As Filed with the Securities and Exchange Commission on April 4, 1997
Registration No. ________
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
- --------------------------------------------------------------------------------
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
EQUITY ONE ABS, INC.
(Exact name of registrant as specified in its charter)
Delaware Applied For
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
---------------
103 Springer Building
3411 Silverside Road
Wilmington, Delaware 19810
(302) 478-6160
- --------------------------------------------------------------------------------
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
Dennis Kildea
Equity One ABS, Inc.
103 Springer Building
3411 Silverside Road
Wilmington, Delaware 19810
(302) 478-6160
- --------------------------------------------------------------------------------
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------
With a copy to:
Brian S. Vargo
Stradley, Ronon, Stevens & Young, LLP
2600 One Commerce Square
Philadelphia, PA 19103-7098
---------------
Approximate date of commencement of proposed sale to the public:
From time to time on or after the effective date of the registration
statement, as determined by market conditions.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend
or interest reinvestment plans, please 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
=======================================================================================
Proposed Proposed
Amount Maximum Maximum Amount of
Title of Each Class of to be Offering Price Aggregate Registration
Securities to Be Registered Registered Per Unit(1) Offering Price(1) Fee
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset Backed Notes and
Asset Certificates........ $1,000,000 100% $1,000,000 $303.03
=======================================================================================
</TABLE>
(1) Estimated for the purpose of calculating the registration fee.
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>
EXPLANATORY NOTE
This Registration Statement includes a basic prospectus and an illustrative
form of prospectus supplement for use in an offering of asset-backed securities
consisting of senior and subordinated certificate classes. The description of
credit enhancement mechanisms or other features in the form of prospectus
supplement is intended merely as an illustration of the principal features of a
possible series of asset-backed securities; the features applicable to any
actual series of asset-backed securities may include some, all or none of the
features so illustrated and may include any features specified in the
prospectus.
<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.
SUBJECT TO COMPLETION, DATED [______], 199___
PROSPECTUS SUPPLEMENT
(To Prospectus dated __________, 199___)
$
(Approximate)
Mortgage Pass-Through Certificates, Series 19__-__
Distributions payable on the ____ day of each month, commencing in _____ 19__
Equity One ABS, Inc.
Depositor
Equity One, Inc.
Servicer
-----------------
The Mortgage Pass-Through Certificates, Series 199__-__ (the
"Certificates") will represent the entire beneficial interest in a Trust Fund
consisting of a pool (the "Mortgage Pool") of the following types of loans
(collectively, the "Loans"): fixed rate and variable rate mortgage loans secured
by first and/or subordinate liens on (A) one- to four-family residential
properties, (each, a "Residential Loan") and (B) mixed commercial/residential
use properties (each, a "Mixed Use Loan"). Only the classes of Certificates
identified in the table below (collectively, the "Offered Certificates") are
offered hereby. See "Index of Defined Terms" on Page [ ] of this Prospectus
Supplement and on Page [ ] of the Prospectus for the location of the definitions
of certain capitalized terms.
-------------------
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER "RISK
FACTORS" ON PAGE [ ] HEREIN AND ON PAGE [ ] IN THE ACCOMPANYING PROSPECTUS.
THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
DEPOSITOR, THE SELLERS, THE SERVICER, THE TRUSTEE OR ANY OF THEIR RESPECTIVE
AFFILIATES. NEITHER THE CERTIFICATES NOR THE LOANS ARE INSURED OR GUARANTEED BY
ANY GOVERNMENTAL ENTITY, THE DEPOSITOR, THE SELLERS, THE SERVICER, THE TRUSTEE
OR ANY OF THEIR AFFILIATES OR ANY OTHER PERSON. DISTRIBUTIONS ON THE
CERTIFICATES WILL BE PAYABLE SOLELY FROM THE ASSETS TRANSFERRED TO THE TRUST
FUND FOR THE BENEFIT OF CERTIFICATEHOLDERS.
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.
================================================================================
Initial Class
Certificate
Balance (1) Pass-Through Rate
- --------------------------------------------------------------------------------
Class A- $ %
- --------------------------------------------------------------------------------
Class $ %
- --------------------------------------------------------------------------------
Class PO $ (2)
- --------------------------------------------------------------------------------
Class X (3) (4)
- --------------------------------------------------------------------------------
Class A-R $ %
- --------------------------------------------------------------------------------
Class B- $ %
- --------------------------------------------------------------------------------
Class $ %
- --------------------------------------------------------------------------------
Class $ %
================================================================================
(1) Subject to the permitted variance described under "Summary of
Terms--Offered Certificates."
(2) The Class PO Certificates will be Principal Only Certificates and will not
bear interest.
(3) The Class X Certificates will be Notional Amount Certificates, will have
no principal balance and will bear interest on their Notional Amount
(initially expected to be approximately $ ).
(4) The Pass-Through Rate for the Class X Certificates for any Distribution
Date will be equal to the excess of (a) the weighted average of the Net
Mortgage Rates of the Non-Discount Loans over (b) % per annum. The
Pass-Through Rate for the Class X Certificates for the first Distribution
Date is expected to be approximately % per annum.
The Offered Certificates will be purchased by _______________ (the
"Underwriter") from the Depositor and will be offered by the Underwriter from
time to time in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. Proceeds to the Depositor from the sale of the
Offered Certificates are expected to be approximately $_______, plus accrued
interest, before deducting issuance expenses payable by the Depositor. The Class
___, Class PO and Class X Certificates will be issued to the Depositor on or
about _________, 19__ as partial consideration for the sale of the Loans to the
Trust Fund.
<PAGE>
The Offered Certificates are offered by the Underwriter, subject to prior
sale, when, as and if delivered to and accepted by the Underwriter and subject
to its right to reject orders in whole or in part. It is expected that delivery
of the Offered Certificates will be made in book-entry form only through the
facilities of The Depository Trust Company on or about _______________, 19__.
[Underwriter]
-2-
<PAGE>
The Loans will be sold to the Depositor by Equity One, Inc., ______,
______, and ____________ (individually, a "Seller" and collectively, the
"Sellers").
An election will be made to treat the Trust Fund as a "real estate
mortgage investment conduit" (the "REMIC") for federal income tax purposes. As
described more fully herein and in the Prospectus, Offered Certificates, other
than the Class A-R Certificates, will constitute "regular interests" in the
REMIC. The Class A-R Certificates will constitute the sole class of "residual
interest" in the REMIC. Prospective investors are cautioned that a Class A-R
Certificateholder's REMIC taxable income and the tax liability thereon will
exceed cash distributions in certain periods, in which event such holder must
have sufficient alternative sources of funds to pay such tax liability. See
"Federal Income Tax Consequences" herein and in the Prospectus.
The Class A-R Certificates will be subject to certain transfer
restrictions. See "Description of the Certificates--Restrictions on Transfer of
the Class A-R Certificates."
The yield to investors on each class of Offered Certificates will be
sensitive in varying degrees to, among other things, the rate and timing of
principal payments (including prepayments) of the Loans, which may vary
significantly over time. The yield to maturity of a class of Offered
Certificates purchased at a discount or premium will be more sensitive to the
rate and timing of payments thereon. Holders of the Offered Certificates should
consider, in the case of any such Certificates purchased at a discount, and
particularly the Principal Only Certificates, the risk that a slower than
anticipated rate of principal payments on the Loans could result in an actual
yield that is lower than the anticipated yield and, in the case of any Offered
Certificates purchased at a premium and particularly the Interest Only
Certificates, the risk that a faster than anticipated rate of principal payments
on the Loans could result in an actual yield that is lower than the anticipated
yield. Holders of the Interest Only Certificates should carefully consider the
risk that a rapid rate of principal payments on the Loans could result in the
failure of such holders to recover their initial investments. The yield to
investors in the Offered Certificates, and particularly the Class ____
Certificates, also will be adversely affected by Net Interest Shortfalls and by
Realized Losses. No representation is made as to the anticipated rate of
prepayments on the Loans, the amount and timing of Net Interest Shortfalls or
Realized Losses, or as to the resulting yield to maturity of any class of
Certificates.
The Underwriter intends to make a secondary market in the classes of
Offered Certificates but has no obligation to do so. There is currently no
secondary market for the Offered Certificates and there can be no assurance that
such a market will develop or, if it does develop, that it will continue or that
it will provide Certificateholders with a sufficient level of liquidity of
investment.
Until ninety days after the date of this Prospectus Supplement, all
dealers effecting transactions in the Offered Certificates, whether or not
participating in this distribution, may be required to deliver a Prospectus
Supplement and the Prospectus. This is in addition to the obligation of dealers
to deliver a Prospectus Supplement and the Prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
-------------------
This Prospectus Supplement does not contain complete information about the
offering of the Offered Certificates. Additional information is contained in the
Prospectus of the Depositor dated , 199___ (the "Prospectus") and
purchasers are urged to read both this Prospectus Supplement and the
Prospectus in full. Sales of the Offered Certificates may not be consummated
unless the purchaser has received both this Prospectus Supplement and the
Prospectus.
The Trustee on behalf of any Trust Fund will provide without charge to
each person to whom this Prospectus Supplement is delivered, on the written or
oral request of such person, a copy of any or all of the documents referred to
in the Prospectus under "Incorporation of Certain Documents by Reference" that
have been or may be incorporated by reference in the Prospectus (not including
exhibits to the information that is incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
the Prospectus incorporates). Such requests should be directed to the Corporate
Trust Office of the Trustee at _____________, telephone:_________, facsimile
number:_____________, attention:__________ (the "Corporate Trust Office").
S-3
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY OF TERMS
This Summary of Terms is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Certain capitalized terms used in this Summary of
Terms are defined elsewhere in this Prospectus Supplement or in the Prospectus.
See "Index of Defined Terms" on Page [ ] of this Prospectus Supplement and on
Page [ ] of the Prospectus for the location of the definitions of certain
capitalized terms.
Title of Certificates............. Mortgage Pass-Through Certificates, Series
199 - (the "Certificates").
Offered Certificates.............. Class A- , Class , Class PO, Class X, Class
A-R, Class B- and Class Certificates
(collectively, the "Offered Certificates").
Only the Offered Certificates are offered
hereby. The aggregate initial Class
Certificate Balances of the Certificates
will be subject to a permitted variance in
the aggregate of plus or minus __%.
Variances in the Class Certificate Balances
may result in variances in the Notional
Amount of the class of Notional Amount
Certificates.
The Notional Amount of the Class X
Certificates for any Distribution Date will
be equal to the aggregate of the Stated
Principal Balances of the Non-Discount Loans
with respect to such Distribution Date. The
initial Notional Amount of the Class X
Certificates will be equal to the aggregate
of the Stated Principal Balances of the
Non-Discount Loans as of the Cut-off Date.
Certificates other than the
Offered Certificates............ In addition to the Offered Certificates, the
following classes of Certificates will be
issued in the indicated approximate initial
Class Certificate Balances and will bear
interest at the indicated Pass-Through
Rates, but are not offered hereby:
Initial Class
Certificate Pass-Through
Balance Rate
---------- ------------
Class (1)..... $ %
Class (1)..... $ %
Class (1)..... $ %
-------------------
(1) The Class ______________, Class
_________ and Class __________ Certificates
will provide limited credit support to the
Senior Certificates and the other
Subordinated Certificates, as described
under "Description of the
Certificates--Principal--Subordinated
Principal Distribution Amount" and "Credit
Enhancement--Subordination of Certain
Classes."
- --------------------------------------------------------------------------------
S-4
<PAGE>
- --------------------------------------------------------------------------------
Any information contained herein with
respect to the Class _______, Class ______
and Class ______ Certificates is provided
only to permit a better understanding of the
Offered Certificates.
Designations
Regular Certificates............ All classes of Certificates other than the
Class A-R Certificates.
Residual Certificates........... Class A-R Certificates.
Senior Certificates............. Class A- , Class ______________, Class PO,
Class X and Class A-R Certificates.
Subordinated Certificates....... Class B- , Class ______________, and Class
_____________ Certificates.
Principal Only Certificates..... Class PO Certificates.
Interest Only Certificates...... Class X Certificates.
Notional Amount
Certificates................. Class X Certificates.
Fixed Rate Certificates......... All classes of Certificates other than the
Class PO and Class X Certificates.
Variable Rate Certificates...... Class X Certificates.
Physical Certificates........... Class PO, Class X and Class A-R Certificates
and the Subordinated Certificates.
Book-Entry Certificates......... All classes of Certificates other than the
Physical Certificates.
Trust Fund........................ The Certificates will represent the entire
beneficial interest in a Trust Fund
consisting of a pool of Loans (the "Mortgage
Pool").
Pooling and Servicing
Agreement....................... The Certificates will be issued pursuant to
a Pooling and Servicing Agreement dated as
of ______________, 19__ (the "Agreement"),
among the Depositor, the Sellers, the
Servicer and the Trustee.
- --------------------------------------------------------------------------------
S-5
<PAGE>
- --------------------------------------------------------------------------------
Depositor......................... Equity One ABS, Inc. (the "Depositor"), a
Delaware corporation and a limited purpose
finance subsidiary of Equity One, Inc., a
Delaware Corporation ("Equity One"). See
"The Depositor" in the Prospectus.
Servicer.......................... Equity One (in its capacity as servicer of
the Loans, the "Servicer"). See "Servicing
of Loans--The Servicer." The Loans were
originated or acquired in the normal course
of business by the Sellers and will be
acquired by the Depositor in a privately
negotiated transaction. The Servicer will be
responsible for the servicing of the Loans
and will receive the Servicing Fee from
interest collected on the Loans. See
"Servicing of Loans--Servicing Compensation
and Payment of Expenses."
Sellers........................... The Loans will be sold to the Depositor by
______, ______, ______, _____ and _____
(collectively, the "Sellers").
Trustee........................... __________________, a _____________________
organized under the laws of
__________________ (the "Trustee").
Cut-off Date...................... ________, 19__.
Closing Date...................... On or about __________, 19__.
Determination Date................ The day of each month or, if such day is
not a business day, the preceding business
day (each, a "Determination Date"); provided
that the Determination Date in each month
will be at least two business days prior to
the related Distribution Date.
Loans............................. The Mortgage Pool will consist of the
following types of loans (collectively, the
"Loans"): fixed rate and variable rate
mortgage loans secured by first and/or
subordinate liens on (A) one- to four-family
residential properties, (each, a
"Residential Loan") and (B) mixed
commercial/residential use properties (each,
a "Mixed Use Loan"). Distributions of
principal and interest on the Certificates
will be based solely on payments received on
the Loans, as described under "Description
of the Certificates." See "The Mortgage
Pool."
Mortgaged Properties.............. [The real properties which secure repayment
of the Loans and on which Sellers have a
first or subordinate lien.]
Distribution Date................. The _________ day of each month or, if such
day is not a business day, on the first
business day thereafter, commencing in
___________ 19 (each, a "Distribution
Date"). Distributions on
- --------------------------------------------------------------------------------
S-6
<PAGE>
- --------------------------------------------------------------------------------
each Distribution Date will be made to
Certificateholders of record as of the
related Record Date, except that the final
distribution on the Certificates will be
made only upon presentment and surrender of
the Certificates at the Corporate Trust
Office of the Trustee.
Record Date....................... The Record Date for each Distribution Date
will be the last business day of the month
preceding the month of such Distribution
Date.
Priority of Distributions......... Distributions will be made on each
Distribution Date from Available Funds in
the following order of priority: (i) to
interest on each interest bearing class of
Senior Certificates; (ii) to principal on
the classes of Senior Certificates then
entitled to receive distributions of
principal, in the order and subject to the
priorities set forth herein under
"Description of the Certificates--
Principal," in each case in an aggregate
amount up to the maximum amount of principal
to be distributed on such classes on such
Distribution Date; (iii) to any Class PO
Deferred Amounts with respect to the Class
PO Certificates, but only from amounts that
would otherwise be distributable on such
Distribution Date as principal of the
Subordinated Certificates; and (iv) to
interest on and then principal of each class
of Subordinated Certificates, in the order
of their numerical class designations,
beginning with the Class __ Certificates, in
each case subject to the limitations set
forth herein under "Description of the
Certificates--Principal."
Under certain circumstances, distributions
from Available Funds for a Distribution Date
that would otherwise be made on the
Subordinated Certificates may be distributed
instead on the Senior Certificates. See
"Description of the Certificates--Allocation
of Losses." herein.
Distributions of Interest......... To the extent funds are available therefor,
each interest bearing class of Certificates
will be entitled to receive interest in the
amount of the Interest Distribution Amount
for such class. The Class PO Certificates
are Principal Only Certificates and will not
bear interest. See "Description of the
Certificates--Interest."
A. Interest Distribution
Amount....................... For each interest bearing class of
Certificates, the amount of interest accrued
during the related Interest Accrual Period
at the applicable Pass-Through Rate on the
related Class Certificate Balance or
Notional Amount, as the case may be.
- --------------------------------------------------------------------------------
S-7
<PAGE>
- --------------------------------------------------------------------------------
B. Pass-Through Rate............ The Pass-Through Rate for each interest
bearing class of Offered Certificates for
each Distribution Date will be as set forth
or described on the cover page hereof.
The Pass-Through Rate for the Class X
Certificates for any Distribution Date will
be equal to the excess of (a) the weighted
average of the Net Mortgage Rates of the
Non-Discount Loans over (b) % per annum. The
Pass-Through Rate for the Class X
Certificates for the first Distribution Date
is expected to be approximately ___% per
annum.
With respect to each Distribution Date, the
"Interest Accrual Period" for each interest
bearing class of Certificates will be the
calendar month preceding the month of such
Distribution Date.
Distributions of Principal........ On each Distribution Date, to the extent
funds are available therefor, principal
distributions in reduction of the Class
Certificate Balances of each class of
Certificates (other than the Notional Amount
Certificates) will be made in the order and
subject to the priorities set forth herein
under "Description of the
Certificates--Principal" in an aggregate
amount equal to such class' allocable
portion of the Senior Principal Distribution
Amount, the Class PO Principal Distribution
Amount or the Subordinated Principal
Distribution Amount, as applicable. The
Notional Amount Certificates do not have
principal balances and are not entitled to
any distributions in respect of principal of
the Loans. See "Description of the
Certificates--Principal."
Credit Enhancement................ Credit enhancement for the Senior
Certificates will be provided by the
Subordinated Certificates and credit
enhancement for each class of Subordinated
Certificates will be provided by the class
or classes of Subordinated Certificates with
higher numerical class designations, as
described below. The aggregate of the
initial Class Certificate Balances of the
Class ____________, Class ___________ and
Class ___ Certificates, which are the only
Certificates supporting the Class
Certificates, is expected to be
approximately $________________.
Subordination..................... The rights of holders of the Subordinated
Certificates to receive distributions with
respect to the Loans in the Trust Fund will
be subordinated to such rights of holders of
the Senior Certificates, and the rights of
the holders of each class of Subordinated
Certificates (other than the Class
______________ Certificates) to receive such
distributions will be further subordinated
to such rights of the class or classes of
Subordinated Certificates with lower
numerical class designations, in each case
only to the extent described under "Credit
Enhancement--Subordination of Certain
Classes."
- --------------------------------------------------------------------------------
S-8
<PAGE>
- --------------------------------------------------------------------------------
The subordination of the Subordinated
Certificates to the Senior Certificates, and
the further subordination within the
Subordinated Certificates, is intended to
increase the likelihood of timely receipt by
the holders of Certificates with higher
relative payment priority of the maximum
amount to which they are entitled on any
Distribution Date and to provide such
holders protection against losses on the
Loans to the extent described under
"Description of Certificates--Allocation of
Losses." The Subordinated Certificates also
provide protection, to a lesser extent,
against Special Hazard Losses, Bankruptcy
Losses and Fraud Losses. However, in certain
circumstances the amount of available
subordination (including the limited
subordination provided for certain types of
losses) may be exhausted and shortfalls in
distributions on the Certificates could
result. Holders of the Senior Certificates
will bear their proportionate share of any
losses realized on the Loans in excess of
the available subordination amount. See
"Description of the Certificates--Priority
of Distributions Among Certificates,"
"--Allocation of Losses," and "Credit
Enhancement--Subordination of Certain
Classes."
In addition, Realized Losses on the Loans
will reduce the Class Certificate Balances
of the applicable class of Subordinated
Certificates to the extent of any losses
allocated thereto (as described under
"Description of the Certificates--Allocation
of Losses"), without the receipt of cash
attributable to such reduction. As a result
of such reductions, less interest will
accrue on such class of Subordinated
Certificates than otherwise would be the
case. The yield to maturity of the
Subordinated Certificates will also be
affected by the disproportionate allocation
of principal prepayments to the Senior
Certificates, Net Interest Shortfalls, other
cash shortfalls in Available Funds and
distribution of funds to Class PO
Certificateholders otherwise available for
distribution on the Subordinated
Certificates to the extent of reimbursement
for Class PO Deferred Amounts. See
"Description of the Certificates--Allocation
of Losses."
Advances.......................... The Servicer is obligated to make cash
advances (each, an "Advance") with respect
to delinquent payments of principal of and
interest on any Loan to the extent described
under "Servicing of Loans--Advances." The
Trustee will be obligated to make any such
Advance if the Servicer fails in its
obligation to do so, to the extent provided
in the Agreement. See "Servicing of
Loans--Advances."
- --------------------------------------------------------------------------------
S-9
<PAGE>
- --------------------------------------------------------------------------------
Prepayment Considerations and
Risks; Reinvestment Risk........ The rate of principal payments on the
Offered Certificates, the aggregate amount
of distributions on the Offered Certificates
and the yield to maturity of the Offered
Certificates will be related to the rate and
timing of payments of principal on the
Loans.
Since the rate of payment of principal on
the Loans will depend on future events and a
variety of factors, no assurance can be
given as to such rate or the rate of
principal prepayments. The extent to which
the yield to maturity of a class of Offered
Certificates may vary from the anticipated
yield may depend upon the degree to which it
is purchased at a discount or premium, and
the degree to which the timing of payments
thereon is sensitive to prepayments,
liquidations and purchases of the Loans.
Further, an investor should consider the
risk that, in the case of the Principal Only
Certificates and any other Offered
Certificate purchased at a discount, a
slower than anticipated rate of principal
payments (including prepayments) on the
Loans could result in an actual yield to
such investor that is lower than the
anticipated yield and, in the case of the
Interest Only Certificates and any other
Offered Certificate purchased at a premium,
a faster than anticipated rate of principal
payments could result in an actual yield to
such investor that is lower than the
anticipated yield. Investors in the Interest
Only Certificates should carefully consider
the risk that a rapid rate of principal
payments on the Loans could result in the
failure of such investors to recover their
initial investments.
Because the Loans may be prepaid at any
time, it is not possible to predict the rate
at which distributions of principal of the
Offered Certificates will be received. Since
prevailing interest rates are subject to
fluctuation, there can be no assurance that
investors in the Offered Certificates will
be able to reinvest the distributions
thereon at yields equaling or exceeding the
yields on such Offered Certificates. It is
possible that yields on any such
reinvestments will be lower, and may be
significantly lower, than the yields on the
Offered Certificates. See "Risk
Factors--Prepayment Considerations and
Risks" and "Yield, Prepayment and Maturity
Considerations."
Optional Termination.............. On any Distribution Date on which the Pool
Principal Balance is less than 5% of the
Cut-off Date Pool Principal Balance, the
Servicer will have the option to purchase,
in whole, the Loans and the REO Property, if
any, remaining in the Trust Fund. See
"Description of the Certificates--Optional
Termination."
- --------------------------------------------------------------------------------
S-10
<PAGE>
- --------------------------------------------------------------------------------
Federal Income Tax
Consequences.................... An election will be made to treat the Trust
Fund as a "real estate mortgage investment
conduit" ("REMIC") for federal income tax
purposes. The Regular Certificates will
constitute "regular interests" in the REMIC
and the Residual Certificates will
constitute the sole class of "residual
interest" in the REMIC. The Class PO and
Class X Certificates will, and depending on
their respective issue prices certain other
classes of Offered Certificates may, be
issued with original issue discount ("OID")
for federal income tax purposes. See
"Federal Income Tax Consequences" herein and
in the Prospectus.
The holders of the Class A-R Certificates
will be subject to special federal income
tax rules that may significantly reduce the
after-tax yield of such Certificates.
Further, significant restrictions apply to
the transfer of the Class A-R Certificates.
See "Description of the
Certificates--Restrictions on Transfer of
the Class A-R Certificates."
ERISA Considerations.............. The acquisition of an Offered Certificate by
a pension or other employee benefit plan (a
"Plan") subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), could, in some instances, result
in a prohibited transaction or other
violation of the fiduciary responsibility
provisions of ERISA and Section 4975 of the
Internal Revenue Code of 1986, as amended
(the "Code").
Subject to the considerations and conditions
described under "ERISA Considerations," it
is expected that the Senior Certificates
(other than the Class PO, Class X and Class
A-R Certificates) may be purchased by a
Plan.
Any Plan fiduciary considering whether to
purchase any Offered Certificates on behalf
of a Plan should consult with its counsel
regarding the applicability of the
provisions of ERISA and the Code. See "ERISA
Considerations."
Legal Investment.................. The Senior Certificates and the Class
______________ Certificates will constitute
"mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement
Act of 1984, as amended ("SMMEA") so long as
they are rated in one of the two highest
rating categories by at least one nationally
recognized statistical rating organization
and, as such, are legal investments for
certain entities to the extent provided for
in SMMEA.
- --------------------------------------------------------------------------------
S-11
<PAGE>
- --------------------------------------------------------------------------------
It is anticipated that the Class ________
and Class ________ Certificates will not be
rated in one of the two highest rating
categories by a nationally recognized
statistical rating organization and,
therefore, will not constitute "mortgage
related securities" for purposes of SMMEA.
Institutions whose investment activities are
subject to review by federal or state
regulatory authorities should consult with
their counsel or the applicable authorities
to determine whether an investment in the
Offered Certificates complies with
applicable guidelines, policy statements or
restrictions. See "Legal Investment" in the
Prospectus.
Ratings........................... It is a condition to the issuance of the
Senior Certificates that they be rated
________ by ("__________") and ________ by
("__________" and, together with _________,
the "Rating Agencies"). See "Ratings." It is
a condition to the issuance of the Class
________, Class ________ and Class ________
Certificates that they be rated at least
_______, ______ and _________, respectively,
by _________. The ratings of the Offered
Certificates of any class should be
evaluated independently from similar ratings
on other types of securities. A rating is
not a recommendation to buy, sell or hold
securities and may be subject to revision or
withdrawal at any time by either of the
Rating Agencies. See "Risk
Factors--Certificate Rating" and "Ratings."
Risk Factors...................... For a discussion of certain risks associated
with an investment in the Certificates, see
"Risk Factors" on Page [ ] herein and on
Page [ ] in the Prospectus.
- --------------------------------------------------------------------------------
S-12
<PAGE>
RISK FACTORS
Investors should consider the following risks in connection with the
purchase of the Certificates. For a discussion of additional risks pertaining to
the Certificates, see "Risk Factors" in the Prospectus.
Consequences of Owning Book-Entry Certificates
Issuance of the Certificates in book-entry form may reduce the liquidity
of such Certificates in the secondary trading market since investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates. See "Description of the Certificates--Book-Entry Certificates"
herein and "Risk Factors--Book-Entry Registration" in the Prospectus.
Since transactions in the Certificates can be effected only through DTC,
participating organizations, indirect participants and certain banks, the
ability of a Beneficial Owner to pledge a Certificate to persons or entities
that do not participate in the DTC system may be limited due to lack of a
physical certificate representing the Certificates. See "Description of the
Certificates--Book-Entry Certificates" herein and "Risk Factors--Book-Entry
Registration" in the Prospectus.
Beneficial Owners may experience some delay in their receipt of
distributions of interest and principal on the Certificates since such
distributions will be forwarded by the Trustee to DTC and DTC will credit such
distributions to the accounts of DTC Participants which will thereafter credit
them to the accounts of Beneficial Owners either directly or indirectly through
indirect participants. Beneficial Owners will not be recognized as
"Certificateholders" as such term is used in the Agreement, and Beneficial
Owners will be permitted to exercise the rights of Certificateholders only
indirectly through DTC and DTC Participants. See "Description of the
Certificates--Book-Entry Certificates" herein and "Risk Factors--Book-Entry
Registration" in the Prospectus.
Cash Flow Considerations and Risks
Minimum monthly payments on the Loans will at least equal and may exceed
accrued interest. Even assuming that the Mortgaged Properties provide adequate
security for the Loans, substantial delays could be encountered in connection
with the liquidation of Loans that are delinquent and resulting shortfalls in
distributions to Certificateholders could occur. Further, liquidation expenses
(such as legal fees, real estate taxes, and maintenance and preservation
expenses) will reduce the proceeds payable to Certificateholders and thereby
reduce the security for the Loans. In the event any of the Mortgaged Properties
fail to provide adequate security for the related Loans, Certificateholders
could experience a loss.
Prepayment Considerations and Risks
All of the Loans may be prepaid in whole or in part at any time, most
without penalty. [Approximately ___% provide for the payment by the borrower of
a prepayment charge in limited circumstances.] See "The Mortgage Pool--General"
herein and "Yield and Prepayment Considerations" in the Prospectus. The Trust
Fund's prepayment experience may be affected by a wide variety of factors,
including general economic conditions, interest rates, the availability of
alternative financing and homeowner mobility. In addition, substantially all of
the Loans contain due-on-sale provisions and the Servicer intends to enforce
such provisions unless (i) such enforcement is not permitted by applicable law
or (ii) the Servicer, in a manner consistent with reasonable commercial
practice, permits the purchaser of the related Mortgaged Property to assume the
Loan. To the extent permitted by applicable law, such assumption will not
release the original borrower from its obligation under any such Loan. See
"Yield, Prepayment and Maturity Considerations--
S-13
<PAGE>
Prepayment Considerations and Risks" herein and "Certain Legal Aspects of the
Loans--Due-on-Sale Clauses" in the Prospectus for a description of certain
provisions of the Loans that may affect the prepayment experience thereof. The
yield to maturity and weighted average life of the Certificates will be affected
primarily by the rate and timing of prepayment on the Loans. Any reinvestment
risks resulting from a faster or slower incidence of prepayment of Loans will be
borne entirely by the Certificateholders. See "Yield, Prepayment and Maturity
Considerations" herein and "Yield and Prepayment Considerations" in the
Prospectus.
Defaults and Delinquent Payments
The yields to maturity of the Offered Certificates will be sensitive to
defaults and delinquent payments on the Loans. If a purchaser of an Offered
Certificate calculates its anticipated yield based on an assumed rate of default
and amount of losses that is lower than the default rate and amount of losses
actually incurred and, its actual yield to maturity will be lower than that so
calculated and could, in the event of substantial losses, be negative. The
timing of Realized Losses will also affect an investor's actual yield to
maturity even if the rate of defaults and severity of such losses are consistent
with an investor's expectations. In general, the earlier a loss occurs, the
greater is the effect on an investor's yield to maturity. There can be no
assurance as to the delinquency, foreclosure or loss experience with respect to
the Loans.
Payment Delay
Under the Agreement, payments of principal and interest on the Loans
received in any calendar month generally will not be passed through to the
holders of the Offered Certificates until the Distribution Date in the following
calendar month. As a result, the monthly distributions to the holders of the
Offered Certificates generally will reflect mortgagor payments during the prior
calendar month. Each Distribution Date will be on the _______ day of each month
(or the next succeeding business day), commencing in ________ 199_. Thus, the
effective yield to the holders of all Offered Certificates will be below that
otherwise produced by the related Pass-Through Rate and the price paid for the
Offered Certificates by such holders because distributions on the Offered
Certificates in respect of any given month will not be made until on or about
the ___ day of the following month.
Balloon Loans
About ___% of the Loans in the Mortgage Pool are balloon loans,
which generally have an original term of 15 years and provide for monthly
payments based on a 30 year amortization schedule and a final monthly payment
substantially greater than the preceding monthly payments. The existence of a
Balloon Payment generally will require the related mortgagor to refinance the
Loan or to sell the Mortgaged Property on or prior to the stated maturity date.
The ability of a mortgagor to accomplish either of these goals will be affected
by a number of factors, including the level of available mortgage rates at the
time of sale or refinancing, the mortgagor's equity in the related Mortgaged
Property, the financial condition of the mortgagor, tax laws and prevailing
general economic conditions. None of the Sellers, the Servicer, the Depositor or
the Trustee is obligated to refinance any Loan.
Mixed Use Loans
Mixed Use Loans represent approximately ___% of the Loans in the Mortgage
Pool. The Properties securing Mixed Use Loans consist of multi-family properties
and structures which include residential dwelling units and space used for
retail, professional or other commercial uses (the "Mixed Use Properties"). The
maximum Loan-to-Value Ratio on Mixed Use Properties will not exceed 70%. Due to
the limited market
S-14
<PAGE>
for such Mixed Use Properties, in the event of a foreclosure, it is expected
that the time it takes to recover Liquidation Proceeds will be longer than with
Single Family Properties.
Subordinate Liens
Loans representing approximately ___% of the Mortgage Pool are secured by
first liens, with the remaining Loans (representing approximately ___% of the
Mortgage Pool) being secured by subordinate liens.
Information is provided under "The Mortgage Pool--General" with respect to
the Combined Loan-toValue Ratios of the Loans. The value of the Mortgaged
Properties could be adversely affected by a number of factors. See "Risk
Factors--Nature of Mortgages" in the Prospectus. As a result, despite the
amortization of the Loans on such Mortgaged Properties, there can be no
assurance that the Combined Loan-to-Value Ratios of such Loans, determined as of
a date subsequent to the origination date, will be the same or lower than the
Combined Loan-to-Value Ratios for such Loans, determined as of the origination
date.
Loans secured by investor-owned Mortgaged Properties represent (based
solely upon statements made by the borrowers at the time of origination of the
related Loan) approximately ___% of the Mortgage Pool. It is possible that the
rate of delinquencies, foreclosures and losses on subordinate liens secured by
nonowner occupied Mortgaged Properties could be higher than for Loans secured by
the primary residence of the borrower.
Certificate Rating
The rating of the Certificates will depend primarily on an assessment by
the Rating Agencies of the Loans. The rating by the Rating Agencies of the
Certificates is not a recommendation to purchase, hold or sell the Certificates,
inasmuch as such rating does not comment as to the market price or suitability
for a particular investor. There is no assurance that the ratings will remain in
place for any given period of time or that the ratings will not be lowered or
withdrawn by the Rating Agencies. In general, the ratings address credit risk
and do not address the likelihood of prepayments. The ratings of the
Certificates do not address the possibility of the imposition of United States
withholding tax with respect to non-United States persons.
Legal Considerations--Lien Priority
Each Loan is secured by first or subordinate deeds of trust or mortgages
on the related Mortgaged Property. Loans secured by second mortgages are
entitled to proceeds that remain from the sale of the related Mortgaged Property
after any related senior mortgage loan and prior statutory liens have been
satisfied. In the event that proceeds from realization on the Mortgaged
Properties are insufficient to satisfy such loans and prior liens in the
aggregate, the Trust Fund and, accordingly, the holders, bear (i) the risk of
delay in distributions while a deficiency judgment against the borrower is
obtained and (ii) the risk of loss if the deficiency judgment cannot be obtained
or is not realized upon. See "Certain Legal Aspects of the Loans" in the
Prospectus.
Bankruptcy and Insolvency Risks
The Servicer, the Sellers and the Depositor each intend that each
conveyance of Loans by the Sellers to the Depositor constitutes a sale, rather
than a pledge of the Loans to secure indebtedness of the Sellers. The Depositor
intends that each conveyance of Loans from the Depositor to the Trust Fund
constitutes a sale, rather than a pledge of the Loans to secure indebtedness of
the Depositor. As a sale of the Loans by the
S-15
<PAGE>
Sellers to the Depositor, the Loans would not be part of a Seller's bankruptcy
estate and would not be available to a Seller's creditors. However, in the event
of the bankruptcy or insolvency of a Seller, it is possible that the bankruptcy
trustee, a conservator or receiver of the Seller or another person may attempt
to recharacterize the sale of the Loans as a borrowing by the Seller, secured by
a pledge of the Loans. Similarly, as a sale of the Loans by the Depositor to the
Trust Fund, the Loans would not be part of the Depositor's bankruptcy estate and
would not be available to the Depositor's creditors. However, in the event of
the bankruptcy or insolvency of the Depositor, it is possible that the
bankruptcy trustee, a conservator or receiver of the Depositor or another person
may attempt to recharacterize the sale of the Loans as a borrowing by the
Depositor, secured by a pledge of the Loans. In either case, this position, if
argued before or accepted by a court, could prevent timely payments of amounts
due on the Certificates and result in a reduction of payments due on the
Certificates.
Geographic Concentration
As of the Cut-off Date, approximately _____% (by Cut-off Date Pool
Principal Balance) of the Mortgaged Properties are located in the State of
__________, approximately _____% (by Cut-off Date Pool Principal Balance) of the
Mortgaged Properties are located in the State of __________, approximately
_____% (by Cut-off Date Pool Principal Balance) of the Mortgaged Properties are
located in the State of __________ and approximately _____% (by Cut-off Date
Pool Principal Balance) of the Mortgaged Properties are located in the State of
__________. An overall decline in the residential real estate markets of
_____________, ________________, _______________ and _______________ could
adversely affect the values of the Mortgaged Properties securing such Loans such
that the Principal Balances of the related Loans could equal or exceed the value
of such Mortgaged Properties. As residential real estate markets are influenced
by many factors, including the general condition of the economy and interest
rates, no assurances may be given that the __________, __________, ___________
and ___________ residential real estate markets will not weaken. If the
__________, ____________, ____________ and ___________ residential real estate
markets should experience an overall decline in property values after the dates
of origination of the Loans, the rates of losses on the Loans would be expected
to increase, and could increase substantially.
Risks of Holding Subordinated Certificates
The subordination of the Subordinated Certificates to the Senior
Certificates, and the further subordination within the Subordinated
Certificates, is intended to increase the likelihood of timely receipt by the
holders of Certificates with higher relative payment priority of the maximum
amount to which they are entitled on any Distribution Date and to provide such
holders protection against losses on the Loans to the extent described under
"Description of the Certificates--Allocation of Losses" and "Credit
Enhancement--Subordination of Certain Classes." However, in certain
circumstances the amount of available subordination (including the limited
subordination provided for certain types of losses) may be exhausted and
shortfalls in distributions on the Certificates could result. Holders of the
Senior Certificates will bear their proportionate share of any losses realized
on the Loans in excess of the available subordination amount.
In addition, the weighted average life of, and the yield to maturity on,
the Subordinated Certificates, in increasing order of their numerical class
designation, will be progressively more sensitive to the rate and timing of
mortgagor defaults and the severity of ensuing losses on the Loans. If the
actual rate and severity of losses on the Loans is higher than those assumed by
a holder of a Subordinated Certificate, the actual yield to maturity of such
Certificate may be lower than the yield expected by such holder based on such
assumption. The timing of losses on Loans will also affect an investor's actual
yield to maturity, even if the rate of defaults and severity of losses over the
life of the Mortgage Pool are consistent with an investor's expectations.
Realized Losses on the Loans will reduce the Class Certificate Balances of the
applicable class
S-16
<PAGE>
of Subordinated Certificates to the extent of any losses allocated thereto (as
described under "Description of the Certificates--Allocation of Losses,"),
without the receipt of cash attributable to such reduction. As a result of such
reductions, less interest will accrue on such class of Subordinated Certificates
than otherwise would be the case. The yield to maturity of the Subordinated
Certificates will also be affected by the disproportionate allocation of
principal prepayments to the Senior Certificates, Net Interest Shortfalls, other
cash shortfalls in Available Funds and distribution of funds to Class PO
Certificateholders otherwise available for distribution on the Subordinated
Certificates to the extent of reimbursement for Class PO Deferred Amounts. See
"Description of the Certificates--Allocation of Losses" and "Yield, Prepayment
and Maturity Considerations--The Subordinated Certificates."
THE MORTGAGE POOL
General
The Mortgage Pool will consist of the following types of loans
(collectively, the "Loans"): mortgage loans secured by first and/or subordinate
liens on (A) one- to four-family residential properties, (each, a "Residential
Loan") and (B) mixed commercial/residential use properties (each, a "Mixed Use
Loan").
The Depositor will purchase the Loans from Sellers pursuant to the Pooling
and Servicing Agreement dated as of the Cut-off Date among Sellers, the
Servicer, the Depositor and the Trustee (the "Agreement") and will cause the
Loans to be conveyed, without recourse, to the Trustee for the benefit of the
holders of the Certificates (the "Certificateholders").
Under the Agreement, the Sellers will make certain representations,
warranties and covenants to the Depositor relating to, among other things, the
due execution and enforceability of the Agreement and certain characteristics of
the Loans and, subject to the limitations described below under "--Sale of the
Loans," will be obligated to repurchase or substitute a similar mortgage loan
for any Loan as to which there exists deficient documentation or an uncured
material breach of any such representation, warranty or covenant. The Sellers
will represent and warrant to the Depositor in the Agreement that the Loans were
selected from among the outstanding loans in the Sellers' portfolios as to which
the representations and warranties set forth in the Agreement can be made and
that such selection was not made in a manner that would adversely affect the
interests of the Certificateholders. See "Loan Program--Representations by
Sellers; Repurchases" in the Prospectus. Under the Agreement, the Depositor will
convey all its right, title and interest in and to such representations,
warranties and covenants (including the Sellers' repurchase obligation) to the
Trustee for the benefit of Certificateholders. The Depositor will make no
representations or warranties with respect to the Loans and will have no
obligation to repurchase or substitute Loans with deficient documentation or
which are otherwise defective. The Sellers are selling the Loans without
recourse and will have no obligation with respect to the Certificates in their
capacity as Sellers other than the repurchase obligation described above. The
obligations of Equity One, as Servicer, with respect to the Certificates are
limited to the Servicer's contractual servicing obligations under the Agreement.
Certain information with respect to the Loans expected to be included in
the Mortgage Pool is set forth below in the following categories: Residential
Loans and Mixed Use Loans. Prior to the Closing Date, Loans may be removed from
the Mortgage Pool and other Loans may be substituted therefor. The Depositor
believes that the information set forth herein under "The Mortgage Pool" with
respect to the Mortgage Pool as presently constituted is representative of the
characteristics of the Mortgage Pool as it will be constituted at the Closing
Date, although certain characteristics of the Loans in the Mortgage Pool may
vary. Unless otherwise indicated, information presented herein under "The
Mortgage Pool" expressed as a percentage
S-17
<PAGE>
(other than rates of interest) are approximate percentages based on the Stated
Principal Balances of the Loans as of the Cut-off Date.
As of the Cut-off Date, the aggregate of the Stated Principal Balances of
the Loans is expected to be approximately $______ (the "Cut-off Date Pool
Principal Balance"). The Loans provide for payment based on the amortization of
the amount financed over a series of substantially equal monthly payments, with
Balloon Payments due at the stated maturities of (i) 15 years, in the case of
Residential Loans and (ii) seven to ten years, in the case of Mixed Use Loans.
Loans with Balloon Payments may involve a greater degree of risk than loans
which are fully amortizing because the ability of a borrower to make a Balloon
Payment typically will depend upon the ability of the borrower to either timely
refinance the Loan or sell the related Mortgaged Property. All the Loans provide
for payments due on a set day, but not necessarily the first day, of each month
(the "Due Date"). The Loans to be included in the Mortgage Pool were originated
or purchased by the Sellers and were originated substantially in accordance with
the Sellers' underwriting criteria for mortgage loans, described under "The
Mortgage Pool--Underwriting Standards."
Scheduled monthly payments made by the mortgagors on the Loans ("Scheduled
Payments") either earlier or later than the scheduled Due Dates thereof will not
affect the amortization schedule or the relative application of such payments to
principal and interest. [All of the Mortgage Notes provide for a ________ (__)
day grace period for monthly payments. Any Loan may be prepaid in full or in
part at any time; however, approximately ____% of the Loans provide for the
payment by the borrower of a prepayment charge in limited circumstances on full
prepayments made within ____ years from the date of execution of the related
Mortgage Note. The amount of the prepayment charge will generally be equal to
____ months' advance interest calculated on the basis of the rate in effect at
the time of such prepayment on the amount prepaid in excess of __% of the
original balance of such Loan.]
Each Loan was originated after ________________________________.
The latest stated maturity date of any Loan is ____________________. The
earliest stated maturity date of any Loan is __________________________.
As of the Cut-off Date, no Loan was delinquent more than ___ days.
No Loan had a Loan-to-Value Ratio at origination of more than ___%.
Approximately ___% of the Residential Loans had a Loan-to-Value Ratio at
origination of 90%. In general, the Mixed Use Loans had a Loan-to-Value Ratio at
origination of not more than 70%.
The "Loan-to-Value Ratio" of a Loan at any given time is equal to (i) the
principal balance of such Loan at the date of origination, divided by (ii) the
Collateral Value of the related Mortgaged Property. The "Combined Loan-to-Value
Ratio" of a Loan secured by a subordinate lien at any given time is the ratio,
expressed as a percentage, of (i) the sum of (a) the original principal balance
of such Loan and (b) the outstanding principal balance, at the date of
origination of such Loan, of any senior mortgage loan(s) or, in the case of any
open ended senior mortgage loan, the maximum available line of credit with
respect to such senior mortgage loan, regardless of any lesser amount actually
outstanding at the date of origination of the Loan to (ii) the Collateral Value
of the related Mortgaged Property.
The "Collateral Value" of a Mortgaged Property, other than with respect to
certain Loans the proceeds of which were used to refinance an existing mortgage
loan (each, a "Refinance Loan"), is the lesser of (a) the appraised value based
on an appraisal made for the related Seller by an independent fee appraiser at
the time of the origination of the related Loan, and (b) if applicable: (i) if
the Loan was for the purpose of acquiring the Mortgaged Property, the sales
price of such Mortgaged Property at such time of origination
S-18
<PAGE>
or (ii) if the Loan is secured by a lien on a Mortgaged Property purchased by
the borrower within one year of the origination of such Loan, the purchase price
of such Mortgaged Property. In the case of Refinance Loans, the Collateral Value
is the appraised value of the Mortgaged Property based upon the appraisal
obtained at the time of refinancing. No assurance can be given that the values
of the Mortgaged Properties have remained or will remain at their levels as of
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 become equal to or greater than the value of
the Mortgaged Properties, actual losses on the Loans could be higher than losses
now generally experienced in the mortgage lending industry.
The following information sets forth in tabular format certain
information, as of the Cut-off Date, as to the Mortgage Pool. Other than with
respect to rates of interest, percentages (approximate) are stated by Stated
Principal Balance of the Loans as of the Cut-off Date and have been rounded in
order to total 100%.
S-19
<PAGE>
Mortgage Pool Tables
<TABLE>
<CAPTION>
Mortgage Rates(1)
-----------------
Number of Loans Aggregate Principal Balance
Mortgage Rates (%) Outstanding Percent of Mortgage Pool
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
6.250....................... $ %
6.750.......................
6.875.......................
7.000.......................
7.125.......................
7.250.......................
7.375.......................
7.500.......................
7.625.......................
7.750.......................
7.875.......................
8.000.......................
8.125.......................
8.250.......................
8.375.......................
8.500.......................
8.625.......................
8.750.......................
8.875.......................
9.000.......................
9.125.......................
9.250.......................
9.375.......................
9.500.......................
9.875.......................
10.000.......................
-- ----------- -------
Totals....................... $ 100.00%
-- ----------- -------
-- ----------- -------
</TABLE>
-------------------
(1) As of the Cut-off Date, the weighted average Mortgage Rate of the Loans
(as so adjusted) is expected to be approximately ___%. Without such
adjustment, the weighted average Mortgage Rate of the Loans is expected to
be approximately ___% per annum.
S-20
<PAGE>
<TABLE>
<CAPTION>
Original Loan-to-Value Ratios(1)
--------------------------------
Original Loan-to-Value Number of Loans Aggregate Principal Balance
Ratios (%) Outstanding Percent of Mortgage Pool
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
50.00 and below.................. $ %
50.01 to 55.00...................
55.01 to 60.00...................
60.01 to 65.00...................
65.01 to 70.00...................
70.01 to 75.00...................
75.01 to 80.00...................
80.01 to 85.00...................
85.01 to 90.00...................
90.01 to 95.00...................
-- ----------- -------
Totals........................... $ 100.00%
-- ----------- -------
-- ----------- -------
</TABLE>
- ----------
(1) The weighted average original Loan-to-Value Ratio of the Loans is expected
to be approximately ______%.
<TABLE>
<CAPTION>
Current Loan Principal Balances(1)
----------------------------------
Current Loan Amounts Number of Loans Aggregate Principal Balance
Outstanding Percent of Mortgage Pool
- --------------------------------------------------------------------------------------------------------------
<C> <C> <C>
$ 0 - $ 50,000........... $ %
$ 50,001 - $ 100,000..........
$100,001 - $ 150,000..........
$150,001 - $ 200,000..........
$200,001 - $ 250,000..........
$250,001 - $ 300,000..........
$300,001 - $ 350,000..........
$350,001 - $ 400,000..........
$400,001 - $ 450,000..........
$450,001 - $ 500,000..........
$500,001 - $ 550,000..........
$550,001 - $ 600,000..........
$600,001 - $ 650,000..........
$650,001 - $ 750,000..........
$750,001 - $1,000,000.........
-- ----------- -------
Totals........................ $ 100.00%
-- ----------- -------
-- ----------- -------
</TABLE>
- ----------
(1) As of the Cut-off Date, the average current Loan principal balance is
expected to be approximately $________.
S-21
<PAGE>
<TABLE>
<CAPTION>
Documentation Program for Loans
-------------------------------
Type of Program (1) Number of Loans Aggregate Principal Balance
Outstanding Percent of Mortgage Pool
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Full Doc.................... $ %
NIV.........................
-- ----------- -------
Totals...................... $ 100.00%
-- ----------- -------
-- ----------- -------
</TABLE>
- ----------
(1) See "The Mortgage Pool--Underwriting Standards" herein and "Loan
Program--Specific Underwriting Criteria; Underwriting Programs" in the
Prospectus.
<TABLE>
<CAPTION>
Type of Mortgaged Properties
----------------------------
Property Type Number of Loans Aggregate Principal Balance
Outstanding Percent of Mortgage Pool
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Single Family.................. $ %
Condominium....................
Mixed Use......................
Two- to Four- Family...........
Planned Unit Development.......
-- ----------- -------
Totals......................... $ 100.00%
-- ----------- -------
-- ----------- -------
</TABLE>
<TABLE>
<CAPTION>
Occupancy Types(1)
------------------
Occupancy Type Number of Loans Aggregate Principal Balance
Outstanding Percent of Mortgage Pool
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Primary Residence.............. $ %
Investor Property..............
Second Residence...............
-- ----------- -------
Totals......................... $ 100.00%
-- ----------- -------
-- ----------- -------
</TABLE>
- ----------
(1) Based upon representations of the related mortgagors at the time of
origination.
S-22
<PAGE>
<TABLE>
<CAPTION>
State Distribution of Mortgaged Properties(1)
---------------------------------------------
State Number of Loans Aggregate Principal Balance
Outstanding Percent of Mortgage Pool
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
$ %
Other (less than [2]%)......
-- ----------- -------
Totals...................... $ 100.00%
-- ----------- -------
-- ----------- -------
</TABLE>
- ----------
(1) Other includes other states with under [2]% concentrations individually.
No more than approximately % of the Loans will be secured by Mortgaged
Properties located in any one postal zip code area.
<TABLE>
<CAPTION>
Purpose of Loans
----------------
Loan Purpose Number of Loans Aggregate Principal Balance
Outstanding Percent of Mortgage Pool
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Purchase.......................... $ %
Refinance (rate/term).............
Refinance (cash out)..............
-- ----------- -------
Totals............................ $ 100.00%
-- ----------- -------
-- ----------- -------
</TABLE>
S-23
<PAGE>
<TABLE>
<CAPTION>
Remaining Terms to Maturity(1)
------------------------------
Remaining Term to Maturity Number of Loans Aggregate Principal Balance
(Months) Outstanding Percent of Mortgage Pool
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
180...............................
179...............................
178...............................
177...............................
176...............................
175...............................
174...............................
173...............................
172...............................
171...............................
170...............................
169...............................
168...............................
167...............................
166...............................
165...............................
164...............................
163...............................
162...............................
161...............................
160...............................
159...............................
158...............................
157...............................
156...............................
155...............................
154...............................
153...............................
152...............................
151...............................
150...............................
149...............................
148...............................
147...............................
146...............................
145...............................
144...............................
-- ----------- -------
Totals............................ $ 100.00%
-- ----------- -------
-- ----------- -------
</TABLE>
- ----------
(1) As of the Cut-off Date, the weighted average remaining term to maturity of
the Loans is expected to be approximately ___ months.
S-24
<PAGE>
Sale of the Loans
Pursuant to the Agreement, the Depositor on the Closing Date will convey
without recourse to the Trustee in trust for the benefit of the
Certificateholders all right, title and interest of the Depositor in and to each
Loan and all right, title and interest in and to all other assets included in
the Trust Fund described under "Credit Enhancement," including all principal and
interest received on or with respect to the Loans, exclusive of principal and
interest due on or prior to the Cut-off Date.
In connection with such conveyance, the Depositor will deliver or cause to
be delivered to the Trustee, or a custodian for the Trustee, among other things,
the original promissory note (the "Mortgage Note") (and any modification or
amendment thereto) endorsed in blank without recourse, the original instrument
creating a first lien on the related Mortgaged Property (the "Mortgage") with
evidence of recording indicated thereon, an assignment in recordable form of the
Mortgage, the title policy with respect to the related Mortgaged Property and,
if applicable, all recorded intervening assignments of the Mortgage and any
riders or modifications to such Mortgage Note and Mortgage (except for any such
documents not returned from the public recording office, which will be delivered
to the Trustee as soon as the same is available to the Depositor) (collectively,
the "Mortgage File").
The Trustee will review each Mortgage File within 90 days of the Closing
Date (or promptly after the Trustee's receipt of any document permitted to be
delivered after the Closing Date) and if any document in a Mortgage File is
found to be missing or defective in a material respect and the related Seller
does not cure such defect within 90 days of notice thereof from the Trustee (or
within such longer period not to exceed ___ days after the Closing Date as
provided in the Agreement in the case of missing documents not returned from the
public recording office), such Seller will be obligated to repurchase the
related Loan from the Trust Fund. Rather than repurchase the Loan as provided
above, a Seller may remove such Loan (a "Deleted Loan") from the Trust Fund and
substitute in its place another mortgage loan (a "Replacement Loan"); however,
such substitution is permitted only within two years of the Closing Date and may
not be made unless an opinion of counsel is provided to the Trustee to the
effect that such substitution will not disqualify the REMIC or result in a
prohibited transaction tax under the Code. Any Replacement Loan generally will,
on the date of substitution, among other characteristics set forth in the
Agreement, (i) have a principal balance, after deduction of all Scheduled
Payments due in the month of substitution, not in excess of, and not more than
10% less than, the Stated Principal Balance of the Deleted Loan (the amount of
any shortfall to be deposited by the related Seller in the Certificate Account
and held for distribution to the Certificateholders on the related Distribution
Date (a "Substitution Adjustment Amount")), (ii) have a Mortgage Rate not lower
than, and not more than 1% per annum higher than, that of the Deleted Loan,
(iii) have a Loan-to-Value Ratio not higher than that of the Deleted Loan, (iv)
have a remaining term to maturity not greater than (and not more than one year
less than) that of the Deleted Loan, and (v) comply with all of the
representations and warranties set forth in the Agreement as of the date of
substitution. This cure, repurchase or substitution obligation constitutes the
sole remedy available to Certificateholders or the Trustee for omission of, or a
material defect in, a Loan document.
Underwriting Standards
The following is a description of the underwriting procedures customarily
employed by Sellers with respect to Loans.
Each Seller produces its Loans through its retail origination network of
loan officers and managers. Each Seller also produces Loans through a wholesale
network of mortgage brokers and other entities located throughout the United
States. Prior to the funding of any Loan, each Seller underwrites the related
Loan
S-25
<PAGE>
in accordance with the underwriting standards that have been established by
Equity One and are consistent with those utilized by mortgage lenders generally
during the period of origination for similar types of loans (the "Equity One
Standards").
The Equity One Standards are primarily intended to evaluate the value and
adequacy of the Mortgaged Property as collateral for the proposed Loan, but also
take into consideration the borrower's credit standing and repayment ability.
The Equity One Standards allow for the origination and purchase of Loans
generally under the following underwriting programs: (i) Grade A Credits, (ii)
Grade B Credits and (iii) Grade C Credits. See "Specific Underwriting Criteria;
Underwriting Programs" and "Summary of Underwriting Requirements by Program" in
the Prospectus. It is expected that Grade A Credits Loans will represent ___%,
Grade B Credits Loans will represent ___% and Grade C Credits Loans will
represent ___% of the Loans in the Mortgage Pool.
On a case by case basis, a Seller may determine that, based upon
compensating factors, a prospective borrower not strictly qualifying under the
specific criteria of Grade A Credits, Grade B Credits or Grade C Credits
warrants an underwriting exception. See "Specific Underwriting Criteria;
Underwriting Programs" in the Prospectus. Compensating factors may include low
Loan-to-Value Ratio, low Debt-to-Income Ratio, stable employment and time in the
same residence. It is expected that some of the Loans to be included in the
Mortgage Pool will have been originated based on such underwriting exceptions.
Under the Equity One Standards, Sellers must use either the Full Doc or
the NIV loan documentation program to verify a borrower's income. See "Specific
Underwriting Criteria; Underwriting Programs" in the Prospectus. It is expected
that ___% of the Loans in the Mortgage Pool will be underwritten pursuant to the
Full Doc program and that ___% of such Loans will be underwritten pursuant to
the NIV program.
The Equity One Standards require an independent appraisal of each
Mortgaged Property securing a Loan in excess of $15,000, which conforms to
Federal National Mortgage Corporation ("FNMA") standards. Each appraisal
includes a market data analysis based on recent sales of comparable homes in the
area and, where deemed appropriate, replacement cost analysis based on the
current cost of constructing a similar home and generally is required to have
been made not earlier than ___ days prior to the date of origination of the
mortgage loan. Every independent appraisal is reviewed by a representative of
the related Seller before the loan is funded. The maximum loan amount varies
depending upon a borrower's credit grade but does not generally exceed $500,000.
Variations in maximum loan amount limits are permitted based on compensating
factors. Maximum loan amounts for Loans underwritten pursuant to the NIV program
generally do not exceed $300,000.
The Equity One Standards permit loans with Loan-to-Value Ratios at
origination of up to 90% depending on the program, type and use of the property,
creditworthiness of the borrower and Debt-to-Income Ratio. The maximum Combined
Loan-to-Value Ratio for purchase money mortgage loans, including any subordinate
mortgages or deeds of trust is 90%.
Title insurance is required on all Loans in excess of $15,000. Each Seller
also requires that fire and extended coverage casualty insurance be maintained
on the Mortgaged Property in an amount at least equal to the principal balance
or the replacement cost of the Mortgaged Property, whichever is less.
S-26
<PAGE>
SERVICING OF LOANS
General
The Servicer will service the Loans in accordance with the terms set forth
in the Pooling and Servicing Agreement. The Servicer may perform any of its
obligations under the Pooling and Servicing Agreement through one or more
sub-servicers. Notwithstanding any such sub-servicing 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 Loans. [As
of the Closing Date, the Servicer will service the Loans without sub-servicing
arrangements.]
The information set forth in the following section through and including
the section captioned "Delinquency Status as of _____________, 199_" has been
provided by Sellers. No representation is made by the Depositor or any of its
affiliates other than Sellers as to the accuracy or completeness of any such
information.
The Servicer
Equity One, Inc. ("Equity One"), a Delaware corporation and a subsidiary
of [Describe], will act as the Servicer of the Loans pursuant to the Pooling and
Servicing Agreement. Equity One is engaged primarily in the mortgage banking
business, and as such, originates, purchases, sells and services mortgage loans.
Equity One originates Loans through a retail branch system and through mortgage
loan brokers and correspondents nationwide. Equity One's Loans are principally
first-lien, fixed or adjustable rate mortgage loans secured by Single-Family
Properties or Mixed Use Properties.
As of __________, 199_, Equity One provided servicing for approximately
$__________ million in Loans.
The principal executive offices of Equity One are located at 523
Fellowship Road, Suite 230, Mt. Laurel, New Jersey, 08054. Its telephone number
is (609) 273-1119. Equity One conducts operations from its headquarters in Mt.
Laurel and through affiliates, from offices throughout the nation.
Loan Servicing
Equity One services substantially all of the Loans originated or acquired
by the Sellers. Equity One has established standard policies for the servicing
and collection of Loans. Servicing includes, but is not limited to, collecting
and remitting Loan payments, accounting for principal and interest, making
inspections as required of the Mortgaged Properties, preparation of tax related
information in connection with the Loans, supervision of delinquent Loans, loss
mitigation efforts, foreclosure proceedings and, if applicable, the disposition
of Mortgaged Properties, and generally administering the Loans, for which it
receives servicing fees.
Coupon booklets are delivered to borrowers for making monthly payments.
Notice of changes in the applicable loan rate, if applicable, are provided by
Equity One to the mortgagor when appropriate.
S-27
<PAGE>
Collection Procedures
When a mortgagor fails to make a payment on a Loan, each Seller attempts
to cause the deficiency to be cured by corresponding with the mortgagor. In most
cases, deficiencies are cured promptly. Pursuant to each Seller's servicing
procedures, each Seller generally mails to the mortgagor a notice of intent to
foreclose after the Loan becomes 31 days past due (two payments due but not
received) and, within 60 days thereafter, if the Loan remains delinquent,
institutes appropriate legal action to foreclose on the Mortgaged Property.
Foreclosure proceedings may be terminated if the delinquency is cured. Loans to
borrowers in bankruptcy proceedings may be restructured in accordance with law
and with a view to maximizing recovery of such Loans, including any
deficiencies.
Once foreclosure is initiated, a foreclosure tracking system is used to
monitor the progress of the proceedings. The system includes state specific
parameters to monitor whether proceedings are progressing within the time frame
typical for the state in which the Mortgaged Property is located. During the
foreclosure proceeding, the Seller determines the amount of the foreclosure bid
and whether to liquidate the Loan.
After foreclosure, the Seller may liquidate the Mortgaged Property and
charge-off the Loan balance which was not recovered through Liquidation
Proceeds. If foreclosed, the Mortgaged Property is sold at a public or private
sale and may be purchased by the Seller.
Servicing and charge-off policies and collection practices may change over
time in accordance with, among other things, the business judgment of each
Seller, changes in the servicing portfolio and applicable laws and regulations.
Foreclosure and Delinquency Experience
The following table summarizes the delinquency experience of the Sellers'
Loans as of _________, 199_. A Loan is characterized as delinquent if the
borrower has not paid the minimum payment due by the due date. The table below
excludes Loans where the Loan is in foreclosure or the borrower has filed for
bankruptcy. This information should not be considered as a basis for assessing
the likelihood, amount, or severity of delinquency or losses on the Loans, and
no assurances can be given that the foreclosure experience presented in the
second paragraph below the table will be indicative of such experience on the
Loans.
Delinquency Status as of __________, 199_
Residential Loans
-----------------
Dollars Percent Units Percent
Current $__________ ______% ____ ______%
30-59 Days $__________ ______% ____ ______%
60-89 Days $__________ ______% ____ ______%
90+ Days $__________ ______% ____ ______%
Total $__________ 100.00% ____ 100.00%
S-28
<PAGE>
Mixed Use Loans
---------------
Dollars Percent Units Percent
Current $__________ ______% ____ ______%
30-59 Days $__________ ______% ____ ______%
60-89 Days $__________ ______% ____ ______%
90+ Days $__________ ______% ____ ______%
Total $__________ 100.00% ____ 100.00%
[These tables do not include ________ Loans with principal balances
aggregating $_____________ that were sold, but were being serviced on an interim
basis pending transfer of servicing, as of ___________, 199_. As of the date
hereof, servicing with respect to such Loans has been transferred.]
Delinquencies are reported on a contractual basis. As of _____________,
199_, __________ Residential Loans and ____________ Mixed Use Loans with an
aggregate principal balance of $______________ were in foreclosure and, there
were ___________ Residential Loans and __________ Mixed Use Loans in bankruptcy
with a combined loan balance of $______________.
Historically, a variety of factors, including the appreciation of real
estate values, have limited the loss and delinquency experience on Loans. There
can be no assurance that factors beyond each Seller's control, such as national
or local economic conditions or downturn in the real estate markets of its
lending areas, will not result in increased rates of delinquencies and
foreclosure losses in the future.
Over the last several years, there has been a general deterioration of the
real estate market and weakening economy in many regions of the country,
including __________. The general deterioration of the real estate market has
been reflected in increases in delinquencies of loans secured by real estate,
slower absorption rates of real estate into the market and lower sales prices
for real estate. The general weakening of the economy has been reflected in
decreases in the financial strength of borrowers and decreases in the value of
collateral serving as security for loans. If the real estate market and economy
continue to decline, the Seller may experience an increase in delinquencies on
the Loans serviced and higher net losses on liquidated Loans.
Servicing Compensation and Payment of Expenses
The Servicer will be paid a monthly fee from interest collected with
respect to each Loan (as well as from any Liquidation Proceeds from a Liquidated
Loan that are applied to accrued and unpaid interest) equal to one-twelfth of
the Stated Principal Balance thereof multiplied by the Servicing Fee Rate (such
product, the "Servicing Fee Rate"). The Servicing Fee Rate for each Loan will
equal .5% per annum. The amount of the monthly Servicing Fee is subject to
adjustment with respect to prepaid Loans, as described herein under
"--Adjustment to Servicing Fee in Connection with Certain Prepaid Loans." The
Servicer is also entitled to receive, as additional servicing compensation,
amounts in respect of interest paid on Principal Prepayments received from the
first day through the fifteenth day of a month ("Prepayment Interest Excess"),
all late payment fees, assumption fees, prepayment penalties and other similar
charges and all reinvestment income earned on amounts on deposit in the
Certificate Account and Distribution Account. The Servicer is obligated to pay
certain ongoing expenses associated with the Loans and incurred by the Trustee
in connection with its responsibilities under the Pooling and Servicing
Agreement.
S-29
<PAGE>
Adjustment to Servicing Fee in Connection with Certain Prepaid Loans
When a borrower prepays a Loan between Due Dates, the borrower is required
to pay interest on the amount prepaid only to the date of prepayment and not
thereafter. Except with respect to the month of the Cut-off Date, principal
prepayments by borrowers received by the Servicer from the first day through the
fifteenth day of a calendar month will be distributed to Certificateholders on
the Distribution Date in the same month in which such prepayments are received
and, accordingly, no shortfall in the amount of interest to be distributed to
Certificateholders with respect to the prepaid Loan will result. Conversely,
principal prepayments by borrowers received by the Servicer from the sixteenth
day (or, in the case of the first Distribution Date, from the Cut-off Date)
through the last day of a calendar month will be distributed to
Certificateholders on the Distribution Date in the month following the month of
receipt and, accordingly, a shortfall in the amount of interest to be
distributed to Certificateholders with respect to such prepaid Loans would
result. Pursuant to the Agreement, the Servicing Fee for any month will be
reduced, up to the full amount of such Servicing Fee, in order to pass through
to Certificateholders the interest to which they would be entitled in respect of
each such prepaid Loan on the related Distribution Date. If shortfalls in
interest as a result of prepayments exceed an amount equal to the amount of the
Servicing Fee otherwise payable on the related Distribution Date, the amount of
interest available to be distributed to Certificateholders will be reduced by
the amount of such excess. See "Description of the Certificates--Interest."
Advances
Subject to the following limitations, the Servicer will be required to
advance prior to each Distribution Date, from its own funds or funds in the
Certificate Account that do not constitute Available Funds for such Distribution
Date, an amount equal to the aggregate of payments of principal and interest on
the Loans (net of the Servicing Fee with respect to the related Loans) which
were due on the related Due Date and which were delinquent on the related
Determination Date, together with an amount equivalent to interest on each Loan
as to which the related Mortgaged Property has been acquired by the Trust Fund
through foreclosure or deed-in-lieu of foreclosure ("REO Property") (any such
advance, an "Advance").
Advances are intended to maintain a regular flow of scheduled interest and
principal payments on the Certificates rather than to guarantee or insure
against losses. The Servicer is obligated to make Advances with respect to
delinquent payments of principal of or interest on each Loan to the extent that
such Advances are, in its reasonable judgment, recoverable from future payments
and collections or insurance payments or proceeds of liquidation of the related
Loan. If the Servicer determines on any Determination Date to make an Advance,
such Advance will be included with the distribution to Certificateholders on the
related Distribution Date. Any failure by the Servicer to make an Advance as
required under the Agreement with respect to the Certificates will constitute an
Event of Default thereunder, in which case the Trustee or the successor servicer
will be obligated to make any such Advance, in accordance with the terms of the
Agreement.
DESCRIPTION OF THE CERTIFICATES
General
The Certificates will be issued pursuant to the Agreement. Set forth below
are descriptions of the material terms and provisions pursuant to which the
Certificates will be issued. When particular provisions or terms used in the
Agreement are referred to, the actual provisions (including definitions of
terms) are incorporated by reference.
S-30
<PAGE>
The Mortgage Pass-Through Certificates, Series 199_ - __ will consist of
the Class A- , Class , Class PO, Class X and Class A-R Certificates
(collectively, the "Senior Certificates") and the Class B- , Class and
Class Certificates (collectively, the "Subordinated Certificates"). The Senior
Certificates and Subordinated Certificates are collectively referred to herein
as the "Certificates." Only the classes of Certificates listed on the cover page
hereof (collectively, the "Offered Certificates") are offered hereby. The
classes of Offered Certificates will have the respective initial Class
Certificate Balances or initial Notional Amounts (subject to the permitted
variance) and Pass-Through Rates set forth or described on the cover hereof.
The "Class Certificate Balance" of any class of Certificates as of any
Distribution Date is the initial Class Certificate Balance thereof (A) reduced
by the sum of (i) all amounts previously distributed to holders of Certificates
of such class as payments of principal, (ii) the amount of Realized Losses
(including Excess Losses) allocated to such class and (iii) in the case of any
class of Subordinated Certificates, any amounts allocated to such class in
reduction of its Class Certificate Balance in respect of payments of Class PO
Deferred Amounts, as described below under "--Allocation of Losses". In
addition, the Class Certificate Balance of the class of Subordinated
Certificates then outstanding with the highest numerical class designation will
be reduced if and to the extent that the aggregate of the Class Certificate
Balances of all classes of Certificates, following all distributions and the
allocation of Realized Losses on a Distribution Date, exceeds the Pool Principal
Balance as of the Due Date occurring in the month of such Distribution Date. The
Notional Amount Certificates do not have principal balances and are not entitled
to any distributions in respect of principal of the Loans.
The "Notional Amount" of the Class X Certificates for any Distribution
Date will be equal to the aggregate of the Stated Principal Balances of the
Non-Discount Loans with respect to such Distribution Date. A "Non-Discount Loan"
is any Loan with a Net Mortgage Rate equal to or greater than __%. The initial
Notional Amount of the Class X Certificates will be equal to the aggregate of
the Stated Principal Balance of the Non-Discount Loans as of the Cut-off Date.
The Senior Certificates will have an initial aggregate principal balance
of approximately $___ and will evidence in the aggregate an initial beneficial
ownership interest of approximately ___% in the Trust Fund. The Class B- ,
Class B- , Class B- , Class B- , Class B- and Class B- Certificates will each
evidence in the aggregate an initial beneficial ownership interest of
approximately ____%, ____%, ____%, ____%, ____%, and ____%, respectively, in the
Trust Fund.
The Book-Entry Certificates will be issuable in book-entry form only. The
Physical Certificates will be issued in fully registered certificated form. The
Physical Certificates (other than Class A-R Certificates) offered hereby will be
issued in minimum dollar denominations of $25,000 and integral multiples of
$1,000 in excess thereof. A single Certificate of each such class may be issued
in an amount different than described above. The Class A-R Certificates will be
issued as a single Certificate in a denomination of $1,000.
Book-Entry Certificates
Each class of Book-Entry Certificates will be issued in one or more
certificates which equal the aggregate initial Class Certificate Balance of each
such class of Certificates and which will be held by a nominee of The Depository
Trust Company ("DTC"). Beneficial interests in the Book-Entry Certificates will
be held indirectly by investors through the book-entry facilities of DTC, as
described herein. Investors may hold such beneficial interests in the Book-Entry
Certificates in minimum denominations representing an original principal amount
of $25,000 and integral multiples of $1,000 in excess thereof. One investor of
each class of Book-Entry Certificates may hold a beneficial interest therein
that is not an integral multiple of $1,000.
S-31
<PAGE>
The Depositor has been informed by DTC that its nominee will be Cede & Co.
("Cede"). Accordingly, Cede is expected to be the holder of record of the
Book-Entry Certificates. Except as described in the Prospectus under
"Description of the Certificates--Book-Entry Certificates," no person acquiring
a Book-Entry Certificate (each, a "Beneficial Owner") will be entitled to
receive a physical certificate representing such Certificate (a "Definitive
Certificate").
Unless and until Definitive Certificates are issued, it is anticipated
that the only Certificateholder of the Book-Entry Certificates will be Cede, as
nominee of DTC. Beneficial Owners of the Book-Entry Certificates will not be
"Certificateholders," as that term is used in the Agreement. Beneficial Owners
are only permitted to exercise the rights of Certificateholders indirectly
through DTC and DTC Participants. Monthly and annual reports on the Trust Fund
provided to Cede, as nominee of DTC, may be made available to Beneficial Owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting DTC, and to the DTC Participants to whose accounts the Book-Entry
Certificates of such Beneficial Owners are credited.
For a description of the procedures generally applicable to the Book-Entry
Certificates, see "Description of the Securities--Book-Entry Registration of
Securities" in the Prospectus.
Payments on Loans; Accounts
On or prior to the Closing Date, the Servicer will establish an account
(the "Certificate Account"), which will be maintained in trust for the benefit
of the Certificateholders. Funds credited to the Certificate Account may be
invested for the benefit and at the risk of the Servicer in Permitted
Investments that are scheduled to mature on or prior to the business day
preceding the next Distribution Date. On or prior to the business day
immediately preceding each Distribution Date, the Servicer will withdraw from
the Certificate Account the amount of Available Funds and will deposit such
Available Funds in an account established and maintained with the Trustee on
behalf of the Certificateholders (the "Distribution Account").
"Permitted Investments" will be specified in the Agreement and will be
limited to (i) obligations of the United States or any agency thereof, provided
such obligations are backed by the full faith and credit of the United States;
(ii) general obligations of or obligations guaranteed by any state of the United
States or the District of Columbia receiving the highest long-term debt rating
of each Rating Agency rating the Certificates, or such lower rating as will not
result in the downgrading or withdrawal of the ratings then assigned to the
Certificates by each such Rating Agency; (iii) commercial or finance company
paper which is then receiving the highest commercial or finance company paper
rating of each such Rating Agency, or such lower rating as will not result in
the downgrading or withdrawal of the ratings then assigned to the Certificates
by each such Rating Agency; (iv) certificates of deposit, demand or time
deposits, or bankers' acceptances issued by any depository institution or trust
company incorporated under the laws of the United States or of any state thereof
and subject to supervision and examination by federal and/or state banking
authorities, provided that the commercial paper and/or long-term unsecured debt
obligations of such depository institution or trust company (or in the case of
the principal depository institution in a holding company system, the commercial
paper or long-term unsecured debt obligations of such holding company, but only
if Moody's is not a Rating Agency) are then rated one of the two highest
long-term and the highest short-term ratings of each such Rating Agency for such
securities, or such lower ratings as will not result in the downgrading or
withdrawal of the rating then assigned to the Certificates by any such Rating
Agency; (v) demand or time deposits or certificates of deposit issued by any
bank or trust company or savings institution to the extent that such deposits
are fully insured by the FDIC; (vi) guaranteed reinvestment agreements issued by
any bank, insurance company or other corporation containing, at the time of the
issuance of such agreements, such terms and conditions as will not result in the
downgrading or withdrawal of the rating then assigned to the Certificates by any
such Rating Agency; (vii) repurchase obligations with
S-32
<PAGE>
respect to any security described in clauses (i) and (ii) above, in either case
entered into with a depository institution or trust company (acting as
principal) described in clause (iv) above; (viii) securities (other than
stripped bonds, stripped coupons or instruments sold at a purchase price in
excess of 115% of the face amount thereof) bearing interest or sold at a
discount issued by any corporation incorporated under the laws of the United
States or any state thereof which, at the time of such investment, have one of
the two highest ratings of each Rating Agency (except if the Rating Agency is
Moody's, such rating shall be the highest commercial paper rating of Moody's for
any such securities), or such lower rating as will not result in the downgrading
or withdrawal of the rating then assigned to the Certificates by any such Rating
Agency, as evidenced by a signed writing delivered by each such Rating Agency;
and (ix) such other investments having a specified stated maturity and bearing
interest or sold at a discount acceptable to each Rating Agency as will not
result in the downgrading or withdrawal of the rating then assigned to the
Certificates by any such Rating Agency, as evidenced by a signed writing
delivered by each such Rating Agency; provided that no such instrument shall be
a Permitted Investment if such instrument evidences the right to receive
interest only payments with respect to the obligations underlying such
instrument.
Distributions
Distributions on the Certificates will be made by the Trustee on the __th
day of each month, or if such day is not a business day, on the first business
day thereafter, commencing in 199 (each, a "Distribution Date"), to the persons
in whose names such Certificates are registered at the close of business on the
last business day of the month preceding the month of such Distribution Date
(the "Record Date").
Distributions on each Distribution Date will be made by check mailed to
the address of the person entitled thereto as it appears on the applicable
certificate register or, in the case of a Certificateholder who holds 100% of a
class of Certificates or who holds Certificates with an aggregate initial
Certificate Balance of $1,000,000 or more or who holds an Interest Only
Certificate and who has so notified the Trustee in writing in accordance with
the Agreement, by wire transfer in immediately available funds to the account of
such Certificateholder at a bank or other depository institution having
appropriate wire transfer facilities; provided, however, that the final
distribution in retirement of the Certificates will be made only upon
presentment and surrender of such Certificates at the Corporate Trust Office of
the Trustee.
Priority of Distributions Among Certificates
As more fully described under "Description of the Certificates--Interest,"
"--Principal" and "--Allocation of Losses," distributions will be made on each
Distribution Date from Available Funds in the following order of priority: (i)
to interest on each interest bearing class of Senior Certificates; (ii) to
principal on the classes of Senior Certificates then entitled to receive
distributions of principal, in the order and subject to the priorities set forth
herein under "--Principal," in each case in an aggregate amount up to the
maximum amount of principal to be distributed on such classes on such
Distribution Date; (iii) to any Class PO Deferred Amounts with respect to the
Class PO Certificates, but only from amounts that would otherwise be distributed
on such Distribution Date as principal of the Subordinated Certificates; and
(iv) to interest on and then principal of each class of Subordinated
Certificates, in the order of their numerical class designations, beginning with
the Class Certificates, in each case subject to the limitations set forth
herein under "Description of the Certificates--Principal."
"Available Funds" with respect to any Distribution Date will be equal to
the sum of (i) all scheduled installments of interest (net of the related
Servicing Fees, trustee fees and credit enhancement fees) and principal due on
the Due Date in the month in which such Distribution Date occurs and received
prior to the related Determination Date, together with any Advances in respect
thereof; (ii) all proceeds of any primary mortgage guaranty insurance policies
and any other insurance policies with respect to the Loans, to the extent
S-33
<PAGE>
such proceeds are not applied to the restoration of the related Mortgaged
Property or released to the mortgagor in accordance with the Servicer's normal
servicing procedures (collectively, "Insurance Proceeds") and all other cash
amounts received and retained in connection with the liquidation of defaulted
Loans, by foreclosure or otherwise ("Liquidation Proceeds") during the calendar
month preceding the month of such Distribution Date (in each case, net of
unreimbursed expenses incurred in connection with a liquidation or foreclosure
and unreimbursed Advances, if any); (iii) all partial or full prepayments
received during the period from the sixteenth day of the month preceding the
month of such Distribution Date (or, in the case of the first Distribution Date,
from the Cut-off Date) through the fifteenth day of the month of such
Distribution Date (the "Prepayment Period"); and (iv) amounts received with
respect to such Distribution Date as the Substitution Adjustment Amount or
purchase price in respect of a Deleted Loan or a Loan repurchased by a Seller or
the Servicer as of such Distribution Date, reduced by amounts in reimbursement
for Advances previously made and other amounts as to which the Servicer is
entitled to be reimbursed from the Certificate Account pursuant to the
Agreement.
With respect to any Distribution Date, the "Class PO Deferred Amount" is
the aggregate of the applicable PO Percentage of each Realized Loss, other than
any Excess Loss, to be allocated to the Class PO Certificates on such
Distribution Date on or prior to the Senior Credit Support Depletion Date or
previously allocated to the Class PO Certificates and not yet paid to the
holders of the Class PO Certificates.
Interest
The classes of Offered Certificates will have the respective Pass-Through
Rates set forth or described on the cover hereof.
The Pass-Through Rate for the Class X Certificates for any Distribution
Date will be equal to the excess of (a) the average of the Net Mortgage Rates of
the Non-Discount Loans, weighted on the basis of the Stated Principal Balances
thereof, over (b) % per annum. The Pass-Through Rate for the Class X
Certificates for the first Distribution Date is expected to be approximately
% per annum. The "Net Mortgage Rate" for each Loan is the interest rate
thereon (the "Mortgage Rate") less the sum of the rates for the Servicing Fees,
trustee fees and credit enhancement fees for such Loan.
On each Distribution Date, to the extent of funds available therefor, each
interest bearing class of Certificates will be entitled to receive an amount
allocable to interest (as to each such class, the "Interest Distribution
Amount") with respect to the related Interest Accrual Period. The "Interest
Distribution Amount" for any interest bearing class will be equal to the sum of
(i) interest at the applicable Pass-Through Rate on the related Class
Certificate Balance or Notional Amount, as the case may be, and (ii) the sum of
the amounts, if any, by which the amount described in clause (i) above on each
prior Distribution Date exceeded the amount actually distributed as interest on
such prior Distribution Dates and not subsequently distributed ("Unpaid Interest
Amounts"). The Class PO Certificates are Principal Only Certificates and will
not bear interest.
With respect to each Distribution Date, the "Interest Accrual Period" for
each interest bearing class of Certificates will be the calendar month preceding
the month of such Distribution Date.
The interest entitlement described above for each class of Certificates
for any Distribution Date will be reduced by the amount of Net Interest
Shortfalls for such Distribution Date. With respect to any Distribution Date,
the "Net Interest Shortfall" is equal to (i) the amount of interest that would
otherwise have been received with respect to any Loan that was the subject of
(a) a Relief Act Reduction or (b) a Special Hazard Loss, Fraud Loss, Debt
Service Reduction or Deficient Valuation, after the exhaustion of the respective
amounts of coverage provided by the Subordinated Certificates for such types of
losses and (ii) any Net Prepayment Interest Shortfalls with respect to such
Distribution Date. A "Relief Act Reduction" is a reduction in the amount of
monthly interest payment on a Loan pursuant to the Soldiers' and Sailors' Civil
S-34
<PAGE>
Relief Act of 1940. See "Certain Legal Aspects of the Loans--Soldiers' and
Sailors' Civil Relief Act" in the Prospectus. With respect to any Distribution
Date, a "Net Prepayment Interest Shortfall" is the amount by which the aggregate
of Prepayment Interest Shortfalls during the calendar month preceding the month
of such Distribution Date exceeds the aggregate amount payable on such
Distribution Date by the Servicer as described under "Servicing of
Loans--Adjustment to Servicing Fee in Connection with Certain Prepaid Loans." A
"Prepayment Interest Shortfall" is the amount by which interest paid by a
borrower in connection with a prepayment of principal on a Loan is less than one
month's interest at the related Mortgage Rate on the Stated Principal Balance of
such Loan. Each class' pro rata share of such Net Interest Shortfalls will be
based on the amount of interest such class otherwise would have been entitled to
receive on such Distribution Date.
Accrued interest to be distributed on any Distribution Date will be
calculated, in the case of each interest bearing class of Certificates, on the
basis of the related Class Certificate Balance or Notional Amount, as
applicable, immediately prior to such Distribution Date. Interest will be
calculated and payable on the basis of a 360-day year divided into twelve 30-day
months.
In the event that, on a particular Distribution Date, Available Funds in
the Certificate Account applied in the order described above under "--Priority
of Distributions Among Certificates" are not sufficient to make a full
distribution of the interest entitlement on the Certificates, interest will be
distributed on each class of Certificates of equal priority based on the amount
of interest each such class would otherwise have been entitled to receive in the
absence of such shortfall. Any Unpaid Interest Amount will be carried forward
and added to the amount holders of each such class of Certificates will be
entitled to receive on the next Distribution Date. Such a shortfall could occur,
for example, if losses realized on the Loans were exceptionally high or were
concentrated in a particular month. Any Unpaid Interest Amount so carried
forward will not bear interest.
Principal
General. All payments and other amounts received in respect of principal
of the Loans will be allocated between (i) the Senior Certificates (other than
the Notional Amount Certificates and the Class PO Certificates) and the
Subordinated Certificates and (ii) the Class PO Certificates, in each case based
on the applicable Non-PO Percentage and the applicable PO Percentage,
respectively, of such amounts.
The "Non-PO Percentage" with respect to any Loan with a Net Mortgage Rate
("NMR") less than ____% (each such Loan, a "Discount Loan") will be equal to NMR
/ ____%. The "Non-PO Percentage" with respect to any Non-Discount Loan will be
100%. The "PO Percentage" with respect to any Discount Loan will be equal to
(____% - NMR) / ____%. The "PO Percentage" with respect to any Non-Discount Loan
will be 0%.
Non-PO Formula Principal Amount. On each Distribution Date, the Non-PO
Formula Principal Amount will be distributed as principal of the Senior
Certificates (other than the Notional Amount Certificates and the Class PO
Certificates) and the Subordinated Certificates, to the extent of the amount
available from Available Funds for the distribution of principal on such
respective classes, as described below.
The "Non-PO Formula Principal Amount" for any Distribution Date will equal
the sum of the applicable Non-PO Percentage of (a) all monthly payments of
principal due on each Loan on the related Due Date, (b) the principal portion of
the purchase price of each Loan that was repurchased by a Seller or another
person pursuant to the Agreement as of such Distribution Date, (c) the
Substitution Adjustment Amount in connection with any Deleted Loan received with
respect to such Distribution Date, (d) any Insurance
S-35
<PAGE>
Proceeds or Liquidation Proceeds allocable to recoveries of principal of Loans
that are not yet Liquidated Loans received during the calendar month preceding
the month of such Distribution Date, (e) with respect to each Loan that became a
Liquidated Loan during the calendar month preceding the month of such
Distribution Date, the amount of the Liquidation Proceeds allocable to principal
received with respect to such Loan and (f) all partial and full principal
prepayments by borrowers received during the related Prepayment Period.
Senior Principal Distribution Amount. On each Distribution Date prior to
the Senior Credit Support Depletion Date, the Non-PO Formula Principal Amount,
up to the amount of the Senior Principal Distribution Amount for such
Distribution Date, will be distributed as principal of the following classes of
Senior Certificates in the following order of priority:
(i) to the Class A-R Certificates until the Class Certificate
Balance thereof has been reduced to zero;
(ii) concurrently, to the Class __ and Class __ Certificates, pro
rata based on their respective Class Certificate Balances, until the Class
Certificate Balances thereof have been reduced to zero;
(iii) sequentially, to the Class __ and Class __ Certificates, in
that order, until the respective Class Certificate Balances thereof have
been reduced to zero;
(iv) sequentially, to the Class __ and Class __ Certificates, in
that order, until the respective Class Certificate Balances thereof have
been reduced to zero; and
(v) to the Class __ Certificates until the Class Certificate Balance
thereof has been reduced to zero.
Notwithstanding the foregoing, on each Distribution Date on and after the
Senior Credit Support Depletion Date, the Non-PO Formula Principal Amount will
be distributed, concurrently as principal of the classes of Senior Certificates
(other than the Notional Amount Certificates and the Class PO Certificates), pro
rata, in accordance with their respective Class Certificate Balances immediately
prior to such Distribution Date.
The "Senior Credit Support Depletion Date" is the date on which the Class
Certificate Balance of each class of Subordinated Certificates has been reduced
to zero.
The "Senior Principal Distribution Amount" for any Distribution Date will
equal the sum of (i) the Senior Percentage of the applicable Non-PO Percentage
of all amounts described in clauses (a) through (d) of the definition of Non-PO
Formula Principal Amount for such Distribution Date, (ii) with respect to each
Loan that became a Liquidated Loan during the calendar month preceding the month
of such Distribution Date, the lesser of (x) the Senior Percentage of the
applicable Non-PO Percentage of the Stated Principal Balance of such Loan and
(y) either (A) the Senior Prepayment Percentage or (B) if an Excess Loss was
sustained with respect to such Liquidated Loan during such preceding calendar
month, the Senior Percentage of the applicable Non-PO Percentage of the amount
of the Liquidation Proceeds allocable to principal received with respect to such
Loan, and (iii) the Senior Prepayment Percentage of the applicable Non-PO
Percentage of amounts described in clause (f) of the definition of Non-PO
Formula Principal Amount for such Distribution Date; provided, however, that if
a Bankruptcy Loss that is an Excess Loss is sustained with respect to a Loan
that is not a Liquidated Loan, the Senior Principal Distribution Amount will be
reduced on the related Distribution Date by the Senior Percentage of the
applicable Non-PO Percentage of the principal portion of such Bankruptcy Loss.
S-36
<PAGE>
"Stated Principal Balance" means as to any Loan and Due Date, the unpaid
principal balance of such Loan as of such Due Date, as specified in the
amortization schedule at the time relating thereto (before any adjustment to
such amortization schedule by reason of any moratorium or similar waiver or
grace period), after giving effect to any previous partial prepayments and
Liquidation Proceeds received and to the payment of principal due on such Due
Date and irrespective of any delinquency in payment by the related mortgagor.
The "Pool Principal Balance" with respect to any Distribution Date equals the
aggregate of the Stated Principal Balances of the Loans outstanding on the Due
Date in the month preceding the month of such Distribution Date.
The "Senior Percentage" for any Distribution Date is the percentage
equivalent of a fraction the numerator of which is the aggregate of the Class
Certificate Balances of each class of Senior Certificates (other than the Class
PO Certificates) immediately prior to such date and the denominator of which is
the aggregate of the Class Certificate Balances of all classes of Certificates,
other than the Class PO Certificates, immediately prior to such date.
The "Senior Prepayment Percentage" for any Distribution Date occurring
during the ____ years beginning on the first Distribution Date will equal 100%.
Thereafter, the Senior Prepayment Percentage will, except as described below, be
subject to gradual reduction as described in the following paragraph. This
disproportionate allocation of certain unscheduled payments in respect of
principal will have the effect of accelerating the amortization of the Senior
Certificates which receive these unscheduled payments of principal (other than
the Class PO Certificates) while, in the absence of Realized Losses, increasing
the interest in the Pool Principal Balance evidenced by the Subordinated
Certificates. Increasing the respective interest of the Subordinated
Certificates relative to that of the Senior Certificates is intended to preserve
the availability of the subordination provided by the Subordinated Certificates.
The "Senior Prepayment Percentage" for any Distribution Date occurring on
or after the _____ anniversary of the first Distribution Date will be as
follows: for any Distribution Date in the _____ year thereafter, the Senior
Percentage plus __% of the Subordinated Percentage for such Distribution Date;
for any Distribution Date in the ______ year thereafter, the Senior Percentage
plus __% of the Subordinated Percentage for such Distribution Date; for any
Distribution Date in the _____ year thereafter, the Senior Percentage plus __%
of the Subordinated Percentage for such Distribution Date; for any Distribution
Date in the ______ year thereafter, the Senior Percentage plus __% of the
Subordinated Percentage for such Distribution Date; and for any Distribution
Date thereafter, the Senior Percentage for such Distribution Date (unless on any
of the foregoing Distribution Dates the Senior Percentage exceeds the initial
Senior Percentage, in which case the Senior Prepayment Percentage for such
Distribution Date will once again equal 100%). Notwithstanding the foregoing, no
decrease in the Senior Prepayment Percentage will occur if (i) the outstanding
principal balance of all Loans delinquent __ days or more (averaged over the
preceding _________ period), as a percentage of the aggregate principal balance
of the Subordinated Certificates (averaged over the preceding _________ period),
is equal to or greater than __%, or (ii) cumulative Realized Losses with respect
to the Loans exceed (a) with respect to the Distribution Date on the _____
anniversary of the first Distribution Date, __% of the aggregate of the
principal balances of the Subordinated Certificates as of the Cut-off Date (the
"Original Subordinated Principal Balance"), (b) with respect to the Distribution
Date on the _____ anniversary of the first Distribution Date, __% of the
Original Subordinated Principal Balance, (c) with respect to the Distribution
Date on the _______ anniversary of the first Distribution Date, __% of the
Original Subordinated Principal Balance, (d) with respect to the Distribution
Date on the ______ anniversary of the first Distribution Date, __% of the
Original Subordinated Principal Balance, and (e) with respect to the
Distribution Date on the _____ anniversary of the first Distribution Date, __%
of the Original Subordinated Principal Balance. The "Subordinated Prepayment
Percentage" as of any Distribution Date will be calculated as the difference
between 100% and the Senior Prepayment Percentage for such date.
S-37
<PAGE>
If on any Distribution Date the allocation to the class of Senior
Certificates then entitled to distributions of principal of full and partial
principal prepayments and other amounts in the percentage required above would
reduce the outstanding Class Certificate Balance of such class below zero, the
distribution to such class of Certificates of the Senior Prepayment Percentage
of such amounts for such Distribution Date will be limited to the percentage
necessary to reduce the related Class Certificate Balance to zero.
Subordinated Principal Distribution Amount. On each Distribution Date, to
the extent of Available Funds therefor, the Non-PO Formula Principal Amount, up
to the amount of the Subordinated Principal Distribution Amount for such
Distribution Date, will be distributed as principal of the Subordinated
Certificates. Except as provided in the next paragraph, each class of
Subordinated Certificates will be entitled to receive its pro rata share of the
Subordinated Principal Distribution Amount (based on its respective Class
Certificate Balance), in each case to the extent of the amount available from
Available Funds for distribution of principal. Distributions of principal of the
Subordinated Certificates will be made sequentially to the classes of
Subordinated Certificates in the order of their numerical class designations,
beginning with the Class ___ Certificates, until the respective Class
Certificate Balances thereof are reduced to zero. The "Subordinated Percentage"
for any Distribution Date will be calculated as the difference between 100% and
the Senior Percentage.
With respect to each class of Subordinated Certificates, if on any
Distribution Date the sum of the related Class Subordination Percentages of such
class and all classes of Subordinated Certificates which have higher numerical
class designations than such class (the "Applicable Credit Support Percentage")
is less than the Applicable Credit Support Percentage for such class on the date
of issuance of the Certificates (the "Original Applicable Credit Support
Percentage"), no distribution of partial principal prepayments and principal
prepayments in full will be made to any such classes (the "Restricted Classes")
and the amount of partial principal prepayments and principal prepayments in
full otherwise distributable to the Restricted Classes will be allocated among
the remaining classes of Subordinated Certificates, pro rata, based upon their
respective Class Certificate Balances, and distributed in the sequential order
described above.
The "Class Subordination Percentage" with respect to any Distribution Date
and each class of Subordinated Certificates, will equal the fraction (expressed
as a percentage) the numerator of which is the Class Certificate Balance of such
class of Subordinated Certificates immediately prior to such Distribution Date
and the denominator of which is the aggregate of the Class Certificate Balances
of all classes of Certificates immediately prior to such Distribution Date.
The approximate Original Applicable Credit Support Percentages for the
Subordinated Certificates on the date of issuance of the Certificates are
expected to be as follows:
Class .......................................... %
Class .......................................... %
Class .......................................... %
Class .......................................... %
Class .......................................... %
Class .......................................... %
The "Subordinated Principal Distribution Amount" for any Distribution Date
will equal (A) the sum of (i) the Subordinated Percentage of the applicable
Non-PO Percentage of all amounts described in clauses (a) through (d) of the
definition of Non-PO Formula Principal Amount for such Distribution Date, (ii)
with respect to each Loan that became a Liquidated Loan during the calendar
month preceding the month of such Distribution Date, the applicable Non-PO
Percentage of the Liquidation Proceeds allocable to principal
S-38
<PAGE>
received with respect to such Loan, after application of such amounts pursuant
to clause (ii) of the definition of Senior Principal Distribution Amount, up to
the Subordinated Percentage of the applicable Non-PO Percentage of the Stated
Principal Balance of such Loan and (iii) the Subordinated Prepayment Percentage
of the applicable Non-PO Percentage of the amounts described in clause (f) of
the definition of Non-PO Formula Principal Amount for such Distribution Date
reduced by (B) the amount of any payments in respect of Class PO Deferred
Amounts on the related Distribution Date.
Residual Certificates. The Class A-R Certificates will remain outstanding
for so long as the Trust Fund shall exist, whether or not they are receiving
current distributions of principal or interest. In addition to distributions of
interest and principal as described above, on each Distribution Date, the
holders of the Class A-R Certificates will be entitled to receive any Available
Funds remaining after payment of interest and principal on the Senior
Certificates and Class PO Deferred Amounts on the Class PO Certificates and
interest and principal on the Subordinated Certificates, as described above. It
is not anticipated that there will be any significant amounts remaining for any
such distribution.
Class PO Principal Distribution Amount. On each Distribution Date,
distributions of principal of the Class PO Certificates will be made in an
amount (the "Class PO Principal Distribution Amount") equal to the lesser of (a)
the PO Formula Principal Amount for such Distribution Date or (b) the product of
(i) Available Funds remaining after distribution of interest on the Senior
Certificates and (ii) a fraction, the numerator of which is the PO Formula
Principal Amount and the denominator of which is the sum of the PO Formula
Principal Amount and the Senior Principal Distribution Amount.
If the Class PO Principal Distribution Amount on a Distribution Date is
calculated as provided in clause (b) above, principal distributions to holders
of the Senior Certificates (other than the Class PO Certificates) will be in an
amount equal to the product of (i) Available Funds remaining after distribution
of interest on the Senior Certificates and (ii) a fraction, the numerator of
which is the Senior Principal Distribution Amount and the denominator of which
is the sum of the Senior Principal Distribution Amount and the PO Formula
Principal Amount.
The "PO Formula Principal Amount" for any Distribution Date will equal the
sum of the applicable PO Percentage of (a) all monthly payments of principal due
on each Loan on the related Due Date, (b) the principal portion of the purchase
price of each Loan that was repurchased by a Seller or another person pursuant
to the Agreement as of such Distribution Date, (c) the Substitution Adjustment
Amount in connection with any Deleted Loan received with respect to such
Distribution Date, (d) any Insurance Proceeds or Liquidation Proceeds allocable
to recoveries of principal of Loans that are not yet Liquidated Loans received
during the calendar month preceding the month of such Distribution Date, (e)
with respect to each Loan that became a Liquidated Loan during the calendar
month preceding the month of such Distribution Date, the amount of Liquidation
Proceeds allocable to principal received with respect to such Loan and (f) all
partial and full principal prepayments by borrowers received during the related
Prepayment Period; provided, however, that if a Bankruptcy Loss that is an
Excess Loss is sustained with respect to a Discount Loan that is not a
Liquidated Loan, the PO Formula Principal Amount will be reduced on the related
Distribution Date by the applicable PO Percentage of the principal portion of
such Bankruptcy Loss.
Allocation of Losses
On each Distribution Date, the applicable PO Percentage of any Realized
Loss, including any Excess Loss, on a Discount Loan will be allocated to the
Class PO Certificates until the Class Certificate Balance thereof is reduced to
zero. The amount of any such Realized Loss, other than an Excess Loss, allocated
on or prior to the Senior Credit Support Depletion Date will be treated as a
Class PO Deferred Amount. To the
S-39
<PAGE>
extent funds are available on such Distribution Date or on any future
Distribution Date from amounts that would otherwise be allocable to the
Subordinated Principal Distribution Amount, Class PO Deferred Amounts will be
paid on the Class PO Certificates prior to distributions of principal on the
Subordinated Certificates. Any distribution of Available Funds in respect of
unpaid Class PO Deferred Amounts will not further reduce the Class Certificate
Balance of the Class PO Certificates. The Class PO Deferred Amounts will not
bear interest. The Class Certificate Balance of the class of Subordinated
Certificates then outstanding with the highest numerical class designation will
be reduced by the amount of any payments in respect of Class PO Deferred
Amounts. After the Senior Credit Support Depletion Date, no new Class PO
Deferred Amounts will be created.
On each Distribution Date, the applicable Non-PO Percentage of any
Realized Loss, other than any Excess Loss, will be allocated first to the
Subordinated Certificates, in the reverse order of their numerical class
designations (beginning with the class of Subordinated Certificates then
outstanding with the highest numerical class designation), in each case until
the class Certificate Balance of the respective class of Certificates has been
reduced to zero, and then to the Senior Certificates (other than the Notional
Amount Certificates and the Class PO Certificates) pro rata, based upon their
respective Class Certificate Balances.
On each Distribution Date, the applicable Non-PO Percentage of Excess
Losses will be allocated pro rata among the classes of Senior Certificates
(other than the Notional Amount Certificates and the Class PO Certificates) and
the Subordinated Certificates based upon their respective Class Certificate
Balances.
Because principal distributions are paid to certain classes of
Certificates (other than the Class PO Certificates) before other classes of
Certificates, holders of such Certificates that are entitled to receive
principal later bear a greater risk of being allocated Realized Losses on the
Loans than holders of classes that are entitled to receive principal earlier.
Realized Losses allocated to a class of Certificates comprised of multiple
payment Components will be allocated pro rata among the Components of such class
of Certificates based on their respective Component balances.
In general, a "Realized Loss" means, with respect to a Liquidated Loan,
the amount by which the remaining unpaid principal balance of the Loan exceeds
the amount of Liquidation Proceeds applied to the principal balance of the
related Loan. "Excess Losses" are (i) Special Hazard Losses in excess of the
Special Hazard Loss Coverage Amount, (ii) Bankruptcy Losses in excess of the
Bankruptcy Loss Coverage Amount and (iii) Fraud Losses in excess of the Fraud
Loss Coverage Amount. "Bankruptcy Losses" are losses that are incurred as a
result of Debt Service Reductions and Deficient Valuations. "Special Hazard
Losses" are Realized Losses in respect of Special Hazard Loans. "Fraud Losses"
are losses sustained on a Liquidated Loan by reason of a default arising from
fraud, dishonesty or misrepresentation. See "Credit Enhancement--Subordination
of Certain Classes."
A "Liquidated Loan" is a defaulted Loan as to which the Servicer has
determined that all recoverable liquidation and insurance proceeds have been
received. A "Special Hazard Loan" is a Liquidated Loan as to which the ability
to recover the full amount due thereunder was substantially impaired by a hazard
not insured against under a standard hazard insurance policy of the type
described in the Prospectus under "Credit Enhancement--Insurance Policies,
Surety Bonds & Guaranties." See "Credit Enhancement--Subordination of Certain
Classes" herein.
