<PAGE> 1
As Filed with the Securities and Exchange Commission on January 20, 1999
Registration Statement No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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THE MONEY STORE HOME EQUITY TRUST 1997-B
(Exact Name of Registrant as Specified in its Charter)
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UPPER TIER 68-0398956
NEW YORK LOWER TIER 91-1864387
(State or Other Jurisdiction of Incorporation) (IRS Employer Identification No.)
</TABLE>
707 THIRD STREET
WEST SACRAMENTO, CA 95606
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive office)
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MARION A. COWELL, JR., ESQ.
EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
FIRST UNION CORPORATION
301 SOUTH COLLEGE STREET
CHARLOTTE, NORTH CAROLINA 28288-0013
(704) 374-6161
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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COPIES TO:
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ROBERT J. HAHN, ESQ. BRUCE HURWITZ, ESQ.
KILPATRICK STOCKTON LLP THE MONEY STORE INC.
ONE FIRST UNION CENTER, SUITE 3500 707 THIRD STREET
CHARLOTTE, NORTH CAROLINA 28202-6001 WEST SACRAMENTO, CALIFORNIA 95606
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES BEING REGISTERED REGISTERED PER SECURITY OFFERING PRICE FEE(2)
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The Money Store Home Equity Asset Backed
Certificates, Series 1997-B........... (1) (1) (1) N/A
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</TABLE>
(1) This Registration Statement pertains to offers and sales of
previously-registered asset-backed securities of The Money Store Home Equity
Trust 1997-B related to market-making transactions in such securities by any
affiliate of The Money Store Inc., the sponsor of the Registrant, including
First Union Capital Markets, a division of Wheat First Securities, Inc.
(2) Because registration fees with respect to these asset backed-securities of
The Money Store Home Equity Trust 1997-B were paid previously in connection
with the registration of the initial offering of such securities to the
public, no fee is due in connection with the registration of market-making
transactions in such securities.
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 THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
MARKET-MAKING PROSPECTUS
THE MONEY STORE HOME EQUITY TRUST 1997-B
ASSET BACKED CERTIFICATES
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This Prospectus relates to offers and sales of
YOU SHOULD CONSIDER previously-registered classes of The Money Store Home Equity
CAREFULLY THE RISK FACTORS Asset Backed Certificates, Series 1997-B, related to
BEGINNING ON PAGE 7 market-making transactions by (1) First Union Capital
HEREIN AND ON PAGE 73 OF Markets, a division of Wheat First Securities, Inc., an
ANNEX IV HERETO. affiliate of The Money Store Inc., or (2) any other
affiliate of The Money Store Inc. The Money Store Inc.
Neither the certificates to sponsored The Money Store Home Equity Trust 1997-B. The
which this Prospectus Money Store Home Equity Trust 1997-B initially offered and
relates nor the underlying sold the certificates in June 1997 pursuant to a
loans are insured or registration statement of The Money Store Inc. and certain
guaranteed by any of its wholly-owned subsidiaries.
governmental agency or
instrumentality. First Union Capital Markets, and any other affiliate of The
Money Store Inc. that may engage in market-making
The certificates to which transactions in the certificates to which this Prospectus
this Prospectus relates relates, (1) may act as principal or agent in any
represent interests in The market-making transactions in the certificates to which this
Money Store Home Equity Prospectus relates, (2) will make any sale of such
Trust 1997-B only and, certificates at prices related to prevailing market prices
except for the certificate of such certificates at the time of such sale or otherwise
guaranty insurance policies and (3) may use this Prospectus when required under the
of MBIA Insurance federal securities laws in connection with offers and sales
Corporation, do not of such certificates related to such market-making
represent interests in or transactions. The Money Store Home Equity Trust 1997-B will
obligations of The Money not receive any proceeds from any market-making transactions
Store Inc., First Union in the certificates.
Capital Markets, a division
of Wheat First Securities, First Union Capital Markets currently expects to make a
Inc., First Union National secondary market in the certificates to which this
Bank, First Union Prospectus relates, but has no obligation to do so. There
Corporation, MBIA can be no assurance that any secondary market for such
Insurance Corporation or certificates will provide holders with liquidity of
any other party. investment or will continue while such certificates remain
outstanding.
-------------------------------
THE PRIMARY ASSETS OF THE MONEY STORE HOME EQUITY TRUST
1997-B CONSIST OF:
Three separate cross-supported sub-trusts, each consisting
of a pool of loans--
- Pool I consists of fixed interest rate one- to
four-family, and certain five-to six-family, residential
first and second mortgage loans. As of , 1999, the
loans in Pool I had an aggregate principal balance of
$ .
- Pool II consists of one- to four-family residential first
mortgage loans with adjustable interest rates. As of
, 1999, the loans in Pool II had an aggregate
principal balance of $ .
- Pool III consists of fixed interest rate five or more unit
residential or mixed-use residential and commercial first
mortgage loans. As of , 1999, the loans in
Pool III had an aggregate principal balance of $ .
THE CERTIFICATES TO WHICH THIS PROSPECTUS RELATES CONSIST
OF:
Nine classes of Class A Certificates--
- The Class A-3 through A-8 Certificates generally represent
the right to receive payments distributable on or with
respect to the loans in Pool I.
- The Class A-9 and A-10 Certificates generally represent
the right to receive payments distributable on or with
respect to the loans in Pool II.
- The Class A-11 Certificates, represent the right to
receive payments distributable on or with respect to the
loans in Pool III.
</TABLE>
The table on page 6 under "Summary -- Offered Certificates" lists the Class A
Certificates to which this Prospectus relates.
Due to the cross-support provisions described herein, the holders of each class
of Class A Certificates may receive cash as credit support from any loan in any
Pool.
MBIA Insurance Corporation has issued certificate guaranty insurance policies
with respect to the Class A Certificates.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED THAT
THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
, 1999
<PAGE> 3
TABLE OF CONTENTS
MARKET MAKING PROSPECTUS
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PAGE
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Important Notice About Information Presented in this
Prospectus................................................ 4
Disclosure Regarding Forward-Looking Statements............. 4
Summary Information......................................... 5
Risk Factors................................................ 7
Multifamily Loans......................................... 7
Bases for Adjustments in Pass-Through Rates and Interest
Rates.................................................. 7
Net Funds Cap and Certificateholders' Interest
Carryover.............................................. 8
Delinquencies and Defaults................................ 8
Acquired Mortgaged Properties............................. 9
Year 2000................................................. 9
Use of Proceeds............................................. 11
Lending Programs............................................ 11
The Representatives and the Originators..................... 11
The Loan Pools.............................................. 12
Maturity, Prepayment and Yield Considerations............... 16
Description of the Certificates............................. 18
The MBIA Policies and MBIA.................................. 29
The Pooling and Servicing Agreement......................... 33
Federal Income Tax Considerations........................... 39
ERISA Considerations........................................ 40
Legal Investment Considerations............................. 43
Plan of Distribution........................................ 43
Experts..................................................... 43
Legal Matters............................................... 43
Rating of the Class A Certificates.......................... 44
Where You Can Find More Information......................... 44
Incorporation of Certain Information by Reference........... 44
ANNEX I
Auction Procedures.......................................... 45
ANNEX II
Settlement Procedures....................................... 57
ANNEX III
Global Clearance, Settlement and Tax Documentation
Procedures................................................ 60
ANNEX IV
Important Notice About Information Presented in this
Prospectus and Prospectus Supplement...................... 65
Prospectus Supplement....................................... 65
Prospectus Summary.......................................... 67
Risk Factors................................................ 73
Limited Ability to Resell Certificates.................... 73
Book-Entry Registration................................... 73
Nature of Security........................................ 73
Unsecured Home Improvement Loans.......................... 75
Combined Loan-to-Value Ratios............................. 76
Legal Considerations...................................... 76
</TABLE>
2
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Prepayment Considerations................................. 77
The Status of the Mortgage Loans in the Event of
Bankruptcy of the Representative or an Originator...... 78
Limitations on Interest Payments and Foreclosures......... 78
Security Rating........................................... 79
The Trusts.................................................. 80
The Representative and the Originators...................... 93
The Single Family Loan Lending Program...................... 94
Description of the Securities............................... 97
Credit Enhancement.......................................... 105
Maturity, Prepayment and Yield Considerations............... 110
The Agreements.............................................. 112
Certain Legal Aspects of the Mortgage Loans................. 122
Federal Income Tax Consequences............................. 131
ERISA Considerations........................................ 157
Legal Investment Considerations............................. 159
Plan of Distribution........................................ 159
Appendix I Auction Procedures............................... 161
Appendix II Settlement Procedures........................... 174
</TABLE>
3
<PAGE> 5
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS
Annex IV to this document provides general information, some of which may
not apply to your Certificates. With certain exceptions, Annex IV to this
document constitutes the Prospectus, dated September 28, 1998, of The Money
Store Inc. (and certain of its wholly-owned subsidiaries) relating to initial
offerings of securities, including securities similar to the Certificates to
which this Prospectus relates, by trusts the assets of which are similar to the
assets of the Trust. These exceptions include (1) the cover page, summary and
risk factors sections and certain other portions have been rewritten as a result
of the SEC's adoption of the plain English rules, effective October 1, 1998, and
(ii) certain sections and provisions originally included that are not applicable
hereto have been deleted.
If the description of the terms of your Certificates varies between
information contained herein and in Annex IV hereto, you should rely on the
information herein. Unless the context requires otherwise, you should construe
references in Annex IV to the "related Prospectus Supplement" to mean references
to this document.
Cross-references are included in this document and in Annex IV hereto to
captions where you can find further related discussions and definition
locations. The Table of Contents on the preceding page provides the pages on
which these captions are located.
You should rely only on the information provided or incorporated by
reference in this Prospectus or any supplement hereto. We have not authorized
anyone else to provide you with different information. You should not assume
that the information in this Prospectus or any supplement hereto is accurate as
of any date other than the date on the front of those documents.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus, including the Annexes hereto, contain certain
forward-looking statements which, together with related qualifying language and
assumptions, are found in the material set forth under the captions "Risk
Factors" herein and in Annex IV hereto, "Prepayment and Yield Considerations"
herein and "Prepayment Considerations" in Annex IV hereto. Forward-looking
statements may also be found elsewhere in this Prospectus and may be identified
by, among other things, accompanying language including the words "expects,"
"intends," "anticipates," "estimates" or similar expressions, or by qualifying
language or assumptions. Such statements involve known and unknown risks,
uncertainties and other important factors that could cause the actual results or
performance to differ materially from such forward-looking statements. Such
risks, uncertainties and other factors include, among others, general economic
and business conditions, competition, changes in political, social and economic
conditions, regulatory initiatives and compliance with government regulations,
customer preference and various other matters, over which the Trust has no
control. These forward-looking statements speak only as of the date of this
Prospectus. The Trust expressly disclaims any obligation or undertaking to
disseminate any updates or revisions to such forward-looking statements to
reflect any change in the expectations of the Trust with regard thereto or any
change in events, conditions or circumstances on which any forward-looking
statement is based.
-------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
4
<PAGE> 6
SUMMARY INFORMATION
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONCERNING THE CERTIFICATES TO
WHICH THIS PROSPECTUS RELATES. PLEASE READ THIS ENTIRE PROSPECTUS, INCLUDING THE
ANNEXES HERETO, CAREFULLY FOR ADDITIONAL DETAILED INFORMATION.
INTRODUCTION
The Money Store Home Equity Asset Backed Certificates, Series 1997-B:
- represent fractional undivided ownership interests in a trust fund
designated as The Money Store Home Equity Trust 1997-B (the "TRUST"), the
assets of which consist primarily of three separate cross-supported
sub-trusts, each consisting of a pool of loans (the "LOANS") having the
characteristics described herein; and
- consist of the classes (each, a "CLASS") of Class A Certificates set
forth in the table under "-- Offered Certificates" on page 5 below to
which this Prospectus relates (the "OFFERED CERTIFICATES"), as well as
two classes of Class A Certificates, Class A-1 and Class A-2, that have
heretofore been paid in full (together with the Offered Certificates, the
"CLASS A CERTIFICATES"), one Class of interest only subordinate
certificates (the "CLASS X CERTIFICATES") and two Classes of residual
certificates (collectively, the "CLASS R CERTIFICATES," and together with
the Class A Certificates and the Class X Certificates, the
"CERTIFICATES").
The three pools of the loans are referred to herein as "POOL I," "POOL II"
and "POOL III." Pool I consists of one- to four-family, and certain five- and
six-family, residential first and second mortgage loans with fixed interest
rates. Pool II consists of one- to four-family, residential first mortgage loans
with adjustable interest rates. The Loans in Pool I and Pool II are collectively
referred to herein as the "HOME EQUITY LOANS." Pool III consists of fixed
interest rate five or more unit residential or mixed-use residential and
commercial first mortgage loans (the "MULTIFAMILY LOANS" and, together with the
Home Equity Loans, the "LOANS").
THIS PROSPECTUS RELATES ONLY TO THE OFFERED CERTIFICATES. The Class A-3
through Class A-8 Certificates generally represent, and the Class A-1 and Class
A-2 Certificates generally represented, the right to receive payments
distributable on or with respect to the Home Equity Loans in Pool I. The Class
A-9 and Class A-10 Certificates generally represent the right to receive
payments distributable on or with respect to the Home Equity Loans in Pool II.
The Class A-11 Certificates generally represent the right to receive payments
distributable on or with respect to the Multifamily Loans in Pool III. HOWEVER,
DUE TO THE CROSS-SUPPORT PROVISIONS DESCRIBED HEREIN, THE HOLDERS OF EACH CLASS
OF CLASS A CERTIFICATES MAY RECEIVE CASH AS CREDIT SUPPORT FROM ANY LOAN IN ANY
POOL. The Trust issued each Class of Offered Certificates in June 1997 in the
original principal balance, and each Class of Offered Certificates bears
interest at the per annum rate, set forth for such Class in the table under
"-- Offered Certificates" below. The Trust also issued the Class A-1
Certificates and the Class A-2 Certificates in June 1997. The Class A-1
Certificates were issued in the original principal balance of $80,500,000 and
bore interest at the per annum rate of 6.395%. The Class A-2 Certificates were
issued in the original principal balance of $84,500,000 and bore interest at the
per annum rate of 6.420% per annum. The Class A-1 and Class A-2 Certificates
have heretofore been paid in full.
MBIA Insurance Corporation ("MBIA") has issued certificate guaranty
insurance policies with respect to the Class A Certificates (the "MBIA
POLICIES").
First Union Capital Markets, a division of Wheat First Securities, Inc.
("FIRST UNION CAPITAL MARKETS"), an affiliate of The Money Store Inc., and any
other affiliate of The Money Store Inc., may use this Prospectus when required
under the federal securities laws in connection with offers and sales related to
market-making transactions in the Offered Certificates. The Money Store Inc.
sponsored the Trust.
5
<PAGE> 7
RELEVANT PARTIES
ISSUER
The Trust issued the Class A Certificates pursuant to a Pooling and
Servicing Agreement (the "POOLING AND SERVICING AGREEMENT"), dated as of May 31,
1997 (the "CUT-OFF DATE"), among The Bank of New York, as trustee, certain
wholly-owned subsidiaries of The Money Store Inc. (the "ORIGINATORS") and The
Money Store Inc., as Representative and Servicer.
REPRESENTATIVE AND SERVICER
The Money Store Inc., a New Jersey corporation, sponsored the Trust (in
such capacity, the "REPRESENTATIVE") and acts as servicer of the Loans (in such
capacity, the "SERVICER"). Except for certain representations and warranties
relating to the Loans and certain other matters, The Money Store Inc.'s
obligations with respect to the Loans are limited to its contractual servicing
obligations. The principal office of The Money Store Inc. is located at 707
Third Street, West Sacramento, California 95605 (telephone number (916)
617-1000). On June 30, 1998, The Money Store Inc. became a wholly-owned
subsidiary of First Union National Bank, a national banking association,
headquartered in Charlotte, North Carolina ("FUNB"), which is a banking
subsidiary of First Union Corporation. First Union Corporation is also the
ultimate parent of First Union Capital Markets. First Union Corporation is a
North Carolina-based, bank holding company registered under the Bank Holding
Company Act of 1956, as amended, and the rules and regulations promulgated
thereunder.
TRUSTEE
The Bank of New York, a New York banking corporation, is the trustee under
the Pooling and Servicing Agreement (in such capacity, the "TRUSTEE").
AUCTION AGENT
Bankers Trust Company, a New York banking corporation, is auction agent (in
such capacity, the "AUCTION AGENT") with respect to the Class A-10 Certificates.
ORIGINATORS
The Originators originated and underwrote, or purchased and re-underwrote,
the Loans and sold the Loans to the Trustee under the Pooling and Servicing
Agreement.
OFFERED CERTIFICATES
The following table sets forth certain information concerning the Offered
Certificates:
<TABLE>
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ORIGINAL PRINCIPAL BALANCE AS OF
CLASS PRINCIPAL BALANCE , 1999 PASS-THROUGH RATE(1)
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Class A-3 Certificates................... $105,400,000 * 6.520%
Class A-4 Certificates................... 57,500,000 * 6.640
Class A-5 Certificates................... 52,800,000 * 6.825
Class A-6 Certificates................... 49,000,000 * 6.930
Class A-7 Certificates................... 65,300,000 * 7.265
Class A-8 Certificates................... 55,000,000 * 6.900
Class A-9 Certificates................... 270,000,000 * (2)
Class A-10 Certificates.................. 140,000,000 * (3)
Class A-11 Certificates.................. 10,000,000 * 7.180
</TABLE>
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* To be filed by amendment.
(1) The per annum rate of interest at which a Class of Certificates bears
interest is referred to herein as the "PASS-THROUGH RATE."
(2) The Pass-Through Rate for the Class A-9 Certificates (the "ADJUSTABLE RATE
CERTIFICATES") adjusts based on one-month London Interbank Offered Rate for
U.S. dollar deposits ("LIBOR") as described herein. See "Description of the
Certificates -- The Distribution Amounts" herein.
(3) The Pass-Through Rate for the Class A-10 Certificates (the "AUCTION RATE
CERTIFICATES") is determined pursuant to the Auction Procedures described in
Annex I hereto. See "Description of the Certificates -- The Distribution
Amounts" herein.
6
<PAGE> 8
RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS, AS WELL AS THE
RISK FACTORS SET FORTH UNDER THE CAPTION "RISK FACTORS" IN ANNEX IV, IN DECIDING
WHETHER TO PURCHASE THE OFFERED CERTIFICATES.
MULTIFAMILY LOANS The Class A-11 Certificates generally represent the
right to receive payments distributable on or with
respect to the Multifamily Loans in Pool III.
Multifamily lending may expose the lender to a
greater risk of loss than single family residential
lending. Owners of multifamily residential
properties rely on monthly lease payments from
tenants (1) to pay for maintenance and other
operating expenses of such properties, (2) to fund
capital improvements and (3) to service any
mortgage loan and any other debt that may be
secured by such properties. Various factors, many
of which are beyond the control of the owner or
operator of such a property, may affect the
economic viability of that property.
Changes in payment patterns by tenants may result
from a variety of social, legal and economic
factors. Economic factors include the rate of
inflation and unemployment levels. Relative rental
rates offered for various types of housing may be
reflected in changes in payment patterns, including
increased risks of defaults by tenants and higher
vacancy rates. Adverse economic conditions, either
local or national, may limit the amount of rent
that can be charged. These adverse conditions may
cause tenants to pay rent late or move out of the
multifamily complex. Construction of additional
housing units, competition and local politics,
including rent stabilization or control laws and
policies also may affect occupancy and rent levels.
In addition, the level of interest rates may
encourage tenants to purchase single family
housing. The Money Store Inc. cannot determine or
predict whether, or to what extent, economic, legal
or social factors will affect future rental or
payment patterns.
The location and construction quality of a
particular building may affect the occupancy levels
and rents that may be charged for individual units.
The characteristics of a neighborhood may change
over time or in relation to newer developments. The
effects of poor construction quality will increase
over time in the form of increased maintenance and
capital improvements. Even good construction will
deteriorate over time if adequate maintenance is
not performed in a timely fashion.
BASES FOR ADJUSTMENTS IN
PASS-THROUGH RATES AND
INTEREST RATES The Adjustable Rate Certificates and the Auction
Rate Certificates generally represent the right to
receive payments distributable on or with respect
to the Home Equity Loans in Pool II. The
Pass-Through Rate for the Adjustable Rate
Certificates adjusts based generally on LIBOR and
the Pass-Through Rate for the Auction Rate
Certificates is determined periodically pursuant to
the Auction Procedures described in Annex I hereto.
Although the interest rates on the Pool II Loans
are also subject to periodic adjustment, the
interest rates on most of the Pool II Loans adjust
less frequently than the Pass-Through Rates on the
Adjustable Rate Certificates and the Auction Rate
Certificates. The interest rates on most of the
Pool II Loans adjust by reference to either the
applicable London Interbank Offered Rate for U.S.
dollar deposits
7
<PAGE> 9
(the "LIBOR INDEX"), which is calculated
differently from LIBOR, or the applicable One-Year
Constant Maturity Treasury Index (the "TREASURY
INDEX"), which may not necessarily correspond to
changes in LIBOR or the Pass-Through Rate
determined pursuant to the Auction Procedures.
NET FUNDS CAP AND
CERTIFICATEHOLDERS'
INTEREST CARRYOVER Under certain circumstances, the interest rate on
the Adjustable Rate Certificates and the Auction
Rate Certificates is subject to a cap referred to
herein as the "NET FUNDS CAP." See "Description of
the Certificateholders -- The Distribution Amounts"
herein. Interest that the holders of the Adjustable
Rate Certificates or the Auction Rate Certificates
do not receive because of the Net Funds Cap is
referred to herein as "CERTIFICATEHOLDERS' INTEREST
CARRYOVER." See "Description of the
Certificateholders -- The Distribution Amounts"
herein.
Any Certificateholders' Interest Carryover,
together with interest thereon at the then
applicable Pass-Through Rate (without giving effect
to the Net Funds Cap, but in no event exceeding 14%
per annum) will be paid as described under "The
Pooling and Servicing Agreement -- Flow of Funds"
herein. Such payments will be made to the
Certificateholders of record of such Class for the
payment date, regardless of whether they owned
Class A Certificates when the related
Certificateholders' Interest Carryover was created.
See "Description of the
Certificates -- Distributions on the Certificates"
herein. The ratings of the Class A Certificates do
not address the likelihood of the payment of any
Certificateholders' Interest Carryover. The MBIA
Policies relating to the Certificates in each Pool
do not guarantee payment of any such amount.
DELINQUENCIES AND DEFAULTS As of , 1999, the following percentages
of Loans were delinquent for the following periods
(the percentages below refer to the percentage of
the aggregate principal balance of the Loans):
- % were 30 to 59 days delinquent;
- % were 60 to 89 days delinquent;
- % were 90 to 119 days delinquent; and
- % were 120 or more days delinquent, but (1)
were not classified as Loans that have been
liquidated ("LIQUIDATED LOANS"), (2) were not in
foreclosure and (3) the Trustee had not acquired
title to the properties securing the Loan in
foreclosure or by deed in lieu of foreclosure.
The amount of Loans that are delinquent changes
from month-to-month. There can be no assurance that
the amount of delinquent Loans will not increase
from the levels described above.
Loans that are delinquent for a longer period of
time are more likely to become Liquidated Loans
than Loans that are delinquent for a shorter period
of time. The larger the aggregate principal balance
of Loans that become Liquidated Loans is, the more
likely it is that available amounts of credit
enhancement will be used to cover losses realized
on those Liquidated Loans. Any use of available
credit enhancement reduces the amount of credit
enhancement available thereafter.
8
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ACQUIRED MORTGAGED
PROPERTIES As of , 1999, the Trust included %
(by aggregate principal balance) of Loans with
respect to which the Trustee had acquired title to
the properties securing such Loans in foreclosure
or by deed in lieu of foreclosure ("REO
PROPERTIES"). REO Property may include properties
that the Trustee can sell. If the Trustee sells REO
Property, the proceeds of the sale (less expenses
incurred in the sale) become available for
distribution to Certificateholders.
The Servicer can give no assurance that any REO
Property will be sold for an amount that will
result in net proceeds being available for
distribution to the Certificateholders.
YEAR 2000 The Servicer, the Trustee and the Auction Agent
utilize a significant number of computer software
programs and operating systems. In addition each is
highly dependent on computer systems operated by
third parties. These include programs and systems
of their suppliers, customers, brokers and agents,
the telephone, electric and utility companies, as
well as others. If any computer system relied upon
by the Servicer, the Trustee and the Auction Agent
or any third party has software applications and
contains source codes that are unable to
appropriately interpret the upcoming calendar year
2000, some level of modification or replacement of
such applications or hardware will be necessary.
The year 2000 issue is the result of prior computer
programs being written using two digits, rather
than four digits, to define the applicable year.
Any of the Servicer's or the Trustee's computer
programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather
than the year 2000. Any such occurrence could
result in a major computer system failure or
miscalculations. Several federal regulatory
agencies, including the Securities and Exchange
Commission, require the entities that they regulate
to take steps to address problems which may arise
in relation to the year 2000.
DTC (as defined herein) has informed its
participants and other members of the financial
community (the "INDUSTRY") that it believes that it
has developed and is implementing a program so that
its computer hardware and software systems, as the
same relate to the timely payment of distributions
(including principal and income payments) to
securityholders, book-entry deliveries, and
settlement of trades within DTC, will continue to
function appropriately. This program includes a
technical assessment and remediation plan, each of
which, according to DTC, is complete. Additionally,
DTC's plan includes a testing phase which is
expected to be completed within appropriate time
frames.
However, DTC's ability to perform properly its
services is also dependent upon other parties,
including but not limited to issuers and their
agents, as well as third-party vendors on whom DTC
relies for information or the provision of
services, including telecommunication and
electrical utility service providers, among others.
DTC has informed the Industry that it is contacting
(and will continue to contact) third party vendors
from whom DTC acquires services to: (1) impress
upon them the importance of such services being
Year 2000 compliant; and (2) determine the extent
of their efforts for Year 2000 remediation (and, as
appropriate, testing) of their services. In
addition, DTC is in the process of developing such
contingency plans as it deems appropriate.
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<PAGE> 11
According to DTC, the foregoing information with
respect to DTC has been provided to the Industry
for information purposes only and is not intended
to serve as a representation, warranty, or contract
modification of any kind.
The Servicer, the Trustee and the Auction Agent
currently are assessing the impact of modifications
or replacements required to adjust for the year
2000. The Servicer, the Trustee and the Auction
Agent are utilizing both internal and external
resources to identify, correct or reprogram, and
test their information technology ("IT") and non-IT
systems that function with microprocessors ("NON-IT
SYSTEMS") for year 2000 compliance. It is
anticipated that all reprogramming efforts and
necessary testing will be completed prior to the
year 2000. The Servicer, the Trustee and the
Auction Agent have initiated formal communications
with those third parties on whom they rely to
determine the extent to which the Servicer, the
Trustee and the Auction Agent are vulnerable to the
failure of these third parties to remediate their
own year 2000 issues. The systems of third parties
on which the systems of the Servicer, the Trustee
and the Auction Agent rely may not be converted in
a timely fashion, or at all, or a third party's
conversion may be incompatible with the systems of
the Servicer, the Trustee and the Auction Agent.
Any of these circumstances could have an adverse
effect on the business, financial condition or
results of operations of the Servicer, the Trustee
and the Auction Agent. The costs of the Year 2000
projects and the dates on which the Servicer, the
Trustee and the Auction Agent plan to complete
their year 2000 modifications are based on their
best estimates and numerous assumptions of future
events. These include the continued availability of
certain resources, third party modification plans
and other factors. There can be no assurance that
these estimates will be achieved. Actual results
could differ materially from such estimates.
Specific factors that might cause such material
differences include: (1) the availability and cost
of personnel trained in this area, (2) the ability
to locate and correct all relevant computer codes
and (3) similar uncertainties.
The systems discussed above, including the systems
of the Servicer, the Trustee and the Auction Agent
may not be year 2000 compliant and the costs
required to address year 2000 issues may adversely
affect the business, financial condition or results
of operations of the respective parties or the
performance of their obligations under the Pooling
and Servicing Agreement. As a result of this
potential effect on performance under the Pooling
and Servicing Agreement, the timely receipt of
payment by the Certificateholders may also be
adversely affected.
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USE OF PROCEEDS
There will be no cash proceeds payable to the Trust from the offer and sale
of the Offered Certificates by First Union Capital Markets, or any other
affiliate of The Money Store Inc., related to market-making transactions.
LENDING PROGRAMS
Prospective Certificateholders should consider, in addition to the
information described under "The Single Family Loan Lending Program" in Annex IV
hereto, the following with respect to the Multifamily Loans.
THE MULTIFAMILY LENDING PROGRAM
The Originators originated Multifamily Loans in several states. Typically,
Multifamily Loans are 25 to 30 year term fully amortizing loans consisting of 5
or more units (some of which may be non-residential units) for non-purchase
money loans. All of the Multifamily Loans are first liens with a minimum loan
amount of $50,000 and a maximum loan amount of $1,000,000, a maximum
Loan-to-Value ratio of approximately 65% and minimum debt service coverage of
approximately 1.25 to 1, although these guidelines can be varied with the
approval of senior management. All Multifamily Loans were underwritten centrally
in Sacramento, California. Appraisals, field inspections and environmental
inspections (performed by outside and certified inspectors) were required for
each Multifamily Loan. Title insurance was obtained for all Multifamily Loans.
Substantially all of the mixed used properties securing Multifamily Loans are
properties with no less than approximately 90%, measured by square footage,
number of units and projected rent, being allocated to residential units.
THE REPRESENTATIVE AND THE ORIGINATORS
The Money Store Inc. acts as Servicer of the Loans. Except for certain
representations and warranties relating to the Loans and certain other matters,
The obligations of The Money Store Inc. with respect to the Loans are limited to
its contractual servicing obligations.
The Money Store Inc. is a New Jersey corporation and the parent company of
the Originators. The Money Store Inc. is headquartered in West Sacramento,
California and Union, New Jersey. On June 30, 1998, The Money Store Inc. became
a wholly-owned subsidiary of FUNB, a national banking association subsidiary of
First Union Corporation. First Union Corporation is also the ultimate parent of
First Union Capital Markets.
The Money Store Inc. is a financial services company engaged, through its
subsidiaries (including the Originators), in the business of originating,
purchasing, selling and servicing consumer and commercial loans of specified
types and offering related services. Loans originated by The Money Store Inc.
and its subsidiaries primarily consist of home equity loans, loans guaranteed in
part by the United States Small Business Administration and government
guaranteed student loans.
Although the Originators have no maximum dollar amount for home equity
loans, the actual maximum amount that the Originators will lend is determined by
an applicant's ability to repay the loan, the value of the borrower's equity in
the real estate and the ratio of such equity to the home's appraised value. For
home equity loans originated in 1994, 1995, 1996 and the first three months of
1997, the average loan size was approximately $52,000, $43,000, $40,000 and
$39,000, respectively.
In July 1993, the Originators introduced a revised program of originating
home equity loans with Combined Loan-to-Value Ratios exceeding 80%, which are
secured by first or second liens, generally possess lower debt-to-income ratios
and bear a higher rate of interest than home equity loans with lower Combined
Loan-to-Value Ratios. The "COMBINED LOAN-TO-VALUE RATIO" of a home equity loan
is the ratio, expressed as a percentage, determined by dividing (x) the sum of
the original principal balance of the home equity loan (less the amount, if any,
of the premium for credit life insurance) plus the then-current principal
balance of
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<PAGE> 13
the related first lien, if any, by (y) the value of the related mortgaged
property, based upon the appraisal or valuation made at the time of origination
of the home equity loan.
First Union Corporation is a North Carolina-based, bank holding company
registered under the Bank Holding Company Act of 1956, as amended, and the rules
and regulations promulgated thereunder. Through its full-service banking
offices, First Union Corporation provides a wide range of commercial and retail
banking services and trust services through its banking and non-banking
affiliates and various other financial services, including mortgage banking,
home equity lending, credit cards, leasing, investment banking, insurance and
securities brokerage services.
LEGAL PROCEEDINGS
Because the nature of the business of The Money Store Inc. involves the
collection of numerous accounts, the validity of liens and compliance with state
and federal lending laws, The Money Store Inc. is subject to claims and legal
actions in the ordinary course of its business. While it is impossible to
estimate with certainty the ultimate legal and financial liability with respect
to such claims and actions, The Money Store Inc. believes that the aggregate
amount of such liabilities will not result in monetary damage which would have a
material adverse effect on the financial condition of The Money Store Inc.
THE LOAN POOLS
GENERAL
The Loans that comprise Pool I and Pool II consist of the Home Equity
Loans. The Home Equity Loans consist of mortgages, deeds of trust or other
security instruments, and the related promissory notes secured by one- to
four-family residences (and, in the case of Pool I, certain five- and six-family
residences) and units in planned unit developments and units in condominium
developments. Each of the Home Equity Loans was originated and underwritten, or
purchased and re-underwritten, by one of the Originators, substantially in
accordance with the Originators' underwriting criteria described under "The
Single Family Loan Lending Program -- Underwriting Criteria" in Annex IV hereto.
However, with respect to some of the Pool I Home Equity Loans, based upon their
original principal balances, the Originators may not have independently verified
the income of the obligors on the related promissory notes (the "MORTGAGORS").
Home Equity Loans not originated by an Originator or Home Equity Loans having
original principal balances less than or equal to $15,000 may not be covered by
title insurance policies. Certain of the Home Equity Loans may contain
provisions requiring the Mortgagor to pay a penalty in connection with certain
prepayments. The Home Equity Loans are either "simple interest" loans or
"actuarial" loans. See "-- Payments on the Loans" below.
The Pool I Home Equity Loans bear interest at fixed rates and the Pool II
Home Equity Loans bear interest at adjustable rates. For each Pool II Home
Equity Loan, the related interest rate will change initially after the period
set forth in the related promissory note and periodically thereafter. Each date
on which the interest rate on a Pool II Home Equity Loan changes is referred to
as a "CHANGE DATE" for such Loan. The interest rate on many of the Pool II Home
Equity Loans adjusts on each applicable Change Date to equal the sum of (i) the
LIBOR Index and (ii) the number of basis points set forth in the related
promissory note, subject to rounding and to the effects of the Periodic Rate
Cap, the applicable Lifetime Cap and the applicable Lifetime Floor. The interest
rate on the remainder of the Pool II Home Equity Loans adjusts on each Change
Date to equal the sum of (i) the Treasury Index as published by the Federal
Reserve Board in the applicable Federal Reserve Board in the applicable Federal
Reserve Board Statistical Release No. H. 15, and (ii) the number of points set
forth in the related promissory note, subject to rounding and to the effects of
the Periodic Rate Cap, the applicable Lifetime Cap and the applicable Lifetime
Floor. The "PERIODIC RATE CAP" is the provision in the promissory note for each
Pool II Home Equity Loan which limits changes in the interest rate on each
Change Date. The "LIFETIME CAP" is the provision in the promissory note for each
Pool II Home Equity Loan, which limits the maximum interest rate over the life
of such Loan. The "LIFETIME FLOOR" is the provision in the promissory note for
each Pool II Home Equity Loan which limits the minimum interest rate over the
life of such Loan.
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<PAGE> 14
The Loans that comprise Pool III consist of the Multifamily Loans. The
Multifamily Loans consist of mortgages, deeds of trust or other security
instruments and the related promissory notes secured by five or more unit
residential or mixed-use residential and commercial properties. Each of the
Multifamily Loans was originated and underwritten, or purchased and
re-underwritten, by one of the Originators, substantially in accordance with the
Originators' underwriting criteria described under "Lending Programs -- The
Multifamily Lending Program" herein. Each Multifamily Loan contains provisions
requiring the Mortgagor to pay a penalty in connection with certain prepayments
made within three or five years, depending on the terms of such Multifamily
Loan, of its origination. The Multifamily Loans are "simple interest" loans. See
"--Payments on the Loans" below. The Multifamily Loans bear interest at fixed
interest rates.
The properties securing the Loans are referred to herein as the "MORTGAGED
PROPERTIES."
SELECTED LOAN DATA
The following table sets forth certain information concerning the Loans as
of , 1999:
<TABLE>
<S> <C>
POOL I
Number of Loans............................................. *
Aggregate Unpaid Principal Balance.......................... $ *
Weighted Average Maturity................................... *
Weighted Average Loan Interest Rate......................... *%
POOL II
Number of Loans............................................. *
Aggregate Unpaid Principal Balance.......................... $ *
Weighted Average Maturity................................... *
Weighted Average Loan Interest Rate......................... *%
POOL III
Number of Loans............................................. *
Aggregate Unpaid Principal Balance.......................... $ *
Weighted Average Maturity................................... *
Weighted Average Loan Interest Rate......................... *%
</TABLE>
- ---------------
* To be filed by amendment.
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<PAGE> 15
DELINQUENCIES, FORECLOSURES AND ACQUIRED MORTGAGE PROPERTIES
The following table sets forth certain information with respect to the
Loans as of , 1999 concerning delinquencies and foreclosures as well
as any REO Property:
POOL I
<TABLE>
<CAPTION>
DELINQUENCIES NUMBER OF LOANS LOAN BALANCES % OF AGGREGATE LOAN BALANCES
------------- --------------- ------------- ----------------------------
<S> <C> <C> <C>
30-59 days........................ * $* *
60-89 days........................ * * *
90 days and over.................. * * *
REO Property...................... * * *
Foreclosures...................... * * *
</TABLE>
POOL II
<TABLE>
<CAPTION>
DELINQUENCIES NUMBER OF LOANS LOAN BALANCES % OF AGGREGATE LOAN BALANCES
------------- --------------- ------------- ----------------------------
<S> <C> <C> <C>
30-59 days........................ * $* *
60-89 days........................ * * *
90 days and over.................. * * *
REO Property...................... * * *
Foreclosures...................... * * *
</TABLE>
POOL III
<TABLE>
<CAPTION>
DELINQUENCIES NUMBER OF LOANS LOAN BALANCES % OF AGGREGATE LOAN BALANCES
------------- --------------- ------------- ----------------------------
<S> <C> <C> <C>
30-59 days........................ * $* *
60-89 days........................ * * *
90 days and over.................. * * *
REO Property...................... * * *
Foreclosures...................... * * *
</TABLE>
- ---------------
* To be filed by amendment.
While the above delinquencies, foreclosures and REO Properties represent
the status of each Pool as of , 1999, there can be no assurance, and
no representation is made, that the delinquency, foreclosure and REO Property
experience with respect to the Loans subsequent to such date will be similar to
that reflected in the table above. The Servicer can neither quantify the impact
of any recent property value declines on the Loans nor predict whether, to what
extent or how long such declines may continue. In a period of such decline, the
rates of delinquencies, foreclosures and losses on the Loans could be higher
than those heretofore experienced in the mortgage lending industry in general.
In addition, adverse economic conditions (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. See "Description of the
Certificates -- The Distribution Amounts" herein for a discussion of the effect
to Certificateholders of delinquencies in payments on the Loans.
PAYMENTS ON THE LOANS
The Loans, other than those providing for a stated maturity of less than
the period of time of the corresponding amortization schedule, generally provide
for a schedule of payments which will be, if timely paid, sufficient to amortize
fully the principal balance of the related Loan on or before its maturity date.
Interest on the Loans accrues on either an "actuarial interest" method or a
"simple interest" method.
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<PAGE> 16
The actuarial interest method provides that interest is charged and
payments are due as of a scheduled day of each month which is fixed at the time
of origination. Scheduled monthly payments on such Loans received either earlier
or later (other than delinquent) than the scheduled due dates thereof will not
affect the amortization schedule or the relative application of such payments to
principal and interest. With respect to the Home Equity Loans in Pool II on each
Change Date, the Mortgagor's monthly payment is adjusted prospectively to fully
amortize such Home Equity Loans in Pool II at the then current interest rates
over its stated remaining term to maturity.
The simple interest method provides for the amortization of the amount of
each Loan over a series of equal monthly payments. However, unlike the monthly
payment under the actuarial interest method, each monthly payment consists of an
installment of interest which is calculated on the basis of the outstanding
principal balance at the stated interest rate and based upon the period elapsed
since the preceding payment of principal was made, using the method permitted by
applicable law. As payments are received under the loan, the amount received is
applied first to interest accrued to the date of payment and the balance, if
any, is applied to reduce the unpaid principal balance. Accordingly, if a
borrower pays a fixed monthly installment on such a loan before its scheduled
due date, the portion of the payment allocable to interest for the period since
the preceding payment was made will be less than it would have been had the
payment been made as scheduled, and the portion of the payment applied to reduce
the unpaid principal balance will be correspondingly greater. Conversely, if a
borrower pays a fixed monthly installment on the loan after its scheduled due
date, the portion of the payment allocable to interest for the period since the
preceding payment was made will be greater than it would be had the payment been
made as scheduled, and the portion of the payment applied to reduce the unpaid
principal balance will be correspondingly reduced. In addition, a late charge
may be imposed with respect to the past due amount.
The amount of interest payable to the holders of the Class A Certificates
on each Remittance Date (as defined below) is not affected by interest accruing
on the Loans based on the simple interest method. On each Remittance Date, the
holders of the Class A Certificates are entitled to receive 30 days' interest
(or, with respect to the Adjustable Rate and Auction Rate Certificates, the
actual number of days from the last Remittance Date to but not including the
upcoming Remittance Date) at the applicable Pass-Through Rate on the outstanding
principal balances of the applicable Class of Certificates. The Servicer is
required to remit to the Trustee the excess, if any, of the amount of interest
the holders of the Class A Certificates are entitled to receive on each
Remittance Date over the interest collected on the Loans during the calendar
month immediately preceding the month of such Remittance Date (the "DUE PERIOD")
and available to pay interest on the Class A Certificates. See "The Pooling and
Servicing Agreement -- Monthly Advances and Compensating Interest" herein.
Similarly, the compensation payable to the Servicer will not be affected by
interest accruing on the Loans based on the simple interest method. The Servicer
is entitled to receive a fee based on the principal balance of the Loans, not
upon the portion of a monthly payment allocable to interest. See "The Pooling
and Servicing Agreement -- Servicing and Other Compensation and Payment of
Expenses" herein.
If a payment is received on a Loan before its due date, more of such
payment will be used on the related Remittance Date to pay principal on the
Class A Certificates than if such payment was received on such due date.
Conversely, if a payment is received on a Loan after its scheduled due date,
less of such payment will be used on the related Remittance Date to pay
principal on the Class A Certificates than if such payment was received on its
due date. This will not affect the total amount of principal to be received by
the Class A Certificateholders over the life of the transaction, but it may
affect the weighted average lives (as defined under "Maturity, Prepayment and
Yield Considerations" herein) of the Class A Certificates.
A "REMITTANCE DATE" is the 15th day of each month or, if the 15th day is
not a Business Day, the first Business Day thereafter; provided, however, that
in no event shall the Remittance Date occur less than three Business Days
following the Determination Date.
A "BUSINESS DAY" is any day other than (i) a Saturday or Sunday or (ii) a
day on which banking institutions in the States of New York or New Jersey are
authorized or obligated by law or executive order to be closed.
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<PAGE> 17
The "DETERMINATION DATE" is the day of each month which is the later of (i)
the third Business Day prior to the 15th day of such month and (ii) the seventh
Business Day of such month.
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS
The effective yield on the Certificates (other than the Adjustable Rate and
Auction Rate Certificates) will be slightly lower than the yield otherwise
produced by the applicable Pass-Through Rate because, while interest will accrue
on such Certificates from the first day of each month, the distribution of such
interest will not be made until the 15th day (or if such 15th day is not a
business day, the next succeeding business day) of the month following the month
of accrual. For the Adjustable Rate and Auction Rate Certificates, interest
accrues generally from the 15th day of each month until the 14th day of the next
month.
In general, because the Pool I and Pool III Loans bear fixed interest
rates, when the level of prevailing interest rates for similar loans
significantly declines, the rate of prepayment of such Loans is likely to
increase, although the prepayment rate is influenced by a number of other
factors, including general economic conditions and homeowner mobility.
Similarly, when the level of interest rates for similar loans significantly
rises, the rate of prepayment of such Loans may decrease. No prediction can be
made as to the prepayment rate that the Loans will actually experience.
All of the Pool II Loans bear interest at adjustable rates. However, the
Pool II Loans still may be subject to increased principal prepayments in a low
interest rate environment. For example, if prevailing interest rates were to
fall, Mortgagors with Pool II Loans may be inclined to refinance their Pool II
Loans with a fixed interest rate loan to "lock in" a lower interest rate. The
existence of the Periodic Rate Cap, the Lifetime Cap and the Lifetime Floor also
may affect the likelihood of prepayments resulting from refinancings. In
addition, the delinquency and loss experience on the Pool II Loans may differ
from that on the Loans in the other Pools because the amount of the monthly
payments on the Pool II Loans are subject to adjustment on each Change Date. If
such different experience were to occur, the prepayment experience on the
Adjustable Rate and Auction Rate Certificates may differ from that on the other
Classes of Certificates.
Generally, junior priority mortgage loans have smaller average principal
balances than first priority mortgage loans and are not viewed by borrowers as
permanent financing. Accordingly, the Loans included in the Trust that are
secured by junior liens may experience a higher rate of prepayment than
traditional first priority mortgage loans. In addition, any future limitations
on the right of borrowers to deduct interest payments on mortgage loans for
Federal income tax purposes may result in a higher rate of prepayment of such
junior Loans. The obligation of the Servicer to enforce the "due-on-sale"
provisions of the Loans may also increase prepayments. The prepayment experience
of the Pools may be affected by a wide variety of factors, including general and
local economic conditions, mortgage market interest rates, the availability of
alternative financing and homeowner mobility. The Money Store Inc. is unaware of
any reliable studies that would project the prepayment risks associated with the
Loans based upon current interest rates and economic conditions and the
historical prepayment experience of The Money Store Inc.'s portfolio of home
equity loans.
Unscheduled payments, delinquencies, repurchases of defective Loans and
defaults on the Loans will affect the amount of funds available to make
distributions on each Remittance Date. In addition, the Servicer may, at its
option, and in the absence of the exercise thereof by the Servicer, MBIA may, at
its option, on any Remittance Date from and after the Remittance Date on which
the aggregate principal balances of the Loans are less then $97,000,000 (such
date, the "OPTIONAL SERVICER TERMINATION DATE"), purchase from the Trust all of
the Loans and any related REO Properties at the prices set forth in the Pooling
and Servicing Agreement for all Pools (see "The Pooling and Servicing
Agreement -- Termination; Purchase of the Loans" herein). MBIA may, at its
option, similarly purchase all the Loans and REO Properties on any Remittance
Date, occurring on or after the Cross-Over Date, on which Remittance Date the
aggregate principal balances (determined as of the Cut-Off Date) of Loans that
have become Liquidated Loans is equal to or exceeds $242,500,000. The Pooling
and Servicing Agreement defines the "CROSS-OVER DATE" as the date on which the
Maximum Subordinated Amount (as defined under "Description of the
Certificates -- Cross-Support Provisions and Spread Amount" herein) is reduced
to zero. See "The MBIA Policies and MBIA" herein.
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<PAGE> 18
If prepayments of principal are received on the Loans at a rate greater
than that assumed by an investor (including the receipt of certain accelerated
payments of principal referred to herein as "SUBORDINATION INCREASE AMOUNTS"
(see "Description of the Certificates -- Cross-Support Provisions and Spread
Amount" herein)) the yield will be increased on Class A Certificates purchased
by such investor at a price less than par (i.e., the principal balance of a
Class A Certificate at the time of its purchase). Similarly, if prepayments of
principal are received on the Loans at a rate greater than that assumed by an
investor, the yield will be decreased on Class A Certificates purchased at a
price greater than par. The effect on an investor's yield of principal
prepayments on the Loans occurring at a rate that is faster (or slower) than the
rate anticipated by the investor in the period immediately following the
issuance of the applicable Class of Class A Certificates may not be offset by a
subsequent like reduction (or increase) in the rate of principal payments. The
weighted average lives of the Class A Certificates will also be affected by the
amount and timing of delinquencies and defaults on the Loans in the related Pool
and the liquidations of defaulted Loans, respectively. Delinquencies and
defaults will generally slow the rate of payment of principal to the Class A
Certificateholders since (i) neither the Servicer nor MBIA is obligated to
advance for delinquent payments of principal and (ii) certain payments due under
the MBIA Policies referred to herein as "INSURED PAYMENTS" (see "The MBIA
Policies and MBIA" herein) with respect to principal generally are not required
until the occurrence of a Subordination Deficit (as defined under "Description
of the Certificates -- Cross-Support Provisions and Spread Amount" herein).
However, this effect will be offset to the extent that lump sum recoveries on
defaulted Loans and foreclosed Mortgaged Properties result in principal payments
on the Loans faster than otherwise scheduled.
As described herein, certain Classes of Certificates in a Pool will be
entitled to receive payments of principal prior to other Classes of Certificates
in the related Pool. As a result, the Classes of Certificates in a Pool
receiving payments of principal first will immediately be affected by the
prepayment rate on the Loans in the related Pool. However, the timing of
commencement of principal distributions and the weighted average lives of each
Class of Class A Certificates will be affected by the prepayment rate
experienced both before and after the commencement of principal distributions on
any such Class.
The Loans are either (i) "simple interest" or (ii) "actuarial method"
loans. If a payment is received on a Loan which is a "simple interest" loan
later than scheduled, a smaller portion of such payment will be applied to
principal and a greater portion will be applied to interest than would have been
the case had the payment been received on the scheduled due date, resulting in
such Loan having a longer weighted average life than would have been the case
had the payment been made as scheduled. Conversely, if a payment on a Loan is
received earlier than scheduled, more of such payment will be applied to
principal and less to interest than would have been the case had the payment
been received on its scheduled due date, resulting in such Loan having a shorter
weighted average life than would have been the case had the payment been made as
scheduled.
In the event that less than 30 days' interest is collected on a Loan during
a Due Period, whether due to prepayment in full or a principal payment that is
in excess of five times the scheduled monthly payment due, but which was not
intended by the Mortgagor to satisfy the Loan in full or to cure a delinquency
(a "CURTAILMENT"), the Servicer is obligated to pay certain amounts referred to
herein as "COMPENSATING INTEREST" (see "The Pooling and Servicing
Agreement -- Monthly Advances and Compensating Interest" herein) with respect
thereto, but only to the extent of the aggregate servicing fee and contingency
fee to which the Servicer is entitled under the Pooling and Servicing Agreement
(see "The Pooling and Servicing Agreement -- Servicing and Other Compensation
and Payment of Expenses" herein) for the related Remittance Date. To the extent
such shortfalls exceed the amount of such Compensating Interest that the
Servicer is obligated to pay, and are not otherwise covered by certain excess
interest referred to herein as "EXCESS SPREAD" (see "Description of the
Certificates -- Cross-Support Provisions and Spread Amount" herein) or Insured
Payments, the yield on the Certificates of the related Pool will be adversely
affected. Any shortfall in collections of interest resulting from the early
receipt of a scheduled payment will not be covered by such compensating
interest, but will be covered by Monthly Advances (as defined under "The Pooling
and Servicing Agreement -- Monthly Advances and Compensating Interest" herein).
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<PAGE> 19
The Pass-Through Rate on the Adjustable Rate Certificates will be adjusted
by reference to changes in the level of one-month LIBOR and the Pass-Through
Rate on the Auction Rate Certificates will be adjusted pursuant to the Auction
Procedures described in as Annex I hereto, in each case subject to the effects
of the applicable Net Funds Cap. Although the interest rates on the Pool II
Loans also are subject to adjustment, with respect to most of the Pool II Loans,
these interest rates adjust less frequently than the Pass-Through Rate on the
Adjustable Rate and Auction Rate Certificates and adjust by reference to either
the London Interbank Offered Rate, which will be calculated differently for the
Pool II Loans and the Adjustable Rate Certificates, or the Treasury Index, which
will not necessarily correspond to changes in one-month LIBOR or the
Pass-Through Rates determined pursuant to the Auction Procedures. Changes in
one-month LIBOR or changes in the LIBOR Index or the Treasury Index may not
correlate to each other or to changes in prevailing interest rates. It is
possible that an increased level of one-month LIBOR could occur simultaneously
with a lower level of prevailing interest rates, which would be expected to
result in faster prepayments, thereby reducing the weighted average life of the
Adjustable Rate and Auction Rate Certificates.
Certain of the Pool II Loans were originated with initial interest rates
that were based on competitive conditions and did not equal the sum of the LIBOR
Index or Treasury Index, as applicable, and the number of basis points set forth
in the related promissory note. As a result, the interest rates on such Pool II
Loans are more likely to adjust on their first, and possibly subsequent, Change
Dates, subject to the effects of the Periodic Rate Cap and the Lifetime Cap.
Because the Pass-Through Rate on the Adjustable Rate and Auction Rate
Certificates is limited by the applicable Net Funds Cap, on each Remittance
Date, limits on changes in the interest rates of the Pool II Loans may limit
changes in the Pass-Through Rate on the Adjustable Rate and Auction Rate
Certificates.
The Net Funds Cap on a Remittance Date will depend, in part, on the
weighted average of the then-current interest rates on the Pool II Loans. If the
Pool II Loans bearing higher interest rates were to prepay, the weighted average
interest rate of the Pool II Loans, and consequently the Net Funds Cap, would be
lower than otherwise would be the case.
"WEIGHTED AVERAGE LIFE" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average lives of the
Class A Certificates will be influenced by the priorities established in the
Pooling and Servicing Agreement, and by the rate at which principal payments on
the Loans in the related Pool are paid, which may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
principal prepayments in full in advance of the final scheduled due date
("PRINCIPAL PREPAYMENTS"), Curtailments and liquidations due to default).
Prepayments on mortgage loans are commonly measured relative to a prepayment
standard or model.
DESCRIPTION OF THE CERTIFICATES
The Certificates were issued pursuant to the Pooling and Servicing
Agreement, a copy of which is included as an exhibit to the Registration
Statement of which this Prospectus forms a part. The following summaries
describe material provisions of the Certificates and the Pooling and Servicing
Agreement, but do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all of the provisions of the
Pooling and Servicing Agreement.
GENERAL
The Class A-3, Class A-4, Class A-5, Class A-6, Class A-7 and Class A-8
Certificates generally represent, and the Class A-1 and Class A-2 Certificates
generally represented, the right to receive payments distributable on or with
respect to the Home Equity Loans in Pool I. The Adjustable Rate and Auction Rate
Certificates generally represent the right to receive payments distributable on
or with respect to the Home Equity Loans in Pool II. The Class A-11 Certificates
generally represent the right to receive payments distributable on or with
respect to the Multifamily Loans in Pool III. The Trust also issued the Class X
and the Class R Certificates. However, as a result of the cross-support
provisions described herein, the holders of each Class of Certificates may
receive cash as credit support from any Loan in any Pool. See "-- Cross
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Support Provisions and Spread Amount" below. Also, amounts, if any, on deposit
in the Spread Account (as defined under "-- Spread Account" below) will be
available to cover shortfalls in amounts otherwise distributable to
Certificateholders regardless of Pool. In addition, the Trust issued the Class
A-1 and the Class A-2 Certificates, both of which Classes of Certificates have
heretofore been paid in full. THIS PROSPECTUS RELATES ONLY TO THE OFFERED
CERTIFICATES.
The Certificates do not represent obligations of FUNB, First Union Capital
Markets, First Union Corporation, the Representative, the Originators or any of
their respective affiliates. The Class A Certificates (other than the Auction
Rate Certificates) were issued in book-entry form in minimum denominations of
$1,000 original principal amount and integral multiples of $1,000 in excess
thereof and the Auction Rate Certificates were issued in book-entry form in
minimum denominations of $25,000 original principal amount and integral
multiples of $25,000 in excess thereof, except that one certificate of each
Class of Class A Certificates may have been issued in a different denomination
and, if so issued, is held in physical form.
Definitive Class A Certificates, if issued, will be transferable and
exchangeable at the corporate trust office of the Trustee or, at the election of
the Trustee, at the office of a Certificate Registrar appointed by the Trustee.
No service charge will be made for any registration of exchange or transfer, but
the Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge.
The assets of the Trust consist of (i) the Home Equity Loans and
Multifamily Loans that from time to time are subject to the Pooling and
Servicing Agreement; (ii) amounts that from time to time are required by the
Pooling and Servicing Agreement (a) to be deposited in the Certificate Account
(as defined under "The Pooling and Servicing Agreement -- Payments on the Loans"
herein), the Principal and Interest Account (as defined under "The Pooling and
Servicing Agreement -- Payments on the Loans" herein), the expense accounts that
the Trustee is required to establish and maintain under the Pooling and
Servicing Agreement, the insurance accounts that the Trustee is required to
establish and maintain for the benefit of MBIA under the Pooling and Servicing
Agreement into which the Trustee deposits certain amounts, including premiums
due MBIA (the "INSURANCE ACCOUNT"), and the Spread Account, (as defined under
"-- Spread Account" below), or (b) to be invested in instruments designated as
"Permitted Instruments" in the Pooling and Servicing Agreement; (iii) all rights
under any insurance policy covering a Loan or the related Mortgaged Property;
(iv) property and any proceeds thereof acquired by foreclosure of a Loan, deed
in lieu of foreclosure or a comparable conversion; and (v) the MBIA Policies and
any proceeds thereof.
