AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 13, 1997
REGISTRATION STATEMENT NO. 333-22843
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PREFERRED SECURITIZATION CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 33-0753116
(State or other jurisdiction (IRS Employee
of incorporation or organization) Identification Number)
3347 MICHELSON DRIVE, SUITE 400
IRVINE, CALIFORNIA 92612
(714) 474-0700
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
TODD A. RODRIGUEZ
PREFERRED SECURITIZATION CORPORATION
3347 MICHELSON DRIVE, SUITE 400
IRVINE, CALIFORNIA 92612
(714) 474-0700
(Address, including zip code, and telephone number,
area code, of agent for service)
COPY TO:
Reed D. Auerbach, Esq.
STROOCK & STROOCK & LAVAN LLP
180 Maiden Lane
New York, New York 10038
Approximate date of commencement of proposed sale to public:
From time to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_| .
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_| .
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=====================================================================================================
TITLE OF EACH CLASS PROPOSED PROPOSED
OF AMOUNT MAXIMUM MAXIMUM AMOUNT OF
SECURITIES TO BE TO BE OFFERING AGGREGATE REGISTRATION
REGISTERED REGISTERED PRICE PER OFFERING FEE (2)
UNIT (1) PRICE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset Backed Notes $1,000,000,000 100% $1,000,000,000 $303,031.00
(the "Notes") and
Asset Backed
Certificates (the
"Certificates" and,
together with the
Notes, the
"Securities")
=====================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) $303.04 has been paid upon the initial filing of this Registration
Statement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 13, 1997
PROSPECTUS
PREFERRED CONSUMER LOAN TRUSTS
ASSET BACKED CERTIFICATES
ASSET BACKED NOTES
(ISSUABLE IN SERIES)
PREFERRED CREDIT CORPORATION, SELLER
PREFERRED SECURITIZATION CORPORATION, DEPOSITOR
Preferred Securitization Corporation (the "Depositor") may offer from
time to time the Asset Backed Notes (the "Notes") and the Asset Backed
Certificates (the "Certificates" and, together with the Notes, the "Securities")
described herein which may be sold from time to time in one or more series
(each, a "Series") in amounts, at prices and on terms to be determined at the
time of sale and to be set forth in a supplement to this Prospectus (each, a
"Prospectus Supplement"). Each Series of Securities may include one or more
classes (each, a "Class") of Notes and/or Certificates. The Certificates will be
issued by a trust to be formed by the Depositor with respect to such Series
(each, a "Trust") pursuant to either a Trust Agreement (each, a "Trust
Agreement") to be entered into between the Depositor and the trustee specified
in the related Prospectus Supplement (the "Trustee") or a Pooling and Servicing
Agreement (each, a "Pooling and Servicing Agreement") among the Depositor,
Advanta Mortgage Corp. USA or such other entity appointed as servicer thereunder
(the "Servicer") and the Trustee. If a Series of Securities includes Notes, such
Notes will be issued and secured pursuant to an Indenture (each, an "Indenture")
to be entered into between any of (i) the Trust, (ii) the Depositor or (iii) a
partnership, corporation or limited liability company formed by the Depositor
solely for the purpose of issuing the Notes of the related Series, as issuer
(the "Issuer") and the Indenture Trustee (the "Indenture Trustee"), in each
case, as specified in the related Prospectus Supplement and will represent
indebtedness of the related Issuer. If with respect to a Series of Notes, the
Issuer is the Depositor, such Notes will have recourse solely to the assets of
the Depositor pledged to secure such Notes under the related Indenture as
specified in the related Prospectus Supplement. The related Prospectus
Supplement will specify which Class or Classes of Notes, if any, and which Class
or Classes of Certificates, if any, of the related Series are being offered
thereby.
(cover continued on next page)
SEE "RISK FACTORS" ON PAGE 19 FOR CERTAIN FACTORS TO BE CONSIDERED IN
PURCHASING THE SECURITIES.
NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS OF THE ISSUER, AND
CERTIFICATES OF A SERIES EVIDENCE BENEFICIAL INTERESTS IN, THE RELATED
ISSUER ONLY AND ARE NOT GUARANTEED
BY ANY GOVERNMENTAL AGENCY OR BY THE DEPOSITOR, THE SELLER, THE TRUSTEE,
THE
SERVICER OR BY ANY OF THEIR RESPECTIVE AFFILIATES OR, UNLESS OTHERWISE
SPECIFIED IN THE RELATED PROSPECTUS SUPPLEMENT, BY ANY
OTHER PERSON OR ENTITY.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR THE PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of the Securities offered hereby unless accompanied by
a Prospectus Supplement.
The date of the Prospectus is __________ __, 199__
<PAGE>
(cover continued from previous page)
The assets of the Issuer for the related Series (the "Issuer Assets")
will include consumer loan related assets (the "Loan Assets") purchased directly
or indirectly from Preferred Credit Corporation (the "Seller") comprised of one
or more pools of fixed or adjustable rate closed-end no or low equity mortgage
loans (the "Loans") secured by mortgages or deeds of trust, which are generally
subordinate liens on residential one- to four- family properties (the "Mortgaged
Properties"), including townhouses, individual units in condominium and planned
unit developments. The related proceeds of the Loans are generally used to
finance (i) debt consolidation, (ii) property improvements, (iii) the
acquisition of personal property such as home appliances or furnishings, (iv)
the purchase or refinancing of residential one- to four-family properties, and
(v) a combination of debt consolidation, property improvements and other
consumer purposes. The Issuer Assets for a related Series may also include (a)
all monies due under the Loan Assets net, if and as provided in the related
Prospectus Supplement, of certain amounts payable to the Servicer, (b) if
specified in the related Prospectus Supplement, funds on deposit in one or more
pre-funding accounts available to acquire additional Loan Assets during the
period specified in the related Prospectus Supplement and/or capitalized
interest accounts available to fund interest shortfalls arising from the use of
pre-funding accounts and (c) reserve funds, letters of credit, surety bonds,
insurance policies or other forms of credit support as described herein and in
the related Prospectus Supplement. The amount initially deposited in a
pre-funding account for a Series of Securities will not exceed fifty percent of
the aggregate principal amount of such Series of Securities.
Interest on and principal of each Class of Securities of a Series will
be payable on the dates specified in the related Prospectus Supplement, at the
times, at the rates, in the amounts and in the order of priority set forth in
the related Prospectus Supplement.
If a Series includes multiple Classes of Securities, such Classes may
vary with respect to the amount, percentage and timing of distributions of
principal, interest or both and one or more Classes may be subordinated to other
Classes with respect to distributions of principal, interest or both as
described herein and in the related Prospectus Supplement. A Series may include
one or more Classes of Securities entitled to distributions in respect of
principal with disproportionate, nominal or no interest distributions, or to
interest distributions, with disproportionate, nominal or no distributions in
respect of principal. If so specified in the related Prospectus Supplement, the
Loan Assets and other related assets of the Issuer may be divided into one or
more loan groups (each, a "Loan Group") and each Class of Securities of the
related Series may have varying rights in one or more of the corresponding Loan
Groups, as specified in the related Prospectus Supplement.
The rate of payment of the aggregate principal balance of each Class of
a Series may depend principally upon the rate of payment (including prepayments)
with respect to the Loans. A rate of prepayment lower or higher than anticipated
will affect the yield on the Securities of a Series in the manner described
herein and in the related Prospectus Supplement. Under certain limited
circumstances described herein and in the related Prospectus Supplement, one or
more Classes of a Series of Securities may be subject to termination or
redemption under the circumstances described herein and in the related
Prospectus Supplement.
If specified in the related Prospectus Supplement, an election may be
made to treat certain assets of the Issuer for a Series as a "real estate
mortgage investment conduit" (a "REMIC") for federal income tax purposes. See
"FEDERAL INCOME TAX CONSIDERATIONS."
Offers of the Securities may be made through one or more different
methods, including offerings through underwriters, as more fully described
herein and in the related Prospectus Supplement. See "PLAN OF DISTRIBUTION"
herein. There will have been no public market for any Series of Securities prior
to the offering thereof. There can be no assurance that a secondary market will
develop for the Securities of any Series or, if one does one develop, that such
market will continue. No application will be made to list the Securities on any
securities exchange.
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Securities to be
offered hereunder will, among other things, set forth with respect to such
Series of Securities offered thereby (the "Offered Securities"): (i) a
description of each Class of such Offered Securities, including with respect to
each such Class the following, (A) the applicable payment or distribution
provisions and priorities, including the nature and extent of subordination of
any Class of Securities of such Series, (B) the aggregate principal amount, if
any, (C) the rate at which interest accrues from time to time, if at all, or the
method of determining such rate, (D) whether interest will accrue from time to
time on its aggregate principal amount, if any, or on a specified notional
amount, if at all, (E) whether such Class of Securities will be initially issued
in definitive or book-entry form; (ii) information with respect to any other
Class of Securities of the same Series; (iii) the respective dates on which
payments or distributions are to be made and the method of payment or
distributions; (iv) certain information concerning the Loan Assets, the Seller,
the Servicer and the applicable Trustee(s); (v) the terms of any Enhancement
with respect to such Series; (vi) the amount, if any, deposited in the
pre-funding account available to purchase additional Loans, the length of the
pre- funding period and the criteria for determining which additional Loans may
become related assets of the related Issuer; (vii) additional information with
respect to the plan of distribution of such Securities; and (viii) whether a
REMIC election will be made with respect to some or all of the Issuer Assets for
such Series.
REPORTS TO HOLDERS
Periodic and annual reports concerning the related Issuer for a Series
of Securities are required under the related Agreement to be forwarded to
Holders. Unless otherwise specified in the related Prospectus Supplement, such
reports will not be examined and reported on by an independent public
accountant. If so specified in the related Prospectus Supplement for a Series of
Securities, such Series or one or more Classes of such Series will be issued in
book-entry form. In such event, (i) owners of beneficial interests in such
Securities will not be considered "Holders" under the Agreements and will not
receive such reports directly from the related Issuer; rather, such reports will
be furnished to such owners through the participants and indirect participants
of the applicable book-entry system and (ii) references herein to the rights of
"Holders" shall refer to the rights of such owners as they may be exercised
indirectly through such participants. See "THE AGREEMENTS--Reports to Holders."
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission
(the "Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Securities. This Prospectus, which forms a part of
the Registration Statement, and the Prospectus Supplement relating to each
Series of Securities contain summaries of the material terms of the documents
referred to herein and therein, but do not contain all of the information set
forth in the Registration Statement pursuant to the Rules and Regulations of the
Commission. For further information, reference is made to such Registration
Statement and the exhibits thereto. Such Registration Statement and exhibits can
be inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at its Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at its Regional Office located as follows,
Midwest Regional Office, 500 West Madison Street, Suite 1400 Chicago, Illinois
60661-2511; and Northeast Regional Office, Seven World Trade Center, New York,
New York 10048. The Commission maintains an Internet web site that contains
reports, proxy and information statements and other information regarding the
registrants that file electronically with the Commission, including the
Depositor. The address of such Internet web site is (http://www.sec.gov).
The Issuer with respect to each Series will be required to file certain
reports with the Commission pursuant to the requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Depositor intends to
cause each Issuer to suspend filing such reports if and when such reports are no
longer required under the Exchange Act.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any related
Prospectus Supplement and, if given or made, such information or representations
must not be relied upon. This Prospectus and any related Prospectus Supplement
do not constitute an offer to sell or a solicitation of an offer to buy any
securities other than the Securities offered hereby and thereby nor an offer of
the Securities to any person in any state or other jurisdiction in which such
offer would be unlawful. The delivery of this Prospectus at any time does not
imply that information herein is correct as of any time subsequent to its date.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the Issuer referred
to in the accompanying Prospectus Supplement with the Commission pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, after the date of this
Prospectus and prior to the termination of any offering of the Securities issued
by such Issuer shall be deemed to be incorporated by reference in this
Prospectus and to be a part of this Prospectus from the date of the filing of
such documents. Any statement contained in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for all purposes of this Prospectus to the extent that a statement contained
herein (or in the accompanying Prospectus Supplement) or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference modifies or replaces such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Depositor on behalf of any Issuer will provide without charge to
each person to whom this Prospectus is delivered, on the written or oral request
of such person, a copy of any or all of the documents referred to above that
have been or may be incorporated by reference in this Prospectus (not including
exhibits to the information that is incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
this Prospectus incorporates). Such requests should be directed to the Depositor
at 3347 Michelson Drive, Suite 400, Irvine, California 92612, Attn.: President
(telephone: (714) 474-0200; facsimile: (714) 474-3872).
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each Series of Securities contained in the
Prospectus Supplement to be prepared and delivered in connection with the
offering of Securities of such Series. Capitalized terms used and not otherwise
defined herein or in the related Prospectus Supplement shall have the meanings
set forth in the "GLOSSARY OF TERMS."
ISSUER................................With respect to each Series of Securities,
the "Issuer" shall be any of (i) a Trust
to be formed by the Depositor pursuant
to a Pooling and Servicing Agreement or
Trust Agreement (each, a "Trust"), (ii)
the Depositor or (iii) a partnership,
corporation or limited liability company
formed by the Depositor solely for the
purpose of issuing the Notes of the
related Series. If with respect to a
Series of Notes, the Issuer is the
Depositor, holders of such Notes will
have recourse solely to one or more
segregated pools of assets of the
Depositor that secure such Notes under
the related Indenture as specified in
the related Prospectus Supplement.
SECURITIES OFFERED.....................Asset Backed Certificates (the
"Certificates") and Asset Backed Notes
(the "Notes" and, together with the
Certificates, the "Securities").
Certificates are issuable from time to
time in Series pursuant to a Pooling and
Servicing Agreement or Trust Agreement.
Each Certificate of a Series will
evidence an interest in the Issuer for
such Series, or in one or more Loan
Groups specified in the related
Prospectus Supplement. Notes are
issuable from time to time in Series
pursuant to an Indenture. Each Series of
Securities will consist of one or more
Classes, one or more of which may be
Classes of Compound Interest Securities,
Planned Amortization Class ("PAC")
Securities, Variable Interest
Securities, Zero Coupon Securities,
Principal Only Securities, Interest Only
Securities, Senior Securities or
Subordinate Securities. Each Class may
differ in, among other things, the
amounts allocated to and the priority of
principal and interest payments, Final
Scheduled Distribution Dates,
Distribution Dates and interest rates.
The Securities of each Class will be
issued in fully registered form in the
denominations specified in the related
Prospectus Supplement. Unless otherwise
specified in the related Prospectus
Supplement, each Class of Securities of
a Series will be available for purchase
in denominations of $25,000 and integral
multiples of $1,000 in excess thereof.
If so specified in the related
Prospectus Supplement, the Securities or
certain Classes of such Securities
offered thereby may be available in
book-entry form only. If the related
Prospectus Supplement specifies that
Classes of Securities are offered in
book-entry form, the Holders of such
Securities will be able to receive
definitive Securities only in the
limited circumstances described herein
and in the related Prospectus
Supplement. See "DESCRIPTION OF THE
SECURITIES--Book- Entry Securities."
Unless otherwise specified in the
related Prospectus Supplement, persons
acquiring beneficial ownership interests
in Securities in book-entry form will
hold their interests in such Securities
through The Depository Trust Company
("DTC") in the United States and Cedel
Bank, societe anonyme ("Cedel") and the
Euroclear System ("Euroclear") in
Europe. See "DESCRIPTION OF THE
SECURITIES--General" and "ANNEX I."
DEPOSITOR..............................Preferred Securitization Corporation (the
"Depositor") a Delaware corporation, and
a wholly-owned, special purpose
subsidiary of Preferred Credit
Corporation. See "THE DEPOSITOR."
SELLER.................................Preferred Credit Corporation (the
"Seller"), a California corporation. See
"THE SELLER."
SERVICER...............................Advanta Mortgage Corp. USA, a Delaware
corporation and an indirect subsidiary
of Advanta Corp., a Delaware corporation
or such other entity specified in the
related Prospectus Supplement (the
"Servicer"). See "THE SERVICER."
INTEREST PAYMENTS......................Interest payments on the Securities of a
Series entitled by their terms to
receive interest will be made on each
Distribution Date, to the extent set
forth in, and at the applicable rate
specified in (or determined in the
manner set forth in), the related
Prospectus Supplement. The interest rate
on Securities of a Series may be
variable or change with changes in the
rates of interest on the related Loans
and/or as prepayments occur with respect
to such Loans. Interest Only Securities
may be assigned a "Notional Amount" set
forth in the related Prospectus
Supplement which is used solely for
convenience in expressing the
calculation of interest and for certain
other purposes and does not represent
the right to receive any distributions
allocable to principal. Principal Only
Securities may not be entitled to
receive any interest payments or may be
entitled to receive only nominal
interest payments. Interest payable on
the Securities of a Series on a
Distribution Date will include all
interest accrued during the period
specified in the related Prospectus
Supplement. See "DESCRIPTION OF THE
SECURITIES--Payments of Interest."
PRINCIPAL PAYMENTS.....................All payments of principal of a Series of
Securities will be made in an aggregate
amount determined as set forth in the
related Prospectus Supplement and will
be paid at the times and will be
allocated among the Classes of such
Series in the order and amounts, and
will be applied either on a pro rata or
a random lot basis among all Securities
of any such Class, all as specified in
the related Prospectus Supplement. See
"DESCRIPTION OF THE SECURITIES--Payments
of Principal."
FINAL SCHEDULED
DISTRIBUTION DATE
OF THE SECURITIES....................The Final Scheduled Distribution Date
with respect to each Class of Notes is
the date no later than which principal
thereof will be fully paid and with
respect to each Class of Certificates is
the date after which no Certificates of
such Class are expected to remain
outstanding, in each case calculated on
the basis of the assumptions applicable
to such Series described in the related
Prospectus Supplement. The Final
Scheduled Distribution Date of a Class
may equal the maturity date of the Loan
Asset of the related Issuer (or Loan
Group, as applicable) which has the
latest stated maturity or will be
determined as described herein and in
the related Prospectus Supplement.
The actual final Distribution Date of the
Securities of a Series will depend
primarily upon the rate of payment
(including prepayments, liquidations due
to default, the receipt of proceeds from
casualty insurance policies and
repurchases) of the Loan Assets
supporting the related Series. Unless
otherwise specified in the related
Prospectus Supplement, the actual final
Distribution Date of any Security is
likely to occur earlier and may occur
substantially earlier or may occur later
than its Final Scheduled Distribution
Date as a result of the application of
prepayments to the reduction of the
principal balances of the Securities and
as a result of defaults on the Loan
Assets. The rate of payments on the
Loans supporting a related Series will
depend on a variety of factors,
including certain characteristics of
such Loans and the prevailing level of
interest rates from time to time, as
well as on a variety of economic,
demographic, tax, legal, social and
other factors. No assurance can be given
as to the actual prepayment experience
with respect to a Series. See "RISK
FACTORS--Negative Effects of Prepayment
on Average Life" and "--Yield May Vary"
and "DESCRIPTION OF THE
SECURITIES--Weighted Average Life of the
Securities."
SPECIAL REDEMPTION.....................If so specified in the Prospectus
Supplement relating to a Series of
Securities having other than monthly
Distribution Dates, one or more Classes
of Securities of such Series may be
subject to special redemption, in whole
or in part, on the day specified in the
related Prospectus Supplement (a
"Special Redemption Date") if, as a
consequence of prepayments on the Loans
relating to such Securities or low
yields then available for reinvestment,
the entity specified in the related
Prospectus Supplement determines, based
on assumptions specified in the
applicable Agreement, that the amount
available for the payment of interest
that will have accrued on such
Securities (the "Available Interest
Amount") through the designated interest
accrual date specified in the related
Prospectus Supplement is less than the
amount of interest that will have
accrued on such Securities to such date.
In such event and as further described
in the related Prospectus Supplement,
the Trustee will redeem a principal
amount of outstanding Securities of such
Series as will cause the Available
Interest Amount to equal the amount of
interest that will have accrued through
such designated interest accrual date
for such Series of Securities
outstanding immediately after such
redemption.
OPTIONAL REDEMPTION, PURCHASE OR
TERMINATION........................One or more Classes of Securities of
any Series may be redeemed or
repurchased in whole or in part, at the
related Issuer's, the Holders' of the
Residual Interests, the Depositor's or
the Servicer's option, at such time and
under the circumstances specified in the
related Prospectus Supplement, at the
price set forth therein. If so specified
in the related Prospectus Supplement for
a Series of Securities, the related
Issuer, the Holders of the Residual
Interest, the Depositor, the Servicer,
or such other entity that is specified
in the related Prospectus Supplement,
may, at its option, repurchase all of
the Issuer Assets remaining relating to
such Series on or after any date on
which the aggregate principal balances
of the Loans relating to such Securities
is less than 10% (if the Holders of the
Residual Certificates are exercising
their option) or is less than 5% (if the
Servicer (or such other entity, if any,
specified in the related Prospectus
Supplement, if the Servicer fails to
exercise its option) is exercising its
option) of the aggregate Principal
Balances of the Loans as of the related
Cut-Off Date (the "Maximum Collateral
Amount"), by purchasing from the related
Trust, on the next succeeding
Distribution Date, all of the property
of such Trust at a price equal to the
sum of (a) the greater of (i) 100% of
the Principal Balance of each
outstanding Loan and each REO Property
and (ii) the fair market value
(disregarding accrued interest) of the
Loans and such REO Properties,
determined as the average of three
written bids (copies of which are to be
delivered to the Trustee by the Servicer
and the reasonable cost of which may be
deducted from the final purchase price)
made by nationally-recognized dealers
reasonably acceptable to the Trustee or
such other party as may be identified in
the related Prospectus Supplement and
based on a valuation process which would
be used to value comparable mortgage
loans and REO properties, plus (b) the
greater of (x) the aggregate amount of
accrued and unpaid interest on the Loans
through the related Collection Period
and (y) 30 days' accrued interest
thereon computed at a rate equal to the
related Loan Rate, and (c) in the event
the Holders of the Residual Certificates
or such other party as may be identified
in the related Prospectus Supplement
exercise such option, plus any unpaid
and accrued Servicing Fee or, in the
event the Servicer exercises such
option, net of the Servicing Fee. See
"DESCRIPTION OF THE SECURITIES--Optional
Redemption, Purchase or Termination."
SECURITIES INVOLVE RISKS.............An investment in the Securities of any
Series involves material risks and
should only be considered by investors
which, either alone or together with
their investment advisors, have the
ability to understand such risks. See
"RISK FACTORS" beginning on page 17
herein.
ISSUER ASSETS.........................The assets supporting a Series of
Securities will consist of one or more
of the assets described below, as
described in the related Prospectus
Supplement.
A. LOAN ASSETS.....................The Loan Assets will be sold by the Seller
directly or indirectly to the Issuer
without recourse except in the case of
breach of certain limited
representations and warranties.
The Loan Assets for a Series may include
one or more pools of closed- end no or
low equity mortgage loans (the "Loans")
secured by mortgages or deeds of trust,
which are generally subordinate liens,
on residential one- to four-family
properties (the "Mortgage Properties"),
including townhouses and individual
units in condominiums and planned unit
developments. Loans may, as specified in
the related Prospectus Supplement, have
various payment characteristics, and may
accrue interest at a fixed rate or an
adjustable rate. The related proceeds of
the Loans are generally used to finance
(i) debt consolidation, (ii) property
improvements, (iii) the acquisition of
personal property such as home
appliances or furnishings, (iv) the
purchase or refinancing of residential
one- to four-family properties, and (v)
a combination of debt consolidation,
property improvements and other consumer
purposes. To the extent provided in the
related Prospectus Supplement,
additional Loans may be periodically
acquired by the related Issuer using
funds deposited in a Pre-Funding Account
(as described below under "--Pre-Funding
and Capitalized Interest Accounts") for
the benefit of a particular Series, as
described in the related Prospectus
Supplement.
The related Prospectus Supplement will
describe certain characteristics of the
Loans for a Series, including, without
limitation, and to the extent relevant:
(a) the aggregate unpaid principal
balance of the Loans; (b) the range and
weighted average Loan Rate on the Loans
and in the case of adjustable rate
Loans, the range and weighted average of
the Current Loan Rates and the Lifetime
Rate Caps, if any; (c) the range and the
average outstanding principal balance of
the Loans; (d) the weighted average
original and remaining term-to- stated
maturity of the Loans and the range of
original and remaining terms-to-stated
maturity, if applicable; (e) the range
of credit bureau risk scores of the
Loans and the weighted average credit
bureau risk score; (f) the range and
weighted average Combined Loan-to-Value
Ratios or Loan-to-Value Ratios, as
applicable, of the Loans, computed in
the manner described in the related
Prospectus Supplement; (g) the
percentage (by principal balance as of
the date specified in the related
Prospectus Supplement) of Loans that
accrue interest at adjustable or fixed
interest rates; (h) any enhancement
relating to the Loans; (i) the
geographic distribution of the Loans;
(j) the use and type of each Mortgaged
Property; (k) the lien priority of the
Loans; and (l) the delinquency status
and year of origination of the Loans.
See "DESCRIPTION OF THE ISSUER
ASSETS--General."
B. COLLECTION, CERTIFICATE AND
DISTRIBUTION ACCOUNTS.........Unless otherwise provided in the
related Prospectus Supplement, all
payments on or with respect to the Loan
Assets for a Series will be remitted
directly to an account (the "Collection
Account" or the "Certificate Account")
to be established for such Series with
the applicable Trustee or the Servicer,
in the name of the applicable Trustee.
Unless otherwise provided in the related
Prospectus Supplement, the Trustee shall
be required to apply a portion of the
amount in the Collection Account or the
Certificate Account, together with
reinvestment earnings from eligible
investments specified in the related
Prospectus Supplement, to the payment of
certain amounts payable to the Servicer
under the related Agreement and any
other person specified in the Prospectus
Supplement, and to deposit a portion of
the amount in the Collection Account
into a separate account (the
"Distribution Account") to be
established for such Series, each in the
manner and at the times established in
the related Prospectus Supplement. All
amounts deposited in such Distribution
Account will be available, unless
otherwise specified in the related
Prospectus Supplement, for (i)
application to the payment of principal
of and interest on such Series of
Securities on the next Distribution
Date, (ii) the making of adequate
provision for future payments on certain
Classes of Securities and (iii) any
other purpose specified in the related
Prospectus Supplement. After applying
the funds in the Collection Account or
the Certificate Account as described
above, any funds remaining in the
Collection Account or the Certificate
Account may be paid over to the
Servicer, the Depositor, any provider of
Enhancement with respect to such Series
(an "Enhancer") or any other person
entitled thereto in the manner and at
the times established in the related
Prospectus Supplement. See "DESCRIPTION
OF THE ISSUER ASSETS--Collection,
Certificate and Distribution Accounts."
C. PRE-FUNDING AND
CAPITALIZED INTEREST
ACCOUNTS......................If specified in the related Prospectus
Supplement, the related Issuer will
establish and maintain with the
applicable Trustee for the related
Series one or more segregated trust
accounts (each, a "Pre- Funding
Account"). If so specified, on the
closing date for such Series, a portion
of the proceeds of the sale of the
Securities of such Series (such amount,
the "Pre-Funded Amount") will be
deposited in the Pre-Funding Account and
may be used to purchase additional Loan
Assets during the period of time, not to
exceed six months, specified in the
related Prospectus Supplement (the
"Pre-Funding Period"). The Loan Assets
to be so purchased will be required to
have certain characteristics specified
in the related Prospectus Supplement. If
any Pre-Funded Amount remains on deposit
in the Pre-Funding Account at the end of
the Pre-Funding Period, such amount will
be applied in the manner specified in
the related Prospectus Supplement to
prepay the Notes and/or the Certificates
of the applicable Series. The amount
initially deposited in a pre- funding
account for a Series of Securities will
not exceed fifty percent of the
aggregate principal amount of such
Series of Securities.
If a Pre-Funding Account is established,
one or more segregated trust accounts
(each, a "Capitalized Interest Account")
may be established and maintained with
the applicable Trustee for the related
Series. On the closing date for such
Series, a portion of the proceeds of the
sale of the Securities of such Series
will be deposited in the Capitalized
Interest Account and used to fund the
excess, if any, of (x) the sum of (i)
the amount of interest accrued on the
Securities of such Series and (ii) if
specified in the related Prospectus
Supplement, certain fees or expenses
during the Pre- Funding Period such as
trustee fees and credit enhancement
fees, over (y) the amount of interest
available therefor from the Issuer
Assets of the related Series. Any
amounts on deposit in the Capitalized
Interest Account at the end of the
Pre-Funding Period that are not
necessary for such purposes will be
distributed to the person specified in
the related Prospectus Supplement. See
"DESCRIPTION OF THE ISSUER
ASSET--Pre-Funding and Capitalized
Interest Accounts."
D. REVOLVING PERIOD AND
AMORTIZATION PERIOD;
RETAINED INTEREST.............If the related Prospectus Supplement so
provides, there may be a period
commencing on the date of issuance of a
class or classes of Notes or
Certificates of a Series and ending in
the date set forth on the related
Prospectus Supplement (each, a
"Revolving Period") during which no
principal payments will be made to one
or more classes of Notes or Certificates
of the related Series as are identified
in such Prospectus Supplement. Until the
applicable Revolving Period ends, all
collections of principal otherwise
allocated to such classes of Notes or
Certificates may be (i) utilized by the
Issuer during the Revolving Period to
acquire additional Loans which satisfy
the criteria described under
"DESCRIPTION OF THE ISSUER ASSETS" and
the criteria set forth in the related
Prospectus Supplement, (ii) held in an
account and invested in Eligible
Investments for later distribution to
Securityholders, (iii) applied to those
Notes or Certificates for such Series,
if any, specified in the related
Prospectus Supplement as then are in
amortization, or (iv) otherwise applied
as specified in the related Prospectus
Supplement. The purpose of a Revolving
Period for any Series of Securities is
to extend the maturity of such
Securities to a date which would not
otherwise be possible if the Issuer
Assets of the related Trust were a fixed
pool.
An "Amortization Period" is the period
during which principal collections which
were not available for distribution
during the Revolving Period (as they
were applied to one or more of the uses
specified in the preceding paragraph)
become available for distribution to
Holders of Securities. If so specified
in the related Prospectus Supplement,
during an Amortization Period all or a
portion of principal collections on the
Receivables may be applied as specified
above for a Revolving Period and, to the
extent not so applied, will be
distributed to the classes of Notes or
Certificates for such Series specified
in the related Prospectus Supplement as
then being entitled to payments of
principal. In addition, if so specified
in the related Prospectus Supplement,
amounts deposited in certain accounts
for the benefit of one or more classes
of Notes or Certificates for such Series
may be released from time to time or on
a specified date and applied as a
payment of principal on such classes of
Notes or Certificates. The related
Prospectus Supplement will set forth the
circumstances which will result in the
commencement of an Amortization Period.
Any Amortization Period which begins
earlier than anticipated with respect to
a class of Securities upon the
occurrence of such circumstances as will
be described in the related Prospectus
Supplement (any such occurrence, an
"Early Amortization Event") will result
in an acceleration of principal payments
on such class, which will cause such
class to have a shorter weighted average
life than had such Early Amortization
Event not occurred. Such an acceleration
of principal payments may adversely
affect the yield to maturity of the
related Securities.
Each Series of Securities which has a
Revolving Period may also issue to the
Depositor a certificate evidencing an
undivided beneficial interest (a
"Retained Interest") in such Series not
represented by the other Securities
issued by such Issuer. As further
described in the related Prospectus
Supplement, the value of such Retained
Interest will fluctuate as the amount of
Issuer Assets fluctuates and the amount
of Notes and Certificates of the related
Series of Securities outstanding is
reduced.
ENHANCEMENT...........................If and to the extent specified in the
related Prospectus Supplement,
enhancement with respect to a Series or
any Class of Securities may include any
one or more of the following: a
financial guaranty insurance policy,
overcollateralization, a letter of
credit, a cash reserve fund, insurance
policies, one or more Classes of
Subordinate Securities, interest rate
swaps, caps, floors and other derivative
products or other forms of credit
enhancement, or any combination thereof
(collectively, "Enhancement") acceptable
to the rating agency or agencies
identified in the related Prospectus
Supplement as rating the related Series
of Securities (collectively, the "Rating
Agency"). The Enhancement with respect
to any Series or any class of Securities
may be structured to provide protection
against delinquencies and/or losses on
the Loan Assets, against changes in
interest rates, or other risks, to the
extent and under the conditions
specified in the related Prospectus
Supplement. Any form of Enhancement will
have certain limitations and exclusions
from coverage thereunder, which will be
described in the related Prospectus
Supplement. Further information
regarding any Enhancer, including
financial information when material,
will be included in the related
Prospectus Supplement. See
"ENHANCEMENT."
With respect to any Series of Securities
including one or more Classes of Notes,
distributions in respect of the
Certificates may be subordinated in
priority of payment to payments on the
Notes, to the extent specified in the
related Prospectus Supplement.
CREDIT QUALITY OF LOANS.............The Loans originated or purchased by the
Seller will have been made to borrowers
that typically have limited access to
traditional mortgage financing for a
variety of reasons, such as insufficient
home equity value, high levels of debt
service-to-income, past credit
experience or a limited credit history.
See "RISK FACTORS-- Underwriting
Standards May Affect Performance" and
"THE SELLER." The Seller has in the past
and will in the future change its
underwriting guidelines and procedures
when, in its business judgment,
competition or other conditions in its
market so warrant. As a result, Loans
originated at different times may
reflect different underwriting
guidelines and be of different credit
quality. However, it is anticipated that
any such material differences will be
reflected in the levels of Enhancement
for the related Series of Securities.
Any such material differences in
underwriting standards will be fully
disclosed in the related Prospectus
Supplement.
SERVICING..............................The Servicer will be responsible for
servicing, managing and making
collections on the Loans for a Series.
In addition, the Servicer, if so
specified in the related Prospectus
Supplement, will act as custodian and
will be responsible for maintaining
custody of the Loans and related
documentation on behalf of the Trustee.
Advances with respect to delinquent
payments of principal or interest on a
Loan will be made by the Servicer only
to the extent described in the related
Prospectus Supplement. Such advances
will be intended to provide liquidity
only and, unless otherwise specified in
the related Prospectus Supplement, are
reimbursable to the Servicer from
scheduled payments of principal and
interest, late collections, or from the
proceeds of liquidation of the related
Loans or from other recoveries relating
to such Loans (including any insurance
proceeds or payments from other credit
support). Advances with respect to
Compensating Interest in the cases of
full prepayment of a Loan and with
respect to Mortgaged Property protection
will be made by the Servicer only to the
extent specified in the related
Prospectus Supplement. "Compensating
Interest" is an amount equal to the
difference between (x) 30 days' interest
at the Loan Rate (net of the rate at
which the Servicing Fee is calculated)
on the Principal Balance of such Loan as
of the first day of the related
Collection Period and (y) to the extent
not previously advanced, the interest
paid by the borrower with respect to
such Loan in connection with such
prepayment. The Servicer will not be
required to pay Compensating Interest
with respect to any Collection Period in
an amount in excess of the aggregate
Servicing Fee received by the Servicer
for such Collection Period. See
"SERVICING OF LOAN--Advances and
Limitations Thereon."
In performing these functions, the
Servicer will make reasonable efforts to
collect all payments required to be made
under the Loans and will be obligated,
consistent with the terms of the related
Agreement for a Series and any
applicable Enhancement, to follow such
collection procedures as it follows with
respect to loans comparable to the Loans
and which are required to generally
conform to the servicing practices of
prudent lending institutions which
service loans of the same type as the
Loans for their own account in the
jurisdiction in which such Loans were
originated ("Accepted Servicing
Practices"). Under certain limited
circumstances, the Servicer may resign
or be removed, in which event either the
Trustee or a third-party servicer will
be appointed as successor servicer. The
Servicer will receive a periodic fee as
servicing compensation (the "Servicing
Fee") and may, as specified herein and
in the related Prospectus Supplement,
receive certain additional compensation.
See "SERVICING OF LOANS-- Servicing
Compensation and Payment of Expenses."
FEDERAL INCOME
TAX CONSIDERATIONS
A. REMIC SECURITIES................If so specified in the related Prospectus
Supplement an election will be made to
treat all or a portion of the Issuer
Assets of a Series as a "real estate
mortgage investment conduit" (a "REMIC")
and Stroock & Stroock & Lavan LLP,
special tax counsel to the Depositor
("Federal Tax Counsel"), will deliver
its opinion generally to the effect that
the arrangement by which the Securities
are issued will be treated as a REMIC
for federal income tax purposes. The
Classes of Securities of such Series
will be designated as "regular
interests" or "residual interests" in a
REMIC. Holders of Securities
constituting "regular interests" in a
REMIC must report income with respect to
such Securities on the accrual method
regardless of a Holder's usual method of
accounting. Securities that are Compound
Interest Securities, Zero Coupon
Securities or Interest Only Securities
will, and certain other Classes of
Securities may, be issued with original
issue discount that is not de minimis.
In such cases, the Holder will be
required to include original issue
discount in gross income as it accrues,
which may be prior to the receipt of
cash attributable to such income. If a
Security is issued at a premium, the
Holder may be entitled to make an
election to amortize such premium on a
constant yield method.
A Holder of a residual interest in a
REMIC ("Residual Interest") will be
required to include in its income its
pro rata share of the taxable income of
the REMIC. In certain circumstances, the
Holder of a Residual Interest may have
REMIC taxable income or tax liability
attributable to REMIC taxable income for
a particular period in excess of cash
distributions for such period or have an
after-tax return that is less than the
after-tax return on comparable debt
instruments. In addition, a portion (or,
in some cases, all) of the income from a
Residual Interest (i) may not be subject
to offset by losses from other
activities or investments, (ii) for a
Holder that is subject to tax under the
Code on unrelated business taxable
income, may be treated as unrelated
business taxable income and (iii) for a
foreign holder, may not qualify for
exemption from or reduction of
withholding. In addition, (i) Residual
Interests are subject to transfer
restrictions and (ii) certain transfers
of Residual Interests will not be
recognized for federal income tax
purposes. See "FEDERAL INCOME TAX
CONSIDERATIONS."
B. NON-REMIC
PASS-THROUGH
SECURITIES...................If so specified in the related Prospectus
Supplement, Federal Tax Counsel will
deliver its opinion generally to the
effect that the Issuer for the related
Series will be classified for federal
income tax purposes as a grantor trust
and will not be classified as an
association taxable as a corporation for
federal income tax purposes. Holders of
Securities of such Series ("Pass-Through
Securities") will be treated as owning
directly rights to receive certain
payments of interest or principal, or
both on the Loan Assets for such Series.
All income with respect to a Stripped
Security (as defined herein) will be
accounted for as original issue discount
and, unless otherwise specified in the
related Prospectus Supplement, will be
reported by the applicable Trustee on an
accrual basis, which may be prior to the
receipt of cash associated with such
income. See "FEDERAL INCOME TAX
CONSIDERATIONS."
C. OWNER TRUST
SECURITIES...................If so specified in the related Prospectus
Supplement, the Issuer for a Series will
be treated as a partnership for purposes
of federal income taxation and Federal
Tax Counsel will deliver its opinion
generally to the effect that the Issuer
will not be an association (or publicly
traded partnership) taxable as a
corporation for federal income tax
purposes. Each Noteholder, by the
acceptance of a Note of such Series,
will agree to treat such Note as
indebtedness, and each
Certificateholder, by the acceptance of
a Certificate of such Series, will agree
to treat the related Issuer as a
partnership in which such
Certificateholder is a partner for
federal income and state tax purposes.
See "FEDERAL INCOME TAX CONSIDERATIONS."
D. CERTIFICATES TREATED AS
DEBT..........................If so specified in the Prospectus Supplement
relating to a Series of Certificates, a
Trust may issue Certificates that will
be characterized as indebtedness for
federal income tax purposes secured by
the related Loans and Federal Tax
Counsel will deliver its opinion
generally to the effect that the
Certificates will be characterized as
indebtedness secured by the Loans for
federal income tax purposes. Each
investor in an interest in the
Certificates of the related Series, by
acceptance of its interest therein, will
agree to treat such Certificates as debt
for federal, state and local income and
franchise tax purposes.
Prior to the issuance of each Series of
Securities, the Company will file a
current report on Form 8-K containing an
opinion of tax counsel (and a related
consent) which covers the tax attributes
of such Series.
ERISA CONSIDERATIONS.................Subject to the considerations discussed
under "ERISA CONSIDERATIONS" herein and
in the related Prospectus Supplement,
the Notes may be eligible for purchase
by employee benefit plans. The related
Prospectus Supplement will provide
further information with respect to the
eligibility of a Class of Certificates
for purchase by employee benefit plans.
A fiduciary of any employee benefit plan
subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), or the Code should carefully
review with its own legal advisors
whether the purchase or holding of
Securities could give rise to a
transaction prohibited or otherwise
impermissible under ERISA or the Code.
See "ERISA CONSIDERATIONS" herein and in
the related Prospectus Supplement.
LEGAL INVESTMENT.......................Unless otherwise specified in the related
Prospectus Supplement, Securities of
each Series offered by this Prospectus
and the related Prospectus Supplement
will not constitute "mortgage related
securities" under the Secondary Mortgage
Market Enhancement Act of 1984
("SMMEA"). Investors whose investment
authority is subject to legal
restrictions (such as, but not limited
to, depository institutions, insurance
companies and pension plans) should
consult their own legal advisors to
determine whether and to what extent the
Securities constitute legal investments
for them. See "LEGAL INVESTMENT."
RATINGS...............................It will be a requirement for issuance of
any Series that the Securities offered
by this Prospectus and the related
Prospectus Supplement be rated by at
least one Rating Agency in one of its
four highest applicable rating
categories. The rating or ratings
applicable to Securities of each Series
offered hereby and by the related
Prospectus Supplement will be as set
forth in the related Prospectus
Supplement. A securities rating should
be evaluated independently of similar
ratings on different types of
securities. A securities rating is not a
recommendation to buy, hold or sell
securities and does not address the
effect that the rate of prepayments on
Loans for a Series may have on the yield
to investors in the Securities of such
Series.
There is no assurance that the rating
initially assigned to such Securities
will not be subsequently lowered or
withdrawn by the Rating Agency. In the
event the rating initially assigned to
any Securities is subsequently lowered
for any reason, no person or entity will
be obligated to provide any credit
enhancement in addition to the
Enhancement, if any, specified in the
related Prospectus Supplement. See "RISK
FACTORS--Ratings Are Not
Recommendations."
<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities.
LIMITED LIQUIDITY AND FLUCTUATION IN VALUE FROM MARKET CONDITIONS
Lack of Secondary Market. There will be no market for the Securities of
any Series prior to the issuance thereof, and there can be no assurance that a
secondary market will develop or, if it does develop, that it will provide
Holders with liquidity of investment or will continue for the life of the
Securities of such Series. No application will be made to list the Securities on
any securities exchange.
Book Entry Registration. To the extent specified in the related
Prospectus Supplement, persons acquiring beneficial ownership interests in the
Securities of any Series or Class will hold their Securities through DTC, in the
United States, or Cedel or 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 Securities are
book-entry Securities, such Securities will be evidenced by one or more
certificates registered in the name of Cede & Co., as the nominee of DTC, or
Citibank N.A. or Morgan Guaranty Trust Company of New York, the relevant
depositaries of Cedel and Euroclear, respectively, and each a participating
member of the DTC. No Securityholder will be entitled to receive a definitive
certificate representing such person's interest, except in the event that
Definitive Securities are issued under the limited circumstances described
herein. See "DESCRIPTION OF THE SECURITIES-- Book-Entry Registration". Unless
and until Definitive Securities for such Series are issued, holders of such
Securities will not be recognized by the applicable Trustee as
"Certificateholders," "Noteholders" or Securityholders," as the case may be (as
such terms are used herein or in the related Agreement). Hence, until Definitive
Securities are issued, holders of such Securities will only be able to exercise
the rights of Securityholders indirectly through DTC (if in the United States)
and its participating organization, or Cedel and Euroclear (in Europe) and their
respective participating organizations. See "DESCRIPTION OF THE SECURITIES--Book
Entry Registration."
Since transactions in the Securities can be effected only through DTC,
Cedel, Euroclear, participating organizations, indirect participants and certain
banks, the ability of the beneficial owner thereof to pledge such Securities to
persons or entities that do not participate in the DTC, Cedel or Euroclear
system, or otherwise to take actions in respect of such Securities, may be
limited due to lack of a physical certificate representing such Securities.
Limited Nature of Ongoing Information. The primary source of ongoing
information regarding Offered Securities of any Series, including information
regarding the status of the related Loan Assets and any Enhancement for such
Offered Securities, will be the periodic reports to Securityholders to be
delivered pursuant to the related Agreement as described herein under the
heading "THE AGREEMENTS--Reports to Holders." There can be no assurance that any
additional ongoing information regarding the Offered Securities of any Series
will be available through any other source. The limited nature of such
information in respect of a Series of Offered Securities may adversely affect
the liquidity thereof, even if a secondary market for such Offered Securities
does develop.
Sensitivity to Fluctuations in Prevailing Interest Rates. Insofar as a
secondary market does develop with respect to any Series of Offered Securities
or Class thereof, the market value of such Offered Securities will be affected
by several factors, including the perceived liquidity thereof, the anticipated
cash flow thereon (which may vary widely depending upon the prepayment and
default assumptions applied in respect of the underlying Loan Assets) and
prevailing interest rates. The price payable at any given time in respect of
certain Classes of Offered Securities (in particular, a Class with a relatively
long average life, or a Class of Interest Only Securities or Principal Only
Securities) may be extremely sensitive to small fluctuations in prevailing
interest rates; and the relative change in price for an Offered Security in
response to an upward or downward movement in prevailing interest rates may not
necessarily equal the relative change in price for such Offered Security in
response to an equal but opposite movement in such rates. Accordingly, the sale
of Offered Securities by a Holder in any secondary market that may develop may
be at a discount from the price paid by such Holder. The Depositor is not aware
of any source through which price information about the Offered Securities will
be generally available on an ongoing basis.
Delisting. The Depositor intends to cause each Issuer to suspend filing
reports with the Commission if and when such reports are no longer required
under the Exchange Act. See "AVAILABLE INFORMATION."
ISSUER ASSETS ARE ONLY SOURCE OF REPAYMENT
The Securities of a Series will be payable solely from the related
assets of the Issuer for such Securities. See "THE AGREEMENTS--Assignment of
Loan Assets." Further, unless otherwise stated in the related Prospectus
Supplement, at the times set forth in the related Prospectus Supplement, certain
Issuer Assets and/or any balance remaining in the Collection Account or
Distribution Account immediately after making all payments due on the Securities
of such Series and other payments specified in the related Prospectus
Supplement, may be promptly released or remitted to the Depositor, the Servicer,
any Enhancer or any other person entitled thereto and will no longer be
available for making payments to Holders. Consequently, Holders of Securities of
each Series must rely solely upon payments with respect to the Issuer Assets and
the other related assets available to support a Series of Securities, including,
if applicable, any amounts available pursuant to any Enhancement for such
Series, for the payment of principal of and interest on the Securities of such
Series.
Holders of a Series of Notes will be required under the Indenture to
proceed only against the Issuer Assets securing such Series of Notes in the case
of a default with respect to such Notes. There is no assurance that the market
value of the Issuer Assets or any other assets for a Series will at any time be
equal to or greater than the aggregate principal amount of the Securities of
such Series then outstanding, plus accrued interest thereon. Moreover, upon an
event of default under the Indenture for a Series of Notes and a sale of the
related assets of the related Issuer or upon a sale of the assets of a Trust for
a Series of Certificates, the Trustee, the Servicer, the Enhancer, if any, and
any other service provider specified in the related Prospectus Supplement
generally will be entitled to receive the proceeds of any such sale to the
extent of unpaid fees and other amounts owing to such persons under the related
Agreement prior to distributions to Holders of Securities. Upon any such sale,
the proceeds thereof may be insufficient to pay in full the principal of and
interest on the Securities of such Series. See "DESCRIPTION OF THE ISSUER
ASSETS."
UNDERWRITING STANDARDS MAY AFFECT PERFORMANCE
The Seller was incorporated as a California corporation in January,
1992 and has been originating subordinate lien mortgage loans since August 1994.
Accordingly, the Seller currently has insufficient historical delinquency,
bankruptcy, foreclosure or default experience that may be referred to for
purposes of estimating the future delinquency and loss experience of loans
similar to the Loans being sold to the related Issuer. At such time as the
Seller has sufficient historical delinquency, bankruptcy, foreclosure and
default experience, the related Prospectus Supplement for a Series will set
forth such information.
The Seller's underwriting standards generally are less stringent than
those of FNMA or FHLMC and other traditional mortgage lenders with respect to a
borrower's capacity, collateral and in certain other respects. As a result of
this approach to underwriting, the Loans supporting the related Series may
experience higher rates of delinquencies, defaults and foreclosures than loans
underwritten in a more traditional manner.
The Seller considers the underwriting policy under which the Loans are
underwritten to be analogous to credit lending, rather than equity lending,
since its underwriting decisions are based primarily on the borrower's ability
and willingness to repay and only secondarily on the potential value of the
collateral upon foreclosure. Loan decisions are based primarily on an analysis
of the prospective borrower's documented cash flow and credit history and
supplemented by a collateral evaluation (with respect to Loans). This collateral
evaluation generally takes the form of (i) a Uniform Residential Appraisal
Report in compliance with FNMA or FHLMC guidelines, (ii) a Second Mortgage
Property Value Analysis Report, typically referred to as a "drive-by" appraisal,
which consists exclusively of an exterior inspection of the property without
examination of the interior or (iii) a "desk-top" appraisal, which generally
consists of an analysis of historical comparable sale information on similar
type properties through the use of public record information or on-line real
estate sale information services and does not consist of an exterior or interior
inspection of the property. There can be no assurance that the values determined
by appraisers at the time of loan origination will be achieved in the event of
foreclosure sale or that a different appraiser (or an appraisal which included
an interior review) would have arrived at the same opinion of value.
The Seller's underwriting standards allow loans to be approved with
Combined Loan-to-Value Ratios of up to approximately 125%. Because the original
Combined Loan-to-Value Ratios of the Loans may be high relative to that of other
similar subordinate lien mortgage loans, recoveries on defaulted Loans may be
lower than the level of recoveries experienced by such other defaulted mortgage
loans. To the extent that the Loan-to-Value Ratio of any defaulted Loan is
greater than 100% at the time of default, the related Issuer will be in the same
position as other unsecured creditors. See "DESCRIPTION OF THE ISSUER
ASSETS--The Loans."
Generally, the majority of the Loans are subordinate liens. The rights
of the related Issuer (and therefore Securityholders), as mortgagee under a
subordinate mortgage, are subordinate to those of the mortgagee under the senior
mortgage. See "CERTAIN LEGAL ASPECTS OF THE LOANS." Accordingly, there can be no
assurance that amounts recovered through foreclosure proceedings will be
sufficient to repay the Loans.
LIMITATIONS OF CREDIT ENHANCEMENT
Limitations Regarding Types of Losses Covered. The related Prospectus
Supplement for a Series of Securities will describe any Enhancement provided
with respect thereto. Use of Enhancement will be subject to the conditions and
limitations described herein and in the related Prospectus Supplement. Moreover,
such Enhancement may not cover all potential losses or delays; for example,
Enhancement may or may not cover loss by reason of fraud or negligence by a
mortgage loan originator or other parties. Any such losses or delays not covered
by Enhancement may, at least in part, be allocated to, or affect distributions
to, one or more Classes of Offered Securities.
Disproportionate Benefits to Certain Classes and Series. A Series of
Securities may include one or more Classes of Subordinate Securities (which may
include Offered Securities), if provided in the related Prospectus Supplement.
Although subordination is intended to reduce the likelihood of temporary
shortfalls and ultimate losses to holders of the related senior Securities, the
amount of subordination will be limited and may decline under certain
circumstances. In addition, if principal payments on one or more Classes of
Offered Securities of a Series are made in a specified order of priority, any
related Enhancement may be exhausted before the principal of the later paid
Classes of Offered Securities of such Series has been repaid in full. As a
result, the impact of losses and shortfalls experienced with respect to the Loan
Assets may fall primarily upon those Classes of Offered Securities having a
later right of payments. Moreover, if a form of Enhancement covers the Offered
Securities of more than one Series and losses on the related Loan Assets exceed
the amount of such Enhancement, it is possible that the Holders of Offered
Securities of one (or more) such Series will be disproportionately benefited by
such Enhancement to the detriment of the holders of Offered Securities of one
(or more) other such Series.
Limitations Regarding the Amount of Credit Enhancement. The amount of
any applicable Enhancement supporting one or more Classes of Offered Securities,
including the subordination of one or more other Classes of Securities, will be
determined on the basis of criteria established by each Rating Agency rating
such Classes of Securities based on an assumed level of defaults, delinquencies
and losses on the Loan Assets and certain other factors. There can be no
assurance that the default, delinquency and loss experience on such Loan Assets
will not exceed such assumed levels. See "ENHANCEMENT." If the defaults,
delinquencies and losses on such Loan Assets do not exceed such assumed levels,
the holders of one or more Classes of Offered Securities will be required to
bear such additional defaults, delinquencies and losses. Regardless of the form
of Enhancement provided with respect to a Series, the amount of coverage will be
limited in amount and in most cases will be subject to periodic reduction in
accordance with a schedule or formula.
NEGATIVE EFFECT OF PREPAYMENTS ON AVERAGE LIFE
As a result of prepayments on Loan Assets, the amount and timing of
payments or distributions of principal and/or interest on the Offered Securities
of the related Series may be highly unpredictable. Prepayments on the Loan
Assets in any Trust will result in a faster rate of principal payments on one or
more Classes of the related Series of Securities than if payments on such Loan
Assets wee made as scheduled. Thus, the prepayment experience on the Loan Assets
supporting a Series may affect the average life of one or more Classes of
Securities of the related Series, including a Class of Offered Securities. The
rate of principal payments on pools of loans varies among pools and from time to
time is influenced by a variety of economic, demographic, geographic, social,
tax and legal factors. For example, if prevailing interest rates fall
significantly below the interest rates borne by the Loan Assets supporting a
Series, then, subject to the particular terms of the Loan Assets (e.g.,
provisions that prohibit voluntary prepayments during specified periods or
impose penalties in connection therewith) and the ability of borrowers to obtain
new financing, principal prepayments on such Loan Assets are likely to be higher
than if prevailing interest rates remain at or above the rates borne by those
Loan Assets. Conversely, if prevailing interest rates rise significantly above
the interest rates borne by the Loan Assets supporting a Series, then principal
prepayments on such Loan Assets are likely to be lower than if prevailing
interest rates remain at or below the interest rates borne by those Loan Assets.
In addition to fluctuations in prevailing interest rates, the rate of
prepayments on the Loan Assets may be influenced by changes and developments in
the types and structures of loan products being offered to consumers within the
mortgage banking and consumer finance industry and by technological developments
and innovations to the loan underwriting and origination process.
Accordingly, there can be no assurance as to the actual rate of
prepayment on the Loan Assets supporting a Series or that such rate of
prepayment will conform to any model described herein or in any Prospectus
Supplement. As a result, depending on the anticipated rate of prepayment for the
Loan Assets supporting a Series, the retirement of any Class of Securities of
the related Series could occur significantly earlier or later, and the average
life thereof could be significantly shorter or longer, than expected.
In comparison to first lien single family mortgage loans, the Seller is
not aware of any reliable publicly available statistical information regarding
the rates of prepayment of loans such as the Loan Assets that is based upon the
historical loan performance of this segment of the mortgage banking and consumer
finance industry. In fact, this segment of the mortgage banking and consumer
finance industry has undergone significant growth and expansion, including an
increase in new loan originations, as a result of certain social and economic
factors, including recent tax law changes that limit the deductibility of
consumer interest to indebtedness secured by an individual's principal residence
and changes and developments in the types and structures of loan products being
offered to consumers. Therefore, no assurance can be given as to the level of
prepayments that the Loan Assets will experience. In fact, a number of factors
suggest that the prepayment experience of the Loan Assets may be significantly
different from that of any first lien mortgage loans with equivalent interest
rates and maturities.
Addition prepayment, yield and weighted average life considerations
with respect to a Series of Securities will be set forth in the related
Prospectus Supplement.
The extent to which prepayments on the Loan Assets supporting a Series
ultimately affect the average life of any Class of Securities of the related
Series will depend on the terms and provisions of such Securities. A Class of
Securities, including a Class of Offered Securities, may provide that on any
Distribution Date the holders of such Securities are entitled to a pro rata
share of the prepayments on the Loan Assets supporting a Series that are
distributable on such date, to a disproportionately large share (which, in some
cases, may be all) of such prepayments, or to a disproportionately small share
(which, in some cases, may be none) of such prepayments. A Class of Securities
that entitles the holders thereof to a disproportionately large share of the
prepayments on the Loan Assets supporting a Series increases the likelihood of
early retirement of such Class ("Call Risk") if the rate of prepayment is
relatively fast; while a Class of Securities that entitles the holders thereof
to a disproportionately small share of the prepayments on the Loan Assets
supporting a Series increases the likelihood of an extended average life of such
Class ("Extension Risk") if the rate of prepayment is relatively slow. To the
extent described in the related Prospectus Supplement, the respective
entitlement of the various Classes of Securityholders of such Series to receive
payments (and, in particular, prepayments) of principal of the Loan Assets
supporting a Series may vary based on the occurrence of certain events (e.g.,
the retirement of one or more Classes of Securities of such Series) or whether
certain contingencies do or do not occur (e.g. prepayment and default rates with
respect to such Loan Assets).
A Series of Securities may include one or more Classes of scheduled
amortization Securities (each, a "Scheduled Amortization Security"), which will
entitle the holders thereof to receive principal distributions according to a
specified principal payment schedule. Although prepayment risk cannot be
eliminated entirely from any Class of Securities, a Class of Scheduled
Amortization Securities will generally provide a relatively stable cash flow so
long as the actual rate of prepayment on the Loan Assets supporting a Series
remains relatively constant at the rate, or within the range of rates, of
prepayment used to establish a specific principal payment schedule for such
Securities. Prepayment risk with respect to a given pool of Loan Assets does not
disappear, however, and the stability afforded to Scheduled Amortization
Securities comes at the expense of one or more companion Classes of the same
Series (each, a "Companion Class"), any of which Companion Classes may also be a
Class of Offered Securities. In general, and as more specifically described in
the related Prospectus Supplement, a Companion Class may entitle the holders
thereof to a disproportionately large share of prepayments on the Loan Assets
supporting a Series when the rate of prepayment is relatively fast, and/or may
entitle the holders thereof to a disproportionately small share of prepayments
on the Loan Assets supporting a Series when the rate of prepayment is relatively
slow. As and to the extent described in the related Prospectus Supplement, a
Companion Class absorbs some (but not all) of the Call Risk and/or Extension
Risk that would otherwise belong to the related Scheduled Amortization
Securities if all payments of principal of the Loan Assets supporting a Series
were allocated on a pro rata basis.
RISKS OF NON-PRIME LENDING INDUSTRY
The non-prime lending industry is a relatively new, rapidly expanding
and highly competitive industry. The ability to securitize loans comparable to
the Loans has made financing available to non- prime lenders at attractive rates
and has helped to reduce barriers to entry in the field. There is competitive
pressure in the industry to originate and securitize additional product so as to
increase gains on sale and earnings. Such competition puts pressure on the
interest rates and the credit quality of such loans and increases the costs of
acquiring this product. See "--Underwriting Standards May Affect Performance."
The growth of the non-prime industry has increased the awareness of
credit-impaired borrowers of the availability of financing from alternative
sources, which may have the effect of increasing refinancing activity in better
economic times. However, in difficult economic times the performance of this
product may be more adversely affected than conventional prime loans. In such
circumstances borrowers of non- prime loans, who have borrowed against all the
equity in their homes, are not likely to have any additional resources against
which they can borrow, and are more likely to default on their obligations. The
non- prime lending industry is subject to greater regulatory and legal scrutiny.
See "Certain Legal Aspects of Loans."
The increased competition in the non-prime lending industry may
increase the costs to the Seller to originate Loans. In the event that a
transaction includes a Pre-Funding Account, to the extent the Seller is unable
to originate sufficient Loans satisfying the eligibility criteria for such
Series prior to the end of the Funding Period, the related Securityholders may
receive a prepayment of principal. In addition, the increased ability of
credit-impaired borrowers to refinance their Loans may effect the yield on the
Securities. Finally, a higher default rate in tougher economic times may also
affect the yield on the Securities. See "Yield and Prepayment Considerations."
YIELD MAY VARY
The yield to maturity experienced by a Holder of Securities may be
affected by the rate of payment of principal of the Loans. The timing of
principal payments of the Securities of a Series will be affected by a number of
factors, including the following: (i) the extent of prepayments of the Loans,
which prepayments may be influenced by a variety of factors; (ii) the manner of
allocating principal payments among the Classes of Securities of a Series as
specified in the related Prospectus Supplement; and (iii) the exercise by the
party entitled thereto of any right of optional termination. See "DESCRIPTION OF
THE SECURITIES--Weighted Average Life of Securities." Prepayments may also
result from repurchases of Loans, due to material breaches of the Seller's or
the Depositor's warranties.
Interest payable on the Securities of a Series on a Distribution Date
will include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues during the calendar month
prior to a Distribution Date, the effective yield to Holders will be reduced
from the yield that would otherwise be obtainable if interest payable on the
Security were to accrue through the day immediately preceding each Distribution
Date, and the effective yield (at par) to Holders will be less than the
indicated coupon rate. See "DESCRIPTION OF THE SECURITIES--Payments of
Interest."