S-40
<PAGE>
Structuring Assumptions
Unless otherwise specified, the information in the tables in this
Prospectus Supplement has been prepared on the basis of the following assumed
characteristics of the Loans and the following additional assumptions
(collectively, the "Structuring Assumptions"): (i) the Mortgage Pool consists of
____________ Loans with the following characteristics:
<TABLE>
<CAPTION>
Original Term to Remaining Term to
Principal Balance Mortgage Rate Net Mortgage Rate Maturity (in months) Maturity (in months) Loan Age
- -------------------- ---------------- -------------------- ---------------------- ---------------------- ------------
<S> <C> <C>
$ % %
$ % %
</TABLE>
(ii) the Loans prepay at the specified constant percentages of SPA, (iii) no
defaults in the payment by mortgagors of principal of and interest on the Loans
are experienced, (iv) scheduled payments on the Loans are received on the first
day of each month commencing in the calendar month following the Closing Date
and are computed prior to giving effect to prepayments received on the last day
of the prior month, (v) prepayments are allocated as described herein without
giving effect to loss and delinquency tests, (vi) there are no Net Interest
Shortfalls and prepayments represent prepayments in full of individual Loans and
are received on the last day of each month, commencing in the calendar month of
the Closing Date, (vii) the scheduled monthly payment for each Loan has been
calculated such that each Loan will amortize in amounts sufficient to repay the
current balance of such Loan by its respective remaining term to maturity,
(viii) the initial Class Certificate Balance or Notional Amount, as applicable,
of each class of Certificates is as set forth on the cover page hereof and under
"Summary of Terms--Certificates other than the Offered Certificates", (ix)
interest accrues on each interest bearing class of Certificates at the
applicable interest rate set forth or described on the cover hereof and as
described under "Description of the Certificates--Interest," (x) distributions
in respect of the Certificates are received in cash on the day of each month
commencing in the calendar month following the Closing Date, (xi) the Closing
Date of the sale of the Offered Certificates is the date set forth under
"Summary of Terms--Closing Date," (xii) a Seller is not required to repurchase
or substitute for any Loan, (xiii) the Servicer does not exercise the option to
repurchase the Loans described herein under "--Optional Purchase of Defaulted
Loans" and "--Optional Termination" and (xiv) no class of Certificates becomes a
Restricted Class. While it is assumed that each of the Loans prepays at the
specified constant percentages of SPA, this is not likely to be the case.
Moreover, discrepancies may exist between the characteristics of the actual
Loans which will be delivered to the Trustee and characteristics of the Loans
used in preparing the tables herein.
Prepayments of mortgage loans commonly are measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement is
the Standard Prepayment Assumption ("SPA"), which represents an assumed rate of
prepayment each month of the then outstanding principal balance of a pool of new
mortgage loans. SPA does not purport to be either a historical description of
the prepayment experience of any pool of mortgage loans or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Loans. 100% SPA assumes prepayment rates of 0.2% per annum of the then unpaid
principal balance of such pool of mortgage loans in the first month of the life
of such mortgage loans and an additional 0.2% per annum in each month thereafter
(for example, 0.4% per annum in the second month) until the 30th month.
Beginning in the 30th month and in each month thereafter during the life of such
mortgage loans, 100% SPA assumes a constant prepayment rate of 6% per annum.
Multiples may be calculated from this prepayment rate sequence. For example,
____% SPA assumes prepayment rates will be ____% per annum in month one, ____%
per annum in month two, and increasing by ____% in each succeeding month until
reaching a rate of ____% per annum in month 30 and remaining constant at ____%
per annum
S-41
<PAGE>
thereafter. 0% SPA assumes no prepayments. There is no assurance that
prepayments will occur at any SPA rate or at any other constant rate.
Optional Purchase of Defaulted Loans
The Servicer may, at its option, purchase from the Trust Fund any Loan
which is delinquent in payment by 91 days or more. Any such purchase shall be at
a price equal to 100% of the Stated Principal Balance of such Loan plus accrued
interest thereon at the applicable Mortgage Rate from the date through which
interest was last paid by the related mortgagor or advanced (and not reimbursed)
to the first day of the month in which such amount is to be distributed.
Optional Termination
The Servicer will have the right to repurchase all remaining Loans and REO
Properties in the Mortgage Pool and thereby effect early retirement of the
Certificates, subject to the Pool Principal Balance of such Loans and REO
Properties at the time of repurchase being less than or equal to 5% of the
Cut-off Date Pool Principal Balance. In the event the Servicer exercises such
option, the purchase price distributed with respect to each Certificate will be
100% of its then outstanding principal balance plus any Class PO Deferred
Amounts in the case of the Class PO Certificates and, in the case of an interest
bearing Certificate, any unpaid accrued interest thereon at the applicable
Pass-Through Rate (in each case subject to reduction as provided in the
Agreement if the purchase price is based in part on the appraised value of any
REO Properties and such appraised value is less than the Stated Principal
Balance of the related Loans). Distributions on the Certificates in respect of
any such optional termination will first be paid to the Senior Certificates and
then to the Subordinated Certificates. The proceeds from any such distribution
may not be sufficient to distribute the full amount to which each class of
Certificates is entitled if the purchase price is based in part on the appraised
value of any REO Property and such appraised value is less than the Stated
Principal Balance of the related Loan.
The Trustee
______________________ will be the Trustee under the Agreement. The
Depositor and the Servicer may maintain other banking relationships in the
ordinary course of business with ___________________. Offered Certificates may
be surrendered at the Corporate Trust Office of the Trustee located at
_______________________________, Attention: _____________________ or at such
other addresses as the Trustee may designate from time to time.
Restrictions on Transfer of the Class A-R Certificates
The Class A-R Certificates will be subject to the restrictions on transfer
described in the Prospectus under "Federal Income Tax Consequences--Taxation of
Holders of Residual Interest Securities--Restrictions on Ownership and Transfer
of Residual Interest Securities" and "--Tax Treatment of Foreign Investors." The
Agreement provides that the Class A-R Certificates (in addition to certain other
classes of Certificates) may not be acquired by an ERISA Plan. See "ERISA
Considerations." Each Class A-R Certificate will contain a legend describing the
foregoing restrictions.
S-42
<PAGE>
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
General
The effective yield to the holders of the interest bearing Certificates
will be lower than the yield otherwise produced by the applicable rate at which
interest is passed through to such holders and the purchase price of such
Certificates because monthly distributions will not be payable to such holders
until the ____ day (or, if such day is not a business day, the following
business day) of the month following the month in which interest accrues on the
Loans (without any additional distribution of interest or earnings thereon in
respect of such delay).
Delinquencies on the Loans which are not advanced by or on behalf of the
Servicer (because amounts, if advanced, would be nonrecoverable), will adversely
affect the yield on the Certificates. Because of the priority of distributions,
shortfalls resulting from delinquencies not so advanced will be borne first by
the Subordinated Certificates, in the reverse order of their numerical class
designations, and then by the Senior Certificates. If, as a result of such
shortfalls, the aggregate of the Class Certificate Balances of all classes of
Certificates exceeds the Pool Principal Balance, the Class Certificate Balance
of the class of Subordinated Certificates then outstanding with the highest
numerical class designation will be reduced by the amount of such excess.
Net Interest Shortfalls will adversely affect the yields on the Offered
Certificates. In addition, although all losses initially will be borne by the
Subordinated Certificates, in the reverse order of their numerical class
designations (either directly or through distributions in respect of Class PO
Deferred Amounts on the Class PO Certificates), Excess Losses will be borne by
all classes of Certificates (other than the Notional Amount Certificates) on a
pro rata basis. Moreover, since the Subordinated Principal Distribution Amount
for each Distribution Date will be reduced by the amount of any distributions on
such Distribution Date in respect of Class PO Deferred Amounts, the amount
distributable as principal on each such Distribution Date to each class of
Subordinated Certificates then entitled to a distribution of principal will be
less than it otherwise would be in the absence of such Class PO Deferred
Amounts. As a result, the yields on the Offered Certificates will depend on the
rate and timing of Realized Losses, including Excess Losses. Excess Losses could
occur at a time when one or more classes of Subordinated Certificates are still
outstanding and otherwise available to absorb other types of Realized Losses.
Prepayment Considerations and Risks
The rate of principal payments on the Offered Certificates, the aggregate
amount of distributions on the Offered Certificates and the yield to maturity of
the Offered Certificates will be related to the rate and timing of payments of
principal on the Loans. The rate of principal payments on the Loans will in turn
be affected by the amortization schedules of the Loans and by the rate of
principal prepayments (including for this purpose prepayments resulting from
refinancing, liquidations of the Loans due to defaults, casualties,
condemnations and repurchases by a Seller or the Servicer). The Loans may be
prepaid by the mortgagors at any time without a prepayment penalty. The Loans
are subject to the due-on-sale provisions included therein. See "The Mortgage
Pool."
Prepayments, liquidations and purchases of the Loans (including any
optional purchase by the Servicer of a defaulted Loan and any optional
repurchase of the remaining Loans in connection with the termination of the
Trust Fund, in each case as described under "Description of the
Certificates--Optional Purchase of Defaulted Loans" and "--Optional
Termination") will result in distributions on the Offered Certificates of
principal amounts which would otherwise be distributed over the remaining terms
of the Loans. Since the
S-43
<PAGE>
rate of payment of principal of the Loans will depend on future events and a
variety of factors, no assurance can be given as to such rate or the rate of
principal prepayments. The extent to which the yield to maturity of a class of
Offered Certificates may vary from the anticipated yield will depend upon the
degree to which such Offered Certificate is purchased at a discount or premium,
and the degree to which the timing of payments thereon is sensitive to
prepayments, liquidations and purchases of the Loans. Further, an investor
should consider the risk that, in the case of the Principal Only Certificates
and any other Offered Certificate purchased at a discount, a slower than
anticipated rate of principal payments (including prepayments) on the Loans
could result in an actual yield to such investor that is lower than the
anticipated yield and, in the case of the Interest Only Certificates and any
other Offered Certificate purchased at a premium, a faster than anticipated rate
of principal payments could result in an actual yield to such investor that is
lower than the anticipated yield. Investors in the Interest Only Certificates
should carefully consider the risk that a rapid rate of principal payments on
the Loans could result in the failure of such investors to recover their initial
investments.
The rate of principal payments (including prepayments) on pools of
mortgage loans may vary significantly over time and may be influenced by a
variety of economic, geographic, social and other factors, including changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties and servicing decisions. In general, if prevailing
interest rates were to fall significantly below the Mortgage Rates on the Loans,
the Loans could be subject to higher prepayment rates than if prevailing
interest rates were to remain at or above the Mortgage Rates on the Loans.
Conversely, if prevailing interest rates were to rise significantly, the rate of
prepayments on the Loans would generally be expected to decrease. No assurances
can be given as to the rate of prepayments on the Loans in stable or changing
interest rate environments.
As described herein under "Description of the Certificates--Principal,"
the Senior Prepayment Percentage of the applicable Non-PO Percentage of all
principal prepayments will be initially distributed to the classes of Senior
Certificates (other than the Class PO Certificates) then entitled to receive
principal prepayment distributions. This may result in all (or a
disproportionate percentage) of such principal prepayments being distributed to
holders of such classes of Senior Certificates and none (or less than their pro
rata share) of such principal prepayments being distributed to holders of the
Subordinated Certificates during the periods of time described in the definition
of Senior Prepayment Percentage.
The timing of changes in the rate of prepayments on the Loans may
significantly affect an investor's actual yield to maturity, even if the average
rate of principal payments is consistent with an investor's expectation. In
general, the earlier a prepayment of principal on the Loans, the greater the
effect on an investor's yield to maturity. The effect on an investor's yield as
a result of principal payments occurring at a rate higher (or lower) than the
rate anticipated by the investor during the period immediately following the
issuance of the Offered Certificates may not be offset by a subsequent like
decrease (or increase) in the rate of principal payments.
The tables below indicate the sensitivity of the pre-tax corporate bond
equivalent yields to maturity of certain classes of Certificates to various
constant percentages of SPA. The yields set forth in the tables were calculated
by determining the monthly discount rates that, when applied to the assumed
streams of cash flows to be paid on the applicable classes of Certificates,
would cause the discounted present value of such assumed streams of cash flows
to equal the assumed aggregate purchase prices of such classes and converting
such monthly rates to corporate bond equivalent rates. Such calculations do not
take into account variations that may occur in the interest rates at which
investors may be able to reinvest funds received by them as distributions on
such Certificates and consequently do not purport to reflect the return on any
investment in any such class of Certificate when such reinvestment rates are
considered.
S-44
<PAGE>
Sensitivity of the Interest Only Certificates
As indicated in the table below, the yield to investors in the Class X
Certificates will be sensitive to the rate of principal payments (including
prepayments) of the Non-Discount Loans (particularly those with high Net
Mortgage Rates), which generally can be prepaid at any time. On the basis of the
assumptions described below, the yield to maturity on the Class X Certificates
would be approximately 0% if prepayments were to occur at a constant rate of
approximately % SPA. If the actual prepayment rate of the Non-Discount Loans
were to exceed the foregoing level for as little as one month while equaling
such level for the remaining months, the investors in the Class X Certificates
would not fully recoup their initial investments.
As described above under "Description of the Certificates--General," the
Pass-Through Rate of the Class X Certificates in effect from time to time is
calculated by reference to the Net Mortgage Rates of the Non-Discount Loans. The
Non-Discount Loans will have higher Net Mortgage Rates (and higher Mortgage
Rates) than the other Loans. In general, mortgage loans with higher mortgage
rates tend to prepay at higher rates than mortgage loans with relatively lower
mortgage rates in response to a given change in market interest rates. As a
result, the Non-Discount Loans may prepay at higher rates, thereby reducing the
Pass-Through Rate and Notional Amount of the Class X Certificates.
The information set forth in the following table has been prepared on the
basis of the Structuring Assumptions and on the assumption that the purchase
price of the Class X Certificates (expressed as a percentage of initial Notional
Amount) is as follows:
Class Price*
------ ------
Class X............... %
- ----------
* The price does not include accrued interest. Accrued interest has been
added to such price in calculating the yields set forth in the table
below.
Sensitivity of the Interest Only Certificates to Prepayments
(Pre-Tax Yields to Maturity)
SPA Prepayment /Assumption
--------------------------
<TABLE>
<CAPTION>
Class 0% % % % % %
- ---------------------- ----------------- ---------------- ---------------- ---------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Class X % % % % % %
</TABLE>
It is unlikely that the Non-Discount Loans will have the precise
characteristics described herein or that the Non-Discount Loans will all prepay
at the same rate until maturity or that all of the Non-Discount Loans will
prepay at the same rate or time. As a result of these factors, the pre-tax
yields on the Class X Certificates are likely to differ from those shown in the
table above, even if all of the Loans prepay at the indicated percentages of
SPA. No representation is made as to the actual rate of principal payments on
the Loans for any period or over the lives of the Class X Certificates or as to
the yield on the Class X Certificates. Investors must make their own decisions
as to the appropriate prepayment assumptions to be used in deciding whether to
purchase the Class X Certificates.
S-45
<PAGE>
Sensitivity of the Principal Only Certificates
The Class PO Certificates will be "principal only" certificates and will
not bear interest. As indicated in the table below, a lower than anticipated
rate of principal payments (including prepayments) on the Discount Loans will
have a negative effect on the yield to investors in the Principal Only
Certificates.
As described above under "Description of the Certificates--Principal," the
Class PO Principal Distribution Amount is calculated by reference to the
principal payments (including prepayments) on the Discount Loans. The Discount
Loans will have lower Net Mortgage Rates (and lower Mortgage Rates) than the
other Loans. In general, mortgage loans with higher mortgage rates tend to
prepay at higher rates than mortgage loans with relatively lower mortgage rates
in response to a given change in market interest rates. As a result, the
Discount Loans may prepay at lower rates, thereby reducing the rate of payment
of principal and the resulting yield of the Class PO Certificates.
The information set forth in the following table has been prepared on the
basis of the Structuring Assumptions and on the assumption that the aggregate
purchase price of the Principal Only Certificates (expressed as a percentage of
initial Class Certificate Balance) is as follows:
Class Price*
------ ------
Class PO............... %
Sensitivity of the Principal Only Certificates to Prepayments
(Pre-Tax Yields to Maturity)
SPA Prepayment /Assumption
--------------------------
<TABLE>
<CAPTION>
Class 0% % % % % %
- ---------------------- ----------------- ---------------- ---------------- ---------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Class PO % % % % % %
Class PO......................... % % % % % %
</TABLE>
It is unlikely that the Discount Loans will have the precise
characteristics described herein or that the Discount Loans will all prepay at
the same rate until maturity or that all of such Discount Loans will prepay at
the same rate or time. As a result of these factors, the pre-tax yield on the
Principal Only Certificates is likely to differ from those shown in the table
above, even if all of the Loans prepay at the indicated percentages of SPA. No
representation is made as to the actual rate of principal payments on the Loans
for any period or over the life of the Principal Only Certificates or as to the
yield on the Principal Only Certificates. Investors must make their own
decisions as to the appropriate prepayment assumptions to be used in deciding
whether to purchase the Principal Only Certificates.
Additional Information
The Depositor intends to file certain additional yield tables and other
computational materials with respect to one or more classes of Underwritten
Certificates with the Commission in a report on Form 8-K to be dated , 19 .
Such tables and materials were prepared by each Underwriter at the request
of certain prospective investors, based on assumptions provided by, and
satisfying the special requirements of, such
S-46
<PAGE>
prospective investors. Such tables and assumptions may be based on assumptions
that differ from the Structuring Assumptions. Accordingly, such tables and other
materials may not be relevant to or appropriate for investors other than those
specifically requesting them.
Weighted Average Lives of the Offered Certificates
The weighted average life of an Offered Certificate is determined by (a)
multiplying the amount of the net reduction, if any, of the Class Certificate
Balance of such Certificate on each Distribution Date by the number of years
from the date of issuance to such Distribution Date, (b) summing the results and
(c) dividing the sum by the aggregate amount of the net reductions in Class
Certificate Balance of such Certificate referred to in clause (a).
For a discussion of the factors which may influence the rate of payments
(including prepayments) of the Loans, see "--Prepayment Considerations and
Risks" herein and "Yield and Prepayment Considerations" in the Prospectus.
In general, the weighted average lives of the Offered Certificates will be
shortened if the level of prepayments of principal of the Loans increases.
However, the weighted average lives of the Offered Certificates will depend upon
a variety of other factors, including the timing of changes in such rate of
principal payments and the priority sequence of distributions of principal of
the classes of Certificates and the distribution of principal of the Planned
Principal Classes and the Targeted Principal Classes in accordance with the
Principal Balance Schedules herein. In particular, if the amount available for
distribution as principal of the Senior Certificates (other than the Class PO
Certificates) on any Distribution Date exceeds the amount required to reduce the
principal balances of the Planned Principal Classes and the Targeted Principal
Classes then entitled to receive a distribution of principal to their respective
scheduled balances as set forth in the Principal Balance Schedules, such excess
principal will be distributed on the remaining classes of Senior Certificates
(other than the Class PO Certificates) on such Distribution Date. Conversely, if
the amount available for distribution of principal of the Senior Certificates
(other than the Class PO Certificates) on any Distribution Date is less than the
amount so required to reduce the Planned Principal Classes and the Targeted
Principal Classes then entitled to receive a distribution of principal to their
respective scheduled balances, no principal will be distributed on such other
classes of Senior Certificates on such Distribution Date. Accordingly, the rate
of principal payments on the Loans is expected to have a greater effect on the
weighted average life of the Support Classes and under certain prepayment
scenarios, the weighted average lives of the Targeted Principal Classes, than on
the weighted average lives of the Planned Principal Classes.
The interaction of the foregoing factors may have different effects on
various classes of Offered Certificates and the effects on any class may vary at
different times during the life of such class. Accordingly, no assurance can be
given as to the weighted average life of any class of Offered Certificates.
Further, to the extent the prices of the Offered Certificates represent
discounts or premiums to their respective original Class Certificate Balances,
variability in the weighted average lives of such classes of Offered
Certificates will result in variability in the related yields to maturity. For
an example of how the weighted average lives of the classes of Offered
Certificates may be affected at various constant percentages of SPA, see the
Decrement Tables below.
Decrement Tables
The following tables indicate the percentages of the initial Class
Certificate Balances of the classes of Offered Certificates (other than the
Notional Amount Certificates) that would be outstanding after each of the dates
shown at various constant percentages of SPA and the corresponding weighted
average lives of such classes. The tables have been prepared on the basis of the
Structuring Assumptions. It is not likely that (i)
S-47
<PAGE>
the Loans will have the precise characteristics described herein or (ii) all of
the Loans will prepay at a constant percentage of SPA. Moreover, the diverse
remaining terms to maturity of the Loans could produce slower or faster
principal distributions than indicated in the tables, which have been prepared
using the specified constant percentages of SPA, even if the remaining term to
maturity of the Loans is consistent with the remaining terms to maturity of the
Loans specified in the Structuring Assumptions.
S-48
<PAGE>
Percent of Initial Class Certificate
Balances Outstanding*
<TABLE>
<CAPTION>
Class A-
--------
Distribution Date 0% % % % % % %
- ------------------------------------- -------------- -------------- -------------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Initial.............................. % % % % % %
19..............................
19..............................
19..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
-- -- -- -- -- --
Weighted Average
Life (in years)**..........
</TABLE>
S-49
<PAGE>
<TABLE>
<CAPTION>
Class
-----
Distribution Date 0% % % % % % %
- ------------------------------------- -------------- -------------- -------------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Initial.............................. % % % % % %
19..............................
19..............................
19..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
20..............................
-- -- -- -- -- --
Weighted Average
Life (in years)**..........
</TABLE>
- ----------
* Rounded to the nearest whole percentage.
** Determined as specified under "--Weighted Average Lives of the Offered
Certificates."
Last Scheduled Distribution Date
The "Last Scheduled Distribution Date" for each class of Offered
Certificates is the Distribution Date in , 20 , which is the
Distribution Date in the month following the latest scheduled maturity date
for any of the Loans. Since the rate of distributions in reduction of the Class
Certificate Balance or Notional
S-50
<PAGE>
Amount of each class of Offered Certificates will depend on the rate of payment
(including prepayments) of the Loans, the Class Certificate Balance or Notional
Amount of any such class could be reduced to zero significantly earlier or later
than the Last Scheduled Distribution Date. The rate of payments on the Loans
will depend on their particular characteristics, as well as on prevailing
interest rates from time to time and other economic factors, and no assurance
can be given as to the actual payment experience of the Loans. See "Yield,
Prepayment and Maturity Considerations--Prepayment Considerations and Risks" and
"--Weighted Average Lives of the Offered Certificates" herein and "Yield and
Prepayment Considerations" in the Prospectus.
The Subordinated Certificates
The weighted average life of, and the yield to maturity on, the
Subordinated Certificates, in increasing order of their numerical class
designation, will be progressively more sensitive to the rate and timing of
mortgagor defaults and the severity of ensuing losses on the Loans. If the
actual rate and severity of losses on the Loans is higher than those assumed by
a holder of a Subordinated Certificate, the actual yield to maturity of such
Certificate may be lower than the yield expected by such holder based on such
assumption. The timing of losses on Loans will also affect an investor's actual
yield to maturity, even if the rate of defaults and severity of losses over the
life of the Mortgage Pool are consistent with an investor's expectations. In
general, the earlier a loss occurs, the greater the effect on an investor's
yield to maturity. Realized Losses on the Loans will reduce the Class
Certificate Balances of the applicable class of Subordinated Certificates to the
extent of any losses allocated thereto (as described under "Description of the
Certificates--Allocation of Losses"), without the receipt of cash attributable
to such reduction. In addition, shortfalls in cash available for distributions
on the Subordinated Certificates will result in a reduction in the Class
Certificate Balance of the class of Subordinated Certificates then outstanding
with the highest numerical class designation if and to the extent that the
aggregate of the Class Certificate Balances of all classes of Certificates,
following all distributions and the allocation of Realized Losses on a
Distribution Date, exceeds the Pool Principal Balance as of the Due Date
occurring in the month of such Distribution Date. As a result of such
reductions, less interest will accrue on such class of Subordinated Certificates
than otherwise would be the case. The yield to maturity of the Subordinated
Certificates will also be affected by the disproportionate allocation of
principal prepayments to the Senior Certificates, Net Interest Shortfalls, other
cash shortfalls in Available Funds and distribution of funds to Class PO
Certificateholders otherwise available for distribution on the Subordinated
Certificates to the extent of reimbursement for Class PO Deferred Amounts. See
"Description of the Certificates--Allocation of Losses."
If on any Distribution Date, the Applicable Credit Support Percentage for
any class of Subordinated Certificates is less than its Original Applicable
Credit Support Percentage, all partial principal prepayments and principal
prepayments in full available for distribution on the Subordinated Certificates
will be allocated solely to such class and all other classes of Subordinated
Certificates with lower numerical class designations, thereby accelerating the
amortization thereof relative to that of the Restricted Classes and reducing the
weighted average lives of such classes of Subordinated Certificates receiving
such distributions. Accelerating the amortization of the classes of Subordinated
Certificates with lower numerical class designations relative to the other
classes of Subordinated Certificates is intended to preserve the availability of
the subordination provided by such other classes.
S-51
<PAGE>
CREDIT ENHANCEMENT
Subordination of Certain Classes
The rights of the holders of the Subordinated Certificates to receive
distributions with respect to the Loans will be subordinated to such rights of
the holders of the Senior Certificates and the rights of the holders of each
class of Subordinated Certificates (other than the Class B-1 Certificates) to
receive such distributions will be further subordinated to such rights of the
class or classes of Subordinated Certificates with lower numerical class
designations, in each case only to the extent described herein. The
subordination of the Subordinated Certificates to the Senior Certificates and
the subordination of the classes of Subordinated Certificates with higher
numerical class designations to those with lower numerical class designations is
intended to increase the likelihood of receipt, respectively, by the Senior
Certificateholders and the holders of Subordinated Certificates with lower
numerical class designations of the maximum amount to which they are entitled on
any Distribution Date and to provide such holders protection against Realized
Losses, other than Excess Losses. In addition, the Subordinated Certificates
will provide limited protection against Special Hazard Losses, Bankruptcy Losses
and Fraud Losses up to the Special Hazard Loss Coverage Amount, Bankruptcy Loss
Coverage Amount and Fraud Loss Coverage Amount, respectively, as described
below. The applicable Non-PO Percentage of Realized Losses, other than Excess
Losses, will be allocated to the class of Subordinated Certificates then
outstanding with the highest numerical class designation. In addition, the Class
Certificate Balance of such class of Subordinated Certificates will be reduced
by the amount of distributions on the Class PO Certificates in reimbursement for
Class PO Deferred Amounts.
The Subordinated Certificates will provide limited protection to the
classes of Certificates of higher relative priority against (i) Special Hazard
Losses in an initial amount expected to be up to approximately $______ (the
"Special Hazard Loss Coverage Amount"), (ii) Bankruptcy Losses in an initial
amount expected to be up to approximately $______ (the "Bankruptcy Loss Coverage
Amount") and (iii) Fraud Losses in an initial amount expected to be up to
approximately $______ (the "Fraud Loss Coverage Amount").
The Special Hazard Loss Coverage Amount will be reduced, from time to
time, to be an amount equal on any Distribution Date to the lesser of (a) the
greater of (i) __% of the aggregate of the principal balances of the Loans or
(ii) _____ the principal balance of the largest Loan, or (b) the Special Hazard
Loss Coverage Amount as of the Closing Date less the amount, if any, of losses
attributable to Special Hazard Loans incurred since the Closing Date. All
principal balances for the purpose of this definition will be calculated as of
the first day of the month preceding such Distribution Date after giving effect
to scheduled installments of principal and interest on the Loans then due,
whether or not paid.
The Fraud Loss Coverage Amount will be reduced, from time to time, by the
amount of Fraud Losses allocated to the Certificates. In addition, on each
anniversary of the Cut-off Date, the Fraud Loss Coverage Amount will be reduced
as follows: (a) on the _____, ______, _____ and ______ anniversaries of the
Cut-off Date, to an amount equal to the lesser of (i) __% of the then current
Pool Principal Balance or (ii) the excess of the Fraud Loss Coverage Amount as
of the preceding anniversary of the Cut-off Date over the cumulative amount of
Fraud Losses allocated to the Certificates since such preceding anniversary and
(b) on the _____ anniversary of the Cut-off Date, to zero.
The Bankruptcy Loss Coverage Amount will be reduced, from time to time, by
the amount of Bankruptcy Losses allocated to the Certificates.
S-52
<PAGE>
The amount of coverage provided by the Subordinated Certificates for
Special Hazard Losses, Bankruptcy Losses and Fraud Losses may be canceled or
reduced from time to time for each of the risks covered, provided that the then
current ratings of the Certificates assigned by the Rating Agencies are not
adversely affected thereby. In addition, a reserve fund or other form of credit
enhancement may be substituted for the protection provided by the Subordinated
Certificates for Special Hazard Losses, Bankruptcy Losses and Fraud Losses.
As used herein, a "Deficient Valuation" is a bankruptcy proceeding whereby
the bankruptcy court may establish the value of the Mortgaged Property at an
amount less than the then outstanding principal balance of the Loan secured by
such Mortgaged Property or may reduce the outstanding principal balance of a
Loan. In the case of a reduction in the value of the related Mortgaged Property,
the amount of the secured debt could be reduced to such value, and the holder of
such Loan thus would become an unsecured creditor to the extent the outstanding
principal balance of such Loan exceeds the value so assigned to the Mortgaged
Property by the bankruptcy court. In addition, certain other modifications of
the terms of a Loan can result from a bankruptcy proceeding, including the
reduction (a "Debt Service Reduction") of the amount of the monthly payment on
the related Loan. Notwithstanding the foregoing, no such occurrence shall be
considered a Debt Service Reduction or Deficient Valuation so long as the
Servicer is pursuing any other remedies that may be available with respect to
the related Loan and (i) such Loan is not in default with respect to payment due
thereunder or (ii) scheduled monthly payments of principal and interest are
being advanced by the Servicer without giving effect to any Debt Service
Reduction or Deficient Valuation.
USE OF PROCEEDS
The Depositor will apply the net proceeds of the sale of the Certificates
against the purchase price of the Loans.
FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, an election will be made to treat the
Trust Fund as a REMIC. Assuming such an election is timely made and the terms of
the Pooling and Servicing Agreement are complied with, Stradley, Ronon, Stevens
& Young, LLP, special tax counsel to the Depositor ("Tax Counsel") is of the
opinion that the Trust Fund will qualify as a REMIC within the meaning of the
Code. The Regular Certificates will constitute the "regular interests" in the
REMIC. The Residual Certificates will constitute the sole class of "residual
interest" in the REMIC. See "Federal Income Tax Consequences" in the Prospectus.
The Regular Certificates generally will be treated as debt instruments
issued by the REMIC for federal income tax purposes. Income on the Regular
Certificates must be reported under an accrual method of accounting.
In the opinion of Tax Counsel, the Principal Only Certificates will be
treated for federal income tax purposes as having been issued with an amount of
Original Issue Discount ("OID") equal to the difference between their principal
balance and their issue price. Although the tax treatment is not entirely
certain, Notional Amount Certificates will be treated as having been issued with
OID for federal income tax purposes equal to the excess of all expected payments
of interest on such Certificates over their issue price. The remaining classes
of Regular Certificates, depending on their respective issue prices (as
described in the Prospectus under "Federal Income Tax Consequences"), may be
treated as having been issued with OID for
S-53
<PAGE>
federal income tax purposes. For purposes of determining the amount and rate of
accrual of OID and market discount, the Trust Fund intends to assume that there
will be prepayments on the Loans at a rate equal to ____% SPA (the "Prepayment
Assumption"). No representation is made as to whether the Loans will prepay at
the foregoing rate or any other rate. See "Yield, Prepayment and Maturity
Considerations" herein and "Federal Income Tax Consequences" in the Prospectus.
Computing accruals of OID in the manner described in the Prospectus may
(depending on the actual rate of prepayments during the accrual period) result
in the accrual of negative amounts of OID on the Certificates issued with OID in
an accrual period. Holders will be entitled to offset negative accruals of OID
only against future OID accrual on such Certificates.
If the holders of any Regular Certificates are treated as holding such
Certificates at a premium, such holders should consult their tax advisors
regarding the election to amortize bond premium and the method to be employed.
As is described more fully under "Federal Income Tax Consequences" in the
Prospectus, the Offered Certificates will represent qualifying assets under
Sections 856(c)(5)(A) and 7701(a)(19)(C) of the Code, and net interest income
attributable to the Offered Certificates will be "interest on obligations
secured by mortgages on real property" within the meaning of Section
856(c)(3)(B) of the Code, to the extent the assets of the Trust Fund are assets
described in such sections. The Regular Certificates will represent qualifying
assets under Section 860G(a)(3) if acquired by a REMIC within the prescribed
time periods of the Code.
The holders of the Residual Certificates must include the taxable income
of the REMIC in their federal taxable income. The resulting tax liability of the
holders may exceed cash distributions to such holders during certain periods.
All or a portion of the taxable income from a Residual Certificate recognized by
a holder may be treated as "excess inclusion" income, which with limited
exceptions, is subject to U.S federal income tax.
Prospective purchasers of a Residual Certificate should consider carefully
the tax consequences of an investment in Residual Certificates discussed in the
Prospectus and should consult their own tax advisors with respect to those
consequences. See "Federal Income Tax Consequences--Taxation of Holders of
Residual Interest Securities" in the Prospectus. Specifically, prospective
holders of Residual Certificates should consult their tax advisors regarding
whether, at the time of acquisition, a Residual Certificate will be treated as a
"noneconomic" residual interest, a "non-significant value" residual interest and
a "tax avoidance potential" residual interest. See "Federal Income Tax
Consequences--Taxation of Holders of Residual Interest Securities--Restrictions
on Ownership and Transfer of Residual Interest Securities," "--Mark to Market
Rules," "--Excess Inclusions" and "--Tax Treatment of Foreign Investors" in the
Prospectus. Additionally, for information regarding prohibited transactions and
treatment of realized losses, see "Federal Income Tax Consequences--Taxation of
the REMIC--Prohibited Transactions and Contributions Tax" and "--Taxation of
Holders of Residual Interest Securities--Limitation on Losses" in the
Prospectus.
ERISA CONSIDERATIONS
Any Plan fiduciary who proposes to cause a Plan (as defined below) to
acquire any of the Offered Certificates should consult with its counsel with
respect to the potential consequences under the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") and/or the Code, of the Plan's
acquisition and ownership of such Certificates. See "ERISA Considerations" in
the Prospectus. Section 406 of ERISA prohibits "parties in interest" with
respect to an employee benefit plan subject to ERISA and/or the excise tax
provisions set forth under Section 4975 of the Code (a "Plan") from engaging in
certain transactions involving such Plan and its assets unless a statutory or
administrative exemption applies to the transaction.
S-54
<PAGE>
Section 4975 of the Code imposes certain excise taxes on prohibited transactions
involving Plans and other arrangements (including, but not limited to,
individual retirement accounts) described under that Section; ERISA authorizes
the imposition of civil penalties for prohibited transactions involving Plans
not subject to the requirements of Section 4975 of the Code.
Certain employee benefit plans, including governmental plans and certain
church plans, are not subject to ERISA's requirements. Accordingly, assets of
such plans may be invested in the Offered Certificates without regard to the
ERISA considerations described herein and in the Prospectus, subject to the
provisions of other applicable federal and state law. Any such plan that is
qualified and exempt from taxation under Sections 401(a) and 501(a) of the Code
may nonetheless be subject to the prohibited transaction rules set forth in
Section 503 of the Code.
Except as noted above, investments by Plans are subject to ERISA's general
fiduciary requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan. A fiduciary who decides to
invest the assets of a Plan in the Offered Certificates should consider, among
other factors, the extreme sensitivity of the investment to the rate of
principal payments (including prepayments) on the Loans.
The United States Department of Labor has granted an individual
administrative exemption to (Prohibited Transaction Exemption _______, Exemption
Application No. D-_____, Fed. Reg. ____ (____) (_____) (the "Underwriter
Exemption") from certain of the prohibited transaction rules of ERISA and the
related excise tax provisions of Section 4975 of the Code with respect to the
initial purchase, the holding and the subsequent resale by Plans of certificates
in pass-through trusts that consist of certain receivables, loans and other
obligations that meet the conditions and requirements of the Underwriter
Exemption. The Underwriter Exemption applies to mortgage loans such as the Loans
in the Trust Fund.
For a general description of the Underwriter Exemption and the conditions
that must be satisfied for the Underwriter Exemption to apply, see "ERISA
Considerations" in the Prospectus.
It is expected that the Underwriter Exemption will apply to the
acquisition and holding by Plans of the Senior Certificates (other than the
Class _____, Class PO, Class X and Class A-R Certificates) and that all
conditions of the Underwriter Exemption other than those within the control of
the investors will be met. In addition, as of the date hereof, there is no
single mortgagor that is the obligor on five percent (5%) of the Loans included
in the Trust Fund by aggregate unamortized principal balance of the assets of
the Trust Fund. Because the Class _____, Class PO and Class X Certificates are
not being purchased by either Underwriter, such classes of Certificates do not
currently meet the requirements of the Underwriter Exemption or any comparable
individual administrative exemption granted to either Underwriter. Consequently,
the sale or exchange of the Class _____, Class PO and Class X Certificates may
be made only under the conditions set forth for the Class B- , Class B- and
Class B- Certificates below.
Because the characteristics of the Class B- , Class B- , Class B- and
Class A-R Certificates may not meet the requirements of PTE 83-1, the
Underwriter Exemption or any other issued exemption under ERISA, the purchase
and holding of the Class B- , Class B- , Class B- and Class A-R Certificates by
a Plan or by individual retirement accounts or other plans subject to Section
4975 of the Code may result in prohibited transactions or the imposition of
excise taxes or civil penalties. Consequently, transfers of the Class B- , Class
B- , Class B- and Class A-R Certificates will not be registered by the Trustee
unless the Trustee receives: (i) a representation from the transferee of such
Certificate, acceptable to and in form and substance satisfactory to the
Trustee, to the effect that such transferee is not an employee benefit plan
subject to Section 406 of ERISA or a plan or arrangement subject to Section 4975
of the Code, nor a person acting on behalf of any such plan or arrangement nor
using
S-55
<PAGE>
the assets of any such plan or arrangement to effect such transfer; (ii) if the
purchaser is an insurance company, a representation that the purchaser is an
insurance company which is purchasing such Certificates with funds contained in
an "insurance company general account" (as such term is defined in Section V(e)
of Prohibited Transaction Class Exemption 95-60 ("PTE 95-60")) and that the
purchase and holding of such Certificates are covered under PTE 95-60; or (iii)
an opinion of counsel satisfactory to the Trustee that the purchase or holding
of such Certificate by a Plan, any person acting on behalf of a Plan or using
such Plan's assets, will not result in the assets of the Trust Fund being deemed
to be "plan assets" and subject to the prohibited transaction requirements of
ERISA and the Code and will not subject the Trustee to any obligation in
addition to those undertaken in the Agreement. Such representation as described
above shall be deemed to have been made to the Trustee by the transferee's
acceptance of a Class B- , Class B- or Class B- Certificate. In the event that
such representation is violated, or any attempt to transfer to a plan or person
acting on behalf of a Plan or using such Plan's assets is attempted without such
opinion of counsel, such attempted transfer or acquisition shall be void and of
no effect.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of PTE 83-1
described in the Prospectus and the Underwriter Exemption, and the potential
consequences in their specific circumstances, prior to making an investment in
any of the Offered Certificates. Moreover, each Plan fiduciary should determine
whether under the general fiduciary standards of investment prudence and
diversification, an investment in any of the Offered Certificates is appropriate
for the Plan, taking into account the overall investment policy of the Plan and
the composition of the Plan's investment portfolio.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement between Equity One, the Depositor and the Underwriter, the Depositor
has agreed to sell to the Underwriter, and the Underwriter has agreed to
purchase from the Depositor the respective classes of Offered Certificates
indicated on the cover page hereof to be purchased by it. Distribution of the
Offered Certificates will be made by the Underwriter from time to time in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. In connection with the sale of the Offered Certificates, the
Underwriter may be deemed to have received compensation from the Depositor in
the form of underwriting discounts.
The Underwriter intends to make a secondary market in the classes of
Offered Certificates, but the Underwriter has no obligation to do so. There can
be no assurance that a secondary market for the Offered Certificates will
develop or, if it does develop, that it will continue or that it will provide
Certificateholders with a sufficient level of liquidity of investment.
Equity One and the Depositor have agreed to indemnify the Underwriter
against, or make contributions to the Underwriter with respect to certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
LEGAL MATTERS
The validity of the Certificates, including certain federal income tax
consequences with respect thereto, will be passed upon for the Depositor by
Stradley, Ronon, Stevens & Young, LLP, Philadelphia,
S-56
<PAGE>
Pennsylvania. Brown & Wood LLP, New York, New York, will pass upon certain legal
matters on behalf of the Underwriter.
RATINGS
It is a condition to the issuance of the Senior Certificates that they be
rated ____ by _____ ("______") and, by ____ ("_____" and, together with ____,
the "Rating Agencies"). It is a condition to the issuance of the Class B- ,
Class B- and Class B- Certificates that they be rated at least ____, ____ and
____, respectively, by ____.
The ratings assigned by ___ to mortgage pass-through certificates address
the likelihood of the receipt of all distributions on the mortgage loans by
the related certificateholders under the agreements pursuant to which such
certificates are issued. ______'s ratings take into consideration the credit
quality of the related mortgage pool, including any credit support providers,
structural and legal aspects associated with such certificates, and the extent
to which the payment stream on the mortgage pool is adequate to make the
payments required by such certificates. ______ ratings on such certificates do
not, however, constitute a statement regarding frequency of payments of the
mortgage loans.
The ratings assigned by _______ to mortgage pass-through certificates
address the likelihood of the receipt of all distributions on the mortgage loans
by the related certificateholders under the agreements pursuant to which such
certificates are issued. ______'s ratings take into consideration the credit
quality of the related mortgage pool, including any credit support providers,
structural and legal aspects associated with such certificates, and the extent
to which the payment stream on such mortgage pool is adequate to make payments
required by such certificates. ________'s ratings on such certificates do not,
however, constitute a statement regarding frequency of prepayments on the
related mortgage loans.
The ratings of the Rating Agencies do not address the possibility that, as
a result of principal prepayments, Certificateholders may receive a lower than
anticipated yield.
The security ratings assigned to the Offered Certificates should be
evaluated independently from similar ratings on other types of securities. 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 Rating Agencies.
The Depositor has not requested a rating of the Offered Certificates by
any rating agency other than the Rating Agencies; there can be no assurance,
however, as to whether any other rating agency will rate the Offered
Certificates or, if it does, what rating would be assigned by such other rating
agency. The rating assigned by such other rating agency to the Offered
Certificates could be lower than the respective ratings assigned by the Rating
Agencies.
S-57
<PAGE>
INDEX OF DEFINED TERMS
Page
----
Advance...............................................................S-9, S-30
Agreement.............................................................S-5, S-17
Applicable Credit Support Percentage.......................................S-38
Available Funds............................................................S-33
Bankruptcy Loss Coverage Amount............................................S-52
Bankruptcy Losses..........................................................S-40
Beneficial Owner...........................................................S-32
Book-Entry Certificates.....................................................S-5
Cede.......................................................................S-32
Certificate Account........................................................S-32
Certificateholders.........................................................S-17
Certificates.....................................................-1-, S-4, S-31
Class Certificate Balance..................................................S-31
Class PO Deferred Amount...................................................S-34
Class PO Principal Distribution Amount.....................................S-39
Class Subordination Percentage.............................................S-38
Code.......................................................................S-11
Collateral Value...........................................................S-18
Combined Loan-to-Value Ratio...............................................S-18
Corporate Trust Office......................................................S-3
Cut-off Date Pool Principal Balance........................................S-18
Debt Service Reduction.....................................................S-53
Deficient Valuation........................................................S-53
Definitive Certificate.....................................................S-32
Deleted Loan...............................................................S-25
Depositor...................................................................S-6
Determination Date..........................................................S-6
Discount Loan..............................................................S-35
Distribution Account.......................................................S-32
Distribution Date.....................................................S-6, S-33
DTC........................................................................S-31
Due Date...................................................................S-18
Equity One............................................................S-6, S-27
Equity One Standards.......................................................S-26
ERISA................................................................S-11, S-54
Excess Losses..............................................................S-40
Fixed Rate Certificates.....................................................S-5
FNMA.......................................................................S-26
Fraud Loss Coverage Amount.................................................S-52
Fraud Losses...............................................................S-40
Insurance Proceeds.........................................................S-34
Interest Accrual Period...............................................S-8, S-34
Interest Distribution Amount...............................................S-34
Interest Only Certificates..................................................S-5
Last Scheduled Distribution Date...........................................S-50
Liquidated Loan............................................................S-40
S-58
<PAGE>
Page
----
Liquidation Proceeds.......................................................S-34
Loan-to-Value Ratio........................................................S-18
Loans............................................................-1-, S-6, S-17
Mixed Use Loan...................................................-1-, S-6, S-17
Mixed Use Properties.......................................................S-14
Mortgage...................................................................S-25
Mortgage File..............................................................S-25
Mortgage Note..............................................................S-25
Mortgage Pool..........................................................-1-, S-5
Mortgage Rate..............................................................S-34
Net Interest Shortfall.....................................................S-34
Net Prepayment Interest Shortfall..........................................S-35
NMR........................................................................S-35
Non-Discount Loan..........................................................S-31
Non-PO Formula Principal Amount............................................S-35
Non-PO Percentage..........................................................S-35
Notional Amount............................................................S-31
Notional Amount Certificates................................................S-5
Offered Certificates.............................................-1-, S-4, S-31
OID..................................................................S-11, S-53
Original Applicable Credit Support Percentage..............................S-38
Original Subordinated Principal Balance....................................S-37
Permitted Investments......................................................S-32
Physical Certificates.......................................................S-5
Plan.................................................................S-11, S-55
PO Formula Principal Amount................................................S-39
PO Percentage..............................................................S-35
Pool Principal Balance.....................................................S-37
Prepayment Assumption......................................................S-54
Prepayment Interest Excess.................................................S-29
Prepayment Interest Shortfall..............................................S-35
Prepayment Period..........................................................S-34
Principal Only Certificates.................................................S-5
Prospectus .................................................................S-3
PTE 95-60 ................................................................S-56
Rating Agencies......................................................S-12, S-57
Realized Loss..............................................................S-40
Record Date................................................................S-33
Refinance Loan.............................................................S-18
Regular Certificates........................................................S-5
Relief Act Reduction.......................................................S-34
REMIC.................................................................S-3, S-11
REO Property...............................................................S-30
Replacement Loan...........................................................S-25
Residential Loan.................................................-1-, S-6, S-17
Residual Certificates.......................................................S-5
Restricted Classes.........................................................S-38
Scheduled Payments.........................................................S-18
Seller......................................................................S-3
S-59
<PAGE>
Page
----
Sellers................................................................S-3, S-6
Senior Certificates...................................................S-5, S-31
Senior Credit Support Depletion Date.......................................S-36
Senior Percentage..........................................................S-37
Senior Prepayment Percentage...............................................S-37
Senior Principal Distribution Amount.......................................S-36
Servicer....................................................................S-6
Servicing Fee Rate.........................................................S-29
SMMEA......................................................................S-11
SPA........................................................................S-41
Special Hazard Loan........................................................S-40
Special Hazard Loss Coverage Amount........................................S-52
Special Hazard Losses......................................................S-40
Stated Principal Balance...................................................S-37
Structuring Assumptions....................................................S-41
Subordinated Certificates.............................................S-5, S-31
Subordinated Percentage....................................................S-38
Subordinated Prepayment Percentage.........................................S-37
Subordinated Principal Distribution Amount.................................S-38
Substitution Adjustment Amount.............................................S-25
Tax Counsel................................................................S-53
Trustee.....................................................................S-6
Underwriter.................................................................-1-
Underwriter Exemption......................................................S-55
Unpaid Interest Amounts....................................................S-34
Variable Rate Certificates..................................................S-5
S-60
<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 Offered Certificates 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; however, if any material change occurs while this
Prospectus Supplement or Prospectus is required by law to be delivered, this
Prospectus Supplement or the Prospectus will be amended or supplemented
accordingly.
_______________
TABLE OF CONTENTS
Page
----
Prospectus Supplement
Summary of Terms...........................................................
Risk Factors...............................................................
The Mortgage Pool..........................................................
Servicing of Loans.........................................................
Description of the Certificates............................................
Yield, Prepayment and Maturity Considerations..............................
Credit Enhancement.........................................................
Use of Proceeds............................................................
Federal Income Tax Consequences............................................
ERISA Considerations.......................................................
Method of Distribution.....................................................
Legal Matters..............................................................
Ratings....................................................................
Index of Defined Terms.....................................................
PROSPECTUS
Prospectus Supplement or Current Report on Form 8-K........................
Available Information......................................................
Incorporation of Certain Document by Reference.............................
Reports to Securityholders.................................................
Summary of Terms...........................................................
Risk Factors...............................................................
The Trust Fund.............................................................
Use of Proceeds............................................................
The Depositor..............................................................
Loan Program...............................................................
Description of the Securities..............................................
Credit Enhancement.........................................................
Yield and Prepayment Considerations........................................
The Agreements.............................................................
Certain Legal Aspects of the Loans.........................................
Federal Income Tax Consequences............................................
State Tax Considerations...................................................
ERISA Considerations.......................................................
Legal Investment...........................................................
Method of Distribution.....................................................
Legal Matters..............................................................
Rating.....................................................................
Index of Defined Terms.....................................................
================================================================================
================================================================================
$[_____________]
(Approximate)
Mortgage Pass-Through
Certificates,
Series 199_ - _
Equity One ABS, Inc.
Depositor
Equity One, Inc.
Servicer
____________________
PROSPECTUS SUPPLEMENT
[_________, 199_]
____________________
================================================================================
S-61
<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.
SUBJECT TO COMPLETION, DATED APRIL ___, 1997
PROSPECTUS
EQUITY ONE ABS, INC.
Depositor
$1,000,000
(Aggregate Amount)
Asset Backed Securities
(Issuable in Series)
------------
This Prospectus relates to the issuance of Asset Backed Certificates (the
"Certificates") and Asset Backed Notes (the "Notes" and, together with the
Certificates, the "Securities"), which may be sold from time to time in one or
more series (each, a "Series") by Equity One ABS, Inc. (the "Depositor") or by a
Trust Fund (as defined below) on terms determined at the time of sale and
described in this Prospectus and the related Prospectus Supplement. The
Securities of a Series will consist of Certificates which evidence beneficial
ownership of a trust established by the Depositor (each, a "Trust Fund"), and/or
Notes secured by the assets of a Trust Fund. As specified in the related
Prospectus Supplement, the Trust Fund for a Series of Securities will include
certain assets (the "Trust Fund Assets") which will consist of the following
types of loans (the "Loans"): (i) mortgage loans secured by first and/or
subordinate liens on (A) one- to four-family residential properties (each, a
"Residential Loan") and (B) mixed commercial/residential use properties (each, a
"Mixed Use Loan" and, together with the Residential Loans, the "Mortgage
Loans"), (ii) revolving home equity loans or certain balances thereof (the
"Revolving Credit Line Loans") secured by first and/or subordinate liens on one-
to four-family residential properties and (iii) home improvement installment
sales contracts and installment loan agreements (collectively, the "Home
Improvement Contracts") that are either unsecured or secured by first and/or
subordinate liens on one- to four-family residential properties or by purchase
money security interests in the home improvements financed thereby
(collectively, the "Home Improvements"). The Trust Fund Assets will be acquired
by the Depositor, either directly or indirectly, from one or more institutions
(each, a "Seller"), which may be affiliates of the Depositor, and conveyed by
the Depositor to the related Trust Fund. Trust Fund Assets also may include
insurance policies, surety bonds, cash accounts, reinvestment income, guaranties
or letters of credit to the extent described in the related Prospectus
Supplement. See "Index of Defined Terms" on Page 100 of this Prospectus for the
location of the definitions of certain capitalized terms.
Each Series of Securities will be issued in one or more classes. Each
class of Certificates of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on the related Trust Fund Assets. Each class of Notes of a Series will
be secured by the related Trust Fund Assets or, if so specified in the related
Prospectus Supplement, a portion thereof. A Series of Securities may include one
or more classes that are senior in right of payment to one or more other classes
of Securities of such Series. One or more classes of Securities of a Series may
be entitled to receive distributions of principal, interest or any combination
thereof prior to one or more other classes of Securities of such Series or after
the occurrence of specified events, in each case as specified in the related
Prospectus Supplement.
Distributions to holders of Securities ("Securityholders") will be made
monthly, quarterly, semi-annually or at such other intervals and on the dates
specified in the related Prospectus Supplement. Distributions on the Securities
of a Series will be made from the related Trust Fund Assets or proceeds thereof
pledged for the benefit of the Securityholders as specified in the related
Prospectus Supplement.
The related Prospectus Supplement will describe any insurance or guarantee
provided with respect to the related Series of Securities including, without
limitation, any insurance or guarantee provided by the Department of Housing and
Urban Development, the United States Department of Veterans Affairs or any
private insurer or guarantor. The only obligations of the Depositor with respect
to a Series of Securities will be to obtain certain representations and
warranties from each Seller and to assign to the Trustee for the related Series
of Securities the Depositor's rights with respect to such representations and
warranties. The principal obligations of the Servicer named in the related
Prospectus Supplement with respect to the related Series of Securities will be
limited to obligations pursuant to certain representations and warranties and to
its contractual servicing obligations, including any obligation it may have to
advance delinquent payments on the related Trust Fund Assets.
The yield on each class of Securities of a Series will be affected by,
among other things, the rate of payments of principal (including prepayments) on
the related Trust Fund Assets and the timing of receipt of such payments as
described under "Risk Factors--Prepayment and Yield Considerations" and "Yield
and Prepayment Considerations" herein and in the related Prospectus Supplement.
A Trust Fund may be subject to early termination under the circumstances
described under "The Agreements--Termination; Optional Termination" herein and
in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, one or more elections
may be made to treat a Trust Fund or specified portions thereof as a "real
estate mortgage investment conduit" ("REMIC") for federal income tax purposes.
See "Federal Income Tax Consequences."
------------
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
SECURITIES, SEE THE INFORMATION UNDER "RISK FACTORS" ON PAGE 14.
THE CERTIFICATES OF A GIVEN SERIES WILL REPRESENT BENEFICIAL INTERESTS IN, AND
THE NOTES OF A GIVEN SERIES WILL REPRESENT OBLIGATIONS OF, THE RELATED TRUST
FUND ONLY AND WILL NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR,
THE SERVICER, ANY SELLER OR ANY AFFILIATES THEREOF, EXCEPT TO THE EXTENT
DESCRIBED IN THE RELATED PROSPECTUS SUPPLEMENT. THE SECURITIES AND THE LOANS
WILL NOT BE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY
OR BY THE DEPOSITOR OR ANY OTHER PERSON OR ENTITY, EXCEPT IN EACH CASE TO THE
EXTENT DESCRIBED IN THE RELATED PROSPECTUS SUPPLEMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE RELATED PROSPECTUS SUPPLEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------
Prior to issuance there will have been no market for the Securities of any
Series and there can be no assurance that a secondary market for any Securities
will develop, or if it does develop, that it will continue or provide
Securityholders with a sufficient level of liquidity of investment. This
Prospectus may not be used to consummate sales of Securities of any Series
unless accompanied by a Prospectus Supplement. Offers of the Securities may be
made through one or more different methods, including offerings through
underwriters, as more fully described under "Method of Distribution" herein and
in the related Prospectus Supplement.
[ ], 1997
<PAGE>
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the securities covered by such Prospectus Supplement,
whether or not participating in the distribution thereof, may be required to
deliver such Prospectus Supplement and this Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus and Prospectus Supplement when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
PROSPECTUS SUPPLEMENT OR CURRENT REPORT ON FORM 8-K
The Prospectus Supplement or Current Report on Form 8-K relating to the
Securities of each Series to be offered hereunder will, among other things, set
forth with respect to such Securities, as appropriate: (i) the aggregate
principal amount, interest rate and authorized denominations of each class of
such Series of Securities; (ii) information as to the assets comprising the
Trust Fund, including the general characteristics of the related Trust Fund
Assets included therein and, if applicable, the insurance policies, surety
bonds, guaranties, letters of credit or other instruments or agreements included
in the Trust Fund or otherwise, and the amount and source of any reserve account
or other cash account; (iii) the circumstances, if any, under which the Trust
Fund may be subject to early termination; (iv) the circumstances, if any, under
which the Notes of such Series are subject to redemption; (v) the method used to
calculate the amount of principal to be distributed or paid with respect to each
class of Securities; (vi) the order of application of distributions or payments
to each of the classes within such Series, whether sequential, pro rata, or
otherwise; (vii) the Distribution Dates with respect to such Series;
(viii) additional information with respect to the method of distribution of
such Securities; (ix) whether one or more REMIC elections will be made with
respect to the Trust Fund and, if so, the designation of the regular interests
and the residual interests; (x) the aggregate original percentage ownership
interest in the Trust Fund to be evidenced by each class of Certificates; (xi)
the stated maturity of each class of Notes of such Series; (xii) information as
to the nature and extent of subordination with respect to any class of
Securities that is subordinate in right of payment to any other class; and
(xiii) information as to the Sellers, the Servicer and the Trustee.
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 (the "Securities Act"), 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 descriptions 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
Offices located as follows: Midwest Regional Office, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661; and Northeast Regional Office, Seven World
Trade Center, Suite 1300, New York, New York 10048. The Commission also
maintains a Web site at http://www.sec.gov from which such Registration
Statement and exhibits may be obtained.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto 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 Trust Fund
referred to in the accompanying Prospectus Supplement with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), after the date of this Prospectus and
prior to the
2
<PAGE>
termination of any offering of the Securities issued by such Trust Fund 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. Neither the Depositor nor the Servicer for any Series intends to
file with the Commission periodic reports with respect to the related Trust Fund
following completion of the reporting period required by Rule 15d-1 or
Regulation 15D under the Exchange Act.
The Trustee or such other entity specified in the related Prospectus
Supplement on behalf of any Trust Fund 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). Additionally, the Trustee will provide a copy of
the Agreement (without exhibits) relating to any Series without charge upon
written request of a holder of record of a Security of such Series. Such
requests should be directed to the corporate trust office of the Trustee or the
address of such other entity specified in the accompanying Prospectus
Supplement. Included in the accompanying Prospectus Supplement is the name,
address, telephone number, and, if available, facsimile number of the office or
contact person at the corporate trust office of the Trustee or such other
entity.
REPORTS TO SECURITYHOLDERS
Periodic and annual reports concerning the related Trust Fund for a Series
of Securities will be forwarded to Securityholders. However, such reports will
neither be examined nor reported on by an independent public accountant. See
"Description of the Securities--Reports to Securityholders."
3
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY OF TERMS
This summary of certain pertinent information is qualified in its entirety
by reference to the detailed information appearing elsewhere in this Prospectus
and in the related Prospectus Supplement with respect to the Series of
Securities offered thereby and to the related Agreement (as such term is defined
below) which will be prepared in connection with each Series of Securities.
Unless otherwise specified, capitalized terms used and not defined in this
Summary of Terms have the meanings given to them in this Prospectus and in the
related Prospectus Supplement. See "Index of Defined Terms" on Page 100 of this
Prospectus for the location of the definitions of certain capitalized terms.
Title of Securities... Asset Backed Certificates (the "Certificates") and Asset
Backed Notes (the "Notes" and, together with the
Certificates, the "Securities"), which are issuable in
Series.
Depositor............. Equity One ABS, Inc., a Delaware corporation.
Trustee............... The trustee(s) (the "Trustee") for each Series of
Securities will be specified in the related Prospectus
Supplement. See "The Agreements" for a description of
the Trustee's rights and obligations.
Servicer.............. The entity or entities named as Servicer (the
"Servicer") in the related Prospectus Supplement, which
may be an affiliate of the Depositor. See "The
Agreements--Certain Matters Regarding the Servicer and
the Depositor."
Trust Fund Assets..... Assets of the Trust Fund for a Series of Securities will
include certain assets (the "Trust Fund Assets") which
will consist of the Loans, together with payments in
respect of such Trust Fund Assets, as specified in the
related Prospectus Supplement. At the time of issuance
of the Securities of the Series, the Depositor will
cause the Loans comprising the related Trust Fund to be
conveyed to the Trustee, without recourse. The Loans
will be collected in a pool (each, a "Pool") as of the
first day of the month of the issuance of the related
Series of Securities or such other date specified in the
related Prospectus Supplement (the "Cut-off Date").
Trust Fund Assets also may include insurance policies,
surety bonds, cash accounts, reinvestment income,
guaranties or letters of credit to the extent described
in the related Prospectus Supplement. See "Credit
Enhancement." In addition, if the related Prospectus
Supplement so provides, the related Trust Fund Assets
will include the funds on deposit in an account (a
"Pre-Funding Account") which will be used to purchase
additional Loans during the period specified in such
Prospectus Supplement. See "The Agreements--Pre-Funding
Account."
Loans................. The Loans will consist of (i) mortgage loans secured by
first and/or subordinate liens on (A) one- to
four-family residential properties (each, a "Residential
Loan") and (B) mixed commercial/residential use
properties (each, a "Mixed Use Loan" and, together with
the Residential Loans, the "Mortgage Loans"),
(ii) revolving home equity loans or certain balances
thereof (the "Revolving Credit Line Loans")
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
secured by first and/or subordinate liens on one- to
four-family residential properties and (iii) home
improvement installment sales contracts and installment
loan agreements (collectively, the "Home Improvement
Contracts") that are either unsecured or secured by
first and/or subordinate liens on one- to four-family
residential properties, or by purchase money security
interests in the home improvements financed thereby
(collectively, the "Home Improvements"). All Loans will
have been purchased by the Depositor, either directly or
through an affiliate, from one or more Sellers. The
Sellers will have either originated the Loans or
purchased the Loans from other lenders.
As specified in the related Prospectus Supplement, the
Revolving Credit Line Loans will, and the Home
Improvement Contracts may, be secured by mortgages or
deeds of trust or other similar security instruments
creating a lien on a Mortgaged Property, as described in
the related Prospectus Supplement. As specified in the
related Prospectus Supplement, Home Improvement
Contracts may be unsecured or secured by purchase money
security interests in the Home Improvements financed
thereby. The Mortgaged Properties and the Home
Improvements are collectively referred to herein as the
"Properties."
Description of
the Securities...... Each Security will represent a beneficial ownership
interest in, or be secured by the assets of, a Trust
Fund created by the Depositor pursuant to an Agreement
among the Depositor, the Servicer and the Trustee for
the related Series. The Securities of any Series may be
issued in one or more classes as specified in the
related Prospectus Supplement. A Series of Securities
may include one or more classes of senior Securities
(collectively, the "Senior Securities") and one or more
classes of subordinated Securities (collectively, the
"Subordinated Securities"). Certain Series or classes of
Securities may be covered by insurance policies or other
forms of credit enhancement, in each case as described
under "Credit Enhancement" herein and in the related
Prospectus Supplement.
One or more classes of Securities of each Series (i) may
be entitled to receive distributions allocable only to
principal, only to interest or to any combination
thereof; (ii) may be entitled to receive distributions
only of prepayments of principal throughout the lives of
the Securities or during specified periods; (iii) may be
subordinated in the right to receive distributions of
scheduled payments of principal, prepayments of
principal, interest or any combination thereof to one or
more other classes of Securities of such Series
throughout the lives of the Securities or during
specified periods; (iv) may be entitled to receive such
distributions only after the occurrence of events
specified in the related Prospectus Supplement; (v) may
be entitled to receive distributions in accordance with
a schedule or formula or on the basis of collections
from designated portions of the related Trust Fund
Assets; (vi) as to Securities entitled to distributions
allocable to interest, may be entitled to receive
interest at a fixed rate or a rate that is subject to
change from time to time; and (vii) as to Securities
entitled to distributions allocable
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
to interest, may be entitled to distributions allocable
to interest only after the occurrence of events
specified in the related Prospectus Supplement and may
accrue interest until such events occur, in each case as
specified in the related Prospectus Supplement. The
timing and amounts of such distributions may vary among
classes or over time, as specified in the related
Prospectus Supplement.
Distributions on
the Securities...... Distributions on the Securities entitled thereto will be
made monthly, quarterly, semi-annually or at such other
intervals and on the dates specified in the related
Prospectus Supplement (each, a "Distribution Date") out
of the payments received in respect of the assets of the
related Trust Fund or Funds or other assets pledged for
the benefit of the Securities as described under "Credit
Enhancement" herein to the extent specified in the
related Prospectus Supplement. The amount allocable to
payments of principal and interest on any Distribution
Date will be determined as specified in the related
Prospectus Supplement. The Prospectus Supplement for a
Series of Securities will describe the method for
allocating distributions among Securities of different
classes as well as the method for allocating
distributions among Securities for any particular class.
Unless otherwise specified in the related Prospectus
Supplement, the aggregate original principal balance of
the Securities will not exceed the aggregate
distributions allocable to principal that such
Securities will be entitled to receive. If specified in
the related Prospectus Supplement, the Securities will
have an aggregate original principal balance equal to
the aggregate unpaid principal balance of the Trust Fund
Assets as of the related Cut-off Date and will bear
interest in the aggregate at a rate equal to the
interest rate borne by the underlying Loans (the "Loan
Rate") net of the aggregate servicing fees and any other
amounts specified in the related Prospectus Supplement
(the "Pass-Through Rate") or at such other interest rate
as may be specified in such Prospectus Supplement. If
specified in the related Prospectus Supplement, the
aggregate original principal balance of the Securities
and interest rates on the classes of Securities will be
determined based on the cash flow on the Trust Fund
Assets.
The rate at which interest will be passed through or
paid to holders of each class of Securities entitled
thereto may be a fixed rate or a rate that is subject to
change from time to time from the time and for the
periods, in each case, as specified in the related
Prospectus Supplement. Any such rate may be calculated
on a loan-by-loan, weighted average or notional amount,
in each case as described in the related Prospectus
Supplement.
Credit Enhancement.... The assets in a Trust Fund or the Securities of one or
more classes in the related Series may have the benefit
of one or more types of credit enhancement as described
in the related Prospectus Supplement. The protection
against losses afforded by any such credit support may
be limited. The type, characteristics and amount of
credit enhancement
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
will be determined based on the characteristics of the
Loans comprising the Trust Fund Assets and other factors
and will be established on the basis of requirements of
each Rating Agency rating the Securities of such Series.
See "Credit Enhancement."
A. Subordination...... A Series of Securities may consist of one or more
classes of Senior Securities and one or more classes of
Subordinated Securities. The rights of the holders of
the Subordinated Securities of a Series to receive
distributions with respect to the assets in the related
Trust Fund will be subordinated to such rights of the
holders of the Senior Securities of the same Series to
the extent described in the related Prospectus
Supplement. This subordination is intended to enhance
the likelihood of regular receipt by holders of Senior
Securities of the full amount of monthly payments of
principal and interest due them. The protection afforded
to the holders of Senior Securities of a Series by means
of the subordination feature will be accomplished by
(i) the preferential right of such holders to receive,
prior to any distribution being made in respect of the
related Subordinated Securities, the amounts of interest
and/or principal due them on each Distribution Date out
of the funds available for distribution on such date in
the related Security Account and, to the extent
described in the related Prospectus Supplement, by the
right of such holders to receive future distributions on
the assets in the related Trust Fund that would
otherwise have been payable to the holders of
Subordinated Securities; (ii) reducing the ownership
interest (if applicable) of the related Subordinated
Securities; or (iii) a combination of clauses (i) and
(ii) above. If so specified in the related Prospectus
Supplement, subordination may apply only in the event of
certain types of losses not covered by other forms of
credit support, such as hazard losses not covered by
standard hazard insurance policies or losses due to the
bankruptcy or fraud of the borrower. The related
Prospectus Supplement will set forth information
concerning, among other things, the amount of
subordination of a class or classes of Subordinated
Securities in a Series, the circumstances in which such
subordination will be applicable, and the manner, if
any, in which the amount of subordination will decrease
over time.
B. Reserve Account.... One or more reserve accounts or other cash accounts
(each, a "Reserve Account") may be established and
maintained for each Series of Securities. The related
Prospectus Supplement will specify whether or not such
Reserve Accounts will be included in the corpus of the
Trust Fund for such Series and will also specify the
manner of funding such Reserve Accounts and the
conditions under which the amounts in any such Reserve
Accounts will be used to make distributions to holders
of Securities of a particular class or released from
such Reserve Accounts.
C. Letter of Credit... If so specified in the related Prospectus Supplement,
credit support may be provided by one or more letters of
credit. A letter of credit may provide limited
protection against certain losses in addition to or in
lieu of other credit support, such as losses resulting
from delinquent payments on the Loans in the related
Trust Fund, losses from risks not covered by standard
hazard insurance policies, losses due to bankruptcy
- --------------------------------------------------------------------------------
7
<PAGE>
- --------------------------------------------------------------------------------
of a borrower and application of certain provisions of
the Bankruptcy Reform Act of 1978, as amended, and
related rules promulgated thereunder (the "Bankruptcy
Code"), and losses due to denial of insurance coverage
due to misrepresentations made in connection with the
origination or sale of a Loan. The issuer of the letter
of credit (the "L/C Bank") will be obligated to honor
demands with respect to such letter of credit, to the
extent of the amount available thereunder to provide
funds under the circumstances and subject to such
conditions as are specified in the related Prospectus
Supplement. The liability of the L/C Bank under its
letter of credit will be reduced by the amount of
unreimbursed payments thereunder.
The maximum liability of a L/C Bank under its letter of
credit will be an amount equal to a percentage specified
in the related Prospectus Supplement of the initial
aggregate outstanding principal balance of the Loans in
the related Trust Fund or one or more Classes of
Securities of the related Series (the "L/C Percentage").
The maximum amount available at any time to be paid
under a letter of credit will be determined in the
manner specified therein and in the related Prospectus
Supplement.
D. Insurance Policies;
Surety Bonds and
Guarantees......... If so specified in the related Prospectus Supplement,
credit support for a Series may be provided by an
insurance policy and/or a surety bond issued by one or
more insurance companies or sureties. Such certificate
guarantee insurance or surety bond will guarantee timely
distributions of interest and/or full distributions of
principal on the basis of a schedule of principal
distributions set forth in or determined in the manner
specified in the related Prospectus Supplement. If
specified in the related Prospectus Supplement, one or
more bankruptcy bonds, special hazard insurance
policies, other insurance or third-party guarantees may
be used to provide coverage for the risks of default or
types of losses set forth in such Prospectus Supplement.
E. Over-
Collateralization.. If so provided in the Prospectus Supplement for a Series
of Securities, a portion of the interest payment on each
Loan may be applied as an additional distribution in
respect of principal to reduce the principal balance of
a certain class or classes of Securities and, thus,
accelerate the rate of payment of principal on such
class or classes of Securities.
F. Loan Pool
Insurance Policy... A mortgage pool insurance policy or policies may
be obtained and maintained for Loans relating to any
Series of Securities, which shall be limited in scope,
covering defaults on the related Loans in an initial
amount equal to a specified percentage of the aggregate
principal balance of all Loans included in the Pool as
of the related Cut-off Date.
- --------------------------------------------------------------------------------
8
<PAGE>
- --------------------------------------------------------------------------------
G. FHA Insurance....... If specified in the related Prospectus Supplement, all
or a portion of the Loans in a Pool may be (i) insured
by the Federal Housing Administration (the "FHA")
and/or (ii) partially guaranteed by the Department of
Veterans Affairs (the "VA"). See "Certain Legal Aspects
of the Loans--The Title I Program."
H. Cross-
Collateralization.. If specified in the related Prospectus Supplement,
separate classes of a Series of Securities may evidence
the beneficial ownership of, or be secured by, separate
groups of assets included in a Trust Fund. In such case,
credit support may be provided by a
cross-collateralization feature which requires that
distributions be made with respect to Securities
evidencing a beneficial ownership interest in, or
secured by, one or more asset groups prior to
distributions to Subordinated Securities evidencing a
beneficial ownership interest in, or secured by, other
asset groups within the same Trust Fund. See "Credit
Enhancement--Cross-Collateralization."
If specified in the related Prospectus Supplement, the
coverage provided by one or more of the forms of credit
enhancement described in this Prospectus may apply
concurrently to two or more separate Trust Funds. If
applicable, the related Prospectus Supplement will
identify the Trust Funds to which such credit
enhancement relates and the manner of determining the
amount of coverage provided to such Trust Funds thereby
and of the application of such coverage to the
identified Trust Funds. See "Credit
Enhancement--Cross-Collateralization."
Advances.............. The Servicer and, if applicable, each mortgage servicing
institution that services a Loan in a Pool on behalf of
the Servicer (each, a "Sub-Servicer") may be obligated
to advance amounts (each, an "Advance") corresponding to
delinquent interest and/or principal payments on such
Loan until the date, as specified in the related
Prospectus Supplement, following the date on which the
related Property is sold at a foreclosure sale or the
related Loan is otherwise liquidated. Any obligation to
make Advances may be subject to limitations as specified
in the related Prospectus Supplement. If so specified in
the related Prospectus Supplement, Advances may be drawn
from a cash account available for such purpose as
described in such Prospectus Supplement. Advances will
be reimbursable to the extent described under
"Description of the Securities--Advances" herein and in
the related Prospectus Supplement.
In the event the Servicer or Sub-Servicer fails to make
a required Advance, the Trustee may be obligated to
advance such amounts otherwise required to be advanced
by the Servicer or Sub-Servicer. See "Description of the
Securities--Advances."
Optional Termination.. The Servicer or the party specified in the related
Prospectus Supplement, including the holder of the
residual interest in a REMIC, may have the option to
effect early retirement of a Series of Securities
through the purchase of the Trust Fund Assets. The
Servicer will
- --------------------------------------------------------------------------------
9
<PAGE>
- --------------------------------------------------------------------------------
deposit the proceeds of any such purchase in the
Security Account for each Trust Fund as described under
"The Agreements--Payments on Loans; Deposits to Security
Account." Any such purchase of Trust Fund Assets and
property acquired in respect of Trust Fund Assets
evidenced by a Series of Securities will be made at the
option of the Servicer, such other person or, if
applicable, such holder of the REMIC residual interest,
at a price specified in the related Prospectus
Supplement. The exercise of such right will effect early
retirement of the Securities of that Series, but the
right of the Servicer, such other person or, if
applicable, such holder of the REMIC residual interest,
to so purchase is subject to the principal balance of
the related Trust Fund Assets being less than the
percentage specified in the related Prospectus
Supplement of the aggregate principal balance of the
Trust Fund Assets at the Cut-off Date for the Series.
The foregoing is subject to the provision that if a
REMIC election is made with respect to a Trust Fund, any
such purchase will be made only in connection with a
"qualified liquidation" of the REMIC within the meaning
of Section 860F(g)(4) of the Code.
Legal Investment...... The Prospectus Supplement for each series of Securities
will specify which, if any, of the classes of Securities
offered thereby constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market
Enhancement Act of 1984, as amended ("SMMEA"). Classes
of Securities that qualify as "mortgage related
securities" will be legal investments for certain types
of institutional investors to the extent provided in
SMMEA, subject, in any case, to any other regulations
which may govern investments by such institutional
investors. Institutions whose investment activities are
subject to review by federal or state authorities should
consult with their counsel or the applicable authorities
to determine whether an investment in a particular class
of Securities (whether or not such class constitutes a
"mortgage related security") complies with applicable
guidelines, policy statements or restrictions. See
"Legal Investment."
Federal Income Tax
Consequences........ The federal income tax consequences to Securityholders
will vary depending on whether one or more elections are
made to treat the Trust Fund or specified portions
thereof as a REMIC under the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"). The
Prospectus Supplement for each Series of Securities will
specify whether such an election will be made.
If a REMIC election is made, Securities representing
regular interests in a REMIC will generally be taxable
to holders in the same manner as evidences of
indebtedness issued by the REMIC. Stated interest on
such regular interests will be taxable as ordinary
income and taken into account using the accrual method
of accounting, regardless of the holder's normal
accounting method. If no REMIC election is made,
interest (other than original issue discount ("OID")) on
Securities that are characterized as indebtedness for
federal income tax purposes will
- --------------------------------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
be includible in income by holders thereof in accordance
with their usual method of accounting.
Certain classes of Securities may be issued with OID. A
holder should be aware that the Code and the regulations
promulgated by the United States Department of the
Treasury (the "Treasury") under the Code do not
adequately address certain issues relevant to prepayable
securities, such as the Securities.
Holders that will be required to report income with
respect to the related Securities under the accrual
method of accounting will do so 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 a Security in
any period could significantly exceed the amount of cash
distributed to such holder in that period.
In the opinion of Stradley, Ronon, Stevens & Young, LLP,
if a REMIC election is made with respect to a Series of
Securities, then the arrangement by which such
Securities 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. A REMIC will not be subject to
entity-level tax. Rather, the taxable income or net loss
of a REMIC will be taken into account by the holders of
residual interests. Such holders will report their
proportionate share of the taxable income of the REMIC
whether or not they receive cash distributions from the
REMIC attributable to such income. The portion of the
REMIC taxable income consisting of "excess inclusions"
may not be offset against other deductions or losses of
the holder, including net operating losses.
In the opinion of Stradley, Ronon, Stevens & Young, LLP,
if a REMIC or a partnership election is not made with
respect to a Series of Securities, then the arrangement
by which such Securities are issued will be classified
as a grantor trust under Subpart E, Part I of Subchapter
J of the Code and not as an association taxable as a
corporation. If so provided in the Prospectus Supplement
for a Series, there will be no separation of the
principal and interest payments on the Loans. In such
circumstances, the holder will be considered to have
purchased a pro rata undivided interest in each of the
Loans. In other cases, sale of the Securities will
produce a separation in the ownership of all or a
portion of the principal payments from all or a portion
of the interest payments on the Loans.
In the opinion of Stradley, Ronon, Stevens & Young, LLP,
if a partnership election is made, the Trust Fund will
not be treated as an association or a publicly traded
partnership taxable as a corporation as long as all of
the provisions of the applicable Agreement are complied
with and the statutory and regulatory requirements are
satisfied. If
- --------------------------------------------------------------------------------
11
<PAGE>
- --------------------------------------------------------------------------------
Notes are issued by such Trust Fund, such Notes will be
treated as indebtedness for federal income tax purposes.
The holders of the Certificates issued by such Trust
Fund, if any, will agree to treat the Certificates as
equity interests in a partnership.
The Securities will be, or, in the case of Certificates
issued by a Trust Fund electing to be treated as a
partnership, should be treated as assets described in
section 7701(a)(19)(C) of the Code and as real estate
assets described in section 856(c) of the Code.
Generally, gain or loss will be recognized on a sale of
Securities in the amount equal to the difference between
the amount realized and the seller's tax basis in the
Securities sold.
The material federal income tax consequences for
investors associated with the purchase, ownership and
disposition of the Securities are set forth herein under
"Federal Income Tax Consequences." The material federal
income tax consequences for investors associated with
the purchase, ownership and disposition of Securities of
any particular Series will be set forth under the
heading "Federal Income Tax Consequences" in the related
Prospectus Supplement. See "Federal Income Tax
Consequences."
ERISA Considerations.. A fiduciary of any employee benefit plan or other
retirement plan or arrangement subject to the Employee
Retirement Income Security Act of 1974, as amended
("ERISA"), or the Code should carefully review with its
legal advisors whether the purchase or holding of
Securities could give rise to a transaction prohibited
or not otherwise permissible under ERISA or the Code.
See "ERISA Considerations." Certain classes of
Securities may not be transferred unless the Trustee and
the Depositor are furnished with a letter of
representation or an opinion of counsel to the effect
that such transfer will not result in a violation of the
prohibited transaction provisions of ERISA and the Code
and will not subject the Trustee, the Depositor or the
Servicer to additional obligations. See "Description of
the Securities--General" and "ERISA Considerations."
Risk Factors.......... For a discussion of certain risks associated with an
investment in the Securities, see "Risk Factors" on Page
14 herein and in the related Prospectus Supplement.
Ratings............... It is a condition precedent to the issuance of any class
of Securities sold under this Prospectus that they be
rated in one of the four highest rating categories
(within which there may be subcategories or gradations
indicating relative standing) of at least one nationally
recognized statistical rating organization. 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 agency.
- --------------------------------------------------------------------------------
12
<PAGE>
- --------------------------------------------------------------------------------
Ratings of the Securities address the likelihood of the
receipt of all distributions on the Loans by the related
Securityholders under the agreements pursuant to which
such Securities are issued. The ratings take into
consideration the credit quality of the related Trust
Fund Assets, including any credit enhancement,
structural and legal aspects associated with such
Securities, and the extent to which the payment stream
on such Trust Fund Assets is adequate to make payments
required by such Securities. The ratings on such
Securities do not, however, constitute a statement
regarding frequency of prepayments on the related Loans.
See "Risk Factors--Rating of the Securities" and
"Rating."
- --------------------------------------------------------------------------------
13
<PAGE>
RISK FACTORS
Investors should consider the following factors in connection with the
purchase of the Securities.
Limited Liquidity
There will be no market for the Securities of any Series prior to the
issuance thereof, and there can be no assurance that a secondary market will
develop or, if it does develop, that it will provide Securityholders with
liquidity of investment or will continue for the life of the Securities of such
Series.
Limited Source of Payments--No Recourse to Sellers, Depositor or Servicer
The Depositor does not have, nor is it expected to have, any significant
assets. Unless otherwise specified in the related Prospectus Supplement, the
Securities of a Series will be payable solely from the Trust Fund for such
Securities and will not have any claim against or security interest in the Trust
Fund for any other Series. There will be no recourse to the Depositor, the
Sellers or any other person for any failure to receive distributions on the
Securities. Further, at the times set forth in the related Prospectus
Supplement, certain Trust Fund Assets and/or any balance remaining in the
Security Account immediately after making all payments due on the Securities of
such Series, after making adequate provision for future payments on certain
classes of Securities and after making any other payments specified in the
related Prospectus Supplement, may be promptly released or remitted to the
Depositor, the Servicer, any credit enhancement provider or any other person
entitled thereto and will no longer be available for making payments to
Securityholders. Consequently, holders of Securities of each Series must rely
solely upon payments with respect to the Trust Fund Assets and the other assets
constituting the Trust Fund for a Series of Securities, including, if
applicable, any amounts available pursuant to any credit enhancement for such
Series, for the payment of principal of and interest on the Securities of such
Series.
The Securities will not represent an interest in or obligation of the
Depositor, the Servicer, any Seller or any of their respective affiliates. The
only obligations, if any, of the Depositor with respect to the Trust Fund Assets
or the Securities of any Series will be pursuant to certain representations and
warranties. The Depositor does not have, and is not expected in the future to
have, any significant assets with which to meet any obligation to repurchase
Trust Fund Assets with respect to which there has been a breach of any
representation or warranty. If, for example, the Depositor were required to
repurchase a Loan, its only sources of funds to make such repurchase would be
from funds obtained (i) from the enforcement of a corresponding obligation, if
any, on the part of the related Seller or originator of such Loan or (ii) to the
extent provided in the related Prospectus Supplement, from a Reserve Account or
similar credit enhancement established to provide funds for such repurchases.
The only obligations of the Servicer, other than its servicing
obligations, with respect to the Trust Fund Assets or the Securities of any
Series will be pursuant to certain representations and warranties. The Servicer
may be required to repurchase or substitute for any Loan with respect to which
such representations and warranties are breached. There is no assurance,
however, that the Servicer will have the financial ability to effect any such
repurchase or substitution.
The only obligations of any Seller (and Equity One, where the Seller is a
subsidiary of Equity One) with respect to Trust Fund Assets or the Securities of
any Series will be pursuant to certain representations and warranties and
certain document delivery requirements. A Seller (and Equity One, where the
Seller is a subsidiary of Equity One) may be required to repurchase or
substitute for any Loan with respect to which such representations and
warranties or document delivery requirements are breached. There is no
assurance, however, that such Seller (and Equity One, where the Seller is a
subsidiary of Equity One) will have the financial ability to effect such
repurchase or substitution. See "Loan Program--Representations by Sellers;
Repurchases."
Credit Enhancement
Although credit enhancement is intended to reduce the risk of delinquent
payments or losses to holders of Securities entitled to the benefit thereof, the
amount of such credit enhancement, if any, will be limited, as set forth
14
<PAGE>
in the related Prospectus Supplement, and may be subject to periodic reduction
in accordance with a schedule or formula or otherwise decline, and could be
depleted under certain circumstances prior to the payment in full of the related
Series of Securities, and as a result Securityholders of the related Series may
suffer losses. Moreover, such credit enhancement will not cover all potential
losses or risks. In addition, the Trustee will generally be permitted to reduce,
terminate or substitute all or a portion of the credit enhancement for any
Series of Securities, provided the applicable Rating Agency indicates that the
then-current rating of the Securities of such Series will not be adversely
affected. See "Credit Enhancement."
Prepayment and Yield Considerations
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 (including, for this purpose, prepayments resulting from refinancing
or liquidations of the Loans due to defaults, casualties, condemnations and
repurchases by the Depositor or the Servicer) of the Loans comprising the Trust
Fund, which prepayments may be influenced by a variety of factors including
general economic conditions, prevailing interest rate levels, the availability
of alternative financing and homeowner mobility, (ii) the manner of allocating
principal and/or payments among the classes of Securities of a Series as
specified in the related Prospectus Supplement, (iii) the exercise by the party
entitled thereto of any right of optional termination and (iv) the rate and
timing of payment defaults and losses incurred with respect to the Trust Fund
Assets. The repurchase of Loans by the Depositor, a Seller (and Equity One,
where the Seller is a subsidiary of Equity One) or the Servicer may result from
repurchases of Trust Fund Assets due to material breaches of the Depositor's,
Equity One's, a Seller's or the Servicer's representations and warranties, as
applicable. See "Loan Program--Representations by Sellers; Repurchases." The
yields to maturity and weighted average lives of the Securities will be affected
primarily by the rate and timing of prepayment of the Loans comprising the Trust
Fund Assets. In addition, the yields to maturity and weighted average lives of
the Securities will be affected by the distribution of amounts remaining in any
Pre-Funding Account following the end of the related Funding Period. Any
reinvestment risks resulting from a faster or slower incidence of prepayment of
Loans held by a Trust Fund will be borne entirely by the holders of one or more
classes of the related Series of Securities. See "Yield and Prepayment
Considerations" and "The Agreements--Pre-Funding Account."
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 over a period ending two or
more days prior to a Distribution Date, the effective yield to Securityholders
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
each Distribution Date, and the effective yield (at par) to Securityholders will
be less than the indicated coupon rate. See "Description of the
Securities--Distributions on Securities--Distributions of Interest."
Balloon Payments
Certain of the Loans as of the related Cut-off Date may not be fully
amortizing over their terms to maturity and, thus, will require substantial
principal payments (i.e., Balloon Payments) at their stated maturity. Loans with
Balloon Payments involve a greater degree of risk because the ability of a
borrower to make a Balloon Payment typically will depend upon the ability of the
borrower either to timely refinance the Loan or to timely sell the related
Property. The ability of a borrower to accomplish either of these goals will be
affected by a number of factors, including the level of available mortgage rates
at the time of sale or refinancing, the borrower's equity in the related
Property, the financial condition of the borrower and tax laws. Losses on such
Loans that are not otherwise covered by the credit enhancement described in the
applicable Prospectus Supplement will be borne by the holders of one or more
classes of Securities of the related Series.
Nature of Mortgages
Property Values. There are several factors that could adversely affect the
value of Properties such that the outstanding balance of the related Loans,
together with any senior financing on the Properties, if applicable, would equal
or exceed the value of the Properties. Among the factors that could adversely
affect the value of the Properties are an overall decline in the real estate
market in the areas in which the Properties are located or a
15
<PAGE>
decline in the general condition of the Properties as a result of failure of
borrowers to maintain adequately the Properties or of natural disasters that are
not necessarily covered by insurance, such as earthquakes and floods. In the
case of Loans secured by subordinate liens, such decline could extinguish the
value of the interest of a junior mortgagee in the Property before having any
effect on the interest of the related senior mortgagee. If such a decline
occurs, the actual rates of delinquencies, foreclosures and losses on all Loans
could be higher than those currently experienced in the mortgage lending
industry in general. Losses on such Loans that are not otherwise covered by the
credit enhancement described in the applicable Prospectus Supplement will be
borne by the holder of one or more classes of Securities of the related Series.
Delays Due to Liquidation. Even assuming that the Properties provide
adequate security for the Loans, substantial delays could be encountered in
connection with the liquidation of defaulted Loans and corresponding delays in
the receipt of related proceeds by Securityholders could occur. An action to
foreclose on a Property securing a Loan is regulated by state statutes and rules
and is subject to many of the delays and expenses of other lawsuits if defenses
or counterclaims are interposed, sometimes requiring several years to complete.
Furthermore, in some states an action to obtain a deficiency judgment is not
permitted, or can be restricted, following a nonjudicial or judicial sale of a
Property. In the event of a default by a borrower, these restrictions, among
other things, may impede the ability of the Servicer to foreclose on or sell the
Property or to obtain Liquidation Proceeds sufficient to repay all amounts due
on the related Loan. In addition, the Servicer will be entitled to deduct from
related Liquidation Proceeds all expenses reasonably incurred in attempting to
recover amounts due on defaulted Loans and not yet repaid, including payments to
senior lienholders, legal fees and costs of legal action, real estate taxes and
maintenance and preservation expenses.
Disproportionate Effect of Liquidation Expenses. Liquidation expenses with
respect to defaulted loans do not vary directly with the outstanding principal
balance of the loan at the time of default. Therefore, assuming that a servicer
took the same steps in realizing upon a defaulted loan having a small remaining
principal balance as it would in the case of a defaulted loan having a large
remaining principal balance, the amount realized after expenses of liquidation
would be smaller as a percentage of the outstanding principal balance of the
small loan than would be the case with the defaulted loan having a large
remaining principal balance.
Junior Liens. Since the mortgages and deeds of trust securing Loans may be
junior liens subordinate to the rights of the mortgagee under the related senior
mortgage(s) or deed(s) of trust, the proceeds from any liquidation, insurance or
condemnation proceeds will be available to satisfy the outstanding balance of
such junior liens only to the extent that the claims of such senior mortgagees
have been satisfied in full, including any related foreclosure costs. In
addition, a junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to any senior mortgage, in which case it
must either pay the entire amount due on any senior mortgage to the related
senior mortgagee at or prior to the foreclosure sale or undertake the obligation
to make payments on any such senior mortgage in the event the mortgagor is in
default thereunder. The Trust Fund will not have any source of funds to satisfy
any senior mortgages or make payments due to any senior mortgagees and may
therefore be prevented from foreclosing on the related Property.
Mixed Use Loans. Due to the limited market for Mixed Use Properties, in
the event of a foreclosure, it is expected that the time it takes to recover
Liquidation Proceeds may be longer than with Single Family Properties and may
have a higher risk of loss.
Consumer Protection Laws. Applicable state laws generally regulate
interest rates and other charges, require certain disclosures, and require
licensing of certain originators and servicers of loans. In addition, most
states have other laws, public policy and general principles of equity relating
to the protection of consumers, unfair and deceptive practices and practices
which may apply to the origination, servicing and collection of the Loans.
Depending on the provisions of the applicable law and the specific facts and
circumstances involved, violations of these laws, policies and principles may
limit the ability of the Servicer to collect all or part of the principal of or
interest on the Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Servicer to damages and
administrative sanctions. See "Certain Legal Aspects of the Loans."
16
<PAGE>
Environmental Risks
Real property pledged as security to a lender may be subject to certain
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the costs of cleanup.
In several states, such a lien has priority over the lien of an existing
mortgage against such property. In addition under the laws of some states and
under the federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), and the Asset Conservation, Lender
Liability and Deposit Insurance Protection Act of 1996, 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 the environmental damage or threat was
caused by a prior owner. Such costs could result in a loss to the holders of one
or more classes of Securities of the related Series. A lender also risks such
liability on foreclosure of the related property. See "Certain Legal Aspects of
the Loans--Environmental Risks."
Certain Other Legal Aspects of the Loans
Consumer Protection Laws. The Loans may also be 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 Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience; and
(iv) for Loans that were originated or closed after November 7,
1989, the Home Equity Loan Consumer Protection Act of 1988, which requires
additional application disclosures, limits changes that may be made to the
loan documents without the borrower's consent and restricts a lender's
ability to declare a default or to suspend or reduce a borrower's credit
limit to certain enumerated events.
The Riegle Act. Certain Loans may be subject to the Riegle Community
Development and Regulatory Improvement Act of 1994 (the "Riegle Act") which
incorporates the Home Ownership and Equity Protection Act of 1994. These
provisions impose additional disclosure and other requirements on creditors with
respect to nonpurchase money mortgage loans with high interest rates or high
up-front fees and charges. The provisions of the Riegle Act apply on a mandatory
basis to all mortgage loans originated on or after October 1, 1995. These
provisions can impose specific statutory liabilities upon creditors who fail to
comply with their provisions and may affect the enforceability of the related
loans. In addition, any assignee of the creditor would generally be subject to
all claims and defenses that the consumer could assert against the creditor,
including, without limitation, the right to rescind the mortgage loan.
Holder in Due Course Rules. The Home Improvement Contracts are also
subject to the Preservation of Consumers' Claims and Defenses regulations of the
Federal Trade Commission and other similar federal and state statutes and
regulations (collectively, the "Holder in Due Course Rules"), which protect the
homeowner from defective craftsmanship or incomplete work by a contractor. These
laws permit the obligor to withhold payment if the work does not meet the
quality and durability standards agreed to by the homeowner and the contractor.
The Holder in Due Course Rules have the effect of subjecting any assignee of the
seller in a consumer credit transaction to all claims and defenses which the
obligor in the credit sale transaction could assert against the seller of the
goods.
17
<PAGE>
Violations of certain provisions of these federal laws may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Loans and in addition could subject the Trust Fund to damages and
administrative enforcement. Losses on such Loans that are not otherwise covered
by the credit enhancement described in the applicable Prospectus Supplement will
be borne by the holders of one or more classes of Securities of the related
Series. See "Certain Legal Aspects of the Loans."
Rating of the Securities
It will be a condition to the issuance of a class of Securities offered
hereby that they be rated in one of the four highest rating categories by the
Rating Agency identified in the related Prospectus Supplement. Any such rating
would be based on, among other things, the adequacy of the value of the related
Trust Fund Assets and any credit enhancement with respect to such class and will
represent such Rating Agency's assessment solely of the likelihood that holders
of such class of Securities will receive payments 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 related Loans
will be made, the degree to which the rate of such prepayments might differ from
that originally anticipated or the likelihood of early optional termination of
the Series of Securities. Such rating shall not be deemed a recommendation to
purchase, hold or sell Securities, inasmuch as it does not address market price
or suitability for a particular investor. Such rating will not address the
possibility that prepayment at higher or lower rates than anticipated by an
investor may cause such investor to experience a lower than anticipated yield or
that an investor purchasing a Security at a significant premium might fail to
recoup its initial investment under certain prepayment scenarios.
There is also no assurance that any such rating will remain in effect for
any given period of time or that it may not be lowered or withdrawn entirely by
the Rating Agency in the future if in its judgment circumstances in the future
so warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of the Trust Fund Assets or any credit enhancement with
respect to a Series of Securities, such rating might also be lowered or
withdrawn because of, among other reasons, an adverse change in the financial or
other condition of a credit enhancement provider or a change in the rating of
such credit enhancement provider's long term debt.
The amount, type and nature of credit enhancement, if any, established
with respect to a class of Securities will be determined on the basis of
criteria established by each Rating Agency rating classes of such Series. Such
criteria are sometimes based upon an actuarial analysis of the behavior of
similar loans in a larger group. Such analysis is often the basis upon which
each Rating Agency determines the amount of credit enhancement required with
respect to each such class. There can be no assurance that the historical data
supporting any such actuarial analysis will accurately reflect future experience
nor any assurance that the data derived from a large pool of similar loans
accurately predicts the delinquency, foreclosure or loss experience of any
particular pool of Loans. No assurance can be given that the values of any
Mortgaged Properties have remained or will remain at their levels on the
respective dates of origination of the related Loans. If the residential real
estate markets should experience an overall decline in property values such that
the outstanding principal balances of the Loans in a particular Trust Fund and
any secondary financing on the related Mortgaged Properties become equal to or
greater than the value of the Mortgaged Properties, the rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. In addition, adverse economic conditions (which
may or may not affect real property values) may affect the timely payment by
mortgagors of scheduled payments of principal and interest on the Loans and,
accordingly, the rates of delinquencies, foreclosures and losses with respect to
any Trust Fund. To the extent that such losses are not covered by credit
enhancement, such losses will be borne, at least in part, by the holders of one
or more classes of Securities of the related Series. See "Rating."
Book-Entry Registration
If issued in book-entry form, such registration may reduce the liquidity
of the Securities in the secondary trading market since investors may be
unwilling to purchase Securities for which they cannot obtain physical
certificates. Since transactions in book-entry Securities can be effected only
through the Depository Trust Company ("DTC"), participating organizations ("DTC
Participants"), Financial Intermediaries and certain banks, the ability of a
Securityholder to pledge a book-entry Security to persons or entities that do
not participate in the DTC system
18
<PAGE>
may be limited due to lack of a physical certificate representing such
Securities. Beneficial Owners will not be recognized as "Noteholders" or
"Certificateholders" as such terms are used in the related Agreement, and
Beneficial Owners will be permitted to exercise the rights of Securityholders
only indirectly through DTC and DTC Participants.
In addition, Securityholders may experience some delay in their receipt of
distributions of interest and principal on book-entry Securities since
distributions are required to be forwarded by the Trustee to DTC and DTC will
then be required to credit such distributions to the accounts of DTC
Participants which thereafter will be required to credit them to the accounts of
Securityholders either directly or indirectly through Financial Intermediaries.
See "Description of the Securities--Book-Entry Registration of Securities."
Pre-Funding Accounts
If so provided in the related Prospectus Supplement, on the date of the
related conveyance of Loans by the Depositor to the Trust (the "Closing Date")
the Depositor will deposit cash in an amount (the "Pre-Funded Amount") specified
in such Prospectus Supplement into an account (the "Pre-Funding Account"). In no
event shall the Pre-Funded Amount exceed 50% of the initial aggregate principal
amount of the Certificates and/or Notes of the related Series of Securities. The
Pre-Funded Amount will be used to purchase Loans ("Subsequent Loans") in a
period from the related Closing Date to a date not more than one year after such
Closing Date (such period, the "Funding Period") from the Depositor (which, in
turn, will acquire such Subsequent Loans from the Seller or Sellers specified in
the related Prospectus Supplement). The Pre-Funding Account will be maintained
with the Trustee for the related Series of Securities and is designed solely to
hold funds to be applied by such Trustee during the Funding Period to pay to the
Depositor the purchase price for Subsequent Loans. Monies on deposit in the
Pre-Funding Account will not be available to cover losses on or in respect of
the related Loans. To the extent that the entire PreFunded Amount has not been
applied to the purchase of Subsequent Loans by the end of the related Funding
Period, any amounts remaining in the Pre-Funding Account will be distributed as
a prepayment of principal to holders of Certificates and/or Notes (respectively
"Certificateholders" and/or "Noteholders") on the Distribution Date immediately
following the end of the Funding Period, in the amounts and pursuant to the
priorities set forth in the related Prospectus Supplement. Any reinvestment risk
resulting from such prepayment will be borne entirely by the holders of one or
more classes of the related Series of Certificates.
Bankruptcy and Insolvency Risks
The Servicer, the Sellers and the Depositor each intend that each
conveyance of Loans by the Sellers to the Depositor constitutes a sale, rather
than a pledge of the Loans to secure indebtedness of the Sellers. The Depositor
intends that each conveyance of Loans from the Depositor to the Trust Fund
constitutes a sale, rather than a pledge of the Loans to secure indebtedness of
the Depositor. As a sale of the Loans by the Sellers to the Depositor, the Loans
would not be part of a Seller's bankruptcy estate and would not be available to
a Seller's creditors. However, in the event of the bankruptcy or insolvency of a
Seller, it is possible that the bankruptcy trustee, a conservator or receiver of
the Seller or another person may attempt to recharacterize the sale of the Loans
as a borrowing by the Seller, secured by a pledge of the Loans. Similarly, as a
sale of the Loans by the Depositor to the Trust Fund, the Loans would not be
part of the Depositor's bankruptcy estate and would not be available to the
Depositor's creditors. However, in the event of the bankruptcy or insolvency of
the Depositor, it is possible that the bankruptcy trustee, a conservator or
receiver of the Depositor or another person may attempt to recharacterize the
sale of the Loans as a borrowing by the Depositor, secured by a pledge of the
Loans. In either case, this position, if argued before or accepted by a court,
could prevent timely payments of amounts due on the Securities and result in a
reduction of payments due on the Securities.
In this regard, it is anticipated that, while the Trustee will hold
original promissory notes for each of the Loans, together with assignments of
each of the Mortgages, the assignments of Mortgages will not be filed of public
record unless an Event of Default occurs with respect to the Notes. As a
consequence, if a court were to recharacterize the sale of Loans by the Seller
to the Depositor or the sale of Loans by the Depositor to the Trustee as a
financing, a question might be raised as to whether the Trustee's interest in
such Loans is perfected. If, through inadvertence or otherwise, any of the Loans
were sold to another party who purchased such Loans in the
19
<PAGE>
ordinary course of its business and took possession of such Loans, the purchaser
would acquire an interest in the Loans superior to the interests of the Trust if
the purchaser acquired the Loans in good faith, for value and without actual
knowledge of the Trust's ownership interest in the Loans. Issues of perfection
and ownership of property are generally governed primarily by state law, and
there is no certainty that the Trustee's interest in the Loans would be
characterized uniformly in every state where Mortgaged Properties are located.
In the event of a bankruptcy or insolvency of the Servicer, the bankruptcy
trustee or a conservator or receiver of the Servicer may have the power to
prevent the Trustee or the Securityholders from appointing a successor servicer.
In the event of an insolvency, receivership or conservatorship of the
Bank, the FDIC or another agency in its capacity as receiver or conservator has
extensive powers under federal banking laws in the administration of the assets
of a failed insured depository institution and its subsidiaries. In the event of
a receivership or conservatorship for the Bank, the FDIC would also have the
power to exercise all of the rights of a shareholder of Equity One and, through
Equity One, of the Depositor.