DISTRIBUTIONS ON THE CLASS A CERTIFICATES
On each Remittance Date until the Class Principal Balance (as defined
below) of each Class of Class A Certificates has been reduced to zero, the
Trustee or any paying agent appointed by the Trustee under the Pooling and
Servicing Agreement, is required to distribute to the persons in whose name a
Class A Certificate (other than the Auction Rate Certificates) is registered at
the close of business on the last day of the month immediately preceding the
month of the related Remittance Date (the "RECORD DATE"), such holder's
Percentage Interest (as defined below) multiplied by that portion of the
Distribution Amount (as defined under "-- The Distribution Amounts" below) for
the applicable Pool allocable to the respective Class of Class A Certificates
for such Remittance Date. For so long as the Class A Certificates are in
book-entry form with The Depository Trust Company ("DTC"), the only "Holder" of
the Class A Certificates will be Cede & Co. ("CEDE"). See "-- Book-Entry
Certificates" below.
With respect to the Auction Rate Certificates, on each Remittance Date, the
Trustee or any paying agent appointed under the Pooling and Servicing Agreement
is required to distribute to the persons in whose name an Auction Rate
Certificate is registered at the close of business on the related Record Date,
such holder's Percentage Interest multiplied by that portion of the Current
Interest Requirement (as defined under "-- The Distribution Amounts" below)
allocable to the respective Class of Auction Rate Certificates for such
Remittance Date. The remainder of the Distribution Amount being distributed to
such Class of Auction Rate Certificates on such Remittance Date will be
allocated as principal to the specific Certificates of such Class selected no
later than 5 business days prior to the related Remittance Date by lot or such
other manner as may
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be determined, which allocations will be made only in amounts equal to $25,000
and integral multiplies of $25,000 in excess thereof.
The "CLASS PRINCIPAL BALANCE" of a Class of Certificates as of any date of
determination is the original principal balance of such Class of Certificates,
less (i) the sum of all amounts (including the principal portion of any related
Insured Payments) previously distributed to the Trustee as principal on the
applicable Class of Certificates, and (ii) any actual loss of principal suffered
by the related Class A Certificateholders due to the failure of MBIA to perform
its obligations under the related MBIA Policy. Any such loss with respect to a
Loan will be allocated among all then outstanding Classes of Class A
Certificates of the related Pool pro rata based upon the then outstanding Class
Principal Balances of such Classes.
A Class A Certificateholder's "PERCENTAGE INTEREST" is that fraction,
expressed as a percentage, the numerator of which is the original denomination
of such Class A Certificateholder's Class A Certificate and the denominator of
which is the original aggregate Class Principal Balance of the respective Class
of Class A Certificate.
THE DISTRIBUTION AMOUNTS
On any Remittance Date, the "DISTRIBUTION AMOUNT" for each Pool equals the
sum of (i) the Current Interest Requirement (as defined below) for such Pool,
(ii) the Principal Distribution Amount (as defined below) for such Pool, (iii)
the Carry-Forward Amount (as defined below) for such Pool and (iv) any amount
received by the Trustee from the Servicer that constitutes a Monthly Advance (as
defined under "The Pooling and Servicing Agreement -- Monthly Advances and
Compensating Interest" herein) with respect to a Loan in such Pool and that is
recoverable and sought to be recovered as a voidable preference by a trustee in
bankruptcy pursuant to the United States Bankruptcy Code (11 U.S.C.) in
accordance with a final, nonappealable order of a court having competent
jurisdiction. The Distribution Amount does not include any Certificateholders'
Interest Carryover.
On any Remittance Date, the "CURRENT INTEREST REQUIREMENT" for a Class of
Certificates equals 30 days' interest (or, in the case of the Adjustable Rate
and Auction Rate Certificates, the actual number of days since the preceding
Remittance Date) at the related Pass-Through Rate on the respective Class
Principal Balance immediately prior to the related Remittance Date (calculated
on the basis of a 360-day year, consisting of twelve 30-day months or, in the
case of the Adjustable Rate and Auction Rate Certificates, the actual number of
days elapsed since interest was last paid). On any Remittance Date, (i) the
"POOL I CURRENT INTEREST REQUIREMENT" equals the sum of the Class A-1 through
Class A-8 Current Interest Requirements, (ii) the "POOL II CURRENT INTEREST
REQUIREMENT" equals the Class A-9 and Class A-10 Current Interest Requirement
and (iii) the "POOL III CURRENT INTEREST REQUIREMENT" equals the Class A-11
Current Interest Requirement.
For each Remittance Date, the Class A-9 Pass-Through Rate equals a per
annum rate equal to the sum of LIBOR plus 0.10%, subject to the applicable Net
Funds Cap for the related Pool (but in no event exceeding 14% per annum).
For each Remittance Date, the Class A-10 Certificates bear interest based
upon the Auction Procedures described in Annex I hereto, subject to the Net
Funds Cap (but in no event exceeding 14% per annum).
If on any Remittance Date the Pass-Through Rate for the Adjustable Rate or
Auction Rate Certificates is based upon the Net Funds Cap, the excess of (i) the
amount of interest such Class of Certificates would be entitled to receive on
such Remittance Date had interest been calculated based on LIBOR plus the
applicable margin or the Auction Rate, as the case may be (but in no event
exceeding 14% per annum), over (ii) the amount of interest such Class receives
on such Remittance Date at the Net Funds Cap, together with the unpaid portion
of any such excess from prior Remittance Dates (and interest accrued thereon at
the then applicable Pass-Through Rate, without giving effect to the Net Funds
Cap but in no event exceeding 14% per annum) is referred to herein as the
"CERTIFICATEHOLDERS' INTEREST CARRYOVER." Any Certificateholders' Interest
Carryover will be paid on future Remittance Dates only as set forth herein under
"The Pooling and Servicing Agreement -- Flow of Funds" herein. No
Certificateholders' Interest Carryover will be paid to a Class of Certificates
after its Class Principal Balance is reduced to zero. The ratings of the
Adjustable Rate or Auction
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<PAGE> 22
Rate Certificates do not address the likelihood of the payment of the amount of
any Certificateholder's Interest Carryover. The MBIA Policies do not insure
payment of Certificateholder's Interest Carryover.
As to any Remittance Date, the "NET FUNDS CAP" is a percentage equal to the
difference between (A) the weighted average interest rate on the Pool II Loans
and (B) the sum of (i) the percentages used in determining the servicing fee and
contingency fee to which the Servicer is entitled under the Pooling and
Servicing Agreement (see "The Pooling and Servicing Agreement -- Servicing and
Other Compensation Payment of Expenses" herein), the fee due the Trustee and the
premium due MBIA, (ii) .50% and (iii) with respect to the Auction Rate
Certificates, the percentage used in determining the fees due the Auction Agent
and the Broker-Dealer (as defined in the Auction Procedures described in Annex I
hereto).
The "CARRY-FORWARD AMOUNT" for each Pool with respect to any Remittance
Date equals the sum of (i) the amount, if any, by which (x) the Distribution
Amount for such Pool as of the immediately preceding Remittance Date exceeded
(y) the amount of the actual distribution to the holders of the Certificates of
such Pool made on such Remittance Date (less the amount of Insured Payments, if
any, on such date), and (ii) interest on the amount, if any, described in clause
(i) at one-twelfth the applicable Pass-Through Rate for the related Class of
Certificates.
The Carry-Forward Amounts are primarily intended to measure the amount of
money for which MBIA is entitled to reimbursement. As set forth herein, MBIA is
subrogated to the rights of Class A Certificateholders to receive payments under
the Class A Certificates to the extent of any Insured Payments made under the
applicable MBIA Policy. See "The MBIA Policies and MBIA" herein. This right of
subrogation, however, is subordinate to the right of the Class A
Certificateholders to receive the entire Distribution Amount on each Remittance
Date.
On any Remittance Date, the "PRINCIPAL DISTRIBUTION AMOUNT" for each Pool
of Certificates equals the excess of:
(A) the sum, without duplication, of the following:
(i) each payment of principal received by the Servicer or any
sub-servicer appointed under the Pooling and Servicing Agreement
(exclusive of Curtailments, Principal Prepayments and amounts described
in clause (iii) hereof) during the related Due Period with respect to
the Loans of the related Pool,
(ii) all Curtailments and all Principal Prepayments received by the
Servicer or any sub-servicer appointed under the Pooling and Servicing
Agreement during the related Due Period with respect to the Loans of the
related Pool,
(iii) the principal portion of all amounts paid by any insurer
pursuant to any insurance policy covering a Loan, Mortgaged Property or
REO Property ("INSURANCE PROCEEDS"), proceeds received by the Servicer
in connection with condemnation, eminent domain or a release of lien
("RELEASED MORTGAGED PROPERTY PROCEEDS") and amounts received in
connection with the liquidation of defaulted Loans ("LIQUIDATION
PROCEEDS") net of certain reimbursements to the Servicer and amounts
required by law to be released to the related Mortgagor (the "NET
LIQUIDATION PROCEEDS") received by the Servicer or any subservicer
appointed under the Pooling and Servicing Agreement during the related
Due Period with respect to the Loans of the related Pool,
(iv) that portion of the purchase price for any Loan of the related
Pool repurchased pursuant to the Pooling and Servicing Agreement which
represents principal and any Substitution Adjustments (as defined
below), in either case to the extent received by the Trustee as of the
related Determination Date,
(v) any proceeds representing principal received by the Trustee in
connection with the liquidation of a Pool or the termination of the
Trust,
(vi) the amount of any Subordination Deficit (as defined under
"-- Cross-Support Provisions and Spread Amount" below) with respect to a
Pool for such Remittance Date, and
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(vii) the amount of any Subordination Increase Amount (as defined
under "-- Cross-Support Provisions and Spread Amount" below) with
respect to a Pool for such Remittance Date, OVER
(B) the amount of any Subordination Reduction Amount (as defined under
"-- Cross-Support Provisions and Spread Amount" below) with respect to a
Pool for such Remittance Date.
In the event any amounts referenced in clause (iv) of the definition of
Distribution Amount or clause (A)(iv) of the definition of Principal
Distribution Amount are covered by Insured Payments or any portion thereof,
payment of such amounts will be disbursed to the trustee in bankruptcy named in
the final order of the court exercising jurisdiction and not to any Class A
Certificateholder directly unless such Class A Certificateholder has returned
principal or interest paid on a Class A Certificate to such trustee in
bankruptcy, in which case such payment will be disbursed to such Class A
Certificateholder.
"SUBSTITUTION ADJUSTMENT" means with respect to any Loan removed from the
Trust and replaced with a qualified substitute loan as provided in the Pooling
and Servicing Agreement, the excess of (i) the outstanding principal balance of
such removed Loan over (ii) the outstanding principal balance of such qualified
substitute loan as of the date of substitution.
The definitions of the Principal Distribution Amount for each Pool are
determined with regard to actual amounts received on the Loans and without any
regard to a schedule for the recovery of principal.
Pursuant to the MBIA Policies, MBIA has agreed to make Insured Payments on
each Remittance Date. See "The MBIA Policies and MBIA." MBIA DOES NOT INSURE
PAYMENT OF CERTIFICATEHOLDERS' INTEREST CARRYOVER.
The Pooling and Servicing Agreement provides that the Trustee or any paying
agent appointed under the Pooling and Servicing Agreement will (i) receive as
attorney-in-fact of each holder of the Class A Certificates any Insured Payment
from MBIA and (ii) disburse such payment pursuant to the Pooling and Servicing
Agreement. The Pooling and Servicing Agreement provides that to the extent MBIA
makes Insured Payments, either directly or indirectly (as by paying through the
Trustee), to the holders of the Class A Certificates, MBIA will be subrogated to
the rights of such holders with respect to such Insured Payments, will be
deemed, to the extent of the payments so made, to be a registered holder of
Class A Certificates and will receive reimbursement for such Insured Payments as
provided in the Pooling and Servicing Agreement, but only from the sources
(other than Insured Payments) and in the manner provided in the Pooling and
Servicing Agreement.
Each holder of a Class A Certificate is required by the Pooling and
Servicing Agreement to notify the Trustee promptly upon the receipt of a court
order to the effect that amounts previously received by such Class A
Certificateholder and described in clause (A)(iv) of the definition of Principal
Distribution Amount or clause (iv) of the definition of Distribution Amount
constitute voidable preferences and to provide a copy of such order with such
notice.
As set forth above, clause (A)(i) of the definition of Principal
Distribution Amount for each Pool includes only payments of principal actually
received by the Servicer or any sub-servicer appointed under the Pooling and
Servicing Agreement. Neither the Servicer nor MBIA is required to advance any
delinquent payments of principal. Accordingly, the Certificateholders will not
receive delinquent payments of principal until such time as the delinquency is
cured or, if such delinquency is not cured, following the time such Loan becomes
a Liquidated Loan.
CROSS-SUPPORT PROVISIONS AND SPREAD AMOUNT
As a result of the cross-support provisions described below, on each
Remittance Date the "EXCESS SPREAD" for each Pool of Loans (i.e., an amount
generally equal to the interest due on the Loans remaining after each Class of
Certificates in the related Pool has been allocated its interest for such
Remittance Date and certain expenses of the Trust have been paid) and certain
other amounts (collectively, the "TOTAL MONTHLY EXCESS CASHFLOW") will be
available to fund any shortfalls in amounts required to be distributed to
Certificates of the related Pool and for Certificates of any other Pool. Any
remaining Total Monthly Excess Cashflow, net
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of certain amounts used to reimburse MBIA, will be applied in the following
order of priority on such Remittance Date:
(i) first, to make accelerated payments of principal to the Class A
Certificates of the related Pool until the Subordinated Amount (as defined
below) of such Pool equals its Specified Subordinated Amount (as defined
below);
(ii) second, to make accelerated payments of principal to the Class A
Certificates of the other Pools until the Subordinated Amount of each such
Pool equals its related Specified Subordinated Amount (the amount of Excess
Spread applied from one Pool to make accelerated payments of principal on
another Pool is the "SUBORDINATION INCREASE AMOUNT" for such latter Pool);
(iii) third, to make deposits into the Spread Account (as defined
under "-- The Spread Account" below) until the amount therein is at its
required level; and
(iv) fourth, to reimburse the Servicer for certain amounts owing to
it, to pay the holders of the Adjustable Rate and Auction Rate Certificates
any Certificateholders' Interest Carryover owing for such Remittance Date
and all prior Remittance Dates (but only with respect to collections
relating to Pool II Home Equity Loans) and to pay any remainder to the
holders of the Class X Certificates and Class R Certificates as specified
in the Pooling and Servicing Agreement.
Certain excess interest otherwise payable to the holders of the Class X
Certificates and Class R Certificates with respect to the Loans will, instead,
be deposited into the Spread Account.
The acceleration feature described above is intended to create, with
respect to each Pool of Loans, an amount (the "SPREAD AMOUNT"), resulting from,
and generally equal to, the excess of the aggregate principal balances of the
Loans of the related Pool, over the principal balances of the Certificates of
the related Pool. Applying Excess Spread to payment of principal on the Class A
Certificates has the effect of accelerating the amortization of the Class A
Certificates relative to the amortization of the Loans. As a result of the
foregoing, the holders of each Class of Class A Certificates may receive cash as
credit support from any Loan in any Pool.
For any Remittance Date and for each Pool, the difference, if any, between
(x) the aggregate principal balances of the Loans of the related Pool as of the
close of business on the last day of the related Due Period and (y) the
aggregate principal balances of the Certificates of the related Pool after
making all distributions on such Remittance Date is the "SUBORDINATED AMOUNT"
with respect to such Pool as of such Remittance Date.
Pursuant to the Pooling and Servicing Agreement and an insurance agreement
relating to the Certificates among MBIA, The Money Store Inc., the Originators
and the Trustee, Excess Spread will be applied as accelerated payments of
principal on the Class A Certificates until the Subordinated Amount for each
Pool has increased to the level required by the Pooling and Servicing Agreement.
The required level of the Subordinated Amount with respect to a Pool of Loans
and Remittance Date is the "SPECIFIED SUBORDINATED AMOUNT" with respect to such
Pool of Loans and Remittance Date. The Pooling and Servicing Agreement generally
provides that the Specified Subordinated Amount may, over time, decrease, or
increase, subject to certain floors, caps and triggers. Cash up to the amount of
any such increase may be deposited in the Spread Account.
The Pooling and Servicing Agreement also provides that, except in limited
circumstances, if the aggregate amount of Excess Spread applied to payments of
principal on the Certificates exceeds the amount specified therein (the "MAXIMUM
SUBORDINATED AMOUNT"), no further Excess Spread will be applied to payment of
principal on the Certificates and the Specified Subordinated Amount will
thereafter be zero.
If with respect to any Pool of Loans and any Remittance Date, the
Subordinated Amount exceeds the related Specified Subordinated Amount (the
amount of such excess being referred to as the "EXCESS SUBORDINATED AMOUNT" with
respect to such Pool of Loans and Remittance Date), then any amounts relating to
principal which would otherwise be distributed to the Class A Certificates of
the related Pool on such Remittance Date will instead be distributed to
Certificates of other Pools in an amount up to such Excess Subordinated Amount.
The amount of principal received on a Pool of Loans and transferred to the other
Pools
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pursuant to this provision is referred to as the "SUBORDINATION REDUCTION
AMOUNT" with respect to the Pool from which such amounts are being transferred.
The Subordinated Amount for a Pool constitutes the first level of credit
support for the related Certificates. If any Loan becomes a Liquidated Loan, the
Net Liquidation Proceeds related thereto and allocated to principal may be less
than the principal balance of the related Loan. The amount of any such
insufficiency is an "UNRECOVERED PORTION." The occurrence of an Unrecovered
Portion will reduce the Subordinated Amount with respect to the related Pool of
Loans. However, Certificateholders of the related Pool will be entitled to
receive Excess Spread, either from the related Pool of Loans or the other Pools,
in an amount equal to the Unrecovered Portion, subject to the limits described
above. Therefore, if sufficient
Excess Spread is available (either on the current Remittance Date or on
future Remittance Dates), Certificateholders will not realize a loss with
respect to an Unrecovered Portion.
If insufficient Excess Spread is available to pay Unrecovered Portions, the
related Pool may experience a Subordination Deficit. The Pooling and Servicing
Agreement defines a "Subordination Deficit" with respect to a Pool of Loans and
Remittance Date to be the amount, if any, by which (x)the Class Principal
Balances of the Class A Certificates of the related Pool, after taking into
account all distributions to be made on such Remittance Date (other than amounts
payable with respect to principal under the applicable MBIA Policy) exceeds
(y)the aggregate principal balances of the related Pool of Loans as of the close
of business on the last day of the prior Due Period. The Trustee is required to
make a claim for an Insured Payment under the related MBIA Policy with respect
to any Remittance Date as to which the Trustee has determined that a
Subordination Deficit will occur for the purpose of applying the proceeds of
such Insured Payment as a payment of principal to the Certificateholders of the
related Pool on such Remittance Date. The MBIA Policies are thus similar to the
provisions described above insofar as the MBIA Policies guarantee ultimate,
rather than current, payment of the amounts of any Unrecovered Portions.
Investors in the Class A Certificates should realize that, under extreme
loss or delinquency scenarios applicable to the related Pool of Loans, so long
as a Subordination Deficit has not resulted, they may temporarily receive no
distributions of principal.
SPREAD ACCOUNT
The "SPREAD ACCOUNT" is an account established and maintained with the
Trustee under the Pooling and Servicing Agreement. The Pooling and Servicing
Agreement provides for an initial cash deposit into the Spread Account and that
the required level of the Spread Amount with respect to each Pool of Loans may
be increased. In such event, cash up to the amount of such increase may be
deposited into the Spread Account. Amounts, if any, on deposit in the Spread
Account will be available to fund any Insured Payments otherwise required to be
made on a Remittance Date with respect to the Class A Certificates, without
distinction as to the Pool, and, in certain circumstances, to make accelerated
payments of principal on the Class A Certificates. The Pooling and Servicing
Agreement also provides that certain excess interest otherwise payable to the
holders of the Class X Certificates and Class R Certificates with respect to the
Loans will, instead, be deposited into the Spread Account.
CREDIT ENHANCEMENT DOES NOT APPLY TO PREPAYMENT AND CERTAIN OTHER RISKS
In general, the protection afforded by the subordination provisions and by
the MBIA Policies is protection for credit risk and not for prepayment risk and
does not apply to the Certificateholders' Interest Carryover. The subordination
provisions may not be adjusted, nor may a claim be made under the MBIA Policies
to guarantee or insure that any particular rate of prepayment is experienced by
the Trust.
REPORTS TO CLASS A CERTIFICATEHOLDERS
On each Remittance Date, the Trustee is required to forward to each Class A
Certificateholder (which will be Cede, as registered holder of the Class A
Certificates and the nominee of DTC, unless and until Definitive Certificates
are issued), a statement which will set forth, among other things:
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<PAGE> 26
(a) the Distribution Amounts for each Pool on such Remittance Date, in
the aggregate and by component and listed separately for the portions
relating to each Class of Class A Certificates;
(b) the Principal Distribution Amounts for each Pool for such
Remittance Date, in the aggregate and listed separately for the portion
relating to each Class of Class A Certificates;
(c) the Current Interest Requirements for each Class of Class A
Certificates for such Remittance Date;
(d) the total amount of any Insured Payments included in the
Distribution Amount for each Pool on such Remittance Date, listed
separately for each Class of Class A Certificates;
(e) the Subordinated Amount and Specified Subordinated Amount for such
Remittance Date, listed separately for each Pool;
(f) the Class Principal Balances for each Class of Class A
Certificates and the Principal Factors (as defined below) after giving
effect to the distribution of the Principal Distribution Amounts on such
Remittance Date;
(g) the number and aggregate principal balances of Loans in each Pool
delinquent (i) 30 to 59 days, (ii) 60 days to 89 days and (iii) 90 days or
more as of the end of the related Due Period;
(h) the number and aggregate principal balances of all Loans in each
Pool in foreclosure or other similar proceedings and the number and
aggregate principal balances of all Loans in each Pool relating to any REO
Properties;
(i) the applicable rate of LIBOR for such Remittance Date;
(j) the Pass-Through Rate for each Class of Adjustable Rate or Auction
Rate Certificates for such Remittance Date and if such Pass-Through Rate
for any such Class was based on the Net Funds Cap, what it would be if
based on LIBOR plus the applicable margin or the Auction Rate, as the case
may be;
(k) the Net Funds Cap for such Remittance Date, stated separately for
each Class of Adjustable Rate and Auction Rate Certificates;
(l) if the Pass-Through Rate for any Class of Adjustable Rate or
Auction Rate Certificates for such Remittance Date is based on the Net
Funds Cap and such Class is entitled to receive Certificateholders'
Interest Carryover, the amount of any Certificateholders' Interest
Carryover allocated to such Class of Certificates for such Remittance Date;
and
(m) the amount of the distribution, if any, allocable to
Certificateholders' Interest Carryover and the amount of any unpaid
Certificateholders' Interest Carryover for all prior Remittance Dates after
giving effect to such distribution for each Class of Adjustable Rate and
Auction Rate Certificates entitled to receive Certificateholders' Interest
Carryover.
As to any Remittance Date, the "PRINCIPAL FACTOR" for a Class of
Certificates will be a fraction, expressed as a percentage, the numerator of
which is the Class Principal Balance for such Class (after giving effect to the
distribution of the Principal Distribution Amount on such Remittance Date), and
the denominator of which is the original Class Principal Balance for such Class.
In the case of information furnished pursuant to clauses (a) through (c)
above, the amounts will be expressed as a dollar amount per Certificate with a
$1,000 principal denomination.
Within 90 days after the end of each calendar year, the Trustee will be
required to mail to each person who at any time was a Class A Certificateholder
during such year, a statement containing the information set forth in clauses
(a)-(c) above aggregated for such calendar year, or, in the case of each person
who was a Class A Certificateholder for a portion of such calendar year, setting
forth such information for each month thereof.
All reports prepared by the Trustee will be based upon statements supplied
to the Trustee by the Servicer.
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<PAGE> 27
BOOK-ENTRY CERTIFICATES
The Class A Certificates are book-entry Certificates (the "BOOK-ENTRY
CERTIFICATES"). Persons acquiring beneficial ownership interests in the Class A
Certificates ("CERTIFICATE OWNERS") will hold their Class A Certificates through
DTC in the United States, or Cedel Bank societe anonyme ("CEDEL BANK") or the
Euroclear System ("EUROCLEAR") (in Europe) if they are participants of such
systems, or indirectly through organizations which are participants in such
systems. The Book-Entry Certificates will be issued in one or more certificates
which equal the aggregate principal balance of the Class A Certificates and will
initially be registered in the name of Cede & Co., the nominee of DTC. Cedel
Bank and Euroclear will hold omnibus positions on behalf of their participants
through customers' securities accounts in Cedel Bank's and Euroclear's names on
the books of their respective depositaries which in turn will hold such
positions in customers' securities accounts in the depositaries' names on the
books of DTC. Citibank N.A. will act as depositary for Cedel Bank and Morgan
Guaranty Trust Company of New York, Brussels Office, will act as depositary for
Euroclear (in such capacities, individually the "RELEVANT DEPOSITARY" and
collectively the "EUROPEAN DEPOSITARIES"). Investors may hold such beneficial
interests in the Book-Entry Certificates in minimum denominations representing
original Certificate Principal Balances of $1,000 and integral multiples of
$1,000 in excess thereof (except for the Auction Rate Certificates, which may be
held in minimum denominations representing original Certificate Principal
Balances of $25,000 and integral multiplies of $25,000 in excess thereof).
Except as described below, no person acquiring a Book-Entry Certificate (each, a
"BENEFICIAL OWNER") will be entitled to receive a physical certificate
representing such Certificate (a "DEFINITIVE CLASS A CERTIFICATE"). Unless and
until Definitive Class A Certificates are issued, it is anticipated that the
only "Certificateholder" of the Class A Certificates will be Cede & Co., as
nominee of DTC. Certificate Owners will not be Certificateholders as that term
is used in the Pooling and Servicing Agreement. Certificate Owners are only
permitted to exercise their rights indirectly through Participants and DTC.
The beneficial owner's ownership of a Book-Entry Certificate is recorded on
the records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "FINANCIAL INTERMEDIARY") that maintains the beneficial
owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such Book-Entry Certificate will be recorded on the records of DTC
(or of a participating firm that acts as agent for the Financial Intermediary,
whose interest will in turn be recorded on the records of DTC, if the beneficial
owner's Financial Intermediary is not a DTC participant and on the records of
Cedel Bank or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of, and
interest on, the Class A Certificates from the Trustee through DTC and DTC
participants. While the Class A Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "RULES"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Class A Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Class A Certificates.
Participants and indirect participants with whom Certificate Owners have
accounts with respect to Class A Certificates are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess certificates, the Rules provide a mechanism by which
Certificate Owners will receive distributions and will be able to transfer their
interest.
Certificate Owners are not entitled to receive certificates representing
their respective interests in the Class A Certificates, except under the limited
circumstances described below. Unless and until Definitive Class A Certificates
are issued, Certificate Owners who are not Participants may transfer ownership
of Class A Certificates only through Participants and indirect participants by
instructing such Participants and indirect participants to transfer Class A
Certificates, by book-entry transfer, through DTC for the account of the
purchasers of such Class A Certificates, which account is maintained with their
respective Participants. Under the Rules and in accordance with DTC's normal
procedures, transfers of ownership of Class A Certificates will be executed
through DTC and the accounts of the respective Participants at DTC is debited
and credited. Similarly, the Participants and indirect participants will make
debits or credits, as the case may be, on their records on behalf of the selling
and purchasing Certificate Owners.
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<PAGE> 28
Because of time zone differences, credits of securities received in Cedel
Bank or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Cedel Bank Participants on such business day. Cash received in
Cedel Bank or Euroclear as a result of sales of securities by or through a Cedel
Bank Participant (as defined below) or Euroclear Participant (as defined below)
to a DTC Participant will be received with value on the DTC settlement date but
will be available in the relevant Cedel Bank or Euroclear cash account only as
of the business day following settlement in DTC. For information with respect to
tax documentation procedures relating to the Certificates, see "GLOBAL
CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES -- Certain U.S. Federal
Income Tax Documentation Requirements" in Annex III hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedel Bank 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 Bank
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedel Bank Participants and Euroclear Participants may not deliver
instructions directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the Book-Entry Certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Certificates will be subject to the rules,
regulations and procedures governing DTC and DTC participants as in effect from
time to time.
Cedel Bank is incorporated under the laws of Luxembourg as a professional
depository. Cedel Bank holds securities for its participating organizations
("CEDEL BANK PARTICIPANTS") and facilitates the clearance and settlement of
securities transactions between Cedel Bank Participants through electronic
book-entry changes in accounts of Cedel Bank Participants, thereby eliminating
the need for physical movement of certificates. Transactions may be settled in
Cedel Bank in many different currencies, including United States dollars. Cedel
Bank provides to its Cedel Bank Participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. Cedel Bank interfaces with
domestic markets in several countries. As a professional depository, Cedel Bank
is subject to regulation by the Luxembourg Monetary Institute. Cedel Bank
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 Bank is
also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Cedel Bank
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
27
<PAGE> 29
cross-market transfers with DTC described above. Euroclear is operated by the
Brussels, Belgium office of Morgan Guaranty Trust Company of New York (the
"EUROCLEAR OPERATOR"), under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation (the "COOPERATIVE"). All operations are
conducted by the Euroclear Operator, and all Euroclear securities clearance
accounts and Euroclear cash accounts are accounts with the Euroclear Operator,
not the Cooperative. The Cooperative establishes policy for Euroclear on behalf
of Euroclear Participants. Euroclear Participants include banks (including
central banks), securities brokers and dealers and other professional financial
intermediaries. Indirect access to Euroclear is also available to other firms
that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "TERMS AND CONDITIONS"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Remittance Date by the Trustee to DTC. DTC will be responsible for crediting the
amount of such payments to the accounts of the applicable DTC participants in
accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the beneficial owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, beneficial owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede. Distributions with respect to Certificates
held through Cedel Bank or Euroclear will be credited to the cash accounts of
Cedel Bank Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. Because DTC can only act
on behalf of Financial Intermediaries, the ability of a beneficial owner to
pledge Book-Entry Certificates to persons or entities that do not participate in
the Depository system, or otherwise take actions in respect of such Book-Entry
Certificates, may be limited due to the lack of physical certificates for such
Book-Entry Certificates. In addition, issuance of the Book-Entry Certificates in
book-entry form may reduce the liquidity of such Certificates in the secondary
market since certain potential investors may be unwilling to purchase
Certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust 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, regulations and procedures creating
and affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such beneficial owners are credited.
DTC has advised the Trustee that, unless and until Definitive Class A
Certificates are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Certificates under the Pooling and Servicing Agreement
only at the direction of one or more Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates are credited, to the extent that such
actions are taken on behalf of Financial Intermediaries whose holdings include
such Book-Entry Certificates, Cedel Bank or the Euroclear Operator, as the case
may be, will take any other action permitted to be taken by a Certificateholder
under the Pooling and Servicing Agreement on behalf of a Cedel Bank Participant
or Euroclear Participant only in accordance
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<PAGE> 30
with its relevant rules and procedures and subject to the ability of the
Relevant Depositary to effect such actions on its behalf through DTC. DTC may
take actions, at the direction of the related Participants, with respect to some
Class A Certificates which conflict with actions taken with respect to other
Class A Certificates.
Definitive Class A Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Representative advises the Trustee in writing that DTC is no longer
willing, qualified or able to discharge properly its responsibilities as nominee
and depository with respect to the Book-Entry Certificates and the
Representative or the Trustee is unable to locate a qualified successor or, (b)
the Representative, at its sole option, with the consent of the Trustee, elects
to terminate a book-entry system through DTC.
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 Class A Certificates. Upon surrender by DTC of the global certificate
or certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Class A Certificates, and
thereafter the Trustee will recognize the holders of such Definitive Class A
Certificates and Certificateholders under the Pooling and Servicing Agreement.
Although DTC, Cedel Bank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Class A Certificates among
participants of DTC, Cedel Bank 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 Representative, the Servicer 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 Certificates held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
THE MBIA POLICIES AND MBIA
The following information has been furnished by MBIA Insurance Corporation
(the "INSURER") for use herein.
The Insurer, in consideration of the payment of the premium and subject to
the terms of the MBIA Policies, unconditionally and irrevocably guarantees to
any Owner (as described below) that an amount equal to each full and complete
Insured Payment will be received by the Trustee, or its successor, on behalf of
the Owners from the Insurer, for distribution by the Trustee to each Owner of
each Owner's proportionate share of the Insured Payment. The Insurer's
obligations under the MBIA Policies with respect to a particular Insured Payment
shall be discharged to the extent funds equal to the applicable Insured Payment
are received by the Trustee, whether or not such funds are properly applied by
the Trustee. Insured Payments shall be made only at the time set forth in the
MBIA Policies and no accelerated Insured Payments shall be made regardless of
any acceleration of the Obligations (as defined below), unless such acceleration
is at the sole option of the Insurer.
Notwithstanding the foregoing paragraph, the MBIA Policies do not cover
shortfalls, if any, attributable to the liability of the Trust, any REMIC or the
Trustee for withholding taxes, if any (including interest and penalties in
respect of any such liability). Additionally, the MBIA Policies do not guaranty
payment of any Certificateholders' Interest Carryover.
The Insurer will pay any Insured Payment that is a Preference Amount on the
Business Day (as defined below) following receipt on a Business Day by the
Fiscal Agent (as defined below) of (i) a certified copy of the order requiring
the return of a preference payment, (ii) an opinion of counsel satisfactory to
the Insurer that such order is final and not subject to appeal, (iii) an
assignment in such form as is reasonably required by the Insurer, irrevocably
assigning to the Insurer all rights and claims of the Owner relating to or
arising under the applicable Class of Obligations against the debtor which made
such preference payment or otherwise with
29
<PAGE> 31
respect to such preference payment and (iv) appropriate instruments to effect
the appointment of the Insurer as agent for such Owner in any legal proceeding
related to such preference payment, such instruments being in a form
satisfactory to the Insurer, provided that if such documents are received after
12:00 noon New York City time on such Business Day, they will be deemed to be
received on the following Business Day. Such payments shall be disbursed to the
receiver or trustee in bankruptcy named in the final order of the court
exercising jurisdiction on behalf of the Owner and not to any Owner directly
unless such Owner has returned principal or interest paid on the applicable
Class of Obligations to such receiver or trustee in bankruptcy, in which case
such payment shall be disbursed to such Owner.
The Insurer will pay any other amount payable under the MBIA Policies no
later than 12:00 noon New York City time on the later of the Remittance Date on
which the Distribution Amount is due or the Business Day following receipt in
New York, New York on a Business Day by State Street Bank and Trust Company,
N.A., as Fiscal Agent for the Insurer or any successor fiscal agent appointed by
the Insurer (the "FISCAL AGENT") of a Notice (as described below); provided that
if such Notice is received after 12:00 noon New York City time on such Business
Day, it will be deemed to be received on the following Business Day. If any such
Notice received by the Fiscal Agent is not in proper form or is otherwise
insufficient for the purpose of making claim under the MBIA Policies, it shall
be deemed not to have been received by the Fiscal Agent for purposes of this
paragraph, and the Insurer or the Fiscal Agent, as the case may be, shall
promptly so advise the Trustee and the Trustee may submit an amended Notice.
Insured Payments due under the MBIA Policies unless otherwise stated in the
MBIA Policies will be disbursed by the Fiscal Agent to the Trustee on behalf of
the Owners by wire transfer of immediately available funds in the amount of the
Insured Payment less, in respect of Insured Payments related to Preference
Amounts, any amount held by the Trustee for the payment of such Insured Payment
and legally available therefor.
The Fiscal Agent is the agent of the Insurer only and the Fiscal Agent
shall in no event be liable to Owners for any acts of the Fiscal Agent or any
failure of the Insurer to deposit, or cause to be deposited, sufficient funds to
make payments due under the MBIA Policies.
As used in the related MBIA Policy, the following terms shall have the
following meanings:
"AGREEMENT" means the Pooling and Servicing Agreement dated May 31, 1997
among The Money Store Inc., as Representative and Servicer, the Originators
listed therein and the Trustee, as trustee, without regard to any amendment or
supplement thereto.
"BUSINESS DAY" means any day other than a Saturday, a Sunday or a day on
which banking institutions in New York City or in the city in which the
corporate trust office of the Trustee under the Pooling and Servicing Agreement
is located are authorized or obligated by law or executive order to close.
"DEFICIENCY AMOUNT" means with respect to any Remittance Date and any Pool
of Obligations, (i) the excess, if any, of (a) the Current Interest Requirement
for such Pool over (b) the sum of the Available Remittance Amount for such Pool
(minus amounts withdrawn to pay required premiums to the Insurer), and the
Excess Spread and the Subordination Reduction Amount applicable to such Pool,
plus (ii) the Subordination Deficit, if any, for such Pool with respect to such
Remittance Date.
"INSURED PAYMENT" means (i) as of any Remittance Date, any Deficiency
Amount and (ii) any Preference Amount.
"NOTICE" means the telephonic or telegraphic notice, promptly confirmed in
writing by telecopy substantially in the form of Exhibit A attached to the
related MBIA Policy, the original of which is subsequently delivered by
registered or certified mail, from the Trustee specifying the Insured Payment
which shall be due and owing on the applicable Remittance Date.
"OBLIGATIONS" means the Class A Certificates.
30
<PAGE> 32
"OWNER" means each Class A Certificateholder (as defined in the Agreement)
(other than the Servicer, the Originators or the Trust) who, on the applicable
Remittance Date, is entitled under the terms of the applicable Class of
Obligations to payment thereunder.
"PREFERENCE AMOUNT" means any amount previously distributed to an Owner on
the Obligations that is recoverable and sought to be recovered as a voidable
preference by a trustee in bankruptcy pursuant to the United States Bankruptcy
Code (11 U.S.C.), as amended from time to time, in accordance with a final
nonappealable order of a court having competent jurisdiction.
Capitalized terms used in the MBIA Policies and not otherwise defined
therein shall have the respective meanings set forth in the Pooling and
Servicing Agreement as of the date of execution of the MBIA Policies, without
giving effect to any subsequent amendment or modification to the Pooling and
Servicing Agreement unless such amendment or modification has been approved in
writing by the Insurer.
Any notice under the MBIA Policies or service of process on the Fiscal
Agent of the Insurer may be made at the address listed below for the Fiscal
Agent of the Insurer or such other address as the Insurer shall specify in
writing to the Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, New
York, New York 10006, Attention: Municipal Registrar and Paying Agency, or such
other address as the Fiscal Agent shall specify to the Trustee in writing.
The MBIA Policies were issued under and pursuant to, and shall be construed
under, the laws of the State of New York, without giving effect to the conflict
of laws principles thereof.
The insurance provided by the MBIA Policies are not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
The MBIA Policies are not cancelable for any reason. The premiums on the
MBIA Policies are not refundable for any reason including payment, or provision
being made for payment, prior to maturity of the Obligations.
The Insurer is the principal operating subsidiary of MBIA Inc., a New York
Stock Exchange listed company ("MBIA INC."). MBIA Inc. is not obligated to pay
the debts of or claims against the Insurer. The Insurer is domiciled in the
State of New York and licensed to do business in and is subject to regulation
under the laws of all 50 states, the District of Columbia, the Commonwealth of
Puerto Rico, the Commonwealth of the Northern Mariana Islands, the Virgin
Islands of the United States and the Territory of Guam. The Insurer has two
European branches, one in the Republic of France and the other in the Kingdom of
Spain. New York has laws prescribing minimum capital requirements, limiting
classes and concentrations of investments and requiring the approval of policy
rates and forms. State laws also regulate the amount of both the aggregate and
individual risks that may be insured, the payment of dividends by the Insurer,
changes in control and transactions among affiliates. Additionally, the Insurer
is required to maintain contingency reserves on its liabilities in certain
amounts and for certain periods of time.
Effective February 17, 1998, MBIA Inc. acquired all of the outstanding
stock of Capital Markets Assurance Corporation ("CMAC") through a merger with
its parent CapMAC Holdings Inc. Pursuant to a reinsurance agreement, CMAC has
ceded all of its net insured risks (including any amounts due but unpaid from
third party reinsurers), as well as its unearned premiums and contingency
reserves, to the Insurer. MBIA Inc. is not obligated to pay the debts of or
claims against CMAC.
The consolidated financial statements of the Insurer, a wholly owned
subsidiary of MBIA Inc., and its subsidiaries as of December 31, 1997 and
December 31, 1996 and for each of the three years in the period ended December
31, 1997, prepared in accordance with generally accepted accounting principles,
included in the Annual Report on Form 10-K of MBIA Inc. for the year ended
December 31, 1997 and the consolidated financial statements of the Insurer and
its subsidiaries as of September 30, 1998 and for the nine-month periods ending
September 30, 1998 and September 30, 1997 included in the Quarterly Report on
Form 10-Q of MBIA Inc. for the period ending September 30, 1998, are hereby
incorporated by reference into this Prospectus and shall be deemed to be a part
hereof. Any statement contained in a document incorporated by
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<PAGE> 33
reference into this Prospectus shall be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which is also incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus.
All financial statements of the Insurer and its subsidiaries included in
documents filed by MBIA Inc. pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934, as amended, subsequent to the date of this
Prospectus and prior to the termination of the offering of the Obligations shall
be deemed to be incorporated by reference into this Prospectus and to be a part
hereof from the respective dates of filing such documents.
The table below presents selected financial information of the Insurer
determined in accordance with statutory accounting practices prescribed or
permitted by insurance regulatory authorities ("SAP") and generally accepted
accounting principles ("GAAP"):
<TABLE>
<CAPTION>
SAP
----------------------------
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Admitted Assets............................................. $5,256 $6,318
Liabilities................................................. 3,496 4,114
Capital and Surplus......................................... 1,760 2,204
</TABLE>
<TABLE>
<CAPTION>
GAAP
----------------------------
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Assets...................................................... $5,988 $7,439
Liabilities................................................. 2,624 3,268
Shareholder's Equity........................................ 3,364 4,171
</TABLE>
Copies of the financial statements of the Insurer incorporated by reference
herein and copies of the Insurer's 1997 year-end audited financial statements
prepared in accordance with statutory accounting practices are available,
without charge, from the Insurer. The address of the Insurer is 113 King Street,
Armonk, New York 10504. The telephone number of the Insurer is (914) 273-4545.
The Insurer does not accept any responsibility for the accuracy or
completeness of this Prospectus or any information or disclosure contained
herein, or omitted herefrom, other than with respect to the accuracy of the
information regarding the MBIA Policies and MBIA set forth under the heading
"The MBIA Policies and MBIA" herein. Additionally, the Insurer makes no
representation regarding the Obligations or the advisability of investing in the
Obligations.
Moody's Investors Service, Inc. rates the financial strength of the Insurer
"Aaa."
Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. rates the financial strength of the Insurer "AAA."
Fitch IBCA, Inc. (formerly known as Fitch Investors Services, L.P.) rates
the financial strength of the Insurer "AAA."
The above ratings are not recommendations to buy, sell or hold the
Obligations, and such ratings may be subject to revisions or withdrawal at any
time by the rating agencies. Any downward revision or withdrawal of any of the
above ratings may have an adverse effect on the market price of the Obligations.
The Insurer does not guaranty the market price of the Obligations nor does it
guaranty that the ratings on the Obligations will not be revised or withdrawn.
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<PAGE> 34
YEAR 2000 READINESS DISCLOSURE
An area of potential risk to the Insurer's financial guarantee business
would be the inability of an issuer or its trustee or paying agent to make
payments on an Insurer insured transaction because of their failure to be Year
2000 ready. To mitigate this risk, the Insurer has been surveying all trustees,
all paying agents and selected high volume issuers to determine their state of
readiness. While the survey is not complete, the results to-date are that all
respondents are either ready or planning to be ready by late 1999. If the
Insurer is asked to pay in those situations where the issuer's system fails, it
will do so and would expect to recover any such payment in a fairly short time
period. It is not possible at this time to evaluate the extent of such payments.
The Insurer believes that it has adequate sources of liquidity to cover these
payments.
THE POOLING AND SERVICING AGREEMENT
In addition to the provisions of the Pooling and Servicing Agreement
summarized elsewhere in this Prospectus, set forth below is a summary of certain
other provisions thereof.
PAYMENTS ON THE LOANS
The Pooling and Servicing Agreement requires the Servicer to establish and
maintain one or more principal and interest accounts (each, a "PRINCIPAL AND
INTEREST ACCOUNT") at one or more institutions designated in the Pooling and
Servicing Agreement.
All funds in the Principal and Interest Accounts are required to be held
(i) uninvested, up to the limits insured by the Federal Deposit Insurance
Corporation or (ii) invested in instruments designated as "Permitted
Instruments" in the Pooling and Servicing Agreement. Any investment earnings on
funds held in the Principal and Interest Accounts are for the account of the
Servicer.
The Servicer is required to deposit in the related Principal and Interest
Account (within 24 hours of receipt) all payments received on account of
principal and interest on the related Loans (but net of the servicing fee and
the contingency fee to which the Servicer is entitled under the Pooling and
Servicing Agreement with respect to each Loan, other servicing compensation
payable to the Servicer as permitted by the Pooling and Servicing Agreement and
any amounts required to be deposited into the Servicing Accounts referred to
below).
Not later than each Determination Date, the Servicer is required to wire
transfer to the Trustee the Available Remittance Amounts for each Pool for
deposit in the segregated trust accounts maintained with the Trustee for such
purpose (each, a "CERTIFICATE ACCOUNT").
The "AVAILABLE REMITTANCE AMOUNT" for each Pool is defined in the Pooling
and Servicing Agreement to include, with respect to any Remittance Date, without
duplication:
(i) the sum of all amounts received by the Servicer or any
sub-servicer appointed under the Pooling & Servicing Agreement on the Loans
of such Pool (including amounts paid by the Servicer and the Representative
and excluding (a) any Excess Spread and Subordination Reduction Amounts
included in such amounts, (b) amounts paid as reimbursement to the Servicer
of advances, (c) amounts deposited into the Servicing Accounts (as defined
below) and (d) amounts recovered as voidable preferences), during the Due
Period, plus
(ii) the amount of any Monthly Advances and Compensating Interest
payments (as each term is defined under "-- Monthly Advances and
Compensating Interest" below) with respect to the Loans of such Pool
remitted by the Servicer for such Remittance Date.
The term Available Remittance Amount does not include Insured Payments.
The Pooling and Servicing Agreement also requires the Servicer to establish
and maintain, in addition to the Principal and Interest Accounts, one or more
accounts (each, a "SERVICING ACCOUNT") in a depository institution the deposits
of which are insured by the Federal Deposit Insurance Corporation to the maximum
extent permitted by law. The Servicer deposits and retains therein all
collections from the Mortgagors for the
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payment of taxes, assessments, insurance premiums, or comparable items as agent
of the Mortgagors and in trust as provided in the Pooling and Servicing
Agreement. Amounts in any Servicing Account may relate to mortgage loans in more
than one mortgage pool or to mortgage loans not yet included in a mortgage pool.
All funds in the Servicing Accounts are required to be held (i) uninvested, up
to the limits insured by the Federal Deposit Insurance Corporation or (ii)
invested in instruments designated in the Pooling and Servicing Agreement as
"Permitted Instruments." Any investment earnings on funds held in the Servicing
Accounts are for the account of the Servicer. Withdrawals of amounts from the
Servicing Accounts may be made only to effect timely payment of taxes,
assessments, insurance premiums, or comparable items, to reimburse the Servicer
for any advances made with respect to such items, to refund to any Mortgagors
any sums as may be determined to be overages, to pay interest, if required, to
Mortgagors on balances in the Servicing Accounts, to pay earnings not required
to be paid to Mortgagors to the Servicer or to clear and terminate the Servicing
Accounts at or at any time after the termination of the Pooling and Servicing
Agreement.
MONTHLY ADVANCES AND COMPENSATING INTEREST
Not later than the close of business on each Determination Date, the
Servicer is required to remit to the Trustee for deposit in the applicable
Certificate Account an amount equal to the amount, if any, by which, for each
Pool (a) the sum of (x) 30 days' interest (or, with respect to the Auction Rate
and Adjustable Rate Certificates, the actual number of days from the last
Remittance Date up to but not including the upcoming Remittance Date) at the
weighted average Adjusted Mortgage Loan Remittance Rates (as defined below) of
such Pool on the aggregate outstanding Class Principal Balances of each Class of
Certificates in such Pool immediately prior to the related Remittance Date and
(y) the Excess Spread, if any, for the related Remittance Date relating to the
Loans of the related Pool exceeds (b) the amount received by the Servicer in
respect of interest on the Loans of the related Pool as of the related Record
Date. Such excess is defined as the "Monthly Advance." Monthly Advances will not
cover any Certificateholders' Interest Carryover.
The "ADJUSTED MORTGAGE LOAN REMITTANCE RATE" for a Class of Certificates
equals the sum of the Pass-Through Rate for such Class and a rate used to
determine certain expenses of the Trust. Certain of the Loans in each Pool may
bear interest at a rate below the Adjusted Mortgage Loan Remittance Rate for the
related Class. Any such Loan was sold to the Trust at a discount so as to
create, for each such Loan, an interest rate that, when applied to the purchase
price paid by such Trust for such Loan, will at least equal the related Adjusted
Mortgage Loan Remittance Rate.
Such Monthly Advances by the Servicer are reimbursable in the first
instance from late collections of interest including Liquidation Proceeds,
Insurance Proceeds and Released Mortgaged Property Proceeds collected with
respect to the related Loan as to which the advances were made, and any other
amount that otherwise would be distributed on the Class X and Class R
Certificates.
Not later than the close of business on each Determination Date, with
respect to each Loan for which a Principal Prepayment in full or Curtailment was
received during the related Due Period, the Servicer is required to remit to the
Trustee for deposit in the applicable Certificate Account, from amounts
otherwise payable to it as servicing compensation, an amount equal to the excess
of (a) 30 days' interest (or, with respect to a Pool II Loan, the actual number
of days since the last Remittance Date up to but not including the upcoming
Remittance Date) on the principal balance of each such Loan as of the beginning
of the related Due Period at the weighted average Adjusted Mortgage Loan
Remittance Rates of the related Pool applicable to the Remittance Date on which
such amount will be distributed, over (b) the amount of interest actually
received on the related Loan for such Due Period (such difference, "COMPENSATING
INTEREST").
FLOW OF FUNDS
The Pooling and Servicing Agreement requires the Servicer to withdraw on
each Determination Date that portion of the Available Remittance Amount for each
Pool in the applicable Principal and Interest Account and to remit such amounts
together with any Excess Spread, Subordination Reduction Amounts, Monthly
Advances and Compensating Interest for the related Remittance Date to the
Trustee for deposit in
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<PAGE> 36
the applicable Certificate Account. Upon receipt on each Determination Date of
such amounts, the Trustee is required to deposit such amounts into the
applicable Certificate Account.
The Pooling and Servicing Agreement provides that on each Remittance Date
the Trustee is required to withdraw from the Certificate Accounts the sum of (i)
the Available Remittance Amounts for each Pool (minus the amounts withdrawn from
the Certificate Accounts to deposit amounts related to required premiums in the
Insurance Account), (ii) any amounts of Total Monthly Excess Cashflow to be
applied to the Certificates and (iii) amounts transferred from the Spread
Account, if any, and Insured Payments, if any, made by MBIA (such sums, the
"AVAILABLE AMOUNT" for the related Pool) and make distributions thereof in the
following order of priority:
(i) to the Certificateholders of each Pool, the lesser of the
Available Amount for such Pool and the Distribution Amount for such Pool;
(ii) then to an expense account, an amount equal to one-twelfth of the
estimated annual fees and expenses of the Trustee and the Trust;
(iii) then to the Servicer and/or The Money Store Inc., an amount
equal to certain unreimbursed amounts with respect to the applicable Pool;
(iv) then to the Adjustable Rate Certificates and the Auction Rate
Certificates, any Certificateholders' Interest Carryover (but only with
respect to distributions relating to the Pool II Loans) pro rata in
accordance with amounts due each Class; and
(v) then to the Class X Certificateholders and Class R
Certificateholders, amounts then remaining with respect to the applicable
Pool as specified in the Pooling and Servicing Agreement.
On each Remittance Date, the amount to be distributed to the Pool I
Certificates pursuant to clause (i) above will be allocated in the following
order of priority:
(A) first, concurrently to the Certificateholders of each Class of
Pool I Certificates, the applicable Current Interest Requirements for such
Remittance Date, pro rata in accordance with such amounts;
(B) second, to the Class A-8 Certificateholders, an amount equal to
the Class A-8 Principal Distribution Amount (as defined below); and
(C) third, to the Class A-1, Class A-2, Class A-3, Class A-4, Class
A-5, Class A-6, Class A-7 and Class A-8 Certificateholders, sequentially in
that order, the excess, if any, of the amount to be distributed to the Pool
I Certificates on such Remittance Date over the amount distributed pursuant
to (A) and (B) above, until the Class Principal Balance of each such Class
(in ascending order of numerical designation) is reduced to zero and the
Certificateholders of each such Class have received an amount equal to the
amount described in clause (iv) of the definition of Distribution Amount
that is recovered from such Certificateholders.
The "CLASS A-8 PRINCIPAL DISTRIBUTION AMOUNT" for any Remittance Date will
be the product of (i) the applicable Class A-8 Principal Percentage (as defined
below) for such Remittance Date and (ii) the Class A-8 Pro Rata Principal
Distribution Amount (as defined below) for such Remittance Date. In no event
will the Class A-8 Principal Distribution Amount on any Remittance Date be
greater than the Principal Distribution Amount for Pool I for such Remittance
Date or the Class Principal Balance of the Class A-8 Certificates.
The "CLASS A-8 PRINCIPAL PERCENTAGE" for each Remittance Date shall be as
follows:
<TABLE>
<CAPTION>
CLASS A-8
REMITTANCE DATES PRINCIPAL PERCENTAGE
---------------- --------------------
<S> <C>
July 1997 -- June 2000...................................... 0%
July 2000 -- June 2002...................................... 45%
July 2002 -- June 2003...................................... 80%
July 2003 -- June 2004...................................... 100%
July 2004 and thereafter.................................... 300%
</TABLE>
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The "CLASS A-8 PRO RATA PRINCIPAL DISTRIBUTION AMOUNT" for each Remittance
Date will be an amount equal to the product of (x) a fraction, the numerator of
which is the Class Principal Balance of the Class A-8 Certificates immediately
prior to such Remittance Date and the denominator of which is the aggregate
Class Principal Balance of the Pool I Certificates immediately prior to such
Remittance Date and (y) the Principal Distribution Amount for Pool I for such
Remittance Date.
On each Remittance Date, the amount to be distributed to the Pool II
Certificates pursuant to clause (i) above will be allocated in the following
order of priority:
(A) first, concurrently to the Certificateholders of each Class of
Pool II Certificates, the applicable Current Interest Requirements for such
Remittance Date, pro rata in accordance with such amounts; and
(B) second, to the Class A-9 and Class A-10 Certificateholders,
sequentially in that order until the Class Principal Balance of each such
Class (in ascending order of numerical designation) is reduced to zero and
the Certificateholders of each such Class have received an amount equal to
the amount described in clause (iv) of the definition of Distribution
Amount that is recovered from such Certificateholders.
On each Remittance Date, the amount to be distributed to the Pool III
Certificates pursuant to clause (i) above will be allocated in the following
order of priority:
(A) first, to the Class A-11 Certificateholders, the applicable
Current Interest Requirement for such Remittance Date; and
(B) second, to the Class A-11 Certificateholders, the excess, if any,
of the amount to be distributed to the Pool III Certificates on such
Remittance Date over the amount distributed pursuant to (A) above, until
the Class Principal Balance of such Class is reduced to zero and such
Certificateholders have received an amount equal to the amount described in
clause (iv) of the definition of Distribution Amount that is recovered from
such Certificateholders.
Notwithstanding the foregoing, principal payments will be made to each
Class of Auction Rate Certificates only in amounts equal to $25,000 and integral
multiples in excess thereof. If the amount in the applicable Certificate Account
otherwise required to be applied as a payment of principal either (i) is less
than $25,000 or (ii) exceeds an even multiple of $25,000, then, in the case of
(i), such entire amount or, in the case of (ii), such excess amount, will not be
paid as principal on the upcoming Remittance Date but will be retained in the
applicable Certificate Account until the amount therein available for payment of
principal equals $25,000 or an integral multiple thereof.
The Trustee will have the right, on behalf of Class A Certificateholders,
to sue MBIA in the event any required Insured Payment is not made in accordance
with the terms of the applicable MBIA Policy.