CERTAIN FACTORS AFFECTING DELINQUENCIES, FORECLOSURES AND LOSSES
ON LOAN ASSETS
General. The payment performance of the Offered Securities of any
Series will be directly related to the payment performance of the Loan Assets
supporting a Series. Set forth below is a discussion of certain factors that
will affect the full and timely payment of the Loan Assets supporting a Series.
Geographic Concentration. Certain geographic regions of the United
States from time to time will experience weaker regional economic conditions and
housing markets, and, consequently, will experience higher rates of loss and
delinquency on mortgage loans generally. Any concentration of Loan Assets in
such a region may present risk considerations in addition to those generally
present for similar mortgage- backed or asset-backed securities without such
concentration.
Decline in Value of a Loan Asset. An investment in Securities secured
by or evidencing an interest in a pool of Loans may be adversely affected by,
among other things, a decline in one-to-four family residential property values.
No assurance can be given that values of the Mortgaged Properties have remained
or will remain at the levels existing on the dates of origination of the related
Loans. If the residential real estate market should experience an overall
decline in property values such that the outstanding balances of the Loans in a
particular pool, and any other financing on the Mortgaged Properties, become
equal to or greater than the value of the Mortgaged Properties, the actual rates
of delinquencies, defaults and losses could be higher than those now generally
experienced with respect to similar types of loans within the mortgage lending
industry. To the extent that such losses are not covered by applicable insurance
policies, if any, or by any Enhancement as described in the related Prospectus
Supplement, holders of Securities secured by or evidencing interests in such
Loans will bear all risk of loss resulting from defaults by borrowers and will
have to look primarily to the value of the related Mortgaged Properties for
recovery of the outstanding principal and unpaid interest of the defaulted
Loans. See "DESCRIPTION OF THE ISSUER ASSETS--LOANS."
An investment in Securities secured by or evidencing interests in Loans
may be affected by, among other things, a downturn in regional or local economic
conditions. These regional or local economic conditions are often volatile, and
historically have affected the delinquency, loan loss and repossession
experience of Loans. To the extent that losses on Loans are not covered by
applicable insurance policies, if any, or by any Enhancement, holders of the
Securities secured by or evidencing interests in such Loans will bear all risk
of loss resulting from default by borrowers and will have to look primarily to
the value of the underlying asset, if any, for recovery of the outstanding
principal and unpaid interest of the defaulted Loans. See "DESCRIPTION OF THE
ISSUER ASSETS."
Limitations on Realizations of Junior Liens. The primary risk with
respect to defaulted Loans secured by junior liens is the possibility that
adequate funds will not be received in connection with a foreclosure of the
related Mortgaged Property to satisfy fully both the related senior lien(s) and
the Loan and that other insurance providing for reimbursement for losses from
such default is not available. The claims of the related senior lienholder(s)
will be satisfied in full out of proceeds of the liquidation of the Mortgaged
Property, if such proceeds are sufficient, before the related Issuer, as the
junior lienholder, receives any payments in respect of the defaulted Loan. If
the Servicer or a subservicer, if any, were to foreclose on any junior lien
Loan, if would do so subject to any related senior lien(s). In order for a
junior lien Loan to be paid in full at such sale, a bidder at the foreclosure
sale of such Loan would have to both bid an amount sufficient to pay off all
sums due under the Loan and the senior lien(s) or purchase the Mortgaged
Property subject to the senior lien(s). If proceeds from a foreclosure and
liquidation of the related Mortgage Property are insufficient to satisfy the
costs of foreclosure and liquidation and the amounts owed under the loans
secured by the senior lien(s) and the junior lien Loan in the aggregate, the
Issuer, as the junior lienholder, will bear (i) the risk of delay in
distributions while a deficiency judgment (which may not be available in certain
jurisdictions) against the borrower is obtained and realized and (ii) the risk
of loss if the deficiency judgment is not obtained or realized. Any such delays
or losses will be borne by the Securityholders of a Series to the extent that
such delays or losses are not otherwise covered by amounts available from any
Enhancement provided for the related Securities, as specified in the related
Prospectus Supplement. See "CERTAIN LEGAL ASPECTS OF THE LOANS."
PRE-FUNDING AND SUBSEQUENT LOANS MAY ADVERSELY AFFECT INVESTMENT
If the assets of an Issuer includes a Pre-Funding Account and the
principal balance of additional Loans delivered to the Issuer during the
Pre-Funding Period is less than the original Pre-Funded Amount, the Holders of
the Securities of the related Series will receive a prepayment of principal as
and to the extent described in the related Prospectus Supplement. Any such
principal prepayment may adversely affect the yield to maturity of the
applicable Securities. Since prevailing interest rates are subject to
fluctuation, there can be no assurance that investors will be able to reinvest
such a prepayment at yields equaling or exceeding the yields on the related
Securities. It is possible that the yield on any such reinvestment will be
lower, and may be significantly lower, than the yield on the related Securities.
Each subsequent Loan Asset must satisfy the eligibility criteria
specified in the related Prospectus Supplement and related Agreements. Such
eligibility criteria will be determined in consultation with each Rating Agency
(and/or any Enhancer) prior to the issuance of the related Series and are
designed to ensure that if such subsequent Loan Assets were included as part of
the initial Loan Assets, the credit quality of such assets would be consistent
with the initial rating of each Class of Securities of such Series. The Seller
will certify to the Trustee that all conditions precedent to the transfer of the
subsequent Loan Assets, including the satisfaction of the eligibility criteria
to the Issuer, have been satisfied. It is a condition to the transfer of any
subsequent Loan Assets to the Issuer that each Rating Agency, after receiving
prior notice of the proposed transfer of the subsequent Loan Assets to the
Issuer, shall not have advised the Seller or the Trustee or any Enhancer that
the conveyance of such subsequent Loan Assets will result in a qualification,
modification or withdrawal of its then current rating of any Class of Notes or
Certificates of such Series. Following the transfer of subsequent Loan Assets to
the Issuer, the aggregate characteristics of the Loan Assets then held by the
Issuer may vary from those of the initial Loan Assets of such Issuer. As a
result, the subsequent Loan Assets may adversely affect the performance of the
related Securities. See "DESCRIPTION OF THE ISSUER ASSETS--Pre-Funding and
Capitalized Interest Accounts."
The ability of an Issuer to invest in subsequent Loans during the
related Pre-Funding Period will be dependent on the ability of the Seller to
originate or acquire Loans that satisfy the requirements for transfer to the
Issuer specified in the related Prospectus Supplement. The ability of the Seller
to originate or acquire such Loans will be affected by its own limited operating
history and competition in the industry as well as a variety of social and
economic factors, including the prevailing level of market interest rates,
unemployment levels and consumer perceptions of general economic conditions.
POTENTIAL LIABILITY FOR ENVIRONMENTAL CONDITIONS
Real property pledged as security to a lender may be subject to certain
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the costs of
clean-up. In several states, such a lien has priority over the lien of an
existing mortgage or owner's interest against such property. In addition, under
the laws of some states and under the federal Comprehensive Environmental
Response, Compensation, and Liability Act of 1980 ("CERCLA"), a lender may be
liable, as an "owner" or "operator," for costs of addressing releases or
threatened releases of hazardous substances that require remedy at a property,
if agents or employees of the lender have become sufficiently involved in the
operations of the borrower, regardless of whether or not the environmental
damage or threat was caused by a prior owner. A lender also risks such liability
on foreclosure of the Mortgaged Property.
CONSUMER PROTECTION LAWS MAY AFFECT LOANS
Applicable state laws generally regulate interest rates and other
charges and require certain disclosures. In addition, other state laws, public
policy and general principles of equity relating to the protection of consumers,
unfair and deceptive practices and debt collection practices may apply to the
origination, servicing and collection of the Loans. In California, for example,
a mortgage lender is subject to the California Fair Debt Collection Practices
Act which regulates practices used to effect collection on consumer loans. See
"Certain Legal Aspects of the Loans." Depending on the provisions of the
applicable law and the specific facts and circumstances involved, violations of
these laws, policies and principles may limit the ability of the Servicer to
collect all or part of the principal of or interest on the Loans, may entitle
the borrower to a refund of amounts previously paid and, in addition, could
subject the owner of the Loan to damages and administrative enforcement.
The Loans are also subject to Federal laws, including:
(i) the federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers
regarding the terms of the Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of
public assistance or the exercise of any right under the Consumer
Credit Protection Act, in the extension of credit;
(iii) the Americans with Disabilities Act, which, among other
things, prohibits discrimination on the basis of disability in the full
and equal enjoyment of the goods, services, facilities, privileges,
advantages or accommodations of any place of public accommodation; and
(iv) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience.
Violations of certain provisions of these Federal laws may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Loans and in addition could subject the Issuer to damages and
administrative enforcement. The Loans may be subject to the Home Ownership and
Equity Protection Act of 1994 (the "Act") which amended the Truth in Lending Act
as it applies to mortgages subject to the Act. The Act requires certain
additional disclosures, specifies the timing of such disclosures and limits or
prohibits inclusion of certain provisions in mortgages subject to the Act. The
Act also provides that any purchaser or assignee of a mortgage covered by the
Act is subject to all of the claims and defenses which the borrower could assert
against the original lender. The maximum damages that may be recovered under the
Act from an assignee is the remaining amount of indebtedness plus the total
amount paid by the borrower in connection with the Loan. If the Issuer owns
Loans subject to the Act, it will be subject to all of the claims and defenses
which the borrower could assert against the Seller. Any violation of the Act
which would result in such liability would be a breach of the Seller's
representations and warranties, and the Seller would be obligated to cure,
repurchase or, if permitted by the Agreement, substitute for the Loan in
question. See "CERTAIN LEGAL ASPECTS OF THE LOANS."
INSOLVENCY OF DEPOSITOR MAY CAUSE LOSSES
The Depositor intends that any transfer of the Loan Assets to a Trust
will constitute a sale, and the Depositor and the Trust will agree to treat each
such transfer as a sale. In the event of the insolvency of the Depositor, the
trustee in bankruptcy or the Depositor, as debtor-in-possession, may attempt to
recharacterize such a sale as a loan by the Trust to the Depositor secured by
the pledge of the related Loan Assets. If such an attempt were to be successful,
Holders of Securities could receive a prepayment of all or part of their
Securities. Any such prepayment would adversely affect the yield on such
Securities and could result in a loss. Even if such an attempt were to be
unsuccessful, Holders of Securities could experience delays in distributions
which would adversely affect the yield on the related Series of Securities.
RISKS RELATING TO INDEXED SECURITIES
An investment in Securities indexed, as to principal, premium and/or
interest, to one or more values of currencies (including exchange rates and swap
indices between currencies), commodities, interest rates or other indices
entails significant risks that are not associated with similar investments in a
conventional fixed-rate debt security. If the interest rate of such a Security
is so indexed, it may result in an interest rate that is less than that payable
on a conventional fixed-rate debt security issued at the same time, including
the possibility that no interest will be paid, and, if the principal amount of
such a Security is so indexed, the principal amount payable on the related Final
Scheduled Distribution Date may be less than the original purchase price of such
Security if allowed pursuant to the terms of such Security, including the
possibility that no principal will be paid. The secondary market for such
Securities will be affected by a number of factors, independent of the
characteristics of the Loan Assets, structure of the cash flows and the value of
the applicable currency, commodity, interest rate or other index, including the
volatility of the applicable currency, commodity, interest rate or other index,
the time remaining to the maturity of such Securities, the amount outstanding of
such Securities and market interest rates. The value of the applicable currency,
commodity, interest rate or other index depends on a number of interrelated
factors, including economic, financial and political events. Additionally, if
the formula used to determine the principal amount, premium, if any, or interest
payable with respect to such Securities contains a multiple or leverage factor,
the effect of any change in the applicable currency, commodity, interest rate or
other index may be increased. The historical experience of the relevant
currencies, commodities, interest rates or other indices should not be taken as
an indication of future performance of such currencies, commodities, interest
rates or other indices during the term of any Security. The credit ratings
assigned to any Series or Class of Securities, in no way, are reflective of the
potential impact of the factors discussed above, or any other factors, on the
market value of the Securities. Accordingly, prospective investors should
consult their own financial and legal advisors as to the risks entailed by an
investment in such Securities and the suitability of such Securities in light of
their particular circumstances.
RATINGS ARE NOT RECOMMENDATIONS
Any rating assigned by a Rating Agency to a Class of Offered Securities
will reflect only its assessment of the likelihood that holders of such Offered
Securities will receive payments or distributions to which such Securityholders
are entitled under the related Agreement. Such rating will not constitute an
assessment of the likelihood that principal prepayments on the Loan Assets
supporting a Series will be made, the degree to which the rate of such
prepayments might differ from that originally anticipated or the likelihood of
early optional redemption or termination of the Securities. Furthermore, such
rating will not address the possibility that prepayment of the Loan Assets at a
higher or lower rate than anticipated by an investor may cause such investor to
experience a lower than anticipated yield or that an investor that purchases an
Offered Security at a significant premium might fail to recover its initial
investment under certain prepayment scenarios. Hence, a rating assigned by a
Rating Agency does not guarantee or ensure the realization of any anticipated
yield on a Class of Offered Securities.
The amount, type and nature of Enhancement, if any, provided with
respect to a Series of Securities will be determined on the basis of criteria
established by each Rating Agency rating a Class of Securities of such Series.
Those criteria are sometimes based upon an actuarial analysis of the behavior of
similar types of loans in a larger group. However, there can be no assurance
that the historical data supporting any such actuarial analysis will accurately
reflect future experience, or that the date derived from a large pool of similar
types of loans will accurately predict the delinquency, default or loss
experience of any particular pool of Loan Assets. In other cases, such criteria
may be based upon determination of the values of the Mortgaged Properties or
other properties, if any, that provide security for the Loan Assets. However, no
assurance can be given that those values will not decline in the future. As a
result, the Enhancement required in respect of the Offered Securities of any
Series may be insufficient to fully protect the holders thereof from losses on
the related Loan Assets. See "--Limitations of Credit Enhancement" and
"ENHANCEMENT."
THE SELLER
GENERAL
Preferred Credit Corporation (the "Seller") is a California corporation
with its principal offices located in Irvine, California. The Seller has 5
offices located in California along with offices located in Aurora, Colorado,
Phoenix, Arizona, Lake Oswego, Oregon, Boca Raton, Florida and employs in excess
of 200 people. Founded in 1989 as a sole proprietorship mortgage broker, it was
subsequently incorporated in January 1992 and began originating subordinate
mortgage loans in 1994. The Seller originates both first and subordinate lien
mortgage loans secured by one- to four-family residences. The Seller is approved
as a non-supervised lender by the U.S. Department of Housing and Urban
Development ("HUD"). Additionally, the Seller is licensed by the State of
California as a residential mortgage lender and is licensed or otherwise
permitted to lend in excess of 40 other states. As of December 31, 1996, the
Seller had over $126 million in assets.
UNDERWRITING STANDARDS
Each prospective mortgagor completes a mortgage loan application that
includes information with respect to the applicant's liabilities, income, credit
history, employment history and personal information. The application is subject
to a direct credit investigation by the Seller or the Seller's approved
correspondent prior to the extension of credit. The Seller's underwriting
investigation generally includes (i) verification of employment, which normally
includes, for salaried borrowers, two of the most recent consecutive pay stubs
showing year-to-date earnings and the previous year's W-2 form and for self-
employed borrowers, a minimum of two years of tax returns or other written or
telephone verification with employers, (ii) verifying ownership of the property
and any senior mortgage balance, (iii) verifying payment history of the senior
lien, which may be obtained from credit bureau information or in writing or by
telephone from the holder of any senior lien, and (iv) obtaining and reviewing
an independent credit bureau report from one of three national credit
repositories, TRW, TransUnion and Equifax. The report typically contains
information relating to such matters as credit history with local and national
merchants and lenders, installment debt payments and any record of defaults,
bankruptcies, repossessions or judgments.
In evaluating the credit quality of borrowers, the Seller utilizes
credit bureau risk scores (the "Credit Bureau Risk Score"), a statistical
ranking of likely future credit performance developed by Fair, Isaac & Company
("Fair, Isaac") and the three national credit repositories--Equifax, TransUnion
and TRW. The Credit Bureau Risk Scores available from the three national credit
repositories are calculated by the assignment of weightings to the most
predictive data collected by the credit repositories and range from the 400s to
the 800s. Such Credit Bureau Risk Scores have been calibrated to indicate the
same level of credit risk regardless of which credit repository is used. Such
Credit Bureau Risk Scores are based solely on the information at the particular
credit repository. The Credit Bureau Risk Score is obtained from one of the
three national credit repositories stated above and is used by the Seller to
provide a means of analysis to assist in underwriting to estimate the
probability that the proposed mortgage loan will be paid in accordance with its
terms, however, the final decision whether to approve a mortgage loan rests with
the Seller.
The Maximum Loan Amount ("MLA") a borrower can obtain is generally
determined by a combination of considerations, including the Credit Bureau Risk
Score of the primary wage earner and the combined debt-to-income ratio (the
"DTI") of joint borrowers. Provided a mortgage loan generally meets the Seller's
other underwriting guidelines, borrowers with applicable Credit Bureau Risk
Scores and DTIs may generally be granted Maximum Loan Amounts of up to $65,000
and a DTI of up to 50%. Exceptions to these guidelines, including exceptions for
Maximum Loan Amounts greater than $65,000, Credit Bureau Risk Scores below 620
and DTI's above 50%, may be approved at the Seller's discretion.
The Seller generally requires one of the following to be obtained for
each mortgage loan: (i) a Uniform Residential Appraisal Report in compliance
with FNMA or FHLMC guidelines, (ii) a Second Mortgage Property Value Analysis
Report, typically referred to as a "Drive-By Appraisal Report" which consists
exclusively of an exterior inspection of the property without examination of
interior, or (iii) a comparable sale analysis report referred to as a "Desk-Top
Appraisal Report" which generally consists of an analysis of historical
comparable sale information on similar type properties through the use of public
record information or other on-line real estate sale information services and
does not consist of an exterior or interior inspection of the property. All
appraisals are analyzed on an "as is" valuation. Substantially all of the
appraisals on the mortgage loans are drive-by appraisals and such appraisals are
only considered to a limited extent by the Seller in its mortgage loan
underwriting decisions.
ORIGINATION PROCESS
The Seller originates its mortgage loans through retail, wholesale and
correspondent channels. Retail loans are generated through the Seller's own
retail divisions using advertising, direct mail and telemarketing. Wholesale
loans (funded by the Seller) and correspondent loans (funded by unaffiliated
third parties) are generated through approved mortgage originators including
mortgage brokers, credit unions, banks and other approved financial
institutions.
As of April 10, 1997, the Seller operated nine retail offices in five
states. As of April 10, 1997 approximately 65% of the Seller's mortgage loans
are funded by it directly; the remainder are purchased from correspondent
originators ("Correspondents").
As of April 10, 1997, the Seller works with 118 Correspondents located
in 23 states. Approximately half of such Correspondents are located in the State
of California. While the Seller has entered into an Agreement for Purchase and
Sale of Loans (a "Correspondent Agreement") with each Correspondent, which
Correspondent Agreement sets forth the terms covering any purchase of mortgage
loans by the Seller from such Correspondent, no Correspondent has any obligation
to sell to the Seller mortgage loans thereunder. The Correspondent Agreement
contains representations and warranties covering each mortgage loan sold to the
Seller, including a representation that such mortgage loans have been
underwritten in accordance with the Seller's standards; however the Seller
reunderwrites each mortgage loan before acquiring it, whether in an individual
or a bulk transaction.
In order to qualify as a Correspondent, unaffiliated third parties are
required to (i) meet and maintain certain net worth and other financial
standards, (ii) demonstrate experience in originating residential mortgage
loans, (iii) meet and maintain certain operational standards, (iv) evaluate each
loan offered to the Seller for consistency with the Seller's underwriting
guidelines and (v) utilize the services of qualified appraisers. The Seller and
the Correspondents use a standard HUD loan application form when gathering
information from potential borrowers.
THE SERVICER
Advanta Mortgage Corp. USA ("Advanta") or such other servicer specified
in the related Prospectus Supplement (the "Servicer") will act as servicer for
the Loans pursuant to the related Agreement. Advanta is an indirect subsidiary
of Advanta Corp., a Delaware corporation ("Advanta Parent"), a publicly-traded
company based in Horsham, Pennsylvania with assets as of December 31, 1996 of
approximately $5.6 billion. Advanta Parent, through its subsidiaries (including
the Servicer) managed assets (including mortgage loans) in excess of $19.2
billion as of December 31, 1996.
As of December 31, 1996, the Servicer and its subsidiaries were
servicing approximately 43,300 Loans in the "Owned and Managed Servicing
Portfolio" representing an aggregate outstanding principal balance of
approximately $2.6 billion, and approximately 62,800 mortgage loans in the
"Third-Party Servicing Portfolio" representing an aggregate outstanding
principal balance of approximately $3.7 billion.
On March 17, 1997, Advanta Parent issued a press release (the "Press
Release"), announcing that it expects to report 1997 results well below previous
expectations. The Press Release stated that for the first quarter of 1997,
Advanta Parent currently expects to report a loss in the area of $20 million
compared to earnings of $41 million in the first quarter of 1996. The losses are
attributed to increases in consumer bankruptcies and chargeoffs and lower
receivables balances than originally anticipated in its credit card business.
Advanta Parent has retained BT Wolfensohn, a division of the Bankers Trust New
York Corporation, to explore all strategic alternatives that build upon the
historic strength and success of the company as a whole and of its business
units, including the Servicer, with the aim of maximizing the company's value
for its shareholders and other constituents.
Advanta's "Owned and Managed Servicing Portfolio" consists of Advanta's
servicing portfolio of fixed and variable rate mortgage loans excluding certain
loans serviced by Advanta that were not originated or purchased and
reunderwritten by Advanta of any affiliate thereof. Advanta's "Third-Party
Servicing Portfolio" consists of mortgage loans being serviced for third parties
on a contract servicing basis. Historical loss and delinquency data of the
Servicer's "Owned and Managed Servicing Portfolio" have not been included herein
because loans similar to the mortgage loans originated by the Seller do not
represent a significant portion of such portfolio. Historical loss and
delinquency data of the Servicer's "Third-Party Servicing Portfolio" have not
been included herein because such information is not available.
In addition to the rights of the Trustee with respect to the Servicer,
an Enhancer may have certain rights, as described in the related Agreement, with
respect to the removal or resignation of the Servicer, the ability of the
Servicer to assign any of its obligations under the related Agreement and the
appointment of a successor Servicer.
The Securities of any Series will not represent an interest in or
obligation of, nor are the Loans guaranteed by the Servicer or Advanta Parent,
nor will they be insured or guaranteed by the Federal Deposit Insurance
Corporation (the "FDIC") or any other governmental agency or instrumentality.
THE DEPOSITOR
The Depositor was incorporated in the state of Delaware on March 3,
1997, and is a wholly-owned subsidiary of Preferred Credit Corporation. The
Depositor's principal executive offices are located at 3347 Michelson Drive,
Suite 400, Irvine, California 92612. Its telephone number is (714) 474-0700.
The Depositor will not engage in any activities other than to
authorize, issue, sell, deliver, purchase and invest in (and enter into
agreements in connection with), and/or to engage in the establishment of one or
more trusts which will issue and sell, bonds, notes, debt or equity securities,
obligations and other securities and instruments ("Depositor Securities")
collateralized or otherwise secured or backed by, or otherwise representing an
interest in, among other things, receivables or pass-through certificates, or
participations or certificates of participation or beneficial ownership in one
or more pools of receivables, and the proceeds of the foregoing, that arise in
connection with loans secured by certain first or junior mortgages on real
estate or manufactured housing and any and all other commercial transactions and
commercial, sovereign, student or consumer loans or indebtedness and, in
connection therewith or otherwise, purchasing, acquiring, owning, holding,
transferring, conveying, servicing, selling, pledging, assigning, financing and
otherwise dealing with such receivables, pass-through certificates, or
participations or certificates of participation or beneficial ownership. Article
Third of the Depositor's Certificate of Incorporation limits the Depositor's
activities to the above activities and certain related activities, such as
credit enhancement with respect to such Depositor Securities, and to any
activities incidental to and necessary or convenient for the accomplishment of
such purposes.
The Depositor may act as Issuer of Notes of a Series or may sell or
assign its beneficial ownership interest in consumer loan related assets, in
whole or in part, to another entity which may be a partnership, corporation or
limited liability company formed by the Depositor solely for the purpose of
issuing the Notes of the related Series, formed by the Depositor solely for the
purpose of acting as the Issuer for a Series of Notes at or prior to the time of
the issuance of such Notes. The organizational documents for such other entity
will be filed with the Commission on a Form 8-K.
DESCRIPTION OF THE SECURITIES
GENERAL
Each Series of Notes will be issued pursuant to an indenture (the
"Indenture") between the related Issuer and the entity named in the related
Prospectus Supplement as trustee (the "Trustee") with respect to such Series. A
form of Indenture has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part. The Certificates will also be issued in
Series pursuant to either a Pooling and Servicing Agreement (each, a "Pooling
and Servicing Agreement") among the Depositor, the Servicer and the Trustee or a
Trust Agreement (each a "Trust Agreement") among the Depositor and the Trustee.
A form of Pooling and Servicing Agreement and a form of Trust Agreement have
been filed as exhibits to the Registration Statement of which this Prospectus
forms a part. A Series may consist of both Notes and Certificates. Unless
otherwise specified in the related Prospectus Supplement, each Class of
Securities of a Series will be available for purchase in denominations of
$25,000 and integral multiples of $1,000 in excess thereof.
The Seller may agree to reimburse the Depositor for certain fees and
expenses of the Depositor incurred in connection with the offering of the
Securities.
The following summaries describe certain provisions in the Agreements
common to each Series of Securities. The summaries do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, the
provisions of the Agreements and the Prospectus Supplement relating to each
Series of Securities. Where particular provisions or terms used in the
Agreements are referred to, the actual provisions (including definitions of
terms) are incorporated herein by reference as part of such summaries.
Each Series of Securities will consist of one or more Classes of
Securities, one or more of which may be Compound Interest Securities, Variable
Interest Securities, PAC Securities, Zero Coupon Securities, Principal Only
Securities or Interest Only Securities (each of which is generally described in
the "GLOSSARY OF TERMS"). A Series may also include one or more Classes of
Subordinate Securities. The Securities of each Series will be issued only in
fully registered form, without coupons, in the authorized denominations for each
Class specified in the related Prospectus Supplement. Upon satisfaction of the
conditions, if any, applicable to a Class of a Series, as described in the
related Prospectus Supplement, the transfer of the Securities may be registered
and the Securities may be exchanged at the office of the Trustee specified in
the Prospectus Supplement without the payment of any service charge other than
any tax or governmental charge payable in connection with such registration of
transfer or exchange. If specified in the related Prospectus Supplement, one or
more Classes of a Series may be available in book-entry form only.
Unless otherwise provided in the related Prospectus Supplement,
payments of principal of and interest on a Series of Securities will be made on
the Distribution Dates specified in the Prospectus Supplement relating to such
Series (which may be different for each Class or for the payment of principal
and interest) by check mailed to Holders of such Series, registered as such at
the close of business on the record date specified in the related Prospectus
Supplement applicable to such Distribution Dates at their addresses appearing on
the security register, except that (a) payments may be made by wire transfer
(which, unless otherwise specified in the related Prospectus Supplement, shall
be at the expense of the Holder requesting payment by wire transfer) in certain
circumstances described in the related Prospectus Supplement and (b) final
payments of principal in retirement of each Security will be made only upon
presentation and surrender of such Security at the office of the Trustee
specified in the Prospectus Supplement. Notice of the final payment on a
Security will be mailed to the Holder of such Security before the Distribution
Date on which the final principal payment on any Security is expected to be made
to the holder of such Security.
Payments of principal of and interest on the Securities will be made by
the Trustee, or a paying agent on behalf of the Trustee, as specified in the
related Prospectus Supplement. Unless otherwise provided in the related
Prospectus Supplement, all payments with respect to the Loan Assets for a
Series, together with reinvestment income thereon, amounts withdrawn from any
Reserve Fund, and amounts available pursuant to any other Enhancement will be
deposited directly into the Collection Account or the Certificate Account. If
provided in the related Prospectus Supplement, such amounts may be net of
certain amounts payable to the related Servicer and any other person specified
in the Prospectus Supplement. Such amounts thereafter may be deposited into the
Distribution Account and will be available to make payments on the Securities of
such Series on the next applicable Distribution Date. See "THE ISSUER--
Collection and Distribution Accounts."
BOOK-ENTRY SECURITIES
If specified in the related Prospectus Supplement, one or more Classes
of Securities may be issued in book-entry form) (the "Book-Entry Securities").
Persons acquiring beneficial ownership interests in the Book-Entry Securities
("Owners") will hold their Securities through the Depository Trust Company
("DTC") in the United States, or CEDEL Bank societe anonyme ("CEDEL") or the
Euroclear System ("Euroclear") (in Europe) if they are participants of such
systems, or indirectly through organizations which are participants in such
systems. The Book-Entry Securities will be issued in one or more certificates
which equal the aggregate principal balance of the applicable Class or Classes
of Securities and will initially be registered in the name of Cede & Co., the
nominee of DTC. CEDEL and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank N.A. ("Citibank") will act as depositary for
CEDEL and The Chase Manhattan Bank ("Chase") will act as depositary for
Euroclear (in such capacities, individually the "Relevant Depositary" and
collectively the "Euroclear Depositaries"). Except as described below, no person
acquiring a Book-Entry Security will be entitled to receive a physical
certificate representing such Security (a "Definitive Security"). Unless and
until Definitive Securities are issued, it is anticipated that the only
"Certificateholder" or Noteholder, as applicable, will be Cede & Co., as nominee
of DTC. Owners are only permitted to exercise their rights indirectly through
Participants and DTC.
The Owner's ownership of a Book-Entry Security 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 Security 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).
Owners will receive all distributions of principal of, and interest on,
the Book-Entry Securities from the Trustee through DTC and DTC participants.
While the Book-Entry Securities 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 Securities and is required to receive and transmit distributions of
principal of, and interest on, the Securities. Participants and indirect
participants with whom Certificate Owners have accounts with respect to
Securities are similarly required to make book- entry transfers and receive and
transmit such distributions on behalf of their respective Owners. Accordingly,
although Owners will not possess certificates, the Rules provide a mechanism by
which Owners will receive distributions and will be able to transfer their
interest.
Owners will not receive or be entitled to receive certificates
representing their respective interests in the Securities, except under the
limited circumstances described below. Unless and until Definitive Securities
are issued, Owners who are not Participants may transfer ownership of Securities
only through Participants and indirect participants by instructing such
Participants and indirect participants to transfer Securities, by book-entry
transfer, through DTC for the account of the purchasers of such Securities,
which account is maintained with their respective Participants. Under the Rules
and in accordance with DTC's normal procedures, transfers of ownership of
Securities 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 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.
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 its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 32 currencies, including United
States dollars. 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.
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 Securities 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 Owners 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 Owners that it
represents.
Under a book-entry format, Owners may experience some delay in their
receipt of payments, since such payments will be forwarded by the Trustee to
Cede. Distributions with respect to Securities 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. Because DTC can only act on behalf of Financial Intermediaries, the
ability of an Owner to pledge Book-Entry Securities to persons or entities that
do not participate in the Depository system, or otherwise take actions in
respect of such Book-Entry Securities, may be limited due to the lack of
physical certificates for such Book-Entry Securities. In addition, issuance of
the Book-Entry Securities in book-entry form may reduce the liquidity of such
Securities in the secondary market since certain potential investors may be
unwilling to purchase Securities for which they cannot obtain physical
certificates.
Monthly and annual reports on the applicable Issuer will be provided to
Cede, as nominee of DTC, and may be made available by Cede to Owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Securities of such Owners are credited.
DTC has advised the Trustee that, unless and until Definitive
Securities are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Securities under the Agreement only at the direction
of one or more Financial Intermediaries to whose DTC accounts the Book-Entry
Securities are credited, to the extent that such actions are taken on behalf of
Financial Intermediaries whose holdings include such Book-Entry Securities.
CEDEL or the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a Holder 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 Securities which conflict with
actions taken with respect to other Securities.
Definitive Securities will be issued to Owners, or their nominees,
rather than to DTC, only if (a) DTC or the Seller advises the Trustee in writing
that DTC is no longer willing, qualified or able to discharge properly its
responsibilities as nominee and depository with respect to the Book-Entry
Securities and the Seller or the Trustee is unable to locate a qualified
successor, (b) the Seller, at its sole option, elects to terminate a book-entry
system through DTC or (c) after the occurrence of an Event of Default (as
defined herein), Owners owning a majority in principal amount of the applicable
Securities 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
Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all applicable
Owners of the occurrence of such event and the availability through DTC of
Definitive Securities. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Securities and instructions for
re-registration, the Trustee will issue Definitive Securities, and thereafter
the Trustee will recognize the holders of such Definitive Securities as
Certificateholders or Noteholders, as applicable, under the Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Securities 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.
Neither the Seller, the Servicer, the Depositor nor the Trustee will
have any responsibility for any aspect of the records relating to or payments
made on account of beneficial ownership interests of the Book-Entry Securities
held by Cede & Co., as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
PAYMENTS OF INTEREST
The Securities of each Class by their terms entitled to receive
interest will bear interest (calculated, unless otherwise specified in the
related Prospectus Supplement, on the basis of a 360 day year of twelve 30-day
months) from the date and at the rate per annum specified, or calculated in the
method described, in the related Prospectus Supplement. Interest on such
Securities of a Series will be payable on the Distribution Date specified in the
related Prospectus Supplement. If so specified in the related Prospectus
Supplement, the Distribution Date for the payment of interest of a Class may be
different from, or occur more or less frequently than, the Distribution Date for
the payment of principal of such Class. The rate of interest on Securities of a
Series may be variable or may change with changes in the annual percentage rates
of the Loans owned by the related Issuer and/or as prepayments occur with
respect to such Loans. Principal Only Securities may not be entitled to receive
any interest distributions or may be entitled to receive only nominal interest
distributions. Any interest on Zero Coupon Securities that is not paid on the
related Distribution Date will accrue and be added to the principal thereof on
such Distribution Date.
Interest payable on the Securities on a Distribution Date will include
all interest accrued during the period specified in the related Prospectus
Supplement. In the event interest accrues during the calendar month preceding a
Distribution Date, the effective yield to Holders will be reduced from the yield
that would otherwise be obtainable if interest payable on the Securities were to
accrue through the day immediately preceding such Distribution Date.
PAYMENTS OF PRINCIPAL
On each Distribution Date for a Series, principal payments will be made
to the Holders of the Securities of such Series on which principal is then
payable, to the extent set forth in the related Prospectus Supplement. Such
payments will be made in an aggregate amount determined as specified in the
related Prospectus Supplement and will be allocated among the respective Classes
of a Series in the manner, at the times and in the priority (which may, in
certain cases, include allocation by random lot) set forth in the related
Prospectus Supplement. The Holders of one or more Classes of Securities may have
the right to request that principal distributions allocable to such Holder's
Class of Securities be distributed to such Holder. If the requests of Holders
exceed the amount of principal to be distributed, the requests generally will be
filled in the order in which they were received. If the amount of principal to
be distributed exceeds the amount of requests, the Trustee will select random
lots of $1,000 each to receive such principal distribution. Thus, some Holders
of the applicable Class of Securities may receive no principal distributions or
a disproportionate amount of such principal distributions. If so specified in
the related Prospectus Supplement, the Distribution Date for the payment of
principal of a Class may be different from, or occur more or less frequently
than, the Distribution Date for the payment of interest for such Class.
FINAL SCHEDULED DISTRIBUTION DATE
The Final Scheduled Distribution Date with respect to each Class of
Notes is the date no later than which the principal thereof will be fully paid
and with respect to each Class of a Series of Certificates will be the date on
which the entire aggregate principal balance of such Class is expected to be
reduced to zero, in each case calculated on the basis of the assumptions
applicable to such Series described in the related Prospectus Supplement. The
Final Scheduled Distribution Date for each Class of a Series will be specified
in the related Prospectus Supplement. Since payments on the Loan Assets will be
used to make distributions in reduction of the outstanding principal amount of
the Securities, it is likely that the actual final Distribution Date of any such
Class will occur earlier, and may occur substantially earlier, than its Final
Scheduled Distribution Date. Furthermore, with respect to a Series of
Certificates, unless otherwise specified in the related Prospectus Supplement,
as a result of delinquencies, defaults and liquidations of the Loan Assets
supporting the related Series, the actual final Distribution Date of any
Certificate may occur later than its Final Scheduled Distribution Date. No
assurance can be given as to the actual prepayment experience with respect to a
Series. See "--Weighted Average Life of the Securities" below.
SPECIAL REDEMPTION
If so specified in the Prospectus Supplement relating to a Series of
Securities having other than monthly Distribution Dates, one or more Classes of
Securities of such Series may be subject to special redemption, in whole or in
part, on the day specified in the related Prospectus Supplement (a "Special
Redemption Date") if, as a consequence of prepayments on the Loans relating to
such Securities or low yields then available for reinvestment, the entity
specified in the related Prospectus Supplement determines, based on assumptions
specified in the applicable Agreement, that the amount available for the payment
of interest that will have accrued on such Securities (the "Available Interest
Amount") through the designated interest accrual date specified in the related
Prospectus Supplement is less than the amount of interest that will have accrued
on such Securities to such date. In such event and as further described in the
related Prospectus Supplement, the Trustee will redeem a principal amount of
outstanding Securities of such Series as will cause the Available Interest
Amount to equal the amount of interest that will have accrued through such
designated interest accrual date for such Series of Securities outstanding
immediately after such redemption.
OPTIONAL REDEMPTION, PURCHASE OR TERMINATION
The related Issuer, the Holders of the Residual Interest, the Depositor
or the Servicer may, at its option, redeem, in whole or in part, one or more
Classes of Notes or purchase one or more Classes of Certificates of any Series,
on any Distribution Date under the circumstances, if any, specified in the
Prospectus Supplement relating to such Series. Alternatively, if so specified in
the related Prospectus Supplement for a Series of Certificates, the related
Issuer, the Holders of the Residual Interest, the Depositor, the Servicer, or
another entity designated in the related Prospectus Supplement may, at its
option, repurchase all of the Issuer Assets remaining relating to such Series on
or after any date on which the aggregate principal balances of the Loans
relating to such Securities is less than 10% (if the Holders of the Residual
Certificates are exercising their option) or is less than 5% (if the Servicer
(or such other entity, if any, specified in the related Prospectus Supplement,
if the Servicer fails to exercise its option) is exercising its option) of the
aggregate Principal Balances of the Loans as of the related Cut-Off Date (the
"Maximum Collateral Amount"), by purchasing from the related Trust, on the next
succeeding Distribution Date, all of the property of such Trust at a price equal
to the sum of (a) the greater of (i) 100% of the Principal Balance of each
outstanding Loan and each REO Property and (ii) the fair market value
(disregarding accrued interest) of the Loans and such REO Properties, determined
as the average of three written bids (copies of which are to be delivered to the
Trustee by the Servicer and the reasonable cost of which may be deducted from
the final purchase price) made by nationally-recognized dealers reasonably
acceptable to the Trustee or such other party as may be identified in the
related Prospectus Supplement and based on a valuation process which would be
used to value comparable mortgage loans and REO properties, plus (b) the greater
of (x) the aggregate amount of accrued and unpaid interest on the Loans
through the related Collection Period and (y) 30 days' accrued interest thereon
computed at a rate equal to the related Loan Rate, and (c) in the event the
Holders of the Residual Certificates or such other party as may be identified in
the related Prospectus Supplement exercise such option, plus any unpaid and
accrued Servicing Fee or, in the event the Servicer exercises such option, net
of the Servicing Fee. Notice of such redemption, purchase or termination must be
given by the Depositor or the Trustee prior to the related date. In such event,
the Securities or the related Series will experience a prepayment redemption,
purchase or repurchase price will be set forth in the related Prospectus
Supplement. If specified in the related Prospectus Supplement, in the event that
a REMIC election has been made, the Trustee shall receive a satisfactory opinion
of counsel that the optional redemption, purchase or termination will be
conducted so as to constitute a "qualified liquidation" under Section 860F of
the Code.
In addition, the Prospectus Supplement may provide other circumstances
under which Holders of Securities of a Series could be fully paid significantly
earlier than would otherwise be the case if payments or distributions were
solely based on the activity of the related Loan Assets.
WEIGHTED AVERAGE LIFE OF THE SECURITIES
Weighted average life refers to the average amount of time that will
elapse from the date of issue of a security until each dollar of principal of
such security will be repaid to the investor. Unless otherwise specified in the
related Prospectus Supplement, the weighted average life of the Securities of a
Class will be influenced by the rate at which the amount financed under the
Loans of the related Issuer for a Series is paid, which may be in the form of
scheduled amortization or prepayments.
Prepayments on loans and other receivables can be measured relative to
a prepayment standard or model. The Prospectus Supplement for a Series of
Securities will describe the prepayment standard or model, if any, used and may
contain tables setting forth the projected weighted average life of each Class
of Securities of such Series and the percentage of the original principal amount
of each Class of Securities of such Series that would be outstanding on
specified Distribution Dates for such Series based on the assumptions stated in
such Prospectus Supplement, including assumptions that prepayments on the Loans
of the related Issuer are made at rates corresponding to various percentages of
the prepayment standard or model specified in such Prospectus Supplement.
There is, however, no assurance that prepayment of the Loans of the
related Issuer will conform to any level of any prepayment standard or model
specified in the related Prospectus Supplement. The rate of principal
prepayments on pools of loans may be influenced by a variety of factors,
including job related factors such as transfers, layoffs or promotions and
personal factors such as divorce, disability or prolonged illness. Economic
conditions, either generally or within a particular geographic area or industry,
also may affect the rate of principal prepayments. Demographic and social
factors may influence the rate of principal prepayments in that some borrowers
have greater financial flexibility to move or refinance than do other borrowers.
The deductibility of mortgage interest payments, servicing decisions and other
factors also affect the rate of principal prepayments. As a result, there can be
no assurance as to the rate or timing of principal prepayments of the Loans
either from time to time or over the lives of such Loans.
The rate of prepayments of conventional housing loans and other
receivables has fluctuated significantly in recent years. In general, however,
if prevailing interest rates fall significantly below the interest rates on the
Loans for a Series, such loans are likely to prepay at rates higher than if
prevailing interest rates remain at or above the interest rates borne by such
loans. In this regard, it should be noted that the Loans for a Series may have
different interest rates. In addition, the weighted average life of the
Securities may be affected by the varying maturities of the Loans. If any Loans
for a Series have actual terms-to-stated maturity of less than those assumed in
calculating the Final Scheduled Distribution Date of the related Securities, one
or more Classes of the Series may be fully paid prior to their respective Final
Scheduled Distribution Date, even in the absence of prepayments and a
reinvestment return higher than the Assumed Reinvestment Rate.
DESCRIPTION OF THE ISSUER ASSETS
GENERAL
The Issuer Assets for a related Series may be composed of (i) the Loan
Assets, (ii) all monies due under the Loan Assets net, if and as provided in the
related Prospectus Supplement, of certain amounts payable to the Servicer, (b)
if specified in the related Prospectus Supplement, funds on deposit in one or
more pre-funding accounts available to acquire additional Loan Assets during the
period specified in the related Prospectus Supplement and/or capitalized
interest accounts available to fund interest shortfalls arising from the use of
pre-funding accounts and (iii) reserve funds, letters of credit, surety bonds,
insurance policies or other forms of credit support as described herein and in
the related Prospectus Supplement.
The Securities will be non-recourse obligations of the related Issuer.
The assets of the Issuer specified in the related Prospectus Supplement for a
Series of Securities, unless otherwise specified in the related Prospectus
Supplement, will serve as collateral only for that Series of Securities. Holders
of a Series of Notes may only proceed against such collateral securing such
Series of Notes in the case of a default with respect to such Series of Notes
and may not proceed against any assets of the related Issuer not pledged to
secure such Notes.
The Loan Assets for a Series will be sold directly or indirectly by the
Seller to the Issuer or purchased directly or indirectly by the Issuer in the
open market or inly negotiated transactions, which may include transactions with
affiliates. Loans relating to a Series will be serviced by the Servicer pursuant
to a Pooling and Servicing Agreement, with respect to a Series consisting solely
of Certificates or a Sale and Servicing Agreement (each, a "Sale and Servicing
Agreement") among the Seller, the Issuer and the Servicer, with respect to a
Series that consists of Notes and Certificates.
As used herein, "Agreement" means, with respect to a Series that only
includes Certificates, the Pooling and Servicing Agreement, and with respect to
a Series that includes Notes, the Indenture, the Trust Agreement and the Sale
and Servicing Agreement, as the context requires.
If so specified in the related Prospectus Supplement, a Trust relating
to a Series of Securities may be a business trust formed under the laws of the
state specified in the related Prospectus Supplement pursuant to a trust
agreement (each, a "Trust Agreement") between the Depositor and the trustee of
such Trust Fund (each, a "Trustee") specified in the related Prospectus
Supplement.
With respect to each Trust, prior to the initial offering of the
related Series of Securities, the Trust will have no assets or liabilities. No
Trust is expected to engage in any activities other than acquiring, managing and
holding the related Loan Assets and other assets contemplated herein and in the
related Prospectus Supplement and the proceeds thereof, issuing Securities and
making payments and distributions thereon and certain related activities. No
Trust is expected to have any source of capital other than its assets and any
related Enhancement. With respect to a Series of Notes issued by the Depositor,
as Issuer, the Notes will be secured by a pool of assets pledged to the
Indenture Trustee of such Series. The Depositor's activities are limited as
specified in its Certificate of Incorporation. See "The Depositor."
An Agreement may provide that additional Loans may be acquired by the
Issuer if such Loans were originated or acquired by the Seller in the ordinary
course of its business, the inclusion of such Loans will maintain or increase
the level of overcollateralization and the inclusion of such Loans will not
result in the withdrawal or downgrading of the ratings then assigned to the
Securities of the related Series. In addition, an Agreement may provide that
Loans may be removed from an Issuer from time to time if the actual level of
overcollateralization exceeds the amount of overcollateralization required to be
maintained and such removal will not result in the withdrawal or downgrading of
the ratings then assigned to the Securities of the related Series. See
"--Pre-Funding and Capitalized Interest Accounts."
THE LOANS
The Loan Assets for a Series will include consumer loan related assets
(the "Loan Assets") purchased directly or indirectly from Preferred Credit
Corporation (the "Seller"), and will be comprised of one or more pools of fixed
or adjustable rate closed-end no or low equity mortgage loans (the "Loans"),
secured by mortgages or deeds of trust, which are generally subordinate liens on
residential one- to four- family properties (the "Mortgaged Properties"),
including townhouses, individual units in condominium and planned unit
developments. Each Loan is evidenced by a mortgage note (each, a "Mortgage
Note"). The related proceeds of the Loans are generally used to finance (i) debt
consolidation, (ii) property improvements, (iii) the acquisition of personal
property such as home appliances or furnishings, (iv) the purchase or
refinancing of residential one- to four-family properties, and (v) a combination
of debt consolidation, property improvements and other consumer purposes.
Since the Mortgage Loans are generally subordinate liens which are
subordinate to the rights of the mortgagee under the senior mortgage or
mortgages encumbering the related Mortgaged Property ("Senior Liens"), the
proceeds from any foreclosure, liquidation, insurance or condemnation
proceedings will be available to satisfy the outstanding balance of such
subordinate mortgage only to the extent that the claims of the mortgagees under
such Senior Liens have been satisfied in full, including any related foreclosure
costs. In addition, a subordinate mortgagee may not foreclose on the Mortgaged
Property securing a subordinate mortgage unless it forecloses subject to the
Senior Liens, in which case it must either pay the entire amount due on the
Senior Liens to the mortgagees thereof at or prior to the foreclosure sale or
undertake the obligation to make payments on the Senior Liens in the event the
mortgagor is in default thereunder. The Issuer will not have any source of funds
to satisfy the Senior Liens or make payments due to the mortgagees thereof.
Each of the Loans is subject to a due-on-sale clause. See "Certain
Legal Aspects of The Loans." The monthly payments for each Loan are due on the
dates of the month specified in the related Mortgage Note (each a "Due Date").
Each Loan requires the related Mortgagor to make current principal and interest
payments during the life of the Loan. Based on information supplied by the
mortgagors in connection with their loan applications at origination, the
Mortgaged Properties will be owner occupied primary residences.
Unless otherwise described in the related Prospectus Supplement, the
full principal amount of a Loan is advanced at origination of the loan and
generally is repayable in equal (or substantially equal) installments of an
amount sufficient to fully amortize such loan at its stated maturity. As more
fully described in the related Prospectus Supplement, interest on each Loan is
calculated on the basis of the outstanding principal balance of such loan
multiplied by the Loan Rate thereon and further multiplied by a fraction, the
numerator of which is the number of days in the period elapsed since the
preceding payment of interest was made and the denominator is the number of days
in the annual period for which interest accrues on such loan. Unless otherwise
described in the related Prospectus Supplement the original terms to stated
maturity of Loans will not exceed 240 months. Under certain circumstances, a
borrower may choose an interest only payment option and is obligated to pay only
the amount of interest which accrues on the loan during the billing cycle. An
interest only payment option may be available for a specified period before the
borrower must begin paying at least the minimum monthly payment of a specified
percentage of the average outstanding balance of the loan.
The initial Combined Loan-to-Value Ratio of a Loan is computed in the
manner described in the related Prospectus Supplement, taking into account the
amounts of the related senior mortgage loans. The selection criteria which will
apply with respect to the Loans, including, but not limited to, the Combined
Loan-to-Value Ratios or Loan-to-Value Ratios, as applicable, original terms to
maturity and delinquency information, will be specified in the related
Prospectus Supplement.
The related Prospectus Supplement for each Series will set forth with
respect to the Loans as of a date specified in such Prospectus Supplement, among
other things, and to the extent relevant: (a) the aggregate unpaid principal
balance of the Loans (or the aggregate unpaid principal balance included in the
assets supporting such Series); (b) the range and weighted average Loan Rate on
the Loans, and, in the case of adjustable rate Loans, the range and weighted
average of the current Loan Rates and the Lifetime Rate Caps, if any; (c) the
range and average outstanding principal balance of the Loans; (d) the weighted
average original and remaining term-to-stated maturity of the Loans and the
range of original and remaining terms-to-stated maturity, if applicable; (e) the
range of credit bureau risk scores of the Loans and the weighted average credit
bureau risk score; (f) the range and weighted average of Combined Loan-to-Value
Ratios or Loan-to-Value Ratios for the Loans, as applicable, computed in the
manner described in the related Prospectus Supplement; (g) the percentage (by
outstanding principal balance as of the Cut-off Date) of Loans that accrue
interest at adjustable or fixed interest rates; (h) any enhancement relating to
the Loans; (i) the geographic distribution of the Loans; (j) the use and type of
each Mortgaged Property; (k) the lien priority of the Loans; and (l) the
delinquency status and year of origination of the Loans. The related Prospectus
Supplement will also specify any other limitations on the types or
characteristics of Loans for a Series.
If information of the nature described above respecting the Loans is
not known to the Depositor at the time the Securities are initially offered,
approximate or more general information of the nature described above will be
provided in the Prospectus Supplement, and the information which otherwise would
have been set forth in the Prospectus Supplement will be set forth in a Current
Report on Form 8-K to be filed with the Commission within 15 days after the
initial issuance of such Securities.
COLLECTION, CERTIFICATE AND DISTRIBUTION ACCOUNTS
A separate Collection Account or Certificate Account will be
established by the applicable Trustee or the Servicer, in the name of the
Trustee, for each Series of Securities for receipt of the amount of cash, if
any, specified in the related Prospectus Supplement to be initially deposited
therein by the Depositor, all amounts received on or with respect to the Loan
Assets and, unless otherwise specified in the related Prospectus Supplement,
income earned thereon. Certain amounts on deposit in such Collection Account and
certain amounts available pursuant to any Enhancement, as provided in the
related Prospectus Supplement, will be deposited in a related Distribution
Account, which will also be established by the Trustee for each such Series of
Securities, for distribution to the related Holders. Unless otherwise specified
in the related Prospectus Supplement, the Trustee will invest the funds in the
Collection, Certificate and Distribution Accounts in Eligible Investments
maturing, with certain exceptions, not later, in the case of funds in the
Collection Account, than the day preceding the date such funds are due to be
deposited in the Distribution Account or otherwise distributed and, in the case
of funds in the Distribution Account, than the day preceding the next
Distribution Date for the related Series of Securities. See "--Eligible
Investments" below.
Notwithstanding any of the foregoing, amounts may be deposited and
withdrawn pursuant to any Deposit Agreement or Minimum Principal Payment
Agreement as specified in the related Prospectus Supplement.
PRE-FUNDING AND CAPITALIZED INTEREST ACCOUNTS
If specified in the related Prospectus Supplement, the assets of the
selected Issuer will include one or more segregated trust accounts (each, a
"Pre-Funding Account") established and maintained with the Trustee for the
related Series. If so specified, on the closing date for such Series, a portion
of the proceeds of the sale of the Securities of such Series not to exceed fifty
percent of the aggregate principal amount of such Series (such amount, the
"Pre-Funded Amount") will be deposited in the Pre-Funding Account and may be
used to purchase additional Loan Assets during the period of time specified in
the related Prospectus Supplement (the "Pre-Funding Period"). Pending the
purchase of such additional Loan Assets, funds deposited in the Pre-Funding
Account will be invested in Eligible Investments. If any Pre-Funded Amount
remains on deposit in the Pre-Funding Account at the end of the Pre-Funding
Period, such amount will be applied in the manner specified in the related
Prospectus Supplement to prepay the Notes and/or the Certificates of the
applicable Series. Any such prepayment will shorten the weighted average life of
such Notes and/or Certificates, and may adversely affect the related
Securityholder's yield to maturity on such Securities. In addition, since
prevailing interest rates are subject to fluctuation, there can be no assurance
that investors will be able to reinvest any such prepayment at yields equaling
or exceeding the yield on the related Securities. It is possible that the yield
on any such reinvestment will be lower, and may be significantly lower, than the
yield on the related Securities.
Each additional Loan Asset must satisfy the eligibility criteria
specified in the related Prospectus Supplement and related Agreements. Such
eligibility criteria will be determined in consultation with each Rating Agency
(and/or any Enhancer) prior to the issuance of the related Series and are
designed to ensure that if such additional Loan Assets were included as part of
the initial Loan Assets, the credit quality of such assets would be consistent
with the initial rating of the Securities of such Series. The eligibility
criteria will apply to the pool of Loan Assets, including the subsequent Loan
Assets, and will include a minimum weighted average interest rate, and may
require the opposed of Enhancement for such Series a maximum weighted average
remaining term to maturity and may require the approval of any Enhancer for such
Series. Depending on the composition of the original Loan Assets and the type of
Enhancement, additional eligibility criteria such as a minimum interest rate, a
maximum principal balance, a limitation on geographic concentration. The Seller
will certify to the Trustee that all conditions precedent to the transfer of the
additional Loan Assets, including the satisfaction of the eligibility criteria
to the Issuer, have been satisfied. It is a condition to the transfer of any
additional Loan Assets to the Issuer that each Rating Agency, after receiving
prior notice of the proposed transfer of the additional Loan Assets to the
Issuer shall not have advised the Seller, the Depositor or the Trustee or any
Enhancer that the conveyance of such additional Loan Assets will result in a
qualification, modification or withdrawal of its then current rating of any
Class of Notes or Certificates of such Series. Following the transfer of
additional Loan Assets to the Issuer, the aggregate characteristics of the Loan
Assets then owned by the Issuer may vary from those of the initial Loan Assets
of such Issuer. As a result, the additional Loan Assets may adversely affect the
performance of the related Securities.
Following the end of each Pre-Funding Period, a Current Report on Form
8-K containing a description of the Loan Assets acquired by the related Trust as
of their respective Cut-off Date or Subsequent Cutt-off Date will be filed with
the Commission.
If a Pre-Funding Account is established, one or more segregated trust
accounts (each, a "Capitalized Interest Account") may be established and
maintained with the Trustee for the related Series. On the closing date for such
Series, a portion of the proceeds of the sale of the Securities of such Series
will be deposited in the Capitalized Interest Account and used to fund the
excess, if any, of the sum of (i) the amount of interest accrued on the
Securities of such Series and (ii) if specified in the related Prospectus
Supplement, certain fees or expenses during the Pre-Funding Period such as
Trustee fees and credit enhancement fees, over the amount of interest available
therefor from the Loan Assets of the Issuer. If so specified in the related
Prospectus Supplement, amounts on deposit in the Capitalized Interest Account
may be released to the Depositor prior to the end of the Pre-Funding Period
subject to the satisfaction of certain tests specified in the related Prospectus
Supplement. Any amounts on deposit in the Capitalized Interest Account at the
end of the Pre-Funding Period that are not necessary for such purposes will be
distributed to the person specified in the related Prospectus Supplement.
REVOLVING PERIOD AND AMORTIZATION PERIOD; RETAINED INTEREST
If the related Prospectus Supplement so provides, there may be a period
commencing on the date of issuance of a class or classes of Notes or
Certificates of a Series and ending in the date set forth on the related
Prospectus Supplement (each, a "Revolving Period") during which no principal
payments will be made to one or more classes of Notes or Certificates of the
related Series as are identified in such Prospectus Supplement. Until the
applicable Revolving Period ends, all collections of principal otherwise
allocated to such classes of Notes or Certificates may be (i) utilized by the
Issuer during the Revolving Period to acquire additional Loans which satisfy the
criteria specified above and the criteria set forth in the related Prospectus
Supplement, (ii) held in an account and invested in Eligible Investments for
later distribution to Securityholders, (iii) applied to those Notes or
Certificates for such Series, if any, specified in the related Prospectus
Supplement as then are in amortization, or (iv) otherwise applied as specified
in the related Prospectus Supplement. The purpose of a Revolving Period for any
Series of Securities is to extend the maturity of such Securities to a date
which would not otherwise be possible if the Issuer Assets of the related Trust
was a fixed pool.
An "Amortization Period" is the period during which principal
collections which were not available for distribution during the Revolving
Period (as they were applied to one or more of the uses specified in the
preceding paragraph) become available for distribution to Holders of a Series.
If so specified in the related Prospectus Supplement, during an Amortization
Period all or a portion of principal collections on the Receivables may be
applied as specified above for a Revolving Period and, to the extent not so
applied, will be distributed to the classes of Notes or Certificates for such
Series specified in the related Prospectus Supplement as then being entitled to
payments of principal. In addition, if so specified in the related Prospectus
Supplement, amounts deposited in certain accounts for the benefit of one or more
classes of Notes or Certificates for such Series may be released from time to
time or on a specified date and applied as a payment of principal on such
classes of Notes or Certificates. The related Prospectus Supplement will set
forth the circumstances which will result in the commencement of an Amortization
Period. Any Amortization Period which begins earlier than anticipated with
respect to a class of Securities upon the occurrence of such circumstances as
will be described in the related Prospectus Supplement (any such occurrence, an
"Early Amortization Event") will result in an acceleration of principal payments
on such class, which will cause such class to have a shorter weighted average
life than had such Early Amortization Event not occurred. Such an acceleration
of principal payments may adversely affect the yield to maturity of the related
Securities.
Each Series which has a Revolving Period may also issue to the
Depositor a certificate evidencing an undivided beneficial interest (a "Retained
Interest") in such Series not represented by the other Securities issued by such
Issuer. As further described in the related Prospectus Supplement, the value of
such Retained Interest will fluctuate as the amount of Issuer Assets fluctuates
and the amount of Notes and Certificates of the related Series of Securities
outstanding is reduced.
ELIGIBLE INVESTMENTS
Each Agreement generally will define Eligible Investments to include
the following:
(i) direct obligations of, or obligations fully guaranteed as
to timely payment of principal and interest by, the United States or
any agency or instrumentality thereof, provided that such obligations
are backed by the full faith and credit of the United States;
(ii) repurchase agreements on obligations specified in clause
(i) maturing not more than three months from the date of acquisition
thereof, provided that the short-term unsecured debt obligations of the
party agreeing to repurchase such obligations are at the time rated by
each Rating Agency in its highest short-term rating category;
(iii) certificates of deposit, time deposits and bankers'
acceptances of any U.S. depository institution or trust company
incorporated under the laws of the United States or any state thereof
and subject to supervision and examination by federal and/or state
banking authorities, provided that the unsecured short-term debt
obligations of such depository institution or trust company at the date
of acquisition thereof have been rated by each Rating Agency in its
highest unsecured short-term debt rating category;
(iv) commercial paper (having original maturities of not more
than 90 days) of any corporation 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 highest short-term rating
categories;
(v) short-term investment funds ("STIFS") 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 rating category of long-term unsecured debt; and
(vi) interests in any money market fund which at the date of
acquisition of the interests in such fund and throughout the time as
the interest is held in such fund has a rating of "Aaa" by Moody's
Investors Service, Inc., and either "AAAm" or "AAAm-G" by Standard &
Poor's Rating Group, a division of the McGraw-Hill Companies, Inc.;
provided that no instrument described above may evidence either the right to
receive (a) only interest 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 provided 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 above 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.
To the extent any such investment would require registration of the
Issuer as an investment company, such investment will not constitute an Eligible
Investment.
ENHANCEMENT
The amounts and types of credit enhancement ("Enhancement")
arrangements and the provider thereof (the "Enhancer"), if applicable, with
respect to a Series or any Class of Securities will be set forth in the related
Prospectus Supplement. If specified in the applicable Prospectus Supplement,
Enhancement for any Series of Securities may cover one or more Classes of Notes
or Certificates, and accordingly may be exhausted for the benefit of a
particular Class of Notes or Certificates and thereafter be unavailable to such
other Classes of Notes or Certificates. Further information regarding any
provider of credit enhancement, including financial information when material,
will be included in the related Prospectus Supplement.