In addition, federal and state statutory provisions, including the
Bankruptcy Code and state laws affording relief to debtors, may interfere with
or affect the ability of the secured mortgage lender to realize upon its
security. For example, in a proceeding under the Bankruptcy Code, a lender may
not foreclose on a mortgaged property without the permission of the bankruptcy
court. The rehabilitation plan proposed by the debtor may provide, if the
mortgaged property is not the debtor's principal residence and the court
determines that the value of the mortgaged property is less than the principal
balance of the mortgage loan, for the reduction of the secured indebtedness to
the value of the mortgaged property as of the date of the commencement of the
bankruptcy, rendering the lender a general unsecured creditor for the
difference, and also may reduce the monthly payments due under such mortgage
loan, change the rate of interest and/or alter the mortgage loan repayment
schedule. The effect of any such proceedings under the Bankruptcy Code,
including but not limited to any automatic stay, could result in delays in
receiving payments on the Loans underlying a Series of Securities and possible
reductions in, or eliminations of, the aggregate amount of such payments.
Consequences of Owning Original Issue Discount Securities.
Debt Securities that are Accrual Securities will be, and certain of the
other Debt Securities may be, issued with OID for federal income tax purposes. A
holder of Debt Securities issued with OID will be required to include OID in
ordinary gross income for federal income tax purposes as it accrues, in advance
of receipt of the cash attributable to such income. Accrued but unpaid interest
on Debt Securities that are Accrual Securities generally will be treated as OID
for this purpose. See "Federal Income Tax Consequences--Taxation of Debt
Securities--Interest and Acquisition Discount" and "--Market Discount."
Value of Trust Fund Assets
There is no assurance that the market value of the Trust Fund Assets or
any other assets relating to a Series of Securities described under "Credit
Enhancement" will at any time be equal to or greater than the principal amount
of the Securities of such Series then outstanding, plus accrued interest
thereon. Moreover, upon an event of default under the Agreement for a Series of
Securities and a sale of the related Trust Fund Assets or upon a sale of the
assets of a Trust Fund for a Series of Securities, the Trustee, the Servicer,
the credit 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 Securityholders.
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.
20
<PAGE>
THE TRUST FUND
General
The Securities of each Series will represent interests in the assets of
the related Trust Fund, and the Notes of each Series will be secured by the
pledge of the assets of the related Trust Fund. The Trust Fund for each Series
will be held by the Trustee for the benefit of the related Securityholders. Each
Trust Fund will consist of certain assets (the "Trust Fund Assets") consisting
of a pool (each, a "Pool") comprised of Loans as specified in the related
Prospectus Supplement, together with payments in respect of such Loans, as
specified in the related Prospectus Supplement.* The Pool will be created on the
first day of the month of the issuance of the related Series of Securities or
such other date specified in the related Prospectus Supplement (the "Cut-off
Date"). The Securities will be entitled to payment from the assets of the
related Trust Fund or Funds or other assets pledged for the benefit of the
Securityholders, as specified in the related Prospectus Supplement, and will not
be entitled to payments in respect of the assets of any other trust fund
established by the Depositor.
The Trust Fund Assets will be acquired by the Depositor, either directly
or through affiliates, from originators or sellers which may be affiliates of
the Depositor (collectively, the "Sellers") pursuant to a Pooling and Servicing
Agreement with respect to a Series consisting solely of Certificates, or a
purchase agreement (each, a "Purchase Agreement") with respect to a Series
consisting of Certificates and Notes, and conveyed without recourse by the
Depositor to the related Trust Fund. Loans acquired by the Depositor will have
been originated in accordance with the underwriting criteria specified below
under "Loan Program--Underwriting Standards," "--Specific Underwriting Criteria;
Underwriting Programs" and "--Summary of Underwriting Requirements by Program"
or as otherwise described in the related Prospectus Supplement. See "Loan
Program--Underwriting Standards," "--Specific Underwriting Criteria;
Underwriting Programs" and "--Summary of Underwriting Requirements by Program."
The Depositor will cause the Trust Fund Assets to be conveyed to the
Trustee named in the related Prospectus Supplement for the benefit of the
holders of the Securities of the related Series. The Servicer will service the
Trust Fund Assets, either directly or through other servicing institutions
(each, a "Sub-Servicer"), pursuant to a Pooling and Servicing Agreement with
respect to a Series consisting solely of Certificates, or a master servicing
agreement (each, a "Master Servicing Agreement") between the Trustee and the
Servicer with respect to a Series consisting of Certificates and Notes, and will
receive a fee for such services. See "Loan Program" and "The Agreements." With
respect to Loans serviced by the Servicer through a Sub-Servicer, the Servicer
will remain liable for its servicing obligations under the related Agreement as
if the Servicer alone were servicing such Loans.
As used herein, "Agreement" means, with respect to a Series consisting
solely of Certificates, the Pooling and Servicing Agreement, and with respect to
a Series consisting of Certificates and Notes, the Purchase Agreement, the Trust
Agreement, the Indenture and the Master Servicing Agreement, as the context
requires.
If so specified in the related Prospectus Supplement, a Trust Fund
relating to a Series of Securities may be a business trust formed under the laws
of the state specified in the related Prospectus Supplement pursuant to a trust
agreement (each, a "Trust Agreement") between the Depositor and the trustee of
such Trust Fund.
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or liabilities.
No Trust Fund is expected to engage in any activities other than purchasing,
- ----------
* Whenever the terms "Pool," "Certificates," "Notes" and "Securities" are used
in this Prospectus, such terms will be deemed to apply, unless the context
indicates otherwise, to one specific Pool and the Securities of one Series
including the Certificates representing certain undivided interests in, and/or
Notes secured by the assets of, a single Trust Fund consisting primarily of the
Loans in such Pool. Similarly, the term "Pass-Through Rate" will refer to the
Pass-Through Rate borne by the Certificates and the term "interest rate" will
refer to the interest rate borne by the Notes of one specific Series, as
applicable, and the term "Trust Fund" will refer to one specific Trust Fund.
21
<PAGE>
managing and holding of the related Trust Fund Assets and other assets
contemplated herein specified and in the related Prospectus Supplement and the
proceeds thereof, issuing Securities and making payments and distributions
thereon and certain related activities. No Trust Fund is expected to have any
source of capital other than its assets and any related credit enhancement.
Unless otherwise specified in the related Prospectus Supplement, the only
obligations of the Depositor with respect to a Series of Securities will be to
obtain certain representations and warranties from Equity One and the Sellers
and to assign to the Trustee for such Series of Securities the Depositor's
rights with respect to such representations and warranties. See "Loan
Program--Representations by Sellers; Repurchases" and "The
Agreements--Assignment of the Trust Fund Assets." The obligations of the
Servicer with respect to the Loans will consist principally of its contractual
servicing obligations under the related Agreement (including its obligation to
enforce the obligations of the Sub-Servicers or Sellers, or both, as more fully
described herein under "Loan Program--Representations by Sellers; Repurchases"
and "The Agreements--Sub-Servicing By Sellers" and "--Assignment of the Trust
Fund Assets") and its obligation, if any, to make certain cash advances in the
event of delinquencies in payments on or with respect to the Loans in the
amounts described herein under "Description of the Securities--Advances." The
obligations of the Servicer to make advances may be subject to limitations, to
the extent provided herein and in the related Prospectus Supplement.
The following is a brief description of the assets expected to be included
in the Trust Funds. If specific information respecting the Trust Fund Assets is
not known at the time the related Series of Securities initially is offered,
more general information of the nature described below will be provided in the
related Prospectus Supplement, and specific information will be set forth in a
report on Form 8-K to be filed with the Commission within fifteen days after the
initial issuance of such Securities (the "Detailed Description"). A copy of the
Agreement with respect to each Series of Securities will be attached to the Form
8-K and will be available for inspection at the corporate trust office of the
Trustee specified in the related Prospectus Supplement. A schedule of the Loans
relating to such Series will be attached to the Agreement delivered to the
Trustee upon delivery of the Securities.
The Loans
General. The Loans will consist of (i) fixed rate and variable rate
mortgage loans secured by first and/or subordinate liens on (A) one- to
four-family residential properties (each, a "Residential Loan") and (B) mixed
commercial/residential use properties (each, a "Mixed Use Loan" and, together
with the Residential Loans, the "Mortgage Loans"), (ii) revolving home equity
loans or certain balances thereof (the "Revolving Credit Line Loans") secured by
first and/or subordinate liens on one- to four-family residential properties and
(iii) home improvement installment sales contracts and installment loan
agreements (collectively, the "Home Improvement Contracts") that are either
unsecured or secured by first and/or subordinate liens on one- to four-family
residential properties, or by purchase money security interests in the home
improvements financed thereby (collectively, the "Home Improvements"). All Loans
will have been purchased by the Depositor, either directly or through an
affiliate, from one or more Sellers. The Sellers will have either originated the
Loans or purchased the Loans from other lenders. As more fully described in the
related Prospectus Supplement, the Loans may be "conventional" loans or loans
that are insured or guaranteed by a governmental agency such as the FHA or VA.
All of the Loans in a Pool will have monthly payments due on a set day,
but not necessarily the first day, of each month. The payment terms of the Loans
to be included in a Trust Fund will be described in the related Prospectus
Supplement and may include any of the following features (or combination
thereof), all as described below or in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from
time to time in relation to an index (which will be specified in the
related Prospectus Supplement), a rate that is fixed for a period of time
or under certain circumstances and is followed by an adjustable rate, a
rate that otherwise varies from time to time, or a rate that is
convertible from an adjustable rate to a fixed rate. Changes to an
adjustable rate may be subject to periodic limitations, maximum rates,
minimum rates or a combination of such limitations. Accrued interest may
be deferred and added to the principal of a Loan for such periods
22
<PAGE>
and under such circumstances as may be specified in the related Prospectus
Supplement. Loans may provide for the payment of interest at a rate lower
than the specified interest rate borne by such Loan (the "Loan Rate") for
a period of time or for the life of the Loan, and the amount of any
difference may be contributed from funds supplied by the seller of the
Property or another source.
(b) Principal may be payable on a level debt service basis to fully
amortize the Loan over its term, may be calculated on the basis of an
assumed amortization schedule that is significantly longer than the
original term to maturity or on an interest rate that is different from
the Loan Rate or may not be amortized during all or a portion of the
original term. Payment of all or a substantial portion of the principal
may be due on maturity ("Balloon Payment"). Principal may include interest
that has been deferred and added to the principal balance of the Loan.
(c) Monthly payments of principal and interest may be fixed for the
life of the Loan, may increase over a specified period of time or may
change from period to period. Loans may include limits on periodic
increases or decreases in the amount of monthly payments and may include
maximum or minimum amounts of monthly payments.
(d) Prepayments of principal may be subject to a prepayment fee,
which may be fixed for the life of the Loan or may decline over time, and
may be prohibited for the life of the Loan or for certain periods
("Lockout Periods"). Certain Loans may permit prepayments after expiration
of the applicable Lockout Period and may require the payment of a
prepayment fee in connection with any such subsequent prepayment. Other
Loans may permit prepayments without payment of a fee unless the
prepayment occurs during specified time periods. The Loans may include
"due on sale" clauses which permit the mortgagee to demand payment of the
entire Loan in connection with the sale or certain transfers of the
related Property. Other Loans may be assumable by persons meeting the then
applicable underwriting standards of the related Seller.
The real properties which secure repayment of the Loans are referred to as
the "Mortgaged Properties." Home Improvement Contracts may, and the other Loans
will, be secured by mortgages or deeds of trust or other similar security
instruments creating a lien on a Mortgaged Property. In the case of Revolving
Credit Line Loans, such liens generally will be subordinated to one or more
senior liens on the related Mortgaged Properties as described in the related
Prospectus Supplement. As specified in the related Prospectus Supplement, Home
Improvement Contracts may be unsecured or secured by first and/or subordinate
liens on one- to four family residential properties, or by purchase money
security interests in the Home Improvements. The Mortgaged Properties and the
Home Improvements are collectively referred to herein as the "Properties."
The Mortgaged Properties relating to Residential Loans and Revolving
Credit Line Loans will consist of detached or semi-detached one- to four-family
dwelling units, townhouses, rowhouses, individual condominium units, individual
units in planned unit developments, and certain other dwelling units (the
"Single Family Properties"). The Mortgaged Properties relating to Mixed Use
Loans will consist of multi-family properties and structures which include
residential dwelling units and space used for retail, professional or other
commercial uses (the "Mixed Use Properties"). The Mortgaged Properties may
include vacation and second homes and investment properties and may be located
in any one of the fifty states, the District of Columbia, Puerto Rico or any
territory of the United States.
Loans with certain Loan-to-Value Ratios and/or certain principal balances
may be covered wholly or partially by primary mortgage guaranty insurance
policies (each, a "Primary Mortgage Insurance Policy"). The existence, extent
and duration of any such coverage will be described in the applicable Prospectus
Supplement.
The aggregate principal balance of Loans secured by Mortgaged Properties
that are owner-occupied will be disclosed in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the sole basis
for a representation that a given percentage of the Loans is secured by Single
Family Properties that are owner-occupied will be the making of a representation
by the borrower at origination of the Loan either that
23
<PAGE>
the underlying Property will be used by the borrower for a period of at least
six months every year or that the borrower intends to use the Property as a
primary residence.
Home Equity Loans. Certain of the Loans are non-purchase money loans
secured by the borrower's equity in his or her home. The full amount of these
Loans is advanced at the inception of the Loan and generally is repayable in
equal (or substantially equal) installments of an amount to fully amortize such
Loan at its stated maturity. Except to the extent provided in the related
Prospectus Supplement, the original terms to stated maturity of these Loans will
not exceed 360 months. Under certain circumstances, a borrower under one of
these Loans 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.
Home Improvement Contracts. The Trust Fund Assets for a Series of
Securities may consist, in whole or in part, of Home Improvement Contracts
originated by a home improvement contractor, a thrift or a commercial mortgage
banker in the ordinary course of business. The Home Improvements securing the
Home Improvement Contracts may include, but are not limited to, replacement
windows, house siding, new roofs, swimming pools, satellite dishes, kitchen and
bathroom remodeling goods and solar heating panels. As specified in the related
Prospectus Supplement, the Home Improvement Contracts will either be unsecured
or secured by mortgages on Single Family Properties which are generally
subordinate to other mortgages on the same Property, or secured by purchase
money security interests in the Home Improvements financed thereby. Except as
otherwise specified in the related Prospectus Supplement, the Home Improvement
Contracts will be fully amortizing, may have fixed or adjustable interest rates
and may provide for other payment characteristics as described below and in the
related Prospectus Supplement. The initial Loan-to-Value Ratio of a Home
Improvement Contract is computed in the manner described in the related
Prospectus Supplement.
Additional Information. Each Prospectus Supplement will contain
information, as of the date of such Prospectus Supplement and to the extent then
specifically known to the Depositor, with respect to the Loans contained in the
related Pool, including (i) the aggregate outstanding principal balance and the
average outstanding principal balance of the Loans as of the applicable Cut-off
Date, (ii) the type of property securing the Loan (e.g., Single Family
Properties, Mixed Use Properties, or other real property), (iii) the original
terms to maturity of the Loans, (iv) the largest principal balance and the
smallest principal balance of any of the Loans, (v) the earliest origination
date and latest maturity date of any of the Loans, (vi) the Loan-to-Value Ratios
or Combined Loan-to-Value Ratios, as applicable, of the Loans, (vii) the Loan
Rates or annual percentage rates ("APR") or range of Loan Rates or APRs borne by
the Loans, (viii) the maximum and minimum per annum Loan Rates, and (ix) the
geographical location of the Properties. If specific information respecting the
Loans is not known to the Depositor at the time the related Securities are
initially offered, more general information of the nature described above will
be provided in the related Prospectus Supplement, and specific information will
be set forth in the Detailed Description.
The "Loan-to-Value Ratio" of a Loan secured by a first lien on a Property,
at any given time, is equal to (i) the principal balance of such Loan at the
date of origination divided by (ii) the Collateral Value of the related
Property. The "Combined Loan-to-Value Ratio" of a Loan secured by a subordinate
lien on a Property, at any given time, is the ratio, expressed as a percentage,
of (i) the sum of (a) the original principal balance of the Loan (or, in the
case of a Revolving Credit Line Loan, the maximum amount thereof available) and
(b) the outstanding principal balance, at the date of origination of the Loan,
of any senior mortgage loan(s) or, in the case of any open ended senior mortgage
loan, the maximum available line of credit with respect to such mortgage loan,
regardless of any lesser amount actually outstanding at the date of origination
of the Loan, to (ii) the Collateral Value of the related Property. The
"Collateral Value" of the Property, other than with respect to certain Loans the
proceeds of which were used to refinance an existing mortgage loan (each, a
"Refinance Loan"), is the lesser of (a) the appraised value determined in an
appraisal obtained by the originator at origination of such Loan and (b) the
sales price for such Property. In the case of Refinance Loans, the "Collateral
Value" of the related Property is the appraised value thereof determined in an
appraisal obtained at the time of refinancing.
24
<PAGE>
No assurance can be given that values of the Properties have remained or
will remain at their levels 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 sum of the outstanding principal balances of the
Loans and any primary or secondary financing on the Properties, as applicable,
in a particular Pool become equal to or greater than the value of the
Properties, the actual rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the mortgage lending industry. In
addition, adverse economic conditions and other factors (which may or may not
affect real property values) may affect the timely payment by borrowers of
scheduled payments of principal and interest on the Loans and, accordingly, the
actual rates of delinquencies, foreclosures and losses with respect to any Pool.
To the extent that such losses are not covered by subordination provisions or
alternative arrangements, such losses will be borne, at least in part, by the
holders of the Securities of the related Series.
Substitution of Trust Fund Assets
Substitution of Trust Fund Assets will be permitted in the event of
breaches of representations and warranties with respect to any original Trust
Fund Asset or in the event the documentation with respect to any Trust Fund
Asset is determined by the Trustee to be incomplete. The period during which
such substitution will be permitted generally will be indicated in the related
Prospectus Supplement.
USE OF PROCEEDS
The Depositor will use 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 Trust Fund Assets, (ii) to establish any Reserve
Accounts described in the related Prospectus Supplement, (iii) to pay costs of
structuring and issuing such Securities, including the costs of obtaining Credit
Enhancement, if any, and (iv) to serve any other corporate purpose specifically
permitted by its Certificate of Incorporation. The Depositor expects to sell
Securities in Series from time to time, but the timing and amount of offerings
of Securities will depend on a number of factors, including the volume of Trust
Fund Assets acquired by the Depositor, prevailing interest rates, availability
of funds and general market conditions.
THE DEPOSITOR
Equity One ABS, Inc., a Delaware corporation (the "Depositor"), was
incorporated in March of 1997 for the limited purpose of acquiring, owning and
transferring Trust Fund Assets and selling interests therein or bonds secured
thereby. The Depositor is a limited purpose wholly owned finance subsidiary of
Equity One, Inc., a Delaware corporation ("Equity One"). Equity One is a wholly
owned operating subsidiary of Banco Popular, FSB, a federal savings bank with
principal offices in Newark, New Jersey (the "Bank"), which in turn is an
indirect wholly owned subsidiary of BanPonce Corporation, a diversified,
publicly owned bank holding company incorporated under the General Corporation
Law of Puerto Rico ("BanPonce"). As such, the Depositor and Equity One are
subject to comprehensive regulation by the Board of Governors of the Federal
Reserve System ("Federal Reserve"), the Office of Thrift Supervision ("OTS") and
the Federal Deposit Insurance Corporation ("FDIC"). No obligations of the
Depositor are insured by any governmental agency. The Depositor maintains its
principal office at 103 Springer Building, 3411 Silverside Road, Wilmington,
Delaware 19810. Its telephone number is (302) 478-6160.
Neither the Depositor nor any of the Depositor's affiliates will insure or
guarantee distributions on the Securities of any Series.
LOAN PROGRAM
The Loans will have been purchased by the Depositor, either directly or
through affiliates, from the Sellers. Unless otherwise specified in the related
Prospectus Supplement, the Loans so purchased by the Depositor will have been
originated in accordance with the underwriting criteria specified below under
"Underwriting Standards," "Specific Underwriting Criteria; Underwriting
Programs" and "Summary of Underwriting Requirements by Program."
25
<PAGE>
Underwriting Standards
Each Seller operates under certain underwriting standards that have been
approved by Equity One and are consistent with those utilized by mortgage
lenders generally during the period of origination for similar types of loans
(the "Equity One Standards"). Unless otherwise specified in the related
Prospectus Supplement, Equity One and each Seller will represent and warrant
that all Loans conveyed by it to the Depositor or one of its affiliates will
have been underwritten in accordance with the Equity One Standards. As to any
Loan insured by the FHA or partially guaranteed by the VA, each Seller will
represent that it has complied with underwriting policies of the FHA or the VA,
as the case may be.
Underwriting standards are applied by or on behalf of a lender to evaluate
the borrower's credit standing and repayment ability, and the value and adequacy
of the related Property as collateral. In general, a prospective borrower
applying for a Loan is required to fill out a detailed application designed to
provide to the underwriting officer pertinent information with respect to the
applicant's liabilities, income, credit history, including the principal balance
and payment history with respect to any senior mortgage, and employment history,
as well as certain other personal information, which, unless otherwise specified
in the related Prospectus Supplement, will be verified by the related Seller. In
addition, unless otherwise specified in the related Prospectus Supplement, each
Seller, as part of its quality control system, reverifies information with
respect to the foregoing matters that has been provided by a mortgage brokerage
company prior to funding a loan and periodically audits files based on a random
sample of closed loans. Each borrower is generally required to provide an
authorization to apply for a credit report which summarizes the borrower's
credit history with local and national merchants and lenders, installment debt
payments and any record of defaults, bankruptcies, repossessions, suits or
judgments. In most cases, an employment verification is obtained either in
writing or verbally from the borrower's employer, which verification reports,
among other things, the length of employment with that organization and the
borrower's current salary. If a prospective borrower is self-employed, the
borrower may be required to submit copies of signed tax returns.
In determining the adequacy of the property to be used as collateral, an
appraisal will generally be made of each property considered for financing in an
amount in excess of $15,000. The appraiser is generally required to inspect the
property, issue a report on its condition and, if applicable, verify
construction, if new, has been completed. The appraisal is based on the market
value of comparable homes, the estimated rental income (if considered applicable
by the appraiser) and the cost of replacing the home. The value of the property
being financed, as indicated by the appraisal, must be such that it currently
supports, and is anticipated to support in the future, the outstanding loan
balance.
Once all applicable employment, credit and property information is
received, a determination generally is made, with the assistance of a
Debt-to-Income Ratio, as to whether the prospective borrower has sufficient
monthly income available (i) to meet the borrower's monthly obligations on the
proposed mortgage loan (generally determined on the basis of the monthly
payments due in the year of origination) and other expenses related to the
property (such as property taxes and hazard insurance) and (ii) to meet other
financial obligations and monthly living expenses. The "Debt-to-Income Ratio" is
the ratio of the borrower's total monthly payments to the borrower's gross
monthly income. The maximum monthly Debt-to-Income Ratio varies depending upon a
borrower's credit grade and loan documentation level (as described below) but
does not generally exceed 50%. Variations in the monthly Debt-to-Income Ratios
limit are permitted based on compensating factors. The underwriting standards
applied by Sellers, particularly with respect to the level of loan documentation
and the borrower's income and credit history, may be varied in appropriate cases
where factors such as low Combined Loan-to-Value Ratios or other favorable
credit exist.
Certain of the types of Loans that may be included in a Trust Fund are
recently developed and may involve additional uncertainties not present in
traditional types of loans. For example, certain of such Loans may provide for
escalating or variable payments by the borrower. These types of Loans are
underwritten on the basis of a judgment that the borrowers have the ability to
make the monthly payments required initially. In some instances, a borrower's
income may not be sufficient to permit continued loan payments as such payments
increase. These types of Loans may also be underwritten primarily upon the basis
of Loan-to-Value Ratios or other favorable credit factors.
26
<PAGE>
Specific Underwriting Criteria; Underwriting Programs
The Equity One Standards allow for the origination and purchase of Loans
generally under three underwriting programs, known as Grade A Credits, Grade B
Credits and Grade C Credits, all of which are summarized below. These programs
and their underwriting criteria may change from time to time. Deviations from
the specific criteria of an underwriting program are permitted to reflect local
economic trends and real estate valuations, as well as other credit factors
specific to each Loan application and/or each portfolio acquired. Some Loans may
be to borrowers whose creditworthiness may not coincide with program criteria.
Overall, the goal is to maintain the integrity of these programs and
simultaneously provide lending officers and correspondent networks with the
flexibility to consider the specific circumstances of each Loan.
Under the Equity One Standards, the following two types of income
documentation programs are used: (i) full income documentation ("Full Doc") and
(ii) no income verification ("NIV"). Under the Full Doc program, income is
verified by reviewing the borrower's W-2s for the past two years and two of the
borrower's current paystubs. Under the NIV program, the borrower must submit
bank statements for the past three months, and a current profit and loss
statement to review cash flow and verify the validity of the business. Tax
returns are generally not required under either income documentation program,
however, each lender always has the right to require tax returns if that is the
only means of verifying income/cash flow.
Underwriting with the NIV program is reserved for Grade A Credits and
Grade B Credits Loans, and offers an alternative for self-employed and employed
applicants with supplemental income, who are either unable to or do not wish to
produce income documentation to substantiate all of their income. For Loans
underwritten pursuant to the NIV program, the Debt-to-Income Ratio is based on a
maximum of 45% of stated income as disclosed on the Loan application.
Summary of Underwriting Requirements by Program
Grade A Credits. For Grade A Credits, the following criteria generally
apply:
1. An in-file credit report on the borrower by an independent credit
reporting agency reflecting the borrower's complete credit history is required.
Typically, a good to excellent credit history of at least one year is required,
and prior credit history may be rated on a case-by-case basis. The credit
history should reflect that existing and previous debts were paid in a timely
manner. A Chapter 7 bankruptcy is not acceptable. A Chapter 13 bankruptcy that
has been discharged for a minimum of two years is acceptable if the borrower has
since established a payment history, notwithstanding such bankruptcy, consistent
with this underwriting program. No unpaid collections, liens or judgments are
allowed under this credit grade. During the most recent 12 month period, the
borrower may not have more than (i) one 30 day delinquency in his or her
mortgage payment history, (ii) three major credit cards with a maximum of one 30
day delinquency and (iii) three retail credit cards with a maximum of two 30 day
delinquencies.
2. Generally, the borrower must have (i) been employed for not less than
three years with the same employer or (ii) established comparable stability in a
particular field of work.
27
<PAGE>
3. Combined Loan-to-Value Ratios and Debt-to-Income Ratios must conform to
the following criteria:
Maximum Combined Maximum Debt-
Loan-to-Value Ratio to-Income Ratio
------------------- ---------------
Property Type
-------------
Owner occupied one- to four-
family dwellings, townhouses,
condominiums 90% 45%
or
80% 50%
True Second Homes 80% 50%
Non-owner occupied single
family dwellings, townhouses,
condominiums 75% 50%
Non-owner occupied two- to four-
family dwellings, townhouses 70% 50%
Mixed use: Purchase 70% Minimum Debt
Refinance 65% Service Coverage 1.30
Grade B Credits. For Grade B Credits, the following criteria generally
apply:
1. An in-file credit report on the borrower by an independent credit
reporting agency reflecting the borrower's complete credit history is required.
Typically, a satisfactory to good credit history of at least one year is
required, and prior credit history may be rated on a case-by-case basis. The
credit history should reflect that existing and previous debts were paid in a
predominately timely manner. A Chapter 7 bankruptcy, if discharged for two
years, is acceptable if there are two years of re-established credit and a
satisfactory written explanation. A Chapter 13 bankruptcy with a minimum of a
three year satisfactory payment plan and one year of re-established credit is
acceptable. All unpaid charge-offs, liens or judgments in the last two years
must be paid in full. During the most recent twelve month period, the borrower
may not have (i) more than two 30 day delinquencies in his or her mortgage
payment history (consecutive 30 day delinquencies are treated as one 30 day
account), (ii) more than four major credit cards or installment debts with a
maximum of two 30 day delinquencies, (iii) any retail credit cards with more
than three 30 day delinquencies and (iv) more than two retail credit cards with
a maximum of one 60 day delinquency.
2. Generally, the borrower must have (i) been employed for not less than
three years with the same employer or (ii) established comparable stability in a
particular field of work.
28
<PAGE>
3. Combined Loan-to-Value Ratios and Debt-to-Income Ratios must conform to
the following criteria:
Maximum Combined Maximum Debt-
Loan-to-Value Ratio to-Income Ratio
------------------- ---------------
Property Type
-------------
Owner occupied one- to four-
family dwellings, townhouses,
condominiums 90% 45%
or
80% 50%
True Second Homes 80% 50%
Non-owner occupied single
family dwellings, townhouses,
condominiums 75% 50%
Non-owner occupied two- to four-
family dwellings, townhouses 70% 50%
Mixed use: Purchase 70% Minimum Debt
Refinance 65% Service Coverage 1.30
Grade C Credits. For Grade C Credits, the following criteria generally
apply:
1. An in-file credit report on the borrower by an independent credit
reporting agency reflecting the borrower's complete credit history is required.
Typically, a fair to satisfactory credit history of at least one year is
required. A discharged Chapter 7 bankruptcy is acceptable with one year of
re-established credit. A non-discharged Chapter 13 bankruptcy will be considered
with a minimum of a two year satisfactory payment plan, one year of
re-established credit and trustee permission. A written explanation of
derogatory credit is required. Mortgage payment history may not reflect any more
than three 30 day delinquencies and one 60 day delinquency during the most
recent 12 months (consecutive 30 day delinquencies are treated as one 30 day
account). In addition, all accounts that are delinquent for 60 days or longer
must be paid from proceeds.
2. Generally, the borrower must have (i) been employed for not less than
one year with the same employer or (ii) established comparable stability in a
particular field of work.
3. Combined Loan-to-Value Ratios and Debt-to-Income Ratios must conform to
the following criteria:
Maximum Combined Maximum Debt-
Loan-to-Value Ratio to-Income Ratio
------------------- ---------------
Property Type
-------------
Owner occupied single family
dwellings, townhouses 80% 50%
Owner occupied two- to four-
family dwellings, townhouses,
condominiums 75% 50%
Owner occupied condominiums 70% 50%
29
<PAGE>
True Second Homes 75% 50%
Non-owner occupied one- to four-
family dwellings 70% 50%
Qualifications of Sellers
Unless otherwise specified in the related Prospectus Supplement, each
Seller is required to satisfy the following qualifications. Each Seller is an
institution experienced in originating loans of the type contained in the
related Pool in accordance with accepted practices and prudent guidelines and
must maintain satisfactory facilities to originate those loans. The Servicer is
an institution experienced in originating and servicing loans of the type
contained in the related Pool in accordance with accepted practices and prudent
guidelines and must maintain satisfactory facilities to originate and service
those loans. Each Seller has all of the licenses necessary for the conduct of
its business.
Representations by Sellers; Repurchases
Each Seller (and Equity One, where a Seller is a subsidiary of Equity One)
will have made representations and warranties in respect of the Loans sold by
such Seller and evidenced by all, or a part, of a Series of Securities. Such
representations and warranties may include, among other things: (i) that (except
for Loans in amounts less than $15,000) title insurance (or in the case of
Properties located in areas where such policies are generally not available, an
attorney's certificate of title) and any required hazard insurance policy were
effective at origination of each Loan and that the title insurace (or
certificate of title as applicable) remained in effect on the date of purchase
of the Loan from Seller by or on behalf of the Depositor; (ii) that Seller had
good title to each such Loan and that such Loan was subject to no offsets,
defenses, counterclaims or rights of rescission except to the extent that any
buydown agreement may forgive certain indebtedness of a borrower; (iii) that
each Loan constituted a valid lien on, or a perfected security interest with
respect to, the Property (subject only to permissible liens disclosed, if
applicable, title insurance exceptions, if applicable, and certain other
exceptions described in the Agreement) and that the Property was free from
damage and was in acceptable condition; (iv) that there were no delinquent tax
or assessment liens against the Property; (v) that no required payment on a Loan
was delinquent more than the number of days specified in the related Prospectus
Supplement; and (vi) that each Loan was made in compliance with all applicable
local, state and federal laws and regulations in all material respects.
The Servicer or the Trustee, if the Servicer is the Seller, will promptly
notify the relevant Seller (and Equity One, if it is not the Servicer or the
Seller) of any breach of any representation or warranty made by it in respect of
a Loan which materially and adversely affects the interests of the
Securityholders in such Loan. Unless otherwise specified in the related
Prospectus Supplement, if such Seller cannot cure such breach within 90 days
following notice from the Servicer or the Trustee, as the case may be, then such
Seller will be obligated either to (i) repurchase such Loan from the Trust Fund
at a price (the "Purchase Price") equal to 100% of the unpaid principal balance
thereof as of the date of the repurchase plus accrued interest thereon to the
first day of the month following the month of repurchase at the Loan Rate (less
any Advances or amount payable as related servicing compensation if the Seller
is the Servicer) or (ii) substitute for such Loan a replacement loan that
satisfies the criteria specified in the related Prospectus Supplement. If a
REMIC election is to be made with respect to a Trust Fund, unless otherwise
specified in the related Prospectus Supplement, the Servicer or a holder of the
related residual certificate generally will be obligated to pay any prohibited
transaction tax which may arise in connection with any such repurchase or
substitution and the Trustee must have received a satisfactory opinion of
counsel that such repurchase or substitution will not cause the Trust Fund to
lose its status as a REMIC or otherwise subject the Trust Fund to a prohibited
transaction tax. The Servicer may be entitled to reimbursement for any such
payment from the assets of the related Trust Fund or from any holder of the
related residual certificate. See "Description of the Securities--General."
Except in those cases in which the Servicer is the Seller, the Servicer will be
required under the applicable Agreement to enforce this obligation for the
benefit of the Trustee and the holders of the Securities, following the
practices it would employ in its good faith business judgment were it the owner
of such
30
<PAGE>
Loan. This repurchase or substitution obligation will constitute the sole remedy
available to holders of Securities or the Trustee for a breach of representation
by a Seller.
If Equity One makes a representation or warranty on behalf of a Seller,
Equity One will be obligated to purchase or substitute a Loan if a Seller
defaults on its obligation to do so, but no assurance can be given that Equity
One will carry out its purchase or substitution obligations with respect to
Loans. Neither the Depositor nor the Servicer (unless the Servicer is a Seller)
will be obligated to purchase or substitute a Loan if a Seller defaults on its
obligation to do so, and no assurance can be given that Sellers will carry out
their respective repurchase or substitution obligations with respect to Loans.
However, to the extent that a breach of a representation and warranty of a
Seller may also constitute a breach of a representation made by the Servicer,
the Servicer may have a repurchase or substitution obligation as described below
under "The Agreements--Assignment of Trust Fund Assets."
DESCRIPTION OF THE SECURITIES
Each Series of Asset Backed Certificates (the "Certificates") will be
issued pursuant to either (i) a pooling and servicing agreement (a "Pooling and
Servicing Agreement") among the Depositor, the Servicer, the trustee(s) named in
the related Prospectus Supplement (the "Trustee") and the Sellers or (ii) a
trust agreement (a "Trust Agreement") between the Depositor and the Trustee. A
form of Pooling and Servicing Agreement and Trust Agreement has been filed as an
exhibit to the Registration Statement of which this Prospectus forms a part.
Each Series of Asset Backed Notes (the "Notes" and, together with the
Certificates, the "Securities") will be issued pursuant to an indenture (an
"Indenture") between the related trust fund established by the Depositor (a
"Trust Fund") and the Trustee, and the related Loans will be serviced by the
Servicer pursuant to a Master Servicing Agreement. A form of Indenture and
Master Servicing Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. A Series of Securities may
consist of both Notes and Certificates. Each Agreement, dated as of the related
Cut-off Date, will be among the Depositor, the Servicer, the Sellers and the
Trustee for the benefit of the holders of the Securities of such Series. The
provisions of each Agreement will vary depending upon the nature of the
Securities to be issued thereunder and the nature of the related Trust Fund. The
following are descriptions of the material provisions which may appear in each
Agreement. The descriptions are subject to, and are qualified in their entirety
by reference to, all of the provisions of the Agreement for each Series of
Securities and the applicable Prospectus Supplement.
General
Unless otherwise specified in the related Prospectus Supplement, the
Securities of each Series will be issued in book-entry or fully registered form,
in the authorized denominations specified in the related Prospectus Supplement,
will, in the case of Certificates, evidence specified beneficial ownership
interests in, and in the case of Notes, be secured by, the assets of the related
Trust Fund created pursuant to each Agreement and will not be entitled to
payments in respect of the assets included in any other Trust Fund established
by the Depositor. Unless otherwise specified in the related Prospectus
Supplement, the Securities will not represent obligations of the Depositor or
any affiliate of the Depositor. Certain of the Loans may be guaranteed or
insured as set forth in the related Prospectus Supplement. Each Trust Fund will
consist of, to the extent provided in the related Agreement, (i) the Trust Fund
Assets, as from time to time are subject to the related Agreement (exclusive of
any amounts specified in the related Prospectus Supplement ("Retained
Interest")), including all payments of interest and principal received with
respect to the Loans after the Cut-off Date (to the extent not applied in
computing the principal balance of such Loans as of the Cut-off Date (the
"Cut-off Date Principal Balance")); (ii) such assets as from time to time are
required to be deposited in the related Security Account, as described below
under "The Agreements--Payments on Loans; Deposits to Security Account;" (iii)
property which secured a Loan and which is acquired on behalf of the
Securityholders by foreclosure or deed in lieu of foreclosure and (iv) any
insurance policies or other forms of credit enhancement required to be
maintained pursuant to the related Agreement. If so specified in the related
Prospectus Supplement, a Trust Fund may also include one or more of the
following: reinvestment income on payments received on the Trust Fund Assets, a
Reserve Account, a mortgage pool insurance policy, a special hazard insurance
policy, a bankruptcy bond, one or more letters of credit, a surety bond,
guaranties or similar instruments.
31
<PAGE>
Each Series of Securities will be issued in one or more classes. Each
class of Certificates of a Series will evidence beneficial ownership of a
specified percentage (which may be 0%) or portion of future interest payments
and a specified percentage (which may be 0%) or portion of future principal
payments on, and each class of Notes of a Series will be secured by, the related
Trust Fund Assets. A Series of Securities may include one or more classes that
are senior in right to payment to one or more other classes of Securities of
such Series. Certain Series or classes of Securities may be covered by insurance
policies, surety bonds or other forms of credit enhancement, in each case as
described under "Credit Enhancement" herein and in the related Prospectus
Supplement. One or more classes of Securities of a Series may be entitled to
receive distributions of principal, interest or any combination thereof.
Distributions on one or more classes of a Series of Securities may be made prior
to one or more other classes, after the occurrence of specified events, in
accordance with a schedule or formula or on the basis of collections from
designated portions of the related Trust Fund Assets, in each case as specified
in the related Prospectus Supplement. The timing and amounts of such
distributions may vary among classes or over time as specified in the related
Prospectus Supplement.
Distributions of principal and interest (or, where applicable, of
principal only or interest only) on the related Securities will be made by the
Trustee on each Distribution Date (i.e., monthly, quarterly, semi-annually or at
such other intervals and on the dates as are specified in the related Prospectus
Supplement) in proportion to the percentages specified in the related Prospectus
Supplement. Distributions will be made to the persons in whose names the
Securities are registered at the close of business on the dates specified in the
related Prospectus Supplement (each, a "Record Date"). Distributions will be
made in the manner specified in the related Prospectus Supplement to the persons
entitled thereto at the address appearing in the register maintained for holders
of Securities (the "Security Register"); provided, however, that the final
distribution in retirement of the Securities will be made only upon presentation
and surrender of the Securities at the office or agency of the Trustee or other
person specified in the notice to Securityholders of such final distribution.
The Securities will be freely transferable and exchangeable at the
corporate trust office of the Trustee as set forth in the related Prospectus
Supplement. No service charge will be made for any registration of exchange or
transfer of Securities of any Series, but the Trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge.
Under current law the purchase and holding of a class of Securities
entitled only to a specified percentage of payments of either interest or
principal or a notional amount of either interest or principal on the related
Loans or a class of Securities entitled to receive payments of interest and
principal on the Loans only after payments to other classes or after the
occurrence of certain specified events by or on behalf of any employee benefit
plan or other retirement arrangement (including individual retirement accounts
and annuities, Keogh plans and collective investment funds in which such plans,
accounts or arrangements are invested) subject to provisions of ERISA or the
Code, may result in prohibited transactions, within the meaning of ERISA and the
Code. See "ERISA Considerations." Unless otherwise specified in the related
Prospectus Supplement, the transfer of Securities of such a class will not be
registered unless the transferee (i) represents that it is not, and is not
purchasing on behalf of, any such plan, account or arrangement or (ii) provides
an opinion of counsel satisfactory to the Trustee and the Depositor that the
purchase of Securities of such a class by or on behalf of such plan, account or
arrangement is permissible under applicable law and will not subject the
Trustee, the Servicer, the Sellers or the Depositor to any obligation or
liability in addition to those undertaken in the Agreements.
As to each Series, an election may be made to treat the related Trust Fund
or designated portions thereof as a "real estate mortgage investment conduit" or
"REMIC" as defined in the Code. The related Prospectus Supplement will specify
whether a REMIC election is to be made. Alternatively, the Agreement for a
Series may provide that a REMIC election may be made at the discretion of the
Depositor or the Servicer and may only be made if certain conditions are
satisfied. As to any such Series, the terms and provisions applicable to the
making of a REMIC election will be set forth in the related Prospectus
Supplement. If such an election is made with respect to a Series, one of the
classes will be designated as evidencing the sole class of "residual interests"
in the related REMIC, as defined in the Code. All other classes of Securities in
such a Series will constitute "regular interests" in the related REMIC, as
defined in the Code. As to each Series with respect to which a REMIC election is
to be made, the Servicer or a holder of the related residual certificate will be
obligated to take all actions required in order
32
<PAGE>
to comply with applicable laws and regulations and will be obligated to pay any
prohibited transaction taxes. The Servicer, unless otherwise provided in the
related Prospectus Supplement, will be entitled to reimbursement for any such
payment from the assets of the Trust Fund or from any holder of the related
residual certificate.
Distributions on Securities
General. In general, the method of determining the amount of distributions
on a particular Series of Securities will depend on the type of credit support,
if any, that is used with respect to such Series. See "Credit Enhancement." Set
forth below are descriptions of various methods that may be used to determine
the amount of distributions on the Securities of a particular Series. The
Prospectus Supplement for each Series of Securities will describe the method to
be used in determining the amount of distributions on the Securities of such
Series.
Distributions allocable to principal and interest on the Securities will
be made by the Trustee out of, and only to the extent of, funds in the related
Security Account, including any funds transferred from any reserve account or
other cash account established and available therefore (a "Reserve Account"). As
between Securities of different classes and as between distributions of
principal (and, if applicable, between distributions of Principal Prepayments,
as defined below, and scheduled payments of principal) and interest,
distributions made on any Distribution Date will be applied as specified in the
related Prospectus Supplement. The Prospectus Supplement will also describe the
method for allocating distributions among Securities of a particular class.
Available Funds. All distributions on the Securities of each Series on
each Distribution Date will be made from the Available Funds described below, in
accordance with the terms described in the related Prospectus Supplement and
specified in the Agreement. "Available Funds" for each Distribution Date will
generally equal the amount on deposit in the related Security Account on such
Distribution Date (net of related fees and expenses payable by the related Trust
Fund) other than amounts to be held therein for distribution on future
Distribution Dates.
Distributions of Interest. Interest will accrue on the aggregate principal
balance of the Securities (or, in the case of Securities entitled only to
distributions allocable to interest, the aggregate notional amount) of each
class of Securities (the "Class Security Balance") entitled to interest from the
date, at the Pass-Through Rate or interest rate, as applicable (which in either
case may be a fixed rate or rate adjustable as specified in such Prospectus
Supplement), and for the periods specified in such Prospectus Supplement. To the
extent funds are available therefor, interest accrued during each such specified
period on each class of Securities entitled to interest (other than a class of
Securities that provides for interest that accrues, but is not currently
payable, referred to hereafter as "Accrual Securities") will be distributable on
the Distribution Dates specified in the related Prospectus Supplement until the
aggregate Class Security Balance of the Securities of such class has been
distributed in full or, in the case of Securities entitled only to distributions
allocable to interest, until the aggregate notional amount of such Securities is
reduced to zero or for the period of time designated in the related Prospectus
Supplement. The original Class Security Balance of each Security will equal the
aggregate distributions allocable to principal to which such Security is
entitled. Distributions allocable to interest on each Security that is not
entitled to distributions allocable to principal will be calculated based on the
notional amount of such Security. The notional amount of a Security will not
evidence an interest in or entitlement to distributions allocable to principal
but will be used solely for convenience in expressing the calculation of
interest and for certain other purposes.
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 over a period ending two or
more days prior to a Distribution Date, the effective yield to Securityholders
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
such Distribution Date, and the effective yield (at par) to Securityholders will
be less than the indicated coupon rate.
With respect to any class of Accrual Securities, if specified in the
related Prospectus Supplement, any interest that has accrued but is not paid on
a given Distribution Date will be added to the aggregate Class Security Balance
of such class of Securities on that Distribution Date. Distributions of interest
on any class of Accrual
33
<PAGE>
Securities will commence only after the occurrence of the events specified in
such Prospectus Supplement. Prior to such time, the beneficial ownership
interest in the Trust Fund or the principal balance, as applicable, of such
class of Accrual Securities, as reflected in the aggregate Class Security
Balance of such class of Accrual Securities, will increase on each Distribution
Date by the amount of interest that accrued on such class of Accrual Securities
during the preceding interest accrual period but that was not required to be
distributed to such class on such Distribution Date. Any such class of Accrual
Securities will thereafter accrue interest on its outstanding Class Security
Balance as so adjusted.
Distributions of Principal. The related Prospectus Supplement will specify
the method by which the amount of principal to be distributed on the Securities
on each Distribution Date will be calculated and the manner in which such amount
will be allocated among the classes of Securities entitled to distributions of
principal. The aggregate Class Security Balance of any class of Securities
entitled to distributions of principal generally will be the aggregate original
Class Security Balance of such class of Securities specified in such Prospectus
Supplement, reduced by all distributions reported to the holders of such
Securities as allocable to principal and, (i) in the case of Accrual Securities,
unless otherwise specified in the related Prospectus Supplement, increased by
all interest accrued but not then distributable on such Accrual Securities and
(ii) in the case of adjustable rate Securities, subject to the effect of
negative amortization, if applicable.
If so provided in the related Prospectus Supplement, one or more classes
of Securities will be entitled to receive all or a disproportionate percentage
of the payments of principal which are received from borrowers in advance of
their scheduled due dates and are not accompanied by amounts representing
scheduled interest due after the month of such payments ("Principal
Prepayments") in the percentages and under the circumstances or for the periods
specified in such Prospectus Supplement. Any such allocation of Principal
Prepayments to such class or classes of Securities will have the effect of
accelerating the amortization of such Securities while increasing the interests
evidenced by one or more other classes of Securities in the Trust Fund.
Increasing the interests of the other classes of Securities relative to that of
certain Securities is intended to preserve the availability of the subordination
provided by such other Securities. See "Credit Enhancement--Subordination."
Unscheduled Distributions. If specified in the related Prospectus
Supplement, the Securities will be subject to receipt of distributions before
the next scheduled Distribution Date under the circumstances and in the manner
described below and in such Prospectus Supplement. If applicable, the Trustee
will be required to make such unscheduled distributions on the day and in the
amount specified in the related Prospectus Supplement if, due to substantial
payments of principal (including Principal Prepayments) on the Trust Fund
Assets, the Trustee or the Servicer determines that the funds available or
anticipated to be available from the Security Account and, if applicable, any
Reserve Account, may be insufficient to make required distributions on the
Securities on such Distribution Date. Unless otherwise specified in the related
Prospectus Supplement, the amount of any such unscheduled distribution that is
allocable to principal will not exceed the amount that would otherwise have been
required to be distributed as principal on the Securities on the next
Distribution Date. Unless otherwise specified in the related Prospectus
Supplement, the unscheduled distributions will include interest at the
applicable Pass-Through Rate (if any) or interest rate (if any) on the amount of
the unscheduled distribution allocable to principal for the period and to the
date specified in such Prospectus Supplement.
Advances
To the extent provided in the related Prospectus Supplement, the Servicer
will be required to advance on or before each Distribution Date (from its own
funds, funds advanced by Sub-Servicers or funds held in the Security Account for
future distributions to the holders of Securities of the related Series), an
amount equal to the aggregate of payments of interest and/or principal that were
delinquent on the related Determination Date (as such term is defined in the
related Prospectus Supplement), subject to the Servicer's determination that
such advances may be recoverable out of late payments by borrowers, Liquidation
Proceeds, Insurance Proceeds or otherwise ("Advances").
In making Advances, the Servicer will endeavor to maintain a regular flow
of scheduled interest and principal payments to holders of the Securities,
rather than to guarantee or insure against losses. If Advances are
34
<PAGE>
made by the Servicer from cash being held for future distribution to
Securityholders, the Servicer will replace such funds on or before any future
Distribution Date to the extent that funds in the applicable Security Account on
such Distribution Date would be less than the amount required to be available
for distributions to Securityholders on such date. Each Advance will be
reimbursable to the Servicer out of recoveries on the specific Loans with
respect to which such Advances were made (e.g., late payments made by the
related borrower, any related Insurance Proceeds, Liquidation Proceeds or
proceeds of any Loan purchased by the Depositor, a Sub-Servicer or a Seller
pursuant to the related Agreement). Advances also will be reimbursable to the
Servicer from cash otherwise distributable to Securityholders (including the
holders of Senior Securities) to the extent that the Servicer determines that
any such Advances previously made are not ultimately recoverable as described
above. To the extent provided in the related Prospectus Supplement, the Servicer
also will be obligated to make Advances, to the extent recoverable out of
Insurance Proceeds, Liquidation Proceeds or otherwise, in respect of certain
taxes and insurance premiums not paid by borrowers on a timely basis. Such
Advances are reimbursable to the Servicer to the extent permitted by the related
Agreement. The obligations of the Servicer to make Advances may be supported by
a cash advance reserve fund, a surety bond or other arrangement of the type
described herein under "Credit Enhancement," in each case as described in the
related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, in the
event the Servicer fails to make a required Advance, the Trustee will be
obligated to make such Advance in its capacity as successor servicer. If the
Trustee makes such an Advance, it will be entitled to be reimbursed for such
Advance to the same extent and degree as the Servicer is entitled to be
reimbursed for Advances. See "Description of the Securities--Distributions on
Securities."
Reports to Securityholders
Prior to or concurrently with each distribution on a Distribution Date the
Servicer or the Trustee will furnish to each Securityholder of record of the
related Series a statement setting forth, to the extent applicable to such
Series of Securities, among other things:
(i) the amount of such distribution allocable to principal,
separately identifying the aggregate amount of any Principal Prepayments
and if so specified in the related Prospectus Supplement, any applicable
prepayment penalties included therein;
(ii) the amount of such distribution allocable to interest;
(iii) the amount of any Advance;
(iv) the aggregate amount (a) otherwise allocable to the
Subordinated Securities on such Distribution Date, and (b) withdrawn from
the Reserve Account, if any, that is included in the amounts distributed
to the Senior Securities;
(v) the outstanding principal balance or notional amount of each
class of the related Series after giving effect to the distribution of
principal on such Distribution Date;
(vi) the percentage of principal payments on the Loans (excluding
Principal Prepayments), if any, which each such class will be entitled to
receive on the following Distribution Date;
(vii) the percentage of Principal Prepayments on the Loans, if any,
which each such class will be entitled to receive on the following
Distribution Date;
(viii) the related amount of the servicing compensation retained or
withdrawn from the Security Account by the Servicer, and the amount of
additional servicing compensation received by the Servicer attributable to
penalties, fees, excess Liquidation Proceeds and other similar charges and
items;
35
<PAGE>
(ix) the number and aggregate principal balances of Loans (A)
delinquent (exclusive of Loans in foreclosure) (1) 1 to 30 days, (2) 31 to
60 days, (3) 61 to 90 days and (4) 91 or more days and (B) in foreclosure
and delinquent (1) 1 to 30 days, (2) 31 to 60 days, (3) 61 to 90 days and
(4) 91 or more days, as of the close of business on the last day of the
calendar month preceding such Distribution Date;
(x) the book value of any real estate acquired through foreclosure
or grant of a deed in lieu of foreclosure;
(xi) the Pass-Through Rate or interest rate, as applicable, if
adjusted from the date of the last statement, of any such class expected
to be applicable to the next distribution to such class;
(xii) if applicable, the amount remaining in any Reserve Account at
the close of business on the Distribution Date;
(xiii) the Pass-Through Rate or interest rate, as applicable, as of
the day prior to the immediately preceding Distribution Date; and
(xiv) any amounts remaining under letters of credit, pool policies
or other forms of credit enhancement.
Where applicable, any amount set forth above may be expressed as a dollar
amount per single Security of the relevant class having the Percentage Interest
specified in the related Prospectus Supplement. The report to Securityholders
for any Series of Securities may include additional or other information of a
similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the Servicer or the Trustee will mail to each Securityholder of
record at any time during such calendar year a report (a) as to the aggregate of
amounts reported pursuant to (i) and (ii) above for such calendar year or, in
the event such person was a Securityholder of record during a portion of such
calendar year, for the applicable portion of such year and (b) such other
customary information as may be deemed necessary or desirable for
Securityholders to prepare their tax returns.
Categories of Classes of Securities
The Securities of any Series may be comprised of one or more classes. Such
classes, in general, fall into different categories. The following chart
identifies and generally defines certain of the more typical categories. The
Prospectus Supplement for a series of Securities may identify the classes which
comprise such Series by reference to the following categories.
Categories of Classes Definition
PRINCIPAL TYPES
Accretion Directed Class.......... A class that receives principal payments
from the accreted interest from specified
Accrual Classes. An Accretion Directed Class
also may receive principal payments from
principal paid on the underlying Trust Fund
Assets for the related Series.
Component Class................... A class consisting of "components." The
components of a Component Class may have
different principal and/or interest payment
characteristics but together constitute a
single class. Each component of a Component
Class may
36
<PAGE>
Categories of Classes Definition
be identified as falling into one or more of
the categories in this chart.
Notional Amount Class............. A class having no principal balance and
bearing interest on the related notional
amount. The notional amount is used for
purposes of the determination of interest
distributions.
Planned Principal Class
(also sometimes
referred to as a "PAC")......... A class that is designed to receive
principal payments using a predetermined
principal balance schedule derived by
assuming two constant prepayment rates for
the underlying Trust Fund Assets. These two
rates are the endpoints for the "structuring
range" for the Planned Principal Class. The
Planned Principal Classes in any Series of
Securities may be subdivided into different
categories (e.g., Primary Planned Principal
Classes, Secondary Planned Principal Classes
and so forth) having different effective
structuring ranges and different principal
payment priorities. The structuring range
for the Secondary Planned Principal Class of
a Series of Securities will be narrower than
that for the Primary Planned Principal Class
of such Series.
Scheduled Principal Class......... A class that is designed to receive
principal payments using a predetermined
principal balance schedule but is not
designated as a Planned Principal Class or
Targeted Principal Class. In many cases, the
schedule is derived by assuming two constant
prepayment rates for the underlying Trust
Fund Assets. These two rates are the
endpoints for the "structuring range" for
the Scheduled Principal Class.
Sequential Pay Class.............. Classes that receive principal payments in a
prescribed sequence, that do not have
predetermined principal balance schedules
and that under all circumstances receive
payments of principal continuously from the
first Distribution Date on which they
receive principal until they are retired. A
single class that receives principal
payments before or after all other classes
in the same Series of Securities may be
identified as a Sequential Pay Class.
Strip Class....................... A class that receives a constant proportion,
or "strip," of the principal payments on the
underlying Trust Fund Assets.
Support Class (also
sometimes referred to
as a "Companion Class")......... A class that receives principal payments on
any Distribution Date only if scheduled
payments have been made on specified Planned
Principal Classes, Targeted Principal
Classes and/or Scheduled Principal Classes.
37
<PAGE>
Categories of Classes Definition
Targeted Principal Class
(also sometimes
referred to as a "TAC")......... A class that is designed to receive
principal payments using a predetermined
principal balance schedule derived by
assuming a single constant prepayment rate
for the underlying Trust Fund Assets.
INTEREST TYPES
Fixed Rate Class.................. A class with an interest rate that is fixed
throughout the life of the class.
Floating Rate Class............... A class with an interest rate that resets
periodically based upon a designated index
and that varies with changes in such index.
Inverse Floating Rate Class....... A class with an interest rate that resets
periodically based upon a designated index
and that varies inversely with changes in
such index.
Variable Rate Class............... A class with an interest rate that resets
periodically and is calculated by reference
to the rate or rates of interest applicable
to specified assets or instruments (e.g.,
the Loan Rates borne by the underlying
Loans).
Interest Only Class............... A class that receives some or all of the
interest payments made on the underlying
Trust Fund Assets and little or no
principal. Interest Only Classes have either
a nominal principal balance or a notional
amount. A nominal principal balance
represents actual principal that will be
paid on the class. It is referred to as
nominal since it is extremely small compared
to other classes. A notional amount is the
amount used as a reference to calculate the
amount of interest due on an Interest Only
Class that is not entitled to any
distributions in respect of principal.
Principal Only Class.............. A class that does not bear interest and is
entitled to receive only distributions in
respect of principal.
Partial Accrual Class............. A class that accretes a portion of the
amount of accrued interest thereon, which
amount will be added to the principal
balance of such class on each applicable
Distribution Date, with the remainder of
such accrued interest to be distributed
currently as interest on such class. Such
accretion may continue until a specified
event has occurred or until such Partial
Accrual Class is retired.
Accrual Class..................... A class that accretes the amount of accrued
interest otherwise distributable on such
class, which amount will be added as
principal to the principal balance of such
class on each applicable Distribution Date.
Such accretion may
38
<PAGE>
Categories of Classes Definition
continue until some specified event has
occurred or until such Accrual Class is
retired.
Indices Applicable to Floating Rate and Inverse Floating Rate Classes
General. Except as otherwise specified in the related Prospectus
Supplement, the indices applicable to Floating Rate and Inverse Floating Rate
Classes will be limited to the indices described below.
LIBOR. Unless otherwise specified in the related Prospectus Supplement, on
the LIBOR Determination Date (as such term is defined in the related Prospectus
Supplement) for each class of Securities of a Series as to which the applicable
interest rate or Pass-Through Rate is determined by reference to an index
denominated as LIBOR, the person designated in the related Agreement (the
"Calculation Agent") will determine LIBOR by reference to the quotations, as set
forth on the Telerate Screen Page 3750, offered by the principal London office
of each of the designated reference banks meeting the criteria set forth below
(the "Reference Banks") for making one-month United States dollar deposits in
leading banks in the London Interbank market, as of 11:00 a.m. (London time) on
such LIBOR Determination Date. In lieu of relying on the quotations for those
Reference Banks that appear at such time on the Telerate Screen Page 3750, the
Calculation Agent will request each of the Reference Banks to provide such
offered quotations at such time. "Telerate Screen Page 3750" means the display
page currently so designated on the Dow Jones Telerate Service (or such other
page as may replace that page on that service for the purpose of displaying
comparable rates or prices).
LIBOR will be established by the Calculation Agent on each LIBOR
Determination Date as follows:
(a) If on any LIBOR Determination Date two or more Reference Banks
provide such offered quotations, LIBOR for the next Interest Accrual
Period shall be the arithmetic mean of such offered quotations (rounded
upwards if necessary to the nearest whole multiple of 1/32%).
(b) If on any LIBOR Determination Date only one or none of the
Reference Banks provides such offered quotations, LIBOR for the next
Interest Accrual Period (as such term is defined in the related Prospectus
Supplement) shall be whichever is the higher of (i) LIBOR as determined on
the previous LIBOR Determination Date or (ii) the Reserve Interest Rate.
The "Reserve Interest Rate" shall be the rate per annum which the
Calculation Agent determines to be either (i) the arithmetic mean (rounded
upwards if necessary to the nearest whole multiple of 1/32%) of the
one-month United States dollar lending rates that New York City banks
selected by the Calculation Agent are quoting, on the relevant LIBOR
Determination Date, to the principal London offices of at least two of the
Reference Banks to which such quotations are, in the opinion of the
Calculation Agent, being so made, or (ii) in the event that the
Calculation Agent can determine no such arithmetic mean, the lowest
one-month United States dollar lending rate which New York City banks
selected by the Calculation Agent are quoting on such LIBOR Determination
Date to leading European banks.
(c) If on any LIBOR Determination Date for a class specified in the
related Prospectus Supplement, the Calculation Agent is required but is
unable to determine the Reserve Interest Rate in the manner provided in
paragraph (b) above, LIBOR for the next Interest Accrual Period shall be
LIBOR as determined on the preceding LIBOR Determination Date, or, in the
case of the first LIBOR Determination Date, LIBOR shall be deemed to be
the per annum rate specified as such in the related Prospectus Supplement.
Each Reference Bank (i) shall be a leading bank engaged in transactions in
Eurodollar deposits in the international Eurocurrency market; (ii) shall not
control, be controlled by, or be under common control with the Calculation
Agent; and (iii) shall have an established place of business in London. If any
such Reference Bank
39
<PAGE>
should be unwilling or unable to act as such or if appointment of any such
Reference Bank is terminated, another leading bank meeting the criteria
specified above will be appointed.
The establishment of LIBOR on each LIBOR Determination Date by the
Calculation Agent and its calculation of the rate of interest for the applicable
classes for the related Interest Accrual Period shall (in the absence of
manifest error) be final and binding.
Treasury Index. Unless otherwise specified in the related Prospectus
Supplement, on the Treasury Index Determination Date (as such term is defined in
the related Prospectus Supplement) for each class of Securities of a Series as
to which the applicable interest rate is determined by reference to an index
denominated as a "Treasury Index," the Calculation Agent will ascertain the
Treasury Index for Treasury securities of the maturity and for the period (or,
if applicable, date) specified in the related Prospectus Supplement. Unless
otherwise specified in the related Prospectus Supplement, the Treasury Index for
any period means the average of the yield for each business day during the
period specified therein (and for any date means the yield for such date),
expressed as a per annum percentage rate, on (i) U.S Treasury securities
adjusted to the "constant maturity" (as further described below) specified in
such Prospectus Supplement or (ii) if no "constant maturity" is so specified,
United States Treasury securities trading on the secondary market having the
maturity specified in such Prospectus Supplement, in each case as published by
the Federal Reserve Board in its Statistical Release No. H.15(519). Statistical
Release No. H.15(519) is published on Monday or Tuesday of each week and may be
obtained by writing or calling the Publications Department at the Board of
Governors of the Federal Reserve System, 21st and C Streets, Washington, D.C.
20551 (202) 452-3244. If the Calculation Agent has not yet received Statistical
Release No. H.15(519) for such week, then it will use such Statistical Release
from the immediately preceding week.
Yields on United States Treasury securities at "constant maturity" are
derived from the United States Treasury's daily yield curve. This curve, which
relates the yield on a security to its time to maturity, is based on the closing
market bid yields on actively traded Treasury securities in the over-the-counter
market. These market yields are calculated from composites of quotations
reported by five leading United States government securities dealers to the
Federal Reserve Bank of New York. This method provides a yield for a given
maturity even if no security with that exact maturity is outstanding. In the
event that the Treasury Index is no longer published, a new index based upon
comparable data and methodology will be designated in accordance with the
Agreement relating to the particular Series of Securities. The Calculation
Agent's determination of the Treasury Index, and its calculation of the rates of
interest for the applicable classes for the related Interest Accrual Period
shall (in the absence of manifest error) be final and binding.
Prime Rate. Unless otherwise specified in the related Prospectus
Supplement, on the Prime Rate Determination Date (as such term is defined in the
related Prospectus Supplement) for each class of Securities of a Series as to
which the applicable interest rate is determined by reference to an index
denominated as the Prime Rate, the Calculation Agent will ascertain the Prime
Rate for the related Interest Accrual Period. Unless otherwise specified in the
related Prospectus Supplement, the Prime Rate for an Interest Accrual Period
will be the "Prime Rate" as published in the "Money Rates" section of The Wall
Street Journal (or if not so published, the "Prime Rate" as published in a
newspaper of general circulation selected by the Calculation Agent in its sole
discretion) on the related Prime Rate Determination Date. If a prime rate range
is given, then the average of such range will be used. In the event that the
Prime Rate is no longer published, a new index based upon comparable data and
methodology will be designated in accordance with the Agreement relating to the
particular Series of Securities. The Calculation Agent's determination of the
Prime Rate and its calculation of the rates of interest for the related Interest
Accrual Period shall (in the absence of manifest error) be final and binding.
The interest rate index or indices applicable to floating rate and inverse
floating rate classes of any Series (the "Securities Index") may not reflect the
actual index or indices employed under applicable Loan documents in calculating
the interest rates on Loans in such class or classes of Securities (the "Loan
Indices"). To this extent, the amounts available for payment of interest on such
class or classes of Securities may increase or decrease depending upon
divergences between performance of the applicable Securities Index and the
composite performance of the applicable Loan Indices. While it might be
possible, through the use of a reserve account, interest rate swaps, financial
derivative contracts or other means, to hedge against the risk that divergences
between the
40
<PAGE>
Securities Index and the Loan Indices might result in insufficient interest
payments being generated from Loans backing such class or classes of Securities
to pay the interest accruing on such class or classes of Securities, the
availability of interest rate hedging protection, if any, shall only be as
disclosed in the related Prospectus Supplement.
Book-Entry Registration of Securities
As described in the related Prospectus Supplement, if not issued in fully
registered form, each class of Securities will be registered as book-entry
securities (the "Book-Entry Securities"). Persons acquiring beneficial ownership
interests in the Securities ("Beneficial Owners") will hold their Securities
through the Depository Trust Company ("DTC") in the United States, or Cedel
Bank, Societe Anonyme ("CEDEL") or 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
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 depositories which in turn
will hold such positions in customers' securities accounts in the depositories'
names on the books of DTC. Citibank, N.A., will act as depository for CEDEL and
The Chase Manhattan Bank will act as depository for Euroclear (in such
capacities, individually the "Relevant Depository" and collectively the
"European Depositories"). Except as described below, no Beneficial Owner 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 "Securityholders" of the Securities will be Cede &
Co., as nominee of DTC. Beneficial Owners are only permitted to exercise their
rights indirectly through DTC Participants and DTC.
The Beneficial 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).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Securities from the Trustee through DTC and DTC Participants.
While the 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 DTC 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. DTC Participants and indirect participants with
whom Beneficial 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 Beneficial Owners. Accordingly,
although Beneficial Owners will not possess physical certificates, the Rules
provide a mechanism by which Beneficial Owners will receive distributions and
will be able to transfer their interest.
Beneficial Owners will not receive or be entitled to receive physical
certificates representing their respective interests in the Securities, except
under the limited circumstances described below. Unless and until Definitive
Securities are issued, Beneficial Owners who are not DTC Participants may
transfer ownership of Securities only through DTC Participants and indirect
participants by instructing such DTC 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
DTC 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 DTC Participants will be debited and
credited. Similarly, the DTC Participants and indirect participants will make
debits or credits, as the case may be, on their records on behalf of the selling
and purchasing Beneficial Owners.
41
<PAGE>
Because of time zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a DTC 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
or Euroclear Participant to a DTC Participant will be received with value on the
DTC settlement date but will be available in the relevant CEDEL or Euroclear
cash account only as of the business day following settlement in DTC.
Transfers between DTC Participants will occur in accordance with the
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 the Rules on behalf of the relevant European international
clearing system by the Relevant Depository; 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 Depository 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 Depositories.
DTC is a limited purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York Banking
Law, a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants (the "DTC Participants") deposit with
DTC. DTC also facilitates the settlement among DTC Participants of securities
transactions, such as transfers and pledges, in deposited securities through
electronic computerized book-entry changes in DTC Participants' accounts,
thereby eliminating the need for physical movement of certificates. DTC
Participants include securities brokers and dealers, banks, trust companies,
clearing corporations, and certain other organizations. DTC is owned by a number
of DTC Participants and by the New York Stock Exchange, Inc., the American Stock
Exchange, Inc. and the National Association of Securities Dealers, Inc. Access
to the DTC system is also available to others such as Financial Intermediaries
that clear through or maintain a custodial relationship with a DTC Participant,
either directly or indirectly. The Rules are on file with the Commission.
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
42
<PAGE>
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York ("Morgan" and, in such capacity, the
"Euroclear Operator"), under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "Belgian Cooperative"). All operations are
conducted by Morgan, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Belgian Cooperative. The Belgian 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.
Morgan 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 Federal Reserve and the New York State Banking Department, as well as the
Belgian Banking Commission.
Securities clearance accounts and cash accounts with Morgan 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.
Under a book-entry format, Beneficial Owners of the Book-Entry Securities
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede & Co., as nominee of DTC. 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 Depository. Such distributions will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. See "Federal
Income Tax Consequences--Tax Treatment of Foreign Investors" and "--Tax
Consequences to holders of the Notes--Backup Withholding." Because DTC can only
act on behalf of Financial Intermediaries, the ability of a Beneficial Owner to
pledge Book-Entry Securities to persons or entities that do not participate in
the Depository system 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 Trust Fund will be provided to Cede &
Co., as nominee of DTC, and may be made available by Cede & Co. to Beneficial
Owners upon request, in accordance with the Rules, and to the Financial
Intermediaries to whose DTC accounts the Book-Entry Securities of such
Beneficial 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 applicable 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 Securityholder 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 Depository to
effect such actions on its behalf through DTC. DTC may take actions, at the
direction of the related DTC Participants, with respect to some Securities which
conflict with actions taken with respect to other Securities.
Definitive Securities will be issued to Securityholders only if (i) the
Servicer advises the applicable Trustee in writing that DTC is no longer willing
or able to discharge properly its responsibilities as depository with respect to
such Securities and such Trustee is unable to locate a qualified successor, (ii)
the Servicer at its option, elects to terminate the book-entry system through
DTC or (iii) after the occurrence of an Event of Default or the
43
<PAGE>
resignation or removal of the Servicer with respect to such Securities, holders
representing at least a majority of the outstanding principal amount of the
related Securities of such series advise DTC, either directly or through DTC
Participants, in writing (with instructions to notify the applicable Trustee in
writing) that the continuation of a book-entry system through DTC (or a
successor thereto) with respect to such Securities is no longer in the best
interest of the holders of such Securities.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Beneficial
Owners of the occurrence of such event and the availability through DTC of
Definitive 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
Securityholders under the applicable 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.
None of the Servicer, the Depositor or 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 of DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
CREDIT ENHANCEMENT
General
Credit enhancement may be provided with respect to one or more classes of
a Series of Securities or with respect to the related Trust Fund Assets. Credit
enhancement may be in the form of a limited financial guaranty policy issued by
an entity named in the related Prospectus Supplement, the subordination of one
or more classes of the Securities of such Series, the establishment of one or
more Reserve Accounts, the use of a cross-collateralization feature, use of a
mortgage pool insurance policy, FHA Insurance, VA Guaranty, bankruptcy bond,
special hazard insurance policy, surety bond, letter of credit, guaranteed
investment contract, overcollateralization, or another method of credit
enhancement contemplated herein and described in the related Prospectus
Supplement, or any combination of the foregoing. Unless otherwise specified in
the related Prospectus Supplement, credit enhancement will not provide
protection against all risks of loss and will not guarantee repayment of the
entire principal balance of the Securities and interest thereon. If losses occur
which exceed the amount covered by credit enhancement or which are not covered
by the credit enhancement, Securityholders will bear their allocable share of
any deficiencies.
Subordination
If so specified in the related Prospectus Supplement, protection afforded
to holders of one or more classes of Securities of a Series by means of the
subordination feature may be accomplished by the preferential right of holders
of one or more other classes of such Series (the "Senior Securities") to
distributions in respect of scheduled principal, Principal Prepayments, interest
or any combination thereof that otherwise would have been payable to holders of
Subordinated Securities under the circumstances and to the extent specified in
the related Prospectus Supplement. Protection may also be afforded to the
holders of Senior Securities of a Series by: (i) reducing the ownership interest
(if applicable) of the related Subordinated Securities; (ii) a combination of
the immediately preceding sentence and clause (i) above; or (iii) as otherwise
described in the related Prospectus Supplement. If so specified in the related
Prospectus Supplement, delays in receipt of scheduled payments on the Loans and
losses on defaulted Loans may be borne first by the various classes of
Subordinated Securities and thereafter by the various classes of Senior
Securities, in each case under the circumstances and subject to the limitations
specified in such Prospectus Supplement. The aggregate distributions in respect
of delinquent payments on the Loans over the lives of the Securities or at any
time, the aggregate losses in respect of defaulted Loans which must be borne by
the Subordinated Securities by virtue of subordination and the amount of the
distributions otherwise distributable to the
44
<PAGE>
holders of Subordinated Securities that will be distributable to holders of
Senior Securities on any Distribution Date may be limited as specified in the
related Prospectus Supplement. If aggregate distributions in respect of
delinquent payments on the Loans or aggregate losses in respect of such Loans
were to exceed an amount specified in the related Prospectus Supplement, holders
of Senior Securities would experience losses on the Securities.
In addition to or in lieu of the foregoing, if so specified in the related
Prospectus Supplement, all or any portion of distributions otherwise payable to
holders of Subordinated Securities on any Distribution Date may instead be
deposited into one or more Reserve Accounts established with the Trustee or
distributed to holders of Senior Securities. Such deposits may be made on each
Distribution Date, for specified periods or until the balance in the Reserve
Account has reached a specified amount and, following payments from the Reserve
Account to holders of Senior Securities or otherwise, thereafter to the extent
necessary to restore the balance in the Reserve Account to required levels, in
each case as specified in the related Prospectus Supplement. Amounts on deposit
in the Reserve Account may be released to the holders of certain classes of
Securities at the times and under the circumstances specified in such Prospectus
Supplement.
If specified in the related Prospectus Supplement, various classes of
Senior Securities and Subordinated Securities may themselves be subordinate in
their right to receive certain distributions to other classes of Senior and
Subordinated Securities, respectively, through a cross-collateralization
mechanism or otherwise.
As between classes of Senior Securities and as between classes of
Subordinated Securities, distributions may be allocated among such classes (i)
in the order of their scheduled final distribution dates, (ii) in accordance
with a schedule or formula, (iii) in relation to the occurrence of events, or
(iv) otherwise, in each case as specified in the related Prospectus Supplement.
As between classes of Subordinated Securities, payments to holders of Senior
Securities on account of delinquencies or losses and payments to any Reserve
Account will be allocated as specified in the related Prospectus Supplement.
Letter of Credit
The letter of credit, if any, with respect to a Series of Securities will
be issued by the bank or financial institution specified in the related
Prospectus Supplement (the "L/C Bank"). Under the letter of credit, the L/C Bank
will be obligated to honor drawings thereunder in an aggregate fixed dollar
amount, net of unreimbursed payments thereunder, equal to the percentage
specified in the related Prospectus Supplement of the aggregate principal
balance of the Loans on the related Cut-off Date or of one or more Classes of
Securities (the "L/C Percentage"). If so specified in the related Prospectus
Supplement, the letter of credit may permit drawings in the event of losses not
covered by insurance policies or other credit support, such as losses arising
from damage not covered by standard hazard insurance policies, losses resulting
from the bankruptcy of a borrower and the application of certain provisions of
the Bankruptcy Code, or losses resulting from denial of insurance coverage due
to misrepresentations in connection with the origination of a Loan. The amount
available under the letter of credit will, in all cases, be reduced to the
extent of the unreimbursed payments thereunder. The obligations of the L/C Bank
under the letter of credit for each Series of Securities will expire at the
earlier of the date specified in the related Prospectus Supplement or the
termination of the Trust Fund. See "The Agreements--Termination; Optional
Termination." A copy of the letter of credit for a Series, if any, will be filed
with the Commission as an exhibit to a Current Report on Form 8-K to be filed
within 15 days of issuance of the Securities of the related Series.
45
<PAGE>
Insurance Policies, Surety Bonds and Guaranties
If so provided in the Prospectus Supplement for a Series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain classes
thereof will be covered by insurance policies and/or surety bonds provided by
one or more insurance companies or sureties. Such instruments may cover, with
respect to one or more classes of Securities of the related series, timely
distributions of interest and/or full distributions of principal on the basis of
a schedule of principal distributions set forth in or determined in the manner
specified in the related Prospectus Supplement. In addition, if specified in the
related Prospectus Supplement, a Trust Fund may also include bankruptcy bonds,
special hazard insurance policies, other insurance or guaranties for the purpose
of (i) maintaining timely payments or providing additional protection against
losses on the assets included in such Trust Fund, (ii) paying administrative
expenses or (iii) establishing a minimum reinvestment rate on the payments made
in respect of such assets or principal payment rate on such assets. Such
arrangements may include agreements under which Securityholders are entitled to
receive amounts deposited in various accounts held by the Trustee upon the terms
specified in such Prospectus Supplement. A copy of any such instrument for a
series will be filed with the Commission as an exhibit to a Current Report on
Form 8-K to be filed with the Commission within 15 days of issuance of the
Securities of the related Series.
Over-Collateralization
If so provided in the Prospectus Supplement for a Series of Securities, a
portion of the interest payment on each Loan may be applied as an additional
distribution in respect of principal to reduce the principal balance of a
certain class or classes of Securities and, thus, accelerate the rate of payment
of principal on such class or classes of Securities.
Reserve Accounts
If specified in the related Prospectus Supplement, credit support with
respect to a Series of Securities will be provided by the establishment and
maintenance with the Trustee for such Series of Securities, in trust, of one or
more Reserve Accounts for such Series. The related Prospectus Supplement will
specify whether or not any such Reserve Accounts will be included in the Trust
Fund for such Series.
The Reserve Account for a Series will be funded (i) by the deposit therein
of cash, United States Treasury securities, instruments evidencing ownership of
principal or interest payments thereon, letters of credit, demand notes,
certificates of deposit or a combination thereof in the aggregate amount
specified in the related Prospectus Supplement, (ii) by the deposit therein from
time to time of certain amounts, as specified in the related Prospectus
Supplement to which the holders of Subordinated Securities, if any, would
otherwise be entitled or (iii) in such other manner as may be specified in the
related Prospectus Supplement.
Any amounts on deposit in the Reserve Account and the proceeds of any
other instrument upon maturity will be held in cash or will be invested in
"Permitted Investments" which may include (i) obligations of the United States
or any agency thereof, provided such obligations are backed by the full faith
and credit of the United States; (ii) general obligations of or obligations
guaranteed by any state of the United States or the District of Columbia
receiving the highest long-term debt rating of each Rating Agency rating the
related Series of Securities, or such lower rating as will not result in the
downgrading or withdrawal of the ratings then assigned to such Securities by
each such Rating Agency; (iii) commercial or finance company paper which is then
receiving the highest commercial or finance company paper rating of each such
Rating Agency, or such lower rating as will not result in the downgrading or
withdrawal of the ratings then assigned to such Securities by each such Rating
Agency; (iv) certificates of deposit, demand or time deposits, or bankers'
acceptances issued by any depository institution or trust company incorporated
under the laws of the United States or of any state thereof and subject to
supervision and examination by federal and/or state banking authorities,
provided that the commercial paper and/or long term unsecured debt obligations
of such depository institution or trust company (or in the case of the principal
depository institution in a holding company system, the commercial paper or
long-term unsecured debt obligations of such holding company, but only if
Moody's is not a Rating Agency) are then rated one of the two highest long-term
and the highest short-term ratings of each such Rating Agency for such
securities, or such lower ratings as will not result
46
<PAGE>
in the downgrading or withdrawal of the rating then assigned to such Securities
by any such Rating Agency; (v) demand or time deposits or certificates of
deposit issued by any bank or trust company or savings institution to the extent
that such deposits are fully insured by the FDIC; (vi) guaranteed reinvestment
agreements issued by any bank, insurance company or other corporation
containing, at the time of the issuance of such agreements, such terms and
conditions as will not result in the downgrading or withdrawal of the rating
then assigned to such Securities by any such Rating Agency; (vii) repurchase
obligations with respect to any security described in clauses (i) and (ii)
above, in either case entered into with a depository institution or trust
company (acting as principal) described in clause (iv) above; (viii) securities
(other than stripped bonds, stripped coupons or instruments sold at a purchase
price in excess of 115% of the face amount thereof) bearing interest or sold at
a discount issued by any corporation incorporated under the laws of the United
States or any state thereof which, at the time of such investment, have one of
the two highest ratings of each Rating Agency (except if the Rating Agency is
Moody's, such rating shall be the highest commercial paper rating of Moody's for
any such securities), or such lower rating as will not result in the downgrading
or withdrawal of the rating then assigned to such Securities by any such Rating
Agency, as evidenced by a signed writing delivered by each such Rating Agency;
(ix) interests in any money market fund which at the date of acquisition of the
interests in such fund and throughout the time such interests are held in such
fund has the highest applicable rating by each such Rating Agency or such lower
rating as will not result in the downgrading or withdrawal of the ratings then
assigned to such Securities by each such Rating Agency; (x) short term
investment funds sponsored by any trust company or national banking association
incorporated under the laws of the United States or any state thereof which on
the date of acquisition has been rated by each such Rating Agency in their
respective highest applicable rating category or such lower rating as will not
result in the downgrading or withdrawal of the ratings then assigned to such
Securities by each such Rating Agency; and (xi) such other investments having a
specified stated maturity and bearing interest or sold at a discount acceptable
to each Rating Agency as will not result in the downgrading or withdrawal of the
rating then assigned to such Securities by any such Rating Agency, as evidenced
by a signed writing delivered by each such Rating Agency; provided that no such
instrument shall be a Permitted Investment if such instrument evidences the
right to receive interest only payments with respect to the obligations
underlying such instrument; and provided, further that no investment specified
in clause (ix) or clause (x) above shall be a Permitted Investment for any
Pre-Funding Account or any related Capitalized Interest Account. If a letter of
credit is deposited with the Trustee, such letter of credit will be irrevocable.
Unless otherwise specified in the related Prospectus Supplement, any instrument
deposited therein will name the Trustee, in its capacity as trustee for the
holders of the Securities, as beneficiary and will be issued by an entity
acceptable to each Rating Agency that rates the Securities of the related
Series. Additional information with respect to such instruments deposited in the
Reserve Accounts will be set forth in the related Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the Reserve Account for distribution to the
holders of Securities of the related Series for the purposes, in the manner and
at the times specified in the related Prospectus Supplement.
Pool Insurance Policies
If specified in the related Prospectus Supplement, a separate pool
insurance policy ("Pool Insurance Policy") will be obtained for the Pool and
issued by the insurer (the "Pool Insurer") named in such Prospectus Supplement.
Each Pool Insurance Policy will, subject to the limitations described below,
cover loss by reason of default in payment on Loans in the Pool in an amount
equal to a percentage specified in such Prospectus Supplement of the aggregate
principal balance of such Loans on the Cut-off Date which are not covered as to
their entire outstanding principal balances by Primary Mortgage Insurance
Policies. As more fully described below, the Servicer will present claims
thereunder to the Pool Insurer on behalf of itself, the Trustee and the holders
of the Securities of the related Series. The Pool Insurance Policies, however,
are not blanket policies against loss, since claims thereunder may only be made
respecting particular defaulted Loans and only upon satisfaction of certain
conditions precedent described below. Unless otherwise specified in the related
Prospectus Supplement, the Pool Insurance Policies will not cover losses due to
a failure to pay or denial of a claim under a Primary Mortgage Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, the Pool
Insurance Policy will provide that no claims may be validly presented unless (i)
any required Primary Mortgage Insurance Policy is in effect for
47
<PAGE>
the defaulted Loan and a claim thereunder has been submitted and settled; (ii)
hazard insurance on the related Property has been kept in force and real estate
taxes and other protection and preservation expenses have been paid; (iii) if
there has been physical loss or damage to the Property, it has been restored to
its physical condition (reasonable wear and tear excepted) at the time of
issuance of the policy; and (iv) the insured has acquired good and merchantable
title to the Property free and clear of liens except certain permitted
encumbrances. Upon satisfaction of these conditions, the Pool Insurer will have
the option either (a) to purchase the property securing the defaulted Loan at a
price equal to the principal balance thereof plus accrued and unpaid interest at
the Loan Rate to the date of such purchase and certain expenses incurred by the
Servicer on behalf of the Trustee and Securityholders, or (b) to pay the amount
by which the sum of the principal balance of the defaulted Loan plus accrued and
unpaid interest at the Loan Rate to the date of payment of the claim and the
aforementioned expenses exceeds the proceeds received from an approved sale of
the Property, in either case net of certain amounts paid or assumed to have been
paid under the related Primary Mortgage Insurance Policy. If any Property
securing a defaulted Loan is damaged and proceeds, if any, from the related
hazard insurance policy or the applicable special hazard insurance policy are
insufficient to restore the damaged Property to a condition sufficient to permit
recovery under the Pool Insurance Policy, the Servicer will not be required to
expend its own funds to restore the damaged Property unless it determines that
(i) such restoration will increase the proceeds to Securityholders on
liquidation of the Loan after reimbursement of the Servicer for its expenses and
(ii) such expenses will be recoverable by it through proceeds of the sale of the
Property or proceeds of the related Pool Insurance Policy or any related Primary
Mortgage Insurance Policy.
Unless otherwise specified in the related Prospectus Supplement, the Pool
Insurance Policy will not insure (and many Primary Mortgage Insurance Policies
do not insure) against loss sustained by reason of a default arising from, among
other things, (i) fraud or negligence in the origination or servicing of a Loan,
including misrepresentation by the borrower, the originator or persons involved
in the origination thereof, or (ii) failure to construct any building or
structure located on a Property in accordance with plans and specifications. A
failure of coverage attributable to one of the foregoing events might result in
a breach of the related Seller's representations described above, and, in such
events might give rise to an obligation on the part of such Seller to repurchase
the defaulted Loan if the breach cannot be cured by such Seller. No Pool
Insurance Policy will cover (and many Primary Mortgage Insurance Policies do not
cover) a claim in respect of a defaulted Loan occurring when the servicer of
such Loan, at the time of default or thereafter, was not approved by the
applicable insurer.
Unless otherwise specified in the related Prospectus Supplement, the
original amount of coverage under each Pool Insurance Policy will be reduced
over the life of the related Securities by the aggregate dollar amount of claims
paid less the aggregate of the net amounts realized by the Pool Insurer upon
disposition of all foreclosed properties. The amount of claims paid will include
certain expenses incurred by the Servicer as well as accrued interest on
delinquent Loans to the date of payment of the claim, unless otherwise specified
in the related Prospectus Supplement. Accordingly, if aggregate net claims paid
under any Pool Insurance Policy reach the original policy limit, coverage under
that Pool Insurance Policy will be exhausted and any further losses will be
borne by the related Securityholders.
Cross-Collateralization
If specified in the related Prospectus Supplement, the beneficial
ownership of separate groups of assets included in a Trust Fund may be evidenced
by separate classes of the related Series of Securities. In such case, credit
support may be provided by a cross-collateralization feature which requires that
distributions be made with respect to Securities evidencing a beneficial
ownership interest in, or secured by, one or more asset groups within the same
Trust Fund prior to distributions to Subordinated Securities evidencing a
beneficial ownership interest in, or secured by, one or more other asset groups
within such Trust Fund. Cross-collateralization may be provided by (i) the
allocation of certain excess amounts generated by one or more asset groups to
one or more other asset groups within the same Trust Fund or (ii) the allocation
of losses with respect to one or more asset groups to one or more other asset
groups within the same Trust Fund. Such excess amounts will be applied and/or
such losses will be allocated to the class or classes of Subordinated Securities
of the related Series then outstanding having the lowest rating assigned by any
Rating Agency or the lowest payment priority, in each case to the extent and in
the manner more specifically described in the related Prospectus Supplement. The
Prospectus Supplement for a Series
48
<PAGE>
which includes a cross-collateralization feature will describe the manner and
conditions for applying such cross-collateralization feature.
If specified in the related Prospectus Supplement, the coverage provided
by one or more of the forms of credit enhancement described in this Prospectus
may apply concurrently to two or more separate Trust Funds. If applicable, the
related Prospectus Supplement will identify the Trust Funds to which such credit
enhancement relates and the manner of determining the amount of coverage
provided to such Trust Funds thereby and of the application of such coverage to
the identified Trust Funds.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the Securities will
be affected primarily by the amount and timing of principal payments received on
or in respect of the Trust Fund Assets included in the related Trust Fund. The
original terms to maturity of the Loans in a given Pool will vary depending upon
the type of Loans included therein. Each Prospectus Supplement will contain
information with respect to the type and maturities of the Loans in the related
Pool. The related Prospectus Supplement will specify the circumstances, if any,
under which the related Loans will be subject to prepayment penalties. The
prepayment experience on the Loans in a Pool will affect the weighted average
life of the related Series of Securities.
The rate of prepayment on the Loans cannot be predicted. The Depositor is
not aware of any publicly available studies or statistics on the rate of
prepayment of mortgage loans of the types generated by the Sellers. The
prepayment experience of the related Trust Fund may be affected by a wide
variety of factors, including general economic conditions, prevailing interest
rate levels, the availability of alternative financing and homeowner mobility.
Other factors that might be expected to affect the prepayment rate of a pool of
Revolving Credit Line Loans include the amounts of, and interest rates on, the
underlying senior mortgage loans, and the use of first mortgage loans as
long-term financing for home purchase and subordinate mortgage loans as
shorter-term financing for a variety of purposes, including home improvement,
education expenses and purchases of consumer durables such as automobiles.
Accordingly, such Loans may experience a higher rate of prepayment than
traditional fixed-rate mortgage loans. In addition, any future limitations on
the right of borrowers to deduct interest payments on home equity loans for
federal income tax purposes may further increase the rate of prepayments of the
Loans. The enforcement of a "due-on-sale" provision (as described below) will
have the same effect as a prepayment of the related Loan. See "Certain Legal
Aspects of the Loans--Due-on-Sale Clauses." The yield to an investor who
purchases Securities in the secondary market at a price other than par will vary
from the anticipated yield if the rate of prepayment on the Loans is actually
different than the rate anticipated by such investor at the time such Securities
were purchased.
Collections on Revolving Credit Line Loans may vary because, among other
things, borrowers may (i) make payments during any month as low as the minimum
monthly payment for such month or, during the interest-only period for certain
Revolving Credit Line Loans with respect to which an interest-only payment
option has been selected, the interest and the fees and charges for such month
or (ii) make payments as high as the entire outstanding principal balance plus
accrued interest and the fees and charges thereon. It is possible that borrowers
may fail to make the required periodic payments. In addition, collections on the
Loans may vary due to seasonal purchasing and the payment habits of borrowers.
Unless otherwise specified in the related Prospectus Supplement, all
conventional Loans will contain due-on-sale provisions permitting the mortgagee
to accelerate the maturity of the loan upon sale or certain transfers by the
borrower of the related Property. Loans insured by the FHA, and Loans on Single
Family Properties partially guaranteed by the VA, are assumable with the consent
of the FHA and the VA, respectively. Thus, the rate of prepayments on such Loans
may be lower than that of conventional Loans bearing comparable interest rates.
The Servicer generally will enforce any due-on-sale or due-on-encumbrance
clause, to the extent it has knowledge of the conveyance or further encumbrance
or the proposed conveyance or proposed further encumbrance of the Property and
reasonably believes that it is entitled to do so under applicable law; provided,
however, that the Servicer will not take any enforcement action that would
impair or threaten to impair any recovery under any related
49
<PAGE>
insurance policy. See "The Agreements--Collection Procedures" and "Certain Legal
Aspects of the Loans" for a description of certain provisions of each Agreement
and certain legal developments that may affect the prepayment experience on the
Loans.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing rates fall
significantly below the Loan Rates borne by the Loans, such Loans are more
likely to be subject to higher prepayment rates than if prevailing interest
rates remain at or above such Loan Rates. Conversely, if prevailing interest
rates rise appreciably above the Loan Rates borne by the Loans, such Loans are
more likely to experience a lower prepayment rate than if prevailing rates
remain at or below such Loan Rates. However, there can be no assurance that such
will be the case.
When a full prepayment is made on a Loan, the borrower is charged interest
on the principal amount of the Loan so prepaid only for the number of days in
the month actually elapsed up to the date of the prepayment, rather than for a
full month. The effect of prepayments in full will be to reduce the amount of
interest passed through or paid in the following month to holders of Securities
because interest on the principal amount of any Loan so prepaid will generally
be paid only to the date of prepayment. Partial prepayments in a given month may
be applied to the outstanding principal balances of the Loans so prepaid on the
first day of the month of receipt or the month following receipt. In the latter
case, partial prepayments will not reduce the amount of interest passed through
or paid in such month. Unless otherwise specified in the related Prospectus
Supplement, neither full nor partial prepayments will be passed through or paid
until the month following receipt.
Even assuming that the Properties provide adequate security for the Loans,
substantial delays could be encountered in connection with the liquidation of
defaulted Loans and corresponding delays in the receipt of related proceeds by
Securityholders could occur. An action to foreclose on a Property securing a
Loan is regulated by state statutes and rules and is subject to many of the
delays and expenses of other lawsuits if defenses or counterclaims are
interposed, sometimes requiring several years to complete. Furthermore, in some
states an action to obtain a deficiency judgment is not permitted following a
nonjudicial sale of a property. In the event of a default by a borrower, these
restrictions among other things, may impede the ability of the Servicer to
foreclose on or sell the Property or to obtain Liquidation Proceeds sufficient
to repay all amounts due on the related Loan. In addition, the Servicer will be
entitled to deduct from related Liquidation Proceeds all expenses reasonably
incurred in attempting to recover amounts due on defaulted Loans and not yet
repaid, including payments to senior lienholders, legal fees and costs of legal
action, real estate taxes and maintenance and preservation expenses.
Liquidation expenses with respect to defaulted mortgage loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as it
would in the case of a defaulted mortgage loan having a large remaining
principal balance, the amount realized after expenses of liquidation would be
smaller as a percentage of the remaining principal balance of the small mortgage
loan than would be the case with the other defaulted mortgage loan having a
large remaining principal balance.
Applicable state laws generally regulate interest rates and other charges,
require certain disclosures, and require licensing of certain originators and
servicers of Loans. In addition, most have other laws, public policy and general
principles of equity relating to the protection of consumers, unfair and
deceptive practices and practices which may apply to the origination, servicing
and collection of the Loans. Depending on the provisions of the applicable law
and the specific facts and circumstances involved, violations of these laws,
policies and principles may limit the ability of the Servicer to collect all or
part of the principal of or interest on the Loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the Servicer
to damages and administrative sanctions.
If the rate at which interest is passed through or paid to the holders of
Securities of a Series is calculated on a Loan-by-Loan basis, disproportionate
principal prepayments among Loans with different Loan Rates will affect the
yield on such Securities. In most cases, the effective yield to Securityholders
will be lower than the yield otherwise produced by the applicable Pass-Through
Rate or interest rate and purchase price, because while interest will accrue on
each Loan from the first day of the month (unless otherwise specified in the
related Prospectus
50
<PAGE>
Supplement), the distribution of such interest will not be made earlier than the
month following the month of accrual.
Under certain circumstances, the Servicer, the holders of the residual
interests in a REMIC or any person specified in the related Prospectus
Supplement may have the option to purchase the assets of a Trust Fund thereby
effecting earlier retirement of the related Series of Securities. See "The
Agreements--Termination; Optional Termination."
The relative contribution of the various factors affecting prepayment may
vary from time to time. There can be no assurance as to the rate of payment of
principal of the Trust Fund Assets at any time or over the lives of the
Securities.
The Prospectus Supplement relating to a Series of Securities will discuss
in greater detail the effect of the rate and timing of principal payments
(including prepayments), delinquencies and losses on the yield, weighted average
lives and maturities of such Securities.
THE AGREEMENTS
Set forth below is a description of the material provisions of each
Agreement which are not described elsewhere in this Prospectus. The description
is subject to, and qualified in its entirety by reference to, the provisions of
each Agreement. Where particular provisions or terms used in the Agreements are
referred to, such provisions or terms are as specified in the Agreements.
Assignment of the Trust Fund Assets
Conveyance of the Loans. At the time of issuance of the Securities of a
Series, the Depositor will cause the Loans comprising the related Trust Fund to
be conveyed to the Trustee, without recourse, together with all principal and
interest received by or on behalf of the Depositor on or with respect to such
Loans after the Cut-off Date, other than principal and interest due on or before
the Cut-off Date and other than any Retained Interest specified in the related
Prospectus Supplement. The Trustee will, concurrently with such conveyance,
deliver such Securities to the Depositor in exchange for the Loans. Each Loan
will be identified in a schedule appearing as an exhibit to the related
Agreement. Such schedule will include information as to the outstanding
principal balance of each Loan after application of payments due on or before
the Cut-off Date, as well as information regarding the Loan Rate or Annual
Percentage Rate ("APR"), the maturity of the Loan, the Loan-to-Value Ratios or
Combined Loan-to-Value Ratios, as applicable, at origination and certain other
information.
Unless otherwise specified in the related Prospectus Supplement, the
Agreement will require that, within the time period specified therein, the
Depositor will also deliver or cause to be delivered to the Trustee (or to the
custodian hereinafter referred to) as to each Mortgage Loan or Revolving Credit
Line Loan, among other things, (i) the mortgage note or contract endorsed
without recourse in blank or to the order of the Trustee, (ii) the mortgage,
deed of trust or similar instrument (a "Mortgage") with evidence of recording
indicated thereon (except for any Mortgage not returned from the public
recording office, in which case the Depositor will deliver or cause to be
delivered a copy of such Mortgage together with a certificate that the original
of such Mortgage was delivered to such recording office), (iii) an assignment of
the Mortgage to the Trustee, which assignment will be in recordable form in the
case of a Mortgage assignment, (iv) such other assignments deemed necessary by
the Trustee, including assignments of title insurance policies covering the
Properties and (v) such other security documents, including those relating to
any senior interests in the Property, as may be specified in the related
Prospectus Supplement or the related Agreement.
The Trustee (or the custodian hereinafter referred to) will review such
Loan documents within the time period specified in the related Prospectus
Supplement after receipt thereof, and the Trustee will hold such documents in
trust for the benefit of the related Securityholders. Unless otherwise specified
in the related Prospectus Supplement, if any such document is found to be
missing or defective in any material respect, the Trustee (or such custodian)
will notify the Servicer and the Depositor, and the Servicer will notify the
related Seller. If such Seller
51
<PAGE>
cannot cure the omission or defect within the time period specified in the
related Prospectus Supplement after receipt of such notice, such Seller will be
obligated to either (i) purchase the related Loan from the Trust Fund at the
Purchase Price or (ii) if so specified in the related Prospectus Supplement,
remove such Loan from the Trust Fund and substitute in its place one or more
other Loans that meets certain requirements set forth therein. There can be no
assurance that a Seller will fulfill this purchase or substitution obligation.
Although the Servicer may be obligated to enforce such obligation to the extent
described above under "Loan Program--Representations by Sellers; Repurchases,"
neither the Servicer nor the Depositor will be obligated to purchase or replace
such Loan if the Seller defaults on its obligation, unless such breach also
constitutes a breach of the representations or warranties of the Servicer or the
Depositor, as the case may be. Unless otherwise specified in the related
Prospectus Supplement, this obligation to cure, purchase or substitute
constitutes the sole remedy available to the Securityholders or the Trustee for
omission of, or a material defect in, a constituent document.
The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the Loans as agent of the Trustee.
The Servicer will make certain representations and warranties regarding
its authority to enter into, and its ability to perform its obligations under,
the Agreement. Upon a breach of any such representation of the Servicer which
materially and adversely affects the interests of the Securityholders in a Loan,
the Servicer will be obligated either to cure the breach in all material
respects or to purchase (at the Purchase Price) or if so specified in the
related Prospectus Supplement, replace the Loan. Unless otherwise specified in
the related Prospectus Supplement, this obligation to cure, purchase or
substitute constitutes the sole remedy available to the Securityholders or the
Trustee for such a breach of representation by the Servicer.
Notwithstanding the foregoing provisions, with respect to a Trust Fund for
which a REMIC election is to be made, no purchase or substitution of a Loan will
be made if such purchase or substitution would result in a prohibited
transaction tax under the Code.
No Recourse to Sellers; Depositor or Servicer. As described above under
"--Conveyance of the Loans," the Depositor will cause the Loans comprising the
related Trust Fund to be conveyed to the Trustee, without recourse. However,
each Seller (and Equity One, where the Seller is a subsidiary of Equity One)
will be obligated to repurchase or substitute for any Loan as to which certain
representations and warranties are breached or for failure to deliver certain
documents relating to the Loans as described herein under "--Conveyance of the
Loans" and "Loan Program--Representations by Sellers; Repurchases." In addition,
the Servicer and the Depositor will be obligated to purchase or substitute for
any Loan as to which certain representations and warranties are breached as
described herein under "--Conveyance of the Loans." These obligations to
purchase or substitute constitute the sole remedy available to the
Securityholders or the Trustee for a breach of any such representation or
failure to deliver a constituent document.
Payments on Loans; Deposits to Security Account
The Servicer will establish and maintain or cause to be established and
maintained with respect to the related Trust Fund a separate account or accounts
for the collection of payments on the related Trust Fund Assets in the Trust
Fund (the "Security Account") which, unless otherwise specified in the related
Prospectus Supplement, must be either (i) maintained with a depository
institution the debt obligations of which (or in the case of a depository
institution that is the principal subsidiary of a holding company, the
obligations of which) are rated in one of the two highest rating categories by
the Rating Agency or Rating Agencies that rated one or more classes of the
related Series of Securities, (ii) an account or accounts the deposits in which
are fully insured by the Bank Insurance Fund (the "BIF") of the FDIC or the
Savings Association Insurance Fund (as successor to the Federal Savings and Loan
Insurance Corporation (the "SAIF")), (iii) an account or accounts the deposits
in which are insured by the BIF or the SAIF (to the limits established by the
FDIC), and the uninsured deposits in which are otherwise secured such that, as
evidenced by an opinion of counsel, the Securityholders have a claim with
respect to the funds in the Security Account or a perfected first priority
security interest against any collateral securing such funds that is superior to
the claims of any other depositors or general creditors of the depository
institution with which the Security Account is maintained, or (iv) an account or
accounts otherwise acceptable to each Rating
52
<PAGE>
Agency. The collateral eligible to secure amounts in the Security Account is
limited to Permitted Investments. A Security Account may be maintained as an
interest bearing account or the funds held therein may be invested pending each
succeeding Distribution Date in Permitted Investments. Unless otherwise
specified in the related Prospectus Supplement, the Servicer or its designee
will be entitled to receive any such interest or other income earned on funds in
the Security Account as additional compensation and will be obligated to deposit
in the Security Account the amount of any loss immediately as realized. The
Security Account may be maintained with the Servicer or with a depository
institution that is an affiliate of the Servicer, provided it meets the
standards set forth above.