CALCULATION OF LIBOR
The Trustee will determine one-month LIBOR commencing on the LIBOR
Determination Date (as defined below) preceding each Remittance Date (the
"ONE-MONTH INDEX MATURITY") which appears on Telerate Page 3750 as of 11:00
a.m., London time, on such LIBOR Determination Date. If such rate does not
appear on Telerate Page 3750, the rate for that day will be determined on the
basis of the rates at which deposits in U.S. dollars, having the One-Month Index
Maturity and in a principal amount of not less than U.S. $1,000,000, are offered
at approximately 11:00 a.m., London time, on such LIBOR Determination Date to
prime banks in the London interbank market by the Reference Banks. The Trustee
will request the principal London office of each of such Reference Banks to
provide a quotation of its rate. If at least two such quotations are provided,
the rate for that day will be the arithmetic mean of the quotations. If fewer
than two quotations are provided, the rate for that day will be the arithmetic
mean of the rates quoted by major banks in New York City, selected by the
Trustee, at approximately 11:00 a.m., New York City time, on such LIBOR
Determination Date for loans in U.S. dollars to leading European banks having
the One Month Index Maturity and in a principal amount equal to an amount of not
less than U.S. $1,000,000; provided that if the
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<PAGE> 38
banks selected as aforesaid are not quoting as mentioned in this sentence, LIBOR
in effect for the applicable Interest Period will be LIBOR in effect for the
previous Interest Period.
"LIBOR DETERMINATION DATE" means the date which is both a Business Day and
a London Banking Day prior to the commencement of each related Interest Period.
"BUSINESS DAY" means any day other than (i) a Saturday or Sunday or (ii) a
day on which banking institutions in the States of New York or New Jersey are
authorized or obligated by law or executive order to be closed.
"LONDON BANKING DAY" means any Business Day on which dealings in deposits
in United States dollars are transacted in the London interbank market.
"INTEREST PERIOD" means, with respect to the Adjustable Rate Certificates,
(i) initially, the period commencing on June 15, 1997 and ending on the day
immediately preceding the Remittance Date in July 1997 and (ii) thereafter, the
period commencing on a Remittance Date and ending on the day immediately
preceding the next Remittance Date.
"REFERENCE BANKS" means leading banks selected by the Trustee and engaged
in transactions in Eurodollar deposits in the international Eurocurrency market.
"TELERATE 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) and "REFERENCE
BANKS" means leading banks selected by the Trustee and engaged in transactions
in Eurodollar deposits in the international Eurocurrency market.
The establishment of LIBOR on each LIBOR Determination Date by the Trustee
and the Trustee's calculation of the rate of interest applicable to the
Adjustable Rate Certificates for the related Remittance Date shall (in the
absence of manifest error) be final and binding. Each such rate of interest may
be obtained by telephoning the Trustee at (212) 815-2793.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Servicer is entitled to a servicing fee of 0.25% per annum of the
principal balance of each Loan (the "SERVICING FEE") and a contingency fee of
0.25% per annum of the principal balance of each Loan (the "CONTINGENCY FEE").
The Contingency Fee is meant to provide additional servicing compensation to a
successor servicer if The Money Store Inc. is replaced as Servicer under the
Pooling and Servicing Agreement. However, as long as The Money Store Inc. acts
as Servicer, it is entitled to receive the Contingency Fee, although such amount
is not deemed servicing compensation. The Servicing Fee and Contingency Fee are
each calculated and payable monthly from the interest portion of scheduled
monthly payments, liquidation proceeds and certain other collected proceeds. In
addition, the Servicer is entitled under the Pooling and Servicing Agreement to
retain additional servicing compensation in the form of assumption and other
administrative fees, prepayment penalties and premiums, late payment charges,
interest paid on funds in the Principal and Interest Accounts, interest paid on
earnings realized investments designated as "Permitted Instruments" in the
Pooling and Servicing Agreement and certain other excess amounts.
TERMINATION; PURCHASE OF LOANS
The Trust will terminate upon distribution to the Certificateholders of
amounts due them following the earlier to occur of (i) the final payment or
other liquidation of the last Loan remaining in the Trust or the disposition of
all REO Property, (ii) the optional purchase of the assets of the Trust by the
Servicer or MBIA, as described below or (iii) the occurrence of a "qualified
liquidation" of the Trust, as permitted by the provisions of the Internal
Revenue Code of 1986, as amended (the "CODE"), related to real estate mortgage
investment conduits ("REMICS") as described below; provided, however, that in no
event will the Trust terminate later than twenty-one years after the death of
the last survivor of the person named in the Pooling and Servicing Agreement.
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As set forth under "The MBIA Policies and MBIA" herein, no accelerated
Insured Payments will be made regardless of any acceleration of the Class A
Certificates, unless such acceleration is at the sole option of MBIA. This will
not affect the Class A Certificateholders since, as described below, as a
condition to any optional termination of the Trust the Certificateholders will
receive an amount equal to the outstanding Class Principal Balance of the
related Class, plus accrued interest.
Subject to provisions in the Pooling and Servicing Agreement concerning
adopting a plan of complete liquidation, on any date on which the aggregate
principal balances of the Loans are less than $97,000,000, the Servicer may, at
its option, and in the absence of the exercise thereof by the Servicer, MBIA
may, at its option, purchase, on the next succeeding Remittance Date, all of the
Loans and any related REO Properties at a price set forth in the Pooling and
Servicing Agreement (the "TERMINATION PRICE") at least equal to the sum of (x)
100% of the principal balances of the Loans, including those evidenced by REO
Properties, and (y) 30 days' interest (or, with respect to the Adjustable Rate
and Auction Rate Certificates, the actual number of days from the last
Remittance Date to but not including the upcoming Remittance Date) thereon at
the then applicable weighted average Pass-Through Rates of the Class A
Certificates plus an amount equal to the interest portion of any unreimbursed
Insured Payments made by MBIA with respect to the applicable Pool of Loans.
On any Remittance Date on or after the Cross-Over Date on which Loans with
aggregate principal balances (determined as of the Cut-Off Date) that equal or
exceed $242,500,000 have become Liquidated Loans, MBIA may determine to purchase
and may cause the purchase from the Trust of all Loans and REO Properties in the
Pools at a price equal to the sum of the Termination Price for each Pool and the
outstanding and unpaid fees and expenses of the Trustee and the Servicer.
Following a final determination by the Internal Revenue Service (the "IRS")
or by a court of competent jurisdiction, in either case from which no appeal is
taken within the permitted time for such appeal, or if any appeal is taken,
following a final determination of such appeal from which no further appeal can
be taken, to the effect that either REMIC does not and will no longer qualify as
a REMIC pursuant to Section 860D of the Code (the "FINAL DETERMINATION"), at any
time on or after the date which is 30 calendar days following such Final
Determination (i) the holders of greater than 50 percent in Percentage Interest
of the Class A Certificates (the "APPLICABLE MAJORITY CERTIFICATEHOLDERS") may
direct the Trustee on behalf of the Trust to adopt a "plan of complete
liquidation" (within the meaning of Section 860F(a)(4)(B)(i) of the Code) with
respect to the related REMIC and (ii) MBIA may notify the Trustee of MBIA's
determination to purchase from the Trust all Loans and all property theretofore
acquired by foreclosure, deed in lieu of foreclosure, or otherwise in respect of
any Loan then remaining in such REMIC at a price equal to the aggregate
Termination Price. Upon receipt of such direction by the Applicable Majority
Certificateholders or of such notice from MBIA, the Trustee will notify the
holders of the Class R Certificates of such election to liquidate or such
determination to purchase, as the case may be (the "TERMINATION NOTICE"). The
holders of a majority of the percentage interest of the Class R Certificates
then outstanding may, within 60 days from the date of receipt of the Termination
Notice (the "PURCHASE OPTION PERIOD"), at their option, purchase from the Trust
all the Loans and all property theretofore acquired by foreclosure, deed in lieu
of foreclosure, or otherwise in respect of any Loan then remaining in the REMIC
at a purchase price equal to the Termination Price of the Trust.
If, during a Purchase Option Period, the holders of the Class R
Certificates have not exercised the option described in the immediately
preceding paragraph, then upon the expiration of the Purchase Option Period (i)
in the event that the Applicable Majority Certificateholders have given the
Trustee the direction described in clause (i) above, the Trustee is required to
sell the Loans and such other property in the related REMIC and distribute the
proceeds of the liquidation of such REMIC, each in accordance with the plan of
complete liquidation, such that, if so directed, the liquidation of such REMIC
and the distribution of the proceeds of the liquidation occur no later than the
close of the 60th day, or such later day as the Applicable Majority
Certificateholders shall permit or direct in writing, after the expiration of
the Purchase Option Period and (ii) in the event that MBIA has given the Trustee
notice of MBIA's determination to purchase the assets described in clause (ii)
preceding, MBIA shall so purchase such assets within 60 days after the
expiration of the Purchase Option Period.
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<PAGE> 40
Following a Final Determination, the holders of a majority of the
percentage interest of the Class R Certificates then outstanding may, at their
option and upon delivery to the Trustee and MBIA of an opinion of nationally
recognized tax counsel selected by the holders of such Class R Certificates,
which opinion shall be reasonably satisfactory in form and substance to the
Applicable Majority Certificateholders and MBIA, that the effect of the Final
Determination is to increase substantially the probability that the gross income
of the related REMIC will be subject to federal taxation, purchase from the
Trust all Loans and all property theretofore acquired by foreclosure, deed in
lieu of foreclosure, or otherwise in respect of any Loan then remaining in the
related REMIC at a purchase price equal to the Termination Price of the Trust.
The foregoing opinion shall be deemed satisfactory unless the Applicable
Majority Certificateholders or MBIA give the holders of a majority of percentage
interests in the Class R Certificates notice that such opinion is not
satisfactory within thirty days after receipt of such opinion.
If the Trust were to lose its qualification as a REMIC, it might be taxable
as a grantor trust, a partnership, or an association taxable as a corporation.
If the Trust is treated as a grantor trust or a partnership, such Trust would
not be subject to a separate entity level tax, and it is not expected that the
tax treatment of the investors would be materially different from the tax
treatment if the REMIC election of such Trust had not been revoked. However, if
the Trust were treated as an association taxable as a corporation it would be
subject to Federal income taxes at corporate rates on its net income. Moreover,
distributions on the Class A Certificates would probably not be deductible in
computing such Trust's taxable income, and all or part of the distributions to
the holders of such Class A Certificates would probably be treated as dividend
income to the holders. Such an entity level tax could result in reduced
distributions to the Class A Certificateholders and such Class A
Certificateholders could also be liable for a share of such a tax. Any such
corporate level tax would be borne first by the holders of the Class R
Certificates from amounts otherwise distributable to such holders. Any remaining
corporate level tax would be borne by holders of all Classes of Class A
Certificates pro rata in proportion to the outstanding principal balances of
such Classes.
SERVICING OF THE LOANS
The Servicer serves as master servicer for the Loans in accordance with the
Pooling and Servicing Agreement. The Servicer may act through subservicers,
including the Originators or other affiliates of the Servicer.
THE TRUSTEE
The Bank of New York is the Trustee under the Pooling and Servicing
Agreement. The Pooling and Servicing Agreement provides that the Trustee may
resign at any time, in which event the Representative will be obligated to
appoint a successor Trustee. The Representative may also remove the Trustee if
the Trustee ceases to be eligible to continue as such under the Pooling and
Servicing Agreement or if the Trustee becomes insolvent. Any resignation or
removal of the Trustee and appointment of a successor Trustee will not become
effective until acceptance of the appointment by the successor Trustee.
THE AUCTION AGENT
Bankers Trust Company, a New York banking corporation, acts as Auction
Agent with respect to the Auction Rate Certificates pursuant to an Auction Agent
Agreement between the Representative, the Trustee and the Auction Agent.
FEDERAL INCOME TAX CONSIDERATIONS
For federal income tax purposes, two separate elections have been made to
treat certain assets of the Trust as REMICs. Each Class of Class A Certificates
constitutes "regular interests" in a REMIC and each class of Class R
Certificates constitutes the sole "residual interest" in the related REMIC. See
"Federal Income Tax Consequences" in Annex IV hereto.
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<PAGE> 41
Because the Offered Certificates are considered REMIC regular interests,
they generally are taxable as debt obligations under the Code, and interest paid
or accrued on such Certificates, including original issue discount with respect
to any such Certificates issued with original issue discount, are taxable to
Certificateholders in accordance with the accrual method of accounting. See
"Federal Income Tax Consequences -- REMIC Regular Certificates -- Current Income
on REMIC Regular Certificates" in Annex IV hereto.
The prepayment assumption that is used in determining the rate of accrual
of original issue discount with respect to the Certificates is 100% Prepayment
Assumption (as defined below). However, this rate does not represent the rate at
which prepayments have actually occurred and no representation is made as to the
rate at which prepayments actually will occur in the future.
With respect to Pool I, the "100% PREPAYMENT ASSUMPTION" assumes a constant
prepayment rate ("CPR") of 2.3% per annum of the then outstanding principal
balance of the respective Home Equity Loans in the first month of the life of
such Home Equity Loans and an additional 2.3% per annum in each month thereafter
until the tenth month. Beginning in the tenth month and in each month thereafter
during the life of the Home Equity Loans, the 100% Prepayment Assumption assumes
a CPR of 2.3% per annum each month. With respect to Pool II, the "100%
PREPAYMENT ASSUMPTION" assumes a CPR of 25% per annum of the then outstanding
principal balance of the adjustable rate loans in Pool II each month. With
respect to Pool III, the "100% PREPAYMENT ASSUMPTION" assumes a CPR of 2.0% per
annum of the then outstanding principal balance of the Multifamily Loans in Pool
III in each month in the first 48 months of the life of such Multifamily Loans.
Beginning in the 49th month and in each month thereafter during the life of such
Multifamily Loans, 100% Prepayment Assumption assumes a CPR of 10% per annum
each month.
ERISA CONSIDERATIONS
Title I of ERISA imposes certain requirements on certain employee benefit
plans and arrangements, and upon collective investment funds and separate
accounts in which such plans or arrangements are invested, and on those persons
who are fiduciaries with respect to such benefit plans. Certain employee benefit
plans, such as governmental plans (as defined in Section 3(32) of ERISA) and
certain church plans (as defined in Section 3(33) of ERISA), are not subject to
Title I of ERISA.
In accordance with ERISA's general fiduciary standards, before investing in
a Class A Certificate a benefit plan fiduciary should determine whether such an
investment is permitted under the governing benefit plan instruments and is
appropriate for the benefit plan in view of its overall investment policy and
the composition and diversification of its portfolio.
In addition, benefit plans subject to Title I of ERISA and individual
retirement accounts or certain types of Keogh plans not subject to Title I of
ERISA but subject to Section 4975 of the Code (each a "PLAN") are prohibited
from engaging in a broad range of transactions relating to the assets of the
Plan when persons having certain specified relationships to a Plan (called
"PARTIES IN INTEREST" in ERISA and "DISQUALIFIED PERSONS" in the Code) are
involved. Such transactions are treated as "PROHIBITED TRANSACTIONS" under
Sections 406 and/or 407 of ERISA, and excise taxes are imposed upon such persons
by Section 4975 of the Code. The Representative, the Originators, MBIA, the
Servicer, the Underwriter, the Trustee, the Auction Agent and certain of their
affiliates might be considered "parties in interest" or "disqualified persons"
with respect to a Plan. If so, the acquisition or holding or transfer of Class A
Certificates by or on behalf of such Plan could be considered to give rise to a
"prohibited transaction" within the meaning of ERISA and/or the Code unless an
exemption is available. A Plan fiduciary considering an investment in Class A
Certificates should consider whether such investment will give rise to
prohibited transactions under ERISA or the Code.
In addition, the U.S. Department of Labor ("DOL") has issued regulations
(29 C.F.R. Section 2510.3-101) concerning the definition of what constitutes the
assets of a Plan (the "PLAN ASSET REGULATIONS"), which provide that, as a
general rule, the underlying assets and properties of corporations,
partnerships, trusts and certain other entities in which a Plan makes an
"equity" investment (as opposed to a "debt" investment) will be deemed for
purposes of ERISA to be assets of the investing Plan unless, among other
exceptions, the equity participation by Plan investors in the equity investment
is not "significant". Under the Plan Asset Regulations,
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equity participation by benefit plan investors is "significant" on any date if,
immediately after the most recent acquisition of the equity interest, 25% or
more of the value of any class of equity interests in the entity is held by
retirement plans, including Plans and plans not subject to ERISA (such as
governmental and church plans). Under the Plan Asset Regulations, an "equity"
investment is an investment in an entity other than an investment treated as
indebtedness under applicable local law and which has no substantial equity
features. The beneficial interest in a trust, the undivided ownership interest
in property and the profit interest in a partnership are deemed to be equity
investments for this purpose.
If an investing Plan's assets were deemed (under the Plan Asset Regulations
or other authority) to include an interest in the Loans and any other assets of
the Trust, and not merely an interest in the Class A Certificates, the assets of
the Trust would become subject to the fiduciary standards of ERISA, and
transactions with the Trust by the Representative, the Originators, MBIA, the
Servicer, the Underwriter, the Trustee, the Auction Agent, or any of their
affiliates might constitute prohibited transactions, unless an exemption
applies. Certain such exemptions which may be applicable to the acquisition and
holding of the Class A Certificates or to the servicing of the Loans are noted
below.
Regardless of whether the Loans and any other assets of the Trust would be
considered "plan assets" for purposes of ERISA, the acquisition or holding of
Class A Certificates on behalf of a Plan could still be considered to give rise
to a prohibited transaction if the Trust is or becomes a party in interest or
disqualified person with respect to such Plan, or if a subsequent transfer of
Class A Certificates is made between a Plan and such party in interest or
disqualified person, unless an exemption applies. Certain such exemptions which
may be applicable to such transactions are noted below.
The DOL has granted individual administrative exemptions to a number of
underwriters and their affiliates, including First Union Corporation (Prohibited
Transaction Exemption ("PTE") 96-22), Prudential Securities Incorporated (PTE
90-32), Merrill Lynch & Co. (PTE 90-29), Bear, Stearns & Co., Inc. (PTE 90-30),
Salomon Brothers Inc. (PTE 89-89), and Lehman Brothers (PTE 91-14)
(collectively, the "UNDERWRITERS EXEMPTION"), from certain of the prohibited
transaction rules of ERISA and the Code with respect to the initial purchase,
the holding and the subsequent resale in the secondary market by Plans of pass-
through certificates representing a beneficial undivided ownership interest in
the assets of a trust that consist of certain receivables, loans and other
obligations that meet the conditions and requirements of the Underwriters
Exemption which may be applicable to the Class A Certificates if First Union
Corporation, Prudential Securities Incorporated, Merrill Lynch & Co., Bear,
Stearns & Co., Inc., Salomon Brothers Inc., or Lehman Brothers, respectively, or
any of their affiliates is either the sole underwriter or the manager or
co-manager of the underwriting syndicate, or a selling or placement agent. On
July 21, 1997, the exemptions under PTE 96-22, PTE 90-32, PTE 90-29, PTE 90-30,
PTE 89-89, and PTE 91-14 were amended and consolidated as PTE 97-34.
The Underwriters Exemption provides relief from the restrictions of
sections 406(a) and 407 of ERISA and the excise taxes imposed under section
4975(c)(1)(A) through (D) of the Code in connection with the direct or indirect
acquisition or disposition of Class A Certificates by a Plan in the secondary
market, and the continued holding of Class A Certificates so acquired, if the
general conditions outlined below are satisfied. However, the Underwriters
Exemption does not provide an exemption from the restrictions of sections
406(a)(1)(E), 406(a)(2) and 407 of ERISA for the acquisition or holding of a
Class A Certificate on behalf of an "EXCLUDED PLAN" by any person who has
discretionary authority or renders investment advice with respect to the assets
of that "Excluded Plan." For purposes of the Class A Certificates, an "Excluded
Plan" is a Plan sponsored by any Originator, the Representative, MBIA, the
Servicer, any Underwriter, the Trustee, or any other servicers or any obligor
with respect to Loans included in the Trust constituting more than 5% of the
aggregate unamortized principal balance of the assets in such Trust or any
affiliate of such parties (the "RESTRICTED GROUP").
In addition, the Underwriters Exemption provides relief from the
self-dealing/conflict of interest restrictions of sections 406(b)(1) and (b)(2)
of ERISA and the excise taxes imposed under section 4975(c)(1)(E) of the Code in
connection with the direct or indirect acquisition or disposition of Class A
Certificates by a Plan in the secondary market, and the continued holding of
Class A Certificates so acquired,
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<PAGE> 43
if (i) the person who has discretionary authority or renders investment advice
with respect to the investment of Plan assets in the Class A Certificates (or
its affiliate) is an obligor with respect to 5% or less of the fair market value
of the Loans contained in the Trust, (ii) the Plan is not an Excluded Plan,
(iii) the Plan's investment in each class of certificates does not exceed 25% of
the certificates of that class outstanding at the time of the Plan's acquisition
and after the Plan's acquisition of Class A Certificates, no more than 25% of
the assets over which the fiduciary has investment authority are invested in
securities of a trust containing assets which are sold or serviced by the same
entity, and (iv) the general conditions outlined below are met.
Finally, the Underwriters Exemption also provides an exemption from the
prohibited transaction restrictions for transactions in connection with the
servicing, management and operation of the Trust if such transactions are
carried out in accordance with the terms of a binding pooling and servicing
arrangement provided to, or described in all material respects in a prospectus
or private placement memorandum provided to, investing Plans and the general
conditions outlined below are satisfied. It is expected that this exemption will
be available, provided that the general conditions outlined below are satisfied.
The general conditions which must be satisfied for the Underwriters
Exemption to apply are:
(i) The acquisition of the Class A Certificates by a Plan is on terms
(including the price for the Class A Certificates) that are at least as
favorable to the Plan as they would be in an arm's length transaction with
an unrelated party.
(ii) The rights and interests evidenced by Class A Certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by any other Certificates of the Trust.
(iii) The Class A Certificates acquired by the Plan have received a
rating at the time of such acquisition that is in one of the three highest
generic rating categories from any of Moody's Investor Service, Inc., Duff
& Phelps Credit Rating Co., Standard & Poor's Structured Rating Group, or
Fitch Investors Service, L.P. ("AUTHORIZED RATING AGENCIES").
(iv) The investment pool consists only of assets of the type
enumerated in the Underwriters Exemption, and which have been included in
other investment pools; certificates evidencing interests in such other
investment pools have been rated in one of the three highest generic rating
categories by an Authorized Rating Agency for at least one year prior to a
Plan's acquisition of certificates; and certificates evidencing interests
in such other investment pools have been purchased by investors other than
Plans for at least one year prior to a plan's acquisition of the Class A
Certificates.
(v) The sum of all payments made to and retained by the Underwriters
in connection with the distribution or placement of the Class A
Certificates represents not more than reasonable compensation for
underwriting or placing the Class A Certificates. The sum of all payments
made to and retained by the Representative and the Originators pursuant to
the sale of the Loans to the Trust represents not more than the fair market
value of such Loans. The sum of all payments made to and retained by the
Servicer or any other servicer represents not more than reasonable
compensation for such services under the Agreement and reimbursement of the
servicers' reasonable expenses in connection therewith.
(vi) The Trustee is not an affiliate of any member of the Restricted
Group as defined above.
(vii) The Plan investing in the Class A Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D under the Securities
Act. Any Plan purchasing Class A Certificates will be deemed to have
represented, by virtue of such purchase, that it is an accredited investor.
It is expected that the second and sixth conditions set forth above will be
satisfied with respect to the Class A Certificates. A fiduciary of a Plan
contemplating the purchase of Class A Certificates must make its own
determination that the first, third, fourth, fifth and seventh conditions set
forth above will be satisfied with respect to the Class A Certificates.
Because of the complexity of the prohibited transaction rules and the
relevant exemptions as well as the penalties imposed on prohibited transactions,
before purchasing a Class A Certificate in reliance on an exemption, including
the Underwriters Exemption, a fiduciary of a Plan should confirm that all
applicable
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<PAGE> 44
requirements would be satisfied. Any Plan fiduciary considering the purchase of
a Class A Certificate should consult with its counsel with respect to the
potential applicability of ERISA and the Code to such investment. Moreover, each
Plan fiduciary should determine whether, under the general fiduciary standards
of investment prudence and diversification, an investment in the Class A
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. See "ERISA Considerations" in the Prospectus.
Any Plan purchasing Class A Certificates shall be deemed to have
represented, by virtue of such purchase, that such an investment is permitted
under the governing benefit plan instruments and is appropriate for the benefit
plan in view of its overall investment policy and the composition and
diversification of its portfolio and is consistent with the requirements of
ERISA and the Code.
LEGAL INVESTMENT CONSIDERATIONS
Although each Class of the Offered Certificates is currently rated in the
highest rating category by each Rating Agency, the Offered Certificates (other
than the Class A-9 and Class A-10 Certificates) do not constitute "mortgage
related securities" for purposes of Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"). Accordingly, many institutions with legal authority to invest in
comparably rated securities based on first mortgage loans or deeds of trust may
not be legally authorized to invest in such Classes of Offered Certificates. The
Class A-9 and Class A-10 Certificates will constitute "mortgage related
securities" under 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, will be "legal investments" for certain types of
institutional investors to the extent provided in SMMEA. Each Class of Offered
Certificates other than the Class A-9 and Class A-10 Certificates does not
constitute "mortgage related securities" under SMMEA. Investors should consult
their own legal advisers in determining whether and the extent to which a Class
of Offered Certificates constitutes legal investments for such investors. No
representation is made herein as to whether the Offered Certificates constitute
legal investments for any entity under any applicable statute, law, rule,
regulation or order. Prospective purchasers are urged to consult with their
counsel concerning the status of the Offered Certificates as legal investments
for such purchasers prior to investing in any Class of Offered Certificates.
PLAN OF DISTRIBUTION
This Prospectus will be used by First Union Capital Markets, and any other
affiliate of The Money Store Inc., when required under the federal securities
laws in connection with market-making transactions in the Offered Certificates.
First Union Capital Markets or any such other affiliate may act as principal or
agent in such transactions. Such sales will be made at prices related to
prevailing market prices at the time of such sale or otherwise.
EXPERTS
The consolidated balance sheets of MBIA Insurance Corporation and
Subsidiaries as of December 31, 1997 and December 31, 1996 and the related
consolidated statements of income, changes in shareholder's equity and cash
flows for each of the three years in the period ended December 31, 1997,
incorporated by reference into this Prospectus, have been incorporated herein in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of that firm as experts in accounting and auditing.
LEGAL MATTERS
The legality of the Offered Certificates and certain matters relating to
United States federal income tax considerations will be passed upon for the
Trust by Stroock and Stroock and Lavan LLP, New York, New York.
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RATING OF THE CLASS A CERTIFICATES
As of January 1999, each Class of the Offered Certificates was rated "AAA"
by Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P") and
"Aaa" by Moody's Investors Service, Inc. ("MOODY'S") (collectively, the "RATING
AGENCIES"). Such ratings are the highest long-term ratings that the Rating
Agencies assign to securities. The ratings given to the Offered Certificates are
based, among other things, upon the ratings assigned to the claims paying
ability of MBIA. Any reduction in such rating of MBIA would most likely result
in a reduction in the ratings given to the Offered Certificates. 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. No
person is obligated to maintain the rating on any Class of Offered Certificates.
The ratings of the Adjustable Rate and Auction Rate Certificates by S&P and
Moody's do not reflect the likelihood of payment of the Certificateholder's
Interest Carryover since MBIA does not insure payment of such amounts.
WHERE YOU CAN FIND MORE INFORMATION
This Prospectus is part of a registration statement that the Trust has
filed with the SEC. This Prospectus does not contain all the information in the
registration statement. Once the registration statement is declared effective,
the Trust will become subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), and will file
periodic reports and other information with the SEC.
You may read and copy any document the Trust files at the SEC's Public
Reference Rooms at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call
the SEC at 1-800-SEC-0330 for further information on the Public Reference rooms.
The SEC also maintains a site on the World Wide Web at "http://www.sec.gov" at
which you can view and download copies of reports, proxy and information
statements and other information filed electronically through the Electronic
Data Gathering, Analysis and Retrieval ("EDGAR") system. The Trust has filed the
registration statement, including all exhibits, through the EDGAR system and
therefore such materials should be available by logging onto the SEC's Web site.
You may request a copy of any document that the Trust files with the SEC,
at no cost, by writing or telephoning the Trust at the following address: The
Money Store Home Equity Trust 1997-B, c/o The Money Store Inc., 707 Third
Street, West Sacramento, California 95606, (916) 617-2699.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The SEC allows the Trust to "incorporate by reference" information it files
with the SEC, which means that the Trust can disclose important information to
you by referring you to those documents. The information incorporated by
reference is considered to be part of this Prospectus. Information that the
Trust files later with the SEC will automatically update the information in the
Prospectus. In all cases, you should rely on the later information rather than
on any different information included in this Prospectus. The Trust incorporates
by reference any future annual, monthly and special SEC reports filed by or on
behalf of the Trust until the termination of the offering of the Offered
Certificates hereby.
As a recipient of this Prospectus, you may request a copy of any document
the Trust incorporates by reference, except exhibits to the documents (unless
the exhibits are specifically incorporated by reference), at no cost, by writing
or calling the Trust at the following address: The Money Store Home Equity Trust
1997-B, c/o The Money Store Inc., 707 Third Street, West Sacramento, California
95606, (916) 617-2699.
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ANNEX I
AUCTION PROCEDURES
The following description of the Auction Procedures applies to each Class
of Auction Rate Certificates. The term "Certificate," as used in this Annex,
refers to each Class of Auction Rate Certificates, and the term
"Certificateholder" refers to Certificateholders holding Auction Rate
Certificates.
DEFINITIONS
Capitalized terms used herein and not otherwise defined have the meanings
ascribed in the accompanying Prospectus, including the Annexes thereto.
Additionally, the following terms have the meanings ascribed to them:
"AGREEMENT" means the Pooling and Servicing Agreement dated as of May 31,
1997 among The Bank of New York, as Trustee, The Money Store Inc., as
Representative and Servicer and the Originators listed therein, including the
Auction Procedures set forth therein as Schedule II.
"ALL HOLD RATE" means ninety percent (90%) of One-Month LIBOR.
"AUCTION" means the implementation of the Auction Procedures on an Auction
Date.
"AUCTION AGENT" means the initial auction agent under the initial Auction
Agent Agreement unless and until a substitute Auction Agent Agreement becomes
effective, after which "Auction Agent" shall mean the substitute auction agent.
"AUCTION AGENT AGREEMENT" means the initial Auction Agent Agreement unless
and until a substitute Auction Agent Agreement is entered into, after which
"Auction Agent Agreement" shall mean such substitute Auction Agent Agreement.
"AUCTION AGENT FEE" has the meaning set forth in the Auction Agent
Agreement.
"AUCTION AGENT FEE RATE" has the meaning set forth in the Auction Agent
Agreement.
"AUCTION DATE" means, with respect to the Initial Period for each Class of
Certificates, July 14, 1997 and thereafter, the Business Day immediately
preceding the first day of each Auction Period for each Certificate, other than:
(A) each Auction Period commencing after the ownership of the
Certificates is no longer maintained in Book-Entry Form by the Depository;
(B) each Auction Period commencing after and during the continuance of
a Certificate Insurer Default; or
(C) each Auction Period commencing less than two Business Days after
the cure or waiver of a Certificate Insurer Default.
Notwithstanding the foregoing, the Auction Date for one or more Auction
Periods may be changed pursuant to the Pooling and Servicing Agreement, as
described herein.
"AUCTION PERIOD" means, with respect to each Certificate, the Interest
Period applicable to such Certificate during which time the applicable
Certificate Interest Rate is determined, which Auction Period (after the Initial
Period for such Certificate) shall commence on each Remittance Date and shall
continue through the day immediately preceding the next Remittance Date for such
Certificate, as the same may be adjusted pursuant to the Pooling and Servicing
Agreement.
"AUCTION PROCEDURES" means the procedures set forth in the Pooling and
Servicing Agreement, and described herein by which the Auction Rate applicable
to a Certificate is determined.
"AUCTION RATE" means, with respect to any Certificate, the rate of interest
per annum that results from the implementation of the Auction Procedures and is
determined as described in the Pooling and Servicing Agreement and this Annex I.
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"AUTHORIZED DENOMINATIONS" means, with respect to any Certificate, $25,000
and any integral multiple in excess thereof.
"BROKER-DEALER" means Lehman Brothers Inc. or any other broker or dealer
(each as defined in the Securities Exchange Act of 1934, as amended), commercial
bank or other entity permitted by law to perform the functions required of a
Broker-Dealer set forth in the Auction Procedures that (a) is a Participant (or
an affiliate of a Participant), (b) has been appointed as such by the
Representative and (c) has entered into a Broker-Dealer Agreement that is in
effect on the date of reference.
"BROKER-DEALER AGREEMENT" means each agreement between the Auction Agent
and a Broker-Dealer pursuant to which the Broker-Dealer agrees to participate in
Auctions as set forth in the Auction Procedures, as from time to time amended or
supplemented.
"BROKER-DEALER FEE" has the meaning set forth in the Auction Agent
Agreement.
"BROKER-DEALER FEE RATE" has the meaning set forth in the Auction Agent
Agreement.
"BUSINESS DAY" means any day other than (i) a Saturday or Sunday or (ii) a
day on which banking institutions in the States of New York or New Jersey are
authorized or obligated by law or executive order to be closed.
"CERTIFICATE INITIAL RATE" means one month LIBOR minus 0% per annum.
"CERTIFICATE INITIAL RATE ADJUSTMENT DATE" means July 15, 1997.
"CERTIFICATE INSURER DEFAULT" means a default by MBIA under the MBIA Policy
relating to the Auction Rate Certificates.
"CERTIFICATE INTEREST RATE" means, with respect to any Class of Auction
Rate Certificate, initially the Certificate Initial Rate until the first Auction
Date for such Class of Auction Rate Certificates, at which time the related
Certificate Interest Rate will be reset pursuant to the Auction Procedures.
"EXISTING CERTIFICATEHOLDER" means (i) with respect to and for the purpose
of dealing with the Auction Agent in connection with an Auction, a Person who is
a Broker-Dealer listed in the Existing Certificateholder Registry at the close
of business on the Business Day immediately preceding such Auction and (ii) with
respect to and for the purpose of dealing with the Broker-Dealer in connection
with an Auction, a Person who is a beneficial owner of any Certificate.
"EXISTING CERTIFICATEHOLDER REGISTRY" means the registry of Persons who are
owners of the Securities, maintained by the Auction Agent as provided in the
Auction Agent Agreement.
"INITIAL PERIOD" means, as to any Certificate, the period commencing on the
Closing Date and continuing through the day immediately preceding the
Certificate Initial Rate Adjustment Date for such Certificate.
"INTEREST PERIOD" means, with respect to a Certificate, the Initial Period
for such Certificate and each period commencing on the Rate Adjustment Date for
such Certificate and ending on the day before (i) the next Rate Adjustment Date
for such Certificate or (ii) the Final Maturity Date of such Certificate, as
applicable.
"LIBOR DETERMINATION DATE" means the date which is both a Business Day and
a London Banking Day prior to the commencement of each related Interest Period.
"LONDON BANKING DAY" means any Business Day on which dealings in deposits
in United States dollars are transacted in the London interbank market.
"MARKET AGENT" means Lehman Brothers Inc., in such capacity under the
Pooling and Servicing Agreement, or any successor to it in such capacity
thereunder.
"MAXIMUM AUCTION RATE" means, either (A) One-Month LIBOR plus 0.60% (if
both ratings assigned by the Rating Agencies to the Auction Rate Certificates
are "Aa3" or "A-" or better) or (B) One-Month LIBOR plus 1.0% (if any one of the
ratings assigned by the Rating Agencies to the Auction Rate Certificates
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is less than "Aa3" or "AA-"). For purposes of the Auction Agent and the Auction
Procedures, the ratings referred to in this definition shall be the last ratings
of which the Auction Agent has been given notice pursuant to the Auction Agent
Agreement.
"NON-PAYMENT RATE" means One-Month LIBOR plus 0.60%.
"ONE-MONTH LIBOR" means the London interbank offered rate for deposits in
U.S. dollars having a maturity of one month commencing on the related LIBOR
Determination Date (the "ONE-MONTH INDEX MATURITY") which appears on Telerate
Page 3750 as of 11:00 a.m., London time, on such LIBOR Determination Date. If
such rate does not appear on Telerate Page 3750, the rate for that day will be
determined on the basis of the rates at which deposits in U.S. dollars, having
the One Month Index Maturity and in a principal amount of not less than U.S.
$1,000,000, are offered at approximately 11:00 a.m., London time, on such LIBOR
Determination Date to prime banks in the London interbank market by the
Reference Banks. The Auction Agent will request the principal London office of
each of such Reference Banks to provide a quotation of its rate. If at least two
such quotations are provided, the rate for that day will be the arithmetic mean
of the quotations. If fewer than two quotations are provided, the rate for that
day will be the arithmetic mean of the rates quoted by major banks in New York
City, selected by the Auction Agent, at approximately 11:00 a.m., New York City
time, on such LIBOR Determination Date for loans in U.S. dollars to leading
European banks having the One Month Index Maturity and in a principal amount
equal to an amount of not less than U.S. $1,000,000; provided that if the banks
selected as aforesaid are not quoting as mentioned in this sentence, One-Month
LIBOR in effect for the applicable Interest Period will be One-Month LIBOR in
effect for the previous Interest Period.
"PERSON" means any individual, corporation, estate, partnership, limited
liability company, joint venture, association, joint stock company, trust
(including any beneficiary thereof), unincorporated organization or government
or any agency or political subdivision thereof.
"POTENTIAL CERTIFICATEHOLDER" means any Person (including an Existing
Certificateholder that is (i) a Broker-Dealer when dealing with the Auction
Agent and (ii) a potential beneficial owner when dealing with a Broker-Dealer)
who may be interested in acquiring Certificates (or, in the case of an Existing
Certificateholder thereof, an additional principal amount of Certificates).
"RATE ADJUSTMENT DATE" means, with respect to each Certificate, the date on
which the applicable Certificate Interest Rate is effective and means, with
respect to each such Certificate, the date of commencement of each Auction
Period.
"RATE DETERMINATION DATE" means, with respect to any Certificate, the
Auction Date, or if no Auction Date is applicable to such Certificate, the
Business Day immediately preceding the date of commencement of an Auction
Period.
"REFERENCE BANKS" means leading banks selected by the Auction Agent and
engaged in transactions in Eurodollar deposits in the international Eurocurrency
market.
EXISTING CERTIFICATEHOLDERS AND POTENTIAL CERTIFICATEHOLDERS
Participants in each Auction will include: (i) "Existing
Certificateholders," which shall mean any Certificateholder according to the
records of the Auction Agent at the close of business on the Business Day
preceding each Auction Date; and (ii) "Potential Certificateholders," which
shall mean any person, including any Existing Certificateholder or a
Broker/Dealer, who may be interested in acquiring Certificates (or, in the case
of an Existing Certificateholder, an additional principal amount of the
Certificate such Certificateholder then holds). See "Broker-Dealer."
By purchasing a Certificate, whether in an Auction or otherwise, each
prospective purchaser of Certificates or its Broker-Dealer must agree and will
be deemed to have agreed: (i) to participate in Auctions on the terms described
herein; (ii) so long as the beneficial ownership of the Certificates is
maintained in Book-Entry Form to sell, transfer or otherwise dispose of the
Certificates only pursuant to a Bid (as defined below) or a Sell Order (as
defined below) in an Auction, or to or through a Broker-Dealer, provided that in
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<PAGE> 49
the case of all transfers other than those pursuant to an Auction, the Existing
Certificateholder of the Certificates so transferred, its Participant or
Broker-Dealer advises the Auction Agent of such transfer; (iii) to have its
beneficial ownership of Certificates maintained at all times in Book-Entry Form
for the account of its Participant, which in turn will maintain records of such
beneficial ownership, and to authorize such Participant to disclose to the
Auction Agent such information with respect to such beneficial ownership as the
Auction Agent may request; (iv) that a Sell Order placed by an Existing
Certificateholder will constitute an irrevocable offer to sell the principal
amount of the Certificate specified in such Sell Order; (v) that a Bid placed by
an Existing Certificateholder will constitute an irrevocable offer to sell the
principal amount of the Certificate specified in such Bid if the rate specified
in such Bid is greater than, or in some cases equal to, the Auction Rate of such
Certificate, determined as described herein; and (vi) that a Bid placed by a
Potential Certificateholder will constitute an irrevocable offer to purchase the
amount, or a lesser principal amount, of the Certificate specified in such Bid
if the rate specified in such Bid is, respectively, less than or equal to the
Certificate Interest Rate of the specified Certificate, determined as described
herein.
The principal amount of the Certificates purchased or sold may be subject
to proration procedures on the Auction Date. Each purchase or sale of
Certificates on the Auction Date will be made for settlement on the first day of
the Interest Period immediately following such Auction Date at a price equal to
100% of the principal amount thereof, plus accrued but unpaid interest thereon.
The Auction Agent is entitled to rely upon the terms of any Order submitted to
it by a Broker-Dealer.
Auction Agent
Bankers Trust Company will be appointed as Auction Agent to serve as agent
for the Trust in connection with Auctions. The Trustee will enter into the
Auction Agreement with Bankers Trust Company, as the Auction Agent. Any
Substitute Auction Agent will be (i) a bank, national banking association or
trust company duly organized under the laws of the United States of America or
any state or territory thereof having its principal place of business in the
Borough of Manhattan, New York, or such other location as approved by the
Trustee and the Market Agent in writing and having a combined capital stock or
surplus of at least $50,000,000, or (ii) a member of the National Association of
Certificates Dealers, Inc. having a capitalization of at least $50,000,000, and,
in either case, authorized by law to perform all the duties imposed upon it
under the Pooling and Servicing Agreement and under the Auction Agent Agreement
and approved by MBIA in writing. The Auction Agent may at any time resign and be
discharged of the duties and obligations created by the Pooling and Servicing
Agreement by giving at least 90 days notice to the Trustee and the Market Agent.
The Auction Agent may be removed at any time by the Trustee upon the written
direction of MBIA, or, with the consent of MBIA, the Certificateholders of
66 2/3% of the aggregate principal amount of the Certificates then outstanding,
by an instrument signed by the MBIA or such Certificateholders or their
attorneys and filed with the Auction Agent, the Trustee and the Market Agent
upon at least 90 days' notice. Neither resignation nor removal of the Auction
Agent pursuant to the preceding two sentences will be effective until and unless
a Substitute Auction Agent has been appointed, has been approved in writing by
MBIA and has accepted such appointment. If required by MBIA, the
Certificateholders of 66 2/3% of the aggregate principal amount of the
Certificates then outstanding or by the Market Agent, a Substitute Auction Agent
Agreement shall be entered into with a Substitute Auction Agent. Notwithstanding
the foregoing, the Auction Agent may terminate the Auction Agent Agreement if,
within 25 days after notifying the Trustee, MBIA and the Market Agent in writing
that it has not received payment of any Auction Agent Fee due it in accordance
with the terms of the Auction Agent Agreement, the Auction Agent does not
receive such payment.
If the Auction Agent should resign or be removed or be dissolved, or if the
property or affairs of the Auction Agent shall be taken under the control of any
state or federal court or administrative body because of bankruptcy or
insolvency, or for any other reason, the Trustee, at the direction of the
Representative and MBIA (after receipt of a certificate from the Market Agent
confirming that any proposed Substitute Auction Agent meets the requirements
described in the immediately preceding paragraph above), shall use its best
efforts to appoint a Substitute Auction Agent.
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The Auction Agent is acting as agent for the Trust in connection with
Auctions. In the absence of bad, faith, negligent failure to act or negligence
on its part, the Auction Agent will not be liable for any action taken, suffered
or omitted or any error of judgment made by it in the performance of its duties
under the Auction Agent Agreement and will not be liable for any error of
judgment made in good faith unless the Auction Agent will have been negligent in
ascertaining (or failing to ascertain) the pertinent facts.
The Trustee will pay the Auction Agent the Auction Agent Fee on each
Remittance Date and will reimburse the Auction Agent upon its request for all
reasonable expenses, disbursements and advances incurred or made by the Auction
Agent in accordance with any provision of the Auction Agent Agreement or the
Broker-Dealer Agreements (including the reasonable compensation and the expenses
and disbursements of its agents and counsel). The Trust will indemnify and hold
harmless the Auction Agent for and against any loss, liability or expense
incurred without negligence or bad faith on the Auction Agent's part, arising
out of or in connection with the acceptance or administration of its agency
under the Auction Agent Agreement and the Broker-Dealer Agreements including the
reasonable costs and expenses (including the reasonable fees and expenses of its
counsel) of defending itself against any such claim or liability in connection
with its exercise or performance of any of its respective duties thereunder and
of enforcing this indemnification provision; provided that the Trust will not
indemnify the Auction Agent as described in this paragraph for any fees and
expenses incurred by the Auction Agent in the normal course of performing its
duties under the Auction Agent Agreement and under the Broker-Dealer Agreements,
such fees and expenses being payable as described above.
Broker-Dealer
Existing Certificateholders and Potential Certificateholders may
participate in Auctions only by submitting orders (in the manner described
below) through a "Broker-Dealer," including Lehman Brothers Inc. as the sole
Broker-Dealer or any other broker or dealer (each as defined in the Certificates
Exchange Act of 1934, as amended), commercial bank or other entity permitted by
law to perform the functions required of a Broker-Dealer set forth below which
(i) is a Participant or an affiliate of a Participant, (ii) has been selected by
the Trustee and (iii) has entered into a Broker-Dealer Agreement with the
Auction Agent that remains effective, in which the Broker-Dealer agrees to
participate in Auctions as described in the Auction Procedures, as from time to
time amended or supplemented.
The Broker-Dealers are entitled to a Broker-Dealer Fee on each Remittance
Date, which is payable by the Auction Agent from monies received from the
Trustee.
Market Agent
The "MARKET AGENT," will act solely as agent of the Trust and will not
assume any obligation or relationship of agency or trust for or with any of the
Certificateholders.
AUCTION PROCEDURES
General
Pursuant to the Pooling and Servicing Agreement, Auctions to establish the
Auction Rate for each Certificate issued by the Trust will be held on each
applicable Auction Date, except as described below, by application of the
Auction Procedures described herein. Such procedures are to be applicable
separately to each Class of Certificates.
The Auction Agent will calculate the Maximum Auction Rate, the All Hold
Rate and One-Month LIBOR on each Auction Date. The Servicer will calculate and,
no later than the Business Day preceding each Auction Date, will report to the
Auction Agent in writing, the Net Funds Cap applicable to the Certificates. If
the ownership of a Certificate is no longer maintained in Book-Entry Form, the
Trustee will calculate the Maximum Auction Rate, and the Servicer will report to
the Trustee in writing the Net Funds Cap, on the Business Day immediately
preceding the first day of each Interest Period commencing after delivery of
such Certificate. If a Certificate Insurer Default has occurred, the Trustee
will calculate the Non-Payment Rate on
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the Rate Determination Date for (i) each Interest Period commencing after the
occurrence and during the continuance of such Certificate Insurer Default and
(ii) any Interest Period commencing less than two Business Days after the cure
of any Certificate Insurer Default. The Auction Agent will determine One-Month
LIBOR for each Interest Period other than the Initial Period for a Certificate;
provided, that if the ownership of the Certificates is no longer maintained in
Book-Entry Form, or if a Certificate Insurer Default has occurred, then the
Trustee will determine One-Month LIBOR for each such Interest Period. The
determination by the Trustee or the Auction Agent, as the case may be, of
One-Month LIBOR will (in the absence of manifest error) be final and binding
upon the Certificateholders and all other parties. If calculated or determined
by the Auction Agent, the Auction Agent will promptly advise the Trustee of
One-Month LIBOR.
Submission of Orders
So long as the ownership of the Certificates is maintained in Book-Entry
Form, an Existing Certificateholder may sell, transfer or otherwise dispose of
Certificates only pursuant to a Bid or Sell Order (as hereinafter defined)
placed in an Auction or through a Broker-Dealer, provided that, in the case of
all transfers other than pursuant to Auctions, such Existing Certificateholder,
its Broker-Dealer or its Participant advises the Auction Agent of such transfer.
Auctions for each Class of Certificates will be conducted on each applicable
Auction Date, if there is an Auction Agent on such Auction Date, in the
following manner (such procedures to be applicable separately to each Class of
Certificates).
Prior to the Submission Deadline (defined as 1:00 p.m., eastern time, on
any Auction Date or such other time on any Auction Date by which Broker-Dealers
are required to submit Orders to the Auction Agent as specified by the Auction
Agent from time to time) on each Auction Date relating to a Certificate:
(a) each Existing Certificateholder of the applicable Certificate may
submit to a Broker-Dealer by telephone or otherwise information as to: (i)
the principal amount and class of outstanding Certificates, if any, held by
such Existing Certificateholder which such Existing Certificateholder
desires to continue to hold without regard to the Certificate Interest Rate
for such Certificates for the next succeeding Auction Period (a "HOLD
ORDER"); (ii) the principal amount and class of outstanding Certificates,
if any, which such Existing Certificateholder offers to sell if the
Certificate Interest Rate for such Certificates for the next succeeding
Auction Period will be less than the rate per annum specified by such
Existing Certificateholder (a "BID"); and/or (iii) the principal amount and
class of outstanding Certificates, if any, held by such Existing
Certificateholder which such Existing Certificateholder offers to sell
without regard to the Certificate Interest Rate for such Certificates for
the next succeeding Auction Period (a "SELL ORDER"); and
(b) one or more Broker-Dealers may contact Potential
Certificateholders to determine the principal amount and class of
Certificates which each such Potential Certificateholder offers to
purchase, if the Certificate Interest Rate for such Certificates for the
next succeeding Auction Period will not be less than the rate per annum
specified by such Potential Certificateholder (also a "BID").
Each Hold Order, Bid and Sell Order will be an "ORDER." Each Existing
Certificateholder and each Potential Certificateholder placing an Order is
referred to as a "BIDDER."
Subject to the provisions described below under "Validity of Orders," a Bid
by an Existing Certificateholder will constitute an irrevocable offer to sell:
(i) the principal amount and class of the outstanding Certificates specified in
such Bid if the Certificate Interest Rate for such Certificates will be less
than the rate specified in such Bid, (ii) such principal amount or a lesser
principal amount and class of the outstanding Certificates to be determined as
described below in "Acceptance and Rejection of Orders," if the Certificate
Interest Rate for such Certificates will be equal to the rate specified in such
Bid or (iii) such principal amount or a lesser principal amount of the then
outstanding Certificates to be determined as described below under "Acceptance
and Rejection of Orders," if the rate specified therein will be higher than the
Certificate Interest Rate for such Certificates and Sufficient Bids (as defined
below) have not been made.
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Subject to the provisions described below under "Validity of Orders," a
Sell Order by an Existing Certificateholder will constitute an irrevocable offer
to sell: (i) the principal amount of the Certificate specified in such Sell
Order or (ii) such principal amount or a lesser principal amount of outstanding
Certificates of the specified Certificate as described below under "Acceptance
and Rejection of Orders," if Sufficient Bids have not been made.
Subject to the provisions described below under "Validity of Orders," a Bid
by a Potential Certificateholder will constitute an irrevocable offer to
purchase: (i) the principal amount of the Certificate specified in such Bid if
the Auction Rate for such Certificates will be higher than the rate specified in
such Bid or (ii) such principal amount or a lesser principal amount of such
Certificates as described below in "Acceptance and Rejection of Orders," if the
Certificate Interest Rate is equal to the rate specified in such Bid.
Each Broker-Dealer will submit in writing to the Auction Agent prior to the
Submission Deadline on each Auction Date all Orders obtained by such
Broker-Dealer and will specify with respect to each such Order: (i) the name of
the Bidder placing such Order; (ii) the aggregate principal amount and class of
Certificate that are the subject of such Order; (iii) to the extent that such
Bidder is an Existing Certificateholder: (a) the principal amount and class of
Certificates, if any, subject to any Hold Order placed by such Existing
Certificateholder; (b) the principal amount, and class of Certificates, if any,
subject to any Bid placed by such Existing Certificateholder and the rate
specified in such Bid; and (c) the principal amount, and class of Certificates,
if any, subject to any Sell Order placed by such Existing Certificateholder, and
(iv) to the extent such Bidder is a Potential Certificateholder, the rate
specified in such Potential Certificateholder's Bid.
If any rate specified in any Bid contains more than three figures to the
right of the decimal point, the Auction Agent will round such rate up to the
next highest one-thousandth (.001) of one percent.
If an Order or Orders covering all Certificates of the applicable class
held by any Existing Certificateholder are not submitted to the Auction Agent
prior to the Submission Deadline, the Auction Agent will deem a Hold Order to
have been submitted on behalf of such Existing Certificateholder covering the
principal amount of Certificates held by such Existing Certificateholder and not
subject to an Order submitted to the Auction Agent.
Neither the Representative, the Trustee nor the Auction Agent will be
responsible for any failure of a Broker-Dealer to submit an Order to the Auction
Agent on behalf of any Existing Certificateholder or Potential
Certificateholder.
An Existing Certificateholder may submit multiple Orders, of different
types and specifying different rates, in an Auction with respect to Certificates
then held by such Existing Certificateholder. An Existing Certificateholder that
offers to purchase additional Certificates is, for purposes of such offer,
treated as a Potential Certificateholder.
Any Bid specifying a rate higher than the Maximum Auction Rate will (i) be
treated as a Sell Order if submitted by a Existing Certificateholder and (ii)
not be accepted if submitted by a Potential Certificateholder.
Validity of Orders
If any Existing Certificateholder submits through a Broker-Dealer to the
Auction Agent one or more Orders covering in the aggregate more than the
principal amount of the class of Certificates held by such Existing
Certificateholder, such Orders will be considered valid as follows and in the
order of priority described below.
Hold Orders. All Hold Orders will be considered valid, but only up to the
aggregate principal amount of the class of Certificates held by such Existing
Certificateholder, and if the aggregate principal amount of the class of
Certificates subject to such Hold Orders exceeds the aggregate principal amount
of the class of Certificates held by such Existing Certificateholder, the
aggregate principal amount of the class of Certificates subject to each such
Hold Order will be reduced pro rata so that the aggregate principal amount of
the class of
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Certificates subject to all such Hold Orders equals the aggregate principal
amount of the class of Certificates held by such Existing Certificateholder.
Bids. Any Bid will be considered valid up to an amount equal to the excess
of the principal amount of the class of Certificates held by such Existing
Certificateholder over the aggregate principal amount of such Certificate,
subject to any Hold Orders referred to above. Subject to the preceding sentence,
if multiple Bids with the same rate are submitted on behalf of such Existing
Certificateholder and the aggregate principal amount of Certificates subject to
such Bids is greater than such excess, such Bids will be considered valid up to
an amount equal to such excess. Subject to the two preceding sentences, if more
than one Bid with different rates are submitted on behalf of such Existing
Certificateholder, such Bids will be considered valid first in the ascending
order of their respective rates until the highest rate is reached at which such
excess exists and then at such rate up to the amount of such excess. In any
event, the aggregate principal amount of Certificates, if any, subject to Bids
not valid under the provisions described above will be treated as the subject of
a Bid by a Potential Certificateholder at the rate therein specified.
Sell Orders. All Sell Orders will be considered valid up to an amount
equal to the excess of the principal amount of Certificates of the class held by
such Existing Certificateholder over the aggregate principal amount of
Certificates subject to valid Hold Orders and valid Bids as referred to above.
If more than one Bid for a class of Certificate is submitted on behalf of
any Potential Certificateholder, each Bid submitted will be a separate Bid with
the rate and principal amount therein specified. Any Bid or Sell Order submitted
by an Existing Certificateholder covering an aggregate principal amount of
Certificates not equal to an Authorized Denomination or an integral multiple
thereof will be rejected and will be deemed a Hold Order. Any Bid submitted by a
Potential Certificateholder covering an aggregate principal amount of
Certificates not equal to an Authorized Denomination or an integral multiple
thereof will be rejected. Any Order submitted in an Auction by a Broker-Dealer
to the Auction Agent prior to the Submission Deadline on any Auction Date will
be irrevocable.
A Hold Order, a Bid or a Sell Order that has been determined valid pursuant
to the procedures described above is referred to as a "SUBMITTED HOLD ORDER," a
"SUBMITTED BID" and a "SUBMITTED SELL ORDER," respectively (collectively,
"SUBMITTED ORDERS").