If and to the extent provided in the related Prospectus Supplement,
Enhancement may include one or more of the following or any combination thereof:
Financial Guaranty Insurance Policy which will be issued by a monoline
insurance company and which, subject to the terms of such policy, will guarantee
timely payment of interest on, and ultimate (as opposed to timely) payment of
principal of, the applicable Class or Classes of Securities;
Overcollateralization which will equal the excess of the aggregate
principal balance of the Loan Assets over the aggregate principal balance of the
Securities. Overcollateralization may take the form of the initial or subsequent
deposit of Loan Assets to create such excess or may build over time from the
application of certain excess cash amounts generated by the Loan Assets to
accelerate the amortization of the applicable Class or Classes of Securities;
Letter of Credit which will be issued by a bank or other financial
institution in a maximum amount which may be permanently reduced as draws are
made or may be replenished as previous draws are repaid from certain excess cash
amounts generated by the Loan Assets. Draws may be made to cover shortfalls
generally in collections, with respect to particular types of shortfalls such as
those due to particular types of losses or with respect to specific situations
such as shortfalls in amounts necessary to pay current interest;
Cash Reserve Fund which may be partially or fully funded on the date of
issuance or may be funded over time from certain excess cash amounts generated
by the Loan Assets. Withdrawals may be made in circumstances similar to those
for which draws may be made on a letter of credit;
Insurance Policies which may insure a portion of the Loans against
credit losses, bankruptcy losses, fraud losses or special hazard losses not
covered by typical homeowners insurance policies;
Subordinate Securities which will be subordinated in the right to
reserve distributions to one or more other Classes of Securities of the same
Series, some or all of which may themselves be subordinated to other Classes or
such Series. Subordination may be with respect to distributions of interest,
principal or both. In addition, all or portions of certain types of losses on
the Loan Assets may be allocated to one or more Classes of the Subordinate
Securities prior to the allocation thereof to other Classes of Subordinate
Certificates and/or the Senior Securities of the applicable Series; or
Derivative Products which may include a swap to convert floating or
fixed rate payments, as applicable, on the Loan Assets into fixed or floating
rate payments, as applicable, on the Securities or a cap or floor agreement
intended to provide protection against changes in floating rates of interest
payable on the Loan Assets and/or the Securities. Any such derivative product
will constitute or will be structured so as to be an insurance policy or an
exempt security.
The presence of Enhancement is intended to increase the likelihood of
receipt by the Certificateholders and the Noteholders of the full amount of
principal and interest due thereon and to decrease the likelihood that the
Certificateholders and the Noteholders will experience losses, or may be
structured to provide protection against changes in interest rates or against
other risks, to the extent and under the conditions specified in the related
Prospectus Supplement. The Enhancement for a Class of Securities generally will
not provide protection against all risks of loss and may not guarantee repayment
of the entire principal and interest thereon. If losses occur which exceed the
amount covered by any Enhancement or which are not covered by any Enhancement,
Securityholders will bear their allocable share of deficiencies. In addition, if
a form of Enhancement covers more than one Class of Securities of a Series,
Securityholders of any such Class will be subject to the risk that such
Enhancement will be exhausted by the claims of Securityholders of other Classes.
SERVICING OF LOANS
GENERAL
The Servicer will service the Loans comprising the Loan Assets
supporting a Series pursuant to the related Sale and Servicing Agreement or
Pooling and Servicing Agreement, as the case may be, with respect to such Series
of Securities.
COLLECTION PROCEDURES; ESCROW ACCOUNTS
The Servicer will be obligated under the related Agreement to service
and administer the Loans on behalf of the Issuer, solely in the best interests
of and for the benefit of the Securityholders and the Enhancer, if any, in
accordance with the terms of the related Agreement, and will have full power and
authority to do any and all things in connection with such servicing and
administration which it may deem necessary or desirable in accordance with the
terms of the related Agreement.
The Servicer may perform any of its obligations under the related
Agreement through one or more subservicers. Notwithstanding any such
subservicing arrangement, the Servicer will remain liable for its servicing
duties and obligations under the related Agreement as if the Servicer alone were
servicing the Loans.
The Servicer will make reasonable efforts to collect all payments
required to be made under the Loans and will be obligated, consistent with the
terms of the related Agreement for a Series and any applicable Enhancement, to
follow such collection procedures as it follows with respect to loans comparable
to the Loans and which are required to generally conform to the servicing
practices of prudent lending institutions which service loans of the same type
as the Loans for their own account in the jurisdiction in which such Loans were
originated ("Accepted Servicing Practices"). Pursuant to the related Agreement,
the Servicer will be required to make reasonable efforts to collect all payments
called for under the terms of the related Loan. Nonetheless, the Servicer, in
determining the type of action that is reasonable to pursue may consider, among
other things, the unpaid principal balance of a Loan against the estimated cost
of collection or foreclosure action, the unpaid balance of the related prior
mortgage, if any, the condition and estimated market value ("as is" and "if
repaired"), the estimated marketability of the related Mortgaged Property and
the borrower's ability to repay. Consistent with the above, the Servicer will be
permitted, in its discretion, to (i) waive any late payment charge, or other
charge in connection with any Loan and (ii) to the extent provided in the
related Agreement, arrange with an obligor a schedule running for no more than
180 days after the Due Date of any installment due under the related Loan, for
the liquidation of delinquent items.
If specified in the related Prospectus Supplement, the Servicer, to the
extent permitted by law, will establish and maintain escrow or impound accounts
("Escrow Accounts") with respect to Loans in which payments by obligors to pay
taxes, assessments, mortgage and hazard insurance premiums, and other comparable
items will be deposited. Loans may not require such payments under the loan
related documents, in which case the Servicer would not be required to establish
any Escrow Account with respect to such Loans. Withdrawals from the Escrow
Accounts are to be made to effect timely payment of taxes, assessments and
mortgage and hazard insurance, to refund to obligors amounts determined to be
overages, to pay interest to obligors on balances in the Escrow Account to the
extent required by law, to repair or otherwise protect the property securing the
related Loan and to clear and terminate such Escrow Account. The Servicer will
be responsible for the administration of the Escrow Accounts and generally will
make advances to such accounts when a deficiency exists therein.
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT OR THE
CERTIFICATE ACCOUNT
Unless otherwise specified in the related Prospectus Supplement, the
Trustee or the Servicer will establish a separate account (the "Collection
Account" or the "Certificate Account") in the name of the Trustee. Unless
otherwise indicated in the related Prospectus Supplement, the Collection Account
and/or Certificate Account will be an account maintained (i) at a depository
institution, the long-term unsecured debt obligations of which at the time of
any deposit therein are rated by each Rating Agency rating the Securities of
such Series at levels satisfactory to each Rating Agency and the Enhancer, if
any, or (ii) in an account or accounts the deposits in which are insured to the
maximum extent available by the Federal Deposit Insurance Corporation ("FDIC")
or which are secured in a manner meeting requirements established by each Rating
Agency and the Enhancer, if any.
Unless otherwise specified in the related Prospectus Supplement, the
funds held in the Collection Account or the Certificate Account may be invested,
pending remittance to the applicable Trustee, in Eligible Investments. If so
specified in the related Prospectus Supplement, the Servicer will be entitled to
receive as additional compensation any interest or other income earned on funds
in the Collection Account or the Certificate Account.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer, the Depositor, the Trustee or the Seller, as appropriate, will deposit
into the Collection Account for each Series on the Closing Date any amounts
representing Scheduled Payments due after the related Cut-off Date but received
by the Servicer on or before the Closing Date, and thereafter, within two
business days after the date of receipt thereof, the following payments and
collections received or made by it (other than, unless otherwise provided in the
related Prospectus Supplement, in respect of principal of and interest on the
related Loan Assets due on or before such Cut-off Date):
(i) All payments on account of principal, including
prepayments, on such Loan Assets;
(ii) All payments on account of interest on such Loan Assets
after deducting therefrom, at the discretion of the Servicer but only
to the extent of the amount permitted to be withdrawn or withheld from
the Collection Account in accordance with the related Agreement, the
Servicing Fee in respect of such Loan Assets;
(iii) All amounts received by the Servicer in connection with
the liquidation of Loan Assets or property acquired in respect thereof,
whether through foreclosure sale, repossession or otherwise, including
payments in connection with such Loan Assets received from the obligor,
other than amounts required to be paid or refunded to the obligor
pursuant to the terms of the applicable loan documents or otherwise
pursuant to law ("Liquidation Proceeds"), exclusive of, in the
discretion of the Servicer, but only to the extent of the amount
permitted to be withdrawn from the Collection Account in accordance
with the related Agreement, the Servicing Fee, if any, in respect of
the related Loan Asset;
(iv) All proceeds under any title insurance, hazard insurance
or other insurance policy covering any such Loan Asset, other than
proceeds to be applied to the restoration or repair of the related
Property or released to the obligor in accordance with the related
Agreement;
(v) All amounts required to be deposited therein from
any applicable Reserve Fund for such Series pursuant to
the related Agreement;
(vi) All Advances made by the Servicer required
pursuant to the related Agreement; and
(vii) All repurchase prices of any such Loan
Assets repurchased by the Depositor, the Servicer or the
Seller pursuant to the related Agreement.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer is permitted, from time to time, to make with drawals from the
Collection Account for each Series for the following purposes:
(i) to reimburse itself for Advances for such Series made by
it pursuant to the related Agreement; the Servicer's right to reimburse
itself is limited to amounts received on or in respect of particular
Loans (including, for this purpose, Liquidation Proceeds and amounts
representing proceeds of insurance policies covering the related
Property) which represent late recoveries of Scheduled Payments
respecting which any such Advance was made;
(ii) to the extent provided in the related Agreement, to
reimburse itself for any Advances for such Series that the Servicer
determines in good faith it will be unable to recover from amounts
representing late recoveries of Scheduled Payments respecting which
such Advance was made or from Liquidation Proceeds or the proceeds of
insurance policies;
(iii) to reimburse itself from Liquidation Proceeds for
liquidation expenses and for amounts expended by it in good faith in
connection with the restoration of damaged Property and, in the event
deposited in the Collection Account and not previously withheld, and to
the extent that Liquidation Proceeds after such reimbursement exceed
the outstanding principal balance of the related Loan, together with
accrued and unpaid interest thereon to the Due Date for such Loan next
succeeding the date of its receipt of such Liquidation Proceeds, to pay
to itself out of such excess the amount of any unpaid Servicing Fee and
any assumption fees, late payment charges, or other charges on the
related Loan;
(iv) in the event it has elected not to pay itself the
Servicing Fee out of the interest component of any Scheduled Payment,
late payment or other recovery with respect to a particular Loan prior
to the deposit of such Scheduled Payment, late payment or recovery into
the Collection Account, to pay to itself the Servicing Fee, as adjusted
pursuant to the related Agreement, from any such Scheduled Payment,
late payment or such other recovery, to the extent permitted by the
related Agreement;
(v) to reimburse itself for expenses incurred by and
recoverable by or reimbursable to it pursuant to the
related Agreement;
(vi) to pay to the applicable person with respect to each Loan
Asset or REO Property acquired in respect thereof that has been
repurchased or removed from the assets supporting a Series by the
Depositor, the Servicer or the Seller pursuant to the related
Agreement, all amounts received thereon and not distributed as of the
date on which the related repurchase price was determined;
(vii) to make payments to the applicable Trustee of such
Series for deposit into the Distribution Account, if any, or for
remittance to the Holders of such Series in the amounts and in the
manner provided for in the related Agreement; and
(viii) to clear and terminate the Collection Account pursuant
to the related Agreement.
In addition, if the Servicer deposits in the Collection Account for a
Series any amount not required to be deposited therein, it may, at any time,
withdraw such amount from such Collection Account.
ADVANCES AND LIMITATIONS THEREON
The related Prospectus Supplement will describe the circumstances, if
any, under which the Servicer will make Advances with respect to delinquent
payments on Loans. If specified in the related Prospectus Supplement, the
Servicer will be obligated to make Advances, and such obligation may be limited
in amount, or may not be activated until a certain portion of a specified
Reserve Fund is depleted. Advances are intended to provide liquidity and, except
to the extent specified in the related Prospectus Supplement, not to guarantee
or insure against losses. Accordingly, any funds advanced are recoverable by the
Servicer out of amounts received on particular Loans which represent late
recoveries of principal or interest, proceeds of insurance policies or
Liquidation Proceeds respecting which any such Advance was made. If an Advance
is made and subsequently determined to be nonrecoverable from late collections,
proceeds of insurance policies, or Liquidation Proceeds from the related Loan,
the Servicer may be entitled to reimbursement from other funds in the Collection
Account or Distribution Account, as the case may be, or from a specified Reserve
Fund as applicable, to the extent specified in the related Prospectus
Supplement. Advances with respect to Compensating Interest in the cases of full
prepayment of a Loan and with respect to Mortgage Property protection will be
made by the Servicer only to the extent specified in the related Prospectus
Supplement. "Compensating Interest" is an amount equal to the difference between
(x) 30 days' interest at the Loan Rate (net of the rate at which the Servicing
Fee is calculated) on the Principal Balance of such Loan as of the first day of
the related Collection Period and (y) to the extent not previously advanced, the
interest paid by the borrower with respect to such Loan in connection with such
prepayment. The Servicer will not be required to pay Compensating Interest with
respect to any Collection Period in an amount in excess of the aggregate
Servicing Fee received by the Servicer for such Collection Period.
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES
Standard Hazard Insurance; Flood Insurance. Except as otherwise
specified in the related Prospectus Supplement, the Servicer will be required to
maintain or to cause the obligor on each Loan to maintain a standard hazard
insurance policy providing coverage of the standard form of fire insurance with
extended coverage for certain other hazards as is customary in the state in
which the related Property is located. The standard hazard insurance policies
will provide for coverage at least equal to the applicable state standard form
of fire insurance policy with extended coverage for property of the type
securing the related Loans.
In general, the standard form of fire and extended coverage policy will
cover physical damage to or destruction of, the related Property caused by fire,
lightning, explosion, smoke, windstorm, hail, riot, strike and civil commotion,
subject to the conditions and exclusions particularized in each policy. Because
the standard hazard insurance policies relating to the Loans will be
underwritten by different hazard insurers and will cover Mortgaged Properties
located in various states, such policies will not contain identical terms and
conditions. The basic terms, however, generally will be determined by state law
and generally will be similar. Most such policies typically will not cover any
physical damage resulting from war, revolution, governmental actions, floods and
other water-related causes, earth movement (including earthquakes, landslides
and mudflows), nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all inclusive. Uninsured risks not covered by a special hazard insurance policy
or other form of Enhancement will adversely affect distributions to Holders.
When a Mortgaged Property is located in a flood area identified by HUD pursuant
to the Flood Disaster Protection Act of 1973, as amended, the Servicer will be
required to cause flood insurance to be maintained with respect to such
Property, to the extent available.
The standard hazard insurance policies covering Mortgaged Properties
typically will contain a "coinsurance" clause which, in effect, will require the
insured at all times to carry hazard insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the Property, including
the improvements on any Property, in order to recover the full amount of any
partial loss. If the insured's coverage falls below this specified percentage,
such clause will provide that the hazard insurer's liability in the event of
partial loss will not exceed the greater of (i) the actual cash value (the
replacement cost less physical depreciation) of the Property, including the
improvements, if any, damaged or destroyed or (ii) such proportion of the loss,
without deduction for depreciation, as the amount of insurance carried bears to
the specified percentage of the full replacement cost of such Property and
improvements. Since the amount of hazard insurance to be maintained on the
improvements securing the Loans declines as the principal balances owing thereon
decrease, and since the value of the Mortgaged Properties will fluctuate in
value over time, the effect of this requirement in the event of partial loss may
be that hazard insurance proceeds will be insufficient to restore fully the
damage to the affected Property.
Unless otherwise specified in the related Prospectus Supplement,
coverage will be in an amount at least equal to the greater of (i) the amount
necessary to avoid the enforcement of any co-insurance clause contained in the
policy or (ii) the outstanding principal balance of the related Loan. Unless
otherwise specified in the related Prospectus Supplement, the Servicer will also
maintain on REO Property that secured a defaulted Loan and that has been
acquired upon foreclosure, deed in lieu of foreclosure, or repossession, a
standard hazard insurance policy in an amount that is at least equal to the
maximum insurable value of such REO Property. No earthquake or other additional
insurance will be required of any obligor or will be maintained on REO Property
acquired in respect of a defaulted Loan, other than pursuant to such applicable
laws and regulations as shall at any time be in force and shall require such
additional insurance.
Any amounts collected by the Servicer under any such policies of
insurance (other than amounts to be applied to the restoration or repair of the
Property, released to the obligor in accordance with normal servicing procedures
or used to reimburse the Servicer for amounts to which it is entitled to
reimbursement) will be deposited in the Collection Account. In the event that
the Servicer obtains and maintains a blanket policy insuring against hazard
losses on all of the Loans, written by an insurer then acceptable to each Rating
Agency which assigns a rating to such Series, it will conclusively be deemed to
have satisfied its obligations to cause to be maintained a standard hazard
insurance policy for each Loan or related REO Property. This blanket policy may
contain a deductible clause, in which case the Servicer will be required,
in the event that there has been a loss that would have been covered by such
policy absent such deductible clause, to deposit in the Collection Account the
amount not otherwise payable under the blanket policy because of the application
of such deductible clause.
REALIZATION UPON DEFAULTED LOANS
In an effort to collect upon delinquent Loans, the Servicer will
attempt to contact the borrower to determine both ability and intent to pay. In
accordance with the policies and procedures of the Servicer and in accordance
with Accepted Servicing Practices and the REMIC Provisions, if applicable,
appropriate action may be taken at the discretion of the Servicer, including but
not limited to, extended payment arrangements, forbearances and referral for
legal actions.
The holder of the Subordinate Certificates may have the right to
repurchase (up to 10% of the Maximum Collateral Amount) from the related Trust
any Charged-Off Loan (or any Loan which will imminently become a Charged-Off
Loan) by depositing an amount equal to the principal balance of such Loan,
together with accrued interest thereon and any unreimbursed advances thereon, in
the account identified in the related Prospectus Supplement.
Except as described below and in the related Prospectus Supplement, the
Servicer may foreclose upon or otherwise comparably convert the ownership of the
Mortgaged Properties securing the related Loans as come into and continue in
default and as to which no satisfactory arrangements can be made for collection
of delinquent payments. In connection with such foreclosure or other conversion,
the Servicer will be required to follow such procedures as it follows with
respect to comparable loans serviced by it. However, the Servicer will not be
required to expend its own funds in connection with any foreclosure or towards
the restoration of the Property unless it determines that (i) such restoration
or foreclosure will increase the Liquidation Proceeds in respect of the related
Loan available to the Holders after reimbursement to itself for such expenses in
accordance with the related Agreement and (ii) such expenses will be recoverable
by it either through Liquidation Proceeds or the proceeds of insurance. While
the holder of a Property acquired through foreclosure can often maximize its
recovery by providing financing to a new purchaser, the Issuer, if applicable,
will have no ability to do so and neither the Servicer nor the Depositor will be
required to do so.
The Servicer will be permitted to foreclosure against the Mortgaged
Property securing a defaulted Loan either by foreclosure, by sale or by strict
foreclosure, and in the event a deficiency judgment is available against the
Mortgagor or any other person, may proceed for the deficiency.
In the event that an Issuer for which a REMIC election has been made
acquires any Mortgaged Property as aforesaid or otherwise in connection with a
default or imminent default on a Loan, such Mortgaged Property will be required
to be disposed of by or on behalf of the Issuer within two years after its
acquisition by the Issuer unless (a) the Trustee and the Enhancer, if any, shall
have received an opinion of counsel to the effect that the holding by the Issuer
of such Mortgaged Property subsequent to two years after its acquisition (and
specifying the period beyond such two-year period for which the Mortgaged
Property may be held) will not cause the Issuer to be subject to the tax on
prohibited transactions imposed by the Code Section 860F(a)(1), otherwise
subject the Issuer to tax or cause the Issuer to fail to qualify as a REMIC at
any time that any related Securities are outstanding, or (b) the Trustee (at the
Servicer's expense) or the Servicer shall have applied for, prior to the
expiration of such two-year period, an extension of such two-year period in the
manner contemplated by Code Section 856(e)(3), in which case the two-year period
shall be extended by the applicable period. The Servicer will also be required
to ensure that the Mortgaged Property is administered so that it constitutes
"foreclosure property" within the meaning of Code Section 860G(a)(8) at all
times, that the sale of such property does not result in the receipt by the
Issuer of any income from non-permitted assets as described in Code Section
860F(a)(2)(B), and that the Issuer does not derive any "net income from
foreclosure property" within the meaning of Code Section 860G(c)(2), with
respect to such property.
If the Servicer is aware that any Mortgaged Property may contain
hazardous wastes, the Servicer may not institute a foreclosure proceeding or
accept a deed in lieu of foreclosure without first obtaining the prior consent
of the Enhancer for a Series, if any, and will not cause an Issuer to acquire
title to such Mortgaged Property if such acquisition is not, in the reasonable
opinion of the Servicer commercially reasonable.
In lieu of foreclosing upon any defaulted Loan, the Servicer may, in
its discretion, permit the assumption of such Loan if, in the Servicer's
reasonable judgment, such default is unlikely to be cured. In connection with
any such assumption, the Loan Rate of the related Mortgage Note and the payment
terms will not be permitted to be changed. Any fee collected by the Servicer for
entering into an assumption agreement will be retained by the Servicer as
servicing compensation.
The Servicer may arrange with the obligor on a defaulted Loan a
modification of such Loan (a "Modification") to the extent provided in the
related Prospectus Supplement. Such Modifications may only be entered into if
they meet the underwriting policies and procedures employed by the Servicer in
servicing receivables for its own account and meet the other conditions set
forth in the related Prospectus Supplement.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
Unless otherwise specified in the related Prospectus Supplement for a
Series, when any Property is about to be conveyed by the obligor, the Servicer
will, to the extent it has knowledge of such prospective conveyance and prior to
the time of the consummation of such conveyance, will have the option to
exercise its rights to accelerate the maturity of the related Loan under the
applicable "due-on-sale" clause, if any, unless it reasonably believes that such
clause is not enforceable under applicable law or if the enforcement of such
clause would result in loss of coverage under any primary mortgage insurance
policy. In such event, the Servicer is authorized to accept from or enter into
an assumption agreement with the person to whom such property has been or is
about to be conveyed, pursuant to which such person becomes liable under the
Loan and pursuant to which the original obligor is released from liability and
such person is substituted as the obligor and becomes liable under the Loan. Any
fee collected in connection with an assumption will be retained by the Servicer
as additional servicing compensation. The terms of a Loan may not be changed in
connection with an assumption except to the extent specified in the related
Prospectus Supplement.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Servicer will be entitled to a periodic fee as servicing
compensation (the "Servicing Fee") in an amount to be determined as specified in
the related Prospectus Supplement. The Servicing Fee may be fixed or variable,
as specified in the related Prospectus Supplement. In addition, the Servicer may
be entitled to servicing compensation in the form of assumption and other
administrative fees, release fees, bad check charges, any other
servicing-relating fees or excess proceeds following disposition of Property in
connection with defaulted Loans.
Except to the extent specified in the related Prospectus Supplement,
the Servicer will pay certain expenses incurred in connection with the servicing
of the Loans, including, without limitation, the payment of the fees and
expenses of the Trustee and independent accountants, payment of insurance policy
premiums and the cost of credit support, if any, and payment of expenses
incurred in preparation of reports to Holders.
When an obligor makes a principal prepayment in full between Due Dates
on the related Loan, the obligor will generally be required to pay interest on
the amount prepaid only to the date of prepayment. If and to the extent provided
in the related Prospectus Supplement in order that one or more Classes of the
Holders of a Series will not be adversely affected by any resulting shortfall in
interest, the amount of the Servicing Fee may be reduced to the extent necessary
to include in the Servicer's remittance to the Trustee for deposit into the
Distribution Account an amount equal to one month's interest on the related Loan
(less the Servicing Fee). If the aggregate amount of such shortfalls in a month
exceeds the Servicing Fee for such month, a shortfall to Holders may occur.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will be entitled to reimbursement for certain expenses incurred by it
in connection with the liquidation of defaulted Loans. The related Holders will
suffer no loss by reason of such expenses to the extent expenses are covered
under related insurance policies or from excess Liquidation Proceeds. If claims
are either not made or paid under the applicable insurance policies or if
coverage thereunder has been exhausted, the related Holders will suffer a loss
to the extent that Liquidation Proceeds, after reimbursement of the Servicer's
expenses, are less than the outstanding principal balance of and unpaid interest
on the related Loan which would be distributable to Holders. In addition, the
Servicer will be entitled to reimbursement of expenditures incurred by it in
connection with the restoration of property securing a defaulted Loan, such
right of reimbursement being prior to the rights of the Holders to receive any
related proceeds of insurance policies, Liquidation Proceeds or amounts derived
from other Enhancement. The Servicer is generally also entitled to reimbursement
from the Collection Account for Advances as described under "--Advances and
Limitations Thereon."
Unless otherwise specified in the related Prospectus Supplement, the
rights of the Servicer to receive funds from the Collection Account for a
Series, whether as the Servicing Fee or other compensation, or for the
reimbursement of Advances, expenses or otherwise, are not subordinate to the
rights of Holders of such Series.
EVIDENCE AS TO COMPLIANCE
The applicable Agreement for each Series will provide that each year, a
firm of independent public accountants will furnish a statement to the Trustee
to the effect that such firm has examined certain documents and records relating
to the servicing of the Loans by the Servicer and that, on the basis of such
examination, such firm is of the opinion that the servicing has been conducted
in compliance with such Agreement, except for (i) such exceptions as such firm
believes to be immaterial and (ii) such other exceptions as are set forth in
such statement.
The applicable Agreement for each Series will also provide for delivery
to the Trustee for such Series of an annual statement signed by an officer of
the Servicer to the effect that the Servicer has fulfilled its obligations under
such Agreement throughout the preceding calendar year.
CERTAIN MATTERS REGARDING THE SERVICER
If an Event of Default occurs under a Servicing Agreement, the Servicer
may be replaced by the Trustee or a successor Servicer. Unless otherwise
specified in the related Prospectus Supplement, such Events of Default and the
rights of the applicable Trustee upon such a default under the Agreement for the
related Series will be substantially similar to those described under "The
Agreements--Events of Default; Rights Upon Events of Default--Sale and Servicing
Agreement; Pooling and Servicing Agreement."
The Servicer will not have the right to assign its rights and delegate
its duties and obligations under the related Agreement for each Series unless
the successor Servicer accepting such assignment or delegation (i) services
similar loans in the ordinary course of its business, (ii) is reasonably
satisfactory to the Trustee for the related Series, (iii) has a net worth of not
less than the amount specified in the related Prospectus Supplement, (iv) would
not cause any Rating Agency's rating of the Securities for such Series in effect
immediately prior to such assignment, sale or transfer to be qualified,
downgraded or withdrawn as a result of such assignment, sale or transfer and (v)
executes and delivers to the Trustee an agreement, in form and substance
reasonably satisfactory to the Trustee, which contains an assumption by such
Servicer of the due and punctual performance and observance of each covenant and
condition to be performed or observed by the Servicer under the related
Agreement from and after the date of such agreement. No such assignment will
become effective until the Trustee or a successor Servicer has assumed the
servicer's obligations and duties under the related Agreement. To the extent
that the Servicer transfers its obligations to a wholly-owned subsidiary or
affiliate, such subsidiary or affiliate need not satisfy the criteria set forth
above; however, in such instance, the assigning Servicer will remain liable for
the servicing obligations under the related Agreement. Any entity into which the
Servicer is merged or consolidated or any successor corporation resulting from
any merger, conversion or consolidation will succeed to the Servicer's
obligations under the related Agreement provided that such successor or
surviving entity meets the requirements for a successor Servicer set forth
above.
Each Agreement will provide that neither the Servicer, nor any
director, officer, employee or agent of the Servicer, will be under any
liability to the related Issuer, the Depositor or the Holders for any action
taken or for failing to take any action in good faith pursuant to the related
Agreement, or for errors in judgment; provided, however, that neither the
Servicer nor any such person will be protected against any breach of warranty or
representations made under such Agreement or the failure to perform its
obligations in compliance with any standard of care set forth in such Agreement,
or liability which would otherwise be imposed by reason of willful misfeasance,
bad faith or negligence in the performance of their duties or by reason of
reckless disregard of their obligations and duties thereunder. Each Agreement
will further provide that the Servicer and any director, officer, employee or
agent of the Servicer is entitled to indemnification from the related Issuer,
and will be held harmless against any loss, liability or expense incurred in
connection with any legal action relating to the Agreement or the Securities,
other than any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or negligence in the performance of duties thereunder or
by reason of reckless disregard of obligations and duties thereunder. In
addition, the related Agreement will provide that the Servicer is not under any
obligation to appear in, prosecute or defend any legal action which is not
incidental to its servicing responsibilities under such Agreement which, in its
opinion, may involve it in any expense or liability. The Servicer may, in its
discretion, undertake any such action which it may deem necessary or desirable
with respect to the related Agreement and the rights and duties of the parties
thereto and the interests of the Holders thereunder. In such event the legal
expenses and costs of such action and any liability resulting therefrom may be
expenses, costs, and liabilities of the Issuer, and the Servicer may be entitled
to be reimbursed therefor out of the Collection Account.
THE AGREEMENTS
The following summaries describe certain provisions of the Agreements.
The summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the Agreements. Where
particular provisions or terms used in the Agreements are referred to, such
provisions or terms are as specified in the related Agreements.
ASSIGNMENT OF LOAN ASSETS
General. At the time of issuance of the Securities of a Series, the
Seller will directly or indirectly transfer, convey and assign to the Issuer all
right, title and interest of the Seller in the Loan Assets and other property to
be transferred to the Issuer for a Series. Such assignment will include all
principal and interest due on or with respect to the Loan Assets after the
Cut-off Date specified in the related Prospectus Supplement (except for any
Retained Interests). The Trustee will, concurrently with such assignment,
execute and deliver the Securities.
Assignment of Loans. Unless otherwise specified in the related
Prospectus Supplement, the Depositor will, as to each Loan, deliver or cause to
be delivered to the applicable Trustee, or, as specified in the related
Prospectus Supplement a custodian on behalf of the Trustee (the "Custodian"),
the Mortgage Note endorsed without recourse to the order of the Trustee or in
blank, the original Mortgage with evidence of recording indicated thereon
(except for any Mortgage not returned from the public recording office, in which
case a copy of such Mortgage will be delivered, together with a certificate that
the original of such Mortgage was delivered to such recording office) and an
assignment of the Mortgage in recordable form. The Trustee, or, if so specified
in the related Prospectus Supplement, the Custodian, will hold such documents in
trust for the benefit of the Holders.
With respect to Loans, if so specified in the related Prospectus
Supplement, the Depositor will, at the time of issuance of the Securities, cause
assignments to the Trustee of the Mortgages relating to the Loans for a Series
to be recorded in the appropriate public office for real property records,
except in states where, in the opinion of counsel acceptable to the Trustee,
such recording is not required to protect the Trustee's interest in the related
Loans. If specified in the related Prospectus Supplement, the Depositor will
cause such assignments to be so recorded within the time after issuance of the
Securities as is specified in the related Prospectus Supplement, in which event,
the Agreement may, as specified in the related Prospectus Supplement, require
the Depositor to repurchase from the Trustee any Loan the related Mortgage of
which is not recorded within such time, at the price described below with
respect to repurchases by reason of defective documentation. Unless otherwise
provided in the related Prospectus Supplement, the enforcement of the repurchase
obligation would constitute the sole remedy available to the Holders or the
Trustee for the failure of a Mortgage to be recorded.
Each Loan will be identified in a schedule appearing as an exhibit to
the related Agreement (the "Loan Schedule"). Such Loan Schedule will specify
with respect to each Loan: the original principal amount and unpaid principal
balance as of the Cut-off Date; the current interest rate; the current Scheduled
Payment of principal and interest; the maturity date, if any, of the related
Mortgage Note; if the Loan is an adjustable rate Loan, the Lifetime Rate Cap, if
any, and the current index.
Repurchase and Substitution of Non-Conforming Loan Assets. Unless
otherwise provided in the related Prospectus Supplement, if any document in the
file relating to the Loan Assets delivered by the Depositor to the Trustee (or
Custodian) is found by the Trustee within [30] days of the execution of the
related Agreement (or promptly after the Trustee's receipt of any document
permitted to be delivered after the Closing Date) to be defective in any
material respect and the Depositor or Seller does not cure such defect within
[60] days, or within such other period specified in the related Prospectus
Supplement, the Depositor or Seller will, not later than [60] days or within
such other period specified in the related Prospectus Supplement, after the
Trustee's notice to the Depositor or the Seller, as the case may be, of the
defect, repurchase the related Loan Asset or any property acquired in respect
thereof from the Trustee at a price equal to, unless otherwise specified in the
related Prospectus Supplement, (a) the lesser of (i) the outstanding principal
balance of such Loan Asset and (ii) the Issuer's federal income tax basis in the
Loan Asset and (b) accrued and unpaid interest to the date of the next scheduled
payment on such Loan Asset at the rate set forth in the related Agreement,
provided, however, the purchase price shall not be limited in (i) above to the
Issuer's federal income tax basis if the repurchase at a price equal to the
outstanding principal balance of such Loan Asset will not result in any
prohibited transaction tax under Section 860F(a) of the Code.
If provided in the related Prospectus Supplement, the Depositor or
Seller, as the case may be, may, rather than repurchase the Loan Asset as
described above, remove such Loan Asset from the Issuer (the "Deleted Loan
Asset") and substitute in its place one or more other Loan Assets (each, a
"Qualifying Substitute Loan Asset") provided, however, that (i) with respect to
a pool of assets of an Issuer for which no REMIC election is made, such
substitution must be effected within 120 days of the date of initial issuance of
the Securities and (ii) with respect to a pool of assets of an Issuer for which
a REMIC election is made, after a specified time period, the Trustee must have
received a satisfactory opinion of counsel that such substitution will not cause
the Issuer to lose its status as a REMIC or otherwise subject the Issuer to a
prohibited transaction tax.
Unless otherwise specified in the related Prospectus Supplement, any
Qualifying Substitute Loan Asset will have, on the date of substitution, (i) an
outstanding principal balance, after deduction of all Scheduled Payments due in
the month of substitution, not in excess of the outstanding principal balance of
the Deleted Loan Asset (the amount of any shortfall to be deposited to the
Collection Account in the month of substitution for distribution to Holders),
(ii) an interest rate not less than (and not more than 2% greater than) the
interest rate of the Deleted Loan Asset, (iii) a remaining term-to-stated
maturity not greater than (and not more than two years less than) that of the
Deleted Loan Asset, and will comply with all of the representations and
warranties set forth in the applicable Agreement as of the date of substitution.
Unless otherwise provided in the related Prospectus Supplement, the
above-described cure, repurchase or substitution obligations constitute the sole
remedies available to the Holders or the Trustee for a material defect in a
document for a Loan Asset.
The Depositor or another entity will make representations and
warranties with respect to Loan Assets for a Series. If the Depositor or such
entity cannot cure a breach of any such representations and warranties in all
material respects within the time period specified in the related Prospectus
Supplement after notification by the Trustee of such breach, and if such breach
is of a nature that materially and adversely affects the value of such Loan
Asset, the Depositor or such entity is obligated to repurchase the affected Loan
Asset or, if provided in the related Prospectus Supplement, provide a Qualifying
Substitute Loan Asset therefor, subject to the same conditions and limitations
on purchases and substitutions as described above.
No Holder of Securities of a Series, solely by virtue of such Holder's
status as a Holder, will have any right under the applicable Agreement for such
Series to institute any proceeding with respect to such Agreement, unless such
Holder previously has given to the Trustee for such Series written notice of
default and unless the Holders of Securities evidencing not less than 51% of the
aggregate voting rights of the Securities for such Series have made written
request upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity, and the Trustee
for 60 days has neglected or refused to institute any such proceeding.
REPORTS TO HOLDERS
The Trustee or other entity specified in the related Prospectus
Supplement will prepare and forward to each Holder on each Distribution Date, or
as soon thereafter as is practicable, a statement setting forth, to the extent
applicable to any Series, among other things:
(i) the amount of principal distributed to Holders of
the related Securities and the outstanding principal
balance of such Securities following such distribution;
(ii) the amount of interest distributed to Holders of
the related Securities and the current interest on such
Securities;
(iii) the amounts of (a) any overdue accrued interest included
in such distribution, (b) any remaining overdue accrued interest with
respect to such Securities or (c) any current shortfall in amounts to
be distributed as accrued interest to Holders of such Securities;
(iv) the amounts of (a) any overdue payments of scheduled
principal included in such distribution, (b) any remaining overdue
principal amounts with respect to such Securities, (c) any current
shortfall in receipt of scheduled principal payments on the related
Loan Assets or (d) any realized losses or Liquidation Proceeds to be
allocated as reductions in the outstanding principal balances of such
Securities;
(v) the amount received under any related
Enhancement, and the remaining amount available under such
Enhancement;
(vi) the number and aggregate principal balance of Loans that
were delinquent (a) one monthly payment, (b) two monthly payments and
(c) three or more monthly payments, as of the end of the prior
collection period;
(vii) the number and aggregate principal balance
of Loans in foreclosure, as of the end of the prior
collection period;
(viii) the aggregate principal balance of Loans
which became REO during the prior collection period;
(ix) the book value of any REO Property acquired by
the related Issuer;
(x) the amount of losses realized during the prior
collection period;
(xi) the aggregate principal balance of Loans
repurchased during the prior collection period;
(xii) the amount of the Servicing Fee for the
prior collection period;
(xiii) during the Pre-Funding Period, the remaining Pre-Funded
Amount and the portion of the Pre-Funding Amount used to acquire
additional Loan Assets since the preceding Distribution Date;
(xiv) during the Pre-Funding Period, the amount
remaining in the Capitalized Interest Account; and
(xv) such other information as specified in the
related Agreement.
In addition, within a reasonable period of time after the end of each
calendar year the Trustee, unless otherwise specified in the related Prospectus
Supplement, will furnish to each Holder of record at any time during such
calendar year (a) the aggregate of amounts reported pursuant to (i), (ii), and
(iv)(d) above for such calendar year and (b) such information specified in the
related Agreement to enable Holders to prepare their tax returns including,
without limitation, the amount of original issue discount accrued on the
Securities, if applicable. Information in the Distribution Date and annual
statements provided to the Holders will not have been examined and reported upon
by an independent public accountant. However, the Servicer will provide to the
Trustee a report by independent public accountants with respect to the
Servicer's servicing of the Loans. See "Servicing of Loans--Evidence as to
Compliance" herein.
If so specified in the Prospectus Supplement for a Series of
Securities, such Series or one or more Classes of such Series will be issued in
book-entry form. In such event, owners of beneficial interests in such
Securities will not be considered Holders and will not receive such reports
directly from the Trustee. The Trustee will forward such reports only to the
entity or its nominee which is the registered holder of the global certificate
which evidences such book-entry securities. Beneficial owners will receive such
reports from the participants and indirect participants of the applicable
book-entry system in accordance with the practices and procedures of such
entities.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Sale and Servicing Agreement; Pooling and Servicing Agreement. Unless
otherwise specified in the related Prospectus Supplement, Events of Default
under the Pooling and Servicing Agreement or Sale and Servicing Agreement, as
the case may be for each Series of Securities relating to Loans include (i) any
failure by the Servicer to deposit amounts in the Collection Account,
Certificate Account and Distribution Account to enable the Trustee to distribute
to Holders of such Series any required payment, which failure continues
unremedied for the number of days specified in the related Prospectus Supplement
after the giving of written notice of such failure to the Servicer by the
Trustee for such Series, or after discovery by such servicer, (ii) any failure
by the Servicer duly to observe or perform in any material respect any other of
its covenants or agreements in the applicable Agreement which continues
unremedied for the number of days specified in the related Prospectus Supplement
after the giving of written notice of such failure to the Servicer by the
Trustee, or to the Servicer and the Trustee by the Holders of such Series
evidencing not less than 25% of the aggregate voting rights of the Securities
for such Series, and (iii) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings and certain actions
by the Servicer indicating its insolvency, reorganization or inability to pay
its obligations.
So long as an Event of Default remains unremedied under the applicable
Agreement for a Series of Securities relating to the servicing of Loans, unless
otherwise specified in the related Prospectus Supplement, the Trustee for such
Series or Holders of Notes of such Series evidencing not less than 25% of the
principal amount of such Notes outstanding of the Securities for such Series may
terminate all of the rights and obligations of the Servicer as servicer under
the applicable Agreement (other than its right to recovery of other expenses and
amounts advanced pursuant to the terms of such Agreement which rights the
Servicer will retain under all circumstances), whereupon the Trustee will
succeed to all the responsibilities, duties and liabilities of the Servicer
under such Agreement and will be entitled to reasonable servicing compensation
not to exceed the applicable servicing fee, together with other servicing
compensation in the form of assumption fees, late payment charges or otherwise
as provided in such Agreement.
In the event that the Trustee is unwilling or unable so to act, it may
select, or petition a court of competent jurisdiction to appoint, a finance
institution, bank or loan servicing institution with a net worth of at least
$15,000,000 to act as successor Servicer under the provisions of the applicable
Agreement. The successor Servicer would be entitled to reasonable servicing
compensation in an amount not to exceed the Servicing Fee as set forth in the
related Prospectus Supplement, together with the other servicing compensation in
the form of assumption fees, late payment charges or otherwise, as provided in
such Agreement.
During the continuance of any Event of Default of a Servicer under an
Agreement for a Series of Securities, the Trustee for such Series will have the
right to take action to enforce its rights and remedies and to protect and
enforce the rights and remedies of the Holders of such Series, and, unless
otherwise specified in the related Prospectus Supplement, Holders of Securities
evidencing not less than 51% of the aggregate voting rights of the Securities
for such Series may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred upon that Trustee. However, the Trustee will not be under any
obligation to pursue any such remedy or to exercise any of such trusts or powers
unless such Holders have offered the Trustee reasonable security or indemnity
against the cost, expenses and liabilities which may be incurred by the Trustee
therein or thereby. The Trustee may decline to follow any such direction if the
Trustee determines that the action or proceeding so directed may not lawfully be
taken or would involve it in personal liability or be unjustly prejudicial to
the nonassenting Holders.
Indenture. Unless otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for five (5) days or more in the payment of any interest
on any Note of such Series; (ii) a default in the payment of principal of any
installment of the principal of any Note when the same becomes due and payable;
(iii) failure to perform any other covenant of the Depositor or the Issuer in
the Indenture which continues for a period of ninety (90) days after notice
thereof is given in accordance with the procedures described in the related
Prospectus Supplement; (iv) any representation or warranty made by the Depositor
or the Issuer in the Indenture or in any certificate or other writing delivered
pursuant thereto or in connection therewith with respect to or affecting such
Series having been incorrect in a material respect as of the time made, and such
breach is not cured within thirty (30) days after notice thereof is given in
accordance with the procedures described in the related Prospectus Supplement;
(v) certain events of bankruptcy, insolvency, receivership or liquidation of
the Depositor or the Issuer; or (vi) any other Event of Default provided with
respect to Notes of that Series. However, the amount of principal required to be
paid to Noteholders of such Series under the related Indenture will generally be
limited to amounts available to be deposited in the applicable Note Distribution
Account. Therefore, unless otherwise specified in the related Prospectus
Supplement, the failure to pay principal on a class of Notes generally will not
result in the occurrence of an Event of Default until the Final Scheduled
Distribution Date for such Class of Notes.
If an Event of Default with respect to the Notes of any Series at the
time outstanding occurs and is continuing, either the Trustee or the Holders of
a majority of the then aggregate outstanding amount of the Notes of such Series
may declare the principal amount (or, if the Notes of that Series are Zero
Coupon Securities, such portion of the principal amount as may be specified in
the terms of that Series, as provided in the related Prospectus Supplement) of
all the Notes of such Series to be due and payable immediately. Such declaration
may, under certain circumstances, be rescinded and annulled by the Holders of a
majority in aggregate outstanding amount of the Notes of such Series.
If, following an Event of Default with respect to any Series of Notes,
the Notes of such Series have been declared to be due and payable, the Trustee
may, in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such Series as they would
have become due if there had not been such a declaration. In addition, the
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a Series following an Event of Default other than a default in the payment of
any principal or interest on any Note of such Series for thirty (30) days or
more, unless (a) the Holders of 100% of the then aggregate outstanding amount of
the Notes of such Series consent to such sale, (b) the proceeds of such sale or
liquidation are sufficient to pay in full the principal of and accrued interest
due and unpaid on the outstanding Notes of such Series at the date of such sale
or (c) the Trustee determines that such collateral would not be sufficient on an
ongoing basis to make all payments on such Notes as such payments would have
become due if such Notes had not been declared due and payable, and the Trustee
obtains the consent of the Holders of 66 2/3% of the then aggregate outstanding
amount of the Notes of such Series.
In the event that the Trustee liquidates the collateral in connection
with an Event of Default involving a default for thirty (30) days or more in the
payment of principal of or interest on the Notes of a Series, the Indenture
provides that the Trustee will have a prior lien on the proceeds of any such
liquidation for unpaid fees and expenses. As a result, upon the occurrence of
such an Event of Default, the amount available for distribution to the
Noteholders may be less than would otherwise be the case. However, the Trustee
may not institute a proceeding for the enforcement of its lien except in
connection with a proceeding for the enforcement of the lien of the Indenture
for the benefit of the Noteholders after the occurrence of such an Event of
Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a Series is declared due and payable, as
described above, the Holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of
the Trustee, in case an Event of Default shall occur and be continuing with
respect to a Series of Notes, the Trustee will be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the Holders of Notes of such Series, unless such Holders
offered to the Trustee security or indemnity satisfactory to it against the
costs, expenses and liabilities which might be incurred by it in complying with
such request or direction. Subject to such provisions for indemnification and
certain limitations contained in the Indenture, the Holders of a majority of the
then aggregate outstanding amount of the Notes of such Series shall have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred on
the Trustee with respect to the Notes of such Series, and the Holders of a
majority of the then aggregate outstanding amount of the Notes of such Series
may, in certain cases, waive any default with respect thereto, except a default
in the payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all the Holders of the outstanding Notes of such Series affected thereby.
THE TRUSTEE
The identity of the commercial bank, savings and loan association or
trust company named as the Trustee for each Series of Securities will be set
forth in the related Prospectus Supplement. The entity serving as Trustee may
have normal banking relationships with the Depositor or the Servicer. In
addition, for the purpose of meeting the legal requirements of certain local
jurisdictions, the Trustee will have the power to appoint co-trustees or
separate trustees of all or any part of the Issuer relating to a Series of
Securities. In the event of such appointment, all rights, powers, duties and
obligations conferred or imposed upon the Trustee by the Agreement relating to
such Series will be conferred or imposed upon the Trustee and each such separate
trustee or co-trustee jointly, or, in any jurisdiction in which the Trustee
shall be incompetent or unqualified to perform certain acts, singly upon such
separate trustee or co-trustee who will exercise and perform such rights,
powers, duties and obligations solely at the direction of the Trustee. The
Trustee may also appoint agents to perform any of the responsibilities of the
Trustee, which agents will have any or all of the rights, powers, duties and
obligations of the Trustee conferred on them by such appointment; provided that
the Trustee will continue to be responsible for its duties and obligations under
the Agreement.
DUTIES OF THE TRUSTEE
The Trustee will not make any representations as to the validity or
sufficiency of the Agreement, the Securities or of any Loan Asset or related
documents. If no Event of Default (as defined in the related Agreement) has
occurred, the Trustee is required to perform only those duties specifically
required of it under the Agreement. Upon receipt of the various certificates,
statements, reports or other instruments required to be furnished to it, the
Trustee is required to examine them to determine whether they are in the form
required by the related Agreement. However, the Trustee will not be responsible
for the accuracy or content of any such documents furnished to it by the Holders
or the Servicer under the Agreement.
The Trustee may be held liable for its own negligent action or failure
to act, or for its own misconduct; provided, however, that the Trustee will not
be personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction of the Holders in an
Event of Default. The Trustee is not required to expend or risk its own funds or
otherwise incur any financial liability in the performance of any of its duties
under the Agreement, or in the exercise of any of its rights or powers, if it
has reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
RESIGNATION OF TRUSTEE
The Trustee may, upon written notice to the Depositor, resign at any
time, in which event the Depositor will be obligated to use its best efforts to
appoint a successor Trustee. If no successor Trustee has been appointed and has
accepted the appointment within 30 days after the giving of such notice of
resignation, the resigning Trustee may petition any court of competent
jurisdiction for appointment of a successor Trustee. The Trustee may also be
removed at any time (i) if the Trustee ceases to be eligible to continue as such
under the Agreement, (ii) if the Trustee becomes insolvent or (iii) by the
Holders of Securities evidencing over 50% of the aggregate voting rights of the
Securities in the Issuer upon written notice to the Trustee and to the
Depositor. Any resignation or removal of the Trustee and appointment of a
successor Trustee will not become effective until acceptance of the appointment
by the successor Trustee.
AMENDMENT OF AGREEMENT
Unless otherwise specified in the Prospectus Supplement, the Agreement
for each Series of Securities may be amended by the Depositor, the Seller, the
Servicer, and the Trustee with respect to such Series, without notice to or
consent of the Holders (i) to cure any ambiguity, (ii) to correct any defective
provisions or to correct or supplement any provision therein, (iii) to add to
the duties of the Depositor, the Issuer or Servicer, (iv) to add any other
provisions with respect to matters or questions arising under such Agreement or
related Enhancement, (v) to add or amend any provisions of such Agreement as
required by a Rating Agency in order to maintain or improve the rating of the
Securities (it being understood that none of the Depositor, the Seller, the
Servicer or Trustee is obligated to maintain or improve such rating), or (vi) to
comply with any requirements imposed by the Code; provided that any such
amendment except pursuant to clause (vi) above will not adversely affect in any
material respect the interests of any Holders of such Series, as evidenced by an
opinion of counsel. Any such amendment except pursuant to clause (vi) of the
preceding sentence shall be deemed not to adversely affect in any material
respect the interests of any Holder if the Trustee receives written confirmation
from each Rating Agency rating such Securities that such amendment will not
cause such Rating Agency to reduce the then current rating thereof. Unless
otherwise specified in the Prospectus Supplement, the Agreement for each Series
may also be amended by the Trustee, the Servicer, if applicable, and the
Depositor with respect to such Series with the consent of the Holders possessing
not less than 662/3% of the aggregate outstanding principal amount of the
Securities of such Series or, if only certain Classes of such Series are
affected by such amendment, 662/3% of the aggregate outstanding principal amount
of the Securities of each Class of such Series affected thereby, for the purpose
of adding any provisions to or changing in any manner or eliminating any of the
provisions of such Agreement or modifying in any manner the rights of Holders of
such Series; provided, however, that no such amendment may (a) reduce the amount
or delay the timing of payments on any Security without the consent of the
Holder of such Security; or (b) reduce the aforesaid percentage of the aggregate
outstanding principal amount of Securities of each Class, the Holders of which
are required to consent to any such amendment or (c) if specified in the related
Prospectus Supplement, adversely affect the interests of the Enhancer, without,
in the case of clauses (a) and (b), the consent of the Holders of 100% of the
aggregate outstanding principal amount of each Class of Securities affected
thereby.
VOTING RIGHTS
The related Prospectus Supplement will set forth the method of
determining allocation of voting rights with respect to a Series. Unless
otherwise provided in the related Prospectus Supplement, no Holder of Securities
of a Series, solely by virtue of such Holder's status as a Holder, will have any
right under the applicable Agreement for such Series to institute any proceeding
with respect to such Agreement, unless such Holder previously has given to the
Trustee for such Series written notice of default and unless the Holders of
Securities evidencing not less than 51% of the aggregate voting rights of the
Securities for such Series have made written request upon the Trustee to
institute such proceeding in its own name as Trustee thereunder and have offered
to the Trustee reasonable indemnity, and the Trustee for 60 days has neglected
or refused to institute any such proceeding.
LIST OF HOLDERS
Upon written request of three or more Holders of record of a Series for
purposes of communicating with other Holders with respect to their rights under
the Agreement, which request is accompanied by a copy of the communication which
such Holders propose to transmit, the Trustee will afford such Holders access
during business hours to the most recent list of Holders of that Series held by
the Trustee.
No Agreement will provide for the holding of any annual or other
meeting of Holders.
BOOK-ENTRY SECURITIES
If specified in the Prospectus Supplement for a Series of Securities,
such Series or one or more Classes of such Series may be issued in book-entry
form. In such event, beneficial owners of such Securities will not be considered
"Holders" under the Agreements and may exercise the rights of Holders only
indirectly through the participants in the applicable book-entry system.
REMIC ADMINISTRATOR
For any Series with respect to which a REMIC election is made,
preparation of certain reports and certain other administrative duties with
respect to the Issuer may be performed by a REMIC administrator, who may be an
affiliate of the Depositor.
TERMINATION
Pooling and Servicing Agreement; Trust Agreement. The obligations
created by the Pooling and Servicing Agreement or Trust Agreement for a Series
will terminate upon the distribution to Holders of all amounts distributable to
them pursuant to such Agreement after the earlier of (i) the later of (a) the
final payment or other liquidation of the last Loan Asset remaining in the
assets for such Series and (b) the disposition of all property acquired upon
foreclosure or deed in lieu of foreclosure or repossession in respect of any
Loan Asset or (ii) the repurchase, as described below, by the Servicer, the
Issuer, the Holders of the Residual Interest, the Depositor or other entity
specified in the related Prospectus Supplement from the Trustee for such Series
of all Issuer Assets and other property at that time subject to such Agreement.
The Agreement for each Series permits, but does not require, the Servicer or
other entity specified in the related Prospectus Supplement to purchase from the
Issuer for such Series all remaining Loan Assets at a price equal to, unless
otherwise specified in the related Prospectus Supplement, 100% of the aggregate
Principal Balance of such Loan Assets plus, with respect to any property
acquired in respect of a Loan Asset, if any, the outstanding Principal Balance
of the related Loan Asset at the time of foreclosure, less, in either case,
related unreimbursed Advances (in the case of the Loan Assets, only to the
extent not already reflected in the computation of the aggregate Principal
Balance of such Loan Assets) and unreimbursed expenses (that are reimbursable
pursuant to the terms of the related Agreement) plus, in either case, accrued
interest thereon at the weighted average rate on the related Loan Assets through
the last day of the Due Period in which such repurchase occurs; provided,
however, that if an election is made for treatment as a REMIC under the Code,
the repurchase price may equal the greater of (a) 100% of the aggregate
Principal Balance of such Loan Assets, plus accrued interest thereon at the
applicable net rates on the Loan Assets through the last day of the month of
such repurchase and (b) the aggregate fair market value of such Loan Assets plus
the fair market value of any property acquired in respect of a Loan Asset and
remaining in the assets for such Series. The exercise of such right will effect
early retirement of the Securities of such Series, but such entity's right to so
purchase is subject to the aggregate Principal Balance of the Loan Assets at the
time of repurchase being less than a fixed percentage, to be set forth in the
related Prospectus Supplement, of the aggregate Principal Balance of the Loan
Assets as of the date specified in the related Prospectus Supplement. In no
event, however, will the trust created by the Agreement continue beyond the
expiration of 21 years from the death of the last survivor of certain persons
identified therein. For each Series, the Servicer or the Trustee, as applicable,
will give written notice of termination of the Agreement to each Holder, and the
final distribution will be made only upon surrender and cancellation of the
Securities at an office or agency specified in the notice of termination. If so
provided in the related Prospectus Supplement for a Series, the Depositor or
another entity may effect an optional termination of the Issuer under the
circumstances described in such Prospectus Supplement. See "Description of The
Securities--Optional Redemption, Purchase or Termination."
Indenture. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes of
such Series or, with certain limitations, upon deposit with the Trustee of funds
sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture
will provide that, if so specified with respect to the Notes of any Series, the
related Issuer will be discharged from any and all obligations in respect of the
Notes of such Series (except for certain obligations relating to temporary Notes
and exchange of Notes, to register the transfer of or exchange Notes of such
Series, to replace stolen, lost or mutilated Notes of such Series, to maintain
paying agencies and to hold monies for payment in trust) upon the deposit with
the Trustee, in trust, of money and/or direct obligations of or obligations
guaranteed by the United States of America which, through the payment of
interest and principal in respect thereof in accordance with their terms, will
provide money in an amount sufficient to pay the principal of and each
installment of interest on the Notes of such Series on the Final Scheduled
Distribution Date for such Notes and any installment of interest on such Notes
in accordance with the terms of the Indenture and the Notes of such Series. In
the event of any such defeasance and discharge of Notes of such Series, holders
of Notes of such Series would be able to look only to such money and/or direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
CERTAIN LEGAL ASPECTS OF LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans and consumer loans which are general in nature. Because certain
of such legal aspects are governed by applicable state law (which laws may
differ substantially), the summaries do not purport to be complete nor reflect
the laws of any particular state, nor encompass the laws of all states in which
the properties securing the Loans are situated.
MORTGAGES
The Loans for a Series will be secured by either mortgages or deeds of
trust or deeds to secure debt (such Loans are hereinafter referred to in this
section as "mortgage loans"), depending upon the prevailing practice in the
state in which the property subject to a mortgage loan is located. In
California, for example, Loans are secured by deeds of trust. The filing of a
mortgage, deed of trust or deed to secure debt creates a lien or title interest
upon the real property covered by such instrument and represents the security
for the repayment of an obligation that is customarily evidenced by a promissory
note. Such liens are not prior to the lien for real estate taxes and assessments
or other charges imposed under governmental police powers and may also be
subject to other liens pursuant to the laws of the jurisdiction in which the
Mortgaged Property is located. Priority with respect to such instruments depends
on their terms, the knowledge of the parties to the mortgage and generally on
the order of recording with the applicable state, county or municipal office.
There are two parties to a mortgage, the mortgagor, who is the borrower/property
owner or the land trustee (as described below), and the mortgagee, who is the
lender. Under the mortgage instrument, the mortgagor delivers to the mortgagee a
note or bond and the mortgage. In the case of a land trust, there are three
parties because title to the property is held by a land trustee under a land
trust agreement of which the borrower/property owner is the beneficiary; at
origination of a mortgage loan, the borrower executes a separate undertaking to
make payments on the mortgage note. A deed of trust transaction normally has
three parties: the trustor, who is the borrower/property owner; the beneficiary,
who is the lender; and the trustee, a third-party grantee. Under a deed of
trust, the trustor grants the property, irrevocably until the debt is paid, in
trust, generally with a power of sale, to the trustee to secure payment of the
obligation. The mortgagee's authority under a mortgage and the trustee's
authority under a deed of trust are governed by the law of the state in which
the real property is located, the express provisions of the mortgage or deed of
trust, and, in some cases, in deed of trust transactions, the directions of the
beneficiary.
FORECLOSURE ON MORTGAGES
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure occasionally may result from difficulties in locating
necessary parties defendant. When the mortgagee's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming and expensive. After the completion of a judicial foreclosure
proceeding, the court may issue a judgment of foreclosure and appoint a receiver
or other officer to conduct the sale of the property. In some states, mortgages
may also be foreclosed by advertisement, pursuant to a power of sale provided in
the mortgage. Foreclosure of a mortgage by advertisement is essentially similar
to foreclosure of a deed of trust by nonjudicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a nonjudicial
trustee's sale under a specific provision in the deed of trust which authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In certain states, such foreclosure also may
be accomplished by judicial action in the manner provided for foreclosure of
mortgages. In some states, the trustee must record a notice of default and send
a copy to the borrower-trustor and to any person who has recorded a request for
a copy of a notice of default and notice of sale. In addition, the trustee in
some states must provide notice to any other individual having an interest in
the real property, including any subordinate lienholders. The trustor, borrower,
or any person having a junior encumbrance on the real estate, may, during a
reinstatement period, cure the default by paying the entire amount in arrears
plus the costs and expenses incurred in enforcing the obligation. Generally,
state law controls the amount of foreclosure expenses and costs, including
attorney's fees, which may be recovered by a lender. If the deed of trust is not
reinstated, a notice of sale must be posted in a public place and, in most
states, published for a specified period of time in one or more newspapers. In
addition, some state laws require that a copy of the notice of sale be posted on
the property, recorded and sent to all parties having an interest in the real
property.
An action to foreclose a mortgage is an action to recover the mortgage debt
by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers. A
foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses or counterclaims are interposed, sometimes requiring up to
several years to complete. Generally, a mortgagor is bound by the terms of the
related mortgage note and the mortgage as made and cannot be relieved from his
default if the mortgagee has exercised his rights in a commercially reasonable
manner. However, since a foreclosure action historically was equitable in
nature, the court may exercise equitable powers to relieve a mortgagor of a
default and deny the mortgagee foreclosure on proof that either the mortgagor's
default was neither willful nor in bad faith or the mortgagee's action
established a waiver, fraud, bad faith, or oppressive or unconscionable conduct
such as to warrant a court of equity to refuse affirmative relief to the
mortgagee. Under certain circumstances a court of equity may relieve the
mortgagor from an entirely technical default where such default was not willful.