The Servicer will deposit or cause to be deposited in the Security Account
for each Trust Fund, to the extent applicable and unless otherwise specified in
the related Prospectus Supplement and provided in the Agreement, the following
payments and collections received or advances made by or on behalf of it
subsequent to the Cut-off Date (other than payments due on or before the Cut-off
Date and exclusive of any amounts representing Retained Interest):
(i) all payments on account of principal, including Principal
Prepayments and, if specified in the related Prospectus Supplement, any
applicable prepayment penalties, on the Loans;
(ii) all payments on account of interest on the Loans, net of
applicable servicing compensation;
(iii) all proceeds (net of unreimbursed payments of property taxes,
insurance premiums and similar items ("Insured Expenses") incurred, and
unreimbursed Advances made, by the Servicer, if any) of the hazard
insurance policies and any Primary Mortgage Insurance Policies, to the
extent such proceeds are not applied to the restoration of the property or
released to the mortgagor in accordance with the Servicer's normal
servicing procedures (collectively, "Insurance Proceeds") and all other
cash amounts (net of unreimbursed expenses incurred in connection with
liquidation or foreclosure ("Liquidation Expenses") and unreimbursed
Advances made, by the Servicer, if any) received and retained in
connection with the liquidation of defaulted Loans, by foreclosure or
otherwise ("Liquidation Proceeds"), together with any net proceeds
received on a monthly basis with respect to any properties acquired on
behalf of the Securityholders by foreclosure or deed in lieu of
foreclosure;
(iv) all proceeds of any Loan or property in respect thereof
purchased by the Servicer, the Depositor or any Seller as described under
"Loan Program--Representations by Sellers; Repurchases" or "--Assignment
of the Trust Fund Assets" and all proceeds of any Loan repurchased as
described under "--Termination; Optional Termination;"
(v) all payments required to be deposited in the Security Account
with respect to any deductible clause in any blanket insurance policy
described under "--Hazard Insurance;"
(vi) any amount required to be deposited by the Servicer in
connection with losses realized on investments for the benefit of the
Servicer of funds held in the Security Account and, to the extent
specified in the related Prospectus Supplement, any payments required to
be made by the Servicer in connection with prepayment interest shortfalls;
and
(vii) all other amounts required to be deposited in the Security
Account pursuant to the Agreement.
The Servicer (or the Depositor, as applicable) may from time to time
direct the institution that maintains the Security Account to withdraw funds
from the Security Account for the following purposes:
(i) to pay to the Servicer the servicing fees described in the
related Prospectus Supplement, the Servicing Fees (subject to reduction)
and, as additional servicing compensation, earnings on or investment
income with respect to funds in the amounts in the Security Account
credited thereto;
53
<PAGE>
(ii) to reimburse the Servicer for Advances, such right of
reimbursement with respect to any Loan being limited to amounts received
that represent late recoveries of payments of principal and/or interest on
such Loan (or Insurance Proceeds or Liquidation Proceeds with respect
thereto) with respect to which such Advance was made;
(iii) to reimburse the Servicer for any Advances previously made
which the Servicer has determined to be nonrecoverable;
(iv) to reimburse the Servicer from Insurance Proceeds for expenses
incurred by the Servicer and covered by the related insurance policies;
(v) to reimburse the Servicer for unpaid Servicing Fees and
unreimbursed out-of-pocket costs and expenses incurred by the Servicer in
the performance of its servicing obligations, such right of reimbursement
being limited to amounts received representing late recoveries of the
payments for which such advances were made;
(vi) to pay to the Servicer, with respect to each Loan or property
acquired in respect thereof that has been purchased by the Servicer
pursuant to the Agreement, all amounts received thereon and not taken into
account in determining the principal balance of such repurchased Loan;
(vii) to reimburse the Servicer or the Depositor for expenses
incurred and reimbursable pursuant to the Agreement;
(viii) to withdraw any amount deposited in the Security Account and
not required to be deposited therein; and
(ix) to clear and terminate the Security Account upon termination of
the Agreement.
In addition, unless otherwise specified in the related Prospectus
Supplement, on or prior to the business day immediately preceding each
Distribution Date, the Servicer shall withdraw from the Security Account the
amount of Available Funds, to the extent on deposit, for deposit in an account
maintained by the Trustee for the related Series of Securities.
Pre-Funding Account
If so provided in the related Prospectus Supplement, the Servicer will
establish and maintain a Pre-Funding Account, in the name of the related Trustee
on behalf of the related Securityholders, into which the Depositor will deposit
cash in an amount equal to the Pre-Funded Amount on the related Closing Date.
The Pre-Funding Account will be maintained with the Trustee for the related
Series of Securities and is designed solely to hold funds to be applied by such
Trustee during the Funding Period to pay to the Depositor the purchase price for
Subsequent Loans. Monies on deposit in the Pre-Funding Account will not be
available to cover losses on or in respect of the related Loans. The Pre-Funded
Amount will not exceed 50% of the initial aggregate principal amount of the
Certificates and Notes of the related Series. The Pre-Funded Amount will be used
by the related Trustee to purchase Subsequent Loans from the Depositor from time
to time during the Funding Period. The Funding Period, if any, for a Trust Fund
will begin on the related Closing Date and will end on the date specified in the
related Prospectus Supplement, which in no event will be later than the date
that is one year after the related Closing Date. Monies on deposit in the
Pre-Funding Account may be invested in Permitted Investments under the
circumstances and in the manner described in the related Agreement. Earnings on
investment of funds in the Pre-Funding Account will be deposited into the
related Security Account or such other trust account as is specified in the
related Prospectus Supplement and losses will be charged against the funds on
deposit in the Pre-Funding Account. Any amounts remaining in the Pre-Funding
Account at the end of the Funding Period will be distributed to the related
Securityholders in the manner and priority specified in the related Prospectus
Supplement, as a prepayment of principal of the related Securities.
54
<PAGE>
In addition, if so provided in the related Prospectus Supplement, on the
related Closing Date the Depositor will deposit in an account (the "Capitalized
Interest Account") cash in such amount as is necessary to cover shortfalls in
interest on the related Series of Securities that may arise as a result of
utilization of the Pre-Funding Account as described above. The Capitalized
Interest Account shall be maintained with the Trustee for the related Series of
Securities and is designed solely to cover the above-mentioned interest
shortfalls. Monies on deposit in the Capitalized Interest Account will not be
available to cover losses on or in respect of the related Loans. To the extent
that the entire amount on deposit in the Capitalized Interest Account has not
been applied to cover shortfalls in interest on the related Series of Securities
by the end of the Funding Period, any amounts remaining in the Capitalized
Interest Account will be paid to the Depositor.
Sub-Servicing by Sellers
Each Seller of a Loan or any other servicing entity may act as the
Sub-Servicer for such Loan pursuant to an agreement (each, a "Sub-Servicing
Agreement"), which will not contain any terms inconsistent with the related
Agreement. While each Sub-Servicing Agreement will be a contract solely between
the Servicer and the SubServicer, the Agreement pursuant to which a Series of
Securities is issued will provide that, if for any reason the Servicer for such
Series of Securities is no longer the Servicer of the related Loans, the Trustee
or any successor Servicer must recognize the Sub-Servicer's rights and
obligations under such Sub-Servicing Agreement. Notwithstanding any such
sub-servicing arrangement, unless otherwise provided in the related Prospectus
Supplement, the Servicer will remain liable for its servicing duties and
obligations under the Master Servicing Agreement as if the Servicer alone were
servicing the Loans.
Collection Procedures
The Servicer, directly or through one or more Sub-Servicers, will make
reasonable efforts to collect all payments called for under the Loans and will,
consistent with each Agreement and any Pool Insurance Policy, Primary Mortgage
Insurance Policy, FHA Insurance, VA Guaranty, bankruptcy bond or alternative
arrangements, follow such collection procedures as are customary with respect to
loans that are comparable to the Loans. Consistent with the above, the Servicer
may, in its discretion, (i) waive any assumption fee, late payment or other
charge in connection with a Loan and (ii) to the extent not inconsistent with
the coverage of such Loan by a Pool Insurance Policy, Primary Mortgage Insurance
Policy, FHA Insurance, VA Guaranty, bankruptcy bond or alternative arrangements,
if applicable, arrange with a borrower a schedule for the liquidation of
delinquencies running for no more than 125 days after the applicable due date
for each payment. To the extent the Servicer is obligated to make or cause to be
made Advances, such obligation will remain during any period of such an
arrangement.
In any case in which property securing a Loan has been, or is about to be,
conveyed by the mortgagor or obligor, the Servicer will, to the extent it has
knowledge of such conveyance or proposed conveyance, exercise or cause to be
exercised its rights to accelerate the maturity of such Loan under any
due-on-sale clause applicable thereto, but only if the exercise of such rights
is permitted by applicable law and will not impair or threaten to impair any
recovery under any Primary Mortgage Insurance Policy. If these conditions are
not met or if the Servicer reasonably believes it is unable under applicable law
to enforce such due-on-sale clause or if such Loan is a mortgage loan insured by
the FHA or partially guaranteed by the VA, the Servicer will enter into or cause
to be entered 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 for repayment of the Loan and, to the extent permitted by
applicable law, the mortgagor remains liable thereon. Any fee collected by or on
behalf of the Servicer for entering into an assumption agreement will be
retained by or on behalf of the Servicer as additional servicing compensation.
See "Certain Legal Aspects of the Loans--Due-on-Sale Clauses." In connection
with any such assumption, the terms of the related Loan may not be changed.
Hazard Insurance
Except as otherwise specified in the related Prospectus Supplement, the
Servicer will require the mortgagor or obligor on each Loan to maintain a hazard
insurance policy providing for no less than the coverage of the
55
<PAGE>
standard form of fire insurance policy with extended coverage customary for the
type of Property in the state in which such Property is located. Such coverage
will be in an amount that is at least equal to the lesser of (i) the maximum
insurable value of the improvements securing such Loan or (ii) the greater of
(a) the outstanding principal balance of the Loan and (b) an amount such that
the proceeds of such policy shall be sufficient to prevent the mortgagor and/or
the mortgagee from becoming a co-insurer. All amounts collected by the Servicer
under any hazard policy (except for amounts to be applied to the restoration or
repair of the Property or released to the mortgagor or obligor in accordance
with the Servicer's normal servicing procedures) will be deposited in the
related Security Account. In the event that the Servicer maintains a blanket
policy insuring against hazard losses on all the Loans comprising part of a
Trust Fund, it will conclusively be deemed to have satisfied its obligation
relating to the maintenance of hazard insurance. Such blanket policy may contain
a deductible clause, in which case the Servicer will be required to deposit from
its own funds into the related Security Account the amounts which would have
been deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements securing a Loan by fire,
lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Loans may have been underwritten
by different insurers under different state laws in accordance with different
applicable forms and therefore may not contain identical terms and conditions,
the basic terms thereof are dictated by respective state laws, and most such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mud flows),
nuclear reactions, wet or dry rot, vermin, rodents, insects or domestic animals,
theft and, in certain cases, vandalism. The foregoing list is merely indicative
of certain kinds of uninsured risks and is not intended to be all inclusive. If
the Property securing a Loan is located in a federally designated special flood
area at the time of origination, the Servicer will require the mortgagor or
obligor to obtain and maintain flood insurance.
The hazard insurance policy covering each Property securing each Loan
typically contains a clause which in effect requires the insured at all times to
carry insurance in an amount which is the lesser of (i) the replacement value of
the Mortgaged Property or (ii) the principal amount of the Loan. Most insurance
policies provide that if the insured's coverage falls below a specified
percentage (usually 80% to 90%), then the insurer's liability in the event of
partial loss will not exceed the larger of (i) the actual cash value (generally
defined as replacement cost at the time and place of loss, less physical
depreciation) of the improvements damaged or destroyed or (ii) such proportion
of the loss as the amount of insurance carried bears to the specified percentage
of the full replacement cost of such improvements. Since the amount of hazard
insurance the Servicer may cause to be maintained on the improvements securing
the Loans declines as the principal balances owing thereon decrease, and since
improved real estate generally has appreciated in value over time in the past,
the effect of this requirement in the event of partial loss may be that hazard
insurance proceeds will be insufficient to restore fully the damaged property.
If specified in the related Prospectus Supplement, a special hazard insurance
policy will be obtained to insure against certain of the uninsured risks
described above. See "Credit Enhancement."
If the Property securing a defaulted Loan is damaged and proceeds, if any,
from the related hazard insurance policy are insufficient to restore the damaged
Property, the Servicer is not required to expend its own funds to restore the
damaged Property unless it determines (i) that such restoration will increase
the proceeds to Securityholders on liquidation of the Loan after reimbursement
of the Servicer for its expenses and (ii) that such expenses will be recoverable
by it from related Insurance Proceeds or Liquidation Proceeds.
If recovery on a defaulted Loan under any related insurance policy is not
available for the reasons set forth in the preceding paragraph, or if the
defaulted Loan is not covered by an insurance policy, the Servicer will be
obligated to follow or cause to be followed such normal practices and procedures
as it deems necessary or advisable to realize upon the defaulted Loan. If the
proceeds of any liquidation of the Property securing the defaulted Loan are less
than the principal balance of such Loan plus interest accrued thereon that is
payable to Securityholders, the Trust Fund will realize a loss in the amount of
such difference plus the aggregate of expenses incurred by the Servicer in
connection with such proceedings and which are reimbursable under the Agreement.
In the unlikely event that any such proceedings result in a total recovery which
is, after reimbursement to the Servicer of its
56
<PAGE>
expenses, in excess of the principal balance of such Loan plus interest accrued
thereon that is payable to Securityholders, the Servicer will be entitled to
withdraw or retain from the Security Account amounts representing its normal
servicing compensation with respect to such Loan and, unless otherwise specified
in the related Prospectus Supplement, amounts representing the balance of such
excess, exclusive of any amount required by law to be forwarded to the related
borrower, as additional servicing compensation.
If the Servicer or its designee recovers Insurance Proceeds which, when
added to any related Liquidation Proceeds and after deduction of certain
expenses reimbursable to the Servicer, exceed the principal balance of such Loan
plus interest accrued thereon that is payable to Securityholders, the Servicer
will be entitled to withdraw or retain from the Security Account amounts
representing its normal servicing compensation with respect to such Loan. In the
event that the Servicer has expended its own funds to restore the damaged
Property and such funds have not been reimbursed under the related hazard
insurance policy, it will be entitled to withdraw from the Security Account out
of related Liquidation Proceeds or Insurance Proceeds an amount equal to such
expenses incurred by it, in which event the Trust Fund may realize a loss up to
the amount so charged. Since Insurance Proceeds cannot exceed deficiency claims
and certain expenses incurred by the Servicer, no such payment or recovery will
result in a recovery to the Trust Fund which exceeds the principal balance of
the defaulted Loan together with accrued interest thereon. See "Credit
Enhancement."
The proceeds from any liquidation of a Loan will be applied in the
following order of priority: first, to reimburse the Servicer for any
unreimbursed expenses incurred by it to restore the related Property and any
unreimbursed servicing compensation payable to the Servicer with respect to such
Loan; second, to reimburse the Servicer for any unreimbursed Advances with
respect to such Loan; third, to accrued and unpaid interest (to the extent no
Advance has been made for such amount) on such Loan; and fourth, as a recovery
of principal of such Loan.
Realization Upon Defaulted Loans
FHA Insurance; VA Guaranties. Loans designated in the related Prospectus
Supplement as insured by the FHA will be insured by the FHA as authorized under
the United States Housing Act of 1937, as amended. In addition to the Title I
Program of the FHA (see "Certain Legal Aspects of the Loans--Title I Program")
certain Loans will be insured under various FHA programs including the standard
FHA 203(b) program to finance the acquisition of one- to four-family housing
units and the FHA 245 graduated payment mortgage program. These programs
generally limit the principal amount and interest rates of the mortgage loans
insured. Loans insured by FHA generally require a minimum down payment of
approximately 5% of the original principal amount of the loan. No FHA-insured
Loans relating to a Series may have an interest rate or original principal
amount exceeding the applicable FHA limits at the time of origination of such
Loan.
Loans designated in the related Prospectus Supplement as guaranteed by the
VA will be partially guaranteed by the VA under the Serviceman's Readjustment
Act of 1944, as amended (a "VA Guaranty"). The Serviceman's Readjustment Act of
1944, as amended, permits a veteran (or in certain instances the spouse of a
veteran) to obtain a mortgage loan guaranty by the VA covering mortgage
financing of the purchase of a one- to four-family dwelling unit at interest
rates permitted by the VA. The program has no mortgage loan limits, requires no
down payment from the purchaser and permits the guaranty of mortgage loans of up
to 30 years' duration. However, no Loan guaranteed by the VA will have an
original principal amount greater than five times the partial VA guaranty for
such Loan. The maximum guaranty that may be issued by the VA under a VA
guaranteed mortgage loan depends upon the original principal amount of the
mortgage loan, as further described in 38 United States Code Section 1803(a), as
amended.
Primary Mortgage Insurance Policies. If so specified in the related
Prospectus Supplement, the Servicer will maintain or cause to be maintained, as
the case may be, in full force and effect, a Primary Mortgage Insurance Policy
with regard to each Loan for which such coverage is required. Primary Mortgage
Insurance Policies reimburse certain losses sustained by reason of defaults in
payments by borrowers. The Servicer will not cancel or refuse to renew any such
Primary Mortgage Insurance Policy in effect at the time of the initial issuance
of a Series of Securities that is required to be kept in force under the
applicable Agreement unless the replacement
57
<PAGE>
Primary Mortgage Insurance Policy for such cancelled or nonrenewed policy is
maintained with an insurer whose claims-paying ability is sufficient to maintain
the current rating of the classes of Securities of such Series that have been
rated.
Servicing and Other Compensation and Payment of Expenses
The principal servicing compensation to be paid to the Servicer in respect
of its servicing activities for each Series of Securities will be equal to the
percentage per annum described in the related Prospectus Supplement (which may
vary under certain circumstances) of the outstanding principal balance of each
Loan, and such compensation will be retained by it from collections of interest
on such Loan in the related Trust Fund (the "Servicing Fee"). As compensation
for its servicing duties, a Sub-Servicer or, if there is no Sub-Servicer, the
Servicer will be entitled to a monthly servicing fee as described in the related
Prospectus Supplement. In addition, the Servicer or SubServicer will retain all
prepayment charges, assumption fees and late payment charges, to the extent
collected from borrowers, and any benefit that may accrue as a result of the
investment of funds in the applicable Security Account (unless otherwise
specified in the related Prospectus Supplement).
The Servicer will pay or cause to be paid certain ongoing expenses
associated with each Trust Fund and incurred by it in connection with its
responsibilities under the related Agreement, including, without limitation,
payment of any fee or other amount payable in respect of any credit enhancement
arrangements, payment of the fees and disbursements of the Trustee, any
custodian appointed by the Trustee, the certificate registrar and any paying
agent, and payment of expenses incurred in enforcing the obligations of
Sub-Servicers and Sellers. The Servicer will be entitled to reimbursement of
expenses incurred in enforcing the obligations of Sub-Servicers and Sellers
under certain limited circumstances.
Evidence as to Compliance
Each Agreement will provide that on or before a specified date in each
year, a firm of independent public accountants will furnish a statement to the
Trustee to the effect that, on the basis of the examination by such firm
conducted substantially in compliance with the Uniform Single Attestation
Program for Mortgage Bankers or the Audit Program for Mortgages serviced for
FHLMC, the servicing by or on behalf of the Servicer of mortgage loans or
private asset backed securities, or under pooling and servicing agreements
substantially similar to each other (including the related Agreement) was
conducted in compliance with such agreements except for any significant
exceptions or errors in records that, in the opinion of the firm, the Audit
Program for Mortgages serviced for the Federal Home Loan Mortgage Corporation
("FHLMC"), or the Uniform Single Attestation Program for Mortgage Bankers, it is
required to report. In rendering its statement such firm may rely, as to matters
relating to the direct servicing of Loans by Sub-Servicers, upon comparable
statements for examinations conducted substantially in compliance with the
Uniform Single Attestation Program for Mortgage Bankers or the Audit Program for
Mortgages serviced for FHLMC (rendered within one year of such statement) of
firms of independent public accountants with respect to the related
Sub-Servicer.
Each Agreement will also provide for delivery to the Trustee, on or before
a specified date in each year, of an annual statement signed by two officers of
the Servicer to the effect that the Servicer has fulfilled its obligations under
the Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of officers
of the Servicer may be obtained by Securityholders of the related Series without
charge upon written request to the Servicer at the address set forth in the
related Prospectus Supplement.
Certain Matters Regarding the Servicer and the Depositor
The Servicer under each Pooling and Servicing Agreement or Master
Servicing Agreement, as applicable, will be named in the related Prospectus
Supplement. The entity serving as Servicer may have normal business
relationships with the Depositor or the Depositor's affiliates.
58
<PAGE>
Each Agreement will provide that the Servicer may not resign from its
obligations and duties under the Agreement except upon a determination that its
duties thereunder are no longer permissible under applicable law. The Servicer
may, however, be removed from its obligations and duties as set forth in the
Agreement. No such resignation will become effective until the Trustee or a
successor servicer has assumed the Servicer's obligations and duties under the
Agreement.
Each Agreement will further provide that neither the Servicer, the
Depositor nor any director, officer, employee, or agent of the Servicer or the
Depositor will be under any liability to the related Trust Fund or
Securityholders for any action taken or for refraining from the taking of any
action in good faith pursuant to the Agreement, or for errors in judgment;
provided, however, that neither the Servicer, the Depositor nor any such person
will be protected against any liability which would otherwise be imposed by
reason of willful misfeasance, bad faith or gross negligence in the performance
of duties thereunder or by reason of reckless disregard of obligations and
duties thereunder. Each Agreement will further provide that the Servicer, the
Depositor and any director, officer, employee or agent of the Servicer or the
Depositor will be entitled to indemnification by the related Trust Fund and will
be held harmless against any loss, liability or expense incurred in connection
with any legal action relating to the Agreement or the Securities, other than
any loss, liability or expense related to any specific Loan or Loans (except any
such loss, liability or expense otherwise reimbursable pursuant to the
Agreement) and any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. In addition, each Agreement will provide that neither the Servicer
nor the Depositor will be under any obligation to appear in, prosecute or defend
any legal action which is not incidental to its respective responsibilities
under the Agreement and which in its opinion may involve it in any expense or
liability. The Servicer or the Depositor may, however, in its discretion
undertake any such action which it may deem necessary or desirable with respect
to the Agreement and the rights and duties of the parties thereto and the
interests of the Securityholders thereunder. In such event, the legal expenses
and costs of such action and any liability resulting therefrom will be expenses,
costs and liabilities of the Trust Fund and the Servicer or the Depositor, as
the case may be, will be entitled to be reimbursed therefor out of funds
otherwise distributable to Securityholders.
Except as otherwise specified in the related Prospectus Supplement, any
person into which the Servicer may be merged or consolidated, or any person
resulting from any merger or consolidation to which the Servicer is a party, or
any person succeeding to the business of the Servicer, will be the successor of
the Servicer under each Agreement, provided that such person is qualified to
sell mortgage loans to, and service mortgage loans on behalf of, the Federal
National Mortgage Association ("FNMA") or FHLMC and further provided that such
merger, consolidation or succession does not adversely affect the then current
rating or ratings of the class or classes of Securities of such Series that have
been rated.
Events of Default; Rights Upon Event of Default
Pooling and Servicing Agreement; Master Servicing Agreement. Except as
otherwise specified in the related Prospectus Supplement, "Events of Default"
under each Agreement will consist of (i) any failure by the Servicer to
distribute or cause to be distributed to Securityholders of any class any
required payment (other than an Advance) which continues unremedied for five
days after the giving of written notice of such failure to the Servicer by the
Trustee or the Depositor, or to the Servicer, the Depositor and the Trustee by
the holders of Securities of such class evidencing not less than 25% of the
total distributions allocated to such class ("Percentage Interests"); (ii) any
failure by the Servicer to make an Advance as required under the Agreement,
unless cured as specified therein; (iii) any failure by the Servicer duly to
observe or perform in any material respect any of its other covenants or
agreements in the Agreement which continues unremedied for thirty days after the
giving of written notice of such failure to the Servicer by the Trustee or the
Depositor, or to the Servicer, the Depositor and the Trustee by the holders of
Securities of any class evidencing not less than 25% of the aggregate Percentage
Interests constituting such class; and (iv) certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceeding and certain actions by or on behalf of the Servicer indicating its
insolvency, reorganization or inability to pay its obligations.
59
<PAGE>
If specified in the related Prospectus Supplement, the Agreement will
permit the Trustee to sell the Trust Fund Assets and the other assets of the
Trust Fund described under "Credit Enhancement" herein in the event that
payments in respect thereto are insufficient to make payments required in the
Agreement. The assets of the Trust Fund will be sold only under the
circumstances and in the manner specified in the related Prospectus Supplement.
Unless otherwise provided in the related Prospectus Supplement, so long as
an Event of Default under an Agreement remains unremedied, the Depositor or the
Trustee may, and at the direction of holders of Securities of any class
evidencing not less than 25% of the aggregate Percentage Interests constituting
such class and under such other circumstances as may be specified in such
Agreement, the Trustee shall terminate all of the rights and obligations of the
Servicer under the Agreement relating to such Trust Fund and in and to the
related Trust Fund Assets, whereupon the Trustee will succeed to all of the
responsibilities, duties and liabilities of the Servicer under the Agreement,
including, if specified in the related Prospectus Supplement, the obligation to
make Advances, and will be entitled to similar compensation arrangements. In the
event that the Trustee is unwilling or unable so to act, it may appoint, or
petition a court of competent jurisdiction for the appointment of, a mortgage
loan servicing institution with a net worth of a least $10,000,000 to act as
successor to the Servicer under the Agreement. Pending such appointment, the
Trustee is obligated to act in such capacity. The Trustee and any such successor
may agree upon the servicing compensation to be paid, which in no event may be
greater than the compensation payable to the Servicer under the Agreement.
Unless otherwise provided in the related Prospectus Supplement, no
Securityholder, solely by virtue of such holder's status as a Securityholder,
will have any right under any Agreement to institute any proceeding with respect
to such Agreement, unless such holder previously has given to the Trustee
written notice of default and unless the holders of Securities of any class of
such Series evidencing not less than 25% of the aggregate Percentage Interests
constituting such class 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.
Indenture. Except as otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes shall
include: (i) a default in the payment of any principal of or interest on any
Note of such Series which continues unremedied for five days after the giving of
written notice of such default is given as specified in the related Prospectus
Supplement; (ii) failure to perform in any material respect any other covenant
of the Depositor or the Trust Fund in the Indenture which continues for a period
of thirty (30) days after notice thereof is given in accordance with the
procedures described in the related Prospectus Supplement; (iii) certain events
of bankruptcy, insolvency, receivership or liquidation of the Depositor or the
Trust Fund; or (iv) any other Event of Default provided with respect to Notes of
that Series including but not limited to certain defaults on the part of the
issuer, if any, of a credit enhancement instrument supporting such 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 have an
interest rate of 0%, 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
more than 50% of the Percentage Interests 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 Notes of such Series for five days or more,
unless (a) the holders of 100% of the Percentage Interests of the Notes of such
Series consent to such sale, (b) the proceeds of such sale or liquidation are
sufficient to pay in full
60
<PAGE>
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
662/3% of the Percentage Interests 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 five 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 holders of Notes would be
less than would otherwise be the case. However, the Trustee may not institute a
proceeding for the enforcement of its lien except in connection with a
proceeding for the enforcement of the lien of the Indenture for the benefit of
the holders of Notes after the occurrence of such an Event of Default.
Except as otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a Series is declared due and payable, as
described above, the holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing with respect
to a Series of Notes, the Trustee shall be under no obligation to exercise any
of the rights or powers under the Indenture at the request or direction of any
of the holders of Notes of such Series, unless such holders offered to the
Trustee security or indemnity satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in complying with such request or
direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, the holders of a majority of the then
aggregate outstanding amount of the Notes of such Series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee with respect to the Notes of such Series, and the holders of a majority
of the then aggregate outstanding amount of the Notes of such Series may, in
certain cases, waive any default with respect thereto, except a default in the
payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all the holders of the outstanding Notes of such Series affected thereby.
Amendment
Except as otherwise specified in the related Prospectus Supplement, each
Agreement may be amended by the Depositor, the Servicer and the Trustee, without
the consent of any of the Securityholders, (i) to cure any ambiguity; (ii) to
correct or supplement any provision therein which may be defective or
inconsistent with any other provision therein; or (iii) to make any other
revisions with respect to matters or questions arising under the Agreement which
are not inconsistent with the provisions thereof, provided that such action will
not adversely affect in any material respect the interests of any
Securityholder. An amendment will be deemed not to adversely affect in any
material respect the interests of the Securityholders if the person requesting
such amendment obtains a letter from each Rating Agency requested to rate the
class or classes of Securities of such Series stating that such amendment will
not result in the downgrading or withdrawal of the respective ratings then
assigned to such Securities. In addition, to the extent provided in the related
Agreement, an Agreement may be amended without the consent of any of the
Securityholders, to change the manner in which the Security Account is
maintained, provided that any such change does not adversely affect the then
current rating on the class or classes of Securities of such Series that have
been rated. In addition, if a REMIC election is made with respect to a Trust
Fund, the related Agreement may be amended to modify, eliminate or add to any of
its provisions to such extent as may be necessary to maintain the qualification
of the related Trust Fund as a REMIC, provided that the Trustee has received an
opinion of counsel to the effect that such action is necessary or helpful to
maintain such qualification. Except as otherwise specified in the related
Prospectus Supplement, each Agreement may also be amended by the Depositor, the
Servicer and the Trustee with consent of holders of Securities of such Series
evidencing not less than 66% of the aggregate Percentage Interests of each class
affected thereby for the purpose of adding any provisions
61
<PAGE>
to or changing in an manner or eliminating any of the provisions of the
Agreement or of modifying in any manner the rights of the holders of the related
Securities; provided, however, that no such amendment may (i) reduce in any
manner the amount of or delay the timing of, payments received on Loans which
are required to be distributed on any Security without the consent of the holder
of such Security, or (ii) reduce the aforesaid percentage of Securities of any
class the holders of which are required to consent to any such amendment without
the consent of the holders of all Securities of such class covered by such
Agreement then outstanding. If a REMIC election is made with respect to a Trust
Fund, the Trustee will not be entitled to consent to an amendment to the related
Agreement without having first received an opinion of counsel to the effect that
such amendment will not cause such Trust Fund to fail to qualify as a REMIC.
Termination; Optional Termination
Pooling and Servicing Agreement; Trust Agreement. Unless otherwise
specified in the related Agreement, the obligations created by each Pooling and
Servicing Agreement and Trust Agreement for each Series of Certificates will
terminate upon the payment to the related holders of Certificates of all amounts
held in the Security Account or by the Servicer and required to be paid to them
pursuant to such Agreement following the later of (i) the final payment of or
other liquidation of the last of the Trust Fund Assets subject thereto or the
disposition of all property acquired upon foreclosure of any such Trust Fund
Assets remaining in the Trust Fund or (ii) the purchase by the Servicer or, if
REMIC treatment has been elected and if specified in the related Prospectus
Supplement, by the holder of the residual interest in the REMIC (see "Federal
Income Tax Consequences") from the related Trust Fund of all of the remaining
Trust Fund Assets and all property acquired in respect of such Trust Fund
Assets.
Unless otherwise specified by the related Prospectus Supplement, any such
purchase of Trust Fund Assets and property acquired in respect of Trust Fund
Assets evidenced by a Series of Certificates will be made at the option of the
Servicer, such other person or, if applicable, such holder of the REMIC residual
interest, at a price specified in the related Prospectus Supplement. The
exercise of such right will effect early retirement of the Certificates of that
Series, but the right of the Servicer, such other person or, if applicable, such
holder of the REMIC residual interest, to so purchase is subject to the
principal balance of the related Trust Fund Assets being less than the
percentage specified in the related Prospectus Supplement of the aggregate
principal balance of the Trust Fund Assets at the Cut-off Date for the Series.
The foregoing is subject to the provision that if a REMIC election is made with
respect to a Trust Fund, any purchase pursuant to clause (ii) above will be made
only in connection with a "qualified liquidation" of the REMIC within the
meaning of Section 860F(g)(4) of the Code.
Indenture. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes of
such Series or, with certain limitations, upon deposit with the Trustee of funds
sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such Series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such Series, to replace stolen, lost or mutilated Notes of such Series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States which through the payment of
interest and principal in respect thereof in accordance with their terms will
provide money in an amount sufficient to pay the principal of and each
installment of interest on the Notes of such Series on the last scheduled
Distribution Date for such Notes and any installment of interest on such Notes
in accordance with the terms of the Indenture and the Notes of such Series. In
the event of any such defeasance and discharge of Notes of such Series, holders
of Notes of such Series would be able to look only to such money and/or direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
62
<PAGE>
The Trustee
The Trustee under each Agreement will be named in the applicable
Prospectus Supplement. The commercial bank or trust company serving as Trustee
may have normal banking relationships with the Depositor, the Servicer and any
of their respective affiliates.
CERTAIN LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the Loans. Because such legal aspects are
governed primarily by applicable state law (which laws may differ
substantially), the descriptions do not, except as expressly provided below,
reflect the laws of any particular jurisdiction, or encompass the laws of all
jurisdictions in which the security for the Loans is situated. The descriptions
are qualified in their entirety by reference to the applicable federal laws and
the appropriate laws of the jurisdictions in which Loans may be originated.
General
The Loans for a Series may be secured by deeds of trust, mortgages,
security deeds or deeds to secure debt, depending upon the prevailing practice
in the state in which the property subject to the loan is located. A mortgage
creates a lien upon the real property encumbered by the mortgage, which lien is
generally not prior to the lien for real estate taxes and assessments. Priority
between mortgages depends on their terms and generally on the order of recording
with a state or county office. There are two parties to a mortgage, the
mortgagor, who is the borrower and owner of the mortgaged property, and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. Although a deed of
trust is similar to a mortgage, a deed of trust formally has three parties, the
borrower-property owner called the trustor (similar to a mortgagor), a lender
(similar to a mortgagee) called the beneficiary, and a third-party grantee
called the trustee. Under a deed of trust, the borrower 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. A security deed and a deed to
secure debt are special types of deeds which indicate on their face that they
are granted to secure an underlying debt. By executing a security deed or deed
to secure debt, the grantor conveys title to, as opposed to merely creating a
lien upon, the subject property to the grantee until such time as the underlying
debt is repaid. The trustee's authority under a deed of trust, the mortgagee's
authority under a mortgage and the grantee's authority under a security deed or
deed to secure debt are governed by law and, with respect to some deeds of
trust, the directions of the beneficiary.
Foreclosure/Repossession
Deeds of Trust and Security Deeds. Foreclosure of a deed of trust or a
security deed is generally accomplished by a non-judicial sale under a specific
provision in the deed of trust or security deed which authorizes the trustee or
grantee to sell the property at public auction upon any default by borrower
under the terms of the note, deed of trust or security deed. In certain states,
such foreclosure also may be accomplished by judicial sale in the manner
provided for foreclosure of mortgages.
Mortgages. Foreclosure of a mortgage is generally accomplished by judicial
action. The action is initiated by the service of legal pleadings upon all
parties having an interest in the real property.
Actions prior to Commencement of Foreclosure. Many states require notices,
sometimes in prescribed form, be given to borrowers prior to commencement of
foreclosure proceedings in addition to any notice requirements contained in the
mortgage or deed of trust. In some states, a notice of default must be recorded
and a copy sent to the borrower and any other party with an interest in the
property. In some states, the borrower has the right to reinstate the loan at
any time following default until shortly before the sale. If a deed of trust,
security deed or mortgage is not reinstated within any applicable cure period, a
notice of sale must be posted in a public place and, in most states, published
for a specific period of time in one or more newspapers. In addition, some state
laws
63
<PAGE>
require that a copy of the notice of sale be posted on the property and sent to
all parties having an interest of record in the real property.
Foreclosure Proceedings. In the case of foreclosure of a security deed,
deed of trust or mortgage, delays in completion of the foreclosure may
occasionally result from difficulties in locating necessary parties. Judicial
foreclosure proceedings are often not contested by any of the parties, but when
the mortgagee's right to foreclose is contested, the legal proceedings necessary
to resolve the issue can be time consuming. After completion of a judicial
foreclosure proceeding, the court generally issues a judgment of foreclosure and
the court either appoints or directs a referee, sheriff, or other court 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. Deeds of trust and security deeds are generally foreclosed by the
Trustee or Grantee in a non-judicial sale.
Although foreclosure sales are typically public sales, frequently no
third party purchaser bids in excess of the lender's lien because of the
difficulty of determining the exact status of title to the property, the
possible deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus, the foreclosing lender often purchases the property from the
trustee, referee, sheriff, or other court officer, for an amount equal to the
principal amount outstanding under the loan, accrued and unpaid interest and the
expenses of foreclosure in which event the mortgagor's debt will be
extinguished. However, the lender may purchase for a lesser amount in some
jurisdictions which only require a minimum bid, or, in states where a deficiency
judgment is available, in order to preserve its right to seek such judgment.
Thereafter, subject to the right of the borrower in some states to remain in
possession during the redemption period, the lender will assume the burden of
ownership, including obtaining hazard insurance 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.
Courts have imposed equitable principles upon foreclosure, which are
generally designed to mitigate the legal consequences to the borrower of the
borrower's default under the loan documents. Some courts have been faced with
the issue of whether federal or state constitutional provisions reflecting due
process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
Right of Redemption. In many states, the borrower, or any other person
having a junior encumbrance on the real estate, may, during a statutorily
prescribed reinstatement period, cure a monetary default by paying the entire
amount in arrears plus other designated 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. After
the reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan and
must pay the loan in full to prevent the scheduled foreclosure sale.
When the beneficiary under a junior mortgage or deed of trust cures the
default and reinstates or redeems by paying the full amount of the senior
mortgage or deed of trust, the amount paid by the beneficiary so to cure or
redeem becomes a part of the indebtedness secured by the junior mortgage or deed
of trust. See "--Junior Mortgages; Rights of Senior Mortgagees."
Environmental Risks
Real property pledged as security to a lender may be subject to unforeseen
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the payment
64
<PAGE>
of the costs of clean-up. In several states such a lien has priority over the
lien of an existing mortgage against such property. In addition, under the
federal Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"), the United States Environmental Protection Agency
("EPA") may impose a lien on property where EPA has incurred clean-up costs.
However, a CERCLA lien is subordinate to pre-existing, perfected security
interests.
Under the laws of some states, and under CERCLA, it is conceivable that a
secured lender may be held liable as an "owner" or "operator" for the costs of
addressing releases or threatened releases of hazardous substances at a
Property, even though the environmental damage or threat was caused by a prior
or current owner or operator. CERCLA imposes liability for such costs on any and
all "responsible parties," including owners or operators. However, CERCLA (as
amended, as to lender liability, by the Asset Conservation, Lender Liability and
Deposit Insurance Protection Act of 1996), excludes from the definition of
"owner or operator" a secured creditor who holds indicia of ownership primarily
to protect its security interest (the "Secured Creditor Exclusion") but without
"participating in the management" of the Property. Thus, if a lender's
activities begin to encroach on the actual management of a contaminated facility
or property, the lender may incur liability as an "owner or operator" under
CERCLA. Similarly, if a lender forecloses and takes title to a contaminated
facility or property, the lender may incur CERCLA liability in various
circumstances, including, but not limited to, when it holds the facility or
property as an investment (including leasing the facility or property to third
party), or fails to market the property in a timely fashion.
Whether actions taken by a lender would constitute participation in the
management of a mortgaged property, or the business of a borrower, so as to
render the secured creditor exemption unavailable to a lender has been a matter
of judicial interpretation of the statutory language, and court decisions have
been inconsistent. In 1990, the United States Court of Appeals for the Eleventh
Circuit suggested that the mere capacity of the lender to influence a borrower's
decisions regarding disposal of hazardous substances was sufficient
participation in the management of the borrower's business to deny the
protection of the secured creditor exemption to the lender.
This ambiguity appears to have been resolved by the enactment of the Asset
Conservation, Lender Liability and Deposit Insurance Protection Act of 1996,
which was signed into law by President Clinton on September 30, 1996. The new
legislation provides that in order to be deemed to have participated in the
management of a mortgaged property, a lender must actually participate in the
operational affairs of the property or the borrower. The legislation also
provides that participation in the management of the property does not include
"merely having the capacity to influence, or unexercised right to control"
operations. Rather, a lender will lose the protection of the secured creditor
exemption only if it exercises decision-making control over the borrower's
environmental compliance and hazardous substance handling and disposal
practices, or assumes control or responsibility for (including day-to-day
management of) all operational functions of the mortgaged property. However,
such amendments do not affect the potential for liability under other federal or
state laws which impose liability on "owners or operators" but do not provide
any protection for secured creditors.
If a lender is or becomes liable, it can bring an action for contribution
against any other "responsible parties," including a previous owner or operator,
who created the environmental hazard, but those persons or entities may be
bankrupt or otherwise judgment proof. The costs associated with environmental
cleanup may be substantial. It is conceivable that such costs arising from the
circumstances set forth above would result in a loss to Securityholders.
CERCLA does not apply to petroleum products, and the Secured Creditor
Exclusion does not govern liability for cleanup costs under federal laws other
than CERCLA, in particular Subtitle I of the federal Resource Conservation and
Recovery Act ("RCRA"), which regulates underground petroleum storage tanks
(except heating oil tanks). The EPA has adopted a lender liability rule for
underground storage tanks under Subtitle I of RCRA. Under such rule, a holder of
a security interest in an underground storage tank or real property containing
an underground storage tank is not considered an operator of the underground
storage tank as long as petroleum is not added to, stored in or dispensed from
the tank. It should be noted, however, that liability for cleanup of petroleum
contamination may be governed by state law, which may not provide for any
specific protection for secured creditors.
65
<PAGE>
In the case of the Residential Loans, at the time of origination, no
environmental assessment was conducted. In the case of the Mixed Use Loans,
except as otherwise specified in the related Prospectus Supplement, at the time
of origination, no environmental assessment of the Properties was conducted.
Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In certain
other states, this right of redemption applies only to sales following judicial
foreclosure, and not to sales pursuant to a non-judicial power of sale. In most
states where the right of redemption is available, statutory redemption may
occur upon payment of the foreclosure purchase price, accrued interest and
taxes. 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 from
the lender subsequent to foreclosure or sale under a deed of trust.
Consequently, the practical effect of the redemption right is to force the
lender to retain the property and pay the expenses of ownership until the
redemption period has run. In some states, there is no right to redeem property.
Anti-Deficiency Legislation; Bankruptcy Laws; Tax Liens
Certain states have imposed statutory restrictions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against borrowers financing the purchase of their residence
or following sale under a deed of trust or certain other foreclosure
proceedings. A deficiency judgment is a personal judgment against the borrower
equal in most cases to the difference between the amount due to the lender and
the fair market value of the real property at the time of the foreclosure sale.
As a result of these prohibitions, it is anticipated that in most instances the
Servicer will utilize the non-judicial foreclosure remedy and will not seek
deficiency judgments against defaulting borrowers.
Some state 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. In some states, exceptions to the anti-deficiency
statutes are provided for in certain instances where the value of the lender's
security has been impaired by acts or omissions of the borrower, for example, in
the event of waste of the property. 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 anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
and state laws affording relief to debtors, may interfere with or affect the
ability of the secured mortgage lender to realize upon its security. For
example, in a proceeding under the Bankruptcy Code, a lender may not foreclose
on a mortgaged property without the permission of the bankruptcy court. The
rehabilitation plan proposed by the debtor may provide, if the mortgaged
property is not the debtor's principal residence and the court determines that
the value of the mortgaged property is less than the principal balance of the
mortgage loan, for the reduction of the secured indebtedness to the value of the
mortgaged property as of the date of the commencement of the bankruptcy,
rendering the lender a general unsecured creditor for the difference, and also
may reduce the monthly payments due under such mortgage loan, change the rate of
interest and alter the mortgage loan repayment schedule. The effect of any such
proceedings under the Bankruptcy Code,
66
<PAGE>
including but not limited to any automatic stay, could result in delays in
receiving payments on the Loans underlying a Series of Securities and possible
reductions in the aggregate amount of such payments.
The federal tax laws provide priority to certain tax liens over the lien
of a mortgage or secured party.
Due-on-Sale Clauses
Unless otherwise specified in the related Prospectus Supplement, each
conventional Loan will contain a due-on-sale clause which will generally provide
that if the mortgagor or obligor sells, transfers or conveys the Property, the
loan or contract may be accelerated by the mortgagee or secured party. Court
decisions and legislative actions have placed substantial restriction on the
right of lenders to enforce such clauses in many states. However, the Garn-St
Germain Depository Institutions Act of 1982 (the "Garn-St Germain Act"), subject
to certain exceptions, preempts state constitutional, statutory and case law
prohibiting the enforcement of due-on-sale clauses. 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. The
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.
As to loans secured by an owner-occupied residence, the Garn-St Germain
Act sets forth nine specific instances in which a mortgagee covered thereunder
may not exercise its rights under a due-on-sale clause, notwithstanding the fact
that a transfer of the property may have occurred. The inability to enforce a
due-on-sale clause may result in transfer of the related Property to an
uncreditworthy person, which could increase the likelihood of default or may
result in a mortgage bearing an interest rate below the current market rate
being assumed by a new home buyer, which may affect the average life of the
Loans and the number of Loans which may extend to maturity.
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. Under certain state laws, prepayment charges may not be imposed
after a certain period of time following the origination of mortgage loans with
respect to prepayments on loans secured by liens encumbering owner-occupied
residential properties. Since many of the Properties will be owner-occupied, it
is anticipated that prepayment charges may not be imposed with respect to many
of the Loans. The absence of such a restraint on prepayment, particularly with
respect to fixed rate Loans having higher Loan Rates, may increase the
likelihood of refinancing or other early retirement of such loans or contracts.
Late charges and prepayment fees are typically retained by servicers as
additional servicing compensation.
Equitable Limitations on Remedies
67
<PAGE>
In connection with lenders' attempts to realize upon their security,
courts have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of defaults
under the loan documents. Examples of judicial remedies that have been fashioned
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate a borrower suffering from temporary financial disability. In other
cases, courts have limited the right of a lender to realize upon the lender's
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 some 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 protection to the borrower.
Applicability of Usury Laws
Each Mortgage Loan jurisdiction has usury laws which limit the interest
and other amounts that may be charged under certain loans. Title V of the
Depository Institutions Deregulation and Monetary Control Act of 1980, enacted
in March 1980, as amended ("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. 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. The statute
authorized the states to reimpose interest rate limits by adopting, before April
1, 1983, a law or constitutional provision 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 was 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. Certain states have taken
action to reimpose interest rate limits and/or to limit discount points or other
charges.
The Home Improvement Contracts
General. The Home Improvement Contracts, excluding those Home Improvement
Contracts that are unsecured or secured by mortgages on real estate (such Home
Improvement Contracts, as limited by said exclusions, are referred to herein as
"Contracts") are generally "chattel paper," as defined in the Uniform Commercial
Code of the applicable jurisdiction (the "UCC"). In some cases, an interest in a
Contract may constitute an "account" within the meaning of the UCC. Under the
UCC, a purchaser of chattel paper or an account is treated as a secured party
whose interest in the chattel paper or account is treated as a security interest
which must be properly perfected in order to take priority over competing
security interests. Under the related Agreement, the Seller will transfer
physical possession of the Contracts to the Depositor, and the Depositor may
file UCC-1 financing statements in the appropriate state and local recording
offices (if any) to, among other things, give notice of its ownership of the
Contracts. The Depositor in turn will transfer physical possession of the
Contracts to the Trustee or a designated custodian or may retain possession of
the Contracts as custodian for the Trustee. The Trustee may then file UCC-1
financing statements in the appropriate state and local recording offices (if
any) to, among other things, give notice of the Trust Fund's ownership of the
Contracts. Unless otherwise specified in the related Prospectus Supplement, the
Contracts will not be stamped or otherwise marked to reflect their sale to
either the Depositor or the Trust Fund. Therefore, if through negligence, fraud,
or otherwise, a subsequent purchaser were able to take physical possession of
the Contracts without notice of such prior sale, the Depositor's or the Trust
Fund's interest in the Contracts could be defeated.
Security Interests in Home Improvements. The Contracts may grant to the
seller of the Home Improvements or another person (the "HIC Secured Party")
related to such Contracts a "purchase money security interest" (within the
meaning of the UCC) in the Home Improvements financed thereby. A financing
statement generally is not required to be filed to perfect a purchase money
security interest in consumer goods. Such purchase money security
68
<PAGE>
interests are assignable. In general, a properly perfected purchase money
security interest grants to the HIC Secured Party a security interest that has
priority over a conflicting security interest in the same collateral and the
proceeds of such collateral. However, to the extent that the collateral subject
to a purchase money security interest becomes a fixture, in order for the
related purchase money security interest to take priority over a conflicting
interest in the fixture, the HIC Secured Party's interest in such Home
Improvement must generally be perfected by a timely fixture filing. In general,
a security interest does not exist under the UCC in ordinary building material
incorporated into an improvement on land. A contractual obligation to pay for
lumber, bricks or other types of ordinary building material which is
incorporated into improvements on land will generally not be secured by an
interest in such building material.
Enforcement of Security Interest in Home Improvements. Following a default
under a Contract, and provided that the Home Improvement has not become subject
to real estate law, a creditor may be able to repossess a Home Improvement
securing the contractual obligation by voluntary surrender, self-help
repossession that is peaceful (i.e., without breach of the peace) or by judicial
process. The HIC Secured Party related to a Contract must give the debtor a
number of days' notice, which generally varies from 10 to 30 days according to
most state laws, prior to commencing any act of repossession. The UCC and
consumer protection laws in most states place restrictions on repossession
sales, including requiring prior notice to the debtor and commercial
reasonableness in effecting such sales. The law in most states also requires
that the debtor be given notice prior to any resale of property that the debtor
may redeem at or before such sale.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency which remains following
repossession and resale of the property securing the debtor's loan. However,
some states impose prohibitions or limitations on deficiency judgments, and in
many cases the defaulting borrower may have no assets with which to pay a
judgment.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and/or resell collateral or enforce a
deficiency judgment.
Consumer Protection Laws. The so-called "Holder-in-Due Course" rule of the
Federal Trade Commission is intended to defeat the ability of the transferor of
a consumer credit contract which is the seller of goods which gave rise to the
transaction (and certain related lenders and assignees) to transfer such
contract free of notice of claims by the debtor thereunder. The effect of this
rule is to subject the assignee of such a contract to all claims and defenses
which the debtor could assert against the seller of goods. Liability under this
rule is limited to amounts paid under a contract; however, the obligor also may
be able to assert the rule to set off remaining amounts due as a defense against
a claim brought by the Trustee against such obligor. Numerous other federal and
state consumer protection laws impose requirements applicable to the origination
and lending pursuant to the contracts, including the Truth in Lending Act, the
Federal Trade Commission Act, the Fair Credit Billing Act, the Fair Credit
Reporting Act, the Equal Credit Opportunity Act, the Fair Debt Collection
Practices Act and the Uniform Consumer Credit Code. In the case of some of these
laws, the failure to comply with their provisions may affect the enforceability
of the related contract.
Applicability of Usury Laws. Title V of the Depository Institutions
Deregulation and Monetary Control Act of 1980, as amended ("Title V"), provides
that, subject to the following conditions, state usury limitations shall not
apply to any contract which is secured by a first lien on certain kinds of
consumer goods. The contracts would be covered if they satisfy certain
conditions governing, among other things, the terms of any prepayments, late
charges and deferral fees and requiring a 30-day notice period prior to
instituting any action leading to repossession of the related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
69
<PAGE>
Soldiers' and Sailors' Civil Relief Act
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of such borrower's Loan (including a borrower who is a
member of the National Guard or is in reserve status at the time of the
origination of the Loan and is later called to active duty) may not be charged
interest above an annual rate of 6% during the period of such borrower's active
duty status, unless a court orders otherwise upon application of the lender. It
is possible that such interest rate limitation could have an effect, for an
indeterminate period of time, on the ability of the Servicer to collect full
amounts of interest on certain of the Loans. Unless otherwise provided in the
related Prospectus Supplement, any shortfall in interest collections resulting
from the application of the Relief Act could result in losses to
Securityholders. The Relief Act also imposes limitations which would impair the
ability of the Servicer to foreclose on an affected Loan during the borrower's
period of active duty status. Moreover, the Relief Act permits the extension of
a Loan's maturity and the re-adjustment of its payment schedule beyond the
completion of military service. Thus, in the event that such a Loan goes into
default, there may be delays and losses occasioned by the inability to realize
upon the Property in a timely fashion.
Junior Mortgages; Rights of Senior Mortgagees
To the extent that the Loans comprising the Trust Fund for a Series are
secured by mortgages which are junior to other mortgages held by other lenders
or institutional investors, the rights of the Trust Fund (and therefore the
Securityholders), as mortgagee under any such junior mortgage, are subordinate
to those of any mortgagee under any senior mortgage. The senior mortgagee has
the right to receive hazard insurance and condemnation proceeds and to cause the
property securing the 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 a default
and bring the senior loan current, in either event adding the amounts expended
to the balance due on the junior loan. In most states, absent a provision in the
mortgage or deed of trust, no notice of default is required to be given to a
junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage, in such order as the mortgagee may determine. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under senior mortgages will have the prior right to collect any
insurance proceeds payable under a hazard insurance policy and any award of
damages in connection with the condemnation and to apply the same to the
indebtedness secured by the senior mortgages. Proceeds in excess of the amount
of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under certain mortgages to perform the obligation itself, at its
election, with the mortgagor agreeing to reimburse the mortgagee for any sums
expended by the mortgagee on behalf of the mortgagor. All sums so expended by
the mortgagee become part of the indebtedness secured by the mortgage.
The Title I Program
General. Certain of the Loans contained in a Trust Fund may be loans
insured under the Title I Credit Insurance program created pursuant to Sections
1 and 2(a) of the National Housing Act of 1934 (the "Title I Program"). Under
the Title I Program, the Secretary of the Department of Housing and Urban
Development ("HUD") is authorized and empowered to insure qualified lending
70
<PAGE>
institutions against losses on eligible loans. The Title I Program operates
as a coinsurance program in which the Secretary of HUD insures up to 90% of
certain losses incurred on an individual insured loan, including the unpaid
principal balance of the loan, but only to the extent of the insurance coverage
available in the lender's insurance coverage reserve account. The owner of the
loan bears the uninsured loss on each loan.
The types of loans which are eligible for insurance by the Secretary of HUD
under the Title I Program include property improvement loans ("Property
Improvement Loans" or "Title I Loans"). A Property Improvement Loan or Title I
Loan means a loan made to finance actions or items that substantially protect or
improve the basic livability or utility of a property and includes single family
improvement loans.
There are two basic methods of lending or originating such loans which
include a "direct loan" or a "dealer loan." With respect to a direct loan, the
borrower makes application directly to a lender without any assistance from a
dealer, which application may be filled out by the borrower or by a person
acting at the direction of the borrower who does not have a financial interest
in the loan transaction, and the lender may disburse the loan proceeds solely to
the borrower or jointly to the borrower and other parties to the transaction.
With respect to a dealer loan, the dealer, who has a direct or indirect
financial interest in the loan transaction, assists the borrower in preparing
the loan application or otherwise assists the borrower in obtaining the loan
from lender and the lender may distribute proceeds solely to the dealer or the
borrower or jointly to the borrower and the dealer or other parties. With
respect to a dealer Title I Loan, a dealer may include a seller, a contractor or
supplier of goods or services.
Loans insured under the Title I Program are required to have fixed interest
rates and, generally, provide for equal installment payments due weekly,
biweekly, semi-monthly or monthly, except that a loan may be payable quarterly
or semi-annually in order to correspond with the borrower's irregular flow of
income. The first or last payments (or both) may vary in amount but may not
exceed 150% of the regular installment payment, and the first payment may be due
no later than two months from the date of the loan. The note must contain a
provision permitting full or partial prepayment of the loan. The interest rate
must be negotiated and agreed to by the borrower and the lender and must be
fixed for the term of the loan and recited in the note. Interest on an insured
loan must accrue from the date of the loan and be calculated according to the
actuarial method. The lender must assure that the note and all other documents
evidencing the loan are in compliance with applicable federal, state and local
laws.
Each insured lender is required to use prudent lending standards in
underwriting individual loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan and
disbursement of loan proceeds. Generally, the lender must exercise prudence and
diligence to determine whether the borrower and any co-maker is solvent and an
acceptable credit risk, with a reasonable ability to make payments on the loan
obligation. The lender's credit application and review must determine whether
the borrower's income will be adequate to meet the periodic payments required by
the loan, as well as the borrower's other housing and recurring expenses, which
determination must be made in accordance with the expense-to-income ratios
published by the Secretary of HUD.
Under the Title I Program, the Secretary of HUD does not review or approve
for qualification for insurance the individual loans insured thereunder at the
time of approval by the lending institution (as is typically the case with other
federal loan programs). If, after a loan has been made and reported for
insurance under the Title I Program, the lender discovers any material
misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, it shall promptly report this to the
Secretary of HUD. In such case, provided that the validity of any lien on the
property has not been impaired, the insurance of the loan under the Title I
Program will not be affected unless such material misstatement of fact or misuse
of loan proceeds was caused by (or was knowingly sanctioned by) the lender or
its employees.
Requirements for Title I Loans. The maximum principal amount for Title I
Loans must not exceed the actual cost of the project plus any applicable fees
and charges allowed under the Title I Program; provided that such maximum amount
does not exceed $25,000 (or the current applicable amount) for a single family
property improvement loan. Generally, the term of a Title I Loan may not be less
than six months nor greater than 20 years and 32 days. A borrower may obtain
multiple Title I Loans with respect to multiple properties, and a borrower may
obtain more than one Title I Loan with respect to a single property, in each
case as long as the total outstanding
71
<PAGE>
balance of all Title I Loans in the same property does not exceed the maximum
loan amount for the type of Title I Loan thereon having the highest permissible
loan amount.
Borrower eligibility for a Title I Loan requires that the borrower have at
least a one-half interest in either fee simple title to the real property, a
lease thereof for a term expiring at least six months after the final maturity
of the Title I Loan or a recorded land installment contract for the purchase of
the real property. Any Title I Loan in excess of $7,500 must be secured by a
recorded lien on the improved property which is evidenced by a mortgage or deed
of trust executed by the borrower and all other owners in fee simple.
The proceeds from a Title I Loan may be used only to finance property
improvements which substantially protect or improve the basic livability or
utility of the property as disclosed in the loan application. The Secretary of
HUD has published a list of items and activities which cannot be financed with
proceeds from any Title I Loan and from time to time the Secretary of HUD may
amend such list of items and activities. With respect to any dealer Title I
Loan, before the lender may disburse funds, the lender must have in its
possession a completion certificate on a HUD approved form, signed by the
borrower and the dealer. With respect to any direct Title I Loan, the lender is
required to obtain, promptly upon completion of the improvements but not later
than six months after disbursement of the loan proceeds with one six month
extension if necessary, a completion certificate, signed by the borrower. The
lender is required to conduct an on-site inspection on any Title I Loan where
the principal obligation is $7,500 or more, and on any direct Title I Loan where
the borrower fails to submit a completion certificate.
HUD Insurance Coverage. Under the Title I Program the Secretary of HUD
establishes an insurance coverage reserve account for each lender which has been
granted a Title I insurance contract. The amount of insurance coverage in this
account is 10% of the amount disbursed, advanced or expended by the lender in
originating or purchasing eligible loans registered with the Secretary of HUD
for Title I insurance, with certain adjustments. The balance in the insurance
coverage reserve account is the maximum amount of insurance claims the FHA is
required to pay. Loans to be insured under the Title I Program will be
registered for insurance by the Secretary of HUD and the insurance coverage
attributable to such loans will be included in the insurance coverage reserve
account for the originating or purchasing lender following the receipt and
acknowledgment by the Secretary of HUD of a timely filed loan report on the
prescribed form pursuant to the Title I regulations. The Secretary of HUD
charges a fee of 0.50% of the loan amount multiplied by the number of years in
the loan term for any eligible loan so reported and acknowledged for insurance.
For loans with maturities of 25 months or less, payment of the entire insurance
premium is due 25 days after the Secretary of HUD acknowledges the loan report.
For loans with a term longer than 25 months, payment of the insurance premium is
made in annual installments beginning 25 days after the Secretary of HUD
acknowledges the loan report. If an insured loan is prepaid during the year, FHA
will not refund or abate portions of the insurance premium already paid. Refunds
and abatements are allowed only in limited circumstances.
Under the Title I Program the Secretary of HUD will reduce the insurance
coverage available in the lender's insurance coverage reserve account with
respect to loans insured under the lender's contract of insurance by (i) the
amount of insurance claims approved for payment relating to such insured loans
and (ii) the amount of insurance coverage attributable to insured loans sold by
the lender. The balance of the lender's insurance coverage reserve account will
be further adjusted as required under Title I or by the Secretary of HUD.
Originations and acquisitions of new eligible loans will continue to increase a
lender's insurance coverage reserve account balance by 10% of the amount
disbursed, advanced or expended in originating or acquiring such eligible loans
registered with the Secretary of HUD for insurance under the Title I Program.
The Secretary of HUD may transfer insurance coverage between insurance coverage
reserve accounts with earmarking with respect to a particular insured loan or
group of insured loans when a determination is made that it is in the Secretary
of HUD's interest to do so.
The lender may transfer insured loans and loans reported for insurance only
to another qualified lender under a valid Title I contract of insurance (except
as collateral in a bona fide transaction). Unless an insured loan is transferred
with recourse or with a guaranty or repurchase agreement, the Secretary of HUD,
upon receipt of the loan report required upon transfer in accordance with the
Title I regulations, will transfer from the transferor's
72
<PAGE>
insurance coverage reserve account to the transferee's insurance coverage
reserve account an amount, if available, equal to 10% of the actual purchase
price or the net unpaid principal balance of such loan (whichever is less).
However, under the Title I Program not more than $5,000 in insurance coverage
shall be transferred to or from a lender's insurance coverage reserve account
during any October 1 to September 30 period without the prior approval of the
Secretary of HUD.
Claims Procedures Under Title I. Under the Title I Program the lender may
accelerate an insured loan following a default on such loan only after the
lender or its agent has contacted the borrower in a face-to-face meeting or by
telephone to discuss the reasons for the default and to seek its cure. If the
borrower does not cure the default or agree to a modification agreement or
repayment plan, the lender will notify the borrower in writing that, unless
within 30 days the default is cured or the borrower enters into a modification
agreement or repayment plan, the loan will be accelerated and that, if the
default persists, the lender will report the default to an appropriate credit
agency. The lender may rescind the acceleration of maturity after full payment
is due and reinstate the loan only if the borrower brings the loan current,
executes a modification agreement or agrees to an acceptable repayment plan.
Following acceleration of maturity upon a secured Title I Loan, the lender
may either (a) proceed against the property under any security instrument, or
(b) make a claim under the lender's contract of insurance. If the lender chooses
to proceed against the property under a security instrument (or if it accepts a
voluntary conveyance or surrender of the property), the lender may file an
insurance claim only with the prior approval of the Secretary of HUD.
When a lender files an insurance claim with the Secretary of HUD under the
Title I Program, the Secretary of HUD reviews the claim, the complete loan file
and documentation of the lender's efforts to obtain recourse against any dealer
who has agreed thereto, certification of compliance with applicable state and
local laws in carrying out any foreclosure or repossession, and evidence that
the lender has properly filed proofs of claims, where the borrower is bankrupt
or deceased. Generally, a claim for reimbursement for loss on any Property
Improvement Loan must be filed with the Secretary of HUD no later than nine
months after the date of default of such loan. Concurrently with filing the
insurance claim, the lender shall assign to the United States the lender's
entire interest in the loan note (or a judgment in lieu of the note), in any
security held and in any claim filed in any legal proceedings. If the Secretary
of HUD has reason to believe that the note is not valid or enforceable against
the borrower, the Secretary of HUD may deny the claim and reassign the note to
the lender. If either such defect is discovered after the Secretary of HUD has
paid a claim, the Secretary of HUD may require the lender to repurchase the paid
claim and to accept a reassignment of the loan note. If the lender subsequently
obtains a valid and enforceable judgment against the borrower, the lender may
resubmit a new insurance claim with an assignment of the judgment. The Secretary
of HUD may contest any insurance claim and make a demand for repurchase of the
loan at any time up to two years from the date the claim was certified for
payment and may do so thereafter in the event of fraud or misrepresentation on
the part of the lender.
Under the Title I Program the amount of an insurance claim payment, when
made, is equal to the Claimable Amount, up to the amount of insurance coverage
in the lender's insurance coverage reserve account. For the purposes hereof, the
"Claimable Amount" means an amount equal to 90% of the sum of (a) the unpaid
loan obligation (net unpaid principal and the uncollected interest earned to the
date of default) with adjustments thereto if the lender has proceeded against
property securing such loan; (b) the interest on the unpaid amount of the loan
obligation from the date of default to the date of the claim's initial
submission for payment plus 15 calendar days (but not to exceed 9 months from
the date of default), calculated at the rate of 7% per annum; (c) the
uncollected court costs; (d) the attorney's fees not to exceed $500; and (e) the
expenses for recording the assignment of the security to the United States.
73
<PAGE>
Consumer Protection Laws
Numerous federal and state consumer protection laws impose substantive
requirements upon mortgage lenders in connection with the origination, servicing
and enforcement of loans secured by Single Family Properties. These laws include
the federal Truth-in-Lending Act and Regulation Z promulgated thereunder, the
Real Estate Settlement Procedures Act, the Equal Credit Opportunity Act and
Regulation B promulgated thereunder, the Fair Credit Billing Act, the Fair
Credit Reporting Act and related statutes and regulations. In particular,
Regulation Z requires certain disclosures to the borrowers regarding the terms
of the Loans; the Equal Credit Opportunity Act and Regulation B promulgated
thereunder prohibit discrimination on the basis of age, race, color, sex,
religion, marital status, national origin, receipt of public assistance or the
exercise of any right under the Consumer Credit Protection Act, in the extension
of credit; and the Fair Credit Reporting Act regulates the use and reporting of
information related to the borrower's credit experience. Certain provisions of
these laws impose specific statutory liabilities upon lenders who fail to comply
therewith. In addition, violations of such laws may limit the ability of the
Sellers to collect all or part of the principal of or interest on the Loans and
could subject the Sellers and in some cases their assignees to damages and
administrative enforcement.
FEDERAL INCOME TAX CONSEQUENCES
General
The following is a summary of the anticipated material federal income tax
consequences of the purchase, ownership, and disposition of the Securities and
is based on the advice of Stradley, Ronon, Stevens & Young, LLP, special counsel
to the Depositor. 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 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 Code, but much of the
discussion is applicable to other investors as well. 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.
The federal income tax consequences to holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness; (ii) an
election is made to treat the Trust Fund relating to a particular Series of
Securities as a real estate mortgage investment conduit ("REMIC") under the
Internal Revenue Code of 1986, as amended (the "Code"); (iii) the Securities
represent an ownership interest in some or all of the assets included in the
Trust Fund for a Series; or (iv) an election is made to treat the Trust Fund
relating to a particular Series of Certificates 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. Prior to issuance of
each Series of Securities, the Depositor shall file with the Commission a Form
8-K on behalf of the related Trust Fund containing an opinion of Stradley,
Ronon, Stevens & Young, LLP with respect to the validity of the information set
forth under "Federal Income Tax Consequences" herein and in the related
Prospectus Supplement.
Taxation of Debt Securities
Status as Real Property Loans. Except to the extent otherwise provided in
the related Prospectus Supplement, Stradley, Ronon, Stevens & Young, LLP will
have advised the Depositor that (i) Securities held by a domestic building and
loan association will or, in the case of Certificates issued by a Trust Fund
electing to be taxed as a partnership, should constitute "loans... secured by an
interest in real property" within the meaning of
74
<PAGE>
Code section 7701(a)(19)(C); and (ii) Securities held by a real estate
investment trust will constitute "real estate assets" within the meaning of Code
section 856(c)(5)(A) and interest on Securities will be considered "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Code section 856(c)(3)(B).
The Small Business Job Protection Act of 1996, as part of the repeal of
the bad debt reserve method for Thrift Institutions, repealed the application of
Code section 593(d) to any taxable year beginning after December 31, 1995.
Interest and Acquisition Discount. Securities representing regular
interests 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."
Debt Securities that are Accrual 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 on January 27, 1994, as amended on June 11, 1996 (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 method taking 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 related Closing Date, the issue price for such class will be
treated as the fair market value of such class on such Closing Date. The issue
price of a Debt Security also includes the amount paid by an initial Debt
Security holder for accrued interest that relates to a period prior to the issue
date of the Debt Security. The stated redemption price at maturity of a Debt
Security 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, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as described
below) provided that such interest payments are unconditionally payable at
intervals of one year or less during the entire term of the Debt Security. The
OID Regulations state that interest payments are unconditionally payable only if
a late payment or nonpayment is expected to be penalized or reasonable remedies
exist to compel payment. Certain Debt Securities may provide for default
remedies in the event of late payment or nonpayment of interest. The interest on
such Debt Securities will be unconditionally payable and constitute qualified
stated interest, not OID. However, absent clarification of the OID Regulations,
where Debt Securities do not provide for default remedies, the interest payments
will be included in the Debt Security's stated redemption price at maturity and
taxed as OID. Interest is payable at a single fixed rate only if the rate
appropriately takes into account the length of the interval between payments.
Distributions of interest on Debt Securities with respect to which deferred
interest will accrue, will not constitute qualified stated interest payments, in
which case the stated redemption price at maturity of such Debt Securities
includes all distributions of interest as well as principal thereon. Where the
interval between the issue date and the first Distribution Date on a Debt
Security is either longer or shorter than the interval between subsequent
Distribution Dates, all or part of the interest foregone, in the case of the
longer interval, and all of the additional interest, in the case of the shorter
interval, will
75
<PAGE>
be included in the stated redemption price at maturity and tested under the de
minimis rule described below. In the case of a Debt Security with a long first
period which has non-de minimis OID, all stated interest in excess of interest
payable at the effective interest rate for the long first period will be
included in the stated redemption price at maturity and the Debt Security will
generally have OID. Holders of Debt Securities should consult their own tax
advisors to determine the issue price and stated redemption price at maturity of
a Debt Security.
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.
Debt Securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is treated as payable at a qualified
variable rate and not as contingent interest if, generally, (i) such interest is
unconditionally payable at least annually, (ii) the issue price of the debt
instrument does not exceed the total noncontingent principal payments and (iii)
interest is based on a "qualified floating rate," an "objective rate," or a
combination of "qualified floating rates" that do not operate in a manner that
significantly accelerates or defers interest payments on such Debt Security. In
the case of Accrual Securities, certain Interest Weighted Securities (as defined
herein), and certain of the other Debt Securities, none of the payments under
the instrument will be considered qualified stated interest, and thus the
aggregate amount of all payments will be included in the stated redemption
price.
The Internal Revenue Services (the "IRS") recently issued final
regulations (the "Contingent Regulations") governing the calculation of OID on
instruments having contingent interest payments. The Contingent Regulations
specifically do not apply for purposes of calculating OID on debt instruments
subject to Code Section 1272(a)(6), such as the Debt Security. Additionally, the
OID Regulations do not contain provisions specifically interpreting Code Section
1272(a)(6). Until the Treasury issues guidance to the contrary, the Trustee
intends to base its computation on Code Section 1272(a)(6) and the OID
Regulations as described in this Prospectus. However, because no regulatory
guidance currently exists under Code Section 1272(a)(6), there can be no
assurance that such methodology represents the correct manner of calculating
OID.
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 OID. 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 or OID,
reduced by the total payments made with respect to such Debt Security in all
prior periods, other than qualified stated interest payments.
The amount of OID to be included in income by a holder of a debt
instrument, such as certain classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a "Pay-Through Security"), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
"Prepayment Assumption"). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of 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,
76
<PAGE>
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 original issue discount required to be included in income by a
holder of a Pay-Through Security to take into account prepayments with respect
to the Loans at a rate that is slower than the Prepayment Assumption. Although
original issue discount will be reported to holders of Pay-Through Securities
based on the Prepayment Assumption, no representation is made to holders that
Loans will be prepaid at that rate or at any other rate.
Certain classes of Regular Interest Securities may represent more than one
class of REMIC regular interests. Unless otherwise provided in the related
Prospectus Supplement, 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 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 any accrual of interest on a security is uncollectible. The
IRS, in a recent Technical Advice Memorandum, has ruled that holders of a debt
instrument having OID must continue to accrue OID, as distinguished from the
accrual of interest, even when the issuer's financial condition is such that
there is no reasonable expectation that the instrument will be redeemed
according to its terms. 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,
holders of Securities should consult their own tax advisors on this point.
Interest Weighted Securities. It is not clear how income should be accrued
with respect to Regular Interest Securities or Stripped Securities (as defined
under "--Tax Status as a Grantor Trust--General") the payments on which consist
solely or primarily of a specified portion of the interest payments on qualified
mortgages held by the REMIC or on Loans underlying Pass-Through Certificates
(the "Interest Weighted Securities"). The Issuer intends to take the position
that all of the income derived from an Interest Weighted Security should be
treated as OID and that the amount and rate of accrual of such OID should be
calculated by treating the Interest Weighted Security as an Accrual Security.
However, in the case of Interest Weighted Securities that are entitled to some
payments of principal and that are Regular Interest Securities the IRS could
assert that income derived from an Interest Weighted Security should be
calculated as if the Security were a security purchased at a premium equal to
the excess of the price paid by such holder for such Security over its stated
principal amount, if any. Under this approach, a holder would be entitled to
amortize such premium only if it has in effect an election under Section 171 of
the Code with respect to all taxable debt instruments held by such holder, as
described below. Alternatively, the IRS could assert that an Interest Weighted
Security should be taxable under the rules governing bonds issued with
contingent payments. Such treatment may be more likely in the case of Interest
Weighted Securities that are Stripped Securities as described below. See "--Tax
Status as a Grantor Trust--Discount or Premium on Pass-Through Certificates."
Variable Rate Debt Securities. In the case of Debt Securities bearing
interest at a rate that varies directly, according to a fixed formula, with an
objective index, it appears that (i) the yield to maturity of such Debt
Securities
77
<PAGE>
and (ii) in the case of Pay-Through Securities, the present value of all
payments remaining to be made on such Debt Securities, should be calculated as
if the interest index remained at its value as of the issue date of such
Securities. Because the proper method of adjusting accruals of OID on a variable
rate Debt Security is uncertain, holders of variable rate Debt Securities should
consult their own tax advisers regarding the appropriate treatment of such
Securities for federal income tax purposes.
Market Discount. A purchaser of a Security may be subject to the market
discount rules of Sections 1276-1278 of the Code. A holder that acquires a Debt
Security with more than a prescribed de minimis amount of "market discount"
(generally, the excess of the principal amount of the Debt Security 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
Securities (or in the case of a Pass-Through Certificate (as defined herein), as
set forth below, the Loans underlying such Security) not originally issued with
OID, stated interest payable in the relevant period to total stated interest
remaining to be paid at the beginning of the period or (b) in the case of
Securities (or, in the case of a Pass-Through Certificate, 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 Certificate, the Loans),
the excess of interest paid or accrued to purchase or carry a Security (or, in
the case of a Pass-Through Certificate, as described below, the underlying
Loans) with market discount over interest received on such Security is allowed
as a current deduction only to the extent such excess is greater than the market
discount that accrued during the taxable year in which such interest expense was
incurred. In general, the deferred portion of any interest expense will be
deductible when such market discount is included in income, including upon the
sale, disposition, or repayment of the Security (or in the case of a
Pass-Through Certificate, 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 Code indicates that premium is to be accrued in the
same manner as market discount. Accordingly, it appears that the accrual of
premium on a class of Pay-Through Securities will be calculated using the
prepayment assumption used in pricing such class. Premium on a Pay-Through
Security that is not amortized pursuant to an election under Code Section 171 is
allocated among the principal payments to be made on the Pay-Through Security
and is allowed as an interest offset (or possibly as a loss deduction). If a
holder makes an election to amortize premium on a Debt Security, such election
will apply to all taxable debt instruments (including all REMIC regular
interests and all pass-through certificates representing ownership interests in
a trust holding debt obligations) held by the holder at the beginning of the
taxable year in which the election is made, and to all taxable debt instruments
acquired thereafter by such holder, and will be irrevocable without the consent
of the IRS. Purchasers who pay a premium for the Securities should consult their
tax advisers regarding the election to amortize premium and the method to be
employed.
On June 27, 1996 the IRS issued proposed regulations (the "Amortizable
Bond Premium Regulations") dealing with amortizable bond premium. These
regulations specifically do not apply to prepayable debt instruments subject to
Code Section 1272(a)(6) such as the Securities. Absent further guidance from the
IRS, the Trustee intends to account for amortizable bond premium in the manner
described above. Prospective purchasers of the Securities should consult their
tax advisors regarding the possible application of the Amortizable Bond Premium
Regulations.
78
<PAGE>
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.
Taxation of the REMIC and its Holders
General. In the opinion of Stradley, Ronon, Stevens & Young, LLP, special
counsel to the Depositor, if a REMIC election is made with respect to a Series
of Securities, then 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.
Except to the extent specified otherwise in a Prospectus Supplement, if a
REMIC election is made with respect to a Series of Securities, (i) Securities
held by a domestic building and loan association will constitute "a regular or a
residual interest in a REMIC" within the meaning of Code Section
7701(a)(19)(C)(xi) (assuming that at least 95% of the REMIC's assets consist of
cash, government securities, "loans secured by an interest in real property,"
and other types of assets described in Code Section 7701(a)(19)(C)); and (ii)
Securities held by a real estate investment trust will constitute "real estate
assets" within the meaning of Code Section 856(c)(6)(B), and income with respect
to the Securities will be considered "interest on obligations secured by
mortgages on real property or on interests in real property" within the meaning
of Code Section 856(c)(3)(B) (assuming, for both purposes, that at least 95% of
the REMIC's assets are qualifying assets). If less than 95% of the REMIC's
assets consist of assets described in (i) or (ii) above, then a Security will
qualify for the tax treatment described in (i) and (ii) in the proportion that
such REMIC assets are qualifying assets.
The Small Business Job Protection Act of 1996, as part of the repeal of
the bad debt reserve method for Thrift Institutions, repealed the application of
Code Section 593(d) to any taxable year beginning after December 31, 1995.
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 (as defined herein) 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 of a Regular Interest Security 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. In
addition, for taxable years beginning after December 31, 1990, the amount of
itemized deductions otherwise allowable for the taxable year for an individual
whose adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation for taxable years beginning after 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 Regular Interest 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 specified in the related
79
<PAGE>
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.
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.
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 (i.e., the day on which the REMIC issues all of its regular and residual
interests). That 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, and the market discount provisions apply to loans
originated after July 18, 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 original issue discount (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." 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 (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, it is possible that
such premium may be recovered in proportion to payments of loan principal.
Prohibited Transactions and Contributions Tax. 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. In addition, subject to a number of exceptions, a
tax is imposed at the rate of 100% on amounts contributed to a REMIC after the
close of the three-month period beginning on the startup day. The holders of
Residual Interest Securities will generally be responsible for the payment of
any such taxes imposed
80
<PAGE>
on the REMIC. To the extent not paid by such holders or otherwise, however, such
taxes will be paid out of the Trust Fund and will be allocated pro rata to all
outstanding classes of Securities of such REMIC.
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 be greater or less than 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 of the REMIC 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
81
<PAGE>
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 (e.g., an organization described
under Code Section 401(a) or 501(c), with certain limited exceptions), 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
trust fund, 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 Small
Business Job Protection Act of 1996 has eliminated the special rule permitting
Section 593 institutions ("Thrift Institutions") to use net operating losses and
other allowable deductions to offset their excess inclusion income from REMIC
residual certificates that have "significant value" within the meaning of the
REMIC Regulations, effective for taxable years beginning after December 31,
1995, except with respect to residual certificates continuously held by a Thrift
Institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect on excess inclusions on the alternative minimum
taxable income of a residual holder. First, alternative minimum taxable income
for such residual holder is determined without regard to the special rule that
taxable income cannot be less than excess inclusions. Second, a residual
holder's alternative minimum taxable income for a tax year cannot be less than
excess inclusions for the year. Third, the amount of any alternative minimum tax
net operating loss deductions must be computed without regard to any excess
inclusions. These rules are effective for tax years beginning after December 31,
1986, unless a residual holder elects to have such rules apply only to tax years
beginning after August 20, 1996.
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 day 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 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, 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.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Securities may be disregarded. See "--Restrictions on Ownership and
Transfer of Residual Interest Securities" and "--Tax Treatment of Foreign
Investors."
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 from the tax (other than a farmers' cooperative
described in Code Section 521) imposed by Sections 1-1399 of the Code, if 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 acting on
behalf of a Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (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-
82
<PAGE>
through entity after March 31, 1988 (including, among others, a partnership,
trust, real estate investment trust, regulated investment company, or any person
holding as nominee), 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.
Under the REMIC Regulations, if a Residual Interest Security is a
"noneconomic residual interest," as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all federal
tax purposes unless no significant purpose of the transfer was to impede the
assessment or collection of tax. A Residual Interest Security is a "noneconomic
residual interest" unless, at the time of the transfer (i) the present value of
the expected future distributions on the Residual Interest Security at least
equals the product of the present value of the anticipated excess inclusions and
the highest rate of tax for the year in which the transfer occurs, and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the REMIC at or after the time at which the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes. If a
transfer of a Residual Interest is disregarded, the transferor would be liable
for any federal income tax imposed upon taxable income derived by the transferee
from the REMIC. The REMIC Regulations provide no guidance as to how to determine
if a significant purpose of a transfer is to impede the assessment or collection
of tax. A similar type of limitation exists with respect to certain transfers of
residual interests by Foreign Persons to United States Persons. See "--Tax
Treatment of Foreign Investors."
Mark to Market Rules. Prospective purchasers of a REMIC Residual Interest
Security should be aware that the Treasury recently issued final regulations
(the "Mark-to-Market Regulations") which provide that a REMIC Residual Interest
Security acquired after January 3, 1995 cannot be marked-to-market. The
Mark-to-Market Regulations replace the temporary regulations which allowed a
REMIC Residual Interest Security to be marked-to-market provided that it was not
a negative value residual interest and did not have the same economic effect as
a negative value residual interest. Prospective purchasers of a REMIC Residual
Interest Security should consult their tax advisors regarding the application of
the Mark-to-Market Regulations.
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 related Prospectus Supplement if a REMIC or
partnership election is not made, in the opinion of Stradley, Ronon, Stevens &
Young, LLP, special counsel to the Depositor, the Trust Fund relating to a
Series of Securities will be classified for federal income tax purposes as a
grantor trust under Subpart E, Part I of Subchapter J of the Code and not as an
association taxable as a corporation (the Securities of such Series, the
"Pass-Through Certificates"). In some Series there will be no separation of the
principal and interest payments on the Loans. In such circumstances, a holder
will be considered to have purchased a pro rata undivided interest in each of
the Loans. In other cases (the "Stripped Securities"), sale of the Securities
will produce a separation in the ownership of all or a portion of the principal
payments from all or a portion of the interest payments on the Loans.
Each holder must report on its federal income tax return its share of the
gross income derived from the Loans (not reduced by the amount payable as fees
to the Trustee and the Servicer and similar fees (collectively, the "Servicing
Fee")), at the same time and in the same manner as such items would have been
reported under the holder's tax accounting method had it held its interest in
the Loans directly, received directly its share of the amounts received with
respect to the Loans, and paid directly its share of the Servicing Fees. In the
case of Pass-Through Certificates other than Stripped Securities, such income
will consist of a pro rata share of all of the income derived from all of the
Loans and, in the case of Stripped Securities, such income will consist of a pro
rata share of the income derived from each stripped bond or stripped coupon in
which the holder owns an interest. The holder
83
<PAGE>
of a Security will generally be entitled to deduct such Servicing Fees under
Section 162 or Section 212 of the Code to the extent that such Servicing Fees
represent "reasonable" compensation for the services rendered by the Trustee and
the Servicer (or third parties that are compensated for the performance of
services). In the case of a noncorporate holder, however, Servicing Fees (to the
extent not otherwise disallowed, e.g., because they exceed reasonable
compensation) will be deductible in computing such holder's regular tax
liability only to the extent that such fees, when added to other miscellaneous
itemized deductions, exceed 2% of adjusted gross income and may not be
deductible to any extent in computing such holder's alternative minimum tax
liability. In addition, the amount of itemized deductions otherwise allowable
for the taxable year for an individual whose adjusted gross income exceeds the
applicable amount (which amount will be adjusted for inflation in taxable years
beginning after 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.
Discount or Premium on Pass-Through Certificates. The holder's purchase
price of a Pass-Through Certificate is to be allocated among the Loans in
proportion to their fair market values, determined as of the time of purchase of
the Securities. In the typical case, the Trustee (to the extent necessary to
fulfill its reporting obligations) will treat each Loan as having a fair market
value proportional to the share of the aggregate principal balances of all of
the Loans that it represents, since the Securities, unless otherwise specified
in the related Prospectus Supplement, will have a relatively uniform interest
rate and other common characteristics. To the extent that the portion of the
purchase price of a Pass-Through Certificate allocated to a Loan (other than to
a right to receive any accrued interest thereon and any undistributed principal
payments) is less than or greater than the portion of the principal balance of
the Loan allocable to the Certificate, the interest in the Loan allocable to the
Pass-Through Certificate will be deemed to have been acquired at a discount or
premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a Loan with OID in excess of a
prescribed de minimis amount or a Stripped Security, a holder of a Security will
be required to report as interest income in each taxable year its share of the
amount of OID that accrues during that year in the manner described above. OID
with respect to a Loan could arise, for example, by virtue of the financing of
points by the originator of the Loan, or by virtue of the charging of points by
the originator of the Loan in an amount greater than a statutory de minimis
exception, in circumstances under which the points are not currently deductible
pursuant to applicable Code provisions. Any market discount or premium on a Loan
will be includible in income, generally in the manner described above, except
that in the case of Pass-Through Certificates, market discount is calculated
with respect to the Loans underlying the Certificate, rather than with respect
to the Certificate. A holder that acquires an interest in a Loan originated
after July 18, 1984 with more than a de minimis amount of market discount
(generally, the excess of the principal amount of the Loan over the purchaser's
allocable purchase price) will be required to include accrued market discount in
income in the manner set forth above. See "--Taxation of Debt Securities--Market
Discount" and "--Premium."
In the case of market discount on a Pass-Through Certificate attributable
to Loans originated on or before July 18, 1984, the holder generally will be
required to allocate (e.g., on a ratable or straight line basis) the portion of
such discount that is allocable to a Loan among the principal payments on the
Loan and to include the discount allocable to each principal payment in ordinary
income at the time such principal payment is made. Such treatment would
generally result in discount being included in income initially at a faster rate
than discount would be required to be included in income using the method
described in the preceding paragraph.
Stripped Securities. A Stripped Security may represent a right to receive
only a portion of the interest payments on the Loans, a right to receive only
principal payments on the Loans, or a right to receive certain payments of both
interest and principal. Certain Stripped Securities (the "Ratio Strip
Securities") may represent a right to receive differing percentages of both the
interest and principal on each Loan. Pursuant to Section 1286 of the Code, the
separation of ownership of the right to receive some or all of the interest
payments on an obligation from ownership of the right to receive some or all of
the principal payments results in the creation of "stripped bonds" with respect
to principal payments and "stripped coupons" with respect to interest payments.
Section 1286 of the Code applies the OID rules to stripped bonds and stripped
coupons. For purposes of computing OID, a stripped bond or a stripped coupon is
treated as a debt instrument issued on the date that such stripped interest is
84
<PAGE>
purchased with an issue price equal to its purchase price or, if more than one
stripped interest is purchased, the ratable share of the purchase price
allocable to such stripped interest.
Servicing fees in excess of reasonable servicing fees ("Excess Servicing")
will be treated under the stripped bond rules. If the Excess Servicing fee is
less than 100 basis points (i.e., 1% interest on the Loan principal balance) or
the Securities are initially sold with a de minimis discount (assuming no
prepayment assumption is required), any non-de minimis discount arising from a
subsequent transfer of the Securities should be treated as market discount. The
IRS appears to require that reasonable servicing fees be calculated on a Loan by
Loan basis, which could result in some Loans being treated as having more than
100 basis points of interest stripped off.
The Code, OID Regulations and judicial decisions provide no direct
guidance as to how the interest and original issue discount rules are to apply
to Stripped Securities and other Pass-Through Certificates. Under the method
described above for Pay-Through Securities (the "Cash Flow Bond Method"), a
prepayment assumption is used and periodic recalculations are made which take
into account with respect to each accrual period the effect of prepayments
during such period. However, the Code does not, absent Treasury regulations,
appear specifically to cover instruments such as the Stripped Securities which
technically represent ownership interests in the underlying Loans, rather than
being debt instruments "secured by" those loans. Nevertheless, it is believed
that the Cash Flow Bond Method is a reasonable method of reporting income for
such Securities, and it is expected that OID will be reported on that basis
unless otherwise specified in the related Prospectus Supplement. In applying the
calculation to Pass-Through Certificates, the Trustee will treat all payments to
be received by a holder with respect to the underlying Loans as payments on a
single installment obligation. The IRS could, however, assert that OID must be
calculated separately for each Loan underlying a Security.
Under certain circumstances, if the Loans prepay at a rate faster than the
Prepayment Assumption, the use of the Cash Flow Bond Method may accelerate a
holder's recognition of income. If, however, the Loans prepay at a rate slower
than the Prepayment Assumption, in some circumstances the use of this method may
decelerate a holder's recognition of income.
In the case of a Stripped Security that is an Interest Weighted Security,
the Trustee intends, absent contrary authority, to report income to Security
holders as OID, in the manner described above for Interest Weighted Securities.
Possible Alternative Characterizations. The characterizations of the
Stripped Securities described above are not the only possible interpretations of
the applicable Code provisions. Among other possibilities, the IRS could contend
that (i) in certain Series, each non-Interest Weighted Security is composed of
an unstripped undivided ownership interest in Loans and an installment
obligation consisting of stripped principal payments; (ii) the non-Interest
Weighted Securities are subject to the contingent payment provisions of the
Contingent Regulations; or (iii) each Interest Weighted Stripped Security is
composed of an unstripped undivided ownership interest in Loans and an
installment obligation consisting of stripped interest payments.
Given the variety of alternatives for treatment of the Stripped Securities
and the different federal income tax consequences that result from each
alternative, potential purchasers are urged to consult their own tax advisers
regarding the proper treatment of the Securities for federal income tax
purposes.
Character as Qualifying Loans. In the case of Stripped Securities, there
is no specific legal authority existing regarding whether the character of the
Securities, for federal income tax purposes, will be the same as the Loans. The
IRS could take the position that the Loans' character is not carried over to the
Securities in such circumstances. Pass-Through Certificates will be, and,
although the matter is not free from doubt, Stripped Securities should be
considered to represent "real estate assets" within the meaning of Section
856(c)(6)(B) 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; and interest income
attributable to the Securities should be considered to represent "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Section 856(c)(3)(B) of the Code. Reserves or
funds underlying the Securities may cause a proportionate reduction in the
above-described qualifying status categories of Securities.
85
<PAGE>
Sale or Exchange
Subject to the discussion below with respect to Trust Funds as to which a
partnership election is made, a holder's tax basis in its Security is the price
such holder pays for a Security, plus amounts of original issue or market
discount included in income and reduced by any payments received (other than
qualified stated interest payments) and any amortized premium. Gain or loss
recognized on a sale, exchange, or redemption of a Security, measured by the
difference between the amount realized and the Security's basis as so adjusted,
will generally be capital gain or loss, assuming that the Security is held as a
capital asset. In the case of a 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 Regular Interest 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 (ii) the amount of ordinary
income actually recognized by the holder with respect to such Regular Interest
Security. For taxable years beginning after December 31, 1992, the maximum tax
rate on ordinary income for individual taxpayers is 39.6% and the maximum tax
rate on long-term capital gains reported after December 31, 1990 for such
taxpayers is 28%. The maximum tax rate on both ordinary income and long-term
capital gains of corporate taxpayers is 35%.
Miscellaneous Tax Aspects
Backup Withholding. Subject to the discussion below with respect to Trust
Funds as to which a partnership election is made, a holder, other than a holder
of a REMIC Residual 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 OID 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 Foreign Persons
(as defined below) who provide appropriate ownership statements as to status as
a Foreign Person. 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
The term "United States Person" means a citizen or resident of the United
States, a corporation, partnership or other entity created or organized in or
under the laws of the United States or any political subdivision thereof, or an
estate whose income is subject to United States federal income tax regardless of
its source of income, or a trust if a court within the United States is able to
exercise primary supervision of the administration of the trust and one or more
United States fiduciaries have the authority to control all substantial
decisions of the trust. A "Foreign Person" is any person that is not a United
States Person.
Subject to the discussion below with respect to Trust Funds as to which a
partnership election is made, under the Code, 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 Foreign Person, 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. Upon
86
<PAGE>
receipt of appropriate ownership statements as to status as a Foreign Person,
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 Foreign Persons. Holders of
Pass-Through Certificates and Stripped Securities, including Ratio Strip
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. They will, however, generally be subject to the regular
United States income tax.
Payments to holders of Residual Interest Securities who are Foreign
Persons 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 Foreign Person 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 Person 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 Residential Securities--Excess
Inclusions."
Tax Characterization of the Trust Fund as a Partnership
In the opinion of Stradley, Ronon, Stevens & Young, LLP, special counsel
to the Depositor, a Trust Fund for which a partnership election is made will not
be an association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion is based on the assumption that the
terms of the Trust Agreement and related documents, including the requirement
that the Trust Fund file with the IRS a protective election to be classified as
a partnership, will be complied with, and on counsel's conclusions that (i) the
Trust Fund will be eligible to be classified as a partnership and (ii) the
nature of the income of the Trust Fund will exempt it from the rule that certain
publicly traded partnerships are taxable as corporations or the issuance of the
Securities has been structured as a private placement under an IRS safe harbor,
so that the Trust Fund will not be characterized as a publicly traded
partnership taxable as a corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, the Trust Fund would be subject to corporate income tax on its taxable
income. The Trust Fund's taxable income would include all its income, possibly
reduced by its interest expense on the Notes. Any such corporate income tax
could materially reduce cash available to make payments on the Notes and
distributions on the Certificates, and Certificateholders could be liable for
any such tax that is unpaid by the Trust Fund.
87
<PAGE>
Tax Consequences to Holders of the Notes
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Special counsel to the Depositor will, except
as otherwise provided in the related Prospectus Supplement, advise the Depositor
that the Notes will be classified as debt for federal income tax purposes. The
discussion below assumes this characterization of the Notes is correct.
OID, etc. The discussion below assumes that all payments on the Notes are
denominated in United States dollars, and that the Notes are not Stripped
Securities. Moreover, the discussion assumes that the interest formula for the
Notes meets the requirements for "qualified stated interest" under the OID
regulations, and that any OID on the Notes (i.e., any excess of the principal
amount of the Notes over their issue price) does not exceed a de minimis amount
(i.e., 0.25% of their principal amount multiplied by the number of full years
included in their term), all within the meaning of the OID regulations. If these
conditions are not satisfied with respect to any given series of Notes,
additional tax considerations with respect to such Notes will be disclosed in
the applicable Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with such
Noteholder's method of tax accounting. Under the OID regulations, a holder of a
Note issued with a de minimis amount of OID must include such OID in income, on
a pro rata basis, as principal payments are made on the Note. It is believed
that any prepayment premium paid as a result of a mandatory redemption will be
taxable as contingent interest when it becomes fixed and unconditionally
payable. A purchaser who buys a Note for more or less than its principal amount
will generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
A holder of a Note that has a fixed maturity date of not more than one
year from the issue date of such Note (a "Short-Term Note") may be subject to
special rules. An accrual basis holder of a Short-Term Note (and certain cash
method holders, including regulated investment companies, as set forth in
Section 1281 of the Code) generally would be required to report interest income
as interest accrues on a straight-line basis over the term of each interest
period. Other cash basis holders of a Short-Term Note would, in general, be
required to report interest income as interest is paid (or, if earlier, upon the
taxable disposition of the Short-Term Note). However, a cash basis holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
Sale or Other Disposition. If a Noteholder sells a Note, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the holder's
cost for the Note, increased by any market discount, acquisition discount, OID
and gain previously included by such Noteholder in income with respect to the
Note and decreased by the amount of bond premium (if any) previously amortized
and by the amount of principal payments previously received by such Noteholder
with respect to such Note. Any such gain or loss will be capital gain or loss if
the Note was held as a capital asset, except for gain representing accrued
interest and accrued market discount not previously included in income. Capital
losses generally may be used only to offset capital gains.
Foreign Holders. Interest payments made (or accrued) to a Noteholder who
is a Foreign Person generally will be considered "portfolio interest," and
generally will not be subject to United States federal income tax and
withholding tax, if the interest is not effectively connected with the conduct
of a trade or business within the United States by the Foreign Person and the
Foreign Person (i) is not actually or constructively a "10 percent shareholder"
88
<PAGE>
of the Trust Fund or the Seller (including a holder of 10% of the outstanding
Certificates) or a "controlled foreign corporation" with respect to which the
Trust Fund or the Seller is a "related person" within the meaning of the Code
and (ii) provides the Owner Trustee or other person who is otherwise required to
withhold United States tax with respect to the Notes with an appropriate
statement (on Form W-8 or a similar form), signed under penalties of perjury,
certifying that the Beneficial Owner of the Note is a Foreign Person and
providing the Foreign Person's name and address. If a Note is held through a
securities clearing organization or certain other financial institutions, the
organization or institution may provide the relevant signed statement to the
withholding agent; in that case, however, the signed statement must be
accompanied by a Form W-8 or substitute form provided by the Foreign Person that
owns the Note. If such interest is not portfolio interest, then it will be
subject to United States federal income and withholding tax at a rate of 30
percent, unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a Foreign Person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the Foreign Person and (ii) in the case of an individual Foreign
Person, the Foreign Person is not present in the United States for 183 days or
more in the taxable year.
Backup Withholding. Each holder of a Note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or Foreign Person who
provides certification as to status as a Foreign Person) will be required to
provide, under penalties of perjury, a certificate containing the holder's name,
address, correct federal taxpayer identification number and a statement that the
holder is not subject to backup withholding. Should a nonexempt Noteholder fail
to provide the required certification, the Trust Fund will be required to
withhold 31 percent of the amount otherwise payable to the holder, and remit the
withheld amount to the IRS as a credit against the holder's federal income tax
liability.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of special counsel to the Company, the IRS successfully asserted that one or
more of the Notes did not represent debt for federal income tax purposes, the
Notes might be treated as equity interests in the Trust Fund. If so treated, the
Trust Fund might be 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, and most likely in the view of special counsel to the
Depositor, the Trust Fund 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 certain tax-exempt entities (including pension
funds) would be "unrelated business taxable income," income to foreign holders
generally would be subject to United States tax and United States tax return
filing and withholding requirements, and individual holders might be subject to
certain limitations on their ability to deduct their share of the Trust Fund's
expenses.
Tax Consequences to Holders of the Certificates
Treatment of the Trust Fund as a Partnership. The Trust Fund and the
Servicer will agree, and the Certificateholders will agree by their purchase of
Certificates, to treat the Trust Fund as a partnership for purposes of federal
and state income tax, franchise tax and any other tax measured in whole or in
part by income, with the assets of the partnership being the assets held by the
Trust Fund, the partners of the partnership being the Certificateholders, and
the Notes being debt of the partnership. However, the proper characterization of
the arrangement involving the Trust Fund, the Certificates, the Notes, the Trust
Fund 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 Trust Fund. 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.
89
<PAGE>
OID, etc. The following discussion assumes that all payments on the
Certificates are denominated in United States dollars, none of the Certificates
are Stripped Securities, and that a Series of Securities includes a single class
of Certificates. If these conditions are not satisfied with respect to any given
Series of Certificates, additional tax considerations with respect to such
Certificates will be disclosed in the applicable Prospectus Supplement.
Partnership Taxation. As a partnership, the Trust Fund will not be subject
to federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust Fund. The Trust Fund'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 Trust Fund's deductions will
consist primarily of interest accruing with respect to the Notes, servicing and
other fees, and losses or deductions upon collection or disposition of Loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust Fund for each month equal to the sum of (i) the interest that accrues on
the Certificates in accordance with their terms for such month, including
interest accruing at the Pass-Through Rate for such month and interest on
amounts previously due on the Certificates but not yet distributed; (ii) any
Trust Fund 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 Trust
Fund 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
Trust Fund will be allocated to the Company. Based on the economic arrangement
of the parties, this approach for allocating Trust Fund income should be
permissible under applicable Treasury regulations, although no assurance can be
given that the IRS would not require a greater amount of income to be allocated
to Certificateholders. Moreover, even under the foregoing method of allocation,
Certificateholders may be allocated income equal to the entire Pass-Through Rate
plus the other items described above even though the Trust Fund might not have
sufficient cash to make current cash distributions of such amount. Thus, cash
basis holders will in effect be required to report income from the Certificates
on the accrual basis and Certificateholders may become liable for taxes on Trust
Fund income even if they have not received cash from the Trust Fund to pay such
taxes. In addition, because tax allocations and tax reporting will be done on a
uniform basis for all Certificateholders but Certificateholders may be
purchasing Certificates at different times and at different prices,
Certificateholders may be required to report on their tax returns taxable income
that is greater or less than the amount reported to them by the Trust Fund.
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 to the extent that
such Certificateholder's share of the taxable income is derived from, or on
account of, debt financed securities. The Notes will constitute acquisition
indebtedness of the Trust Fund for this purpose under Code Section 514.
An individual taxpayer's share of expenses of the Trust Fund (including
fees to the Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual in whole or in
part and might result in such holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to such holder over the life of
the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Loan, the Trust Fund
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Loans were not issued with
OID, and, therefore, the Trust Fund should not have OID income. However, the
purchase price paid by the Trust Fund for the Loans may be
90
<PAGE>
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 Trust Fund will make this calculation
on an aggregate basis, but might be required to recompute it on a Loan by Loan
basis.)
If the Trust Fund acquires the Loans at a market discount or premium, the
Trust Fund will elect to include any such discount in income currently as it
accrues over the life of the 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 Trust Fund
will be deemed to terminate for federal income tax purposes if 50% or more of
the capital and profits interests in the Trust Fund are sold or exchanged within
a 12-month period. If such a termination occurs, the Trust Fund will be
considered to distribute its assets to the partners, who would then be treated
as recontributing those assets to the Trust Fund as a new partnership. The Trust
Fund will not comply with certain technical requirements that might apply when
such a constructive termination occurs. As a result, the Trust Fund may be
subject to certain tax penalties and may incur additional expenses if it is
required to comply with those requirements. Furthermore, the Trust Fund might
not be able to comply due to lack of data.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
holder's cost increased by the holder's share of Trust Fund income (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 Trust Fund. A holder acquiring Certificates
at different prices may be required to maintain a single aggregate adjusted tax
basis in such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the Certificates
sold (rather than maintaining a separate tax basis in each Certificate for
purposes of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's share
of unrecognized accrued market discount on the Loans would generally be treated
as ordinary income to the holder and would give rise to special tax reporting
requirements. The Trust Fund does not expect to have any other assets that would
give rise to such special reporting requirements. Thus, to avoid those special
reporting requirements, the Trust Fund will elect to include market discount in
income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificateholders
in proportion to the principal amount of Certificates owned by them as of the
close of the last day of such month. As a result, a holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the Certificateholders. The Trust
Fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust Fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the
91
<PAGE>
Trust Fund were to file an election under Section 754 of the Code. In order to
avoid the administrative complexities that would be involved in keeping accurate
accounting records, as well as potentially onerous information reporting
requirements, the Trust Fund will not make such election. As a result,
Certificateholders might be allocated a greater or lesser amount of Trust Fund
income than would be appropriate based on their own purchase price for
Certificates.