Determination of Sufficient Bid and Bid Auction Rate
Not earlier than the Submission Deadline on each Auction Date, the Auction
Agent will assemble all valid Submitted Orders and will determine:
(a) for the applicable Certificate, the excess of the total principal
amount of such Certificates over the sum of the aggregate principal amount
of such Certificates subject to Submitted Hold Orders (such excess being
hereinafter referred to as the "AVAILABLE CERTIFICATES"); and
(b) from such Submitted Orders whether the aggregate principal amount
of Certificates of such class subject to Submitted Bids by Potential
Certificateholders specifying one or more rates equal to or lower than the
Maximum Auction Rate exceeds or is equal to the sum of (i) the aggregate
principal amount of Certificates of such class subject to Submitted Bids by
Existing Certificateholders specifying one or more rates higher than the
Maximum Auction Rate and (ii) the aggregate principal amount of
Certificates of such class subject to Submitted Sell Orders (in the event
such excess or such equality exists other than because all of the
Certificates are subject to Submitted Hold Orders, such Submitted Bids by
Potential Certificateholders above will be hereinafter referred to
collectively as "SUFFICIENT BIDS"); and
(c) if Sufficient Bids exist, the "Bid Auction Rate," which will be
the lowest rate specified in such Submitted Bids such that if:
(i) each such Submitted Bid from Existing Certificateholders of
such Certificate specifying such lowest rate and all other Submitted
Bids from Existing Certificateholders of such Certificate specifying
lower rates were rejected (thus entitling such Existing
Certificateholders to continue to hold the principal amount of
Certificates subject to such Submitted Bids); and
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(ii) each such Submitted Bid from Potential Certificateholders of
such Certificate specifying such lowest rate and all other Submitted
Bids from Potential Certificateholders specifying lower rates, were
accepted, the result would be that such Existing Certificateholders
described in subparagraph (c)(i) above would continue to hold an
aggregate principal amount of Certificates which, when added to the
aggregate principal amount of Certificates to be purchased by such
Potential Certificateholders described in this subparagraph (ii) would
equal not less than the Available Certificates.
Determination of Auction Rate and Certificate Interest Rate, Notice
Promptly after the Auction Agent has made the determinations described
above, the Auction Agent is to advise the Trustee of the applicable Net Funds
Cap, the Maximum Auction Rate, the All Hold Rate and the components thereof on
the Auction Date, and based on such determinations, the Auction Rate for the
next succeeding Interest Period for the applicable Certificate as follows:
(a) if Sufficient Bids exist, that the Auction Rate for the next
succeeding Interest Period will be equal to the Bid Auction Rate so
determined;
(b) if Sufficient Bids do not exist (other than because all of the
Certificates of the applicable Certificate are subject to Submitted Hold
Orders), that the Auction Rate for the next succeeding Interest Period will
be equal to the Maximum Auction Rate; or
(c) if all Certificates of the applicable Certificate are subject to
Submitted Hold Orders, that the Auction Rate for the next succeeding
Interest Period will be equal to the All Hold Rate.
Promptly after the Auction Agent has determined the Auction Rate, the
Auction Agent will determine and advise the Trustee of the Certificate Interest
Rate for each applicable Certificate, which rate will be the lesser of (a) the
Auction Rate for each such Certificate and (b) the applicable Net Funds Cap. In
no event shall a Certificate Interest Rate exceed the rate (the "Certificate
Interest Rate Limitation") set forth in the Prospectus.
Acceptance and Rejection of Orders
Existing Certificateholders will continue to hold the principal amount of
Certificates of such class that are subject to Submitted Hold Orders. If, with
respect to a Certificate, the Net Funds Cap is equal to or greater than the Bid
Auction Rate and if Sufficient Bids, as described above under "Determination of
Sufficient Bids and Bid Auction Rate," have been received by the Auction Agent,
the Bid Auction Rate will be the Certificate Interest Rate, and Submitted Bids
and Submitted Sell Orders will be accepted or rejected and the Auction Agent
will take such other action as provided in the Pooling and Servicing Agreement
and described below under "Sufficient Bids."
If the applicable Net Funds Cap is less than the Auction Rate, the
Certificate Interest Rate will be the applicable Net Funds Cap. If the Auction
Rate and the Net Funds Cap are both greater than the Certificate Interest Rate
Limitation, the Certificate Interest Rate for each series shall be equal to the
Certificate Interest Rate Limitation. If the Auction Agent has not received
Sufficient Bids as described above under "Determination of Sufficient Bids and
Bid Auction Rate" (other than because all of the Certificates are subject to
Submitted Holds Orders), the Certificate Interest Rate will be the lesser of the
Maximum Auction Rate or the Net Funds Cap. In any of the cases described above
in this paragraph, Submitted Orders will be accepted or rejected and the Auction
Agent will take such other action as described below under "Insufficient Bids."
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Sufficient Bids. If Sufficient Bids have been made with a respect to a
Certificate and the applicable Net Funds Cap is equal to or greater than the Bid
Auction Rate (in which case the Certificate Interest Rate shall be the Bid
Auction Rate), all Submitted Sell Orders will be accepted and, subject to the
denomination requirements described below, Submitted Bids will be accepted or
rejected as follows in the following order of priority and all other Submitted
Bids will be rejected:
(a) Existing Certificateholders' Submitted Bids specifying any rate
that is higher than the Certificate Interest Rate will be accepted, thus
requiring each such Existing Certificateholder to sell the aggregate
principal amount of Certificates subject to such Submitted Bids;
(b) Existing Certificateholders' Submitted Bids specifying any rate
that is lower than the Certificate Interest Rate will be rejected, thus
entitling each such Existing Certificateholder to continue to hold the
aggregate principal amount of Certificates subject to such Submitted Bids;
(c) Potential Certificateholders' Submitted Bids specifying any rate
that is lower than the Certificate Interest Rate will be accepted;
(d) Each Existing Certificateholder's Submitted Bid specifying a rate
that is equal to the Certificate Interest Rate will be rejected, thus
entitling such Existing Certificateholder to continue to hold the aggregate
principal amount of Certificates subject to such Submitted Bid, unless the
aggregate principal amount of Certificates subject to such Submitted Bids
will be greater than the principal amount of Certificates (the "remaining
principal amount") equal to the excess of the Available Certificates over
the aggregate principal amount of Certificates subject to Submitted Bids
described in subparagraphs (b) and (c) above, in which event such Submitted
Bid of such Existing Certificateholder will be rejected in part and such
Existing Certificateholder will be entitled to continue to hold the
principal amount of Certificates subject to such Submitted Bid, but only in
an amount equal to the aggregate principal amount of Certificates obtained
by multiplying the remaining principal amount by a fraction, the numerator
of which will be the principal amount of Certificates held by such Existing
Certificateholder subject to such Submitted Bid and the denominator of
which will be the sum of the principal amount of Certificates subject to
such Submitted Bids made by all such Existing Certificateholders that
specified a rate equal to the Certificate Interest Rate; and
(e) Each Potential Certificateholder's Submitted Bid specifying a rate
that is equal to the Certificate Interest Rate will be accepted, but only
in an amount equal to the principal amount of Certificates obtained by
multiplying the excess of the aggregate principal amount of Available
Certificates over the aggregate principal amount of Certificates subject to
Submitted Bids described in subparagraphs (b), (c) and (d) above by a
fraction, the numerator of which will be the aggregate principal amount of
Certificates subject to such Submitted Bid and the denominator of which
will be the sum of the principal amount of Certificates subject to
Submitted Bids made by all such Potential Certificateholders that specified
a rate equal to the Certificate Interest Rate.
Insufficient Bids. If Sufficient Bids have not been made with respect to a
Certificate (other than because all of the Certificates of such class are
subject to Submitted Hold Orders) or if the applicable Net Funds Cap is less
than the Bid Auction Rate (in which case the Certificate Interest Rate shall be
the Net Funds Cap) or if the Certificate Interest Rate Limitation applies,
subject to the denomination requirements described below, Submitted Orders will
be accepted or rejected as follows in the following order of priority and all
other Submitted Bids will be rejected:
(a) Existing Certificateholders' Submitted Bids specifying any rate
that is equal to or lower than the Certificate Interest Rate will be
rejected, thus entitling such Existing Certificateholders to continue to
hold the aggregate principal amount of Certificates subject to such
Submitted Bids;
(b) Potential Certificateholders' Submitted Bids specifying any rate
that is equal to or lower than the Certificate Interest Rate will be
accepted, and specifying any rate that is higher than the Certificate
Interest Rate will be rejected; and
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(c) each Existing Certificateholder's Submitted Bid specifying any
rate that is higher than the Certificate Interest Rate and the Submitted
Sell Order of each Existing Certificateholder will be accepted, thus
entitling each Existing Certificateholder that submitted any such Submitted
Bid or Submitted Sell Order to sell the Certificates subject to such
Submitted Bid or Submitted Sell Order, but in both cases only in an amount
equal to the aggregate principal amount of Certificates obtained by
multiplying the aggregate principal amount of Certificates subject to
Submitted Bids described in subparagraph (b) above by a fraction, the
numerator of which will be the aggregate principal amount of Certificates
held by such Existing Certificateholder subject to such Submitted Bid or
Submitted Sell Order and the denominator of which will be the aggregate
principal amount of Certificates subject to all such Submitted Bids and
Submitted Sell Orders.
All Hold Orders. If all Certificates of a class are subject to Submitted
Hold Orders, all Submitted Bids will be rejected.
Authorized Denominations Requirement. If, as a result of the procedures
described above regarding Sufficient Bids and Insufficient Bids, any Existing
Certificateholder would be entitled or required to sell, or any Potential
Certificateholder would be entitled or required to purchase, a principal amount
of Certificates that is not equal to an Authorized Denomination or an integral
multiple thereof, the Auction Agent will, in such manner as in its sole
discretion it will determine, round up or down the principal amount of
Certificates to be purchased or sold by any Existing Certificateholder or
Potential Certificateholder so that the principal amount of Certificates
purchased or sold by each Existing Certificateholder or Potential
Certificateholder will be equal to an Authorized Denomination or an integral
multiple in excess thereof. If, as a result of the procedures described above
regarding Insufficient Bids, any Potential Certificateholder would be entitled
or required to purchase less than a principal amount of Certificates equal to an
Authorized Denomination or any integral multiple thereof, the Auction Agent
will, in such manner as in its sole discretion it will determine, allocate
Certificates for purchase among Potential Certificateholders so that only
Certificates in an Authorized Denomination or any integral multiples in excess
thereof are purchased by any Potential Certificateholder, even if such
allocation results in one or more of such Potential Certificateholders not
purchasing any Certificates.
Based on the results of each Auction, the Auction Agent is to determine the
aggregate principal amount of Certificates of each class to be purchased and the
aggregate principal amount of Certificates of each class to be sold by Potential
Certificateholders and Existing Certificateholders on whose behalf each
Broker-Dealer submitted Bids or Sell Orders and, with respect to each
Broker-Dealer, to the extent that such aggregate principal amount of
Certificates to be sold differs from such aggregate principal amount of
Certificates to be purchased, determine to which other Broker-Dealer or
Broker-Dealers acting for one or more purchasers such Broker-Dealer will
deliver, or from which Broker-Dealers acting for one or more sellers such
Broker-Dealer will receive, as the case may be, Certificates.
Any calculation by the Auction Agent (or the Trustee, if applicable) of the
Certificate Interest Rate, One-Month LIBOR, the Maximum Auction Rate, the All
Hold Rate, the Net Funds Cap and the Non-Payment Rate will, in the absence of
manifest error, be binding on all other parties.
Notwithstanding anything in the Pooling and Servicing Agreement to the
contrary, no Auction is to be held on any Auction Date on which there are
insufficient moneys held by the Trustee under the Pooling and Servicing
Agreement and available to pay the principal of and interest due on the
applicable Certificate on the Remittance Date immediately following such Auction
Date.
Settlement Procedures
The Auction Agent is required to advise each Broker-Dealer that submitted
an Order in an Auction of the Certificate Interest Rate for a Certificate for
the next Interest Period and, if such Order was a Bid or Sell Order, whether
such Bid or Sell Order was accepted or rejected, in whole or in part, by
telephone not later than 3:00 pm., eastern time, on the Auction Date if the
Interest Rate is the Auction Rate and not later than 4:00 pm. eastern time on
the Auction Date if the Interest Rate is the Net Funds Cap. Each Broker-Dealer
that submitted an Order on behalf of a Bidder is required to then advise such
Bidder of the applicable
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Certificate Interest Rate for the next Interest Period and, if such Order was a
Bid or a Sell Order, whether such Bid or Sell Order was accepted or rejected, in
whole or in part, confirm purchases and sales with each Bidder purchasing or
selling Certificates as a result of the Auction and advise each Bidder
purchasing or selling Certificates as a result of the Auction to give
instructions to its Participant to pay the purchase price against delivery of
such Certificates or to deliver such Certificates against payment therefor, as
appropriate. Pursuant to the Auction Agent Agreement, the Auction Agent is to
record each transfer of Certificates on the Existing Certificateholders Registry
to be maintained by the Auction Agent.
In accordance with DTC's normal procedures, on the Business Day after the
Auction Date, the transactions described above will be executed through DTC, so
long as DTC is the Depository, and the accounts of the respective Participants
at DTC will be debited and credited and Certificates delivered as necessary to
effect the purchases and sales of Certificates as determined in the Auction.
Purchasers are required to make payment through their Participants in same-day
funds to DTC against delivery through their Participants. DTC will make payment
in accordance with its normal procedures, which now provide for payment against
delivery by its Participants in immediately available funds.
If any Existing Certificateholder selling Certificates in an Auction fails
to deliver such Certificates, the Broker-Dealer of any person that was to have
purchased Certificates in such Auction may deliver to such person a principal
amount of Certificates that is less than the principal amount of Certificates
that otherwise was to be purchased by such person but in any event equal to an
Authorized Denomination or any integral multiple thereof. In such event, the
principal amount of Certificates to be delivered will be determined by such
Broker-Dealer. Delivery of such lesser principal amount of Certificates will
constitute good delivery. Neither the Trustee nor the Auction Agent will have
any responsibility or liability with respect to the failure of a Potential
Certificateholder, Existing Certificateholder or their respective Broker-Dealer
or Participant to deliver the principal amount of Certificates or to pay for the
Certificates purchased or sold pursuant to an Auction or otherwise. For a
further description of the settlement procedures, see "SETTLEMENT PROCEDURES"
attached hereto as Annex II.
TRUSTEE NOT RESPONSIBLE FOR AUCTION AGENT, MARKET AGENT AND BROKER-DEALERS
The Trustee shall not be liable or responsible for the actions of or
failure to act by the Auction Agent, Market Agent or any Broker-Dealer under the
Pooling and Servicing Agreement or under the Auction Agent Agreement, the Market
Agent Agreement or any Broker-Dealer Agreement. The Trustee may conclusively
rely upon any information required to be furnished by the Auction Agent, the
Market Agent or any Broker-Dealer without undertaking any independent review or
investigation of the truth or accuracy of such information.
CHANGES IN THE AUCTION DATE
The Market Agent, at the consent of the Representative and MBIA, may
specify an earlier Auction Date (but in no event more than five Business Days
earlier) than the Auction Date that would otherwise be determined in accordance
with the definition of "Auction Date" with respect to one or more specified
Auction Periods in order to conform with then current market practice with
respect to similar securities or to accommodate economic and financial factors
that may affect or be relevant to the day of the week constituting an Auction
Date and the interest rate borne on the Certificates. The Representative will
not consent to such change in the Auction Date unless the Representative will
have received from the Market Agent not less than three days nor more than 20
days prior to the effective date of such change a written request for consent
together with a certificate demonstrating the need for change in reliance on
such factors. The Market Agent will provide notice of its determination to
specify an earlier Auction Date for one or more Auction Periods by means of a
written notice delivered at least 10 days prior to the proposed changed Auction
Date to the Trustee, the Auction Agent, the Representative, MBIA, the Rating
Agencies and the Depository.
The changes in Auction terms described above may be made with respect to
any class of Certificates. In connection with any change in Auction terms
described above, the Auction Agent is to provide such further notice to such
parties as is specified in the Auction Agent Agreement.
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ANNEX II
SETTLEMENT PROCEDURES
(a) Not later than (i) 3:00 p.m. if the Certificate Interest Rate is the
Auction Rate or (2) 4:00 p.m. if the Certificate Interest Rate is the Net Funds
Cap, the Auction Agent is to notify by telephone each Broker-Dealer that
participated in the Auction held on such Auction Date and submitted an Order on
behalf of an Existing Certificateholder or Potential Certificateholder of:
(i) the Certificate Interest Rate fixed for the next Interest Period;
(ii) whether there were Sufficient Bids in such Auction;
(iii) if such Broker-Dealer (a "SELLER'S BROKER-DEALER") submitted
Bids or Sell Orders on behalf of an Existing Certificateholder, whether
such Bid or Sell Order was accepted or rejected, in whole or in part, and
the principal amount of Certificates, if any, to be sold by such Existing
Certificateholder;
(iv) if such Broker-Dealer (a "BUYER'S BROKER-DEALER") submitted a Bid
on behalf of a Potential Certificateholder, whether such Bid was accepted
or rejected, in whole or in part, and the principal amount of Certificates,
if any, to be purchased by such Potential Certificateholder;
(v) if the aggregate amount of Certificates to be sold by all Existing
Certificateholders on whose behalf such Seller's Broker-Dealer submitted
Bids or Sell Orders exceeds the aggregate principal amount of Certificates
to be purchased by all Potential Certificateholders on whose behalf such
Buyer's Broker-Dealer submitted a Bid, the name or names of one or more
Buyer's Broker-Dealers and the name of the Participant, if any, of each
such Buyer's Broker-Dealer (a "PARTICIPANT") acting for one or more
purchasers of such excess principal amount of Certificates and the
principal amount of Certificates to be purchased from one or more Existing
Certificateholders on whose behalf such Seller's Broker-Dealer acted by one
or more Potential Certificateholders on whose behalf each of such Buyer's
Broker-Dealers acted;
(vi) if the principal amount of Certificates to be purchased by all
Potential Certificateholders on whose behalf such Buyer's Broker-Dealer
submitted a Bid exceeds the amount of Certificates to be sold by all
Existing Certificateholders on whose behalf such Seller's Broker-Dealer
submitted a Bid or a Sell Order, the name or names of one or more Seller's
Broker-Dealers (and the name of the Participant, if any, of each such
Seller's Broker-Dealer) acting for one or more sellers of such excess
principal amount of Certificates and the principal amount of Certificates
to be sold to one or more Potential Certificateholders on whose behalf such
Buyer's Broker-Dealer acted by one or more Existing Certificateholder on
whose behalf each of such Seller's Broker-Dealers acted; and
(vii) the Auction Date for the next succeeding Auction.
(b) On each Auction Date, each Broker-Dealer that submitted an Order on
behalf of any Existing Certificateholder or Potential Certificateholder is to:
(i) advise each Existing Certificateholder and Potential
Certificateholder on whose behalf such Broker-Dealer submitted a Bid or
Sell Order in the Auction on such Auction Date whether such Bid or Sell
Order was accepted or rejected, in whole or in part;
(ii) in the case of a Broker-Dealer that is a Buyer's Broker-Dealer,
advise each Potential Certificateholder on whose behalf such Buyer's
Broker-Dealer submitted a Bid that was accepted, in whole or in part, to
instruct such Potential Certificateholder's Participant to pay to such
Buyer's Broker-Dealer (or its Participant) through the Depository the
amount necessary to purchase the principal amount of the Certificates to be
purchased pursuant to such Bid against receipt of such Certificates
together with accrued interest;
(iii) in the case of a Broker-Dealer that is a Seller's Broker-Dealer,
instruct each Existing Certificateholder on whose behalf such Seller's
Broker-Dealer submitted a Sell Order that was accepted, in whole or in
part, or a Bid that was accepted, in whole or in part, to instruct such
Existing
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Certificateholder's Participant to deliver to such Seller's Broker-Dealer
(or its Participant) through the Depository the principal amount of the
Certificates to be sold pursuant to such Order against payment therefor;
(iv) advise each Existing Certificateholder on whose behalf such
Broker-Dealer submitted an Order and each Potential Certificateholder on
whose behalf such Broker-Dealer submitted a Bid of the Certificate Interest
Rate for the next Interest Period;
(v) advise each Existing Certificateholder on whose behalf such
Broker-Dealer submitted an Order of the next Auction Date; and
(vi) advise each Potential Certificateholder on whose behalf such
Broker-Dealer submitted a Bid that was accepted, in whole or in part, of
the next Auction Date.
(c) On the basis of the information provided to it pursuant to paragraph
(a) above, each Broker-Dealer that submitted a Bid or Sell Order in an Auction
is required to allocate any funds received by it in connection with such Auction
pursuant to paragraph (b)(ii) above, and any Certificates received by it in
connection with such Auction pursuant to paragraph (b)(iii) above, among the
Potential Certificateholders, if any, on whose behalf such Broker-Dealer
submitted Bids, the Existing Certificateholder, if any, on whose behalf such
Broker-Dealer submitted Bids or Sell Orders in such Auction, and any
Broker-Dealers identified to it by the Auction Agent following such Auction
pursuant to paragraph (a)(v) or (a)(vi) above.
(d) On each Auction Date:
(i) each Potential Certificateholder and Existing Certificateholder
with an Order in the Auction on such Auction Date will instruct its
Participant as provided in (b)(ii) or (b)(iii) above, as the case may be:
(ii) each Seller's Broker-Dealer that is not a Participant of the
Depository will instruct its Participant to deliver such Certificates
through the Depository to a Buyer's Broker-Dealer (or its Participant)
identified to such Seller's Broker-Dealer pursuant to (a)(v) above against
payment therefor; and
(iii) each Buyer's Broker-Dealer that is not a Participant in the
Depository will instruct its Participant to pay through the Depository to
Seller's Broker-Dealer (or its Participant) identified following such
Auction pursuant to (a)(vi) above the amount necessary to purchase the
Certificates to be purchased pursuant to (b)(ii) above against receipt of
such Certificates.
(e) On the Business Day following each Auction Date;
(i) each Participant for a Bidder in the Auction on such Auction Date
referred to in (d)(i) above will instruct the Depository to execute the
transactions described under (b)(ii) or (b)(iii) above for such Auction,
and the Depository will execute such transactions;
(ii) each Seller's Broker-Dealer or its Participant will instruct the
Depository to execute the transactions described in (d)(ii) above for such
Auction, and the Depository will execute such transactions; and
(iii) each Buyer's Broker-Dealer or its Participant will instruct the
Depository to execute the transactions described in (d)(iii) above for such
Auction, and the Depository will execute such transactions.
(f) If an Existing Certificateholder selling Certificates in an Auction
fails to deliver such Certificates (by authorized book-entry), a Broker-Dealer
may deliver to the Potential Certificateholder on behalf of which it submitted a
Bid that was accepted a principal amount of Certificates that is less than the
principal amount of Certificates that otherwise was to be purchased by such
Potential Certificateholder. In such event, the principal amount of Certificates
to be so delivered will be determined solely by such Broker-Dealer (but only in
Authorized Denominations). Delivery of such lesser principal amount of
Certificates will constitute good delivery. Notwithstanding the foregoing terms
of this paragraph (f), any delivery or nondelivery of Certificates
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which will represent any departure from the results of an Auction, as determined
by the Auction Agent, will be of no effect unless and until the Auction Agent
will have been notified of such delivery or nondelivery in accordance with the
provisions of the Auction Agent Agreement and the Broker-Dealer Agreements.
Neither the Trustee nor the Auction Agent will have any responsibility or
liability with respect to the failure of a Potential Certificateholder, Existing
Certificateholder or their Respective Broker-Dealer or Participant to take
delivery of or deliver, as the case may be, the principal amount of the
Certificates purchased or sold pursuant to an Auction or otherwise.
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ANNEX III
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Class A
Certificates (the "GLOBAL SECURITIES") will be available only in book-entry
form. Investors in the Global Securities may hold such Global Securities through
any of The Depository Trust Company, Cedel Bank or Euroclear. The Global
Securities will be tradeable as home market instruments in both the European and
U.S. domestic markets. Initial settlement and all secondary trades will settle
in same-day funds.
Secondary market trading between investors holding Global Securities
through Cedel Bank and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional Eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior Asset Backed Certificates issues.
Secondary cross-market trading between Cedel Bank or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedel Bank and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Cedel Bank and Euroclear will
hold positions on behalf of their participants through their respective
Depositaries, which in turn will hold such positions in accounts as DTC
Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to prior Asset-Backed Certificates issues.
Investor securities custody accounts will be credited with their holdings
against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel Bank or
Euroclear accounts will follow the settlement procedures applicable to
conventional Eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior Home
Equity Loan Asset-Backed Certificates issues in same-day funds.
Trading between Cedel Bank and/or Euroclear Participants. Secondary market
trading between Cedel Bank Participants or Euroclear Participants will be
settled using the procedures applicable to conventional eurobonds in same-day
funds.
Trading between DTC Seller and Cedel Bank or Euroclear Purchaser. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Cedel Bank Participant or a Euroclear
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Participant, the purchaser will send instructions to Cedel Bank or Euroclear
through a Cedel Bank Participant or Euroclear Participant at least one business
day prior to settlement. Cedel Bank or Euroclear will instruct the respective
Depositary, as the case may be, to receive the Global Securities against
payment. Payment will include interest accrued on the Global Securities from and
including the last coupon payment date to and excluding the settlement date, on
the basis of the actual number of days in such accrual period and a year assumed
to consist of 360 days or a 360-day year of twelve 30-day months, as applicable.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. Payment
will then be made by the respective Depositary of the DTC Participant's account
against delivery of the Global Securities. After settlement has been completed,
the Global Securities will be credited to the respective clearing system and by
the clearing system, in accordance with its usual procedures, to the Cedel Bank
Participant's or Euroclear Participant's account. The securities credit will
appear the next day (European time) and the cash debt will be back-valued to,
and the interest on the Global Securities will accrue from, the value date
(which would be the preceding day when settlement occurred in New York.) If
settlement is not completed on the intended value date (i.e., the trade fails),
the Cedel Bank, or Euroclear cash debt will be valued instead as of the actual
settlement date.
Cedel Bank Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedel Bank or Euroclear. Under
this approach, they may take on credit exposure to Cedel Bank or Euroclear until
the Global Securities are credited to their accounts one day later.
As an alternative, if Cedel Bank or Euroclear has extended a line of credit
to them, Cedel Bank Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Cedel Bank Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for one
day, assuming they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, in many cases the investment income on
the Global Securities earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although this result will depend
on each Cedel Bank Participant's or Euroclear Participant's particular cost of
funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of Cedel Bank Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
Trading between Cedel Bank or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Cedel Bank Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Cedel Bank or Euroclear through a Cedel Bank Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases Cedel Bank or Euroclear will instruct the respective Depositary, as
appropriate, to deliver the Global Securities to the DTC Participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment to and excluding the settlement date
on the basis of the actual number of days in such accrual period and a year
assumed to consist of 360 days or a 360-day year of twelve 30-day months, as
applicable. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
The payment will then be reflected in the account of the Cedel Bank Participant
or Euroclear Participant the following day, and receipt of the cash proceeds in
the Cedel Bank Participant's or Euroclear Participant's account would be
back-valued to the value date (which would be the preceding day, when settlement
occurred in New York). Should the Cedel Bank Participant or Euroclear
Participant have a line of credit with its respective clearing system and elect
to be in debt in anticipation of receipt of the sale proceeds in its account,
the back-valuation will extinguish any overdraft incurred over that one-day
period. If settlement is not completed on the intended
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value date (i.e., the trade fails), receipt of the cash proceeds in the Cedel
Bank Participant's or Euroclear Participant's account would instead be valued as
of the actual settlement date.
Finally, day traders that use Cedel Bank or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedel Bank Participants
or Euroclear Participants should note that these trades would automatically fail
on the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedel Bank or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedel Bank or
Euroclear accounts) in accordance with the clearing system's customary
procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedel Bank or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the Cedel Bank
Participant or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of holding securities through Cedel Bank, or Euroclear
(or through DTC if the holder has an address outside the U.S.) will be subject
to the 30% U.S. withholding tax that generally applies to payments of interest
(including original issue discount) on registered debt issued by U.S. Persons
(as defined below), unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business in the chain of intermediaries between such beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (ii) such beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate.
Exception for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries. (Form 1001). Non-U.S. Persons that are Certificateholders residing
in a country that has a tax treaty with the United States can obtain an
exemption or reduced tax rate (depending on the treaty terms) by filing Form
1001 (Ownership, Exemption or Reduced Rate Certificate). If the treaty provides
only for a reduced rate, withholding tax will be imposed at that rate unless the
filer alternatively files Form W-8. Form 1001 may be filed by the
Certificateholders or their agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
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The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership (or other entity treated as a
corporation or partnership for federal income tax purposes) organized in or
under the laws of the United States or any state thereof, (iii) an estate the
income of which is includible in gross income for United States tax purposes,
regardless of its source, or (iv) 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 persons have the authority to control all substantial
decisions of the trust. This summary does not deal with all aspects of U.S.
Federal income tax withholding that may be relevant to foreign holders of the
Global Securities and does not address the application of recently issued
Treasury regulations relating to tax documentation requirements that are
generally effective with respect to payments made after December 31, 1999.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the Global Securities.
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ANNEX IV
ASSET BACKED CERTIFICATES
THE MONEY STORE ASSET BACKED NOTES
(ISSUABLE IN SERIES BY SEPARATE TRUSTS)
<TABLE>
<CAPTION>
<S> <C>
-------------------------------
EACH TRUST --
YOU SHOULD CAREFULLY
CONSIDER THE RISK FACTORS - will issue a series of asset backed securities, which will
BEGINNING ON PAGE 10 OF consist of one or more classes of securities; and
THIS PROSPECTUS.
- will own --
Neither the certificates nor
the notes of any series nor - a pool or pools which may consist of fixed or adjustable
the related underlying interest rate mortgage loans which may be secured by a
mortgage loans will be first, second or more junior lien on a one- to four-family
insured or guaranteed by residential, multifamily or mixed-use property, loans
any governmental agency secured by security interests in cooperative housing
or instrumentality corporations, and sales contracts secured by manufactured
housing; and
The certificates and/or
notes of each series will - other assets described in this prospectus and the
represent interests in or accompanying prospectus supplement.
rights to receive payments
from the related trust only EACH POOL OF MORTGAGE ASSETS --
and will not represent
interests in or obligations - will be sold to the related Trust by The Money Store or
of The Money Store Inc. or affiliates of The Money Store and will have been originated
any affiliate of The Money or acquired by The Money Store or its affiliates;
Store Inc.
- will be underwritten to The Money Store's standards or
This prospectus may be such other standards as described in this prospectus and the
used to offer and sell any accompanying prospectus supplement; and
series of certificates or
notes only if accompanied - will be serviced by The Money Store or one of its
by the prospectus affiliates individually or together with other servicers.
supplement for that series.
EACH SERIES OF SECURITIES --
-------------------------------
- may include two or more classes of certificates and/or
notes;
- will represent the right to receive, or will be secured
by, a specified amount of payments of principal and/or
interest on the Mortgage Assets;
- may provide credit support for certain classes by
"subordinating" certain classes to other classes of
securities;
- may be entitled to one or more of the other types of
credit support described in this prospectus; and
- will be paid only from the assets of the related Trust.
</TABLE>
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THE
CERTIFICATES OR THE NOTES OR DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
The date of this Prospectus is ,
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IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
Information is provided to you about the certificates and/or notes in two
separate documents that progressively provide more detail: (a) this Prospectus,
which provides general information, some of which may not apply to a particular
series (each, a "SERIES") of asset-backed certificates (the "CERTIFICATES") and
asset-backed notes (the "NOTES") (collectively, the "SECURITIES"), including
your Series, and (b) the accompanying Prospectus Supplement, which will describe
the specific terms of your Series of Securities, including:
- the principal balances and/or interest rates of each class of Securities
(a "CLASS") and/or subclass ("SUBCLASS");
- the timing and priority of interest and principal payments;
- statistical and other information about the primary assets of each trust
("MORTGAGE ASSETS");
- information about credit enhancement, if any, for each Class or Subclass;
- the ratings for each Class or Subclass; and
- the method for selling the Securities.
IF THE TERMS OF A PARTICULAR SERIES OF SECURITIES VARY BETWEEN THIS
PROSPECTUS AND THE PROSPECTUS SUPPLEMENT, YOU SHOULD RELY ON THE INFORMATION IN
THE PROSPECTUS SUPPLEMENT.
You should rely only on the information provided in this Prospectus and the
accompanying Prospectus Supplement including the information incorporated by
reference. No one has been authorized to provide you with different information.
The Securities are not being offered in any state where the offer is not
permitted. The Representative does not claim the accuracy of the information in
this Prospectus or the accompanying Prospectus Supplement as of any date other
than the dates stated on their respective covers.
Cross-references are included in this Prospectus and in the accompanying
Prospectus Supplement to captions in these materials where you can find further
related discussions.
---------------------
Offers of the Securities may be made through one or more different methods,
including offerings through underwriters, including First Union Capital Markets,
a division of Wheat First Securities, Inc., an affiliate of the Representative,
as more fully described under "Plan of Distribution" herein and in the related
Prospectus Supplement. The intention of any underwriter to make a secondary
market in the Securities will be set forth in the related Prospectus Supplement.
There can be no assurance that a secondary market for the Securities will
develop, or if it does develop, that it will continue. This Prospectus may not
be used to consummate sales of a Series of Securities unless accompanied by a
Prospectus Supplement.
First Union Capital Markets expects to enter into market making
transactions in the Securities and may act as principal or agent in any such
transactions. Any such purchases or sales will be made at prices related to
prevailing market prices at the time of sale. This Prospectus and the related
Prospectus Supplement may be used by First Union Capital Markets in connection
with such transactions.
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
The Prospectus Supplement relating to a Series of Certificates and/or Notes
to be offered hereunder, among other things, will set forth with respect to such
Series of Certificates and/or Notes: (i) the aggregate principal amount, he rate
at which any Class of Certificates (the "PASS-THROUGH RATE") or the rate at
which any Class of Notes (the "INTEREST RATE") bear interest or other applicable
annual rate or rates of interest (or the manner of determining such rate or
rates) and authorized denominations of each Class of such Certificates and/or
Notes; (ii) certain information concerning the Mortgage Assets and insurance
policies,
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cash accounts, letters of credit, financial guaranty insurance policies, third
party guarantees, supplemental interest payments or other forms of credit
enhancement or maturity protection or other derivative instruments, if any,
relating to the pools (each, a "POOL") of trust assets, or all or part of the
related Certificates and/or Notes; (iii) the specified interest of each Class of
Certificates and/or Notes in, and manner and priority of, the distributions on
the Mortgage Assets; (iv) information as to the nature and extent of
subordination with respect to such Series of Certificates and/or Notes, if any;
(v) the date of any distributions to holders of any Class of Notes
("NOTEHOLDERS") or holders of any Class of Certificates ("CERTIFICATEHOLDERS"
and collectively with the Noteholders, "SECURITYHOLDERS" or "HOLDERS") as
specified in the related Prospectus Supplement (each, a "REMITTANCE DATE"),
which may be monthly, quarterly, semi-annually or at other intervals; (vi)
information as to the entity or entities acting as master servicer to the trust
(the "MASTER SERVICER" or simply "SERVICER"); (vii) the circumstances, if any,
under which each trust may be subject to early termination; (viii) whether The
Money Store, Inc. ("THE MONEY STORE" or the "REPRESENTATIVE") intends to elect
to cause the trust to be treated as a "real estate mortgage investment conduit"
(a "REMIC"); and (ix) additional information with respect to the plan of sale of
such Certificates and/or Notes.
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PROSPECTUS SUMMARY
- - THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT, BUT DOES NOT
CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER IN MAKING YOUR
INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS OF A SERIES OF
CERTIFICATES AND/OR NOTES, PLEASE READ THIS ENTIRE DOCUMENT AND THE
ACCOMPANYING PROSPECTUS SUPPLEMENT CAREFULLY.
- - THIS SUMMARY PROVIDES AN OVERVIEW OF CERTAIN CALCULATIONS, CASH FLOWS AND
OTHER INFORMATION TO AID YOUR UNDERSTANDING OF THE TERMS OF THE CERTIFICATES
AND/OR NOTES AND IS QUALIFIED BY THE FULL DESCRIPTION OF THESE CALCULATIONS,
CASH FLOWS AND OTHER INFORMATION IN THIS PROSPECTUS AND THE ACCOMPANYING
PROSPECTUS SUPPLEMENT.
RELEVANT PARTIES FOR EACH SERIES OF SECURITIES
ISSUER
Each Series of Certificate and/or Notes will be issued by a separate trust (a
"TRUST" or, together with all assets owned by such Trust, a "TRUST ESTATE" or
"TRUST FUND")). Notes will be issued pursuant to an indenture (an "INDENTURE")
and Certificates will be issued pursuant to either a pooling and servicing
agreement (a "POOLING AND SERVICING AGREEMENT") or a trust agreement (a "TRUST
AGREEMENT"). The term "AGREEMENTS" is used to refer to, with respect to a Series
of Certificates, the related Pooling and Servicing Agreement or the related
Trust Agreement, with respect to a Series of Notes, the related Indenture and
the related Sale and Servicing Agreement, as the context requires, and with
respect to a Series of Securities, the relevant combination of Agreements for
such Series.
REPRESENTATIVE AND MASTER
SERVICER
The Prospectus Supplement relating to any Series of Certificates and/or Notes
will name the entities (which may include The Money Store or one of its
affiliates and may include other unrelated entities) which will act as Master
Servicers, either directly or through one or more entities with whom the Master
Servicers may into sub-servicing arrangements with (each, a "SUB-SERVICER"), as
described in the related Pooling and Servicing Agreement or Sale and Servicing
Agreement (a "SALE AND SERVICING AGREEMENT"). In addition, the Master Servicer
may be required to make Monthly Advances (as defined in "Description of the
Securities -- Monthly Advances and Compensating Interest") with respect to the
Mortgage Loans (as defined in "The Trusts") in each Trust.
The trustee or trustees under any Agreement relating to a Series of Securities
(each, a "TRUSTEE") will be specified in the related Prospectus Supplement.
Additionally, any Co-Trustees, custodians of mortgage documentation (each, a
"CUSTODIAN") or Co-Custodians will be set forth in the related Prospectus
Supplement.
THE MORTGAGE ASSETS
The primary assets of each Trust, or "MORTGAGE ASSETS," may consist of one or
more Pools of Mortgage Loans and certain other mortgage-related assets specified
in the related Prospectus Supplements, which may include:
- - first, second and more junior lien mortgage loans, deeds of trust or
participations therein secured by one- to four-family residential properties;
- - loans or participations therein secured by security interests or similar liens
on shares in private, non-profit cooperative housing corporations and on the
related proprietary leases or occupancy agreements;
- - first, second and more junior lien mortgage loans, deeds of trust or
participations therein secured by multifamily residential or mixed-use
properties;
- - conditional sales contracts and installment sales or loan agreements or
participations therein secured by manufactured housing;
- - mortgage-backed securities issued or guaranteed by the Government National
Mortgage Association ("GNMA"), the Federal National Mortgage Association
("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC");
- - privately issued mortgage-backed securities;
- - first, second and more junior home improvement mortgage loans that are either
conventional loans
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or loans originated under the Title I credit insurance program created under
the National Housing Act of 1934 by the Federal Housing Administration
("FHA"); and
- - unsecured home improvement loans consisting of conventional unsecured home
improvement loans and FHA insured home improvement loans.
See "The Trusts" and "The Single Family Loan Lending Program."
You should refer to the applicable Prospectus Supplement for the precise
characteristics or expected characteristics of the Mortgage Assets and a
description of the other property, if any, included in a particular Trust.
DESCRIPTION OF THE CERTIFICATES
Each Certificate will represent a fractional undivided ownership interest in the
Trust created pursuant to the related Agreement. The Certificates of any Series
may be issued in one or more Classes. A Series of Certificates may include one
or more Classes of senior Certificates (collectively, "SENIOR CERTIFICATES")
which receive certain preferential treatment with respect to one or more Classes
of subordinate Certificates (collectively the "SUBORDINATED CERTIFICATES").
Each Class of Certificates within a Series will evidence the interests specified
in the related Prospectus Supplement, which may:
- - include the right to receive distributions allocable only to principal, only
to interest or to any combination thereof;
- - include the right to receive distributions only of prepayments of principal
throughout the lives of the Certificates or during specified periods;
- - be subordinated in its right to receive distributions of schedule payments of
principal, prepayments of principal, interest or any combination thereof to
one or more other Classes of Certificates of such Series throughout the lives
of the Certificates or during specified periods or may be subordinated with
respect to certain losses or delinquencies;
- - include the right to receive such distributions only after the occurrence of
specified events;
- - include the right to receive distributions in accordance with a schedule or
formula or on the basis of collections from designated portions of the assets
in the related Trust;
- - include, as to Certificates entitled to distributions allocable to interest,
the right to receive interest at a fixed rate or a floating rate; and
- - include, as to Certificates entitled to distributions allocable to interest,
the right to distributions allocable to interest only after the occurrence of
specified events, and in each case, may accrue interest until such events
occur.
The timing and amounts of such distributions may vary among Classes, over time,
or otherwise as specified in the related Prospectus Supplement.
The Pass-Through Rate for a Class of Certificates that pay interest based upon a
floating rate of interest may base such floating rate upon any of following:
- - the rate determined from the auction procedures described in Appendix I
("AUCTION RATE SECURITIES");
- - the London interbank offered rate for U.S. dollar deposits for a specified
period ("LIBOR") plus an amount set forth in the related Prospectus
Supplement;
- - the average bond equivalent rates of weekly auctions of Treasury bills for a
specified period (the "T-BILL RATE") plus an amount set forth in the related
Prospectus Supplement; or
- - any such other method or procedures used to determine the floating rate of
interest as may be described in the applicable Prospectus Supplement.
With respect to any Series of Securities including one or more Classes of Notes,
distributions in respect of the Certificates may be subordinated in priority of
payment to payments on the Notes of such Series.
DESCRIPTION OF THE NOTES
Any Series of Securities may include one or more Classes of Notes, each of which
will be issued pursuant to an Indenture and will be treated as debt obligations
of the related Trust.
Each Class of Notes will have a stated principal amount and will bear interest
at the Interest Rate or Rates as specified in the related Prospectus Supplement,
which may be different for each Class of Notes. The Interest Rates may be fixed,
variable,
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adjustable, or any combination of the foregoing. The Interest Rate for a Class
of Notes that pays interest based upon a floating rate of interest may base such
floating rate upon any of the following:
- - the auction procedures for Auction Rate Securities described herein;
- - LIBOR plus an amount set forth in the related Prospectus Supplement,
- - the T-Bill Rate plus an amount set forth in the related Prospectus Supplement;
or
- - any such other method or procedures used to determine the floating rate of
interest as may be described in the applicable Prospectus Supplement.
A Series may include two or more Classes of Notes. Such Classes may differ as to
the timing and priority of payment, seniority, allocations of loss, Interest
Rate or amount of payments of principal or interest, or as to which payments of
principal or interest may or may not be made upon the occurrence of specified
events or on the basis of collections from designated portions of the Mortgage
Assets for such Series. In addition, a Series may include one or more Classes of
Notes entitled to:
- - principal payments with disproportionate, nominal or no interest payments; or
- - interest payments with disproportionate, nominal or no principal payments.
A Series of Notes may include one or more Classes of senior Notes (collectively,
"SENIOR NOTES") which receive certain preferential treatment with respect to one
or more Classes of subordinated Notes (collectively, the "SUBORDINATED NOTES").
OTHER CHARACTERISTICS OF CERTAIN SERIES
PRE-FUNDING ACCOUNT
If provided in the related Prospectus Supplement, the original principal amount
of a Series of Securities may exceed the principal balance of the Mortgage
Assets initially being delivered to the Trustee. Cash in an amount up to the
amount of such difference (the "PRE-FUNDED AMOUNT") will be deposited into a
separate trust account (the "PRE-FUNDING ACCOUNT") maintained with the Trustee
for the benefit of Securityholders.
During the period set forth in the related Prospectus Supplement (the "FUNDING
PERIOD"), the Pre-Funded Amount may be used to purchase additional Mortgage
Assets for the related Trust subject to the satisfaction of certain conditions
specified under the Agreements. If any Pre-Funded Amount remains at the end of
the Funding Period, such amount may be used to prepay some or all Classes of the
related Series of Certificates and/or Notes.
REVOLVING PERIOD AND AMORTIZATION PERIOD
If the related Prospectus Supplement so provides, there may be a period
commencing on the date of issuance of a Class or Classes of Notes and/or
Certificates of a Series and ending on the date set forth in the related
Prospectus Supplement (each, a "REVOLVING PERIOD") during which limited or no
principal payments will be made to one or more Classes. Some or all collections
of principal otherwise allocated to such Classes of Notes or Certificates may
be:
- - utilized during the Revolving Period to acquire additional Mortgage Assets;
- - held in an account and invested in Permitted Investments for later
distribution to Securityholders;
- - applied to those Notes or Certificates for such Series, if any, as then are in
amortization; or
otherwise applied as specified in the related Prospectus Supplement.
A "PERMITTED INVESTMENT" is an obligation of the United States and certain
agencies thereof, a certificate of deposit, certain commercial paper, a time
deposit and bankers acceptance sold by an eligible commercial bank, certain
repurchase agreements of United States government securities with eligible
commercial banks and certain other instruments acceptable to the nationally
recognized rating agency that provides a rating for the related Series of
Securities (a "RATING AGENCY").
An "AMORTIZATION PERIOD" is the period during which an amount of principal is
payable to Holders of Securities which, during the Revolving Period, were not
otherwise entitled to such payments. During an Amortization Period all or a
portion of principal collections on the Mortgage Loans may be applied as
specified above for a Revolving Period and, to the extent not so applied, will
be distributed to the Classes of Notes and/or Certificates for such Series as
then being entitled to payments of principal.
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CREDIT ENHANCEMENT
The Mortgage Assets in a Trust or the Securities of one or more Classes in the
related Series may have the benefit of one or more types of credit enhancement.
The protection against losses afforded by any such credit support may be
limited. Such credit enhancement may include one or more of the following types:
SUBORDINATION AND RESERVE ACCOUNT
The rights of all Certificateholders will be subordinated to the rights of all
Noteholders of a Series to receive distributions to the extent described in the
related Prospectus Supplement.
The rights of the holders of Subordinated Certificates and/or Subordinated
Notes, as the case may be (collectively, "SUBORDINATED SECURITIES"), of a Series
to receive distributions will be subordinated to the rights of the holders of
the Senior Certificates and/or Senior Notes, as the case may be (collectively,
"SENIOR SECURITIES"), of the same Series to receive distributions 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 payments which such holders
would be entitled to receive if there had been no losses or delinquencies.
The protection afforded to the holders of Senior Securities through
subordination may be accomplished by:
- - the preferential right of such holders to receive, prior to any distribution
being made in respect of the related Subordinated Securities, the amounts of
principal and interest due to them on each Remittance Date out of the funds
available for distribution on such date; or
- - allocation of certain types of losses or delinquencies to the related
Subordinated Securities.
The same Class of Securities may constitute Senior Certificates and/or Senior
Notes, as the case may be, with respect to certain types of payments or certain
losses or delinquencies and Subordinated Certificates and/or Subordinated Notes,
as the case may be, with respect to other types of payments or losses or
delinquencies.
One or more reserve accounts (each, a "RESERVE ACCOUNT") may be established
and maintained by the deposit the accounts of distributions allocable to the
holders of Subordinated Certificates and/or Subordinated Notes for a specified
time or until a specified level is reached.
GUARANTY INSURANCE POLICY
A guaranty insurance policy ("GUARANTEE INSURANCE POLICY") generally
unconditionally and irrevocably guarantees that the full amount of the
distributions of principal and interest will be received by an agent of the
Trustee, for distribution by the Trustee to holders of the covered Securities.
Guaranty Insurance Policies may have certain limitations.
SPREAD AMOUNT
Certain Classes of Certificates and/or Notes may be entitled to receive limited
acceleration of principal relative to the amortization of the related Mortgage
Assets. The accelerated amortization will be achieved by applying certain excess
interest collected on the Mortgage Assets to the payment of principal on such
Classes of Securities.
This acceleration feature is intended to create an amount (the "SPREAD AMOUNT"),
resulting from, and generally equal to, the excess of the aggregate principal
balances of the applicable Mortgage Assets over the principal balances of the
applicable Classes of Securities.
MORTGAGE POOL INSURANCE POLICY
A mortgage pool insurance policy (a "MORTGAGE POOL INSURANCE POLICY") or
policies may be obtained and maintained for each Series pertaining to Mortgage
Loans, limited in scope, covering defaults on the related Mortgage Loans in an
initial amount equal to a specified percentage of the aggregate principal
balance of all Mortgage Loans as of a specified date.
SPECIAL HAZARD INSURANCE POLICY
In the case of Mortgage Loans or Contracts, certain physical risks that are not
otherwise insured against by a standard hazard insurance policy or policies (a
"STANDARD HAZARD INSURANCE POLICY") may be covered by a special hazard insurance
policy or policies (a "SPECIAL HAZARD INSURANCE POLICY").
BANKRUPTCY BONDS
A mortgagor bankruptcy bond or bonds ("BANKRUPTCY BOND") may be obtained to
cover certain
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losses resulting from a reduction by a bankruptcy court of scheduled payments of
principal or interest on a Mortgage Loan or a reduction by such court of the
principal amount of a Mortgage Loan, and will cover certain unpaid interest on
the amount of such a principal reduction.
CROSS SUPPORT
The ownership interests of separate Trusts or separate groups of assets may be
evidenced by separate Classes of the related Series of Certificates and/or
Notes. In such case, credit support may be provided by a cross-support feature.
This requires that distributions be made with respect to certain Certificates
and/or Notes evidencing interests in one or more Trusts or asset groups prior to
distributions to other Certificates and/or Notes evidencing interests in other
asset groups or Trusts.
SUPPLEMENTAL INTEREST PAYMENTS
One or more Classes of Certificates and/or Notes may be entitled to receive
supplemental interest payments ("SUPPLEMENTAL INTEREST PAYMENTS") under
specified circumstances. Supplemental interest payments will be available to
fund some or all of the difference, if any, between the interest owed to a Class
of Securities on a Remittance Date and the interest that would be available to
pay such interest assuming no defaults or delinquencies on the Mortgage Assets.
MATURITY PROTECTION
One or more Classes of Certificates and/or Notes may be entitled to third-party
payments to help provide that the Securityholders receive their unpaid principal
on or prior to a specified dated.
OTHER INSURANCE, GUARANTEES, SWAPS, AND SIMILAR INSTRUMENTS OR AGREEMENTS
A Trust may include such arrangements as letters of credit, financial guaranty
insurance policies, other third party guarantees, limited guarantees or
insurance from agencies or instrumentalities of the United States. These
arrangements maintain timely payments or provide additional protection against
losses on the assets included in such Trust, pay administrative expenses, or
accomplish such other purpose as may be described in the Prospectus Supplement.
If any Class of Securities has a floating interest rate, or if any of the
Mortgage Assets has a floating interest rate, the Trust may include an interest
rate swap contract, an interest rate cap agreement or similar hedge contract
providing limited protection against interest rate risks.
Additionally, to the extent a significant portion of the Mortgage Loans
underlying a given Series of Securities consists of loans originated under the
Title I credit insurance program created under the National Housing Act of 1934
(the "NHA ACT") by the FHA ("FHA LOANS"), the related Prospectus Supplement will
describe the features of any related credit support including, but not limited
to, that provided by the FHA, if any.
Any credit support will be described in the applicable Prospectus Supplement.
See "Credit Enhancement."
OPTIONAL TERMINATION
The Master Servicer, certain insurers, the holders of certain classes of
Certificates or Notes, or certain other entities may have the option to effect
early retirement of a Series of Securities through the purchase of the related
Mortgage Assets in the related Trust under the circumstances and in the manner
described in "The Agreement-Termination; Purchase of Mortgage Loans."
MANDATORY TERMINATION
The Trustee, the Master Servicer or certain other entities may be required to
effect early retirement of a Series of Securities under the circumstances and in
the manner specified in the related Prospectus Supplement and herein under "The
Agreements-Termination; Purchase of Mortgage Loans."
TAX STATUS
The federal income tax consequences of the purchase, ownership and disposition
of the Classes of Certificates and/or Notes will depend on:
- - whether an election is made to treat the corresponding Trust (or certain
assets of the Trust) as a REMIC under the Internal Revenue Code of 1986, as
amended (the "CODE"); and
- - if such election is not made, whether the Trust is structured and intended to
be treated as a grantor trust, a partnership or otherwise.
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You are advised to consult your tax advisors and to review "Federal Income Tax
Consequences" herein and, if applicable, in the related Prospectus Supplement.
ERISA LIMITATIONS
If you are a fiduciary of any employee benefit plan subject to the fiduciary
responsibility provisions of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), you should carefully review with your own legal
advisors whether the purchase or holding of Certificates could give rise to a
transaction prohibited or otherwise impermissible under ERISA or the Code.
See "ERISA Considerations."
LEGAL INVESTMENTS
Each Prospectus Supplement will describe the extent, if any, to which the
Classes of Securities offered thereby will constitute "mortgage-related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") and whether they will be legal investments for certain types of
institutional investors under SMMEA.
See "Legal Investment Considerations."
REGISTRATION OF SECURITIES
Securities may be represented by global certificates and notes registered in the
name of Cede & Co. ("CEDE"), as nominee of The Depository Trust Company ("DTC")
or another nominee. In such case, Securityholders will not be entitled to
receive definitive certificates and/or notes representing such Holders'
interests, except in certain circumstances described in the related Prospectus
Supplement. See "Description of the Securities-Book-Entry Registration."
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RISK FACTORS
LIMITED ABILITY TO RESELL
CERTIFICATES Any secondary market for the Certificates might not
continue or might not be sufficiently liquid to
allow you to resell any of your Certificates.
BOOK-ENTRY REGISTRATION The liquidity of the Certificates in the secondary
trading market may be reduced because the Offered
Certificates are in book entry form. Investors may
be unwilling to purchase securities for which they
cannot obtain physical certificates.
You will be able to effect transactions in the
Certificates offered by the related Prospectus
Supplement (the "OFFERED CERTIFICATES"), in most
cases, only through DTC, Direct or Indirect
Participants (as defined in "Description of the
Securities -- Book-Entry Registration") and certain
banks. As a result, your ability to pledge an
Offered Certificate to entities that do not
participate in the DTC system, or otherwise to take
actions in respect of the Offered Certificates, may
be limited.
You may experience delay in your receipt of
distributions on the Offered Certificates since
distributions may be required to be forwarded by
the Trustee to DTC. In that case, DTC must credit
the distributions to the accounts of its
participants. Such participants thereafter must
credit them to the accounts of the applicable
Certificateholders either directly or through
indirect participants or such other entities as
described in the related prospectus supplement. See
"Description of the Securities -- Book-Entry
Registration."
NATURE OF SECURITY Certain of the Mortgage Loans will be loans secured
by junior liens. These liens are subordinate to the
rights of the mortgagee under each related senior
mortgage. As a result, the proceeds from any
liquidation, insurance or condemnation proceedings
will be available to satisfy the principal balance
of a junior mortgage loan only to the extent that
the claims, if any, of each such senior mortgagee
are satisfied in full, including any related
foreclosure costs. In addition, a mortgagee may not
foreclose on the mortgaged property unless it
forecloses subject to any related senior mortgage
or mortgages. In that case, it must either (1) pay
the entire amount of each senior mortgage at or
prior to the foreclosure sale or (2) make payments
on each senior mortgage in the event of default
under such mortgage. In servicing mortgage loans in
their portfolios, the Representative's wholly-owned
subsidiaries and other affiliates which originate
certain of the Mortgage Assets (the "ORIGINATORS")
usually satisfy any senior mortgage at or prior to
the foreclosure sale only to the extent that they
determine any amounts so paid will be recoverable.
The Trust does not have any source of funds to
satisfy any such senior mortgage or make payments
due to any senior mortgagee. See "Certain Legal
Aspects of the Mortgage Loans -- Foreclosure/
Repossession."
An overall decline in the market value of
residential real estate, the general condition of a
mortgaged property, or other factors, could
adversely affect the values of the mortgaged
properties. In that case, the outstanding balances
of the Mortgage Loans which are junior mortgage
loans, together with any senior liens on the
mortgaged properties, could equal or exceed the
value of the mortgaged properties. Such a decline
could extinguish the interest of the Trust in the
mortgaged property
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before having any effect on the interest of the
related senior mortgagee. The Representative cannot
quantify the impact of any property value declines
on the Mortgage Loans. It cannot predict whether,
to what extent or how long such declines may
continue. In periods of such declines, the actual
rates of delinquencies, foreclosures and losses on
the Mortgage Loans could be higher than those
historically experienced in the mortgage lending
industry in general. See "The Single Family Lending
Program -- Servicing and Collections." Certain of
the Mortgage Loans may constitute "BALLOON LOANS."
Balloon Loans are originated with a stated maturity
of less than the period of time of the
corresponding amortization schedule. As a result,
upon the maturity of a Balloon Loan, the mortgagor
will be required to make a "balloon" payment. The
balloon payment will be significantly larger than
the mortgagor's previous monthly payments. The
ability of such a mortgagor to repay a Balloon Loan
at maturity frequently will depend on such
borrower's ability to refinance the Mortgage Loan.
The ability of a mortgagor to refinance such a
Mortgage Loan will be affected by a number of
factors, including (1) the level of available
mortgage rates at the time, (2) the value of the
related mortgaged property, (3) the mortgagor's
equity in the related mortgaged property, (4) the
financial condition of the mortgagor, and (5) the
tax laws and general economic conditions at the
time.