Moreover, a non-collusive, regularly conducted foreclosure sale may be
challenged as a fraudulent conveyance, regardless of the parties' intent, if a
court determines that the sale was for less than fair consideration and such
sale occurred while the mortgagor was insolvent and within one year (or within
the state statute of limitations if the trustee in bankruptcy elects to proceed
under state fraudulent conveyance law) of the filing of bankruptcy. Similarly, a
suit against the debtor on the related mortgage note may take several years and,
generally, is a remedy alternative to foreclosure, the mortgagee being precluded
from pursuing both at the same time.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty potential third party purchasers at the
sale have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for an amount which may be equal to the unpaid
principal amount of the mortgage note secured by the mortgage or deed of trust
plus accrued and unpaid interest and the expenses of foreclosure, in which event
the mortgagor's debt will be extinguished or the lender may purchase for a
lesser amount in order to preserve its right against a borrower to seek a
deficiency judgment in states where such a judgment is available. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burdens of ownership,
including obtaining hazard insurance, paying taxes and making such repairs at
its own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Any loss may be reduced by the
receipt of any mortgage guaranty insurance proceeds.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the trustor or mortgagor and foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. The
right of redemption should be distinguished from the equity of redemption, which
is a non-statutory right that must be exercised prior to the foreclosure sale.
In some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the former borrower pays only a portion
of the sums due. The effect of a statutory right of redemption is to diminish
the ability of the lender to sell the foreclosed property. The exercise of a
right of redemption would defeat the title of any purchaser at a foreclosure
sale, or of any purchaser from the lender subsequent to foreclosure or sale
under a deed of trust. Consequently the practical effect of a right of
redemption is to force the lender to retain the property and pay the expenses of
ownership until the redemption period has run. In some states, such as
California, there is no right to redeem property after a trustee's sale under a
deed of trust.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGES
The mortgage loans comprising or underlying the Primary Assets of a Series
will be secured by mortgages or deeds of trust which may be second or more
junior mortgages to other mortgages held by other lenders or institutional
investors. The rights of the Issuer (and therefore the Holders), as mortgagee
under a junior mortgage, are subordinate to those of the mortgagee under the
senior mortgage, including the prior rights of the senior mortgagee to receive
hazard insurance and condemnation proceeds and to cause the property securing
the mortgage loan to be sold upon default of the mortgagor, thereby
extinguishing the junior mortgagee's lien unless the junior mortgagee asserts
its subordinate interest in the property in foreclosure litigation and,
possibly, satisfies the defaulted senior mortgage. A junior mortgagee may
satisfy a defaulted senior loan in full and, in some states, may cure such
default and bring the senior loan current, in either event adding the amounts
expended to the balance due on the junior loan. In most states, absent a
provision in the mortgage or deed of trust, no notice of default is required to
be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders and
the standard form of deed of trust used by most institutional lenders in
California confer on the mortgagee or beneficiary the right both to receive all
proceeds collected under any hazard insurance policy and all awards made in
connection with condemnation proceedings, and to apply such proceeds and awards
to any indebtedness secured by the mortgage or deed of trust, in such order as
the mortgagee may determine; provided, however, that the beneficiary is
prohibited (under California law) from applying insurance and condemnation
proceeds to the indebtedness secured by the deed of trust unless the
beneficiary's security interest has been impaired by the casualty or
condemnation, and, if such security interest has been impaired, permits such
proceeds to be so applied only to the extent of such impairment. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders (and by most institutional lenders in
California) obligates the mortgagor or trustee to pay before delinquency all
taxes and assessments on the property and, when due, all encumbrances, charges
and liens on the property which appear prior to the mortgage or deed of trust,
to provide and maintain fire and hazard insurance on the property, to maintain
and repair the property and not to commit or permit any waste thereof, and to
appear in and defend any action or proceeding purporting to affect the property
or the rights of the mortgagee under the mortgage. Upon a failure of the
mortgagor or trustee to perform any of these obligations, the mortgagee or
beneficiary is given the right under certain mortgages and deeds of trust to
perform the obligation itself, at its election, with the mortgagor or trustee
agreeing to reimburse the mortgagee or beneficiary for any sums expended by the
mortgagee or beneficiary on behalf of the mortgagor or trustee. All sums so
expended by the mortgagee or beneficiary become part of the indebtedness secured
by the mortgage or deed of trust.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states, including California, have imposed statutory prohibitions
which limit the remedies of a beneficiary under a deed of trust or a mortgagee
under a mortgage. In some states, including California, statutes limit the right
of the beneficiary or mortgagee to obtain a deficiency judgment against the
borrower following foreclosure or sale under a deed of trust. A deficiency
judgment is a personal judgment against the former borrower equal in most cases
to the difference between the net amount realized upon the public sale of the
real property and the amount due to the lender. Other statutes require the
beneficiary or mortgagee to exhaust the security afforded under a deed of trust
or mortgage by foreclosure in an attempt to satisfy the full debt before
bringing a personal action against the borrower. In certain other states, the
lender has the option of bringing a personal action against the borrower on the
debt without first exhausting such security; however, in some of these states,
the lender, following judgment on such personal action, may be deemed to have
elected a remedy and may be precluded from exercising remedies with respect to
the security. Consequently, the practical effect of the election requirement,
when applicable, is that lenders will usually proceed first against the security
rather than bringing a personal action against the borrower. Finally, other
statutory provisions limit any deficiency judgment against the former borrower
following a foreclosure sale to the excess of the outstanding debt over the fair
market value of the property at the time of the public sale. The purpose of
these statutes is generally to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result of
low or no bids at the foreclosure sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws, the Federal
Soldiers' and Sailors' Relief Act of 1940, and state laws affording relief to
debtors, may interfere with or affect the ability of the secured lender to
realize upon collateral and/or enforce a deficiency judgment. For example, with
respect to federal bankruptcy law, the filing of a petition acts as a stay
against the enforcement of remedies for collection of a debt. Moreover, a court
with federal bankruptcy jurisdiction may permit a debtor through a Chapter 13
Bankruptcy Code rehabilitative plan to cure a monetary default with respect to a
loan on a debtor's residence by paying arrearages within a reasonable time
period and reinstating the original loan payment schedule even though the lender
accelerated the loan and the lender has taken all steps to realize upon his
security (provided no sale of the property has yet occurred) prior to the filing
of the debtor's Chapter 13 petition. Some courts with federal bankruptcy
jurisdiction have approved plans, based on the particular facts of the
reorganization case, that effected the curing of a loan default by permitting
the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan may be modified if the borrower has filed a petition
under Chapter 13. These courts have suggested that such modifications may
include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Federal bankruptcy law and limited case law
indicate that the foregoing modifications could not be applied to the terms of a
loan secured by property that is the principal residence of the debtor. In all
cases, the secured creditor is entitled to the value of its security plus
post-petition interest, attorney's fees and costs to the extent the value of the
security exceeds the debt.
In a Chapter 11 case under the Bankruptcy Code, the lender is precluded
from foreclosing without authorization from the bankruptcy court. The lender's
lien may be transferred to other collateral and/or be limited in amount to the
value of the lender's interest in the collateral as of the date of the
bankruptcy. The loan term may be extended, the interest rate may be adjusted to
market rates and the priority of the loan may be subordinated to bankruptcy
court-approved financing. The bankruptcy court can, in effect, invalidate
due-on-sale clauses through confirmed Chapter 11 plans of reorganization.
The Bankruptcy Code provides priority to certain tax liens over the
lender's security. This may delay or interfere with the enforcement of rights in
respect of a defaulted Loan. In addition, substantive requirements are imposed
upon lenders in connection with the origination and the servicing of mortgage
loans by numerous federal and some state consumer protection laws. The laws
include the federal Truth-in-Lending Act, Real Estate Settlement Procedures Act,
Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act
and related statutes and regulations. These federal laws impose specific
statutory liabilities upon lenders who originate loans and who fail to comply
with the provisions of the law. In some cases, this liability may affect
assignees of the loans.
DUE-ON-SALE CLAUSES IN LOANS
Due-on-sale clauses permit the lender to accelerate the maturity of the
loan if the borrower sells or transfers, whether voluntarily or involuntarily,
all or part of the real property securing the loan without the lender's prior
written consent. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases, typically involving
single family residential mortgage transactions, their enforceability has been
limited or denied. In any event, the Garn-St. Germain Depository Institutions
Act of 1982 (the "Garn-St. Germain Act") preempts state constitutional,
statutory and case law that prohibits the enforcement of due-on-sale clauses and
permits lenders to enforce these clauses in accordance with their terms, subject
to certain exceptions. As a result, due-on-sale clauses have become generally
enforceable except in those states whose legislatures exercised their authority
to regulate the enforceability of such clauses with respect to mortgage loans
that were (i) originated or assumed during the "window period" under the
Garn-St. Germain Act which ended in all cases not later than October 15, 1982,
and (ii) originated by lenders other than national banks, federal savings
institutions and federal credit unions. FHLMC has taken the position in its
published mortgage servicing standards that, out of a total of eleven "window
period states," five states (Arizona, Michigan, Minnesota, New Mexico and Utah)
have enacted statutes extending, on various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to certain
categories of window period loans. Also, the Garn-St. Germain Act does
"encourage" lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from such bankruptcy proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations, upon the late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if the
loan is prepaid. Late charges and prepayment fees are typically retained by
servicers as additional servicing compensation.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security,
courts, including California courts, have invoked general equitable principles.
The equitable principles are generally designed to relieve the borrower from the
legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes of the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, including cases in California, courts have
substituted their judgment for the lender's judgment and have required that
lenders reinstate loans or recast payment schedules in order to accommodate
borrowers who are suffering from temporary financial disability. In other cases,
courts have limited the right of a lender to realize upon his security if the
default under the security agreement is not monetary, such as the borrower's
failure to adequately maintain the property or the borrower's execution of
secondary financing affecting the property. Finally, some courts have been faced
with the issue of whether or not federal or state constitutional provisions
reflecting due process concerns for adequate notice require that borrowers under
security agreements receive notices in addition to the statutorily-prescribed
minimums. For the most part, these cases have upheld the notice provisions as
being reasonable or have found that, in cases involving the sale by a trustee
under a deed of trust or by a mortgagee under a mortgage having a power of sale,
there is insufficient state action to afford constitutional protections to the
borrower.
Most conventional single-family mortgage loans may be prepaid in full or in
part without penalty. The regulations of the Office of Thrift Supervision (the
"OTS") prohibit the imposition of a prepayment penalty or equivalent fee for or
in connection with the acceleration of a loan by exercise of a due-on-sale
clause. A mortgagee to whom a prepayment in full has been tendered may be
compelled to give either a release of the mortgage or an instrument assigning
the existing mortgage. The absence of a restraint on prepayment, particularly
with respect to mortgage loans having higher mortgage rates, may increase the
likelihood of refinancing or other early retirements of such mortgage loans.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. Similar federal statutes
were in effect with respect to mortgage loans made during the first three months
of 1980. The OTS, as successor to the Federal Home Loan Bank Board, is
authorized to issue rules and regulations and to publish interpretations
governing implementation of Title V. Title V authorized any state to reimpose
interest rate limits by adopting, before April 1, 1983, a state law, or by
certifying that the voters of such state have voted in favor of any provision,
constitutional or otherwise, which expressly rejects an application of the
federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V is not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V.
ENVIRONMENTAL LEGISLATION
A federal statute, the Comprehensive Environmental Response, Compensation,
and Liability Act, and a growing number of state laws impose a statutory lien
for associated costs on property that is the subject of a cleanup action on
account of hazardous wastes or hazardous substances released or disposed of on
the property. Such a lien generally will have priority over all subsequent liens
on the property and, in certain of these states, will have priority over prior
recorded liens, including the lien of a deed of trust. The priority of the
environmental lien under federal law depends on the time of perfection of the
federal lien compared to the time of perfection of any competing liens under
applicable state law. In addition, under federal environmental legislation and
possibly under state law in a number of states, a secured party that takes a
deed in lieu of foreclosure or acquires a property at a foreclosure sale may be
liable for the costs of cleaning up a contaminated site. Although such costs
could be substantial, they would probably not be imposed on a secured lender
(such as the related Issuer) if it promptly marketed the foreclosed property for
resale. In the event that the related Issuer acquired title to a property
securing a Loan and cleanup costs were incurred in respect of the property, the
Holders of the Securities might incur a delay in the payment if such costs were
required to be paid by such Issuer.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service, (i) are entitled to have interest rates reduced and capped at
6% per annum, on obligations (including Loans) incurred prior to the
commencement of military service for the duration of military service, (ii) may
be entitled to a stay of proceedings on any kind of foreclosure or repossession
action in the case of defaults on such obligations entered into prior to
military service for the duration of military service and (iii) may have the
maturity of such obligations incurred prior to military service extended, the
payments lowered and the payment schedule readjusted for a period of time after
the completion of military service. However, the benefits of (i), (ii), or (iii)
above are subject to challenge by creditors and if, in the opinion of the court,
the ability of a person to comply with such obligations is not materially
impaired by military service, the court may apply equitable principles
accordingly. If a borrower's obligation to repay amounts otherwise due on a Loan
included in the assets of the Issuer for a Series is relieved pursuant to the
Soldiers' and Sailors' Civil Relief Act of 1940, none of the Issuer, the
Servicer, the Depositor nor the Trustee will be required to advance such
amounts, and any loss in respect thereof may reduce the amounts available to be
paid to the Holders of the Securities of such Series. Unless otherwise specified
in the related Prospectus Supplement, any shortfalls in interest collections on
Loans, included in the assets of the Issuer for a Series resulting from
application of the Soldiers' and Sailors' Civil Relief Act of 1940 will be
allocated to each Class of Securities of such Series that is entitled to receive
interest in respect of such Loans in proportion to the interest that each such
Class of Securities would have otherwise been entitled to receive in respect of
such Loans had such interest shortfall not occurred.
USE OF PROCEEDS
The Depositor will apply all or substantially all of the net proceeds from
the sale of each Series of Securities for one or more of the following purposes:
(i) to purchase the related Loan Assets, (ii) to repay indebtedness which has
been incurred to obtain funds to acquire such Loan Assets, (iii) to establish
any Reserve Funds described in the related Prospectus Supplement and (iv) to pay
costs of structuring and issuing such Securities, including the costs of
obtaining Enhancement, if any. If so specified in the related Prospectus
Supplement, the purchase of the Loan Assets for a Series may be effected by an
exchange of Securities with the Seller of such Loan Assets.
FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
In the opinion of Stroock & Stroock & Lavan LLP, special tax counsel to the
Depositor ("Federal Tax Counsel"), the following summarizes the material federal
income tax consequences of the purchase, ownership and disposition of
Securities. The summary does not purport to deal with all aspects of federal
income taxation that may affect particular investors in light of their
individual circumstances, nor with certain types of investors subject to special
treatment under the federal income tax laws. This summary focuses primarily upon
investors who will hold Securities as "capital assets" (generally, property held
for investment) within the meaning of Section 1221 of the of the Internal
Revenue Code of 1986, as amended (the "Code"), but much of the discussion is
applicable to other investors as well. Because tax consequences may vary based
on the status or tax attributes of the owner of a Security, prospective
investors are advised to consult their own tax advisers concerning the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of the Securities. For purposes of this tax discussion (except
with respect to information reporting, or where the context indicates
otherwise), any reference to the "Holder" means the beneficial owner of a
Security.
The summary is based upon the provisions of the Code, the regulations
promulgated thereunder, including, where applicable, proposed regulations, and
the judicial and administrative rulings and decisions now in effect, all of
which are subject to change or possible differing interpretations. The statutory
provisions, regulations, and interpretations on which this interpretation is
based are subject to change, and such a change could apply retroactively.
The federal income tax consequences to Holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness for
federal income tax purposes; (ii) an election is made to treat certain assets of
a particular Series of Securities as a real estate mortgage investment conduit
("REMIC") under the Code; (iii) the Securities represent an ownership interest
for federal income tax purposes in some or all of the assets owned by the Issuer
for a Series; or (iv) for federal income tax purposes the Issuer relating to a
particular Series of Certificates is classified as a partnership. The Prospectus
Supplement for each Series of Securities will specify how the Securities will be
treated for federal income tax purposes and will discuss whether a REMIC
election, if any, will be made with respect to such Series.
TAXATION OF DEBT SECURITIES (INCLUDING REGULAR INTEREST SECURITIES)
Interest and Acquisition Discount. Securities representing regular interest
in a REMIC ("Regular Interest Securities") are generally taxable to Holders in
the same manner as evidences of indebtedness issued by the REMIC. Stated
interest on the Regular Interest Securities will be taxable as ordinary income
and taken into account using the accrual method of accounting, regardless of the
Holder's normal accounting method. Interest (other than original issue discount)
on Securities (other than Regular Interest Securities) that are characterized as
indebtedness for federal income tax purposes will be includible in income by
Holders thereof in accordance with their usual methods of accounting. Securities
characterized as debt for federal income tax purposes and Regular Interest
Securities will be referred to hereinafter collectively as "Debt Securities."
For Certificates treated as debt for federal income tax purposes, see "Certain
Certificates Treated as Indebtedness."
Debt Securities that are Compound Interest Securities will, and certain of
the other Debt Securities may, be issued with "original issue discount" ("OID").
The following discussion is based in part on the rules governing OID which are
set forth in Sections 1271-1275 of the Code and the Treasury regulations issued
thereunder (the "OID Regulations"). A Holder should be aware, however, that the
OID Regulations do not adequately address certain issues relevant to prepayable
securities, such as the Debt Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. A Holder of
a Debt Security must include such OID in gross income as ordinary interest
income as it accrues under a prescribed method which takes into account an
economic accrual of the discount. In general, OID must be included in income in
advance of the receipt of the cash representing that income. The amount of OID
on a Debt Security will be considered to be zero if it is less than a de minimis
amount determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of Debt Securities is sold for cash on
or prior to the Closing Date, the issue price for such class will be treated as
the fair market value of such class on the Closing Date. The stated redemption
price at maturity of a Debt Security includes the original principal amount of
the Debt Security, but generally will not include distributions of interest if
such distributions constitute "qualified stated interest."
Under the OID Regulations, interest payments will not be qualified
stated interest unless the interest payments are "unconditionally payable." The
OID Regulations state that interest is unconditionally payable if reasonable
legal remedies exist to compel timely payment, or the debt instrument otherwise
provides terms and conditions that make the likelihood of late payment (other
than late payment that occurs within a reasonable grace period) or nonpayment of
interest a remote contingency, as defined in the OID Regulations. It is unclear
whether the terms and conditions of the loans underlying the Debt Securities or
the terms and conditions of the Debt Securities are considered when determining
the likelihood of late payment or nonpayment is a remote contingency.
Accordingly, Federal Tax Counsel is unable to opine whether interest on the Debt
Securities will constitute qualified stated interest. Any terms and conditions
that do not reflect arm's length dealing or that the holder does not intend to
enforce are not considered.
Certain Debt Securities will provide for distributions of interest based on
a period that is the same length as the interval between Distribution Dates but
ends prior to each Distribution Date. Any interest that accrues prior to the
Closing Date may be treated under the OID Regulations either (i) as part of the
issue price and the stated redemption price at maturity of the Debt Securities
or (ii) as not included in the issue price or stated redemption price. The OID
Regulations provide a special application of the de minimis rule for debt
instruments with long first accrual periods where the interest payable for the
first period is at a rate which is effectively less than that which applies in
all other periods. In such cases, for the sole purpose of determining whether
original issue discount is de minimis, the OID Regulations provide that the
stated redemption price is equal to the instrument's issue price plus the
greater of the amount of foregone interest or the excess (if any) of the
instrument's stated principal amount over its issue price.
Under the de minimis rule, OID on a Debt Security will be considered to be
zero if such OID is less than 0.25% of the stated redemption price at maturity
of the Debt Security multiplied by the weighted average maturity of the Debt
Security. For this purpose, the weighted average maturity of the Debt Security
is computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the Debt Security and the
denominator of which is the stated redemption price at maturity of the Debt
Security. Holders generally must report de minimis OID pro rata as principal
payments are received, and such income will be capital gain if the Debt Security
is held as a capital asset. However, accrual method Holders may elect to accrue
all de minimis OID as well as market discount under a constant interest method.
See "--Election to Treat All Interest as Original Issue Discount"
The Holder of a Debt Security issued with OID must include in gross income,
for all days during its taxable year on which it holds such Debt Security, the
sum of the "daily portions" of such original issue discount. The amount of OID
includible in income by a Holder will be computed by allocating to each day
during a taxable year a pro rata portion of the original issue discount that
accrued during the relevant accrual period. In the case of a Debt Security that
is not a Regular Interest Security and the principal payments on which are not
subject to acceleration resulting from prepayments on the Loans, the amount of
OID includible in income of a Holder for an accrual period (generally the period
over which interest accrues on the debt instrument) will equal the product of
the yield to maturity of the Debt Security and the adjusted issue price of the
Debt Security, reduced by any payments of qualified stated interest. The
adjusted issue price is the sum of its issue price plus prior accruals of OID,
reduced by the total payments made with respect to such Debt Security in all
prior periods, other than qualified stated interest payments.
The amount of OID to be included in income by a Holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a "Pay-Through Security"), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
"Prepayment Assumption"). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and (b) the payments during the accrual
period of amounts included in the stated redemption price of the Pay-Through
Security, over the adjusted issue price of the Pay-Through Security at the
beginning of the accrual period. The present value of the remaining payments is
to be determined on the basis of three factors: (i) the original yield to
maturity of the Pay-Through Security (determined on the basis of compounding at
the end of each accrual period and properly adjusted for the length of the
accrual period), (ii) events which have occurred before the end of the accrual
period and (iii) the assumption that the remaining payments will be made in
accordance with the original Prepayment Assumption. The effect of this method is
to increase the portions of OID required to be included in income by a Holder to
take into account prepayments with respect to the Loans at a rate that exceeds
the Prepayment Assumption, and to decrease (but not below zero for any period)
the portions of OID required to be included in income by a Holder of a
Pay-Through Security to take into account prepayments with respect to the Loans
at a rate that is slower than the Prepayment Assumption. Although OID will be
reported to Holders of Pay-Through Securities based on the Prepayment
Assumption, no representation is made to Holders that Loans will be prepaid at
that rate or at any other rate.
The Depositor may adjust the accrual of OID on a Class of Regular Interest
Securities (or other regular interests in a REMIC) in a manner that it believes
to be appropriate, to take account of realized losses on the Loans. Because the
OID Regulations do not provide for such adjustments, Federal Tax Counsel is
unable to opine on the propriety of making such adjustments to the accrual of
OID. If the Internal Revenue Service were to require that OID be accrued without
such adjustments, the rate of accrual of OID for a Class of Regular Interest
Securities could increase.
Certain classes of Regular Interest Securities may represent more than one
class of REMIC regular interests. Unless the applicable Prospectus Supplement
specifies otherwise, the Trustee intends, based on the OID Regulations, to
calculate OID on such Securities as if, solely for the purposes of computing
OID, the separate regular interests were a single debt instrument.
A subsequent Holder of a Debt Security will also be required to include OID
in gross income, but such a Holder who purchases such Debt Security for an
amount that exceeds its adjusted issue price will be entitled (as will an
initial Holder who pays more than a Debt Security's issue price) to offset such
OID by comparable economic accruals of portions of such excess.
Effects of Defaults and Delinquencies. Holders will be required to report
income with respect to the related Regular Interest Securities under an accrual
method without giving effect to delays and reductions in distributions
attributable to a default or delinquency on the Loans, except possibly to the
extent that it can be established that such amounts are uncollectible. As a
result, the amount of income (including OID) reported by a Holder of such a
Security in any period could significantly exceed the amount of cash distributed
to such Holder in that period. The Holder will eventually be allowed a loss (or
will be allowed to report a lesser amount of income) to the extent that the
aggregate amount of distributions on the Securities is reduced as a result of a
Loan default. However, the timing and character of such losses or reductions in
income are uncertain and, accordingly, Federal Tax Counsel is unable to opine as
to the timing and character of such losses or reductions in income and Holders
of Securities should consult their own tax advisors on this point.
Interest-Only Debt Securities. The Issuer intends to report income from
interest-only classes of Debt Securities to the Internal Revenue Service and to
Holders of interest-only Debt Securities based on the assumption that the stated
redemption price at maturity is equal to the sum of all payments determined
under the applicable prepayment assumption. As a result, such interest-only Debt
Securities will be treated as having original issue discount.
Variable Rate Debt Securities. Under the OID Regulations, Debt Securities
paying interest at a variable rate (a "Variable Rate Debt Security") are subject
to special rules. A Variable Rate Debt Security will qualify as a "variable rate
debt instrument" if (i) its issue price does not exceed the total noncontingent
principal payments due under the Variable Rate Debt Security by more than a
specified de minimis amount; (ii) it provides for stated interest, paid or
compounded at least annually, at (a) one or more qualified floating rates, (b) a
single fixed rate and one or more qualified floating rates, (c) a single
objective rate or (d) a single fixed rate and a single objective rate that is a
qualified inverse floating rate; and (iii) it does not provide for any principal
payments that are contingent, as defined in the OID Regulations, except as
provided in (i) above. Although Federal Tax Counsel is unable to opine on the
matter, because the OID Regulations relating to contingent payment debt
instruments do not apply to REMIC regular interests, principal payments on
Regular Interest Securities should not be considered contingent for this
purpose.
A "qualified floating rate" is any variable rate where variations in the
value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Rate Debt Security is denominated. A multiple of a qualified floating
rate will generally not itself constitute a qualified floating rate for purposes
of the OID Regulations. However, a variable rate equal to (i) the product of a
qualified floating rate and a fixed multiple that is greater than 0.65 but not
more than 1.35 or (ii) the product of a qualified floating rate and a fixed
multiple that is greater than 0.65 but not more than 1.35, increased or
decreased by a fixed rate will constitute a qualified floating rate for purposes
of the OID Regulations. In addition, under the OID Regulations, two or more
qualified floating rates that can reasonably be expected to have approximately
the same values throughout the term of the Variable Rate Debt Security will be
treated as a single qualified floating rate (a "Presumed Single Qualified
Floating Rate"). Two or more qualified floating rates with values within 25
basis points of each other as determined on the Variable Rate Debt Security's
issue date will be conclusively presumed to be a Presumed Single Qualified
Floating Rate. Notwithstanding the foregoing, a variable rate that would
otherwise constitute a qualified floating rate but which is subject to one or
more restrictions such as a cap or floor, will not be a qualified floating rate
for purposes of the OID Regulations unless the restriction is fixed throughout
the term of the Variable Rate Debt Security or the restriction will not
significantly affect the yield of the Variable Rate Debt Security.
An "objective rate" is a rate that is not itself a qualified floating rate
but which is determined using a single fixed formula and which is based upon
objective financial or economic information. The OID Regulations also provide
that other variable rates may be treated as objective rates if so designated by
the Internal Revenue Service in the future. Although Federal Tax Counsel is
unable to opine on the matter, an interest rate on a REMIC regular interest that
is the weighted average of the interest rates on some or all of the qualified
mortgages held by the REMIC should constitute an objective rate. Despite the
foregoing, a variable rate of interest on a Variable Rate Debt Security will not
constitute an objective rate if it is reasonably expected that the average value
of such rate during the first half of the Variable Rate Debt Security's term
will be either significantly less than or significantly greater than the average
value of the rate during the final half of the Variable Rate Debt Security's
term. Further, an objective rate does not include a rate that is based on
information that is in the control of or unique to the circumstances of the
issuer or a party related to the issuer. An objective rate will qualify as a
"qualified inverse floating rate" if such rate is equal to a fixed rate minus a
qualified floating rate and variations in the rate can reasonably be expected to
inversely reflect contemporaneous variations in the qualified floating rate. The
OID Regulations also provide that if a Variable Rate Debt Security provides for
stated interest at a fixed rate for an initial period of less than one year
followed by a variable rate that is either a qualified floating rate or an
objective rate and if the variable rate on the Variable Rate Debt Security's
issue date is intended to approximate the fixed rate, then the fixed rate and
the variable rate together will constitute either a single qualified floating
rate or objective rate, as the case may be (a "Presumed Single Variable Rate").
If the value of the variable rate and the initial fixed rate are within 25 basis
points of each other as determined on the Variable Rate Debt Security's issue
date, the variable rate will be conclusively presumed to approximate the fixed
rate.
For Variable Rate Debt Securities that qualify as a "variable rate debt
instrument" under the OID Regulations and provide for interest at either a
single qualified floating rate, a single objective rate, a Presumed Single
Qualified Floating Rate or a Presumed Single Variable Rate throughout the term
(a "Single Variable Rate Debt Security"), original issue discount is computed as
described above based on the following: (i) stated interest on the Single
Variable Rate Debt Security which is unconditionally payable in cash or property
(other than debt instruments of the issuer) at least annually will constitute
qualified stated interest; (ii) by assuming that the variable rate on the Single
Variable Debt Security is a fixed rate equal to: (a) in the case of a Single
Variable Rate Debt Security with a qualified floating rate or a qualified
inverse floating rate, the value of, as of the issue date, of the qualified
floating rate or the qualified inverse floating rate or (b) in the case of a
Single Variable Rate Debt Security with an objective rate (other than a
qualified inverse floating rate), a fixed rate which reflects the reasonably
expected yield for such Single Variable Debt Security; and (iii) the qualified
stated interest allocable to an accrual period is increased (or decreased) if
the interest actually paid during an accrual period exceeds (or is less than)
the interest assumed to be paid under the assumed fixed rate described in (ii)
above.
In general, any Variable Rate Debt Security other than a Single Variable
Rate Debt Security (a "Multiple Variable Rate Debt Security") that qualifies as
a "variable rate debt instrument" will be converted into an "equivalent" fixed
rate debt instrument for purposes of determining the amount and accrual of
original issue discount and qualified stated interest on the Multiple Variable
Rate Debt Security. The OID Regulations generally require that such a Multiple
Variable Rate Debt Security be converted into an "equivalent" fixed rate debt
instrument by substituting any qualified floating rate or qualified inverse
floating rate provided for under the terms of the Multiple Variable Rate Debt
Security with a fixed rate equal to the value of the qualified floating rate or
qualified inverse floating rate, as the case may be, as of the Multiple Variable
Rate Debt Security's issue date. Any objective rate (other than a qualified
inverse floating rate) provided for under the terms of the Multiple Variable
Rate Debt Security is converted into a fixed rate that reflects the yield that
is reasonably expected for the Multiple Variable Rate Debt Security. In the case
of a Multiple Variable Rate Debt Security that qualifies as a "variable rate
debt instrument" and provides for stated interest at a fixed rate in addition to
either one or more qualified floating rates or a qualified inverse floating
rate, the fixed rate is initially converted into a qualified floating rate (or a
qualified inverse floating rate, if the Multiple Variable Rate Debt Security
provides for a qualified inverse floating rate). Under such circumstances, the
qualified floating rate or qualified inverse floating rate that replaces the
fixed rate must be such that the fair market value of the Multiple Variable Rate
Debt Security as of the Multiple Variable Rate Debt Security's issue date is
approximately the same as the fair market value of an otherwise identical debt
instrument that provides for either the qualified floating rate or qualified
inverse floating rate rather than the fixed rate. Subsequent to converting the
fixed rate into either a qualified floating rate or a qualified inverse floating
rate, the Multiple Variable Rate Debt Security is then converted into an
"equivalent" fixed rate debt instrument in the manner described above.
Once the Multiple Variable Rate Debt Security is converted into an
"equivalent" fixed rate debt instrument pursuant to the foregoing rules, the
amount of original issue discount and qualified stated interest, if any, are
determined for the "equivalent" fixed rate debt instrument by applying the OID
rules to the "equivalent" fixed rate debt instrument in the manner described
above. A Holder of the Multiple Variable Rate Debt Security will account for
such OID and qualified stated interest as if the Holder held the "equivalent"
fixed rate debt instrument. Each accrual period, appropriate adjustments will be
made to the amount of qualified stated interest or original issue discount
assumed to have been accrued or paid with respect to the "equivalent" fixed rate
debt instrument in the event that such amounts differ from the actual amount of
interest accrued or paid on the Multiple Variable Rate Debt Security during the
accrual period.
If a Variable Rate Debt Security does not qualify as a "variable rate debt
instrument" under the OID Regulations, then the Variable Rate Debt Security
would be treated as a contingent payment debt obligation. It is not clear under
current law and Federal Tax Counsel is unable to opine how a Variable Rate Debt
Security that is a Pay-Through Security (including Regular Interest Securities)
would be taxed if such Debt Security were treated as a contingent payment debt
obligation since the OID Regulations relating to contingent payment debt
instruments do not apply to Pay-Through Securities.
Market Discount. A purchaser of a Security may be subject to the market
discount rules of Sections 1276-1278 of the Code. A Holder that acquires a Debt
Security with more than a prescribed de minimis amount of "market discount"
(generally, the excess of the principal amount of the Debt Security over the
purchaser's purchase price) will be required to include accrued market discount
in income as ordinary income in each month, but limited to an amount not
exceeding the principal payments on the Debt Security received in that month
and, if the Securities are sold, the gain realized. Such market discount would
accrue in a manner to be provided in Treasury regulations but, until such
regulations are issued, such market discount would in general accrue either (i)
on the basis of a constant yield (in the case of a Pay-Through Security, taking
into account a prepayment assumption) or (ii) in the ratio of (a) in the case of
Debt Securities (or in the case of a Pass-Through Security, as set forth below,
the Loans underlying such Security) not originally issued with original issue
discount, stated interest payable in the relevant period to total stated
interest remaining to be paid at the beginning of the period or (b) in the case
of Debt Securities (or, in the case of a Pass-Through Security, as described
below, the Loans underlying such Security) originally issued at a discount, OID
in the relevant period to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination date
of the Debt Security (or, in the case of a Pass-Through Security, the Loans),
the excess of interest paid or accrued to purchase or carry a Debt Security (or,
in the case of a Pass-Through Security, as described below, the underlying
Loans) with market discount over interest received on such Debt Security is
allowed as a current deduction only to the extent such excess is greater than
the market discount that accrued during the taxable year in which such interest
expense was incurred. In general, the deferred portion of any interest expense
will be deductible when such market discount is included in income, including
upon the sale, disposition, or repayment of the Debt Security (or in the case of
a Pass-Through Security, an underlying Loan). A Holder may elect to include
market discount in income currently as it accrues, on all market discount
obligations acquired by such Holder during the taxable year such election is
made and thereafter, in which case the interest deferral rule will not apply.
Premium. A Holder who purchases a Debt Security (other than an Interest
Weighted Security to the extent described above) at a cost greater than its
stated redemption price at maturity, generally will be considered to have
purchased the Security at a premium, which it may elect to amortize as an offset
to interest income on such Security (and not as a separate deduction item) on a
constant yield method. Although no regulations addressing the computation of
premium accrual on securities similar to the Securities have been issued, the
legislative history of the 1986 Act indicates that premium is to be accrued in
the same manner as market discount. Accordingly, although Federal Tax Counsel is
unable to opine as to the matter, it appears that the accrual of premium on a
Class of Pay-Through Securities will be calculated using the prepayment
assumption used in pricing such Class. If a Holder makes an election to amortize
premium on a Debt Security, such election will apply to all taxable debt
instruments (including all REMIC regular interests and all pass-through
certificates representing ownership interests in a trust holding debt
obligations) held by the Holder at the beginning of the taxable year in which
the election is made, and to all taxable debt instruments acquired thereafter by
such Holder, and will be irrevocable without the consent of the Internal Revenue
Service. Purchasers who pay a premium for the Securities should consult their
tax advisers regarding the election to amortize premium and the method to be
employed.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a Holder of a Debt Security to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method for Debt Securities
acquired on or after April 4, 1994. If such an election were to be made with
respect to a Debt Security with market discount, the Holder of the Debt Security
would be deemed to have made an election to include in income currently market
discount with respect to all other debt instruments having market discount that
such Holder of the Debt Security acquires during the year of the election or
thereafter. Similarly, a Holder of a Debt Security that makes this election for
a Debt Security that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Holder owns or acquires. The election to
accrue interest, discount and premium on a constant yield method with respect to
a Debt Security is irrevocable.
Sale or Exchange. A Holder's tax basis in its Debt Security generally is
the price such Holder pays for a Debt Security, plus amounts of OID or market
discount included in income and reduced by any payments received (other than
qualified stated interest payments) and any amortized premium. Gain or loss
recognized on a sale, exchange, or redemption of a Debt Security, measured by
the difference between the amount realized and the Debt Security's basis as so
adjusted, will generally be capital gain or loss, assuming that the Debt
Security is held as a capital asset. In the case of a Debt Security held by a
bank, thrift, or similar institution described in Section 582 of the Code,
however, gain or loss realized on the sale or exchange of a Debt Security will
be taxable as ordinary income or loss. In addition, gain from the disposition of
a Regular Interest Security that might otherwise be capital gain will be treated
as ordinary income to the extent of the excess, if any, of (i) the amount that
would have been includible in the Holder's income if the yield on such Regular
Interest Security had equaled 110% of the applicable federal rate as of the
beginning of such Holder' s holding period, over the amount of ordinary income
actually recognized by the Holder with respect to such Regular Interest
Security. In addition, gain on the sale of a Debt Security purchased at a market
discount would be taxable as ordinary income in an amount not exceeding the
market discount that accrued while the Security was held by the Seller, reduced
by any market discount includable in income under the rules described above
under "Market Discount." Currently, the maximum tax rate on ordinary income for
individual taxpayers is 39.6% and the maximum tax rate on long-term capital
gains for such taxpayers is 28%. The maximum tax rate on both ordinary income
and long-term capital gains of corporate taxpayers is 35%.
TAXATION OF THE REMIC AND ITS HOLDERS
General. If a REMIC election is made with respect to a Series of
Securities, then Federal Tax Counsel will deliver its opinion generally to the
effect that the arrangement by which the Securities of that Series are issued
will be treated as a REMIC as long as all of the provisions of the applicable
Agreement are complied with and the statutory and regulatory requirements are
satisfied. Securities will be designated as "Regular Interests" or "Residual
Interests" in a REMIC, as specified in the related Prospectus Supplement.
Status of Regular Interest Securities. Regular Interest Securities and
Securities representing a residual interest in a REMIC (both types of securities
collectively referred to as "REMIC Securities") will be "real estate assets" for
purposes of Section 856(c)(5)(A) of the Code and assets described in Section
7701(a)(19)(C) of the Code (assets qualifying under one or both of those
sections, applying each section separately, "qualifying assets") to the extent
that the REMIC's assets are qualifying assets. However, if at least 95 percent
of the REMIC's assets are qualifying assets, then 100 percent of the REMIC
Securities will be qualifying assets. Similarly, income on the REMIC Securities
will be treated as "interest on obligations secured by mortgages on real
property" within the meaning of Section 856(c)(3)(B) of the Code, subject to the
limitations of the preceding two sentences. In addition to Loans, the REMIC's
assets will include payments on Loans held pending distribution to Holders of
REMIC Securities, amounts in reserve accounts (if any), other credit
enhancements (if any) and possibly buydown funds. The Loans generally will be
qualifying assets under both of the foregoing sections of the Code. However,
Loans that are not secured by residential real property or real property used
primarily for church purposes may not constitute qualifying assets under Section
7701(a)(19)(C)(v) of the Code. In addition, to the extent that the principal
amount of a Loan exceeds the value of the property securing the Loan, it is
unclear and Federal Tax Counsel is unable to opine whether the Loans will be
qualifying assets. The regulations under Sections 860A through 860G of the Code
(the "REMIC Regulations") treat credit enhancements as part of the mortgage or
pool of mortgages to which they relate, and therefore credit enhancements
generally should be qualifying assets. Regulations issued in conjunction with
the REMIC Regulations provide that amounts paid on Loans and held pending
distribution to Holders of Regular Interest Securities ("cash flow investments")
will be treated as qualifying assets. It is unclear and Federal Tax Counsel is
unable to opine whether reserve funds or buydown funds would also constitute
qualifying assets under either of those provisions.
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, all of the expenses of a REMIC will be taken into
account by Holders of the Residual Interest Securities. In the case of a "single
class REMIC," however, the expenses will be allocated, under Treasury
regulations, among the Holders of the Regular Interest Securities and the
Holders of the Residual Interest Securities on a daily basis in proportion to
the relative amounts of income accruing to each Holder on that day. In the case
of a Holder who is an individual or a "pass-through interest Holder" (including
certain pass-through entities but not including real estate investment trusts),
such expenses will be deductible only to the extent that such expenses, plus
other "miscellaneous itemized deductions" of the Holder, exceed 2% of such
Holder's adjusted gross income and such Holder may not be able to deduct such
fees and expenses to any extent in computing such Holder's alternative minimum
tax liability. In addition, the amount of itemized deductions otherwise
allowable for the taxable year for an individual whose adjusted gross income
exceeds the applicable amount ($100,000 (or $50,000 in the case of a married
individual filing separately), adjusted for inflation since 1990) will be
reduced by the lesser of (i) 3% of the excess of adjusted gross income over the
applicable amount, or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year. The reduction or disallowance of this deduction
may have a significant impact on the yield of the Security to such a Holder. In
general terms, a single class REMIC is one that either (i) would qualify, under
existing Treasury regulations, as a grantor trust if it were not a REMIC
(treating all interests as ownership interests, even if they would be classified
as debt for federal income tax purposes) or (ii) is similar to such a trust and
which is structured with the principal purpose of avoiding the single class
REMIC rules. Unless otherwise stated in the applicable Prospectus Supplement,
the expenses of the REMIC will be allocated to Holders of the related Residual
Interest Securities.
TAXATION OF THE REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the Holders of
residual interests. As described above, the regular interests are generally
taxable as debt of the REMIC.
Tiered REMIC Structures. For certain Series of Securities, two or more
separate elections may be made to treat designated portions of the related
Issuer as REMICs ("Tiered REMICs") for federal income tax purposes. With respect
to any such Series of Securities, Federal Tax Counsel will deliver its opinion
generally to the effect that, assuming compliance with all provisions of the
related Pooling and Servicing Agreement, the Tiered REMICs will each qualify as
a REMIC and the REMIC Securities issued by the Tiered REMICs, respectively, will
be considered to evidence ownership of regular interests or residual interests
in the related REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Securities will be
"real estate assets" within the meaning of Section 856(c)(5)(A) of the Code, and
"loans secured by an interest in real property" under Section 7701(a)(19)(C) of
the Code, and whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
Calculation of REMIC Income. The taxable income or net loss of a REMIC is
determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between (i) the gross income produced
by the REMIC's assets, including stated interest and any OID or market discount
on loans and other assets, and (ii) deductions, including stated interest and
OID accrued on Regular Interest Securities, amortization of any premium with
respect to Loans, and servicing fees and other expenses of the REMIC. A Holder
of a Residual Interest Security that is an individual or a "pass-through
interest Holder" (including certain pass-through entities, but not including
real estate investment trusts) will be unable to deduct servicing fees payable
on the Loans or other administrative expenses of the REMIC for a given taxable
year, to the extent that such expenses, when aggregated with such Holder's other
miscellaneous itemized deductions for that year, do not exceed two percent of
such Holder's adjusted gross income and such Holder may not be able to deduct
such fees and expenses to any extent in computing such holders alternative
minimum tax liability.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the Startup
Day (generally, the day that the interests are issued). Such aggregate basis
will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated on
or after March 2, 1984. Subject to possible application of the de minimis rules,
the method of accrual by the REMIC of OID income on such loans will be
equivalent to the method under which Holders of Pay-Through Securities accrue
OID (i.e., under the constant yield method taking into account the Prepayment
Assumption). The REMIC will deduct OID on the Regular Interest Securities in the
same manner that the Holders of the Regular Interest Securities include such
discount in income, but without regard to the de minimis rules. See "Taxation of
Debt Securities (Including Regular Interest Securities)" above. However, a REMIC
that acquires loans at a market discount must include such market discount in
income currently, as it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (presumably taking into account the Prepayment Assumption) on a
constant yield method. Although the law is somewhat unclear regarding recovery
of premium attributable to loans originated on or before such date and Federal
Tax Counsel is unable to opine on the matter, it is possible that such premium
may be recovered in proportion to payments of loan principal.
Prohibited Transactions; Contributions Tax; Tax on Net Income from
Foreclosure Property. The REMIC will be subject to a 100% tax on any net income
derived from a "prohibited transaction." For this purpose, net income will be
calculated without taking into account any losses from prohibited transactions
or any deductions attributable to any prohibited transaction that resulted in a
loss. In general, prohibited transactions include: (i) subject to limited
exceptions, the sale or other disposition of any qualified mortgage transferred
to the REMIC; (ii) subject to a limited exception, the sale or other disposition
of a cash flow investment; (iii) the receipt of any income from assets not
permitted to be held by the REMIC pursuant to the Code; or (iv) the receipt of
any fees or other compensation for services rendered by the REMIC. It is
anticipated that a REMIC will not engage in any prohibited transactions in which
it would recognize a material amount of net income. Subject to a number of
exceptions, a tax is imposed at the rate of 100% on amounts contributed to a
REMIC after the Startup Day. The Holders of Residual Interest Securities will
generally be responsible for the payment of any such taxes imposed on the REMIC.
To the extent not paid by such Holders or otherwise, however, such taxes will be
paid out of the assets of the Issuer and will be allocated pro rata to all
outstanding Classes of Securities of such REMIC. In addition, a REMIC is subject
to a tax (deductible from its income) on any "net income from foreclosure
property" (determined in accordance with Section 857(b)(4)(B) of the Code as if
the REMIC were a REIT).
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES
The Holder of a Security representing a residual interest (a "Residual
Interest Security") will take into account the "daily portion" of the taxable
income or net loss of the REMIC for each day during the taxable year on which
such Holder held the Residual Interest Security. The daily portion is determined
by allocating to each day in any calendar quarter its ratable portion of the
taxable income or net loss of the REMIC for such quarter, and by allocating that
amount among the Holders (on such day) of the Residual Interest Securities in
proportion to their respective holdings on such day.
The Holder of a Residual Interest Security must report its proportionate
share of the taxable income of the REMIC whether or not it receives cash
distributions from the REMIC attributable to such income or loss. The reporting
of taxable income without corresponding distributions could occur, for example,
in certain REMIC issues in which the Loans held by the REMIC were issued or
acquired at a discount, since mortgage prepayments cause recognition of discount
income, while the corresponding portion of the prepayment could be used in whole
or in part to make principal payments on REMIC Regular Interests issued without
any discount or at an insubstantial discount. (If this occurs, it is likely that
cash distributions will exceed taxable income in later years.) Taxable income
may also be greater in earlier years of certain REMIC issues as a result of the
fact that interest expense deductions, as a percentage of outstanding principal
on REMIC Regular Interest Securities, will typically increase over time as lower
yielding Securities are paid, whereas interest income with respect to loans will
generally remain constant over time as a percentage of loan principal.
In any event, because the Holder of a residual interest is taxed on the net
income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond or
instrument.
Limitation on Losses. The amount of the REMIC's net loss that a Holder may
take into account currently is limited to the Holder's adjusted basis at the end
of the calendar quarter in which such loss arises. A Holder's basis in a
Residual Interest Security will initially equal such Holder's purchase price,
and will subsequently be increased by the amount of the REMIC's taxable income
allocated to the Holder, and decreased (but not below zero) by the amount of
distributions made and the amount of the REMIC's net loss allocated to the
Holder. Any disallowed loss may be carried forward indefinitely, but may be used
only to offset income generated by the same REMIC. The ability of Holders of
Residual Interest Securities to deduct net losses may be subject to additional
limitations under the Code, as to which such Holders should consult their tax
advisers.
Distributions. Distributions on a Residual Interest Security (whether at
their scheduled times or as a result of prepayments) will generally not result
in any additional taxable income or loss to a Holder of a Residual Interest
Security. If the amount of such payment exceeds a Holder's adjusted basis in the
Residual Interest Security, however, the Holder will recognize gain (treated as
gain from the sale of the Residual Interest Security) to the extent of such
excess.
Sale or Exchange. A Holder of a Residual Interest Security will recognize
gain or loss on the sale or exchange of a Residual Interest Security equal to
the difference, if any, between the amount realized and such Holder's adjusted
basis in the Residual Interest Security at the time of such sale or exchange.
Except to the extent provided in regulations, which have not yet been issued,
any loss upon disposition of a Residual Interest Security will be disallowed if
the selling Holder acquires any residual interest in a REMIC or similar mortgage
pool within six months before or after such disposition.
Excess Inclusions. The portion of the REMIC taxable income of a Holder of a
Residual Interest Security consisting of "excess inclusion" income may not be
offset by other deductions or losses, including net operating losses, on such
Holder's federal income tax return. Further, if the Holder of a Residual
Interest Security is an organization subject to the tax on unrelated business
income imposed by Code Section 511, such Holder's excess inclusion income will
be treated as unrelated business taxable income of such Holder. In addition,
under Treasury regulations yet to be issued, if a real estate investment trust,
a regulated investment company, a common Issuer, or certain cooperatives were to
own a Residual Interest Security, a portion of dividends (or other
distributions) paid by the real estate investment trust (or other entity) would
be treated as excess inclusion income. If a Residual Security is owned by a
foreign person, excess inclusion income is subject to tax at a rate of 30% which
may not be reduced by treaty, is not eligible for treatment as "portfolio
interest" and is subject to certain additional limitations. See "Tax Treatment
of Foreign Investors."
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to a
Residual Interest Security, over the daily accruals for such quarterly period of
(i) 120% of the long term applicable federal rate on the Startup Date multiplied
by (ii) the adjusted issue price of such Residual Interest Security at the
beginning of such quarterly period. The adjusted issue price of a Residual
Interest Security at the beginning of each calendar quarter will equal its issue
price (calculated in a manner analogous to the determination of the issue price
of a Regular Interest Security), increased by the aggregate of the daily
accruals for prior calendar quarters, and decreased (but not below zero) by the
amount of loss allocated to a Holder and the amount of distributions made on the
Residual Interest Security before the beginning of the quarter. The long-term
federal rate, which is announced monthly by the Treasury Department, is an
interest rate that is based on the average market yield of outstanding
marketable obligations of the United States government having remaining
maturities in excess of nine years.
Provisions governing the relationship between excess inclusions and the
alternative minimum tax provide that (i) the alternative minimum taxable income
of a taxpayer is based on the taxpayer's regular taxable income computed without
regard to the rule that taxable income cannot be less than the amount of excess
inclusions, (ii) the alternative minimum taxable income of a taxpayer for a
taxable year cannot be less than the amount of excess inclusions for that year,
and (iii) the amount of any alternative minimum tax net operating loss is
computed without regard to any excess inclusions. While these provisions are
generally effective for tax years beginning after December 31, 1986, a taxpayer
may elect to apply them only with respect to tax years beginning after August
20, 1996.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Interest Securities may be disregarded. See "--Restrictions on
Ownership and Transfer of Residual Interest Securities" and "Tax Treatment of
Foreign Investors" below.
Restrictions on Ownership and Transfer of Residual Interest Securities. As
a condition to qualification as a REMIC, reasonable arrangements must be made to
prevent the ownership of a REMIC residual interest by any "Disqualified
Organization." Disqualified Organizations include the United States, any State
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing, a rural
electric or telephone cooperative described in Section 1381(a)(2)(C) of the
Code, or any entity exempt generally from tax (other than certain farmers'
cooperatives), unless such entity is not subject to tax on its unrelated
business income. Accordingly, the applicable Pooling and Servicing Agreement
will prohibit Disqualified Organizations from owning a Residual Interest
Security. In addition, no transfer of a Residual Interest Security will be
permitted unless the proposed transferee shall have furnished to the Trustee an
affidavit representing and warranting that it is neither a Disqualified
Organization nor an agent or nominee acing on behalf of a Disqualified
Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization (in violation of the restrictions set forth above), a substantial
tax will be imposed on the transferor of such Residual Interest Security at the
time of the transfer. In addition, if a Disqualified Organization holds an
interest in a pass- through entity (including, among others, a partnership,
trust, real estate investment trust, regulated investment company, or any person
holding as nominee an interest in a pass-through entity), that owns a Residual
Interest Security, the pass-through entity will be required to pay an annual tax
on its allocable share of the excess inclusion income of the REMIC.
The REMIC Regulations provide that a transfer of a "noneconomic residual
interest" will be disregarded for all federal income tax purposes unless
impeding the assessment or collection of tax was not a significant purpose of
the transfer. A residual interest will be treated as a "noneconomic residual
interest" unless, at the time of the transfer (1) the present value of the
expected future distributions on the residual interest at least equals the
product of (x) the present value of all anticipated excess inclusions with
respect to the residual interest and (y) the highest corporate tax rate,
currently 35 percent, and (2) the transferor reasonably expects that for each
anticipated excess inclusion, the transferee will receive distributions from the
REMIC, at or after the time at which taxes on such excess inclusion accrue,
sufficient to pay the taxes thereon. A significant purpose to impede the
assessment or collection of tax exists if the transferor, at the time of the
transfer, either knew or should have known (had "improper knowledge") that the
transferee would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. A transferor will be presumed not to have improper
knowledge if (i) the transferor conducts, at the time of the transfer, a
reasonable investigation of the financial condition of the transferee and, as a
result of the investigation, the transferor finds that the transferee has
historically paid its debts as they came due and finds no significant evidence
to indicate that the transferee will not continue to pay its debts as they come
due in the future, and (ii) the transferee represents to the transferor that (A)
the transferee understands that it might incur tax liabilities in excess of any
cash received with respect to the residual interest and (B) the transferee
intends to pay the taxes associated with owning the residual interest as they
come due. A different formulation of this rule applies to transfers of Residual
Interest Security by or to foreign transferees. See "Tax Treatment to Foreign
Investors."
Mark to Market Rules. Code Section 475 generally requires that securities
dealers include securities in inventory at their fair market value, recognizing
gain or loss as if the securities were sold at the end of each tax year.
Treasury regulations provide that for purposes of this mark to market
requirement, a REMIC residual certificate acquired on or after January 4, 1995
is not treated as a security and thus may not be marked to market.
ADMINISTRATIVE MATTERS
The REMIC's books must be maintained on a calendar year basis and the REMIC
must file an annual federal income tax return. The REMIC will also be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination of any adjustments to, among other things, items of
REMIC income, gain, loss, deduction, or credit, by the IRS in a unified
administrative proceeding.
TAX STATUS AS A GRANTOR TRUST
General. As specified in the Prospectus Supplement for a Series of
Securities, if a REMIC or partnership election is not made and the Certificates
are not treated as debt for federal income tax purposes, Federal Tax Counsel
will deliver its opinion generally to the effect that the Issuer relating to the
Series of Securities will be classified for federal income tax purposes as a
grantor trust under Subpart E, Part I of Subchapter J of the Code and not as an
association taxable as a corporation (the Securities of such Series,
"Pass-Through Securities"). Accordingly, each Holder of a Pass-Through Security
is treated for federal income tax purposes as the owner of an undivided interest
in the assets owned by the Issuer. As further described below, each Holder of a
Pass-Through Security therefore must report on its federal income tax return the
gross income from the portion of the assets that is allocable to such
Pass-Through Security and may deduct the portion of the expenses incurred or
accrued by the Issuer that is allocable to such Pass- Through Security, at the
same time and to the same extent as such items would be reported by such Holder
if it had purchased and held directly such interest in such assets and received
or accrued directly its share of the payments with respect to such assets and
incurred or accrued directly its share of expenses incurred or accrued by the
Issuer with respect to such assets when those amounts are received, incurred or
accrued by the Issuer.
A Holder of a Pass-Through Security that is an individual, estate, or trust
will be allowed deductions for such expenses only to the extent that the sum of
those expenses and the Holder's other miscellaneous itemized deductions exceeds
two percent of such Holder's adjusted gross income. Moreover, a Holder of a
Pass-Through Security that is not a corporation cannot deduct such expenses for
purposes of the alternative minimum tax (if applicable). An individual's
deductions may also be limited by Code Section 68 if the individual's adjusted
gross income exceeds certain limits. Such deductions will include servicing,
guarantee and administrative fees paid to the servicer of the Loans. As a
result, individuals, estates, or trusts holding Pass-Through Securities may have
taxable income in excess of the cash received.
Status of the Pass-Through Securities. The Pass-Through Securities will be
"real estate assets" for purposes of Section 856(c)(5)(A) of the Code and "loans
. . . secured by an interest in real property" within the meaning of Section
7701(a)(19)(C)(v) of the Code (assets qualifying under one or both of those
sections, applying each section separately, "qualifying assets") to the extent
that the related assets of the Issuer of a Series are qualifying assets. It is
unclear and Federal Tax Counsel is unable to opine whether the Pass-Through
Securities will be qualifying assets under any of the foregoing sections of the
Code to the extent that the related assets of the Issuer of a Series include
buydown funds, reserve funds, or payments on mortgages held pending distribution
to Certificateholders. Further, the Pass-Through Securities may not be "real
estate assets" to the extent loans held by the trust are not secured by real
property, and may not be "loans . . . secured by an interest in real property"
to the extent loans held by the trust are not secured by residential real
property or real property used primarily for church purposes. In addition, to
the extent that the principal amount of a loan exceeds the value of the property
securing the loan, it is unclear and Federal Tax Counsel is unable to opine
whether the loans will be qualifying assets.
Taxation of Pass-Through Securities Under Stripped Bond Rules. The federal
income tax treatment of the Pass-Through Securities will depend on whether they
are subject to the rules of section 1286 of the Code (the "stripped bond
rules"). The Pass-Through Securities will be subject to those rules if stripped
interest-only Certificates are issued. In addition, whether or not stripped
interest-only Certificates are issued, the Internal Revenue Service may contend
that the stripped bond rules apply on the ground that the Servicer's servicing
fee, or other amounts, if any, paid to (or retained by) the Servicer or its
affiliates, as specified in the applicable Prospectus Supplement, represent
greater than an arm's length consideration for servicing the Loans and should be
characterized for federal income tax purposes as an ownership interest in the
Loans. The Internal Revenue Service has taken the position in Revenue Ruling
91-46 that a retained interest in excess of reasonable compensation for
servicing is treated as a "stripped coupon" under the rules of Code Section
1286.
If interest retained for the Servicer's servicing fee or other interest is
treated as a "stripped coupon," the Pass-Through Securities will either be
subject to the OID rules or the market discount rules. A Holder of a
Pass-Through Security representing an interest in Loans will account for any
discount on the Pass- Through Security as market discount rather than OID if
either (i) the amount of OID with respect to the Pass-Through Security was
treated as zero under the OID de minimis rule when the Pass-Through Security was
stripped or (ii) no more than 100 basis points (including any amount of
servicing in excess of reasonable servicing) is stripped off from the Loans. If
neither of the above exceptions applies, the OID rules will apply to the
Pass-Through Securities.
If the OID rules apply, the Holder of a Pass-Through Security (whether a
cash or accrual method taxpayer) will be required to report interest income from
the Pass-Through Security in each taxable year equal to the income that accrues
on the Pass-Through Security in that year calculated under a constant yield
method based on the yield of the Pass-Through Security (or, possibly, the yield
of each Mortgage underlying such Pass-Through Security) to such Holder. Such
yield would be computed at the rate (assuming monthly compounding) that, if used
in discounting the Holder's share of the payments on the Mortgages, would cause
the present value of those payments to equal the price at which the Holder
purchased the Pass-Through Security. With respect to certain categories of debt
instruments, Section 1272(a)(6) of the Code requires that OID be accrued based
on a prepayment assumption determined in a manner prescribed by forthcoming
regulations. It is unclear whether such regulations would apply this rule to the
Pass-Through Securities, whether Section 1272(a)(6) might apply to the
Pass-Through Securities in the absence of such regulations, or whether the
Internal Revenue Service could require use of a reasonable prepayment assumption
based on other tax law principles and Federal Tax Counsel is unable to opine
with respect to this issue. If required to report interest income on the
Pass-Through Securities to the Internal Revenue Service under the stripped bond
rules, it is anticipated that the Trustee will calculate the yield of the
Pass-Through Securities based on a representative initial offering price of the
Pass-Through Securities and a reasonable assumed rate of prepayment of the Loans
(although such yield may differ from the yield to any particular Holder that
would be used in calculating the interest income of such Holder). The Prospectus
Supplement for each series of Pass-Through Securities will describe the
prepayment assumption that will be used for this purpose, but no representation
is made that the Loans will prepay at that rate or at any other rate.
In the case of a Pass-Through Security acquired at a price equal to the
principal amount of the Loans allocable to the Pass-Through Security, the use of
a reasonable prepayment assumption would not have any significant effect on the
yield used in calculating accruals of interest income. In the case, however, of
a Pass-Through Security acquired at a discount or premium (that is, at a price
less than or greater than such principal amount, respectively), the use of a
reasonable prepayment assumption would increase or decrease such yield, and thus
accelerate or decelerate the reporting of interest income, respectively.
If a Loan is prepaid in full, the Holder of a Pass-Through Security
acquired at a discount or premium generally will recognize ordinary income or
loss equal to the difference between the portion of the prepaid principal amount
of the Loan that is allocable to the Pass-Through Security and the portion of
the adjusted basis of the Pass-Through Security (see "Sales of Pass-Through
Securities" below) that is allocable to the Loan. The method of allocating such
basis among the Loans may differ depending on whether a reasonable prepayment
assumption is used in calculating the yield of the Pass-Through Securities for
purposes of accruing OID. It is not clear and Federal Tax Counsel is unable to
opine as to whether any other adjustments would be required to reflect
differences between the prepayment rate that was assumed in calculating yield
and the actual rate of prepayments.
Pass-Through Securities of certain series ("Variable Rate Pass-Through
Securities") may provide for a Pass-Through Rate based on the weighted average
of the interest rates of the Loans held by the Issuer, which interest rates may
be fixed or variable. In the case of a Variable Rate Pass-Through Security that
is subject to the OID rules, the daily portions of OID generally will be
calculated under the principles discussed in "--Taxation of Debt Securities
(Including Regular Interest Securities)--Variable Rate Debt Securities."