Administrative Matters. The Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust Fund will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust Fund and will report each Certificateholder's allocable share of items of
Trust Fund income and expense to holders and the IRS on Schedule K-1. The Trust
Fund will provide the Schedule K-l information to nominees that fail to provide
the Trust Fund with the information statement described below and such nominees
will be required to forward such information to the Beneficial Owners of the
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Trust Fund or be subject to penalties unless
the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust Fund
with a statement containing certain information on the nominee, the Beneficial
Owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
Beneficial Owner (a) the name, address and identification number of such person,
(b) 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 (c) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust Fund information
as to themselves and their ownership of Certificates. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such information statement to the Trust Fund. The information referred to above
for any calendar year must be furnished to the Trust Fund on or before the
following January 31. Nominees, brokers and financial institutions that fail to
provide the Trust Fund with the information described above may be subject to
penalties.
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 Trust Fund by the appropriate taxing authorities
could result in an adjustment of the returns of the Certificateholders, and,
under certain circumstances, a Certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the Trust Fund. An
adjustment could also result in an audit of a Certificateholder's returns and
adjustments of items not related to the income and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust Fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to Foreign
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 Trust Fund would be engaged in a trade or business in the United States
for such purposes, the Trust Fund will withhold as if it were so engaged in
order to protect the Trust Fund from possible adverse consequences of a failure
to withhold. The Trust Fund expects to withhold on the portion of its taxable
income that is allocable to Certificateholders who are not Foreign Persons
pursuant to Section 1446 of the Code, as if such income were effectively
connected to a United States trade or business, at a rate of 35% for holders
that are Foreign Persons taxable as corporations and 39.6% for all other holders
who are Foreign Persons. Subsequent adoption of Treasury regulations or the
issuance of other administrative pronouncements may require the Trust Fund to
change its withholding procedures. In determining a holder's withholding status,
the Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the holder's
certification of foreign status signed under penalties of perjury.
92
<PAGE>
Each holder who is a Foreign Person might be required to file a United
States individual or corporate income tax return (including, in the case of a
corporation, the branch profits tax) on its share of the Trust Fund's income.
Each holder who is a Foreign Person must obtain a taxpayer identification number
from the IRS and submit that number to the Trust Fund on Form W-8 in order to
assure appropriate crediting of the taxes withheld. A holder who is a Foreign
Person generally would be entitled to file with the IRS a claim for refund with
respect to taxes withheld by the Trust Fund taking the position that no taxes
were due because the Trust Fund was not engaged in a United States 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 Trust
Fund. If these interest payments are properly characterized as guaranteed
payments, then the interest will not be considered "portfolio interest." As a
result, Certificateholders will be subject to United States federal income tax
and withholding tax at a rate of 30 percent, unless reduced or eliminated
pursuant to an applicable treaty. In such case, a holder who is a Foreign Person
would only be entitled to claim a refund for that portion of the taxes in excess
of the taxes that should be withheld with respect to the guaranteed payments.
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.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Federal
Income Tax Consequences," 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 following describes certain considerations under ERISA and the Code,
which apply only to Securities of a Series that are not divided into subclasses.
If Securities are divided into subclasses the related Prospectus Supplement will
contain information concerning considerations relating to ERISA and the Code
that are applicable to such Securities.
ERISA imposes requirements on employee benefit plans (and on certain other
retirement plans and arrangements, including individual retirement accounts and
annuities, Keogh plans and collective investment funds and separate accounts in
which such plans, accounts or arrangements are invested) (collectively, "Plans")
subject to ERISA and on persons who are fiduciaries with respect to such Plans.
Generally, ERISA applies to investments made by Plans. Among other things, ERISA
requires that the assets of Plans be held in trust and that the trustee, or
other duly authorized fiduciary, have exclusive authority and discretion to
manage and control the assets of such Plans. ERISA also imposes certain duties
on persons who are fiduciaries of Plans. Under ERISA, any person who exercises
any authority or control respecting the management or disposition of the assets
of a Plan is considered to be a fiduciary of such Plan (subject to certain
exceptions not here relevant). Certain employee benefit plans, such as
governmental plans (as defined in ERISA Section 3(32)) and, if no election has
been made under Section 410(d) of the Code, church plans (as defined in ERISA
Section 3(33)), are not subject to ERISA requirements. Accordingly, assets of
such plans may be invested in Securities without regard to the ERISA
considerations described above and below, subject to the provisions of
applicable state law. Any such plan which is qualified and exempt from taxation
under Code Sections 401(a) and 501(a), however, is subject to the prohibited
transaction rules set forth in Code Section 503.
On November 13, 1986, the United States Department of Labor (the "DOL")
issued final regulations concerning the definition of what constitutes the
assets of a Plan. (Labor Reg. Section 2510.3-101) Under this regulation, the
underlying assets and properties of corporations, partnerships and certain other
entities in which a
93
<PAGE>
Plan makes an "equity" investment could be deemed for purposes of ERISA to be
assets of the investing Plan in certain circumstances. However, the regulation
provides that, generally, the assets of a corporation or partnership in which a
Plan invests will not be deemed for purposes of ERISA to be assets of such Plan
if the equity interest acquired by the investing Plan is a publicly-offered
security. A publicly-offered security, as defined in the Labor Reg. Section
2510.3-101, is a security that is widely held, freely transferable and
registered under the Exchange Act.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA prohibits a broad range of transactions
involving Plan assets and persons ("Parties in Interest") having certain
specified relationships to a Plan and imposes additional prohibitions where
Parties in Interest are fiduciaries with respect to such Plan. Because the Loans
may be deemed Plan assets of each Plan that purchases Securities, an investment
in the Securities by a Plan might be a prohibited transaction under ERISA
Sections 406 and 407 and subject to an excise tax under Code Section 4975 unless
a statutory or administrative exemption applies.
In Prohibited Transaction Exemption 83-1 ("PTE 83-1"), which amended
Prohibited Transaction Exemption 81-7, the DOL exempted from ERISA's prohibited
transaction rules certain transactions relating to the operation of residential
mortgage pool investment trusts and the purchase, sale and holding of "mortgage
pool pass-through certificates" in the initial issuance of such certificates.
PTE 83-1 permits, subject to certain conditions, transactions which might
otherwise be prohibited between Plans and Parties in Interest with respect to
those Plans related to the origination, maintenance and termination of mortgage
pools consisting of mortgage loans secured by first or second mortgages or deeds
of trust on single-family residential property, and the acquisition and holding
of certain mortgage pool pass-through certificates representing an interest in
such mortgage pools by Plans. If the general conditions (discussed below) of PTE
83-1 are satisfied, investments by a Plan in Securities that represent interests
in a Pool consisting of Loans ("Single Family Securities") will be exempt from
the prohibitions of ERISA Sections 406(a) and 407 (relating generally to
transactions with Parties in Interest who are not fiduciaries) if the Plan
purchases the Single Family Securities at no more than fair market value and
will be exempt from the prohibitions of ERISA Sections 406(b)(1) and (2)
(relating generally to transactions with fiduciaries) if, in addition, the
purchase is approved by an independent fiduciary, no sales commission is paid to
the pool sponsor, the Plan does not purchase more than 25% of all Single Family
Securities, and at least 50% of all Single Family Securities are purchased by
persons independent of the pool sponsor or pool trustee. PTE 83-1 does not
provide an exemption for transactions involving Subordinated Securities.
Accordingly, unless otherwise provided in the related Prospectus Supplement, no
transfer of a Subordinated Security or a Security which is not a Single Family
Security may be made to a Plan.
The discussion in this and the next succeeding paragraph applies only to
Single Family Securities. The Depositor believes that, for purposes of PTE 83-1,
the term "mortgage pass-through certificate" would include (i) Securities issued
in a Series consisting of only a single class of Securities; and (ii) Securities
issued in a Series in which there is only one class of such Securities; provided
that the Securities in the case of clause (i), or the Securities in the case of
clause (ii), evidence the beneficial ownership of both a specified percentage of
future interest payments (greater than 0%) and a specified percentage (greater
than 0%) of future principal payments on the Loans. It is not clear whether a
class of Securities that evidences the beneficial ownership in a Trust Fund
divided into Loan groups, beneficial ownership of a specified percentage of
interest payments only or principal payments only, or a notional amount of
either principal or interest payments, or a class of Securities entitled to
receive payments of interest and principal on the Loans only after payments to
other classes or after the occurrence of certain specified events would be a
"mortgage pass-through certificate" for purposes of PTE 83-1.
PTE 83-1 sets forth three general conditions which must be satisfied for
any transaction to be eligible for exemption: (i) the maintenance of a system of
insurance or other protection for the pooled mortgage loans and property
securing such loans, and for indemnifying Securityholders against reductions in
pass-through payments due to property damage or defaults in loan payments in an
amount not less than the greater of one percent of the aggregate principal
balance of all covered pooled mortgage loans or the principal balance of the
largest covered pooled mortgage loan; (ii) the existence of a pool trustee who
is not an affiliate of the pool sponsor; and (iii) a limitation on the amount of
the payment retained by the pool sponsor, together with other funds inuring to
its benefit, to not more than adequate consideration for selling the mortgage
loans plus reasonable compensation for
94
<PAGE>
services provided by the pool sponsor to the Pool. The Depositor believes that
the first general condition referred to above will be satisfied with respect to
the Securities in a Series issued without a subordination feature, or the
Securities only in a Series issued with a subordination feature, provided that
the subordination and Reserve Account, subordination by shifting of interests,
the pool insurance or other form of credit enhancement described under "Credit
Enhancement" herein (such subordination, pool insurance or other form of credit
enhancement being the system of insurance or other protection referred to above)
with respect to a Series of Securities is maintained in an amount not less than
the greater of one percent of the aggregate principal balance of the Loans or
the principal balance of the largest Loan. See "Description of the Securities."
In the absence of a ruling that the system of insurance or other protection with
respect to a Series of Securities satisfies the first general condition referred
to above, there can be no assurance that these features will be so viewed by the
DOL. The Trustee will not be affiliated with the Depositor.
Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold Single Family Securities
must make its own determination as to whether the first and third general
conditions, and the specific conditions described briefly in the preceding
paragraph, of PTE 83-1 have been satisfied, or as to the availability of any
other prohibited transaction exemptions. Each Plan fiduciary should also
determine whether, under the general fiduciary standards of investment prudence
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.
The DOL has granted to certain underwriters individual administrative
exemptions (the "Underwriter Exemptions") from certain of the prohibited
transaction rules of ERISA and the related excise tax provisions of Section 4975
of the Code with respect to the initial purchase, the holding and the subsequent
resale by Plans of certificates in pass-through trusts that consist of certain
receivables, loans and other obligations that meet the conditions and
requirements of the Underwriter Exemptions. The Underwriter Exemptions contain
several requirements, some of which differ from those in PTE 83-l. The
Underwriter Exemptions contain an expanded definition of "certificate" which
includes an interest which entitles the holder to pass-through payments of
principal, interest and/or other payments. The Underwriter Exemptions contain an
expanded definition of "trust" which permits the trust corpus to consist of
secured consumer receivables.
While each Underwriter Exemption is an individual exemption separately
granted to a specific underwriter, the terms and conditions which generally
apply to the Underwriter Exemptions are substantially the following:
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as favorable
to the Plan as they would be in an arm's-length transaction with an
unrelated party;
(2) the rights and interest evidenced by the certificates acquired
by the Plan are not subordinated to the rights and interests evidenced by
other certificates of the trust fund;
(3) the certificates required by the Plan have received a rating at
the time of such acquisition that is one of the three highest generic
rating categories from Standard & Poor's Ratings Group, a Division of The
McGraw-Hill Companies ("S&P"), Moody's Investors Service, Inc.
("Moody's"), Duff & Phelps Credit Rating Co. ("DCR") or Fitch Investors
Service, Inc. ("Fitch");
(4) the trustee must not be an affiliate of any other member of the
Restricted Group as defined below;
(5) the sum of all payments made to and retained by the underwriters
in connection with the distribution of the certificates represents not
more than reasonable compensation for underwriting the certificates; the
sum of all payments made to and retained by the seller pursuant to the
assignment of the loans to the trust fund represents not more than the
fair market value of such loans; the sum of all payments made to and
retained by the servicer and any other servicer represents not more than
reasonable
95
<PAGE>
compensation for such person's services under the agreement pursuant to
which the loans are pooled and reimbursements of such person's reasonable
expenses in connection therewith; and
(6) the Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Commission
under the Securities Act.
The Underwriter Exemptions provide that the term "trust" does not include
any investment pool unless, among other things, it meets the following
requirements:
(i) the corpus of the trust fund must consist solely of assets of the type
that have been included in other investment pools;
(ii) certificates in such other investment pools must have been rated in
one of the three highest rating categories of S&P, Moody's, Fitch or DCR for at
least one year prior to the Plan's acquisition of certificates; and
(iii) 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 certificates.
Moreover, the Underwriter Exemptions generally provide relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire certificates in a trust as to which
the fiduciary (or its affiliate) is an obligor on the receivables held in the
trust provided that, among other requirements, (i) in the case of an acquisition
in connection with the initial issuance of certificates, at least fifty percent
(50%) of each class of certificates in which Plans have invested is acquired by
persons independent of the Restricted Group; (ii) such fiduciary (or its
affiliate) is an obligor with respect to five percent (5%) or less of the fair
market value of the obligations contained in the trust; (iii) the Plan's
investment in certificates of any class does not exceed twenty-five percent
(25%) of all of the certificates of that class 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 with respect to which such
person is a fiduciary is invested in certificates representing an interest in
one or more trusts containing assets sold or serviced by the same entity. The
Underwriter Exemptions do not apply to Plans sponsored by the Seller, the
related Underwriter, the Trustee, the Servicer, any insurer with respect to the
Loans, any obligor with respect to Loans included in the Trust Fund constituting
more than five percent (5%) of the aggregate unamortized principal balance of
the assets in the Trust Fund, or any affiliate of such parties (the "Restricted
Group").
The Prospectus Supplement for each Series of Securities will indicate the
classes of Securities, if any, offered thereby as to which it is expected that
an Underwriter Exemption will apply.
Any Plan fiduciary which proposes to cause a Plan to purchase Securities
should consult with their counsel concerning the impact of ERISA and the Code,
the applicability of PTE 83-1 and the Underwriter Exemptions, and the potential
consequences in their specific circumstances, prior to making such investment.
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
The related Prospectus Supplement for each series of Securities will
specify which, if any, of the classes of Securities offered thereby constitute
"mortgage related securities" for purposes of SMMEA. Classes of Securities that
qualify as "mortgage related securities" will be legal investments for persons,
trusts, corporations, partnerships, associations, business trusts, and business
entities (including depository institutions, life insurance companies and
pension funds) created pursuant to or existing under the laws of the United
States or of any state (including the District of Columbia and Puerto Rico)
whose authorized investments are subject to state regulations to the same extent
as, under applicable law, obligations issued by or guaranteed as to principal
and interest by the United States or any such entities. Under SMMEA, if a state
enacts legislation prior to October 4, 1991 specifically limiting the
96
<PAGE>
legal investment authority of any such entities with respect to "mortgage
related securities," securities will constitute legal investments for entities
subject to such legislation only to the extent provided therein. Approximately
twenty-one states adopted such legislation prior to the October 4, 1991
deadline. SMMEA provides, however, that in no event will the enactment of any
such legislation affect the validity of any contractual commitment to purchase,
hold or invest in securities, or require the sale or other disposition of
securities, so long as such contractual commitment was made or such securities
were acquired prior to the enactment of such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in Securities
without limitations as to the percentage of their assets represented thereby,
federal credit unions may invest in mortgage related securities, and national
banks may purchase securities for their own account without regard to the
limitations generally applicable to investment securities set forth in 12 U.S.C.
24 (Seventh), subject in each case to such regulations as the applicable federal
authority may prescribe. In this connection, federal credit unions should review
the National Credit Union Administration ("NCUA") Letter to Credit Unions No.
96, as modified by Letter to Credit Unions No. 108, which includes guidelines to
assist federal credit unions in making investment decisions for mortgage related
securities and the NCUA's regulation "Investment and Deposit Activities" (12
C.F.R. Part 703), which sets forth certain restrictions on investment by federal
credit unions in mortgage related securities (in each case whether or not the
class of Securities under consideration for purchase constituted a "mortgage
related security").
All depository institutions considering an investment in the Securities
(whether or not the class of Securities under consideration for purchase
constitutes a "mortgage related security") should review the Federal Financial
Institutions Examination Council's Supervisory Policy Statement on the
Securities Activities (to the extent adopted by their respective regulators)
(the "Policy Statement") setting forth, in relevant part, certain securities
trading and sales practices deemed unsuitable for an institution's investment
portfolio, and guidelines for (and restrictions on) investing in mortgage
derivative products, including "mortgage related securities," which are
"high-risk mortgage securities" as defined in the Policy Statement. According to
the Policy Statement, such "high-risk mortgage securities" include securities
such as Securities not entitled to distributions allocated to principal or
interest, or Subordinated Securities. Under the Policy Statement, it is the
responsibility of each depository institution to determine, prior to purchase
(and at stated intervals thereafter), whether a particular mortgage derivative
product is a "high-risk mortgage security," and whether the purchase (or
retention) of such a product would be consistent with the Policy Statement.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to "prudent investor" provisions which may restrict or prohibit investment in
securities which are not "interest bearing" or "income paying."
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Securities or to purchase
Securities representing more than a specified percentage of the investor's
assets. Investors should consult their own legal advisors in determining whether
and to what extent the Securities constitute legal investments for such
investors.
METHOD OF DISTRIBUTION
Securities are being offered hereby in Series from time to time through
any of the following methods:
1. By negotiated firm commitment underwriting and public reoffering
by underwriters;
2. By agency placements through one or more placement agents
primarily with institutional investors and dealers; and
3. By placement directly by the Depositor with institutional
investors.
97
<PAGE>
A Prospectus Supplement will be prepared for each Series which will
describe the method of offering being used for that Series and will set forth
the identity of any underwriters thereof and either the price at which such
Series is being offered, the nature and amount of any underwriting discounts or
additional compensation to such underwriters and the proceeds of the offering to
the Depositor, or the method by which the price at which the underwriters will
sell the Securities will be determined. Each Prospectus Supplement for an
underwritten offering will also contain information regarding the nature of the
underwriters' obligations, any material relationship between the Depositor and
any underwriter and, where appropriate, information regarding any discounts or
concessions to be allowed or reallowed to dealers or others and any arrangements
to stabilize the market for the Securities so offered. In firm commitment
underwritten offerings, the underwriters will be obligated to purchase all of
the Securities of such Series if any such Securities are purchased. Securities
may be acquired by the underwriters for their own accounts and may be resold
from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices determined
at the time of sale.
Underwriters and agents may be entitled under agreements entered into with
the Depositor to indemnification by the Depositor against certain civil
liabilities, including liabilities under the Securities Act, or to contribution
with respect to payments which such underwriters or agents may be required to
make in respect thereof.
If a Series is offered other than through underwriters, the Prospectus
Supplement relating thereto will contain information regarding the nature of
such offering and any agreements to be entered into between the Depositor and
purchasers of Securities of such Series.
LEGAL MATTERS
The validity of the Securities of each Series, including certain federal
income tax consequences with respect thereto, will be passed upon for the
Depositor by Stradley, Ronon, Stevens & Young, LLP, 2600 One Commerce Square,
Philadelphia, PA 19103.
RATING
It is a condition to the issuance of the Securities of each Series offered
hereby and by the related Prospectus Supplement that they shall have been rated
in one of the four highest rating categories by the nationally recognized
statistical rating agency or agencies (each, a "Rating Agency") specified in the
related Prospectus Supplement.
Any such rating would be based on, among other things, the adequacy of the
value of the Trust Fund Assets and any credit enhancement with respect to such
class and will reflect such Rating Agency's assessment solely of the likelihood
that holders of a class of Securities of such class will receive payments 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 related Loans will be made, the degree to which the rate of such
prepayments might differ from that originally anticipated or the likelihood of
early optional termination of the Series of Securities. Such rating should not
be deemed a recommendation to purchase, hold or sell Securities, inasmuch as it
does not address market price or suitability for a particular investor. Each
security rating should be evaluated independently of any other security rating.
Such rating will not address the possibility that prepayment at higher or lower
rates than anticipated by an investor may cause such investor to experience a
lower than anticipated yield or that an investor purchasing a Security at a
significant premium might fail to recoup its initial investment under certain
prepayment scenarios.
There is also no assurance that any such rating will remain in effect for
any given period of time or that it may not be lowered or withdrawn entirely by
the Rating Agency in the future if in its judgment circumstances in the future
so warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of the Trust Fund Assets or any credit enhancement with
respect to a Series, such rating might also be lowered or withdrawn among other
reasons, because of an adverse change in the financial or other condition of a
credit enhancement provider or a change in the rating of such credit enhancement
provider's long term debt.
The amount, type and nature of credit enhancement, if any, established
with respect to a Series of Securities will be determined on the basis of
criteria established by each Rating Agency rating classes of such Series. Such
criteria are sometimes based upon an actuarial analysis of the behavior of
mortgage loans in a larger group. Such
98
<PAGE>
analysis is often the basis upon which each Rating Agency determines the amount
of credit enhancement required with respect to each such class. There can be no
assurance that the historical data supporting any such actuarial analysis will
accurately reflect future experience nor any assurance that the data derived
from a large pool of mortgage loans accurately predicts the delinquency,
foreclosure or loss experience of any particular pool of Loans. No assurance can
be given that values of any Properties have remained or will remain at their
levels on the respective dates of origination of the related Loans. If the
residential real estate markets should experience an overall decline in property
values such that the outstanding principal balances of the Loans in a particular
Trust Fund and any secondary financing on the related Properties become equal to
or greater than the value of the Properties, the rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. In additional, adverse economic conditions (which
may or may not affect real property values) may affect the timely payment by
mortgagors of scheduled payments of principal and interest on the Loans and,
accordingly, the rates of delinquencies, foreclosures and losses with respect to
any Trust Fund. To the extent that such losses are not covered by credit
enhancement, such losses will be borne, at least in part, by the holders of one
or more classes of the Securities of the related Series.
99
<PAGE>
INDEX OF DEFINED TERMS
Term Page
Accretion Directed Class....................................................36
Accrual Class...............................................................38
Accrual Securities..........................................................33
Advance......................................................................9
Advances....................................................................34
Agreement...................................................................21
Amortizable Bond Premium Regulations........................................79
APR.....................................................................24, 51
Available Funds.............................................................33
Balloon Payment.............................................................23
Bank........................................................................25
Bankruptcy Code..............................................................8
BanPonce....................................................................25
Belgian Cooperative.........................................................43
Beneficial Owners...........................................................41
BIF.........................................................................52
Book-Entry Securities.......................................................41
Calculation Agent...........................................................39
Capitalized Interest Account................................................55
Cash Flow Bond Method.......................................................85
CEDEL.......................................................................41
CEDEL Participants..........................................................42
CERCLA..................................................................17, 65
Certificateholders..........................................................19
Certificates..........................................................1, 4, 31
Claimable Amount............................................................73
Class Security Balance......................................................33
Closing Date................................................................19
Code....................................................................10, 74
Collateral Value............................................................24
Combined Loan-to-Value Ratio................................................24
Commission .................................................................2
Companion Class.............................................................37
Component Class.............................................................36
Contingent Regulations......................................................76
Contracts...................................................................68
Cut-off Date.............................................................4, 21
Cut-off Date Principal Balance..............................................31
DCR.........................................................................96
Debt Securities.............................................................75
Debt-to-Income Ratio........................................................26
Definitive Security.........................................................41
Depositor................................................................1, 25
Detailed Description........................................................22
Disqualified Organization...................................................82
Distribution Date............................................................6
DOL.........................................................................94
DTC.....................................................................18, 41
DTC Participants........................................................18, 42
EPA.........................................................................65
Equity One..................................................................25
100
<PAGE>
Equity One Standards........................................................26
ERISA.......................................................................12
Euroclear...................................................................41
Euroclear Operator..........................................................43
Euroclear Participants......................................................42
European Depositaries.......................................................41
Events of Default...........................................................59
Excess Servicing............................................................85
Exchange Act.................................................................2
FDIC........................................................................25
Federal Reserve.............................................................25
FHA..........................................................................9
FHLMC.......................................................................58
Financial Intermediary......................................................41
Fitch.......................................................................96
Fixed Rate Class............................................................38
Floating Rate Class.........................................................38
FNMA........................................................................59
Foreign Person..............................................................87
Full Doc....................................................................27
Funding Period..............................................................19
Garn-St Germain Act.........................................................67
HIC Secured Party...........................................................68
Holder in Due Course Rules..................................................17
Home Improvement Contracts............................................1, 5, 22
Home Improvements.....................................................1, 5, 22
HUD.........................................................................69
Indenture...................................................................31
Insurance Proceeds..........................................................53
Insured Expenses............................................................53
Interest Only Class.........................................................38
Interest Weighted Securities................................................77
Inverse Floating Rate Class.................................................38
IRS.........................................................................76
L/C Bank.................................................................8, 45
L/C Percentage...........................................................8, 45
Liquidation Expenses........................................................53
Liquidation Proceeds........................................................53
Loan Indices................................................................40
Loan Rate................................................................6, 23
Loan-to-Value Ratio.........................................................24
Loans........................................................................1
Lockout Periods.............................................................23
Mark-to-Market Regulations..................................................83
Master Servicing Agreement..................................................21
Mixed Use Loan........................................................1, 4, 22
Moody's.....................................................................96
Morgan......................................................................43
Mortgage....................................................................51
Mortgage Loans........................................................1, 4, 22
Mortgaged Properties........................................................23
NCUA........................................................................97
NIV.........................................................................27
Noteholders ................................................................19
Notes.................................................................1, 4, 31
Notional Amount Class.......................................................37
OID.....................................................................10, 75
101
<PAGE>
OID Regulations.............................................................75
OTS.........................................................................25
PAC.........................................................................37
Partial Accrual Class.......................................................38
Parties in Interest.........................................................94
Pass-Through Certificates...................................................83
Pass-Through Rate............................................................6
Pay-Through Security........................................................76
Percentage Interests........................................................59
Permitted Investments.......................................................46
Planned Principal Class.....................................................37
Plans.......................................................................94
Policy Statement............................................................97
Pool.....................................................................4, 21
Pool Insurance Policy.......................................................47
Pool Insurer................................................................47
Pooling and Servicing Agreement.............................................31
Pre-Funded Amount...........................................................19
Pre-Funding Account......................................................4, 19
Prepayment Assumption.......................................................76
Primary Mortgage Insurance Policy...........................................23
Prime Rate..................................................................40
Principal Only Class........................................................38
Principal Prepayments.......................................................34
Properties..................................................................23
Property Improvement Loans..................................................71
PTE 83-1....................................................................94
Purchase Agreement..........................................................21
Purchase Price..............................................................30
Rating Agency...............................................................98
Ratio Strip Securities......................................................84
RCRA........................................................................65
Record Date ................................................................32
Reference Banks.............................................................39
Refinance Loan..............................................................24
Regular Interest Securities.................................................75
Relevant Depositary.........................................................41
Relief Act..................................................................70
REMIC....................................................................1, 74
Reserve Account..........................................................7, 33
Reserve Interest Rate.......................................................39
Residential Loan......................................................1, 4, 22
Residual Interest Security..................................................81
Restricted Group............................................................96
Retained Interest...........................................................31
Revolving Credit Line Loans...........................................1, 4, 22
Riegle Act..................................................................17
Rules.......................................................................41
S&P.........................................................................96
SAIF........................................................................52
Scheduled Principal Class...................................................37
Secured Creditor Exclusion..................................................65
Securities............................................................1, 4, 31
Securities Act...............................................................2
Securities Index............................................................40
Security Account............................................................52
Security Register...........................................................32
102
<PAGE>
Securityholders..........................................................1, 41
Seller.......................................................................1
Sellers.....................................................................21
Senior Securities........................................................5, 44
Sequential Pay Class........................................................37
Series.......................................................................1
Servicer.....................................................................4
Servicing Fee...........................................................58, 84
Short-Term Note.............................................................88
Single Family Properties....................................................23
Single Family Securities....................................................94
SMMEA...................................................................10, 97
Strip Class ................................................................37
Stripped Securities.........................................................83
Sub-Servicer.................................................................9
Sub-Servicers...............................................................21
Sub-Servicing Agreement.....................................................55
Subordinated Securities......................................................5
Subsequent Loans............................................................19
Support Class...............................................................37
TAC.........................................................................38
Targeted Principal Class....................................................38
Terms and Conditions........................................................43
Thrift Institutions.........................................................82
TIN.........................................................................86
Title I Loans...............................................................71
Title I Program.............................................................70
Title V.................................................................68, 69
Treasury....................................................................11
Treasury Index..............................................................40
Trust Agreement.........................................................21, 31
Trust Fund...............................................................1, 31
Trust Fund Assets.....................................................1, 4, 21
Trustee..................................................................4, 31
UCC.........................................................................68
Underwriter Exemptions......................................................95
United States Person........................................................87
VA...........................................................................9
VA Guaranty.................................................................57
Variable Rate Class.........................................................38
103
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution*
The following table sets forth the estimated expenses in connection with
the issuance and distribution of the Securities being registered under this
Registration Statement, other than underwriting discounts and commissions:
SEC Registration Fee............................................... $303.03
Printing and Engraving Expenses ................................... **
Legal Fees and Expenses............................................ **
Trustee Fees and Expenses.......................................... **
Accounting Fees and Expenses....................................... **
Blue Sky Fees and Expenses......................................... **
Rating Agency Fees................................................. **
Miscellaneous...................................................... **
=======
Total.............................................................. **
=======
- ----------
* All amounts except the SEC Registration Fee are estimates of expenses
incurred in connection with the issuance and distribution of a Series of
Securities in an aggregate principal amount assumed for these purposes to
be equal to $____________ of Securities registered hereby.
** To be completed by amendment.
Item 15. Indemnification of Directors and Officers.
Section 145 of the General Corporation Law of Delaware empowers a
corporation to indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation), by reason of the fact that he or she is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise. Depending on the character of the proceeding, a corporation may
indemnify against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred in connection with
such action, suit or proceeding if the person indemnified acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or
proceeding, had no cause to believe his or her conduct was unlawful. In the case
of an action by or in the right of the corporation, no indemnification may be
made in respect to any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to the extent that
the Court of Chancery or the court in which such action or suit was brought
shall determine that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper. Section 145
further provides that to the extent a director or officer of a corporation has
been successful in the defense of any action, suit or proceeding referred to
above or in the defense of any claim, issue or matter therein, he or she shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him or her in connection therewith.
The Certificate of Incorporation of the Registrant provides, in effect,
that, to the extent and under the circumstances permitted by Section 145 of the
General Corporation Law of Delaware, the Registrant shall indemnify any person
who was or is a party or is threatened to be made a party to any action, suit or
proceeding of the type
II-1
<PAGE>
described above by reason of the fact that he or she (i) is or was a director or
officer of the Registrant or (ii) is or was serving at the request of the
Registrant as a director or officer (or its equivalent) of another enterprise,
except as to any action, suit or proceeding brought by or on behalf of a
director or officer without prior approval of the Board of Directors of the
Registrant.
Item 16. Exhibits.
1.1 Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
4.1 Form of Pooling and Servicing Agreement.
5.1 Opinion of Stradley, Ronon, Stevens & Young, LLP as to legality of the
Securities.
8.1 Opinion of Stradley, Ronon, Stevens & Young, LLP as to certain tax
matters (included in Exhibit 5.1).
23.1 Consent of Stradley, Ronon, Stevens & Young, LLP (included in Exhibits
5.1 and 8.1 hereof).
24.1 Power of Attorney.
- --------------------------
Item 17. Undertakings.
(a) 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, as amended (the "Act");
(ii) To reflect in the prospectus any facts or events arising
after the effective date of this Registration Statement (or the most
recent post-effective amendment hereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in this Registration Statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more
than a 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective Registration Statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) of this section
do not apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed with or
furnished to the Commission by the Registrant pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 that are incorporated by reference in this
Registration Statement.
(2) That, for the purpose of determining any liability under the
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
II-2
<PAGE>
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Act, each filing of a Trust Fund's annual
report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act
of 1934 that is incorporated by reference in this Registration Statement 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.
(c) Insofar as indemnification for liabilities arising under the Act 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) 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 of 1939 in accordance
with the rules and regulations prescribed by the Commission under Section
305(b)(2) of the Trust Indenture Act of 1939.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that (i) it reasonably believes that the security rating
requirement of Transaction Requirement B.5 of Form S-3 will be met by the time
of sale of each Series of Securities to which this Registration Statement
relates and (ii) it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Wilmington, State of Delaware on the 3rd day of
April, 1997.
Equity One ABS, Inc.
By: /s/ Thomas J. Fitzpatrick
---------------------------
Thomas J. Fitzpatrick
President
Each person whose signature appears below hereby constitutes and appoints
Thomas J. Fitzpatrick and Dennis Kildea, and each of them, with full power to
act without the other, his or her true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for her or him and in her or
his name, place and stead in any and all capacities (until revoked in writing)
to sign all amendments (including post-effective amendments) to this
Registration Statement on Form S-3 of Equity One ABS, Inc., and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary fully to all
intents and purposes as she or he might or could do in person thereby ratifying
and confirming all that said attorneys-in-fact and agents or any of them, or
their or her or his substitute, may lawfully do or cause to be done, by virtue
hereof. Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Thomas J. Fitzpatrick
- ------------------------- Director and President
Thomas J. Fitzpatrick (Chief Executive Officer) April 3, 1997
/s/ Dennis Kildea
- ------------------------- Director, Vice President,
Dennis Kildea Treasurer and Assistant April 3, 1997
Secretary (Chief Financial/
Accounting Officer)
/s/ John N. Martella
- ------------------------- Director, Vice President,
John N. Martella Secretary and Assistant April 3, 1997
Treasurer
II-4
<PAGE>
/s/ George P. Warren, Jr.
- ------------------------- Director, Vice President
George P. Warren, Jr. and Assistant Secretary April 3, 1997
/s/ Joseph Corvaia
- ------------------------- Director
Joseph Corvaia April 3, 1997
II-5
<PAGE>
EXHIBIT INDEX
Exhibit Page
No. Description of Exhibit Number
- ------- ---------------------- ------
* 1.1 -- Form of Underwriting Agreement.
3.1 -- Certificate of Incorporation of the Registrant.
3.2 -- Bylaws of the Registrant.
4.1 -- Form of Pooling and Servicing Agreement.
* 5.1 -- Opinion of Stradley, Ronon, Stevens & Young, LLP as to
legality of the Securities.
* 8.1 -- Opinion of Stradley, Ronon, Stevens & Young, LLP as to
certain tax matters (included in Exhibit 5.1).
* 23.1 -- Consent of Stradley, Ronon, Stevens & Young, LLP (included in
Exhibits 5.1 and 8.1).
24.1 -- Power of Attorney (see Page II-4 and II-5).
- ----------
* To be filed by amendment.
CERTIFICATE OF INCORPORATION
OF
EQUITY ONE ABS, INC.
The undersigned, in order to form a corporation for the purposes
hereinafter stated, under and pursuant to the General Corporation Law of the
State of Delaware, as amended (the "GCL"), does hereby certify as follows:
FIRST: The name of the Corporation is EQUITY ONE ABS, INC. (the
"Corporation").
SECOND: The address of the Corporation's registered office in the
State of Delaware is 3411 Silverside Road, in the City of Wilmington,
County of New Castle. The name of the Corporation's registered agent at
such address is George P. Warren, Jr.
THIRD: The nature of the business or purposes to be conducted or
promoted by the Corporation is to engage solely in the following
activities, subject to applicable laws and regulations:
a. To acquire, purchase, own, hold, sell, assign, transfer,
pledge or otherwise dispose of:
(1) interests in (A) loan agreements, promissory notes or
other evidences of indebtedness (the "Mortgage Loans") secured by
mortgages, deeds of trust, pledge agreements or other security
devices creating first and/or subordinate liens on one- to
four-family residential properties, detached or semi-detached
one- to four-family dwelling units, townhouses, rowhouses,
individual condominium units, individual units in planned unit
developments, and certain other dwelling units (the "Single
Family Properties") or mixed use properties which include one- to
four-family residential dwelling units and space used for retail,
professional or other commercial uses (together with the Single
Family Properties, the "Properties"), (B) closed-end and/or
revolving home equity loans (the "Home Equity Loans") secured by
first and/or subordinate liens on Single Family Properties and/or
(C) home improvement sale contracts and installment sale
agreements (the "Home Improvement Contracts" and, together with
the Home Equity Loans and the Mortgage Loans, the "Loans") that
are either unsecured or secured primarily by subordinate liens on
Single Family Properties or by purchase
<PAGE>
money security interests in the home improvements financed
thereby;
(2) mortgage-backed securities insured and/or guaranteed as
to timely payment of interest and/or principal by the Government
National Mortgage Association, Federal National Mortgage
Association or Federal Home Loan Mortgage Corporation; and
(3) mortgage pass-through certificates, mortgage pay-through
notes, collateralized mortgage obligations and other asset-backed
securities and instruments issued by a trust (including a
business trust), a financial institution or other entity engaged
generally in the business of mortgage lending, a public agency or
instrumentality of a state, local or federal government, or a
limited purpose corporation engaged in the business of
establishing trusts and acquiring and selling residential loans
to such trusts and selling beneficial interests in such trusts.
b. To act as settlor or depositor of trusts formed under a trust
agreement, pooling and servicing agreement, master servicing
agreement, servicing agreement or other agreement to issue one or more
series (any of which series may be issued in one or more classes) of
trust certificates ("Certificates") representing interests in Loans
and/or to issue pursuant to an indenture or other agreement one or
more series (any of which series may be issued in one or more classes)
of bonds, notes or other evidences of indebtedness ("Debt
Obligations") collateralized by Loans and/or other property and to
enter into any other agreement in connection with the authorization,
issuance, sale and delivery of Certificates and/or Debt Obligations
(collectively, the "Securities").
c. To acquire, own, hold, pledge, sell, transfer, assign or
otherwise deal with Securities, including Securities representing a
senior interest in Loans ("Senior Interests"), representing a
subordinated interest in Loans ("Subordinated Interests") or a
residual interest in Loans ("Residual Interests").
d. To loan or invest or otherwise apply proceeds from Loans,
funds received in respect of Securities, Senior Interests,
Subordinated Interests or Residual Interests and any other income, as
determined by the Corporation's Board of Directors.
2
<PAGE>
e. To engage in any lawful act or activity and to exercise any
powers permitted to corporations organized under the GCL that are
incidental to and necessary or convenient for the accomplishment of
the foregoing purposes.
FOURTH: The total number of shares of all classes of capital
stock that the Corporation shall have authority to issue is 1,000
shares of common stock, and the par value of such shares shall be
$0.01 per share.
FIFTH: The name and mailing address of the sole incorporator is
as follows:
Gilbert B. Warren
103 Springer Building
3411 Silverside Road
Wilmington, DE 19810
SIXTH: The Corporation is to have perpetual existence.
SEVENTH: The following provisions are inserted for the management
of the business and the conduct of the affairs of the Corporation, and
for further definition, limitation and regulation of the powers of the
Corporation and of its directors and stockholders:
1. The business and affairs of the Corporation shall be
managed by or under the direction of the Board of Directors.
2. In furtherance and not in limitation of the powers
conferred by statute, the Board of Directors shall have
concurrent power with the stockholders to make, alter, amend,
change, add to or repeal the bylaws of the Corporation.
3. The number of directors of the Corporation shall
initially be five and thereafter shall be as from time to time
fixed by, or in the manner provided in, the bylaws of the
Corporation. Election of directors need not be by written ballot
unless the bylaws so provide.
4. At least one director of the Corporation will not be a
director, officer or employee of any direct or indirect parent of
the Corporation or of any affiliate of such parent.
5. In addition to the powers and authority hereinabove or by
statute expressly conferred upon
3
<PAGE>
them, the directors are hereby empowered to exercise all
such powers and do all such acts and things as may be exercised
or done by the Corporation, subject nevertheless to the
provisions of the GCL, this Certificate of Incorporation and the
bylaws of the Corporation; provided, however, that no bylaw
hereafter adopted by the stockholders shall invalidate any prior
act of the directors that would have been valid if such bylaw had
not been adopted. The Corporation's Board of Directors will duly
authorize all of the Corporation's actions.
6. The Corporation's funds and other assets will not be
commingled with those of any of its stockholders or of any direct
or indirect parent of the Corporation or of any affiliate of any
such parent.
7. The Corporation will maintain separate corporate records
and books of account from those of any of its stockholders or of
any direct or indirect parent of the Corporation or of any
affiliate of any such parent.
EIGHTH: The Corporation shall not issue, assume or guarantee any
debt securities unless such debt securities are acceptable to the
rating agencies that have rated any outstanding Securities and such
issuance, assumption or guarantee will not result in the downgrade or
withdrawal of the rating then assigned to any outstanding Securities
then rated by such rating agency.
NINTH: A director of the Corporation shall not in the absence of
fraud be disqualified by his office from dealing or contracting with
the Corporation either as a vendor, purchaser or otherwise, nor in the
absence of fraud shall a director of the Corporation be liable to
account to the Corporation for any profit realized by him from or
through any transaction or contract of the Corporation by reason of
the fact that he, or any firm of which he is a member, or any
corporation of which he is an officer, director or stockholder, was
interested in such transaction or contract if such transaction or
contract has been authorized, approved or ratified in the manner
provided in the GCL for authorization, approval or ratification of
transactions or contracts between the Corporation and one or more of
its directors or officers, or between the Corporation and any other
corporation, partnership, association or other organization in which
one or more of its directors or officers are directors or officers or
have a financial interest.
4
<PAGE>
TENTH: Whenever a compromise or arrangement is proposed between
the Corporation and its creditors or any class of them and/or between
the Corporation and its stockholders or any class of them, any court
of equitable jurisdiction within the State of Delaware may, on the
application in a summary way of the Corporation or of any creditor or
stockholder thereof or on the application of any receiver or receivers
appointed for the Corporation under the provisions of Section 291 of
the GCL or on the application of trustees in dissolution or of any
receiver or receivers appointed for the Corporation under the
provisions of Section 279 of the GCL, order a meeting of the creditors
or class of creditors and/or of the stockholders or class of
stockholders of the Corporation, as the case may be, to be summoned in
such manner as the said court directs. If a majority in number
representing three-fourths in value of the creditors or class of
creditors and/or of the stockholders or class of stockholders of the
Corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of the Corporation as a
consequence of such compromise or arrangement, the said compromise or
arrangement and the said reorganization shall, if sanctioned by the
court to which the said application has been made, be binding on all
the creditors or class of creditors and/or on all the stockholders or
class of stockholders of the Corporation, as the case may be, and also
on the Corporation.
ELEVENTH: No director shall be personally liable to the
Corporation or any of its stockholders for monetary damages for breach
of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii)
pursuant to Section 174 of the GCL or (iv) for any transaction from
which the director derived an improper personal benefit. Any repeal or
modification of this Article ELEVENTH by the stockholders of the
Corporation shall not adversely affect any right of protection of a
director of the Corporation existing at the time of such repeal or
modification with respect to acts or omissions occurring prior to such
repeal or modification.
TWELFTH: Notwithstanding any other provision of this Certificate
of Incorporation and any provision of law that otherwise so empowers
the Corporation, the Corporation, for so long as any rated Securities
remain outstanding, shall not:
(i) engage in any business or activity other than those set
forth in Article THIRD;
5
<PAGE>
(ii) dissolve or liquidate, in whole or in part; consolidate
or merge with or into any other entity or convey or transfer its
properties and assets substantially as an entirety to any entity,
unless:
(A) the entity (if other than the Corporation) formed
or surviving the consolidation or merger or which acquires
the properties and assets of the Corporation, is organized
and existing under the laws of the State of Delaware,
expressly assumes the due and punctual payment of, and all
obligations of the Corporation, and has a Certificate of
Incorporation containing provisions identical to the
provisions of Articles THIRD, SEVENTH, EIGHTH, TWELFTH and
SIXTEENTH of this Certificate of Incorporation;
(B) immediately after giving effect to the transaction,
no default or event of default has occurred and is
continuing under any indebtedness of the Corporation or any
agreements relating to such indebtedness; and
(C) the Corporation receives written confirmation from
each rating agency then rating any outstanding Securities
that such merger or consolidation will not result in the
downgrade or withdrawal of the rating then assigned to any
Securities then rated by such rating agency; and
(iii) without the affirmative vote of 100% of the members of
the Board of Directors of the Corporation, institute proceedings
to be adjudicated bankrupt or insolvent, or consent to the
institution of bankruptcy or insolvency proceedings against it,
or file a petition seeking or consent to reorganization or relief
under any applicable federal or state law relating to bankruptcy,
or consent to the appointment of a receiver, liquidator,
assignee, trustee, sequestrator (or other similar official) of
the Corporation or a substantial part of its property, or make
any assignment for the benefit of creditors, or admit in writing
its inability to pay its debts generally as they become due, or
dissolve, liquidate, consolidate, merge or sell all or
substantially all of the assets of the Corporation.
THIRTEENTH: The Board of Directors, by the affirmative vote of a
majority of the whole Board, and irrespective of any personal interest
of its members, shall have authority to provide reasonable
compensation of all
6
<PAGE>
directors for services, ordinary or extraordinary, to the
Corporation as directors, officers or otherwise.
FOURTEENTH: Meetings of stockholders and directors may be held
within or without the State of Delaware, as the bylaws of the
Corporation may provide. The books and records of the Corporation may
be kept (subject to any provision contained in the GCL) outside the
State of Delaware.
FIFTEENTH: Each person who is or was a director or officer of the
Corporation, and each person who serves or has served at the request
of the Corporation as a director or officer (or its equivalent) of
another enterprise, shall be indemnified by the Corporation to the
fullest extent authorized by the GCL as it may be in effect from time
to time, except as to any action, suit or proceeding brought by or on
behalf of a director or officer without prior approval of the Board of
Directors.
SIXTEENTH: The Corporation reserves the right to amend, alter,
change or repeal any provisions contained in this Certificate of
Incorporation, in the manner now or hereafter prescribed by statute,
and all rights conferred upon stockholders herein are granted subject
to this reservation; provided that no such amendment of Articles
THIRD, SEVENTH, EIGHTH, TWELFTH or SIXTEENTH shall be effective
without the Corporation having received confirmation from each rating
agency rating any outstanding Securities that such amendment shall not
result in the termination or lowering of the rating of such
Securities.
IN WITNESS WHEREOF, I the undersigned, being the sole
incorporator hereinbefore named, do hereby execute this Certificate of
Incorporation this 25th day of March, 1997.
/s/ Gilbert B. Warren
-------------------------------
Gilbert B. Warren
Sole Incorporator
7
BYLAWS
OF
EQUITY ONE ABS, INC.
(a Delaware corporation)
ARTICLE I
Stockholders
SECTION 1. Annual Meetings. The annual meeting of stockholders for the
election of directors and for the transaction of such other business as may
properly come before the meeting shall be held each year at such date and time,
within or without the State of Delaware, as the Board of Directors shall
determine.
SECTION 2. Special Meetings. Special meetings of stockholders for the
transaction of such business as may properly come before the meeting may be
called by order of the Board of Directors or by stockholders holding together at
least a majority of all the shares of the Corporation entitled to vote at the
meeting, and shall be held at such date and time, within or without the State of
Delaware, as may be specified by such order. Whenever the directors shall fail
to fix such place, the meeting shall be held at the principal executive office
of the Corporation.
SECTION 3. Notice of Meetings. Written notice of all meetings of the
stockholders shall be mailed or delivered to each stockholder not less than 10
nor more than 60 days prior to the meeting. Notice of any special meeting shall
state in general terms the purpose or purposes for which the meeting is to be
held.
SECTION 4. Stockholder Lists. The officer who has charge of the stock
ledger of the Corporation shall prepare and make, at least 10 days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, either at a place within the city where the meeting is
to be held, which place shall be specified in the notice of the meeting, or, if
not so specified, at the place where the meeting is to be held. The list shall
also be produced and kept at the time and place of the meeting during the whole
time thereof, and may be inspected by any stockholder who is present.
The stock ledger shall be the only evidence as to who are the
stockholders entitled to examine the stock ledger, the list required by this
section or the books of the Corporation, or to vote in person or by proxy at any
meeting of stockholders.
<PAGE>
SECTION 5. Quorum. Except as otherwise provided by law or the
Corporation's Certificate of Incorporation, a quorum for the transaction of
business at any meeting of stockholders shall consist of the holders of record
of a majority of the issued and outstanding shares of the capital stock of the
Corporation entitled to vote at the meeting, present in person or by proxy. At
all meetings of the stockholders at which a quorum is present, all matters,
except as otherwise provided by law or the Certificate of Incorporation, shall
be decided by the vote of the holders of a majority of the shares entitled to
vote thereat present in person or by proxy. If there be no such quorum, the
holders of a majority of such shares so present or represented may adjourn the
meeting from time to time, without further notice, until a quorum shall have
been obtained. When a quorum is once present it is not broken by the subsequent
withdrawal of any stockholder.
SECTION 6. Organization. Meetings of stockholders shall be presided over
by the Chairman, if any, or if none or in the Chairman's absence the Vice
Chairman, if any, or if none or in the Vice Chairman's absence the President, if
any, or if none or in the President's absence a Vice President, or, if none of
the foregoing is present, by a chairman to be chosen by the stockholders
entitled to vote who are present in person or by proxy at the meeting. The
Secretary of the Corporation, or in the Secretary's absence an Assistant
Secretary, shall act as secretary of every meeting, but if neither the Secretary
nor an Assistant Secretary is present, the presiding officer of the meeting
shall appoint any person present to act as secretary of the meeting.
SECTION 7. Voting; Proxies; Required Vote. (a) At each meeting of
stockholders, every stockholder shall be entitled to vote in person or by proxy
appointed by instrument in writing, subscribed by such stockholder or by such
stockholder's duly authorized attorney-in-fact (but no such proxy shall be voted
or acted upon after three years from its date, unless the proxy provides for a
longer period), and, unless the Certificate of Incorporation provides otherwise,
shall have one vote for each share of stock entitled to vote registered in the
name of such stockholder on the books of the Corporation on the applicable
record date fixed pursuant to these Bylaws. At all elections of directors the
voting may but need not be by ballot and a plurality of the votes cast there
shall elect. Except as otherwise required by law or the Certificate of
Incorporation, any other action shall be authorized by a majority of the votes
cast.
(b) Any action required or permitted to be taken at any meeting of
stockholders may, except as otherwise required by law or the Certificate of
Incorporation, be taken without a meeting, without prior notice and without a
vote, if a consent in writing, setting forth the action so taken, shall be
signed by the holders of record of the issued and outstanding capital stock of
the Corporation having a majority of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted, and the writing or writings are filed with the permanent
records of the Corporation. Prompt notice of the taking of corporate action
without a meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
-2-
<PAGE>
(c) Where a separate vote by a class or classes, present in person or
represented by proxy, shall constitute a quorum entitled to vote on that matter,
the affirmative vote of the majority of shares of such class or classes present
in person or represented by proxy at the meeting shall be the act of such class,
unless otherwise provided in the Corporation's Certificate of Incorporation.
SECTION 8. Inspectors. The Board of Directors, in advance of any meeting,
may, but need not, appoint one or more inspectors of election to act at the
meeting or any adjournment thereof. If an inspector or inspectors are not so
appointed, the person presiding at the meeting may, but need not, appoint one or
more inspectors. In case any person who may be appointed as an inspector fails
to appear or act, the vacancy may be filled by appointment made by the directors
in advance of the meeting or at the meeting by the person presiding thereat.
Each inspector, if any, before entering upon the discharge of his or her duties,
shall take and sign an oath faithfully to execute the duties of inspector at
such meeting with strict impartiality and according to the best of his or her
ability. The inspectors, if any, shall determine the number of shares of stock
outstanding and the voting power of each, the shares of stock represented at the
meeting, the existence of a quorum, and the validity and effect of proxies, and
shall receive votes, ballots or consents, hear and determine all challenges and
questions arising in connection with the right to vote, count and tabulate all
votes, ballots or consents, determine the result, and do such acts as are proper
to conduct the election or vote with fairness to all stockholders. On request of
the person presiding at the meeting, the inspector or inspectors, if any, shall
make a report in writing of any challenge, question or matter determined by such
inspector or inspectors and execute a certificate of any fact found by such
inspector or inspectors.
ARTICLE II
Board of Directors
SECTION 1. General Powers. The business, property and affairs of the
Corporation shall be managed by, or under the direction of, the Board of
Directors.
SECTION 2. Qualification; Number; Term; Remuneration. (a) Each director
shall be at least 18 years of age. A director need not be a stockholder, a
citizen of the United States or a resident of the State of Delaware. The number
of directors constituting the entire Board shall initially be five, or such
other number as may be fixed from time to time by action of the stockholders or
Board of Directors, one of whom may be selected by the Board of Directors to be
its chairman. The use of the phrase "entire Board" herein refers to the total
number of directors which the Corporation would have if there were no vacancies.
-3-
<PAGE>
(b) Directors who are elected at an annual meeting of stockholders, and
directors who are elected in the interim to fill vacancies and newly created
directorships, shall hold office until the next annual meeting of stockholders
and until their successors are elected and qualified or until their earlier
resignation or removal.
(c) Directors may be paid their expenses, if any, of attendance at each
meeting of the Board of Directors and may be paid a fixed sum for attendance at
each meeting of the Board of Directors or a stated salary as director. No such
payment shall preclude any director from serving the Corporation in any other
capacity and receiving compensation therefor. Members of special or standing
committees may be allowed like compensation for attending committee meetings.
SECTION 3. Quorum and Manner of Voting. Except as otherwise provided by
law, a majority of the entire Board shall constitute a quorum. A majority of the
directors present, whether or not a quorum is present, may adjourn a meeting
from time to time to another time and place without notice. The vote of the
majority of the directors present at a meeting at which a quorum is present
shall be the act of the Board of Directors.
SECTION 4. Places of Meetings. Meetings of the Board of Directors may be
held at any place within or without the State of Delaware as may from time to
time be fixed by resolution of the Board of Directors or as may be specified in
the notice of meeting.
SECTION 5. Annual Meeting. Following the annual meeting of stockholders,
the newly elected Board of Directors shall meet for the purpose of the election
of officers and the transaction of such other business as may properly come
before the meeting. Such meeting may be held without notice immediately after
the annual meeting of stockholders at the same place at which such stockholders'
meeting is held.
SECTION 6. Regular Meetings. Regular meetings of the Board of Directors
shall be held at such times and places as the Board of Directors shall from time
to time by resolution determine. Notice need not be given of regular meetings of
the Board of Directors held at times and places fixed by resolution of the Board
of Directors.
SECTION 7. Special Meetings. Special meetings of the Board of Directors
shall be held whenever called by the Chairman of the Board, Chief Executive
Officer, President, or by a majority of the directors then in office.
SECTION 8. Notice of Meetings. A notice of the place, date and time and
the purpose or purposes of each meeting of the Board of Directors, other than
regular meetings held at times and places fixed by resolution of the Board of
Directors, shall be given to each director by mailing the same at least two days
before the meeting, or by telegraphing or telephoning the same or by delivering
the same personally not later than the day before the day of the meeting.
-4-
<PAGE>
SECTION 9. Organization. At all meetings of the Board of Directors, the
Chairman, if any, or if none or in the Chairman's absence or inability to act
the President, or in the President's absence or inability to act any Vice
President who is a member of the Board of Directors, or in such Vice President's
absence or inability to act a chairman chosen by the directors, shall preside.
The Secretary of the Corporation shall act as secretary at all meetings of the
Board of Directors when present, and, in the Secretary's absence, the presiding
officer may appoint any person to act as secretary.
SECTION 10. Resignation. Any director may resign at any time upon written
notice to the Corporation and such resignation shall take effect upon receipt
thereof by the President or Secretary, unless otherwise specified in the
resignation. Any or all of the directors may be removed, with or without cause,
by the holders of a majority of the shares of stock outstanding and entitled to
vote for the election of directors.
SECTION 11. Vacancies. Unless otherwise provided in these Bylaws,
vacancies on the Board of Directors, whether caused by resignation, death,
disqualification, removal, an increase in the authorized number of directors or
otherwise, may be filled by the affirmative vote of a majority of the remaining
directors, although less than a quorum, or by a sole remaining director, or at a
special meeting of the stockholders, by the holders of shares entitled to vote
for the election of directors.
SECTION 12. Action by Written Consent; Telephonic Meetings. Any action
required or permitted to be taken at any meeting of the Board of Directors may
be taken without a meeting if all the directors consent thereto in writing, and
the writing or writings are filed with the minutes of proceedings of the Board
of Directors. Subject to applicable notice provisions, members of the Board of
Directors may participate in and hold meetings by means of conference telephone
or similar communications equipment by means of which all persons participating
in the meeting can hear each other, and participation in such meeting shall be
deemed presence in person at such meeting, except where a person's participation
is for the express purpose of objecting to the transaction of any business on
the ground that the meeting is not lawfully called or convened.
ARTICLE III
Committees
SECTION 1. Appointment. From time to time the Board of Directors by a
resolution adopted by a majority of the entire Board may appoint any committee
or committees for any purpose or purposes, to the extent lawful, which shall
have powers as shall be determined and specified by the Board of Directors in
the resolution of appointment.
SECTION 2. Procedures, Quorum and Manner of Acting. Each committee shall
fix its own rules of procedure, and shall meet where and as provided by such
rules or by
-5-
<PAGE>
resolution of the Board of Directors. Except as otherwise provided by law, the
presence of a majority of the then appointed members of a committee shall
constitute a quorum for the transaction of business by that committee, and in
every case where a quorum is present the affirmative vote of a majority of the
members of the committee present shall be the act of the committee. Each
committee shall keep minutes of its proceedings, and actions taken by a
committee shall be reported to the Board of Directors.
SECTION 3. Acting by Written Consent; Telephonic Meetings. Any action
required or permitted to be taken at any meeting of any committee of the Board
of Directors may be taken without a meeting if all the members of the committee
consent thereto in writing, and the writing or writings are filed with the
minutes or proceedings of the committee. Subject to applicable notice
provisions, members of any committee of the Board of Directors may participate
in and hold meetings by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in such meeting shall be deemed presence in person
at such meeting, except where a person's participation is for the express
purpose of objecting to the transaction of any business on the ground that the
meeting is not lawfully called or convened.
SECTION 4. Terms; Termination. In the event any person shall cease to be a
director of the Corporation, such person shall simultaneously therewith cease to
be a member of any committee appointed by the Board of Directors.
ARTICLE IV
Officers
SECTION 1. Election and Qualifications. The Board of Directors shall elect
the officers of the Corporation, which shall include a President and a
Secretary, and may include, by election or appointment, one or more Vice
Presidents (any one or more of whom may be given an additional designation of
rank or function), a Treasurer and such assistant secretaries, such assistant
treasurers and such other officers as the Board may from time to time deem
proper. Each officer shall have such powers and duties as may be prescribed by
these Bylaws and as may be assigned by the Board of Directors or the President.
Any two or more offices may be held by the same person except the offices of
President and Secretary.
SECTION 2. Term of Office and Remuneration. The term of office of all
officers shall be one year or until their respective successors have been
elected and qualified, but any officer may be removed from office, either with
or without cause, at any time by the Board of Directors. Any vacancy in any
office arising from any cause may be filled for the unexpired portion of the
term by the Board of Directors. The remuneration of all officers of the
Corporation may be fixed by the Board of Directors or in such manner as the
Board of Directors shall provide.
-6-
<PAGE>
SECTION 3. Resignation; Removal. Any officer may resign at any time upon
written notice to the Corporation and such resignation shall take effect upon
receipt thereof by the President or Secretary, unless otherwise specified in the
resignation. Any officer shall be subject to removal, with or without cause, at
any time by vote of a majority of the entire Board.
SECTION 4. Chairman of the Board. The Chairman of the Board of Directors,
if there be one, shall preside at all meetings of the Board of Directors and
shall have such other powers and duties as may from time to time be assigned by
the Board of Directors.
SECTION 5. President and Chief Executive Officer. The President shall be
the chief executive officer of the Corporation and shall have such duties as
customarily pertain to that office. The President also shall be a director of
the Corporation. If, at any time and for any reason, the President's term of
office as a director of the Corporation terminates or is terminated, then his
term of office as President of the Corporation shall also be automatically
terminated. The President shall have general management and supervision of the
property, business and affairs of the Corporation and over its other officers;
may appoint and remove assistant officers and other agents and employees, other
than officers referred to in Section I of this Article IV; and may execute and
deliver in the name of the Corporation powers of attorney, contracts, bonds and
other obligations and instruments.
SECTION 6. Vice President. A Vice President may execute and deliver in the
name of the Corporation contracts and other obligations and instruments
pertaining to the regular course of the duties of said office, and shall have
such other authority as from time to time may be assigned by the Board of
Directors or the President.
SECTION 7. Treasurer. The Treasurer shall in general have all duties
incident to the position of Treasurer and such other duties as may be assigned
by the Board of Directors or the President.
SECTION 8. Secretary. The Secretary shall in general have all the duties
incident to the office of Secretary and such other duties as may be assigned by
the Board of Directors or the President.
SECTION 9. Assistant Officers. Any assistant officer shall have such
powers and duties of the officer such assistant officer assists as such officer
or the Board of Directors shall from time to time prescribe.
-7-
<PAGE>
ARTICLE V
Books and Records
SECTION 1. Location. The books and records of the Corporation may be kept
at such place or places within or outside the State of Delaware as the Board of
Directors or the respective officers in charge thereof may from time to time
determine. The record books containing the names and addresses of all
stockholders, the number and class of shares of stock held by each and the dates
when they respectively became the owners of record thereof shall be kept by the
Secretary as prescribed in these Bylaws and by such officer or agent as shall be
designated by the Board of Directors.
SECTION 2. Addresses of Stockholders. Notices of meetings and all other
corporate notices may be delivered personally or mailed to each stockholder at
the stockholder's address as it appears on the records of the Corporation.
SECTION 3. Fixing Date for Determination of Stockholders of Record. (a) In
order that the Corporation may determine the stockholders entitled to notice of
or to vote at any meeting of stockholders or any adjournment thereof, the Board
of Directors may fix a record date, which record date shall not be more than 60
nor less than 10 days before the date of such meeting. If no record date is
fixed by the Board of Directors, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the day next preceding the day
on which the meeting is held. A determination of stockholders of record entitled
to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board of Directors may
fix a new record date for the adjourned meeting.
(b) In order that the Corporation may determine the stockholders entitled
to consent to corporate action in writing without a meeting, the Board of
Directors may fix a record date which date shall not be more than 10 days after
the date upon which the resolution fixing the record date is adopted by the
Board of Directors. If no record date has been fixed by the Board of Directors,
the record date for determining stockholders entitled to consent to corporate
action in writing without a meeting, when no prior action by the Board of
Directors is required, shall be the first date on which a signed written consent
setting forth the action taken or proposed to be taken is delivered to the
Corporation by delivery to its registered office in this State, its principal
place of business, or an officer or agent of the Corporation having custody of
the book in which proceedings of meetings of stockholders are recorded. Delivery
made to the Corporation's registered office shall be by hand or by certified or
registered mail, return receipt requested. If no record date has been fixed by
the Board of Directors and prior action by the Board of Directors is required by
this chapter, the record date for determining stockholders entitled to consent
to corporate action in writing without a meeting shall be at the close of
business on the day on which the Board of Directors adopts the resolution taking
such prior action.
-8-
<PAGE>
(c) In order that the Corporation may determine the stockholders entitled
to receive payment of any dividend or other distribution or allotment of any
rights or the stockholder entitled to exercise any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action, the Board of Directors may fix a record date which record date shall be
not more than 60 days prior to such action. If no record date is fixed, the
record date for determining stockholders for any such purpose shall be at the
close of business on the day on which the Board of Directors adopts the
resolution relating thereto.
ARTICLE VI
Certificates Representing Stock
SECTION 1. Certificate; Signatures. The shares of the Corporation shall be
represented by certificates, provided that the Board of Directors of the
Corporation may provide by resolution or resolutions that some or all of any or
all classes or series of its stock shall be uncertificated shares. Any such
resolution shall not apply to shares represented by a certificate until such
certificate is surrendered to the Corporation. Notwithstanding the adoption of
such a resolution by the Board of Directors, every holder of stock represented
by certificates and upon request every holder of uncertificated shares shall be
entitled to have a certificate, signed by or in the name of the Corporation by
the Chairman or Vice Chairman of the Board of Directors, or the President or
Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary
or an Assistant Secretary of the Corporation, representing the number of shares
registered in certificate form. Any and all signatures on any such certificate
may be facsimiles. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he or she were such officer, transfer agent or registrar at the date of
issue. The name of the holder of record of the shares represented thereby, with
the number of such shares and the date of issue, shall be entered on the books
of the Corporation.
SECTION 2. Transfers of Stock. Upon compliance with provisions restricting
the transfer or registration of transfer of shares of stock, if any, shares of
capital stock shall be transferable on the books of the Corporation only by the
holder of record thereof in person, or by duly authorized attorney, upon
surrender and cancellation of certificates for a like number of shares, properly
endorsed, and the payment of all taxes due thereon.
SECTION 3. Fractional Shares. The Corporation may, but shall not be
required to, issue certificates for fractions of a share where necessary to
effect authorized transactions, or the Corporation may pay in cash the fair
value of fractions of a share as of the time when those entitled to receive such
fractions are determined, or it may issue scrip in registered or bearer form
over the manual or facsimile signature of an officer of the Corporation or of
its
-9-
<PAGE>
agent, exchangeable as therein provided for full shares, but such scrip shall
not entitle the holder to any rights of a stockholder except as therein
provided.
The Board of Directors shall have power and authority to make all such
rules and regulations as it may deem expedient concerning the issue, transfer
and registration of certificates representing shares of the Corporation.
SECTION 4. Lost, Stolen or Destroyed Certificates. The Corporation may
issue a new certificate of stock in place of any certificate, theretofore issued
by it, alleged to have been lost, stolen or destroyed, and the Board of
Directors may require the owner of any lost, stolen or destroyed certificate, or
his legal representative, to give the Corporation a bond sufficient to indemnify
the Corporation against any claim that may be made against it on account of the
alleged loss, theft or destruction of any such certificate or the issuance of
any such new certificate.
ARTICLE VII
Dividends
Subject always to the provisions of law and the Certificate of
Incorporation, the Board of Directors shall have full power to determine whether
any, and, if any, what part of any, funds legally available for the payment of
dividends shall be declared as dividends and paid to stockholders; the division
of the whole or any part of such funds of the Corporation shall rest wholly
within the lawful discretion of the Board of Directors, and it shall not be
required at any time, against such discretion, to divide or pay any part of such
funds among or to the stockholders as dividends or otherwise; and before the
payment of any dividend, there may be set aside out of any funds of the
Corporation available for dividends such sum or sums as the Board of Directors
from time to time, in its absolute discretion, thinks proper as a reserve or
reserves to meet contingencies, or for equalizing dividends, or for repairing or
maintaining any property of the Corporation, or for such other purpose as the
Board of Directors shall think conducive to the interest of the Corporation, and
the Board of Directors may modify or abolish any such reserve in the manner in
which it was created.
ARTICLE VIII
Ratification
Any transaction, questioned in any law suit on the ground of lack of
authority, defective or irregular execution, adverse interest of director,
officer or stockholder, nondisclosure, miscomputation, or the application of
improper principles or practices of accounting, may be ratified before or after
judgment, by the Board of Directors or by the stockholders, and if so ratified
shall have the same force and effect as if the questioned
-10-
<PAGE>
transaction had been originally duly authorized. Such ratification shall be
binding upon the Corporation and its stockholders and shall constitute a bar to
any claim or execution of any judgment in respect of such questioned
transaction.
ARTICLE IX
Corporate Seal
The corporate seal shall have inscribed thereon the name of the
Corporation and the year of its incorporation, and shall be in such form and
contain such other words and/or figures as the Board of Directors shall
determine. The corporate seal may be used by printing, engraving, lithographing,
stamping or otherwise making, placing or affixing, or causing to be printed,
engraved, lithographed, stamped or otherwise made, placed or affixed, upon any
paper or document, by any process whatsoever, an impression, facsimile or other
reproduction of said corporate seal.
ARTICLE X
Fiscal Year
The fiscal year of the Corporation shall be fixed, and shall be subject to
change, by the Board of Directors. Unless otherwise fixed by the Board of
Directors, the fiscal year of the Corporation shall end on the last day of
December.
ARTICLE XI
Waiver of Notice
Whenever notice is required to be given by these Bylaws or by the
Certificate of Incorporation or by law, a written waiver thereof, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent to notice.
ARTICLE XII
Bank Accounts, Drafts, Contracts, Etc.
SECTION 1. Bank Accounts and Drafts. In addition to such bank accounts as
may be authorized by the Board of Directors, the primary financial officer or
any person designated by said primary financial officer, whether or not an
employee of the Corporation,
-11-
<PAGE>
may authorize such bank accounts to be opened or maintained in the name and on
behalf of the Corporation as he or she may deem necessary or appropriate, and
payments from such bank accounts may be made upon and according to the check of
the Corporation in accordance with the written instructions of said primary
financial officer, or other person so designated by the Treasurer.
SECTION 2. Contracts. The Board of Director may authorize any person or
persons, in the name and on behalf of the Corporation, to enter into or execute
and deliver any and all deeds, bonds, mortgages, contracts and other obligations
or instruments, and such authority may be general or confined to specific
instances.
SECTION 3. Proxies; Powers of Attorney; Other Instruments. The Chairman,
the President or any other person designated by either of them shall have the
power and authority to execute and deliver proxies, powers of attorney and other
instruments on behalf of the Corporation in connection with the rights and
powers incident to the ownership of stock by the Corporation. The Chairman, the
President or any other person authorized by proxy or power of attorney executed
and delivered by either of them on behalf of the Corporation may attend and vote
at any meeting of stockholders of any company in which the Corporation may hold
stock, and may exercise on behalf of the Corporation any and all of the rights
and powers incident to the ownership of such stock at any such meeting, or
otherwise as specified in the proxy or power of attorney so authorizing any such
person. The Board of Directors, from time to time, may confer like powers upon
any other person.
SECTION 4. Financial Reports. The Board of Directors may appoint the
primary financial officer or other fiscal officer or any other officer to cause
to be prepared and furnished to stockholders entitled thereto any special
financial notice and/or financial statement, as the case may be, which may be
required by any provision of law.
ARTICLE XIII
Amendments
The Board of Directors shall have power to adopt, amend or repeal Bylaws. Bylaws
adopted by the Board of Directors may be repealed or changed, and new Bylaws
made, by the stockholders, and the stockholders may prescribe that any Bylaw
made by them shall not be altered, amended or repealed by the Board of
Directors.
-12-
<PAGE>
Equity One ABS, Inc.
Depositor
Equity One, Inc.
A Seller and the Servicer
-----------------------------------
-----------------------------------
-----------------------------------
-----------------------------------
-----------------------------------
-----------------------------------
Sellers
and
----------------------------
Trustee
-----------------------------------
POOLING AND SERVICING AGREEMENT
Dated as of _________, 1997
----------------------------------
ASSET BACKED CERTIFICATES, Series 1997-1
================================================================================
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I - DEFINITIONS .................................................... 1
Accretion Directed Certificates ................................... 1
Accrual Amount .................................................... 1
Accrual Certificates .............................................. 1
Accrual Termination Date .......................................... 1
Adjusted Mortgage Rate ............................................ 1
Adjusted Net Mortgage Rate ........................................ 1
Advance ........................................................... 1
Agreement ......................................................... 2
Allocable Share ................................................... 2
Amount Available for Senior Principal ............................. 2
Amount Held for Future Distribution ............................... 2
Applicable Credit Support Percentage .............................. 2
Appraised Value ................................................... 2
Available Funds ................................................... 3
Bankruptcy Code ................................................... 3
Bankruptcy Coverage Termination Date .............................. 3
Bankruptcy Loss ................................................... 3
Bankruptcy Loss Coverage Amount ................................... 3
Book-Entry Certificates ........................................... 4
Business Day ...................................................... 4
Certificate ....................................................... 4
Certificate Account ............................................... 4
Certificate Balance ............................................... 4
Certificate Owner ................................................. 4
Certificate Register .............................................. 4
Certificateholder or Holder ....................................... 4
Class ............................................................. 5
Class A-_ Optimal Amount .......................................... 5
Class A-_ Percentage .............................................. 5
Class Certificate Balance ......................................... 5
Class Interest Shortfall .......................................... 5
Class Optimal Interest Distribution Amount ........................ 5
Class PO Deferred Amount .......................................... 6
Class Subordination Percentage .................................... 6
Class Unpaid Interest Amounts ..................................... 6
Closing Date ...................................................... 6
Code .............................................................. 6
Component ......................................................... 6
Component Balance ................................................. 6
Component Certificates ............................................ 6
Corporate Trust Office ............................................ 7
Cut-off Date ...................................................... 7
Cut-off Date Pool Principal Balance ............................... 7
Cut-off Date Principal Balance .................................... 7
DCR ............................................................... 7
Debt Service Reduction ............................................ 7
i
<PAGE>
Defective Loan ................................................... 7
Deficient Valuation .............................................. 7
Definitive Certificates .......................................... 7
Deleted Loan ..................................................... 7
Denomination ..................................................... 8
Depositor ........................................................ 8
Depository ....................................................... 8
Depository Participant ........................................... 8
Determination Date ............................................... 8
Discount Loan .................................................... 8
Distribution Account ............................................. 8
Distribution Account Deposit Date ................................ 8
Distribution Date ................................................ 8
Due Date ......................................................... 9
Eligible Account ................................................. 9
Equity One-Delaware .............................................. 9
ERISA ............................................................ 9
ERISA-Restricted Certificate ..................................... 9
Escrow Account ................................................... 9
Event of Default ................................................. 9
Excess Loss ...................................................... 9
Excess Proceeds .................................................. 10
Expense Rate ..................................................... 10
FDIC ............................................................. 10
FHLMC ............................................................ 10
FIRREA ........................................................... 10
Fitch ............................................................ 10
FNMA ............................................................. 10
Fraud Loan ....................................................... 10
Fraud Loss Coverage Amount ....................................... 10
Fraud Loss Coverage Termination Date ............................. 11
Fraud Losses ..................................................... 11
Indirect Participant ............................................. 11
Initial Bankruptcy Coverage Amount ............................... 11
Initial Component Balance ........................................ 11
Insurance Policy ................................................. 11
Insurance Proceeds ............................................... 11
Insured Expenses ................................................. 11
Interest Accrual Period .......................................... 11
Interest Determination Date ...................................... 11
Latest Possible Maturity Date .................................... 12
LIBOR ............................................................ 12
LIBOR Certificates ............................................... 12
Liquidated Loan .................................................. 12
Liquidation Proceeds ............................................. 12
Loan-to-Value Ratio .............................................. 12
Loans ............................................................ 12
Loan Schedule .................................................... 12
Majority in Interest ............................................. 13
Monthly Statement ................................................ 13
Moody's .......................................................... 13
Mortgage ......................................................... 14
ii
<PAGE>
Mortgage File....................................................... 14
Mortgage Note....................................................... 14
Mortgage Rate....................................................... 14
Mortgaged Property.................................................. 14
Mortgagor........................................................... 14
National Cost of Funds Index........................................ 14
Net Prepayment Interest Shortfalls.................................. 14
Non-Delay Certificates.............................................. 14
Non-Discount Loan................................................... 14
Non-PO Formula Principal Amount..................................... 14
Non-PO Percentage................................................... 15
Nonrecoverable Advance.............................................. 15
Notice of Final Distribution........................................ 15
Notional Amount..................................................... 15
Notional Amount Certificates........................................ 15
Offered Certificates................................................ 15
Officer's Certificate............................................... 16
Opinion of Counsel.................................................. 16
Optional Termination................................................ 16
Original Applicable Credit Support Percentage....................... 16
Original Loan....................................................... 16
Original Subordinated Principal Balance............................. 16
OTS ........................................................... 16
Outstanding......................................................... 16
Outstanding Loan.................................................... 17
Ownership Interest.................................................. 17
Pass-Through Rate................................................... 17
Percentage Interest................................................. 17
Permitted Investments............................................... 17
Permitted Transferee................................................ 18
Person ........................................................... 19
Physical Certificate................................................ 19
Planned Balance..................................................... 19
Planned Principal Classes........................................... 19
PO Formula Principal Amount......................................... 19
PO Percentage....................................................... 20
Pool Stated Principal Balance....................................... 20
Prepayment Interest Excess.......................................... 20
Prepayment Interest Shortfall....................................... 20
Prepayment Period................................................... 20
Prepayment Shifting Percentage...................................... 20
Primary Insurance Policy............................................ 21
Primary Planned Principal Classes................................... 21
Principal Prepayment................................................ 21
Principal Prepayment in Full........................................ 21
Private Certificate................................................. 21
Pro Rata Share...................................................... 21
Prospectus Supplement............................................... 21
PUD................................................................. 21
Purchase Price...................................................... 21
Qualified Insurer................................................... 22
Rating Agency....................................................... 22
175162.3
iii
<PAGE>
Realized Loss....................................................... 22
Record Date......................................................... 22
Reference Bank...................................................... 23
Refinancing Loan.................................................... 23
Regular Certificates................................................ 23
Relief Act.......................................................... 23
Relief Act Reductions............................................... 23
REMIC............................................................... 23
REMIC Change of Law................................................. 23
REMIC Provisions.................................................... 23
REO Property........................................................ 23
Request for Release................................................. 23
Required Coupon..................................................... 23
Required Insurance Policy........................................... 23
Residual Certificates............................................... 23
Responsible Officer................................................. 24
Restricted Classes.................................................. 24
Scheduled Balances.................................................. 24
Scheduled Classes................................................... 24
Scheduled Payment................................................... 24
Scheduled Principal Distribution Amount............................. 24
Secondary Planned Principal Clauses................................. 24
Securities Act...................................................... 24
Sellers............................................................. 24
Senior Certificates................................................. 24
Senior Credit Support Depletion Date................................ 25
Senior Percentage................................................... 25
Senior Prepayment Percentage........................................ 25
Senior Principal Distribution Amount................................ 26
Servicer ........................................................... 26
Servicer Advance Date............................................... 26
Servicing Advances.................................................. 26
Servicing Fee....................................................... 26
Servicing Fee Rate.................................................. 26
Servicing Officer................................................... 27
Special Hazard Coverage Termination Date............................ 27
Special Hazard Loss................................................. 27
Special Hazard Loss Coverage Amount................................. 28
Special Hazard Loan................................................. 28
S&P................................................................. 28
Startup Day......................................................... 28
Stated Principal Balance............................................ 28
Streamlined Documentation Loan...................................... 29
Subordinated Certificates........................................... 29
Subordinated Percentage............................................. 29
Subordinated Prepayment Percentage.................................. 29
Subordinated Principal Distribution Amount.......................... 29
Subservicer......................................................... 29
Substitute Loan..................................................... 29
Substitution Adjustment Amount...................................... 30
Support Classes..................................................... 30
Targeted Balance.................................................... 30
iv
<PAGE>
Targeted Principal Classes.......................................... 30
Tax Matters Person.................................................. 30
Tax Matters Person Certificate...................................... 30
Transfer............................................................ 30
Trustee............................................................. 30
Trustee Fee......................................................... 30
Trustee Fee Rate.................................................... 30
Trust Fund.......................................................... 30
Unscheduled Principal Distribution Amount........................... 31
Voting Rights....................................................... 31
ARTICLE II - CONVEYANCE OF LOANS; REPRESENTATIONS
AND WARRANTIES................................................. 32
SECTION 2.01. Conveyance of Loans.................................. 32
SECTION 2.02. Acceptance by Trustee of the Loans................... 35
SECTION 2.03. Representations, Warranties and
Covenants of the Sellers............................. 37
SECTION 2.04. Representations and Warranties of the
Depositor as to the Loans............................ 39
SECTION 2.05. Delivery of Opinion of Counsel in
Connection with Substitutions........................ 40
SECTION 2.06. Execution and Delivery of Certificates............... 41
SECTION 2.07. REMIC Matters........................................ 41
SECTION 2.08. Covenants of the Servicer............................ 41
ARTICLE III - ADMINISTRATION AND SERVICING OF LOANS.......................... 42
SECTION 3.01. Servicer to Service Loans............................ 42
SECTION 3.02. Subservicing; Enforcement of the
Obligations of Servicers............................. 43
SECTION 3.03. Rights of the Depositor and the Trustee
in Respect of the Servicer........................... 44
SECTION 3.04. Trustee to Act as Servicer........................... 44
SECTION 3.05. Collection of Loan Payments; Certificate
Account; Distribution Account........................ 44
SECTION 3.06. Collection of Taxes, Assessments and
Similar Items; Escrow Accounts....................... 48
SECTION 3.07. Access to Certain Documentation and
Information Regarding the Loans...................... 48
SECTION 3.08. Permitted Withdrawals from the
Certificate Account and Distribution
Account.............................................. 49
SECTION 3.09. Maintenance of Hazard Insurance;
Maintenance of Primary Insurance
Policies............................................. 51
SECTION 3.10. Enforcement of Due-on-Sale Clauses;
Assumption Agreements................................ 52
SECTION 3.11. Realization Upon Defaulted Loans;
Repurchase of Certain Loans.......................... 54
SECTION 3.12. Trustee to Cooperate; Release of
Mortgage Files....................................... 57
v
<PAGE>
SECTION 3.13. Documents Records and Funds in
Possession of Servicer to be Held
for the Trustee...................................... 58
SECTION 3.14. Servicing Compensation............................... 58
SECTION 3.15. Access to Certain Documentation...................... 59
SECTION 3.16. Annual Statement as to Compliance.................... 59
SECTION 3.17. Annual Independent Public Accountants'
Servicing Statement; Financial
Statements........................................... 60
SECTION 3.18. Errors and Omissions Insurance;
Fidelity Bonds....................................... 60
ARTICLE IV - DISTRIBUTIONS AND ADVANCES BY THE SERVICER..................... 62
SECTION 4.01. Advances............................................. 62
SECTION 4.02. Priorities of Distribution........................... 62
SECTION 4.03. Allocation of Realized Losses........................ 68
SECTION 4.04. Monthly Statements to
Certificateholders................................... 69
SECTION 4.05. Determination of Pass-Through Rates for
COFI Certificates.................................... 71
SECTION 4.06. Determination of Pass-Through Rates for
LIBOR Certificates................................... 74
ARTICLE V - THE CERTIFICATES .............................................. 76
SECTION 5.01. The Certificates..................................... 76
SECTION 5.02. Certificate Register; Registration
of Transfer and Exchange of
Certificates......................................... 77
SECTION 5.03. Mutilated, Destroyed, Lost or
Stolen Certificates.................................. 82
SECTION 5.04. Persons Deemed Owners................................ 83
SECTION 5.05. Access to List of
Certificateholders' Names and
Addresses............................................ 83
SECTION 5.06. Maintenance of Office or Agency...................... 83
ARTICLE VI - THE DEPOSITOR AND THE SERVICER ................................ 84
SECTION 6.01. Respective Liabilities of the
Depositor and the Servicer........................... 84
SECTION 6.02. Merger or Consolidation of the
Depositor or the Servicer............................ 84
SECTION 6.03. Limitation on Liability of the
Depositor, the Sellers, the
Servicer and Others.................................. 84
SECTION 6.04. Limitation on Resignation of
Servicer............................................. 85
vi
<PAGE>
ARTICLE VII - DEFAULT ....................................................... 86
SECTION 7.01. Events of Default.................................... 86
SECTION 7.02. Trustee to Act; Appointment of
Successor............................................ 88
SECTION 7.03. Notification to Certificateholders................... 89
ARTICLE VIII - CONCERNING THE TRUSTEE ....................................... 90
SECTION 8.01. Duties of Trustee.................................... 90
SECTION 8.02. Certain Matters Affecting the
Trustee.............................................. 91
SECTION 8.03. Trustee Not Liable for Certificates
or Loans............................................. 92
SECTION 8.04. Trustee May Own Certificates......................... 93
SECTION 8.05. Trustee's Fees and Expenses.......................... 93
SECTION 8.06. Eligibility Requirements for
Trustee.............................................. 93
SECTION 8.07. Resignation and Removal of Trustee................... 94
SECTION 8.08. Successor Trustee.................................... 95
SECTION 8.09. Merger or Consolidation of Trustee................... 96
SECTION 8.10. Appointment of Co-Trustee or
Separate Trustee..................................... 96
SECTION 8.11. Tax Matters.......................................... 98
SECTION 8.12. Periodic Filings.....................................100
ARTICLE IX - TERMINATION ....................................................101
SECTION 9.01. Termination upon Liquidation or
Purchase of all Loans................................101
SECTION 9.02. Final Distribution on the
Certificates.........................................101
SECTION 9.03. Additional Termination
Requirements.........................................103
ARTICLE X - MISCELLANEOUS PROVISIONS ........................................104
SECTION 10.01. Amendment............................................104
SECTION 10.02. Recordation of Agreement;
Counterparts.........................................105
SECTION 10.03. Governing Law........................................106
SECTION 10.04 Intention of Parties.................................106
SECTION 10.05. Notices..............................................107
SECTION 10.06. Severability of Provisions...........................108
SECTION 10.07. Assignment...........................................109
SECTION 10.08. Limitation on Rights of
Certificateholders...................................109
SECTION 10.09. Inspection and Audit Rights..........................110
SECTION 10.10. Certificates Nonassessable and
Fully Paid...........................................110
vii
<PAGE>
SCHEDULES
Schedule I: Loan Schedule...............................................S-I-1
Schedule II: Representations and Warranties
of the Seller..............................................S-II-1
Schedule III: Representations and Warranties
as to the Loans...........................................S-III-1
Schedule IV: Planned Balance Schedules..................................S-IV-1
Schedule V: Form of Monthly Servicer Report.............................S-V-1
EXHIBITS
Exhibit A: Form of Senior Certificate
(excluding Notional Amount Certificates)......................A-1
Exhibit B: Form of Subordinated Certificate..............................B-1
Exhibit C: Form of Class A-R Certificate.................................C-1
Exhibit D: Form of Notional Amount Certificate...........................D-1
Exhibit E: Form of Reverse of Certificates...............................E-1
Exhibit F: [Reserved]....................................................F-1
Exhibit G: Form of Initial Certificates..................................G-1
Exhibit H: Form of Final Certification of Trustee........................H-1
Exhibit I: Transfer Affidavit............................................I-1
Exhibit J: Form of Transferor Certificate................................J-1
Exhibit K: Form of Investment Letter [Non-Rule 144A].....................K-1
Exhibit L: Form of Rule 144A Letter......................................L-1
Exhibit M: Request for Release (for Trustee).............................M-1
Exhibit N: Request for Release (Loan)
Paid in Full, Repurchased and Replaced........................N-1
viii
<PAGE>
THIS POOLING AND SERVICING AGREEMENT, dated as of _______ __, 1997, among
Equity One ABS, Inc., a Delaware corporation, as depositor (the "Depositor"),
Equity One, Inc., a Delaware corporation, as a seller (in such capacity, "Equity
One-Delaware") and as servicer (in such capacity, the "Servicer"),
_________________________, a ___________________ corporation
("_______________________"), _________________________, a ___________________
corporation ("_______________________"), _________________________, a
___________________ corporation ("_______________________"),
_________________________, a ___________________ corporation
("_______________________"), _________________________, a ___________________
corporation ("_______________________"), _________________________, a
___________________ corporation ("_______________________," and, together with
Equity One-Delaware, ______________, ____________, ___________, ____________ and
___________, the "Sellers") and ____________________, a banking corporation
organized under the laws of the __________________, as trustee (the "Trustee").
WITNESSETH THAT
In consideration of the mutual agreements herein contained, the parties
hereto agree as follows:
PRELIMINARY STATEMENT
The Depositor is the owner of the Trust Fund that is hereby conveyed to the
Trustee in return for the Certificates. The Trust Fund for federal income tax
purposes will consist of a single REMIC. The Certificates will represent the
entire beneficial ownership interest in the Trust Fund. The Regular Certificates
will represent the "regular interests" in the Trust Fund and the Residual
Certificates will represent as the single "residual interest" in the Trust Fund.
The "latest possible maturity date" for federal income tax purposes of all
interests created hereby will be the Latest Possible Maturity Date.
The following table sets forth characteristics of the Certificates,
together with the minimum denominations and integral multiples in excess thereof
in which such Classes shall be issuable (except that one Certificate of each
Class of Certificates may be issued in a different amount and, in addition, one
Residual Certificate representing the Tax Matters Person Certificate may be
issued in a different amount):
<PAGE>
================================================================================
Integral
Initial Class Multiples
Certificate Pass-Through Minimum in Excess of
Balance Rate Denomination Minimum
- ------------------------------------------------------------------------------
Class A-_ $__________ ____% $_________ $________
- ------------------------------------------------------------------------------
Class A-_ $__________ ____% $_________ $________
- ------------------------------------------------------------------------------
Class A-_ $__________ ____% $_________ $________
- ------------------------------------------------------------------------------
Class A-_ $__________ ____% $_________ $________
- ------------------------------------------------------------------------------
Class A-_ $__________ ____% $_________ $________
- ------------------------------------------------------------------------------
Class A-_ $__________ ____% $_________ $________
- ------------------------------------------------------------------------------
Class A-_ $__________ (4) $_________ $________
- ------------------------------------------------------------------------------
Class PO $__________ (1) $_________ $________
- ------------------------------------------------------------------------------
Class X (2) (3) $_________ $_______(5)
- ------------------------------------------------------------------------------
Class A-R $__________ ____% $_________ N/A
- ------------------------------------------------------------------------------
Class B-_ $__________ ____% $_________ $________
- ------------------------------------------------------------------------------
Class B-_ $__________ ____% $_________ $________
- ------------------------------------------------------------------------------
Class B-_ $__________ ____% $_________ $________
- ------------------------------------------------------------------------------
Class B-_ $__________ ____% $_________ $________
- ------------------------------------------------------------------------------
Class B-_ $__________ ____% $_________ $________
- ------------------------------------------------------------------------------
Class B-_ $__________ ____% $_________ $________
================================================================================
- ---------------------
(1) The Class PO Certificates will be Principal Only Certificates and will not
bear interest.
(2) The Class X Certificates will be Notional Amount Certificates, will
have no principal balance and will bear interest on their Notional
Amount (initially, $----------------).
(3) The Pass-Through Rate for the Class X Certificates for any Distribution
Date will be equal to the excess of (a) the average of the Net Mortgage
Rates of the Non-Discount Loans, weighted on the basis of their
respective Stated Principal Balances over (b) ____% per annum. The
Pass-Through Rate of the Class X Certificates for the first
Distribution Date is -------%.
(4) The Class A-_ Certificates will be comprised of multiple payment
components. The Pass-Through Rate for any Distribution Date will equal
the weighted average of the Pass-Through Rates of the various
Components. The Pass- Through Rate for the first Distribution Date is
_____%.
2
<PAGE>
(5) Minimum Denomination is based on the Notional Amount of such Class.
Set forth below are designations of Classes of Certificates to the
categories used herein:
Accretion Directed
Certificates. . . . . . Class A-_ Certificates and Class A-
_-_ Certificates.
Accrual Certificates . . . Class A-_-_ Certificates.
Book-Entry Certificates . . All Classes of Certificates other
than the Physical Certificates.
Component Certificates . . Class A-_ Certificates.
Components . . . . . . For purposes of calculating
distributions, the Component
Certificates will be comprised of
multiple payment components having
the designations, Initial Component
Balances and Pass-Through Rates set
forth below:
Initial
Component
Designation Balance Pass-Through Rate
Class A-_-_ Notional ____%
Class A-_-_ Notional ____%
Class A-_-_ Notional ____%
Class A-_-_ $____________ ____%
Class A-_-_ $____________ ____%
Class A-_-_ $____________ ____%
The Class A-_-_, Class A-_-_ and Class A-_-_
Components will have no Component Balances and
will bear interest on their respective Notional
Amounts. The Notional Amount for the Class A-_-_
Component will equal the outstanding Class
Certificate Balance of the Class A-_ Certificate.
The Notional Amount for the Class A-_-_ Component
will equal the outstanding Class Certificate
Balance of the Class A- _ Certificate. The
Notional Amount for the Class A-_-_ Component
will
3
<PAGE>
equal the outstanding Class Certificate Balance
of the Class A- _ Certificate.
Delay Certificates . . . All interest-bearing Classes
of Certificates other than the Non-Delay
Certificates, if any.
ERISA-Restricted
Certificates . . . . . Class PO and Class X Certificates,
Residual Certificates and
Subordinated Certificates.
Floating Rate Certificates. [Class ____ Certificates.]
Inverse Floating Rate
Certificates . . . . . [Class ____ Certificates.]
LIBOR Certificates . . . [Class ____ Certificates.]
Non-Delay Certificates . . [Class ____ Certificates.]
Notional Amount
Certificates . . . . . Class X Certificates and the Class
A-_-_, Class A-_-_ and Class A-_-_
Components.
Offered Certificates . . All Classes of Certificates other
than the Private Certificates.
Physical Certificates . . Residual Certificates, Class
PO Certificates, Class X
Certificates, Class A-_
Certificates and the Subordinated
Certificates.
Planned Principal Classes . Class A-_ and Class A-_
Certificates and the Class A-_-_
and Class A-_-_ Components.
Primary Planned Principal
Classes . . . . . . . [Class ____ Certificates.]
Principal Only
Certificates . . . . . Class PO Certificates.
Private Certificates . . Class A-_, Class B-_, Class B-_ and
Class B-_ Certificates.
Rating Agencies . . . . ___________ and __________.
4
<PAGE>
Regular Certificates . . All Classes of Certificates, other
than the Residual Certificates.
Residual Certificates . . Class A-R Certificates.
Scheduled Principal
Classes . . . . . . . [Class ____ Certificates.]
Secondary Planned Principal
Class . . . . . . . [Class ____ Certificates.]
Senior Certificates . . . Class A-_, Class A-_, Class A-_,
Class A-_, Class A-_, Class A-_,
Class A-_, Class PO, Class X and
Class A-R Certificates.
Subordinated Certificates . Class B-_, Class B-_, Class B-_,
Class B-_, Class B-_ and Class B-_
Certificates.
Support Classes . . . . Class A-_ and Class A-_
Certificates and the Class A-_-_
Component.
Targeted Principal
Classes . . . . . . . Class A-_ Certificates and the
Class A-_-_, Class A-_-_ and Class
A-_-_ Components.
With respect to any of the foregoing designations as to which the
corresponding reference is "None," all defined terms and provisions herein
relating solely to such designations shall be of no force or effect, and any
calculations herein incorporating references to such designations shall be
interpreted without reference to such designations and amounts. Defined terms
and provisions herein relating to statistical rating agencies not designated
above as Rating Agencies shall be of no force or effect.
5
<PAGE>
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, the following words and phrases, unless
the context otherwise requires, shall have the following meanings:
Accretion Directed Certificates: As specified in the Preliminary Statement.
Accrual Amount: With respect to any Class of Accrual Certificates and any
Distribution Date prior to the Accrual Termination Date, the amount allocable to
interest on each such Class of Accrual Certificates with respect to such
Distribution Date pursuant to Section 4.02(a)(i).
Accrual Certificates: As specified in the Preliminary Statement.
Accrual Termination Date: The earlier to occur of (i) the first
Distribution Date following the Distribution Date on which the Component Balance
of the Class A-_-_ Component is reduced to zero, and (ii) the Senior Credit
Support Depletion Date.
Adjusted Mortgage Rate: As to each Loan, and at any time, the per annum
rate equal to the Mortgage Rate less the Servicing Fee Rate.
Adjusted Net Mortgage Rate: As to each Loan, and at any time, the per annum
rate equal to the Mortgage Rate less the related Expense Rate. For purposes of
determining whether any Substitute Loan is a Discount Loan or a Non-Discount
Loan and for purposes of calculating the applicable PO Percentage and applicable
Non-PO Percentage, each Substitute Loan shall be deemed to have an Adjusted Net
Mortgage Rate equal to the Adjusted Net Mortgage Rate of the Deleted Loan for
which it is substituted.
Advance: The payment required to be made by the Servicer with respect to
any Distribution Date pursuant to Section 4.01, the amount of any such payment
being equal to the aggregate of payments of principal and interest (net of the
Servicing Fee and net of any net income in the case of any REO Property) on the
Loans that were due on the related Due Date and not received as of the close of
business on the related Determination Date, less the aggregate amount of any
such delinquent payments that the Servicer has determined would constitute a
Nonrecoverable Advance if advanced.
1
<PAGE>
Agreement: This Pooling and Servicing Agreement, together with all of the
exhibits and schedules hereto, and all amendments or supplements of any of the
foregoing.
Allocable Share: As to any Distribution Date and any Loan (i) with respect
to the Class X Certificates, (a) the ratio that (x) the excess, if any, of the
Adjusted Net Mortgage Rate with respect to such Loan over the Required Coupon
bears to (y) such Adjusted Net Mortgage Rate or (b) if the Adjusted Net Mortgage
Rate with respect to such Loan does not exceed the Required Coupon, zero, (ii)
with respect to the Class PO Certificates, zero and (iii) with respect to each
other Class of Certificates the product of (a) the lesser of (I) the ratio that
the Required Coupon bears to such Adjusted Net Mortgage Rate and (II) one,
multiplied by (b), the ratio that the amount calculated with respect to such
Distribution Date for such Class pursuant to clause (i) of the definition of
Class Optimal Interest Distribution Amount (without giving effect to any
reduction of such amount pursuant to Section 4.02(d)) bears to the amount
calculated with respect to such Distribution Date for each Class of Certificates
pursuant to clause (i) of the definition of Class Optimal Interest Distribution
Amount (in each case without giving effect to any reduction of such amounts
pursuant to Section 4.02(d)).
Amount Available for Senior Principal: As to any Distribution Date,
Available Funds for such Distribution Date reduced by the aggregate amount
distributable (or allocable to the Accrual Amount, if applicable) on such
Distribution Date in respect of interest on the Senior Certificates pursuant to
Section 4.02(a)(i).
Amount Held for Future Distribution: As to any Distribution Date, the
aggregate amount held in the Certificate Account at the close of business on the
related Determination Date on account of (i) Principal Prepayments received
during the related Prepayment Period and Liquidation Proceeds received in the
month of such Distribution Date and (ii) all Scheduled Payments due after the
related Due Date.
Applicable Credit Support Percentage: As defined in Section 4.02(e).
Appraised Value: With respect to any Loan, the Appraised Value of the
related Mortgaged Property shall be: (i) with respect to a Loan other than a
Refinancing Loan, the lesser of (a) the value of the Mortgaged Property based
upon the appraisal made at the time of the origination of such Loan and (b) the
sales price of the Mortgaged Property at the time of the origination of such
Loan; (ii) with respect to a Refinancing Loan other than a Streamlined
Documentation Loan, the value of the Mortgaged Property based upon the appraisal
made at the time of
2
<PAGE>
the origination of such Refinancing Loan; and (iii) with respect to a
Streamlined Documentation Loan, (a) if the loan-to-value ratio with respect to
the Original Loan at the time of the origination thereof was __% or less, the
value of the Mortgaged Property based upon the appraisal made at the time of the
origination of the Original Loan and (b) if the loan-to-value ratio with respect
to the Original Loan at the time of the origination thereof was greater than
__%, the value of the Mortgaged Property based upon the appraisal (which may be
a drive-by appraisal) made at the time of the origination of such Streamlined
Documentation Loan.
Available Funds: As to any Distribution Date, the sum of (a) the aggregate
amount held in the Certificate Account at the close of business on the related
Determination Date net of the Amount Held for Future Distribution and net of
amounts permitted to be withdrawn from the Certificate Account pursuant to
clauses (i)-(viii), inclusive, of Section 3.08(a) and amounts permitted to be
withdrawn from the Distribution Account pursuant to clauses (i)-(iii) inclusive
of Section 3.08(b), (b) the amount of the related Advance and (c) in connection
with Defective Loans, as applicable, the aggregate of the Purchase Prices and
Substitution Adjustment Amounts deposited on the related Distribution Account
Deposit Date.
Bankruptcy Code: The United States Bankruptcy Reform Act of 1978, as
amended.
Bankruptcy Coverage Termination Date: The point in time at which the
Bankruptcy Loss Coverage Amount is reduced to zero.
Bankruptcy Loss: With respect to any Loan, a Deficient Valuation or Debt
Service Reduction; provided, however, that a Bankruptcy Loss shall not be deemed
a Bankruptcy Loss hereunder so long as the Servicer has notified the Trustee in
writing that the Servicer is diligently pursuing any remedies that may exist in
connection with the related Loan and either (A) the related Loan is not in
default with regard to payments due thereunder or (B) delinquent payments of
principal and interest under the related Loan and any related escrow payments in
respect of such Loan are being advanced on a current basis by the Servicer, in
either case without giving effect to any Debt Service Reduction or Deficient
Valuation.
Bankruptcy Loss Coverage Amount: As of any Determination Date, the
Bankruptcy Loss Coverage Amount shall equal the Initial Bankruptcy Coverage
Amount as reduced by (i) the aggregate amount of Bankruptcy Losses allocated to
the Certificates since the Cut-off Date and (ii) any permissible reductions in
the Bankruptcy Loss Coverage Amount as evidenced by a letter of each Rating
Agency to the Trustee to the effect that
3
<PAGE>
any such reduction will not result in a downgrading of the then current ratings
assigned to the Classes of Certificates rated by it.
Book-Entry Certificates: As specified in the Preliminary Statement.
Business Day: Any day other than (i) a Saturday or a Sunday, or (ii) a day
on which banking institutions in the City of New York, New York, or the State of
[] or the city in which the Corporate Trust Office of the Trustee is located are
authorized or obligated by law or executive order to be closed.
Certificate: Any one of the Certificates executed by the Trustee in
substantially the forms attached hereto as exhibits.
Certificate Account: The separate Eligible Account or Accounts created and
maintained by the Servicer pursuant to Section 3.05 with a depository
institution in the name of the Servicer for the benefit of the Trustee on behalf
of Certificateholders and designated "____________________________ in trust for
the registered holders of Equity One ABS, Inc., Asset Backed Certificates Series
199_-_."
Certificate Balance: With respect to any Certificate at any time, the
maximum dollar amount of principal to which the Holder thereof is then entitled
hereunder, such amount being equal to the Denomination thereof (A) minus the sum
of (i) all distributions of principal previously made with respect thereto and
(ii) all Realized Losses allocated thereto and, in the case of any Subordinated
Certificates, all other reductions in Certificate Balance previously allocated
thereto pursuant to Section 4.03 and (B) in the case of any Class of Accrual
Certificates, increased by the Accrual Amount added to the Class Certificate
Balance of such Class prior to such date.
Certificate Owner: With respect to any Book-Entry Certificate, the Person
who is the beneficial owner of such Book-Entry Certificate.