Although a low interest rate environment may
facilitate the refinancing of a balloon payment,
the receipt and reinvestment by you, as a
Certificateholder, of the proceeds in such an
environment may produce a lower return than that
previously received in connection with the Mortgage
Loan. Conversely, a high interest rate environment
may make it more difficult for the mortgagor to
accomplish a refinancing and may result in
delinquencies or defaults. None of the
Representative, the Originators, the Servicer or
the Trustee will be obligated to provide funds to
refinance any Mortgage Loan.
General economic conditions have an impact on the
ability of borrowers to repay mortgage loans. Loss
of earnings, illness and other similar factors may
lead to an increase in delinquencies and bankruptcy
filings by borrowers. The Trust could experience a
loss on a mortgagor's Mortgage Loan if the
mortgagor files bankruptcy. A bankruptcy court may
suspend or reduce the payments of principal and
interest with respect to such Mortgage Loan. In
addition, a bankruptcy court may permanently reduce
the principal balance of such Mortgage Loan, thus
either delaying or permanently limiting the amount
received by the Trust. Moreover, if a bankruptcy
court prevents the transfer of the related
mortgaged property to the Trust, any remaining
balance on such Mortgage Loan may not be
recoverable.
Even assuming that the mortgaged properties provide
adequate security for the Mortgage Loans,
substantial delays could be encountered in
connection with the liquidation of defaulted
Mortgage Loans. Delays in the receipt of related
proceeds by you, as a Certificateholder, could
occur. State statutes and rules regulate
foreclosure on mortgaged property. Actions to
foreclose may result in the same delays as other
lawsuits, particularly if a mortgagor asserts
defenses or counterclaims. Furthermore, in some
states an action to obtain a deficiency judgment is
not
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permitted following a nonjudicial sale of a
mortgaged property. If a borrower on a Mortgage
Loan (a "MORTGAGOR") defaults on a Mortgage Loan,
these restrictions, among other things, may impede
(1) the ability of the Servicer to foreclose on or
sell the mortgaged property, or (2) to obtain
Liquidation Proceeds (net of expenses) sufficient
to repay all amounts due on the related Mortgage
Loan. The Servicer can deduct from amounts received
in connection with the liquidation of defaulted
Mortgage Loans ("LIQUIDATION PROCEEDS") all
expenses reasonably incurred in attempting to
recover amounts due on the related liquidated
Mortgage Loan and not yet repaid. These expenses
include (1) payments to prior lienholders, (2)
legal fees and costs of legal action, (3) real
estate taxes, and (4) maintenance and preservation
expenses. If the mortgaged properties fail to
provide adequate security for the related Mortgage
Loans and insufficient funds are available from
applicable credit enhancement, you could experience
a loss on your investment.
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, the amount realized
after expenses of liquidation would be smaller as a
percentage of the outstanding principal balance of
a smaller mortgage loan than a larger loan. Because
the average outstanding principal balances of the
Mortgage Loans that are junior mortgage loans are
small relative to the size of the loans in a
typical pool composed entirely of first mortgages,
realizations on defaulted Mortgage Loans which are
junior mortgage loans may also be smaller as a
percentage of the principal amount of such junior
mortgage loans than would be the case with a
typical pool of first mortgage loans.
Under environmental legislation and case law
applicable in various states, including California,
a secured party that takes a deed in lieu of
foreclosure, acquires a mortgaged property at a
foreclosure sale or which, prior to foreclosure,
has been involved in decisions or actions which may
lead to contamination of a property, may be liable
for the costs of cleaning up a contaminated site.
Although such costs could be substantial, it is
unclear whether they would be imposed on a holder
of a mortgage note (such as a Trust) which, under
the terms of the Agreement, is not required to take
an active role in operating the mortgaged
properties. See "Certain Legal Aspects of the
Mortgage Loans -- Environmental Considerations."
Certain mortgaged properties relating to Mortgage
Loans may not be owner occupied. It is possible
that the rate of delinquencies, foreclosures and
losses on Mortgage Loans secured by non-owner
occupied properties could be higher than for loans
secured by the primary residence of the borrower.
UNSECURED HOME IMPROVEMENT
LOANS The obligations of the borrower under any
conventional unsecured home improvement loan or FHA
insured home improvement loan (collectively,
"UNSECURED HOME IMPROVEMENT LOANS") included in a
Pool will not be secured by an interest in the
related real estate or otherwise, and the related
Trust Fund, as the owner of such Unsecured Home
Improvement Loan, will be a general unsecured
creditor as to such obligations.
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As a consequence, in the event of a default under
an Unsecured Home Improvement Loan, the related
Trust Fund will have recourse only against the
borrower's assets generally, along with all other
general unsecured creditors of the borrower. In a
bankruptcy or insolvency proceeding relating to a
borrower on an Unsecured Home Improvement Loan, the
obligations of the borrower under such Unsecured
Home Improvement Loan may be discharged in their
entirety, notwithstanding the fact that the portion
of such borrower's assets made available to the
related Trust Fund as a general unsecured creditor
to pay amounts due and owing thereunder are
insufficient to pay all such amounts. A borrower on
an Unsecured Home Improvement Loan may not
demonstrate the same degree of concern over
performance of the borrower's obligations under
such Home Improvement Loan as if such obligations
were secured by the real estate or other assets
owned by such borrower.
COMBINED LOAN-TO-VALUE
RATIOS The Originators' underwriting standards allow loans
to be approved with Combined Loan-to-Value Ratios
(as defined in "The Trusts -- The Mortgage
Loans -- General") that exceed 100%. Because the
original Combined Loan-to-Value Ratios of certain
of the Mortgage Loans may be high relative to that
of other similar mortgage loans, recoveries on
defaulted Mortgage Loans may be lower than the
level of recoveries experienced by such other
defaulted mortgage loans.
LEGAL CONSIDERATIONS Applicable state laws generally regulate interest
rates and other charges, require certain
disclosures, and require licensing of the
Originators and the Servicer. 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 Mortgage Loans.
Depending on the provisions of the applicable law
and the specific facts and circumstances involved,
violations of these laws, policies and principles
may (1) limit the ability of the Servicer to
collect all or part of the principal of or interest
on the Mortgage Loans, (2) entitle the borrower to
a refund of amounts previously paid and (3) subject
the Servicer to damages and administrative
sanctions. See "Certain Legal Aspects of the
Mortgage Loans."
The Mortgage Loans may also be subject to federal
laws, including: (1) the Federal Truth in Lending
Act and Regulation Z promulgated thereunder, which
require certain disclosures to the borrowers
regarding the terms of the Mortgage Loans, (2) 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, (3) the Fair Credit
Reporting Act, which regulates the use and
reporting of information related to the borrower's
credit experience, and (4) the NHA Act with respect
to FHA Loans.
The Mortgage Loans may be subject to the Home
Ownership and Equity Protection Act of 1994 (the
"HOME OWNERSHIP ACT"). The Home Ownership Act (1)
requires certain additional disclosures, (2)
specifies the timing of such disclosures and (3)
limits or prohibits the inclusion of certain
provisions in mortgages subject to the Home
Ownership Act.
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The Home Ownership Act also provides that any
purchaser or assignee of a mortgage covered by the
Home Ownership Act is subject to all of the claims
and defenses which the borrower could assert
against the original lender. The maximum damages
that may be recovered in an action under the Home
Ownership Act from an assignee is the remaining
amount of indebtedness plus the total amount paid
by the borrower in connection with the mortgage
loan. Any Trust for which the Mortgage Assets
include Mortgage Loans subject to the Home
Ownership Act is subject to all of the claims and
defenses which the borrower could assert against
the original lender. Any violation of the Home
Ownership Act which would result in such liability
would be a breach of the applicable Originator's
representations and warranties, and the
Representative would be obligated to cure,
repurchase or, if permitted by the related
Agreement, substitute for the Mortgage Loan in
question.
PREPAYMENT CONSIDERATIONS The Mortgage Loans may be prepaid in full or in
part at any time; however, a prepayment penalty or
premium may still be imposed in connection
therewith. The rate of prepayments of the Mortgage
Loans cannot be predicted and may be affected by a
wide variety of economic, social, and other
factors. These include prevailing interest rates,
the availability of alternative financing, and
homeowner mobility. Therefore, no assurance can be
given as to the level of prepayments that the Trust
will experience.
A number of factors suggest that the prepayment
behavior of a pool including junior mortgage loans
may be significantly different from that of a pool
composed entirely of first mortgage loans with
equivalent interest rates and maturities. One such
factor is the smaller average principal balance of
a pool of junior mortgage loans. This factor may
result in a higher prepayment rate than that of a
pool of first mortgage loans with a larger average
balance, regardless of the interest rate
environment. A small principal balance, however,
also may make refinancing a junior mortgage loan at
a lower interest rate less attractive to the
borrower. This may be because the impact on the
borrower of lower interest rates may be less than
for a first mortgage loan with a larger balance.
Other factors that may affect the prepayment rate
of a pool of junior mortgage loans include (1) the
amounts of, and interest rates on, the underlying
senior mortgage loans, and (2) the use of first
mortgage loans as long-term financing for home
purchase and junior mortgage loans as shorter-term
financing for purposes, such as home improvement,
education expenses and purchases of consumer
durables. Accordingly, junior mortgage 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 mortgage
loans for federal income tax purposes may further
increase the rate of prepayments of such junior
mortgage loans. See "Maturity, Prepayment and Yield
Considerations."
Prepayments may result from (1) voluntary early
payments by borrowers (including payments in
connection with refinancings of the related senior
mortgage loan or loans), (2) sales of mortgaged
properties subject to "due-on-sale" provisions and
liquidations due to default, as well as (3) the
receipt of proceeds from physical damage, credit
life and disability insurance policies and, if so
specified in the related Prospectus
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Supplement, and (4) amounts on deposit in the
Pre-Funding Account at the end of the Funding
Period being applied to the payment of principal of
the Securities. In addition, repurchases or
purchases from a Trust of Mortgage Loans required
to be made by the Representative under the
Agreement will have the same effect on you, as a
Certificateholder, as a prepayment of such Mortgage
Loans. Unless otherwise specified in the related
Prospectus Supplement, all of the secured Mortgage
Loans contain "due-on-sale" provisions, and the
Servicer is required to enforce such provisions
unless (1) such enforcement would materially
increase the risk of default or delinquency on, or
materially decrease the security for, such Mortgage
Loan or (2) such enforcement is not permitted by
applicable law, in which case the Servicer is
authorized to permit the purchaser of the property
securing the Mortgage Loans (the "MORTGAGED
PROPERTY," as described more fully in "The
Trusts -- The Mortgage Loans -- General") to assume
the Mortgage Loan. See "The Agreement" in the
prospectus supplement.
Collections on the Mortgage Loans may vary due to
the level of incidence of delinquent payments and
of prepayments. Collections on the Mortgage Loans
may also vary due to seasonal purchasing and
payment habits of borrowers.
Certain of the Mortgage Loans may be "SIMPLE
INTEREST" or "DATE-OF-PAYMENT LOANS." If a payment
is received on such a Mortgage Loan later than
scheduled, a smaller portion of such payment will
be applied to principal and a greater portion will
be applied to interest than would have been the
case had the payment been received on the scheduled
due date, resulting in such Mortgage Loan having a
longer average life than would have been the case
had the payment been made as scheduled. Conversely,
if a payment on such a Mortgage Loan is received
earlier than scheduled, more of such payment will
be applied to principal and less to interest than
would have been the case had the payment been
received on its scheduled due date, resulting in
such Mortgage Loan having a shorter average life
than would have been the case had the payment been
made as scheduled.
STATUS OF THE MORTGAGE
LOANS IN
THE EVENT OF BANKRUPTCY OF
THE
REPRESENTATIVE OR AN
ORIGINATOR If the Representative or an Originator files
bankruptcy at a time when it or any of its
respective affiliates holds a subordinated interest
in the Trust, a trustee in bankruptcy of the
Representative or its creditors could attempt to
recharacterize the sale of the Mortgage Loans to
the related Trust as a borrowing by the
Representative, the Originator or such affiliate.
If such recharacterization is upheld, you, as a
Certificateholder, would be deemed to be a creditor
of the Representative, the Originator or such
affiliate, secured by a pledge of the Mortgage
Loans. If such an attempt were successful, a
trustee in bankruptcy could elect to accelerate
payment of the Certificates and liquidate the
Mortgage Loans, with you, as a Certificateholder,
being entitled to the then outstanding principal
amount thereof together with accrued interest.
Thus, you could lose the right to future payments
of interest, and might suffer reinvestment loss in
a lower interest rate environment.
LIMITATIONS ON INTEREST
PAYMENTS
AND FORECLOSURES Generally, under the terms of the Soldiers' and
Sailors' Civil Relief Act of 1940, as amended (the
"RELIEF ACT"), or similar state legislation, a
mortgagor who enters military service after the
origination of the related Mortgage Loan (including
a mortgagor who is a member of the
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National Guard or is in reserve status at the time
of the origination of the Mortgage Loan and is
later called to active duty) may not be charged
interest (including fees and charges) above an
annual rate of 6% during the period of such
mortgagor's active duty status, unless a court
orders otherwise upon application of the lender. It
is possible that such action could have an effect,
for an indeterminate period of time, on the ability
of the Servicer to collect full amounts of interest
on certain of the Mortgage Loans. In addition, the
Relief Act imposes limitations which would impair
the ability of the Servicer to foreclose on an
affected Mortgage Loan during the mortgagor's
period of active duty status. Thus, in the event
that such a Mortgage Loan goes into default, there
may be delays and losses occasioned by the
inability to realize upon the mortgaged property in
a timely fashion.
SECURITY RATING The rating of the Offered Certificates may depend,
to a large extent, on the creditworthiness of a
third party provider of credit enhancement. In such
event, any reduction in the rating assigned to the
claims-paying ability of such provider below the
rating initially given to the offered certificates
would likely result in a reduction in the rating of
such Certificates. See "Rating."
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THE TRUSTS
A Trust for any Series of Securities will include the Mortgage Assets
consisting of (A) one or more Pools* comprised of (i) Single Family Loans, (ii)
Cooperative Loans, (iii) Multifamily Loans, (iv) Contracts, (v) FHA Loans, (vi)
Secured Conventional Home Improvement Loans, (vii) Unsecured Home Improvement
Loans, or (B) Agency Securities or Private Mortgage-Backed Securities, in each
case, as specified in the related Prospectus Supplement, together with payments
in respect of such Mortgage Assets and certain other accounts, obligations or
agreements, in each case as specified in the related Prospectus Supplement.
These various kinds of Mortgage Assets are described later in this section. The
Single Family Loans, Cooperative Loans, Multifamily Loans, Secured Conventional
Home Improvement Loans, FHA Loans and Unsecured Home Improvement Loans are
sometimes referred to herein collectively as the "MORTGAGE LOANS." The Mortgage
Loans may be closed-end or revolving as described in the related Prospectus
Supplement.
The Notes of each Series will be secured by the pledge of the assets of the
related Trust, and the Certificates of each Series will represent interest in
the assets of the related Trust. The Securities will be entitled to payment only
from the assets of the related Trust and, to the extent specified in a
Prospectus Supplement, payments in respect of the assets of other trusts
established by the Representative, the Originators or any of their affiliates.
If specified in the related Prospectus Supplement, certain Securities will
evidence the entire fractional undivided ownership interest in a Trust which
will contain a beneficial ownership interest in another Trust which will contain
all or some of the Mortgage Assets.
Certain of the Mortgage Assets may have been originated by the Originators.
Other Mortgage Assets may have been acquired by the Representative, an
Originator or an affiliate thereof in the open market or in privately negotiated
transactions, including transactions with entities affiliated with the
Representative. See "The Single Family Loan Lending Program -- Underwriting
Criteria."
The following is a brief description of the Mortgage Assets expected to be
included in the Trusts. If specific information respecting the Mortgage 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
Prospectus Supplement, and specific information will be set forth in a report on
Form 8-K to be filed with the Securities and Exchange Commission (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 Mortgage Assets relating to such Series
(the "MORTGAGE ASSET SCHEDULE") will be attached to the Agreement delivered to
the Trustee upon delivery of the Securities.
THE MORTGAGE LOANS -- GENERAL
The Mortgaged Properties, which secure repayment of the Mortgage Loans and
Contracts, consist of real property and Manufactured Homes (as defined in
"-- Contracts" below), as the case may be, located in any one of the fifty
states, the District of Columbia, the Commonwealth of Puerto Rico or any other
commonwealth, territory or possession of the United States. It is expected that
the Mortgage Loans or Contracts will be "CONVENTIONAL LOANS" (i.e., loans that
are not insured or guaranteed by any governmental agency). However, if specified
in the related Prospectus Supplement, certain of the Single Family Loans may be
insured by the FHA or partially guaranteed by the Veterans Administration (the
"VA"). Mortgage Loans with Combined Loan-to-Value Ratios and/or certain
principal balances may be covered wholly or partially by
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*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, the Certificates representing
certain undivided fractional interests, as described below, in a single Trust
consisting primarily of the Mortgage Loans in such Pool, and the Notes shall
refer to debt obligations of such Trust secured by the related Pool of
Mortgage Loans. Similarly, the term "PASS-THROUGH RATE" will refer to the
Pass-Through Rate borne by the Certificates of one specific Series, the terms
"INTEREST RATE" will refer to the Interest Rate borne by the Notes of one
specific Series and the term "TRUST" will refer to one specific Trust.
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"PRIMARY MORTGAGE INSURANCE POLICIES." The Mortgage Loans may be covered by
Standard Hazard Insurance Policies.
All of the Mortgage Loans in a Pool will provide for payments to be made
monthly ("MONTHLY PAY"), bi-weekly or on such other terms as may be described in
a Prospectus Supplement. The payment terms of the Mortgage Loans to be included
in a Trust will be described in the related Prospectus Supplement and may
include any of the following features or combinations thereof or other features
described in the related Prospectus Supplement:
(a) Interest may be payable at a "FIXED RATE," or an "ADJUSTABLE RATE"
(i.e., a rate that is adjustable from time to time in relation to an index,
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). The specified rate of interest on a Mortgage Loan is its
"MORTGAGE INTEREST RATE." The specified rate of interest on a Contract is
its annual percentage rate ("APR"). 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 Mortgage Loan for such periods and under such
circumstances as may be specified in the related Prospectus Supplement.
Mortgage Loans may provide for the payment of interest at a rate lower than
the Mortgage Interest Rate for a period of time or for the life of the
Mortgage Loan, and the amount of any difference may be contributed from
funds supplied by the seller of the Mortgaged Property securing the related
Mortgage Loan or another source or may be treated as accrued interest added
to the principal of the Mortgage Loan.
(b) Principal may be payable on a level basis to fully amortize the
Mortgage 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 Mortgage
Interest 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" payments). Principal may include interest
that has been deferred and added to the principal balance of the Mortgage
Loan.
(c) Monthly payments of principal and interest may be fixed for the
life of the Mortgage Loan, may increase over a specified period of time
("GRADUATED PAYMENTS") or may change from period to period. Mortgage 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. Mortgage Loans may require the monthly payments of principal and
interest to increase for a specified period, provide for deferred payment
of some or all of the payments due during a specified period, which may be
recouped as deferred interest through negative amortization or otherwise.
Other Mortgage Loans sometimes referred to as "growing equity" mortgage
loans may provide for periodic scheduled payment increases for a specified
period with the full amount of such increases being applied to principal.
(d) Prepayments of principal may be subject to a prepayment fee, which
may be fixed for the life of the Mortgage Loan or may decline over time,
and may be prohibited for the life of the Mortgage Loan or for certain
periods ("LOCKOUT PERIODS"). Certain Mortgage 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 Mortgage Loans may permit prepayments without payment of
a fee unless the prepayment occurs during specified time periods. The
Mortgage Loans may include due-on-sale clauses which permit the mortgagee
to demand payment of the entire Mortgage Loan in connection with the sale
or certain transfers of the related Mortgaged Property. Other Mortgage
Loans may be assumable by persons meeting the then applicable underwriting
standards of the Originator.
To the extent a significant portion of the Mortgage Loans underlying a
given Series of Securities consist of FHA Loans and/or Secured Conventional Home
Improvement Loans, the related Prospectus Supplement will describe the material
provisions of such Mortgage Loans and the programs under which they were
originated. The Prospectus Supplement for each Series of Securities will contain
information with respect to all the Mortgage Loans expected to be included in
the related Pools as of the related closing date, including
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(i) the expected aggregate outstanding principal balance and the expected
average outstanding principal balance of the Mortgage Loans as of the date set
forth in the Prospectus Supplement, (ii) the largest expected principal balance
and the smallest expected, principal balance of any of the Mortgage Loans, (iii)
the types of Mortgaged Properties and/or other assets securing the Mortgage
Loans (e.g., one- to four-family houses, vacation and second homes, Manufactured
Homes, multifamily apartments or other real property) and the percentage, if
any, of Unsecured Home Improvement Loans expected to be included in the related
Pool, (iv) the original terms to maturity of the Mortgage Loans, (v) the
expected weighted average term to maturity of the Mortgage Loans as of the date
set forth in the Prospectus Supplement and the expected range of the terms to
maturity, (vi) the earliest origination date and latest maturity date of any of
the Mortgage Loans, (vii) the expected weighted average Combined Loan-to-Value
Ratios at origination (except with respect to home improvement loans), (viii)
the expected Mortgage Interest Rate or APR and ranges of Mortgage Interest Rates
or APRs borne by the Mortgage Loans, (ix) in the case of Mortgage Loans having
Adjustable Rates, the expected weighted average of the Adjustable Rates, if any,
(x) the expected aggregate outstanding principal balance, if any, of Buy-Down
Loans and Mortgage Loans having graduated payment provisions as of the date set
forth in the Prospectus Supplement, (xi) the amount of any Mortgage Pool
Insurance Policy, Special Hazard Insurance Policy or Bankruptcy Bond to be
maintained with respect to such Pool, (xii) the amount, if any, and terms of any
other credit enhancement or other derivative instruments to be provided with
respect to all or a material portion of the Mortgage Loans or the Pool and
(xiii) the expected geographic location of the Mortgaged Properties. If specific
information respecting the Mortgage Loans is not known to the Representative at
the time the related Securities are initially offered, more general information
of the nature described above will be provided in the Prospectus Supplement and
specific information will be set forth in the Detailed Description.
The "COMBINED LOAN-TO-VALUE RATIO" of a Single Family Loan at any given
time is the ratio, expressed as a percentage, determined by dividing (x) the sum
of the original principal balance of the Single Family Loan (less the amount, if
any, of the premium for credit life insurance) plus the then-current principal
balance of the related first lien, if any, by (y) the value of the related
Mortgaged Property, based upon the appraisal or valuation made at the time of
origination of the Single Family Loan. To the extent a significant portion of
the Mortgage Loans underlying a given Series of Securities consists of FHA loans
and/or Secured Conventional Home Improvement Loans, the related Prospectus
Supplement may describe the method for calculating the Combined Loan-to-Value
Ratio, if deemed relevant by the Representative. In the case of Refinance Loans,
the value of the related Mortgaged Property generally will be based on an
appraisal or valuation obtained at the time of refinancing. For purposes of
calculating the Combined Loan-to-Value Ratio of a Contract relating to a new
Manufactured Home, the value of such Manufactured Home generally will be no
greater than the sum of a fixed percentage of the list price of the unit
actually billed by the manufacturer to the dealer (exclusive of freight to the
dealer site) including "accessories" identified in the invoice (the
"MANUFACTURER'S INVOICE PRICE"), plus the actual cost of any accessories
purchased from the dealer, a delivery and set-up allowance, depending on the
size of the unit, and the cost of state and local taxes, filing fees and up to
three years prepaid hazard insurance premiums. The value of a used Manufactured
Home generally will be the least of the sales price, appraised value, and, if
applicable, National Automobile Dealer's Association book value plus prepaid
taxes and hazard insurance premiums. The appraised value of a Manufactured Home
will be based upon the age and condition of the manufactured housing unit and
the quality and condition of the mobile home park in which it is situated, if
applicable.
The Mortgage Loans in any Trust may include Mortgage Loans whose Combined
Loan to Value Ratios exceed 100%. The related Mortgaged Properties are unlikely
to provide adequate security for such Mortgage Loans. Even assuming that a
Mortgaged Property provides adequate security for the related Mortgage Loan,
substantial delays could be encountered in connection with the liquidation of a
Mortgage Loan that would result in current shortfalls in payments to
Securityholders to the extent such shortfalls are not covered by any credit
enhancement as described in the related Prospectus Supplement. In addition,
liquidation expenses relating to any liquidated Mortgage Loan (such as legal
fees, real estate taxes, and maintenance and preservation expenses) will reduce
the liquidation proceeds otherwise available for payment to Securityholders. In
the event that any Mortgaged Property fails to provide adequate security for the
related Mortgage Loan, any losses in connection with such Mortgage Loan will be
borne by Securityholders as
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described in the related Prospectus Supplement to the extent that the applicable
credit enhancement described in the related Prospectus Supplement is
insufficient to absorb all such losses.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. If the real estate market should experience an overall
decline in property values such that the outstanding principal balances of the
Mortgage Loans (plus any additional financing by other lenders on the same
Mortgaged Properties), in a particular Pool become equal to or greater than the
value of such Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. An overall decline in the market value of real
estate, the general condition of a Mortgaged Property, or other factors, could
adversely affect the values of the Mortgaged Properties such that the
outstanding balances of the Mortgage Loans, together with any additional liens
on the Mortgaged Properties, equal or exceed the value of the Mortgaged
Properties. Under such circumstances, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry.
Certain of the residential mortgage loans to be included in a Trust are
expected to be residential mortgage loans secured by second, third or fourth
liens ("HOME EQUITY LOANS") subordinate to the rights of the mortgagee under
each related senior mortgage. The proceeds from any liquidation, insurance or
condemnation of Mortgaged Properties relating to Home Equity Loans in a Pool
will be available to satisfy the principal balance of such Home Equity Loans
only to the extent that the claims, if any, of the related senior mortgagee,
including any related foreclosure costs, are satisfied in full. In addition, the
Master Servicer may not foreclose on a Mortgaged Property relating to a Home
Equity Loan unless it forecloses subject to the related senior mortgage or
mortgages, in which case it must either pay the entire amount of each senior
mortgage to the applicable mortgagee at or prior to the foreclosure sale or
undertake the obligation to make payments on each senior mortgage in the event
of default thereunder. Generally, in servicing Home Equity Loans in their loan
portfolios, it has been the Originators' practice to satisfy each senior
mortgage at or prior to a foreclosure sale only to the extent that they
determine any amounts so paid will be recoverable from future payments and
collections on the Home Equity Loans or otherwise. The Trusts will not have any
source of funds to satisfy any such senior mortgage or make payments due to any
senior mortgagee. See "Certain Legal Aspects of the Mortgage
Loans -- Foreclosure/Repossession."
In addition, general economic conditions and other factors (which may or
may not effect real property values) have an impact on the ability of mortgagors
to repay mortgage loans. Loss of earnings, illness and other similar factors may
lead to an increase in delinquencies and bankruptcy filings by mortgagors. In
the event of bankruptcy of a mortgagor, it is possible that a Trust could
experience a loss with respect to the related Mortgage Loan. In conjunction with
a mortgagor's bankruptcy, a bankruptcy court may suspend or reduce the payments
of principal and interest to be paid with respect to such Mortgage Loan or
permanently reduce the principal balance of such Mortgage Loan, thus either
delaying or permanently limiting the amount received by such Trust with respect
thereto. Moreover, in the event a bankruptcy court prevents the transfer of the
related Mortgaged Property to the Trust, any remaining balance on such Mortgage
Loan may not be recoverable.
Other factors affecting mortgagors' ability to repay Mortgage Loans include
excessive building resulting in an oversupply of housing stock or a decrease in
employment reducing the demand for units in an area; federal, state or local
regulations and controls affecting rents; prices of goods and energy;
environmental restrictions; increasing labor and material costs; and the
relative attractiveness of the Mortgaged Properties. To the extent that such
losses are not covered by credit enhancements, such losses will be borne, at
least in part, by the Securityholders of the related Series.
The Representative will cause the Mortgage Loans comprising each Pool to be
assigned to the Trustee named in the related Prospectus Supplement for the
benefit of the holders of the Securities of the related Series. One or more
Master Servicers named in the related Prospectus Supplement will service the
Mortgage Loans, either directly or through Sub-Servicers, pursuant to the
Agreement and will receive a fee for such services. See "The Single Family Loan
Lending Program" and "The Agreements." With respect to Mortgage
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Loans serviced through a Sub-Servicer, the Master Servicer will remain liable
for its servicing obligations under the related Agreement as if the Master
Servicer alone were servicing such Mortgage Loans.
The only obligations of the Representative or the Originators with respect
to a Series of Securities will be to provide (or, where the Representative or an
Originator acquired a Mortgage Loan from another originator, obtain from such
originator) certain representations and warranties concerning the Mortgage Loans
and to assign to the Trustee for such Series of Securities the Representative's
or Originator's rights with respect to such representations and warranties. See
"The Agreements -- Sale of Mortgage Loans." The obligations of the Master
Servicer with respect to the Mortgage Loans will consist principally of its
contractual servicing obligations under the related Agreement and its obligation
to make certain cash advances in the event of delinquencies in payments on or
with respect to the Mortgage Loans in the amounts described herein under
"Description of Securities -- Monthly Advances and Compensating Interest." The
obligations of a Master Servicer to make advances may be subject to limitations,
to the extent provided herein and in the related Prospectus Supplement.
If provided in the related Prospectus Supplement, the original principal
amount of a Series of Securities may exceed the principal balance of the
Mortgage Assets initially being delivered to the Trustee. Cash in an amount
equal to such difference (the "PRE-FUNDED AMOUNT") will be deposited into a
separate trust account (the "PRE-FUNDING ACCOUNT") maintained with the Trustee.
During the period set forth in the related Prospectus Supplement (the "FUNDING
PERIOD"), amounts on deposit in the Pre-Funding Account may be used to purchase
additional Mortgage Assets for the related Trust subject to the satisfaction of
certain conditions specified under the Agreements. Any amounts remaining in the
Pre-Funding Account at the end of such period will be distributed as a principal
prepayment to the holders of the related Series of Securities at the time and in
the manner set forth in the related Prospectus Supplement.
SINGLE FAMILY AND COOPERATIVE LOANS
"SINGLE FAMILY LOANS" will consist of mortgage loans, deeds of trust or
participation or other beneficial interests therein, secured by first, second or
more junior liens on one- to four-family residential properties. If so specified
in a Prospectus Supplement, the Single Family Loans may include loans or
participations therein secured by mortgages or deeds of trust on condominium
units in low-rise condominium buildings together with such condominium units'
appurtenant interests in the common elements of the condominium buildings.
"COOPERATIVE LOANS" generally will be secured by security interests in or
similar liens on stock, shares or membership certificates issued by Cooperatives
and in the related proprietary leases or occupancy agreements granting exclusive
rights to occupy specific dwelling units in such Cooperatives' buildings.
Cooperatives are described below under "-- Multifamily Loans."
The Mortgaged Properties relating to Single Family Loans will consist of
detached or semi-detached one-family dwelling units, two- to four-family
dwelling units, townhouses, rowhouses, individual condominium units in low-rise
condominium buildings, individual units in planned unit developments, and
certain mixed use and other dwelling units. Such Mortgaged Properties may
include vacation and second homes or investment properties. A portion of a
dwelling unit may contain a commercial enterprise.
MULTIFAMILY LOANS
"MULTIFAMILY LOANS" will consist of mortgage loans, deeds of trust or
participation or other beneficial interests therein, secured by first, second or
more junior liens on rental apartment buildings, mixed-use properties or
projects containing five or more residential units.
Mortgaged Properties which secure Multifamily Loans may include high-rise,
mid-rise and garden apartments. Certain of the Multifamily Loans may be secured
by apartment buildings owned by "COOPERATIVES." In such cases, the Cooperative
owns all the apartment units in the building and all common areas. The
Cooperative is owned by tenant-stockholders who, through ownership of stock,
shares or membership certificates in the corporation, receive proprietary leases
or occupancy agreements which confer exclusive rights to occupy specific
apartments or units. Generally, a tenant-stockholder of a Cooperative must make
a monthly payment to the Cooperative representing such tenant-stockholder's pro
rata share of the Coopera-
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tive's payments for its mortgage loans, real property taxes, maintenance
expenses and other capital or ordinary expenses. Those payments are in addition
to any payments of principal and interest the tenant-stockholder must make on
any loans to the tenant-stockholder secured by its shares in the Cooperative.
The Cooperative will be directly responsible for building management and, in
most cases, payment of real estate taxes and hazard and liability insurance. A
Cooperative's ability to meet debt service obligations on a Multifamily Loan, as
well as all other operating expenses, will be dependent in large part on the
receipt of maintenance payments from the tenant-stockholders, as well as any
rental income from units or commercial areas the Cooperative might control.
Unanticipated expenditures may in some cases have to be paid by special
assessments on the tenant-stockholders.
Substantially all of the Multifamily Loans will be secured by mixed-use
properties, with no less than approximately 90% of such properties, measured by
square footage, number of units and projected rent, being allocated to
residential units.
CONTRACTS
"CONTRACTS" will consist of manufactured housing conditional sales
contracts and installment sales or loan agreements each secured by a
Manufactured Home. Contracts may be conventional, insured by the FHA or
partially guaranteed by the VA, as specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
each Contract will be fully amortizing and will bear interest at its APR.
The "MANUFACTURED HOMES" securing the Contracts will consist of
manufactured homes within the meaning of 42 United States Code, Section 5402(6),
which defines a "manufactured home" as "a structure, transportable in one or
more sections, which, in the traveling mode, is eight body feet or more in width
or forty body feet or more in length, or, when erected on site, is three hundred
twenty or more square feet, and which is built on a permanent chassis and
designed to be used as a dwelling with or without a permanent foundation when
connected to the required utilities, and includes the plumbing, heating, air
conditioning, and electrical systems contained therein; except that such term
shall include any structure which meets all the requirements of [this] paragraph
except the size requirements and with respect to which the manufacturer
voluntarily files a certification required by the Secretary of Housing and Urban
Development and complies with the standards established under [this] chapter."
The related Prospectus Supplement will specify for the Contracts contained
in the related Trust, among other things, the date of origination of the
Contracts; the APRs on the Contracts; the Contract loan-to-value ratios; the
minimum and maximum outstanding principal balances as of the date of issuance of
a particular series of Securities as set forth in the related Prospectus
Supplement (each, a "CUT-OFF DATE") and the average outstanding principal
balance; the outstanding principal balances of the Contracts included in the
related Trust; and the original maturities of the Contracts and the last
maturity date of any Contract.
FHA LOANS
The "FHA LOANS" will consist of home improvement loans originated under
Title I (the "TITLE I LOAN PROGRAM") of the NHA Act. Under the NHA Act, the FHA,
an agency of the United States Department of Housing and Urban Development
("HUD"), is authorized and empowered to insure qualified lending institutions
against losses on eligible loans. Several types of loans may be made under the
Title I Loan Program, including (1) property improvement loans; (2) manufactured
home purchase loans; (3) manufactured home lot loans; and (4) combination loans
(to purchase a manufactured home and a lot). Property improvement loans (the
"TITLE I PROPERTY IMPROVEMENT LOANS") may be made by approved lenders to finance
alterations, repair or improvement of existing single family, multifamily,
manufactured housing and nonresidential structures.
Title I Property Improvement Loans, in addition to improvements to protect
the livability or utility of single family, multifamily or manufactured housing
or nonresidential property, also include loans for the renovation or
preservation of historic residential structures and loans to finance the
installation of fire safety equipment in existing health care facilities. Loan
processing and credit determinations are done by an
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approved financial institution. Each lender is required to use prudent lending
standards in underwriting individual loans.
Under the Title I Loan Program, the FHA does not review individual loans at
the time of approval (as is typically the case with some other federal loan
programs), except when the amount of a Title I Property Improvement Loan would
result in any borrower having a total unpaid principal obligation on such loans
in excess of certain specified amounts, in which case HUD approval must be
obtained.
The Title I Loan Program is a coinsurance program. The lender initially is
at risk for 10% of the principal balance of each loan. The FHA will insure the
remaining 90% of the principal balance of each loan, subject to the limits of
the reserve amount discussed below. Such FHA insurance is accorded the full
faith and credit of the United States of America. Thus, a lender under the
program risks the loss of up to 10% of the principal balance on every loan
submitted to the FHA for an insurance claim (or a greater amount if the lender's
reserve amount is diminished or exhausted), plus a portion of the interest on
such loans.
At the time the FHA receives a new loan origination or transfer of note
report from an approved lender, the FHA adds to the balance in the reserve
amount established by the FHA for the lender originating or purchasing such loan
an amount equal to 10% of the amount disbursed, advanced or expended by the
lender in originating or purchasing the loan. The balance in the reserve amount
limits the amount of claims the FHA is required to pay.
The reserve amount established by the FHA for each lender will be reduced
by the amount of all insurance claims approved for payment in conjunction with
losses on such loans. The lender's reserve amount will be increased based upon
additions made pursuant to the origination or purchase of eligible loans
registered for insurance.
The FHA charges a fee of 0.50% per annum of the original balance for each
loan it insures, on a non-declining basis. The FHA bills the lender annually (on
the anniversary date of origination) for the insurance premium, unless the loan
has a maturity of 25 months or less, in which case the insurance charge is
payable in one lump sum. If a loan is prepaid during the year, the FHA will not
rebate the insurance premium nor reduce the balance in the lender's insurance
coverage reserve account. The unused insurance charge will, however, be rebated
when a Title I loan is refinanced.
SECURED CONVENTIONAL HOME IMPROVEMENT LOANS
The Secured Conventional Home Improvement Loans will consist of secured
conventional loans, the proceeds of which generally will be used for purposes
similar to those described under the heading "-- FHA Loans." To the extent set
forth in the related Prospectus Supplement, the Secured Conventional Home
Improvement Loans will be fully amortizing and will bear interest at a fixed or
variable annual percentage rate.
UNSECURED HOME IMPROVEMENT LOANS
The Unsecured Home Improvement Loans will consist of conventional unsecured
home improvement loans and FHA insured unsecured home improvement loans. To the
extent set forth in the related Prospectus Supplement, the Unsecured Home
Improvement Loans will be fully amortizing and will bear interest at a fixed or
variable annual percentage rate.
AGENCY SECURITIES
"AGENCY SECURITIES" include the following mortgage pass-through
certificates issued or guaranteed by GNMA, FNMA, FHLMC or other government
agencies or government-sponsored agencies.
Government National Mortgage Association. GNMA is a wholly-owned corporate
instrumentality of the United States within the HUD. Section 306(g) of Title II
of the NHA Act, authorizes GNMA to, among other things, guarantee the timely
payment of the principal of and interest on certificates which represent an
interest in a pool of mortgage loans insured by FHA under the NHA Act, or Title
V of the Housing Act of
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1949, or partially guaranteed by the VA under the Servicemen's Readjustment Act
of 1944, as amended, or chapter 37 of Title 38, United States Code ("VA LOANS").
Section 306(g) of the NHA Act provides that "the full faith and credit of
the United States is pledged to the payment of all amounts which may be required
to be paid under any guarantee under this subsection." In order to meet its
obligations under any such guarantee, GNMA may, under Section 306(d) of the NHA
Act, borrow from the United States Treasury in an amount which is at any time
sufficient to enable GNMA, with no limitations as to amount, to perform its
obligations under its guarantee.
GNMA Certificates. Each "GNMA CERTIFICATE" held in a Trust Fund (which may
be a GNMA I Certificate or a GNMA II Certificate) will be a "fully modified
pass-through" mortgaged-backed certificate issued and serviced by a mortgage
banking company or other financial concern ("GNMA ISSUER") approved by GNMA or
approved by FNMA as a seller-servicer of FHA Loans and/or VA Loans. The mortgage
loans underlying the GNMA Certificates held in a Trust Fund will consist of FHA
Loans and/or VA Loans. Each such mortgage loan is secured by a one- to
four-family residential property or a manufactured home. GNMA will approve the
issuance of each such GNMA Certificate in accordance with a guaranty agreement
(a "GUARANTY AGREEMENT") between GNMA and the GNMA Issuer. Pursuant to its
Guaranty Agreement, a GNMA Issuer will be required to advance its own funds in
order to make timely payments of all amounts due on each such GNMA Certificate,
even if the payments received by the GNMA Issuer on the FHA Loans or VA Loans
underlying each such GNMA Certificate are less than the amounts due on each such
GNMA Certificate.
The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States. Each such GNMA Certificate will have an
original maturity of not more than 40 years (but may have original maturities of
substantially less than 40 years). Each such GNMA Certificate will provide for
the payment by or on behalf of the GNMA Issuer to the registered holder of such
GNMA Certificate of scheduled monthly payments of principal and interest equal
to the registered holder's proportionate interest in the aggregate amount of the
monthly principal and interest payment on each FHA Loan or VA Loan underlying
such GNMA Certificate, less the applicable servicing and guarantee fee which
together equal the difference between the interest on the FHA Loans or VA Loans
and the pass-through rate on the GNMA Certificate. In addition, each payment
will include proportionate pass-through payments of any prepayments of principal
on the FHA Loans or VA Loans underlying such GNMA Certificate and liquidation
proceeds in the event of a foreclosure or other disposition of any such FHA
Loans or VA Loans.
If a GNMA Issuer is unable to make the payments on a GNMA Certificate as it
becomes due, it must promptly notify GNMA and request GNMA to make such payment.
Upon notification and request, GNMA will make such payments directly to the
registered holder of such GNMA Certificate. In the event no payment is made by a
GNMA Issuer and the GNMA Issuer fails to notify and request GNMA to make such
payment, the holder of such GNMA Certificate will have recourse only against
GNMA to obtain such payment. The Trustee or its nominee, as registered holder of
the GNMA Certificates held in a Trust Fund, will have the right to proceed
directly against GNMA under the terms of the Guaranty Agreements relating to
such GNMA Certificates for any amounts that are not paid when due.
All mortgage loans underlying a particular GNMA Certificate must have the
same interest rate (except for pools of mortgage loans secured by manufactured
homes) over the term of the loan. The interest rate on such GNMA I Certificate
will equal the interest rate on the mortgage loans included in the pool of
mortgage loans underlying such GNMA I Certificate, less one-half percentage
point per annum of the unpaid principal balance of the mortgage loans.
Mortgage loans underlying a particular GNMA II Certificate may have per
annum interest rates that vary from each other by up to one percentage point.
The interest rate on each GNMA II Certificate will be between one-half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying such GNMA II Certificate (except for pools of mortgage loans secured
by manufactured homes).
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Regular monthly installment payments on each GNMA Certificate held in a
Trust Fund will be comprised of interest due as specified on such GNMA
Certificate plus the scheduled principal payments on the FHA Loans or VA Loans
underlying such GNMA Certificate due on the first day of the month in which the
scheduled monthly installments on such GNMA Certificate is due. Such regular
monthly installments on each such GNMA Certificate are required to be paid to
the Trustee as registered holder by the 15th day of each month in the case of a
GNMA I Certificate and are required to be mailed to the Trustee by the 20th day
of each month in the case of a GNMA II Certificate. Any principal prepayments on
any FHA Loans or VA Loans underlying a GNMA Certificate held in a Trust Fund or
any other early recovery of principal on such loan will be passed through to the
Trustee as the registered holder of such GNMA Certificate.
GNMA Certificates may be backed by graduated payment mortgage loans or by
"buydown" mortgage loans for which funds will have been provided (and deposited
into escrow accounts) for application to the payment of a portion of the
borrowers' monthly payments during the early years of such mortgage loan.
Payments due the registered holders of GNMA Certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other GNMA Certificates and will include amounts to be
collected from both the borrower and the related escrow account. The graduated
payment mortgage loans will provide for graduated interest payments that, during
the early years of such mortgage loans, will be less than the amount of stated
interest on such mortgage loans. The interest not so paid will be added to the
principal of such graduated payment mortgage loans and, together with interest
thereon, will be paid in subsequent years. The obligations of GNMA and of a GNMA
Issuer will be the same irrespective of whether the GNMA Certificates are backed
by graduated payment mortgage loans or "buydown" mortgage loans. No statistics
comparable to the FHA's prepayment experience on level payment, non-buydown
loans are available in respect of graduated payment or buydown mortgages. GNMA
Certificates related to a Series of Securities may be held in book-entry form.
GNMA also guarantees the timely payment of principal of and interest on
"fully modified pass-through" mortgage-backed securities issued and serviced by
certain mortgage banking companies and other financial concerns ("GNMA PROJECT
ISSUERS") based upon and backed by pools of multi-family residential mortgage
loans coinsured by FHA and GNMA Project Issuers under the NHA Act ("GNMA PROJECT
CERTIFICATES"). The Prospectus Supplement for a Series of Securities that
includes GNMA Project Certificates will set forth additional information
regarding the GNMA guaranty program, servicing of the mortgage pool, the payment
of principal and interest on GNMA Project Certificates and other matters with
respect to multi-family residential mortgage loans that qualify for the GNMA
guaranty.
Federal National Mortgage Association. FNMA is a federally chartered and
privately owned corporation organized and existing under the Federal National
Mortgage Association Charter Act (the "CHARTER ACT"). FNMA was originally
established in 1938 as a United States government agency to provide supplemental
liquidity to the mortgage market and was transformed into a stockholder-owned
and privately-managed corporation by legislation enacted in 1968.
FNMA provides funds to the mortgage market primarily by purchasing mortgage
loans from lenders, thereby replenishing their funds for additional lending.
FNMA acquires funds to purchase mortgage loans from many capital market
investors that may not ordinarily invest in mortgages, thereby expanding the
total amount of funds available for housing. Operating nationwide, FNMA helps to
redistribute mortgage funds from capital-surplus to capital-short areas.
FNMA Certificates. "FNMA CERTIFICATES" are either Guaranteed Mortgage
Pass-Through Certificates ("FNMA MBS") or Stripped Mortgage-Backed Securities
("FNMA SMBS"). The following discussion of FNMA Certificates applies equally to
both FNMA MBS and FNMA SMBS, except as otherwise indicated. Each FNMA
Certificate included in the Trust for a Series will represent a fractional
undivided interest in a pool of mortgage loans formed by FNMA. Each such pool
will consist of mortgage loans of one of the following types: (i) fixed-rate
level installment conventional mortgage loans; (ii) fixed-rate level installment
mortgage loans that are insured by FHA or partially guaranteed by the VA; (iii)
adjustable rate conventional mortgage loans; or (iv) adjustable rate mortgage
loans that are insured by the FHA or partially guaranteed by the VA. Each
mortgage loan must meet the applicable standards set forth under the FNMA
purchase
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program. Each such mortgage loan will be secured by a first lien on a one-family
or two- to four-family residential property. Each such FNMA Certificate will be
issued pursuant to a trust indenture. Original maturities of substantially all
of the conventional, level payment mortgage loans underlying a FNMA Certificate
are expected to be between either 8 to 15 years or 20 to 40 years. The original
maturities of substantially all of the fixed rate level payment FHA Loans or VA
Loans are expected to be 30 years.
Mortgage loans underlying a FNMA Certificate may have annual interest rates
that vary by as much as two percentage points from each other. The rate of
interest payable on a FNMA MBS (and the series pass-through rate payable with
respect to a FNMA SMBS) is equal to the lowest interest rate of any mortgage
loan in the related pool, less a specified minimum annual percentage
representing servicing compensation and FNMA's guaranty fee. Under a regular
servicing option (pursuant to which the mortgagee or other servicer assumes the
entire risk of foreclosure losses), the annual interest rates on the mortgage
loans underlying a FNMA Certificate will be between 50 basis points and 250
basis points greater than the annual pass-through rate if a FNMA MBS or the
series pass-through rate if a FNMA SMBS; and under a special servicing option
(pursuant to which FNMA assumes the entire risk for foreclosure losses), the
annual interest rates on the mortgage loans underlying a FNMA Certificate will
generally be between 55 basis points and 255 basis points greater than the
annual FNMA Certificate pass-through rate if a FNMA MBS, or the series
pass-through rate if a FNMA SMBS.
FNMA guarantees to each registered holder of a FNMA Certificate that it
will distribute on a timely basis amounts representing such holder's
proportionate share of scheduled principal and interest payments at the
applicable pass-through rate provided for by such FNMA Certificate on the
underlying mortgage loans, whether or not received, and such holder's
proportionate share of the full principal amount of any foreclosed or other
finally liquidated mortgage loan, whether or not such principal amount is
actually recovered. The obligations of FNMA under its guarantees are obligations
solely of FNMA and are not backed by, nor entitled to, the full faith and credit
of the United States. If FNMA were unable to satisfy its obligations,
distributions to holders of FNMA Certificates would consist solely of payments
and other recoveries on the underlying mortgage loans and, accordingly, monthly
distributions to holders of FNMA Certificates would be affected by delinquent
payments and defaults on such mortgage loans.
FNMA SMBS are issued in series of two or more classes, with each class
representing a specified undivided fractional interest in principal
distributions and interest distributions (adjusted to the series pass-through
rate) on the underlying pool of mortgage loans. The fractional interests of each
class in principal and interest distributions are not identical, but the classes
in the aggregate represent 100% of the principal distributions and interest
distributions (adjusted to the series pass-through rate) on the respective pool.
Because of such difference between the fractional interests in principal and
interest of each class, the effective rate of interest on the principal of each
class of FNMA SMBS may be significantly higher or lower than the series
pass-through rate and/or the weighted average interest rate of the underlying
mortgage loans.
Unless otherwise specified by FNMA, FNMA Certificates evidencing interests
in pools of mortgages formed on or after May 1, 1985 will be available in
book-entry form only. Distributions of principal and interest on each FNMA
Certificate will be made by FNMA on the 25th day of each month to the persons in
whose name the FNMA Certificate is entered in the books of the Federal Reserve
Banks (or registered on the FNMA Certificate register in the case of fully
registered FNMA Certificates) as of the close of business on the last day of the
preceding month. With respect to FNMA Certificates issued in book-entry form,
distributions thereon will be made by wire, and with respect to fully registered
FNMA Certificates, distributions thereon will be made by check.
Federal Home Loan Mortgage Corporation. FHLMC is a publicly held United
States government-sponsored enterprise created pursuant to the Federal Home Loan
Mortgage Corporation Act, Title III of the Emergency Home Finance Act of 1970,
as amended (the "FHLMC ACT"). The common stock of FHLMC is owned by the Federal
Home Loan Banks. FHLMC was established primarily for the purpose of increasing
the availability of mortgage credit for the financing of urgently needed
housing. It seeks to provide an enhanced degree of liquidity for residential
mortgage investments primarily by assisting in the development of secondary
markets for conventional mortgages. The principal activity of FHLMC currently
consists of the purchase of
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first lien conventional mortgage loans or participation interests in such
mortgage loans and the sale of the mortgage loans or participations so purchased
in the form of mortgage securities, primarily FHLMC Certificates. FHLMC is
confined to purchasing, so far as practicable, mortgage loans that it deems to
be of such quality, type and class as to meet generally the purchase standards
imposed by private institutional mortgage investors.
FHLMC Certificates. Each "FHLMC CERTIFICATE" represents an undivided
interest in a pool of mortgage loans that may consist of first lien conventional
loans, FHA Loans or VA Loans (a "FHLMC CERTIFICATE GROUP"). FHLMC Certificates
are sold under the terms of a Mortgage Participation Certificate Agreement. A
FHLMC Certificate may be issued under either FHLMC's Cash Program or Guarantor
Program, as described below.
Unless otherwise described in the Prospectus Supplement, Mortgage loans
underlying the FHLMC Certificates held by a Trust Fund will consist of mortgage
loans with original terms to maturity of between 10 and 40 years. Each such
mortgage loan must meet the applicable standards set forth in the FHLMC Act. A
FHLMC Certificate Group may include whole loans, participation interests in
whole loans and undivided interests in whole loans and/or participations
comprising another FHLMC Certificate Group. Under the Guarantor Program, any
such FHLMC Certificate Group may include only whole loans or participation
interests in whole loans.
FHLMC guarantees to each registered holder of a FHLMC Certificate the
timely payment of interest on the underlying mortgage loans to the extent of the
applicable Security rate on the registered holder's pro rata share of the unpaid
principal balance outstanding on the underlying mortgage loans in the FHLMC
Certificate Group represented by such FHLMC Certificate, whether or not
received. FHLMC also guarantees to each registered holder of a FHLMC Certificate
ultimate receipt by such holder of all principal on the underlying mortgage
loans, without any offset or deduction, to the extent of such holder's pro rata
share thereof, but does not, except if and to the extent specified in the
Prospectus Supplement for a Series of Securities, guarantee the timely payment
of scheduled principal. Under FHLMC's Gold PC Program, FHLMC guarantees the
timely payment of principal based on the difference between the pool factor,
published in the month preceding the month of distribution and the pool factor
published in such month of distribution. Pursuant to its guarantees, FHLMC
indemnifies holders of FHLMC Certificates against any diminution in principal by
reason of charges for property repairs, maintenance and foreclosure. FHLMC may
remit the amount due on account of its guarantee of collection of principal at
any time after default on an underlying mortgage loan, but not later than (i) 30
days following foreclosure sale, (ii) 30 days following payment of the claim by
any mortgage insurer, or (iii) 30 days following the expiration of any right of
redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal. In taking actions regarding the collection of principal after default
on the mortgage loans underlying FHLMC Certificates, including the timing of
demand for acceleration, FHLMC reserves the right to exercise its judgment with
respect to the mortgage loans in the same manner as for mortgage loans which it
has purchased but not sold. The length of time necessary for FHLMC to determine
that a mortgage loan should be accelerated varies with the particular
circumstances of each mortgagor, and FHLMC has not adopted standards which
require that the demand be made within any specified period.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of FHLMC under its
guarantee are obligations solely of FHLMC and are not backed by, nor entitled
to, the full faith and credit of the United States. If FHLMC were unable to
satisfy such obligations, distributions to holders of FHLMC Certificates would
consist solely of payments and other recoveries on the underlying mortgage loans
and, accordingly, monthly distributions to holders of FHLMC Certificates would
be affected by delinquent payments and defaults on such mortgage loans.
Registered holders of FHLMC Certificates are entitled to receive their
monthly pro rata share of all principal payments on the underlying mortgage
loans received by FHLMC, including any scheduled principal payments, full and
partial prepayments of principal and principal received by FHLMC by virtue of
condemnation, insurance, liquidation or foreclosure, and repurchases of the
mortgage loans by FHLMC or the
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seller thereof. FHLMC is required to remit each registered FHLMC
Certificateholder's pro rata share of principal payments on the underlying
mortgage loans, interest at the FHLMC pass-through rate and any other sums such
as prepayment fees, within 60 days of the date on which such payments are deemed
to have been received by FHLMC.
Under FHLMC's "CASH PROGRAM," with respect to pools formed prior to June 1,
1987, there is no limitation on the amount by which interest rates on the
mortgage loans underlying a FHLMC Certificate may exceed the pass-through rate
on the FHLMC Certificate. With respect to FHLMC Certificates issued on or after
June 1, 1987, the maximum interest rate on the mortgage loans underlying such
FHLMC Certificates may exceed the pass through rate of the FHLMC Certificates by
50 to 100 basis points. Under such program, FHLMC purchases groups of whole
mortgage loans from sellers at specified percentages of their unpaid principal
balances, adjusted for accrued or prepaid interest, which when applied to the
interest rate of the mortgage loans and participations purchased, results in the
yield (expressed as a percentage) required by FHLMC. The required yield, which
includes a minimum servicing fee retained by the servicer, is calculated using
the outstanding principal balance. The range of interest rates on the mortgage
loans and participations in a FHLMC Certificate group under the Cash Program
will vary since mortgage loans and participations are purchased and assigned to
a FHLMC Certificate group based upon their yield to FHLMC rather than on the
interest rate on the underlying mortgage loans.
Under FHLMC's "GUARANTOR PROGRAM," the pass-through rate on a FHLMC
Certificate is established based upon the lowest interest rate on the underlying
mortgage loans, minus a minimum servicing fee and the amount of FHLMC's
management and guaranty income as agreed upon between the seller and FHLMC. For
FHLMC Certificate Groups formed under the Guarantor Program with certificate
numbers beginning with 18-012, the range between the lowest and the highest
annual interest rates on the mortgage loans in a FHLMC Certificate group may not
exceed two percentage points.
FHLMC Certificates duly presented for registration of ownership on or
before the last business day of a month are registered effective as of the first
day of the month. The first remittance to a registered holder of a FHLMC
Certificate will be distributed so as to be received normally by the 15th day of
the second month following the month in which the purchaser became a registered
holder of the FHLMC Certificates. Thereafter, such remittance will be
distributed monthly to the registered holder so as to be received normally by
the 15th day of each month. The Federal Reserve Bank of New York maintains
book-entry accounts with respect to FHLMC Certificates sold by FHLMC on or after
January 2, 1985, and makes payments of principal and interest each month to the
registered holders thereof in accordance with such holders' instructions.