Taxation of Pass-Through Securities If Stripped Bond Rules Do Not Apply. If
the stripped bond rules do not apply to a Pass-Through Security, then the Holder
will be required to include in income its share of the interest payments on the
Mortgages in accordance with its tax accounting method. In addition, if the
Holder purchased the Pass-Through Security at a discount or premium, the Holder
will be required to account for such discount or premium in the manner described
below. The treatment of any discount will depend on whether the discount is OID
as defined in the Code and, in the case of discount other than OID, whether such
other discount exceeds a de minimis amount. In the case of OID, the Holder
(whether a cash or accrual method taxpayer) will be required to report as
additional interest income in each month the portion of such discount that
accrues in that month, calculated based on a constant yield method. In general
it is not anticipated that the amount of OID to be accrued in each month, if
any, will be significant relative to the interest paid currently on the
Mortgages. However, OID could arise with respect to a Loan ("ARM") that provides
for interest at a rate equal to the sum of an index of market interest rates and
a fixed number. The OID for ARMs generally will be determined under the
principles discussed in "Taxation of Debt Securities (Including Regular Interest
Securities)--Variable Rate Debt Securities."
If discount other than OID exceeds a de minimis amount (described below),
the Holder will also generally be required to include in income in each month
the amount of such discount accrued through such month and not previously
included in income, but limited, with respect to the portion of such discount
allocable to any Loan, to the amount of principal on such Loan received by the
Issuer in that month. Because the Loans may provide for monthly principal
payments, such discount may be required to be included in income at a rate that
is not significantly slower than the rate at which such discount accrues (and
therefore at a rate not significantly slower than the rate at which such
discount would be included in income if it were OID). The Holder may elect to
accrue such discount under a constant yield method based on the yield of the
Pass-Through Security to such Holder (or possibly based on the yields of each
Loan). In the absence of such an election, it may be necessary to accrue such
discount under a more rapid straight-line method. Under the de minimis rule,
market discount with respect to a Pass-Through Security will be considered to be
zero if it is less than the product of (i) 0.25% of the principal amount of the
Loans allocable to the Pass-Through Security and (ii) the weighted average life
(in complete years) of the Loans remaining at the time of purchase of the
Pass-Through Security.
If a Holder purchases a Pass-Through Security at a premium, such Holder may
elect under Section 171 of the Code to amortize the portion of such premium that
is allocable to a Loan under a constant yield method based on the yield of the
Loan to such Holder, provided that such Loan was originated after September 27,
1985. Premium allocable to a Loan originated on or before that date should be
allocated among the principal payments on the Loan and allowed as an ordinary
deduction as principal payments are made or, perhaps, upon termination.
It is not clear whether the foregoing adjustments for discount or premium
would be made based on the scheduled payments on the Loans or taking account of
a reasonable prepayment assumption, and Federal Tax Counsel is unable to opine
on this issue.
If a Loan is prepaid in full, the Holder of a Pass-Through Security
acquired at a discount or premium will recognize ordinary income or loss equal
to the difference between the portion of the prepaid principal amount of the
Loan that is allocable to the Pass-Through Security and the portion of the
adjusted basis of the Pass-Through Security (see "Sales of Pass-Through
Securities" below) that is allocable to the Loan. The method of allocating such
basis among the Loans may differ depending on whether a reasonable prepayment
assumption is used in calculating the yield of the Pass-Through Securities for
purposes of accruing OID. Although Federal Tax Counsel is unable to opine on the
matter, other adjustments might be required to reflect differences between the
prepayment rate that was assumed in accounting for discount or premium and the
actual rate of prepayments.
MISCELLANEOUS TAX ASPECTS
Backup Withholding A Holder, other than a Holder of a Residual Interest
Security, may, under certain circumstances, be subject to "backup withholding"
at a rate of 31% with respect to distributions or the proceeds of a sale of
certificates to or through brokers that represent interest or original issue
discount on the Securities. This withholding generally applies if the Holder of
a Security (i) fails to furnish the Trustee with its taxpayer identification
number ("TIN"); (ii) furnishes the Trustee an incorrect TIN; (iii) fails to
report properly interest, dividends or other "reportable payments" as defined in
the Code; or (iv) under certain circumstances, fails to provide the Trustee or
such Holder's securities broker with a certified statement, signed under penalty
of perjury, that the TIN provided is its correct number and that the Holder is
not subject to backup withholding. Backup withholding will not apply, however,
with respect to certain payments made to Holders, including payments to certain
exempt recipients (such as exempt organizations) and to certain Nonresidents (as
defined below). Holders should consult their tax advisers as to their
qualification for exemption from backup withholding and the procedure for
obtaining the exemption.
The Trustee will report to the Holders and to the Servicer for each
calendar year the amount of any "reportable payments" during such year and the
amount of tax withheld, if any, with respect to payments on the Securities.
TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to Issuers which are treated
as partnerships for federal income tax purposes and with respect to Certificates
treated as debt for federal income tax purposes, unless interest (including OID)
paid on a Security (other than a Residual Interest Security) is considered to be
"effectively connected" with a trade or business conducted in the United States
by a nonresident alien individual, foreign partnership, foreign corporation,
foreign estate, or foreign trust ("foreign investors"), such interest will
normally qualify as portfolio interest (except where (i) the recipient is a
Holder, directly or by attribution, of 10% or more of the capital or profits
interest in the issuer, or (ii) the recipient is a controlled foreign
corporation to which the issuer is a related person) and will be exempt from
federal income tax. See "--Tax Consequences to Holders of the Certificates
Issued by a Partnership--Tax Consequences to Foreign Certificateholders" and
"--Certain Certificates Treated as Indebtedness--Foreign Investors." Upon
receipt of appropriate ownership statements, the issuer normally will be
relieved of obligations to withhold tax from such interest payments. These
provisions supersede the generally applicable provisions of United States law
that would otherwise require the issuer to withhold at a 30% rate (unless such
rate were reduced or eliminated by an applicable tax treaty) on, among other
things, interest and other fixed or determinable, annual or periodic income paid
to nonresidents. Holders of Pass-Through Securities however, may be subject to
withholding to the extent that the Loans were originated on or before July 18,
1984.
Interest and OID of Holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the Holder and the Holders timely provide an IRS Form 4224. They
will, however, generally be subject to the regular United States income tax.
Payments to Holders of Residual Interest Securities who are foreign
investors will generally be treated as interest for purposes of the 30% (or
lower treaty rate) United States withholding tax. Holders should assume that
such income does not qualify for exemption from United States withholding tax as
"portfolio interest." It is clear that, to the extent that a payment represents
a portion of REMIC taxable income that constitutes excess inclusion income, a
Holder of a Residual Interest Security will not be entitled to an exemption from
or reduction of the 30% (or lower treaty rate) withholding tax rule. If the
payments are subject to United States withholding tax, they generally will be
taken into account for withholding tax purposes only when paid or distributed
(or when the Residual Interest Security is disposed of). The Treasury has
statutory authority, however, to promulgate regulations which would require such
amounts to be taken into account at an earlier time in order to prevent the
avoidance of tax. Such regulations could, for example, require withholding prior
to the distribution of cash in the case of Residual Interest Securities that do
not have significant value. Under the REMIC Regulations, if a Residual Interest
Security has tax avoidance potential, a transfer of a Residual Interest Security
to a nonresident will be disregarded for all federal tax purposes. A Residual
Interest Security has tax avoidance potential unless, at the time of the
transfer the transferor reasonably expects that the REMIC will distribute to the
transferee residual interest Holder amounts that will equal at least 30% of each
excess inclusion, and that such amounts will be distributed at or after the time
at which the excess inclusions accrue and not later than the calendar year
following the calendar year of accrual. If a foreign investor transfers a
Residual Interest Security to a United States person, and if the transfer has
the effect of allowing the transferor to avoid tax on accrued excess inclusions,
then the transfer is disregarded and the transferor continues to be treated as
the owner of the Residual Interest Security for purposes of the withholding tax
provisions of the Code. See "Taxation of Holders of Residual Interest
Securities--Excess Inclusions."
Subject to the discussion in the previous paragraph, any capital gain
realized on the sale, redemption, retirement or other taxable disposition of a
Security by a foreign person will be exempt from United States federal income
and withholding tax, provided that (i) such gain is not effectively connected
with the conduct of a trade or business in the United States by the foreign
person and (ii) in the case of an individual foreign person, the foreign person
is not present in the United States for 183 days or more in the taxable year.
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
Federal Tax Counsel will deliver its opinion for an Issuer which is
intended to be a partnership for federal income tax purposes, as specified in
the related Prospectus Supplement, generally to the effect that the Issuer will
not be an association (or publicly traded partnership) taxable as a corporation
for federal income tax purposes. This opinion will be based on the assumption
that the terms of the Trust Agreement and related documents will be complied
with, and on counsel's conclusion the nature of the income of the Issuer will
exempt it from the rule that certain publicly traded partnerships are taxable as
corporations or such rule is otherwise inapplicable to the Issuer, so that the
Issuer will not be characterized as a publicly traded partnership taxable as a
corporation.
If the Issuer were taxable as a corporation for federal income tax
purposes, the Issuer would be subject to corporate income tax on its taxable
income. The Issuer's taxable income would include all its income, possibly
reduced by its interest expense on the Notes. Any such corporate income tax
could materially reduce cash available to make payments on the Notes and
distributions on the Certificates, and Certificateholders could be liable for
any such tax that is unpaid by the Issuer. In additions, all distributions to
the Certificateholders would be taxable as dividends.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES ISSUED BY A PARTNERSHIP
Treatment of the Notes as Indebtedness. The Issuer will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Except as otherwise provided in the related
Prospectus Supplement, Federal Tax Counsel will advise the Depositor that in its
opinion the Notes will be classified as debt for federal income tax purposes.
Consequently, Holders of Notes will be subject to taxation as described in
"Taxation of Debt Securities (Including Regular Interest Securities)" above for
Debt Securities which are not Regular Interest Securities.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of Federal Tax Counsel, the IRS successfully asserted that one or more of the
Notes did not represent debt for federal income tax purposes, the Notes might be
treated as equity interests in the Issuer. If so treated, the Issuer might be
taxable as a corporation with the adverse consequences described above (and the
taxable corporation would not be able to reduce its taxable income by deductions
for interest expense on Notes recharacterized as equity). Alternatively, the
Issuer might be treated as a publicly traded partnership that would not be
taxable as a corporation because it would meet certain qualifying income tests.
Nonetheless, treatment of the Notes as equity interests in such a publicly
traded partnership could have adverse tax consequences to certain Holders. For
example, income to foreign Holders generally would be subject to U.S. federal
income tax and U.S. federal income tax return filing and withholding
requirements, and individual Holders might be subject to certain limitations on
their ability to deduct their share of the Issuer's expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES ISSUED BY A PARTNERSHIP
Treatment of the Issuer as a Partnership. In the case of an Issuer intended
to qualify as a partnership for federal income tax purposes, the Issuer and the
Transferor will agree, and the Certificateholders will agree by their purchase
of Certificates, to treat the Issuer as a partnership for purposes of federal
and state income tax, franchise tax and any other tax measured in whole or in
part by income, with the assets of the partnership being the assets held by the
Issuer, the partners of the partnership being the Certificateholders, and the
Notes, if any, being debt of the partnership. However, the proper
characterization of the arrangement involving the Issuer, the Certificates, the
Notes, the Issuer and the Servicer is not clear because there is no authority on
transactions closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Issuer. Generally, provided the
Certificates are issued at or close to face value, any such characterization
would not result in materially adverse tax consequences to Certificateholders as
compared to the consequences from treatment of the Certificates as equity in a
partnership, described below. The following discussion assumes that the
Certificates represent equity interests in a partnership.
Partnership Taxation. As a partnership, the Issuer will not be subject to
federal income tax. Rather, each Certificateholder will be required to
separately take into account such Holder's allocated share of income, gains,
losses, deductions and credits of the Issuer. The Issuer's income will consist
primarily of interest and finance charges earned on the Loans (including
appropriate adjustments for market discount, OID and bond premium) and any gain
upon collection or disposition of Loans. The Issuer's deductions will consist
primarily of interest and OID accruing with respect to the Notes, servicing and
other fees, and losses or deductions upon collection or disposition of Loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Issuer for each month equal to the sum of (i) the interest that accrues on the
Certificates in accordance with their terms for such month, including interest
accruing at the Pass-Through Rate for such month and interest on amounts
previously due on the Certificates but not yet distributed; (ii) any Issuer
income attributable to discount on the Loans that corresponds to any excess of
the principal amount of the Certificates over their initial issue price; (iii)
prepayment premium payable to the Certificateholders for such month; and (iv)
any other amounts of income payable to the Certificateholders for such month.
Such allocation will be reduced by any amortization by the Issuer of premium on
Loans that corresponds to any excess of the issue price of Certificates over
their principal amount. All remaining taxable income of the Issuer will be
allocated to the Depositor. Based on the economic arrangement of the parties,
this approach for allocating Issuer income should be permissible under
applicable Treasury regulations, although no assurance can be given that the IRS
would not require a greater amount of income to be allocated to
Certificateholders. Moreover, even under the foregoing method of allocation,
Certificateholders may be allocated income equal to the entire Pass-Through Rate
plus the other items described above even though the Issuer might not have
sufficient cash to make current cash distributions of such amount. Thus, cash
basis Holders will in effect be required to report income from the Certificates
on the accrual basis and Certificateholders may become liable for taxes on
Issuer income even if they have not received cash from the Issuer to pay such
taxes. In addition, because tax allocations and tax reporting will be done on a
uniform basis for all Certificateholders but Certificateholders may be
purchasing Certificates at different times and at different prices,
Certificateholders may be required to report on their tax returns taxable income
that is greater or less than the amount reported to them by the Issuer.
If Notes are also issued, some or all of the taxable income allocated to a
Certificateholder that is a pension, profit sharing or employee benefit plan or
other tax-exempt entity (including an individual retirement account) will
constitute "unrelated business taxable income" generally taxable to such a
Holder under the Code.
An individual taxpayer's share of expenses of the Issuer (including fees to
the Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual in whole or in
part and might result in such Holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to such Holder over the life of
the Issuer.
The Issuer intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Loan, the Issuer
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Loans were not issued with
OID and, therefore, the Trust should not have OID income. However, the purchase
price paid by the Issuer for the Loans may be greater or less than the remaining
principal balance of the Loans at the time of purchase. If so, the Loan will
have been acquired at a premium or discount, as the case may be. (As indicated
above, the Issuer will make this calculation on an aggregate basis, but might be
required to recompute it on a Loan by Loan basis.)
If the Issuer acquires the Loans at a market discount or premium, the
Issuer will elect to include any such discount in income currently as it accrues
over the life of the Loans or to offset any such premium against interest income
on the Loans. As indicated above, a portion of such market discount income or
premium deduction may be allocated to Certificateholders.
Section 708 Termination. Under Section 708 of the Code, the Issuer will be
deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Issuer are sold or exchanged within a
12-month period. If such a termination occurs, the Issuer will be considered to
distribute its assets to the partners, who would then be treated as
recontributing those assets to the Issuer as a new partnership. Proposed
Treasury regulations would provide that if a termination occurs, the partnership
will be considered to transfer its assets and liabilities to a new partnership
in exchange for interests in that new partnership, which it would then be
treated as transferring to its partners. The Issuer will not comply with certain
technical requirements that might apply when such a constructive termination
occurs. As a result, the Issuer may be subject to certain tax penalties and may
incur additional expenses if it is required to comply with those requirements.
Furthermore, the Issuer might not be able to comply due to lack of data.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
Holder's cost increased by the Holder's share of Issuer income (includible in
income) and decreased by any distributions received with respect to such
Certificate. In addition, both the tax basis in the Certificates and the amount
realized on a sale of a Certificate would include the Holder's share of the
Notes and other liabilities of the Issuer. A Holder acquiring Certificates at
different prices may be required to maintain a single aggregate adjusted tax
basis in such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the Certificates
sold (rather than maintaining a separate tax basis in each Certificate for
purposes of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the Holder's share of
unrecognized accrued market discount on the Loans would generally be treated as
ordinary income to the Holder and would give rise to special tax reporting
requirements. The Issuer does not expect to have any other assets that would
give rise to such special reporting requirements. Thus, to avoid those special
reporting requirements, the Issuer will elect to include market discount in
income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Depositors and Transferees. In general, the Issuer's
taxable income and losses will be determined monthly and the tax items for a
particular calendar month will be apportioned among the Certificateholders in
proportion to the principal amount of Certificates owned by them as of the close
of the last day of such month. As a result, a Holder purchasing Certificates may
be allocated tax items (which will affect its tax liability and tax basis)
attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations and Federal Tax Counsel is unable to opine on the matter. If a
monthly convention is not allowed (or only applies to transfers of less than all
of the partner's interest), taxable income or losses of the Issuer might be
reallocated among the Certificateholders. The Issuer's method of allocation
between transferors and transferees may be revised to conform to a method
permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Issuer's assets will not be adjusted to reflect that higher
(or lower) basis unless the Issuer were to file an election under Section 754 of
the Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Issuer currently does not intend to make
such election. As a result, Certificateholders might be allocated a greater or
lesser amount of Issuer income than would be appropriate based on their own
purchase price for Certificates.
Administrative Matters. The Trustee is required to keep or have kept
complete and accurate books of the Issuer. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Issuer will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Issuer and will report each Certificateholder's allocable share of items of
Issuer income and expense to Holders and the IRS on Schedule K-1. The Issuer
will provide the Schedule K-1 information to nominees that fail to provide the
Issuer with the information statement described below and such nominees will be
required to forward such information to the beneficial owners of the
Certificates. Generally, Holders must file tax returns that are consistent with
the information return filed by the Issuer or be subject to penalties unless the
Holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Issuer
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of such person,
(y) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Issuer information as
to themselves and their ownership of Certificates. A clearing agency registered
under Section 17A of the Exchange Act is not required to furnish any such
information statement to the Issuer. The information referred to above for any
calendar year must be furnished to the Issuer on or before the following January
31. Nominees, brokers and financial institutions that fail to provide the Issuer
with the information described above may be subject to penalties.
The Depositor will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Issuer by the appropriate taxing authorities could
result in an adjustment of the returns of the Certificateholders, and, under
certain circumstances, a Certificateholder may be precluded from separately
litigating a proposed adjustment to the items of the Issuer. An adjustment could
also result in an audit of a Certificateholder's returns and adjustments of
items not related to the income and losses of the Issuer.
Tax Consequences to Foreign Certificateholders. It is not clear and Federal
Tax Counsel is unable to opine whether the Issuer would be considered to be
engaged in a trade or business in the United States for purposes of federal
withholding taxes with respect to non-U.S. persons because there is no clear
authority dealing with that issue under facts substantially similar to those
described herein. Although it is not expected that the Issuer would be engaged
in a trade or business in the United States for such purposes, the Issuer will
withhold as if it were so engaged in order to protect the Issuer from possible
adverse consequences of a failure to withhold. The Issuer expects to withhold on
the portion of its taxable income that is allocable to foreign
Certificateholders pursuant to Section 1446 of the Code, as if such income were
effectively connected to a U.S. trade or business, at a rate of 35% for foreign
Holders that are taxable as corporations and 39.6% for all other foreign
Holders. Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the Issuer to change its withholding
procedures.
If the trust is engaged in a U.S. trade or business, each foreign Holder
might be required to file a U.S. individual or corporate income tax return
(including, in the case of a corporation, the branch profits tax) on its share
of the Issuer's income. A foreign Holder generally would be entitled to file
with the IRS a claim for refund with respect to taxes withheld by the Issuer
taking the position that no taxes were due because the Issuer was not engaged in
a U.S. trade or business. However, interest payments made (or accrued) to a
Certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the Issuer, and for that reason or because of the nature of the
assets of the Issuer probably will not be considered "portfolio interest." As a
result, even if the Issuer was not considered to be engaged in a U.S. trade or
business, Certificateholders will be subject to United States federal income tax
which must be withheld at a rate of 30%, unless reduced or eliminated pursuant
to an applicable treaty. A foreign Holder would be entitled to claim a refund
for such withheld tax, taking the position that the interest was portfolio
interest and therefore not subject to U.S. tax. However, the IRS may disagree
and no assurance can be given as to the appropriate amount of tax liability. As
a result, each potential foreign Certificateholder should consult its tax
advisor as to whether an interest in a Certificate is an unsuitable investment.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the Holder is an exempt recipient under
applicable provisions of the Code.
CERTAIN CERTIFICATES TREATED AS INDEBTEDNESS
With respect to Certificates which are intended to be treated as
indebtedness for federal income tax purposes, Federal Tax Counsel will opine
that based upon its analysis of the factors discussed below, that for federal
income tax purposes the Certificates will be characterized as indebtedness that
is secured by the Loans. Opinions of counsel are not binding on the Internal
Revenue Service (the "IRS"), however, and there can be no assurance that the IRS
could not successfully challenge this conclusion.
The Depositor will express in the Trust Agreement its intent that the
Certificates be indebtedness secured by the Loans for federal, state and local
income or franchise tax purposes. The Depositor, by entering into the Trust
Agreement, has agreed and each Certificateholder, by the acceptance of a
Certificate, will agree to treat the Certificates as indebtedness for federal,
state and local income or franchise tax purposes. However, because different
criteria are used to determine the non-tax accounting characterization of the
transactions contemplated by the Trust Agreement, the Depositor expects to treat
such transaction, for regulatory and financial accounting purposes, as a
transfer of an ownership interest in the Loans and not as a debt obligation.
A basic premise of federal income tax law is that the economic substance of
a transaction generally determines the tax consequences. The form of a
transaction, while a relevant factor, is not conclusive evidence of its economic
substance. In appropriate circumstances, the courts have allowed taxpayers, as
well as the IRS, to treat a transaction in accordance with its economic
substance, as determined under federal income tax law, notwithstanding that the
participants characterize the transaction differently for non-tax purposes. In
some instances, however, 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. Federal Tax Counsel believes that the
rationale of those cases will not apply to the issuance of the Certificates.
The determination of whether the economic substance of a transfer of an
interest in property is a sale or a loan secured by the transferred property
depends on numerous factors that indicate whether the transferor has
relinquished (and the transferee has obtained) substantial incidents of
ownership in the property. Among the primary factors considered are whether the
transferee has obtained the opportunity for gain if the property increases in
value and has assumed the risk of loss if the property decreases in value. Based
upon its analysis of such factors, Federal Tax Counsel will conclude that the
Certificateholders are not the owners of the Loans for federal income tax
purposes. As a result, Federal Tax Counsel will opine with respect to
Certificates which are intended to be treated as indebtedness, that such
Certificates will properly be characterized for federal income tax purposes as
indebtedness. Contrary characterizations that could be asserted by the IRS are
described below under "--Possible Characterization of the Transaction as a
Partnership or as an Association Taxable as a Corporation."
Certificateholders as the Holders of debt instruments for federal tax
purposes will be taxed in the manner described above in "--Taxation of Debt
Securities (Including Regular Interest Securities)" for Debt Securities which
are not Regular Interest Securities.
Possible Characterization of the Transaction as a Partnership or as
Association Taxable as a Corporation. As stated above, the opinion of Federal
Tax Counsel with respect to the Certificates will not be binding on the courts
or the IRS, and no assurance can be given that the characterization of the
Certificates as debt would prevail. It is possible that the IRS would assert
that, for purposes of the Code, the transaction described herein constitutes a
transfer of the Loans (or an interest therein) to the Certificateholders and
that the proper classification of the legal relationship between the Depositor
and the Certificateholders resulting from the transaction is that of a
partnership, a publicly traded partnership taxed as a corporation, or an
association taxable as a corporation. Since Federal Tax Counsel will advise that
the Certificates will be treated as indebtedness for federal income tax
purposes, the Depositor generally will not attempt to comply with the federal
income tax reporting requirements that would apply if Certificates were treated
as interests in a partnership, a publicly traded partnership taxable as a
corporation or a corporation.
If a partnership were deemed to be created between the Depositor and the
Certificateholders, the partnership itself would not be subject to federal
income tax (unless it were to be characterized as a publicly traded partnership
taxable as a corporation); rather, the partners of such partnership, including
the Certificateholders, 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 deduction of a
Certificateholder could differ if the Certificates were held to constitute
partnership interests, rather than indebtedness. Moreover, an individual's share
of expenses of the partnership would be miscellaneous itemized deductions that,
in the aggregate, are allowed as deductions only to the extent they exceed two
percent of the individual's adjusted gross income, and would be subject to
reduction under Section 68 of the Code if the individual's adjusted gross income
exceeded certain limits. As a result, the individual might be taxed on a greater
amount of income than would be the case if the Certificates were treated as a
debt instrument. Finally, all or a portion of any taxable income allocated to a
Certificateholder that is a pension, profit-sharing or employee benefit plan, or
other tax-exempt entity may, under certain circumstances constitute "unrelated
business taxable income" which generally would be taxable to the holder under
the Code.
If it were determined that the transaction created an entity classified as
an association or as a publicly traded partnership taxable as a corporation, the
Issuer would be subject to federal income tax at corporate income tax rates on
the income it derives from the Loans, which would reduce the amounts available
for distribution to the Certificateholders. Such classification may also have
adverse state and local tax consequences that would reduce amounts available for
distribution to Certificateholders. Moreover, distributions on the Certificates
would most likely not be deductible in computing the entity's taxable income,
and cash distributions to the Certificateholders generally would be treated as
dividends for tax purposes to the extent of such entity's earnings and profits.
Foreign Investors. If the IRS were to successfully contend that the
Certificates are interests in a partnership and if such partnership were
considered to be engaged in a trade or business in the United States, the
partnership would be subject to a withholding tax on distributions to (or, at
its election, income allocable to) a foreign investor; and such Holder would be
credited for his or her share of the withholding tax paid by the partnership. In
such case, the Holder generally would be subject to United States federal income
tax at regular federal income tax rates, and possibly a branch profits tax in
the case of a corporate Holder.
Alternatively, although there may be arguments to the contrary, if such a
partnership is not considered to be engaged in a trade or business within the
United States and if income with respect to the Certificates is not otherwise
effectively connected with the conduct of a trade or business in the United
States by the foreign investor, the foreign investor would be subject to United
States federal income tax and withholding at a rate of 30% (unless reduced by an
applicable tax treaty) on the Holder's distributive share of the partnership's
interest income. See "Tax Consequences to Holders of the Certificates Issued by
a Partnership--Tax Consequences to Foreign Certificateholders" for a more
detailed discussion of the tax consequences of an equity investment in a
partnership by a foreign investor.
If the Issuer were taxable as a corporation, distributions to foreign
investors, to the extent treated as dividends, would generally be subject to
withholding at the rate of 30%, unless such rate were reduced or eliminated by
an applicable income tax treaty.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "FEDERAL
INCOME TAX CONSIDERATIONS," potential investors should consider the state and
local income tax consequences of the acquisition, ownership, and disposition of
the Securities. State and local income tax law may differ substantially from the
corresponding federal law, and this discussion does not purport to describe any
aspect of the income tax laws of any state or locality. Therefore, potential
investors should consult their own tax advisors with respect to the various
state and local tax consequences of an investment in the Securities.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA")
and the Code impose certain restrictions on employee benefit plans subject to
ERISA and on plans and other arrangements subject to Section 4975 of the Code
and on persons who are parties in interest or disqualified persons ("parties in
interest") with respect to such plans or arrangements. Certain employee benefit
plans, such as governmental plans and church plans (if no election has been made
under Section 410(d) of the Code), are not subject to the restrictions of ERISA,
and assets of such plans may be invested in the Securities without regard to the
ERISA considerations described below, subject to other applicable federal and
state law. However, any such governmental or church plan which is qualified
under Section 401(a) of the Code and exempt from taxation under Section 501(a)
of the Code is subject to the prohibited transaction rules set forth in Section
503 of the Code.
A fiduciary of an employee benefit plan subject to Title I of ERISA should
consider the fiduciary standards under ERISA in the context of the plan's
particular circumstances before authorizing an investment of a portion of such
plan's assets in the Securities. Accordingly, among other factors, such
fiduciary should consider (i) whether the investment is for the exclusive
benefit of plan participants and their beneficiaries; (ii) whether the
investment satisfies the diversification requirements of Section 404 of ERISA;
(iii) whether the investment is in accordance with the documents and instruments
governing the plan and (iv) whether the investment is prudent, considering the
nature of the investment. Fiduciaries of such plans also should consider ERISA's
prohibition on improper delegation of control over, or responsibility for, plan
assets.
In addition, fiduciaries of employee benefit plans subject to Title I of
ERISA, as well as certain plans or other retirement arrangements not subject to
ERISA but which are subject to Section 4975 of the Code (such as individual
retirement accounts and Keogh plans covering only a sole proprietor or partners)
or any entity, including an insurance company general account whose underlying
assets include plan assets by reason of a plan or account investing in such
entity (collectively, "Plan(s)"), should consult with their legal counsel to
determine whether an investment in the Securities will cause the assets of the
Issuer to be considered plan assets pursuant to the plan asset regulations set
forth at 29 CFR ss.2510.3-101 (the "Regulation"), thereby subjecting the Plan to
the prohibited transaction rules with respect to the Issuer and the Trustee, or
any entities providing services with respect to the operation of the Trust, to
the fiduciary investment standards of ERISA, or cause the excise tax provisions
of Section 4975 of the Code to apply to the Issuer, unless a statutory or
regulatory exception or an administrative exemption granted by the Department of
Labor ("DOL") applies to the purchase, sale, transfer or holding of the
Securities.
The Regulation contains rules for determining what constitutes the assets
of a Plan. The Regulation provides that, as a general rule, the underlying
assets and properties of corporations, partnerships, trusts and certain other
entities in which a Plan makes an investment in an "equity interest" will be
deemed for purposes of ERISA to be assets of the Plan unless certain exceptions
apply.
Under the terms of the Regulation, the Issuer may be deemed to hold plan
assets by reason of a Plan's investment in a Security; such plan assets would
include an undivided interest in the Loan Assets and any other assets held by
the Issuer. In such an event, persons providing services with respect to the
operation of the Issuer may be parties in interest, subject to the fiduciary
responsibility provisions of Title I of ERISA, including the prohibited
transaction provisions of Section 406 of ERISA and of Section 4975 of the Code,
with respect to transactions involving such assets unless such transactions are
subject to a statutory or regulatory exception or an administrative exemption.
One such exception applies if the interest described is treated as
indebtedness under applicable local law and which has no substantial equity
features. Generally, a profits interest in a partnership, an undivided ownership
interest in property and a beneficial ownership interest in a trust are deemed
to be "equity interests" under the final regulation. If Notes of a particular
Series were deemed to be indebtedness under applicable local law without any
substantial equity features, an investing Plan's assets would include such
Notes, but not, by reason of such purchase, the underlying assets of the Issuer.
However, without regard to whether the Notes are treated as an equity interest
for such purposes, the purchase, holding or transfer of Notes by or on behalf of
a Plan could be considered a prohibited transaction if the Depositor or the
Trustee or any of their respective affiliates is, or becomes, a party in
interest or disqualified person with respect to such Plan.
Another such exception applies if the class of equity interests in question
is: (i) "widely held" (held by 100 or more investors who are independent of the
Depositor and each other); (ii) freely transferable; and (iii) sold as part of
an offering pursuant to (A) an effective registration statement under the
Securities Act of 1933, and then subsequently registered under the Securities
Exchange Act of 1934 or (B) an effective registration statement under Section
12(b) or 12(g) of the Securities Exchange Act of 1934 ("Publicly Offered
Securities"). In addition, the regulation provides that if at all times more
than 75% of the value of all classes of equity interests in the Depositor or the
Issuer are held by investors other than benefit plan investors (which is defined
as including both Plans and government plans), the investing Plan's assets will
not include any of the underlying assets of the Depositor or the Issuer.
The DOL has granted to certain underwriters and/or placement agents
individual prohibited transaction exemptions which may be applicable to avoid
certain of the prohibited transactions rules of ERISA with respect to the
initial purchase, the holding and the subsequent resale in the secondary market
by Plans of pass-through certificates representing a beneficial undivided
ownership interest in the assets of a trust that consist of certain receivables,
loans and other obligations that meet the conditions and requirements of the
exemption which may be applicable to the Certificates.
In addition, one or more other prohibited transaction exemptions issued by
the DOL may be available to a Plan investing in Securities, depending in part
upon the type of Plan fiduciary making the decision to acquire the Securities
and the circumstances under which such decision is made, including but not
limited to: DOL Prohibited Transaction Exemption ("PTE") 84-14 (involving
transactions determined by "qualified professional asset managers"); PTE 91-38
(involving bank collective investment funds); PTE 90-1 (involving insurance
company pooled separate accounts); PTE 95-60 (involving insurance company
general accounts) and PTE 96-23 (involving transactions determined by "in-house
asset managers"). However, even if the conditions specified in any of these
exemptions are met, the scope of the relief provided might or might not cover
all acts which might be construed as prohibited transactions.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, and the potential consequences to
their specific circumstances, prior to making an investment in the Securities.
Moreover, each Plan fiduciary should determine whether under the general
fiduciary standards of investment procedure and diversification an investment in
the Securities is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio.
LEGAL INVESTMENT
Unless otherwise specified in the related Prospectus Supplement, the
Securities will not constitute "mortgage-related securities" within the meaning
of SMMEA. Accordingly, investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether and to
what extent the Securities constitute legal investments for them.
PLAN OF DISTRIBUTION
On the terms and conditions set forth in an underwriting agreement (the
"Underwriting Agreement") with respect to each Issuer, the Depositor will agree
to sell to each of the underwriters named therein and in the related Prospectus
Supplement, and each of such underwriters will severally agree to purchase from
the Depositor, the principal amount of each Class of Securities of the related
Series set forth therein and in the related Prospectus Supplement.
In each Underwriting Agreement, the several underwriters will agree,
subject to the terms and conditions set forth therein, to purchase all of the
Securities described therein which are offered hereby and by the related
Prospectus Supplement if any of such Securities are purchased. In the event of a
default by any such underwriter, each Underwriting Agreement will provide that,
in certain circumstances, purchase commitments of the nondefaulting underwriters
may be increased, or the Underwriting Agreement may be terminated.
Each Prospectus Supplement will either (i) set forth the price at which
each Class of Securities being offered thereby will be offered to the public and
any concessions that may be offered to certain dealers participating in the
offering of such Securities or (ii) specify that the related Securities are to
be resold by the underwriters in negotiated transactions at varying prices to be
determined at the time of such sale. After the initial public offering of any
Securities, the public offering price and such concessions may be changed.
Each Underwriting Agreement will provide that the Depositor will indemnify
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended.
Under each Underwriting Agreement, the closing of the sale of any Class of
Securities subject thereto will be conditioned on the closing of the sale of all
other such Classes.
The place and time of delivery for the Securities in respect of which this
Prospectus is delivered will be set forth in the related Prospectus Supplement.
LEGAL MATTERS
Unless otherwise specified in the related Prospectus Supplement, certain
legal matters in connection with the Securities will be passed upon for the
Depositor by Stroock & Stroock & Lavan LLP, New York, New York.
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION
PROCEDURES
Except in certain limited circumstances, any globally offered series of
Securities (the "Global Securities") will be available only in book-entry form.
Investors in the Global Securities may hold such Global Securities through any
of 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.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Notes and, if the related Prospectus Supplement so
provides, Certificates will be effected on a delivery-against- payment basis
through the respective Depositories 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 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 Depositories,
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 specified by the Underwriters. 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 securities
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 insure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled 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 Depositor 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 Depository, as the case may be, to receive the
Global Securities against payment. Payment will include interest accrued on the
Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the actual number of days in such
accrual period and 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 Depository 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 to finance the 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 Depository 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 Depositor 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 Depository, 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 Depository, 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
interest 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;
(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 WITHHOLDING TAXES AND DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities through Cedel or Euroclear (or
through DTC if the holder has an address outside the U.S.) will be subject to
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 owners take 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 beneficial owners of Global Securities
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
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
Certificateholder 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 holder of a Global
Securities 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 (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof or (iii) an estate or trust
the income of which is includible in gross income for United States tax
purposes, regardless of its source. This summary of documentation requirements
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.
GLOSSARY OF TERMS
The following are abbreviated definitions of certain capitalized terms used
in this Prospectus. Unless otherwise provided in a "Supplemental Glossary" in
the Prospectus Supplement for a Series, such definitions shall apply to
capitalized terms used in such Prospectus Supplement. The definitions may vary
from those in the related Agreement for a Series and the related Agreement for a
Series generally provides a more complete definition of certain of the terms.
Reference should be made to the related Agreement for a Series for a more
complete definition of such terms.
"Accrual Termination Date" means, with respect to a Class of Compound
Interest Securities, the Distribution Date specified in the related Prospectus
Supplement.
"Advance" means cash advanced by the Servicer in respect of delinquent
payments of principal of and interest on a Loan, and for any other purposes
specified in the related Prospectus Supplement.
"Agreement" means, with respect to a Series consisting solely of
Certificates, the Pooling and Servicing Agreement, and, with respect to a Series
containing Notes, the Indenture, the Trust Agreement and the Sale and Servicing
Agreement, as the context requires.
"Appraised Value" means, with respect to property securing a Loan, the
lesser of the appraised value determined in an appraisal obtained at origination
of the Loan or sales price of such property at such time.
"Assumed Reinvestment Rate" means, with respect to a Series, the per annum
rate or rates specified in the related Prospectus Supplement for a particular
period or periods as the "Assumed Reinvestment Rate" for funds held in any fund
or account for the Series.
"Available Distribution Amount" means the amount in the Distribution
Account (including amounts deposited therein from any reserve fund or other fund
or account) eligible for distribution to Holders on a Distribution Date.
"Bankruptcy Code" means the federal bankruptcy code, 11 United States Code
101 et seq., and related rules and regulations promulgated thereunder.
"Business Day" means a day that, in the State of New York or California or
in the state or states in which the corporate trust office of the Trustee are
located, is neither a legal holiday nor a day on which banking institutions are
authorized or obligated by law, regulations or executive order to be closed.
"Certificate" means the Asset Backed Certificates.
"Charged-Off Loan" means any Loan with respect to which the earliest of the
following has occurred: (a) the date on which any payment due or portion thereof
with respect to a Loan which has become Delinquent for a period of 180 days on a
consecutive basis (irrespective of grace periods), (b) the time at which a Loan
becomes a Liquidated Loan or (c) the date on which the holder of the Subordinate
Certificates of the applicable Series repurchases such Loan as described under
"SERVICING OF LOANS Realization Upon Defaulted Loans".
"Class" means a Class of Securities of a Series.
"Closing Date" means, with respect to a Series, the date specified in the
related Prospectus Supplement as the date on which Securities of such Series are
first issued.
"Code" means the Internal Revenue Code of 1986, as amended, and regulations
(including proposed regulations) or other pronouncements of the Internal Revenue
Service promulgated thereunder.
"Collection Account" means, with respect to a Series, the account
established in the name of the Servicer for the deposit by the Servicer of
payments received from the Loan Assets.
"Combined Loan-to-Value Ratio" means, with respect to a Loan, the ratio
determined as set forth in the related Prospectus Supplement taking into account
the amounts of any related senior mortgage loans on the related Mortgaged
Property.
"Commission" means the Securities and Exchange Commission.
"Compound Interest Security" means any Security of a Series on which all or
a portion of the interest accrued thereon is added to the principal balance of
such Security on each Distribution Date, through the Accrual Termination Date,
and with respect to which no interest shall be payable until such Accrual
Termination Date, after which interest payments will be made on the Compound
Value thereof.
"Compound Value" means, with respect to a Class of Compound Interest
Securities, the original principal balance of such Class, plus all accrued and
unpaid interest, if any, previously added to the principal balance thereof and
reduced by any payments of principal previously made on such Class of Compound
Interest Securities.
"Cut-off Date" means the date designated as such in the related Prospectus
Supplement for a Series.
"Debt Securities" means Securities characterized as indebtedness for
federal income tax purposes, and Regular Interest Securities.
"Deferred Interest" means the excess of the interest accrued on the
outstanding principal balance of a Loan during a specified period over the
amount of interest required to be paid by an obligor on such Loan on the related
Due Date.
"Delinquent" means, with respect to a Loan, that a payment due thereon is
not made by the close of business on the date of each month specified in the
related Mortgage Note.
"Deposit Agreement" means a guaranteed investment contract or reinvestment
agreement providing for the investment of funds held in a fund or account,
guaranteeing a minimum or a fixed rate of return on the investment of moneys
deposited therein.
"Depositor" means Preferred Securitization Corporation.
"Disqualified Organization" means the United States, any State or political
subdivision thereof, any possession of the United States, any foreign
government, any international organization, or any agency or instrumentality of
any of the foregoing, a rural electric or telephone cooperative described in
section 1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by
sections 1-1399 of the Code, if such entity is not subject to tax on its
unrelated business income.
"Distribution Account" means, with respect to a Series, the account
established in the name of the applicable Trustee for the deposit of remittances
received from the Servicer with respect to the Loan Assets.
"Distribution Date" means, with respect to a Series or Class of Securities,
each date specified as a distribution date for such Series or Class in the
related Prospectus Supplement.
"Due Date" means each date, as specified in the related Prospectus
Supplement for a Series, on which any payment of principal or interest is due
and payable by the obligor on any Loan Asset pursuant to the terms thereof.
"Eligible Investments" means any one or more of the obligations or
securities described as such in the related Agreement.
"Enhancement" means the enhancement for a Series, if any, specified in the
related Prospectus Supplement.
"Enhancer" means the provider of the Enhancement for a Series specified in
the related Prospectus Supplement.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Account" means an account, established and maintained by the
Servicer for a Loan, into which payments by borrowers to pay taxes, assessments,
mortgage and hazard insurance premiums and other comparable items required to be
paid to the mortgagee are deposited.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"Final Scheduled Distribution Date" means, with respect to a Class of Notes
of a Series, the date no later than which principal thereof will be fully paid
and with respect to a Class of Certificates of a Series, the date after which no
Certificates of such Class will remain outstanding, in each case based on the
assumptions set forth in the related Prospectus Supplement.
"FNMA" means the Federal National Mortgage Association.
"Holder" means the person or entity in whose name a Security is registered.
"HUD" means the United States Department of Housing and Urban Development.
"Indenture" means the indenture relating to a Series of Notes between the
Issuer and the Trustee.
"Insurance Policies" means certain mortgage insurance, hazard insurance and
other insurance policies required to be maintained with respect to Loans.
"Insurance Proceeds" means amount paid by the insurer under any of the
Insurance Policies covering any Loan or Mortgaged Property.
"Interest Only Securities" means a Class of Securities entitled solely or
primarily to distributions of interest and which is identified as such in the
related Prospectus Supplement.
"IRS" means the Internal Revenue Service.
"Issuer" means, with respect to any Series of Securities, and as specified
in the related Prospectus Supplement either (i) the Depositor or (ii) the trust
formed pursuant to the related Pooling and Servicing Agreement or Trust
Agreement.
"Lifetime Rate Cap" means the lifetime limit if any, on the Loan Rate
during the life of each adjustable rate Loan.
"Liquidated Loan" means any Loan as to which the Servicer, in its
reasonable, good faith judgment in accordance with accepted servicing practices,
has determined that all amounts which will be recovered with respect to such
Loan have been so recovered (exclusive of any possibility of a deficiency
judgment).
"Liquidation Proceeds" means amounts received by the Servicer in connection
with the liquidation of a Loan, net of liquidation expenses.
"Loan" means a closed-end loan secured by a Mortgaged Property.
"Loan Group" means, with respect to the Loan Assets and other assets
comprising the Issuer of a Series, a group of such Loan Assets and other assets
having the characteristics described in the related Prospectus Supplement.
"Loan Rate" means, unless otherwise indicated herein or in the Prospectus
Supplement, the interest rate borne by a Loan.
"Loan-to-Value Ratio" means, with respect to a Loan, the ratio determined
as set forth in the related Prospectus Supplement.
"Minimum Principal Payment Agreement" means a minimum principal payment
agreement with an entity meeting the criteria of the Rating Agencies.
"Minimum Rate" means the lifetime minimum Loan Rate during the life of each
adjustable rate Loan.
"Modification" means a change in any term of a Loan.
"Mortgage" means the mortgage, deed of trust or other similar security
instrument securing a Mortgage Note.
"Mortgage Note" means the note or other evidence of indebtedness of a
Mortgagor under the Loan.
"Mortgagor" means the obligor on a Mortgage Note.
"1986 Act" means the Tax Reform Act of 1986.
"Notes" means the Asset Backed Notes.
"Notional Amount" means the amount set forth in the related Prospectus
Supplement for a Class of Interest Only Securities.
"PAC" ("Planned Amortization Class Securities") means a Class of Securities
of a Series on which payments of principal are made in accordance with a
schedule specified in the related Prospectus Supplement, based on certain
assumptions stated therein.
"Pass-Through Security" means a security representing an undivided
beneficial interest in a pool of assets, including the right to receive a
portion of all principal and interest payments relating to those assets.
"Pay Through Security" means Regular Interest Securities and certain Debt
Securities that are subject to acceleration due to prepayment on the underlying
Loan Assets.
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust (including any beneficiary thereof),
unincorporated organization, or government or any agency or political
subdivision thereof.
"Pooling and Servicing Agreement" means the pooling and servicing agreement
relating to a Series of Certificates among the Depositor, the Servicer and the
Trustee.
"Principal Balance" means, with respect to a Loan Asset and as of a
Distribution Date, initially the outstanding principal balance of such Loan
Asset as of the Cut-Off Date or the related Subsequent Cut-Off Date, as
applicable, and thereafter, as of any Distribution Date such balance as of the
last day of the Collection Period related to such Distribution Date after giving
effect to Principal Prepayments received and payments of principal collected
during such Collection Period and any Curtailments applied by the Servicer in
reduction of the unpaid principal balance of such Loan Asset as of such Due
Date; once a Loan Asset becomes a Charged-off Loan, its Principal Balance, for
purposes of the related Trust Fund, will thereafter be considered to be zero.
"Principal Only Securities" means a Class of Securities entitled solely or
primarily to distributions of principal and identified as such in the Prospectus
Supplement.
"Property" means a Mortgaged Property securing a Loan.
"Qualified Insurer" means a mortgage guarantee or insurance company duly
qualified as such under the laws of the states in which the Mortgaged Properties
are located duly authorized and licensed in such states to transact the
applicable insurance business and to write the insurance provided.
"Rating Agency" means the nationally recognized statistical rating
organization (or organizations) which was (or were) requested by the Depositor
to rate the Securities upon the original issuance thereof.
"Regular Interest" means a regular interest in a REMIC.
"REMIC" means a real estate mortgage investment conduit.
"REMIC Administrator" means the Person, if any, specified in the related
Prospectus Supplement for a Series for which a REMIC election is made, to serve
as administrator of the Series.
"REMIC Provisions" means the provisions of the federal income tax law
relating to real estate mortgage investment conduits, which appear at sections
860A through 860G of Subchapter M of Chapter 1 of the Code, and related
provisions, and regulations, including proposed regulations and rulings, and
administrative pronouncements promulgated thereunder, as the foregoing may be in
effect from time to time.
"REO Property" means real property which secured a defaulted Loan,
beneficial ownership of which has been acquired upon foreclosure, deed in lieu
of foreclosure, repossession or otherwise.
"Reserve Fund" means, with respect to a Series, any Reserve Fund
established pursuant to the related Agreement.
"Residual Interest" means a residual interest in a REMIC.
"Retained Interest" means, with respect to a Loan Asset, the amount or
percentage specified in the related Prospectus Supplement which is not included
in the Issuer for the related Series.
"Scheduled Payments" means the scheduled payments of principal and interest
to be made by the borrower on a Loan Asset.
"Securities" means the Notes or the Certificates.
"Seller" means Preferred Credit Corporation
"Senior Securities" means a Class of Securities as to which the holders'
rights to receive distributions of principal and interest are senior to the
rights of holders of Subordinate Securities, to the extent specified in the
related Prospectus Supplement.
"Senior Securityholder" means a holder of a Senior Security.
"Series" means a separate series of Securities sold pursuant to this
Prospectus and the related Prospectus Supplement.
"Servicer" means, with respect to a Series, Advanta Mortgage Corp. USA or
the Person if any, designated in the related Prospectus Supplement to service
Loans for that Series, or the successors or assigns of such Person.
"Stripped Securities" means Pass-Through Securities representing interests
in Loan Assets with respect to which all or a portion of the principal payments
have been separated from all or a portion of the interest payments.
"Subordinate Securityholder" means a Holder of a Subordinate Security.
"Subordinated Securities" means a Class of Securities as to which the
rights of holders to receive distributions of principal, interest or both is
subordinated to the rights of holders of Senior Securities, and may be allocated
losses and shortfalls prior to the allocation thereof to other Classes of
Securities, to the extent and under the circumstances specified in the related
Prospectus Supplement.
"Trustee" means the trustee under the applicable Agreement and its
successors.
"UCC" means the Uniform Commercial Code.
"Variable Interest Security" means a Security on which interest accrues at
a rate that is adjusted, based upon a predetermined index, at fixed periodic
intervals, all as set forth in the related Prospectus Supplement.
"Zero Coupon Security" means a Security entitled to receive payments of
principal only.
<PAGE>
=============================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY, NOR AN OFFER OF SUCH SECURITIES IN ANY STATE OR JURISDICTION IN
WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE
INFORMATION CONTAINED HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE.
TABLE OF CONTENTS
PAGE
PROSPECTUS SUPPLEMENT
Summary of Terms................................. S-
Risk Factors......................................S-
Description of the Loans..........................S-
Prepayment and Yield Considerations...............S-
Description of the Certificates...................S-
[The Policy and the Certificate Insurer]..........S-
Use of Proceeds...................................S-
Federal Income Tax Considerations.................S-
ERISA Considerations .............................S-
Underwriting......................................S-
Report of Experts.................................S-
Ratings...........................................S-
Legal Matters ....................................S-
PROSPECTUS
Prospectus Supplement..............................3
Reports to Holders.................................3
Available Information..............................3
Incorporation of Certain Documents by Reference....4
Summary of Terms...................................5
Risk Factors......................................17
The Seller........................................27
The Servicer .....................................28
The Depositor.....................................29
Description of the Securities.....................30
Description of the Issuer Assets..................38
Enhancement.......................................44
Servicing of Loans................................45
The Agreements....................................54
Certain Legal Aspects of Loans....................64
Use of Proceeds...................................70
Federal Income Tax Considerations.................71
State Tax Considerations..........................94
ERISA Considerations..............................94
Legal Investment..................................96
Plan of Distribution..............................96
Legal Matters.....................................97
Annex I...........................................98
Glossary of Terms..............................102
==============================================================================
$________________
PREFERRED SECURITIZATION
CORPORATION,
DEPOSITOR
PREFERRED CREDIT
CORPORATION,
SELLER
PREFERRED CONSUMER
LOAN TRUSTS
ASSET BACKED SECURITIES,
SERIES 199_ -__
___________
_____________________________
PROSPECTUS SUPPLEMENT
_____________________________
__________________
_____ __, 199_
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Except with respect to the Registration Fee, the following table sets
forth the estimated expenses to be incurred in connection with the offering of a
Series of Securities, other than underwriting discounts and commissions:
SEC Registration Fee..................................$303,031
Trustee's Fees and Expenses........................... 25,000
Printing and Engraving................................ 50,000
Legal Fees and Expenses............................... 125,000
Blue Sky Fees......................................... 15,000
Accounting Fees and Expenses.......................... 17,000
Rating Agency Fees.................................... 140,000
Miscellaneous......................................... 4,969
--------
Total................................................ $680,000
- ------------------------------
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article TWELFTH of the Certificate of Incorporation of the Depositor
provides for the indemnification of any person who is or was an officer or
director of the Issuer with respect to actions taken or omitted by such person
in any capacity in which such person serves or served the Issuer, to the full
extent authorized or permitted by Section 145 of the Delaware General
Corporation Law. Reference is made to the Certificate of Incorporation filed as
an exhibit to this Registration Statement for the complete text of Article
TWELFTH of the Certificate of Incorporation. The Registrant's parent has
liability insurance for the officers and directors of the Registrant.
ITEM 16. EXHIBITS.
(a) FINANCIAL STATEMENTS:
NONE.
(b) EXHIBITS:
*1.1 --Form of Underwriting Agreement.
*3.1 --Certificate of Incorporation of Preferred
Securitization Corporation.
*3.2 --By-Laws of Preferred Securitization Corporation.
*4.1 --Form of Indenture.
*4.2 --Form of Pooling and Servicing Agreement.
*4.3 --Form of Purchase and Sale Agreement.
*4.4 --Form of Trust Agreement.
*4.5 --Form of Administration Agreement.
**5.1 --Opinion of Stroock & Stroock & Lavan LLP
with respect to the securities being registered.
**8.1 --Opinion of Stroock & Stroock & Lavan LLP with
respect to tax matters (included as part of Exhibit
5.1).
*10.1 --Form of Sale and Servicing Agreement.
**23.1 --Consent of Stroock & Stroock & Lavan LLP(included
as part of Exhibit 5.1).
*24.1 --Powers of Attorney of Directors and
Officers of Issuer.
**25.1 --Statement of Eligibility and Qualification of
Trustee (Form T-1).
**99.1 --Form of Prospectus Supplement
- ---------------------
* Previously filed
** Filed herewith
ITEM 17. UNDERTAKINGS.
(a) AS TO RULE 415.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration
Statement;
(i) To include any prospectus required by Section
10(a) (3) of the Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(b) AS TO DOCUMENTS SUBSEQUENTLY FILED THAT ARE INCORPORATED BY
REFERENCE.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed a new registration statement relating to
the securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) AS TO INDEMNIFICATION.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(d) AS TO QUALIFICATION OF TRUST INDENTURES UNDER THE TRUST
INDENTURE ACT OF 1939.
The undersigned registrant hereby undertakes to file an application for the
purpose of determining the eligibility of the trustee to act under subsection
(a) of Section 310 of the Trust Indenture Act in accordance with the rules and
regulations prescribed by the Commission under Section 305(b)(2) of the Act.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 2 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Los Angeles, State of California, on
the 13th day of May, 1997.
PREFERRED SECURITIZATION CORPORATION
By /S/ TODD A. RODRIGUEZ
Name: Todd A. Rodriguez
Title: President
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 2 to the Registration Statement has been signed below by the
following persons in the capacities and on May 13, 1997.
SIGNATURE TITLE
/S/ TODD A. RODRIGUEZ President, Chief
Todd A. Rodriguez Executive Officer and
Director (Principal
Financial Officer)
/S/ * Executive Vice
Walter F. Villaume President and
Treasurer and Director
(Principal Accounting
Officer)
*By: /S/ TODD A. RODRIGUEZ
Todd A. Rodriguez
Attorney-in-Fact
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION Page NO.
NO.
*1.1 -- Form of Underwriting Agreement......................
*3.1 -- Certificate of Incorporation of Preferred
Securitization Corporation..........................
*3.2 -- By--Laws of Preferred Securitization
Corporation.......................................
*4.1 -- Form of Indenture...................................
*4.2 -- Form of Pooling and Servicing Agreement
*4.3 -- Form of Purchase and Sale Agreement.................
*4.4 -- Form of Trust Agreement..............................
*45 -- Form of Administration Agreement.....................
**5.1 -- Opinion of Stroock & Stroock & Lavan LLP
with respect to the securities being
registered............................................
**8.1 -- Opinion of Stroock & Stroock & Lavan LLP
with respect to tax matters (included
as part of Exhibit 5.1)................................
*10.1 -- Form of Sale and Servicing Agreement...................
**23.1 -- Consent of Stroock & Stroock & Lavan LLP
(included as part of Exhibit 5.1)......................
*24.1 -- Powers of Attorney of Directors and
Officers of Issuer.....................................
**25.1 -- Statement of Eligibility and Qualification
of Trustee (Form T-1)..................................
**99.1 -- Form of Prospectus Supplement
-------------------
* Previously filed
** Filed herewith
Exhibit 5.1
Stroock & Stroock & Lavan
180 Maiden Lane
New York, New York 10038
May 13, 1997
Preferred Securitization Corporation
3347 Michelson Drive, Suite 400
Irvine, California 92612
Preferred Credit Corporation
3347 Michelson Drive, Suite 400
Irvine, California 92612
Ladies and Gentlemen:
We have acted as counsel to Preferred Securitization Corporation, a Delaware
corporation (the "Depositor") and Preferred Credit Corporation, a California
corporation (the "Seller"), in connection with the preparation of the
registration statement on Form S-3 (No. 333-22843)(the "Registration Statement")
relating to the proposed offering from time to time in one or more series (each,
a "Series") by one or more trusts of up to $1,000,000,000 aggregate principal
amount of asset backed notes (the "Notes") and asset backed certificates (the
"Certificates," and, together with the Notes, the "Securities"). The
Registration Statement has been filed with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Act"). As set forth in the Registration Statement, each Series of Securities is
to be issued under and pursuant to the terms of a separate pooling and servicing
agreement, or sale and servicing agreement, trust agreement and indenture (each,
an "Agreement") among the Depositor, Advanta Mortgage Corp. USA, as servicer
(the "Servicer"), and a trustee (the "Trustee") to be identified in the
prospectus supplement for such Series of Securities.
As such counsel, we have examined copies of the Certificate of Incorporation and
By- Laws of each of the Depositor and the Seller, the Registration Statement,
the base Prospectus and form of Prospectus Supplement included therein, the form
of each Agreement, and originals or copies of such other corporate minutes,
records, agreements and other instruments of the Depositor and the Seller,
certificates of public officials and other documents, and have made such
examinations of law, as we have deemed necessary to form the basis for the
opinions hereinafter expressed. In our examination of such materials, we have
assumed the genuineness of all signatures, the authenticity of all documents
submitted to us as originals and the conformity to original documents of all
copies submitted to us. As to various questions of fact material to such
opinions, we have relied, to the extent we deemed appropriate, upon
representations, statements and certificates of officers and representatives of
the Depositor, the Seller and others.
Attorneys involved in the preparation of this opinion are admitted to practice
law in the State of New York and we do not express any opinion herein concerning
any law other than the federal laws of the United States of America, the laws of
the State of New York and the General Corporation Law of the State of Delaware.
Based upon and subject to the foregoing, we are of the opinion that:
1. When the issuance, execution and delivery of each Series of Notes have
been authorized by all necessary corporate action of the Depositor in accordance
with the provisions of the related Agreement or Agreements, and when such Notes
have been duly executed and delivered, authenticated by the Trustee and sold as
described in the Registration Statement, assuming that the terms of such Notes
are otherwise in compliance with applicable law at such time, such Notes will
constitute valid and binding obligations of the issuer thereof in accordance
with their terms and the terms of such Agreement or Agreements. This opinion is
subject to the effect of bankruptcy, insolvency, moratorium, fraudulent
conveyance and similar laws relating to or affecting creditors' rights generally
and court decisions with respect thereto and we express no opinion with respect
to the application of equitable principles or remedies in any proceeding,
whether at law or in equity.
2. When the issuance, execution and delivery of each Series of Certificates
have been authorized by all necessary corporate action of the Depositor in
accordance with the provisions of the related Agreement or Agreements, and when
such Certificates have been duly executed and delivered, authenticated by the
Trustee and sold as described in the Registration Statement, assuming that the
terms of such Certificates are otherwise in compliance with applicable law at
such time, such Certificates will be legally issued, fully paid and
non-assessable.
3. The statements set forth in the Prospectus under the heading "Federal
Income Tax Considerations," to the extent they constitute matters of law or
legal conclusions with respect thereto, are correct.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to this firm under the captions
"Federal Income Tax Considerations" and "Legal Matters" in the Prospectus which
forms a part of the Registration Statement. In giving such consent, we do not
admit hereby that we come within the category of persons whose consent is
required under Section 7 of the Act or the Rules and Regulations of the
Commission thereunder.
Very truly yours,
/S/ STROOCK & STROOCK & LAVAN LLP
STROOCK & STROOCK & LAVAN LLP
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM T-1
Statement of eligibility under the Trust
Indenture Act of 1939 of a corporation
designated to act as trustee
__X__Check if an application to determine eligibility
of a trustee pursuant to section 305(b)(2)
BANKERS TRUST COMPANY
(Exact name of trustee as specified in its charter)
280 PARK AVENUE
NEW YORK, NEW YORK 10017 13-4941247
(Address of principal (I.R.S. Employer
executive offices) Identification No.)
PREFERRED SECURITIZATION CORP.
(Exact name of obligor as specified in its charter)
DELAWARE 33-0753116
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
3347 MICHELSON DRIVE
SUITE 400
IRVINE, CALIFORNIA 92612
(Address of principal executive offices)
ASSET-BACKED CERTIFICATES AND ASSET-BACKED NOTES
(Title of the indenture securities)
<PAGE>
Item 1. General Information.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising
authority to which it is subject.
Name Address
Office of the Comptroller 1114 Avenue of the
of the Currency Americas, Suite 3900
New York, New York 10036
(b) Whether it is authorized to exercise corporate
trust powers.
Yes.
Item 2. Affiliations with Obligor
If the obligor is an affiliate of the trustee, describe each
such affiliation.
None.
Item 16. List of Exhibits
Exhibit 1 - Restated Organization Certificate as amended on
August 20, 1990, June 26, 1992, March 28, 1994, June 23, 1995, December 27,
1995, and March 21, 1996.
Exhibit 2 - Certificate of Good Standing from the State of New
York, Banking Department dated April 10, 1997.
Exhibit 3 - Existing By-Laws of Bankers Trust Company dated
February 18, 1997.
Exhibit 4 - Not Applicable.
Exhibit 5 - Consent of Bankers Trust Company required by
Section 321(b) of the Act.