Certificate Register: The register maintained pursuant to Section 5.02
hereof.
Certificateholder or Holder: The person in whose name a Certificate is
registered in the Certificate Register, except that, solely for the purpose of
giving any consent pursuant to this Agreement, any Certificate registered in the
name of the Depositor or any affiliate of the Depositor shall be deemed not to
be Outstanding and the Percentage Interest evidenced thereby shall not be taken
into account in determining whether the requisite amount of Percentage Interests
necessary to effect such
4
<PAGE>
consent has been obtained; provided, however, that if any such Person (including
the Depositor) owns 100% of the Percentage Interests evidenced by a Class of
Certificates, such Certificates shall be deemed to be Outstanding for purposes
of any provision hereof that requires the consent of the Holders of Certificates
of a particular Class as a condition to the taking of any action hereunder. The
Trustee is entitled to rely conclusively on a certification of the Depositor or
any affiliate of the Depositor in determining which Certificates are registered
in the name of an affiliate of the Depositor.
Class: All Certificates bearing the same class designation as set forth in
the Preliminary Statement.
Class A-_ Optimal Amount: As to any Distribution Date, an amount equal to
the sum of (i) the product of the Class A-_ Percentage and the Scheduled
Principal Distribution Amount and (ii) the product of (A) the Class A-_
Percentage, (B) the Prepayment Shifting Percentage and (C) the Unscheduled
Principal Distribution Amount.
Class A-_ Percentage: As to any Distribution Date, a fraction, the
numerator of which is the Class Certificate Balance of the Class A-_
Certificates on such Distribution Date and the denominator of which is the
aggregate Class Certificate Balances of the Senior Certificates (other than the
Class PO Certificates) on such Distribution Date.
Class Certificate Balance: With respect to any Class and as to any date of
determination, the aggregate of the Certificate Balances of all Certificates of
such Class as of such date.
Class Interest Shortfall: As to any Distribution Date and Class, the amount
by which the amount described in clause (i) of the definition of Class Optimal
Interest Distribution Amount for such Class exceeds the amount of interest
actually distributed on such Class on such Distribution Date pursuant to such
clause (i).
Class Optimal Interest Distribution Amount: With respect to any
Distribution Date and interest bearing Class or, with respect to any interest
bearing Component, any Component thereof, the sum of (i) one month's interest
accrued during the related Interest Accrual Period at the Pass-Through Rate for
such Class on the related Class Certificate Balance, Component Balance or
Notional Amount, as applicable, subject to reduction as provided in Section
4.02(d) and (ii) any Class Unpaid Interest Amounts for such Class or Component.
5
<PAGE>
Class PO Deferred Amount: As to any Distribution Date, the aggregate of the
applicable PO Percentage of each Realized Loss, other than any Excess Loss, to
be allocated to the Class PO Certificates on such Distribution Date on or prior
to the Senior Credit Support Depletion Date or previously allocated to the Class
PO Certificates and not yet paid to the Holders of the Class PO Certificates.
Class Subordination Percentage: With respect to any Distribution Date and
each Class of Subordinated Certificates, the quotient (expressed as a
percentage) of (a) the Class Certificate Balance of such Class of Certificates
immediately prior to such Distribution Date divided by (b) the aggregate of the
Class Certificate Balances immediately prior to such Distribution Date of all
Classes of Certificates.
Class Unpaid Interest Amounts: As to any Distribution Date and Class of
interest bearing Certificates, the amount by which the aggregate Class Interest
Shortfalls for such Class on prior Distribution Dates exceeds the amount
distributed on such Class on prior Distribution Dates pursuant to clause (ii) of
the definition of Class Optimal Interest Distribution Amount.
Closing Date: ___________, 1997.
Code: The Internal Revenue Code of 1986, including any successor or
amendatory provisions.
Collateral Value: With respect to a Loan the proceeds of which were not
used to refinance an existing mortgage loan, the lesser of (x) the appraised
value based on an appraisal made by an independent fee appraiser at the time of
the origination of the related Loan, and (y) the sales price of such Mortgaged
Property at such time of origination. With respect to a Loan the proceeds of
which were used to refinance an existing mortgage loan, the appraised value of
the Mortgaged Property based upon the appraisal obtained at the time of
refinancing.
Component: As specified in the Preliminary Statement.
Component Balance: With respect to any Component and any Distribution Date,
the Initial Component Balance thereof on the Closing Date, (A) less all amounts
applied in reduction of the principal balance of such Component and Realized
Losses allocated thereto on previous Distribution Dates and (B) in the case of
the Accrual Certificates, increased by all interest accrued and added to the
Component Balance thereof prior to such Distribution Date.
Component Certificates: As specified in the Preliminary Statement.
6
<PAGE>
Corporate Trust Office: The designated office of the Trustee in the State
of New York at which at any particular time its corporate trust business with
respect to this Agreement shall be administered, which office at the date of the
execution of this Agreement is located at __________________________________
(Attn: ____________________________________, facsimile no. ________________, and
which is the address to which notices to and correspondence with the Trustee
should be directed.
Cut-off Date: _________ __, 199_.
Cut-off Date Pool Principal Balance: $______________.
Cut-off Date Principal Balance: As to any Loan, the Stated Principal
Balance thereof as of the close of business on the Cut-off Date.
DCR: Duff & Phelps Credit Rating Company, or any successor thereto. If DCR
is designated as a Rating Agency in the Preliminary Statement, for purposes of
Section 10.05(b) the address for notices to DCR shall be Duff & Phelps Credit
Rating Company, 17 State Street, 12th Floor, New York, New York 10004,
Attention: ______________, or such other address as DCR may hereafter furnish to
the Depositor and the Servicer.
Debt Service Reduction: With respect to any Loan, a reduction by a court of
competent jurisdiction in a proceeding under the Bankruptcy Code in the
Scheduled Payment for such Loan which became final and non-appealable, except
such a reduction resulting from a Deficient Valuation or any reduction that
results in a permanent forgiveness of principal.
Defective Loan: Any Loan which is required to be repurchased pursuant to
Section 2.02 or 2.03.
Deficient Valuation: With respect to any Loan, a valuation by a court of
competent jurisdiction of the Mortgaged Property in an amount less than the
then-outstanding indebtedness under the Loan, or any reduction in the amount of
principal to be paid in connection with any Scheduled Payment that results in a
permanent forgiveness of principal, which valuation or reduction results from an
order of such court which is final and non-appealable in a proceeding under the
Bankruptcy Code.
Definitive Certificates: Any Certificate evidenced by a Physical
Certificate and any Certificate issued in lieu of a Book-Entry Certificate
pursuant to Section 5.02(e).
Deleted Loan: As defined in Section 2.03(b) hereof.
7
<PAGE>
Denomination: With respect to each Certificate, the amount set forth on the
face thereof as the "Initial Certificate Balance of this Certificate" or the
"Initial Notional Amount of this Certificate" or, if neither of the foregoing,
the Percentage Interest appearing on the face thereof.
Depositor: Equity One ABS, Inc., a Delaware corporation, or its successor
in interest.
Depository: The initial Depository shall be The Depository Trust Company,
the nominee of which is CEDE & Co., as the registered Holder of the Book-Entry
Certificates. The Depository shall at all times be a "clearing corporation" as
defined in Section 8-102(3) of the Uniform Commercial Code of the State of New
York.
Depository Participant: A broker, dealer, bank or other financial
institution or other Person for whom from time to time a Depository effects
book-entry transfers and pledges of securities deposited with the Depository.
Determination Date: As to any Distribution Date, the ____ day of each month
or if such ____ day is not a Business Day the next preceding Business Day;
provided, however, that if such ____ day or such Business Day, whichever is
applicable, is less than two Business Days prior to the related Distribution
Date, the Determination Date shall be the first Business Day which is two
Business Days preceding such Distribution Date.
Discount Loan: Any Loan with an Adjusted Net Mortgage Rate that is less
than the Required Coupon.
Distribution Account: The separate Eligible Account created and maintained
by the Trustee pursuant to Section 3.05 in the name of the Trustee for the
benefit of the Certificateholders and designated "_________________________ in
trust for registered holders of Equity One ABS, Inc. Asset Backed Certificates,
Series 199_-_." Funds in the Distribution Account shall be held in trust for the
Certificateholders for the uses and purposes set forth in this Agreement.
Distribution Account Deposit Date: As to any Distribution Date, 12:30 p.m.
Pacific time on the Business Day immediately preceding such Distribution Date.
Distribution Date: The ____ day of each calendar month after the initial
issuance of the Certificates, or if such ____ day is not a Business Day, the
next succeeding Business Day, commencing in ____________, 199_.
8
<PAGE>
Due Date: With respect to any Distribution Date, the first day of the month
in which the related Distribution Date occurs.
Eligible Account: Any of (i) an account or accounts maintained with a
federal or state chartered depository institution or trust company the
short-term unsecured debt obligations of which (or, in the case of a depository
institution or trust company that is the principal subsidiary of a holding
company, the debt obligations of such holding company) have the highest
short-term ratings of each Rating Agency at the time any amounts are held on
deposit therein, or (ii) an account or accounts in a depository institution or
trust company in which such accounts are insured by the FDIC (to the limits
established by the FDIC) and the uninsured deposits in which accounts are
otherwise secured such that, as evidenced by an Opinion of Counsel delivered to
the Trustee and to each Rating Agency, the Certificateholders have a claim with
respect to the funds in such account or a perfected first priority security
interest against any collateral (which shall be limited to Permitted
Investments) securing such funds that is superior to claims of any other
depositors or creditors of the depository institution or trust company in which
such account is maintained, or (iii) a trust account or accounts maintained with
(a) the trust department of a federal or state chartered depository institution
or (b) a trust company, acting in its fiduciary capacity or (iv) any other
account acceptable to each Rating Agency. Eligible Accounts may bear interest,
and may include, if otherwise qualified under this definition, accounts
maintained with the Trustee.
Equity One-Delaware: Equity One, Inc., a Delaware corporation.
ERISA: The Employee Retirement Income Security Act of 1974, as amended.
ERISA-Restricted Certificate: As specified in the Preliminary Statement.
Escrow Account: The Eligible Account or Accounts established and maintained
pursuant to Section 3.06(a) hereof.
Event of Default: As defined in Section 7.01 hereof.
Excess Loss: The amount of any (i) Fraud Loss realized after the Fraud Loss
Coverage Termination Date, (ii) Special Hazard Loss realized after the Special
Hazard Coverage Termination Date or (iii) Bankruptcy Loss realized after the
Bankruptcy Coverage Termination Date.
9
<PAGE>
Excess Proceeds: With respect to any Liquidated Loan, the amount, if any,
by which the sum of any Liquidation Proceeds of such Loan received in the
calendar month in which such Loan became a Liquidated Loan, net of any amounts
previously reimbursed to the Servicer as Nonrecoverable Advance(s) with respect
to such Loan pursuant to Section 3.08(a)(iii), exceeds (i) the unpaid principal
balance of such Liquidated Loan as of the Due Date in the month in which such
Loan became a Liquidated Loan plus (ii) accrued interest at the Mortgage Rate
from the Due Date as to which interest was last paid or advanced (and not
reimbursed) to Certificateholders up to the Due Date applicable to the
Distribution Date immediately following the calendar month during which such
liquidation occurred.
Expense Rate: As to each Loan, the sum of the related Servicing Fee Rate
and the Trustee Fee Rate.
FDIC: The Federal Deposit Insurance Corporation, or any successor thereto.
FHLMC: The Federal Home Loan Mortgage Corporation, a corporate
instrumentality of the United States created and existing under Title III of the
Emergency Home Finance Act of 1970, as amended, or any successor thereto.
FIRREA: The Financial Institutions Reform, Recovery, and Enforcement Act of
1989.
Fitch: Fitch Investors Service, L.P., or any successor thereto. If Fitch is
designated as a Rating Agency in the Preliminary Statement, for purposes of
Section 10.05(b) the address for notices to Fitch shall be Fitch Investors
Service, L.P., One State Street Plaza, New York, New York 10004, Attention:
_______________________________________, or such other address as Fitch may
hereafter furnish to the Depositor and the Servicer.
FNMA: The Federal National Mortgage Association, a federally chartered and
privately owned corporation organized and existing under the Federal National
Mortgage Association Charter Act, or any successor thereto.
Fraud Loan: A Liquidated Loan as to which a Fraud Loss has occurred.
Fraud Loss Coverage Amount: As of the Closing Date, $_____________ subject
to reduction from time to time, by the amount of Fraud Losses allocated to the
Certificates. In addition, on each anniversary of the Cut-off Date, the Fraud
Loss Coverage Amount will be reduced as follows: (a) on the __________,
__________, __________ and __________ anniversaries of the Cut-off Date, to an
amount equal to the lesser of (i) ___%
10
<PAGE>
of the then current Pool Stated Principal Balance and (ii) the excess of the
Fraud Loss Coverage Amount as of the preceding anniversary of the Cut-off Date
over the cumulative amount of Fraud Losses allocated to the Certificates since
such preceding anniversary; and (b) on the __________ anniversary of the Cut-off
Date, to zero.
Fraud Loss Coverage Termination Date: The point in time at which the Fraud
Loss Coverage Amount is reduced to zero.
Fraud Losses: Realized Losses on Loans as to which a loss is sustained by
reason of a default arising from fraud, dishonesty or misrepresentation in
connection with the related Loan, including a loss by reason of the denial of
coverage under any related Primary Insurance Policy because of such fraud,
dishonesty or misrepresentation.
Indirect Participant: A broker, dealer, bank or other financial institution
or other Person that clears through or maintains a custodial relationship with a
Depository Participant.
Initial Bankruptcy Coverage Amount: $_________.
Initial Component Balance: As specified in the Preliminary Statement.
Insurance Policy: With respect to any Loan included in the Trust Fund, any
insurance policy, including all riders and endorsements thereto in effect,
including any replacement policy or policies for any Insurance Policies.
Insurance Proceeds: Proceeds paid by an insurer pursuant to any Insurance
Policy, in each case other than any amount included in such Insurance Proceeds
in respect of Insured Expenses.
Insured Expenses: Expenses covered by an Insurance Policy or any other
insurance policy with respect to the Loans.
Interest Accrual Period: With respect to each Class of Delay Certificates
and any Distribution Date, the calendar month prior to the month of such
Distribution Date. With respect to any Non-Delay Certificates and any
Distribution Date, the one month period commencing on the ____ day of the month
preceding the month in which such Distribution Date occurs and ending on the
____ day of the month in which such Distribution Date occurs.
[Interest Determination Date: With respect to any Interest Accrual Period
for any LIBOR Certificates, the second Business Day prior to the first day of
such Interest Accrual Period.]
11
<PAGE>
Latest Possible Maturity Date: The Distribution Date following the third
anniversary of the scheduled maturity date of the Loan having the latest
scheduled maturity date as of the Cut-off Date.
LIBOR: The London interbank offered rate for one-month United States dollar
deposits calculated in the manner described in Section 4.06.
LIBOR Certificates: As specified in the Preliminary Statement.
Liquidated Loan: With respect to any Distribution Date, a defaulted Loan
(including any REO Property) which was liquidated in the calendar month
preceding the month of such Distribution Date and as to which the Servicer has
determined (in accordance with this Agreement) that it has received all amounts
it expects to receive in connection with the liquidation of such Loan, including
the final disposition of an REO Property.
Liquidation Proceeds: Amounts, including Insurance Proceeds, received in
connection with the partial or complete liquidation of defaulted Loans, whether
through trustee's sale, foreclosure sale or otherwise or amounts received in
connection with any condemnation or partial release of a Mortgaged Property and
any other proceeds received in connection with an REO Property, less the sum of
related unreimbursed Servicing Fees, Servicing Advances and Advances.
Loan-to-Value Ratio: With respect to any Loan and as to any date of
determination, (i) the principal balance of such Loan [at the date of
origination] divided by (ii) the Collateral Value of the related Mortgaged
Property.
Loans: Such of the mortgage loans conveyed and assigned to the Trustee
pursuant to the provisions hereof as from time to time are held as a part of the
Trust Fund (including any REO Property), the mortgage loans so held being
identified in the Loan Schedule, notwithstanding foreclosure or other
acquisition of title of the related Mortgaged Property.
Loan Schedule: The list of Loans (as from time to time amended by the
Servicer to reflect the addition of Substitute Loans and the deletion of Deleted
Loans pursuant to the provisions of this Agreement) transferred to the Trustee
as part of the Trust Fund and from time to time subject to this Agreement,
attached hereto as Schedule I, setting forth the following information with
respect to each Loan:
12
<PAGE>
(i) the loan number;
(ii) the Mortgagor's name and the street address of the Mortgaged
Property, including the zip code;
(iii) the maturity date;
(iv) the original principal balance;
(v) the Cut-off Date Principal Balance;
(vi) the first payment date of the Loan;
(vii) the Scheduled Payment in effect as of the Cut-off Date;
(viii) the Loan-to-Value Ratio at origination;
(ix) a code indicating whether the residential dwelling at the time of
origination was represented to be owner-occupied;
(x) a code indicating whether the residential dwelling is either (a) a
detached single family dwelling (b) a dwelling in a de minimis PUD, (c) a
condominium unit or PUD (other than a de minimis PUD), or (d) a two- to
four-unit residential property;
(xi) the Mortgage Rate;
(xii) the purpose for the Loan;
(xiii) the type of documentation program pursuant to which the Loan was
originated, and
(xiv) the Servicing Fee for the Loan.
Such schedule shall also set forth the total of the amounts described under
(iv) and (v) above for all of the Loans.
Majority in Interest: As to any Class of Regular Certificates, the Holders
of Certificates of such Class evidencing, in the aggregate, at least 51% of the
Percentage Interests evidenced by all Certificates of such Class.
Monthly Statement: The statement delivered to the Certificateholders
pursuant to Section 4.04.
Moody's: Moody's Investors Service, Inc., or any successor thereto. If
Moody's is designated as a Rating Agency in the Preliminary Statement, for
purposes of Section 10.05(b) the address for notices to Moody's shall be Moody's
Investors
13
<PAGE>
Service, Inc., 99 Church Street, New York, New York 10007,
Attention: ___________________________________, or such other
address as Moody's may hereafter furnish to the Depositor or the
Servicer.
Mortgage: The mortgage, deed of trust or other instrument creating a first
lien on an estate in fee simple or leasehold interest in real property securing
a Mortgage Note.
Mortgage File: The mortgage documents listed in Section 2.01 hereof
pertaining to a particular Loan and any additional documents delivered to the
Trustee to be added to the Mortgage File pursuant to this Agreement.
Mortgage Note: The original executed note or other evidence of indebtedness
evidencing the indebtedness of a Mortgagor under a Loan.
Mortgage Rate: The annual rate of interest borne by a Mortgage Note from
time to time, net of any interest premium charged by the mortgagee to obtain or
maintain any Primary Insurance Policy.
Mortgaged Property: The underlying property securing a Loan.
Mortgagor: The obligor(s) on a Mortgage Note.
National Cost of Funds Index: The National Monthly Median Cost of Funds
Ratio to SAIF-Insured Institutions published by the Office of Thrift
Supervision.
Net Prepayment Interest Shortfalls: As to any Distribution Date, the amount
by which the aggregate of Prepayment Interest Shortfalls during the related
Prepayment Period exceeds an amount equal to one-half of the aggregate Servicing
Fee for such Distribution Date before reduction of the Servicing Fee in respect
of such Prepayment Interest Shortfalls.
Non-Delay Certificates: As specified in the Preliminary Statement.
Non-Discount Loan: Any Loan with an Adjusted Net Mortgage Rate that is
greater than or equal to the Required Coupon.
Non-PO Formula Principal Amount: As to any Distribution Date, the sum of
the applicable Non-PO Percentage of (a) the principal portion of each Scheduled
Payment (without giving effect, prior to the Bankruptcy Coverage Termination
Date, to any reductions thereof caused by any Debt Service Reductions or
Deficient Valuations) due on each Loan on the related Due
14
<PAGE>
Date, (b) the Stated Principal Balance of each Loan that was repurchased by the
Seller or the Servicer pursuant to this Agreement as of such Distribution Date,
(c) the Substitution Adjustment Amount in connection with any Deleted Loan
received with respect to such Distribution Date, (d) any Insurance Proceeds or
Liquidation Proceeds allocable to recoveries of principal of Loans that are not
yet Liquidated Loans received during the calendar month preceding the month of
such Distribution Date, (e) with respect to each Loan that became a Liquidated
Loan during the calendar month preceding the month of such Distribution Date,
the amount of the Liquidation Proceeds allocable to principal received during
the calendar month preceding the month of such Distribution Date with respect to
such Loan and (f) all Principal Prepayments received during the related
Prepayment Period.
Non-PO Percentage: As to any Discount Loan, a fraction (expressed as a
percentage) the numerator of which is the Adjusted Net Mortgage Rate of such
Discount Loan and the denominator of which is the Required Coupon. As to any
Non-Discount Loan, 100%.
Nonrecoverable Advance: Any portion of an Advance previously made or
proposed to be made by the Servicer that, in the good faith judgment of the
Servicer, will not be ultimately recoverable by the Servicer from the related
Mortgagor, related Liquidation Proceeds or otherwise.
Notice of Final Distribution: The notice to be provided pursuant to Section
9.02 to the effect that final distribution on any of the Certificates shall be
made only upon presentation and surrender thereof.
Notional Amount: With respect to any Distribution Date and the Class X
Certificates, the aggregate of the Stated Principal Balances of the Non-Discount
Loans as of the Due Date in the month of such Distribution Date (prior to giving
effect to any Scheduled Payments due on such Loans on such Due Date). With
respect to any Distribution Date and (i) the Class A-_-_ Component, the Class
Certificate Balance of the Class A-_ Certificate on such Distribution Date; (ii)
the Class A-_-_ Component, the Class Certificate Balance of the Class A-_
Certificate on such Distribution Date; and (iii) the Class A-_-_ Component, the
Class Certificate Balance of the Class A-_ Certificate on such Distribution
Date.
Notional Amount Certificates: As specified in the Preliminary Statement.
Offered Certificates: As specified in the Preliminary Statement.
15
<PAGE>
Officer's Certificate: A certificate (i) signed by the Chairman of the
Board, the Vice Chairman of the Board, the President, a Managing Director, a
Vice President (however denominated), an Assistant Vice President, the
Treasurer, the Secretary, or one of the Assistant Treasurers or Assistant
Secretaries of the Depositor or the Servicer, or (ii), if provided for in this
Agreement, signed by a Servicing Officer, as the case may be, and delivered to
the Depositor and the Trustee, as the case may be, as required by this
Agreement.
Opinion of Counsel: A written opinion of counsel, who may be counsel for
the Depositor or the Servicer, including, in-house counsel, reasonably
acceptable to the Trustee; provided, however, that with respect to the
interpretation or application of the REMIC Provisions, such counsel must (i) in
fact be independent of the Depositor and the Servicer, (ii) not have any direct
financial interest in the Depositor or the Servicer or in any affiliate of
either, and (iii) not be connected with the-Depositor or the Servicer as an
officer, employee, promoter, underwriter, trustee, partner, director or person
performing similar functions.
Optional Termination: The termination of the trust created hereunder in
connection with the purchase of the Loans pursuant to Section 9.01(a) hereof.
Original Applicable Credit Support Percentage: With respect to each of the
following Classes of Subordinated Certificates, the corresponding percentage
described below, as of the Closing Date:
Class B-_ ____%
Class B-_ ____%
Class B-_ ____%
Class B-_ ____%
Class B-_ ____%
Class B-_ ____%
Original Loan: The mortgage loan refinanced in connection with the
origination of a Refinancing Loan.
Original Subordinated Principal Balance: The aggregate of the Class
Certificate Balances of the Subordinated Certificates as of the Closing Date.
OTS: The Office of Thrift Supervision.
Outstanding: With respect to the Certificates as of any date of
determination, all Certificates theretofore executed and authenticated under
this Agreement except:
16
<PAGE>
(i) Certificates theretofore canceled by the Trustee or delivered to the
Trustee for cancellation; and
(ii) Certificates in exchange for which or in lieu of which other
Certificates have been executed and delivered by the Trustee pursuant to
this Agreement.
Outstanding Loan: As of any Due Date, a Loan with a Stated Principal
Balance greater than zero, which was not the subject of a Principal Prepayment
in Full prior to such Due Date and which did not become a Liquidated Loan prior
to such Due Date.
Ownership Interest: As to any Residual Certificate, any ownership interest
in such Certificate including any interest in such Certificate as the Holder
thereof and any other interest therein, whether direct or indirect, legal or
beneficial.
Pass-Through Rate: For any interest bearing Class of Certificates or
Component, the per annum rate set forth or calculated in the manner described in
the Preliminary Statement.
Percentage Interest: As to any Certificate, the percentage interest
evidenced thereby in distributions required to be made on the related Class,
such percentage interest being set forth on the face thereof or equal to the
percentage obtained by dividing the Denomination of such Certificate by the
aggregate of the Denominations of all Certificates of the same Class.
Permitted Investments: (i) obligations of the United States or any agency
thereof, provided such obligations are backed by the full faith and credit of
the United States; (ii) general obligations of or obligations guaranteed by any
state of the United States or the District of Columbia receiving the highest
long-term debt rating of each Rating Agency rating the related Series of
Securities, or such lower rating as will not result in the downgrading or
withdrawal of the ratings then assigned to the Certificates by each such Rating
Agency; (iii) commercial or finance company paper which is then receiving the
highest commercial or finance company paper rating of each such Rating Agency,
or such lower rating as will not result in the downgrading or withdrawal of the
ratings then assigned to the Certificates by each such Rating Agency; (iv)
certificates of deposit, demand or time deposits, or bankers' acceptances issued
by any depository institution or trust company incorporated under the laws of
the United States or of any state thereof and subject to supervision and
examination by federal and/or state banking authorities, provided that the
commercial paper and/or long term unsecured debt obligations of such depository
institution or trust company (or in the case of the principal depository
institution in a holding company system, the commercial paper or long-term
unsecured debt obligations of such holding company, but
17
<PAGE>
only if Moody's is not a Rating Agency) are then rated one of the two highest
long-term and the highest short-term ratings of each such Rating Agency for such
securities, or such lower ratings as will not result in the downgrading or
withdrawal of the rating then assigned to the Certificates by any such Rating
Agency; (v) demand or time deposits or certificates of deposit issued by any
bank or trust company or savings institution to the extent that such deposits
are fully insured by the FDIC; (vi) guaranteed reinvestment agreements issued by
any bank, insurance company or other corporation containing, at the time of the
issuance of such agreements, such terms and conditions as will not result in the
downgrading or withdrawal of the rating then assigned to the Certificates by any
such Rating Agency; (vii) repurchase obligations with respect to any security
described in clauses (i) and (ii) above, in either case entered into with a
depository institution or trust company (acting as principal) described in
clause (iv) above; (viii) securities (other than stripped bonds, stripped
coupons or instruments sold at a purchase price in excess of 115% of the face
amount thereof) bearing interest or sold at a discount issued by any corporation
incorporated under the laws of the United States or any state thereof which, at
the time of such investment, have one of the two highest ratings of each Rating
Agency (except if the Rating Agency is Moody's, such rating shall be the highest
commercial paper rating of Moody's for any such securities), or such lower
rating as will not result in the downgrading or withdrawal of the rating then
assigned to the Certificates by any such Rating Agency, as evidenced by a signed
writing delivered by each such Rating Agency; and (ix) such other investments
having a specified stated maturity and bearing interest or sold at a discount
acceptable to each Rating Agency as will not result in the downgrading or
withdrawal of the rating then assigned to the Securities of such Series by any
such Rating Agency, as evidenced by a signed writing delivered by each such
Rating Agency; provided that no such instrument shall be a Permitted Investment
if such instrument evidences the right to receive interest only payments with
respect to the obligations underlying such instrument.
Permitted Transferee: Any person other than (i) the United States, any
State or political subdivision thereof, or any agency or instrumentality of any
of the foregoing, (ii) a foreign government, International Organization or any
agency or instrumentality of either of the foregoing, (iii) an organization
(except certain farmers' cooperatives described in section 521 of the Code)
which is exempt from tax imposed by Chapter 1 of the Code (including the tax
imposed by section 511 of the Code on unrelated business taxable income) on any
excess inclusions (as defined in section 860E(c)(l) of the Code) with respect to
any Residual Certificate, (iv) rural electric and telephone cooperatives
described in section 1381(a)(2)(C) of the Code, (v) a Person that is not a
citizen or resident of the United States, a corporation, partnership, or other
entity created or organized
18
<PAGE>
in or under the laws of the United States or any political subdivision thereof,
or an estate or trust whose income from sources without the United States is
includible in gross income for United States federal income tax purposes
regardless of its connection with the conduct of a trade or business within the
United States unless such Person has furnished the transferor and the Trustee
with a duly completed Internal Revenue Service Form 4224, and (vi) any other
Person so designated by the Depositor based upon an Opinion of Counsel that the
Transfer of an Ownership Interest in a Residual Certificate to such Person may
cause the REMIC hereunder to fail to qualify as a REMIC at any time that the
Certificates are outstanding. The terms "United States," "State" and
"International Organization" shall have the meanings set forth in section 7701
of the Code or successor provisions. A corporation will not be treated as an
instrumentality of the United States or of any State or political subdivision
thereof for these purposes if all of its activities are subject to tax and, with
the exception of the Federal Home Loan Mortgage Corporation, a majority of its
board of directors is not selected by such government unit.
Person: Any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government, or any agency or political subdivision thereof.
Physical Certificate: As specified in the Preliminary Statement.
Planned Balance: With respect to the Planned Principal Classes and any
Distribution Date appearing in Schedule IV hereto, the applicable amount
appearing opposite such Distribution Date for such respective Class or
Component.
Planned Principal Classes: As specified in the Preliminary Statement.
PO Formula Principal Amount: As to any Distribution Date, the sum of the
applicable PO Percentage of (a) the principal portion of each Scheduled Payment
(without giving effect, prior to the Bankruptcy Coverage Termination Date, to
any reductions thereof caused by any Debt Service Reductions or Deficient
Valuations) due on each Loan on the related Due Date, (b) the Stated Principal
Balance of each Loan that was repurchased by the Seller or the Servicer pursuant
to this Agreement as of such Distribution Date, (c) the Substitution Adjustment
Amount in connection with any Deleted Loan received with respect to such
Distribution Date, (d) any Insurance Proceeds or Liquidation Proceeds allocable
to recoveries of principal of Loans that are not yet Liquidated Loans received
during the calendar month preceding the month of such Distribution Date, (e)
with respect to each Loan that became a
19
<PAGE>
Liquidated Loan during the month preceding the calendar month of such
Distribution Date, the amount of Liquidation Proceeds allocable to principal
received during the month preceding the month of such Distribution Date with
respect to such Loan and (f) all Principal Prepayments received during the
related Prepayment Period.
PO Percentage: As to any Discount Loan, a fraction (expressed as a
percentage) the numerator of which is the excess of the Required Coupon over the
Adjusted Net Mortgage Rate of such Discount Loan and the denominator of which is
the Required Coupon. As to any Non-Discount Loan, 0%.
Pool Stated Principal Balance: As to any Distribution Date, the aggregate
of the Stated Principal Balances of the Loans which were Outstanding Loans on
the Due Date in the month preceding the month of such Distribution Date.
Prepayment Interest Excess: As to any Principal Prepayment received by the
Servicer from the first day through the fifteenth day of any calendar month
(other than the calendar month in which the Cut-off Date occurs), all amounts
paid by the related Mortgagor in respect of interest on such Principal
Prepayment. All Prepayment Interest Excess shall be paid to the Servicer as
additional servicing compensation.
Prepayment Interest Shortfall: As to any Distribution Date, Loan and
Principal Prepayment received on or after the sixteenth day of the month
preceding the month of such Distribution Date (or, in the case of the first
Distribution Date, on or after the Cut-off Date) and on or before the last day
of the month preceding the month of such Distribution Date, the amount, if any,
by which one month's interest at the related Mortgage Rate, net of the Servicing
Fee Rate, on such Principal Prepayment exceeds the amount of interest paid in
connection with such Principal Prepayment.
Prepayment Period: As to any Distribution Date, the period from the __th
day of the calendar month preceding the month of such Distribution Date (or, in
the case of the first Distribution Date, from the Cut-off Date) through the __th
of the month of such Distribution Date.
Prepayment Shifting Percentage: As to any Distribution Date occurring
during the ____ years beginning on the _____ Distribution Date will equal 0%.
Thereafter, the Prepayment Shifting Percentage for any Distribution Date
occurring on or after the ____ anniversary of the _____ Distribution Date will
be as follows: for any Distribution Date in the _____ year thereafter, __%; for
any Distribution Date in the ______ year thereafter, __%; for any Distribution
Date in the ______ year
20
<PAGE>
thereafter, __%; for any Distribution Date in the ______ year thereafter, __%;
and for any Distribution Date thereafter, 100%.
Primary Insurance Policy: Each policy of primary mortgage guaranty
insurance or any replacement policy therefor with respect to any Loan.
Primary Planned Principal Classes: As specified in the Preliminary
Statement.
Principal Prepayment: Any payment of principal by a Mortgagor on a Loan
that is received in advance of its scheduled Due Date and is not accompanied by
an amount representing scheduled interest due on any date or dates in any month
or months subsequent to the month of prepayment. Partial Principal Prepayments
shall be applied by the Servicer in accordance with the terms of the related
Mortgage Note.
Principal Prepayment in Full: Any Principal Prepayment made by a Mortgagor
of the entire principal balance of a Loan.
Private Certificate: As specified in the Preliminary Statement.
Pro Rata Share: As to any Distribution Date, the Subordinated Principal
Distribution Amount and any Class of Subordinated Certificates, the portion of
the Subordinated Principal Distribution Amount allocable to such Class, equal to
the product of the Subordinated Principal Distribution Amount on such
Distribution Date and a fraction, the numerator of which is the related Class
Certificate Balance thereof and the denominator of which is the aggregate of the
Class Certificate Balances of the Subordinated Certificates.
Prospectus Supplement: The Prospectus Supplement dated ________ __, 199_
relating to the Offered Certificates.
PUD: Planned Unit Development.
Purchase Price: With respect to any Loan required to be purchased by the
Seller pursuant to Section 2.02 or 2.03 hereof or purchased at the option of the
Servicer pursuant to Section 3.11, an amount equal to the sum of (i) 100% of the
unpaid principal balance of the Loan on the date of such purchase, and (ii)
accrued interest thereon at the applicable Mortgage Rate (or at the applicable
Adjusted Mortgage Rate if (x) the purchaser is the Servicer or (y) if the
purchaser is a Seller and Equity One-Delaware is the Servicer) from the date
through which interest was last paid by the Mortgagor to the Due Date in the
month in which the Purchase Price is to be distributed to Certificateholders.
21
<PAGE>
Qualified Insurer: A mortgage guaranty insurance company duly qualified as
such under the laws of the state of its principal place of business and each
state having jurisdiction over such insurer in connection with the insurance
policy issued by such insurer, duly authorized and licensed in such states to
transact a mortgage guaranty insurance business in such states and to write the
insurance provided by the insurance policy issued by it, approved as a
FNMA-approved mortgage insurer and having a claims paying ability rating of at
least "AA" or equivalent rating by a nationally recognized statistical rating
organization. Any replacement insurer with respect to a Loan must have at least
as high a claims paying ability rating as the insurer it replaces had on the
Closing Date.
Rating Agency: Each of the Rating Agencies specified in the Preliminary
Statement. If any such organization or a successor is no longer in existence,
"Rating Agency" shall be such nationally recognized statistical rating
organization, or other comparable Person, as is designated by the Depositor,
notice of which designation shall be given to the Trustee. References herein to
a given rating category of a Rating Agency shall mean such rating category
without giving effect to any modifiers.
Realized Loss: With respect to each Liquidated Loan, an amount (not less
than zero or more than the Stated Principal Balance of the Loan) as of the date
of such liquidation, equal to (i) the Stated Principal Balance of the Liquidated
Loan as of the date of such liquidation, plus (ii) interest at the Adjusted Net
Mortgage Rate from the Due Date as to which interest was last paid or advanced
(and not reimbursed) to Certificateholders up to the Due Date in the month in
which Liquidation Proceeds are required to be distributed on the Stated
Principal Balance of such Liquidated Loan from time to time, minus (iii) the
Liquidation Proceeds, if any, received during the month in which such
liquidation occurred, to the extent applied as recoveries of interest at the
Adjusted Net Mortgage Rate and to principal of the Liquidated Loan. With respect
to each Loan which has become the subject of a Deficient Valuation, if the
principal amount due under the related Mortgage Note has been reduced, the
difference between the principal balance of the Loan outstanding immediately
prior to such Deficient Valuation and the principal balance of the Loan as
reduced by the Deficient Valuation. With respect to each Loan which has become
the subject of a Debt Service Reduction and any Distribution Date, the amount,
if any, by which the principal portion of the related Scheduled Payment has been
reduced.
Record Date: With respect to any Distribution Date, the close of business
on the last Business Day of the month preceding the month in which such
Distribution Date occurs.
22
<PAGE>
Reference Bank: As defined in Section 4.05.
Refinancing Loan: Any Loan originated in connection with the refinancing of
an existing mortgage loan.
Regular Certificates: As specified in the Preliminary Statement.
Relief Act: The Soldiers' and Sailors' Civil Relief Act of 1940, as
amended.
Relief Act Reductions: With respect to any Distribution Date and any Loan
as to which there has been a reduction in the amount of interest collectible
thereon for the most recently ended calendar month as a result of the
application of the Relief Act, the amount, if any, by which (i) interest
collectible on such Loan for the most recently ended calendar month is less than
(ii) interest accrued thereon for such month pursuant to the Mortgage Note.
REMIC: A "real estate mortgage investment conduit" within the meaning of
section 860D of the Code.
REMIC Change of Law: Any proposed, temporary or final regulation, revenue
ruling, revenue procedure or other official announcement or interpretation
relating to REMICs and the REMIC Provisions issued after the Closing Date.
REMIC Provisions: 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 promulgated thereunder, as the foregoing may be in effect from time
to time as well as provisions of applicable state laws.
REO Property: A Mortgaged Property acquired by the Trust Fund through
foreclosure or deed-in-lieu of foreclosure in connection with a defaulted Loan.
Request for Release: The Request for Release submitted by the Servicer to
the Trustee, substantially in the form of Exhibits M and N, as appropriate.
Required Coupon: ____% per annum.
Required Insurance Policy: With respect to any Loan, any insurance policy
that is required to be maintained from time to time under this Agreement.
Residual Certificates: As specified in the Preliminary Statement.
23
<PAGE>
Responsible Officer: When used with respect to the Trustee, any Vice
President, any Assistant Vice President, the Secretary, any Assistant Secretary,
any Trust Officer or any other officer of the Trustee customarily performing
functions similar to those performed by any of the above designated officers and
also to whom, with respect to a particular matter, such matter is referred
because of such officer's knowledge of and familiarity with the particular
subject.
Restricted Classes: As defined in Section 4.02(e).
Scheduled Balances: With respect to any Scheduled Classes and any
Distribution Date appearing in Schedule IV hereto, the applicable amount
appearing in Schedule IV hereto opposite such Distribution Date for such
respective Classes.
Scheduled Classes: As specified in the Preliminary Statement.
Scheduled Payment: The scheduled monthly payment on a Loan due on any Due
Date allocable to principal and/or interest on such Loan which, unless otherwise
specified herein, shall give effect to any related Debt Service Reduction and
any Deficient Valuation that affects the amount of the monthly payment due on
such Loan.
Scheduled Principal Distribution Amount: With respect to any Distribution
Date, the applicable Non-PO Percentage of the amount described in clauses (a)
through (d) of the definition of Non-PO Formula Principal Amount.
Secondary Planned Principal Clauses: As specified in the Preliminary
Statement.
Securities Act: The Securities Act of 1933, as amended.
Sellers: Collectively, the following corporations, their successors and
assigns, each in its capacity as a Seller of the Loans to the Depositor:
____________________, a __________ corporation, ____________________, a
__________ corporation, ____________________, a __________ corporation,
____________________, a __________ corporation, ____________________, a
__________ corporation, ____________________, a __________ corporation, and
____________________, a __________ corporation.
Senior Certificates: As specified in the Preliminary Statement.
24
<PAGE>
Senior Credit Support Depletion Date: The date on which the Class
Certificate Balance of each Class of Subordinated Certificates has been reduced
to zero.
Senior Percentage: As to any Distribution Date, the percentage equivalent
of a fraction the numerator of which is the aggregate of the Class Certificate
Balances of each Class of Senior Certificates (other than the Class PO
Certificates) as of such date and the denominator of which is the aggregate of
the Class Certificate Balances of all Classes of Certificates (other than the
Class PO Certificates) as of such date.
Senior Prepayment Percentage: For any Distribution Date during the
__________ years beginning on the ____ Distribution Date, 100%. The Senior
Prepayment Percentage for any Distribution Date occurring on or after the
__________ anniversary of the first Distribution Date will, except as provided
herein, be as follows: for any Distribution Date in the __________ year
thereafter, the Senior Percentage plus __% of the Subordinated Percentage for
such Distribution Date; for any Distribution Date in the __________ year
thereafter, the Senior Percentage plus ___% of the Subordinated Percentage for
such Distribution Date; for any Distribution Date in the __________ year
thereafter, the Senior Percentage plus __% of the Subordinated Percentage for
such Distribution Date; for any Distribution Date in the __________ year
thereafter, the Senior Percentage plus ___% of the Subordinated Percentage for
such Distribution Date; and for any Distribution Date thereafter, the Senior
Percentage for such Distribution Date (unless on any of the foregoing
Distribution Dates the Senior Percentage exceeds the initial Senior Percentage,
in which case the Senior Prepayment Percentage for such Distribution Date will
once again equal 100%). Notwithstanding the foregoing, no decrease in the Senior
Prepayment Percentage will occur if, as of the first Distribution Date as to
which any such decrease applies, (i) the outstanding principal balance of all
Loans delinquent ___ days or more (averaged over the preceding ______ period),
as a percentage of the aggregate principal balance of the Subordinate
Certificates (averaged over the preceding six month period), is equal to or
greater than ___% or (ii) cumulative Realized Losses with respect to the Loans
exceed (a) with respect to the Distribution Date on the __________ anniversary
of the first Distribution Date, __% of the Original Subordinated Principal
Balance, (b) with respect to the Distribution Date on the __________ anniversary
of the first Distribution Date, __% of the Original Subordinated Principal
Balance, (c) with respect to the Distribution Date on the __________ anniversary
of the first Distribution Date, __% of the Original Subordinated Principal
Balance, (d) with respect to the Distribution Date on the __________ anniversary
of the first Distribution Date, __% of the Original Subordinated Principal
Balance and (e) with respect to the Distribution Date on the __________
anniversary of the first
25
<PAGE>
Distribution Date, __% of the Original Subordinated Principal Balance.
Senior Principal Distribution Amount: As to any Distribution Date, the sum
of (i) the Senior Percentage of the applicable Non-PO Percentage of all amounts
described in clauses (a) through (d) of the definition of "Non-PO Formula
Principal Amount" for such Distribution Date, (ii) with respect to each Loan
that became a Liquidated Loan during the calendar month preceding the month of
such Distribution Date, the lesser of (x) the Senior Percentage of the
applicable Non-PO Percentage of the Stated Principal Balance of such Loan and
(y) either (A) the Senior Prepayment Percentage or (B) if an Excess Loss was
sustained with respect to such Liquidated Loan during such prior calendar month,
the Senior Percentage, of the applicable Non-PO Percentage of the amount of the
Liquidation Proceeds allocable to principal received with respect to such Loan,
and (iii) the Senior Prepayment Percentage of the applicable Non-PO Percentage
of the amounts described in clause (f) of the definition of "Non-PO Formula
Principal Amount" for such Distribution Date.
Servicer: Equity One, Inc., a Delaware corporation, and its successors and
assigns, in its capacity as servicer hereunder.
Servicer Advance Date: As to any Distribution Date, 12:30 p.m. Pacific time
on the Business Day immediately preceding such Distribution Date.
Servicing Advances: All customary, reasonable and necessary "out of pocket"
costs and expenses incurred in the performance by the Servicer of its servicing
obligations, including, but not limited to, the cost of (i) the preservation,
restoration and protection of a Mortgaged Property, (ii) any expenses
reimbursable to the Servicer pursuant to Section 3.11 and any enforcement or
judicial proceedings, including foreclosures, (iii) the management and
liquidation of any REO Property and (iv) compliance with the obligations under
Section 3.09.
Servicing Fee: As to each Loan and any Distribution Date, an amount payable
out of each full payment of interest received on such Loan and equal to
one-twelfth of the Servicing Fee Rate multiplied by the Stated Principal Balance
of such Loan as of the Due Date in the month of such Distribution Date (prior to
giving effect to any Scheduled Payments due on such Loan on such Due Date),
subject to reduction as provided in Section 3.14.
Servicing Fee Rate: With respect to each Loan, ____% per annum.
26
<PAGE>
Servicing Officer: Any officer of the Servicer involved in, or responsible
for, the administration and servicing of the Loans whose name and facsimile
signature appear on a list of servicing officers furnished to the Trustee by the
Servicer on the Closing Date pursuant to this Agreement, as such list may from
time to time be amended.
Special Hazard Coverage Termination Date: The point in time at which the
Special Hazard Loss Coverage Amount is reduced to zero.
Special Hazard Loss: Any Realized Loss suffered by a Mortgaged Property on
account of direct physical loss but not including (i) any loss of a type covered
by a hazard insurance policy or a flood insurance policy required to be
maintained with respect to such Mortgaged Property pursuant to Section 3.09 to
the extent of the amount of such loss covered thereby, or (ii) any loss caused
by or resulting from:
(a) normal wear and tear;
(b) fraud, conversion or other dishonest act on the part of the
Trustee, the Servicer or any of their agents or employees (without regard
to any portion of the loss not covered by any errors and omissions policy);
(c) errors in design, faulty workmanship or faulty materials, unless
the collapse of the property or a part thereof ensues and then only for the
ensuing loss;
(d) nuclear or chemical reaction or nuclear radiation or radioactive
or chemical contamination, all whether controlled or uncontrolled, and
whether such loss be direct or indirect, proximate or remote or be in whole
or in part caused by, contributed to or aggravated by a peril covered by
the definition of the term "Special Hazard Loss";
(e) hostile or warlike action in time of peace and war, including
action in hindering, combating or defending against an actual, impending or
expected attack:
1. by any government or sovereign power, de jure or de facto, or
by any authority maintaining or using military, naval or air forces;
or
2. by military, naval or air forces; or
3. by an agent of any such government, power, authority or
forces;
27
<PAGE>
(f) any weapon of war employing nuclear fission, fusion or other
radioactive force, whether in time of peace or war; or
(g) insurrection, rebellion, revolution, civil war, usurped power or
action taken by governmental authority in hindering, combating or defending
against such an occurrence, seizure or destruction under quarantine or
customs regulations, confiscation by order of any government or public
authority or risks of contraband or illegal transportation or trade.
Special Hazard Loss Coverage Amount: With respect to the first Distribution
Date, $____________. With respect to any Distribution Date after the first
Distribution Date, the lesser of (a) the greatest of (i) ___% of the aggregate
of the principal balances of the Loans, (ii) __________ the principal balance of
the largest Loan and (iii) the aggregate of the principal balances of all Loans
secured by Mortgaged Properties located in the single New Jersey or Pennsylvania
postal zip code area having the highest aggregate principal balance of any such
zip code area and (b) the Special Hazard Loss Coverage Amount as of the Closing
Date less the amount, if any, of Special Hazard Losses allocated to the
Certificates since the Closing Date. All principal balances for the purpose of
this definition will be calculated as of the first day of the calendar month
preceding the month of such Distribution Date after giving effect to Scheduled
Payments on the Loans then due, whether or not paid.
Special Hazard Loan: A Liquidated Loan as to which a Special Hazard Loss
has occurred.
S&P: Standard & Poor's Ratings Group, a division of McGraw-Hill Inc. If S&P
is designated as a Rating Agency in the Preliminary Statement, for purposes of
Section 10.05(b) the address for notices to S&P shall be Standard & Poor's
Ratings Group, 26 Broadway, 15th Floor, New York, New York 10004, Attention:
________________________________, or such other address as S&P may hereafter
furnish to the Depositor and the Servicer.
Startup Day: The Closing Date.
Stated Principal Balance: As to any Loan and Due Date, the unpaid principal
balance of such Loan as of such Due Date as specified in the amortization
schedule at the time relating thereto (before any adjustment to such
amortization schedule by reason of any moratorium or similar waiver or grace
period) after giving effect to any previous partial Principal Prepayments and
Liquidation Proceeds allocable to principal (other than with respect to any
Liquidated Loan) and to the payment of principal
28
<PAGE>
due on such Due Date and irrespective of any delinquency in
payment by the related Mortgagor.
Streamlined Documentation Loan: Any Loan originated pursuant to the
Seller's Streamlined Loan Documentation Program then in effect.
Subordinated Certificates: As specified in the Preliminary Statement.
Subordinated Percentage: As to any Distribution Date, 100% minus the Senior
Percentage for such Distribution Date.
Subordinated Prepayment Percentage: As to any Distribution Date, 100% minus
the Senior Prepayment Percentage for such Distribution Date.
Subordinated Principal Distribution Amount: With respect to any
Distribution Date, an amount equal to (A) the sum of (i) the Subordinated
Percentage of the applicable Non-PO Percentage of all amounts described in
clauses (a) through (d) of the definition of "Non-PO Formula Principal Amount"
for such Distribution Date, (ii) with respect to each Loan that became a
Liquidated Loan during the calendar month preceding the month of such
Distribution Date, the applicable Non-PO Percentage of the amount of the
Liquidation Proceeds allocated to principal received with respect thereto
remaining after application thereof pursuant to clause (ii) of the definition of
Senior Principal Distribution Amount, up to the Subordinated Percentage of the
applicable Non-PO Percentage of the Stated Principal Balance of such Loan and
(iii) the Subordinated Prepayment Percentage of the applicable Non-PO Percentage
of all amounts described in clause (f) of the definition of "Non-PO Formula
Principal Amount" for such Distribution Date reduced by (B) the amount of any
payments in respect of Class PO Deferred Amounts on the related Distribution
Date.
Subservicer: Any person to whom the Servicer has contracted for the
servicing of all or a portion of the Loans pursuant to Section 3.02 hereof.
Substitute Loan: A Loan substituted by a Seller for a Deleted Loan which
must, on the date of such substitution, as confirmed in a Request for Release,
substantially in the form of Exhibit M, (i) have a Stated Principal Balance,
after deduction of the principal portion of the Scheduled Payment due in the
month of substitution, not in excess of, and not more than __% less than the
Stated Principal Balance of the Deleted Loan; (ii) be accruing interest at a
rate no lower than and not more than __% per annum higher than, that of the
Deleted Loan; (iii) have a Loan-to-Value Ratio no higher than that of the
Deleted Loan; (iv) have a remaining term to maturity no greater than (and not
more
29
<PAGE>
than ____________ less than that of) the Deleted Loan; and (v) comply with each
representation and warranty set forth in Section 2.03 hereof.
Substitution Adjustment Amount: The meaning ascribed to such term pursuant
to Section 2.03.
Support Classes: As specified in the Preliminary Statement.
Targeted Balance: With respect to the Targeted Principal Classes and any
Distribution Date appearing in Schedule IV hereto, the applicable amount
appearing opposite such Distribution Date for such respective Class or
Component.
Targeted Principal Classes: As specified in the Preliminary Statement.
Tax Matters Person: The person designated as "tax matters person" in the
manner provided under Treasury regulation (section) 1.860F-4(d) and temporary
Treasury regulation (section) 301.6231(a)(7)1T. Initially, the Tax Matters
Person shall be the Trustee.
Tax Matters Person Certificate: The Class A-R Certificate with a
Denomination of $1.00.
Transfer: Any direct or indirect transfer or sale of any Ownership Interest
in a Residual Certificate.
Trustee: ____________________ and its successors and, if a successor
trustee is appointed hereunder, such successor.
Trustee Fee: As to any Distribution Date, an amount equal to one-twelfth of
the Trustee Fee Rate multiplied by the Pool Stated Principal Balance with
respect to such Distribution Date.
Trustee Fee Rate: With respect to each Loan, the per annum rate agreed upon
in writing on or prior to the Closing Date by the Trustee and the Depositor.
Trust Fund: The corpus of the trust created hereunder consisting of (i) the
Loans and all interest and principal received on or with respect thereto after
the Cut-off Date to the extent not applied in computing the Cut-off Date
Principal Balance thereof; (ii) the Certificate Account, the Distribution
Account, and all amounts deposited therein pursuant to the applicable provisions
of this Agreement; (iv) property that secured a Loan and has been acquired by
foreclosure, deed-in-lieu of foreclosure or otherwise; and (v) all proceeds of
the conversion, voluntary or involuntary, of any of the foregoing.
30
<PAGE>
Unscheduled Principal Distribution Amount: With respect to any Distribution
Date, the sum of (i) with respect to each Loan that became a Liquidated Loan
during the calendar month preceding the month of such Distribution Date, the
lesser of (x) the applicable Non-PO Percentage of the Stated Principal Balance
of such Loan and (y) the applicable Non-PO Percentage of the amount of the
Liquidation Proceeds allocable to principal received with respect to such Loan,
and (ii) the applicable Non-PO Percentage of the amount described in clause (f)
of the definition of Non-PO Formula Principal Amount.
Voting Rights: The portion of the voting rights of all of the Certificates
which is allocated to any Certificate. As of any date of determination, (a) 1%
of all Voting Rights shall be allocated to each Class of Notional Amount
Certificates, if any (such Voting Rights to be allocated among the holders of
Certificates of each such Class in accordance with their respective Percentage
Interests), and (b) the remaining Voting Rights (or 100% of the Voting Rights if
there is no Class of Notional Amount Certificates) shall be allocated among
Holders of the remaining Classes of Certificates in proportion to the
Certificate Balances of their respective Certificates on such date.
[Add, in appropriate alphabetical location, corporate-specific
identifications for each subsidiary or subsubsidiary of "Equity One-Delaware"
that becomes a Seller]
31
<PAGE>
ARTICLE II
CONVEYANCE OF LOANS;
REPRESENTATIONS AND WARRANTIES
SECTION 2.01. Conveyance of Loans.
(a) Each Seller, concurrently with the execution and delivery hereof,
hereby sells, transfers, assigns, sets over and otherwise conveys to the
Depositor, without recourse, all the right, title and interest of such Seller in
and to that portion of the Loans listed on the Loan Schedule that pertains to
such Seller, including all interest and principal received or receivable by such
Seller on or with respect to such Loans after the Cut-off Date and all interest
and principal payments on such Loans received prior to the Cut-off Date in
respect of installments of interest and principal due thereafter, but not
including payments of principal and interest due and payable on such Loans on or
before the Cut-off Date. On or prior to the Closing Date, each Seller shall
deliver to the Depositor or, at the Depositor's direction, to the Trustee or
other designee of the Depositor, the Mortgage File for each Loan listed in that
portion of the Loan Schedule that pertains to such Seller. Such delivery of the
Mortgage Files shall be made against payment by the Depositor of the purchase
price, previously agreed to by such Seller and the Depositor, for the Loans
listed on the Loan Schedule that pertains to such Seller. With respect to any
Loan that does not have a first payment date on or before the Due Date in the
month of the first Distribution Date, such Seller shall deposit into the
Distribution Account on or before the Distribution Account Deposit Date relating
to the first Distribution Date, an amount equal to one month's interest at the
related Adjusted Mortgage Rate on the Cut-off Date Principal Balance of such
Loan.
(b) The Depositor, concurrently with the execution and delivery hereof,
hereby sells, transfers, assigns, sets over and otherwise conveys to the Trustee
for the benefit of the Certificateholders, without recourse, all the right,
title and interest of the Depositor in and to the Trust Fund together with the
Depositor's right to require the Sellers to cure any breach of a representation
or warranty made herein by the Sellers or to repurchase or substitute for any
affected Loan in accordance herewith.
(c) In connection with the transfer and assignment set forth in clause (b)
above, the Depositor has delivered or caused to be delivered to the Trustee for
the benefit of the Certificateholders the following documents or instruments
with respect to each Loan so assigned:
32
<PAGE>
(i) the original Mortgage Note endorsed by manual or facsimile
signature in blank in the following form: "Pay to the order of ____________
without recourse," with all intervening endorsements showing a complete
chain of endorsement from the originator to the Person endorsing it to the
Trustee (each such endorsement being sufficient to transfer all right,
title and interest of the party so endorsing, as noteholder or assignee
thereof, in and to that Mortgage Note);
(ii) except as provided below, the original recorded Mortgage or a
copy of such Mortgage certified by the Seller as being a true and complete
copy of the Mortgage;
(iii) a duly executed assignment of the Mortgage (which may be
included in a blanket assignment or assignments), together with, except as
provided below, all interim recorded assignments of such mortgage (each
such assignment, when duly and validly completed, to be in recordable form
and sufficient to effect the assignment of and transfer to the assignee
thereof, under the Mortgage to which the assignment relates); provided
that, if the related Mortgage has not been returned from the applicable
public recording office, such assignment of the Mortgage may exclude the
information to be provided by the recording office;
(iv) the original or copies of each assumption, modification, written
assurance or substitution agreement, if any; and
(v) except as provided below, the original or duplicate original
lender's title policy and all riders thereto.
In the event that in connection with any Loan the Depositor cannot deliver
(a) the original recorded Mortgage, (b) all interim recorded assignments or (c)
the lender's title policy (together with all riders thereto) satisfying the
requirements of clause (ii), (iii) or (v) above, respectively, concurrently with
the execution and delivery hereof because such document or documents have not
been returned from the applicable public recording office in the case of clause
(ii) or (iii) above, or because the title policy has not been delivered to
either the Servicer or the Depositor by the applicable title insurer in the case
of clause (v) above, the Depositor shall promptly deliver to the Trustee, in the
case of clause (ii) or (iii) above, such original Mortgage or such interim
assignment, as the case may be, with evidence of recording indicated thereon
upon receipt thereof from the public recording office, or a copy thereof,
certified, if appropriate, by the relevant recording office, but in no event
33
<PAGE>
shall any such delivery of the original Mortgage and each such interim
assignment or a copy thereof, certified, if appropriate, by the relevant
recording office, be made later than one year following the Closing Date, or, in
the case of clause (v) above, no later than 120 days following the Closing Date;
provided, however, in the event the Depositor is unable to deliver by such date
each Mortgage and each such interim assignment by reason of the fact that any
such documents have not been returned by the appropriate recording office, or,
in the case of each such interim assignment, because the related Mortgage has
not been returned by the appropriate recording office, the Depositor shall
deliver such documents to the Trustee as promptly as possible upon receipt
thereof and, in any event, within 720 days following the Closing Date. The
Depositor shall forward or cause to be forwarded to the Trustee (a) from time to
time additional original documents evidencing an assumption or modification of a
Loan and (b) any other documents required to be delivered by the Depositor or
the Servicer to the Trustee. In the event that the original Mortgage is not
delivered and in connection with the payment in full of the related Loan and the
public recording office requires the presentation of a "lost instruments
affidavit and indemnity" or any equivalent document, because only a copy of the
Mortgage can be delivered with the instrument of satisfaction or reconveyance,
the Servicer shall execute and deliver or cause to be executed and delivered
such a document to the public recording office. In the case where a public
recording office retains the original recorded Mortgage or in the case where a
Mortgage is lost after recordation in a public recording office, the appropriate
Seller shall deliver to the Trustee a copy of such Mortgage certified by such
public recording office to be a true and complete copy of the original recorded
Mortgage.
As promptly as practicable subsequent to such transfer and assignment, and
in any event, within thirty (30) days thereafter, the Trustee shall (i) affix
the Trustee's name to each assignment of Mortgage, as the assignee thereof, (ii)
cause such assignment to be in proper form for recording in the appropriate
public office for real property records and (iii) cause to be delivered for
recording in the appropriate public office for real property records the
assignments of the Mortgages to the Trustee, except that, with respect to any
assignments of Mortgage as to which the Trustee has not received the information
required to prepare such assignment in recordable form, the Trustee's obligation
to do so and to deliver the same for such recording shall be as soon as
practicable after receipt of such information and in any event within thirty
(30) days after receipt thereof and that the Trustee need not cause to be
recorded any assignment which relates to a Loan (a) the Mortgaged Property and
Mortgage File relating to which are located in [list appropriate States] or (b)
in any other jurisdiction under the laws of which, as evidenced by an Opinion of
Counsel delivered by the Seller (at the Seller's expense) to the Trustee, the
34
<PAGE>
recordation of such assignment is not necessary to protect the Trustee's and the
Certificateholders' interest in the related Loan.
In the case of Loans that have been prepaid in full as of the Closing Date,
the Depositor, in lieu of delivering the above documents to the Trustee, will
deposit in the Certificate Account the portion of such payment that is required
to be deposited in the Certificate Account pursuant to Section 3.08 hereof.
SECTION 2.02. Acceptance by Trustee of the Loans.
The Trustee acknowledges receipt of the documents identified in the Initial
Certification in the form annexed hereto as Exhibit G and declares that it holds
and will hold such documents and the other documents delivered to it
constituting the Mortgage Files, and that it holds or will hold such other
assets as are included in the Trust Fund, in trust for the exclusive use and
benefit of all present and future Certificateholders. The Trustee acknowledges
that it will maintain possession of the Mortgage Notes in the State of
__________, unless otherwise permitted by the Rating Agencies.
The Trustee agrees to execute and deliver on the Closing Date to the
Depositor, the Servicer and the Sellers an Initial Certification in the form
annexed hereto as Exhibit G. Based on its review and examination, and only as to
the documents identified in such Initial Certification, the Trustee acknowledges
that such documents appear regular on their face and relate to such Loan. The
Trustee shall be under no duty or obligation to inspect, review or examine said
documents, instruments, certificates or other papers to determine that the same
are genuine, enforceable or appropriate for the represented purpose or that they
have actually been recorded in the real estate records or that they are other
than what they purport to be on their face.
Not later than 90 days after the Closing Date, the Trustee shall deliver to
the Depositor, the Servicer and the Sellers a Final Certification in the form
annexed hereto as Exhibit H, with any applicable exceptions noted thereon.
If, in the course of such review, the Trustee finds any document
constituting a part of a Mortgage File which does not meet the requirements of
Section 2.01, the Trustee shall list such as an exception in the Final
Certification; provided, however that the Trustee shall not make any
determination as to whether (i) any endorsement is sufficient to transfer all
right, title and interest of the party so endorsing, as noteholder or assignee
thereof, in and to that Mortgage Note or (ii) any assignment is in recordable
form or is sufficient to effect the
35
<PAGE>
assignment of and transfer to the assignee thereof under the mortgage to which
the assignment relates. The appropriate Seller shall promptly correct or cure
such defect within 90 days from the date it was so notified of such defect and,
if the appropriate Seller does not correct or cure such defect within such
period, the appropriate Seller shall either (a) substitute for the related Loan
a Substitute Loan, which substitution shall be accomplished in the manner and
subject to the conditions set forth in Section 2.03, or (b) purchase such Loan
from the Trustee within 90 days from the date the appropriate Seller was
notified of such defect in writing at the Purchase Price of such Loan; provided,
however, that in no event shall such substitution or purchase occur more than
540 days from the Closing Date, except that if the substitution or purchase of a
Loan pursuant to this provision is required by reason of a delay in delivery of
any comments by the appropriate recording office, and there is a dispute between
either the Servicer or the appropriate Seller and the Trustee over the location
or status of the recorded document, then such substitution or purchase shall
occur within 720 days from the Closing Date. The Trustee shall deliver written
notice to each Rating Agency within 270 days from the Closing Date indicating
each Loan (a) which has not been returned by the appropriate recording office or
(b) as to which there is a dispute as to location or status of such Loan. Such
notice shall be delivered every 90 days thereafter until the related Loan is
returned to the Trustee. Any such substitution pursuant to (a) above or purchase
pursuant to (b) above shall not be effected prior to the delivery to the Trustee
of the opinion of Counsel required by Section 2.05 hereof, if any, and any
substitution pursuant to (a) above shall not be effected prior to the additional
delivery to the Trustee of a Request for release substantially in the form of
Exhibit N. No substitution is permitted to be made in any calendar month after
the Determination Date for such month. The Purchase Price for any such Loan
shall be deposited by the appropriate Seller in the Certificate Account on or
prior to the Distribution Account Deposit Date for the Distribution Date in the
month following the month of repurchase and, upon receipt of such deposit and
certification with respect thereto in the form of Exhibit N hereto, the Trustee
shall release the related Mortgage File to the appropriate Seller and shall
execute and deliver at the appropriate Seller's request such instruments of
transfer or assignment prepared by the appropriate Seller, in each case without
recourse, as shall be necessary to vest in the appropriate Seller, or a
designee, the Trustee's interest in any Loan released pursuant hereto.
The Trustee shall retain possession and custody of each Mortgage File in
accordance with and subject to the terms and conditions set forth herein. The
Servicer shall promptly deliver to the Trustee, upon the execution or receipt
thereof, the originals of such other documents or instruments constituting the
36
<PAGE>
Mortgage File as come into the possession of the Servicer from time to time.
It is understood and agreed that the obligation of the appropriate Seller
to substitute for or to purchase any Loan which does not meet the requirements
of Section 2.01 above shall constitute the sole remedy respecting such defect
available to the Trustee, the Depositor and any Certificateholder against any
Seller.
SECTION 2.03. Representations, Warranties and
Covenants of the Sellers.
(a) [insert definition of each Seller], each in its capacity as a Seller,
hereby makes the representations and warranties set forth in Schedule II hereto,
and by this reference incorporated herein, to the Depositor and the Trustee, as
of the Closing Date, or if so specified therein, as of the Cut-off Date.
(b) [insert definition of each Seller], each in its capacity as a Seller,
hereby makes the representations and warranties set forth in Schedule III
hereto, and by this reference incorporated herein, to the Depositor and the
Trustee, as of the Closing Date, or if so specified therein, as of the Cut-off
Date.
(c) Upon discovery by any of the parties hereto of a breach of a
representation or warranty made pursuant to Section 2.03(a) or Section 2.03(b)
that materially and adversely affects the interests of the Certificateholders in
any Loan, the party discovering such breach shall give prompt notice thereof to
the other parties. The Sellers hereby covenant that within 90 days of the
earlier of its discovery or their receipt of written notice from any party of a
breach of any representation or warranty made pursuant to Section 2.03(a) or
Section 2.03(b) which materially and adversely affects the interests of the
Certificateholders in any Loan, the appropriate Seller shall cure such breach in
all material respects, and if such breach is not so cured, shall, (i) if such
90-day period expires prior to the second anniversary of the Closing Date,
remove such Loan (a "Deleted Loan") from the Trust Fund and substitute in its
place a Substitute Loan, in the manner and subject to the conditions set forth
in this Section; or (ii) repurchase the affected Loan or Loans from the Trustee
at the Purchase Price in the manner set forth below; provided, however, that any
such substitution pursuant to (i) above shall not be effected prior to the
delivery to the Trustee of the Opinion of Counsel required by Section 2.05
hereof, if any, and any such substitution pursuant to (i) above shall not be
effected prior to the additional delivery to the Trustee of a Request for
Release substantially in the form of Exhibit N and the Mortgage File for any
such Substitute Loan. The appropriate Seller shall promptly reimburse the
Servicer and
37
<PAGE>
the Trustee for any expenses reasonably incurred by the Servicer or the Trustee
in respect of enforcing the remedies for such breach. With respect to the
representations and warranties described in this Section which are made to the
best of a Seller's knowledge, if it is discovered by either the Depositor, the
appropriate Seller or the Trustee that the substance of such representation and
warranty is inaccurate and such inaccuracy materially and adversely affects the
value of the related Loan or the interests of the Certificateholders therein,
notwithstanding the appropriate Seller's lack of knowledge with respect to the
substance of such representation or warranty, such inaccuracy shall be deemed a
breach of the applicable representation or warranty.
With respect to any Substitute Loan or Loans, the appropriate Seller shall
deliver to the Trustee for the benefit of the Certificateholders the Mortgage
Note, the Mortgage, the related assignment of the Mortgage, and such other
documents and agreements as are required by Section 2.01, with the Mortgage Note
endorsed and the Mortgage assigned as required by Section 2.01. No substitution
is permitted to be made in any calendar month after the Determination Date for
such month. Scheduled Payments due with respect to Substitute Loans in the month
of substitution shall not be part of the Trust Fund and will be retained by the
appropriate Seller on the next succeeding Distribution Date. For the month of
substitution, distributions to Certificateholders will include the monthly
payment due on any Deleted Loan for such month and thereafter the appropriate
Seller shall be entitled to retain all amounts received in respect of such
Deleted Loan. The Servicer shall amend the Loan Schedule for the benefit of the
Certificateholders to reflect the removal of such Deleted Loan and the
substitution of the Substitute Loan or Loans and the Servicer shall deliver the
amended Loan Schedule to the Trustee. Upon such substitution, the Substitute
Loan or Loans shall be subject to the terms of this Agreement in all respects,
and the appropriate Seller shall be deemed to have made with respect to such
Substitute Loan or Loans, as of the date of substitution, the representations
and warranties made pursuant to Section 2.03(b) with respect to such Loan. Upon
any such substitution and the deposit to the Certificate Account of the amount
required to be deposited therein in connection with such substitution as
described in the following paragraph, the Trustee shall release the Mortgage
File held for the benefit of the Certificateholders relating to such Deleted
Loan to the appropriate Seller and shall execute and deliver at the appropriate
Seller's direction such instruments of transfer or assignment prepared by the
appropriate Seller, in each case without recourse, as shall be necessary to vest
title in the appropriate Seller, or its designee, the Trustee's interest in any
Deleted Loan substituted for pursuant to this Section 2.03.
38
<PAGE>
For any month in which the appropriate Seller substitutes one or more
Substitute Loans for one or more Deleted Loans, the Servicer will determine the
amount (if any) by which the aggregate principal balance of all such Substitute
Loans as of the date of substitution is less than the aggregate Stated Principal
Balance of all such Deleted Loans (after application of the scheduled principal
portion of the monthly payments due in the month of substitution). The amount of
such shortage (the "Substitution Adjustment Amount") plus an amount equal to the
aggregate of any unreimbursed Advances with respect to such Deleted Loans shall
be deposited in the Certificate Account by the appropriate Seller on or before
the Distribution Account Deposit Date for the Distribution Date in the month
succeeding the calendar month during which the related Loan became required to
be purchased or replaced hereunder.
In the event that the appropriate Seller shall have repurchased a Loan, the
Purchase Price therefor shall be deposited in the Certificate Account pursuant
to Section 3.05 on or before the Distribution Account Deposit Date for the
Distribution Date in the month following the month during which the appropriate
Seller became obligated hereunder to repurchase or replace such Loan and upon
such deposit of the Purchase Price, the delivery of the Opinion of Counsel
required by Section 2.05 and receipt of a Request for Release in the form of
Exhibit N hereto, the Trustee shall release the related Mortgage File held for
the benefit of the Certificateholders to such Person, and the Trustee shall
execute and deliver at such Person's direction such instruments of transfer or
assignment prepared by such Person, in each case without recourse, as shall be
necessary to transfer title from the Trustee. It is understood and agreed that
the obligation under this Agreement of any Person to cure, repurchase or replace
any Loan as to which a breach has occurred and is continuing shall constitute
the sole remedy against such Persons respecting such breach available to
Certificateholders, the Depositor or the Trustee on their behalf.
The representations and warranties made pursuant to this Section 2.03 shall
survive delivery of the respective Mortgage Files to the Trustee for the benefit
of the Certificateholders.
SECTION 2.04. Representations and Warranties of the
Depositor as to the Loans.
The Depositor hereby represents and warrants to the Trustee with respect to
each Loan as of the date hereof or such other date set forth herein that as of
the Closing Date, and following the transfer of the Loans to it by the Sellers,
the Depositor had good title to the Loans and the Mortgage Notes were subject to
no offsets, defenses or counterclaims.
39
<PAGE>
The Depositor hereby assigns, transfers and conveys to the Trustee all of
its rights with respect to the Loans including, without limitation, the
representations and warranties of the Sellers made pursuant to Section 2.03(b)
hereof, together with all rights of the Depositor to require the Sellers to cure
any breach thereof or to repurchase or substitute for any affected Loan in
accordance with this Agreement.
It is understood and agreed that the representations and warranties set
forth in this Section 2.04 shall survive delivery of the Mortgage Files to the
Trustee. Upon discovery by the Depositor or the Trustee of a breach of any of
the foregoing representations and warranties set forth in this Section 2.04
(referred to herein as a "breach"), which breach materially and adversely
affects the interest of the Certificateholders, the party discovering such
breach shall give prompt written notice to the others and to each Rating Agency.
SECTION 2.05. Delivery of Opinion of Counsel in
Connection with Substitutions.
(a) Notwithstanding any contrary provision of this Agreement, no
substitution pursuant to Section 2.02 or Section 2.03 shall be made more than 90
days after the Closing Date unless the appropriate Seller delivers to the
Trustee an Opinion of Counsel, which Opinion of Counsel shall not be at the
expense of either the Trustee or the Trust Fund, addressed to the Trustee, to
the effect that such substitution will not (i) result in the imposition of the
tax on "prohibited transactions" on the Trust Fund or contributions after the
Startup Date, as defined in Sections 860F(a)(2) and 860G(d) of the Code,
respectively, or (ii) cause the Trust Fund to fail to qualify as a REMIC at any
time that any Certificates are outstanding.
(b) Upon discovery by the Depositor, the appropriate Seller, the Servicer,
or the Trustee that any Loan does not constitute a "qualified mortgage" within
the meaning of Section 860G(a)(3) of the Code, the party discovering such fact
shall promptly (and in any event within five (5) Business Days of discovery)
give written notice thereof to the other parties. In connection therewith, the
Trustee shall require the appropriate Seller, at the appropriate Seller's
option, to either (i) substitute, if the conditions in Section 2.03(c) with
respect to substitutions are satisfied, a Substitute Loan for the affected Loan,
or (ii) repurchase the affected Loan within 90 days of such discovery in the
same manner as it would a Loan for a breach of representation or warranty made
pursuant to Section 2.03. The Trustee shall reconvey to such Seller the Loan to
be released pursuant hereto in the same manner, and on the same terms and
conditions, as it would a Loan repurchased for breach of a representation or
warranty contained in Section 2.03.
40
<PAGE>
SECTION 2.06. Execution and Delivery of Certificates.
The Trustee acknowledges the transfer and assignment to it of the Trust
Fund and, concurrently with such transfer and assignment, has executed and
delivered to or upon the order of the Depositor, the Certificates in authorized
denominations evidencing directly or indirectly the entire ownership of the
Trust Fund. The Trustee agrees to hold the Trust Fund and exercise the rights
referred to above for the benefit of all present and future Holders of the
Certificates and to perform the duties set forth in this Agreement to the best
of its ability, to the end that the interests of the Holders of the Certificates
may be adequately and effectively protected.
SECTION 2.07. REMIC Matters.
The Preliminary Statement sets forth the designations and "latest possible
maturity date" for federal income tax purposes of all interests created hereby.
The "Startup Day" for purposes of the REMIC Provisions shall be the Closing
Date. The "tax matters person" with respect to the Trust Fund shall be the
Trustee and the Trustee shall hold the Tax Matters Person Certificate. The Trust
Fund's fiscal year shall be the calendar year.
SECTION 2.08. Covenants of the Servicer.
The Servicer hereby covenants to the Depositor and the Trustee as follows:
(a) the Servicer shall comply in the performance of its obligations
under this Agreement with all reasonable rules and requirements of the
insurer under each Required Insurance Policy; and
(b) no written information, certificate of an officer, statement
furnished in writing or written report delivered to the Depositor, any
affiliate of the Depositor or the Trustee and prepared by the Servicer
pursuant to this Agreement will contain any untrue statement of a material
fact or omit to state a material fact necessary to make such information,
certificate, statement or report not misleading.
41
<PAGE>
ARTICLE III
ADMINISTRATION AND SERVICING
OF LOANS
SECTION 3.01. Servicer to Service Loans.
For and on behalf of the Certificateholders, the Servicer shall service and
administer the Loans in accordance with the terms of this Agreement and
customary and usual standards of practice of prudent mortgage loan servicers. In
connection with such servicing and administration, the Servicer shall have full
power and authority, acting alone and/or through Subservicers as provided in
Section 3.02 hereof, to do or cause to be done any and all things that it may
deem necessary or desirable in connection with such servicing and
administration, including but not limited to, the power and authority, subject
to the terms hereof (i) to execute and deliver, on behalf of the
Certificateholders and the Trustee, customary consents or waivers and other
instruments and documents, (ii) to consent to transfers of any Mortgaged
Property and assumptions of the Mortgage Notes and related Mortgages (but only
in the manner provided in this Agreement), (iii) to collect any Insurance
Proceeds and other Liquidation Proceeds, and (iv) to effectuate foreclosure or
other conversion of the ownership of the Mortgaged Property securing any Loan;
provided that the Servicer shall not take any action that is inconsistent with
or prejudices the interests of the Trust Fund or the Certificateholders in any
Loan or the rights and interests of the Depositor, the Trustee and the
Certificateholders under this Agreement. The Servicer shall represent and
protect the interests of the Trust Fund in the same manner as it protects its
own interests in mortgage loans in its own portfolio in any claim, proceeding or
litigation regarding a Loan, and shall not make or permit any modification,
waiver or amendment of any Loan which would cause the Trust Fund to fail to
qualify as a REMIC or result in the imposition of any tax under Section 860F(a)
or Section 860G(d) of the Code. Without limiting the generality of the
foregoing, the Servicer, in its own name or in the name of the Depositor and the
Trustee, is hereby authorized and empowered by the Depositor and the Trustee,
when the Servicer believes it appropriate in its reasonable judgment, to execute
and deliver, on behalf of the Trustee, the Depositor, the Certificateholders or
any of them, any and all instruments of satisfaction or cancellation, or of
partial or full release or discharge and all other comparable instruments, with
respect to the Loans, and with respect to the Mortgaged Properties held for the
benefit of the Certificateholders. The Servicer shall prepare and deliver to the
Depositor and/or the Trustee such documents requiring execution and delivery by
either or both of them as are necessary or appropriate to enable the Servicer to
service and administer the Loans to the extent that the Servicer is not
permitted to execute and deliver such documents pursuant
42
<PAGE>
to the preceding sentence. Upon receipt of such documents, the Depositor and/or
the Trustee shall execute such documents and deliver them to the Servicer.
In accordance with the standards of the preceding paragraph, the Servicer
shall advance or cause to be advanced funds as necessary for the purpose of
effecting the payment of taxes and assessments on the Mortgaged Properties,
which advances shall be reimbursable in the first instance from related
collections from the Mortgagors pursuant to Section 3.06, and further as
provided in Section 3.08. The costs incurred by the Servicer, if any, in
effecting the timely payments of taxes and assessments on the Mortgaged
Properties and related insurance premiums shall not, for the purpose of
calculating monthly distributions to the Certificateholders, be added to the
Stated Principal Balances of the related Loans, notwithstanding that the terms
of such Loans so permit.
SECTION 3.02. Subservicing; Enforcement of the
Obligations of Servicers.
(a) The Servicer may arrange for the subservicing of any Loan by a
Subservicer pursuant to a subservicing agreement; provided, however, that such
subservicing arrangement and the terms of the related subservicing agreement
must provide for the servicing of such Loans in a manner consistent with the
servicing arrangements contemplated hereunder. Unless the context otherwise
requires, references in this Agreement to actions taken or to be taken by the
Servicer in servicing the Loans include actions taken or to be taken by a
Subservicer on behalf of the Servicer. Notwithstanding the provisions of any
subservicing agreement, any of the provisions of this Agreement relating to
agreements or arrangements between the Servicer and a Subservicer or reference
to actions taken through a Subservicer or otherwise, the Servicer shall remain
obligated and liable to the Depositor, the Trustee and the Certificateholders
for the servicing and administration of the Loans in accordance with the
provisions of this Agreement without diminution of such obligation or liability
by virtue of such subservicing agreements or arrangements or by virtue of
indemnification from the Subservicer and to the same extent and under the same
terms and conditions as if the Servicer alone were servicing and administering
the Loans. All actions of each Subservicer performed pursuant to the related
subservicing agreement shall be performed as an agent of the Servicer with the
same force and effect as if performed directly by the Servicer.
(b) For purposes of this Agreement, the Servicer shall be deemed to have
received any collections, recoveries or payments with respect to the Loans that
are received by a Subservicer regardless of whether such payments are remitted
by the Subservicer to the Servicer.
43
<PAGE>
SECTION 3.03. Rights of the Depositor and the Trustee
in Respect of the Servicer.
The Depositor may, but is not obligated to, enforce the obligations of the
Servicer hereunder and may, but is not obligated to, perform, or cause a
designee to perform, any defaulted obligation of the Servicer hereunder and in
connection with any such defaulted obligation to exercise the related rights of
the Servicer hereunder; provided that the Servicer shall not be relieved of any
of its obligations hereunder by virtue of such performance by the Depositor or
its designee. Neither the Trustee nor the Depositor shall have any
responsibility or liability for any action or failure to act by the Servicer nor
shall the Trustee or the Depositor be obligated to supervise the performance of
the Servicer hereunder or otherwise.
SECTION 3.04. Trustee to Act as Servicer.
In the event that the Servicer shall for any reason no longer be the
Servicer hereunder (including by reason of an Event of Default), the Trustee or
its successor shall thereupon assume all of the rights and obligations of the
Servicer hereunder arising thereafter (except that the Trustee shall not be (i)
liable for losses of the Servicer pursuant to Section 3.09 hereof or any acts or
omissions of the predecessor Servicer hereunder), (ii) obligated to make
Advances if it is prohibited from doing so by applicable law, (iii) obligated to
effectuate repurchases or substitutions of Loans hereunder including, but not
limited to, repurchases or substitutions of Loans pursuant to Section 2.02 or
2.03 hereof, (iv) responsible for expenses of the Servicer pursuant to Section
2.03 or (v) deemed to have made any representations and warranties of the
Servicer hereunder). Any such assumption shall be subject to Section 7.02
hereof. If the Servicer shall for any reason no longer be the Servicer
(including by reason of any Event of Default), the Trustee or its successor
shall succeed to any rights and obligations of the Servicer under each
subservicing agreement.
The Servicer shall, upon request of the Trustee, but at the expense of the
Servicer, deliver to the assuming party all documents and records relating to
each subservicing agreement or substitute subservicing agreement and the Loans
then being serviced thereunder and an accounting of amounts collected or held by
it and otherwise use its best efforts to effect the orderly and efficient
transfer of the substitute subservicing agreement to the assuming party.
SECTION 3.05. Collection of Loan Payments; Certificate
Account; Distribution Account.
(a) The Servicer shall make reasonable efforts in accordance with the
customary and usual standards of practice of
44
<PAGE>
prudent mortgage servicers to collect all payments called for under the terms
and provisions of the Loans to the extent such procedures shall be consistent
with this Agreement and the terms and provisions of any related Required
Insurance Policy. Consistent with the foregoing, the Servicer may in its
discretion (i) waive any late payment charge or any prepayment charge or penalty
interest in connection with the prepayment of a Loan and (ii) extend the due
dates for payments due on a Mortgage Note for a period not greater than 180
days; provided, however, that the Servicer cannot extend the maturity of any
such Loan past the date on which the final payment is due on the latest maturing
Loan as of the Cut-off Date. In the event of any such arrangement, the Servicer
shall make Advances on the related Loan in accordance with the provisions of
Section 4.01 during the scheduled period in accordance with the amortization
schedule of such Loan without modification thereof by reason of such
arrangements. The Servicer shall not be required to institute or join in
litigation with respect to collection of any payment (whether under a Mortgage,
Mortgage Note or otherwise or against any public or governmental authority with
respect to a taking or condemnation) if it reasonably believes that enforcing
the provision of the Mortgage or other instrument pursuant to which such payment
is required is prohibited by applicable law.
(b) The Servicer shall establish and maintain a Certificate Account into
which the Servicer shall deposit or cause to be deposited on a daily basis
within one Business Day of receipt, except as otherwise specifically provided
herein, the following payments and collections remitted by Subservicers or
received by it in respect of Loans subsequent to the Cut-off Date (other than in
respect of principal and interest due on the Loans on or before the Cut-off
Date) and the following amounts required to be deposited hereunder:
(i) all payments on account of principal on the Loans, including
Principal Prepayments;
(ii) all payments on account of interest on the Loans, net of the
related Servicing Fee;
(iii) all Insurance Proceeds and Liquidation Proceeds, other than
proceeds to be applied to the restoration or repair of the Mortgaged
Property or released to the Mortgagor in accordance with the Servicer's
normal servicing procedures;
(iv) any amount required to be deposited by the Servicer pursuant to
Section 3.05(e) in connection with any losses on Permitted Investments;
45
<PAGE>
(v) any amounts required to be deposited by the Servicer pursuant to
Section 3.09(b), 3.09(d), and in respect of net monthly rental income from
REO Property pursuant to Section 3.11 hereof;
(vi) all Substitution Adjustment Amounts;
(vii) all Advances made by the Servicer pursuant to Section 4.01; and
(viii) any other amounts required to be deposited hereunder.
In addition, with respect to any Loan that is subject to a buydown
agreement, on each Due Date for such Loan, in addition to the monthly payment
remitted by the Mortgagor, the Servicer shall cause funds to be deposited into
the Certificate Account in an amount required to cause an amount of interest to
be paid with respect to such Loan equal to the amount of interest that has
accrued on such Loan from the preceding Due Date at the Mortgage Rate net of the
related Servicing Fee on such date.
The foregoing requirements for remittance by the Servicer shall be
exclusive, it being understood and agreed that, without limiting the generality
of the foregoing, payments in the nature of prepayment penalties, late payment
charges or assumption fees, if collected, need not be remitted by the Servicer.
In the event that the Servicer shall remit any amount not required to be
remitted, it may at any time withdraw or direct the institution maintaining the
Certificate Account to withdraw such amount from the Certificate Account, any
provision herein to the contrary notwithstanding. Such withdrawal or direction
may be accomplished by delivering written notice thereof to the Trustee or such
other institution maintaining the Certificate Account which describes the
amounts deposited in error in the Certificate Account. The Servicer shall
maintain adequate records with respect to all withdrawals made pursuant to this
Section. All funds deposited in the Certificate Account shall be held in trust
for the Certificateholders until withdrawn in accordance with Section 3.08.
(c) The Trustee shall establish and maintain, on behalf of the
Certificateholders, the Distribution Account. The Trustee shall, promptly upon
receipt, deposit in the Distribution Account and retain therein the following:
(i) the aggregate amount remitted by the Servicer to the Trustee
pursuant to Section 3.08(a)(ix);
(ii) any amount deposited by the Servicer pursuant to Section 3.05(d)
in connection with any losses on Permitted Investments; and
46
<PAGE>
(iii) any other amounts deposited hereunder which are required to be
deposited in the Distribution Account.
In the event that the Servicer shall remit any amount not required to be
remitted, it may at any time direct the Trustee to withdraw such amount from the
Distribution Account, any provision herein to the contrary notwithstanding. Such
direction may be accomplished by delivering an Officer's Certificate to the
Trustee which describes the amounts deposited in error in the Distribution
Account. All funds deposited in the Distribution Account shall be held by the
Trustee in trust for the Certificateholders until disbursed in accordance with
this Agreement or withdrawn in accordance with Section 3.08. In no event shall
the Trustee incur liability for withdrawals from the Distribution Account at the
direction of the Servicer.
(d) Each institution at which the Certificate Account or the Distribution
Account is maintained shall invest the funds therein as directed in writing by
the Servicer in Permitted Investments, which shall mature not later than (i) in
the case of the Certificate Account, the second Business Day next preceding the
related Distribution Account Deposit Date (except that if such Permitted
Investment is an obligation of the institution that maintains such account, then
such Permitted Investment shall mature not later than the Business Day next
preceding such Distribution Account Deposit Date) and (ii) in the case of the
Distribution Account, the Business Day next preceding the Distribution Date
(except that if such Permitted Investment is an obligation of the institution
that maintains such fund or account, then such Permitted Investment shall mature
not later than such Distribution Date) and, in each case, shall not be sold or
disposed of prior to its maturity. All such Permitted Investments shall be made
in the name of the Trustee, for the benefit of the Certificateholders. All
income and gain net of any losses realized from any such investment of funds on
deposit in the Certificate Account or the Distribution Account shall be for the
benefit of the Servicer as servicing compensation and shall be remitted to it
monthly as provided herein. The amount of any realized losses in the Certificate
Account or the Distribution Account incurred in any such account in respect of
any such investments shall promptly be deposited by the Servicer in the
Certificate Account or paid to the Trustee for deposit into the Distribution
Account, as applicable. The Trustee in its fiduciary capacity shall not be
liable for the amount of any loss incurred in respect of any investment or lack
of investment of funds held in the Certificate Account or the Distribution
Account and made in accordance with this Section 3.05.
(e) The Servicer shall give notice to the Trustee, each Seller, each Rating
Agency and the Depositor of any proposed change of the location of the
Certificate Account prior to any change thereof. The Trustee shall give notice
to the Servicer,
47
<PAGE>
the Seller, each Rating Agency and the Depositor of any proposed change of the
location of the Distribution Account prior to any change thereof.
SECTION 3.06. Collection of Taxes, Assessments and
Similar Items; Escrow Accounts.
(a) To the extent required by the related Mortgage Note and not violative
of current law, the Servicer shall establish and maintain one or more accounts
(each, an "Escrow Account") and deposit and retain therein all collections from
the Mortgagors (or advances by the Servicer) for the payment of taxes,
assessments, hazard insurance premiums or comparable items for the account of
the Mortgagors. Nothing herein shall require the Servicer to compel a Mortgagor
to establish an Escrow Account in violation of applicable law.
(b) Withdrawals of amounts so collected from the Escrow Accounts may be
made only to effect timely payment of taxes, assessments, hazard insurance
premiums, condominium or PUD association dues, or comparable items, to reimburse
the Servicer out of related collections for any payments made pursuant to
Sections 3.01 hereof (with respect to taxes and assessments and insurance
premiums) and 3.09 hereof (with respect to hazard insurance), to refund to any
Mortgagors any sums determined to be overages, to pay interest, if required by
law or the terms of the related Mortgage or Mortgage Note, to Mortgagors on
balances in the Escrow Account or to clear and terminate the Escrow Account at
the termination of this Agreement in accordance with Section 9.01 hereof. The
Escrow Accounts shall not be a part of the Trust Fund.
(c) The Servicer shall advance any payments referred to in Section 3.06(a)
that are not timely paid by the Mortgagors on the date when the tax, premium or
other cost for which such payment is intended is due, but the Servicer shall be
required so to advance only to the extent that such advances, in the good faith
judgment of the Servicer, will be recoverable by the Servicer out of Insurance
Proceeds, Liquidation Proceeds or otherwise.
SECTION 3.07. Access to Certain Documentation and
Information Regarding the Loans.
The Servicer shall afford the Depositor and the Trustee reasonable access
to all records and documentation regarding the Loans and all accounts, insurance
information and other matters relating to this Agreement, such access being
afforded without charge, but only upon reasonable request and during normal
business hours at the office designated by the Servicer.
48
<PAGE>
Upon reasonable advance notice in writing, the Servicer will provide to
each Certificateholder which is a savings and loan association, bank or
insurance company certain reports and reasonable access to information and
documentation regarding the Loans sufficient to permit such Certificateholder to
comply with applicable regulations of the OTS or other regulatory authorities
with respect to investment in the Certificates; provided that the Servicer shall
be entitled to be reimbursed by each such Certificateholder for actual expenses
incurred by the Servicer in providing such reports and access.
SECTION 3.08. Permitted Withdrawals from the
Certificate Account and Distribution
Account.
(a) The Servicer may from time to time make withdrawals from the
Certificate Account for the following purposes:
(i) to pay to the Servicer (to the extent not previously retained by
the Servicer) the servicing compensation to which it is entitled pursuant
to Section 3.14, and to pay to the Servicer, as additional servicing
compensation, earnings on or investment income with respect to funds in or
credited to the Certificate Account;
(ii) to reimburse the Servicer for unreimbursed Advances made by it,
such right of reimbursement pursuant to this subclause (ii) being limited
to amounts received on the Loan(s) in respect of which any such Advance was
made;
(iii) to reimburse the Servicer for any Nonrecoverable Advance
previously made;
(iv) to reimburse the Servicer for Insured Expenses from the related
Insurance Proceeds;
(v) to reimburse the Servicer for (a) unreimbursed Servicing Advances,
the Servicer's right to reimbursement pursuant to this clause (a) with
respect to any Loan being limited to amounts received on such Loan(s) which
represent late recoveries of the payments for which such advances were made
pursuant to Section 3.01 or Section 3.06 and (b) for unpaid Servicing Fees
as provided in Section 3.11 hereof;
(vi) to pay to the purchaser, with respect to each Loan or property
acquired in respect thereof that has been purchased pursuant to Section
2.02, 2.03 or 3.11, all amounts received thereon after the date of such
purchase;
49
<PAGE>
(vii) to reimburse the Sellers, the Servicer or the Depositor for
expenses incurred by any of them and reimbursable pursuant to Section 6.03
hereof;
(viii) to withdraw any amount deposited in the Certificate Account and
not required to be deposited therein;
(ix) on or prior to the Distribution Account Deposit Date, to withdraw
an amount equal to the related Available Funds and the Trustee Fee for such
Distribution Date and remit such amount to the Trustee for deposit in the
Distribution Account; and
(x) to clear and terminate the Certificate Account upon termination of
this Agreement pursuant to Section 9.01 hereof.
The Servicer shall keep and maintain separate accounting, on a Loan by Loan
basis, for the purpose of justifying any withdrawal from the Certificate Account
pursuant to such subclauses (i), (ii), (iv), (v) and (vi). Prior to making any
withdrawal from the Certificate Account pursuant to subclause (iii), the
Servicer shall deliver to the Trustee an Officer's Certificate of a Servicing
Officer indicating the amount of any previous Advance determined by the Servicer
to be a Nonrecoverable Advance and identifying the related Loans(s), and their
respective portions of such Nonrecoverable Advance.
(b) The Trustee shall withdraw funds from the Distribution Account for
distributions to Certificateholders in the manner specified in this Agreement
(and to withhold from the amounts so withdrawn, the amount of any taxes that it
is authorized to withhold pursuant to the last paragraph of Section 8.11). In
addition, the Trustee may from time to time make withdrawals from the
Distribution Account for the following purposes:
(i) to pay to itself the Trustee Fee for the related Distribution
Date;
(ii) to pay to the Servicer as additional servicing compensation
earnings on or investment income with respect to funds in the Distribution
Account;
(iii) to withdraw and return to the Servicer any amount deposited in
the Distribution Account and not required to be deposited therein; and
(iv) to clear and terminate the Distribution Account upon termination
of the Agreement pursuant to Section 9.01 hereof.
50
<PAGE>
SECTION 3.09. Maintenance of Hazard Insurance;
Maintenance of Primary Insurance Policies.
(a) The Servicer shall cause to be maintained, for each Loan, hazard
insurance with extended coverage in an amount that is at least equal to the
lesser of (i) the maximum insurable value of the improvements securing such Loan
or (ii) the greater of (y) the outstanding principal balance of the Loan and (z)
an amount such that the proceeds of such policy shall be sufficient to prevent
the Mortgagor and/or the mortgagee from becoming a co-insurer. Each such policy
of standard hazard insurance shall contain, or have an accompanying endorsement
that contains, a standard mortgagee clause. Any amounts collected by the
Servicer under any such policies (other than the amounts to be applied to the
restoration or repair of the related Mortgaged Property or amounts released to
the Mortgagor in accordance with the Servicer's normal servicing procedures)
shall be deposited in the Certificate Account. Any cost incurred by the Servicer
in maintaining any such insurance shall not, for the purpose of calculating
monthly distributions to the Certificateholders or remittances to the Trustee
for their benefit, be added to the principal balance of the Loan,
notwithstanding that the terms of the Loan so permit. Such costs shall be
recoverable by the Servicer out of late payments by the related Mortgagor or out
of Liquidation Proceeds to the extent permitted by Section 3.08 hereof. It is
understood and agreed that no earthquake or other additional insurance is to be
required of any Mortgagor or maintained on property acquired in respect of a
Mortgage other than 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 is located at the time of origination of the Loan in a
federally designated special flood hazard area and such area is participating in
the national flood insurance program, the Servicer shall cause flood insurance
to be maintained with respect to such Loan. Such flood insurance shall be in an
amount equal to the least of (i) the original principal balance of the related
Loan, (ii) the replacement value of the improvements which are part of such
Mortgaged Property, and (iii) the maximum amount of such insurance available for
the related Mortgaged Property under the national flood insurance program.
(b) In the event that the Servicer shall obtain and maintain a blanket
policy insuring against hazard losses on all of the Loans, it shall conclusively
be deemed to have satisfied its obligations as set forth in the first sentence
of this Section, it being understood and agreed that such policy may contain a
deductible clause on terms substantially equivalent to those commercially
available and maintained by comparable servicers. If such policy contains a
deductible clause, the Servicer shall, in the event that there shall not have
been
51
<PAGE>
maintained on the related Mortgaged Property a policy complying with the first
sentence of this Section, and there shall have been a loss that would have been
covered by such policy, deposit in the Certificate Account the amount not
otherwise payable under the blanket policy because of such deductible clause. In
connection with its activities as Servicer of the Loans, the Servicer agrees to
present, on behalf of itself, the Depositor, and the Trustee for the benefit of
the Certificateholders, claims under any such blanket policy.
(c) The Servicer shall not take any action which would result in
non-coverage under any applicable Primary Insurance Policy of any loss which,
but for the actions of the Servicer, would have been covered thereunder. The
Servicer shall not cancel or refuse to renew any such Primary Insurance Policy
that is in effect at the date of the initial issuance of the Certificates and is
required to be kept in force hereunder unless the replacement Primary Insurance
Policy for such canceled or non-renewed policy is maintained with a Qualified
Insurer. The Servicer shall not be required to maintain any Primary Insurance
Policy with respect to any Loan with a Loan-to-Value Ratio less than or equal to
80% as of any date of determination or, based on a new appraisal, the principal
balance of such Loan represents 80% or less of the new appraised value. The
Servicer agrees to effect the timely payment of the premiums on each Primary
Insurance Policy, and such costs not otherwise recoverable shall be recoverable
by the Servicer from the related liquidation proceeds.
(d) In connection with its activities as Servicer of the Loans, the
Servicer agrees to present on behalf of itself, the Trustee and
Certificateholders, claims to the insurer under any Primary Insurance Policies
and, in this regard, to take such reasonable action as shall be necessary to
permit recovery under any Primary Insurance Policies respecting defaulted Loans.
Any amounts collected by the Servicer under any Primary Insurance Policies shall
be deposited in the Certificate Account.
SECTION 3.10. Enforcement of Due-on-Sale Clauses;
Assumption Agreements.
(a) Except as otherwise provided in this Section, when any property subject
to a Mortgage has been conveyed by the Mortgagor, the Servicer shall to the
extent that it has knowledge of such conveyance, enforce any due-on-sale clause
contained in any Mortgage Note or Mortgage, to the extent permitted under
applicable law and governmental regulations, but only to the extent that such
enforcement will not adversely affect or jeopardize coverage under any Required
Insurance Policy. Notwithstanding the foregoing, the Servicer is not required to
exercise such rights with respect to a Loan if the Person to whom the related
Mortgaged Property has been conveyed or is proposed
52
<PAGE>
to be conveyed satisfies the terms and conditions contained in the Mortgage Note
and Mortgage related thereto and the consent of the mortgagee under such
Mortgage Note or Mortgage is not otherwise so required under such Mortgage Note
or Mortgage as a condition to such transfer. In the event that the Servicer is
prohibited by law from enforcing any such due-on-sale clause, or if coverage
under any Required Insurance Policy would be adversely affected, or if
nonenforcement is otherwise permitted hereunder, the Servicer is authorized,
subject to Section 3.10(b), to take or enter into an assumption and modification
agreement from or 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 state law, the Mortgagor remains
liable thereon, provided that the Loan shall continue to be covered (if-so
covered before the Servicer enters such agreement) by the applicable Required
Insurance Policies. The Servicer, subject to Section 3.10(b), is also authorized
with the prior approval of the insurers under any Required Insurance Policies 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.
Notwithstanding the foregoing, the Servicer shall not be deemed to be in default
under this Section by reason of any transfer or assumption which the Servicer
reasonably believes it is restricted by law from preventing, for any reason
whatsoever.
(b) Subject to the Servicer's duty to enforce any due-on-sale clause to the
extent set forth in Section 3.10(a) hereof, in any case in which a Mortgaged
Property has been conveyed to a Person by a Mortgagor, and such Person is to
enter into an assumption agreement or modification agreement or supplement to
the Mortgage Note or Mortgage that requires the signature of the Trustee, or if
an instrument of release signed by the Trustee is required releasing the
Mortgagor from liability on the Loan, the Servicer shall prepare and deliver or
cause to be prepared and delivered to the Trustee for signature and shall
direct, in writing, the Trustee to execute the assumption agreement with the
Person to whom the Mortgaged Property is to be conveyed and such modification
agreement or supplement to the Mortgage Note or Mortgage or other instruments as
are reasonable or necessary to carry out the terms of the Mortgage Note or
Mortgage or otherwise to comply with any applicable laws regarding assumptions
or the transfer of the Mortgaged Property to such Person. In connection with any
such assumption, no material term of the Mortgage Note may be changed. In
addition, the substitute Mortgagor and the Mortgaged Property must be acceptable
to the Servicer in accordance with its underwriting standards as then in effect.
Together with each such substitution, assumption or other agreement or
instrument delivered to the Trustee for execution by it, the Servicer shall
53
<PAGE>
deliver an Officer's Certificate signed by a Servicing Officer stating that the
requirements of this subsection have been met in connection therewith. The
Servicer shall notify the Trustee that any such substitution or assumption
agreement has been completed by forwarding to the Trustee the original of such
substitution or assumption agreement, which in the case of the original shall be
added to the related Mortgage File and shall, for all purposes, be considered a
part of such Mortgage File to the same extent as all other documents and
instruments constituting a part thereof. Any fee collected by the Servicer for
entering into an assumption or substitution of liability agreement will be
retained by the Servicer as additional servicing compensation.
SECTION 3.11. Realization Upon Defaulted Loans;
Repurchase of Certain Loans.