FHLMC also issues mortgage participation certificates representing an
undivided interest in a group of multi-family residential mortgage loans or
participations in multi-family residential mortgage loans purchased by FHLMC
("FHLMC PROJECT CERTIFICATES"). The Prospectus Supplement for a Series of
Securities issued by a Trust that included FHLMC Project Certificates will set
forth additional information regarding multi-family residential mortgage loans
that qualify for purchase by FHLMC.
Stripped Mortgage-Backed Securities. Agency Securities may consist of one
or more "STRIPPED MORTGAGE-BACKED SECURITIES," each as described herein and in
the related Prospectus Supplement. Each such Agency Security will represent an
undivided interest in all or part of either the principal distributions (but not
the interest distributions) or the interest distributions (but not the principal
distributions), or in some specified portion of the principal and interest
distributions (but not all of such distributions) on certain FHLMC, FNMA, GNMA
or other government agency or government-sponsored agency certificates. The
underlying securities will be held under a trust agreement by FHLMC, FNMA, GNMA
or another government agency or government-sponsored agency, each as trustee, or
by another trustee named in the related Prospectus Supplement. FHLMC, FNMA, GNMA
or another government agency or government-sponsored agency will guarantee each
stripped Agency Security to the same extent as such entity guarantees the
underlying securities backing such stripped Agency Security, unless otherwise
specified in the related Prospectus Supplement.
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Other Agency Securities. If specified in the related Prospectus
Supplement, a Trust Fund may include other mortgage pass-through certificates
issued or guaranteed by GNMA, FNMA, FHLMC or other government agencies or
government-sponsored agencies. The characteristics of any such mortgage pass-
through certificates will be described in such Prospectus Supplement. If so
specified, a combination of different types of Agency Securities may be held in
a Trust Fund.
PRIVATE MORTGAGE-BACKED SECURITIES
General. "PRIVATE MORTGAGE-BACKED SECURITIES" may consist of (a) mortgage
participations or pass-through certificates representing beneficial interests in
certain mortgage loans or (b) collateralized mortgage obligations secured by
such mortgage loans. Private Mortgage-Backed Securities will have been issued
pursuant to a PMBS agreement (the "PMBS AGREEMENT"). The seller/servicer of the
underlying mortgage loans will have entered into the PMBS Agreement with a PMBS
Trustee (the "PMBS TRUSTEE") under the PMBS Agreement. The PMBS Trustee or its
agent, or a custodian, will possess the mortgage loans underlying such Private
Mortgage-Backed Security. Mortgage loans underlying a Private Mortgage-Backed
Security will be serviced by a PMBS Servicer (a "PMBS SERVICER") directly or by
one or more sub-servicers who may be subject to the supervision of the PMBS
Servicer. The PMBS Servicer will be approved as a servicer by FNMA or FHLMC and,
if FHA Loans underlie the Private Mortgage-Backed Securities, approved by HUD as
an FHA mortgagee.
The PMBS Issuer will be a financial institution or other entity engaged
generally in the business of mortgage lending or the acquisition of mortgage
loans, a public agency or instrumentality of a state, local or federal
government, or a limited purpose or other corporation organized for the purpose
of among other things, establishing trusts and acquiring and selling housing
loans to such trusts and selling beneficial interests in such trusts. If so
specified in the Prospectus Supplement, the PMBS Issuer may be an affiliate of
the Representative. The obligations of the PMBS Issuer will generally be limited
to certain representations and warranties with respect to the assets conveyed by
it to the related trust. Unless otherwise specified in the related Prospectus
Supplement, the PMBS Issuer will not have guaranteed any of the assets conveyed
to the related trust or any of the Private Mortgage-Backed Securities issued
under the PMBS Agreement. Additionally, although the mortgage loans underlying
the Private Mortgage-Backed Securities may be guaranteed by an agency or
instrumentality of the United States, the Private Mortgage-Backed Securities
themselves will not be so guaranteed.
Distributions of principal and interest will he made on the Private
Mortgage-Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Mortgage-Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private Mortgage-Backed
Securities by the PMBS Trustee or the PMBS Servicer. The PMBS Issuer or the PMBS
Servicer may have the right to repurchase assets underlying the Private
Mortgage-Backed Securities after a certain date or under other circumstances
specified in the related Prospectus Supplement.
Underlying Mortgage Loans. The Mortgage Loans underlying the Private
Mortgage-Backed Securities (the "UNDERLYING MORTGAGE LOANS") may consist of
fixed rate, level payment, fully amortizing loans or graduated payment mortgage
loans, buydown loans, adjustable rate mortgage loans, or loans having balloon or
other special payment features. Such Underlying Mortgage Loans may be Single
Family Loans, Multifamily Loans, Cooperative Loans or Contracts secured by
Manufactured Homes. As specified in the related Prospectus Supplement, (i) no
Underlying Mortgage Loan will have had a Combined Loan-to-Value Ratio at
origination in excess of the percentage set forth in the related Prospectus
Supplement, (ii) each underlying mortgage loan will have had an original term to
stated maturity of not less than 5 years and not more than 40 years, (iii) each
Underlying Mortgage Loan (other than Cooperative Loans) will be required to be
covered by a standard hazard insurance policy (which may be a blanket policy),
and (iv) each mortgage loan (other than Cooperative Loans or Contracts secured
by a Manufactured Home) will be covered by a title insurance policy.
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Credit Support Relating to Private Mortgage-Backed Securities. Credit
support in the form of subordination of other private mortgage certificates
issued under the PMBS Agreement, reserve funds, insurance policies, letters of
credit, financial guaranty insurance policies, guarantees or other types of
credit support may be provided with respect to the Underlying Mortgage Loans or
with respect to the Private Mortgage-Backed Securities themselves.
Additional Information. The Prospectus Supplement for a Series for which
the related Trust includes Private Mortgage-Backed Securities will specify (i)
the aggregate approximate principal amount and type of the Private
Mortgage-Backed Securities to be included in the Trust Fund, (ii) certain
characteristics of the Underlying Mortgage Loans including (A) the payment
features of such Underlying Mortgage Loans, (B) the approximate aggregate
principal balance, if known, of Underlying Mortgage Loans insured or guaranteed
by a governmental entity, (C) the servicing fee or range of servicing fees with
respect to the Underlying Mortgage Loans, and (D) the minimum and maximum stated
maturities of the Underlying Mortgage Loans at origination, (iii) the maximum
original term-to-stated maturity of the Private Mortgage-Backed Securities, (iv)
the weighted average term-to-stated maturity of the Private Mortgage-Backed
Securities, (v) the pass-through or certificate rate of the Private
Mortgage-Backed Securities, (vi) the weighted average pass-through or
certificate rate of the Private Mortgage-Backed Securities, (vii) the PMBS
Issuer, the PMBS Servicer (if other than the PMBS Issuer) and the PMBS Trustee
for such Private Mortgage-Backed Securities, (viii) certain characteristics of
credit support, if any, such as reserve funds, insurance policies, letters of
credit or guarantees relating to the Underlying Mortgage Loans or to such
Private Mortgage-Backed Securities themselves, (ix) the terms on which the
Underlying Mortgage Loans for such Private Mortgage-Backed Securities may, or
are required to, be purchased prior to their stated maturity or the stated
maturity of the Private Mortgage-Backed Securities and (x) the terms on which
other mortgage loans may be substituted for those originally underlying the
Private Mortgage-Backed Securities.
In addition, if any Series of Securities includes Private Mortgage-Backed
Securities, such Private Mortgage-Backed Securities will be registered to the
extent required under the Securities Act of 1933, as amended, and the rules,
regulations and interpretations thereof by the Staff of the Commission.
THE REPRESENTATIVE AND THE ORIGINATORS
The Mortgage Loans will have been originated or acquired by the
Originators. The Money Store or certain of its affiliates, including First Union
National Bank or certain of its affiliates, may act as a Master Servicer of the
Mortgage Loans and other Mortgage Assets. Except for certain representations and
warranties relating to the Mortgage Loans and other Mortgage Assets and certain
other matters, the obligations of The Money Store with respect to the Mortgage
Loans and other Mortgage Assets will be limited to its contractual servicing
obligations.
The Money Store is a New Jersey corporation and is headquartered in
Sacramento, California and Union, New Jersey. The Money Store is a wholly-owned
subsidiary of First Union National Bank, a national banking association
subsidiary of First Union Corporation.
The Money Store is a financial services company engaged, through its
subsidiaries (including the Originators), in the business of originating,
purchasing, selling and servicing consumer and commercial loans of specified
types and offering related services. Loans originated by The Money Store and its
subsidiaries have consisted primarily of mortgage loans, loans partially
guaranteed by the United States Small Business Administration, and student
loans.
Since 1967, The Money Store and its subsidiaries have been active in the
development of the residential home equity lending industry in the United
States.
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THE SINGLE FAMILY LOAN LENDING PROGRAM
OVERVIEW
The Money Store's and the Originators' mortgage lending activities consist
primarily of originating, purchasing, selling and servicing mortgage loans that
are primarily secured by one- to four-family residential properties, including
low-rise condominiums, single-family detached homes, single-family attached
homes, planned unit developments and mixed use properties (collectively, "SINGLE
FAMILY LOANS"). It has been the Originators' policy generally not to make
mortgage loans secured by high-rise condominiums, cooperative residences or
other categories of properties that management believes have demonstrated
relatively high levels of risk. The majority of Single Family Loans are to
borrowers owning a single-family detached home. Single Family Loans are made to
borrowers for, among other purposes, education, home improvements and debt
consolidation. The Money Store and its subsidiaries also originate, with the
intention of selling and servicing, Multifamily Loans, FHA Loans, Secured
Conventional Home Improvement Loans, Unsecured Home Improvement Loans and loans
partially guaranteed by the United States Small Business Administration. In
addition, The Money Store and its subsidiaries from time to time purchase
packages of loans from other lenders or government agencies.
The Originators originate and purchase Single Family Loans with original
terms of up to 40 years. The following is a description of the origination,
underwriting, servicing and other procedures used by The Money Store and the
Originators in connection with their Single Family Loan program. If a
significant portion of the Mortgage Loans underlying a given Series of
Securities consists of FHA Loans, Secured Conventional Home Improvement Loans
and/or Unsecured Home Improvement Loans, the related Prospectus Supplement will
contain a similar description of the program relating to such Mortgage Loans.
SINGLE FAMILY LOAN ORIGINATION
The Originators' Single Family Loan origination offices are generally
located in small and medium-sized suburban communities. All Single Family Loan
origination offices have a manager who reports to senior management. Each
regional office supervises the operations of a group of states. The supervision
of all of the Originator's underwriting and administrative functions is
conducted from the Sacramento, California headquarters.
The entire application and approval process for Single Family Loans is
generally conducted by telephone. The Originators attempt to grant approvals of
loans quickly to borrowers meeting their underwriting criteria. A loan officer
is responsible for completing, evaluating and processing the loan application of
a prospective borrower based on information obtained from the borrower and
verified with third parties. Depending on the size of the loan applied for, loan
applications must be approved by an underwriter located in the Sacramento,
California headquarters. Loan officers are trained to structure loans that meet
the applicant's needs, while satisfying the Originators' lending criteria. If an
applicant does not meet the lending criteria, the loan officer may offer to make
a smaller loan, if a smaller loan would meet the lending criteria, or suggest a
debt consolidation package that better suits the applicant's needs.
The Originators also acquire Single Family Loans through an indirect
lending program, from independent brokers. Such Single Family Loans are
underwritten by the Originators using the same criteria applied to loans
originated by such Originator. Brokers participating in this program must
satisfy certain requirements established by the Originators pertaining to
experience, size of business and various licenses and approvals. The Originators
also acquire, from time to time, portfolios of Single Family Loans from various
third parties. The Originators will not sell such acquired loans to a Trust
unless the Originators determine that such loans, when originated, were
underwritten using the same criteria applied to loans originated by the
Originators.
Starting in October 1995, the Originators began originating Single Family
Loans under a program that will result in lower interest rates for borrowers
that make timely payments during the early years of the related loan. Under this
program, if a borrower remits all scheduled payments during the first year of
the loan on a timely basis, the interest rate on the loan will be reduced 0.50%
per annum. If the borrower remits all scheduled payments during the second year
of the loan on a timely basis, the interest rate will be reduced an
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additional 0.50% per annum and, if all payments are made during the third year
of the loan on a timely basis, the interest rate will be reduced a final 0.50%
per annum. Once the interest rate on a loan is reduced, it will not be
increased, regardless of the borrowers future payment record.
UNDERWRITING CRITERIA
The following is a brief description of certain of the underwriting
standards used by the Originators to underwrite Single Family Loans. The
underwriting process is intended to assess both the prospective borrower's
ability to repay and the adequacy of the real property security as collateral
for the loan granted. To the extent that the relevant underwriting criteria
differ from those described herein, the related Prospectus Supplement for such
Series will specifically describe such criteria.
In certain cases deemed appropriate by an Originator's underwriters, loans
may be made outside of the Originator's guidelines with the prior approval of
pre-designated senior officials. No information is available with respect to the
portion of the Mortgage Loans which was originated outside of these guidelines.
The Originators' objective in originating Single Family Loans is to provide
loans to borrowers with satisfactory income and credit histories deemed
sufficient to demonstrate the ability to repay their loan. The primary and
initial origination policy is to analyze the applicant's creditworthiness (i.e.,
a determination of the applicant's ability to repay the loan). Creditworthiness
is assessed by examination of a number of factors, which may include calculating
a debt-to-income ratio obtained by dividing a borrower's fixed monthly debt by
the borrower's gross monthly income. Fixed monthly debt generally includes (i)
the monthly payment under the related prior mortgages (which generally includes
an escrow for real estate taxes) based, in the case of an adjustable-rate first
mortgage, on the assumption that the then-current rate is the rate at which
interest will accrue on such loan, (ii) the monthly payment on the loan applied
for and (iii) other installment debt, including, for revolving debt, the
required monthly payment thereon or if no such payment is specified, 5% of the
balance as of the date of calculation. Fixed monthly debt does not include any
debt (other than revolving credit debt) described above that matures within less
than 10 months of the date of calculation. Except as otherwise set forth in the
related Prospectus Supplement, the debt-to-income ratio of any borrower will not
have exceeded 50% as of origination of the related loan. Creditworthiness is
also assessed by examining the applicant's credit history through standard
credit reporting bureaus, and by checking the applicant's payment history with
respect to the first mortgage, if any, on the property.
The second origination policy for Single Family Loans is a determination of
the Combined Loan-to-Value Ratio. Combined Loan-to-Value Ratio guidelines are
established depending on the type of loan. For each Single Family Loan, the
Originator confirms the value of the property to be mortgaged by appraisals
(which in certain cases may be drive-by appraisals) performed by independent
appraisers. Drive-by appraisals involve a visual observation of the exterior of
the characteristics and condition of the property and the neighborhood. Because
the interior dimensions, improvements and conditions are not inspected, a
drive-by appraisal produces only a general approximation of value for the
particular property. If the Originator has previously originated a loan to the
same borrower secured by the same property within one year, the Originator may
rely on the prior appraisal in conjunction with a new drive-by appraisal. If an
appraisal is not required to be obtained for a Single Family Loan, the value of
the related mortgaged property, as represented by the borrower, may be evaluated
through other methods such as a drive-by appraisal, a review of comparable sales
or tax assessments or reliance upon a recent sales price for such mortgaged
property. Such methods do not constitute an appraisal of the related mortgaged
property. All Combined Loan-to-Value Ratios are determined prior to approval of
the loans.
The Originators have several procedures which they use to verify
information obtained from an applicant. The applicant's outstanding balance and
payment history on any senior mortgage may be verified by calling the senior
mortgage lender. If the senior mortgage lender cannot be reached by telephone to
verify this information, the Originator may rely upon information provided by
the applicant, such as a recent statement from the senior lender and
verification of payment, such as canceled checks, or upon information provided
by national credit bureaus.
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In order to verify an applicant's employment status, the Originators may
obtain from the applicant recent tax returns or other tax forms (e.g., W-2
forms) or current pay stubs or may telephone the applicant's employer or obtain
written verification from the employer. As in the case of the senior mortgage
lender verification procedures, if the employer will not verify employment
history over the telephone, the Originator may rely solely on the other
information provided by the applicant.
The Originators will not close a Single Family Loan prior to receiving
evidence that the property securing the loan is insured. In addition, at the
closing, the borrower is required to sign a letter addressed to his insurance
carrier naming the Originator as a loss payee under the insurance policy, which
the Originator will thereafter mail to the insurer. Accordingly, the Originator
normally will not be named as a loss payee with respect to the property securing
the Single Family Loan at the time the loan is closed.
A title search is ordered to verify the vesting of title to the Mortgaged
Property, along with the existence of any mortgages, tax or other liens that
have been levied on the property, to assure that the lien priority will be as
represented by the borrower.
Most Single Family Loans originated or purchased by the Originators
generally are scheduled to amortize over their terms and provide for equal
monthly payments over their terms. The Originators also offer a "balloon"
mortgage on a limited basis. The Originators collect nonrefundable points, late
charges and various fees in certain states in connection with their mortgage
loans. Other fees charged, where allowable, include those related to credit
reports, lien searches, title insurance and recordings, prepayment fees and
appraisal fees. From time-to-time, the Originators may originate or purchase
Single Family Loans containing other features. To the extent that a substantial
portion of a Trust Fund consists of such Single Family Loans such features will
be described in the related Prospectus Supplement.
Although the Originators have no maximum dollar amount for Single Family
Loans, the actual maximum amount that they will lend is determined by an
evaluation of the applicant's ability to repay the loan, the value of the
borrower's equity in the real estate and the ratio of such equity to the real
estate's appraised value.
Commencing in 1997, the Originators began originating Single Family Loans
with Combined Loan-to-Value Ratios exceeding 100%. Such Single Family Loans are
originated to borrowers believed by the Originators to have the income capacity
and credit history to offset the lack of equity in the related Mortgaged
Property. Such Single Family Loans generally bear a higher rate of interest than
Single Family Loans with lower Combined Loan-to-Value Ratios.
QUALITY CONTROL
Quality control is exercised in two areas: lending and documentation
standards. In the case of Single Family Loans, a centralized quality control
staff checks to confirm that lending and documentation standards are met. Every
month, at least one office is audited and every loan type originated during the
prior month by such office is reviewed for compliance with lending and
documentation standards. Five percent of all Single Family Loans originated by
the Originators are audited at random on a monthly basis for compliance with
lending and documentation standards. Additional offices receive audits on a
random, monthly basis. In order to confirm the validity of appraisals obtained
at the time loans are made, reappraisals are obtained for the property securing
the loans in approximately two percent to five percent of the transactions.
REFINANCING POLICY
Where the Originators believe that borrowers having existing loans with
them are likely to refinance such loans due to interest rate changes or other
reasons, the Originators actively attempt to retain such borrowers through
solicitations of such borrowers to refinance with the Originators. Such
refinancings generate fee and servicing income for the Originators. Since the
solicited borrowers may refinance their existing loans in any case, the
Representative believes that this practice will be unlikely to affect the
prepayment experience of the Single Family Loans in a material respect. The
Originators also have solicited their borrowers who are in good standing to
apply for additional loans, consistent with their origination standards, where
deemed appropriate.
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SERVICING AND COLLECTIONS
The Money Store or one of its affiliates, as Master Servicer, will be
required under the related Agreement to master service the Mortgage Loans and
other Mortgage Assets underlying a particular Series of Securities with the same
degree of skill and care that it exercises with respect to all comparable loans
and assets that it master services for its own account. Servicing includes, but
is not limited to, post-origination loan processing, customer service,
remittance handling, collections and liquidations.
Borrowers are sent payment coupon books or monthly statements that specify
the fixed payment due and the late payment amount, if any. Due dates for
payments occur throughout the calendar month. If payment is not received within
fifteen working days of the due date, an initial collection effort is made by
telephone in an attempt to bring the delinquent account current. The various
stages of delinquency are monitored and evaluated on a monthly basis.
Means of contacting delinquent accounts include, but are not limited to,
telephone calls and collection letters. When an account is 30 days past due, the
collection supervisor analyzes the account to determine the appropriate course
of action. If a borrower is experiencing difficulty in making payments on time,
the Servicer may modify the payment schedule (as permitted by the Agreement) but
will not remove the loan from a delinquency status.
The course of action taken by the Servicer is dependent upon a number of
factors including the borrower's payment history, the amount of equity in the
related Mortgaged Property and the reason for the current inability to make
timely payments.
When a loan is 90 days past due, the related Mortgaged Property is required
to be reappraised and the results evaluated by the Company to determine a course
of action. Foreclosure regulations and practices and the rights of the owner in
default vary from state to state, but generally procedures may be initiated if:
(i) the loan is 90 days or more delinquent; (ii) a notice of default on a senior
lien is received or (iii) the servicer discovers circumstances indicating
potential loss exposure. During the foreclosure process, any expenses incurred
by the Servicer may be added to the amount owed by the borrower, as permitted by
applicable law. Upon completion of the foreclosure, the property is sold to an
outside bidder, or passes to the mortgagee, in which case the Servicer proceeds
to liquidate the asset.
The Servicer may not foreclose on the property securing a junior mortgage
loan unless it forecloses subject to the related senior mortgages. In such
cases, the Servicer generally will pay the amount due on the senior mortgages to
the senior mortgagees, if the Servicer considers it to be in the best interest
of the related Securityholders to do so. In the event that foreclosure
proceedings have been instituted on a senior mortgage prior to the initiation of
the Servicer's foreclosure action, the Servicer will either satisfy such
mortgage at the time of the foreclosure sale or take other appropriate action.
The Servicer retains "in-house" counsel in part to help assist with problem
accounts. Such counsel may be utilized by all levels of management to help avoid
legal problems, including those associated with consumer lending.
Servicing and charge-off policies and collection practices may change over
time in accordance with the servicer's business judgment, changes in its
real-estate loan portfolio and applicable laws and regulations, as well as other
items.
Regulations and practices regarding the liquidation of properties (e.g.,
foreclosure) and the rights of the borrower in default vary greatly from state
to state. Only if a delinquency cannot otherwise be cured will the servicer
decide that liquidation is the appropriate course of action. If, after
determining that purchasing a property securing a mortgage loan will minimize
the loss associated with such defaulted loan, the servicer may bid at the
foreclosure sale for such property or accept a deed in lieu of foreclosure.
DESCRIPTION OF THE SECURITIES
Each Series of Certificates will be issued, from time to time, pursuant to
either a Pooling and Servicing Agreement or a Trust Agreement, and each Series
of Notes will be issued, from time to time, pursuant to an Indenture, each to be
dated as of the Cut-off Date, among The Money Store, the applicable Originators
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and/or certain affiliates thereof and the Trustee for the benefit of the related
Certificateholders or Noteholders, as the case may be, of such Series. A Series
may contain either Certificates or Notes or a combination thereof. 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. A form
of a Pooling and Servicing Agreement, Trust Agreement, Sale and Servicing
Agreement and an Indenture have each been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The following
summaries describe certain material provisions which may appear in each
Agreement. The Prospectus Supplement for a Series of Securities will describe
any provision of the Agreement relating to such Series that materially differs
from the description thereof contained in this Prospectus. The summaries do not
purport to be complete and 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. The Representative will
provide a copy of the Agreement (without exhibits) relating to any Series
without charge upon written request of a holder of a Security of such Series
addressed to The Money Store Inc., 707 Third Street, West Sacramento, California
95605, Attention: Managing Attorney.
GENERAL
The Securities of each Series will represent debt obligations of, in the
case of Notes, or fractional undivided ownership interests in, in the case of
Certificates, a Trust created pursuant to the related Agreement and/or such
other assets as may be described in the related Prospectus Supplement. The
Securities will be issued in fully registered form, in minimum denominations of
$1,000 and integral multiples of $1,000 in excess thereof (or such other amounts
do may be set forth in a Prospectus Supplement), except that one Certificate or
Note of each Class may be issued in a different denomination.
Securities in fully registered, certificated form issued to Securityholders
or their nominees ("DEFINITIVE SECURITIES"), if issued, will be transferable and
exchangeable at the corporate trust office of the Trustee or, at the election of
the Trustee, at the office of a security registrar appointed by the Trustee (the
"SECURITY REGISTRAR"). No service charge will be made for any registration of
exchange or transfer, but the Trustee may require payment of a sum sufficient to
cover any tax or other governmental charge. If provided in the related
Agreement, a security administrator may perform certain duties in connection
with the administration of the Securities.
The Securities will not represent obligations of the Representative (except
with respect to a guaranty issued in connection with a Series), the Originators
or any affiliate thereof. The assets of each Trust will consist of one or more
of the following, as set forth in the related Prospectus Supplement, (a) the
Mortgage Loans that from time to time are subject to the related Agreement and
which are held in the related Pool; (b) the assets for the Trust that from time
to time are required by the Agreement to be deposited in certain reserve
accounts, including the Distribution Account, the Principal and Interest
Account, the Expense Account, the Letter of Credit Fee Account and the Insurance
Account (each, as defined herein), or to be invested in Permitted Investments
(as defined below); (c) property and any proceeds thereof acquired by
foreclosure of the Mortgage Loans in such Pool, deed in lieu of foreclosure or a
comparable conversion; (d) any Primary Mortgage Insurance Policies; (e) any
Mortgage Pool Insurance Policies; (f) any Special Hazard Insurance Policies; (g)
any Bankruptcy Bonds; and (h) all rights under any other insurance policies,
guarantees, supplemental interest payments, surety bonds, letters of credit, or
other credit enhancement or maturity protection or other derivative instrument
covering any Securities, any Mortgage Loan in the related Pool or any related
Mortgaged Property which is required to be maintained pursuant to the related
Agreement.
Each Series of Securities will be issued in one or more Classes. Each Class
of Securities of a Series will evidence beneficial ownership of the interest in
assets of the related Trust specified in the related Prospectus Supplement. A
Class of Securities may be divided into two or more Sub-Classes, as specified in
the related Prospectus Supplement.
A Series may include two or more Classes of Certificates, as specified in
the related Prospectus Supplement, which differ as to the timing and priority of
payment, seniority, allocations of loss, Pass-Through
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Rate or amount of payments of principal or interest, or as to which payments of
principal or interest may or may not be made upon the occurrence of specified
events or on the basis of collections from designated portions of the Mortgage
Assets for such Series. A Series of Certificates may include one or more Classes
of Senior Certificates that receive certain preferential treatment, specified in
the related Prospectus Supplement, with respect to one or more Classes of
Subordinated Certificates of such Series. Certain Series or Classes of
Certificates within a Series may be covered by a Guaranty Insurance Policy,
Mortgage Pool Insurance Policy, Special Hazard Insurance Policy, Bankruptcy Bond
or other insurance policies, cash accounts, letters of credit, financial
guaranty insurance policies, third party guarantees, supplemental interest
payments or other forms of credit enhancement or maturity protection, or
derivative products, in each case as described herein and in the related
Prospectus Supplement. The Pass-Through Rate for a Class of Certificates that
pay interest based upon a floating rate of interest, as specified in the related
Prospectus Supplement, may base such floating rate upon any of the following:
(i) the auction procedures for Auction Rate Securities described herein, (ii)
LIBOR plus an amount set forth in the related Prospectus Supplement , (iii) the
T-Bill Rate plus an amount set forth in the related Prospectus Supplement or
(iv) any such other method or procedures used to determine the floating rate of
interest as may be described in the applicable Prospectus Supplement. In
addition, a Series may include one or more Classes of Certificates entitled to
(a) principal payments with disproportionate, nominal or no interest payments or
(b) interest payments with disproportionate, nominal or no principal payments
(Strip Certificates).
A Series may include two or more Classes of Notes, as specified in the
related Prospectus Supplement, which differ as to the timing and priority of
payment, seniority, allocations of loss, Interest Rate or amount of payments of
principal or interest, or as to which payments of principal or interest may or
may not be made upon the occurrence of specified events or on the basis of
collections from designated portions of the Mortgage Assets for such Series. A
Series of Notes may include one or more Classes of Senior Notes which receive
certain preferential treatment specified in the related Prospectus Supplement
with respect to one or more Classes of Subordinated Notes of such Series.
Certain Series or Classes of Notes within a Series may be covered by a Guaranty
Insurance Policy, Mortgage Pool Insurance Policy, Special Hazard Insurance
Policy, Bankruptcy Bond or other insurance policies, cash accounts, letters of
credit, financial guaranty insurance policies, third party guarantees,
supplemental interest payments or other forms of credit enhancement or maturity
protection, or derivative products, in each case as described herein and in the
related Prospectus Supplement. The Interest Rate for a Class of Notes that pay
interest based upon a floating rate of interest, as specified in the related
Prospectus Supplement, may base such floating rate upon any of following: (i)
the auction procedures for Auction Rate Securities described herein, (ii) LIBOR
plus an amount set forth in the related Prospectus Supplement, (iii) the T-Bill
Rate plus an amount set forth in the related Prospectus Supplement or (iv) any
such other method or procedures used to determine the floating rate of interest
as may be described in the applicable Prospectus Supplement. In addition, a
Series may include one or more Classes of Notes entitled to (a) principal
payments with disproportionate, nominal or no interest payments or (b) interest
payments with disproportionate, nominal or no principal payments ("STRIP
NOTES").
With respect to any Series of Securities that includes one or more Classes
of Notes, distributions in respect of the Certificates may be subordinated in
priority of payment to payments on the Notes of such Series, to the extent
specified in the related Prospectus Supplement.
Unless otherwise 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
Remittance Date, in the amounts 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 record dates specified in the
Prospectus Supplement unless Definitive Securities have been issued, the
registered holder of all Securities will be Cede or such other nominee specified
in the related Prospectus Supplement. Distributions will be made by check mailed
to the persons entitled thereto at the address appearing in the register
maintained for holders of Securities (the "SECURITY REGISTER") or, to the extent
described in the related Prospectus Supplement, by wire transfer or by such
other means as are described therein, except that the final distribution in
retirement of the Securities will be made only upon presentation and surrender
of the
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Securities at the office or agency of the Trustee or other person specified in
the final distribution notice to Securityholders.
Capitalized terms first used in the foregoing discussion have the following
meanings:
"DISTRIBUTION ACCOUNT" means a segregated trust account maintained with the
Trustee for the purpose of holding remittances on Mortgage Loans available for
distribution. See "The Agreements -- Payments on the Mortgage Loans."
"PRINCIPAL AND INTEREST ACCOUNT" means an account maintained by the Master
Servicer at a depository institution for the purpose of holding all payment
received after the related Cut-off Date on account of principal and interest on
the related Mortgage Loans. See "The Agreements -- Payments on the Mortgage
Loans."
"EXPENSE ACCOUNT" means an account established by the Trustee to hold funds
to pay the fees and expenses of the Trustee, the Co-Trustee and the Custodian.
"INSURANCE ACCOUNT" means an account established by the Trustee to hold
funds to pay any insurance premiums with respect to any insurance policies on
any Securities.
DISTRIBUTIONS OF SECURITIES
Each Class of Securities within a Series will evidence the interests
specified in the related Prospectus Supplement, which may (i) include the right
to receive distributions allocable only to principal, only to interest or to any
combination thereof; (ii) include the right to receive distributions only of
prepayments of principal throughout the lives of the Securities or during
specified periods; (iii) be subordinated in its 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 or may be
subordinated with respect to certain losses or delinquencies; (iv) include the
right to receive such distributions only after the occurrence of events
specified in the Prospectus Supplement; (v) include the right to receive
distributions in accordance with a schedule or formula or on the basis of
collections from designated portions of the assets in the related Trust; (vi)
include, as to Securities entitled to distributions allocable to interest, the
right to receive interest at a Fixed Rate or an Adjustable Rate; and (vii)
include, as to Securities entitled to distributions allocable to interest, the
right to distributions allocable to interest only after the occurrence of events
specified in the related Prospectus Supplement, and in each case, may accrue
interest until such events occur, as specified in such Prospectus Supplement.
Distributions allocable to principal and interest on the Securities will be
made by the Trustee out of, and only to the extent of, funds available in the
related Distribution Account and other accounts to the extent described in the
related Prospectus Supplement. To the extent described in the related Prospectus
Supplement, on each Remittance Date, the Master Servicer will withdraw from the
applicable Distribution Account and such other accounts as may be described in
the related Prospectus Supplement and distribute to the Securityholders of each
Class (other than a Series having a Class of Subordinated Certificates, as
described below), either the specified interest of such Class in the Pool times
the aggregate of all amounts on deposit in the Distribution Account as of the
day of each month preceding a Remittance Date that is set forth in the related
Prospectus Supplement (the "DETERMINATION DATE"), or, in the case of Classes
which have been assigned an aggregate principal balance and Pass-Through Rate or
Interest Rate, payments of interest and payments in reduction of such aggregate
principal balance from all amounts on deposit in the Distribution Account on the
Determination Date, in the priority and calculated in the manner set forth in
the related Prospectus Supplement, except, in each case, for (i) all payments on
the Mortgage Loans that were due on or before the Cut-off Date; (ii) all
principal payments in full in advance of the final scheduled due date
("PRINCIPAL PREPAYMENTS"), Liquidation Proceeds and amounts paid by any insurer
pursuant to any insurance policy covering a Mortgage Loan, Mortgaged Property or
REO Property ("INSURANCE PROCEEDS") received after the period specified in the
related Prospectus Supplement (the "PRINCIPAL PREPAYMENT PERIOD"); (iii) all
scheduled payments of principal and interest due on a date or dates subsequent
to the Determination Date; (iv) amounts representing reimbursement for Monthly
Advances, as specified in the related Prospectus
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Supplement; (v) amounts representing reimbursement for any unpaid Servicing Fee
or Contingency Fee due to the Master Servicer (as described in "The
Agreements -- Servicing and Other Compensation and Payment of Expenses") and
expenses from Liquidation Proceeds, condemnation proceeds and proceeds of
insurance policies with respect to the related Mortgage Loans; (vi) all income
from any Permitted Investments held in the Distribution Account for the benefit
of the Master Servicer; and (vii) any Advances deposited in the Distribution
Account prior to the applicable Remittance Date. "REO PROPERTY" is property
acquired by foreclosure or by deed in lieu of foreclosure.
The timing and amounts of distributions allocable to interest and principal
and, if applicable, Principal Prepayments and scheduled payments of principal,
to be made on any Remittance Date may vary among Classes, over time or otherwise
as specified in the Prospectus Supplement. Differing allocations of principal
and interest to different Classes of Securityholders will have the effect of
accelerating the amortization of Senior Notes or Senior Certificates, as the
case may be, while increasing the interests evidenced by the Subordinated Notes
or Senior Certificates, as the case may be, in the related Trust. Distributions
to any Class of Certificates or Notes will be made pro rata to all
Securityholders of that Class, or as otherwise described in a Prospectus
Supplement.
SUMMARY OF AUCTION PROCEDURES
The following summarizes certain procedures that will be used in
determining the interest rates on any Notes or Certificates that are Auction
Rate Securities. Appendix I hereto contains a more detailed description of these
procedures. Prospective investors in the Auction Rate Securities should read
carefully the following summary, along with the more detailed description in
Appendix I.
The interest rate on each Class of Auction Rate Securities will be
determined periodically (generally, for periods ranging from 7 days to one year)
by means of a "DUTCH AUCTION." In this Dutch Auction, investors and potential
investors submit orders through an eligible broker/dealer as to the principal
amount of Auction Rate Securities such investors wish to buy, hold or sell at
various interest rates. The broker/dealers submit their clients' orders to the
auction agent, who processes all orders submitted by all eligible broker/dealers
and determines the interest rate for the upcoming interest period. The
broker/dealers are notified by the auction agent of the interest rate for the
upcoming interest period and are provided with settlement instructions relating
to purchases and sales of Auction Rate Securities.
In the auction procedures, the following types of orders may be submitted:
(i) Bid/Hold Orders -- the minimum interest rate that a current
investor is willing to accept in order to continue to HOLD some or all of
its Auction Rate Securities for the upcoming interest period;
(ii) Sell Orders -- an order by a current investor to SELL a specified
principal amount of Auction Rate Securities, regardless of the upcoming
interest rate; and
(iii) Potential Bid Orders -- the minimum interest rate that a
potential investor (or a current investor wishing to purchase additional
Auction Rate Securities) is willing to accept in order to BUY a specified
principal amount of Auction Rate Securities.
If an existing investor does not submit orders with respect to all its
Auction Rate Securities of the applicable Class, the investor will be deemed to
have submitted a Hold Order at the new interest rate for that portion of the
Auction Rate Securities for which no order was received.
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In connection with each auction, Auction Rate Securities will be purchased
and sold between investors and potential investors at a price equal to their
then outstanding principal balance (i.e., par) plus any accrued interest. The
following example helps illustrate how the above-described procedures are used
in determining the interest rate on the Auction Rate Securities.
(a) Assumptions:
1. Denominations (Units) = $100,000
2. Interest Period = 28 Days
3. Principal Amount Outstanding = $50 Million (500 Units)
(b) Summary of All Orders Received For The Auction
<TABLE>
<CAPTION>
BID/HOLD ORDERS SELL ORDERS POTENTIAL BID ORDERS
------------------ -------------- --------------------
<S> <C> <C> <C>
10 Units at 2.90% 50 Units Sell 20 Units at 2.95%
30 Units at 3.02% 50 Units Sell 30 Units at 3.00%
60 Units at 3.05% 100 Units Sell 50 Units at 3.05%
100 Units at 3.10% --------------- 50 Units at 3.10%
100 Units at 3.12% 200 Units 50 Units at 3.11%
------------------ 50 Units at 3.14%
300 Units 100 Units at 3.15%
------------------
350 Units
</TABLE>
Total units under existing Bid/Hold Orders and Sell Orders always equal
issue size (in this case 500 units).
(c) Auction Agent Organizes Orders in Ascending Order
<TABLE>
<CAPTION>
NUMBER CUMULATIVE NUMBER CUMULATIVE
ORDER OF TOTAL ORDER ORDER OF TOTAL ORDER
NUMBER UNITS (UNITS) % NUMBER UNITS (UNITS) %
------ --------- ---------- ------- ------ --------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 10(W) 10 2.90% 7 100(W) 300 3.10%
2 20(W) 30 2.95% 8 50(W) 350 3.10%
3 30(W) 90 3.02% 10 100(W) 500 3.12%
5 50(W) 140 3.05% 11 50(L) 3.14%
6 60(W) 200 3.05% 12 100(L) 3.15%
</TABLE>
- ---------------
(W) Winning Order (L) Losing Order
Order #10 is the order that clears the market of all available units. All
winning orders are awarded the winning rate (in this case, 3.12%) as the
interest rate for the next period that interest will accrue (each an "INTEREST
PERIOD"), when another auction will be held. Multiple orders at the winning rate
are allocated units on a pro rata basis. Notwithstanding the foregoing, in no
event will the interest rate exceed the lesser of the Net Loan Rate or the
Maximum Auction Rate.
The above example assumes that a successful auction has occurred (i.e., all
Sell Orders and all Bid/Hold Orders below the new interest rate were fulfilled).
In certain circumstances, there may be insufficient Potential Bid Orders to
purchase all the Auction Rate Securities offered for sale. In such
circumstances, the interest rate for the upcoming Interest Period will equal the
lesser of the Net Loan Rate and the Maximum Auction Rate. Also, if all the
Auction Rate Securities are subject to Hold Orders (i.e., each holder of Auction
Rate Securities wishes to continue holding its Auction Rate Securities,
regardless of the interest rate) the interest rate for the upcoming Interest
Period will equal the lesser of the Net Loan Rate and the All Hold Rate.
As stated above, the foregoing is only a summary of the auction procedures.
A more detailed description of these procedures is contained in Appendix I,
along with definitions of capitalized terms used in this discussion.
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MONTHLY ADVANCES AND COMPENSATING INTEREST
In order to maintain a regular flow of scheduled interest payments to
Securityholders (rather than to guarantee or insure against losses) if provided
in the related Prospectus Supplement, the Master Servicer will be required to
advance to the Trustee, on or before each Remittance Date (from its own funds),
the amount, if any, by which (a) the sum of (x) 30 days' interest at the
applicable weighted average Adjusted Mortgage Loan Remittance Rate (as defined
below) on the then outstanding principal balance of the related Series of
Securities and (y) the amount, if any, required to be deposited into the related
Reserve Account (as specified in the Prospectus Supplement) for the related
Remittance Date exceeds (b) the amount received by the Master Servicer and any
Sub-Servicers in respect of interest on the Mortgage Loans as of the related
Record Date (such excess, the "MONTHLY ADVANCE"). For each Class of Securities,
the "ADJUSTED MORTGAGE LOAN REMITTANCE RATE" will equal the sum of the related
Pass-Through Rate or Interest Rate and the rate used in determining certain
expenses payable by the related Trust, as more specifically set forth in the
related Prospectus Supplement. The Master Servicer will not be required to make
any Monthly Advances which it determines, in good faith, would be nonrecoverable
from amounts received in respect of the Mortgage Loans.
If so specified in the related Prospectus Supplement, not later than the
close of business on each Determination Date, with respect to each Mortgage Loan
for which a Principal Prepayment in full or a principal payment that exceeds the
scheduled payment by a specified multiple, but which was not intended by the
Mortgagor to satisfy the Mortgage Loan in full or to cure a delinquency (a
"CURTAILMENT"), was received during the related immediately preceding calendar
month (the "DUE PERIOD"), the Master Servicer will be required to remit to the
Trustee for deposit in the Distribution Account from amounts otherwise payable
to it as servicing compensation, an amount equal to the excess of (a) 30 days'
interest on the principal balance of each such Mortgage Loan as of the beginning
of the related Due Period at the applicable weighted average Adjusted Mortgage
Loan Remittance Rate, over (b) the amount of interest actually received on the
related Mortgage Loan for such Due Period (such difference, "COMPENSATING
INTEREST").
REVOLVING PERIOD AND AMORTIZATION PERIOD; RETAINED INTEREST
If the related Prospectus Supplement so provides, there may be a period
commencing on the date of issuance of a Class or Classes of Notes and/or
Certificates of a Series and ending on the date set forth in the related
Prospectus Supplement (each, a "REVOLVING PERIOD") during which limited or no
principal payments will be made to one or more Classes of Notes or Certificates
of the related Series as are identified in such Prospectus Supplement. Some or
all collections of principal otherwise allocated to such Classes of Notes or
Certificates may be (i) utilized during the Revolving Period to acquire
additional Mortgage Assets which satisfy the criteria specified above and the
criteria set forth in the related Prospectus Supplement, (ii) held in an account
and invested in Permitted Investments for later distribution to Securityholders,
(iii) applied to those Notes or Certificates for such Series, if any, specified
in the related Prospectus Supplement as then are in amortization, or (iv)
otherwise applied as specified in the related Prospectus Supplement.
An "AMORTIZATION PERIOD" is the period during which an amount of principal
is payable to Holders of a Series which, during the Revolving Period, were not
otherwise entitled to such payments. If so specified in the related Prospectus
Supplement, during an Amortization Period all or a portion of principal
collections on the Mortgage Loans may be applied as specified above for a
Revolving Period and, to the extent not so applied, will be distributed to the
Classes of Notes or Certificates for such Series specified in the related
Prospectus Supplement as then being entitled to payments of principal. In
addition, if so specified in the related Prospectus Supplement, amounts
deposited in certain accounts for the benefit of one or more Classes of Notes or
Certificates for such Series may be released from time to time or on a specified
date and applied as a payment of principal on such Classes of Notes or
Certificates. The related Prospectus Supplement will set forth the circumstances
which will result in the commencement of an Amortization Period.
Each Series which has a Revolving Period may also issue to the
Representative or one of its affiliates a certificate evidencing an undivided
beneficial interest (a "RETAINED INTEREST") in such Series not represented by
the other Securities issued by the Representative. As further described in the
related Prospectus
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Supplement, the value of such Retained Interest will fluctuate as the amount of
Notes and Certificates of the related Series of Securities outstanding is
reduced.
BOOK-ENTRY REGISTRATION
If so specified in the related Prospectus Supplement, the Certificates
and/or Notes of a Series initially will be registered in the name of Cede, the
nominee of DTC. DTC is a limited purpose trust company organized under the laws
of the State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold securities
for its participating organizations ("PARTICIPANTS") and facilitate the
clearance and settlement of securities transactions between Participants through
electronic book-entry changes in their accounts, thereby eliminating the need
for physical movement of certificates. Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and may include
certain other organizations. Indirect access to the DTC system also is available
to others such as brokers, dealers, banks and trust companies that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly ("INDIRECT PARTICIPANT").
Under a book-entry format, Certificateholders and/or Noteholders, as
applicable, that are not Participants or Indirect Participants but desire to
purchase, sell or otherwise transfer ownership of Certificates and/or Notes of a
Series registered in the name of Cede, as nominee of DTC, may do so only through
Participants and Indirect Participants. In addition, such Securityholders will
receive all distributions of principal of and interest on the Securities and
reports relating to the Securities from the Trustee through DTC and its
Participants. Under a book-entry format, Securityholders will receive payments
and reports relating to the Securities after the related Remittance Date
because, while payments and such reports are required to be forwarded to Cede,
as nominee for DTC, on each such date, DTC will forward such payments and
reports to its Participants which thereafter will be required to forward them to
Indirect Participants or Securityholders. Unless and until Definitive Securities
are issued, it is anticipated that the only Securityholder will be Cede, as
nominee of DTC, and that the beneficial holders of Securities will not be
recognized by the Trustee as Securityholders under the Agreement. The beneficial
holders of such Certificates and/or Notes of a Series will only be permitted to
exercise the rights of Certificateholders and/ or Noteholders, as applicable,
under the applicable Agreement indirectly through DTC and its Participants who
in turn will exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Securities and is required to
receive and transmit reports and payments of principal of and interest on the
Securities. Participants and Indirect Participants with which Securityholders
have accounts with respect to the Securities similarly are required to make
book-entry transfers and receive and transmit such reports and payments on
behalf of their respective Securityholders. Accordingly, although
Securityholders will not possess Securities, the rules provide a mechanism by
which Securityholders will receive distributions and reports and will be able to
transfer their interests.
Unless and until Definitive Securities are issued, Securityholders who are
not Participants may transfer ownership of Securities only through Participants
by instructing such Participants to transfer Securities, by book-entry transfer,
through DTC for the account of the purchasers of such Securities, which account
is maintained with their respective Participants. Under the Rules and in
accordance with DTC's normal procedures, transfers of ownership of Securities
will be executed through DTC and the accounts of the respective Participants at
DTC will be debited and credited. Similarly, the respective Participants will
make debits or credits, as the case may be, on their records on behalf of the
selling and purchasing Securityholders.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Securityholder to pledge Securities to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Securities may be limited due to the lack of a physical certificate for such
Securities.
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DTC in general advises that it will take any action permitted to be taken
by a Securityholder under an Agreement only at the direction of one or more
Participants to whose account with DTC the Securities are credited.
Additionally, DTC in general advises that it will take such actions with respect
to specified percentages of the Securityholders only at the direction of and on
behalf of Participants whose holdings include current principal amounts of
outstanding Securities that satisfy such specified percentages. DTC may take
conflicting actions with respect to other current principal amounts of
outstanding Securities to the extent that such actions are taken on behalf of
Participants whose holdings include such current principal amounts of
outstanding Securities.
Any Notes and/or Certificates initially registered in the name of Cede, as
nominee of DTC, will be issued in fully registered, certificated form to
Securityholders or their nominees ("DEFINITIVE SECURITIES"), rather than to DTC
or its nominee only under the events specified in the related Agreement and
described in the related Prospectus Supplement. Upon the occurrence of any of
the events specified in the related Agreement and Prospectus Supplement, DTC
will be required to notify all Participants of the availability through DTC of
Definitive Securities. Upon surrender by DTC of the certificates and/or notes
representing the Securities and instruction for re-registration, the Trustee
will issue the Notes and/or Certificates in the form of Definitive Securities,
and thereafter the Trustee will recognize the holders of such Definitive
Securities as Securityholders. Thereafter, payments of principal of and interest
on the Securities will be made by the Trustee directly to Securityholders in
accordance with the procedures set forth herein and in the related Agreement.
The final distribution of any Security (whether Definitive Securities or
Securities registered in the name of Cede), however, will be made only upon
presentation and surrender of such Securities on the final Remittance Date at
such office or agency as is specified in the notice of final payment to
Securityholders.
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 Mortgage Assets in the related
Trust. Credit enhancement may be in the form of (i) the subordination of one or
more Classes of the Notes and/or Certificates of such Series, (ii) the use of a
Guaranty Insurance Policy, Spread Amount, Mortgage Pool Insurance Policy,
Special Hazard Insurance Policy, Bankruptcy Bond, Reserve Accounts, Supplemental
Interest Payments, a letter of credit, a limited financial guaranty insurance
policy, third party guarantees or maturity protection, derivative instruments,
another method of credit enhancement described in the related Prospectus
Supplement, or the use of a cross-support feature, or (iii) any combination of
the foregoing. 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,
holders of one or more Classes of Securities will bear their allocable share of
deficiencies. If a form of credit enhancement applies to several Classes of
Securities, and if principal payments equal to the aggregate principal balances
of certain Classes will be distributed prior to such distributions to other
Classes, the Classes which receive such distributions at a later time are more
likely to bear any losses which exceed the amount covered by credit enhancement.
Coverage under any credit enhancement may be canceled or reduced by the Master
Servicer or the Representative if such cancellation or reduction would not
adversely affect the rating or ratings of the related Securities. The Trustee of
the related Trust will have the right to sue providers of credit enhancement if
a default is made on a required payment.
SUBORDINATION
All Classes of Certificates are Subordinated in right of payment to any
Class of Notes in a given Series to the extent described in the related
Prospectus Supplement. To enhance the likelihood of regular receipt by holders
of Senior Certificates or Senior Notes, as the case may be, of the full amount
of payments which they would be entitled to receive in the absence of any losses
or delinquencies, if so specified in the related Prospectus Supplement,
distributions of scheduled principal, Principal Prepayments, interest or any
combination thereof that otherwise would have been payable to one or more
Classes of Subordinated Certificates or
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Subordinated Notes, as the case may be, of a Series will instead be payable to
holders of one or more Classes of Senior Certificates or Senior Notes, as the
case may be, under the circumstances and to the extent specified in the
Prospectus Supplement. If specified in the related Prospectus Supplement, the
holders of Senior Certificates or Senior Notes, as the case may be, will receive
the amounts of principal and/or interest due to them on each Remittance Date,
out of the funds available for distribution on such date in the related
Distribution Account, prior to any such distribution being made to holders of
the related Subordinated Certificates or Subordinated Notes, a the case may be,
in each case under the circumstances and subject to the limitations specified in
the Prospectus Supplement. The protection afforded to the holders of Senior
Certificates or Senior Notes, as the case may be, through subordination also may
be accomplished by first allocating certain types of losses or delinquencies to
the related Subordinated Certificates or Subordinated Notes, as the case may be,
to the extent described in the related Prospectus Supplement. If aggregate
losses and delinquencies in respect of such Mortgage Loans were to exceed the
total amounts payable and available for distribution to holders of Subordinated
Certificates or Subordinated Notes, as the case may be, or, if applicable, were
to exceed the specified maximum amount, holders of Senior Certificates or Senior
Notes, as the case may be, would experience losses on the Securities.
In addition to or in lieu of the foregoing, if so specified in the
Prospectus Supplement, all or any portion of distributions otherwise payable to
holders of Subordinated Certificates or Subordinated Notes, as the case may be,
on any Remittance Date may instead be deposited into one or more Reserve
Accounts established and maintained with the Trustee. If so specified in the
Prospectus Supplement, such deposits may be made on each Remittance Date, on
each Remittance 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 Certificates or Senior Notes, as the case may be,
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 Prospectus
Supplement. If so specified in the related Prospectus Supplement, amounts on
deposit in the Reserve Account may be released to the holders of the Class of
Securities specified in the Prospectus Supplement at the times and under the
circumstances specified in the Prospectus Supplement. See "-- Reserve Accounts"
below.
If so specified in the related Prospectus Supplement, the same Class of
Securities may be Senior Certificates or Senior Notes, as the case may be, with
respect to certain types of payments or certain types of losses or delinquencies
and Subordinated Certificates or Subordinated Notes, as the case may be, with
respect to other types of payment or types of losses or delinquencies. If
specified in the related Prospectus Supplement, various Classes of Senior
Certificates or Senior Notes, as the case may be, and Subordinated Certificates
or Subordinated Notes, as the case may be, may themselves be subordinate in
their right to receive certain distributions to other Classes of Senior and
Subordinated Certificates or Subordinated Notes, as the case may be,
respectively, through a cross support mechanism or otherwise. As between Classes
of Senior Certificates or Senior Notes, as the case may be, and as between
Classes of Subordinated Certificates or Subordinated Notes, as the case may be,
distributions may be allocated among such Classes (i) in the order of their
scheduled final Remittance 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 Prospectus Supplement. The related Prospectus Supplement
will set forth information concerning the amount of subordination of a Class or
Classes of Subordinated Certificates or Subordinated Notes, as the case may be,
in a Series, the circumstances in which such subordination will be applicable,
the manner, if any, in which the amount of subordination will decrease over
time, the manner of funding any Reserve Account, and the conditions under which
amounts in any such Reserve Account will be used to make distributions to Senior
Holders of Senior Certificates or Senior Notes, as the case may be, or released
to Holder of Subordinated Certificates or Subordinated Notes, as the case may
be, from the related Trust.
GUARANTY INSURANCE POLICIES
If so specified in the related Prospectus Supplement, a Guaranty Insurance
Policy may be obtained and maintained for any Class or Series of Certificates
and/or Notes. The issuer of any Guaranty Insurance Policy (a "SECURITY GUARANTY
INSURER") will be described in the related Prospectus Supplement. A copy of any
such Guaranty Insurance Policy will be attached as an exhibit to the related
Prospectus Supplement.
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If so specified in the related Prospectus Supplement, a Guaranty Insurance
Policy will unconditionally and irrevocably guarantee to Securityholders that an
amount equal to each full and complete Insured Payment will be received by an
agent of the Trustee (an "INSURANCE PAYING AGENT") on behalf of Securityholders,
for distribution by the Trustee to each Securityholder. The "INSURED PAYMENT"
will equal the full amount of the distributions of principal and interest to
which Securityholders are entitled under the related Agreement plus any other
amounts specified therein or in the related Prospectus Supplement.
The specific terms of any Guaranty Insurance Policy will be as set forth in
the related Prospectus Supplement. Guaranty Insurance Policies may have
limitations including (but not limited to) limitations on the insurer's
obligation to guarantee the Master Servicer's obligation to repurchase or
substitute for any Mortgage Loans, to guarantee any specified rate of
prepayments or to provide funds to redeem Securities on any specified date.
Subject to the terms of the related Agreement, the Security Guaranty
Insurer may be subrogated to the rights of each Securityholder to receive
payments under the Securities to the extent of any payments by such Security
Guaranty Insurer under the related Guaranty Insurance Policy.
SPREAD AMOUNT
If so specified in the related Prospectus Supplement, certain Classes of
Securities may be entitled to receive limited acceleration of principal relative
to the amortization of the related Mortgage Assets. The accelerated amortization
will be achieved by applying certain excess interest collected on the Mortgage
Assets to the payment of principal on such Classes of Securities. This
acceleration feature is intended to create an amount (the "SPREAD AMOUNT"),
resulting from, and generally equal to, the excess of the aggregate principal
balances of the applicable Mortgage Assets over the principal balances of the
applicable Classes of Securities. Once the required Spread Amount is reached,
and subject to the provisions described in the next sentence and in the related
Prospectus Supplement, the acceleration feature will cease, unless necessary to
maintain the required level of the Spread Amount. The applicable Agreement will
provide that, subject to certain floors, caps and triggers, the required level
of the Spread Amount may increase or decrease over time. An increase would
result in a temporary period of accelerated amortization of the applicable
Classes of Securities to increase the actual level of the Spread Amount to its
required level; a decrease would result in a temporary period of decelerated
amortization to reduce the actual level of the Spread Amount to its required
level. An Agreement also may provide that after one or more Classes of
Securities have been paid to the required level of the Spread Amount, excess
interest, together with certain other excess amounts, may be applied to make-up
shortfalls in, or accelerate the amortization of, other Classes of Securities.
MORTGAGE POOL INSURANCE POLICIES
If specified in the Prospectus Supplement related to any Pool of Mortgage
Loans, a Mortgage Pool Insurance Policy issued by the insurer (the "POOL
INSURER") named in such Prospectus Supplement will be obtained and maintained
for each Series pertaining to Mortgage Loans. Each Mortgage Pool Insurance
Policy will, subject to the limitations described below or in the related
Prospectus Supplement, cover loss by reason of default in payment on the related
Mortgage Loans in the Pool in an amount initially equal to a specified
percentage of the aggregate principal balance of all Mortgage Loans included in
the Pool as of the Cut-off Date or such other date as is specified in such
Prospectus Supplement. The Mortgage Pool Insurance Policies, however, are not
blanket policies against loss, since claims thereunder may only be made
respecting particular defaulted Mortgage Loans and only upon satisfaction of
certain conditions precedent described below. The Mortgage Pool Insurance
Policies generally will not cover losses due to a failure to pay or denial of a
claim under a Primary Mortgage Insurance Policy.