Exhibit 6 - Reports of Condition of Bankers Trust Company
dated as of December 31, 1996.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939 the
trustee, Bankers Trust Company, a New York Corporation, organized and existing
under the laws of New York, has duly caused this statement of eligibility to be
signed on its behalf by the undersigned, thereunto duly authorized, all in the
city of Irvine, and State of California, on the 18th day of April, 1997.
Bankers Trust Company
By: /s/ Judy L. Gomez
Judy L. Gomez
Assistant Vice President
<PAGE>
EXHIBIT 1
[Filed under cover of Form SE pursuant to continuing
hardship exemption granted April 29, 1997]
<PAGE>
EXHIBIT 2 STATE OF NEW YORK, BANKING DEPARTMENT I, MANUEL KURSKY,
Deputy Superintendent of Banks of the State of New York, DO HEREBY CERTIFY:
THAT, BANKERS TRUST COMPANY is a corporation duly organized and
existing under the laws of the State of New York and has its principal office
and place of business at 280 Park Avenue, New York, New York.
THAT, BANKERS TRUST COMPANY is validly existing as a banking
organization under the Banking Law of the State of New York. The authorization
certificate of such corporation has not been revoked or suspended and such
corporation is subsisting trust company under the supervision of this
Department.
WITNESS, my hand and official seal of the Banking Department at
the City of New York,
this 10TH day of APRIL in the Year of our Lord
one thousand nine hundred and NINETY-SEVEN.
/S/ MANUEL KURSKY
DEPUTY Superintendent of Banks
<PAGE>
EXHIBIT 3
BY-LAWS
FEBRUARY 18, 1997
Bankers Trust Company New York
<PAGE>
BY-LAWS of Bankers Trust Company
ARTICLE I
MEETINGS OF STOCKHOLDERS
SECTION 1. The annual meeting of the stockholders of this Company
shall be held at the office of the Company in the Borough of Manhattan, City of
New York, on the third Tuesday in January of each year, for the election of
directors and such other business as may properly come before said meeting.
SECTION 2. Special meetings of stockholders other than those regulated
by statute may be called at any time by a majority of the directors. It shall be
the duty of the Chairman of the Board, the Chief Executive Officer or the
President to call such meetings whenever requested in writing to do so by
stockholders owning a majority of the capital stock.
SECTION 3. At all meetings of stockholders, there shall be present,
either in person or by proxy, stockholders owning a majority of the capital
stock of the Company, in order to constitute a quorum, except at special
elections of directors, as provided by law, but less than a quorum shall have
power to adjourn any meeting.
SECTION 4. The Chairman of the Board or, in his absence, the Chief
Executive Officer or, in his absence, the President or, in their absence, the
senior officer present, shall preside at meetings of the stockholders and shall
direct the proceedings and the order of business. The Secretary shall act as
secretary of such meetings and record the proceedings.
ARTICLE II
DIRECTORS
SECTION 1. The affairs of the Company shall be managed and its
corporate powers exercised by a Board of Directors consisting of such number of
directors, but not less than ten nor more than twenty-five, as may from time to
time be fixed by resolution adopted by a majority of the directors then in
office, or by the stockholders. In the event of any increase in the number of
directors, additional directors may be elected within the limitations so fixed,
either by the stockholders or within the limitations imposed by law, by a
majority of directors then in office. One-third of the number of directors, as
fixed from time to time, shall constitute a quorum. Any one or more members of
the Board of Directors or any Committee thereof may participate in a meeting of
the Board of Directors or Committee thereof by means of a conference telephone
or similar communications equipment which allows all persons participating in
the meeting to hear each other at the same time. Participation by such means
shall constitute presence in person at such a meeting.
All directors hereafter elected shall hold office until the next
annual meeting of the stockholders and until their successors are elected and
have qualified. No person who shall have attained age 72 shall be eligible to be
elected or re-elected a director. Such director may, however, remain a director
of the Company until the next annual meeting of the stockholders of Bankers
Trust New York Corporation (the Company's parent) so that such director's
retirement will coincide with the retirement date from Bankers Trust New York
Corporation.
No Officer-Director who shall have attained age 65, or earlier
relinquishes his responsibilities and title, shall be eligible to serve as a
director.
SECTION 2. Vacancies not exceeding one-third of the whole number of
the Board of Directors may be filled by the affirmative vote of a majority of
the directors then in office, and the directors so elected shall hold office for
the balance of the unexpired term.
SECTION 3. The Chairman of the Board shall preside at meetings of the
Board of Directors. In his absence, the Chief Executive Officer or, in his
absence, such other director as the Board of Directors from time to time may
designate shall preside at such meetings.
SECTION 4. The Board of Directors may adopt such Rules and Regulations
for the conduct of its meetings and the management of the affairs of the Company
as it may deem proper, not inconsistent with the laws of the State of New York,
or these By-Laws, and all officers and employees shall strictly adhere to, and
be bound by, such Rules and Regulations.
SECTION 5. Regular meetings of the Board of Directors shall be held
from time to time on the third Tuesday of the month. If the day appointed for
holding such regular meetings shall be a legal holiday, the regular meeting to
be held on such day shall be held on the next business day thereafter. Special
meetings of the Board of Directors may be called upon at least two day's notice
whenever it may be deemed proper by the Chairman of the Board or, the Chief
Executive Officer or, in their absence, by such other director as the Board of
Directors may have designated pursuant to Section 3 of this Article, and shall
be called upon like notice whenever any three of the directors so request in
writing.
SECTION 6. The compensation of directors as such or as members of
committees shall be fixed from time to time by resolution of the Board of
Directors.
ARTICLE III
COMMITTEES
SECTION 1. There shall be an Executive Committee of the Board
consisting of not less than five directors who shall be appointed annually by
the Board of Directors. The Chairman of the Board shall preside at meetings of
the Executive Committee. In his absence, the Chief Executive Officer or, in his
absence, such other member of the Committee as the Committee from time to time
may designate shall preside at such meetings.
The Executive Committee shall possess and exercise to the extent
permitted by law all of the powers of the Board of Directors, except when the
latter is in session, and shall keep minutes of its proceedings, which shall be
presented to the Board of Directors at its next subsequent meeting. All acts
done and powers and authority conferred by the Executive Committee from time to
time shall be and be deemed to be, and may be certified as being, the act and
under the authority of the Board of Directors.
A majority of the Committee shall constitute a quorum, but the
Committee may act only by the concurrent vote of not less than one-third of its
members, at least one of whom must be a director other than an officer. Any one
or more directors, even though not members of the Executive Committee, may
attend any meeting of the Committee, and the member or members of the Committee
present, even though less than a quorum, may designate any one or more of such
directors as a substitute or substitutes for any absent member or members of the
Committee, and each such substitute or substitutes shall be counted for quorum,
voting, and all other purposes as a member or members of the Committee.
SECTION 2. There shall be an Audit Committee appointed annually by
resolution adopted by a majority of the entire Board of Directors which shall
consist of such number of directors, who are not also officers of the Company,
as may from time to time be fixed by resolution adopted by the Board of
Directors. The Chairman shall be designated by the Board of Directors, who shall
also from time to time fix a quorum for meetings of the Committee. Such
Committee shall conduct the annual directors' examinations of the Company as
required by the New York State Banking Law; shall review the reports of all
examinations made of the Company by public authorities and report thereon to the
Board of Directors; and shall report to the Board of Directors such other
matters as it deems advisable with respect to the Company, its various
departments and the conduct of its operations.
In the performance of its duties, the Audit Committee may employ or
retain, from time to time, expert assistants, independent of the officers or
personnel of the Company, to make studies of the Company's assets and
liabilities as the Committee may request and to make an examination of the
accounting and auditing methods of the Company and its system of internal
protective controls to the extent considered necessary or advisable in order to
determine that the operations of the Company, including its fiduciary
departments, are being audited by the General Auditor in such a manner as to
provide prudent and adequate protection. The Committee also may direct the
General Auditor to make such investigation as it deems necessary or advisable
with respect to the Company, its various departments and the conduct of its
operations. The Committee shall hold regular quarterly meetings and during the
intervals thereof shall meet at other times on call of the Chairman.
SECTION 3. The Board of Directors shall have the power to appoint any
other Committees as may seem necessary, and from time to time to suspend or
continue the powers and duties of such Committees. Each Committee appointed
pursuant to this Article shall serve at the pleasure of the Board of Directors.
ARTICLE IV
OFFICERS
SECTION 1. The Board of Directors shall elect from among their number
a Chairman of the Board and a Chief Executive Officer, and shall also elect a
President, a Senior Vice Chairman, one or more Vice Chairmen, one or more
Executive Vice Presidents, one or more Senior Managing Directors, one or more
Managing Directors, one or more Senior Vice Presidents, one or more Vice
Presidents, one or more General Managers, a Secretary, a Controller, a
Treasurer, a General Counsel, one or more Associate General Counsels, a General
Auditor, a General Credit Auditor, and one or more Deputy Auditors, who need not
be directors. The officers of the corporation may also include such other
officers or assistant officers as shall from time to time be elected or
appointed by the Board. The Chairman of the Board or the Chief Executive Officer
or, in their absence, the President, the Senior Vice Chairman or any Vice
Chairman, may from time to time appoint assistant officers. All officers elected
or appointed by the Board of Directors shall hold their respective offices
during the pleasure of the Board of Directors, and all assistant officers shall
hold office at the pleasure of the Board or the Chairman of the Board or the
Chief Executive Officer or, in their absence, the President, the Senior Vice
Chairman or any Vice Chairman. The Board of Directors may require any and all
officers and employees to give security for the faithful performance of their
duties.
SECTION 2. The Board of Directors shall designate the Chief Executive
Officer of the Company who may also hold the additional title of Chairman of the
Board, President, Senior Vice Chairman or Vice Chairman and such person shall
have, subject to the supervision and direction of the Board of Directors or the
Executive Committee, all of the powers vested in such Chief Executive Officer by
law or by these By-Laws, or which usually attach or pertain to such office. The
other officers shall have, subject to the supervision and direction of the Board
of Directors or the Executive Committee or the Chairman of the Board or, the
Chief Executive Officer, the powers vested by law or by these By-Laws in them as
holders of their respective offices and, in addition, shall perform such other
duties as shall be assigned to them by the Board of Directors or the Executive
Committee or the Chairman of the Board or the Chief Executive Officer.
The General Auditor shall be responsible, through the Audit Committee,
to the Board of Directors for the determination of the program of the internal
audit function and the evaluation of the adequacy of the system of internal
controls. Subject to the Board of Directors, the General Auditor shall have and
may exercise all the powers and shall perform all the duties usual to such
office and shall have such other powers as may be prescribed or assigned to him
from time to time by the Board of Directors or vested in him by law or by these
By-Laws. He shall perform such other duties and shall make such investigations,
examinations and reports as may be prescribed or required by the Audit
Committee. The General Auditor shall have unrestricted access to all records and
premises of the Company and shall delegate such authority to his subordinates.
He shall have the duty to report to the Audit Committee on all matters
concerning the internal audit program and the adequacy of the system of internal
controls of the Company which he deems advisable or which the Audit Committee
may request. Additionally, the General Auditor shall have the duty of reporting
independently of all officers of the Company to the Audit Committee at least
quarterly on any matters concerning the internal audit program and the adequacy
of the system of internal controls of the Company that should be brought to the
attention of the directors except those matters responsibility for which has
been vested in the General Credit Auditor. Should the General Auditor deem any
matter to be of special immediate importance, he shall report thereon forthwith
to the Audit Committee. The General Auditor shall report to the Chief Financial
Officer only for administrative purposes.
The General Credit Auditor shall be responsible to the Chief Executive
Officer and, through the Audit Committee, to the Board of Directors for the
systems of internal credit audit, shall perform such other duties as the Chief
Executive Officer may prescribe, and shall make such examinations and reports as
may be required by the Audit Committee. The General Credit Auditor shall have
unrestricted access to all records and may delegate such authority to
subordinates.
SECTION 3. The compensation of all officers shall be fixed under such
plan or plans of position evaluation and salary administration as shall be
approved from time to time by resolution of the Board of Directors.
SECTION 4. The Board of Directors, the Executive Committee, the
Chairman of the Board, the Chief Executive Officer or any person authorized for
this purpose by the Chief Executive Officer, shall appoint or engage all other
employees and agents and fix their compensation. The employment of all such
employees and agents shall continue during the pleasure of the Board of
Directors or the Executive Committee or the Chairman of the Board or the Chief
Executive Officer or any such authorized person; and the Board of Directors, the
Executive Committee, the Chairman of the Board, the Chief Executive Officer or
any such authorized person may discharge any such employees and agents at will.
ARTICLE V
INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHERS
SECTION 1. The Company shall, to the fullest extent permitted by
Section 7018 of the New York Banking Law, indemnify any person who is or was
made, or threatened to be made, a party to an action or proceeding, whether
civil or criminal, whether involving any actual or alleged breach of duty,
neglect or error, any accountability, or any actual or alleged misstatement,
misleading statement or other act or omission and whether brought or threatened
in any court or administrative or legislative body or agency, including an
action by or in the right of the Company to procure a judgment in its favor and
an action by or in the right of any other corporation of any type or kind,
domestic or foreign, or any partnership, joint venture, trust, employee benefit
plan or other enterprise, which any director or officer of the Company is
servicing or served in any capacity at the request of the Company by reason of
the fact that he, his testator or intestate, is or was a director or officer of
the Company, or is serving or served such other corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise in any capacity,
against judgments, fines, amounts paid in settlement, and costs, charges and
expenses, including attorneys' fees, or any appeal therein; provided, however,
that no indemnification shall be provided to any such person if a judgment or
other final adjudication adverse to the director or officer establishes that (i)
his acts were committed in bad faith or were the result of active and deliberate
dishonesty and, in either case, were material to the cause of action so
adjudicated, or (ii) he personally gained in fact a financial profit or other
advantage to which he was not legally entitled.
SECTION 2. The Company may indemnify any other person to whom the
Company is permitted to provide indemnification or the advancement of expenses
by applicable law, whether pursuant to rights granted pursuant to, or provided
by, the New York Banking Law or other rights created by (i) a resolution of
stockholders, (ii) a resolution of directors, or (iii) an agreement providing
for such indemnification, it being expressly intended that these By-Laws
authorize the creation of other rights in any such manner.
SECTION 3. The Company shall, from time to time, reimburse or advance
to any person referred to in Section 1 the funds necessary for payment of
expenses, including attorneys' fees, incurred in connection with any action or
proceeding referred to in Section 1, upon receipt of a written undertaking by or
on behalf of such person to repay such amount(s) if a judgment or other final
adjudication adverse to the director or officer establishes that (i) his acts
were committed in bad faith or were the result of active and deliberate
dishonesty and, in either case, were material to the cause of action so
adjudicated, or (ii) he personally gained in fact a financial profit or other
advantage to which he was not legally entitled.
SECTION 4. Any director or officer of the Company serving (I) another
corporation, of which a majority of the shares entitled to vote in the election
of its directors is held by the Company, or (ii) any employee benefit plan of
the Company or any corporation referred to in clause (i) in any capacity shall
be deemed to be doing so at the request of the Company. In all other cases, the
provisions of this Article V will apply (i) only if the person serving another
corporation or any partnership, joint venture, trust, employee benefit plan or
other enterprise so served at the specific request of the Company, evidenced by
a written communication signed by the Chairman of the Board, the Chief Executive
Officer or the President, and (ii) only if and to the extent that, after making
such efforts as the Chairman of the Board, the Chief Executive Officer or the
President shall deem adequate in the circumstances, such person shall be unable
to obtain indemnification from such other enterprise or its insurer.
SECTION 5. Any person entitled to be indemnified or to the
reimbursement or advancement of expenses as a matter of right pursuant to this
Article V may elect to have the right to indemnification (or advancement of
expenses) interpreted on the basis of the applicable law in effect at the time
of occurrence of the event or events giving rise to the action or proceeding, to
the extent permitted by law, or on the basis of the applicable law in effect at
the time indemnification is sought.
SECTION 6. The right to be indemnified or to the reimbursement or
advancement of expense pursuant to this Article V (i) is a contract right
pursuant to which the person entitled thereto may bring suit as if the
provisions hereof were set forth in a separate written contract between the
Company and the director or officer, (ii) is intended to be retroactive and
shall be available with respect to events occurring prior to the adoption
hereof, and (iii) shall continue to exist after the rescission or restrictive
modification hereof with respect to events occurring prior thereto.
SECTION 7. If a request to be indemnified or for the reimbursement or
advancement of expenses pursuant hereto is not paid in full by the Company
within thirty days after a written claim has been received by the Company, the
claimant may at any time thereafter bring suit against the Company to recover
the unpaid amount of the claim and, if successful in whole or in part, the
claimant shall be entitled also to be paid the expenses of prosecuting such
claim. Neither the failure of the Company (including its Board of Directors,
independent legal counsel, or its stockholders) to have made a determination
prior to the commencement of such action that indemnification of or
reimbursement or advancement of expenses to the claimant is proper in the
circumstance, nor an actual determination by the Company (including its Board of
Directors, independent legal counsel, or its stockholders) that the claimant is
not entitled to indemnification or to the reimbursement or advancement of
expenses, shall be a defense to the action or create a presumption that the
claimant is not so entitled.
SECTION 8. A person who has been successful, on the merits or
otherwise, in the defense of a civil or criminal action or proceeding of the
character described in Section 1 shall be entitled to indemnification only as
provided in Sections 1 and 3, notwithstanding any provision of the New York
Banking Law to the contrary.
ARTICLE VI
SEAL
SECTION 1. The Board of Directors shall provide a seal for the
Company, the counterpart dies of which shall be in the charge of the Secretary
of the Company and such officers as the Chairman of the Board, the Chief
Executive Officer or the Secretary may from time to time direct in writing, to
be affixed to certificates of stock and other documents in accordance with the
directions of the Board of Directors or the Executive Committee.
SECTION 2. The Board of Directors may provide, in proper cases on a
specified occasion and for a specified transaction or transactions, for the use
of a printed or engraved facsimile seal of the Company.
ARTICLE VII
CAPITAL STOCK
SECTION 1. Registration of transfer of shares shall only be made upon
the books of the Company by the registered holder in person, or by power of
attorney, duly executed, witnessed and filed with the Secretary or other proper
officer of the Company, on the surrender of the certificate or certificates of
such shares properly assigned for transfer.
ARTICLE VIII
CONSTRUCTION
SECTION 1. The masculine gender, when appearing in these By-Laws,
shall be deemed to include the feminine gender.
ARTICLE IX
AMENDMENTS
SECTION 1. These By-Laws may be altered, amended or added to by the
Board of Directors at any meeting, or by the stockholders at any annual or
special meeting, provided notice thereof has been given.
I, Lea Lahtinen, Assistant Secretary of Bankers Trust Company, New
York, New York, hereby certify that the foregoing is a complete, true and
correct copy of the By-Laws of Bankers Trust Company, and that the same are in
full force and effect at this date.
/S/ LEA LAHTINEN
ASSISTANT SECRETARY
DATED: 4/18/97
<PAGE>
EXHIBIT 5
CONSENT OF TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture
Act of 1939 in connection with the proposed Asset-Backed Certificates and
Asset-Backed Loans issue by Preferred Securitization Corp., we hereby consent
that reports of examination by Federal, State, Territorial or District
authorities may be furnished by such authorities to the Securities and Exchange
Commission upon request therefor.
Bankers Trust Company
By:/s/ Judy L. Gomez
Judy L. Gomez
Assistant Vice President
Dated: April 18, 1997
<PAGE>
EXHIBIT 6
[Filed under cover of Form SE pursuant to continuing
hardship exemption granted April 29, 1997]
Exhibit 99.1
SUBJECT TO COMPLETION, DATED _________ _, 1997
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED ____________ __, 199_)
$-------------
--------------------------
PREFERRED CREDIT
CORPORATION
--------------------------
PREFERRED CREDIT CORPORATION
(Seller)
PREFERRED SECURITIZATION CORPORATION
(Depositor)
Preferred Consumer Loan Asset Backed Certificates, Series
199__-__
$ %Class A-1 Certificates
----------- ----
$ % Class A-2 Certificates
---------- ----
$ % Class A-3 Certificates
---------- ----
$ % Class A-4 Certificates
---------- ----
$ % Class A-5 Certificates
---------- ----
$ % Class A-6 Certificates
---------- ----
(Principal and interest payable on the twenty-fifth day of each
month, beginning in ________ __, 199_).
----------------------
The Preferred Consumer Loan Asset Backed Certificates, Series 199_-_ (the
"Certificates") will represent beneficial interests in a trust, the assets of
which will consist primarily of a pool of fixed rate, closed-end no or low
equity loans secured by mortgages, which are generally subordinate liens, on
residential one-to-four-family properties (the "Mortgage Loans" and together
with all other assets of the trust fund, including any funds on deposit in the
Capitalized Interest Account (as defined herein) and the Pre-Funding Account (as
defined herein), the "Trust Fund") originated or purchased by Preferred Credit
Corporation (the "Seller") in the ordinary course of its business and conveyed,
together with certain related property described herein, by the Seller to
Preferred Securitization Corporation (the "Depositor") and then conveyed by the
Depositor to the Trust Fund. The Trust Fund will be created and the Certificates
will be issued pursuant to a Pooling and Servicing Agreement (the "Pooling and
Servicing Agreement") among the Depositor, the Seller, Advanta Mortgage Corp.
USA, as servicer (the "Servicer") and ______________, as Trustee. See
"Description of the Certificates" herein.
The Depositor has caused ______________ (the "Certificate Insurer") to issue a
certificate guaranty insurance policy (the "Certificate Insurance Policy") for
the benefit of the Class A Certificateholders pursuant to which it will
guarantee certain payments to the Class A Certificateholders as described
herein.
PROSPECTIVE INVESTORS SHOULD CONSIDER THE INFORMATION SET FORTH
UNDER "RISK FACTORS" BEGINNING ON PAGE __ HEREIN AND ON PAGE __ OF THE
ACCOMPANYING PROSPECTUS.
--------------
THE CLASS A CERTIFICATES WILL NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE
DEPOSITOR, THE TRUSTEE, THE SELLER, THE SERVICER OR ANY OF THEIR RESPECTIVE
AFFILIATES. THE CLASS A CERTIFICATES WILL NOT BE INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Price to Underwriting Proceeds
PUBLIC(1) DISCOUNT to the
DEPOSITOR(1)(2)
Class A-1 Certificates.......
Class A-2 Certificates.......
Class A-3 Certificates.......
Class A-4 Certificates.......
Class A-5 Certificates.......
Class A-6 Certificates.......
Total........................
- -------------------
(1) Plus accrued interest, if any, at the applicable Pass-Through Rate
from _________ __, 199__.
(2) Before deducting expenses payable by the Depositor, estimated to be
$_______.
-----------
The Class A Certificates are offered by _______________ (the "Underwriter")
when, as and if delivered to and accepted by the Underwriter, subject to prior
sale, withdrawal or modification of the offer without notice, the approval of
counsel and other conditions. It is expected that the Class A Certificates will
be delivered through the Same Day Funds Settlement system of The Depository
Trust Company, Cedel Bank, societe anonyme and the Euroclear System on or about
___________, ____.
-----------
The date of this Prospectus Supplement is ________ __, 199_.
<PAGE>
(Continued from the cover page)
The Certificates will consist of six classes of senior Certificates
(respectively, the "Class A-1 Certificates," the "Class A-2 Certificates," the
"Class A-3 Certificates," the "Class A-4 Certificates," the "Class A-5
Certificates" and the "Class A-6 Certificates" and collectively the "Class A
Certificates"), and one or more classes of subordinate Certificates,
(collectively, the "Subordinate Certificates"), which term includes any REMIC
"residual interests" (a "Residual Certificate")). Only the Class A Certificates
are being offered hereby.
The Class A Certificates will have an initial aggregate principal balance of
$___________, and the Subordinate Certificates will have an initial aggregate
principal balance of approximately $__________. The Class A Certificates will
initially evidence a _____% undivided interest in the principal of the Mortgage
Loans and a ___% undivided interest in the Pre-Funding Account. The Subordinate
Certificates will initially evidence a ____% interest in the principal of the
Initial Mortgage Loans, together with certain excess interest. The Seller
considers the underwriting policy under which the Mortgage Loans are
underwritten to be analogous to credit lending, rather than equity lending,
since its underwriting decisions are based primarily on the borrower's ability
and willingness to repay and only secondarily on the potential value of the
collateral upon foreclosure. Approximately ____% of the Initial Mortgage Loans
by aggregate principal balance as of the Cut-off Date (as defined herein) are
secured by Mortgaged Properties located in California. See "Risk
Factors--Geographic Concentration" in this Prospectus Supplement (the
"Prospectus Supplement") and "Risk Factors--Underwriting Standards May Affect
Performance" and "The Seller--Underwriting Standards" in the accompanying
Prospectus.
Additional mortgage loans (the "Subsequent Mortgage Loans") may be purchased by
the Trust Fund from time to time on or before ________ __, 199_ from funds on
deposit in the pre-funding account (the "Pre-Funding Account"). On the Closing
Date aggregate cash amounts of approximately $__________ and approximately
$_________, respectively, from the proceeds of the sale of the Class A
Certificates will be deposited with the Trustee in the Pre-Funding Account and
the Capitalized Interest Account (as defined herein), respectively.
Distributions in respect of interest will be made on the 25th day of each month
or, if the 25th day is not a Business Day, on the next succeeding Business Day,
commencing on _______ __, 199_ (each, a "Distribution Date"), to the holders of
the Class A Certificates to the extent described herein. On each Distribution
Date, the amount of interest distributed in respect of the Class A Certificates
will equal the interest accrued on the Certificate Principal Balance (as defined
herein) of the Class A Certificates immediately prior to such Distribution Date
at the applicable Class A Pass-Through Rate during the calendar month
immediately preceding the month in which such Distribution Date occurs and will
be calculated on the basis of a 360-day year assumed to consist of twelve 30-day
months.
One or more real estate mortgage investment conduit ("REMIC") elections will be
made with respect to certain assets of the Trust Fund for federal income tax
purposes. As described more fully herein, the Class A Certificates and
Subordinate Certificates (other than the Residual Certificates) will constitute
"regular interests" in a REMIC and the Residual Certificates will constitute a
"residual interest" in a REMIC. See "Summary--Federal Income Tax Consequences"
and "Federal Income Tax Consequences" herein.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF EACH CLASS OF
CLASS A CERTIFICATES OFFERED HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME.
The Certificates will be part of a separate series of Consumer Loan Asset Backed
Certificates being offered by the Depositor from time to time pursuant to a
Prospectus dated ________ __, 199_ (the "Prospectus"), of which this Prospectus
Supplement is a part and which accompanies this Prospectus Supplement. The
Prospectus contains important information about the offering of the Class A
Certificates that is not contained herein, and prospective investors are urged
to read both this Prospectus Supplement and the Prospectus in full. Sales of the
Class A Certificates may not be consummated unless the purchaser has received
both this Prospectus Supplement and the Prospectus.
SUMMARY
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and in the
accompanying Prospectus. Capitalized terms used herein that are not otherwise
defined shall have the meanings ascribed thereto elsewhere in this Prospectus
Supplement or in the Prospectus. See the Index of Principal Terms for the
location herein of certain principal terms.
Securities Issued........................... Preferred Consumer Loan Asset
Backed Certificates, Series 199_
(the "Certificates") will be
issued pursuant to a pooling and
servicing agreement, to be dated
as of ________ __, 199_ (the
"Pooling and Servicing
Agreement"), among Preferred
Securitization Corporation, as
depositor (the "Depositor"),
Preferred Credit Corporation (in
its capacity as the seller to the
Depositor, the "Seller"), Advanta
Mortgage Corp. USA ("Advanta," or
in its capacity as servicer, the
"Servicer") and ______________, a
___________ (the "Trustee").
The Certificates will consist of
six classes (each, a "Class") of
senior Certificates
(respectively, the "Class A-1
Certificates," the "Class A-2
Certificates," the "Class A-3
Certificates," the "Class A-4
Certificates," the "Class A-5
Certificates," and the "Class A-6
Certificates" (collectively, the
"Class A Certificates")) and one
or more Classes of subordinate
Certificates (the "Subordinate
Certificates," which term
includes any REMIC "residual
interests" (a "Residual
Certificate")).
The Certificates will be issued
in the amounts (with respect to
each Class, the "Initial
Certificate Principal Balance")
and bear the pass-through rates
(with respect to each Class, the
"Pass-Through Rate") set forth
below:
INITIAL CERTIFICATE PASS-THROUGH
CLASS PRINCIPAL BALANCE RATE
Class A-1
Certificates $_________ -----%
Class A-2
Certificates $_________ -----%
Class A-3
Certificates $_________ -----%
Class A-4
Certificates $_________ -----%
Class A-5
Certificates $_________ -----%
Class A-6
Certificates $_________ -----%
Securities Offered.......................... The Class A Certificates are the
only Certificates being offered
hereby. The Class A Certificates
will be issued in book-entry form
in minimum denominations of
[$1,000] and integral multiples
of [$1] in excess thereof. The
Class A Certificates initially
will be represented by
certificates registered in the
name of Cede & Co., as the
nominee of The Depository Trust
Company ("DTC"). Certificates
representing the Class A
Certificates will be issued in
definitive form only under the
limited circumstances described
herein. All references herein to
"holders" or "holders of the
Class A Certificates" shall
reflect the rights of beneficial
owners of Class A Certificates
issued in book- entry form
("Certificate Owners") as they
may indirectly exercise such
rights through DTC in the United
States, or Cedel Bank, societe
anonyme ("Cedel") or the
Euroclear System ("Euroclear") in
Europe, and participating members
thereof, except as otherwise
specified herein. See "Risk
Factors--Limited Liquidity and
Fluctuation in Value from Market
Conditions--Book Entry
Registration" and "Description of
the Securities--Book Entry
Registration" in the accompanying
Prospectus.
The Class A Certificates will
evidence undivided interests in
the Mortgage Loans and together
with all other assets of the
trust fund, including any funds
on deposit in the Capitalized
Interest Account (as defined
herein) and the Pre-Funding
Account (as defined herein)
(collectively, the "Trust Fund").
The undivided percentage interest
(the "Percentage Interest") of a
Class A-1, Class A-2, Class A-3,
Class A-4, Class A-5 and Class A-
6 Certificate in distributions on
the related Class of Certificates
will equal the percentage
obtained from dividing the
denomination of such Certificate
by the Initial Class A-1, Initial
Class A-2, Initial Class A-3,
Initial Class A-4, Initial Class
A-5 or Initial Class A-6
Certificate Principal Balance, as
the case may be.
The Class A Certificates will not
represent interests in or
obligations of the Depositor, the
Seller, the Servicer, the Trustee
or any of their respective
affiliates. Neither the Class A
Certificates nor the underlying
Mortgage Loans will be insured or
guaranteed by any governmental
agency or instrumentality.
Cut-Off Date................................ The opening of business on
________, 199__.
Statistical Calculation Date................ The close of business on
__________, 199__.
Closing Date................................ On or about _________, 199__ (the
"Closing Date").
Distributions............................... Distributions to the holders of
the Certificates of a Class on
each Distribution Date will be
made in an amount equal to their
respective Percentage Interests
multiplied by the aggregate
amount distributed on such Class
of Certificates on such
Distribution Date. So long as the
Class A Certificates are
registered in the name of Cede &
Co., as nominee of DTC,
distributions on each
Distribution Date will be made to
the holders of record of the
related Class A Certificates (the
"Certificateholders") as of the
close of business on the last
Business Day of the month
immediately preceding the month
in which such Distribution Date
occurs (each, a "Record Date").
As more fully described herein
under "Description of the
Certificates--Payment of
Available Funds," distributions
to Certificateholders generally
will be applied first to the
payment of interest and interest
shortfalls, second to any unpaid
principal and third, if any
principal is then due, to the
payment of principal of the
related Class of Certificates.
Distributions on the Certificates
will be made on the 25th day of
each month (or, if such 25th day
is not a Business Day, on the
next succeeding Business Day)
(each, a "Distribution Date").
"Business Day" shall mean any day
other than (i) a Saturday or
Sunday, or (ii) any day on which
the Certificate Insurer or
banking institutions located in
the States of New York or
California are authorized or
obligated by law or executive
order to close.
Description of the Certificates............. The Certificates will represent
the entire beneficial ownership
interest in the Trust Fund. The
assets of the Trust Fund will
consist primarily of a pool of
closed end loans (the "Mortgage
Loans") secured by mortgages or
deeds of trust on residential
one-to-four-family properties,
including townhouses and
individual units in condominiums
and planned unit developments
(such properties, the "Mortgaged
Properties" and such pool, the
"Mortgage Pool"). See
"Description of the Mortgage
Loans" herein. In addition, the
Depositor has caused
________________ (the
"Certificate Insurer") to issue a
certificate guaranty insurance
policy (the "Certificate
Insurance Policy") relating to
the Class A Certificates for the
benefit of the Class A
Certificateholders, pursuant to
which it will guarantee certain
payments to the Trustee for the
benefit of the Class A
Certificateholders, as described
herein. The Trust Fund will be
formed and the Certificates will
be issued pursuant to the Pooling
and Servicing Agreement.
The Subordinate Certificates will
have an original principal
balance of approximately
$_________, but such amount will
increase by an amount equal to
____% of the principal balance of
the Subsequent Mortgage Loans, if
any.
The Subordinate Certificates are
not being offered hereby, and any
information contained herein with
respect to the Subordinate
Certificates is provided only to
permit a better understanding of
the cash flow mechanics and
subordination provisions of the
Trust Fund, insofar as such
mechanics and provisions are
relevant to the Class A
Certificates.
The Mortgage Pool........................... The statistical information
presented in this Prospectus
Supplement concerning the pool of
Initial Mortgage Loans is based
on the pool as of the close of
business on ________ __, 199__
(such date, the "Statistical
Calculation Date"). The pool
aggregated $_________, as of the
Statistical Calculation Date. The
Seller expects that the actual
pool as of the Closing Date will
represent approximately
$___________ in Initial Mortgage
Loans. Initial Mortgage Loans
will represent Mortgage Loans
acquired or to be acquired by the
Seller on or prior to the Closing
Date. In addition, with respect
to the pools as of the
Statistical Calculation Date as
to which statistical information
is presented herein, some
amortization of the pools will
occur prior to the Closing Date.
Moreover, certain loans included
in the pools as of the
Statistical Calculation Date may
prepay in full, or may be
determined not to meet the
eligibility requirements for the
final pools, and may not be
included in the final pools. As a
result of the foregoing, the
statistical distribution of
characteristics as of the Closing
Date for the final Initial
Mortgage Loan pool will vary
somewhat from the statistical
distribution of such
characteristics as of the
Statistical Calculation Date as
presented in this Prospectus
Supplement, although such
variance will not be material.
Unless otherwise noted, all
statistical percentages in this
Prospectus Supplement are
measured by the aggregate
principal balance of the Mortgage
Pool as of the Statistical
Calculation Date.
The Mortgage Loans to be included
in the Trust Fund will be
closed-end, fixed rate no or low
equity loans secured by mortgages
or deeds of trust, which are
first or subordinate liens, on
one-to-four family residential
properties, ____% of which, as of
the Statistical Calculation Date,
are located in the State of
California, and all of which have
original terms to stated maturity
of approximately ten through
twenty years. The Monthly
Payments for each Mortgage Loan
are due on the dates of the month
specified in the related Mortgage
Note (as defined herein) (each, a
"Due Date"). See "Description of
the Mortgage Loans" herein. The
Mortgage Loans were underwritten
in accordance with the
underwriting standards of the
Seller. See "Risk Factors--
Geographic Concentration" herein
and "--Underwriting Standards May
Affect Performance" in the
accompanying Prospectus.
The related process of the
Mortgage Loans are generally used
to finance (i) debt
consolidation, (ii) property
improvements, (iii) the
acquisition of personal property
such as home appliances or
furnishings, (iv) the purchase or
refinancing of residential one-
to four-family properties, and
(v) a combination of debt
consolidation, property
improvements and other consumer
purposes.
In addition to the Mortgage Loans
acquired by the Trust Fund on the
Closing Date (such Mortgage
Loans, the "Initial Mortgage
Loans"), the Trust Fund may
acquire up to approximately
$________ in additional Mortgage
Loans, (the "Subsequent Mortgage
Loans") during the three-month
period commencing on the Closing
Date. The Subsequent Mortgage
Loans, if available, will be
originated by the Seller, sold by
the Seller to the Depositor and
then sold by the Depositor to the
Trust Fund. The Subsequent
Mortgage Loans, as well as all
Mortgage Loans, must conform to
certain specified
characteristics. See "Pre-Funding
Feature" below.
Prepayment and Yield
Considerations.............................. In general, the Mortgage Loans
may be prepaid at any time
without penalty and, accordingly,
the rate of principal payments
thereon is likely to vary from
time to time. The Class A
Certificates may be sold at a
discount to their principal
amounts. A slower than
anticipated rate of principal
payments on the Mortgage Loans is
likely to result in a lower than
anticipated yield on the Class A
Certificates if they are
purchased at a discount. See
"Prepayment and Yield
Considerations" herein and "Risk
Factors--Negative Effect of
Prepayments on Average Life" in
the accompanying Prospectus.
Pre-Funding Feature......................... On the Closing Date,
approximately $__________ (the
"Original Pre-Funded Amount")
will be deposited with the
Trustee and used by the Trust
Fund to purchase the Subsequent
Mortgage Loans.
The Trust Fund will be obligated,
subject to the satisfaction of
certain conditions described
herein, to purchase the
Subsequent Mortgage Loans from
time to time during the
Pre-Funding Period defined below,
subject to the availability
thereof. In connection with each
purchase of Subsequent Mortgage
Loans, the Trust Fund will be
required to pay to the Depositor
a cash purchase price of _____%
of the principal amount thereof
from the Pre- Funding Account;
the remaining ____% will be
evidenced by an increase in the
Subordinate Certificate Principal
Balance; as a result of the
foregoing, the Trust Fund may
acquire up to approximately
$_________ in aggregate principal
balance of Subsequent Mortgage
Loans, based on the original cash
deposit of approximately
$_________ to the Pre-Funding
Account. The Depositor will
designate as a cut-off date (each
a "Subsequent Cut-Off Date") (i)
the last day of the month
preceding the month in which
Subsequent Mortgage Loans will be
conveyed by the Depositor to the
Trust Fund or (ii) the date of
origination, if any such
Subsequent Mortgage Loan is
originated in the month of
conveyance by the Depositor to
the Trust Fund (each a
"Subsequent Transfer Date")
occurring during the Pre- Funding
Period (as defined herein). The
Trust Fund may purchase the
Subsequent Mortgage Loans only
from the Depositor and not from
any other person. See
"Description of the Mortgage
Loans."
The "Pre-Funding Period" is the
period from the Closing Date
until the earliest of (i) the
date on which the amount on
deposit in the Pre-Funding
Account is less than [$50,000],
(ii) the date on which an Event
of Default occurs under the
Pooling and Servicing Agreement
or (iii) __________ __, 199__.
The amount on deposit in the
Pre-Funding Account will be
reduced during the Pre-Funding
Period by the amount thereof used
to purchase Subsequent Mortgage
Loans. Any amount remaining in
the Pre-Funding Account at the
end of the Pre-Funding Period
will be distributed to the Class
A Certificates as an additional
distribution of principal on the
Distribution Date which follows
the end of the Pre-Funding
Period.
Capitalized Interest Account................ On the Closing Date, the Trustee,
from amounts received from the
Depositor, will be required to
deposit a portion of the proceeds
of the sale of the Class A
Certificates in an account (the
"Capitalized Interest Account")
in the name of the Trustee on
behalf of the Trust Fund. The
amount deposited therein will be
used, as necessary, by the
Trustee during the Pre-Funding
Period to fund the negative
arbitrage on the Pre-Funding
Account monies. Any amounts
remaining in the Capitalized
Interest Account on the
Distribution Date which follows
the end of the Pre-Funding Period
and not used for such purpose on
such Distribution Date are
required to be paid directly to
the holders of the Subordinate
Certificates on such Distribution
Date.
Mortgage Interest Rate...................... The "Mortgage Interest Rate" of
each Mortgage Loan is the per
annum interest rate required to
be paid by the mortgagor under
the terms of the related mortgage
note (the "Mortgage Note"). The
Mortgage Interest Rate borne by
each Mortgage Loan is fixed on
the related Mortgage Note.
Interest Distributions...................... On each Distribution Date, the
holders of the Class A
Certificates will be entitled to
receive, to the extent of amounts
available for distribution as
described herein, interest
distributions in an amount equal
to the sum of (i) interest
accrued for the related Accrual
Period (as defined herein) on the
related Class A Principal Balance
immediately prior to such
Distribution Date at the
applicable Class A Pass-Through
Rate and (ii) the portion of the
related Class A Carry-Forward
Amount (as defined herein),
allocable to interest (the "Class
A Interest Distribution Amount").
Interest on the Class A
Certificates will accrue at the
applicable Class A Pass-Through
Rate during the calendar month
immediately preceding the month
in which such Distribution Date
occurs (each, an "Accrual
Period"). See "Description of the
Certificates" herein.
Principal Distributions..................... The "Class A Principal Balance"
represents the maximum specified
dollar amount of principal to
which the Holders of the Class A
Certificates are entitled on the
assets in the Trust Fund. The
"Class A Principal Balance" at
any time is equal to the Class A
Principal Balance as of the Cut-
Off Date (the "Original Class A
Principal Balance") minus the
aggregate, cumulative amounts
actually distributed as principal
to the Class A
Certificateholders. See
"Description of the
Certificates--Payment of
Available Funds" and "The
Certificate Insurance Policy and
The Certificate Insurer" herein.
For purposes of receiving
distributions with respect to
principal, the Class A
Certificates have been divided
into six "sequential paying"
classes. On each Distribution
Date until the Class A-1
Principal Balance has been
reduced to zero, the Holders of
the Class A-1 Certificates will
be entitled to receive 100% of
the distribution with respect to
the Class A Principal
Distribution Amount on such
Distribution Date. After the
Class A-1 Certificate Principal
Balance has been reduced to zero,
the Holders of the Class A-2
Certificates will be entitled to
receive 100% of such
distributions with respect to
principal until the Class A-2
Certificate Principal Balance has
been reduced to zero. After the
Class A-2 Certificate Principal
Balance has been reduced to zero,
the Holders of the Class A-3
Certificates will be entitled to
receive 100% of such
distributions with respect to
principal until the Class A-3
Certificate Principal Balance has
been reduced to zero. After the
Class A-3 Certificate Principal
Balance has been reduced to zero,
the Holders of the Class A-4
Certificates shall be entitled to
receive 100% of such
distributions with respect to
principal until the Class A-4
Certificate Principal Balance has
been reduced to zero. After the
Class A-4 Certificate Principal
Balance has been reduced to zero,
the Holders of the Class A-5
Certificates shall be entitled to
receive 100% of such
distributions with respect to
principal until the Class A-5
Certificate Principal Balance has
been reduced to zero. After the
Class A-5 Certificate Principal
Balance has been reduced to zero,
the Holders of the Class A-6
Certificates shall be entitled to
receive 100% of remaining
distributions of principal.
Holders of the Class A
Certificates will be entitled to
receive on each Distribution
Date, to the extent of amounts
available for distribution (as
described herein) remaining after
interest on the Class A
Certificates is distributed, the
"Senior Principal Distribution
Amount," which will generally
reflect principal collections on
the Mortgage Loans with respect
to the prior calendar month (the
"Collection Period"), together
with an amount (which may not, on
any particular Distribution Date,
be the full necessary amount)
necessary to increase the actual
Overcollateralization Amount to
its Required
Overcollateralization Level, and
minus an amount intended to
reduce any excess
Overcollateralization Amount.
Specifically, the "Class A
Principal Distribution Amount"
for a Distribution Date will
equal:
(a) the sum, without
duplication, of:
(i) the portion of the Class A
Carry-Forward Amount which
relates to a shortfall in a
distribution of a related
Overcollateralization Deficit,
(ii) all scheduled
and unscheduled amounts relating
to principal with respect to the
Mortgage Loans received by the
Servicer during the prior
Collection Period to the extent
actually received by the Trustee,
(iii) the Principal
Balance of each Mortgage Loan
that either was repurchased by
the Seller or by the Depositor to
the extent such Principal
Balances are actually received by
the Trustee,
(iv) any
Substitution Adjustments (as
defined herein) delivered by the
Depositor or the Seller on the
related Servicer Remittance Date
in connection with a substitution
of a Mortgage Loan, to the extent
such Substitution Adjustments are
actually received by the Trustee,
(v) the net
Liquidation Proceeds (as defined
herein) collected by the Servicer
of all the Mortgage Loans during
the prior calendar month (to the
extent such net Liquidation
Proceeds are related to
principal) to the extent actually
received by the Trustee, (vi) any
monies released from the
Pre-Funding Account as a
prepayment of Class A
Certificates on the Distribution
Date which immediately follows
the end of the Pre-Funding
Period,
(vii) the proceeds received by
the Trustee of any termination of
the Trust Fund (to the extent
such proceeds related to
principal),
(viii) the amount of any
Overcollateralization Deficit (as
defined herein) for such
Distribution Date,
(ix) without
duplication of amounts
distributed under clause (viii)
above, the amount of any related
Overcollateralization Increase
Amount (as defined herein) for
such Distribution Date; minus
(b) the amount of any
Overcollateralization Reduction
Amount (as defined herein) for
such Distribution Date.
In no event will the Class A
Principal Distribution Amount
with respect to any Distribution
Date be less than zero or greater
than the Class A Principal
Balance of the Class A
Certificates.
The actual amount distributed
with respect to the Class A
Certificates on any Distribution
Date is the "Class A Distribution
Amount" for such Distribution
Date.
Upon the earlier of (a) the date
on which any payment due or
portion thereof with respect to a
Mortgage Loan has become
delinquent for a period of 180
consecutive days, (b) the time at
which a Mortgage Loan becomes a
Liquidated Loan or (c) the date
on which the Holder of the
Subordinate Certificates
repurchases such Mortgage Loan as
described under "Servicing of the
Mortgage Loans--Realization Upon
a Sale of Defaulted Mortgage
Loans" herein, such Mortgage Loan
will become a "Charged-off Loan."
Once a Mortgage Loan becomes a
Charged-off Loan, its Principal
Balance, for purposes of the
Trust Fund, will thereafter be
considered to be zero.
A "Liquidated Loan" is a Mortgage
Loan as to which the Servicer, in
its reasonable, good faith
business judgment in accordance
with Accepted Servicing Practices
(as defined herein), has
determined that all amounts which
will be recovered with respect to
such Mortgage Loan have been so
recovered (exclusive of any
possibility of a deficiency
judgment).
An amount to cover any loss on a
Charged-off Loan may or may not
be distributed to the Holders of
the Class A Certificates on the
Distribution Date which
immediately follows such Mortgage
Loan becoming a Charged-off Loan.
However, the Holders of the Class
A Certificates are entitled to
receive ultimate recovery of any
loss on the Mortgage Loans which
receipt will be no later than the
Distribution Date occurring after
cumulative losses on Charged-off
Loans result in an
Overcollateralization Deficit.
Credit Enhancement.......................... The credit enhancement provided
for the benefit of the Class A
Certificateholders consists of
(a) the Overcollateralization
provided by the Subordinate
Certificate Principal Balance, as
thereafter augmented by the
acceleration feature described
below, which together with the
subordination mechanics utilize
the internal cash flows of the
Mortgage Loans, and (b) A.
Overcollateralization the
Certificate Insurance Policy. See
"Description of the
Certificates--
Overcollateralization,
Subordination Provisions and
Support Features" herein.
A. Overcollateralization.................... The Overcollateralization feature
of the Trust Fund is a result of
the aggregate debt service
requirements of the Class A
Certificates being less than the
Trust Fund's aggregate expected
revenues, such revenues being the
expected collections and
recoveries on the Mortgage Loans.
The Overcollateralization is
evidenced by the Subordinate
Certificates, which represent the
right to receive excess principal
(which initially equals the
Overcollateralization Amount (as
defined below) on the Cut-off
Date) and excess interest (the
excess of interest collections on
the Mortgage Loans over Class A
Certificate interest, plus fees).
The Pooling and Servicing
Agreement defines the
"Overcollateralization Amount" to
be, as of the end of the related
Collection Period, the excess of
the sum of (i) the amount then on
deposit in the Pre-Funding
Account and (ii) the then
outstanding aggregate Principal
Balance of the Mortgage Loans
over the then outstanding Class A
Principal Balance. Following the
Closing Date, the
Overcollateralization provisions
will result in a limited
acceleration of the Class A
Certificates relative to the
amortization of the Mortgage
Loans in the early months of the
transaction. The accelerated
amortization is achieved by the
application of 100% of principal
payments on the Mortgage Loans
and certain excess interest
(i.e., the cash flows otherwise
payable to the Subordinate
Certificates) to the payment of
the Class A Principal Balance
until the Overcollateralization
Amount reaches a target level
(the "Required
Overcollateralization Level")
mandated by the Certificate
Insurer. Once the Required
Overcollateralization Level is
reached, and subject to the
provisions described in the next
paragraph, the acceleration
feature will cease, unless
necessary to maintain the actual
Overcollateralization Amount at
the Required
Overcollateralization Level in
effect at that time.
The Pooling and Servicing
Agreement provides that, subject
to certain trigger tests, the
Required Overcollateralization
Level may increase or decrease
over time. An increase would
result in a temporary period of
accelerated amortization of the
related Class A Certificates to
increase the actual
Overcollateralization Amount to
the Required
Overcollateralization Level; a
decrease would result in a
temporary period of decelerated
amortization to reduce the actual
Overcollateralization Amount to
the Required
Overcollateralization Level.
B. Subordination............................ The rights of the holders of the
Subordinate Certificates to
receive distributions with
respect to the Mortgage Loans in
the Trust Fund will be
subordinated, to the extent
described herein, to such rights
of the holders of the Class A
Certificates. This subordination
is intended to enhance the
likelihood of regular receipt by
the holders of the Class A
Certificates of the full amount
of their principal and scheduled
monthly payments of interest and
to afford such holders protection
against losses on the Mortgage
Loans.
The protection afforded to the
holders of the Class A
Certificates by means of the
subordination of the Subordinate
Certificates will be accomplished
by the preferential right of the
Class A Certificateholders to
receive, prior to any
distribution being made on a
Distribution Date in respect of
the Subordinate Certificates, the
amounts of interest and principal
due them on each Distribution
Date out of the Available Funds
on such date in the Certificate
Account and, if necessary, by the
right of such Class A
Certificateholders to receive
future distributions of Available
Funds that would otherwise be
payable to the holders of the
Subordinate Certificates. See
"Description of the
Certificates--Overcollateraliza
tion, Subordination Provisions
and Support Features" herein.
C. The Certificate Insurance Policy......... The Certificate Insurer will
issue a certificate guaranty
insurance policy (the
"Certificate Insurance Policy")
with respect to the Class A
Certificates, pursuant to which
it will irrevocably and
unconditionally guarantee payment
to the Trustee for the benefit of
the Holders of the Class A
Certificates as further described
herein, an amount that will
insure that the full amount of
the Insured Distribution Amount
is available for distribution by
the Trustee to the Class A
Certificateholders on such
Distribution Date. The "Insured
Distribution Amount" for a
Distribution Date equals the sum
of (i) the Class A Interest
Distribution Amount and (ii) the
Overcollateralization Deficit.
The Certificate Insurance Policy
does not guarantee the Class A
Certificates any specified rate
of prepayments. A payment by the
Certificate Insurer under the
Certificate Insurance Policy is
referred to herein as an "Insured
Payment." The Certificate Insurer
will be entitled to reimbursement
for all Insured Payments together
with interest thereon. See "The
Certificate Insurance Policy and
The Certificate Insurer" herein.
Mandatory Prepayment of
Class A Certificates........................ The Original Pre-Funded Amount
may be used to acquire Subsequent
Mortgage Loan If by the end of
the Pre-Funding Period, not all
of the Original Pre-Funded Amount
has been used to acquire
Subsequent Mortgage Loans, then
the Class A Certificates will be
prepaid in part on the
Distribution Date which follows
the end of the Pre-Funding
Period, from and to the extent of
such remaining funds.
The Certificate Insurer..................... ______________ (the "Certificate
Insurer"). See "The Certificate
Insurance Policy and The
Certificate Insurer" herein.
Servicing of the Mortgage Loans............. The Servicer has agreed to
service the Mortgage Loans on a
"scheduled/actual" basis (i.e.,
the Servicer is responsible for
advancing scheduled payments of
interest to the extent described
in "--Delinquency Interest
Advances and Compensating
Interest" below) in accordance
with the Pooling and Servicing
Agreement and to cause the
Mortgage Loans to be serviced
with the same care as it
customarily employs in servicing
and administering mortgage loans
of the same type for its own
account in accordance with
accepted mortgage servicing
practices of prudent lending
institutions.
Credit Quality of Loans..................... The Seller considers the
underwriting policy under which
the Mortgage Loans are
underwritten to be analogous to
credit lending, rather than
equity lending, since its
underwriting decisions are based
primarily on the borrower's
ability and willingness to repay
and only secondarily on the
potential value of the collateral
upon foreclosure. Loan decisions
are based primarily on an
analysis of the prospective
borrower's documented cash flow
and credit history and
supplemented by a collateral
evaluation.
The Mortgage Loans originated or
purchased by the Seller will have
been made to borrowers that
typically have limited access to
traditional mortgage financing
for a variety of reasons, such as
insufficient home equity value,
high levels of debt
service-to-income, past credit
experience or a limited credit
history. See "Risk
Factors--Underwriting Standards
and "The Seller" in the
accompanying Prospectus.
Delinquency Interest Advances and
Compensating................................ The Servicer will be obligated to
make Interest. Delinquency
Interest Advances (as defined
below) unless it reasonably
believes that the amount of such
Delinquency Interest Advance will
ultimately not be recoverable
with respect to the related
Mortgage Loan (exclusive of any
possibility of a deficiency
judgment). Delinquency Interest
Advances may be funded by the
Servicer from subsequent
collections on the Mortgage Loans
generally, and are reimbursable
from (i) future collections and
(ii) Net Liquidation Proceeds.
"Delinquency Interest Advances"
are amounts deposited in the
Certificate Account by the
Servicer equal to the sum of the
interest portions (net of the
Servicing Fees) due, but not
collected with respect to
delinquent Mortgage Loans during
the related Collection Period.
Notwithstanding the Servicer's
good faith determination at the
time such Delinquency Interest
Advance was made, that it would
not be a Nonrecoverable Advance,
in the event such Delinquency
Interest Advance becomes a
Nonrecoverable Advance, the
Servicer will be entitled to
reimbursement therefor from the
Trust Fund. Upon an Event of
Default (as described herein),
the Trustee, as successor
servicer, will be obligated to
make any such Delinquency
Interest Advance if the Servicer
fails in its obligation to do so,
to the extent provided in the
Pooling and Servicing Agreement.
In addition, the Servicer will
also be required to deposit
Compensating Interest in the
Certificate Account with respect
to any full Prepayment received
on a Mortgage Loan during the
related Collection Period out of
its own funds without any right
of reimbursement therefor.
"Compensating Interest" is an
amount equal to the difference
between (x) 30 days' interest at
the Mortgage Interest Rate (net
of the rate at which the
Servicing Fee is calculated) on
the Principal Balance of such
Mortgage Loan as of the first day
of the related Collection Period
and (y) to the extent not
previously advanced, the interest
paid by the Mortgagor with
respect to the Mortgage Loan
during such Collection Period.
The Servicer will not be required
to pay Compensating Interest with
respect to any Collection Period
in an amount in excess of the
aggregate Servicing Fee received
by the Servicer for such
Collection Period. See
"Description of the
Certificates--Payments on the
Mortgage Loans" herein.
Servicing Advances.......................... Subject to the Servicer's good
faith determination that such
action would not constitute a
Nonrecoverable Advance and that a
prudent mortgage lender would
make a like advance if it or an
affiliate owned the related
Mortgage Loan, the Servicer is
required to advance amounts with
respect to the Mortgage Loans
("Servicing Advances")
constituting "out- of-pocket"
costs and expenses relating to
(a) the preservation and
restoration of the Mortgaged
Property, (b) enforcement
proceedings, including
foreclosures, (c) expenditures
relating to the purchase or
maintenance of a senior lien not
included in the Trust Fund on the
Mortgaged Property, and (d)
certain other customary amounts
described in the Pooling and
Servicing Agreement. Such
Servicing Advances by the
Servicer are reimbursable to the
Servicer subject to certain
conditions and restrictions. In
the event that, notwithstanding
the Servicer's good faith
determination at the time such
Servicing Advance was made, that
it would not be a Nonrecoverable
Advance, in the event such
Servicing Advance becomes a
Nonrecoverable Advance, the
Servicer will be entitled to
reimbursement therefor from the
Fund.
Servicing Fee............................... The Servicer is entitled to a
servicing fee of ____% per annum
of the Principal Balance of each
Mortgage Loan (the "Servicing
Fee"), calculated and payable
monthly. The Servicer is entitled
to other compensation to the
extent described herein.
Optional Termination........................ The Holders of the Residual
Certificates or Servicer may, at
their option (and if neither
option is exercised, the
Certificate Insurer may, at its
option) terminate the Trust Fund
on any date on which the
aggregate Principal Balances of
the Mortgage Loans is less than
10% (if the Holders of the
Residual Certificates are
exercising their option) or is
less than 5% (if the Servicer (or
the Certificate Insurer, if the
Servicer fails to exercise its
option) is exercising its option)
of the sum of (a) the aggregate
Principal Balances of the Initial
Mortgage Loans as of the Cut-Off
Date plus (b) the aggregate
Principal Balance of the
Subsequent Mortgage Loans, as of
the related Subsequent Cut- Off
Date (such sum, the "Maximum
Collateral Amount"), by
purchasing from the Trust Fund,
on the next succeeding
Distribution Date, all of the
property of such Trust Fund at a
price equal to the sum of (a) the
greater of (i) 100% of the
aggregate Principal Balances of
each outstanding Mortgage Loan
and each REO Property and (ii)
the fair market value
(disregarding accrued interest)
of the Mortgage Loans and such
REO Properties, determined as the
average of three written bids
(copies of which are to be
delivered to the Trustee and the
Certificate Insurer by the
Servicer and the reasonable cost
of which may be deducted from the
final purchase price so long as
such deduction would not result
in a draw on the Certificate
Insurance Policy) made by
nationally-recognized dealers
reasonably acceptable to the
Certificate Insurer and based on
a valuation process which would
be used to value comparable
mortgage loans and REO
properties, plus (b) the greater
of (x) the aggregate amount of
accrued and unpaid interest on
the Mortgage Loans through the
related Collection Period and (y)
30 days' accrued interest thereon
computed at a rate equal to the
related Mortgage Interest Rate,
(c) in the event the Holders of
the Residual Certificates or the
Certificate Insurer exercise such
option, plus any unpaid and
accrued Servicing Fee or in the
event the Servicer exercises such
option, net of the Servicing Fee,
and (d) any unreimbursed amounts
due to the Certificate Insurer
under the Pooling and Servicing
Agreement and any accrued and
unpaid Insured Payments, plus
interest thereon. The first date
on which the Holders of the
Residual Certificates may
exercise their option is the
"Clean-Up Call Date." See
"Servicing of the Mortgage
Loans--Termination; Purchase of
Mortgage Loans" herein.
Trustee..................................... ________________, a
______________ with offices
located at
______________________. See "The
Trustee" herein.
ERISA Considerations........................ The Class A Certificates may not
be purchased by Plans (as defined
below) until the earlier of the
(i) the end of the Pre- Funding
Period or (ii) the date on which
the U.S. Department of Labor
amends the exemption (as defined
below) to permit the use
thereunder of pre-funding
accounts as described herein. On
or after the earlier to occur of
such dates, a fiduciary of any
Plan should carefully review with
its legal advisors whether the
purchase or holding of Class A
Certificates could give rise to a
transaction prohibited or not
otherwise permissible under ERISA
or the Code. The U.S. Department
of Labor has issued an individual
exemption, Prohibited Transaction
Exemption 89-90 to the
Underwriter (the "Exemption"),
which generally exempts from the
application of certain of the
prohibited transaction provisions
of ERISA, and the excise taxes
imposed on such prohibited
transactions by Section 4975(a)
and (b) of the Code and Section
502(i) of ERISA, transactions
relating to the purchase, sale
and holding of pass-through
certificates such as the Class A
Certificates and the servicing
and operation of asset pools such
as the Trust Fund, provided that
certain conditions are satisfied.
See "ERISA Considerations" herein
and in the accompanying
Prospectus.
Legal Investment............................ The Class A Certificates will not
constitute "mortgage related
securities" for purposes of the
Secondary Mortgage Market
Enhancement Act of 1984. See
"Legal Investment" herein.
Federal Income Tax
Consequences................................ For federal income tax purposes,
one or more elections will be
made to treat certain assets of
the Trust Fund as a "real estate
mortgage investment conduit" (a
"REMIC"). Immediately prior to
the issuance of the Certificates,
Stroock & Stroock & Lavan LLP,
special tax counsel to the
Depositor, will deliver its
opinion generally to the effect
that the arrangement by which the
Certificates are issued will be
treated as a REMIC and the Class
A Certificates will be treated as
"regular interests" in a REMIC as
long as all the provisions of the
Pooling and Servicing Agreement
are complied with and the
statutory and regulatory
requirements are satisfied. The
Class A Certificates will be
treated as debt instruments
issued by a REMIC for federal
income tax purposes. Holders of
Class A Certificates, including
Holders that generally report
income on the cash method of
accounting, will be required to
include interest on the Class A
Certificates in income in
accordance with the accrual
method of accounting. See
"Federal Income Tax Consequences"
herein and in the accompanying
prospectus.