The Servicer shall use reasonable efforts to foreclose upon or otherwise
comparably convert the ownership of properties securing such of the 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 shall follow such practices and
procedures as it shall deem necessary or advisable and as shall be normal and
usual in its general mortgage servicing activities and meet the requirements of
the insurer under any Required Insurance Policy; provided, however, that the
Servicer shall not be required to expend its own funds in connection with any
foreclosure or towards the restoration of any property unless it shall determine
(i) that such restoration and/or foreclosure will increase the proceeds of
liquidation of the Loan after reimbursement to itself of such expenses and (ii)
that such expenses will be recoverable to it through Liquidation Proceeds
(respecting which it shall have priority for purposes of withdrawals from the
Certificate Account). The Servicer shall be responsible for all other costs and
expenses incurred by it in any such proceedings; provided, however, that it
shall be entitled to reimbursement thereof from the liquidation proceeds with
respect to the related Mortgaged Property, as provided in the definition of
Liquidation Proceeds. If the Servicer has knowledge that a Mortgaged Property
which the Servicer is contemplating acquiring in foreclosure or by deed in lieu
of foreclosure is located within a 1 mile radius of any site listed in the
Expenditure Plan for the Hazardous Substance Clean Up Bond Act of 1984 or other
site with environmental or hazardous waste risks known to the Servicer, the
Servicer will, prior to acquiring the Mortgaged Property, consider such risks
and only take action in accordance with its established environmental review
procedures.
With respect to any REO Property, the deed or certificate of sale shall be
taken in the name of the Trustee for the benefit of the Certificateholders, or
its nominee, on behalf
54
<PAGE>
of the Certificateholders. The Trustee's name shall be placed on the title to
such REO Property solely as the Trustee hereunder and not in its individual
capacity. The Servicer shall ensure that the title to such REO Property
references the Pooling and Servicing Agreement and the Trustee's capacity
thereunder. Pursuant to its efforts to sell such REO Property, the Servicer
shall either itself or through an agent selected by the Servicer protect and
conserve such REO Property in the same manner and to such extent as is customary
in the locality where such REO Property is located and may, incident to its
conservation and protection of the interests of the Certificateholders, rent the
same, or any part thereof, as the Servicer deems to be in the best interest of
the Certificateholders for the period prior to the sale of such REO Property.
The Servicer shall prepare for and deliver to the Trustee a statement with
respect to each REO Property that has been rented showing the aggregate rental
income received and all expenses incurred in connection with the management and
maintenance of such REO Property at such times as is necessary to enable the
Trustee to comply with the reporting requirements of the REMIC Provisions. The
net monthly rental income, if any, from such REO Property shall be deposited in
the Certificate Account no later than the close of business on each
Determination Date. The Servicer shall perform the tax reporting and withholding
required by Sections 1445 and 6050J of the Code with respect to foreclosures and
abandonments, the tax reporting required by Section 6050H of the Code with
respect to the receipt of mortgage interest from individuals and any tax
reporting required by Section 6050P of the Code with respect to the cancellation
of indebtedness by certain financial entities, by preparing such tax and
information returns as may be required, in the form required, and delivering the
same to the Trustee for filing.
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
Loan, the Servicer shall dispose of such Mortgaged Property prior to two years
after its acquisition by the Trust Fund unless the Trustee shall have been
supplied with an Opinion of Counsel to the effect that the holding by the Trust
Fund of such Mortgaged Property subsequent to such two-year period will not
result in the imposition of taxes on "prohibited transactions" of the REMIC
hereunder as defined in section 860F of the Code or cause the REMIC to fail to
qualify as a REMIC at any time that any Certificates are outstanding, in which
case the Trust Fund may continue to hold such Mortgaged Property (subject to any
conditions contained in such Opinion of Counsel). Notwithstanding any other
provision of this Agreement, no Mortgaged Property acquired by the Trust Fund
shall be rented (or allowed to continue to be rented) or otherwise used for the
production of income by or on behalf of the Trust Fund in such a manner or
pursuant to any terms that would (i) cause such Mortgaged Property to fail to
qualify as "foreclosure property"
55
<PAGE>
within the meaning of section 860G(a)(8) of the Code or (ii) subject the REMIC
to the imposition of any federal, state or local income taxes on the income
earned from such Mortgaged Property under Section 860G(c) of the Code or
otherwise, unless the Servicer has agreed to indemnify and hold harmless the
Trust Fund with respect to the imposition of any such taxes.
The decision of the Servicer to foreclose on a defaulted Loan shall be
subject to a determination by the Servicer that the proceeds of such foreclosure
would exceed the costs and expenses of bringing such a proceeding. The income
earned from the management of any REO Properties, net of reimbursement to the
Servicer for expenses incurred (including any property or other taxes) in
connection with such management and net of unreimbursed Servicing Fees, Advances
and Servicing Advances, shall be applied to the payment of principal of and
interest on the related defaulted Loans (with interest accruing as though such
Loans were still current) and all such income shall be deemed, for all purposes
in this Agreement, to be payments on account of principal and interest on the
related Mortgage Notes and shall be deposited into the Certificate Account. To
the extent the net income received during any calendar month is in excess of the
amount attributable to amortizing principal and accrued interest at the related
Mortgage Rate on the related Loan for such calendar month, such excess shall be
considered to be a partial prepayment of principal of the related Loan.
The proceeds from any liquidation of a Loan, as well as any income from an
REO Property, will be applied in the following order of priority: first, to
reimburse the Servicer for any related unreimbursed Servicing Advances and
Servicing Fees; second, to reimburse the Servicer for any unreimbursed Advances;
third, to reimburse the Certificate Account for any Nonrecoverable Advances (or
portions thereof) that were previously withdrawn by the Servicer pursuant to
Section 3.08(a)(iii) that related to such Loan; fourth, to accrued and unpaid
interest (to the extent no Advance has been made for such amount or any such
Advance has been reimbursed) on the Loan or related REO Property, at the
Adjusted Net Mortgage Rate to the Due Date occurring in the month in which such
amounts are required to be distributed; and fifth, as a recovery of principal of
the Loan. Excess Proceeds, if any, from the liquidation of a Liquidated Loan
will be retained by the Servicer as additional servicing compensation pursuant
to Section 3.14.
The Servicer, in its sole discretion, shall have the right to purchase for
its own account from the Trust Fund any Loan which is 91 days or more delinquent
at a price equal to the Purchase Price. The Purchase Price for any Loan
purchased hereunder shall be deposited in the Certificate Account and the
Trustee, upon receipt of a certificate from the Servicer in the
56
<PAGE>
form of Exhibit N hereto, shall release or cause to be released to the purchaser
of such Loan the related Mortgage File and shall execute and deliver such
instruments of transfer or assignment prepared by the purchaser of such Loan, in
each case without recourse, as shall be necessary to vest in the purchaser of
such Loan any Loan released pursuant hereto and the purchaser of such Loan shall
succeed to all the Trustee's right, title and interest in and to such Loan and
all security and documents related thereto. Such assignment shall be an
assignment outright and not for security. The purchaser of such Loan shall
thereupon own such Loan, and all security and documents, free of any further
obligation to the Trustee or the Certificateholders with respect thereto.
SECTION 3.12. Trustee to Cooperate; Release of
Mortgage Files.
Upon the payment in full of any Loan, or the receipt by the Servicer of a
notification that payment in full will be escrowed in a manner customary for
such purposes, the Servicer will immediately notify the Trustee by delivering,
or causing to be delivered a "Request for Release" substantially in the form of
Exhibit N. Upon receipt of such request, the Trustee shall promptly release the
related Mortgage File to the Servicer, and the Trustee shall at the Servicer's
direction execute and deliver to the Servicer the request for reconveyance, deed
of reconveyance or release or satisfaction of mortgage or such instrument
releasing the lien of the Mortgage in each case provided by the Servicer,
together with the Mortgage Note with written evidence of cancellation thereon.
Expenses incurred in connection with any instrument of satisfaction or deed of
reconveyance shall be chargeable to the related Mortgagor. From time to time and
as shall be appropriate for the servicing or foreclosure of any Loan, including
for such purpose, collection under any policy of flood insurance, any fidelity
bond or errors or omissions policy, or for the purposes of effecting a partial
release of any Mortgaged Property from the lien of the Mortgage or the making of
any corrections to the Mortgage Note or the Mortgage or any of the other
documents included in the Mortgage File, the Trustee shall, upon delivery to the
Trustee of a Request for Release in the form of Exhibit M signed by a Servicing
Officer, release the Mortgage File to the Servicer. Subject to the further
limitations set forth below, the Servicer shall cause the Mortgage File or
documents so released to be returned to the Trustee when the need therefor by
the Servicer no longer exists, unless the Loan is liquidated and the proceeds
thereof are deposited in the Certificate Account, in which case the Servicer
shall deliver to the Trustee a Request for Release in the form of Exhibit N,
signed by a Servicing Officer.
57
<PAGE>
If the Servicer at any time seeks to initiate a foreclosure proceeding in
respect of any Mortgaged Property as authorized by this Agreement, the Servicer
shall deliver or cause to be delivered to the Trustee, for signature, as
appropriate, any court pleadings, requests for trustee's sale or other documents
necessary to effectuate such foreclosure or any legal action brought to obtain
judgment against the Mortgagor on the Mortgage Note or the Mortgage or to obtain
a deficiency judgment or to enforce any other remedies or rights provided by the
Mortgage Note or the Mortgage or otherwise available at law or in equity.
SECTION 3.13. Documents Records and Funds in
Possession of Servicer to be Held for
the Trustee.
Notwithstanding any other provisions of this Agreement, the Servicer shall
transmit to the Trustee as required by this Agreement all documents and
instruments in respect of a Loan coming into the possession of the Servicer from
time to time and shall account fully to the Trustee for any funds received by
the Servicer or which otherwise are collected by the Servicer as Liquidation
Proceeds or Insurance Proceeds in respect of any Loan. All Mortgage Files and
funds collected or held by, or under the control of, the Servicer in respect of
any Loans, whether from the collection of principal and interest payments or
from Liquidation Proceeds, including but not limited to, any funds on deposit in
the Certificate Account, shall be held by the Servicer for and on behalf of the
Trustee and shall be and remain the sole and exclusive property of the Trustee,
subject to the applicable provisions of this Agreement. The Servicer also agrees
that it shall not create, incur or subject any Mortgage File or any funds that
are deposited in the Certificate Account, Distribution Account or any Escrow
Account, or any funds that otherwise are or may become due or payable to the
Trustee for the benefit of the Certificateholders, to any claim, lien, security
interest, judgment, levy, writ of attachment or other encumbrance, or assert by
legal action or otherwise any claim or right of setoff against any Mortgage File
or any funds collected on, or in connection with, a Loan, except, however, that
the Servicer shall be entitled to set off against and deduct from any such funds
any amounts that are properly due and payable to the Servicer under this
Agreement.
SECTION 3.14. Servicing Compensation.
As compensation for its activities hereunder, the Servicer shall be
entitled to retain or withdraw from the Certificate Account an amount equal to
the Servicing Fee for each Loan, provided that the aggregate Servicing Fee with
respect to any Distribution Date shall be reduced (i) by an amount equal to the
aggregate of the Prepayment Interest
58
<PAGE>
Shortfalls, if any, with respect to such Distribution Date, but not below an
amount equal to one-half of the aggregate Servicing Fee for such Distribution
Date before reduction thereof in respect of such Prepayment Interest Shortfalls,
and (ii) with respect to the first Distribution Date, an amount equal to any
amount to be deposited into the Distribution Account by the Depositor pursuant
to Section 2.01(a) and not so deposited.
Additional servicing compensation in the form of Excess Proceeds,
Prepayment Interest Excess, prepayment penalties, assumption fees, late payment
charges and all income and gain net of any losses realized from Permitted
Investments shall be retained by the Servicer to the extent not required to be
deposited in the Certificate Account pursuant to Section 3.05 hereof. The
Servicer shall be required to pay all expenses incurred by it in connection with
its servicing activities hereunder (including payment of any premiums for hazard
insurance and any Primary Insurance Policy and maintenance of the other forms of
insurance coverage required by this Agreement) and shall not be entitled to
reimbursement therefor except as specifically provided in this Agreement.
SECTION 3.15. Access to Certain Documentation.
The Servicer shall provide to the OTS and the FDIC and to comparable
regulatory authorities supervising Holders of Subordinated Certificates and the
examiners and supervisory agents of the OTS, the FDIC and such other
authorities, access to the documentation regarding the Loans required by
applicable regulations of the OTS and the FDIC. Such access shall be afforded
without charge, but only upon reasonable and prior written request and during
normal business hours at the offices designated by the Servicer. Nothing in this
Section shall limit the obligation of the Servicer to observe any applicable law
prohibiting disclosure of information regarding the Mortgagors and the failure
of the Servicer to provide access as provided in this Section as a result of
such obligation shall not constitute a breach of this Section.
SECTION 3.16. Annual Statement as to Compliance.
The Servicer shall deliver to the Depositor and the Trustee on or before
120 days after the end of the Servicer's fiscal year, commencing with its 199_
fiscal year, an Officer's Certificate stating, as to the signer thereof, that
(i) a review of the activities of the Servicer during the preceding calendar
year and of the performance of the Servicer under this Agreement has been made
under such officer's supervision and (ii) to the best of such officer's
knowledge, based on such review, the Servicer has fulfilled all its obligations
under this Agreement throughout such year, or, if there has been a default in
the fulfillment of any such obligation, specifying each such default
59
<PAGE>
known to such officer and the nature and status thereof. The Trustee shall
forward a copy of each such statement to each Rating Agency.
SECTION 3.17. Annual Independent Public Accountants'
Servicing Statement; Financial
Statements.
On or before 120 days after the end of the Servicer's fiscal year,
commencing with its 199_ fiscal year, the Servicer at its expense shall cause a
nationally or regionally recognized firm of independent public accountants (who
may also render other services to the Servicer, the Seller or any affiliate
thereof) which is a member of the American Institute of Certified Public
Accountants to furnish a statement to the Trustee and the Depositor to the
effect that-such firm has examined certain documents and records relating to the
servicing of the Loans under this Agreement or of mortgage loans under pooling
and servicing agreements substantially similar to this Agreement (such statement
to have attached thereto a schedule setting forth the pooling and servicing
agreements covered thereby) and that, on the basis of such examination,
conducted substantially in compliance with the Uniform Single Attestation
Program for Mortgage Bankers or the Audit Program for Mortgages serviced for
FNMA and FHLMC, such servicing has been conducted in compliance with such
pooling and servicing agreements except for such significant exceptions or
errors in records that, in the opinion of such firm, the Uniform Single
Attestation Program for Mortgage Bankers or the Audit Program for Mortgages
serviced for FNMA and FHLMC requires it to report. In rendering such statement,
such firm may rely, as to matters relating to direct servicing of mortgage loans
by Subservicers, upon comparable statements for examinations conducted
substantially in compliance with the Uniform Single Attestation Program for
Mortgage Bankers or the Audit Program for Mortgages serviced for FNMA and FHLMC
(rendered within one year of such statement) of independent public accountants
with respect to the related Subservicer. Copies of such statement shall be
provided by the Trustee to any Certificateholder upon request at the Servicer's
expense, provided such statement is delivered by the Servicer to the Trustee.
SECTION 3.18. Errors and Omissions Insurance; Fidelity
Bonds.
The Servicer shall for so long as it acts as servicer under this Agreement,
obtain and maintain in force (a) a policy or policies of insurance covering
errors and omissions in the performance of its obligations as Servicer hereunder
and (b) a fidelity bond in respect of its officers, employees and agents. Each
such policy or policies and bond shall, together, comply with the requirements
from time to time of FNMA or FHLMC for
60
<PAGE>
persons performing servicing for mortgage loans purchased by FNMA or FHLMC. In
the event that any such policy or bond ceases to be in effect, the Servicer
shall obtain a comparable replacement policy or bond from an insurer or issuer,
meeting the requirements set forth above as of the date of such replacement.
61
<PAGE>
ARTICLE IV
DISTRIBUTIONS AND
ADVANCES BY THE SERVICER
SECTION 4.01. Advances.
The Servicer shall determine on or before each Servicer Advance Date
whether it is required to make an Advance pursuant to the definition thereof. If
the Servicer determines it is required to make an Advance, it shall, on or
before the Servicer Advance Date, either (i) deposit into the Certificate
Account an amount equal to the Advance or (ii) make an appropriate entry in its
records relating to the Certificate Account that any Amount Held for Future
Distribution has been used by the Servicer in discharge of its obligation to
make any such Advance. Any funds so applied shall be replaced by the Servicer by
deposit in the Certificate Account no later than the close of business on the
next Servicer Advance Date. The Servicer shall be entitled to be reimbursed from
the Certificate Account for all Advances of its own funds made pursuant to this
Section as provided in Section 3.08. The obligation to make Advances with
respect to any Loan shall continue if such Loan has been foreclosed or otherwise
terminated and the Mortgaged Property has not been liquidated.
The Servicer shall deliver to the Trustee on the related Servicer Advance
Date an Officer's Certificate of a Servicing Officer indicating the amount of
any proposed Advance determined by the Servicer to be a Nonrecoverable Advance.
SECTION 4.02. Priorities of Distribution.
(a) On each Distribution Date, the Trustee shall withdraw the Available
Funds from the Distribution Account and apply such funds to distributions on the
Certificates in the following order and priority and, in each case, to the
extent of Available Funds remaining:
[(i) to each interest-bearing Class of Senior Certificates, an amount
allocable to interest equal to the related Class Optimal Interest
Distribution Amount, any shortfall being allocated among such Classes in
proportion to the amount of the Class Optimal Interest Distribution Amount
that would have been distributed in the absence of such shortfall,
provided, however, that prior to the Accrual Termination Date, the amount
otherwise distributable as interest on each Class of Accrual Certificates
on such Distribution Date shall be distributed to the Accretion Directed
Certificates as set forth in 4.02(a)(ii) and added to the Class Certificate
Balances of certain Classes as set forth in Section 4.02(b);
62
<PAGE>
(ii) On each Distribution Date until the Accrual Termination
Date, the Accrual Amount will be distributed as principal of the
following Classes of Senior Certificates in the following order of
priority:
(x) to the Class A-_ Certificates, until the Class
Certificate Balance thereof has been reduced to zero; and
(y) to the Class A-_-_ Component until the Component Balance
thereof has been reduced to zero.
On any Distribution Date that the Accrual Amount is in excess of the amount
necessary to reduce the Component Balance of the Class A-_-_ Component to zero,
such excess shall be distributed as provided in Section 4.02(b).
(iii) to each Class of Senior Certificates, concurrently as
follows:
(x) to the Class PO Certificates, an amount allocable to
principal equal to the PO Formula Principal Amount, up to the
outstanding Class Certificate Balance of the Class PO
Certificates;
(y) on each Distribution Date prior to the Senior Credit
Support Depletion Date, the Non-PO Formula Principal Amount, up
to the amount of the Senior Principal Distribution Amount for
such Distribution Date, will be distributed as follows:
(A) to the Class A-_ Certificates, the Class
A-_ Optimal Amount;
(B) to the Class A-R Certificates until the Class
Certificate Balance thereof has been reduced to zero;
(C) sequentially, to the Class A-_ and Class
A-_ Certificates in that order, until the respective Class
Certificate Balances thereof have been reduced to their
respective Planned Balances for such Distribution Date;
(D) sequentially, to the Class A-_ Certificates and the
Class A-_-_ and Class A-_-_ Components, in that order,
until the respective Class Certificate Balance or Component
Balances thereof, as the case may be, have been reduced to
their respective Targeted Balances for such Distribution
Date;
63
<PAGE>
(E) concurrently, to the Class A-_ and Class
A-_ Certificates and the Class A-_-_ Component, pro rata
based on their respective Class Certificate Balances or
Component Balance, as the case may be, until the Class
Certificate Balances and Component Balance thereof, as the
case may be, have been reduced to zero;
(F) sequentially, to the Class A-_ Certificates and the
Class A-_-_ and Class A- _-_ Components, in that order,
without regard to their respective Targeted Balances and
until the respective Class Certificate Balance or Component
Balances thereof, as the case may be, have been reduced to
zero;
(G) sequentially, to the Class A-_ and Class
A-_ Certificates in that order, without regard to their
respective Planned Balances and until the respective Class
Certificate Balances have been reduced to zero; and
(H) to the Class A-_ Certificates until the Class
Certificate Balance thereof has been reduced to zero.
(iv) to the Class PO Certificates, any Class PO Deferred Amounts,
up to an amount not to exceed the amount calculated pursuant to clause
(A) of the definition of the Subordinated Principal Distribution
Amount for such Distribution Date (with such amount to be allocated
first from amounts calculated pursuant to clause (a)(iii) of the
definition of Subordinated Principal Distribution Amount);
(v) to each Class of Subordinated Certificates, subject to
paragraph (e) below, in the following order of priority:
(A) to the Class B-_ Certificates, an amount allocable
to interest equal to the Class Optimal Interest Distribution
Amount for such Distribution Date;
(B) to the Class B-_ Certificates, an amount allocable
to principal equal to its Pro Rata Share for such
Distribution Date until the Class Certificate Balance
thereof is reduced to zero;
64
<PAGE>
(C) to the Class B-_ Certificates, an amount allocable
to interest equal to the Class Optimal Interest Distribution
Amount for such Class for such Distribution Date;
(D) to the Class B-_ Certificates, an amount allocable
to principal equal to its Pro Rata Share for such
Distribution Date until the Class Certificate Balance
thereof is reduced to zero;
(E) to the Class B-_ Certificates, an amount allocable
to interest equal to the Class Optimal Interest Distribution
Amount for such Class for such Distribution Date;
(F) to the Class B-_ Certificates, an amount allocable
to principal equal to its Pro Rata Share for such
Distribution Date until the Class Certificate Balance
thereof is reduced to zero;
(G) to the Class B-_ Certificates, an amount allocable
to interest equal to the amount of the Class Optimal
Interest Distribution Amount for such Class for such
Distribution Date;
(H) to the Class B-_ Certificates, an amount allocable
to principal equal to its Pro Rata Share for such
Distribution Date until the Class Certificate Balance
thereof has been reduced to zero;
(I) to the Class B-_ Certificates, an amount allocable
to interest equal to the amount of the Class Optimal
Interest Distribution Amount for such Class for such
Distribution Date;
(J) to the Class B-_ Certificates, an amount allocable
to principal equal to its Pro Rata Share for such
Distribution Date until the Class Certificate Balance
thereof has been reduced to zero;
(K) to the Class B-_ Certificates, an amount allocable
to interest equal to the Class Optimal Interest Distribution
Amount for such Class for such Distribution Date; and
65
<PAGE>
(L) to the Class B-_ Certificates, an amount allocable
to principal equal to its Pro Rata Share for such
Distribution Date until the Class Certificate Balance
thereof is reduced to zero.
(vi) to the Class A-R Certificates, any remaining Available
Funds.]
On any Distribution Date, amounts distributed in respect of Class PO Deferred
Amounts will not reduce the Class Certificate Balance of the Class PO
Certificates.
On any Distribution Date, to the extent the Amount Available for Senior
Principal is insufficient to make the full distribution required to be made
pursuant to clause (iii)(x) above, (A) the amount distributable on the Class PO
Certificates in respect of principal shall be equal to the product of (1) the
Amount Available for Senior Principal and (2) a fraction, the numerator of which
is the PO Formula Principal Amount and the denominator of which is the sum of
the PO Formula Principal Amount and the Senior Principal Distribution Amount and
(B) the amount distributable on the Senior Certificates, other than the Class PO
Certificates, in respect of principal shall be equal to the product of (1) the
Amount Available for Senior Principal and (2) a fraction, the numerator of which
is the Senior Principal Distribution Amount and the denominator of which is the
sum of the Senior Principal Distribution Amount and the PO Formula Principal
Amount.
(b) On each Distribution Date prior to the Accrual Termination Date, the
Accrual Amount for such Distribution Date shall not (except as provided in the
last sentence of this clause (b)) be distributed as interest with respect to the
Class A-_-_ Component but shall instead be added to the Component Balance of
such Component on the related Distribution Date. With respect to any
Distribution Date prior to the Accrual Termination Date on which principal
payments on the Class A-_-_ Component are distributed pursuant to Section
4.02(a)(iii), the Accrual Amount shall be deemed to have been added on such
Distribution Date to the Class Certificate Balance (and included in the amount
distributable on the Accretion Directed Certificates pursuant to Section
4.02(a)(ii) for such Distribution Date) and the related distribution thereon
shall be deemed to have been applied concurrently towards the reduction of all
or a portion of the amount so added and, to the extent of any excess, towards
the reduction of the Component Balance of the Class A-_-_ Component immediately
prior to such Distribution Date. Notwithstanding any such distribution, the
Class A-_-_ Component shall continue to be a Class of Accrual Certificates on
each subsequent Distribution Date until the Accrual Termination Date.
Notwithstanding the foregoing with respect to the Distribution Date on which the
66
<PAGE>
Accrual Amount is in excess of the amount necessary to reduce the Component
Balance of the Class A-___ Component to zero, such excess will be distributed on
such Distribution Date as interest on the Class A-_-_ Component.
(c) On each Distribution Date on or after the Senior Credit Support
Depletion Date, notwithstanding the allocation and priority set forth in Section
4.02(a)(iii)(y), the portion of Available Funds available to be distributed as
principal of the Senior Certificates (other than the Class PO Certificates)
shall be distributed concurrently, as principal, on such Classes, pro rata, on
the basis of their respective Class Certificate Balances, until the Class
Certificate Balances thereof are reduced to zero.
(d) On each Distribution Date, the amount referred to in clause (i) of the
definition of Class Optimal Interest Distribution Amount for each Class of
Certificates for such Distribution Date shall be reduced by (i) the related
Class' pro rata share of Net Prepayment Interest Shortfalls based on such Class'
Class Optimal Interest Distribution Amount for such Distribution Date without
taking into account such Net Prepayment Interest Shortfalls and (ii) the related
Class' Allocable Share of (A) after the Special Hazard Coverage Termination
Date, with respect to each Loan that became a Special Hazard Loan during the
calendar month preceding the month of such Distribution Date, the excess of one
month's interest at the related Adjusted Net Mortgage Rate on the Stated
Principal Balance of such Loan as of the Due Date in such month over the amount
of Liquidation Proceeds applied as interest on such Loan with respect to such
month, (B) after the Bankruptcy Coverage Termination Date, with respect to each
Loan that became subject to a Bankruptcy Loss during the calendar month
preceding the month of such Distribution Date, the interest portion of the
related Debt Service Reduction or Deficient Valuation, (C) each Relief Act
Reduction incurred during the calendar month preceding the month of such
Distribution Date and (D) after the Fraud Coverage Termination Date, with
respect to each Loan that became a Fraud Loan during the calendar month
preceding the month of such Distribution Date, the excess of one month's
interest at the related Adjusted Net Mortgage Rate on the Stated Principal
Balance of such Loan as of the Due Date in such month over the amount of
Liquidation Proceeds applied as interest on such Loan with respect to such
month.
(e) Notwithstanding the priority and allocation contained in Section
4.02(a)(v), if with respect to any Class of Subordinated Certificates on any
Distribution Date the sum of the related Class Subordination Percentages of such
Class and of all Classes of Subordinated Certificates which have a higher
numerical Class designation than such Class (the "Applicable Credit Support
Percentage") is less than the Original Applicable
67
<PAGE>
Credit Support Percentage for such Class, no distribution of Principal
Prepayments will be made to any such Classes (the "Restricted Classes") and the
amount of such Principal Prepayments otherwise distributable to the Restricted
Classes shall be distributed to any Classes of Subordinated Certificates having
lower numerical Class designations than such Class, pro rata, based on their
respective Class Certificate Balances immediately prior to such Distribution
Date and shall be distributed in the sequential order provided in Section
4.02(a)(v).
SECTION 4.03. Allocation of Realized Losses.
(a) On or prior to each Determination Date, the Trustee shall determine the
total amount of Realized Losses, including Excess Losses, with respect to the
related Distribution Date.
Realized Losses with respect to any Distribution Date shall be allocated as
follows:
[(i) the applicable PO Percentage of any Realized Loss shall be
allocated to the Class PO Certificates; and
(ii) (A) the applicable Non-PO Percentage of any Realized Loss (other
than an Excess Loss) shall be allocated first to the Subordinated
Certificates in reverse order of their respective numerical Class
designations (beginning with the Class of Subordinated Certificates then
outstanding with the highest numerical Class designation) until the
respective Class Certificate Balance of each such Class is reduced to zero,
and second to the Senior Certificates (other than the Class PO
Certificates), pro rata on the basis of their respective Class Certificate
Balances immediately prior to the related Distribution Date, or, in the
case of the Accrual Certificate, the lesser of the Component Balance or the
initial Component Balance thereof, until the Class Certificate Balances and
Component Balance thereof have been reduced to zero;
(B) the applicable Non-PO Percentage of any Excess Losses shall
be allocated to the Senior Certificates (other than the Class PO
Certificates) and the Subordinated Certificates then outstanding, pro rata,
on the basis of their respective Class Certificate Balances or, in the case
of the Accrual Certificates, on the basis of the lesser of their initial
Component Balance and their then-current Component Balance immediately
prior to the related Distribution Date.]
68
<PAGE>
(b) The Class Certificate Balance of the Class of Subordinated Certificates
then outstanding with the highest numerical Class designation shall be reduced
on each Distribution Date (i) by the amount of any payments on the Class PO
Certificates in respect of Class PO Deferred Amounts and (ii) by the amount, if
any, by which the aggregate of the Class Certificate Balances of all outstanding
Classes of Certificates (after giving effect to the distribution of principal
and the allocation of Realized Losses and Class PO Deferred Amounts on such
Distribution Date) exceeds the Pool Stated Principal Balance for the following
Distribution Date.
(c) Any Realized Loss allocated to a Class of Certificates or any reduction
in the Class Certificate Balance of a Class of Certificates pursuant to Section
4.03(b) above shall be allocated among the Certificates of such Class in
proportion to their respective Certificate Balances. Any Realized Loss allocated
to a Class of Certificates comprised of Components shall be allocated among such
Components based on their respective Component Balances.
(d) Any allocation of Realized Losses to a Certificate or to any Component
or any reduction in the Certificate Balance of a Certificate, pursuant to
Section 4.03(b) above shall be accomplished by reducing the Certificate Balance
or Component Balance thereof, as applicable, immediately following the
distributions made on the related Distribution Date in accordance with the
definition of "Certificate Balance" or "Component Balance," as the case may be.
SECTION 4.04. Monthly Statements to
Certificateholders.
(a) Not later than each Distribution Date, the Trustee shall prepare and
cause to be forwarded by first class mail to each Certificateholder, the
Servicer and the Depositor a statement setting forth with respect to the related
distribution:
(i) the amount thereof allocable to principal, separately identifying
the aggregate amount of any Principal Prepayments and Liquidation Proceeds
included therein;
(ii) the amount thereof allocable to interest, any Class Unpaid
Interest Shortfall included in such distribution and any remaining Class
Unpaid Interest Shortfall after giving effect to such distribution;
(iii) if the distribution to the Holders of such Class of Certificates
is less than the full amount that would be distributable to such Holders if
there were
69
<PAGE>
sufficient funds available therefor, the amount of the shortfall and
the allocation thereof as between principal and interest;
(iv) the Class Certificate Balance of each Class of Certificates and
the Component Balances of each Component after giving effect to the
distribution of principal on such Distribution Date;
(v) the Pool Stated Principal Balance for the following Distribution
Date;
(vi) the Senior Percentage and Subordinated Percentage for the
following Distribution Date;
(vii) the amount of the Servicing Fees paid to or retained by the
Servicer with respect to such Distribution Date;
(viii) the Pass-Through Rate for each such Class of Certificates with
respect to such Distribution Date;
(ix) the amount of Advances included in the distribution on such
Distribution Date and the aggregate amount of Advances outstanding as of
the close of business on such Distribution Date;
(x) the number and aggregate principal amounts of Loans (A) delinquent
(exclusive of Loans in foreclosure) (1) 1 to 30 days (2) 31 to 60 days (3)
61 to 90 days and (4) 91 or more days and (B) in foreclosure and delinquent
(1) 1 to 30 days (2) 31 to 60 days (3) 61 to 90 days and (4) 91 or more
days, as of the close of business on the last day of the calendar month
preceding such Distribution Date;
(xi) with respect to any Loan that became an REO Property during the
preceding calendar month, the loan number and Stated Principal Balance of
such Loan as of the close of business on the Determination Date preceding
such Distribution Date and the date of acquisition thereof;
(xii) the total number and principal balance of any REO Properties
(and market value, if available) as of the close of business on the
Determination Date preceding such Distribution Date;
(xiii) the Senior Prepayment Percentage and Class A-6 Optimal Amount
for the following Distribution Date;
70
<PAGE>
(xiv) the aggregate amount of Realized Losses incurred during the
preceding calendar month; and
(xv) the Special Hazard Loss Coverage Amount, the Fraud Loss Coverage
Amount and the Bankruptcy Loss Coverage Amount, in each case as of the
related Determination Date.
(b) The Trustee's responsibility for disbursing the above information to
the Certificateholders is limited to the availability, timeliness and accuracy
of the information provided by the Servicer. The Trustee will send a copy of
each statement provided pursuant to this Section 4.04 to each Rating Agency.
(c) On or before the fifth Business Day following the end of each
Prepayment Period (but in no event later than the third Business Day prior to
the related Distribution Date), the Servicer shall deliver to the Trustee (which
delivery may be by electronic data transmission) a report in substantially the
form set forth as Schedule V hereto.
(d) Within a reasonable period of time after the end of each calendar year,
the Trustee shall cause to be furnished to each Person who at any time during
the calendar year was a Certificateholder, a statement containing the
information set forth in clauses (a)(i), (a)(ii) and (a)(vii) of this Section
4.04 aggregated for such calendar year or applicable portion thereof during
which such Person was a Certificateholder. Such obligation of the Trustee shall
be deemed to have been satisfied to the extent that substantially comparable
information shall be provided by the Trustee pursuant to any requirements of the
Code as from time to time in effect.
[SECTION 4.05. Determination of Pass-Through Rates for
COFI Certificates.
The Pass-Through Rate for each Class of COFI Certificates for each Interest
Accrual Period after the initial Interest Accrual Period shall be determined by
the Trustee as provided below on the basis of the Index and the applicable
formulae appearing in footnotes corresponding to the COFI Certificates in the
table relating to the Certificates in the Preliminary Statement.
Except as provided below, with respect to each Interest Accrual Period
following the initial Interest Accrual Period, the Trustee shall not later than
two Business Days following the publication of the applicable Index determine
the Pass-Through Rate at which interest shall accrue in respect of the COFI
Certificates during the related Interest Accrual Period.
71
<PAGE>
Except as provided below, the Index to be used in determining the
respective Pass-Through Rates for the COFI Certificates for a particular
Interest Accrual Period shall be COFI for the second calendar month preceding
such Interest Accrual Period. If at the Outside Reference Date for any Interest
Accrual Period, COFI for the second calendar month preceding such Interest
Accrual Period has not been published, the Trustee shall use COFI for the third
calendar month preceding such Interest Accrual Period. If COFI for neither the
second nor third calendar months preceding any Interest Accrual Period has been
published on or before the related Outside Reference Date, the Index for such
Interest Accrual Period and for all subsequent Interest Accrual Periods shall be
the National Cost of Funds Index for the third calendar month preceding such
Interest Accrual Period (or the fourth preceding calendar month if such National
Cost of Funds Index for the third preceding calendar month has not been
published by such Outside Reference Date). In the event that the National Cost
of Funds Index for neither the third nor fourth calendar months preceding an
Interest Accrual Period has been published on or before the related Outside
Reference Date, then for such Interest Accrual Period and for each succeeding
Interest Accrual Period, the Index shall be LIBOR, determined in the manner set
forth below.
On each Interest Determination Date so long as the COFI Certificates are
outstanding and the applicable Index therefor is LIBOR, the Trustee shall either
(i) request each Reference Bank to inform the Trustee of the quotation offered
by its principal London office for making one-month United States dollar
deposits in leading banks in the London interbank market, as of 11:00 a.m.
(London time) on such Interest Determination Date or (ii) in lieu of making any
such request, rely on such Reference Bank quotations that appear at such time on
the Reuters Screen LIBO Page (as defined in the International Swap Dealers
Association Inc. Code of Standard Wording, Assumptions and Provisions for Swaps,
1986 Edition), to the extent available.
With respect to any Interest Accrual Period for which the applicable Index
is LIBOR, LIBOR for such Interest Accrual Period will be established by the
Trustee on the related Interest Determination Date as follows:
(a) If on any Interest Determination Date two or more Reference Banks
provide such offered quotations, LIBOR for the next Interest Accrual Period
shall be the arithmetic mean of such offered quotations (rounding such
arithmetic mean upwards if necessary to the nearest whole multiple of
1/32%).
(b) If on any Interest Determination Date only one or none of the
Reference Banks provides such offered quotations, LIBOR for the next
Interest Accrual Period shall
72
<PAGE>
be whichever is the higher of (i) LIBOR as determined on the previous
Interest Determination Date or (ii) the Reserve Interest Rate. The "Reserve
Interest Rate" shall be the rate per annum which the Trustee determines to
be either (i) the arithmetic mean (rounded upwards if necessary to the
nearest whole multiple of 1/32%) of the one-month United States dollar
lending rates that New York City banks selected by the Trustee are quoting,
on the relevant Interest Determination Date, to the principal London
offices of at least two of the Reference Banks to which such quotations
are, in the opinion of the Trustee, being so made, or (ii) in the event
that the Trustee can determine no such arithmetic mean, the lowest
one-month United States dollar lending rate which New York City banks
selected by the Trustee are quoting on such Interest Determination Date to
leading European banks.
From such time as the applicable Index becomes LIBOR until all of the COFI
Certificates are paid in full, the Trustee will at all times retain at least
four Reference Banks for the purposes of determining LIBOR with respect to each
interest Determination Date. The Servicer initially shall designate the
Reference Banks. Each "Reference Bank" shall be a leading bank engaged in
transactions in Eurodollar deposits in the international Eurocurrency market,
shall not control, be controlled by, or be under common control with, the
Trustee and shall have an established place of business in London. If any such
Reference Bank should be unwilling or unable to act as such or if the Servicer
should terminate its appointment as Reference Bank, the Trustee shall promptly
appoint or cause to be appointed another Reference Bank. The Trustee shall have
no liability or responsibility to any Person for (i) the selection of any
Reference Bank for purposes of determining LIBOR or (ii) any inability to retain
at least four Reference Banks which is caused by circumstances beyond its
reasonable control.
In determining LIBOR and any Pass-Through Rate for the COFI Certificates or
any Reserve Interest Rate, the Trustee may conclusively rely and shall be
protected in relying upon the offered quotations (whether written, oral or on
the Reuters Screen) from the Reference Banks or the New York City banks as to
LIBOR or the Reserve Interest Rate, as appropriate, in effect from time to time.
The Trustee shall not have any liability or responsibility to any Person for (i)
the Trustee's selection of New York City banks for purposes of determining any
Reserve Interest Rate or (ii) its inability, following a good-faith reasonable
effort, to obtain such quotations from the Reference Banks or the New York City
banks or to determine such arithmetic mean, all as provided for in this
Section 4.05.
73
<PAGE>
The establishment of LIBOR and each Pass-Through Rate for the LIBOR
Certificates by the Trustee shall (in the absence of manifest error) be final,
conclusive and binding upon each Holder of a Certificate and the Trustee.]
[SECTION 4.06. Determination of Pass-Through Rates for
LIBOR Certificates.
On each Interest Determination Date so long as the LIBOR Certificates are
outstanding, the Trustee shall either (i) request each Reference Bank to inform
the Trustee of the quotation offered by its principal London office for making
one-month United States dollar deposits in leading banks in the London interbank
market, as of 11:00 a.m. (London time) on such Interest Determination Date or
(ii) in lieu of making any such request, rely on such Reference Bank quotations
that appear at such time on the Reuters Screen LIBO Page (as defined in the
International Swap Dealers Association Inc. Code of Standard Wording,
Assumptions and provisions for Swaps, 1986 Edition), to the extent available.
LIBOR for the next Interest Accrual Period will be established by the
Trustee on each interest Determination Date as follows:
(a) If on any interest Determination Date two or more Reference Banks
provide such offered quotations, LIBOR for the next Interest Accrual Period
shall be the arithmetic mean of such offered quotations (rounding such
arithmetic mean upwards if necessary to the nearest whole multiple of
1/32%).
(b) If on any Interest Determination Date only one or none of the
Reference Banks provides such offered quotations, LIBOR for the next
Interest Accrual Period shall be whichever is the higher of (i) LIBOR as
determined on the previous Interest Determination Date or (ii) the Reserve
Interest Rate. The "Reserve Interest Rate" shall be the rate per annum
which the Trustee determines to be either (i) the arithmetic mean (rounded
upwards if necessary to the nearest whole multiple of 1/32%) of the
one-month United States dollar lending rates that New York City banks
selected by the Trustee are quoting, on the relevant Interest Determination
Date, to the principal London offices of at least two of the Reference
Banks to which such quotations are, in the opinion of the Trustee, being so
made, or (ii) in the event that the Trustee can determine no such
arithmetic mean, the lowest one-month United States dollar lending rate
which New York City banks selected by the Trustee are quoting on such
Interest Determination Date to leading European banks.
74
<PAGE>
(c) If on any interest Determination Date the trustee is required but
is unable to determine the Reserve Interest Rate in the manner provided in
paragraph (b) above, LIBOR shall be LIBOR as determined on the preceding
Interest Determination Date, or, in the case of the first Interest
Determination Date, the Initial LIBOR Rate.
Until all of the LIBOR Certificates are paid in full, the Trustee will at
all times retain at least four Reference Banks for the purpose of determining
LIBOR with respect to each Interest Determination Date. The Servicer initially
shall designate the Reference Banks. Each "Reference Bank" shall be a leading
bank engaged in transactions in Eurodollar deposits in the international
Eurocurrency market, shall not control, be controlled by, or be under common
control with, the Trustee and shall have an established place of business in
London. If any such Reference Bank should be unwilling or unable to act as such
or if the Servicer should terminate its appointment as Reference Bank, the
Trustee shall promptly appoint or cause to be appointed another Reference Bank.
The Trustee shall have no liability or responsibility to any Person for (i) the
selection of any Reference Bank for purposes of determining LIBOR or (ii) any
inability to retain at least four Reference Banks which is caused by
circumstances beyond its reasonable control.
The Pass-Through Rate for each Class of LIBOR Certificates for each
Interest Accrual Period shall be determined by the Trustee on each Interest
Determination Date so long as the LIBOR Certificates are outstanding on the
basis of LIBOR and the respective formulae appearing in footnotes corresponding
to the LIBOR Certificates in the table relating to the Certificates in the
Preliminary Statement.
In determining LIBOR, any Pass-Through Rate for the LIBOR Certificates or
any Reserve Interest Rate, the Trustee may conclusively rely and shall be
protected in relying upon the offered quotations (whether written, oral or on
the Reuters Screen) from the Reference Banks or the New York City banks as to
LIBOR or the Reserve Interest Rate, as appropriate, in effect from time to time.
The Trustee shall not have any liability or responsibility to any Person for (i)
the Trustee's selection of New York City banks for purposes of determining any
Reserve Interest Rate or (ii) its inability, following a good-faith reasonable
effort, to obtain such quotations from the Reference Banks or the New York City
banks or to determine such arithmetic mean, all as provided for in this
Section 4.06.
The establishment of LIBOR and each Pass-Through Rate for the LIBOR
Certificates by the Trustee shall (in the absence of manifest error) be final,
conclusive and binding upon each Holder of a Certificate and the Trustee.]
75
<PAGE>
ARTICLE V
THE CERTIFICATES
SECTION 5.01. The Certificates.
The Certificates shall be substantially in the forms attached hereto as
exhibits. The Certificates shall be issuable in registered form, in the minimum
denominations, integral multiples in excess thereof (except that one Certificate
in each Class may be issued in a different amount which must be in excess of the
applicable minimum denomination) and aggregate denominations per Class set forth
in the Preliminary Statement.
Subject to Section 9.02 hereof respecting the final distribution on the
Certificates, on each Distribution Date the Trustee shall make distributions to
each Certificateholder of record on the preceding Record Date either (x) by wire
transfer in immediately available funds to the account of such holder at a bank
or other entity having appropriate facilities therefor, if (i) such Holder has
so notified the Trustee at least five Business Days prior to the related Record
Date and (ii) such Holder shall hold (A) a Notional Amount Certificate, (B) 100%
of the Class Certificate Balance of any Class of Certificates or (C)
Certificates of any Class with aggregate principal Denominations of not less
than $1,000,000 or (y) by check mailed by first class mail to such
Certificateholder at the address of such holder appearing in the Certificate
Register.
The Certificates shall be executed by manual or facsimile signature on
behalf of the Trustee by an authorized officer. Certificates bearing the manual
or facsimile signatures of individuals who were, at the time when such
signatures were affixed, authorized to sign on behalf of the Trustee shall bind
the Trustee, notwithstanding that such individuals or any of them have ceased to
be so authorized prior to the countersignature and delivery of such Certificates
or did not hold such offices at the date of such Certificate. No Certificate
shall be entitled to any benefit under this Agreement, or be valid for any
purpose, unless countersigned by the Trustee by manual signature, and such
countersignature upon any Certificate shall be conclusive evidence, and the only
evidence, that such Certificate has been duly executed and delivered hereunder.
All Certificates shall be dated the date of their countersignature. On the
Closing Date, the Trustee shall countersign the Certificates to be issued at the
direction of the Depositor, or any affiliate thereof.
The Depositor shall provide, or cause to be provided, to the Trustee on a
continuous basis, an adequate inventory of Certificates to facilitate transfers.
76
<PAGE>
SECTION 5.02. Certificate Register; Registration of
Transfer and Exchange of Certificates.
(a) The Trustee shall maintain, or cause to be maintained in accordance
with the provisions of Section 5.06 hereof, a Certificate Register for the Trust
Fund in which, subject to the provisions of subsections (b) and (c) below and to
such reasonable regulations as it may prescribe, the Trustee shall provide for
the registration of Certificates and of transfers and exchanges of Certificates
as herein provided. Upon surrender for registration of transfer of any
Certificate, the Trustee shall execute and deliver, in the name of the
designated transferee or transferees, one or more new Certificates of the same
Class and aggregate Percentage Interest.
At the option of a Certificateholder, Certificates may be exchanged for
other Certificates of the same Class in authorized denominations and evidencing
the same aggregate Percentage Interest upon surrender of the Certificates to be
exchanged at the office or agency of the Trustee. Whenever any Certificates are
so surrendered for exchange, the Trustee shall execute, authenticate, and
deliver the Certificates which the Certificateholder making the exchange is
entitled to receive. Every Certificate presented or surrendered for registration
of transfer or exchange shall be accompanied by a written instrument of transfer
in form satisfactory to the Trustee duly executed by the holder thereof or his
attorney duly authorized in writing.
No service charge to the Certificateholders shall be made for any
registration of transfer or exchange of Certificates, but payment of a sum
sufficient to cover any tax or governmental charge that may be imposed in
connection with any transfer or exchange of Certificates may be required.
All Certificates surrendered for registration of transfer or exchange shall
be canceled and subsequently destroyed by the Trustee in accordance with the
Trustee's customary procedures.
(b) No transfer of a Private Certificate shall be made unless such transfer
is made pursuant to an effective registration statement under the Securities Act
and any applicable state securities laws or is exempt from the registration
requirements under said Act and such state securities laws. In the event that a
transfer is to be made in reliance upon an exemption from the Securities Act and
such laws, in order to assure compliance with the Securities Act and such laws,
the Certificateholder desiring to effect such transfer and such
Certificateholder's prospective transferee shall each certify to the Trustee in
writing the facts surrounding the transfer in substantially the forms set forth
in Exhibit J (the "Transferor Certificate") and (i) deliver a letter in
substantially the form of either Exhibit K (the "Investment
77
<PAGE>
Letter") or Exhibit L (the "Rule 144A Letter") or (ii) there shall be delivered
to the Trustee at the expense of the transferor an Opinion of Counsel that such
transfer may be made pursuant to an exemption from the Securities Act. The
Depositor shall provide to any Holder of a Private Certificate and any
prospective transferee designated by any such Holder, information regarding the
related Certificates and the Loans and such other information as shall be
necessary to satisfy the condition to eligibility set forth in Rule 144A(d)(4)
for transfer of any such Certificate without registration thereof under the
Securities Act pursuant to the registration exemption provided by Rule 144A. The
Trustee and the Servicer shall cooperate with the Depositor in providing the
Rule 144A information referenced in the preceding sentence, including providing
to the Depositor such information regarding the Certificates, the Loans and
other matters regarding the Trust Fund as the Depositor shall reasonably request
to meet its obligation under the preceding sentence. Each Holder of a Private
Certificate desiring to effect such transfer shall, and does hereby agree to,
indemnify the Trustee and the Depositor, the Seller and the Servicer against any
liability that may result if the transfer is not so exempt or is not made in
accordance with such federal and state laws.
No transfer of an ERISA-Restricted Certificate shall be made unless the
Trustee shall have received either (i) a representation from the transferee of
such Certificate acceptable to and in form and substance satisfactory to the
Trustee (in the event such Certificate is a Private Certificate, such
requirement is satisfied only by the Trustee's receipt of a representation
letter from the transferee substantially in the form of Exhibit K or Exhibit L),
to the effect that such transferee is not an employee benefit plan or
arrangement subject to Section 406 of ERISA or a plan or arrangement subject to
Section 4975 of the Code, nor a person acting on behalf of any such plan or
arrangement, nor using the assets of any such plan or arrangement to effect such
transfer, (ii) if the purchaser is an insurance company, a representation that
the purchaser is an insurance company which is purchasing such Certificates with
funds contained in an "insurance company general account" (as such term is
defined in Section V(e) of Prohibited Transaction Class Exemption 95-60 ("PTCE
95-60")) and that the purchase and holding of such Certificates are covered
under PTCE 95-60 or (iii) in the case of any such ERISA-Restricted Certificate
presented for registration in the name of an employee benefit plan subject to
ERISA, or a plan or arrangement subject to Section 4975 of the Code (or
comparable provisions of any subsequent enactments), or a trustee of any such
plan or any other person acting on behalf of any such plan or arrangement, or
using such plan's or arrangement's assets, an Opinion of Counsel satisfactory to
the Trustee, which Opinion of Counsel shall not be an expense of either the
Trustee or the Trust Fund, addressed to the Trustee to
78
<PAGE>
the effect that the purchase or holding of such ERISA-Restricted Certificate
will not result in the assets of the Trust Fund being deemed to be "plan assets"
and subject to the prohibited transaction provisions of ERISA and the Code and
will not subject the Trustee to any obligation in addition to those expressly
undertaken in this Agreement or to any liability. For purposes of the preceding
sentence, with respect to an ERISA-Restricted Certificate that is not a Private
Certificate, in the event the representation letter referred to in the preceding
sentence is not so furnished, such representation shall be deemed to have been
made to the Trustee by the transferee's (including an initial acquiror's)
acceptance of the ERISA-Restricted Certificates. Notwithstanding anything else
to the contrary herein, any purported transfer of an ERISA-Restricted
Certificate to or on behalf of an employee benefit plan subject to ERISA or to
the Code without the delivery to the Trustee of an Opinion of Counsel
satisfactory to the Trustee as described above shall be void and of no effect.
To the extent permitted under applicable law (including, but not limited
to, ERISA), the Trustee shall be under no liability to any Person for any
registration of transfer of any ERISA-Restricted Certificate that is in fact not
permitted by this Section 5.02(b) or for making any payments due on such
Certificate to the Holder thereof or taking any other action with respect to
such Holder under the provisions of this Agreement so long as the transfer was
registered by the Trustee in accordance with the foregoing requirements.
(c) Each Person who has or who acquires any Ownership Interest in a
Residual Certificate shall be deemed by the acceptance or acquisition of such
Ownership Interest to have agreed to be bound by the following provisions, and
the rights of each Person acquiring any Ownership Interest in a Residual
Certificate are expressly subject to the following provisions:
(i) Each Person holding or acquiring any Ownership Interest in a
Residual Certificate shall be a Permitted Transferee and shall promptly
notify the Trustee of any change or impending change in its status as a
Permitted Transferee.
(ii) No Ownership Interest in a Residual Certificate may be registered
on the Closing Date or thereafter transferred, and the Trustee shall not
register the Transfer of any Residual Certificate unless, in addition to
the certificates required to be delivered to the Trustee under subparagraph
(b) above, the Trustee shall have been furnished with an affidavit (a
"Transfer Affidavit") of the initial owner or the proposed transferee in
the form attached hereto as Exhibit I.
79
<PAGE>
(iii) Each Person holding or acquiring any Ownership Interest in a
Residual Certificate shall agree (A) to obtain a Transfer Affidavit from
any other Person to whom such Person attempts to Transfer its Ownership
Interest in a Residual Certificate, (B) to obtain a Transfer Affidavit from
any Person for whom such Person is acting as nominee, trustee or agent in
connection with any Transfer of a Residual Certificate and (C) not to
Transfer its Ownership Interest in a Residual Certificate or to cause the
Transfer of an Ownership Interest in a Residual Certificate to any other
Person if it has actual knowledge that such Person is not a Permitted
Transferee.
(iv) Any attempted or purported Transfer of any Ownership Interest in
a Residual Certificate in violation of the provisions of this Section
5.02(c) shall be absolutely null and void and shall vest no rights in the
purported Transferee. If any purported transferee shall become a Holder of
a Residual Certificate in violation of the provisions of this Section
5.02(c), then the last preceding Permitted Transferee shall be restored to
all rights as Holder thereof retroactive to the date of registration of
Transfer of such Residual Certificate. The Trustee shall be under no
liability to any Person for any registration of Transfer of a Residual
Certificate that is in fact not permitted by Section 5.02(b) and this
Section 5.02(c) or for making any payments due on such Certificate to the
Holder thereof or taking any other action with respect to such Holder under
the provisions of this Agreement so long as the Transfer was registered
after receipt of the related Transfer Affidavit, Transferor Certificate and
either the Rule 144A Letter or the Investment Letter. The Trustee shall be
entitled but not obligated to recover from any Holder of a Residual
Certificate that was in fact not a Permitted Transferee at the time it
became a Holder or, at such subsequent time as it became other than a
Permitted Transferee, all payments made on such Residual Certificate at and
after either such time. Any such payments so recovered by the Trustee shall
be paid and delivered by the Trustee to the last preceding Permitted
Transferee of such Certificate.
(v) The Depositor shall use its best efforts to make available, upon
receipt of written request from the Trustee, all information necessary to
compute any tax imposed under Section 860E(e) of the Code as a result of a
Transfer of an Ownership Interest in a Residual Certificate to any Holder
who is not a Permitted Transferee.
The restrictions on Transfers of a Residual Certificate set
forth in this Section 5.02(c) shall cease to apply (and the applicable portions
of the legend on a Residual Certificate may be deleted) with respect to
Transfers occurring after delivery to
80
<PAGE>
the Trustee of an Opinion of Counsel, which Opinion of Counsel shall not be an
expense of the Trust Fund, the Trustee, the Sellers or the Servicer, to the
effect that the elimination of such restrictions will not cause the Trust Fund
hereunder to fail to qualify as a REMIC at any time that the Certificates are
outstanding or result in the imposition of any tax on the Trust Fund, a
Certificateholder or another Person. Each Person holding or acquiring any
Ownership Interest in a Residual Certificate hereby consents to any amendment of
this Agreement which, based on an Opinion of Counsel furnished to the Trustee,
is reasonably necessary (a) to ensure that the record ownership of, or any
beneficial interest in, a Residual Certificate is not transferred, directly or
indirectly, to a Person that is not a Permitted Transferee and (b) to provide
for a means to compel the Transfer of a Residual Certificate which is held by a
Person that is not a Permitted Transferee to a Holder that is a Permitted
Transferee.
(d) The preparation and delivery of all certificates and opinions referred
to above in this Section 5.02 in connection with transfer shall be at the
expense of the parties to such transfers.
(e) Except as provided below, the Book-Entry Certificates shall at all
times remain registered in the name of the Depository or its nominee and at all
times: (i) registration of the Certificates may not be transferred by the
Trustee except to another Depository; (ii) the Depository shall maintain
book-entry records with respect to the Certificate Owners and with respect to
ownership and transfers of such Book-Entry Certificates; (iii) ownership and
transfers of registration of the Book-Entry Certificates on the books of the
Depository shall be governed by applicable rules established by the Depository;
(iv) the Depository may collect its usual and customary fees, charges and
expenses from its Depository Participants; (v) the Trustee shall deal with the
Depository, Depository Participants and indirect participating firms as
representatives of the Certificate Owners of the Book-Entry Certificates for
purposes of exercising the rights of holders under this Agreement, and requests
and directions for and votes of such representatives shall not be deemed to be
inconsistent if they are made with respect to different Certificate Owners; and
(vi) the Trustee may rely and shall be fully protected in relying upon
information furnished by the Depository with respect to its Depository
Participants and furnished by the Depository Participants with respect to
indirect participating firms and persons shown on the books of such indirect
participating firms as direct or indirect Certificate Owners.
All transfers by Certificate Owners of Book-Entry Certificates shall be
made in accordance with the procedures established by the Depository Participant
or brokerage firm representing such Certificate Owner. Each Depository
Participant
81
<PAGE>
shall only transfer Book-Entry Certificates of Certificate Owners it represents
or of brokerage firms for which it acts as agent in accordance with the
Depository's normal procedures.
If (x) (i) the Depository or the Depositor advises the Trustee in writing
that the Depository is no longer willing or able to properly discharge its
responsibilities as Depository, and (ii) the Trustee or the Depositor is unable
to locate a qualified successor, (y) the Depositor at its option advises the
Trustee in writing that it elects to terminate the book-entry system through the
Depository or (z) after the occurrence of an Event of Default, Certificate
Owners representing at least 51% of the Certificate Balance of the Book-Entry
Certificates together advise the Trustee and the Depository through the
Depository Participants in writing that the continuation of a book-entry system
through the Depository is no longer in the best interests of the Certificate
Owners, the Trustee shall notify all Certificate Owners, through the Depository,
of the occurrence of any such event and of the availability of definitive,
fully-registered Certificates (the "Definitive Certificates") to Certificate
Owners requesting the same. Upon surrender to the Trustee of the related Class
of Certificates by the Depository, accompanied by the instructions from the
Depository for registration, the Trustee shall issue the Definitive
Certificates. Neither the Servicer, the Depositor nor the Trustee shall be
liable for any delay in delivery of such instruction and each may conclusively
rely on, and shall be protected in relying on, such instructions. The Servicer
shall provide the Trustee with an adequate inventory of certificates to
facilitate the issuance and transfer of Definitive Certificates. Upon the
issuance of Definitive Certificates all references herein to obligations imposed
upon or to be performed by the Depository shall be deemed to be imposed upon and
performed by the Trustee, to the extent applicable with respect to such
Definitive Certificates and the Trustee shall recognize the Holders of the
Definitive Certificates as Certificateholders hereunder; provided that the
Trustee shall not by virtue of its assumption of such obligations become liable
to any party for any act or failure to act of the Depository.
SECTION 5.03. Mutilated, Destroyed, Lost or Stolen
Certificates.
If (a) any mutilated Certificate is surrendered to the Trustee, or the
Trustee receives evidence to its satisfaction of the destruction, loss or theft
of any Certificate and (b) there is delivered to the Servicer and the Trustee
such security or indemnity as may be required by them to save each of them
harmless, then, in the absence of notice to the Trustee that such Certificate
has been acquired by a bona fide purchaser, the Trustee shall execute,
countersign and deliver, in exchange for or in lieu of any such mutilated,
destroyed, lost or stolen Certificate, a new Certificate of like Class, tenor
and Percent-
82
<PAGE>
age Interest. In connection with the issuance of any new Certificate under this
Section 5.03, the Trustee may require the payment of a sum sufficient to cover
any tax or other governmental charge that may be imposed in relation thereto and
any other expenses (including the fees and expenses of the Trustee) connected
therewith. Any replacement Certificate issued pursuant to this Section 5.03
shall constitute complete and indefeasible evidence of ownership, as if
originally issued, whether or not the lost, stolen or destroyed Certificate
shall be found at any time.
SECTION 5.04. Persons Deemed Owners.
The Servicer, the Trustee and any agent of the Servicer or the Trustee may
treat the Person in whose name any Certificate is registered as the owner of
such Certificate for the purpose of receiving distributions as provided in this
Agreement and for all other purposes whatsoever, and neither the Servicer, the
Trustee nor any agent of the Servicer or the Trustee shall be affected by any
notice to the contrary.
SECTION 5.05. Access to List of Certificateholders'
Names and Addresses.
If three or more Certificateholders (a) request such information in writing
from the Trustee, (b) state that such Certificateholders desire to communicate
with other Certificateholders with respect to their rights under this Agreement
or under the Certificates, and (c) provide a copy of the communication which
such Certificateholders propose to transmit, or if the Depositor or Servicer
shall request such information in writing from the Trustee, then the Trustee
shall, within ten Business Days after the receipt of such request, provide the
Depositor, the Servicer or such Certificateholders at such recipients' expense
the most recent list of the Certificateholders of such Trust Fund held by the
Trustee, if any. The Depositor and every Certificateholder, by receiving and
holding a Certificate, agree that the Trustee shall not be held accountable by
reason of the disclosure of any such information as to the list of the
Certificateholders hereunder, regardless of the source from which such
information was derived.
SECTION 5.06. Maintenance of Office or Agency.
The Trustee will maintain or cause to be maintained at its expense an
office or offices or agency or agencies in New York City where Certificates may
be surrendered for registration of transfer or exchange. The Trustee initially
designates its Corporate Trust Office for such purposes. The Trustee will give
prompt written notice to the Certificateholders of any change in such location
of any such office or agency.
83
<PAGE>
ARTICLE VI
THE DEPOSITOR AND THE SERVICER
SECTION 6.01. Respective Liabilities of the Depositor
and the Servicer.
The Depositor and the Servicer shall each be liable in accordance herewith
only to the extent of the obligations specifically and respectively imposed upon
and undertaken by them herein.
SECTION 6.02. Merger or Consolidation of the Depositor
or the Servicer.
The Depositor and the Servicer will each keep in full effect its existence,
rights and franchises as a corporation under the laws of the United States or
under the laws of one of the states thereof and will each obtain and preserve
its qualification to do business as a foreign corporation in each jurisdiction
in which such qualification is or shall be necessary to protect the validity and
enforceability of this Agreement, or any of the Loans and to perform its
respective duties under this Agreement.
Any Person into which the Depositor or the Servicer may be merged or
consolidated, or any Person resulting from any merger or consolidation to which
the Depositor or the Servicer shall be a party, or any person succeeding to the
business of the Depositor or the Servicer, shall be the successor of the
Depositor or the Servicer, as the case may be, hereunder, without the execution
or filing of any paper or any further act on the part of any of the parties
hereto, anything herein to the contrary notwithstanding; provided, however, that
the successor or surviving Person to the Servicer shall be qualified to sell
mortgage loans to, and to service mortgage loans on behalf of, FNMA or FHLMC.
SECTION 6.03. Limitation on Liability of the
Depositor, the Sellers, the Servicer and
Others.
None of the Depositor, the Sellers, the Servicer or any of the directors,
officers, employees or agents of the Depositor, the Sellers or the Servicer
shall be under any liability to the Certificateholders for any action taken or
for refraining from the taking of any action in good faith pursuant to this
Agreement, or for errors in judgment; provided, however, that this provision
shall not protect the Depositor, the Sellers, the Servicer or any such Person
against any breach of representations or warranties made by it herein or protect
the Depositor, the Sellers, the Servicer or any such Person from any liability
which
84
<PAGE>
would otherwise be imposed by reasons of willful misfeasance, bad faith or gross
negligence in the performance of duties or by reason of reckless disregard of
obligations and duties hereunder. The Depositor, the Sellers, the Servicer and
any director, officer, employee or agent of the Depositor, the Sellers or the
Servicer may rely in good faith on any document of any kind prima facie properly
executed and submitted by any Person respecting any matters arising hereunder.
The Depositor, the Sellers, the Servicer and any director, officer, employee or
agent of the Depositor, the Sellers or the Servicer shall be indemnified by the
Trust Fund and held harmless against any loss, liability or expense incurred in
connection with any audit, controversy or judicial proceeding relating to a
governmental taxing authority or any legal action relating to this Agreement or
the Certificates, other than any loss, liability or expense related to any
specific Loan or Loans (except as any such loss, liability or expense shall be
otherwise reimbursable pursuant to this Agreement) and any loss, liability or
expense incurred by reason of willful misfeasance, bad faith or gross negligence
in the performance of duties hereunder or by reason of reckless disregard of
obligations and duties hereunder. None of the Depositor, the Sellers or the
Servicer shall be under any obligation to appear in, prosecute or defend any
legal action that is not incidental to its respective duties hereunder and which
in its opinion may involve it in any expense or liability; provided, however,
that any of the Depositor, the Sellers or the Servicer may in its discretion
undertake any such action that it may deem necessary or desirable in respect of
this Agreement and the rights and duties of the parties hereto and interests of
the Trustee and the Certificateholders hereunder. In such event, the legal
expenses and costs of such action and any liability resulting therefrom shall be
expenses, costs and liabilities of the Trust Fund, and the Depositor, the
Sellers and the Servicer shall be entitled to be reimbursed therefor out of the
Certificate Account.
SECTION 6.04. Limitation on Resignation of Servicer.
The Servicer shall not resign from the obligations and duties hereby
imposed on it except (a) upon appointment of a successor servicer and receipt by
the Trustee of a letter from each Rating Agency that such a resignation and
appointment will not result in a downgrading of the rating of any of the
Certificates, or (b) upon determination that its duties hereunder are no longer
permissible under applicable law. Any such determination under clause (b)
permitting the resignation of the Servicer shall be evidenced by an Opinion of
Counsel to such effect delivered to the Trustee. No such resignation shall
become effective until the Trustee or a successor servicer shall have assumed
the Servicer's responsibilities, duties, liabilities and obligations hereunder.
85
<PAGE>
ARTICLE VII
DEFAULT
SECTION 7.01. Events of Default.
"Event of Default," wherever used herein, means any one of the following
events:
(i) any failure by the Servicer to deposit in the Certificate Account
or remit to the Trustee any payment (other than a payment required to be
made under Section 4.01 hereof) required to be made with respect to any
Class of Certificates under the terms of this Agreement, which failure
shall continue unremedied for five days after the date upon which written
notice of such failure shall have been given to the Servicer by the Trustee
or the Depositor or to the Servicer, the Depositor and the Trustee by the
Holders of Certificates of such Class evidencing not less than 25% of the
total distributions allocated to such Class; or
(ii) any failure by 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 this Agreement, which failure shall continue
unremedied for a period of thirty days after the date on which written
notice of such failure shall have been given to the Servicer by the Trustee
or the Depositor, or to the Servicer, the Depositor and the Trustee by the
Holders of Certificates of any Class evidencing not less than 25% of the
total distributions allocated to such Class; or
(iii) a decree or order of a court or agency or supervisory authority
having jurisdiction in the premises for the appointment of a receiver or
liquidator in any insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceeding, 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 consecutive days; or
(iv) the Servicer shall consent to the appointment of a receiver or
liquidator in any insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings of or relating to the Servicer or
all or substantially all of the property of the Servicer; or
86
<PAGE>
(v) the Servicer shall admit in writing its inability to pay its debts
generally as they become due, file a petition to take advantage of, or
commence a voluntary case under, any applicable insolvency or
reorganization statute, make an assignment for the benefit of its
creditors, or voluntarily suspend payment of its obligations; or
[(vi) so long as the Servicer is a Seller, any failure by any Seller
to observe or perform in any material respect any other of the covenants or
agreements on the part of any Seller contained in this Agreement, which
failure shall continue unremedied for a period of 60 days after the date on
which written notice of such failure shall have been given to such Seller
by the Trustee or the Depositor, or to such Seller and the Trustee by the
Holders of Certificates of any Class evidencing not less than 25% of the
total distributions allocated to such Class; or]
(vii) any failure of the Servicer to make any Advance in the manner
and at the time required to be made pursuant to Section 4.01 which
continues unremedied for a period of one Business Day after the date of
such failure.
If an Event of Default described in clauses (i) to (vi) of this Section
shall occur, then, and in each and every such case, so long as such Event of
Default shall not have been remedied, the Trustee may, or at the direction of
the Holders of Certificates of any Class evidencing not less than 25% of the
total distributions allocated to such Class, the Trustee shall by notice in
writing to the Servicer (with a copy to each Rating Agency), terminate all of
the rights and obligations of the Servicer under this Agreement and in and to
the Loans and the proceeds thereof, other than its rights as a Certificateholder
hereunder. If an Event of Default described in clause (vii) hereof shall occur,
the Trustee shall, by notice in writing to the Servicer and the Depositor,
terminate all of the rights and obligations of the Servicer under this Agreement
and in and to the Loans and the proceeds thereof, other than its rights as a
Certificateholder hereunder. On and after the receipt by the Servicer of such
written notice, all authority and power of the Servicer hereunder, whether with
respect to the Loans or otherwise, shall pass to and be vested in the Trustee.
[The Trustee shall thereupon make any Advance described in clause (vii) hereof
subject to Section 3.04 hereof.] The Trustee is hereby authorized and empowered
to execute and deliver, on behalf of the Servicer, as attorney-in-fact or
otherwise, any and all documents and other instruments, and to do or accomplish
all other acts or things necessary or appropriate to effect the purposes of such
notice of termination, whether to complete the
87
<PAGE>
transfer and endorsement or assignment of the Loans and related documents, or
otherwise. Unless expressly provided in such written notice, no such termination
shall affect any obligation of the Servicer to pay amounts owed pursuant to
Article VIII. The Servicer agrees to cooperate with the Trustee in effecting the
termination of the Servicer's responsibilities and rights hereunder, including,
without limitation, the transfer to the Trustee of all cash amounts which shall
at the time be credited to the Certificate Account, or thereafter be received
with respect to the Loans.
Notwithstanding any termination of the activities of the Servicer
hereunder, the Servicer shall be entitled to receive, out of any late collection
of a Scheduled Payment on a Loan which was due prior to the notice terminating
such Servicer's rights and obligations as Servicer hereunder and received after
such notice, that portion thereof to which such Servicer would have been
entitled pursuant to Sections 3.08(a)(i) through (viii),and any other amounts
payable to such Servicer hereunder the entitlement to which arose prior to the
termination of its activities hereunder.
SECTION 7.02. Trustee to Act; Appointment of
Successor.
On and after the time the Servicer receives a notice of termination
pursuant to Section 7.01 hereof, the Trustee shall, subject to and to the extent
provided in Section 3.04, be the successor to the Servicer in its capacity as
servicer under this Agreement and the transactions set forth or provided for
herein and shall be subject to all the responsibilities, duties and liabilities
relating thereto placed on the Servicer by the terms and provisions hereof and
applicable law including the obligation to make Advances pursuant to Section
4.01. As compensation therefor, the Trustee shall be entitled to all funds
relating to the Loans that the Servicer would have been entitled to charge to
the Certificate Account or Distribution Account if the Servicer had continued to
act hereunder. Notwithstanding the foregoing, if the Trustee has become the
successor to the Servicer in accordance with Section 7.01 hereof, the Trustee
may, if it shall be unwilling to so act, or shall, if it is prohibited by
applicable law from making Advances pursuant to Section 4.01 hereof or if it is
otherwise unable to so act, appoint, or petition a court of competent
jurisdiction to appoint, any established mortgage loan servicing institution the
appointment of which does not adversely affect the then current rating of the
Certificates by each Rating Agency as the successor to the Servicer hereunder in
the assumption of all or any part of the responsibilities, duties or liabilities
of the Servicer hereunder. Any successor to the Servicer shall be an institution
which is a FNMA and FHLMC approved seller/servicer in good standing, which has a
net worth of at least $10,000,000, and which is willing to service the
88
<PAGE>
Loans and executes and delivers to the Depositor and the Trustee an agreement
accepting such delegation and assignment, which contains an assumption by such
Person of the rights, powers, duties, responsibilities, obligations and
liabilities of the Servicer (other than liabilities of the Servicer under
Section 6.03 hereof incurred prior to termination of the Servicer under Section
7.01), with like effect as if originally named as a party to this Agreement; and
provided further that each Rating Agency acknowledges that its rating of the
Certificates in effect immediately prior to such assignment and delegation will
not be qualified or reduced as a result of such assignment and delegation.
Pending appointment of a successor to the Servicer hereunder, the Trustee,
unless the Trustee is prohibited by law from so acting, shall, subject to
Section 3.04 hereof, act in such capacity as hereinabove provided. In connection
with such appointment and assumption, the Trustee may make such arrangements for
the compensation of such successor out of payments on Loans as it and such
successor shall agree; provided, however, that no such compensation shall be in
excess of the Servicing Fee permitted the Servicer hereunder. The Trustee and
such successor shall take such action, consistent with this Agreement, as shall
be necessary to effectuate any such succession. Neither the Trustee nor any
other successor servicer shall be deemed to be in default hereunder by reason of
any failure to make, or any delay in making, any distribution hereunder or any
portion thereof or any failure to perform, or any delay in performing, any
duties or responsibilities hereunder, in either case caused by the failure of
the Servicer to deliver or provide, or any delay in delivering or providing, any
cash, information, documents or records to it.
Any successor to the Servicer as servicer shall give notice to the
Mortgagors of such change of servicer and shall, during the term of its service
as servicer maintain in force the policy or policies that the Servicer is
required to maintain pursuant to Section 6.05.
SECTION 7.03. Notification to Certificateholders.
(a) Upon any termination of or appointment of a successor to the Servicer,
the Trustee shall give prompt written notice thereof to Certificateholders and
to each Rating Agency.
(b) Within 60 days after the occurrence of any Event of Default, the
Trustee shall transmit by mail to all Certificateholders notice of each such
Event of Default hereunder known to the Trustee, unless such Event of Default
shall have been cured or waived.
89
<PAGE>
ARTICLE VIII
CONCERNING THE TRUSTEE
SECTION 8.01. Duties of Trustee.
The Trustee, prior to the occurrence of an Event of Default and after the
curing of all Events of Default that may have occurred, shall undertake to
perform such duties and only such duties as are specifically set forth in this
Agreement. In case an Event of Default has occurred and remains uncured, the
Trustee shall exercise such of the rights and powers vested in it by this
Agreement, and use the same degree of care and skill in their exercise as a
prudent person would exercise or use under the circumstances in the conduct of
such person's own affairs.
The Trustee, upon receipt of all resolutions, certificates, statements,
opinions, reports, documents, orders or other instruments furnished to the
Trustee that are specifically required to be furnished pursuant to any provision
of this Agreement shall examine them to determine whether they are in the form
required by this Agreement; provided, however, that the Trustee shall not be
responsible for the accuracy or content of any such resolution, certificate,
statement, opinion, report, document, order or other instrument.
No provision of this Agreement shall be construed to relieve the Trustee
from liability for its own negligent action, its own negligent failure to act or
its own willful misconduct; provided, however, that:
(i) unless an Event of Default known to the Trustee shall have
occurred and be continuing, the duties and obligations of the Trustee shall
be determined solely by the express provisions of this Agreement, the
Trustee shall not be liable except for the performance of such duties and
obligations as are specifically set forth in this Agreement, no implied
covenants or obligations shall be read into this Agreement against the
Trustee and the Trustee may conclusively rely, as to the truth of the
statements and the correctness of the opinions expressed therein, upon any
certificates or opinions furnished to the Trustee and conforming to the
requirements of this Agreement which it believed in good faith to be
genuine and to have been duly executed by the proper authorities respecting
any matters arising hereunder;
(ii) the Trustee shall not be liable for an error of judgment made in
good faith by a Responsible Officer or Responsible Officers of the Trustee,
unless
90
<PAGE>
it shall be finally proven that the Trustee was negligent in
ascertaining the pertinent facts; and
(iii) the Trustee shall not be liable with respect to any action
taken, suffered or omitted to be taken by it in good faith in accordance
with the direction of Holders of Certificates evidencing not less than 25%
of the Voting Rights of Certificates relating to the time, method and place
of conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred upon the Trustee under this
Agreement.
SECTION 8.02. Certain Matters Affecting the Trustee.
Except as otherwise provided in Section 8.01:
(i) the Trustee may request and rely upon and shall be protected in
acting or refraining from acting upon any resolution, Officers'
Certificate, certificate of auditors or any other certificate, statement,
instrument, opinion, report, notice, request, consent, order, appraisal,
bond or other paper or document believed by it to be genuine and to have
been signed or presented by the proper party or parties and the Trustee
shall have no responsibility to ascertain or confirm the genuineness of any
signature of any such party or parties;
(ii) the Trustee may consult with counsel, financial advisers or
accountants and the advice of any such counsel, financial advisers or
accountants and any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken or suffered or
omitted by it hereunder in good faith and in accordance with such Opinion
of Counsel;
(iii) the Trustee shall not be liable for any action taken, suffered
or omitted by it in good faith and believed by it to be authorized or
within the discretion or rights or powers conferred upon it by this
Agreement;
(iv) the Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, consent, order, approval,
bond or other paper or document, unless requested in writing so to do by
Holders of Certificates evidencing not less than 25% of the Voting Rights
allocated to each Class of Certificates;
91
<PAGE>
(v) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents,
accountants or attorneys;
(vi) the Trustee shall not be required to risk or expend its own funds
or otherwise incur any financial liability in the performance of any of its
duties or in the exercise of any of its rights or powers hereunder if it
shall have reasonable grounds for believing that repayment of such funds or
adequate indemnity against such risk or liability is not assured to it;
(vii) the Trustee shall not be liable for any loss on any investment
of funds pursuant to this Agreement (other than as issuer of the investment
security);
(viii) the Trustee shall not be deemed to have knowledge of an Event
of Default until a Responsible Officer of the Trustee shall have received
written notice thereof; and
(ix) the Trustee shall be under no obligation to exercise any of the
trusts, rights or powers vested in it by this Agreement or to institute,
conduct or defend any litigation hereunder or in relation hereto at the
request, order or direction of any of the Certificateholders, pursuant to
the provisions of this Agreement, unless such Certificateholders shall have
offered to the Trustee reasonable security or indemnity satisfactory to the
Trustee against the costs, expenses and liabilities which may be incurred
therein or thereby.
SECTION 8.03. Trustee Not Liable for Certificates or Loans.
The recitals contained herein and in the Certificates shall be taken as the
statements of the Depositor or the Sellers, as the case may be, and the Trustee
assumes no responsibility for their correctness. The Trustee makes no
representations as to the validity or sufficiency of this Agreement or of the
Certificates or of any Loan or related document other than with respect to the
Trustee's execution and counter-signature of the Certificates. The Trustee shall
not be accountable for the use or application by the Depositor or the Servicer
of any funds paid to the Depositor or the Servicer in respect of the Loans or
deposited in or withdrawn from the Certificate Account by the Depositor or the
Servicer.
92
<PAGE>
SECTION 8.04. Trustee May Own Certificates.
The Trustee in its individual or any other capacity may become the owner or
pledgee of Certificates with the same rights as it would have if it were not the
Trustee.
SECTION 8.05. Trustee's Fees and Expenses.
The Trustee, as compensation for its activities hereunder, shall be
entitled to withdraw from the Distribution Account on each Distribution Date an
amount equal to the Trustee Fee for such Distribution Date. The Trustee and any
director, officer, employee or agent of the Trustee shall be indemnified by the
Servicer and held harmless against any loss, liability or expense (including
reasonable attorney's fees) (i) incurred in connection with any claim or legal
action relating to (a) this Agreement, (b) the Certificates or (c) in connection
with the performance of any of the Trustee's duties hereunder, other than any
loss, liability or expense incurred by reason of willful misfeasance, bad faith
or negligence in the performance of any of the Trustee's duties hereunder and
(ii) resulting from any error in any tax or information return prepared by the
Servicer. Such indemnity shall survive the termination of this Agreement or the
resignation or removal of the Trustee hereunder. Without limiting the foregoing,
the Servicer covenants and agrees, except as otherwise agreed upon in writing by
the Depositor and the Trustee, and except for any such expense, disbursement or
advance as may arise from the Trustee's negligence, bad faith or willful
misconduct, to pay or reimburse the Trustee, for all reasonable expenses,
disbursements and advances incurred or made by the Trustee in accordance with
any of the provisions of this Agreement with respect to: (A) the reasonable
compensation and the expenses and disbursements of its counsel not associated
with the closing of the issuance of the Certificates, (B) the reasonable
compensation, expenses and disbursements of any accountant, engineer or
appraiser that is not regularly employed by the Trustee, to the extent that the
Trustee must engage such persons to perform acts or services hereunder and (C)
printing and engraving expenses in connection with preparing any Definitive
Certificates. Except as otherwise provided herein, the Trustee shall not be
entitled to payment or reimbursement for any routine ongoing expenses incurred
by the Trustee in the ordinary course of its duties as Trustee, Registrar, Tax
Matters Person or Paying Agent hereunder or for any other expenses.
SECTION 8.06. Eligibility Requirements for Trustee.
The Trustee hereunder shall at all times be a corporation or association
organized and doing business under the laws of a state or the United States of
America, authorized under such laws to exercise corporate trust powers, having a
combined capital and surplus of at least $________ subject to supervision
93
<PAGE>
or examination by federal or state authority and with a credit rating which
would not cause either of the Rating Agencies to reduce their respective then
current ratings of the Certificates (or having provided such security from time
to time as is sufficient to avoid such reduction). If such corporation or
association publishes reports of condition at least annually, pursuant to law or
to the requirements of the aforesaid supervising or examining authority, then
for the purposes of this Section 8.06 the combined capital and surplus of such
corporation or association shall be deemed to be its combined capital and
surplus as set forth in its most recent report of condition so published. In
case at any time the Trustee shall cease to be eligible in accordance with the
provisions of this Section 8.06, the Trustee shall resign immediately in the
manner and with the effect specified in Section 8.07 hereof. The entity serving
as Trustee may have normal banking and trust relationships with the Depositor
and its affiliates or the Servicer and its affiliates; provided, however, that
such entity cannot be an affiliate of the Servicer other than the Trustee in its
role as successor to the Servicer.
SECTION 8.07. Resignation and Removal of Trustee.
The Trustee may at any time resign and be discharged from the trusts hereby
created by giving written notice of resignation to the Depositor and the
Servicer and each Rating Agency not less than 60 days before the date specified
in such notice when, subject to Section 8.08, such resignation is to take
effect, and acceptance by a successor trustee in accordance with Section 8.08
meeting the qualifications set forth in Section 8.06. If no successor trustee
meeting such qualifications shall have been so appointed and have accepted
appointment within 30 days after the giving of such notice or resignation, the
resigning Trustee may petition any court of competent jurisdiction for the
appointment of a successor trustee.
If at any time the Trustee shall cease to be eligible in accordance with
the provisions of Section 8.06 hereof and shall fail to resign after written
request thereto by the Depositor, or if at any time the Trustee shall become
incapable of acting, or shall be adjudged as bankrupt or insolvent, or a
receiver of the Trustee or of its property shall be appointed, or any public
officer shall take charge or control of the Trustee or of its property or
affairs for the purpose of rehabilitation, conservation or liquidation, or a tax
is imposed with respect to the Trust Fund by any state in which the Trustee or
the Trust Fund is located and the imposition of such tax would be avoided by the
appointment of a different trustee, then the Depositor or the Servicer may
remove the Trustee and appoint a successor trustee by written instrument, in
triplicate, one copy of which instrument shall be delivered to the Trustee, one
copy of which
94
<PAGE>
shall be delivered to the Servicer and one copy to the successor
trustee.
The Holders of Certificates entitled to at least 51% of the Voting Rights
may at any time remove the Trustee and appoint a successor trustee by written
instrument or instruments, in triplicate, signed by such Holders or their
attorneys-in-fact duly authorized, one complete set of which instruments shall
be delivered by the successor Trustee to the Servicer, one complete set to the
Trustee so removed and one complete set to the successor so appointed. Notice of
any removal of the Trustee shall be given to each Rating Agency by the Successor
Trustee.
Any resignation or removal of the Trustee and appointment of a successor
trustee pursuant to any of the provisions of this Section 8.07 shall become
effective upon acceptance of appointment by the successor trustee as provided in
Section 8.08 hereof.
SECTION 8.08. Successor Trustee.
Any successor trustee appointed as provided in Section 8.07 hereof shall
execute, acknowledge and deliver to the Depositor and to its predecessor trustee
and the Servicer an instrument accepting such appointment hereunder and
thereupon the resignation or removal of the predecessor trustee shall become
effective and such successor trustee, without any further act, deed or
conveyance, shall become fully vested with all the rights, powers, duties and
obligations of its predecessor hereunder, with the like effect as if originally
named as trustee herein. The Depositor, the Servicer and the predecessor trustee
shall execute and deliver such instruments and do such other things as may
reasonably be required for more fully and certainly vesting and confirming in
the successor trustee all such rights, powers, duties, and obligations.
No successor trustee shall accept appointment as provided in this Section
8.08 unless at the time of such acceptance such successor trustee shall be
eligible under the provisions of Section 8.06 hereof and its appointment shall
not adversely affect the then current rating of the Certificates.
Upon acceptance of appointment by a successor trustee as provided in this
Section 8.08, the Depositor shall mail notice of the succession of such trustee
hereunder to all Holders of Certificates. If the Depositor fails to mail such
notice within 10 days after acceptance of appointment by the successor trustee,
the successor trustee shall cause such notice to be mailed at the expense of the
Depositor.
95
<PAGE>
SECTION 8.09. Merger or Consolidation of Trustee.
Any corporation into which the Trustee may be merged or converted or with
which it may be consolidated or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to the business of the Trustee, shall be the successor of
the Trustee hereunder, provided that such corporation shall be eligible under
the provisions of Section 8.06 hereof without the execution or filing of any
paper or further act on the part of any of the parties hereto, anything herein
to the contrary notwithstanding.
SECTION 8.10. Appointment of Co-Trustee or Separate Trustee.
Notwithstanding any other provisions of this Agreement, 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 any Mortgage Note 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 and for the
benefit of the Certificateholders, such title to the Trust Fund or any part
thereof, whichever is applicable, and, subject to the other provisions of this
Section 8.10, such powers, duties, obligations, rights and trusts as the
Servicer and the Trustee may consider necessary or desirable. If the Servicer
shall not have joined in such appointment within 15 days after the receipt by it
of a request to do so, or in the case an Event of Default shall have occurred
and be continuing, the Trustee alone shall have the power to make such
appointment. No co-trustee or separate trustee hereunder shall be required to
meet the terms of eligibility as a successor trustee under Section 8.06 and no
notice to Certificateholders of the appointment of any co-trustee or separate
trustee shall be required under Section 8.08.
Every separate trustee and co-trustee shall, to the extent permitted by
law, be appointed and act subject to the following provisions and conditions:
(i) To the extent necessary to effectuate the purposes of this Section
8.10, all rights, powers, duties and obligations conferred or imposed upon
the Trustee, except for the obligation of the Trustee under this Agreement
to advance funds on behalf of the Servicer, shall be conferred or imposed
upon and exercised or performed by the Trustee and such separate trustee or
co-trustee jointly (it being understood that
96
<PAGE>
such separate trustee or co-trustee is not authorized to act separately
without the Trustee joining in such act), except to the extent that
under any law of any jurisdiction in which any particular act or acts
are to be performed (whether as Trustee hereunder or as successor to the
Servicer hereunder), the Trustee shall be incompetent or unqualified to
perform such act or acts, in which event such rights, powers, duties and
obligations (including the holding of title to the applicable Trust Fund or
any portion thereof in any such jurisdiction) shall be exercised and
performed singly by such separate trustee or co-trustee, but solely at the
direction of the Trustee;
(ii) No trustee hereunder shall be held personally liable by reason of
any act or omission of any other trustee hereunder and such appointment
shall not, and shall not be deemed to, constitute any such separate trustee
or co-trustee as agent of the Trustee;
(iii) The Trustee may at any time accept the resignation of or remove
any separate trustee or co-trustee; and
(iv) The Servicer, and not the Trustee, shall be liable for the
payment of reasonable compensation, reimbursement and indemnification to
any such separate trustee or co-trustee.
Any notice, request or other writing given to the Trustee shall be deemed
to have been given to each of the separate trustees and co-trustees, when and as
effectively as if given to each of them. Every instrument appointing any
separate trustee or co-trustee shall refer to this Agreement and the conditions
of this Article VIII. Each separate trustee and co-trustee, upon its acceptance
of the trusts conferred, shall be vested with the estates or property specified
in its instrument of appointment, either jointly with the Trustee or separately,
as may be provided therein, subject to all the provisions of this Agreement,
specifically including every provision of this Agreement relating to the conduct
of, affecting the liability of, or affording protection to, the Trustee. Every
such instrument shall be filed with the Trustee and a copy thereof given to the
Servicer and the Depositor.
Any separate trustee or co-trustee may, at any time, constitute the Trustee
its agent or attorney-in-fact, with full power and authority, to the extent not
prohibited by law, to do any lawful act under or in respect of this Agreement on
its behalf and in its name. If any separate trustee or co-trustee shall die,
become incapable of acting, resign or be removed, all of its estates,
properties, rights, remedies and trusts shall
97
<PAGE>
vest in and be exercised by the Trustee, to the extent permitted by law, without
the appointment of a new or successor trustee.
SECTION 8.11. Tax Matters.
It is intended that the assets with respect to which any REMIC election is
to be made, as set forth in the Preliminary Statement, shall constitute, and
that the conduct of matters relating to such assets shall be such as to qualify
such assets as, a "real estate mortgage investment conduit" as defined in and in
accordance with the REMIC Provisions. In furtherance of such intention, the
Trustee covenants and agrees that it shall act as agent (and the Trustee is
hereby appointed to act as agent) on behalf of the REMIC and that in such
capacity it shall: (a) prepare and file, or cause to be prepared and filed, in a
timely manner, a U.S. Real Estate Mortgage Investment Conduit Income Tax Return
(Form 1066 or any successor form adopted by the Internal Revenue Service) and
prepare and file or cause to be prepared and filed with the Internal Revenue
Service and applicable state or local tax authorities income tax or information
returns for each taxable year with respect to the REMIC, containing such
information and at the times and in the manner as may be required by the Code or
state or local tax laws, regulations, or rules, and furnish or cause to be
furnished to Certificateholders the schedules, statements or information at such
times and in such manner as may be required thereby; (b) within thirty days of
the Closing Date, furnish or cause to be furnished to the Internal Revenue
Service, on Forms 8811 or as otherwise may be required by the Code, the name,
title, address, and telephone number of the person that the holders of the
Certificates may contact for tax information relating thereto, together with
such additional information as may be required by such Form, and update such
information at the time or times in the manner required by the Code; (c) make or
cause to be made elections that such assets be treated as a REMIC on the federal
tax return for its first taxable year (and, if necessary, under applicable state
law); (d) prepare and forward, or cause to be prepared and forwarded, to the
Certificateholders and to the Internal Revenue Service and, if necessary, state
tax authorities, all information returns and reports as and when required to be
provided to them in accordance with the REMIC Provisions, including without
limitation, the calculation of any original issue discount using the Prepayment
Assumption; (e) provide information necessary for the computation of tax imposed
on the transfer of a Residual Certificate to a Person that is not a Permitted
Transferee, or an agent (including a broker, nominee or other middleman) of a
Non-Permitted Transferee, or a pass-through entity in which a Non-Permitted
Transferee is the record holder of an interest (the reasonable cost of computing
and furnishing such information may be charged to the Person liable for such
tax); (f) to the extent that they are under its control conduct matters relating
to such assets at all times that any Certifi-
98
<PAGE>
cates are outstanding so as to maintain the status as a REMIC under the REMIC
Provisions; (g) not knowingly or intentionally take any action or omit to take
any action that would cause the termination of the REMIC status; (h) pay, from
the sources specified in the last paragraph of this Section 8.11, the amount of
any federal or state tax, including prohibited transaction taxes as described
below, imposed on the REMIC prior to its termination when and as the same shall
be due and payable (but such obligation shall not prevent the Trustee or any
other appropriate Person from contesting any such tax in appropriate proceedings
and shall not prevent the Trustee from withholding payment of such tax, if
permitted by law, pending the outcome of such proceedings); (i) ensure that
federal, state or local income tax or information returns shall be signed by the
Trustee or such other person as may be required to sign such returns by the Code
or state or local laws, regulations or rules; (j) maintain records relating to
the REMIC, including but not limited to the income, expenses, assets and
liabilities thereof and the fair market value and adjusted basis of the assets
determined at such intervals as may be required by the Code, as may be necessary
to prepare the foregoing returns, schedules, statements or information; and (k)
as and when necessary and appropriate, represent the REMIC in any administrative
or judicial proceedings relating to an examination or audit by any governmental
taxing authority, request an administrative adjustment as to any taxable year of
the REMIC, enter into settlement agreements with any governmental taxing agency,
extend any statute of limitations relating to any tax item of the REMIC, and
otherwise act on behalf of the REMIC in relation to any tax matter or
controversy involving it.
In order to enable the Trustee to perform its duties as set forth herein,
the Depositor shall provide, or cause to be provided, to the Trustee within ten
(10) days after the Closing Date all information or data that the Trustee
requests in writing and determines to be relevant for tax purposes to the
valuations and offering prices of the Certificates, including, without
limitation, the price, yield, prepayment assumption and projected cash flows of
the Certificates and the Loans. Thereafter, the Depositor shall provide to the
Trustee promptly upon written request therefor, any such additional information
or data that the Trustee may, from time to time, reasonably request in order to
enable the Trustee to perform its duties as set forth herein. The Depositor
hereby indemnifies the Trustee for any losses, liabilities, damages, claims or
expenses of the Trustee arising from any errors or miscalculations of the
Trustee that result from any failure of the Depositor to provide, or to cause to
be provided, accurate information or data to the Trustee on a timely basis.
In the event that any tax is imposed on "prohibited transactions" of the
REMIC as defined in Section 860F(a)(2) of the Code, on the "net income from
foreclosure property" of the
99
<PAGE>
REMIC as defined in Section 860G(c) of the Code, on any contribution to the
REMIC after the Startup Day pursuant to Section 860G(d) of the Code, or any
other tax is imposed, including, without limitation, any minimum tax imposed
upon the REMIC pursuant to Sections _____, _____, and [or] _____ of the [insert
any appropriate State tax code reference], if not paid as otherwise provided for
herein, such tax shall be paid by (i) the Trustee, if any such other tax arises
out of or results from a breach by the Trustee of any of its obligations under
this Agreement, (ii) the Servicer, in the case of any such minimum tax, or if
such tax arises out of or results from a breach by the Servicer or a Seller of
any of their obligations under this Agreement, (iii) the Sellers, if any such
tax arises out of or results from any Seller's obligation to repurchase a Loan
pursuant to Section 2.02 or 2.03 or (iv) in all other cases, or in the event
that the Trustee, the Servicer or a Seller fails to honor its obligations under
the preceding clause (i),(ii) or (iii), any such tax will be paid with amounts
otherwise to be distributed to the Certificateholders, as provided in Section
3.08(b).
SECTION 8.12. Periodic Filings.
[Pursuant to written instructions from the Depositor, the Trustee shall
prepare, execute and file all periodic reports required under the Securities
Exchange Act of 1934 in conformity with the terms of the relief granted to the
Depositor in Equity One ABS, Inc. (___________, 199_), a copy of which has been
supplied to the Trustee by the Issuer.] In connection with the preparation and
filing of such periodic reports, the Depositor and the Servicer shall timely
provide to the Trustee all material information available to them which is
required to be included in such reports and not known to them to be in the
possession of the Trustee and such other information as the Trustee reasonably
may request from either of them and otherwise reasonably shall cooperate with
the Trustee. The Trustee shall have no liability with respect to any failure to
properly prepare or file such periodic reports resulting from or relating to the
Trustee's inability or failure to obtain any information not resulting from its
own negligence or willful misconduct.
100
<PAGE>
ARTICLE IX
TERMINATION
SECTION 9.01. Termination upon Liquidation or Purchase
of all Loans.
Subject to Section 9.03, the obligations and responsibilities of the
Depositor, the Servicer and the Trustee created hereby with respect to the Trust
Fund shall terminate upon the earlier of (a) the purchase by the Servicer of all
Loans (and REO Properties) remaining in the Trust Fund at the price equal to the
sum of (i) 100% of the Stated Principal Balance of each Loan plus one month's
accrued interest thereon at the applicable Adjusted Mortgage Rate and (ii) the
lesser of (x) the appraised value of any REO Property as determined by the
higher of two appraisals completed by two independent appraisers selected by the
Servicer at the expense of the Servicer and (y) the Stated Principal Balance of
each Loan related to any REO Property, in each case plus accrued and unpaid
interest thereon at the applicable Adjusted Mortgage Rate and (b) the later of
(i) the maturity or other liquidation (or any Advance with respect thereto) of
the last Loan remaining in the Trust Fund and the disposition of all REO
Property and (ii) the distribution to Certificateholders of all amounts required
to be distributed to them pursuant to this Agreement. In no event shall the
trusts created hereby continue beyond the earlier of (i) the expiration of 21
years from the death of the survivor of the descendants of Joseph P. Kennedy,
the late Ambassador of the United States to the Court of St. James's, living on
the date hereof and (ii) the Latest Possible Maturity Date. The right to
purchase all Loans and REO Properties pursuant to clause (a) above shall be
conditioned upon the Pool Stated Principal Balance, at the time of any such
repurchase, aggregating less than ten percent of the aggregate Cut-off Date
Principal Balance of the Loans.
SECTION 9.02. Final Distribution on the Certificates.
If on any Determination Date, the Servicer determines that there are no
Outstanding Loans and no other funds or assets in the Trust Fund other than the
funds in the Certificate Account, the Servicer shall direct the Trustee promptly
to send a final distribution notice to each Certificateholder. If the Servicer
elects to terminate the Trust Fund pursuant to clause (a) of Section 9.01, at
least 20 days prior to the date notice is to be mailed to the affected
Certificateholders, the Servicer shall notify the Depositor and the Trustee of
the date the Servicer intends to terminate the Trust Fund and of the applicable
repurchase price of the Loans and REO Properties.
101
<PAGE>
Notice of any termination of the Trust Fund, specifying the Distribution
Date on which Certificateholders may surrender their Certificates for payment of
the final distribution and cancellation, shall be given promptly by the Trustee
by letter to Certificateholders mailed not earlier than the 15th day and no
later than the 10th day of the month next preceding the month of such final
distribution. Any such notice shall specify (a) the Distribution Date upon which
final distribution on the Certificates will be made upon presentation and
surrender of Certificates at the office therein designated, (b) the amount of
such final distribution, (c) the location of the office or agency at which such
presentation and surrender must be made, and (d) that the Record Date otherwise
applicable to such Distribution Date is not applicable, distributions being made
only upon presentation and surrender of the Certificates at the office therein
specified. The Servicer will give such notice to each Rating Agency at the time
such notice is given to Certificateholders.
In the event such notice is given, the Servicer shall cause all funds in
the Certificate Account to be remitted to the Trustee for deposit in the
Distribution Account on the Business Day prior to the applicable Distribution
Date in an amount equal to the final distribution in respect of the
Certificates. Upon such final deposit with respect to the Trust Fund and the
receipt by the Trustee of a Request for Release therefor, the Trustee shall
promptly release to the Servicer the Mortgage Files for the Loans.
Upon presentation and surrender of the Certificates, the Trustee shall
cause to be distributed to Certificateholders of each Class, in the order set
forth in Section 4.02 hereof, on the final Distribution Date and in proportion
to their respective Percentage Interests, with respect to Certificateholders of
the same Class, an amount equal to (i) as to each Class of Regular Certificates,
the Certificate Balance thereof plus (a) accrued interest thereon (or on their
Notional Amount, if applicable) in the case of an interest bearing Certificate
and (b) any Class PO Deferred Amounts in the case of the Class PO Certificates,
and (ii) as to the Residual Certificates, the amount, if any, which remains on
deposit in the Distribution Account (other than the amounts retained to meet
claims) after application pursuant to clause (i) above.
In the event that any affected Certificateholders shall not surrender
Certificates for cancellation within six months after the date specified in the
above mentioned written notice, the Trustee shall give a second written notice
to the remaining Certificateholders to surrender their Certificates for
cancellation and receive the final distribution with respect thereto. If within
six months after the second notice all the applicable Certificates shall not
have been surrendered for cancellation, the Trustee may take appropriate steps,
or may appoint an agent
102
<PAGE>
to take appropriate steps, to contact the remaining Certificateholders
concerning surrender of their Certificates, and the cost thereof shall be paid
out of the funds and other assets which remain a part of the Trust Fund. If
within one year after the second notice all Certificates shall not have been
surrendered for cancellation, the Class A-R Certificateholders shall be entitled
to all unclaimed funds and other assets of the Trust Fund which remain subject
hereto.
SECTION 9.03. Additional Termination Requirements.
(a) In the event the Servicer exercises its purchase option as provided in
Section 9.01, the Trust Fund shall be terminated in accordance with the
following additional requirements, unless the Trustee has been supplied with an
Opinion of Counsel, at the expense of the Servicer, to the effect that the
failure to comply with the requirements of this Section 9.03 will not (i) result
in the imposition of taxes on "prohibited transactions" on the REMIC as defined
in section 860F of the Code, or (ii) cause the Trust Fund to fail to qualify as
a REMIC at any time that any Certificates are outstanding:
(1) Within 90 days prior to the final Distribution Date set forth in
the notice given by the Servicer under Section 9.02, the Servicer shall
prepare and the Trustee, at the expense of the "tax matters person," shall
adopt a plan of complete liquidation within the meaning of section
860F(a)(4) of the Code which, as evidenced by an Opinion of Counsel (which
opinion shall not be an expense of the Trustee or the Tax Matters Person),
meets the requirements of a qualified liquidation; and
(2) Within 90 days after the time of adoption of such a plan of
complete liquidation, the Trustee shall sell all of the assets of the Trust
Fund to the Servicer for cash in accordance with Section 9.01.
(b) The Trustee as agent for any REMIC hereby agrees to adopt and sign such
a plan of complete liquidation upon the written request of the Servicer, and the
receipt of the Opinion of Counsel referred to in Section 9.03(a)(1) and to take
such other action in connection therewith as may be reasonably requested by the
Servicer.
(c) By their acceptance of the Certificates, the Holders thereof hereby
authorize the Servicer to prepare and the Trustee to adopt and sign a plan of
complete liquidation.
103
<PAGE>
ARTICLE X
MISCELLANEOUS PROVISIONS
SECTION 10.01. Amendment.
This Agreement may be amended from time to time by the Depositor, the
Servicer and the Trustee without the consent of any of the Certificateholders to
cure any ambiguity, or to correct or supplement any provisions herein, or to
make such other provisions with respect to matters or questions arising under
this Agreement as shall not be inconsistent with any other provisions herein;
provided that such action shall not, as evidenced by an Opinion of Counsel
(which Opinion of Counsel shall not be an expense of the Trustee or the Trust
Fund), adversely affect in any material respect the interests of any
Certificateholder; provided, however, that the amendment shall not be deemed to
adversely affect in any material respect the interests of the Certificateholders
if the Person requesting the amendment obtains a letter from each Rating Agency
stating that the amendment would not result in the downgrading or withdrawal of
the respective ratings then assigned to the Certificates; it being understood
and agreed that any such letter in and of itself will not represent a
determination as to the materiality of any such amendment and will represent a
determination only as to the credit issues affecting any such rating. The
Trustee, the Depositor and the Servicer also may at any time and from time to
time amend this Agreement without the consent of the Certificateholders to
modify, eliminate or add to any of its provisions to such extent as shall be
necessary or helpful to maintain the qualification of the Trust Fund as a REMIC
under the Code or to avoid or minimize the risk of the imposition of any tax on
the REMIC pursuant to the Code that would be a claim at any time prior to the
final redemption of the Certificates, provided that the Trustee has been
provided an Opinion of Counsel, which opinion shall be an expense of the party
requesting such opinion but in any case shall not be an expense of the Trustee
or the Trust Fund, to the effect that such action is necessary or helpful to
maintain such qualification or to avoid or minimize the risk of the imposition
of such a tax.