A Mortgage Pool Insurance Policy generally 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 Mortgage Loan, including misrepresentation by
the Mortgagor, the originator or persons involved in the origination thereof, or
(ii) failure to construct a Mortgaged Property in accordance with plans and
specifications. If so specified in the related Prospectus
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Supplement, an endorsement to the Mortgage Pool Insurance Policy, a bond or
other credit support may cover fraud in connection with the origination of
Mortgage Loans. If so specified in the related Prospectus Supplement, a failure
of coverage attributable to an event specified in clause (i) or (ii) above might
result in a breach of the Master Servicer's representations described above and,
in such event, might give rise to an obligation on the part of the Master
Servicer to purchase the defaulted Mortgage Loan if the breach cannot be cured
by the Master Servicer. No Mortgage Pool Insurance Policy will cover (and many
Primary Mortgage Insurance Policies do not cover) a claim in respect of a
defaulted Mortgage Loan occurring when the servicer of such Mortgage Loan, at
the time of default or thereafter, was not approved by the applicable insurer.
The original amount of coverage under each Mortgage 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 Master Servicer as well as accrued
interest on delinquent Mortgage Loans to the date of payment of the claim.
Accordingly, if aggregate net claims paid under any Mortgage Pool Insurance
Policy reach the original policy limit, coverage under that Mortgage Pool
Insurance Policy will be exhausted and any further losses will be borne by the
Securityholders.
The terms of any pool insurance policy relating to a pool of Contracts will
be described in the related Prospectus Supplement.
SPECIAL HAZARD INSURANCE POLICIES
If specified in the related Prospectus Supplement, a separate Special
Hazard Insurance Policy will be obtained for the Pool and will be issued by the
insurer (the "SPECIAL HAZARD INSURER") named in such Prospectus Supplement. Each
Special Hazard Insurance Policy will, subject to limitations described below,
protect holders of the related Securities from (i) loss by reason of damage to
Mortgaged Properties caused by certain hazards (including earthquakes and, to a
limited extent, tidal waves and related water damage) not insured against under
the standard form of hazard insurance policy for the respective states in which
the Mortgaged Properties are located or under a flood insurance policy if the
Mortgaged Property is located in a federally designated flood area, and (ii)
loss caused by reason of the application of the coinsurance clause contained in
hazard insurance policies. See "The Agreements -- Hazard Insurance." No Special
Hazard Insurance Policy will cover losses occasioned by war, civil insurrection,
certain governmental action, errors in design, faulty workmanship or materials
(except under certain circumstances), nuclear reaction, flood (if the Mortgaged
Property is located in a federally designated flood area), chemical
contamination and certain other risks. The amount of coverage under any Special
Hazard Insurance Policy will be specified in the related Prospectus Supplement.
Each Special Hazard Insurance Policy will provide that no claim may be paid
unless hazard and, if applicable, flood insurance on the property securing the
Mortgage Loan has been kept in force and other protection and preservation
expenses have been paid.
Since each Special Hazard Insurance Policy will be designed to permit full
recovery under the Mortgage Pool Insurance Policy in circumstances in which such
recoveries would otherwise be unavailable because property has been damaged by a
cause not insured against by a standard hazard policy and thus would not be
restored, each Agreement will provide that, if the related Mortgage Pool
Insurance Policy shall have been terminated or been exhausted through payment of
claims, the Master Servicer will be under no further obligation to maintain such
Special Hazard Insurance Policy.
The terms of any Special Hazard Insurance Policy relating to a pool of
Contracts will be described in the related Prospectus Supplement.
BANKRUPTCY BONDS
If specified in the related Prospectus Supplement, a Bankruptcy Bond for
proceedings under the federal Bankruptcy Code will be issued by an insurer named
in such Prospectus Supplement. Each Bankruptcy Bond will cover certain losses
resulting from a reduction by a bankruptcy court of scheduled payments of
principal and interest on a Mortgage Loan or a reduction by such court of the
principal amount of a Mortgage Loan and will cover certain unpaid interest on
the amount of such a principal reduction from the date of the filing of a
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bankruptcy petition. The required amount of coverage under each Bankruptcy Bond
will be set forth in the related Prospectus Supplement. To the extent specified
in an applicable Prospectus Supplement, the Master Servicer may deposit cash, an
irrevocable letter of credit or any other instrument acceptable to each
nationally recognized rating agency rating the Securities of the related Series
in the Trust to provide protection in lieu of or in addition to that provided by
a Bankruptcy Bond. See "Certain Legal Aspects of the Mortgage Loans --
Anti-Deficiency Legislation and Other Limitations on Lenders."
The terms of any Bankruptcy Bond relating to a pool of Contracts will be
described in the related Prospectus Supplement.
RESERVE ACCOUNTS
If specified in a Prospectus Supplement, cash, U.S. 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 Prospectus Supplement may be
deposited by the Master Servicer or Representative on the date specified in the
Prospectus Supplement in one or more Reserve Accounts established with the
Trustee. In addition to or in lieu of the foregoing, if so specified in such
Prospectus Supplement, all or any portion of distributions otherwise payable to
holders of Subordinated Certificates on any Remittance Date may instead be
deposited into such Reserve Accounts. Such deposits may be made on the date
specified in the Prospectus Supplement, which may include each Remittance Date,
each Remittance Date for specified periods or until the balance in the Reserve
Account has reached a specified amount. See "-- Subordination" above.
The cash and other assets in the Reserve Accounts will be used to enhance
the likelihood of timely payment of principal of, and interest on, or, if so
specified in the Prospectus Supplement, to provide additional protection against
losses in respect of, the assets in the related Trust, to pay the expenses of
the Trust or for such other purposes specified in the Prospectus Supplement. Any
cash in a Reserve Account and the proceeds upon maturity or liquidation of any
other asset or instrument therein will be invested, to the extent acceptable to
the applicable Rating Agency, in obligations of the United States and certain
agencies thereof, certificates of deposit, certain commercial paper, time
deposits and bankers acceptances sold by eligible commercial banks, certain
repurchase agreements of United States government securities with eligible
commercial banks and certain other instruments acceptable to the applicable
Rating Agency ("PERMITTED INVESTMENTS"). Any asset or instrument deposited in
the Reserve Account generally will name the Trustee, in its capacity as trustee
for the Securityholders, as beneficiary and will be issued by an entity
acceptable to the applicable nationally recognized rating agency that provides a
rating for the related Series of Securities (the "RATING AGENCY"). Additional
information with respect to such instruments deposited in the Reserve Accounts
will be set forth in the Prospectus Supplement.
Any amounts so deposited and payments on assets and instruments deposited
in a Reserve Account will be available for withdrawal from such Reserve Account
for distribution to Securityholders for the purposes, in the manner and at the
times specified in the Prospectus Supplement.
SUPPLEMENTAL INTEREST PAYMENTS
If so specified in the Prospectus Supplement, one or more Classes of
Securities may be entitled to receive supplemental interest payments under
specified circumstances. Supplemental interest payments will be available to
fund some or all of the difference, if any, between the interest owed to a Class
of Securities on a Remittance Date and the interest that would be available to
pay such interest assuming no defaults or delinquencies on the Mortgage Assets.
Such differences may result if the interest rates on the applicable Classes of
Securities are based upon an index that differs from the index used in
determining the interest rates on the Mortgage Assets. Except as otherwise
provided in a Prospectus Supplement, supplemental interest payments will not be
available to fund shortfalls resulting from delinquencies or defaults on the
Mortgage Assets.
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MATURITY PROTECTION
If so specified in the Prospectus Supplement, one or more Classes of
Securities may be entitled to third-party payments to help provide that the
holders of such Securities receive their unpaid principal on or prior to a
specified date.
OTHER INSURANCE, GUARANTEES, SWAPS, AND SIMILAR INSTRUMENTS OR AGREEMENTS
If specified in the related Prospectus Supplement, a Trust may include in
lieu of some or all of the foregoing or in addition thereto letters of credit,
financial guaranty insurance policies, third party guarantees, limited
guarantees or insurance from agencies or instrumentalities of the United States,
and other arrangements for maintaining timely payments or providing additional
protection against losses on the assets included in such Trust, paying
administrative expenses, or accomplishing such other purpose as may be described
in the Prospectus Supplement. The Trust may include a guaranteed investment
contract or reinvestment agreement pursuant to which funds held in one or more
accounts will be invested at a specified rate.
If any Class of Securities has a floating interest rate, or if any of the
Mortgage Assets has a floating interest rate, the Trust may include an interest
rate swap contract, an interest rate cap agreement or similar hedge contract
providing limited protection against interest rate risks. If provided in the
related Prospectus Supplement, interest and/or principal on one or more Classes
of the Securities of a Series may be paid to Holders thereof in a currency other
than U.S. dollars. If so provided, the Trust may, in connection therewith, enter
into one or more currency rate swaps to provide limited protection against
foreign currency rate fluctuation risks. One or more Classes of Securities also
may be issued in conjunction with a put or call feature entitling (in the case
of a put) or obligating (in the case of a call) the applicable Securityholders
to sell some or all of its Securities to the party named in the applicable
Prospectus Supplement on the date or dates set forth therein. Any such
arrangements must be acceptable to the Rating Agencies. Additionally, to the
extent a significant portion of the Mortgage Loans underlying a given Series of
Securities consists of FHA Loans, the related Prospectus Supplement will
describe the features of any related credit support including, but not limited
to, that provided by the FHA, if any.
CROSS SUPPORT
If specified in the related Prospectus Supplement, the beneficial ownership
of separate groups of assets included in a Trust may be evidenced by separate
Classes of the related Series of Securities. In such case, credit support may be
provided by a cross-support feature which requires that distributions be made
with respect to Securities evidencing a beneficial ownership interest in other
asset groups within the same Trust. The Prospectus Supplement for a Series which
includes a cross-support feature will describe the manner and conditions for
applying such cross-support feature. If specified in the related Prospectus
Supplement, the coverage provided by one or more forms of credit support may
apply concurrently to two or more separate Trusts. If applicable, the Prospectus
Supplement will identify the Trusts to which such credit support relates and the
manner of determining the amount of the coverage provided thereby and of the
application of such coverage to the identified Trusts.
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS
The yields to maturity of the Securities will be affected by the amount and
timing of principal payments on or in respect of the Mortgage Assets included in
the related Trusts, the allocation of available funds to various Classes of
Securities, the Pass-Through Rate or Interest Rate for various Classes of
Securities and the purchase price paid for the Securities.
The original terms to maturity of the Mortgage Loans in a given Pool will
vary depending upon the type of Mortgage Loans included therein. Each Prospectus
Supplement will contain information with respect to the type and maturities of
the Mortgage Loans in the related Pool. Single Family Loans, Cooperative Loans
and Contracts generally may be prepaid without penalty in full or in part at any
time, although a prepayment fee or penalty may be imposed in connection
therewith. Multifamily Loans may prohibit prepayment for a specified
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period after origination, may prohibit partial prepayments entirely, and may
require the payment of a prepayment fee or penalty upon prepayment in full or in
part.
In general, prepayment of Mortgage Loans is likely to increase when the
level of prevailing interest rates declines significantly, although the
prepayment rate is influenced by a number of other factors, some of which are
described below. Similarly, when the level of prevailing interest rates rises,
prepayment rates may decrease. No prediction can be made as to the prepayment
rate that the Mortgage Loans will actually experience.
Generally, junior mortgage loans have smaller average principal balances
than senior or first mortgage loans and are not viewed by borrowers as permanent
financing. Accordingly, Mortgage Loans which are junior mortgage loans may
experience a higher rate of prepayment than Mortgage Loans which represent first
liens. In addition, any future limitations on the right of borrowers to deduct
interest payments on Mortgage Loans for Federal income tax purposes may result
in a higher rate of prepayment of the Mortgage Loans. The obligation of the
Master Servicer to enforce due-on-sale provisions (described below) of the
Mortgage Loans may also increase prepayments. The prepayment experience of the
Pools may be affected by a wide variety of factors, including general and local
economic conditions, mortgage market interest rates, the availability of
alternative financing and homeowner mobility. The Representative is unaware of
any reliable studies that would project the prepayment risks associated with the
Mortgage Loans based upon current interest rates and economic conditions or the
historical prepayment experience of The Money Store's and its affiliates'
portfolios of Mortgage Loans.
The secured conventional Mortgage Loans and Contracts generally will
contain due-on-sale provisions permitting the mortgagee or holder of the
Contract to accelerate the maturity of the Mortgage Loan or Contract upon sale
or certain transfers by the borrower of the underlying Mortgaged Property. The
Master 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 Mortgaged
Property and reasonably believes that it is entitled to do so under applicable
law; provided, however, that the Master Servicer will not take any enforcement
action that would impair or threaten to impair any recovery under any related
insurance policy. See "The Agreements" and "Certain Legal Aspects of the
Mortgage Loans" for a description of certain provisions of each Agreement and
certain legal developments that may affect the prepayment experience on the
Mortgage Loans.
Greater than anticipated prepayments of principal will increase the yield
on Securities purchased at a price less than par. Similarly, greater than
anticipated prepayments of principal will decrease the yield on Securities
purchased at a price greater than par. The effect on an investor's yield of
principal prepayments on the Mortgage Loans occurring at a rate that is faster
(or slower) than the rate anticipated by the investor in the period immediately
following the issuance of the applicable Class of Securities may not be offset
by a subsequent like reduction (or increase) in the rate of principal payments.
The weighted average lives of Securities will also be affected by the
amount and timing of delinquencies and defaults on the Mortgage Loans and the
liquidations of defaulted Mortgage Loans. Delinquencies and defaults will
generally slow the rate of payment of principal to the Securityholders. However,
this effect will be offset to the extent that lump sum recoveries on defaulted
Mortgage Loans and foreclosed Mortgaged Properties result in principal payments
on the Securities faster than otherwise scheduled.
When a full prepayment or Curtailment occurs on a Mortgage Loan, the
Mortgagor will be charged interest on the principal amount of the Mortgage 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. Interest shortfalls also
could result from the application of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "RELIEF ACT"), as described under "Certain Legal
Aspects of the Mortgage Loans -- Soldiers' and Sailors' Civil Relief Act"
herein. If so specified in the related Prospectus Supplement, in the event that
less than 30 days' interest is collected on a Mortgage Loan during a Due Period,
whether due to prepayment in full or a Curtailment, the Master Servicer will be
obligated to pay Compensating Interest with respect thereto, but only to the
extent of the aggregate Servicing Fee and Contingency Fee for the related
Remittance Date. To the extent such
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shortfalls exceed the amount of Compensating Interest that the Master Servicer
is obligated to pay, and are not otherwise covered by Insured Payments, the
yield on the Securities could be adversely affected.
Under certain circumstances, the Master Servicer, certain insurers, the
holders of REMIC Residual Certificates (as defined in "Federal Income Tax
Consequences -- REMIC Elections") or certain other entities specified in the
related Prospectus Supplement may have the option to purchase the Mortgage
Assets and other assets of a Trust, thereby effecting earlier retirement of the
related Series of Securities. See "The Agreements -- Termination; Purchase of
Mortgage Loans."
If so specified in the related Prospectus Supplement, the effective yield
to certain Securityholders may be slightly lower than the yield otherwise
produced by the applicable Remittance Rate and purchase price, because while
interest generally will accrue on such Securities from the first day of each
month, the distribution of such interest will not be made earlier than a
specified date in the month following the month of accrual.
In addition, if so specified in the related Prospectus Supplement,
prepayments may result from amounts on deposit, if any, in the Pre-Funding
Account at the end of the Funding Period being applied to the payment of
principal 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) on the yield, weighted average lives and maturities of
such Securities. Factors other than those identified herein and in the related
Prospectus Supplement could significantly affect principal prepayments at any
time and over the lives of the Securities.
THE AGREEMENTS
Set forth below is a summary of certain provisions of each Agreement which
are not described elsewhere in this Prospectus. The summary does not purport to
be complete and 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.
SALE OF MORTGAGE LOANS
Pursuant to each related Pooling and Servicing Agreement or Sale and
Servicing Agreement, as the case may be, at the time of issuance of Securities
of a Series the Originators and/or The Money Store will sell to the related
Trust, without recourse, all interest of the Originators and/or The Money Store
in each of the Mortgage Assets comprising the assets of such Trust and all
interest in all actual payments collected after the Cut-off Date with respect to
such Mortgage Assets.
In addition, to the extent specified in the related Prospectus Supplement,
the net proceeds received from the sale of the Securities of a given Series will
be applied to the deposit of the Pre-Funded Amount into the Pre-Funding Account.
The aggregate principal balance of additional Mortgage Assets to be purchased
for the related Trust generally will be equal to the Pre-Funded Amount on the
date of the issuance of the related Series. On each applicable purchase date,
the Originators and/or The Money Store will sell to the related Trust, without
recourse, the entire interest of the Originators and/or The Money Store in the
additional Mortgage Assets identified in a schedule attached to a supplemental
conveyance relating to such additional Mortgage Assets executed on such date by
the Originators and/or The Money Store. In connection with each purchase of
additional Mortgage Assets, the related Trust will be required to pay to the
Originators and/or The Money Store a cash purchase price equal to the
outstanding principal balance of each additional Mortgage Asset as of its
related Cut-off Date. The purchase price will be withdrawn from the Pre-Funding
Account and paid to the Originators and/or The Money Store so long as the
representations and warranties set forth in " -- Representations and Warranties"
below apply to each additional Mortgage Asset to be conveyed, and the conditions
set forth in the paragraph below and in the related Agreement are satisfied. The
Originators and/or The Money Store will convey the additional Mortgage Assets to
the related Trust on the applicable purchase date pursuant to the Agreement.
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Any conveyance of additional Mortgage Assets will be subject to the
following conditions, among others specified in the related Prospectus
Supplement: (i) each such additional Mortgage Asset must satisfy the eligibility
criteria specified in the preceding paragraph as of its applicable Cut-off Date
and such additional criteria as may be specified in the related Prospectus
Supplement; (ii) if and to the extent specified in the related Prospectus
Supplement, the third-party credit enhancement provider, if any, shall have
approved the transfer of such additional Mortgage Assets to the related Trust;
(iii) neither the Originator nor The Money Store will have selected such
additional Mortgage Assets in a manner that either believes is adverse to the
interests of Securityholders; and (iv) the Originator and The Money Store will
deliver certain opinions of counsel to the Trustee(s) and the Rating Agencies
with respect to the validity of the conveyance of such additional Mortgage
Assets.
In connection with such sales of the Mortgage Loans, the Representative
will be required to deliver to the Trustee certain specified items (collectively
with respect to each Mortgage Loan, the "TRUSTEE'S MORTGAGE FILE") with respect
to each Mortgage Loan. Unless otherwise specified in the related Prospectus
Supplement, each Trustee's Mortgage File will be required to include the
following, together with certain other specified items: (a) The original note
evidencing the Mortgagor's obligation (the "MORTGAGE NOTE"); (b) either: (i) the
original Mortgage, with evidence of recording thereon or (ii) a certified copy
of the Mortgage where the original has been transmitted for recording or has
been lost; and (c) an assignment of the Mortgage Loan from the applicable
Originator to either the related Trustee or Co-Trustee under the Agreement with
evidence of recording thereon (unless opinions of counsel are delivered
satisfactory to the Rating Agencies and the Security Guaranty Insurer, if any,
to the effect that recordation of such assignments is not required in the
relevant jurisdictions to protect the interests of the Trustee in the Mortgage
Loans).
The Trustee will be required to review each such Trustee's Mortgage File to
ascertain that all required documents have been executed and received. If the
Security Guaranty Insurer, if any, or the Trustee finds any document
constituting a part of a Trustee's Mortgage File which is not properly executed,
has not been received, is unrelated to the Mortgage Loans of the related Trust
or does not conform in a material respect to the description thereof provided on
behalf of the Representative, the Securities Guaranty Insurer, if any, or the
Trustee is required promptly to notify the Master Servicer, The Money Store, and
the Trustee or the Security Guaranty Insurer, if any, respectively. The Money
Store is required to use reasonable efforts to remedy a material defect in a
document constituting part of a Trustee's Mortgage File of which it is so
notified. If, however, within 60 days after the Trustee's notice to it
respecting such defect The Money Store has not remedied the defect and the
defect materially and adversely affects the interest of the Trust in the related
Mortgage Loan or the interests of the Security Guaranty Insurer, if any, The
Money Store is required to (i) substitute in lieu of such Mortgage Loan a
substitute Mortgage Loan which qualifies for substitution under the Agreement (a
"QUALIFIED SUBSTITUTE MORTGAGE LOAN") and, if the then outstanding principal
balance of such Qualified Substitute Mortgage Loan is less than the principal
balance of such Mortgage Loan as of the date of such substitution, deposit in
the related Principal and Interest Account (as defined herein under " --
Payments on the Mortgage Loans") the amount of such shortfall in principal
balance arising from such substitution (the "SUBSTITUTION ADJUSTMENT") or (ii)
purchase such Mortgage Loan at a price equal to the principal balance of such
Mortgage Loan as of the date of purchase, plus 30 days' interest on such
principal balance, computed at the Adjusted Mortgage Loan Remittance Rate (as
defined in the related Prospectus Supplement) as of the next succeeding
Determination Date, plus any accrued unpaid Servicing Fees and Contingency Fees
(each as defined herein under " -- Servicing and Other Compensation and Payment
of Expenses") and certain other amounts advanced by and reimbursable to the
Master Servicer, plus the interest portion of any unreimbursed Insured Payments
made by the Security Guaranty Insurer, if any, related to such Mortgage Loan,
which purchase price will be deposited in the Principal and Interest Account and
delivered to the Trustee on the next succeeding Determination Date, except for
the amount described above relating to unreimbursed Insured Payments, if any,
which shall be paid directly to the Security Guaranty Insurer; provided,
however, that, if a REMIC election has been made for the related Trust, The
Money Store may not take any such action unless it has theretofore caused to be
delivered to the Trustee an opinion of counsel knowledgeable in federal income
tax matters (an "OPINION OF COUNSEL") which states that such a purchase or
substitution would not constitute a "prohibited transaction," as defined in
Section 860F of the Code (a "PROHIBITED TRANSACTION").
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REPRESENTATIONS AND WARRANTIES
The Representative will represent, among other things, that as of the
related Cut-off Date as to each Mortgage Loan sold to the related Trust, the
information provided with respect to such Mortgage Loan was true and correct;
all of the original or certified documentation constituting the Trustee's
Mortgage Files (including all material documents related thereto) has been or
will be delivered to the Trustee or a custodian on its behalf (the "CUSTODIAN");
each Mortgage was a valid and subsisting lien of record on the Mortgaged
Property; immediately prior to such transfer and assignment, the Originators
were the sole owners of each Mortgage Loan conveyed by them; and as of the
related Cut-off Date, no Mortgage Loan will be more than 59 days delinquent in
payment, no Mortgage Loan originated within 12 months of the related Cut-off
Date will be delinquent more than 59 days as measured at the end of any month
during the 12 months immediately preceding such Cut-off Date, and with respect
to Mortgage Loans originated more than 12 months before such Cut-off Date, no
more than the percentage of Mortgage Loans specified in the related Prospectus
Supplement (measured by outstanding principal balance as of such Cut-off Date)
will have been on up to two occasions more than 59 days delinquent as measured
at the end of any month since the inception of each such Mortgage Loan.
Pursuant to the Agreement, upon the discovery by The Money Store, the
Servicer, any Subservicer, the Custodian, the Security Guaranty Insurer, if any,
or the Trustee that any of the representations and warranties contained in the
Agreement have been breached in any material respect as of the related Cut-off
Date, with the result that the interests of the related Trust in the related
Mortgage Loan or the interests of the Security Guaranty Insurer, if any, were
materially and adversely affected, notwithstanding that such representation and
warranty was made to The Money Store's best knowledge, the party discovering
such breach is required to give prompt written notice to the other parties.
Within 60 days of the earlier to occur of The Money Store's discovery or its
receipt of notice of any such breach, The Money Store will be required to cure
promptly such breach in all material respects, or (i) remove such Mortgage Loan
and substitute one or more Qualified Substitute Mortgage Loans or (ii) purchase
such Mortgage Loan, in each case on the same terms and on the same conditions as
described above under "Sale of Mortgage Loans." The obligation of The Money
Store to so substitute or purchase any Mortgage Loan will constitute the sole
remedy respecting a material breach of any such representation or warranty
available to the Securityholders or the Trustee.
PAYMENTS ON THE MORTGAGE LOANS
The Agreement will require the Master Servicer to establish and maintain
one or more principal and interest accounts (each a "PRINCIPAL AND INTEREST
ACCOUNT") at one or more institutions designated as a "Designated Depository
Institution" in the Agreement.
All funds in the Principal and Interest Accounts will be required to be
held (i) uninvested, up to the limits insured by the Federal Deposit Insurance
Corporation or (ii) invested in instruments designated as "PERMITTED
INSTRUMENTS" in the Agreement. Any investment earnings on funds held in the
Principal and Interest Accounts are for the account of the Master Servicer.
The Master Servicer will be required to deposit or cause to be deposited in
the related Principal and Interest Account (within 24 hours of receipt) all
payments received after the related Cut-off Date on account of principal and
interest on the related Mortgage Loans (but net of the Servicing Fee and the
Contingency Fee with respect to each Mortgage Loan and other servicing
compensation payable to the Master Servicer as permitted by the Agreement).
Not later than the day of each month preceding a date of distributions to
Securityholders (a "REMITTANCE DATE") that is set forth in a Prospectus
Supplement (each such day a "DETERMINATION DATE"), the Master Servicer will be
required to wire transfer to the Trustee the Available Remittance Amount for
deposit in the segregated trust accounts to be maintained with the Trustee for
such purpose (each a "DISTRIBUTION ACCOUNT").
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Unless otherwise specified in the related Prospectus Supplement, the
"AVAILABLE REMITTANCE AMOUNT" will be defined in the Agreement to include, with
respect to any Remittance Date, without duplication:
(i) the sum of all amounts received by the Master Servicer or any
Sub-Servicer on the Mortgage Loans (including amounts paid by the Master
Servicer and the Representative and excluding amounts required to be
deposited into any related Reserve Account, amounts paid as reimbursement
to the Master Servicer of advances and amounts recovered as voidable
preferences) during the immediately preceding calendar month (the "DUE
PERIOD"), PLUS
(ii) the amount of any Monthly Advance and Compensating Interest
payments with respect to the Mortgage Loans remitted by the Master Servicer
for such Remittance Date.
The term Available Remittance Amounts will not include Insured Payments, if
any.
GENERAL SERVICING STANDARDS
The Master Servicer will agree to master service the Mortgage Loans in
accordance with the related Agreement and, where applicable, prudent mortgage
servicing standards. "Prudent mortgage servicing standards" generally will
require the Master Servicer to exercise collection and foreclosure procedures
with respect to the Mortgage Loans with the same degree of care and skill that
it would use in master servicing mortgage loans for its own account. Pursuant to
each Agreement, the Master Servicer will be required to make reasonable efforts
to collect all payments called for under the terms of the related Mortgage Loan.
Nonetheless, the Master Servicer, in determining the type of action that is
reasonable to pursue may consider, among other things, the unpaid principal
balance of a Mortgage Loan against the estimated cost of collection or
foreclosure action, the unpaid balance of the related prior mortgage, if any,
the condition and estimated market value ("as is" and "if repaired"), the
estimated marketability of the related Mortgaged Property and the borrower's
ability to repay.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Master Servicer will be entitled to a servicing fee (the "SERVICING
FEE") and a contingency fee (the "CONTINGENCY FEE") equal to the percentage per
annum specified in the related Prospectus Supplement of the principal balance of
each Mortgage Loan. The Contingency Fee is meant to provide additional servicing
compensation to a successor servicer if The Money Store is replaced as Master
Servicer under the related Agreement. However, as long as The Money Store acts
as Master Servicer, it will be entitled to receive the Contingency Fee, although
such amount is not deemed servicing compensation. Unless otherwise specified in
the related Prospectus Supplement, the Servicing Fee and Contingency Fee will
each be calculated and payable monthly from the interest portion of scheduled
monthly payments, liquidation proceeds and certain other collected proceeds. In
addition, the Master Servicer will be entitled under the Agreement to retain
additional servicing compensation in the form of assumption and other
administrative fees, prepayment penalties and premiums, late payment charges,
interest paid on funds in the Principal and Interest Account, interest paid on
earnings realized on Permitted Instruments, and certain other excess amounts.
The Master Servicer will be required to pay all reasonable and customary
"out-of-pocket" costs and expenses incurred in the performance of its
obligations under the Agreements, including, but not limited to, the cost of (i)
the preservation, restoration and protection of the Mortgaged Property, (ii) any
enforcement or judicial proceedings, including foreclosures, and (iii) the
management and liquidation of Mortgaged Property acquired in satisfaction of the
related Mortgage Loan. Such expenditures may include costs of collection
efforts, reappraisals when a loan is 90 days past due, forced placement of
hazard insurance if a borrower allows his hazard policy to lapse, legal fees in
connection with foreclosure actions, advancing payments on the related senior
mortgage, if any, advances of delinquent property taxes, upkeep and maintenance
of the property if it is acquired through foreclosure and similar types of
expenses. Each such expenditure constitutes a "SERVICING ADVANCE." The Master
Servicer will be obligated to make the Servicing Advances incurred in the
performance of its servicing obligations. The Master Servicer will be entitled
to recover Servicing Advances to the extent permitted by the Mortgage Loans or,
if not theretofore recovered from the Mortgagor on whose behalf such Servicing
Advance was made, from Liquidation Proceeds, proceeds received by the Master
Servicer in
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connection with condemnation, eminent domain or a release of lien ("RELEASED
MORTGAGED PROPERTY PROCEEDS"), Insurance Proceeds and such other amounts as may
be collected by the Servicer from the Mortgagor or otherwise relating to the
Mortgage Loan. Servicing Advances will be reimbursable to the Servicer from the
sources described above out of the funds on deposit in the Principal and
Interest Account.
HAZARD INSURANCE
The Master Servicer will be required to cause to be maintained fire and
hazard insurance with extended coverage customary in the area where the
Mortgaged Property is located, in an amount which is at least equal to the least
of (i) the outstanding principal balance owing on the Mortgage Loan and the
related senior mortgage, if any, (ii) the full insurable value of the premises
securing the Mortgage Loan, and (iii) the minimum amount required to compensate
for damage or loss on a replacement cost basis. If the Mortgaged Property is in
an area identified in the Federal Register by the Flood Emergency Management
Agency as having special flood hazards (and such flood insurance has been made
available), the Master Servicer will be required to cause to be purchased a
flood insurance policy with a generally acceptable insurance carrier, in an
amount representing coverage not less than the least of (a) the outstanding
principal balance of the Mortgage Loan and the senior lien, if any, (b) the full
insurable value of the Mortgaged Property, or (c) the maximum amount of
insurance available under the National Flood Insurance Act of 1968, as amended.
The Master Servicer will also be required to maintain, to the extent such
insurance is available, on REO Property, fire and hazard insurance in the
applicable amounts described above, liability insurance and, to the extent
required and available under the National Flood Insurance Act of 1968, as
amended, flood insurance in an amount equal to that required above. Any amounts
collected by the Master Servicer or any Sub-Servicer under any such policies
(other than amounts to be applied to the restoration or repair of the Mortgaged
Property, or to be released to the Mortgagor in accordance with customary first
or second mortgage servicing procedures) are required to be deposited in the
Principal and Interest Account.
In the event that the Master Servicer obtains and maintains a blanket
policy insuring against fire and hazards of extended coverage on all of the
Mortgage Loans, then, to the extent such policy names the Trustee as loss payee
and provides coverage in an amount equal to the aggregate unpaid principal
balance on the Mortgage Loans without individual fire and hazard insurance, and
otherwise complies with the requirements of the preceding paragraph, the Master
Servicer will be deemed conclusively to have satisfied its obligations with
respect to fire and hazard insurance coverage.
ENFORCEMENT OF DUE ON SALE CLAUSES
When a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Master Servicer, on behalf of the Trustee, will, to the extent it
has knowledge of such conveyance or prospective conveyance, be required to
enforce the rights of the Trustee as the mortgagee of record to accelerate the
maturity of the related Mortgage Loan under any "due-on-sale" clause contained
in the related Mortgage or Mortgage Note; provided, however, that the Master
Servicer will not be required to exercise any such right if the "due-on-sale"
clause, in the reasonable belief of the Master Servicer, is not enforceable
under applicable law or if such enforcement would materially increase the risk
of default or delinquency on, or materially decrease the security for, such
Mortgage Loan. In such event, the Master Servicer will attempt to enter into an
assumption and modification agreement with the person to whom such property has
been or is about to be conveyed, pursuant to which such person becomes liable
under the Mortgage Note and, unless prohibited by applicable law or the mortgage
documents, the Mortgagor remains liable thereon. The Master Servicer also will
be authorized with the prior approval of the Security Guaranty Insurer, if any,
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, with respect to Mortgage Loans with Combined
Loan-to-Value Ratios exceeding 100%, the Master Servicer may, but will be under
no obligation to, permit a borrower who is selling his principal residence to
substitute the new mortgaged property as collateral for the related Mortgage
Loan. In such event, the Master Servicer may require the borrower to make a
partial prepayment in reduction of the principal balance of the Mortgage Loan.
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REALIZATION UPON DEFAULTED MORTGAGE
The Master Servicer generally will foreclose upon or otherwise comparably
convert the ownership in the name of the Trustee of Mortgaged Properties
relating to defaulted Mortgage Loans as to which no satisfactory arrangements
can be made for collection of delinquent payments. However, the Master Servicer
will be required to take into account the existence of any hazardous substances,
hazardous wastes or solid wastes on a Mortgaged Property in determining whether
to foreclose upon or otherwise comparably convert the ownership of such
Mortgaged Property.
WAIVERS AND DEFERMENTS OF CERTAIN PAYMENTS
The Agreement will require the Master Servicer to make reasonable efforts
to collect all payments called for under the terms and provisions of the
Mortgage Loans. Consistent with the foregoing, the Master Servicer may in its
discretion waive any late payment charge, prepayment charge, assumption fee or
any penalty interest in connection with the prepayment of a Mortgage Loan or any
other fee or charge which the Master Servicer would be entitled to retain as
servicing compensation and may waive, vary or modify any term of any Mortgage
Loan or consent to the postponement of strict compliance with any such term or
in any matter grant indulgence to any Mortgagor, subject to the limitations set
forth in the Agreement. In the event the Master Servicer consents to the
deferment of the due dates for payments due on a Mortgage Note, the Master
Servicer will nonetheless make payment of any required Monthly Advance with
respect to the payments so extended to the same extent as if such installment
were due, owing and delinquent and had not been deferred.
SUB-SERVICERS
The Master Servicer will be permitted under the related Agreement to enter
into sub-servicing arrangements with sub-servicers meeting the requirements of
the related Agreement (each, a "SUB-SERVICER"). Such sub-servicing arrangements
will not relieve the Master Servicer of any liability it might otherwise have,
had the sub-servicing arrangement not been entered into.
REMOVAL AND RESIGNATION OF MASTER SERVICER
With respect to each Series of Securities, the Security Guaranty Insurer,
if any, or the Holders of not less than 50 percent of each Class of Securities
of the related Series, other than the holders of residual interests (the
"MAJORITY SECURITYHOLDERS"), by notice in writing to the Master Servicer and
with the prior written consent of the Security Guaranty Insurer, if any, which
consent may not be unreasonably withheld, generally may, pursuant to the related
Agreement, remove the Master Servicer upon the occurrence of any of the
following events:
(i) (A) an Event of Nonpayment (as defined below) if the Series of
Securities has the benefit of a Guaranty Insurance Policy; (B) the failure
by the Master Servicer to make any required Servicing Advance to the extent
such failure materially or adversely affects the interests of the Security
Guaranty Insurer, if any, or the Securityholders; (C) the failure by the
Master Servicer to make any required Monthly Advance; (D) the failure by
the Master Servicer to remit any Compensating Interest; or (E) any failure
by the Master Servicer to remit to the Trustee any payment required to be
made under the terms of the related Agreement, which in each case continues
unremedied (in the case of the events described in clauses (i)(A), (i)(B),
(i)(D) and (i)(E) for 30 days) after the date upon which written notice of
such failure, requiring the same to be remedied, shall have been given to
the Master Servicer by the Trustee or to the Master Servicer and the
Trustee by any Securityholder or the Security Guaranty Insurer, if any; or
(ii) failure by the Master Servicer or The Money Store (so long as The
Money Store is the Master Servicer) duly to observe or perform, in any
material respect, any other covenants, obligations or agreements of the
Master Servicer or the Representative, as set forth in the related
Agreement, which failure continues unremedied for a period of 60 days after
the date on which written notice of such failure, requiring the same to be
remedied, shall have been given to the Master Servicer or The Money Store,
as
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the case may be, by the Trustee or to the Master Servicer or The Money
Store, as the case may be, and the Trustee by any Securityholder or the
Security Guaranty Insurer, if any; or
(iii) a decree or order of a court or agency or supervisory authority
having jurisdiction for the appointment of a conservator or receiver or
liquidator in any insolvency, readjustment of debt, marshaling of assets
and liabilities or similar proceedings, or for the winding-up or
liquidation of its affairs, shall have been entered against the Master
Servicer and such decree or order shall have remained in force,
undischarged or unstayed for a period of 60 days; or
(iv) the Master Servicer shall consent to the appointment of a
conservator or receiver or liquidator in any insolvency, readjustment of
debt, marshaling of assets and liabilities or similar proceedings of or
relating to the Master Servicer or of or relating to all or substantially
all of the Master Servicer's property; or
(v) the Master Servicer shall admit in writing its inability to pay
its debts as they become due, file a petition to take advantage of any
applicable insolvency or reorganization statute, make an assignment for the
benefit of its creditors, or voluntarily suspend payment of its
obligations.
An "EVENT OF NONPAYMENT" will generally be defined in the Agreements as a
shortfall on any Remittance Date in moneys (excluding any amounts representing
Insured Payments) available to fund the full amount of the Distribution Amounts
due on such Remittance Date.
The Master Servicer may not assign its obligations under the Agreement nor
resign from the obligations and duties thereby imposed on it except by mutual
consent of the Master Servicer, the Security Guaranty Insurer, if any, the
Trustee and the Majority Securityholders, or upon the determination that the
Master Servicer's duties thereunder are no longer permissible under applicable
law and such incapacity cannot be cured by the Master Servicer. No such
resignation shall become effective until a successor has assumed the Master
Servicer's responsibilities and obligations in accordance with the Agreement.
Upon removal or resignation of the Master Servicer, the Trustee will be the
successor servicer (the "SUCCESSOR SERVICER"), except that the Trustee as
Successor Servicer will not be required to make Monthly Advances and certain
other advances to the extent that the Trustee determines reasonably and in good
faith that such advances would not be recoverable. If, however, the Trustee is
unwilling or unable to act as Successor Servicer, or if the Majority
Securityholders or the Security Guaranty Insurer, if any, so request, the
Trustee may appoint, or petition a court of competent jurisdiction to appoint,
any established mortgage loan servicing institution acceptable to the Security
Guaranty Insurer, if any, having a net worth of not less than $15,000,000 and
which is approved as a servicer by FNMA and FHLMC as the Successor Servicer in
the assumption of all or any part of the responsibilities, duties or liabilities
of the Master Servicer.
The Successor Servicer will be entitled to receive the Servicing Fee, the
Contingency Fee and such other compensation as is described under " -- Servicing
and Other Compensation and Payment of Expenses" above.
TERMINATION; PURCHASE OF MORTGAGE LOANS
Pooling and Servicing Agreement; Trust Agreement. The Trust established
under a Pooling and Servicing Agreement or a Trust Agreement will terminate upon
notice to the Trustee following the earlier to occur of (i) the final payment or
other liquidation of such last Mortgage Loan remaining in the related Trust or
the disposition of all REO Property, (ii) the optional purchase of the assets of
the Trust by the Master Servicer or the Security Guaranty Insurer, if any, as
described below, (iii) mutual consent of the Master Servicer, the Security
Guaranty Insurer, if any, and all Securityholders in writing, or (iv) if a REMIC
election has been made for the related Trust, the occurrence of a "qualified
liquidation" of the Trust, as permitted by the REMIC provisions of the Code as
described below; provided, however, that in no event will any Trust terminate
later than twenty-one years after the death of the last survivor of the person
named in the related Agreement.
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Subject to provisions in an Agreement concerning adopting a plan of
complete liquidation, on any date on which the aggregate principal balances of
the Mortgage Loans are less than 10% of the original pool principal balance (or
such other percentage as may be specified in the related Prospectus Supplement),
the Master Servicer may, at its option, and in the absence of the exercise
thereof by the Master Servicer, the Security Guaranty Insurer, if any, may, at
its option, purchase, on the next succeeding Remittance Date, all of the
Mortgage Loans and any related REO Properties at a price equal to the
Termination Price. If so provided in the related Prospectus Supplement, the
Master Servicer or another entity may purchase some or all of the Mortgage
Assets under the circumstances described in such Prospectus Supplement.
On any Remittance Date on or after the Cross-Over Date on which Mortgage
Loans with an aggregate principal balance as of the Cut-off Date that equals or
exceeds 25% of the original pool principal balance (or such other percentage as
may be specified in the related Prospectus Supplement) have become liquidated
Mortgage Loans, the Security Guaranty Insurer, if any, may determine to purchase
and may cause the purchase from the Trust of all Mortgage Loans and REO
Properties in the Pool at a price equal to the sum of the Termination Price (as
defined below) and the outstanding and unpaid fees and expenses of the Trustee
and the Master Servicer.
The "CROSS-OVER DATE" is the date on which the Maximum Subordinated Amount
is reduced to zero. The "MAXIMUM SUBORDINATED AMOUNT" is the amount by which the
aggregate amount of Monthly Excess Spread applied to payments on principal on
Certificates exceeds the amount specified therein. The "MONTHLY EXCESS SPREAD"
is an amount generally equal to the interest due on the Loans remaining after
each Class of Certificates in the related Pool has been allocated and its
interest for such Remittance Date and certain expenses of the Trust have been
paid.
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 may
provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such Series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such Series, to replace stolen, lost or mutilated Notes of such Series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States of America which, through the
payment of interest and principal in respect thereof in accordance with their
terms, will provide money in an amount sufficient to pay the principal of and
each installment of interest on the Notes of such Series on the final scheduled
Remittance 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.
REMIC Considerations. If a REMIC election is made for a Series of
Securities, following a final determination by the Internal Revenue Service (the
"IRS") or by a court of competent jurisdiction, in either case from which no
appeal is taken within the permitted time for such appeal, or if any appeal is
taken, following a final determination of such appeal from which no further
appeal can be taken, to the effect that the REMIC does not and will no longer
qualify as a REMIC pursuant to Section 860D of the Code (the "FINAL
DETERMINATION"), at any time on or after the date which is 30 calendar days
following such Final Determination (i) the Majority Securityholders may direct
the Trustee on behalf of such Trust to adopt a "plan of complete liquidation"
(within the meaning of Section 860F(a)(4)(B)(i) of the Code) with respect to
such REMIC and (ii) the Security Guaranty Insurer, if any, may notify the
Trustee of the Security Guaranty Insurer's determination to purchase from the
Trust all Mortgage Loans and all property theretofore acquired by foreclosure,
deed in lieu of foreclosure, or otherwise in respect of any Mortgage Loan, then
remaining in such REMIC at a price (the "TERMINATION PRICE") equal to the sum of
(x) 100% of the
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aggregate principal balances of such Mortgage Loans as of the day of purchase
minus amounts remitted from the Principal and Interest Account to the
Distribution Account representing collections of principal on such Mortgage
Loans during the current Due Period, (y) 30 days' interest on such amount
computed at the applicable weighted average of the Adjusted Mortgage Loan
Remittance Rates, and (z) the interest portion of any unreimbursed insured
payment made by the Security Guaranty Insurer, if any. Upon receipt of such
direction by the Majority Securityholders or of such notice from the Security
Guaranty Insurer, the Trustee will notify the holders of the Class R
Certificates of such election to liquidate or such determination to purchase, as
the case may be (the "TERMINATION NOTICE"). The Holders of a majority of the
percentage interest of the Class R Certificates then outstanding may, within 60
days from the date of receipt of the Termination Notice (the "PURCHASE OPTION
PERIOD"), at their option, purchase from the related Trust all Mortgage Loans
and all property theretofore acquired by foreclosure, deed in lieu of
foreclosure, or otherwise in respect of any Mortgage Loan then remaining in the
REMIC at a purchase price equal to the Termination Price.
If, during a Purchase Option Period, the holders of the Class R
Certificates have not exercised the option described in the immediately
preceding paragraph, then upon the expiration of the Purchase Option Period (i)
in the event that the Majority Securityholders have given the Trustee the
direction described in clause (i) above, the Trustee is required to sell the
Mortgage Loans and such other property in the REMIC and distribute the proceeds
of the liquidation of the REMIC, each in accordance with the plan of complete
liquidation, such that, if so directed, the liquidation of the REMIC and the
distribution of the proceeds of the liquidation occur no later than the close of
the 60th day, or such later day as the Majority Securityholders shall permit or
direct in writing, after the expiration of the Purchase Option Period and (ii)
in the event that the Security Guaranty Insurer has given the Trustee notice of
the Security Guaranty Insurer's determination to purchase the assets described
in clause (ii) preceding, the Security Guaranty Insurer shall so purchase such
assets within 60 days after the expiration of the Purchase Option Period.
Following a Final Determination, the holders of a majority of the
percentage interest of the Class R Certificates then outstanding may, at their
option and upon delivery to the Trustee and the Security Guaranty Insurer, if
any, of an opinion of nationally recognized tax counsel selected by the Holders
of such Class R Certificates, which opinion shall be reasonably satisfactory in
form and substance to the Majority Securityholders and the Security Guaranty
Insurer, if any, that the effect of the Final Determination is to increase
substantially the probability that the gross income of the REMIC will be subject
to federal taxation, purchase from the Trust all Mortgage Loans and all property
theretofore acquired by foreclosure, deed in lieu of foreclosure, or otherwise
in respect of any Mortgage Loan then remaining in the applicable REMIC at a
purchase price equal to the Termination Price. The foregoing opinion shall be
deemed satisfactory unless the Majority Securityholders give the holders of a
majority of percentage interests in the Class R Certificates notice that such
opinion is not satisfactory within thirty days after receipt of such opinion.
CONTROL BY HOLDERS
Each Agreement will provide that the Majority Securityholders may exercise
any trust or power conferred on the Trustee with respect to the Securities or
the Trusts, upon satisfaction of certain conditions set forth in the Agreements;
provided, however, that with respect to any action or event affecting only one
or more Classes of Securities, only Holders of such Class or Classes may
exercise such trust or power.
EVENTS OF DEFAULT UNDER THE INDENTURE; RIGHTS OF NOTEHOLDERS
Unless otherwise specified in the related Prospectus Supplement, Events of
Default under the Indenture for each Series of Notes include: (i) a default for
thirty (30) days or more in the payment of any principal of or interest on any
Note of such Series; (ii) failure to perform any other covenant of the
Representative or the Trust Fund in the Indenture which continues for a period
of sixty (60) days after notice thereof is given in accordance with the
procedures described in the related Prospectus Supplement; (iii) any
representation or warranty made by the Representative or the Trust Fund in the
Indenture or in any certificate or other writing delivered pursuant thereto or
in connection therewith with respect to or affecting such Series having been
incorrect in a material respect as of the time made, and such breach is not
cured within sixty (60) days after
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notice thereof is given in accordance with the procedures described in the
related Prospectus Supplement; (iv) certain events of bankruptcy, insolvency,
receivership or liquidation of the Representative or the Trust Fund; or (v) any
other Event of Default provided with respect to Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the time
outstanding occurs and is continuing, either the Trustee or the Holders of a
majority of the then aggregate outstanding amount of the Notes of such Series
may declare the principal amount of all the Notes of such Series to be due and
payable immediately. Such declaration may, under certain circumstances, be
rescinded and annulled by the Holders of a majority in aggregate outstanding
amount of the Notes of such Series.
If, following an Event of Default with respect to any Series of Notes, the
Notes of such Series have been declared to be due and payable, the Trustee may,
in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such Series as they would
have become due if there had not been such a declaration. In addition, the
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a Series following an Event of Default other than a default in the payment of
any principal or interest on any Note of such Series for thirty (30) days or
more, unless (a) the Holders of 100% of the then aggregate outstanding amount of
the Notes of such Series consent to such sale, (b) the proceeds of such sale or
liquidation are sufficient to pay in full the principal of and accrued interest
due and unpaid on the outstanding Notes of such Series at the date of such sale
or (c) the Trustee determines that such collateral would not be sufficient on an
ongoing basis to make all payments on such Notes as such payments would have
become due if such Notes had not been declared due and payable, and the Trustee
obtains the consent of the Holders of 66 2/3% of the then aggregate outstanding
amount of the Notes of such Series.
In the event that the Trustee liquidates the collateral in connection with
an Event of Default involving a default for thirty (30) days or more in the
payment of principal of or interest on the Notes of a Series, the Indenture
provides that the Trustee will have a prior lien on the proceeds of any such
liquidation for unpaid fees and expenses. As a result, upon the occurrence of
such an Event of Default, the amount available for distribution to the
Noteholders may be less than would otherwise be the case. However, the Trustee
may not institute a proceeding for the enforcement of its lien except in
connection with a proceeding for the enforcement of the lien of the Indenture
for the benefit of the Noteholders after the occurrence of such an Event of
Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Note of a Series is declared due and payable, as
described above, the Holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing with respect
to a Series of Notes, the Trustee will be under no obligation to exercise any of
the rights or powers under the Indenture at the request or direction of any of
the Holders of Notes of such Series, unless such Holders offered to the Trustee
security or indemnity satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in complying with such request or
direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, the Holders of a majority of the then
aggregate outstanding amount of the Notes of such Series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee with respect to the Notes of such Series, and the Holders of a majority
of the then aggregate outstanding amount of the Notes of such Series may, in
certain cases, waive any default with respect thereto, except a default in the
payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all the Holders of the outstanding Notes of such Series affected thereby.
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AMENDMENT
Each Agreement may be amended from time to time by the Master Servicer and
the Trustee by written agreement, upon the prior written consent of the Security
Guaranty Insurer, if any, without the notice to, or consent of, the
Securityholders, to cure any ambiguity, to correct or supplement any provisions
therein, to comply with any changes in the Code, or to make any other provisions
with respect to matters or questions arising under the Agreement which are not
inconsistent with the provisions of such Agreement, or any agreement for the
retention of each Trustee's Mortgage File; provided, however, that such action
shall not, as evidenced by an Opinion of Counsel delivered to the Trustee,
adversely affect the interest of any Securityholder or any other party and
further provided that no such amendment shall reduce in any manner the amount
of, or delay the timing of, any amounts which are required to be distributed on
any Security without the consent of the Holder of such Security, or change the
rights or obligations of any other party thereto without the consent of such
party.
Each Agreement may be amended from time to time by The Money Store, the
Master Servicer and the Trustee with the consent of the Security Guaranty
Insurer, if any, and the Holders of the majority of the percentage interest in
each Class of Securities affected thereby for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
such Agreement or of modifying in any manner any provisions thereof; provided,
however, that if a REMIC election is made for the applicable Trust, no such
amendment shall be made unless the Trustee receives an Opinion of Counsel, at
the expense of the party requesting the change, that such change will not
adversely affect the status of the Trust as a REMIC or cause a tax to be imposed
on the REMIC, and provided further, that no such amendment shall reduce in any
manner the amount of, or delay the timing of, any amounts which are required to
be distributed on any Securities without the consent of the Holders of 100% of
each Class of Securities affected thereby.
Each Agreement may be amended from time to time by the Master Servicer, The
Money Store and the Trustee by written agreement, upon the prior written consent
of the Security Guaranty Insurer, if any, without the notice to or consent of
the Securityholders, in connection with the substitution of cash, a letter of
credit or any other collateral deposited in a Reserve Account.
It will not be necessary for the consent of holders to approve the
particular form of any proposed amendment, but it will be sufficient if such
consent shall approve the substance thereof.
THE TRUSTEE
Each Prospectus Supplement will name the Trustee under the related
Agreement. The Agreement will provide that the Trustee may resign at any time,
in which event the Representative will be obligated to appoint a successor
Trustee. The Representative may also remove the Trustee if the Trustee ceases to
be eligible to continue as such under the Agreement, if the Trustee becomes
insolvent or, if the Trustee enters into certain business combinations. Any
resignation or removal of the Trustee and appointment of a successor Trustee
will not become effective until acceptance of the appointment by the successor
Trustee.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
GENERAL
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the Mortgage Loans. Laws and practices
relating to the legal effects and enforcement of mortgages and deeds of trust
vary somewhat from state to state. In general, however, the most significant
applicable legal principles are similar in all states. The following discussion
addresses the more significant legal principles applicable to mortgages and
deeds of trust in all states. It should be noted that some of the Mortgage Loans
may relate to Mortgaged Properties located in California, which has enacted
various laws, not common to most other states, which impose special limitations
on the remedies available to the holders of mortgages and deeds of trust. These
laws, called "anti-deficiency laws," are discussed below.
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NATURE OF THE MORTGAGE ASSETS
Single Family Loans, FHA Loans, Secured Conventional Home Improvement Loans
and Multifamily Loans. The Single Family Loans, FHA Loans, Secured Conventional
Home Improvement Loans and Multifamily Loans generally will be secured by
mortgages, deeds of trust, 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. 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 mortgagee's authority under a mortgage, the trustee's
authority under a deed of trust 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.
Condominiums. Certain of the Mortgage Loans may be loans secured by
condominium units. The condominium building may be a multi-unit building or
buildings, or a group of buildings whether or not attached to each other,
located on property subject to condominium ownership. Condominium ownership is a
form of ownership of real property wherein each owner is entitled to the
exclusive ownership and possession of his or her individual condominium unit and
also owns a proportionate undivided interest in all parts of the condominium
building (other than the individual condominium units) and all areas or
facilities, if any, for the common use of the condominium units. The condominium
unit owners appoint or elect the condominium association to govern the affairs
of the condominium.
Cooperatives. Certain of the Mortgage Loans may be Cooperative Loans. The
Cooperative (i) owns all the real property that comprises the project, including
the land and the apartment building comprised of separate dwelling units and
common areas or (ii) leases the land generally by a long-term ground lease and
owns the apartment building. The Cooperative is directly responsible for project
management and, in most cases, payment of real estate taxes and hazard and
liability insurance. If there is a blanket mortgage on the Cooperative and/or
underlying land, as is generally the case, the Cooperative, as project
mortgagor, is also responsible for meeting these mortgage obligations. A blanket
mortgage is ordinarily incurred by the Cooperative in connection with the
construction or purchase of the Cooperative's apartment building. The interest
of the occupants under proprietary leases or occupancy agreements to which the
Cooperative is a party are generally subordinate to the interest of the holder
of the blanket mortgage in that building. If the Cooperative is unable to meet
the payment obligations arising under its blanket mortgage, the mortgagee
holding the blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements. In addition, the
blanket mortgage on a Cooperative may provide financing in the form of a
mortgage that does not fully amortize with a significant portion of principal
being due in one lump sum at final maturity. The inability of the Cooperative to
refinance this mortgage and its consequent inability to make such final payment
could lead to foreclosure by the mortgagee providing the financing. A
foreclosure in either event by the holder of the blanket mortgage could
eliminate or significantly diminish the value of any collateral held by the
lender who financed the purchase by an individual tenant-stockholder of
Cooperative shares or, in the case of a Trust including Cooperative Loans, the
collateral securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
units. Generally, a tenant-stockholder of a Cooperative must make a monthly
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payment to the Cooperative representing such tenant-stockholder's pro rata share
of the Cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying rights is financed through a
Cooperative share loan evidenced by a promissory note and secured by a security
interest in the occupancy agreement or proprietary lease and in the related
Cooperative shares. The lender takes possession of the share certificate and a
counterpart of the proprietary lease or occupancy agreement, and a financing
statement covering the proprietary lease or occupancy agreement and the
Cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of Cooperative
shares.
Contracts. Each Contract evidences both (a) the obligation of the obligor
to repay the loan evidenced thereby, and (b) the grant of a security interest in
the Manufactured Home to secure repayment of such loan. The Contracts generally
are "chattel paper" as defined in the UCC in effect in the states in which the
Manufactured Homes initially were registered. Pursuant to the UCC, the rules
governing the sale of chattel paper are similar to those governing the
perfection of a security interest in chattel paper. Unless otherwise specified
in the Prospectus Supplement, under the Agreement, the Representative will
transfer or cause the transfer of physical possession of the Contracts to the
Trustee or its custodian. In addition, the Representative will make or cause to
be made an appropriate filing of a UCC-1 financing statement in the appropriate
states to give notice of the Trustee's ownership of the Contracts.