Certificate Ratings......................... It is a condition to the issuance
of the Class A Certificates that
the Class A Certificates shall
have been rated not lower than
______ by ________________
("___________") and _____ by
______________ ("_______" and
together with _______, the
"Rating Agencies"). A security
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.
The ratings do not address the
possibility that Class A
Certificateholders may suffer a
lower than anticipated yield. See
"Ratings" and "Prepayment and
Yield Considerations" herein.
<PAGE>
RISK FACTORS
Prospective investors in the Class A Certificates should consider
among other things the following risk factors in connection with the purchase of
the Class A Certificates.
LIMITED LIQUIDITY
The Underwriter intends to make a secondary market in the Class A
Certificates, but will have no obligation to do so. There can be no assurance
that a secondary market for any Class of Class A Certificates will develop, or
if one does develop, that it will continue or provide sufficient liquidity of
investment or that it will remain for the term of the related Class of Class A
Certificates. See "Legal Investment Considerations" herein and "Risk
Factors--Limited Liquidity and Fluctuation in Value from Market Conditions--Lack
of Secondary Market" in the accompanying Prospectus.
GEOGRAPHIC CONCENTRATION
As of the Statistical Calculation Date, approximately _____% of the
Initial Mortgage Loans are secured by Mortgaged Properties located in the State
of California. Because of the relative geographic concentration of the Mortgage
Loans within California, losses on the Mortgage Loans may be higher than would
be the case if the Mortgage Loans were more geographically diversified. For
example, certain of the Mortgaged Properties may be more susceptible to certain
types of special hazards, such as earthquakes, floods, hurricanes and other
natural disasters and major civil disturbances, than residential properties
located in other parts of the country. In addition, the regional economies of
the areas in which the Mortgage Loans are located may be adversely affected to a
greater degree than the economies of other areas of the country by certain
regional developments. In recent years, property values of residential real
estate generally have declined in California. If the relevant California
residential real estate markets experience an overall decline in property values
after the dates of origination of the respective Mortgage Loans, then the rates
of delinquencies, foreclosures and losses on the Mortgage Loans may be expected
to increase and such increase may be substantial. Further, the State of
California is an "election of remedies" state, which generally means that in the
event of default on Mortgage Loans in that state, the lender, in this case the
Servicer, in the name of and on behalf of the Trustee, must elect either to sue
on the debt or pursue its remedies against the property. If the Servicer chooses
to pursue its remedies against the Borrower, then generally it will not be able
to foreclose against the Mortgaged Property.
THE SUBSEQUENT MORTGAGE LOANS AND THE PRE FUNDING ACCOUNT
There is no assurance that the Depositor will have sufficient Mortgage
Loans to sell to the Trust Fund during the Pre-Funding Period so as to account
for the entire Original Pre-Funded Amount; if the Depositor does not have
sufficient Mortgage Loans, a partial prepayment of principal to Holders of Class
A Certificates will result. In addition, any conveyance of Subsequent Mortgage
Loans is subject to the following conditions, among others: (i) each such
Subsequent Mortgage Loan must satisfy certain specified representations and
warranties; (ii) the Depositor will not select such Subsequent Mortgage Loans in
a manner that it believes is adverse to the interests of the Holders of the
Class A Certificates or the Certificate Insurer; (iii) the Depositor will
deliver certain opinions of counsel with respect to the validity of the
conveyance of such Subsequent Mortgage Loans; and (iv) as of the Subsequent
Cut-Off Date, the Mortgage Loans at that time, including the Subsequent Mortgage
Loans to be conveyed by the Depositor as of such Subsequent Cut-Off Date, will
satisfy the criteria set forth in the Pooling and Servicing Agreement, as
described herein under "Description of the Mortgage Loans--Conveyance of
Subsequent Mortgage Loans."
To the extent that amounts on deposit in the Pre-Funding Account have
not been fully applied to the purchase of Subsequent Mortgage Loans by the end
of the Pre-Funding Period, such remaining amount will be applied as a prepayment
of principal paid to the Holders of the Class A Certificates on the Distribution
Date following the end of the Pre-Funding Period (in no event later than the
__________, 199__ Distribution Date). The amount of any such prepayment will be
applied to the Class A Certificates. Although no assurances can be given, it is
anticipated by the Seller that the principal amount of Subsequent Mortgage Loans
sold to the Trust Fund will require the application of substantially all amounts
on deposit in the Pre-Funding Account and that there will be no material
principal prepayment to the Holders of the Class A Certificates.
Subsequent Mortgage Loans may have characteristics different from
those of the related Initial Mortgage Loans. However, each Subsequent Mortgage
Loan must satisfy the eligibility criteria referred to above at the time of its
addition and be underwritten in accordance with the Seller's underwriting
criteria. See "Description of the Mortgage Loans--Conveyance of Subsequent
Mortgage Loans" herein.
BOOK-ENTRY REGISTRATION
Since transactions in the Class A Certificates can be effected only
through DTC, Cedel, Euroclear, participating organizations, indirect
participants and certain banks, the ability of a Certificate Owner of Class A
Certificates to pledge a Class A Certificate to persons or entities that do not
participate in the DTC, Cedel or Euroclear system, or otherwise to take action
in respect of such Class A Certificate, may be limited due to lack of a physical
certificate representing such Class A Certificate.
Certificate Owners of Class A Certificates may experience some delay
in their receipt of distributions of interest and principal on the Class A
Certificates since such distributions will be forwarded by the Trustee to DTC
and DTC will credit such distributions to the accounts of its Participants,
which will thereafter credit them to the accounts of such Certificate Owners
either directly or indirectly through indirect participants. See "Description of
the Securities--Book Entry Registration" and "Risk Factors--Limited Liquidity
and Fluctuation in Value from Market Conditions--Book Entry Registration" in the
accompanying Prospectus.
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
The statistical information regarding the Mortgage Loans (the "Initial
Mortgage Loans") which is presented in this Prospectus Supplement is based upon
the characteristics of the Mortgage Pool as of the close of business on
___________, 199_ (the "Statistical Calculation Date"). Unless otherwise
indicated, all percentages set forth in this Prospectus Supplement are based
upon the aggregate Principal Balances of the Initial Mortgage Loans as of the
Statistical Calculation Date, which was $______________.
The Mortgage Loans to be included in the Trust Fund are evidenced by
mortgage notes (each, a "Mortgage Note") secured by mortgages or deeds of trust
which are generally subordinate liens (the "Mortgages") on one- to four- family
residential properties, including townhouses, individual units in condominiums
and planned unit developments (the "Mortgaged Properties") and have the
additional characteristics described below. Since the Mortgage Loans are
generally subordinate liens which are subordinate to the rights of the mortgagee
under the senior mortgage or mortgages encumbering the related Mortgaged
Property ("Senior Liens"), the proceeds from any foreclosure, liquidation,
insurance or condemnation proceedings will be available to satisfy the
outstanding balance of such subordinate mortgage only to the extent that the
claims of the mortgagees under such Senior Liens have been satisfied in full,
including any related foreclosure costs. In addition, a subordinate mortgagee
may not foreclose on the Mortgaged Property securing a subordinate mortgage
unless it forecloses subject to the Senior Liens, in which case it must either
pay the entire amount due on the Senior Liens to the mortgagees thereof at or
prior to the foreclosure sale or undertake the obligation to make payments on
the Senior Liens in the event the mortgagor is in default thereunder. The Trust
Fund will not have any source of funds to satisfy the Senior Liens or make
payments due to the mortgagees thereof.
The Mortgage Loans have original terms to stated maturity of ten
through twenty years. Generally the original term to stated maturity is 15
years. The loan application for each Mortgage Loan was approved in the ordinary
course of the Seller's fixed rate closed-end loan program. As of the Statistical
Calculation Date, the average principal balance of the Initial Mortgage Loans
was approximately $_________. As of the Statistical Calculation Date, the
weighted average Mortgage Interest Rate was approximately _____%. The weighted
average Combined Loan-to-Value Ratio (as defined below) of the Initial Mortgage
Loans as of the Statistical Calculation Date is approximately ______%. A
"Combined Loan-to-Value Ratio" on an individual Mortgage Loan is calculated by
dividing the sum of (x) any outstanding senior mortgage balance plus (y) the
original principal balance of the Mortgage Loan, by the appraised value of such
Mortgaged Property. In the instance where more than one appraisal was performed
on the subject property, the lesser of the two values will be used to determine
the Combined Loan-to-Value Ratio. As of the Statistical Calculation Date, the
weighted average remaining term to stated maturity was ______ months and the
latest scheduled maturity of any Initial Mortgage Loan is ____________; however
the actual date on which any Mortgage Loan is paid in full may be earlier than
the stated maturity date due to unscheduled payments of principal.
The related proceeds of the Mortgage Loans are generally used to
finance (i) debt consolidation, (ii) property improvements, (iii) the
acquisition of personal property such as home appliances or furnishings, (iv)
the purchase or refinancing of residential one- to four-family properties, and
(v) a combination of debt consolidation, property improvements and other
consumer purposes.
Substantially all of the proceeds of Mortgage Loans with loan-to-value
ratios in excess of a specified percentage, calculated in accordance with the
Treasury regulations pertaining to REMICS, are used to finance improvements on
the related Mortgage Property.
Each of the Mortgage Loans is subject to a due-on-sale clause. See
"Certain Legal Aspects of the Loans" in the accompanying Prospectus.
The Monthly Payments for each Mortgage Loan are due on the dates of
the month specified in the related Mortgage Note (each a "Due Date"). Each
Mortgage Loan requires the related Mortgagor to make current principal and
interest payments during the life of the Mortgage Loan.
Based on information supplied by the mortgagors in connection with
their loan applications at origination, the Mortgaged Properties will be owner
occupied primary residences.
POOL STATISTICS
The Mortgage Loans were underwritten by the Seller in accordance with
underwriting standards developed by the Seller described under "The
Seller--Underwriting Standards" in the accompanying Prospectus.
Set forth below is a description of certain additional characteristics
of the Initial Mortgage Loans as of the Statistical Calculation Date (except as
otherwise indicated). Dollar amounts and percentages may not add up to totals
due to rounding.
The statistical information presented in this Prospectus Supplement
concerning the pool of Initial Mortgage Loans is based on the pool as of the
close of business on ___________, 199_ (such date, the "Statistical Calculation
Date"). The pool aggregated $______________ as of the Statistical Calculation
Date. The Seller expects that the actual pool as of the Closing Date will
represent approximately $___________ in Initial Mortgage Loans. Initial Mortgage
Loans will represent Mortgage Loans acquired or to be acquired by the Seller on
or prior to the Closing Date. In addition, with respect to the pools as of the
Statistical Calculation Date as to which statistical information is presented
herein, some amortization of the pools will occur prior to the Closing Date.
Moreover, certain loans included in the pools as of the Statistical Calculation
Date may prepay in full, or may be determined not to meet the eligibility
requirements for the final pools, and may not be included in the final pools. As
a result of the foregoing, the statistical distribution of characteristics as of
the Closing Date for the final Initial Mortgage Loan pool will vary somewhat
from the statistical distribution of such characteristics as of the Statistical
Calculation Date as presented in this Prospectus Supplement, although such
variance will not be material. Unless otherwise noted, all statistical
percentages in this Prospectus Supplement are measured by the aggregate
principal balance of the Mortgage Pool as of the Statistical Calculation Date.
The sum of the percentage columns set forth in the following tables
may not equal 100% due to rounding.
<PAGE>
<TABLE>
<CAPTION>
MORTGAGE INTEREST RATES
Statistical Percentage of
Calculation Statistical
Number of Date Calculation
Initial Aggregate Date
MORTGAGE Mortgage Unpaid Aggregate
INTEREST RATES Loans Principal Unpaid
Balance Principal Balance
<S> <C> <C> <C>
10.000-10.249%........
10.250-10.499..........
10.500-10.749...........
10.750-10.999...........
11.000-11.249...........
11.250-11.499...........
11.500-11.749...........
11.750-11.999...........
12.000-12.249...........
12.250-12.499...........
12.500-12.749...........
12.750-12.999...........
13.000-13.249...........
13.250-13.499...........
13.500-13.749...........
13.750-13.999...........
14.000-14.249...........
14.250-14.499...........
14.500-14.749...........
14.750-14.999...........
15.000-15.249...........
15.250-15.499...........
15.500-15.749...........
15.750-15.999...........
16.000-16.249...........
16.250-16.499...........
16.500-16.749...........
16.750-16.999...........
17.000-17.250...........
TOTAL................... ----------------------- --------------------------- ----------------------------
The weighted average Mortgage Interest Rate of the Initial Mortgage
Loans is approximately ____% per annum.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
REMAINING MONTHS TO STATED MATURITY
Statistical
Calculation Date Percentage of
Number of Aggregate Statistical
Remaining Months Initial Mortgage Unpaid Calculation Date
to Loans Principal Balance Aggregate Unpaid
Stated Maturity Principal Balance
<S> <C> <C> <C>
106.....................
162.....................
163.....................
164.....................
165.....................
166.....................
167.....................
168.....................
169.....................
170.....................
171.....................
172.....................
173.....................
174.....................
175.....................
176.....................
177.....................
178.....................
179.....................
180.....................
240.....................
----------------------- --------------------------- ---------------------------
TOTAL.................
The weighted average remaining term to stated maturity of the Initial
Mortgage Loans is approximately _____ months. The latest scheduled maturity of
the Initial Mortgage Loans is October _______.
ORIGINAL MONTHS TO STATED MATURITY
Statistical
Calculation Percentage of
Number of Date Statistical
Original Months Initial Mortgage Aggregate Calculation Date
to Stated Loans Unpaid Aggregate
Maturity Principal Unpaid
Balance Principal Balance
120....................
179.....................
180.....................
240.....................
TOTAL................
ORIGINATION MONTH
Statistical
Calculation Percentage of
Number of Date Statistical
Initial Mortgage Aggregate Calculation Date
ORIGINATION MONTH LOANS Unpaid Aggregate
Principal Unpaid
Balance Principal Balance
TOTAL.................
The earliest month and year of origination of any Initial Mortgage Loan
is __________ and the latest month and year of origination is __________.
</TABLE>
<TABLE>
<CAPTION>
COMBINED LOAN-TO-VALUE RATIOS
Statistical
Calculation Percentage of
Number of Date Statistical
Combined Initial Mortgage Aggregate Calculation Date
LOAN-TO-VALUE LOANS Unpaid Aggregate
RATIOS Principal Unpaid
BALANCE PRINCIPAL
BALANCE
<S> <C> <C> <C>
20.00-24.99%..........
25.00-29.99...........
35.00-39.99...........
45.00-49.99...........
50.00-54.99...........
55.00-59.99...........
60.00-64.99...........
65.00-69.99...........
70.00-74.99...........
75.00-79.99...........
80.00-84.99...........
85.00-89.99...........
90.00-94.99...........
95.00-99.99...........
100.00-104.99...........
105.00-109.99...........
110.00-114.99...........
115.00-119.99...........
120.00-124.99...........
125.00-129.99...........
TOTAL.................... --------------------------- ---------------------------- ----------------------------
The minimum and maximum Combined Loan-to-Value Ratios of the Initial
Mortgage Loans as of the Statistical Calculation Date are approximately _____%
and _____%, respectively, and the weighted average Combined Loan-to-Value Ratio
as of the Statistical Calculation Date of the Initial Mortgage Loans is
approximately _____%. The "Combined Loan-to-Value Ratio" of a Mortgage Loan is
the ratio, expressed as a percentage, equal to the sum of any outstanding senior
liens mortgage balance plus the original balance of the Mortgage Loan divided by
the appraised value of the Mortgaged Property. In the instance where more than
one appraisal was performed on the subject property, the lesser of the two
values will be used to determine the Combined Loan-to-Value Ratio.
</TABLE>
<TABLE>
<CAPTION>
CREDIT BUREAU RISK SCORES
Statistical
Calculation Percentage of
Number of Date Statistical
Credit Bureau Initial Mortgage Aggregate Calculation Date
RISK SCORES LOANS Unpaid Aggregate
Principal Unpaid
BALANCE PRINCIPAL
BALANCE
<S> <C> <C> <C>
560-569.......
570-579.......
580-589.......
590-599.......
600-609.......
610-619.......
620-629.......
630-639.......
640-649.......
650-659.......
660-669.......
670-679.......
680-689.......
690-699.......
700-709.......
710-719.......
720-729.......
730-739.......
740-749.......
750-759.......
760-769.......
770-779.......
780-789.......
790-799.......
800-809.......
810-819.......
TOTAL....... --------------------------- --------------------------- ---------------------------
As of the Statistical Calculation Date, the weighted average Credit
Bureau Risk Score of the Initial Mortgage Loans is ______.
</TABLE>
<TABLE>
<CAPTION>
SUBORDINATE MORTGAGE RATIOS OF MORTGAGE LOANS
Statistical
Calculation Percentage of
Number of Date Statistical
Subordinate Initial Mortgage Aggregate Calculation Date
MORTGAGE LOANS Unpaid Aggregate
RATIOS Principal Unpaid
BALANCE PRINCIPAL
BALANCE
<S> <C> <C> <C>
4.50 to 9.99%.........
10.00 to 19.99..........
20.00 to 29.99..........
30.00 to 39.99..........
40.00 to 49.99..........
50.00 to 59.99..........
60.00 to 69.99..........
70.00 to 79.99..........
80.00 to 89.99..........
90.00 to 99.99..........
TOTAL................. -------------------------- -------------------------- ---------------------------
As of the Statistical Calculation Date, the weighted average
Subordinate Mortgage Ratio of the Initial Mortgage Loans will be approximately
_____%. The "Subordinate Mortgage Ratio" of a Mortgage Loan which is in a
subordinate lien position is equal to the ratio (expressed as a percentage) of
the original principal balance of such Mortgage Loan to the sum of (i) the
original principal balance of such Mortgage Loan and (ii) the principal balance
of any senior liens (computed at the time of origination of such Mortgage Loan).
Senior liens are not included above.
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES
Statistical
Original Calculation Percentage of
Mortgage Loan Number of Date Statistical
Principal Initial Mortgage Aggregate Calculation Date
Balance of the LOANS Unpaid Aggregate
Initial Principal Unpaid
MORTGAGE BALANCE PRINCIPAL
LOANS BALANCE
<S> <C> <C> <C>
$10,000-14,999........
15,000-19,999.........
20,000-24,999.........
25,000-29,999.........
30,000-34,999.........
35,000-39,999.........
40,000-44,999.........
45,000-49,999.........
50,000-54,999.........
55,000-59,999.........
60,000-64,999.........
65,000-69,999.........
70,000-74,999.........
75,000-79,999.........
80,000-84,999.........
85,000-89,999.........
90,000-94,999.........
95,000-99,999.........
100,000-104,999........
120,000-124,999.........
130,000-134,999.........
145,000-149,999.........
TOTAL...................
As of the Statistical Calculation Date, the average Original Principal
Balance of the Initial Mortgage Loans is approximately $__________. The largest
Original Principal Balance of the Initial Mortgage Loans is $________.
REMAINING MORTGAGE LOAN PRINCIPAL BALANCES
Statistical
Calculation Percentage of
Remaining Mortgage Number of Date Statistical
Loan Initial Aggregate Calculation Date
Principal Balance Mortgage Unpaid Aggregate Unpaid
of the LOANS Principal PRINCIPAL
INITIAL MORTGAGE BALANCE BALANCE
LOANS
<S> <C> <C> <C>
$ 9,000-9,999.........
10,000-14,999..........
15,000-19,999..........
20,000-24,999..........
25,000-29,999..........
30,000-34,999..........
35,000-39,999..........
40,000-44,999..........
45,000-49,999..........
50,000-54,999..........
55,000-59,999..........
60,000-64,999..........
65,000-69,999..........
70,000-74,999..........
75,000-79,999..........
80,000-139,999..........
TOTAL...................
As of the Statistical Calculation Date, the average Remaining
Principal Balance of the Initial Mortgage Loans is approximately $_________.
</TABLE>
<TABLE>
<CAPTION>
MORTGAGED PROPERTY TYPES
Statistical
Calculation Percentage of
Number of Date Statistical
Initial Mortgage Aggregate Calculation Date
PROPERTY LOANS Unpaid Aggregate
TYPES Principal Unpaid
BALANCE PRINCIPAL
BALANCE
<S> <C> <C> <C>
Single Family...........
Low-rise Condo.........
High-rise Condo.........
PUD.....................
2-Unit..................
3-Unit..................
4-Unit..................
TOTAL.................
DELINQUENCY STATUS OF MORTGAGE LOANS
Statistical
Calculation Percentage of
Number of Date Statistical
Number of Initial Mortgage Aggregate Calculation Date
DAYS LOANS Unpaid Aggregate
DELINQUENT Principal Unpaid
BALANCE PRINCIPAL
BALANCE
Current...........
1-30 days
delinquent.........
31-59 days
delinquent.........
TOTAL..................
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
Statistical
Calculation Percentage of
Number of Date Statistical
Initial Mortgage Aggregate Calculation Date
STATE LOANS Unpaid Aggregate
Principal Unpaid
BALANCE PRINCIPAL
BALANCE
TOTAL.................
No more than approximately ____% of the Initial Mortgage Loans are
secured by Mortgaged Properties located in any one zip code.
</TABLE>
<PAGE>
The information set forth in the preceding section "Description of the
Mortgage Loans" has been based upon information provided by the Seller and
tabulated by the Depositor. None of the Depositor, the Trustee, the Servicer or
the Certificate Insurer make any representation as to the accuracy or
completeness of such information.
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS
The Pooling and Servicing Agreement permits the Trust Fund to acquire
approximately $__________ aggregate principal balance of Subsequent Mortgage
Loans. Accordingly, the statistical characteristics of the Mortgage Loans will
vary as of any Subsequent Cut-Off Date upon the acquisition of Subsequent
Mortgage Loans.
The obligation of the Trust Fund to purchase the Subsequent Mortgage
Loans on a Subsequent Transfer Date is subject to the following requirements
among others: (i) such Subsequent Mortgage Loan may not be more than 30 days
contractually delinquent as of the related Subsequent Cut-Off Date; (ii) the
remaining term to maturity of such Subsequent Mortgage Loan may not exceed 20
years; (iii) such Subsequent Mortgage Loan has a Mortgage Interest Rate of at
least _____%; (iv) the Subsequent Mortgage Loans in the aggregate have a
weighted average CLTV (based on the original appraisal) of no greater than 100%;
(v) such Subsequent Mortgage Loan is a fully amortizing loan with level payments
generally over 15 years; (vi) such Subsequent Mortgage Loan is secured by a
residential dwelling; (vii) the related Trustee's Mortgage File with respect to
such Subsequent Mortgage Loan shall have been delivered to the Trustee; (viii)
no such Subsequent Mortgage Loan is secured by an investor property or
associated with the purchase of a home; and (ix) following the purchase of such
Subsequent Mortgage Loans by the Trust Fund, the Mortgage Loans (including the
Subsequent Mortgage Loans) (a) will have a weighted average Mortgage Interest
Rate of at least ____%; (b) will have a weighted average CLTV (based on the
original appraisal) of not more than ___%; (c) will have no Mortgage Loan with a
Principal Balance in excess of $______; (d) will not have any non-owner occupied
properties; (e) will have a weighted average Subordinate Mortgage Ratio of not
more than ____%; (f) will not have a concentration in a single zip code in
excess of ___% by aggregate Principal Balance; (g) will not have a concentration
in Los Angeles County, California in excess of __% by aggregate Principal
Balance; (h) will not have a concentration in any other county in excess of ___%
by aggregate Principal Balance; (i) will not have a concentration of Credit
Bureau Risk Scores under ___ in excess of ___% by aggregate Principal Balance;
(j) will not have a concentration of Mortgage Loans with self employed
mortgagors in excess of _% by aggregate Principal Balance; (k) will have a
weighted average Credit Bureau Risk Score of at least ___ and a weighted average
DTI of no more than __% and (l) will have a concentration of Mortgage Loans
secured by single family residences of at least __% by aggregate Principal
Balance. The Pooling and Servicing Agreement will provide that any of such
requirements may be waived or modified in any respect upon prior written consent
of the Certificate Insurer and certain other parties.
MANDATORY REPURCHASE OR SUBSTITUTION OF MORTGAGE LOANS
The Seller is required, with respect to Mortgage Loans that are found
by the Trustee to have defective documentation, or in respect of which the
Seller has breached a representation or warranty, to repurchase such Mortgage
Loans or substitute such Mortgage Loan with a Qualified Substitute Mortgage
Loan. See "Prepayment and Yield Considerations" and "Description of the
Certificates--Assignment of Mortgage Loans" and "--Representations and
Warranties of the Seller" herein.
DELINQUENCY AND LOSS EXPERIENCE
The table below sets forth the combined delinquency and loss
experience of mortgage loans originated and acquired by the Seller and held for
sale or securitization in the Seller's servicing portfolio and securitized loans
originated by the Seller and serviced by Advanta for the periods indicated.
While the Seller commenced originating mortgage loans approximately two years
before the first period set forth below, prior to 1996 almost all of the
Seller's originations were of a product different than the Mortgage Loans.
Further, such mortgage loans were sold on a servicing released basis. As a
result, the Seller has no information with respect to the delinquency and loss
experience of mortgage loans originated or acquired by it prior to the indicated
periods.
The information set forth in the table below may be affected by the
size, rapid growth and relative lack of seasoning of the mortgage loans
Accordingly, no assurances can be given that the delinquency and loss experience
presented in the table below will be indicative of such experience of the
Mortgage Loans.
<TABLE>
<CAPTION>
DELINQUENCY AND LOSS EXPERIENCE
PREFERRED CREDIT CORPORATION
(Dollar amounts in thousands)
March 31, June 30, September 30 December 30 March 31
1996 1996 1997 1996 1997
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Number of Loans Serviced
Aggregate Principal Balance
of Loans Serviced
30-59 days delinquent
60-89 days delinquent
90 days or more delinquent
Bankruptcies ------------------------------------------------------------------------------- -----------------
Total Delinquencies =============================================================================== ============
% of total
principal of loans
serviced:
30-59 days delinquent
60-89 days delinquent
90 days or more delinquent
Bankruptcies ------------------------------------------------------------------------------- -----------------
Total Delinquencies =============================================================================== =================
Charge offs
Charge offs as a % of
principaL balance
</TABLE>
<PAGE>
DESCRIPTION OF THE SALE AND PURCHASE AGREEMENT
The Mortgage Loans to be transferred to the Trust Fund by the
Depositor will be purchased by the Depositor from the Seller pursuant to the
Sale and Purchase Agreement to be entered into between the Depositor, as
purchaser (the "Purchaser") of the Mortgage Loans, and the Seller, as
unaffiliated seller of the Mortgage Loans. Under the Sale and Purchase
Agreement, the Seller will agree to transfer the Initial Mortgage Loans to the
Depositor and the Subsequent Mortgage Loans to the Trust Fund, as assignee of
the Purchaser under the Sale and Purchase Agreement. Pursuant to the Pooling and
Servicing 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 Sale and Purchase Agreement to the Trust Fund. In the Sale and
Purchase Agreement, the Seller will make representations and warranties with
respect to the Mortgage Loans. In the event of a breach of any such
representations and warranties which has a material adverse effect on the
interest of the Certificateholders or the Certificate Insurer, the Seller will
repurchase or substitute for the Mortgage Loans as described in the Pooling and
Servicing Agreement.
The Seller has also agreed to indemnify the Depositor and the Trust
Fund from and against certain losses, liabilities and expenses (including
reasonable attorneys' fees) suffered or sustained pursuant to the Sale and
Purchase Agreement.
ASSIGNMENT TO THE TRUST FUND
The Seller expressly acknowledges and consents to the Depositor's
transfer of its rights relating to the Mortgage Loans under the Sale and
Purchase Agreement to the Trust Fund. The Seller also agrees to perform its
obligations under the Sale and Purchase Agreement for the benefit of the Trust
Fund.
TERMINATION
The Sale and Purchase Agreement will terminate upon the termination of
the Trust Fund except that any indemnity provided thereunder shall survive such
termination.
<PAGE>
PREPAYMENT AND YIELD CONSIDERATIONS
The weighted average life of, and, if purchased at other than par, the
yield to maturity on, a Class A Certificate will be directly related to the rate
of payment of principal of the Mortgage Loans, including for this purpose
voluntary payment in full of Mortgage Loans prior to stated maturity,
liquidations due to defaults, casualties and condemnations, repurchases of or
substitutions for Mortgage Loans by the Seller as required or permitted under
the Pooling and Servicing Agreement and the number, if any, of Subsequent
Mortgage Loans purchased.
The actual rate of principal prepayments on pools of mortgage loans is
influenced by a variety of economic, tax, geographic, demographic, social, legal
and other factors and has fluctuated considerably in recent years. In addition,
the rate of principal prepayments may differ among pools of mortgage loans at
any time because of specific factors relating to the mortgage loans in the
particular pool, including, among other things, the age of the mortgage loans,
the geographic locations of the properties securing the loans and the extent of
the mortgagors' equity in such properties, and changes in the mortgagors'
housing needs, job transfers and employment.
The rate of prepayment on the Mortgage Loans cannot be predicted.
Subordinate lien mortgage loans similar to the Mortgage Loans as described
herein have been originated in significant volume only during the past few years
and the Seller is not aware of any publicly available studies or statistics on
the rate of prepayment of such Mortgage Loans. Generally, the Mortgage Loans are
not viewed by borrowers as permanent financing. Accordingly, the Mortgage Loans
may experience a higher rate of prepayment than traditional first 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 economic
conditions, prevailing interest rate levels, the availability of alternative
financing and homeowner mobility and changes affecting the deductibility for
Federal income tax purposes of interest payments on the Mortgage Loans.
Generally, the Mortgage Loans are prepayable by the related Mortgagors without
penalty. All of the Mortgage Loans contain "due-on-sale" provisions, and the
Servicer is required by the Agreement to enforce such provisions, unless such
enforcement is not permitted by applicable law. The enforcement of a
"due-on-sale" provision will have the same effect as a prepayment of the related
Mortgage Loan. See "Certain Legal Aspects of the Mortgage Loans-Due-on-Sale
Clauses in Mortgage Loans" herein. 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.
The rate of prepayments with respect to conventional mortgage loans
has fluctuated significantly in recent years. In general, if prevailing interest
rates fall significantly below the interest rates at the time of origination,
mortgage loans may be subject to higher prepayment rates than if prevailing
rates remain at or above those at the time such mortgage loans were originated.
Conversely, if prevailing interest rates rise appreciably above the interest
rates at the time of origination, mortgage loans may experience a lower
prepayment rate than if prevailing rates remain at or below those at the time
such mortgage loans were originated. However, there can be no assurance that the
Mortgage Loans will conform to the prepayment experience of conventional
mortgage loans or to any past prepayment experience or any published prepayment
forecast. No assurance can be given as to the level of prepayments on Mortgage
Loans that the Trust Fund will experience.
As indicated above, if purchased at other than par, the yield to
maturity on a Class A Certificate will be affected by the rate of the payment of
principal of the Mortgage Loans. If the actual rate of payments on the Mortgage
Loans is slower than the rate anticipated by an investor who purchases a Class A
Certificate at a discount, the actual yield to such investor will be lower than
such investor's anticipated yield. If the actual rate of payments on the
Mortgage Loans is faster than the rate anticipated by an investor who purchases
a Class A Certificate at a premium, the actual yield to such investor will be
lower than such investor's anticipated yield.
For purposes of receiving distributions with respect to principal, the
Class A Certificates have been divided into six "sequential paying" classes. On
each Distribution Date until the Class A-1 Certificate Principal Balance has
been reduced to zero, the Holders of the Class A-1 Certificates will be entitled
to receive 100% of the distribution with respect to the Class A Principal
Distribution Amount on such Distribution Date. After the Class A-1 Certificate
Principal Balance has been reduced to zero, the Holders of the Class A-2
Certificates will be entitled to receive 100% of such distributions with respect
to principal until the Class A-2 Certificate Principal Balance has been reduced
to zero. After the Class A-2 Certificate Principal Balance has been reduced to
zero, the Holders of the Class A-3 Certificates will be entitled to receive 100%
of such distributions with respect to principal until the Class A-3 Certificate
Principal Balance has been reduced to zero. After the Class A-3 Certificate
Principal Balance has been reduced to zero, the Holders of the Class A-4
Certificates shall be entitled to receive 100% of such distributions with
respect to principal until the Class A-4 Certificate Principal Balance has been
reduced to zero. After the Class A-4 Certificate Principal Balance has been
reduced to zero, the Holders of the Class A-5 Certificates shall be entitled to
receive 100% of such distributions with respect to principal until the Class A-5
Certificate Principal Balance has been reduced to zero. After the Class A-5
Certificate Principal Balance has been reduced to zero, the Holders of the Class
A-6 Certificates shall be entitled to receive 100% of remaining distributions of
principal.
The tables below were prepared on the basis of the assumptions in the
following paragraphs; there are discrepancies between the characteristics of the
actual Mortgage Loans and the characteristics of the Mortgage Loans assumed in
preparing the tables. Any such discrepancy may have an effect upon the weighted
average lives of the Class A Certificates set forth in the tables. In addition,
since the actual Mortgage Loans have characteristics which differ from those
assumed in preparing the tables set forth below, the distributions of principal
on the Class A Certificates may be made earlier or later than as indicated in
the tables. For the purpose of this table, the Final Scheduled Maturity Date for
the Class A Certificates is expected to be ________, ____, which is [10] months
after the latest possible final stated maturity date of any Mortgage Loan. The
weighted average life of the Class A Certificates is likely to be shorter than
would be the case if payments actually made on the Mortgage Loans conformed to
the foregoing assumption, and the final Distribution Date with respect to any
Class of the Class A Certificates could occur significantly earlier than the
Final Scheduled Maturity Date, because (i) Excess Cashflow will be used to make
accelerated payments of principal (i.e., Overcollateralization Increase Amounts)
to the Class A Certificates, which payments will have the effect of shortening
the weighted average lives of the Class A Certificates, (ii) prepayments
(including, for this purpose, prepayments attributable to foreclosure,
liquidation, repurchase and the like) on Mortgage Loans are likely to occur,
(iii) ten months have been added to obtain the Final Scheduled Maturity Date
above, and (iv) the Seller or the Servicer (or if the Servicer fails to do so,
the Certificate Insurer) may cause a liquidation of the Trust Fund when the
aggregate outstanding Principal Balance of the Mortgage Loans is with respect to
the Seller less than 10% and with respect to the Servicer (or if the Servicer
fails to do so, the Certificate Insurer) less than 5% of the Maximum Collateral
Amount.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security is scheduled to be repaid to an investor. The weighted average
life of the Class A Certificates will be influenced by the rate at which
principal of the Mortgage Loans is paid, which may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
liquidations due to default). Prepayments on mortgage loans are commonly
measured relative to a prepayment standard or model. The model used in this
Prospectus Supplement is the prepayment assumption (the "Prepayment Assumption")
which represents an assumed rate of prepayment each month relative to the then
outstanding principal balance of a pool of mortgage loans for the life of such
mortgage loans. 100% Prepayment Assumption assumes conditional prepayment rates
of 4% per annum of the then outstanding principal balance of the Mortgage Loans
in the first month of the life of the mortgage loans and an additional 1.0% per
annum in each month thereafter until the twelfth month. Beginning in the twelfth
month and in each month thereafter during the life of the mortgage loans, a 100%
Prepayment Assumption assumes a conditional prepayment rate of 15% per annum
each month. As used in the table below, 0% Prepayment Assumption assumes
prepayment rates equal to 0% of the Prepayment Assumption i.e., no prepayments.
Correspondingly, 100% Prepayment Assumption assumes prepayment rates equal to
100% of the Prepayment Assumption, and so forth. The Prepayment Assumption does
not purport to be a historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of mortgage loans,
including the Mortgage Loans. The Depositor believes that no existing statistics
of which it is aware provide a reliable basis for holders of Class A
Certificates to predict the amount or the timing of receipt of prepayments on
the Mortgage Loans.
The following table regarding the Class A Certificates has been
prepared assuming that (i) all calculations are done on the basis of a 360-day
year consisting of twelve 30-day months and the interest rate is fixed for the
remaining term to maturity at the weighted average Mortgage Interest Rate noted
in (xiv); (ii) payment dates on each Mortgage Loan are the 1st day of the month;
(iii) all scheduled monthly payments on the Mortgage Loans are made in a timely
fashion and there are no delinquencies; (iv) all prepayments represent
prepayments in full and there are no Prepayment Interest Shortfalls; (v)
distributions on the Class A Certificates are made on the 25th day of each month
regardless of the day on which the Distribution Date actually occurs, commencing
on __________, ____; (vi) the Closing Date is ___________, ____; (vii) the
Mortgage Loans will prepay at the indicated Prepayment Assumptions set forth
below, (viii) none of the Holders of the Class R Certificates, the Servicer or
the Certificate Insurer exercise their right of optional termination, (ix) ____%
(by Principal Balance) of interest losses per annum occur on the synthetic
Mortgage Loans described below, (x) fees are deducted for the Servicer, the
Certificate Insurer and the Trustee, (xi) the initial Class A Principal Balance
is equal to $___________, (xii) the Capitalized Interest Account has sufficient
funds on deposit to cover shortfalls in interest of the Class A Certificates
during the Pre-Funding Period attributable to the pre-funding feature; (xiii)
the Overcollateralization Amount as of the Cut-off Date and the Required
Overcollateralization Level are the amounts specified by the Certificate
Insurer; and (xiv) the Mortgage Pool consists of [seven] synthetic mortgages
having the following characteristics:
<PAGE>
<TABLE>
<CAPTION>
INITIAL MORTGAGE LOANS
Weighted Weighted
Average Average
Remaining
Original Term to
Aggregate Weighted Average Term to Maturity
PRINCIPAL MORTGAGE INTEREST Maturity (IN MONTHS)
BALANCE RATE (IN MONTHS)
<S> <C> <C> <C>
SUBSEQUENT MORTGAGE LOANS (ASSUMED TO BE ACQUIRED BY THE TRUST
FUND IN ___________ _______)
Weighted Weighted
Average Average
Remaining
Original Term to
Aggregate Weighted Average Term to Maturity
PRINCIPAL MORTGAGE INTEREST Maturity (IN
BALANCE RATE (IN MONTHS)
MONTHS)
</TABLE>
The following table indicates the weighted average life of each Class
of Class A Certificates, and sets forth the percentages of the Original
Principal Balance of each such Class of Class A Certificates that would be
outstanding after each of the dates shown at various percentages of the
Prepayment Assumption, based on the assumptions described above.
<PAGE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE
FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
PAYMENT DATE CLASS A-1 CLASS A-2 CLASS A-3
Initial Percentage...
Weighted Average
Life In
Years(1)....
..................
(1) The weighted average life of each of the Class A Certificates is
determined by (a) multiplying the amount of each principal payment by the
number of years from the Closing Date to the related Distribution Date;
(b) adding the results; and (c) dividing the sum by the original Class A
Principal Balance of each Class of Class A Certificates.
<PAGE>
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT
THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
PAYMENT DATE CLASS A-4 CLASS A-5 CLASS A-6
Initial Percentage..
Weighted Average
Life In Years(1)....
..................
(1) The weighted average life of each of the Class A Certificates is determined
by (a) multiplying the amount of each principal payment by the number of
years from the Closing Date to the related Distribution Date; (b) adding
the results; and (c) dividing the sum by the original Class A Principal
Balance of each Class of Class A Certificates.
<PAGE>
There is no assurance that prepayments will occur or, if they do
occur, that they will occur at any percentage of the Prepayment Assumption.
The Pooling and Servicing Agreement provides that none of the
Certificate Insurer, the Trust Fund, the Trustee, the Depositor or the Servicer
will be liable to any Certificateholder or Holder for any loss or damage
incurred by such Certificateholder or Holder as a result of any difference in
the rate of return received by such Certificateholder or Holder as compared to
the applicable Pass-Through Rate, with respect to any Holder of Class A
Certificates upon reinvestment of the funds received in connection with any
premature repayment of principal on the Certificates, including any such
repayment resulting from any prepayment by the Mortgagor, any liquidation of
such Mortgage Loan, or any repurchase of or substitution for any Mortgage Loan
by the Seller.
MANDATORY PREPAYMENT
The Original Pre-Funded Amount, funded from the proceeds of the sale
of the Class A Certificates may be used to acquire Subsequent Mortgage Loans.
Any amount remaining in the Pre- Funding Account at the end of the Pre-Funding
Period will be used to prepay in part the Class A Certificates on the
Distribution Date which follows the end of the Pre-Funding Period, which in no
event will be later than the _______ 199__ Distribution Date.
Although no assurances can be given, it is anticipated by the Seller
that the principal amount of Subsequent Mortgage Loans sold to the Trust Fund
will require the application of substantially all the amount on deposit in the
Pre-Funding Account and that there should be no material principal prepaid to
the holders of the Class A Certificates.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Class A Certificates will be issued by and represent interests in
certain segregated assets of the Trust Fund. In addition to the Class A
Certificates, the Trust Fund will also issue the Subordinate Certificates. The
Subordinate Certificates are not being offered hereby.
Each Class A Certificate represents a certain fractional undivided
ownership interest in the Trust Fund created and held pursuant to the Pooling
and Servicing Agreement described below, subject to the limits and the priority
of distribution described therein. The Trust Fund consists of (a) the Mortgage
Loans, together with (i) all collections thereon and proceeds thereof collected
on and after the Cut-Off Date (other than Monthly Payments due on each Mortgage
Loan up to and including any Due Date occurring prior to the Cut-Off Date), and
(ii) all mortgage files relating thereto, (b) REO Properties and collections
thereon and proceeds thereof, (c) amounts (including Permitted Investments as
may be held from time to time, except as otherwise provided herein) on deposit
in the Collection Account and the Certificate Account, (d) the Trustee's rights
with respect to the Mortgage Loans under all insurance policies required to be
maintained pursuant to the Pooling and Servicing Agreement and any insurance
proceeds, (e) Liquidation Proceeds, (f) released mortgaged property proceeds,
(g) amounts (including Permitted Investments as may be held from time to time)
on deposit in the Capitalized Interest Account and the Pre-Funding Account and
(h) all of the income, payments and proceeds of each of the foregoing. The Trust
Fund owns all the Accounts and all collections with respect thereto. In
addition, the Depositor has caused the Certificate Insurer to issue the
Certificate Insurance Policy under which it will guarantee payments to the Class
A Certificateholders as described herein.
ASSIGNMENT OF MORTGAGE LOANS
Pursuant to the Sale and Purchase Agreement, the Seller will sell,
transfer, assign, set over and otherwise convey the Mortgage Loans without
recourse to the Depositor on the Closing Date. Pursuant to the Pooling and
Servicing Agreement, the Depositor will sell, transfer, assign, set over and
otherwise convey without recourse to the Trustee in trust for the benefit of the
Certificateholders and the Certificate Insurer all right, title and interest in
and to each Mortgage Loan. Each such transfer will convey all right, title and
interest in and to the principal due and interest accruing, on the Mortgage
Loans on and after the Cut-Off Date.
In connection with such transfer and assignment, the Depositor will
cause to be delivered to the Trustee on the Closing Date the following documents
(collectively, with respect to each Mortgage Loan, the "Trustee's Mortgage
File") with respect to each Mortgage Loan:
(a) The original Mortgage Note, bearing all intervening endorsements
showing a complete chain of endorsements from the originator of such Mortgage
Loan to the Seller endorsed by the Seller without recourse in the following
form: "Pay to the order of Bankers Trust Company, as Trustee for the benefit of
the Certificateholders and the Certificate Insurer for Preferred Consumer Loan
Asset- Backed Certificates, Series 199__-__, without recourse" and signed in the
name of the Seller by an authorized officer;
(b) The original Mortgage with evidence of recording indicated thereon
or if such Mortgage has not been returned from the applicable recording office,
a copy of the Mortgage certified by an authorized officer of the Seller;
(c) An original assignment of the original Mortgage, in suitable form
for recordation in the jurisdiction in which the related Mortgaged Property is
located, in the name of the Seller signed by an authorized officer (with
evidence of submission for recordation of such assignment in the appropriate
real estate recording office for such Mortgaged Property); provided, however,
that assignments of mortgages shall not be required to be submitted for
recording with respect to any Mortgage Loan which relates to the Trustee's
Mortgage File if the Trustee, each of the Rating Agencies and the Certificate
Insurer shall have received an opinion of counsel at the expense of the Seller
satisfactory to the Trustee, each of the Rating Agencies and the Certificate
Insurer stating that, in such counsel's opinion, the failure to record such
assignment shall not have a materially adverse effect on the security interest
of the Trustee in the Mortgage; or if the related Mortgage has not been returned
from the applicable recording office, then a copy of such assignment certified
by an authorized officer of the Seller shall be delivered;
(d) The original of any intervening assignments of the Mortgage with
evidence of recording thereon showing a complete chain of assignment from the
originator of such Mortgage Loan to the Seller;
(e) The original of any assumption, modification, consolidation or
extension agreements with evidence of recording thereon; and
(f) The title report or policy of title insurance (or a commitment for
title insurance if the policy is being held by the title insurance company
pending recordation of the Mortgage) issued with respect to such Mortgage Loan.
Pursuant to the Pooling and Servicing Agreement, the Trustee agrees to
execute and deliver on or prior to the Closing Date an acknowledgment of receipt
of the Certificate Insurance Policy and, for each Mortgage Loan, the original
Mortgage Note, item (a) above, with respect to the Mortgage Loans (with any
exceptions noted). The Trustee agrees, for the benefit of the Certificateholders
and the Certificate Insurer, to review (or cause to be reviewed) each Trustee's
Mortgage File within 30 days after the Closing Date (or, with respect to any
Qualified Substitute Mortgage Loan, within 30 days after the receipt by the
Trustee thereof) and to deliver a certification generally to the effect that, as
to each Mortgage Loan listed in the Mortgage Loan Schedule, (a) all documents
required to be delivered to it pursuant to the Pooling and Servicing Agreement
are in its possession and (b) each such document has been reviewed by it and has
not been mutilated, damaged, torn or otherwise physically altered, appears
regular on its face and relates to such Mortgage Loan.
If the Trustee or the Certificate Insurer during the process of
reviewing the Trustee's Mortgage Files finds any document constituting a part of
a Trustee's Mortgage File which is not executed, has not been received or is
unrelated to the Mortgage Loans, or that any Mortgage Loan does not conform to
the requirements above or to the description thereof as set forth in the
Mortgage Loan Schedule, the Trustee or the Certificate Insurer, as applicable,
shall promptly so notify the Trustee, the Servicer, the Seller and the
Certificate Insurer. The Seller agrees to use reasonable efforts to cause to be
remedied any material defect in a document constituting part of a Trustee's
Mortgage File of which it is so notified by the Trustee. If, however, within 60
days after the Trustee's notice to it respecting such defect the Seller has not
caused to be remedied the defect and the defect materially and adversely affects
the interest of the Holders in the Mortgage Loan or the interests of the
Certificate Insurer, the Seller will either (i) substitute in lieu of such
Mortgage Loan a Qualified Substitute Mortgage Loan and, if the then outstanding
principal balance of such Qualified Substitute Mortgage Loan is less than the
applicable Principal Balance of such Mortgage Loan as of the date of such
substitution plus accrued and unpaid interest thereon, deliver to the Servicer
as part of the related monthly remittance remitted by the Servicer the amount of
any such shortfall (the "Substitution Adjustment") or (ii) purchase such
Mortgage Loan at a price equal to the outstanding Principal Balance of such
Mortgage Loan as of the date of purchase, plus the greater of (x) all accrued
and unpaid interest thereon or (y) 30 days' interest thereon, computed at the
related Mortgage Interest Rate, plus the amount of any unreimbursed Delinquency
Interest Advances and Servicing Advances made by the Servicer, which purchase
price shall be deposited in the Collection Account on the next succeeding
Determination Date after deducting therefrom any amounts received in respect of
such repurchased Mortgage Loan or Loans and being held in the Collection Account
for future distribution to the extent such amounts have not yet been applied to
principal or interest on such Mortgage Loan (see "--Payment of Available Funds"
below); provided, however, that the Seller may not purchase the Principal
Balance of any Mortgage Loan that is not in default or as to which no default is
imminent pursuant to clause (ii) preceding unless the Seller has theretofore
caused to be delivered to the Trustee and the Certificate Insurer an opinion of
counsel knowledgeable in federal income tax matters which states that such a
purchase would not constitute a prohibited transaction under the Code.
A "Qualified Substitute Mortgage Loan" is defined in the Pooling and
Servicing Agreement as any mortgage loan or mortgage loans which (i) has or have
the same or greater interest rate, (ii) relates or relate to a detached
one-family residence or to the same type of residential dwelling as the deleted
Mortgage Loan and in each case has or have the same or a better lien priority as
the deleted Mortgage Loan with a Borrower having the same or better
traditionally ranked credit status and is an owner- occupied Mortgaged Property,
(iii) matures or mature no later than (and not more than one year earlier than)
the deleted Mortgage Loan, (iv) has or have a Loan-to-Value Ratio or Combined
Loan-to-Value Ratio at the time of such substitution no higher than the
Loan-to-Value Ratio or the Combined Loan-to- Value Ratio, as applicable, of the
deleted Mortgage Loan, (v) has or have a principal balance or principal balances
(after application of all payments received on or prior to the date of
substitution) (which shall be the Principal Balance or Principal Balances
thereof) not substantially less and not more than the Principal Balance of the
deleted Mortgage Loan as of such date, (vi) satisfies or satisfy the criteria
set forth from time to time in the definition of "qualified replacement
mortgage" in Section 860G(a)(4) of the Code (or any successor statute thereto)
and (vii) complies or comply as of the date of substitution with each
representation and warranty set forth in the Pooling and Servicing Agreement.
REPRESENTATIONS AND WARRANTIES OF THE SELLER
The Seller will make certain representations and warranties with
respect to each Mortgage Loan, as of the Closing Date or the Subsequent Transfer
Date, as applicable.
Pursuant to the Pooling and Servicing Agreement, upon the discovery by
any of the Certificateholders, the Servicer, the Seller, the Certificate Insurer
or the Trustee that any of the representations and warranties contained in the
Pooling and Servicing Agreement have been breached in any material respect as of
the Closing Date, with the result that the interests of the Certificateholders
in the related Mortgage Loan or the interests of the Certificate Insurer were
materially and adversely affected (notwithstanding that such representation and
warranty was made to the Seller's best knowledge), the party discovering such
breach is required to give prompt written notice to the other parties and to the
Certificate Insurer. Subject to certain provisions of the Pooling and Servicing
Agreement, within 60 days of the earlier to occur of the Seller's discovery or
its receipt of written notice of any such breach, the Seller will (a) promptly
cure such breach in all material respects, (b) remove each Mortgage Loan which
has given rise to the requirement for action by the Seller, substitute one or
more Qualified Substitute Mortgage Loans and, if the outstanding principal
amount of such Qualified Substitute Mortgage Loans as of the date of such
substitution is less than the outstanding Principal Balance, plus accrued and
unpaid interest thereon of the deleted Mortgage Loans as of the date of
substitution deliver to the Trust Fund as part of the amounts remitted by the
Servicer on such Distribution Date the amount of such Substitution Adjustment,
or (c) purchase such Mortgage Loan at a price (the "Loan Repurchase Price")
equal to the Principal Balance of such Mortgage Loan as of the date of purchase
plus the greater of (i) all accrued and unpaid interest thereon and (ii) 30
days' interest thereon computed at the Mortgage Interest Rate, plus the amount
of any unreimbursed Delinquency Interest Advances and Servicing Advances made by
the Servicer, and deposit such purchase price into the Collection Account on the
next succeeding Determination Date after deducting therefrom any amounts
received in respect of such repurchased Mortgage Loan or Loans and being held in
the Collection Account or the Certificate Account for future distribution to the
extent such amounts have not yet been applied to principal or interest on such
Mortgage Loan; provided, however, that any substitution of one or more Qualified
Substitute Mortgage Loans pursuant to clause (b) preceding must be effected not
later than two years after the Closing Date unless the Trustee and the
Certificate Insurer receive an opinion of counsel that such substitution would
not constitute a prohibited transaction for purposes of the REMIC provisions of
the Code and, provided, further, that the Seller may not purchase such Mortgage
Loan that is not in default or as to which no default is imminent pursuant to
clause (c) preceding unless the Seller has theretofore caused to be delivered to
the Trustee and to the Certificate Insurer an opinion of counsel knowledgeable
in Federal income tax matters in form and substance satisfactory to the Trustee
and to the Certificate Insurer to the effect that such a purchase would not
constitute a prohibited transaction for purposes of the REMIC provisions of the
Code or cause the Trust Fund to fail to qualify as a REMIC at any time any
Certificates are outstanding. The obligation of the Seller to cure such breach
or to substitute or purchase any Mortgage Loan constitutes the sole remedy
respecting a material breach of any such representation or warranty to the
Certificateholders, the Trustee and the Certificate Insurer.
PAYMENTS ON THE MORTGAGE LOANS
The Pooling and Servicing Agreement provides that the Servicer, for
the benefit of the Certificateholders and the Certificate Insurer, shall
establish and maintain a collection account (the "Collection Account"), and that
such Collection Account will generally be a trust account maintained with a
depository institution acceptable to each Rating Agency and the Certificate
Insurer (any such account, an "Eligible Account"). The Servicer shall have the
right to choose and relocate the Collection Account at any time, provided each
Collection Account shall otherwise comply with the requirements of the preceding
sentence and that there shall be a Collection Account. The Pooling and Servicing
Agreement permits the Servicer to direct any depository institution maintaining
the Collection Account to invest the funds in such Collection Account in one or
more Permitted Investments, as defined below, that mature, unless payable on
demand, no later than the Business Day preceding the date on which the Servicer
is required to transfer any amounts included in such funds from such Collection
Account to the Certificate Account as described below.
The Servicer is obligated to deposit or cause to be deposited in the
Collection Account within two days of receipt, amounts representing the
following payments received and collections on and after the Cut-Off Date (other
than in respect of Monthly Payments on the Mortgage Loans due on each Mortgage
Loan up to and including any Due Date occurring prior to the Cut-Off Date): (i)
all payments on account of principal, including Principal Prepayments and
Curtailments; (ii) all payments on account of interest on the Mortgage Loans,
(iii) all Liquidation Proceeds, Net REO Proceeds and all Insurance Proceeds to
the extent such proceeds are not to be applied to the restoration of the related
Mortgaged Property or released to the related borrower in accordance with the
express requirements of law or in accordance with prudent and customary
servicing practices; (iv) all net revenues with respect to a Mortgaged Property
held by the Trust Fund; (v) all other amounts required to be deposited in the
Collection Account pursuant to the Pooling and Servicing Agreement; and (vi) any
amounts required to be deposited in connection with net losses realized on
investments of funds in the Collection Account.
The Trustee for the benefit of the Certificateholders and the
Certificate Insurer will be obligated to establish and maintain an account (the
"Certificate Account"), which is required to be an Eligible Account, into which
the Servicer will deposit or cause to be deposited the Servicer Remittance
Amount in immediately available funds on the 18th day of each month (the
"Servicer Remittance Date") or if such 18th day is not a Business Day, the
Business Day immediately preceding such 18th day.
The "Servicer Remittance Amount" for a Servicer Remittance Date is
equal to the sum of (i) all scheduled and unscheduled collections of principal
on the Mortgage Loans (including Principal Prepayments, Curtailments, Net REO
Proceeds and Net Liquidation Proceeds, if any) collected by the Servicer during
the related Collection Period and all interest due during such Collection Period
and received on or prior to the fifteenth day of the month in which such
Servicer Remittance Date occurs, (ii) all Delinquency Interest Advances made by
the Servicer with respect to interest payments due to be received on the
Mortgage Loans during the related Collection Period, (iii) the amount of
Compensating Interest due with respect to the related Collection Period, and
(iv) any other amounts which the Pooling and Servicing Agreement requires the
Servicer to deposit in the Collection Account, but excluding the following:
(a) amounts received as late payments of principal or interest and
respecting which the Servicer has previously made any unreimbursed Delinquency
Interest Advances or Servicing Advances;
(b) the portion of Liquidation Proceeds used to reimburse any
unreimbursed Delinquency Interest Advances or Servicing Advances by the
Servicer;
(c) the Servicing Fee;
(d) that portion of Liquidation Proceeds and REO Proceeds which
represents any unpaid Servicing Fee;
(e) all income from Permitted Investments that is held in the
Collection Account for the account of the Servicer;
(f) all amounts in respect of late fees, assumption fees, prepayment
fees and similar fees;
(g) certain other amounts which are reimbursable to the Servicer, as
provided in the Pooling and Servicing Agreement; and
(h) that portion of Net Foreclosure Profits otherwise due to the
Servicer as provided in the Pooling and Servicing Agreement.
SERVICING FEES AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
As compensation for its activities as Servicer under the Pooling and
Servicing Agreement, the Servicer shall be entitled to the Servicing Fee, which
shall be payable monthly from amounts on deposit in the Collection Account. The
"Servicing Fee" shall be an amount equal to one-twelfth of the Servicing Fee
Rate times the aggregate Principal Balance of Mortgage Loans at the beginning of
the applicable Collection Period. The "Servicing Fee Rate" will be ___% per
annum. In addition, the Servicer shall be entitled to receive as additional
servicing compensation, to the extent permitted by applicable law and the
related Mortgage Notes, any late payment charges, assumption fees or similar
items. The Servicer shall also be entitled to withdraw from the Collection
Account any interest or other income earned on deposits therein. The Servicer
shall pay all expenses incurred by it in connection with its servicing
activities under the Pooling and Servicing Agreement and shall not be entitled
to reimbursement therefor except as specifically provided in the Pooling and
Servicing Agreement.
The Servicer may recover Delinquency Interest Advances and Servicing
Advances from the Collection Account or the Certificate Account to the extent
permitted by the Pooling and Servicing Agreement and by the terms of the
Mortgage Loans or, if not recovered from the Mortgagor on whose behalf such
Delinquency Interest Advance or Servicing Advance was made, from late
collections, including liquidation proceeds, released mortgaged property
proceeds, insurance proceeds and such other amounts as may be collected by the
Servicer, or, in the case of Delinquency Interest Advances, from late
collections of interest on any Mortgage Loan. In the event a Delinquency
Interest Advance or a Servicing Advance becomes a Nonrecoverable Advance, the
Servicer may be reimbursed for such advance from the Collection Account.
The Servicer shall not be required to make any Delinquency Interest
Advance or Servicing Advance which it determines would be a nonrecoverable
Delinquency Interest Advance or nonrecoverable Servicing Advance (a
"Nonrecoverable Advance"). A Delinquency Interest Advance or Servicing Advance
is "nonrecoverable" if in the good faith judgment of the Servicer, such
Delinquency Interest Advance or Servicing Advance is not ultimately recoverable.
DELINQUENCY INTEREST ADVANCES AND COMPENSATING INTEREST
The Servicer shall be required, not later than each Servicer
Remittance Date, to deposit into the Certificate Account an amount equal to the
sum of the interest (net of the Servicing Fees) due, but not collected, with
respect to delinquent Mortgage Loans during the prior Collection Period unless
the Servicer determines in good faith that there shall be no further recovery
from the related Mortgage Loan (exclusive of any possibility of a deficiency
judgment). Such amounts are "Delinquency Interest Advances." The Servicer will
be permitted to fund its payment of Delinquency Interest Advances from amounts
deposited to the Collection Account representing collections on the Mortgage
Loans relating to any Collection Period subsequent to the related Collection
Period and will be required to deposit into the Collection Account with respect
thereto (i) collections and (ii) Net Liquidation Proceeds to the extent of the
amount of aggregate Delinquency Interest Advances.
Upon an Event of Default (as described herein), the Trustee, as
successor servicer, will be obligated to make any such Delinquency Interest
Advances, if the Servicer fails in its obligation to do so, to the extent
provided in the Pooling and Servicing Agreement.
A Mortgage Loan is "delinquent" if any payment due thereon is not made
by the close of business on the Due Date.
In addition, the Servicer will also be required to deposit
Compensating Interest in the Certificate Account with respect to any full
Prepayment received on a Mortgage Loan during the related Collection Period out
of its own funds without any right of reimbursement therefor. "Compensating
Interest" is an amount equal to the difference between (x) 30 days' interest at
the Mortgage Interest Rate (net of the rate at which the Servicing Fee is
calculated) on the Principal Balance of such Mortgage Loan as of the first day
of the related Collection Period and (y) to the extent not previously advanced,
the interest paid by the Mortgagor with respect to the Mortgage Loan in
connection with such prepayment. The Servicer will not be required to pay
Compensating Interest with respect to any Collection Period in an amount in
excess of the aggregate Servicing Fee received by the Servicer for such
Collection Period.
OVERCOLLATERALIZATION, SUBORDINATION PROVISIONS AND SUPPORT FEATURES
Overcollateralization Resulting from Cash Flow Structure. The
Overcollateralization feature of the Trust Fund is a result of the aggregate
debt service requirements of the Class A Certificates being less than the Trust
Fund's aggregate expected revenues, such revenues being the expected collections
and recoveries on the Mortgage Loans. The Overcollateralization is evidenced by
the Subordinate Certificates, which represent the right to receive excess
principal (which initially equals the Overcollateralization Amount on the
Cut-off Date) and excess interest (the excess of interest collections on the
Mortgage Loans over Class A Certificate interest, plus fees).
