
CORPORATION
FEBRUARY 21, 1997
_______________________________ _______________________________
<PAGE>