This Agreement may also be amended from time to time by the Depositor, the
Servicer and the Trustee with the consent of the Holders of a Majority in
Interest of each Class of Certificates affected thereby for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of this Agreement or of modifying in any manner the rights of the
Holders of Certificates; provided, however, that no such amendment shall (i)
reduce in any manner the amount of, or delay the timing of, payments required to
be distributed on any Certificate without the consent of the Holder of such
Certificate, (ii) adversely affect in any material respect the
104
<PAGE>
interests of the Holders of any Class of Certificates in a manner other than as
described in (i), without the consent of the Holders of Certificates of such
Class evidencing, as to such Class, Percentage Interests aggregating 66%, or
(iii) reduce the aforesaid percentages of Certificates the Holders of which are
required to consent to any such amendment, without the consent of the Holders of
all such Certificates then outstanding.
Notwithstanding any contrary provision of this Agreement, the Trustee shall
not consent to any amendment to this Agreement unless it shall have first
received an Opinion of Counsel, which opinion shall not be an expense of the
Trustee or the Trust Fund, to the effect that such amendment will not cause the
imposition of any tax on the REMIC or the Certificateholders or cause the Trust
Fund to fail to qualify as a REMIC at any time that any Certificates are
outstanding.
Promptly after the execution of any amendment to this Agreement requiring
the consent of Certificateholders, the Trustee shall furnish written
notification of the substance or a copy of such amendment to each
Certificateholder and each Rating Agency.
It shall not be necessary for the consent of Certificateholders under this
Section to approve the particular form of any proposed amendment, but it shall
be sufficient if such consent shall approve the substance thereof. The manner of
obtaining such consents and of evidencing the authorization of the execution
thereof by Certificateholders shall be subject to such reasonable regulations as
the Trustee may prescribe.
Nothing in this Agreement shall require the Trustee to enter into an
amendment without receiving an Opinion of Counsel (which Opinion shall not be an
expense of the Trustee or the Trust Fund, satisfactory to the Trustee that (i)
such amendment is permitted and is not prohibited by this Agreement and that all
requirements for amending this Agreement have been complied with; and (ii)
either (A) the amendment does not adversely affect in any material respect the
interests of any Certificateholder or (B) the conclusion set forth in the
immediately preceding clause (A) is not required to be reached pursuant to this
Section 10.01.
SECTION 10.02. Recordation of Agreement; Counterparts.
This Agreement is subject to recordation in all appropriate public offices
for real property records in all the counties or other comparable jurisdictions
in which any or all of the properties subject to the Mortgages are situated, and
in any other appropriate public recording office or elsewhere, such recordation
to be effected by the Servicer at its expense, but only upon direction by the
Trustee accompanied by an Opinion of
105
<PAGE>
Counsel to the effect that such recordation materially and beneficially affects
the interests of the Certificateholders.
For the purpose of facilitating the recordation of this Agreement as herein
provided and for other purposes, this Agreement may be executed simultaneously
in any number of counterparts, each of which counterparts shall be deemed to be
an original, and such counterparts shall constitute but one and the same
instrument.
SECTION 10.03. Governing Law.
THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE
SUBSTANTIVE LAWS OF THE STATE OF ____________ APPLICABLE TO AGREEMENTS MADE AND
TO BE PERFORMED IN THE STATE OF __________________ AND THE OBLIGATIONS, RIGHTS
AND REMEDIES OF THE PARTIES HERETO AND THE CERTIFICATEHOLDERS SHALL BE
DETERMINED IN ACCORDANCE WITH SUCH LAWS.
SECTION 10.04. Intention of Parties.
It is the express intent of the parties hereto that the conveyance of the
Loans by the Sellers to the Depositor pursuant to Article II of this Agreement
be, and be construed as, an absolute sale thereof to the Depositor. It is
further, not the intention of the parties that such conveyance be deemed a
pledge thereof by the Sellers to the Depositor. However, in the event that,
notwithstanding the intent of the parties, such assets are held to be the
property of the Sellers or any one of them, or if for any other reason this
Agreement is held or deemed to create a security interest in such assets, than
(i) this Agreement shall be deemed, effective as of _______________ 1, 1997, to
be a security agreement within the meaning of the Uniform Commercial Code of the
State of _________________ and (ii) the conveyance provided for in this
Agreement shall be deemed, effective as of ____________ 1, 1997, to be an
assignment and a grant by the Sellers to the Depositor, for the benefit of the
Trustee and the Certificateholders, of a security interest in all of the assets
that constitute the Loans [and the Trust Fund], whether now owned or hereafter
acquired.
The Sellers for the benefit of the Depositor, the Trustee and the
Certificateholders, shall cause to be filed in all appropriate jurisdictions on
or before the Closing Date, all financing statements necessary to perfect the
ownership interest of the Depositor in the Loans. The Sellers shall also arrange
for filing any appropriate Uniform Commercial Code continuation statements as
may be necessary or appropriate to continue the perfection of the ownership
interest of the Depositor in the Loans.
106
<PAGE>
It is the express intent of the parties hereto that the conveyance of the
Trust Fund by the Depositor to the Trustee pursuant to Article II of this
Agreement be, and be construed as, an absolute sale thereof to the Trustee. It
is, further, not the intention of the parties that such conveyance be deemed a
pledge thereof by the Depositor to the Trustee. However, in the event that,
notwithstanding the intent of the parties, such assets are held to be the
property of the Depositor, or if for any other reason this Agreement is held or
deemed to create a security interest in such assets, then (i) this Agreement
shall be deemed, effective as of __________ 1, 1997, to be a security agreement
within the meaning of the Uniform Commercial Code of the State of ___________
and (ii) the conveyance provided for in this Agreement shall be deemed,
effective as of __________ 1, 1997, to be an assignment and a grant by the
Depositor to the Trustee, for the benefit of the Certificateholders, of a
security interest in all of the assets that constitute the Trust Fund, whether
now owned or hereafter acquired.
The Depositor, for the benefit of the Trustee and the Certificateholders,
shall file in all appropriate jurisdictions on or before the Closing Date all
financings statements necessary to perfect the ownership interest of the
Depositor in the Loans. The Depositor shall also arrange for the filing of any
appropriate Uniform Commercial Code continuation statements as may be necessary
or appropriate to continue the perfection of the Trustee's ownership interest in
the Loans. The Depositor, for the benefit of the Trustee and the
Certificateholders shall, to the extent consistent with this Agreement, take
such actions as may be necessary to ensure that, if this Agreement were deemed
to create a security interest in the Trust Fund, such security interest would be
deemed to be a perfected security interest of first priority under applicable
law and will be maintained as such throughout the term of the Agreement. The
Depositor shall arrange for filing any appropriate Uniform Commercial Code
financing statements, continuation statements or other appropriate forms,
notices or documents in connection with any security interest granted or
assigned to the Trustee for the benefit of the Certificateholder.
SECTION 10.05. Notices.
(a) The Trustee shall use its best efforts to promptly provide notice to
each Rating Agency with respect to each of the following of which it has actual
knowledge:
1. Any material change or amendment to this Agreement;
2. The occurrence of any Event of Default that has not been cured;
107
<PAGE>
3. The resignation or termination of the Servicer or the Trustee and
the appointment of any successor;
4. The repurchase or substitution of Loans pursuant to Section 2.03;
and
5. The final payment to Certificateholders.
In addition, the Trustee shall promptly furnish to each Rating Agency
copies of the following:
1. Each report to Certificateholders described in Section 4.04;
2. Each annual statement as to compliance described in Section 3.16;
3. Each annual independent public accountants' servicing report described
in Section 3.17; and
4. Any notice of a purchase of a Loan pursuant to Section 2.02, 2.03 or
3.11.
(b) All directions, demands and notices hereunder shall be in writing and
shall be deemed to have been duly given when delivered to (a) in the case of the
Depositor, Equity One ABS, Inc., 103 Springer Building, 3411 Silverside Road,
Wilmington, Delaware 19810, Attention: _______________, (b) in the case of the
Servicer, Equity One, Inc., 523 Fellowship Road, Suite 230, Mt. Laurel, New
Jersey 08054, Attention: Dennis Kildea or such other address as may be hereafter
furnished to the Depositor and the Trustee by the Servicer in writing, (c) in
the case of the Trustee, _____________________ _____________________, Attention:
_______________ ___________________________________, or such other address as
the Trustee may hereafter furnish to the Depositor or Servicer and (d) in the
case of the Rating Agencies, the address specified therefor in the definition
corresponding to the name of such Rating Agency. Notices to Certificateholders
shall be deemed given when mailed, first class postage prepaid, to their
respective addresses appearing in the Certificate Register.
SECTION 10.06. Severability of Provisions.
If any one or more of the covenants, agreements, provisions or terms of
this Agreement shall be for any reason whatsoever held invalid, then such
covenants, agreements, provisions or terms shall be deemed severable from the
remaining covenants, agreements, provisions or terms of this Agreement and shall
in no way affect the validity or enforceability of the other provisions of this
Agreement or of the Certificates or the rights of the Holders thereof.
108
<PAGE>
SECTION 10.07. Assignment.
Notwithstanding anything to the contrary contained herein, except as
provided in Section 6.02, this Agreement may not be assigned by the Servicer
without the prior written consent of the Trustee and Depositor.
SECTION 10.08. Limitation on Rights of Certificateholders.
The death or incapacity of any Certificateholder shall not operate to
terminate this Agreement or the trust created hereby, nor entitle such
Certificateholder's legal representative or heirs to claim an accounting or to
take any action or commence any proceeding in any court for a petition or
winding up of the trust created hereby, or otherwise affect the rights,
obligations and liabilities of the parties hereto or any of them.
No Certificateholder shall have any right to vote (except as provided
herein) or in any manner otherwise control the operation and management of the
Trust Fund, or the obligations of the parties hereto, nor shall anything herein
set forth or contained in the terms of the Certificates be construed so as to
constitute the Certificateholders from time to time as partners or members of an
association; nor shall any Certificateholder be under any liability to any third
party by reason of any action taken by the parties to this Agreement pursuant to
any provision hereof.
No Certificateholder shall have any right by virtue or by availing itself
of any provisions of this Agreement to institute any suit, action or proceeding
in equity or at law upon or under or with respect to this Agreement, unless such
Holder previously shall have given to the Trustee a written notice of an Event
of Default and of the continuance thereof, as herein provided, and unless the
Holders of Certificates evidencing not less than 25% of the Voting Rights
evidenced by the Certificates shall also have made written request to the
Trustee to institute such action, suit or proceeding in its own name as Trustee
hereunder and shall have offered to the Trustee such reasonable indemnity as it
may require against the costs, expenses, and liabilities to be incurred therein
or thereby, and the Trustee, for 60 days after its receipt of such notice,
request and offer of indemnity shall have neglected or refused to institute any
such action, suit or proceeding; it being understood and intended, and being
expressly covenanted by each Certificateholder with every other
Certificateholder and the Trustee, that no one or more Holders of Certificates
shall have any right in any manner whatever by virtue or by availing itself or
themselves of any provisions of this Agreement to affect, disturb or prejudice
the rights of the Holders of any other of the Certificates, or to obtain or seek
to obtain priority over or preference to any other such Holder or to
109
<PAGE>
enforce any right under this Agreement, except in the manner herein provided and
for the common benefit of all Certificateholders. For the protection and
enforcement of the provisions of this Section 10.08, each and every
Certificateholder and the Trustee shall be entitled to such relief as can be
given either at law or in equity.
SECTION 10.09. Inspection and Audit Rights.
The Servicer agrees that, on reasonable prior notice, it will permit and
will cause each Subservicer to permit any representative of the Depositor or the
Trustee during the Servicer's normal business hours, to examine all the books of
account, records, reports and other papers of the Servicer relating to the
Loans, to make copies and extracts therefrom, to cause such books to be audited
by independent certified public accountants selected by the Depositor or the
Trustee and to discuss its affairs, finances and accounts relating to the Loans
with its officers, employees and independent public accountants (and by this
provision the Servicer hereby authorizes said accountants to discuss with such
representative such affairs, finances and accounts), all at such reasonable
times and as often as may be reasonably requested. Any out-of-pocket expense
incident to the exercise by the Depositor or the Trustee of any right under this
Section 10.09 shall be borne by the party requesting such inspection; all other
such expenses shall be borne by the Servicer or the related Subservicer.
SECTION 10.10. Certificates Nonassessable and Fully Paid.
It is the intention of the Depositor that Certificateholders shall not be
personally liable for obligations of the Trust Fund, that the interests in the
Trust Fund represented by the Certificates shall be nonassessable for any reason
whatsoever, and that the Certificates, upon due authentication thereof by the
Trustee pursuant to this Agreement, are and shall be deemed fully paid.
* * * * * *
110
<PAGE>
IN WITNESS WHEREOF, the Depositor, the Trustee, each of the Sellers and the
Servicer have caused their names to be signed hereto by their respective
officers thereunto duly authorized as of the day and year first above written.
Equity One ABS, INC.
as Depositor
By: ________________________________
Name: _________________________
Title: ________________________
___________________________________
as Trustee
By: ________________________________
Name: _________________________
Title: ________________________
Equity One, Inc.
as a Seller and Servicer
By: ________________________________
Name: _________________________
Title: ________________________
___________________________________
as a Seller
By: ________________________________
Name: _________________________
Title: ________________________
___________________________________
as a Seller
By: ________________________________
Name: _________________________
Title: ________________________
___________________________________
as a Seller
111
<PAGE>
By: ________________________________
Name: _________________________
Title: ________________________
___________________________________
as a Seller
By: ________________________________
Name: _________________________
Title: ________________________
___________________________________
as a Seller
By: ________________________________
Name: _________________________
Title: ________________________
___________________________________
as a Seller
By: ________________________________
Name: _________________________
Title: ________________________
112
<PAGE>
SCHEDULE I
Loan Schedule
[Delivered at Closing to Trustee]
1
<PAGE>
SCHEDULE II
Equity One ABS, Inc.
Asset Backed Certificates
Series 199_-_
Representations and Warranties of the Sellers
____________________________ ("Seller") hereby makes the representations
and warranties set forth in this Schedule II to the Depositor and the Trustee,
as of the Closing Date, or if so specified herein, as of the Cut-off Date with
respect to the Loans set forth in Exhibit II-A. Capitalized terms used but not
otherwise defined in this Schedule II shall have the meanings ascribed thereto
in the Pooling and Servicing Agreement (the "Pooling and Servicing Agreement")
relating to the above-referenced Series, among Seller, the other Sellers and the
Servicer identified therein, Equity One ABS, Inc., as depositor, and
_____________________, as trustee.
(1) Seller is duly organized as a _______ corporation and is validly
existing and in good standing under the laws of the State of ___________
and is duly authorized and qualified to transact any and all business
contemplated by the Pooling and Servicing Agreement to be conducted by
Seller in any state in which a Mortgaged Property is located or is
otherwise not required under applicable law to effect such qualification
and, in any event, is in compliance with the doing business laws of any
such state, to the extent necessary to ensure its ability to enforce each
Loan[, to service the Loans in accordance with the terms of the Pooling and
Servicing Agreement] and to perform any of its other obligations under the
Pooling and Servicing Agreement in accordance with the terms thereof.
(2) Seller has the full corporate power and authority to sell [and
service] each Loan, and to execute, deliver and perform, and to enter into
and consummate the transactions contemplated by the Pooling and Servicing
Agreement and has duly authorized by all necessary corporate action on the
part of Seller the execution, delivery and performance of the Pooling and
Servicing Agreement; and the Pooling and Servicing Agreement, assuming the
due authorization, execution and delivery thereof by the other parties
thereto, constitutes a legal, valid and binding obligation of Seller,
enforceable against Seller in accordance with its terms, except that (a)
the enforceability thereof may be limited by bankruptcy, insolvency,
moratorium, receivership and other similar laws relating to creditors'
rights generally and (b) the remedy of specific performance and injunctive
and other forms of equitable relief may be
1
<PAGE>
subject to equitable defenses and to the discretion of the court
before which any proceeding therefor may be brought.
(3) The execution and delivery of the Pooling and Servicing Agreement
by Seller, the sale [and servicing] of the Loans by Seller under the
Pooling and Servicing Agreement, the consummation of any other of the
transactions contemplated by the Pooling and Servicing Agreement, and the
fulfillment of or compliance with the terms thereof are in the ordinary
course of business of Seller and will not (A) result in a material breach
of any term or provision of the charter or by-laws of Seller or (B)
materially conflict with, result in a material breach, violation or
acceleration of, or result in a material default under, the terms of any
other material agreement or instrument to which Seller is a party or by
which it may be bound, or (C) constitute a material violation of any
statute, order or regulation applicable to Seller of any court, regulatory
body, administrative agency or governmental body having jurisdiction over
Seller; and Seller is not in breach or violation of any material indenture
or other material agreement or instrument, or in violation of any statute,
order or regulation of any court, regulatory body, administrative agency or
governmental body having jurisdiction over it which breach or violation may
materially impair Seller's ability to perform or meet any of its
obligations under the Pooling and Servicing Agreement.
(4) Seller [is an approved servicer of conventional mortgage loans for
FNMA or FHLMC and] is a mortgagee approved by the Secretary of Housing and
Urban Development pursuant to sections 203 and 211 of the National Housing
Act.
(5) No litigation is pending or, to the best of Seller's knowledge,
threatened, against Seller that would materially and adversely affect the
execution, delivery or enforceability of the Pooling and Servicing
Agreement or the ability of Seller to sell [or service] the Loans or to
perform any of its other obligations under the Pooling and Servicing
Agreement in accordance with the terms thereof.
(6) No consent, approval, authorization or order of any court or
governmental agency or body is required for the execution, delivery and
performance by Seller of, or compliance by Seller with, the Pooling and
Servicing Agreement or the consummation of the transactions contemplated
thereby, or if any such consent, approval, authorization or order is
required, Seller has obtained the same.
2
<PAGE>
(7) Seller intends to treat the conveyance of the Loans to the
Depositor as a sale of the Loans for all tax, accounting and regulatory
purposes.
3
<PAGE>
SCHEDULE III
Equity One ABS, Inc.
Asset Backed Certificates
Series 199_-_
Representations and Warranties as to the Loans
____________________________ ("Seller") hereby makes the representations
and warranties set forth in this Schedule III to the Depositor and the Trustee,
as of the Closing Date, or if so specified herein, as of the Cut-off Date with
respect to the Loans set forth on Exhibit III-A. Capitalized terms used but not
otherwise defined in this Schedule III shall have the meanings ascribed thereto
in the Pooling and Servicing Agreement (the "Pooling and Servicing Agreement")
relating to the above-referenced Series, among Seller, the other Sellers and the
Servicer identified therein, Equity One ABS, Inc., as depositor, and
________________________, as trustee.
(1) The information set forth on Schedule I to the Pooling and
Servicing Agreement with respect to the Loans set forth on Exhibit III-A is
true and correct in all material respects as of the Closing Date.
(2) As of the Closing Date, all payments due with respect to the Loans
set forth on Exhibit III-A prior to the Cut-off Date have been made; and as
of the Cut-off Date, no such Loan has been contractually delinquent for __
or more days during the twelve months prior to the Cut-off Date.
(3) With respect to the Loans set forth on Exhibit III-A, no such Loan
had a Loan-to-Value Ratio at origination in excess of __%.
(4) Each Mortgage set forth on Exhibit III-B is a valid and
enforceable first lien on the referenced Mortgaged Property subject only to
(a) the lien of non delinquent current real property taxes and assessments,
(b) covenants, conditions and restrictions, rights of way, easements and
other matters of public record as of the date of recording of such
Mortgage, such exceptions appearing of record being acceptable to mortgage
lending institutions generally or specifically reflected in the appraisal
made in connection with the origination of the related Loan, and (c) other
matters to which like properties are commonly subject which do not
materially interfere with the benefits of the security intended to be
provided by such Mortgage.
1
<PAGE>
(5) Immediately prior to the assignment of the Loans set forth on
Exhibit III-A to the Depositor, the Seller had good title to, and was the
sole owner of, each such Loan free and clear of any pledge, lien,
encumbrance or security interest and had full right and authority, subject
to no interest or participation of, or agreement with, any other party, to
sell and assign the same pursuant to the Pooling and Servicing Agreement.
(6) There is no delinquent tax or assessment lien against any
Mortgaged Property set forth on Exhibit III-B.
(7) There is no valid offset, defense or counterclaim to any Mortgage
Note or Mortgage set forth on Exhibit III-B, including the obligation of
the Mortgagor to pay the unpaid principal of or interest on such Mortgage
Note.
(8) There are no mechanics' liens or claims for work, labor or
material affecting any Mortgaged Property set forth on Exhibit III-B which
are or may be a lien prior to, or equal with, the lien of such Mortgage set
forth on Exhibit III-B, except those which are insured against by the title
insurance policy referred to in item (12) below.
(9) To the best of the Seller's knowledge, each Mortgaged Property set
forth on Exhibit III-B is free of material damage and in good repair.
(10) Each Loan set forth on Exhibit III-A at origination complied in
all material respects with applicable state and federal laws, including,
without limitation, usury, equal credit opportunity, real estate settlement
procedures, truth-in-lending and disclosure laws, and consummation of the
transactions contemplated hereby will not involve the violation of any such
laws.
(11) As of the Closing Date, neither the Seller nor any prior holder
of any Mortgage set forth on Exhibit III-B has modified the Mortgage set
forth on Exhibit III-B in any material respect (except that a Loan set
forth on Exhibit III-A may have been modified by a written instrument which
has been recorded or submitted for recordation, if necessary, to protect
the interests of the Certificateholders and the original or a copy of which
has been delivered to the Trustee); satisfied, canceled or subordinated
such Mortgage in whole or in part; released the related Mortgaged Property
in whole or in part from the lien of such Mortgage; or executed any
instrument of release, cancellation, modification or satisfaction with
respect thereto.
2
<PAGE>
(12) A lender's policy of title insurance together with a condominium
endorsement and extended coverage endorsement, if applicable, in an amount
at least equal to the Cut-off Date Stated Principal Balance of each such
Loan or a commitment (binder) to issue the same was effective on the date
of the origination of each Loan, each such policy is valid and remains in
full force and effect, and each such policy was issued by a title insurer
qualified to do business in the jurisdiction where the related Mortgaged
Property is located and acceptable to FNMA or FHLMC and is in a form
acceptable to FNMA or FHLMC, which policy insures the Seller and successor
owners of indebtedness secured by the related insured Mortgage, as to the
first priority lien of the Mortgage subject to the exceptions set forth in
paragraph (4) above; to the best of the Seller's knowledge, no claims have
been made under such mortgage title insurance policy and no prior holder of
the related Mortgage, including the Seller, has done, by act or omission,
anything which would impair the coverage of such mortgage title insurance
policy.
(13) Each Loan set forth on Exhibit III-A was originated by an entity
that satisfied at the time of origination the requirements of Section
3(a)(41) of the Securities Exchange Act of 1934, as amended.
(14) To the best of the Seller's knowledge, all of the improvements
which were included for the purpose of determining the Appraised Value of
each Mortgaged Property set forth on Exhibit III-B lies wholly within the
boundaries and building restriction lines of such property, and no
improvements on adjoining properties encroach upon such Mortgaged Property.
(15) To the best of the Seller's knowledge, no improvement located on
or being part of any Mortgaged Property set forth on Exhibit III-B is in
violation of any applicable zoning law or regulation. To the best of the
Seller's knowledge, all inspections, licenses and certificates required to
be made or issued with respect to all occupied portions of such Mortgaged
Property and, with respect to the use and occupancy of the same, including
but not limited to certificates of occupancy and fire underwriting
certificates, have been made or obtained from the appropriate authorities,
unless the lack thereof would not have a material adverse effect on the
value of such Mortgaged Property, and such Mortgaged Property is lawfully
occupied under applicable law.
(16) Each Mortgage Note and related Mortgage set forth on Exhibit
III-B are genuine, and each is the legal, valid and binding obligation of
the maker thereof,
3
<PAGE>
enforceable in accordance with its terms and under applicable law. To
the best of the Seller's knowledge, all parties to such Mortgage Note and
such Mortgage had legal capacity to execute such Mortgage Note and such
Mortgage and each such Mortgage Note and Mortgage have been duly and
properly executed by such parties.
(17) The proceeds of each Loan set forth on Exhibit III-A have been
fully disbursed, there is no requirement for future advances thereunder and
any and all requirements as to completion of any on-site or off-site
improvements and as to disbursements of any escrow funds therefor have been
complied with. All costs, fees and expenses incurred in making, or closing
or recording such Loans were paid.
(18) The related Mortgage contains customary and enforceable
provisions which render the rights and remedies of the holder thereof
adequate for the realization against the related Mortgaged Property of the
benefits of the security, including, (i) in the case of a Mortgage
designated as a deed of trust, by trustee's sale, and (ii) otherwise by
judicial foreclosure.
(19) With respect to each Mortgage set forth on Exhibit III-B
constituting a deed of trust, a trustee, duly qualified under applicable
law to serve as such, has been properly designated and currently so serves
and is named in such Mortgage, and no fees or expenses are or will become
payable by the Certificateholders to the trustee under the deed of trust,
except in connection with a trustee's sale after default by the Mortgagor.
(20) Each Mortgage Note and each Mortgage set forth on Exhibit III-B
is in substantially one of the forms acceptable to FNMA or FHLMC, with such
riders as have been acceptable to FNMA or FHLMC, as the case may be.
(21) There exist no deficiencies with respect to escrow deposits and
payments, if such are required, for which customary arrangements for
repayment thereof have not been made, and no escrow deposits or payments of
other charges or payments due the Seller have been capitalized under any
Mortgage or related Mortgage Note set forth on Exhibit III-B.
(22) The origination, underwriting and collection practices used by
the Seller with respect to each Loan set forth on Exhibit III-A have been
in all respects legal, prudent and customary in the mortgage lending and
servicing business.
4
<PAGE>
(23) There is no pledged account or other security other than real
estate securing the Mortgagor's obligations.
(24) No Loan set forth on Exhibit III-A has a shared appreciation
feature, or other contingent interest feature.
(25) Each Loan set forth on Exhibit III-A contains a customary "due on
sale" clause.
(26) None of the Loans set forth on Exhibit III-A provides for a
prepayment penalty.
[(27) Each Loan set forth on Exhibit III-A which had a Loan-to-Value
Ratio at origination in excess of 80% is the subject of a Primary Insurance
Policy that insures that portion of the principal balance thereof that
exceeds the amount equal to 75% of the Appraised Value of the related
Mortgaged Property. Each such Primary Insurance Policy is issued by a
Qualified Insurer. All provisions of any such Primary Insurance Policy have
been and are being complied with, any such policy is in full force and
effect, and all premiums due thereunder have been paid. Any Mortgage set
forth on Exhibit III-B subject to any such Primary Insurance Policy
obligates either the Mortgagor or the mortgagee thereunder to maintain such
insurance and to pay all premiums and charges in connection therewith. The
Mortgage Rate for each such Loan is net of any such insurance premium.]
(28) At the Cut-off Date, the improvements upon each Mortgaged
Property set forth on Exhibit III-B are covered by a valid and existing
hazard insurance policy with a generally acceptable carrier that provides
for fire and extended coverage and coverage for such other hazards as are
customary in the area where such Mortgaged Property is located in an amount
which is at least equal to the lesser of (i) the maximum insurable value of
the improvements securing such Loan or (ii) the greater of (a) the
outstanding principal balance of related Loan and (b) an amount such that
the proceeds of such policy shall be sufficient to prevent the Mortgagor
and/or the mortgagee from becoming a co-insurer. If such Mortgaged Property
is a condominium unit, it is included under the coverage afforded by a
blanket policy for the condominium unit. All such individual insurance
policies and all flood policies referred to in item (29) below contain a
standard mortgagee clause naming the Seller or the original mortgagee, and
its successors in interest, as mortgagee, and the Seller has received no
notice that any premiums due and payable thereon have not been paid; the
Mortgage obligates the Mortgagor
5
<PAGE>
thereunder to maintain all such insurance including flood insurance at
the Mortgagor's cost and expense, and upon the Mortgagor's failure to do
so, authorizes the holder of the Mortgage to obtain and maintain such
insurance at the Mortgagor's cost and expense and to seek reimbursement
therefor from the Mortgagor.
(29) If a Mortgaged Property set forth on Exhibit III-B is in an area
identified in the Federal Register by the Federal Emergency Management
Agency as having special flood hazards, a flood insurance policy in a form
meeting the requirements of the current guidelines of the Flood Insurance
Administration is in effect with respect to such Mortgaged Property with a
generally acceptable carrier in an amount representing coverage not less
than the least of (A) the original outstanding principal balance of the
related Loan, (B) the minimum amount required to compensate for damage or
loss on a replacement cost basis, or (C) the maximum amount of insurance
that is available under the Flood Disaster Protection Act of 1973, as
amended.
(30) To the best of the Seller's knowledge, there is no proceeding
occurring, pending or threatened for the total or partial condemnation of
any Mortgaged Property set forth on Exhibit III-B.
(31) There is no material monetary default existing under any Mortgage
or the related Mortgage Note set forth on Exhibit III-B and, to the best of
the Seller's knowledge, there is no material event which, with the passage
of time or with notice and the expiration of any grace or cure period,
would constitute a default, breach, violation or event of acceleration
under such Mortgage or related Mortgage Note; and the Seller has not waived
any default, breach, violation or event of acceleration.
(32) Each Mortgaged Property set forth on Exhibit III-B is improved by
a one- to four-family residential dwelling including condominium units and
dwelling units in PUDs, which, to the best of Seller's knowledge, does not
include cooperatives or mobile homes and does not constitute other than
real property under state law.
(33) Each Loan set forth on Exhibit III-A is being serviced by the
Servicer.
(34) Any future advances made prior to the Cut-off Date have been
consolidated with the outstanding principal amount secured by the related
Mortgage set forth on Exhibit III-B, and the secured principal amount, as
consolidated, bears a single interest rate and single repayment term
reflected on the related Loan Schedule. The
6
<PAGE>
consolidated principal amount does not exceed the original principal
amount of such Loan. No Mortgage Note set forth on Exhibit III-B permits or
obligates the Servicer to make future advances to the Mortgagor at the
option of the Mortgagor.
(35) All taxes, governmental assessments, insurance premiums, water,
sewer and municipal charges, leasehold payments or ground rents which
previously became due and owing have been paid, or an escrow of funds has
been established in an amount sufficient to pay for every such item which
remains unpaid and which has been assessed, but is not yet due and payable.
Except for (A) payments in the nature of escrow payments, and (B) interest
accruing from the date of any Mortgage Note set forth on Exhibit III-B or
date of disbursement of the related Mortgage proceeds, whichever is later,
to the day which precedes by one month the Due Date of the first
installment of principal and interest, including without limitation, taxes
and insurance payments, the Servicer has not advanced funds, or induced,
solicited or knowingly received any advance of funds by a party other than
the Mortgagor, directly or indirectly, for the payment of any amount
required by the related Mortgage.
(36) Each Loan set forth on Exhibit III-A was underwritten in all
material respects in accordance with the Seller's underwriting guidelines
as set forth in the Prospectus Supplement.
(37) Other than with respect to any Streamlined Documentation Loan as
to which the loan-to-value ratio of the related Original Loan was less than
60% at the time of the origination of such Original Loan, prior to the
approval of any application with respect to any Loan set forth on Exhibit
III-A, an appraisal of the related Mortgaged Property was obtained from a
qualified appraiser, duly appointed by the originator, who had no interest,
direct or indirect, in the Mortgaged Property or in any loan made on the
security thereof, and whose compensation is not affected by the approval or
disapproval of such Loan; such appraisal is in a form acceptable to FNMA
and FHLMC.
(38) No Loan set forth on Exhibit III-A is a graduated payment
mortgage loan or a growing equity mortgage loan, and no more than [five] of
such Loans are subject to a buydown or similar arrangement.
(39) Any leasehold estate securing a Loan set forth on Exhibit III-A
has a term of not less than five years in excess of the term of the related
Loan.
7
<PAGE>
(40) The Loans set forth on Exhibit III-A were selected from among the
outstanding [fixed-rate] one- to four-family mortgage loans in Seller's
portfolio at the Closing Date as to which the representations and
warranties made as to such Loans set forth in this Schedule III can be
made. Such selection was not made in a manner that would adversely affect
the interests of Certificateholders.
(41) Except for ___ Loans, each Loan set forth on Exhibit III-A has a
payment date on or before the Due Date in the month of the first
Distribution Date.
(42) The Loans set forth on Exhibit III-A, individually and in the
aggregate, conform in all material respects to the descriptions thereof in
the Prospectus Supplement.
8
<PAGE>
SCHEDULE IV
PRINCIPAL BALANCE SCHEDULES
1
<PAGE>
<TABLE>
SCHEDULE V
Form of Monthly Servicer Report
================================================================================================
LOAN LEVEL REPORTING SYSTEM
- ------------------------------------------------------------------------------------------------
DATABASE STRUCTURE
- ------------------------------------------------------------------------------------------------
[MONTH, YEAR]
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Field Number Field Name Field Type Field Width Dec
- ------------------------------------------------------------------------------------------------
1 INVNUM Numeric 4
- ------------------------------------------------------------------------------------------------
2 INVBLK Numeric 4
- ------------------------------------------------------------------------------------------------
3 INACNU Character 8
- ------------------------------------------------------------------------------------------------
4 BEGSCH Numeric 15 2
- ------------------------------------------------------------------------------------------------
5 SCHPRN Numeric 13 2
- ------------------------------------------------------------------------------------------------
6 TADPRN Numeric 11 2
- ------------------------------------------------------------------------------------------------
7 LIQEPB Numeric 11 2
- ------------------------------------------------------------------------------------------------
8 ACTCOD Numeric 11
- ------------------------------------------------------------------------------------------------
9 ACTDAT Numeric 4
- ------------------------------------------------------------------------------------------------
10 INTPMT Numeric 8
- ------------------------------------------------------------------------------------------------
11 PRNPMT Numeric 13 2
- ------------------------------------------------------------------------------------------------
12 ENDSCH Numeric 13 2
- ------------------------------------------------------------------------------------------------
13 SCHNOT Numeric 13 2
- ------------------------------------------------------------------------------------------------
14 SCHPAS Numeric 7 3
- ------------------------------------------------------------------------------------------------
15 PRINPT Numeric 7 3
- ------------------------------------------------------------------------------------------------
16 PRIBAL Numeric 11 2
- ------------------------------------------------------------------------------------------------
17 LPIDTE Numeric 13 2
- ------------------------------------------------------------------------------------------------
18 DELPRN Numeric 7
- ------------------------------------------------------------------------------------------------
19 PPDPRN Numeric 11 2
- ------------------------------------------------------------------------------------------------
20 DELPRN Numeric 11 2
- ------------------------------------------------------------------------------------------------
21 NXTCHG Numeric 8
- ------------------------------------------------------------------------------------------------
22 ARMNOT Numeric 7 3
- ------------------------------------------------------------------------------------------------
23 ARMPAS Numeric 7 3
- ------------------------------------------------------------------------------------------------
24 ARMPMT Numeric 11 2
- ------------------------------------------------------------------------------------------------
25 ZZTYPE Character 2
- ------------------------------------------------------------------------------------------------
26 ISSUID Character 1
- ------------------------------------------------------------------------------------------------
27 KEYNAME Character 8
- ------------------------------------------------------------------------------------------------
TOTAL 240
- ------------------------------------------------------------------------------------------------
Suggested Format: DBASE file
Modem transmission
</TABLE>
1
<PAGE>
==========================================================================
Servicer
- --------------------------------------------------------------------------
LOAN LEVEL REPORTING SYSTEM
- --------------------------------------------------------------------------
INVESTOR NUMBER:
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
GENERAL INFORMATION
- --------------------------------------------------------------------------
Beg.
Inv. # Blk # CFC # Investor # Balance Principal Curtailment
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
Loan
Count:
- --------------------------------------------------------------------------
==========================================================================
<TABLE>
===============================================================================================================================
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
CURRENT MONTH SCHEDULED INFORMATION TRIAL BALANCE INFORMATION
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total End Pass- Del PPD
Payoff Amt. A/Code A/Date Interest Principal Balance Note thru P&I UPB LPI Prin. Prin.
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Total
Remittance:
- -------------------------------------------------------------------------------------------------------------------------------
===============================================================================================================================
</TABLE>
========================================
- ----------------------------------------
- ----------------------------------------
CUTOFF: [Date]
- ----------------------------------------
- ----------------------------------------
ARM LOANS ONLY
- ----------------------------------------
Next Pass-
Chg. Note thru P&I
- ----------------------------------------
- ----------------------------------------
- ----------------------------------------
- ----------------------------------------
========================================
<PAGE>
EXHIBIT A
[FORM OF SENIOR CERTIFICATE]
[UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO ISSUER OR ITS AGENT
FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED
IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY
AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO
SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY
TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON
IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST
HEREIN.]
[SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A "REGULAR
INTEREST" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT," AS THOSE TERMS ARE
DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE INTERNAL REVENUE CODE OF
1986, AS AMENDED (THE "CODE").]
Certificate No. :
Cut-off Date :
First Distribution Date :
Initial Certificate Balance
of this Certificate
("Denomination") : $
Initial Certificate Balances
of all Certificates of
this Class : $
CUSIP :
Equity One ABS, Inc.
Asset Backed Certificates, Series 199_-____
Class [ ]
evidencing a percentage interest in the distributions allocable to the
Certificates of the above-referenced Class with respect to a Trust Fund
consisting primarily of a pool of conventional mortgage loans (the "Loans")
secured by first liens on one- to four-family residential properties
A-1
<PAGE>
Equity One ABS, Inc., as Depositor
Principal in respect of this Certificate is distributable monthly as set
forth herein. Accordingly, the Certificate Balance at any time may be less than
the Certificate Balance as set forth herein. This Certificate does not evidence
an obligation of, or an interest in, and is not guaranteed by the Depositor, the
Seller, the Servicer or the Trustee referred to below or any of their respective
affiliates. Neither this Certificate nor the Loans are guaranteed or insured by
any governmental agency or instrumentality.
This certifies that ______________________ is the registered owner of the
Percentage Interest evidenced by this Certificate (obtained by dividing the
denomination of this Certificate by the aggregate Initial Certificate Balances
of all Certificates of the Class to which this Certificate belongs) in certain
monthly distributions with respect to a Trust Fund consisting primarily of the
Loans deposited by Equity One ABS, Inc. (the "Depositor"). The Trust Fund was
created pursuant to a Pooling and Servicing Agreement dated as of the Cut-off
Date specified above (the "Agreement") among the Depositor, [specify all
Sellers], (collectively, the "Sellers"), Equity One, Inc. as servicer (in such
capacity, the "Servicer"), and ___________________, as trustee (the "Trustee").
To the extent not defined herein, the capitalized terms used herein have the
meanings assigned in the Agreement. This Certificate is issued under and is
subject to the terms, provisions and conditions of the Agreement, to which
Agreement the Holder of this Certificate by virtue of the acceptance hereof
assents and by which such Holder is bound.
Reference is hereby made to the further provisions of this Certificate set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
This Certificate shall not be entitled to any benefit under the Agreement
or be valid for any purpose unless manually countersigned by an authorized
signatory of the Trustee.
* * *
A-2
<PAGE>
IN WITNESS WHEREOF, the Trustee has caused this Certificate to be duly
executed.
Dated: ______, 19_____
_______________________,
as Trustee
By _____________________
Countersigned:
By ______________________________
Authorized Signatory of
_______________________,
as Trustee
A-3
<PAGE>
EXHIBIT B
[FORM OF SUBORDINATED CERTIFICATE]
[UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO ISSUER OR ITS AGENT
FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED
IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY
AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO
SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY
TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON
IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST
HEREIN.]
SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A "REGULAR
INTEREST" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT," AS THOSE TERMS ARE
DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE INTERNAL REVENUE CODE OF
1986, AS AMENDED (THE "CODE").
THIS CERTIFICATE IS SUBORDINATED IN RIGHT OF PAYMENT TO CERTAIN CERTIFICATES AS
DESCRIBED IN THE AGREEMENT REFERRED TO HEREIN.
[THE FOLLOWING INFORMATION IS PROVIDED SOLELY FOR THE PURPOSE OF APPLYING THE
U.S. FEDERAL INCOME TAX ORIGINAL ISSUE DISCOUNT ("OID") RULES UNDER THE CODE TO
THIS CERTIFICATE. THE ISSUE DATE OF THIS CERTIFICATE IS ______________, 199_.
THE INITIAL PER ANNUM RATE OF INTEREST ON THIS CERTIFICATE IS ___%. ASSUMING
THAT THE LoanS PREPAY AT AN ASSUMED RATE OF PREPAYMENT OF ___% PER ANNUM (THE
"PREPAYMENT ASSUMPTION"), THIS CERTIFICATE HAS BEEN ISSUED WITH $__________ OF
OID PER $1,000 OF THE ORIGINAL PRINCIPAL AMOUNT OF THIS CERTIFICATE; THE ANNUAL
YIELD TO MATURITY OF THIS CERTIFICATE FOR PURPOSES OF COMPUTING THE ACCRUAL OF
OID IS APPROXIMATELY ___% (COMPOUNDED MONTHLY); THE AMOUNT OF OID ALLOCABLE TO
THE SHORT FIRST ACCRUAL PERIOD IS $_______ PER $1,000 OF THE ORIGINAL PRINCIPAL
AMOUNT OF THIS CERTIFICATE COMPUTED USING THE MONTHLY YIELD AND DAILY
COMPOUNDING DURING THE SHORT ACCRUAL PERIOD. NO REPRESENTATION IS MADE THAT THE
LoanS WILL PREPAY AT A RATE BASED ON THE PREPAYMENT ASSUMPTION OR AT ANY OTHER
RATE. THE ACTUAL YIELD TO MATURITY MAY DIFFER FROM THAT SET FORTH ABOVE, AND THE
ACCRUAL OF OID WILL BE ADJUSTED, IN ACCORDANCE WITH SECTION 1272(a)(6) OF THE
CODE, TO TAKE INTO ACCOUNT EVENTS WHICH HAVE OCCURRED DURING ANY ACCRUAL PERIOD.
THE PREPAYMENT ASSUMPTION IS INTENDED TO BE THE PREPAYMENT ASSUMPTION REFERRED
TO IN SECTION 1272(a)(6)(B)(iii) OF THE CODE.]
[THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"). ANY RESALE OR TRANSFER OF THIS CERTIFICATE WITHOUT
REGISTRATION THEREOF UNDER THE ACT MAY
B-1
<PAGE>
ONLY BE MADE IN A TRANSACTION EXEMPTED FROM THE REGISTRATION REQUIREMENTS OF THE
ACT AND IN ACCORDANCE WITH THE PROVISIONS OF THE AGREEMENT REFERRED TO HEREIN.]
NEITHER THIS CERTIFICATE NOR ANY INTEREST HEREIN MAY BE TRANSFERRED UNLESS THE
TRANSFEREE REPRESENTS TO THE TRUSTEE THAT SUCH TRANSFEREE IS NOT AN EMPLOYEE
BENEFIT PLAN SUBJECT TO THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS
AMENDED, OR A PLAN SUBJECT TO SECTION 4975 OF THE CODE, OR DELIVERS TO THE
TRUSTEE AN OPINION OF COUNSEL IN ACCORDANCE WITH THE PROVISIONS OF THE AGREEMENT
REFERRED TO HEREIN. [SUCH REPRESENTATION SHALL BE DEEMED TO HAVE BEEN MADE TO
THE TRUSTEE BY THE TRANSFEREE'S ACCEPTANCE OF A CERTIFICATE OF THIS CLASS AND BY
A BENEFICIAL OWNER'S ACCEPTANCE OF ITS INTEREST IN A CERTIFICATE OF THIS CLASS.]
NOTWITHSTANDING ANYTHING ELSE TO THE CONTRARY HEREIN, ANY PURPORTED TRANSFER OF
THIS CERTIFICATE TO OR ON BEHALF OF AN EMPLOYEE BENEFIT PLAN SUBJECT TO ERISA OR
TO THE CODE WITHOUT THE OPINION OF COUNSEL SATISFACTORY TO THE TRUSTEE AS
DESCRIBED ABOVE SHALL BE VOID AND OF NO EFFECT.
B-2
<PAGE>
Certificate No. :
Cut-off Date :
First Distribution Date :
Initial Certificate Balance
of this Certificate
("Denomination") : $
Initial Certificate Balances
of all Certificates of
this Class : $
Equity One ABS, Inc.
Asset Backed Certificates, Series 199_-____
Class [ ]
evidencing a percentage interest in the distributions allocable to the
Certificates of the above-referenced Class with respect to a Trust Fund
consisting primarily of a pool of conventional loans (the "Loans")
secured by first liens on one- to four-family residential properties
Equity One ABS, Inc., as Depositor
Principal in respect of this Certificate is distributable monthly as set
forth herein. Accordingly, the Certificate Balance at any time may be less than
the Certificate Balance as set forth herein. This Certificate does not evidence
an obligation of, or an interest in, and is not guaranteed by the Depositor, the
Sellers, the Servicer or the Trustee referred to below or any of their
respective affiliates. Neither this Certificate nor the Loans are guaranteed or
insured by any governmental agency or instrumentality.
This certifies that ______________ is the registered owner of the
Percentage Interest evidenced by this Certificate (obtained by dividing the
denomination of this Certificate by the aggregate Initial Certificate Balances
of all Certificates of the Class to which this Certificate belongs) in certain
monthly distributions with respect to a Trust Fund consisting primarily of the
Loans deposited by Equity One ABS, Inc. (the "Depositor"). The Trust Fund was
created pursuant to a Pooling and Servicing Agreement dated as of the Cut-off
Date specified above (the "Agreement") among the Depositor, [identify each
Seller], (in such capacity, collectively, the "Sellers") and Equity One, Inc. as
servicer (in such capacity, the "Servicer"), and __________________, as trustee
(the "Trustee").
To the
B-3
<PAGE>
extent not defined herein, the capitalized terms used herein have the meanings
assigned in the Agreement. This Certificate is issued under and is subject to
the terms, provisions and conditions of the Agreement, to which Agreement the
Holder of this Certificate by virtue of the acceptance hereof assents and by
which such Holder is bound.
[No transfer of a Certificate of this Class shall be made unless such
transfer is made pursuant to an effective registration statement under the
Securities Act and any applicable state securities laws or is exempt from the
registration requirements under said Act and such laws. In the event that a
transfer is to be made in reliance upon an exemption from the Securities Act and
such laws, in order to assure compliance with the Securities Act and such laws,
the Certificateholder desiring to effect such transfer and such
Certificateholder's prospective transferee shall each certify to the Trustee in
writing the facts surrounding the transfer. In the event that such a transfer is
to be made within three years from the date of the initial issuance of
Certificates pursuant hereto, there shall also be delivered (except in the case
of a transfer pursuant to Rule 144A of the Securities Act) to the Trustee an
Opinion of Counsel that such transfer may be made pursuant to an exemption from
the Securities Act and such state securities laws, which Opinion of Counsel
shall not be obtained at the expense of the Trustee, the Sellers, the Servicer
or the Depositor. The Holder hereof desiring to effect such transfer shall, and
does hereby agree to, indemnify the Trustee and the Depositor against any
liability that may result if the transfer is not so exempt or is not made in
accordance with such federal and state laws.]
No transfer of a Certificate of this Class shall be made unless the Trustee
shall have received either (i) a representation [letter] from the transferee of
such Certificate, acceptable to and in form and substance satisfactory to the
Trustee, to the effect that such transferee is not an employee benefit plan
subject to Section 406 of ERISA or Section 4975 of the Code, nor a person acting
on behalf of any such plan, which representation letter shall not be an expense
of the Trustee or the Servicer, (ii) if the purchaser is an insurance company, a
representation that the purchaser is an insurance company which is purchasing
such Certificates with funds contained in an "insurance company general account"
(as such term is defined in Section V(e) of Prohibited Transaction Class
Exemption 95-60 ("PTCE 95-60")) and that the purchase and holding of such
Certificates are covered under PTCE 95-60, or (iii) in the case of any such
Certificate presented for registration in the name of an employee benefit plan
subject to ERISA or Section 4975 of the Code (or comparable provisions of any
subsequent enactments), or a trustee of any such plan or any other person acting
on behalf of any such plan, an Opinion of Counsel satisfactory to the Trustee
and the Servicer to the effect that the purchase or holding of such Certificate
will not result in the assets of the Trust Fund being
B-4
<PAGE>
deemed to be "plan assets" and subject to the prohibited transaction provisions
of ERISA and the Code and will not subject the Trustee to any obligation in
addition to those undertaken in the Agreement, which Opinion of Counsel shall
not be an expense of the Trustee or the Servicer. [Such representation shall be
deemed to have been made to the Trustee by the Transferee's acceptance of a
Certificate of this Class and by a beneficial owner's acceptance of its interest
in a Certificate of this Class.] Notwithstanding anything else to the contrary
herein, any purported transfer of a Certificate of this Class to or on behalf of
an employee benefit plan subject to ERISA or to the Code without the opinion of
counsel satisfactory to the Trustee as described above shall be void and of no
effect.
Reference is hereby made to the further provisions of this Certificate set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
This Certificate shall not be entitled to any benefit under the Agreement
or be valid for any purpose unless manually countersigned by an authorized
signatory of the Trustee.
* * *
IN WITNESS WHEREOF, the Trustee has caused this Certificate to be duly
executed.
Dated: ______, 19_____
_______________________,
as Trustee
By _____________________
Countersigned:
By ______________________________
Authorized Signatory of
_______________________,
as Trustee
B-5
<PAGE>
EXHIBIT C
[FORM OF RESIDUAL CERTIFICATE]
SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A "RESIDUAL
INTEREST" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT," AS THOSE TERMS ARE
DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE INTERNAL REVENUE CODE OF
1986, AS AMENDED (THE "CODE").
NEITHER THIS CERTIFICATE NOR ANY INTEREST HEREIN MAY BE TRANSFERRED UNLESS THE
PROPOSED TRANSFEREE DELIVERS TO THE TRUSTEE A TRANSFER AFFIDAVIT IN ACCORDANCE
WITH THE PROVISIONS OF THE AGREEMENT REFERRED TO HEREIN.
[THIS CERTIFICATE REPRESENTS THE "TAX MATTERS PERSON RESIDUAL INTEREST" ISSUED
UNDER THE POOLING AND SERVICING AGREEMENT REFERRED TO BELOW AND MAY NOT BE
TRANSFERRED TO ANY PERSON EXCEPT IN CONNECTION WITH THE ASSUMPTION BY THE
TRANSFEREE OF THE DUTIES OF THE SERVICER UNDER SUCH AGREEMENT.]
NEITHER THIS CERTIFICATE NOR ANY INTEREST HEREIN MAY BE TRANSFERRED UNLESS THE
TRANSFEREE DELIVERS TO THE TRUSTEE EITHER A REPRESENTATION LETTER TO THE EFFECT
THAT SUCH TRANSFEREE IS NOT AN EMPLOYEE BENEFIT PLAN SUBJECT TO THE EMPLOYEE
RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED, OR A PLAN SUBJECT TO SECTION
4975 OF THE CODE, OR AN OPINION OF COUNSEL IN ACCORDANCE WITH THE PROVISIONS OF
THE AGREEMENT REFERRED TO HEREIN. NOTWITHSTANDING ANYTHING ELSE TO THE CONTRARY
HEREIN, ANY PURPORTED TRANSFER OF THIS CERTIFICATE TO OR ON BEHALF OF AN
EMPLOYEE BENEFIT PLAN SUBJECT TO ERISA OR TO THE CODE WITHOUT THE OPINION OF
COUNSEL SATISFACTORY TO THE TRUSTEE AS DESCRIBED ABOVE SHALL BE VOID AND OF NO
EFFECT.
C-1
<PAGE>
Certificate No. :
Cut-off Date :
Initial Certificate Balance
of this Certificate
("Denomination") : $
Initial Certificate Balances
of all Certificates of
this Class : $
CUSIP :
Equity One ABS, Inc.
Asset Backed Certificates, Series 199_-____
evidencing the distributions allocable to the Class A-R Certificates
with respect to a Trust Fund consisting primarily of a pool of
conventional loans (the "Loans") secured by first liens on one- to
four-family residential properties
Equity One ABS, Inc., as Depositor
Principal in respect of this Certificate is distributable monthly as set
forth herein. Accordingly, the Certificate Balance at any time may be less than
the Certificate Balance as set forth herein. This Certificate does not evidence
an obligation of, or an interest in, and is not guaranteed by the Depositor, the
Sellers, the Servicer or the Trustee referred to below or any of their
respective affiliates. Neither this Certificate nor the Loans are guaranteed or
insured by any governmental agency or instrumentality.
This certifies _______________________ that is the registered owner of the
Percentage Interest (obtained by dividing the Denomination of this Certificate
by the aggregate Initial Certificate Balances of all Certificates of the Class
to which this Certificate belongs) in certain monthly distributions with respect
to a Trust Fund consisting of the Loans deposited by Equity One ABS, Inc. (the
"Depositor"). The Trust Fund was created pursuant to a Pooling and Servicing
Agreement dated as of the Cut-off Date specified above (the "Agreement") among
the Depositor, [identify each Seller], (in such capacity, collectively, the
"Sellers") and Equity One, Inc. as servicer (in such capacity, the "Servicer"),
and ___________________, as trustee (the "Trustee"). To the extent not defined
herein, the capitalized terms used herein have the meanings assigned in the
Agreement. This Certificate is issued under and is subject to
C-2
<PAGE>
the terms, provisions and conditions of the Agreement, to which Agreement the
Holder of this Certificate by virtue of the acceptance hereof assents and by
which such Holder is bound.
Any distribution of the proceeds of any remaining assets of the Trust Fund
will be made only upon presentment and surrender of this Class A-R Certificate
at the Corporate Trust Office or the office or agency maintained by the Trustee
in New York, New York.
No transfer of a Class A-R Certificate shall be made unless the Trustee
shall have received either (i) a representation letter from the transferee of
such Certificate, acceptable to and in form and substance satisfactory to the
Trustee, to the effect that such transferee is not an employee benefit plan
subject to Section 406 of ERISA or Section 4975 of the Code, nor a person acting
on behalf of any such plan, which representation letter shall not be an expense
of the Trustee or the Servicer, or (ii) in the case of any such Class A-R
Certificate presented for registration in the name of an employee benefit plan
subject to ERISA, or Section 4975 of the Code (or comparable provisions of any
subsequent enactments), or a trustee of any such plan or any other person acting
on behalf of any such plan, an Opinion of Counsel satisfactory to the Trustee
and the Servicer to the effect that the purchase or holding of such Class A-R
Certificate will not result in the assets of the Trust Fund being deemed to be
"plan assets" and subject to the prohibited transaction provisions of ERISA and
the Code and will not subject the Trustee or the Servicer to any obligation in
addition to those undertaken in this Agreement, which Opinion of Counsel shall
not be an expense of the Trustee or the Servicer. Notwithstanding anything else
to the contrary herein, any purported transfer of a Class A-R Certificate to or
on behalf of an employee benefit plan subject to ERISA or to the Code without
the opinion of counsel satisfactory to the Trustee as described above shall be
void and of no effect.
Each Holder of this Class A-R Certificate will be deemed to have agreed to
be bound by the restrictions of the Agreement, including but not limited to the
restrictions that (i) each person holding or acquiring any Ownership Interest in
this Class A-R Certificate must be a Permitted Transferee, (ii) no Ownership
Interest in this Class A-R Certificate may be transferred without delivery to
the Trustee of (a) a transfer affidavit of the proposed transferee and (b) a
transfer certificate of the transferor, each of such documents to be in the form
described in the Agreement, (iii) each person holding or acquiring any Ownership
Interest in this Class A-R Certificate must agree to require a transfer
affidavit and to deliver a transfer certificate to the Trustee as required
pursuant to the Agreement, (iv) each person holding or acquiring an Ownership
Interest in this Class A-R Certificate must agree not to transfer an Ownership
Interest in this Class A-R Certificate if it has actual knowledge that the
C-3
<PAGE>
proposed transferee is not a Permitted Transferee and (v) any attempted or
purported transfer of any Ownership Interest in this Class A-R Certificate in
violation of such restrictions will be absolutely null and void and will vest no
rights in the purported transferee.
Reference is hereby made to the further provisions of this Certificate set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
This Certificate shall not be entitled to any benefit under the Agreement
or be valid for any purpose unless manually countersigned by an authorized
signatory of the Trustee.
* * *
IN WITNESS WHEREOF, the Trustee has caused this Certificate to be duly
executed.
Dated: ______, 19_____
_______________________,
as Trustee
By _____________________
Countersigned:
By ______________________________
Authorized Signatory of
_______________________,
as Trustee
C-4
<PAGE>
EXHIBIT D
[FORM OF NOTIONAL AMOUNT CERTIFICATE]
[SOLELY FOR U.S. FEDERAL INCOME TAX PURPOSES, THIS CERTIFICATE IS A "REGULAR
INTEREST" IN A "REAL ESTATE MORTGAGE INVESTMENT CONDUIT," AS THOSE TERMS ARE
DEFINED, RESPECTIVELY, IN SECTIONS 860G AND 860D OF THE INTERNAL REVENUE CODE OF
1986, AS AMENDED (THE "CODE").]
THIS CERTIFICATE HAS NO PRINCIPAL BALANCE AND IS NOT ENTITLED TO ANY
DISTRIBUTIONS IN RESPECT OF PRINCIPAL.
[THE FOLLOWING INFORMATION IS PROVIDED SOLELY FOR THE PURPOSE OF APPLYING THE
U.S. FEDERAL INCOME TAX ORIGINAL ISSUE DISCOUNT ("OID") RULES UNDER THE CODE TO
THIS CERTIFICATE. THE ISSUE DATE OF THIS CERTIFICATE IS ______________, 199_.
THE INITIAL PER ANNUM RATE OF INTEREST ON THIS CERTIFICATE IS ____%. ASSUMING
THAT THE LoanS PREPAY AT AN ASSUMED RATE OF PREPAYMENT OF ___% PER ANNUM (THE
"PREPAYMENT ASSUMPTION"), THIS CERTIFICATE HAS BEEN ISSUED WITH $_____________
OF OID ON THE INITIAL POOL STATED PRINCIPAL BALANCE; THE ANNUAL YIELD TO
MATURITY OF THIS CERTIFICATE FOR PURPOSES OF COMPUTING THE ACCRUAL OF OID IS
APPROXIMATELY ___% (COMPOUNDED MONTHLY); THE AMOUNT OF OID ALLOCABLE TO THE
SHORT FIRST ACCRUAL PERIOD IS $_________ ON THE INITIAL POOL STATED PRINCIPAL
BALANCE; AND THE METHOD USED TO CALCULATE THE ANNUAL YIELD TO MATURITY AND THE
AMOUNT OF OID ALLOCABLE TO THE SHORT FIRST ACCRUAL PERIOD IS THE EXACT METHOD AS
DEFINED IN PROPOSED TREASURY REGULATIONS. NO REPRESENTATION IS MADE THAT THE
LoanS WILL PREPAY AT A RATE BASED ON THE PREPAYMENT ASSUMPTION OR AT ANY OTHER
RATE. THE ACTUAL YIELD TO MATURITY MAY DIFFER FROM THAT SET FORTH ABOVE, AND THE
ACCRUAL OF OID WILL BE ADJUSTED, IN ACCORDANCE WITH SECTION 1272(a)(6) OF THE
CODE, TO TAKE INTO ACCOUNT EVENTS WHICH HAVE OCCURRED DURING ANY ACCRUAL PERIOD.
THE PREPAYMENT ASSUMPTION IS INTENDED TO BE THE PREPAYMENT ASSUMPTION REFERRED
TO IN SECTION 1272(a)(6)(B)(iii) OF THE CODE.]
D-1
<PAGE>
Certificate No. :
Cut-off Date :
First Distribution Date :
Initial Notional Amount
of this Certificate
("Denomination") :
Initial Notional Amount
of all Certificates
of this Class :
CUSIP :
Equity One ABS, Inc.
Asset Backed Certificates, Series 199_-____
Class [ ]
evidencing a percentage interest in the distributions allocable to the
Certificates of the above-referenced Class with respect to a Trust Fund
consisting primarily of a pool of conventional loans (the "Loans")
secured by first liens on one- to four-family residential properties
Equity One ABS, Inc., as Depositor
This Certificate does not evidence an obligation of, or an interest in, and
is not guaranteed by the Depositor, the Sellers, the Servicer or the Trustee
referred to below or any of their respective affiliates. Neither this
Certificate nor the Loans are guaranteed or insured by any governmental agency
or instrumentality.
This certifies ______________________ that is the registered owner of the
Percentage Interest evidenced by this Certificate specified above in certain
monthly distributions with respect to a Trust Fund consisting primarily of the
Loans deposited by Equity One ABS, Inc. (the "Depositor"). The Trust Fund was
created pursuant to a Pooling and Servicing Agreement dated as of Cut-off Date
specified above (the "Agreement") among the Depositor,[identify each Seller],
(in such capacity, collectively, the "Sellers") and Equity One, Inc. as servicer
(in such capacity, the "Servicer"), and _________________, as trustee (the
"Trustee"). To the extent not defined herein, the capitalized terms used herein
have the meanings assigned in the Agreement. This Certificate is issued under
and is subject to the terms, provisions and conditions of the Agreement, to
which
D-2
<PAGE>
Agreement the Holder of this Certificate by virtue of the acceptance hereof
assents and by which such Holder is bound.
Reference is hereby made to the further provisions of this Certificate set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
This Certificate shall not be entitled to any benefit under the Agreement
or be valid for any purpose unless manually countersigned by an authorized
signatory of the Trustee.
* * *
IN WITNESS WHEREOF, the Trustee has caused this Certificate to be duly
executed.
Dated: ______, 19_____
_______________________,
as Trustee
By _____________________
Countersigned:
By ______________________________
Authorized Signatory of
_______________________,
as Trustee
D-3
<PAGE>
EXHIBIT E
[Form of Reverse of Certificates]
Equity One ABS, Inc.
Asset Backed Certificates
This Certificate is one of a duly authorized issue of Certificates
designated as Equity One ABS, Inc. Asset Backed Certificates, of the Series
specified on the face hereof (herein collectively called the "Certificates"),
and representing a beneficial ownership interest in the Trust Fund created by
the Agreement.
The Certificateholder, by its acceptance of this Certificate, agrees that
it will look solely to the funds on deposit in the Distribution Account for
payment hereunder and that the Trustee is not liable to the Certificateholders
for any amount payable under this Certificate or the Agreement or, except as
expressly provided in the Agreement, subject to any liability under the
Agreement.
This Certificate does not purport to summarize the Agreement and reference
is made to the Agreement for the interests, rights and limitations of rights,
benefits, obligations and duties evidenced thereby, and the rights, duties and
immunities of the Trustee.
Pursuant to the terms of the Agreement, a distribution will be made on the
25th day of each month or, if such 25th day is not a Business Day, the Business
Day immediately following (the "Distribution Date"), commencing on the first
Distribution Date specified on the face hereof, to the Person in whose name this
Certificate is registered at the close of business on the applicable Record Date
in an amount equal to the product of the Percentage Interest evidenced by this
Certificate and the amount required to be distributed to Holders of Certificates
of the Class to which this Certificate belongs on such Distribution Date
pursuant to the Agreement. The Record Date applicable to each Distribution Date
is the last Business Day of the month next preceding the month of such
Distribution Date.
Distributions on this Certificate shall be made by wire transfer of
immediately available funds to the account of the Holder hereof at a bank or
other entity having appropriate facilities therefor, if such Certificateholder
shall have so notified the Trustee in writing at least five Business Days prior
to the related Record Date and such Certificateholder shall satisfy the
conditions to receive such form of payment set forth in the Agreement, or, if
not, by check mailed by first class mail to the address of such
Certificateholder appearing in the Certificate Register. The final distribution
on each Certificate will be made in like manner, but only upon presentment and
E-1
<PAGE>
surrender of such Certificate at the Corporate Trust Office or such other
location specified in the notice to Certificateholders of such final
distribution.
The Agreement permits, with certain exceptions therein provided, the
amendment thereof and the modification of the rights and obligations of the
Trustee and the rights of the Certificateholders under the Agreement at any time
by the Depositor, the Servicer and the Trustee with the consent of the Holders
of Certificates affected by such amendment evidencing the requisite Percentage
Interest, as provided in the Agreement. Any such consent by the Holder of this
Certificate shall be conclusive and binding on such Holder and upon all future
Holders of this Certificate and of any Certificate issued upon the transfer
hereof or in exchange therefor or in lieu hereof whether or not notation of such
consent is made upon this Certificate. The Agreement also permits the amendment
thereof, in certain limited circumstances, without the consent of the Holders of
any of the Certificates.
As provided in the Agreement and subject to certain limitations therein set
forth, the transfer of this Certificate is registrable in the Certificate
Register of the Trustee upon surrender of this Certificate for registration of
transfer at the Corporate Trust Office or the office or agency maintained by the
Trustee in New York, New York, accompanied by a written instrument of transfer
in form satisfactory to the Trustee and the Certificate Registrar duly executed
by the holder hereof or such holder's attorney duly authorized in writing, and
thereupon one or more new Certificates of the same Class in authorized
denominations and evidencing the same aggregate Percentage Interest in the Trust
Fund will be issued to the designated transferee or transferees.
The Certificates are issuable only as registered Certificates without
coupons in denominations specified in the Agreement. As provided in the
Agreement and subject to certain limitations therein set forth, Certificates are
exchangeable for new Certificates of the same Class in authorized denominations
and evidencing the same aggregate Percentage Interest, as requested by the
Holder surrendering the same.
No service charge will be made for any such registration of transfer or
exchange, but the Trustee may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith.
The Depositor, the Servicer, the Sellers and the Trustee and any agent of
the Depositor or the Trustee may treat the Person in whose name this Certificate
is registered as the owner hereof for all purposes, and neither the Depositor,
the Trustee, nor any such agent shall be affected by any notice to the contrary.
E-2
<PAGE>
On any Distribution Date on which the Pool Stated Principal Balance is less
than 10% of the aggregate Cut-off Date Principal Balances of the Loans, the
Servicer will have the option to repurchase, in whole, from the Trust Fund all
remaining Loans and all property acquired in respect of the Loans at a purchase
price determined as provided in the Agreement. In the event that no such
optional termination occurs, the obligations and responsibilities created by the
Agreement will terminate upon the later of the maturity or other liquidation (or
any advance with respect thereto) of the last Loan remaining in the Trust Fund
or the disposition of all property in respect thereof and the distribution to
Certificateholders of all amounts required to be distributed pursuant to the
Agreement. 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 the descendants living at the date of the Agreement of a certain person named
in the Agreement.
Any term used herein that is defined in the Agreement shall have the
meaning assigned in the Agreement, and nothing herein shall be deemed
inconsistent with that meaning.
E-3
<PAGE>
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and
transfer(s) unto ______________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
(Please print or typewrite name and address including postal zip code of
assignee)
the Percentage Interest evidenced by the within Certificate and hereby
authorizes the transfer of registration of such Percentage Interest to assignee
on the Certificate Register of the Trust Fund.
I (We) further direct the Trustee to issue a new Certificate of a like
denomination and Class, to the above named assignee and deliver such Certificate
to the following address:
______________________________________________________________________________ .
Dated:
------------------------------------
Signature by or on behalf of assignor
DISTRIBUTION INSTRUCTIONS
The assignee should include the following for purposes of distribution:
Distributions shall be made, by wire transfer or otherwise, in immediately
available funds to ____________________________________________________________
______________________________________________________________________________,
______________________________________________________________________________,
for the account of ___________________________________________________________,
account number ___________ or, if mailed by check, to ________________________.
Applicable statements should be mailed to _____________________________________
_______________________________________________________________________________
_______________________________________________________________________________
This information is provided by ______________________________________,
the assignee named above, or __________________________________________________,
as its agent.
E-4
<PAGE>
STATE OF )
) ss.:
COUNTY OF )
On the ______ day of ____, 19____ before me, a notary public in and for
said State, personally appeared , known to me who, being by me duly
sworn, did depose and say that he executed the foregoing instrument.
______________________
Notary Public
[Notarial Seal]
E-5
<PAGE>
EXHIBIT F
[RESERVED]
F-1
<PAGE>
EXHIBIT G
FORM OF INITIAL CERTIFICATION OF TRUSTEE
[date]
[Depositor]
[Servicer]
[Sellers]
- ---------------------
- ---------------------
Re: Pooling and Servicing Agreement among Equity One
ABS, Inc., as Depositor, ____________
______________, as Sellers, Equity One, Inc. as
Servicer, and _________________, as Trustee, Asset
Backed Certificates, Series 199_-____
___________________________________________________
Gentlemen:
In accordance with Section 2.02 of the above-captioned Pooling and
Servicing Agreement (the "Pooling and Servicing Agreement"), the undersigned, as
Trustee, hereby certifies that, as to each Loan listed in the Loan Schedule
(other than any Loan paid in full or listed on the attached schedule) it has
received:
(i) the original Mortgage Note endorsed in the following form: "Pay to the
order of __________, without recourse"; and
(ii) a duly executed assignment of the Mortgage (which may be included in a
blanket assignment or assignments).
Based on its review and examination and only as to the foregoing documents,
such documents appear regular on their face and related to such Loan.
The Trustee has made no independent examination of any documents contained
in each Mortgage File beyond the review specifically required in the Pooling and
Servicing Agreement. The Trustee makes no representations as to: (i) the
validity, legality, sufficiency, enforceability or genuineness of any of the
documents contained in each Mortgage File of any of the Loans identified on the
Loan Schedule, or (ii) the collectability, insurability, effectiveness or
suitability of any such Loan.
G-1
<PAGE>
Capitalized words and phrases used herein shall have the respective
meanings assigned to them in the Pooling and Servicing Agreement.
________________________________ ,
as Trustee
By: ________________________________
Name:
Title:
G-2
<PAGE>
EXHIBIT H
FORM OF FINAL CERTIFICATION OF TRUSTEE
[date]
[Depositor]
[Servicer]
[Seller]
- ------------------
- ------------------
Re: Pooling and Servicing Agreement among
Equity One ABS, Inc., as Depositor, _____________
_________________, as Sellers and Equity One, Inc.
as Servicer, and ____________________, as Trustee,
Asset Backed Certificates, Series 199_-____
__________________________________________________
Gentlemen:
In accordance with Section 2.02 of the above-captioned Pooling and
Servicing Agreement (the "Pooling and Servicing Agreement"), the undersigned, as
Trustee, hereby certifies that as to each Loan listed in the Loan Schedule
(other than any Loan paid in full or listed on the attached Document Exception
Report) it has received:
(i) the original Mortgage Note endorsed in the form provided in Section
2.01(c) of the Pooling and Servicing Agreement, with all intervening
endorsements showing a complete chain of endorsement from the originator to the
Seller.
(ii) The original recorded Mortgage.
(iii) A duly executed assignment of the Mortgage in the form provided in
Section 2.01(c) of the Pooling and Servicing Agreement, or, if the Depositor has
certified or the Trustee otherwise knows that the related Mortgage has not been
returned from the applicable recording office, a copy of the assignment of the
Mortgage (excluding information to be provided by the recording office).
(iv) The original or duplicate original recorded assignment or assignments
of the Mortgage showing a complete chain of assignment from the originator to
the Seller.
H-1
<PAGE>
(v) The original or duplicate original lender's title policy and all riders
thereto or, any one of an original title binder, an original preliminary title
report or an original title commitment, or a copy thereof certified by the title
company.
Based on its review and examination and only as to the foregoing documents,
(a) such documents appear regular on their face and related to such Loan, and
(b) the information set forth in items (i), (ii), (iii), (iv), (vi), and (xi) of
the definition of the "Loan Schedule" in Section 1.01 of the Pooling and
Servicing Agreement accurately reflects information set forth in the Mortgage
File.
The Trustee has made no independent examination of any documents contained
in each Mortgage File beyond the review specifically required in the Pooling and
Servicing Agreement. The Trustee makes no representations as to: (i) the
validity, legality, sufficiency, enforceability or genuineness of any of the
documents contained in each Mortgage File of any of the Loans identified on the
Loan Schedule, or (ii) the collectability, insurability, effectiveness or
suitability of any such Loan.
Capitalized words and phrases used herein shall have the respective
meanings assigned to them in the Pooling and Servicing Agreement.
---------------------------------,
as Trustee
By: ________________________________
Name:
Title:
H-2
<PAGE>
EXHIBIT I
TRANSFER AFFIDAVIT
Equity One ABS, Inc.
Asset Backed Certificates
Series 199__-__
STATE OF )
) ss.:
COUNTY OF )
The undersigned, being first duly sworn, deposes and says as follows:
1. The undersigned is an officer of _________________________, the proposed
Transferee of an Ownership Interest in a Class A-R Certificate (the
"Certificate") issued pursuant to the Pooling and Servicing Agreement, (the
"Agreement"), relating to the above-referenced Series, by and among Equity One
ABS, Inc., as depositor (the "Depositor"), ___________________________, as
sellers, Equity One, Inc. as servicer and ___________________, as Trustee.
Capitalized terms used, but not defined herein or in Exhibit 1 hereto, shall
have the meanings ascribed to such terms in the Agreement. The Transferee has
authorized the undersigned to make this affidavit on behalf of the Transferee.
2. The Transferee is, as of the date hereof, and will be, as of the date of
the Transfer, a Permitted Transferee. The Transferee is acquiring its Ownership
Interest in the Certificate either (i) for its own account or (ii) as nominee,
trustee or agent for another Person and has attached hereto an affidavit from
such Person in substantially the same form as this affidavit. The Transferee has
no knowledge that any such affidavit is false.
3. The Transferee has been advised of, and understands that (i) a tax will
be imposed on Transfers of the Certificate to Persons that are not Permitted
Transferees; (ii) such tax will be imposed on the transferor, or, if such
Transfer is through an agent (which includes a broker, nominee or middleman) for
a Person that is not a Permitted Transferee, on the agent; and (iii) the Person
otherwise liable for the tax shall be relieved of liability for the tax if the
subsequent Transferee furnished to such Person an affidavit that such subsequent
Transferee is a Permitted Transferee and, at the time of Transfer, such Person
does not have actual knowledge that the affidavit is false.
I-1
<PAGE>
4. The Transferee has been advised of, and understands that a tax will be
imposed on a "pass-through entity" holding the Certificate if at any time during
the taxable year of the pass-through entity a Person that is not a Permitted
Transferee is the record holder of an interest in such entity. The Transferee
understands that such tax will not be imposed for any period with respect to
which the record holder furnishes to the pass-through entity an affidavit that
such record holder is a Permitted Transferee and the pass-through entity does
not have actual knowledge that such affidavit is false. (For this purpose, a
"pass-through entity" includes a regulated investment company, a real estate
investment trust or common trust fund, a partnership, trust or estate, and
certain cooperatives and, except as may be provided in Treasury Regulations,
persons holding interests in pass-through entities as a nominee for another
Person.)
5. The Transferee has reviewed the provisions of Section 5.02(c) of the
Agreement (attached hereto as Exhibit 2 and incorporated herein by reference)
and understands the legal consequences of the acquisition of an Ownership
Interest in the Certificate including, without limitation, the restrictions on
subsequent Transfers and the provisions regarding voiding the Transfer and
mandatory sales. The Transferee expressly agrees to be bound by and to abide by
the provisions of Section 5.02(c) of the Agreement and the restrictions noted on
the face of the Certificate. The Transferee understands and agrees that any
breach of any of the representations included herein shall render the Transfer
to the Transferee contemplated hereby null and void.
6. The Transferee agrees to require a Transfer Affidavit from any Person to
whom the Transferee attempts to Transfer its Ownership Interest in the
Certificate, and in connection with any Transfer by a Person for whom the
Transferee is acting as nominee, trustee or agent, and the Transferee will not
Transfer its Ownership Interest or cause any Ownership Interest to be
Transferred to any Person that the Transferee knows is not a Permitted
Transferee. In connection with any such Transfer by the Transferee, the
Transferee agrees to deliver to the Trustee a certificate substantially in the
form set forth as Exhibit J to the Agreement (a "Transferor Certificate") to the
effect that such Transferee has no actual knowledge that the Person to which the
Transfer is to be made is not a Permitted Transferee.
7. The Transferee does not have the intention to impede the assessment or
collection of any tax legally required to be paid with respect to the
Certificate.
8. The Transferee's taxpayer identification number is _________________ .
9. The Transferee is a U.S. Person as defined in Code Section 7701(a)(30).
I-2
<PAGE>
10. The Transferee is aware that the Certificate may be a "noneconomic
residual interest" within the meaning of proposed Treasury regulations
promulgated pursuant to the Code and that the transferor of a noneconomic
residual interest will remain liable for any taxes due with respect to the
income on such residual interest, unless no significant purpose of the transfer
was to impede the assessment or collection of tax.
11. The Transferee is not an employee benefit plan that is subject to ERISA
or a plan that is subject to Section 4975 of the Code, and the Transferee is not
acting on behalf of such a plan.
* * *
I-3
<PAGE>
IN WITNESS WHEREOF, the Transferee has caused this instrument to be
executed on its behalf, pursuant to authority of its Board of Directors, by its
duly authorized officer and its corporate seal to be hereunto affixed, duly
attested, this __________ day of ___________________, 19____ .
---------------------------------
PRINT NAME OF TRANSFEREE
By: _________________________________
Name:
Title:
[Corporate Seal]
ATTEST:
_____________________________
[Assistant] Secretary
Personally appeared before me the above-named ___________________, known or
proved to me to be the same person who executed the foregoing instrument and to
be the _________________________ of the Transferee, and acknowledged that he
executed the same as his free act and deed and the free act and deed of the
Transferee.
Subscribed and sworn before me this _____ day of _______________________,
19_________.
_______________________________
NOTARY PUBLIC
My Commission expires the _____
day of ______________, 19_____.
I-4
<PAGE>
EXHIBIT 1
to EXHIBIT I
Certain Definitions
"Ownership Interest": As to any Certificate, any ownership interest in such
Certificate, including any interest in such Certificate as the Holder thereof
and any other interest therein, whether direct or indirect, legal or beneficial.
"Permitted Transferee": Any Person other than (i) the United States, any
State or political subdivision thereof, or any agency or instrumentality of any
of the foregoing, (ii) a foreign government, International Organization or any
agency or instrumentality of either of the foregoing, (iii) an organization
(except certain farmers' cooperatives described in Code Section 521) which is
exempt from tax imposed by Chapter 1 of the Code (including the tax imposed by
Code Section 511 on unrelated business taxable income) on any excess inclusions
(as defined in Code Section 860E(c)(1)) with respect to any Class A-R
Certificate, (iv) rural electric and telephone cooperatives described in Code
Section 1381(a)(2)(c), (v) a Person that is not a citizen or resident of the
United States, a corporation, partnership, or other entity created or organized
in or under the laws of the United States or any political subdivision thereof,
or an estate or trust whose income from sources without the United States is
includible in gross income for United States federal income tax purposes
regardless of its connection with the conduct of a trade or business within the
United States, and (vi) any other Person so designated by the Trustee based upon
an Opinion of Counsel that the Transfer of an Ownership Interest in a Class A-R
Certificate to such Person may cause the Trust Fund to fail to qualify as a
REMIC at any time that certain Certificates are Outstanding. The terms "United
States," "State" and "International Organization" shall have the meanings set
forth in Code Section 7701 or successor provisions. A corporation will not be
treated as an instrumentality of the United States or of any State or political
subdivision thereof if all of its activities are subject to tax, and, with the
exception of the FHLMC, a majority of its board of directors is not selected by
such governmental unit.
"Person": Any individual, corporation, partnership, joint venture, bank,
joint stock company, trust (including any beneficiary thereof), unincorporated
organization or government or any agency or political subdivision thereof.
"Transfer": Any direct or indirect transfer or sale of any Ownership
Interest in a Certificate, including the acquisition of a Certificate by the
Depositor.
"Transferee": Any Person who is acquiring by Transfer any Ownership
Interest in a Certificate.
I-5
<PAGE>
EXHIBIT 2
to EXHIBIT I
Section 5.02(c) of the Agreement
(c) Each Person who has or who acquires any Ownership Interest in a Class
A-R Certificate shall be deemed by the acceptance or acquisition of such
Ownership Interest to have agreed to be bound by the following provisions, and
the rights of each Person acquiring any Ownership Interest in a Class A-R
Certificate are expressly subject to the following provisions:
(i) Each Person holding or acquiring any Ownership Interest in a Class
A-R Certificate shall be a Permitted Transferee and shall promptly notify
the Trustee of any change or impending change in its status as a Permitted
Transferee.
(ii) No Ownership Interest in a Class A-R Certificate may be
registered on the Closing Date or thereafter transferred, and the Trustee
shall not register the Transfer of any Class A-R Certificate unless, in
addition to the certificates required to be delivered to the Trustee under
subparagraph (b) above, the Trustee shall have been furnished with an
affidavit (a "Transfer Affidavit") of the initial owner or the proposed
transferee in the form attached hereto as Exhibit I.
(iii) Each Person holding or acquiring any Ownership Interest in a
Class A-R Certificate shall agree (A) to obtain a Transfer Affidavit from
any other Person to whom such Person attempts to Transfer its Ownership
Interest in a Class A-R Certificate, (B) to obtain a Transfer Affidavit
from any Person for whom such Person is acting as nominee, trustee or agent
in connection with any Transfer of a Class A-R Certificate and (C) not to
Transfer its Ownership Interest in a Class A-R Certificate or to cause the
Transfer of an Ownership Interest in a Class A-R Certificate to any other
Person if it has actual knowledge that such Person is not a Permitted
Transferee.
(iv) Any attempted or purported Transfer of any Ownership Interest in
a Class A-R Certificate in violation of the provisions of this Section
5.02(c) shall be absolutely null and void and shall vest no rights in the
purported Transferee. If any purported transferee shall become a Holder of
a Class A-R Certificate in violation of the provisions of this Section
5.02(c), then the last preceding Permitted Transferee shall be restored to
all rights as Holder thereof retroactive to the date of registration of
Transfer of such Class A-R Certificate. The Trustee shall be under no
liability to any Person for any registration of Transfer of a Class A-R
Certificate that is
I-6
<PAGE>
in fact not permitted by Section 5.02(b) and this Section 5.02(c) or
for making any payments due on such Certificate to the Holder thereof or
taking any other action with respect to such Holder under the provisions of
this Agreement so long as the Transfer was registered after receipt of the
related Transfer Affidavit, Transferor Certificate and either the Rule 144A
Letter or the Investment Letter. The Trustee shall be entitled but not
obligated to recover from any Holder of a Class A-R Certificate that was in
fact not a Permitted Transferee at the time it became a Holder or, at such
subsequent time as it became other than a Permitted Transferee, all
payments made on such Class A-R Certificate at and after either such time.
Any such payments so recovered by the Trustee shall be paid and delivered
by the Trustee to the last preceding Permitted Transferee of such
Certificate.
(v) The Depositor shall use its best efforts to make available, upon
receipt of written request from the Trustee, all information necessary to
compute any tax imposed under Section 860E(e) of the Code as a result of a
Transfer of an Ownership Interest in a Class A-R Certificate to any Holder
who is not a Permitted Transferee.
I-7
<PAGE>
EXHIBIT J
FORM OF TRANSFEROR CERTIFICATE
______________________
Date
Equity One ABS, Inc.
103 Springer Building
3411 Silverside Road
Wilmington, Delaware 19810
Attention: _______________
[Trustee]
______________________
______________________
Attention: ____________________________
____________________________
Re: Equity One ABS, Inc. Asset Backed Certificates,
Series 199 -__, Class __________________________,
Ladies and Gentlemen:
In connection with our disposition of the above Certificates we certify
that (a) we understand that the Certificates have not been registered under the
Securities Act of 1933, as amended (the "Act"), and are being disposed by us in
a transaction that is exempt from the registration requirements of the Act, (b)
we have not offered or sold any Certificates to, or solicited offers to buy any
Certificates from, any person, or otherwise approached or negotiated with any
person with respect thereto, in a manner that would be deemed, or taken any
other action which would result in, a violation of Section 5 of the Act and (c)
to the extent we are disposing of a Class A-R Certificate, we have no knowledge
the Transferee is not a Permitted Transferee.
Very truly yours,
-------------------------------
Print Name of Transferor
By: ___________________________
Authorized Officer
J-1
<PAGE>
EXHIBIT K
FORM OF INVESTMENT LETTER (NON-RULE 144A)
____________________
Date
Equity One ABS, Inc.
103 Springer Building
3411 Silverside Road
Wilmington, Delaware 19810
Attention: _______________
[Trustee]
______________________
______________________
Attention: ____________________________
____________________________
Re: Equity One ABS, Inc. Asset Backed Certificates,
Series 199 -__, Class __________________________,
Ladies and Gentlemen:
In connection with our acquisition of the above Certificates
we certify that (a) we understand that the Certificates are not being registered
under the Securities Act of 1933, as amended (the "Act"), or any state
securities laws and are being transferred to us in a transaction that is exempt
from the registration requirements of the Act and any such laws, (b) we are an
"accredited investor," as defined in Regulation D under the Act, and have such
knowledge and experience in financial and business matters that we are capable
of evaluating the merits and risks of investments in the Certificates, (c) we
have had the opportunity to ask questions of and receive answers from the
Depositor concerning the purchase of the Certificates and all matters relating
thereto or any additional information deemed necessary to our decision to
purchase the Certificates, (d) we are not an employee benefit plan that is
subject to the Employee Retirement Income Security Act of 1974, as amended, or a
plan or arrangement that is subject to Section 4975 of the Internal Revenue Code
of 1986, as amended, nor are we acting on behalf of any such plan or
arrangement, nor are we using the assets of any such plan or arrangement to
effect such acquisition, (e) we are acquiring the Certificates for investment
for our own account and not with a view to any distribution of such Certificates
(but without prejudice to our right at all times to sell or otherwise dispose of
the Certificates in accordance with clause (g) below), (f) we have not offered
or sold any Certificates to, or solicited offers to buy any Certificates from,
any person, or otherwise approached
K-1
<PAGE>
or negotiated with any person with respect thereto, or taken any other action
which would result in a violation of Section 5 of the Act, and (g) we will not
sell, transfer or otherwise dispose of any Certificates unless (1) such sale,
transfer or other disposition is made pursuant to an effective registration
statement under the Act or is exempt from such registration requirements, and if
requested, we will at our expense provide an opinion of counsel satisfactory to
the addressees of this Certificate that such sale, transfer or other disposition
may be made pursuant to an exemption from the Act, (2) the purchaser or
transferee of such Certificate has executed and delivered to you a certificate
to substantially the same effect as this certificate, and (3) the purchaser or
transferee has otherwise complied with any conditions for transfer set forth in
the Pooling and Servicing Agreement.
Very truly yours,
------------------------------
Print Name of Transferee
By: __________________________
Authorized Officer
K-2
<PAGE>
EXHIBIT L
FORM OF RULE 144A LETTER
______________________
Date
Equity One ABS, Inc.
103 Springer Building
3411 Silverside Road
Wilmington, Delaware 19810
Attention: _______________
[Trustee]
______________________
______________________
Attention: ____________________________
____________________________
Re: Equity One ABS, Inc. Asset Backed Certificates,
Series 199 -__, Class __________________________,
Ladies and Gentlemen:
In connection with our acquisition of the above Certificates we certify
that (a) we understand that the Certificates are not being registered under the
Securities Act of 1933, as amended (the "Act"), or any state securities laws and
are being transferred to us in a transaction that is exempt from the
registration requirements of the Act and any such laws, (b) we have such
knowledge and experience in financial and business matters that we are capable
of evaluating the merits and risks of investments in the Certificates, (c) we
have had the opportunity to ask questions of and receive answers from the
Depositor concerning the purchase of the Certificates and all matters relating
thereto or any additional information deemed necessary to our decision to
purchase the Certificates, (d) we are not an employee benefit plan that is
subject to the Employee Retirement Income Security Act of 1974, as amended, or a
plan or arrangement that is subject to Section 4975 of the Internal Revenue Code
of 1986, as amended, nor are we acting on behalf of any such plan or
arrangement, nor are we using the assets of any such plan or arrangement to
effect such acquisition, (e) we have not, nor has anyone acting on our behalf
offered, transferred, pledged, sold or otherwise disposed of the Certificates,
any interest in the Certificates or any other similar security to, or solicited
any offer to buy or accept a transfer, pledge or other disposition of the
Certificates, any interest in the Certificates or any other similar security
from, or otherwise approached or negotiated with respect to the Certificates,
any interest in the Certificates or any other similar security with, any person
in any manner, or
L-1
<PAGE>
made any general solicitation by means of general advertising or in any other
manner, or taken any other action, that would constitute a distribution of the
Certificates under the Securities Act or that would render the disposition of
the Certificates a violation of Section 5 of the Securities Act or require
registration pursuant thereto, nor will act, nor has authorized or will
authorize any person to act, in such manner with respect to the Certificates,
(f) we are a "qualified institutional buyer" as that term is defined in Rule
144A under the Securities Act and have completed either of the forms of
certification to that effect attached hereto as Annex 1 or Annex 2. We are aware
that the sale to us is being made in reliance on Rule 144A. We are acquiring the
Certificates for our own account or for resale pursuant to Rule 144A and
further, understand that such Certificates may be resold, pledged or transferred
only (i) to a person reasonably believed to be a qualified institutional buyer
that purchases for its own account or for the account of a qualified
institutional buyer to whom notice is given that the resale, pledge or transfer
is being made in reliance on Rule 144A, or (ii) pursuant to another exemption
from registration under the Securities Act.
L-2
<PAGE>
ANNEX 1 TO EXHIBIT L
QUALIFIED INSTITUTIONAL BUYER STATUS UNDER SEC RULE 144A
[For Transferees Other Than Registered Investment Companies]
The undersigned (the "Buyer") hereby certifies as follows to the parties
listed in the Rule 144A Transferee Certificate to which this certification
relates with respect to the Certificates described therein:
1. As indicated below, the undersigned is the President, Chief Financial
Officer, Senior Vice President or other executive officer of the Buyer.
2. In connection with purchases by the Buyer, the Buyer is a "qualified
institutional buyer" as that term is defined in Rule 144A under the Securities
Act of 1933, as amended ("Rule 144A") because (i) the Buyer owned and/or
invested on a discretionary basis either at least $100,000 in securities or, if
Buyer is a dealer, Buyer must own and/or invest on a discretionary basis at
least $10,000,000 in securities (except for the excluded securities referred to
below) as of the end of the Buyer's most recent fiscal year (such amount being
calculated in accordance with Rule 144A and (ii) the Buyer satisfies the
criteria in the category marked below.
___ Corporation, etc. The Buyer is a corporation (other than
a bank, savings and loan association or similar institution),
Massachusetts or similar business trust, partnership, or
charitable organization described in Section 501(c)(3) of the
Internal Revenue Code of 1986, as amended.
___ Bank. The Buyer (a) is a national bank or banking institution
organized under the laws of any State, territory or the
District of Columbia, the business of which is substantially
confined to banking and is supervised by the State or territorial
banking commission or similar official or is a foreign bank or
equivalent institution, and (b) has an audited net worth of at
least $25,000,000 as demonstrated in its latest annual financial
statements, a copy of which is attached hereto.
___ Savings and Loan. The Buyer (a) is a savings and loan
association, building and loan association, cooperative bank,
homestead association or similar institution, which is supervised
and examined by a State or Federal authority having supervision
over any such institutions or is a foreign savings and loan
association or equivalent institution and (b) has an audited net
worth of at least $25,000,000
L-3
<PAGE>
as demonstrated in its latest annual financial statements, a
copy of which is attached hereto.
___ Broker-dealer. The Buyer is a dealer registered pursuant
to Section 15 of the Securities Exchange Act of 1934.
___ Insurance Company. The Buyer is an insurance company
whose primary and predominant business activity is the writing of
insurance or the reinsuring of risks underwritten by insurance
companies and which is subject to supervision by the insurance
commissioner or a similar official or agency of a State,
territory or the District of Columbia.
___ State or Local Plan. The Buyer is a plan established
and maintained by a State, its political subdivisions, or any
agency or instrumentality of the State or its political
subdivisions, for the benefit of its employees.
___ ERISA Plan. The Buyer is an employee benefit plan within
the meaning of Title I of the Employee Retirement Income Security
Act of 1974.
___ Investment Advisor. The Buyer is an investment advisor
registered under the Investment Advisors Act of 1940.
___ Small Business Investment Company. Buyer is a small
business investment company licensed by the U.S. Small Business
Administration under Section 301(c) or (d) of the Small Business
Investment Act of 1958.
___ Business Development Company. Buyer is a business
development company as defined in Section 202(a)(22) of the
Investment Advisors Act of 1940.
3. The term "securities" as used herein does not include (i) securities of
issuers that are affiliated with the Buyer, (ii) securities that are part of an
unsold allotment to or subscription by the Buyer, if the Buyer is a dealer,
(iii) securities issued or guaranteed by the U.S. or any instrumentality
thereof, (iv) bank deposit notes and certificates of deposit, (v) loan
participations, (vi) repurchase agreements, (vii) securities owned but subject
to a repurchase agreement and (viii) currency, interest rate and commodity
swaps.
4. For purposes of determining the aggregate amount of securities owned
and/or invested on a discretionary basis by the Buyer, the Buyer used the cost
of such securities to the Buyer and did not include any of the securities
referred to in the preceding paragraph, except (i) where the Buyer reports its
L-4
<PAGE>
securities holdings in its financial statements on the basis of their market
value, and (ii) no current information with respect to the cost of those
securities has been published. If clause (ii) in the preceding sentence applies,
the securities may be valued at market. Further, in determining such aggregate
amount, the Buyer may have included securities owned by subsidiaries of the
Buyer, but only if such subsidiaries are consolidated with the Buyer in its
financial statements prepared in accordance with generally accepted accounting
principles and if the investments of such subsidiaries are managed under the
Buyer's direction. However, such securities were not included if the Buyer is a
majority-owned, consolidated subsidiary of another enterprise and the Buyer is
not itself a reporting company under the Securities Exchange Act of 1934, as
amended.
5. The Buyer acknowledges that it is familiar with Rule 144A and
understands that the seller to it and other parties related to the Certificates
are relying and will continue to rely on the statements made herein because one
or more sales to the Buyer may be in reliance on Rule 144A.
6. Until the date of purchase of the Rule 144A Securities, the Buyer will
notify each of the parties to which this certification is made of any changes in
the information and conclusions herein. Until such notice is given, the Buyer's
purchase of the Certificates will constitute a reaffirmation of this
certification as of the date of such purchase. In addition, if the Buyer is a
bank or savings and loan is provided above, the Buyer agrees that it will
furnish to such parties updated annual financial statements promptly after they
become available.
______________________________________
Print Name of Buyer
By: __________________________________
Name:
Title:
Date: ________________________________
L-5
<PAGE>
ANNEX 2 TO EXHIBIT L
QUALIFIED INSTITUTIONAL BUYER STATUS UNDER SEC RULE 144A
[For Transferees That are Registered Investment Companies]
The undersigned (the "Buyer") hereby certifies as follows to the parties
listed in the Rule 144A Transferee Certificate to which this certification
relates with respect to the Certificates described therein:
1. As indicated below, the undersigned is the President, Chief Financial
Officer or Senior Vice President of the Buyer or, if the Buyer is a "qualified
institutional buyer" as that term is defined in Rule 144A under the Securities
Act of 1933, as amended ("Rule 144A") because Buyer is part of a Family of
Investment Companies (as defined below), is such an officer of the Adviser.
2. In connection with purchases by Buyer, the Buyer is a "qualified
institutional buyer" as defined in SEC Rule 144A because (i) the Buyer is an
investment company registered under the Investment Company Act of 1940, as
amended and (ii) as marked below, the Buyer alone, or the Buyer's Family of
Investment Companies, owned at least $100,000,000 in securities (other than the
excluded securities referred to below) as of the end of the Buyer's most recent
fiscal year. For purposes of determining the amount of securities owned by the
Buyer or the Buyer's Family of Investment Companies, the cost of such securities
was used, except (i) where the Buyer or the Buyer's Family of Investment
Companies reports its securities holdings in its financial statements on the
basis of their market value, and (ii) no current information with respect to the
cost of those securities has been published. If clause (ii) in the preceding
sentence applies, the securities may be valued at market.
___ The Buyer owned $________ in securities (other than the excluded
securities referred to below) as of the end of the Buyer's most
recent fiscal year (such amount being calculated in accordance
with Rule 144A).
___ The Buyer is part of a Family of Investment Companies
which owned in the aggregate $_____ in securities (other than the
excluded securities referred to below) as of the end of the
Buyer's most recent fiscal year (such amount being calculated in
accordance with Rule 144A).
3. The term "Family of Investment Companies" as used herein means two or
more registered investment companies (or series thereof) that have the same
investment adviser or investment advisers that are affiliated (by virtue of
being majority
L-6
<PAGE>
owned subsidiaries of the same parent or because one investment adviser is a
majority owned subsidiary of the other).
4. The term "securities" as used herein does not include (i) securities of
issuers that are affiliated with the Buyer or are part of the Buyer's Family of
Investment Companies, (ii) securities issued or guaranteed by the U.S. or any
instrumentality thereof, (iii) bank deposit notes and certificates of deposit,
(iv) loan participations, (v) repurchase agreements, (vi) securities owned but
subject to a repurchase agreement and (vii) currency, interest rate and
commodity swaps.
5. The Buyer is familiar with Rule 144A and understands that the parties
listed in the Rule 144A Transferee Certificate to which this certification
relates are relying and will continue to rely on the statements made herein
because one or more sales to the Buyer will be in reliance on Rule 144A. In
addition, the Buyer will only purchase for the Buyer's own account.
6. Until the date of purchase of the Certificates, the undersigned will
notify the parties listed in the Rule 144A Transferee Certificate to which this
certification relates of any changes in the information and conclusions herein.
Until such notice is given, the Buyer's purchase of the Certificates will
constitute a reaffirmation of this certification by the undersigned as of the
date of such purchase.
__________________________________
Print Name of Buyer or Adviser
By: ______________________________
Name:
Title:
IF AN ADVISER:
__________________________________
Print Name of Buyer
Date: ___________________________
L-7
<PAGE>
EXHIBIT M
REQUEST FOR RELEASE
(for Trustee)
Equity One ABS, Inc.
Asset Backed Certificates
Series 199__ -__
Loan Information
Name of Mortgagor: ________________________________________
Servicer
Loan No.: ________________________________________
Trustee
Name: ________________________________________
Address: ________________________________________
Trustee ________________________________________
Mortgage File No.: ________________________________________
The undersigned Servicer hereby acknowledges that it has received from
_______________________, as Trustee (the "Trustee") for the Holders of Asset
Backed Certificates, of the above-referenced Series, the documents referred to
below (the "Documents"). All capitalized terms not otherwise defined in this
Request for Release shall have the meanings given them in the Pooling and
Servicing Agreement (the "Pooling and Servicing Agreement") relating to the
above-referenced Series among the Trustee, __________________________, as
Sellers, Equity One, Inc. as Servicer and Equity One ABS, Inc., as Depositor.
( ) Mortgage Note dated ____________, 19___, in the original
principal sum of $ ______________, made by _______________.
payable to, or endorsed to the order of, the Trustee.
( ) Mortgage recorded on _______________________ as instrument no. _______
______________ in the County Recorder's Office of the
County of _______________________, State of __________________ in
book/reel/docket ____________________ of official records at
page/image _______________________.
( ) Deed of Trust recorded on ________________________ as instrument
no. ____________________ in the County Recorder's Office of the
County of ____________________, State of ______________________ in
book/reel/docket ______________________ of official records at
page/image ___________________.
M-1
<PAGE>
( ) Assignment of Mortgage or Deed of Trust to the Trustee,
recorded on _________________ as instrument no. _______
in the County Recorder's Office of the County of____________,
State of _________ in book/reel/docket ___________________________
of official records at page/image ________________________ .
( ) Other documents, including any amendments, assignments or
other assumptions of the Mortgage Note or Mortgage.
( ) _______________________________________________
( ) _______________________________________________
( ) _______________________________________________
( ) _______________________________________________
The undersigned Servicer hereby acknowledges and agrees as follows:
(1) The Servicer shall hold and retain possession of the
Documents in trust for the benefit of the Trustee, solely for the
purposes provided in the Agreement.
(2) The Servicer shall not cause or knowingly permit the
Documents to become subject to, or encumbered by, any claim, liens,
security interest, charges, writs of attachment or other impositions
nor shall the Servicer assert or seek to assert any claims or rights
of setoff to or against the Documents or any proceeds thereof.
(3) The Servicer shall return each and every Document previously
requested from the Mortgage File to the Trustee when the need therefor
no longer exists, unless the Loan relating to the Documents has been
liquidated and the proceeds thereof have been remitted to the
Certificate Account and except as expressly provided in the Agreement.
(4) The Documents and any proceeds thereof, including any
proceeds of proceeds, coming into the possession or control of the
Servicer shall at all times be earmarked for the account of the
Trustee, and the Servicer shall keep the Documents and any proceeds
separate and distinct from all other property in the Servicer's
possession, custody or control.
[Servicer]
By _________________________________
Name: ______________________________
Title: _____________________________
Date: _______________________, 19___
M-2
<PAGE>
EXHIBIT N
REQUEST FOR RELEASE OF DOCUMENTS
To: ____________________ Attn: _______________
______________
Re: The Pooling & Servicing Agreement dated _____________,
199_ among _______________________, as Sellers, Equity
One, Inc. as Servicer, and Equity One ABS, Inc. as
Depositor and ____________________ as Trustee
Ladies and Gentlemen:
In connection with the administration of the Loans held by you as Trustee
for Equity One ABS, Inc., we request the release of the Loan File for the
Loan(s) described below, for the reason indicated.
FT Account#: Pool #:
Mortgagor's Name, Address and Zip Code:
Loan Number:
Reason for Requesting Documents (check one)
1. Loan paid in full (_______________________, Inc. hereby certifies that
all amounts have been received.)
2. Loan Liquidated (___________________________ hereby certifies that all
proceeds of foreclosure, insurance, or other liquidation have been
finally received.)
3. Loan in Foreclosure.
4. Other (explain):
If item 1 or 2 above is checked, and if all or part of the Mortgage File
was previously released to us, please release to us our previous receipt on file
with you, as well as any additional documents in your possession relating to the
above-specified Loan. If item 3 or 4 is checked, upon return of all of the above
N-1
<PAGE>
documents to you as Trustee, please acknowledge your receipt by signing in the
space indicated below, and returning this form.
_____________________________
_____________________________
_____________________________
By: __________________________________
Name: ________________________________
Title: _______________________________
Date: ________________________________
TRUSTEE CONSENT TO RELEASE AND
ACKNOWLEDGEMENT OF RECEIPT
By: __________________________________
Name: ________________________________
Title: _______________________________
Date: ________________________________
N-2