The Pooling and Servicing Agreement requires that, on each
Distribution Date, the Excess Cashflow, if any, be applied on such Distribution
Date as an accelerated payment of principal on the Class A Certificates, but
only to the limited extent hereafter described. The "Excess Cashflow" for any
Distribution Date is equal to (x) the amount on deposit in the Certificate
Account on such Distribution Date with respect to the Mortgage Loans (such
amount, other than the related Insured Payments and the Trustee's Fee and
Certificate Insurer Premium Amount payable on such Distribution Date, being the
related "Available Funds" for such Distribution Date) minus (y) the sum of (i)
the sum of the Class A Interest Distribution Amount and the Class A Principal
Distribution Amount (calculated for this purpose without regard to any
Overcollateralization Increase Amount or portion thereof included therein) and
(ii) any related Reimbursement Amount (as defined herein) owed to the
Certificate Insurer. This application has the effect of accelerating the
amortization of the Class A Certificates relative to the amortization of the
Mortgage Loans.
The Pooling and Servicing Agreement requires that the Excess Cashflows
will be applied as an accelerated payment of principal on the Class A
Certificates until the Overcollateralization Amount has increased to the level
equal to the Required Overcollateralization Level for such Distribution Date.
Any amount of the Excess Cashflow actually applied as an accelerated payment of
principal is an "Overcollateralization Increase Amount." The required level of
the Overcollateralization Amount with respect to a Distribution Date is the
"Required Overcollateralization Level" with respect to such Distribution Date.
Initially, the Required Overcollateralization Level will be set at an amount
equal to a percentage, specified in the Pooling and Servicing Agreement, of the
Maximum Collateral Amount. The Pooling and Servicing Agreement generally
provides that the Required Overcollateralization Level may, over time, decrease
or increase, subject to certain floors, caps and triggers.
In the event that the required level of the Required
Overcollateralization Level is permitted to decrease or "step down" on a
Distribution Date in the future, the Pooling and Servicing Agreement provides
that a portion of the principal which would otherwise be distributed to the
Holders of the Class A Certificates on such Distribution Date shall be
distributed to the Holders of the Subordinate Certificates on such Distribution
Date. This has the effect of decelerating the amortization of the Class A
Certificates relative to the amortization of the Mortgage Loans and of reducing
the actual Overcollateralization Amount. With respect to any Distribution Date,
the difference, if any, between (a) the actual Overcollateralization Amount that
would apply on such Distribution Date after taking into account all
distributions to be made on such Distribution Date (exclusive of any reductions
thereto attributable to Overcollateralization Reduction Amounts (as described
below) on such Distribution Date) and (b) the Required Overcollateralization
Level for such Distribution Date is the related "Excess Overcollateralization
Amount" with respect to such Distribution Date. With respect to any Distribution
Date, an amount equal to the lesser of (a) the Excess Overcollateralization
Amount and (b) the principal collections received by the Servicer with respect
to the prior Collection Period (after taking into account all distributions to
be made on such Distribution Date) is the related "Overcollateralization
Reduction Amount." In addition, due to the cash flow structure of the Trust Fund
as described below, Overcollateralization Reduction Amounts may result even
prior to the occurrence of any decrease or "step down" in the Required
Overcollateralization Level. This is because the Holders of the Class A
Certificates will generally be entitled to receive 100% of collected principal,
even though the Class A Principal Balance will, following the accelerated
amortization resulting from the application of the Excess Cashflow, represent
less than 100% of the Mortgage Loan's principal balance. In the absence of the
provisions relating to Overcollateralization Reduction Amounts, the foregoing
may otherwise increase the Overcollateralization Amounts above their Required
Overcollateralization Level requirements even without the application of any
Excess Cashflow.
In the event that any Mortgage Loan becomes a Charged-off Loan during
a Collection Period, and the net Liquidation Proceeds related thereto and
allocated to principal are less than the Principal Balance of the related
Mortgage Loan; the amount of any such insufficiency is a "Charged-off Loan
Loss." The Pooling and Servicing Agreement provides that the principal balance
of any Mortgage Loan after it becomes a Charged-off Mortgage Loan shall equal
zero. The Pooling and Servicing Agreement does not contain any rule which
requires that the amount of any Charged-Off Loan Loss be distributed to the
Holders of the Class A Certificates on the Distribution Date which immediately
follows the event of loss, i.e., the Pooling and Servicing Agreement does not
require the current recovery of losses. However, the realization of a Charged-
Off Loan Loss will reduce the Overcollateralization Amount, which, to the extent
that such reduction causes the Overcollateralization Amount to be less than the
Required Overcollateralization Level applicable to the related Distribution
Date, will require the payment of an Overcollateralization Increase Amount on
such Distribution Date (or, if insufficient funds are available on such
Distribution Date, on subsequent Distribution Dates, until the
Overcollateralization Amount equals the Required Overcollateralization Level).
The effect of the foregoing is to allocate losses to the Holders of the
Subordinate Certificates by reducing, or eliminating entirely, payments of
Excess Cashflow and of Overcollateralization Reduction Amounts which such
Holders would otherwise receive. Overcollateralization and the Certificate
Insurance Policy. The Pooling and Servicing Agreement defines an
"Overcollateralization Deficit" with respect to a Distribution Date to be the
amount, if any, by which (x) the aggregate Certificate Principal Balance of the
Class A Certificates as of such Distribution Date, following the making of all
distributions to be made on such Distribution Date (except for any payment to be
made as to principal from proceeds of the Certificate Insurance Policy), exceeds
(y) the aggregate Principal Balances of the Mortgage Loans as of the close of
business on the last day of the immediately preceding Collection Period, plus
the amount on deposit, if any, in the Pre-Funding Account as of the close of
business on the last day of the immediately preceding Collection Period. The
Pooling and Servicing Agreement requires the Trustee to make a claim for an
Insured Payment under the Certificate Insurance Policy not later than the third
Business Day prior to any Distribution Date as to which the Trustee has
determined that an Overcollateralization Deficit will occur for the purpose of
applying the proceeds of such Insured Payment as a payment of principal to the
Holders of the Class A Certificates on such Distribution Date. Investors in the
Class A Certificates should realize that, under extreme loss or delinquency
scenarios, they may temporarily receive no distributions of principal.
Subordination. The rights of the holders of the Subordinate
Certificates to receive distributions with respect to the Mortgage Loans in the
Trust Fund will be subordinated, to the extent described herein, to such rights
of the holders of the Class A Certificates. This subordination is intended to
enhance the likelihood of regular receipt by the holders of the Class A
Certificates of the full amount of their scheduled monthly payments of interest
and principal and to afford such holders protection against losses on the
Mortgage Loans.
The protection afforded to the holders of the Class A Certificates by
means of the subordination of the Subordinate Certificates will be accomplished
by the preferential right of the Class A Certificateholders to receive, prior to
any distribution being made on a Distribution Date in respect of the Subordinate
Certificates, the amounts due them on such Distribution Date out of the
Available Funds on such date in the Certificate Account and, if necessary, by
the right of such Class A Certificateholders to receive future distributions of
Available Funds that would otherwise be payable to the holders of the
Subordinate Certificates.
CLASS A INTEREST DISTRIBUTION AMOUNTS
On each Distribution Date, holders of the Class A Certificates will be
entitled to receive interest distributions in an amount equal to the sum of (a)
interest accrued for the Accrual Period (as defined below) on the applicable
Class A Principal Balance thereof immediately prior to such Distribution Date at
the related Class A Pass-Through Rate and (b) the portion of the related Class A
Carry-Forward Amount allocable to interest. The Class A Interest Distribution
Amount with respect to the Class A Certificates is calculated on the basis of a
360-day year and a 30-day month.
With respect to any Distribution Date and the Class A Certificates,
the sum of the Class A Interest Distribution Amount and the amount of the
Overcollateralization Deficit, if any, with respect to such Distribution Date is
the "Insured Distribution Amount" for such Distribution Date.
For each Distribution Date, with respect to the Class A Certificates,
the "Accrual Period" is the calendar month immediately preceding the month in
which such Distribution Date occurs.
With respect to the Class A Certificates, the "Class A Carry-Forward
Amount" as of any Distribution Date equals the sum of (a) the amount, if any, by
which (i) the Insured Distribution Amount for the immediately preceding
Distribution Date exceeded (ii) the amount actually distributed to the Holders
of the Class A Certificates on such Distribution Date in respect thereof
(including, without limitation, amounts paid under a Certificate Insurance
Policy) and (b) 30 days' interest on such amount at the Pass-Through Rate
applicable to the Class A Certificates for such Distribution Date.
The Pass-Through Rate on each of the Class A Certificates is fixed and
set forth on the cover hereof.
As described herein, the Class A Interest Distribution Amount
allocable to the Class A Certificates is based on the Certificate Principal
Balances thereof immediately prior to the related Distribution Date. The
Certificate Principal Balance of any Class A Certificate as of any date of
determination is equal to the initial Certificate Principal Balance thereof,
reduced as described herein with respect to such Certificate.
On any Distribution Date, the amount of the premium (the "Certificate
Insurer Premium Amount") payable to the Certificate Insurer is equal to one-
twelfth of the product of a percentage specified in the Pooling and Servicing
Agreement and the Certificate Principal Balance of the Class A Certificates.
CLASS A PRINCIPAL DISTRIBUTION AMOUNT
Holders of the Class A Certificates will be entitled to receive on
each Distribution Date, to the extent of the portion of the amounts remaining
for distribution after payments under clauses (a) through (d) under "--Payment
of Available Funds" below, an amount (the "Class A Principal Distribution
Amount"), in reduction of the Certificate Principal Balance thereof as described
below, which equals the sum, without duplication, of (i) the portion of any
Class A Carry-Forward Amount which relates to a shortfall in a distribution of
an Overcollateralization Deficit, (ii) all scheduled and unscheduled amounts
relating to principal with respect to the Mortgage Loans received by the
Servicer during the related Collection Period to the extent actually received by
the Trustee, (iii) the Principal Balance of each Mortgage Loan that either was
repurchased by the Seller or by the Depositor, to the extent actually received
by the Trustee, (iv) any Substitution Adjustments delivered by the Seller or the
Depositor on the Servicer Remittance Date (as defined herein) in connection with
a substitution of a Mortgage Loan, to the extent actually received by the
Trustee, (v) the net Liquidation Proceeds collected by the Servicer of all
Mortgage Loans during the prior calendar month (to the extent such net
Liquidation Proceeds are related to principal) to the extent actually received
by the Trustee, (vi) the amount of any Overcollateralization Deficit for such
Distribution Date, (vii) the proceeds received by the Trustee of any termination
of the Trust Fund (to the extent such proceeds are related to principal), (viii)
without duplication of amounts distributed in clause (vi) above, the amount of
any Overcollateralization Increase Amount for such Distribution Date; (ix) any
monies released from the Pre-Funding Account as a prepayment of Class A
Certificates on the Distribution Date which immediately follows the end of the
Pre-Funding Period, minus (x) the amount of any Overcollateralization Reduction
Amount for such Distribution Date.
In no event will the Class A Principal Distribution Amount with
respect to any Distribution Date be (x) less than zero or (y) greater than the
then outstanding Certificate Principal Balance of the Class A Certificates.
Distributions of the Class A Principal Distribution Amount with
respect to the Class A Certificates will be allocated to the Class A
Certificates in reduction of the Certificate Principal Balance thereof, until
such Certificate Principal Balance has been reduced to zero.
The "Principal Balance" of any Mortgage Loan (or related REO Property)
as of any date of determination is the outstanding principal balance of such
Mortgage Loan as of the Due Date preceding such date of determination, as such
principal balance is specified for such Due Date in the amortization schedule
(before any adjustments to such amortization schedule by reason of any
bankruptcy (other than Deficient Valuations (as defined herein)) or similar
proceeding or any moratorium or similar waiver or grace period), after giving
effect to prepayments received prior to such Due Date, Deficient Valuations
incurred prior to such Due Date, and to the payment of principal due on such Due
Date. The Principal Balance of a Mortgage Loan which becomes a Charged-off Loan
(as defined herein) on or prior to such Due Date shall be zero.
For purposes of receiving distributions with respect to principal, the
Class A Certificates have been divided into six "sequential paying" classes. On
each Distribution Date until the Class A-1 Certificate Principal Balance has
been reduced to zero, the Holders of the Class A-1 Certificates will be entitled
to receive 100% of the distribution with respect to the Class A Principal
Distribution Amount on such Distribution Date. After the Class A-1 Certificate
Principal Balance has been reduced to zero, the Holders of the Class A-2
Certificates will be entitled to receive 100% of such distributions with respect
to principal until the Class A-2 Certificate Principal Balance has been reduced
to zero. After the Class A- 2 Certificate Principal Balance has been reduced to
zero, the Holders of the Class A-3 Certificates will be entitled to receive 100%
of such distributions with respect to principal until the Class A-3 Certificate
Principal Balance has been reduced to zero. After the Class A-3 Certificate
Principal Balance has been reduced to zero, the Holders of the Class A-4
Certificates shall be entitled to receive 100% of such distributions with
respect to principal until the Class A-4 Certificate Principal Balance has been
reduced to zero. After the Class A-4 Certificate Principal Balance has been
reduced to zero, the Holders of the Class A-5 Certificates shall be entitled to
receive 100% of such distributions with respect to principal until the Class A-5
Certificate Principal Balance has been reduced to zero. After the Class A-5
Certificate Principal Balance has been reduced to zero, the Holders of the Class
A-6 Certificates shall be entitled to receive 100% of remaining distributions of
principal.
PAYMENT OF AVAILABLE FUNDS
On each Distribution Date, the Trustee shall distribute the funds on
deposit in the Certificate Account, together with the amount of any Insured
Payments, as follows:
(a) to the Certificate Insurer, the Certificate Insurer Premium
Amount;
(b) to the Trustee, an amount equal to the Trustee's Fees then due to
it;
(c) from the Available Funds, to the Certificate Insurer the lesser of
(x) the excess of (i) such Available Funds over (ii) the amount of the Insured
Distribution Amount for such Distribution Date and (y) the amount of all Insured
Payments and other payments made by the Certificate Insurer pursuant to the
Certificate Insurance Policy which have not been previously repaid together with
interest thereon at the rate set forth in the Insurance Agreement (the
"Reimbursement Amount") as of such Distribution Date;
(d) from amounts then on deposit in the Certificate Account (including
any Insured Payments), to each of the Class A Certificateholders an amount equal
to the related Class A Interest Distribution Amount (as described above);
(e) from amounts then on deposit in the Certificate Account (including
any Insured Payments), to each of the Class A Certificateholders an amount equal
to the related Class A Principal Distribution Amount (as described above) as
follows:
(1) to the Class A-1 Certificateholders until the Class A-1
Certificate Principal Balance has been reduced to zero;
(2) to the Class A-2 Certificateholders until the Class A-2
Certificate Principal Balance has been reduced to zero;
(3) to the Class A-3 Certificateholders until the Class A-3
Certificate Principal Balance has been reduced to zero;
(4) to the Class A-4 Certificateholders until the Class A-4
Certificate Principal Balance has been reduced to zero;
(5) to the Class A-5 Certificateholders until the Class A-5
Certificate Principal Balance has been reduced to zero; and
(6) to the Class A-6 Certificateholders until the Class A-6
Certificate Principal Balance has been reduced to zero;
(f) following the making by the Trustee of all allocations, transfers
and disbursements described above, from amounts then on deposit in the
Certificate Account, the Trustee shall distribute to the Holders of the
Subordinate Certificates, the amount remaining in the Certificate Account on
such Distribution Date, if any.
Notwithstanding the foregoing, the aggregate amount on all
Distribution Dates to the Holders of each of the Class A Certificates on account
of principal shall not exceed the Original Class A Principal Balance.
REPORT TO CERTIFICATEHOLDERS
Pursuant to the Pooling and Servicing Agreement, on each Distribution
Date the Trustee will deliver to the Certificate Insurer, each Certificateholder
and the Depositor a written report containing information, including, without
limitation, the amount of the distribution on such Distribution Date, the amount
of such distribution allocable to principal and allocable to interest, the
aggregate outstanding principal balance of each of the Class A Certificates as
of such Distribution Date, the amount of any Insured Payment included in such
distributions on such Distribution Date and other such information as required
by the Pooling and Servicing Agreement.
REGISTRATION OF THE CLASS A CERTIFICATES
The Class A Certificates will be book-entry Certificates (the
"Book-Entry Certificates"). Certificate Owners will hold their Class A
Certificates through the 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 Class A Certificates and will initially be
registered in the name of Cede & Co., the nominee of DTC. Cedel and Euroclear
will hold omnibus positions on behalf of their participants through customer's
securities accounts in Cedel's and Euroclear's names on the books of their
respective depositaries which in turn will hold such positions in customer's
securities accounts in the depositaries' names on the books of DTC. Citibank
will act as depositary for Cedel and the Chase Manhattan Bank will act as
depositary for Euroclear (in such capacities, individually the "Relevant
Depositary" and collectively the "European Depositaries"). Investors may hold
such beneficial interests in the Book-Entry Certificates in minimum
denominations of $50,000. Except as described below, no person acquiring a
Book-Entry Certificate 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 Class A Certificates will be Cede & Co., as nominee
of DTC. Certificate Owners will not be Certificateholders as that term is used
in the Pooling and Servicing Agreement. Certificate Owners will be permitted to
exercise their rights only indirectly through Participants and DTC.
SERVICING OF THE MORTGAGE LOANS
THE SERVICER
Advanta will act as the Servicer of the Trust Fund. See "The
Servicer."
COLLECTION AND OTHER SERVICING PROCEDURES; MORTGAGE LOAN MODIFICATIONS
The Servicer will be obligated under the Pooling and Servicing
Agreement to service and administer the Mortgage Loans, on behalf of the Trust
Fund, solely in the best interests of and for the benefit of the
Certificateholders and the Certificate Insurer in accordance with the terms of
the Pooling and Servicing Agreement, and will have full power and authority to
do any and all things in connection with such servicing and administration which
it may deem necessary or desirable in accordance with the terms of the Pooling
and Servicing Agreement.
The Servicer may perform any of its obligations under the Pooling and
Servicing Agreement through one or more subservicers. Notwithstanding any such
subservicing arrangement, the Servicer will remain liable for its servicing
duties and obligations under the Pooling and Servicing Agreement as if the
Servicer alone were servicing the Mortgage Loans. The Servicer will be obligated
under the Pooling and Servicing Agreement to make reasonable efforts to collect
all payments called for under the terms and provisions of the Mortgage Notes and
will be obligated, consistent with the other terms of the Pooling and Servicing
Agreement, to follow such collection procedures as it would normally follow with
respect to mortgage loans comparable to the Mortgage Loans and which are
required to generally conform to the mortgage servicing practices of prudent
mortgage lending institutions which service mortgage loans of the same type as
the Mortgage Loans for their own account in the jurisdictions in which the
related Mortgaged Properties are located ("Accepted Servicing Practices").
Pursuant to the Pooling and Servicing Agreement, the Servicer will be required
to make reasonable efforts to collect all payments called for under the terms of
the related Mortgage Loan. Nonetheless, the Servicer, in determining the type of
action that is reasonable to pursue may consider, among other things, the unpaid
principal balance of a Mortgage Loan against the estimated cost of collection or
foreclosure action, the unpaid balance of the related prior mortgage, if any,
the condition and estimated market value ("as is" and "if repaired"), the
estimated marketability of the related Mortgaged Property and the borrower's
ability to repay. Consistent with the above, the Servicer will be permitted, in
its discretion, to (i) waive any late payment charge or other charge in
connection with any Mortgage Loan, and (ii) arrange a schedule, running for no
more than 180 days after the Due Date of any installment due under the related
Mortgage Note, for the liquidation of delinquent items.
REALIZATION UPON OR SALE OF DEFAULTED MORTGAGE LOANS
In an effort to collect upon delinquent Mortgage Loans, the Servicer
will attempt to contact the borrower to determine both ability and intent to
pay. In accordance with the policies and procedures of the Servicer and in
accordance with Accepted Servicing Practices and the REMIC provisions,
appropriate action may be taken at the discretion of the Servicer, including but
not limited to, extended payment arrangements, forbearance and referral for
legal actions.
Upon the earlier of (a) the date on which any payment due or portion
thereof with respect to a Mortgage Loan has become delinquent for a period of
180 consecutive days, (b) the time at which a Mortgage Loan becomes a Liquidated
Loan or (c) the date on which the Holder of the Subordinate Certificates
repurchases such Mortgage Loan pursuant to the second succeeding paragraph, such
Mortgage Loan will become a "Charged-off Loan." Once a Mortgage Loan becomes a
Charged-off Loan, its Principal Balance, for purposes of the Trust Fund, will
thereafter be considered to be zero.
A "Liquidated Loan" is a Mortgage Loan as to which the Servicer, in
its reasonable, good faith business judgment, in accordance with Accepted
Servicing Practices has determined that all amounts which will be recovered with
respect to such Mortgage Loan have been so recovered (exclusive of any
possibility of a deficiency judgment).
The Holder of the Subordinate Certificates may have the right to
repurchase (up to 10% of the Maximum Collateral Amount) from the Trust Fund any
Charged- Off Loan (or any Mortgage Loan which will imminently become a
Charged-Off Loan) by depositing an amount equal to the related Loan Repurchase
Price in the Certificate Account.
Except as described below, the Servicer may foreclose upon or
otherwise comparably convert the ownership of properties securing such of the
Mortgage Loans as come into and continue in default and as to which no
satisfactory arrangements can be made for collection of delinquent payments. In
connection with such foreclosure or other conversion, the Servicer will be
required to follow such procedures as it follows with respect to similar
mortgage loans held in its own portfolio. However, the Servicer shall not be
required to expend its own funds in connection with any foreclosure or to
restore any damaged property unless it shall determine that (i) such foreclosure
and/or restoration will increase the proceeds of liquidation of the Mortgage
Loan to Certificateholders after reimbursement to itself for such expenses in
accordance with the Pooling and Servicing Agreement and (ii) such expenses shall
be recoverable to it through Liquidation Proceeds (respecting which it shall
reimburse itself for such expense prior to the deposit in the Collection Account
of such proceeds).
The Servicer will be permitted to foreclose against the Mortgaged
Property securing a defaulted Mortgage Loan either by foreclosure, by sale or by
strict foreclosure, and in the event a deficiency judgment is available against
the Mortgagor or any other person, may proceed for the deficiency.
In the event that title to any Mortgaged Property is acquired in
foreclosure or by deed in lieu of foreclosure, the deed or certificate of sale
will be required to be issued to the Trustee, or to the Servicer in the name of
the Trustee on behalf of the Trustee, the Certificateholders and the Certificate
Insurer. Notwithstanding any such acquisition of title and cancellation of the
related Mortgage Loan, such Mortgage Loan is required to be considered to be a
Mortgage Loan held in the Trust Fund until such time as the related Mortgaged
Property is sold and such Mortgage Loan becomes a Liquidated Mortgage Loan.
Consistent with the foregoing, for purposes of all calculations under the
Pooling and Servicing Agreement, so long as such Mortgage Loan is an outstanding
Mortgage Loan:
(i) It will be assumed that, notwithstanding that the indebtedness
evidenced by the related Mortgage Note shall have been discharged, such Mortgage
Note and the related amortization schedule in effect at the time of any such
acquisition of title (after giving effect to any previous partial prepayments
and before any adjustment thereto by reason of any bankruptcy or similar
proceeding or any moratorium or similar waiver or grace period) remain in
effect, except that such schedule shall be adjusted to reflect the application
of proceeds received in any month pursuant to the succeeding clause.
(ii) Net proceeds (after payment of Servicer's expenses related to
disposition) from such property received in any month shall be deemed to have
been received first in payment of the accrued interest that remained unpaid on
the date that title to the related Mortgaged Property was acquired by the Trust
Fund, with the excess thereof, if any, being deemed to have been received in
respect of the delinquent principal installments that remained unpaid on such
date. Thereafter, net proceeds from such property received in any month shall be
applied to the payment of installments of principal and accrued interest on such
Mortgage Loan deemed to be due and payable in accordance with the terms of such
Mortgage Note and such amortization schedule. If such net proceeds exceed the
then unpaid REO amortization, the excess shall be treated as a partial principal
prepayment received in respect of such Mortgage Loan.
(iii) The amount of that portion of such net proceeds on such a
Mortgage Loan that is allocable to interest to be allocated to the Servicing Fee
with respect thereto shall be determined by multiplying such portion by the
ratio of (A) the total amount of net proceeds allocable to interest as the rate
at which the Servicing Fee is determined to (B) the Mortgage Interest Rate borne
by such Mortgage Loan.
In the event that the Trust Fund acquires any Mortgaged Property as
aforesaid or otherwise in connection with a default or imminent default on a
Mortgage Loan, such Mortgaged Property will be required to be disposed of by or
on behalf of the Trust Fund within two years after its acquisition by the Trust
Fund unless (a) the Trustee and the Certificate Insurer shall have received an
opinion of counsel to the effect that the holding by the Trust Fund of such
Mortgaged Property subsequent to two years after its acquisition (and specifying
the period beyond such two-year period for which the Mortgaged Property may be
held) will not cause the Trust Fund to be subject to the tax on prohibited
transactions imposed by Code Section 860F(a)(1), otherwise subject the Trust
Fund to tax or cause the Trust Fund to fail to qualify as a REMIC at any time
that any Certificates are outstanding, or (b) the Trustee (at the Servicer's
expense) or the Servicer shall have applied for, prior to the expiration of such
two-year period, an extension of such two-year period in the manner contemplated
by Code Section 856(e)(3), in which case the two- year period shall be extended
by the applicable period. The Servicer will also be required to ensure that the
Mortgaged Property is administered so that it constitutes "foreclosure property"
within the meaning of Code Section 860G(a)(8) at all times, that the sale of
such property does not result in the receipt by the Trust Fund of any income
from non-permitted assets as described in Code Section 860F(a)(2)(B), and that
the Trust Fund does not derive any "net income from foreclosure property" within
the meaning of Code Section 860G(c)(2), with respect to such property.
If the Servicer is aware that any Mortgaged Property may contain
hazardous wastes, the Servicer may not institute a foreclosure proceeding or
accept a deed in lieu of foreclosure without first obtaining the prior consent
of the Certificate Insurer.
In lieu of foreclosing upon any defaulted Mortgage Loan, the Servicer
may, in its discretion, permit the assumption of such Mortgage Loan if, in the
Servicer's reasonable judgment, such default is unlikely to be cured. In
connection with any such assumption, the Mortgage Interest Rate of the related
Mortgage Note and the payment terms will not be permitted to be changed. Any fee
collected by the Servicer for entering into an assumption agreement will be
retained by the Servicer as servicing compensation.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
In addition to the Servicing Fee, the Servicer is entitled under the
Pooling and Servicing Agreement to retain additional servicing compensation in
the form of assumption and other administrative fees, release fees, bad check
charges, any other servicing-related fees, Net Liquidation Proceeds not
otherwise required to be deposited in the Certificate Account pursuant to the
Pooling and Servicing Agreement, earnings paid on Permitted Investments and
amounts held on deposit as investment earnings on a Collection Account shall be
retained by or remitted to the Servicer to the extent not required to be
remitted to the Trustee for deposit in the Certificate Account. The Servicer
shall be required to pay all expenses incurred by it in connection with its
servicing activities under the Pooling and Servicing Agreement and shall not be
entitled to reimbursement therefor except as specifically provided for therein.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
When a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Servicer shall, to the extent it has knowledge of such conveyance
or prospective conveyance, exercise its rights to accelerate the maturity of the
related Mortgage Loan under any "due-on-sale" clause contained in the related
Mortgage or Mortgage Note; provided, however, that the Servicer shall not
exercise any such right if the "due-on-sale" clause in the reasonable belief of
the Servicer, is not enforceable under applicable law. In such event, the
Servicer may enter into an assumption and modification agreement with the person
to whom such property has been or is about to be conveyed, pursuant to which
such person becomes liable under the Mortgage Note and, unless prohibited by
applicable law or the Mortgage or Mortgage Note, the Mortgagor remains liable
thereon. The Servicer is also authorized, with the prior approval of the
Certificate Insurer, to enter into a substitution of liability agreement with
such person, pursuant to which the original Mortgagor is released from liability
and such person is substituted as Mortgagor and becomes liable under the
Mortgage Note.
MAINTENANCE OF INSURANCE POLICIES AND ERRORS AND OMISSIONS AND FIDELITY
COVERAGE
The Servicer is required to cause to be maintained for each Mortgage
Loan a fire and hazard insurance policy with extended coverage on the related
Mortgaged Property in an amount which is not less than (a) the full insurable
value of the Mortgaged Property securing such Mortgage Loan or (b) the unpaid
principal balance of such Mortgage Loan plus the amount of any first lien,
whichever is less. The Servicer will also be required to maintain or cause to be
maintained fire and hazard insurance with extended coverage on each property
acquired by the Trust Fund by foreclosure or by deed in lieu of foreclosure in
an amount which is at least equal to the lesser of (i) the full insurable value
of the improvements which are a part of such property and (ii) the principal
balance owing on such Mortgage Loan at the time of such foreclosure or grant in
lieu of foreclosure plus the amount of any senior lien plus accrued interest and
related liquidation expenses; provided, however, that such insurance may not be
less than the minimum amount required to fully compensate for any loss or damage
on a replacement cost basis. Any cost incurred by the Servicer in maintaining
any such insurance shall not, for the purpose of calculating distributions to
Certificateholders, be added to the unpaid principal balance of the related
Mortgage Loan, notwithstanding that the terms of such Mortgage Loan so permit.
No earthquake or other additional insurance other than flood insurance is, under
the Pooling and Servicing Agreement, to be required of any Mortgagor or to be
maintained by the Servicer other than pursuant to the terms of the related
Mortgage Note or Mortgage and pursuant to such applicable laws and regulations
as shall at any time be in force and as shall require such additional insurance.
If the Mortgaged Property was located at the time of origination in a
federally designated special flood hazard area, the Servicer will be obligated
to cause to be maintained flood insurance in respect thereof to the extent
available. Such flood insurance shall be in an amount equal to the lesser of (i)
the unpaid principal balance of the related Mortgage Loan plus the amount of any
senior lien and (ii) the maximum amount of such insurance required by the terms
of the related Mortgage Note or Mortgage and as is available for the related
property under the national flood insurance program (assuming that the area in
which such property is located is participating in such program).
Alternatively, the Servicer may obtain, at its own expense, a blanket
insurance policy with an insurer insuring against flood, fire and hazard losses
on all of the Mortgage Loans, which policy may contain a deductible clause, in
which case the Servicer shall, in the event that (i) there shall not have been
maintained on the related Mortgaged Property a policy otherwise complying with
the provisions described above, and (ii) there shall have been one or more
losses which would have been covered by such a policy had it been maintained,
deposit into the Certificate Account from its own funds the amount not otherwise
payable under the blanket policy because of such deductible clause.
The Servicer will also be required under the Pooling and Servicing
Agreement to maintain in force (i) a policy or policies of insurance covering
errors and omissions in the performance of its obligations as Servicer and (ii)
a fidelity bond in respect of its officers, employees or agents. Each such
policy or policies and bond will, together, be substantially comparable to a
policy or policies and bond otherwise complying with the requirements of FNMA
for persons performing servicing for mortgage loans purchased by FNMA.
No pool insurance policy, special hazard insurance policy, bankruptcy
bond or repurchase bond will be maintained with respect to the Mortgage Loans,
nor will any Mortgage Loan be insured by any government or government agency.
SERVICER REPORTS
The Servicer is required to deliver to the Certificate Insurer, the
Trustee and the Rating Agencies, not later than the last day of the third month
following the end of the Servicer's fiscal year an Officers' Certificate stating
that (i) the Servicer has fully complied with the servicing provisions of the
Pooling and Servicing Agreement, (ii) a review of the activities of the Servicer
during the preceding fiscal year and of performance under the Pooling and
Servicing Agreement has been made under such officers' supervision, and (iii) to
the best of such officers' knowledge, based on such review, the Servicer has
fulfilled all its obligations under the Pooling and Servicing Agreement for such
year, or, if there has been a default in the fulfillment of any such obligation,
specifying each such default known to such officers and the nature and status
thereof including the steps being taken by the Servicer to remedy such default.
The first such Officer's Certificate shall be delivered by the Servicer in 1997.
Not later than the last day of the third month following the end of
the Servicer's fiscal year, the Servicer, at its expense, is required to cause
to be delivered to the Certificate Insurer, the Trustee and the Rating Agencies
from a firm of independent certified public accountants (who may also render
other services to the Servicer) a statement to the effect that such firm has
examined certain documents and records relating to the servicing of the Mortgage
Loans during the preceding calendar year (or such longer period from the Closing
Date to the end of the following calendar year) and that, on the basis of such
examination conducted substantially in compliance with generally accepted
auditing standards and the requirements of the Uniform Single Attestation
Program for Mortgage Bankers or the Attestation Program for Mortgages serviced
for FHLMC, such servicing has been conducted in compliance with the Pooling and
Servicing Agreement except for such significant exceptions or errors in records
that, in the opinion of such firm, generally accepted auditing standards and the
Uniform Single Attestation Program for Mortgage Bankers or the Attestation
Program for Mortgages serviced for FHLMC require it to report, in which case
such exceptions and errors shall be so reported.
EVENTS OF DEFAULT
The Trustee, only at the direction of the Certificate Insurer or the
majority Certificateholders, with the consent of the Certificate Insurer (in the
case of any direction of the majority Certificateholders), may remove the
Servicer upon the occurrence and continuation beyond the applicable cure period
of an event described below (each an "Event of Default"):
(a) any failure by the Servicer to remit to the Trustee any payment
required to be made by the Servicer under the terms of the Pooling and Servicing
Agreement which continues unremedied for 2 days; (b) the failure by the Servicer
to make any required Servicing Advance which failure continues unremedied for a
period of 30 days after the date on which written notice of such failure,
requiring the same to be remedied, shall have been given to the Servicer by the
Trustee or to the Servicer and the Trustee by any Certificateholder or the
Certificate Insurer;
(b) any failure on the part of the Servicer duly to observe or perform
in any material respect any other of the covenants or agreements on the part of
the Servicer contained in the Pooling and Servicing Agreement, or the failure of
any representation and warranty set forth in the Pooling and Servicing
Agreement, which continues unremedied for a period of 30 days after the date on
which written notice of such failure, requiring the same to be remedied, shall
have been given to the Servicer by the Depositor or the Trustee, or to the
Servicer and the Trustee by any Certificateholder or the Certificate Insurer;
(c) a decree or order of a court or agency or supervisory authority
having jurisdiction in an involuntary case under any present or future federal
or state bankruptcy, insolvency or similar law or for the appointment of a
conservator or receiver or liquidator in any insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings, or for the
winding-up or liquidation of its affairs, shall have been entered against the
Servicer and such decree or order shall have remained in force, undischarged or
unstayed for a period of 60 days;
(d) the Servicer shall consent to the appointment of a conservator or
receiver or liquidator in any insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings of or relating to the Servicer or
of or relating to all or substantially all of the Servicer's property; (f) the
Servicer shall admit in writing its inability to pay its debts as they become
due, file a petition to take advantage of any applicable insolvency or
reorganization statute, make an assignment for the benefit of its creditors, or
voluntarily suspend payment of its obligations; or (g) the delinquency or loss
experience of the Mortgage Loan pool exceeds certain levels specified in the
Pooling and Servicing Agreement.
REMOVAL AND RESIGNATION OF SERVICER
The Servicer may not assign its obligations under the Pooling and
Servicing Agreement nor resign from the obligations and duties thereby imposed
on it except by mutual consent of the Servicer, the Certificate Insurer and the
Trustee, or upon the determination that the Servicer's duties thereunder are no
longer permissible under applicable law and such incapacity cannot be cured by
the Servicer without the incurrence, in the reasonable judgment of the
Certificate Insurer, of unreasonable expense. No such resignation shall become
effective until a successor has assumed the Servicer's responsibilities and
obligations in accordance with the Pooling and Servicing Agreement.
Upon removal or resignation of the Servicer, the Trustee has agreed to
be the Successor Servicer (the "Successor Servicer"). The Trustee, as Successor
Servicer, will be obligated to make Delinquency Interest Advances and Servicing
Advances and certain other advances unless it determines reasonably and in good
faith that such advances would not be recoverable. If, however, the Trustee is
unwilling or unable to act as Successor Servicer, or if the majority
Certificateholders (with the consent of the Certificate Insurer) or the
Certificate Insurer so requests, the Trustee shall appoint, or petition a court
of competent jurisdiction to appoint, in accordance with the provisions of the
Pooling and Servicing Agreement and subject to the approval of the Certificate
Insurer any established mortgage loan servicing institution acceptable to the
Certificate Insurer having a net worth of not less than $15,000,000 as the
Successor Servicer in the assumption of all or any part of the responsibilities,
duties or liabilities of the Servicer.
The Trustee and any other Successor Servicer in such capacity is
entitled to the same reimbursement for advances and no more than the same
servicing compensation as the Servicer. See "--Servicing and Other Compensation
and Payment of Expenses" above.
TERMINATION; PURCHASE OF MORTGAGE LOANS
The Trust Fund will terminate upon notice to the Trustee and the
Certificate Insurer of either: (a) the later of the distribution to
Certificateholders of the final payment or collection with respect to the last
Mortgage Loan (or Delinquency Interest Advances of same by the Servicer), or the
disposition of all funds with respect to the last Mortgage Loan and the
remittance of all funds due under the Pooling and Servicing Agreement and the
payment of all amounts due and payable to the Certificate Insurer and the
Trustee or (b) mutual consent of the Servicer, the Certificate Insurer and all
Certificateholders in writing.
Subject to provisions in the Pooling and Servicing Agreement
concerning adopting a plan of complete liquidation, the Holders of the Residual
Certificates or Servicer may, at their respective option and at their respective
sole cost and expense (and if such option is not exercised by the Holders of the
Residual Certificates or the Servicer, the Certificate Insurer may, in
accordance with the provisions of the Pooling and Servicing Agreement, at its
option and at its sole cost and expense), terminate the Trust Fund on any date
on which the aggregate Principal Balance of the Mortgage Loans is less than 10%
(with respect to such option of the Holders of the Residual Certificates) and
with respect to the Servicer less than 5% of the Maximum Collateral Amount by
purchasing, on the next succeeding Distribution Date, all of the property of the
Trust Fund at a price equal to the sum of (a) the greater of (i) 100% of the
aggregate Principal Balance of each outstanding Mortgage Loan and each REO
Property and (ii) the fair market value (disregarding accrued interest) of the
Mortgage Loans and REO Properties, determined as the average of three written
bids (copies of which are to be delivered to the Trustee and the Certificate
Insurer by the Servicer and the reasonable cost of which may be deducted from
the final purchase price provided that such deduction does not result in a draw
on the Certificate Insurance Policy) made by nationally recognized dealers
acceptable to the Certificate Insurer and based on a valuation process which
would be used to value comparable mortgage loans and REO property, plus (b) the
greater of (x) the aggregate amount of accrued and unpaid interest on the
Mortgage Loans through the related Collection Period and (y) 30 days' accrued
interest thereon computed at a rate equal to the related Mortgage Interest Rate,
(c) in the event the Holders of the Residual Certificates or the Certificate
Insurer exercise such option, plus any unpaid and accrued Servicing Fee or in
the event the Servicer exercises such option, net of the Servicing Fee, and (d)
any unreimbursed amounts due to the Certificate Insurer under the Pooling and
Servicing Agreement or the Insurance Agreement. No such termination is permitted
without the prior written consent of the Certificate Insurer if it would result
in a draw on the Certificate Insurance Policy and the Certificate Insurer shall
have received an opinion of counsel reasonably satisfactory to it stating that
no amounts paid under the Pooling and Servicing Agreement are subject to
recapture as preferential transfers under the United States Bankruptcy Code, 11
U.S.C. ss.ss. 101 et seq., as amended.
The first date on which the Holders of the Residual Certificates may
exercise their option is the "Clean-Up Call Date."
AMENDMENT
The Pooling and Servicing Agreement may be amended from time to time
by the Depositor, the Servicer and the Trustee by written agreement, upon the
prior written consent of the Certificate Insurer (which consent shall not be
withheld if, in the opinion of counsel addressed to the Trustee and the
Certificate Insurer, failure to amend would adversely affect the interests of
the Certificateholders unless such consent would adversely affect the interests
of the Certificate Insurer), without notice to, or consent of, the
Certificateholders, to cure any ambiguity, to correct or supplement any
provisions therein, to comply with any changes in the Code, or to make any other
provisions with respect to matters or questions arising under the Pooling and
Servicing Agreement which shall not be inconsistent with the provisions of the
Pooling and Servicing Agreement, provided that such action shall not, as
evidenced by an opinion of counsel delivered to the Trustee and the Certificate
Insurer, but not obtained at the expense of the Trustee or the Certificate
Insurer, adversely affect in any material respect the interests of any
Certificateholder (or 100% of the Class of Certificateholders so affected shall
have consented); and provided, further, that no such amendment shall reduce in
any manner the amount of, or delay the timing of, payments received on Mortgage
Loans which are required to be distributed on any Certificate without the
consent of the Holder of such Certificate, or change the rights or obligations
of any other party to the Pooling and Servicing Agreement without the consent of
such party.
The Pooling and Servicing Agreement may be amended from time to time
by the Depositor, the Servicer and the Trustee with the consent of the
Certificate Insurer (which consent shall not be withheld if, in the opinion of
counsel addressed to the Trustee and the Certificate Insurer, failure to amend
would adversely affect the interests of the Certificateholders unless such
consent would adversely affect the interests of the Certificate Insurer), and
the Holders of the majority of the Percentage Interest in the Class A
Certificates for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of the Pooling and Servicing
Agreement or of modifying in any manner the rights of the Holders; provided,
however, that no such amendment shall be made unless the Trustee and the
Certificate Insurer receives an opinion of counsel, at the expense of the party
requesting the change, that such change will not adversely affect the status of
the Trust Fund as a REMIC or cause a tax to be imposed on the Trust Fund; and
provided, further, that no such amendment shall reduce in any manner the amount
of or delay the timing of, payments received on Mortgage Loans which are
required to be distributed on any Certificate without the consent of the Holder
of such Certificate or reduce the percentage for each Class the Holders of which
are required to consent to any such amendment without the consent of the Holders
of 100% of each Class of Certificates affected thereby.
The rights of the Certificateholders of the Trust Fund will be
determined pursuant to the Pooling and Servicing Agreement.
THE TRUSTEE
_________________, a _______________________, has been named Trustee
pursuant to the Pooling and Servicing Agreement. The Trustee will serve
initially as the custodian of the Trustee's Mortgage Files. The Pooling and
Servicing Agreement provides that the Trustee shall be entitled to a fee (the
"Trustee Fee") in respect of its services as Trustee.
The Trustee shall at all times be a banking association organized and
doing business under the laws of any State or the United States of America
subject to suspension or examination by federal or state authority, authorized
under such laws to exercise corporate trust powers, having a combined capital
and surplus of at least $50,000,000, whose short-term debt rating is rated
"A-1+" by Standard & Poor's and "P-1" by Moody's and whose long-term deposits,
if any, are rated at least "BBB" by Standard & Poor's and Baa2 by Moody's, or
such lower rating as may be reasonably approved in writing by the Certificate
Insurer. If at any time the Trustee shall cease to be eligible in accordance
with the provisions described in this paragraph, it shall resign immediately in
the manner and with the effect specified in the Pooling and Servicing Agreement.
Any resignation or removal of the Trustee and appointment of a
successor trustee shall become effective upon the acceptance of appointment by a
successor trustee.
The Trustee, or any trustee or trustees hereafter appointed, may
resign at any time in the manner set forth in the Pooling and Servicing
Agreement. Upon receiving notice of resignation, the Certificate Insurer may and
if the Certificate Insurer fails to, the Servicer shall promptly appoint a
successor trustee or trustees acceptable to the Certificate Insurer and meeting
the eligibility requirements set forth above in the manner set forth in the
Pooling and Servicing Agreement. The Servicer will deliver a copy of the
instrument used to appoint a successor trustee to the Certificateholders, the
Certificate Insurer and the Depositor, and upon acceptance of appointment by a
successor trustee in the manner provided in the Pooling and Servicing Agreement,
the Servicer will give notice thereof to the Certificateholders. If no successor
trustee shall have been appointed and have accepted appointment within 30 days
after the giving of such notice of resignation, the resigning trustee may
petition any court of competent jurisdiction for the appointment of a successor
trustee. Such court may thereupon, after such notice, if any, as it may deem
proper and prescribe, appoint a successor trustee.
If the Trustee fails to perform in accordance with the terms of the
Pooling and Servicing Agreement, the Certificate Insurer or the majority of
Certificateholders with the consent of the Certificate Insurer, may remove the
Trustee under the conditions set forth in the Pooling and Servicing Agreement
and appoint a successor trustee in the manner set forth therein.
At any time, for the purpose of meeting any legal requirements of any
jurisdiction in which any part of the Trust Fund or property securing the same
may at the time be located, the Servicer and the Trustee acting jointly shall
have the power and shall execute and deliver all instruments to appoint one or
more persons approved by the Trustee to act as co-trustee or co-trustees,
jointly with the Trustee, or separate trustee or separate trustees, of all or
any part of the Trust Fund and to vest in such person or persons, in such
capacity, such title to the Trust Fund, or any part thereof, and, subject to the
provisions of the Pooling and Servicing Agreement, such powers, duties,
obligations, rights and trusts as the Servicer and the Trustee may consider
necessary or desirable.
THE CERTIFICATE INSURANCE POLICY AND THE CERTIFICATE INSURER
[TO BE PROVIDED]
FEDERAL INCOME TAX CONSIDERATIONS
For federal income tax purposes, one or more elections will be made to
treat certain assets of the Trust Fund as a REMIC. Immediately prior to the
issuance of the Certificates, Stroock & Stroock & Lavan LLP, special tax counsel
to the Depositor, will deliver its opinion generally to the effect that the
arrangement by which the Certificates are issued will be treated as a REMIC and
the Class A Certificates will be treated as "regular interests" in a REMIC as
long as all the provisions of the Pooling and Servicing Agreement are complied
with and the statutory and regulatory requirements are satisfied. For federal
income tax purposes, regular interests in a REMIC are generally treated as debt
instruments issued by the REMIC on the date on which those interests are
created, and not as ownership interests in the REMIC or its assets. Holders of
Class A Certificates that otherwise report income under a cash method of
accounting will be required to report income with respect to such Class A
Certificates under an accrual method.
In general, as a result of being regular interest in a REMIC, (i)
Class A Certificates held by a thrift institution taxed as a "domestic building
and loan association" will constitute "assets" within the meaning of Section
7701(a)(19)(C) of the Code; and (ii) Class A Certificates held by a real estate
investment trust will constitute "real estate assets" within the meaning of
Section 856(c)(5)(a) of the Code. If less than 95% of the assets comprising the
REMIC are assets qualifying under any of the foregoing sections of the Code,
then the Class A Certificates will be qualifying assets only to the extent that
the assets comprising the REMIC are qualifying assets. Interest on the Class A
Certificates will be interest described in Section 856(c)(3)(B) of the Code to
the extent that the Class A Certificates are treated as "real estate assets"
within the meaning of Section 856(c)(5)(A) of the Code.
All holders of Class A Certificates should see "Certain Federal Income
Tax Consequences" in the accompanying Prospectus for a general discussion of the
material anticipated federal income tax consequences of the purchase, ownership
and disposition of regular interests in a REMIC.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Code impose certain restrictions on (a) employee benefit
plans (as defined in Section 3(3) of ERISA), (b) plans described in section
4975(e)(1) of the Code, including individual retirement accounts or Keogh plans,
(c) any entities whose underlying assets include plan assets by reason of a
plan's investment in such entities (each a "Plan") and (d) persons who have
certain specified relationships to such Plans ("Parties-in- Interest" under
ERISA and "Disqualified Persons" under the Code). Moreover, based on the
reasoning of the United States Supreme Court in John Hancock Life Ins. Co. v.
Harris Trust and Sav. Bank, 114 S. Ct. 517 (1993), an insurance company's
general account may be deemed to include assets of the Plans investing in the
general account (e.g., through the purchase of an annuity contract). ERISA also
imposes certain duties on persons who are fiduciaries of Plans subject to ERISA
and prohibits certain transactions between a Plan and Parties-in-Interest or
Disqualified Persons with respect to such Plans.
The DOL has granted an administrative exemption to __________________
(Prohibited Transaction Exemption _____, the "Exemption") which generally
exempts from the application of the prohibited transaction provisions of Section
406(a), Section 406(b)(1), Section 406(b)(2) and Section 407(a) of ERISA and the
excise taxes imposed pursuant to Sections 4975(a) and (b) of the Code, certain
transactions relating to the servicing and operation of asset pools and the
purchase, sale and holding of asset-backed pass-through certificates, including
pass-through certificates evidencing interests in certain secured receivables,
secured loans and other secured obligations, provided that certain conditions
set forth in the Exemption are satisfied. Among the conditions that must be
satisfied for the Exemption to apply are the following:
1. The Acquisition of the Class A Certificates by a Plan is on terms
(including the price for the Class A Certificates) that are at least as
favorable to the Plan as they would be in an arm's length transaction with an
unrelated party;
2. The rights and interests evidenced by the Class A Certificates
acquired by the Plan are not subordinated to the rights and interests evidenced
by other certificates of the Trust Fund;
3. The Class A Certificates acquired by the Plan have received a
rating at the time of such acquisition that is in one of the three highest
generic rating categories from either Standard & Poor's, Moody's, Duff & Phelps
Inc. ("D&P") or Fitch Investor Service, Inc. ("Fitch");
4. The sum of all payments made to the Underwriter in connection with
the distribution of the Class A Certificates represents not more than reasonable
compensation for the placement of the Class A Certificates. The sum of all
payments made to and retained by the Servicer represents not more than
reasonable compensation for the Servicer's services under the Pooling and
Servicing Agreement and reimbursement of the Servicer's reasonable expenses in
connection therewith;
5. The Trustee is not an affiliate of any other member of the
Restricted Group (as defined below); and
6. The Plan investing in the Class A Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities and
Exchange Commission under the Securities Act of 1933.
The Trust Fund also must meet the following requirements:
a. The corpus of the Trust Fund must consist solely of assets of the
type which have been included in other investment pools;
b. Certificates in such other investment pools must have been rated in
one of the three highest rating categories of S&P, Moody's, D&P or Fitch for at
least one year prior to the Plan's acquisition of certificates; and
c. Certificates evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at least one year
prior to any Plan's acquisition of Class A Certificates.
In order for the Exemption to apply to certain self-dealing/conflict
of interest prohibited transactions that may occur when a Plan fiduciary causes
the Plan to acquire Class A Certificates, the Exemption requires, among other
matters, that: (i) in the case of an acquisition in connection with the initial
issuance of Certificates, at least fifty percent of each class of certificates
in which Plans have invested is acquired by persons independent of the
Restricted Group and at least fifty percent of the aggregate interest in the
Trust Fund is acquired by persons independent of the Restricted Group (as
defined below); (ii) such fiduciary (or its affiliate) is an obligor with
respect to 5 percent or less of the fair market value of the obligations
contained in the Trust Fund; (iii) the Plan's investment in Class A Certificates
does not exceed twenty-five percent (25%) of all of the certificates outstanding
at the time of the acquisition and (iv) immediately after the acquisition, no
more than twenty-five percent (25%) of the assets of the Plan are invested in
certificates representing an interest in one or more trusts containing assets
sold or serviced by the same entity.
The Exemption does not apply to certain prohibited transactions in the
case of Plans sponsored by the Underwriter, the Trustee, the Servicer, any
obligor with respect to the Mortgage Loans included in the Trust Fund
constituting more than five percent of the aggregate unamortized principal
balance of assets in the Trust Fund, any entity deemed to be a "sponsor" of the
Trust Fund as such term is defined in the exemption, or any affiliate of any
such party (the "Restricted Group").
Prior to the earlier of (i) the date on which the Pre-Funding Period
expires and (ii) the date on which the DOL amends the Exemption to permit the
use thereunder of pre-funding accounts as described herein, Plans will not be
permitted to purchase the Class A Certificates. On or after the earlier to occur
of such dates, the Exemption may be available for the purchase of Class A
Certificates by Plans. Before purchasing a Class A Certificate, a fiduciary of
an ERISA Plan should make its own determination as to the availability of the
exemptive relief provided in the Exemption and whether the conditions of any
such exemption will be applicable to the Class A Certificates. Any fiduciary of
an ERISA Plan considering whether to purchase a Class A Certificate should also
carefully review with its own legal advisors the applicability of the fiduciary
duty and prohibited transaction provisions of ERISA and the Code to such
investment.
A governmental plan as defined in Section 3(32) of ERISA is not
subject to ERISA, or Code Section 4975. However, such a governmental plan may be
subject to a federal, state, or local law, which is, to a material extent,
similar to the provisions of ERISA or Code Section 4975 ("Similar Law"). A
fiduciary of a governmental plan should make its own determination as to the
need for and the availability of any exemptive relief under Similar Law.
The sale of Certificates to an ERISA Plan is in no respect a
representation by the Depositor or the Placement Agent that this investment
meets all relevant legal requirements with respect to investments by ERISA Plans
generally or any particular ERISA Plan, or that this investment is appropriate
for ERISA Plans generally or any particular ERISA Plan.
LEGAL INVESTMENT
The Class A Certificates will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA").
Additionally, institutions subject to the jurisdiction of the Office
of the Comptroller of the Currency, the Board of Governors of the Federal
Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift
Supervision, the National Credit Union Administration or state banking or
insurance authorities should review applicable rules, supervisory policies and
guidelines of these agencies before purchasing any of the Class A Certificates,
since such Class A Certificates may be deemed to be unsuitable investments under
one or more of these rules, policies and guidelines and certain restrictions may
apply to such investments. It should also be noted that certain states have
enacted legislation limiting to varying extents the ability of certain entities
(in particular, insurance companies) to invest in mortgage related securities.
Investors should consult with their own legal advisors in determining whether
and to what extent the Class A Certificates constitute legal investments for
such investors. See "Legal Investment" in the Prospectus Supplement.
UNDERWRITING
The Underwriter named below has agreed, subject to the terms and
conditions of the Underwriting Agreement, to purchase from the Depositor the
respective principal amounts of the Class A Certificates set forth below.
In the Underwriting Agreement, the Underwriter has agreed, subject to
the terms and conditions set forth therein, to purchase all of the Class A
Certificates offered hereby if any Class A Certificates are purchased. In the
event of default by the Underwriter, the Underwriting Agreement provides that,
in certain circumstances, the Underwriting Agreement may be terminated.
The Depositor has been advised by the Underwriter that it proposes
initially to offer each Class of Class A Certificates to the public at the
related price set forth herein, and to certain dealers at such price less the
initial concession not in excess of, based on Initial Certificate Principal
Balances, _____% of the Class A-1 Certificates, _____% of the Class A-2
Certificates, _____% of the Class A-3 Certificates, _____% of the Class A-4
Certificates, _____% of the Class A-5 Certificates, and _____% of the Class A-6
Certificates. The Underwriter may allow and such dealers may reallow a
concession not in excess of, based on Initial Certificate Principal Balances,
_____% of the Class A-1 Certificates, _____% of the Class A-2 Certificates,
_____% of the Class A-3 Certificates, _____% of the Class A-4 Certificates,
_____% of the Class A-5 Certificates, and _____% of the Class A-6 Certificates,
to certain other dealers. After the initial public offering of each Class of
Class A Certificates, the public offering price and such concessions for such
Class may be changed.
The Underwriting Agreement provides that the Seller and the Depositor
will indemnify the Underwriter against certain liabilities, including
liabilities under the Securities Act of 1933, as amended, or contribute to
payments the Underwriter may be required to make in respect thereof.
REPORT OF EXPERTS
The consolidated financial statements of the Certificate Insurer as of
___________, ____ and ___________, ____ and for the three years ended
___________, ____ incorporated by reference into this Prospectus Supplement have
been audited by _________________, ______, independent accountants, as set forth
in their report thereon, incorporated by reference herein in reliance upon the
authority of such firm as experts in accounting and auditing.
RATINGS
The Class A Certificates will be rated at their initial issuance
"_____" by ____ and "____" by ____________ (the "Rating Agencies").
The Rating Agencies' rating on mortgage loan asset-backed certificates
address the likelihood of the receipt by the Certificateholders of payments
required under the Pooling and the Servicing Agreement. The Rating Agencies'
ratings take into consideration the claims paying ability of the Certificate
Insurer.
The Depositor has not requested a rating on the Class A Certificates
by any rating agency other than the Rating Agencies. However, there can be no
assurance as to whether any other rating agency will rate the Class A
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. A rating on the Class A Certificates by another rating agency, if
assigned at all, may be lower than the ratings assigned to the Class A
Certificates by the Rating Agencies.
A security 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 security rating should be evaluated
independently of any other security rating. In the event that the rating
initially assigned to any of the Class A Certificates is subsequently lowered
for any reason, no person or entity is obligated to provide any additional
support or credit enhancement with respect to such Class A Certificates.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the Class A
Certificates will be passed upon by Stroock & Stroock & Lavan LLP, New York, New
York. Certain legal matters relating to the Certificate Insurer and the
Certificate Insurance Policy will be passed upon for the Certificate Insurer by
_________________.
<PAGE>
INDEX OF SIGNIFICANT PROSPECTUS SUPPLEMENT DEFINITIONS
TERM PAGE
Accepted Servicing Practices...........................................
Accrual Period.........................................................
Advanta................................................................
Advanta Parent.........................................................
Agreement..............................................................
Applicable Federal Rate................................................
Available Funds........................................................
Backup withholding.....................................................
Business Day...........................................................
Capitalized Interest Account...........................................
Cedel..................................................................
Certificate Account....................................................
Certificate Insurance Policy...........................................
Certificate Insurer....................................................
Certificate Insurer Premium Amount.....................................
Certificate Owners.....................................................
Certificateholders.....................................................
Certificates...........................................................
Charged-off Loan.......................................................
Charged-off Loan Loss..................................................
Class..................................................................
Class A Carry-Forward Amount...........................................
Class A Distribution Amount............................................
Class A Interest Distribution Amount...................................
Class A Principal Balance..............................................
Class A Principal Distribution Amount..................................
Class A Certificates...................................................
Class A-1 Certificates.................................................
Class A-2 Certificates.................................................
Class A-3 Certificates.................................................
Class A-4 Certificates.................................................
Class A-5 Certificates.................................................
Class A-6 Certificates.................................................
Class B Certificates...................................................
Clean-Up Call Date.....................................................
Closing Date...........................................................
Collection Account.....................................................
Collection Period......................................................
Combined Loan-to-Value Ratio...........................................
Compensating Interest..................................................
Credit Bureau Risk Score...............................................
Cut-off Date..........................................................
D&P....................................................................
Daily portions.........................................................
Deficiency Amount......................................................
Delinquency Interest Advances..........................................
Depositor..............................................................
Disqualified Persons...................................................
Distribution Date......................................................
DOL....................................................................
DTC....................................................................
DTI....................................................................
Due Date...............................................................
Due-on-Sale............................................................
Eligible Account.......................................................
ERISA..................................................................
Euroclear..............................................................
Event of Default.......................................................
Excess Cashflow........................................................
Excess Overcollateralization Amount....................................
Exemption..............................................................
Fair, Isaac............................................................
FDIC...................................................................
Fiscal Agent...........................................................
Fitch..................................................................
GAAP...................................................................
Garn-St Germain Act....................................................
HUD....................................................................
Initial Certificate Principal Balance..................................
Initial Mortgage Loans.................................................
Insured Distribution Amount............................................
Insured Payment........................................................
Liquidated Loan........................................................
Loan Repurchase Price..................................................
Maximum Collateral Amount..............................................
Memorandum.............................................................
MLA....................................................................
Moody's................................................................
Mortgage Interest Rate.................................................
Mortgage Loans.........................................................
Mortgage Note..........................................................
Mortgage Pool..........................................................
Mortgaged Properties...................................................
Mortgages..............................................................
Non-U.S. Person........................................................
Nonrecoverable Advance.................................................
Notice.................................................................
OID Regulations........................................................
Original Class A Principal Balance.....................................
Original Pre-Funded Amount.............................................
OTS...................................................................
Overcollateralization Amount...........................................
Overcollateralization Deficit..........................................
Overcollateralization Increase Amount..................................
Overcollateralization Reduction Amount.................................
Owner..................................................................
Parties-in-Interest....................................................
Percentage Interest....................................................
Plan...................................................................
Pre-Funding Account....................................................
Pre-Funding Period.....................................................
Preference Amount......................................................
Prepayment Assumption..................................................
Principal Balance......................................................
Pooling and Servicing Agreement........................................
Prospectus.............................................................
Prospectus Supplement..................................................
Qualified Substitute Mortgage Loan.....................................
Rating Agencies........................................................
Record Date............................................................
Residual Certificate...................................................
Regulations............................................................
Reimbursement Amount...................................................
Relief Act.............................................................
REMIC..................................................................
Remittance Date........................................................
Required Overcollateralization Level...................................
Restricted Group.......................................................
S&P....................................................................
Seller.................................................................
Senior Liens...........................................................
Senior Percentage......................................................
Servicer...............................................................
Servicer Remittance Amount.............................................
Servicer Remittance Date...............................................
Servicing Advances.....................................................
Servicing Fee..........................................................
Servicing Fee Rate.....................................................
Similar Law............................................................
SMMEA..................................................................
Standard & Poor's......................................................
Startup Day............................................................
Statistical Calculation Date...........................................
Subordinate Mortgage Ratio.............................................
Subordinate Certificates...............................................
Subsequent Cut-Off Date................................................
Subsequent Mortgage Loans..............................................
Subsequent Transfer Date...............................................
Substitution Adjustment................................................
Successor Servicer....................................................
Title V................................................................
Trust Fund.............................................................
Trustee................................................................
Trustee Fee............................................................
Trustee's Mortgage File................................................
Underwriter............................................................