Under the laws of most states, manufactured housing constitutes personal
property and is subject to the motor vehicle registration laws of the state or
other jurisdiction in which the unit is located. In a few states, where
certificates of title are not required for Manufactured Homes, security
interests are perfected by the filing of a financing statement under Article 9
of the UCC. Such financing statements are effective for five years and must be
renewed at the end of each five years. The certificate of title laws adopted by
the majority of states provide that ownership of motor vehicles and manufactured
housing shall be evidenced by a certificate of title issued by the motor
vehicles department (or a similar entity) of such state. In the states which
have enacted certificate of title laws, a security interest in a unit of
manufactured housing, so long as it is not attached to land in so permanent a
fashion as to become a fixture, is generally perfected by the recording of such
interest on the certificate of title to the unit in the appropriate motor
vehicle registration office or by delivery of the required documents and payment
of a fee to such office, depending on state law. Unless otherwise specified in
the related Prospectus Supplement, the Master Servicer will be required to
effect such notation or delivery of the required documents and fees, and to
obtain possession of the certificate of title, as appropriate under the laws of
the state in which any Manufactured Home is registered. If the Master Servicer
fails, due to clerical errors or otherwise, to effect such notation or delivery,
or files the security interest under the wrong law (for example, under a motor
vehicle title statute rather than under the UCC, in a few states), the Trustee
may not have a first priority security interest in the Manufactured Home
securing a Contract.
As manufactured homes have become larger and often have been attached to
their sites without any apparent intention to move them, courts in many states
have held that manufactured homes may, under certain circumstances, become
subject to real estate title and recording laws. As a result, a security
interest in a manufactured home could be rendered subordinate to the interests
of other parties claiming an interest in the home under applicable state real
estate law. In order to perfect a security interest in a Manufactured Home under
real estate laws, the holder of the security interest must file either a
"fixture filing" under the provisions of the UCC or a real estate mortgage under
the real estate laws of the state where the home is located. These filings must
be made in the real estate records office of the county where the home is
located. Generally, Contracts will contain provisions prohibiting the obligor
from permanently attaching the Manufactured Home to its site. So long as the
obligor does not violate this agreement, a security interest in the Manufactured
Home will be governed by the certificate of title laws or the UCC, and the
notation of the security interest on the certificate of title or the filing of a
UCC financing statement will be effective to maintain the priority of the
security interest in the Manufactured Home. If, however, a Manufactured Home
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is permanently attached to its site, other parties could obtain an interest in
the Manufactured Home which is prior to the security interest originally
retained by the Seller and transferred to the Representative.
The Representative will assign or cause to be assigned a security interest
in the Manufactured Homes to the Trustee, on behalf of the Securityholders.
Unless otherwise specified in the related Prospectus Supplement, neither the
Representative, the Master Servicer nor the Trustee will amend the certificates
of title to identify the Trustee, on behalf of the Securityholders, as the new
secured party and, accordingly, the Representative or the Seller will continue
to be named as the secured party on the certificates of title relating to the
Manufactured Homes. In most states, such assignment is an effective conveyance
of such security interest without amendment of any lien noted on the related
certificate of title and the new secured party succeeds to the Representative's
rights as the secured party. However, in some states there exists a risk that,
in the absence of an amendment to the certificate of title, such assignment of
the security interest might not be held effective against creditors of the
Representative or Seller.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Trustee on
the certificate of title or delivery of the required documents and fees should
be sufficient to protect the Trustee against the rights of subsequent purchasers
of a Manufactured Home or subsequent lenders who take a security interest in the
Manufactured Home. If there are any Manufactured Homes as to which the security
interest assigned to the Representative and the Trustee is not perfected, such
security interest would be subordinate to, among others, subsequent purchasers
for value of Manufactured Homes and holders of perfected security interests.
There also exists a risk in not identifying the Trustee, on behalf of the
Securityholders as the new secured party on the certificate of title that,
through fraud or negligence, the security interest of the Trustee could be
released.
If the owner of a Manufactured Home moves it to a state other than the
state in which such Manufactured Home initially is registered, under the laws of
most states the perfected security interest in the Manufactured Home would
continue for four months after such relocation and thereafter until the owner
re-registers the Manufactured Home in such state. If the owner were to relocate
a Manufactured Home to another state and re-register the Manufactured Home in
such state, and if steps are not taken to re-perfect the Trustee's security
interest in such state, the security interest in the Manufactured Home would
cease to be perfected. A majority of states generally require surrender of a
certificate of title to re-register a Manufactured Home; accordingly, the
Trustee must surrender possession if it holds the certificate of title to such
Manufactured Home or, in the case of Manufactured Homes registered in states
which provide for notation of lien, the Master Servicer would receive notice of
surrender if the security interest in the Manufactured Home is noted on the
certificate of title. Accordingly, the Trustee would have the opportunity to
re-perfect its security interest in the Manufactured Home in the state of
relocation. In states which do not require a certificate of title for
registration of a Manufactured Home, re-registration could defeat perfection.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a Manufactured Home, the obligee must surrender possession of the
certificate of title or it will receive notice as a result of its lien noted
thereon and accordingly will have an opportunity to require satisfaction of the
related manufactured housing conditional sales contract before release of the
lien. The Master Servicer will be obligated to take such steps, at the Master
Servicer's expense, as are necessary to maintain perfection of security
interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Representative will represent that it has no knowledge of any such liens with
respect to any Manufactured Home securing a Contract. However, such liens could
arise at any time during the term of a Contract. No notice will be given to the
Trustee or Securityholders in the event such a lien arises.
FORECLOSURE/REPOSSESSION
Single Family Loans, FHA Loans, Secured Conventional Home Improvement Loans
and Multifamily Loans. Foreclosure of a deed of trust is generally accomplished
by a non-judicial sale under a specific
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provision in the deed of trust which authorizes the trustee to sell the property
at public auction upon any default by the borrower under the terms of the note
or deed of trust. In some states, the trustee must record a notice of default
and send a copy to the borrower-trustor, to any person who has recorded a
request for a copy of any notice of default and notice of sale, to any successor
in interest to the borrower-trustor, to the beneficiary of any junior deed of
trust and to certain other persons. Before such non-judicial sales take place,
typically a notice of sale must be posted in a public place and published during
a specific period of time in one or more newspapers, posted on the property, and
sent to parties having an interest of record in the property.
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. Delays in completion of the foreclosure may
occasionally result from difficulties in locating necessary parties. When the
mortgagee's right to foreclosure is contested, the legal proceedings necessary
to resolve the issue can be time-consuming. After the completion of a judicial
foreclosure proceeding, the court generally issues a judgment of foreclosure and
appoints a referee or other court officer to conduct the sale of the property.
In general, 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. If the mortgage is not reinstated, 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 require that a copy of the notice of sale be posted on the property and
sent to all parties having an interest in the real property.
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
or referee for an amount equal to the principal amount outstanding under the
loan, accrued and unpaid interest and the expenses of foreclosure. Thereafter,
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.
Courts have imposed general equitable principles upon foreclosure, which
are generally designed to mitigate the legal consequences to the borrower of the
borrower's defaults 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.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in the building but who did not purchase shares in the
Cooperative when the building was so converted.
Cooperative Loans. The Cooperative shares owned by the tenant-stockholder
and pledged to the lender are, in almost all cases, subject to restrictions on
transfer as set forth in the Cooperative's Certificate of Incorporation and
Bylaws, as well as the proprietary lease or occupancy agreement, and may be
canceled by the Cooperative for failure by the tenant-stockholder to pay rent or
other obligations or charges owed by such tenant-stockholder, including
mechanics' liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the Cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the
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performance of covenants required thereunder. Typically, the lender and the
Cooperative enter into a recognition agreement which establishes the rights and
obligations of both parties in the event of a default by the tenant-stockholder
on its obligations under the proprietary lease or occupancy agreement. A default
by the tenant-stockholder under the proprietary lease or occupancy agreement
will usually constitute a default under the security agreement between the
lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease.
In some states, foreclosure on the Cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the UCC and the security
agreement relating to those shares. Article 9 of the UCC requires that a sale be
conducted in a "commercially reasonable" manner. Whether a foreclosure sale has
been conducted in a "commercially reasonable" manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, place and terms of the
foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency. See "Anti-Deficiency Legislation and Other
Limitations on Lenders" below.
Contracts. The Master Servicer on behalf of the Trustee, to the extent
required by the related Agreement, may take action to enforce the Trustee's
security interest with respect to Contracts in default by repossession and
resale of the Manufactured Homes securing such Contracts in default. So long as
the Manufactured Home has not become subject to the real estate law, a creditor
can repossess a Manufactured Home securing a Contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a Contract must give the
debtor a number of days' notice, generally varying from 10 to 30 days depending
on the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit so that the debtor may
redeem at or before such resale. In the event of such repossession and resale of
a Manufactured Home, the Trustee would be entitled to be paid out of the sale
proceeds before such proceeds could be applied to the payment of the claims of
unsecured creditors or the holders of subsequently perfected security interests
or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the Manufactured Home securing such a debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments.
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Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral.
RIGHTS OF REDEMPTION
Single Family Loans, FHA Loans, Secured Conventional Home Improvement Loans
and Multifamily Loans. 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 some states, redemption may occur only upon payment of the entire
principal balance of the loan, accrued interest and expenses of foreclosure. In
other states, redemption may be authorized if the former borrower pays only a
portion of the sums due. The effect of a statutory right of redemption is to
diminish the ability of the lender to sell the foreclosed property. The rights
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.
Contracts. While state laws do not usually require notice to be given
debtors prior to repossession, many states do require delivery of a notice of
default and of the debtor's right to cure defaults before repossession. The law
in most states also requires that the debtor be given notice of sale prior to
the resale of the home so that the owner may redeem at or before resale. In
addition, the sale must comply with the requirements of the UCC. Manufactured
Homes are most often resold through private sale.
FORECLOSURE IN CALIFORNIA
It is expected that a significant portion of the Mortgage Assets (by
principal balance) will be secured by properties located in California.
Foreclosure of a deed of trust in California may be effected by a judicial or
nonjudicial foreclosure proceeding, with the choice of remedy depending on the
circumstances. Where the likelihood of a large recoverable deficiency is
present, a judicial foreclosure action may be preferred. The discussion above
under the heading "Foreclosure/Repossession" and "Rights of Redemption" are
generally accurate with respect to foreclosure of a deed of trust in California.
Generally, upon the completion of a non-judicial foreclosure sale in
California, the foreclosing lender is prohibited from obtaining a deficiency
judgment against the borrower. A deficiency judgment is available following a
judicial foreclosure, subject to the limitation of the excess of the outstanding
debt over the fair market value of the property at the time of sale, and in no
event may the deficiency exceed the difference between the outstanding debt and
the purchase price at the foreclosure sale. However, in the case of certain
purchase money mortgage loans, a lender may be prohibited by statute from
obtaining a deficiency judgment. California law also requires the deed of trust
beneficiary to exhaust all real property security in a single action (i.e. in a
judicial foreclosure) before a deficiency judgment may be sought against the
borrower.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states (including California) have imposed statutory prohibitions
which limit the remedies of a beneficiary under a deed of trust or a mortgagee
under a mortgage. In some states, statutes limit the right of the beneficiary or
mortgagee to obtain a deficiency judgment against the borrower following
foreclosure or sale under a deed of trust. A deficiency judgment would be a
personal judgment against the former borrower equal in most cases to the
difference between the amount due to the lender and the fair market value of the
real property sold at the foreclosure sale. As a result of these prohibitions,
it is anticipated that in many instances the Master Servicer will not seek
deficiency judgments against defaulting mortgagors. Under the laws applicable in
most states, a creditor is entitled to obtain a deficiency judgment for any
deficiency following possession and resale of a Manufactured Home. However, some
states impose prohibitions or limitations on deficiency judgments in such cases.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws
and state laws (including California law) affording relief to debtors, may
interfere with or affect the ability of the secured mortgage lender to realize
upon collateral
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and/or enforce a deficiency judgment. For example, in a proceeding under the
federal Bankruptcy Code, a lender may not foreclose on the Mortgaged Property
without the permission of the bankruptcy court. The rehabilitation plan proposed
by the debtor may provide, if 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
federal Bankruptcy Code, including but not limited to any automatic stay, could
result in delays in receiving payments on the Mortgage Loans underlying a Series
of Securities and possible reductions in the aggregate amount of such payments.
Some states also have homestead exemption laws which would protect a principal
residence from a liquidation in bankruptcy.
Federal and local real estate tax laws provide priority to certain tax
liens over the lien of a mortgage or secured party. Numerous federal and state
consumer protection laws impose substantive requirements upon mortgage lenders
and manufactured housing lenders in connection with the origination, servicing
and enforcement of Single Family Loans, Cooperative Loans and Contracts. These
laws include the federal Truth-in-Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act and related statutes and regulations. These federal and state laws
impose specific statutory liabilities upon lenders who fail to comply with the
provisions of the law. In some cases, this liability may affect assignees of the
loans or contracts.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade Commission
(the "FTC RULE") has the effect of subjecting a seller (and certain related
creditors and their assignees) in a consumer credit transaction and any assignee
of the creditor to all claims and defenses which the debtor in the transaction
could assert against the seller of the goods. Liability under the FTC Rule is
limited to the amounts paid by a debtor on the contract, and the holder of the
contract may also be unable to collect amounts still due thereunder.
Most of the Contracts in a Mortgage Pool will be subject to the
requirements of the FTC Rule. Accordingly, the Trustee, as holder of the
Contracts, will be subject to any claims or defenses that the purchaser of the
related Manufactured Home may assert against the seller of the Manufactured
Home, subject to a maximum liability equal to the amounts paid by the obligor on
the Contract. If an obligor is successful in asserting any such claim or
defense, and if the seller of such Contract had or should have had knowledge of
such claim or defense, the Master Servicer will have the right to require the
seller to repurchase the Contract because of a breach of such seller's
representation and warranty that no claims or defenses exist which would affect
the obligor's obligation to make the required payments under the Contract.
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner
DUE-ON-SALE CLAUSES
Unless otherwise provided in the related Prospectus Supplement, each
Mortgage Loan may contain a due-on-sale clause which will generally provide that
if the mortgagor or obligor sells, transfers or conveys the Mortgaged Property,
the loan or contract may be accelerated by the mortgagor or secured party. 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 to loans
secured by an owner-occupied residence (which would include a Manufactured
Home), the Garn-St. Germain Act sets forth nine specific instances in which a
mortgagee covered by the Act 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 Mortgaged Property to an uncreditworthy person, which could
increase the likelihood of default.
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PREPAYMENT CHARGES
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following origination of mortgage loans with respect to
prepayments on loans secured by liens encumbering owner-occupied residential
properties. Since many of the Mortgaged Properties will be owner-occupied, it is
anticipated that prepayment charges may not be imposed with respect to many of
the Mortgage Loans. The absence of such a restraint on prepayment, particularly
with respect to fixed rate Mortgage Loans having higher Mortgage Rates or APR's,
may increase the likelihood of refinancing or other early retirement of such
loans or contracts. Legal restrictions, if any, on prepayment of Multifamily
Loans will be described in the related Prospectus Supplement.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("TITLE V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, 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. In
addition, even where Title V is not so rejected, any state is authorized by the
law to adopt a provision limiting discount points or other charges on mortgage
loans covered by Title V. Certain states have taken action to reimpose interest
rate limits and/or to limit discount points or other charges.
Title V also provides that, subject to the following conditions, state
usury limitations will not apply to any loan which is secured by a first lien on
certain kinds of manufactured housing. The Contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayment, late charges and deferral fees and requiring a 30-day notice period
prior to instituting any action leading to repossession of or foreclosure with
respect to 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. In any state in which application of Title
V was expressly rejected or a provision limiting discount points or other
charges has been adopted, no Contract which imposes finance charges or provides
for discount points or charges in excess of permitted levels will be included in
any Trust Fund.
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 Mortgage 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 Mortgage 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 Master Servicer to
collect full amounts of interest on certain of the Mortgage Loans. Unless
otherwise provided in the applicable Prospectus Supplement, any shortfall in
interest collections resulting from the application of the Relief Act could
result in losses to the holders of the Securities. In addition, the Relief Act
imposes limitations which would impair the ability of the Master Servicer to
foreclose on an affected Mortgage Loan during the borrower's period of active
duty status. Thus, in the event that such a Mortgage Loan goes into default,
there may be delays and losses occasioned by the inability to realize upon the
Mortgaged Property in a timely fashion.
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PRODUCT LIABILITY AND RELATED LITIGATION
Certain environmental and product liability claims may be asserted alleging
personal injury or property damage from the existence of certain chemical
substances which may be present in building materials. For example, formaldehyde
and asbestos have been and in some cases are incorporated into many building
materials utilized in manufactured and other housing. As a consequence, lawsuits
may arise from time to time asserting claims against manufacturers or builders
of the housing, suppliers of component parts, and related persons in the
distribution process. Plaintiffs have won such judgments in certain such
lawsuits.
Under the FTC Rule described above, the holder of any Contract secured by a
Manufactured Home with respect to which a product liability claim has been
successfully asserted may be liable to the obligor for the amount paid by the
obligor on the related Contract and may be unable to collect amounts still due
under the Contract. Unless otherwise described in the related Prospectus
Supplement, the successful assertion of such claim constitutes a breach of a
representation or warranty of the Seller, and the Securityholders would suffer a
loss only to the extent that (i) the Seller breached its obligation to
repurchase the Contract in the event an obligor is successful in asserting such
a claim, and (ii) the Seller, the Representative or the Trustee were
unsuccessful in asserting any claim of contribution or subrogation on behalf of
the Securityholders against the manufacturer or other persons who were directly
liable to the plaintiff for the damages. Typical products liability insurance
policies held by manufacturers and component suppliers of manufactured homes may
not cover liabilities arising from formaldehyde and certain other chemicals in
manufactured housing, with the result that recoveries from such manufacturers,
suppliers or other persons may be limited to their corporate assets without the
benefit of insurance.
To the extent described in the Prospectus Supplement, the Mortgage Loans
may include installment sales contracts entered into with the builders of the
homes located on the Mortgaged Properties. The Mortgagors in some instances may
have claims and defenses against the builders which could be asserted against a
Trust.
ENVIRONMENTAL CONSIDERATIONS
Environmental conditions may diminish the value of the Mortgage Assets and
give rise to liability of various parties. There are many federal and state
environmental laws concerning hazardous waste, hazardous substances, gasoline,
radon and other materials which may affect the property securing the Mortgage
Assets. For example, under the federal Comprehensive Environmental Response
Compensation and Liability Act, as amended, and possibly under state law in
certain states, a secured party which takes a deed in lieu of foreclosure or
purchases a mortgaged property at a foreclosure sale may become liable in
certain circumstances for the costs of a remedial action ("CLEANUP COSTS") if
hazardous wastes or hazardous substances have been released or disposed of on
the property. Such Cleanup Costs may be substantial. It is possible that such
costs could become a liability of a Trust and reduce the amounts otherwise
distributable to the Securityholders if a Mortgaged Property securing a Mortgage
Loan became the property of such Trust in certain circumstances and if such
Cleanup Costs were incurred. Moreover, certain states by statute impose a lien
for any Cleanup Costs incurred by such state on the property that is the subject
of such Cleanup Costs (a "SUPERLIEN"). All subsequent liens on such property are
subordinated to such Superlien and, in some states, even prior recorded liens
are subordinated to such Superliens. In the latter states, the security interest
of the Trustee in a property that is subject to such a Superlien could be
adversely affected.
FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Stroock & Stroock & Lavan LLP, special Federal tax
counsel ("FEDERAL TAX COUNSEL"), the following are the material federal income
tax consequences of the purchase, ownership and disposition of the Certificates
or Notes offered hereby. The discussion, and the opinions referred to below, are
based on laws, regulations, rulings and decisions now in effect (or, in the case
of certain regulations, proposed), all of which are subject to change or
possibly differing interpretations. Because tax consequences may vary based on
the status or tax attributes of the owner of a Certificate or Note, prospective
investors should consult their own tax advisors in determining the federal,
state, local and other tax consequences to them of the purchase, ownership and
disposition of Certificates or Notes. For purposes of this tax discussion
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(except with respect to information reporting, or where the context indicates
otherwise), the terms "CERTIFICATEHOLDER," "NOTEHOLDER" and "HOLDER" mean the
beneficial owner of a Certificate or Note, as appropriate.
REMIC ELECTIONS
Under the Internal Revenue Code of 1986, as amended (the "CODE"), an
election may be made with respect to each Trust related to a series of
Certificates to treat such Trust or certain assets of such Trust as a "real
estate mortgage investment conduit" ("REMIC"). The Prospectus Supplement for
each Series of Certificates will indicate whether one or more REMIC election
will be made with respect to the related Trust. In addition, if the related
Prospectus Supplement so provides, the transaction documents for a Trust may
provide that an election will be made to qualify such trust as a Financial Asset
Securitization Investment Trust ("FASIT") pursuant to recently effective
provisions of the Code. If a REMIC election is to be made, the Prospectus
Supplement will designate the Certificates of such series as "regular interests"
("REMIC REGULAR CERTIFICATES") in the REMIC (within the meaning of Section
860G(a)(1) of the Code) or as the "residual interest" ("REMIC RESIDUAL
CERTIFICATES") in the REMIC (within the meaning of Section 860G(a)(2) of the
Code). The terms "REMIC CERTIFICATES" and "NON-REMIC CERTIFICATES" denote,
respectively, Certificates of a series with respect to which a REMIC election
will be made or for which neither a REMIC or FASIT election will be made.
REMIC CERTIFICATES
With respect to each series of REMIC Certificates, the Trustee will agree
in the Agreement to elect to treat the related Trust or certain assets of such
Trust as a REMIC. Qualification as a REMIC requires ongoing compliance with
certain conditions. Upon the issuance of each series of REMIC Certificates,
Federal Tax Counsel will deliver its opinion generally to the effect that, with
respect to each series of REMIC Certificates for which a REMIC election is to be
made, under then existing law and assuming a proper and timely REMIC election
and ongoing compliance with the provisions of the Agreement and applicable
provisions of the Code and applicable Treasury regulations, the related Trust or
certain assets of such Trust will be a REMIC and the REMIC Certificates will be
considered to evidence ownership of "regular interests" or "residual interests"
within the meaning of the REMIC provisions of the Code.
To the extent provided in the Prospectus Supplement for a series,
Certificateholders may have the benefit of a Reserve Account and of certain
agreements (each, a "YIELD SUPPLEMENT AGREEMENT") under which payment will be
made from the Reserve Account in the event that interest accrued on the Mortgage
Loans at their Mortgage Interest Rates is insufficient to pay interest on the
Certificates of such Series (a "BASIS RISK SHORTFALL"). REMIC Regular
Certificateholders who are entitled to payments from the Reserve Account in the
event of a Basis Risk Shortfall will be required to allocate their purchase
price between their beneficial ownership interests in the related REMIC regular
interests and Yield Supplement Agreements, and will be required to report their
income realized with respect to each, calculated taking into account such
allocation. In general, such allocation would be based on the respective fair
market values of the REMIC regular interests and the related Yield Supplement
Agreements on the date of purchase of the related REMIC Regular Certificate.
However, a portion of the purchase price of a REMIC Regular Certificate should
be allocated to accrued but unpaid interest. No representation is or will be
made as to the fair market value of the Yield Supplement Agreements or the
relative values of the REMIC regular interests and the Yield Supplement
Agreements, upon initial issuance of the related REMIC Regular Certificates or
at any time thereafter. REMIC Regular Certificateholders are advised to consult
their own tax advisors concerning the determination of such fair market values.
Under the Agreement, holders of applicable classes of REMIC Regular Certificates
will agree that, for federal income tax purposes, they will be treated as owners
of the respective class of regular interests and of the corresponding Yield
Supplement Agreement.
Status of REMIC Certificates. The REMIC Certificates will be "real estate
assets" for purposes of Section 856(c)(4)(A) of the Code and assets described in
Section 7701(a)(19)(C) of the Code (assets qualifying under one or both of those
sections, applying each section separately, "qualifying assets") to the extent
that the REMIC's assets are qualifying assets, but not to the extent that the
REMIC's assets consist of
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Yield Supplement Agreements. However, if at least 95 percent of the REMIC's
assets are qualifying assets, then 100 percent of the REMIC Certificates will be
qualifying assets (other than yield supplement agreements). Similarly, income on
the REMIC Certificates will be treated as "interest on obligations secured by
mortgages on real property" within the meaning of Section 856(c)(3)(B) of the
Code, subject to the limitations of the preceding two sentences. In addition to
Mortgage Assets, the REMIC's assets will include payments on Mortgage Assets
held pending distribution to holders of REMIC Certificates, amounts in reserve
accounts (if any), other credit enhancements (if any) and possibly buydown funds
("BUYDOWN FUNDS"). The Mortgage Assets generally will be qualifying assets under
the foregoing sections of the Code except to the extent provided in the
Prospectus Supplement. However, Mortgage Assets that are not secured by
residential real property or real property used primarily for church purposes
may not constitute qualifying assets under Section 7701(a)(19)(C)(v) of the
Code. In addition, to the extent that the principal amount of a Mortgage Asset
exceeds the value of the property securing the Mortgage Asset, it is unclear and
Federal Tax Counsel is unable to opine whether the loans will be qualifying
assets. The regulations under Sections 860A through 860G of the Code (the "REMIC
REGULATIONS") treat credit enhancements as part of the mortgage or pool of
mortgages to which they relate, and therefore credit enhancements generally
should be qualifying assets. Regulations issued in conjunction with the REMIC
Regulations provide that amounts paid on Mortgage Assets and held pending
distribution to holders of Certificates ("CASH FLOW INVESTMENTS") will be
treated as qualifying assets under Section 856(c)(4)(A). It is unclear whether
amounts in a Reserve Account or Buydown Funds would also constitute qualifying
assets under any of those provisions. The Prospectus Supplement for each series
will indicate (if applicable) that it has Buydown Funds.
TIERED REMIC STRUCTURES
For certain series of Certificates, two or more separate elections may be
made to treat designated portions of the related Trust as REMICs ("TIERED
REMICS") for federal income tax purposes. Upon the issuance of any such series
of Certificates, Federal Tax Counsel will deliver its opinion generally to the
effect that, assuming compliance with all provisions of the related Agreement
and applicable provisions of the Code and applicable Treasury regulations and
rulings, the Tiered REMICs will each qualify under then existing law as a REMIC
and the REMIC Certificates issued by the Tiered REMICs, respectively, will be
considered to evidence ownership of "regular interests" or "residual interests"
in the related REMIC within the meaning of the REMIC provisions of the Code.
Solely for purposes of determining whether the REMIC Certificates will be
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code and
assets described in Section 7701(a)(19)(C) of the Code, and whether the income
on such Certificates is interest described in Section 856(c)(3)(B) of the Code,
the Tiered REMICs will be treated as one REMIC.
REMIC REGULAR CERTIFICATES
Current Income on REMIC Regular Certificates -- General. Except as
otherwise indicated herein, the REMIC Regular Certificates will be treated for
federal income tax purposes (but not necessarily for accounting or other
purposes) as debt instruments that are issued by the REMIC on the date of
issuance of the REMIC Regular Certificates and not as ownership interests in the
REMIC or the REMIC's assets. Holders of REMIC Regular Certificates who would
otherwise report income under a cash method of accounting will be required to
report income with respect to REMIC Regular Certificates under an accrual
method.
Payments of interest on REMIC Regular Certificates may be based on a fixed
rate, a variable rate as permitted by the REMIC Regulations, or may consist of a
specified portion of the interest payments on qualified mortgages where such
portion does not vary during the period the REMIC Regular Certificate is
outstanding. The definition of a variable rate for purposes of the REMIC
Regulations is based on the definition of a qualified floating rate for purposes
of the rules governing original issue discount set forth in Sections 1271
through 1275 of the Code and the regulations thereunder (the "OID REGULATIONS")
with certain modifications and permissible variations. See "-- Payment Lag REMIC
Regular Certificates; Initial Period--Variable Rate REMIC Regular Certificates,"
below, for a discussion of the definition of a qualified
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floating rate for purposes of the OID Regulations. In contrast to the OID
Regulations, for purposes of the REMIC Regulations, a qualified floating rate
does not include any multiple of a qualified floating rate (also excluding
multiples of qualified floating rates that themselves would constitute qualified
floating rates under the OID Regulations), and the characterization of a
variable rate that is subject to a cap, floor or similar restriction as a
qualified floating rate for purposes of the REMIC Regulations will not depend
upon the OID Regulations relating to caps, floors, and similar restrictions. See
"-- Payment Lag REMIC Regular Certificates; Initial Period -- Variable Rate
REMIC Regular Certificates," below, for a discussion of the OID Regulations
relating to caps, floors and similar restrictions. A qualified floating rate, as
defined above for purposes of the REMIC Regulations (a "REMIC QUALIFIED FLOATING
RATE"), qualifies as a variable rate for purposes of the REMIC Regulations if
such REMIC qualified floating rate is set at a "current rate" as defined in the
OID Regulations. In addition, a rate equal to the highest, lowest or an average
of two or more REMIC qualified floating rates qualifies as a variable rate for
REMIC purposes. A REMIC Regular Certificate also may have a variable rate based
on a weighted average of the interest rates on some or all of the qualified
mortgages held by the REMIC where each qualified mortgage taken into account has
a fixed rate or a variable rate that is permissible under the REMIC Regulations.
Further, a REMIC Regular Certificate may have a rate that is the product of a
REMIC qualified floating rate or a weighted average rate and a fixed multiplier,
is a constant number of basis points more or less than a REMIC qualified
floating rate or a weighted average rate, or is the product, plus or minus a
constant number of basis points, of a REMIC qualified floating rate or a
weighted average rate and a fixed multiplier. An otherwise permissible variable
rate for a REMIC Regular Certificate, described above, will not lose its
character as such because it is subject to a floor or a cap, including a "funds
available cap" as that term is defined in the REMIC Regulations. Lastly, a REMIC
Regular Certificate will be considered as having a permissible variable rate if
it has a fixed or otherwise permissible variable rate during one or more payment
or accrual periods and different fixed or otherwise permissible variable rates
during other payment or accrual periods.
Original Issue Discount. REMIC Regular Certificates of certain series may
be issued with "original issue discount" within the meaning of Section 1273(a)
of the Code. Holders of REMIC Regular Certificates issued with original issue
discount generally must include original issue discount in gross income for
federal income tax purposes as it accrues, in advance of receipt of the cash
attributable to such income, under a method that takes account of the
compounding of interest. The Code requires that information with respect to the
original issue discount accruing on any REMIC Regular Certificate be reported
periodically to the Internal Revenue Service and to certain categories of
holders of such REMIC Regular Certificates.
Each Trust will report original issue discount, if any, to the holders of
REMIC Regular Certificates based on the OID Regulations. OID Regulations
concerning contingent payment debt instruments do not apply to the REMIC Regular
Certificates.
The OID Regulations provide that, in the case of a debt instrument such as
a REMIC Regular Certificate, (i) the amount and rate of accrual of original
issue discount will be calculated based on a reasonable assumed prepayment rate
(the "PREPAYMENT ASSUMPTION"), and (ii) adjustments will be made in the amount
and rate of accrual of such discount to reflect differences between the actual
prepayment rate and the Prepayment Assumption. The method for determining the
appropriate assumed prepayment rate will eventually be set forth in Treasury
regulations, but those regulations have not yet been issued. The applicable
legislative history indicates, however, that such regulations will provide that
the assumed prepayment rate for securities such as the REMIC Regular
Certificates will be the rate used in pricing the initial offering of the
securities. The Prospectus Supplement for each series of REMIC Regular
Certificates will specify the Prepayment Assumption, but no representation is
made that the REMIC Regular Certificates will, in fact, prepay at a rate based
on the Prepayment Assumption or at any other rate.
In general, a REMIC Regular Certificate will be considered to be issued
with original issue discount if its stated redemption price at maturity exceeds
its issue price. Except as discussed below under "-- Payment Lag REMIC Regular
Certificates; Initial Period" and "-- Qualified Stated Interest," and in the
case of certain Variable Rate REMIC Regular Certificates (as defined below) and
accrual certificates, the stated redemption price at maturity of a REMIC Regular
Certificate is its principal amount. The issue price of a REMIC Regular
Certificate is the initial offering price to the public (excluding bond houses
and brokers) at which a
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substantial amount of the class of REMIC Regular Certificates was sold. The
issue price will be reduced if any portion of such price is allocable to a
related Yield Supplement Agreement. Notwithstanding the general definition of
original issue discount, such discount will be considered to be zero for any
REMIC Regular Certificate on which such discount is less than 0.25% of its
stated redemption price at maturity multiplied by its weighted average life. The
weighted average life of a REMIC Regular Certificate apparently is computed for
purposes of this de minimis rule as the sum, for all distributions included in
the stated redemption price at maturity of the REMIC Regular Certificate, of the
amounts determined by multiplying (i) the number of complete years (rounding
down for partial years) from the closing date set forth in the related
Prospectus Supplement (the "CLOSING DATE") to the date on which each such
distribution is expected to be made, determined under the Prepayment Assumption,
by (ii) a fraction, the numerator of which is the amount of such distribution
and the denominator of which is the REMIC Regular Certificate's stated
redemption price at maturity. The OID Regulations provide that holders will
include any de minimis original issue discount ratably as payments of stated
principal are made on the REMIC Regular Certificates.
The holder of a REMIC Regular Certificate issued with original issue
discount must include in gross income the sum of the "daily portions" of such
original issue discount for each day during its taxable year on which it held
such REMIC Regular Certificate. In the case of an original holder of a REMIC
Regular Certificate, the daily portions of original issue discount are
determined first by calculating the portion of the original issue discount that
accrued during each period (an "ACCRUAL PERIOD") that begins on the day
following a Remittance Date (or in the case of the first such period, begins on
the Closing Date) and ends on the next succeeding Remittance Date. The original
issue discount accruing during each accrual period is then allocated ratably to
each day during such period to determine the daily portion of original issue
discount for that day.
The portion of the original issue discount that accrues in any accrual
period will equal the excess, if any, of (i) the sum of (A) the present value,
as of the end of the accrual period, of all of the distributions to be made on
the REMIC Regular Certificate, if any, in future periods and (B) the
distributions made on the REMIC Regular Certificate during the accrual period
that are included in such REMIC Regular Certificate's stated redemption price at
maturity, over (ii) the adjusted issue price of such REMIC Regular Certificate
at the beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence will be calculated (i)
assuming that the REMIC Regular Certificates will be prepaid in future periods
at a rate computed in accordance with the Prepayment Assumption and (ii) using a
discount rate equal to the original yield to maturity of the REMIC Regular
Certificates. For these purposes, the original yield to maturity of the REMIC
Regular Certificates will be calculated based on their issue price and assuming
that the REMIC Regular Certificates will be prepaid in accordance with the
Prepayment Assumption. The adjusted issue price of a REMIC Regular Certificate
at the beginning of any accrual period will equal the issue price of such REMIC
Regular Certificate, increased by the portion of the original issue discount
that has accrued during prior accrual periods, and reduced by the amount of any
distributions made on such REMIC Regular Certificate in prior accrual periods
that were included in such REMIC Regular Certificate's stated redemption price
at maturity.
The daily portions of original issue discount may increase or decrease
depending on the extent to which the actual rate of prepayments diverges from
the Prepayment Assumption. If original issue discount accruing during any
accrual period computed as described above is negative, it is likely that a
holder will be entitled to offset such amount only against positive original
issue discount accruing on such REMIC Regular Certificate in future accrual
periods. Although Federal Tax Counsel is unable to opine with respect to this
matter, such a holder may be entitled to deduct a loss to the extent that its
remaining basis would exceed the maximum amount of future payments to which such
holder is entitled. It is unclear whether the Prepayment Assumption is taken
into account for this purpose.
A subsequent holder that purchases a REMIC Regular Certificate issued with
original issue discount at a cost less than its remaining stated redemption
price at maturity will also generally be required to include in gross income,
for each day on which it holds such REMIC Regular Certificate, the daily
portions of original issue discount with respect to the REMIC Regular
Certificate, calculated as described above. However, if (i) the excess of the
remaining stated redemption price at maturity over such cost is less than (ii)
the aggregate amount of such daily portions for all days after the date of
purchase until final retirement of such
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REMIC Regular Certificate, then such daily portions will be reduced
proportionately in determining the income of such holder.
Qualified Stated Interest. Interest payable on a REMIC Regular Certificate
which qualifies as "qualified stated interest" for purposes of the OID
Regulations will not be includible in the stated redemption price at maturity of
the REMIC Regular Certificate. Accordingly, if the interest on a REMIC Regular
Certificate does not constitute "qualified stated interest," the REMIC Regular
Certificate will have original issue discount. Interest payments will not
qualify as qualified stated interest unless the interest payments are
"unconditionally payable." The OID Regulations state that interest is
unconditionally payable if reasonable legal remedies exist to compel timely
payment, or the debt instrument otherwise provides terms and conditions that
make the likelihood of late payment (other than a late payment that occurs
within a reasonable grace period) or nonpayment of interest a remote
contingency, as defined in the OID Regulations. It is unclear whether the terms
and conditions of the Mortgage Assets underlying the REMIC Regular Certificates
or the terms and conditions of the REMIC Regular Certificates are considered
when determining whether the likelihood of late payment or nonpayment of
interest is a remote contingency. Any terms or conditions that do not reflect
arm's length dealing or that the holder does not intend to enforce are not
considered. Accordingly, Federal Tax Counsel is unable to opine whether interest
payments on REMIC Regular Certificates that otherwise would not be treated as
having original issue discount would be considered to have original issue
discount because there are not reasonable remedies to compel timely payment of
interest or terms or conditions that would make the likelihood of late payment
or nonpayment remote.
Premium. A purchaser of a REMIC Regular Certificate that purchases such
REMIC Regular Certificate at a cost greater than its remaining stated redemption
price at maturity will be considered to have purchased such REMIC Regular
Certificate at a premium, and may, under Section 171 of the Code, elect to
amortize such premium under a constant yield method over the life of the REMIC
Regular Certificate. The Prepayment Assumption is probably taken into account in
determining the life of the REMIC Regular Certificate for this purpose. Except
as provided in regulations, amortizable premium will be treated as an offset to
interest income on the REMIC Regular Certificate.
PAYMENT LAG REMIC REGULAR CERTIFICATES; INITIAL PERIOD
Considerations. Certain REMIC Regular Certificates will provide for
distributions of interest based on a period that is the same length as the
interval between Remittance Dates but ends prior to each Remittance Date. Any
interest that accrues prior to the Closing Date may be treated under the OID
Regulations either (i) as part of the issue price and the stated redemption
price at maturity of the REMIC Regular Certificates or (ii) as not included in
the issue price or the stated redemption price. The OID Regulations provide a
special application of the de minimis rule for debt instruments with long first
accrual periods where the interest payable for the first period is at a rate
which is effectively less than that which applies in all other periods. In such
cases, for the sole purpose of determining whether original issue discount is de
minimis, the OID Regulations provide that the stated redemption price is equal
to the instrument's issue price plus the greater of the amount of foregone
interest or the excess (if any) of the instrument's stated principal amount over
its issue price.
Variable Rate REMIC Regular Certificates. Under the OID Regulations, REMIC
Regular Certificates paying interest at a variable rate (a "VARIABLE RATE REMIC
REGULAR CERTIFICATE") are subject to special rules. A Variable Rate REMIC
Regular Certificate will qualify as a "variable rate debt instrument" if (i) its
issue price does not exceed the total noncontingent principal payments due under
the Variable Rate REMIC Regular Certificate by more than a specified de minimis
amount; (ii) it provides for stated interest, paid or compounded at least
annually, at (a) one or more qualified floating rates, (b) a single fixed rate
and one or more qualified floating rates, (c) a single objective rate or (d) a
single fixed rate and a single objective rate that is a qualified inverse
floating rate; and (iii) it does not provide for any principal payments that are
contingent, as defined in the OID Regulations, except as provided in (i), above.
Because the OID Regulations relating to contingent payment debt instruments do
not apply to REMIC regular interests, principal payments on the REMIC Regular
Certificates should not be considered contingent for this purpose.
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A "QUALIFIED FLOATING RATE" is any variable rate where variations in the
value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Rate REMIC Regular Certificate is denominated. A multiple of a
qualified floating rate will generally not itself constitute a qualified
floating rate for purposes of the OID Regulations. However, a variable rate
equal to (i) the product of a qualified floating rate and a fixed multiple that
is greater than 0.65 but not more than 1.35 or (ii) the product of a qualified
floating rate and a fixed multiple that is greater than 0.65 but not more than
1.35, increased or decreased by a fixed rate will constitute a qualified
floating rate for purposes of the OID Regulations. In addition, under the OID
Regulations, two or more qualified floating rates that can reasonably be
expected to have approximately the same values throughout the term of the
Variable Rate REMIC Regular Certificate will be treated as a single qualified
floating rate (a "PRESUMED SINGLE QUALIFIED FLOATING RATE"). Two or more
qualified floating rates with values within 25 basis points of each other as
determined on the Variable Rate REMIC Regular Certificate's issue date will be
conclusively presumed to be a Presumed Single Qualified Floating Rate.
Notwithstanding the foregoing, a variable rate that would otherwise constitute a
qualified floating rate but which is subject to one or more restrictions such as
a cap or floor, will not be a qualified floating rate for purposes of the OID
Regulations unless the restriction is fixed throughout the term of the Variable
Rate REMIC Regular Certificate or the restriction is not reasonably expected as
of the issue date to significantly affect the yield of the Variable Rate REMIC
Regular Certificate.
An "OBJECTIVE RATE" is a rate that is not itself a qualified floating rate
but which is determined using a single fixed formula and which is based upon
objective financial or economic information. The OID Regulations also provide
that other variable rates may be treated as objective rates if so designated by
the Internal Revenue Service in the future. Despite the foregoing, a variable
rate of interest on a Variable Rate REMIC Regular Certificate will not
constitute an objective rate if it is reasonably expected that the average value
of such rate during the first half of the Variable Rate REMIC Regular
Certificate's term will be either significantly less than or significantly
greater than the average value of the rate during the final half of the Variable
Rate REMIC Regular Certificate's term. Further, an objective rate does not
include a rate that is based on information that is within the control of the
issuer (or a party related to the issuer) or that is unique to the circumstances
of the issuer (or a party related to the issuer). Although not free from doubt,
an interest rate on a REMIC Regular Certificate that is the weighted average of
the interest rates on some or all of the qualified mortgages held by the REMIC
should constitute an objective rate. An objective rate will qualify as a
"QUALIFIED INVERSE FLOATING RATE" if such rate is equal to a fixed rate minus a
qualified floating rate and variations in the rate can reasonably be expected to
inversely reflect contemporaneous variations in the qualified floating rate. The
OID Regulations also provide that if a Variable Rate REMIC Regular Certificate
provides for stated interest at a fixed rate for an initial period of less than
one year followed by a variable rate that is either a qualified floating rate or
an objective rate and if the variable rate on the Variable Rate REMIC Regular
Certificate's issue date is intended to approximate the fixed rate, then the
fixed rate and the variable rate together will constitute either a single
qualified floating rate or objective rate, as the case may be (a "PRESUMED
SINGLE VARIABLE RATE"). If the value of the variable rate and the initial fixed
rate are within 25 basis points of each other as determined on the Variable Rate
REMIC Regular Certificate's issue date, the variable rate will be conclusively
presumed to approximate the fixed rate.
For Variable Rate REMIC Regular Certificates that qualify as a "variable
rate debt instrument" under the OID Regulations and provide for interest at
either a single qualified floating rate, a single objective rate, a Presumed
Single Qualified Floating Rate or a Presumed Single Variable Rate throughout the
term (a "SINGLE VARIABLE RATE REMIC REGULAR CERTIFICATE"), original issue
discount is computed as described in "-- REMIC Regular Certificates -- Original
Issue Discount" based on the following: (i) stated interest on the Single
Variable Rate REMIC Regular Certificate which is unconditionally payable in cash
or property (other than debt instruments of the issuer) at least annually will
constitute qualified stated interest; (ii) by assuming that the variable rate on
the Single Variable Rate REMIC Certificate is a fixed rate equal to: (a) in the
case of a Single Variable Rate REMIC Regular Certificate with a qualified
floating rate or a qualified inverse floating rate, the value of, as of the
issue date, of the qualified floating rate or the qualified inverse floating
rate or (b) in the case of a Single Variable Rate REMIC Regular Certificate with
an objective rate (other than a qualified inverse floating rate), a fixed rate
which reflects the reasonably expected yield for such Single Variable Rate REMIC
Regular Certificate; and (iii) the qualified stated interest allocable to an
accrual
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period is increased (or decreased) if the interest actually paid during an
accrual period exceeds (or is less than) the interest assumed to be paid under
the assumed fixed rate described in (ii), above.
In general, any Variable Rate REMIC Regular Certificate other than a Single
Variable Rate REMIC Regular Certificate (a "MULTIPLE VARIABLE RATE REMIC REGULAR
CERTIFICATE") that qualifies as a "variable rate debt instrument" will be
converted into an "equivalent" fixed rate debt instrument for purposes of
determining the amount and accrual of original issue discount and qualified
stated interest on the Multiple Variable Rate REMIC Regular Certificate. The OID
Regulations generally require that such a Multiple Variable Rate REMIC Regular
Certificate be converted into an "equivalent" fixed rate debt instrument by
substituting any qualified floating rate or qualified inverse floating rate
provided for under the terms of the Multiple Variable Rate REMIC Regular
Certificate with a fixed rate equal to the value of the qualified floating rate
or qualified inverse floating rate, as the case may be, as of the Multiple
Variable Rate REMIC Regular Certificate's issue date. Any objective rate (other
than a qualified inverse floating rate) provided for under the terms of the
Multiple Variable Rate REMIC Regular Certificate is converted into a fixed rate
that reflects the yield that is reasonably expected for the Multiple Variable
Rate REMIC Regular Certificate. In the case of a Multiple Variable Rate REMIC
Regular Certificate that qualifies as a "variable rate debt instrument" and
provides for stated interest at a fixed rate in addition to either one or more
qualified floating rates or a qualified inverse floating rate, the fixed rate is
initially converted into a qualified floating rate (or a qualified inverse
floating rate, if the Multiple Variable Rate REMIC Regular Certificate provides
for a qualified inverse floating rate). Under such circumstances, the qualified
floating rate or qualified inverse floating rate that replaces the fixed rate
must be such that the fair market value of the Multiple Variable Rate REMIC
Regular Certificate as of the Multiple Variable Rate REMIC Regular Certificate's
issue date is approximately the same as the fair market value of an otherwise
identical debt instrument that provides for either the qualified floating rate
or qualified inverse floating rate rather than the fixed rate. Subsequent to
converting the fixed rate into either a qualified floating rate or a qualified
inverse floating rate, the Multiple Variable Rate REMIC Regular Certificate is
then converted into an "equivalent" fixed rate debt instrument in the manner
described above.
Once the Multiple Variable Rate REMIC Regular Certificate is converted into
an "equivalent" fixed rate debt instrument pursuant to the foregoing rules, the
amount of original issue discount and qualified stated interest, if any, are
determined for the "equivalent" fixed rate debt instrument by applying the
original issue discount rules to the "equivalent" fixed rate debt instrument in
the manner described in "REMIC Regular Certificates -- Original Issue Discount."
A holder of the Multiple Variable Rate REMIC Regular Certificate will account
for such original issue discount and qualified stated interest as if the holder
held the "equivalent" fixed rate debt instrument. In each accrual period,
appropriate adjustments will be made to the amount of qualified stated interest
or original issue discount assumed to have been accrued or paid with respect to
the "equivalent" fixed rate debt instrument in the event that such amounts
differ from the actual amount of interest accrued or paid on the Multiple
Variable Rate REMIC Regular Certificate during the accrual period.
If a Variable Rate REMIC Regular Certificate does not qualify as a
"variable rate debt instrument" under the OID Regulations, then the Variable
Rate REMIC Regular Certificate would be treated as a contingent payment debt
obligation. Federal Tax Counsel is unable to opine how a Variable Rate REMIC
Regular Certificate would be taxed if such REMIC Regular Certificate were
treated as a contingent payment debt obligation, since the OID Regulations
relating to contingent payment debt obligations do not apply to REMIC regular
interests.
Interest-Only REMIC Regular Certificates. The Trust intends to report
income from interest-only classes of REMIC Regular Certificates to the Internal
Revenue Service and to holders of interest-only REMIC Regular Certificates based
on the assumption that the stated redemption price at maturity is equal to the
sum of all payments determined under the Prepayment Assumption. As a result,
such interest-only REMIC Regular Certificates will be treated as having original
issue discount.
Market Discount. A holder that acquires a REMIC Regular Certificate at a
market discount (that is, a discount that exceeds any unaccrued original issue
discount) will recognize gain upon receipt of a principal distribution,
regardless of whether the distribution is scheduled or is a prepayment. In
particular, the REMIC
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Regular Certificateholder will be required to allocate that principal
distribution first to the portion of the market discount on such REMIC Regular
Certificate that has accrued but has not previously been includible in income,
and will recognize ordinary income to that extent. In general terms, unless
Treasury regulations when issued state otherwise, market discount on a REMIC
Regular Certificate may be treated, at the REMIC Certificateholder's election,
as accruing either (i) under a constant yield method, taking into account the
Prepayment Assumption, or (ii) in proportion to accruals of original issue
discount (or, if there is no original issue discount, in proportion to stated
interest at the Pass Through Rate or Interest Rate).
In addition, a holder may be required to defer deductions for a portion of
the holder's interest expense on any debt incurred or continued to purchase or
carry a REMIC Regular Certificate purchased with market discount. The deferred
portion of any interest deduction would not exceed the portion of the market
discount on the REMIC Regular Certificate that accrues during the taxable year
in which such interest would otherwise be deductible and, in general, would be
deductible when such market discount is included in income upon receipt of a
principal distribution on, or upon the sale of, the REMIC Regular Certificate.
The Code requires that information necessary to compute accruals of market
discount be reported periodically to the Internal Revenue Service and to certain
categories of holders of REMIC Regular Certificates.
Notwithstanding the above rules, market discount on a REMIC Regular
Certificate will be considered to be zero if such discount is less than 0.25% of
the remaining stated redemption price at maturity of such REMIC Regular
Certificate multiplied by its weighted average remaining life. Weighted average
remaining life presumably is calculated in a manner similar to weighted average
life (described above under "-- REMIC Regular Certificates -- Original Issue
Discount"), taking into account distributions (including prepayments) prior to
the date of acquisition of such REMIC Regular Certificate by the subsequent
purchaser. If market discount on a REMIC Regular Certificate is treated as zero
under this rule, the actual amount of such discount must be allocated to the
remaining principal distributions on the REMIC Regular Certificate, and when
each such distribution is made, gain equal to the discount, if any, allocated to
the distribution will be recognized.
Election to Treat all Interest Under the Constant Yield Rules. The OID
Regulations provide that all holders may elect to include in gross income all
interest that accrues on a debt instrument issued after April 4, 1994 by using
the constant yield method. For purposes of this election, interest includes
stated interest, original issue discount, and market discount, as adjusted to
account for any premium. Holders should consult their own tax advisors regarding
the availability or advisability of such an election.
Sales of REMIC Regular Certificates. If a REMIC Regular Certificate is
sold, the seller will recognize gain or loss equal to the difference between the
amount realized on the sale and its adjusted basis in the REMIC Regular
Certificate. A holder's adjusted basis in a REMIC Regular Certificate generally
equals the cost of the REMIC Regular Certificate to the holder, increased by
income reported by the holder with respect to the REMIC Regular Certificate and
reduced (but not below zero) by distributions on the REMIC Regular Certificate
received by the holder and by amortized premium. Except as indicated in the next
two paragraphs, any such gain or loss generally will be capital gain or loss
provided the REMIC Regular Certificate is held as a capital asset.
Gain from the sale of a REMIC Regular Certificate that might otherwise be
capital gain will be treated as ordinary income to the extent that such gain
does not exceed the excess, if any, of (i) the amount that would have been
includible in the seller's income with respect to the REMIC Regular Certificate
had income accrued thereon at a rate equal to 110% of "the applicable Federal
rate" (generally, an average of current yields on Treasury securities),
determined as of the date of purchase of the REMIC Regular Certificate, over
(ii) the amount actually includible in the seller's income. In addition, gain
recognized on the sale of a REMIC Regular Certificate by a seller who purchased
the REMIC Regular Certificate at a market discount would be taxable as ordinary
income in an amount not exceeding the portion of such discount that accrued
during the period the REMIC Regular Certificate was held by such seller, reduced
by any market discount includible in income under the rules described above
under "-- Payment Lag REMIC Regular Certificates; Initial Period -- Market
Discount."
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REMIC Regular Certificates will be "evidences of indebtedness" within the
meaning of Section 582(c)(1) of the Code, so that gain or loss recognized from a
sale of a REMIC Regular Certificate by a bank or other financial institution to
which such section applies would be ordinary income or loss.
Termination. The REMIC will terminate shortly following the REMIC's
receipt of the final payment in respect of the Mortgage Assets. The last
distribution on a REMIC Regular Certificate should be treated as a payment in
full retirement of a debt instrument.
TAX TREATMENT OF YIELD SUPPLEMENT AGREEMENTS
Whether a REMIC Regular Certificateholder of a series will have a separate
contractual right to payments under a Yield Supplement Agreement, and the tax
treatment of such payments, if any, will be addressed in the related Prospectus
Supplement.
REMIC RESIDUAL CERTIFICATES
Because the REMIC Residual Certificates will be treated as "residual
interests" in the REMIC, each holder of a REMIC Residual Certificate will be
required to take into account its daily portion of the taxable income or net
loss of the REMIC for each day during the calendar year on which it holds its
REMIC Residual Certificate. The daily portion is determined by allocating to
each day in a calendar quarter a ratable portion of the taxable income or net
loss of the REMIC for that quarter and allocating such daily amounts among the
holders on such day in proportion to their holdings. All income or loss of the
REMIC taken into account by a REMIC Residual Certificateholder must be treated
as ordinary income or loss as the case may be. Income from residual interests is
"portfolio income" which cannot be offset by "passive activity losses" in the
hands of individuals or other persons subject to the passive loss rules. The
Code also provides that all residual interests must be issued on the REMIC's
startup day and designated as such. For this purpose, "startup day" means the
day on which the REMIC issues all of its regular and residual interests, and
under the REMIC Regulations may, in the case of a REMIC to which property is
contributed over a period of up to ten consecutive days, be any day designated
by the REMIC within such period.
The taxable income of the REMIC, for purposes of determining the amounts
taken into account by holders of REMIC Residual Certificates, is determined in
the same manner as in the case of an individual, with certain exceptions. The
accrual method of accounting must be used and the taxable year of the REMIC must
be the calendar year. The basis of property contributed to the REMIC in exchange
for regular or residual interests is its fair market value immediately after the
transfer. The REMIC Regulations determine the fair market value of the
contributed property by deeming it equal to the aggregate issue prices of all
regular and residual interests in the REMIC.
A REMIC Regular Certificate will be considered indebtedness of the REMIC.
Market discount on any of the Mortgage Assets held by the REMIC must be included
in the income of the REMIC as it accrues, rather than being included in income
only upon sale of the Mortgage Assets or as principal on the Mortgage Assets is
paid. The REMIC is not entitled to any personal exemptions or to deductions for
taxes paid to foreign countries and U.S. possessions, charitable contributions
or net operating losses, or to certain other deductions to which individuals are
generally entitled. Income or loss in connection with a "prohibited transaction"
is disregarded. See "-- of Payments to a Transferee in Consideration of Transfer
of a REMIC Residual Certificate -- Restrictions on Transfer; Holding by
Pass-Through Entities."
As previously discussed, the timing of recognition of negative original
issue discount, if any, on a REMIC Regular Certificate is uncertain. As a
result, the timing of recognition of the REMIC taxable income related to a REMIC
Residual Certificate is also uncertain. Although Federal Tax Counsel is unable
to opine as to this matter, the related REMIC taxable income may be recognized
when the adjusted issue price of such REMIC Regular Certificate would exceed the
maximum amount of future payments with respect to such REMIC Regular
Certificate. It is unclear whether the Prepayment Assumption is taken into
account for this purpose.
A REMIC Residual Certificate has a tax basis in its holder's hands that is
distinct from the REMIC's basis in its assets. The tax basis of a REMIC Residual
Certificate in its holder's hands will be its cost (i.e., the
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purchase price of the REMIC Residual Certificate), and will be reduced (but not
below zero) by the holder's share of cash distributions and losses and increased
by its share of taxable income from the REMIC.
If, in any year, cash distributions to a holder of a REMIC Residual
Certificate exceed its share of the REMIC's taxable income, the excess will
constitute a return of capital to the extent of the holder's basis in its REMIC
Residual Certificate. A return of capital is not treated as income for federal
income tax purposes, but will reduce the tax basis of the holder in its REMIC
Residual Certificate (but not below zero). If a REMIC Residual Certificate's
basis is reduced to zero, any cash distributions with respect to that REMIC
Residual Certificate in any taxable year in excess of its share of the REMIC's
income would be taxable to the holder as gain on the sale or exchange of its
interest in the REMIC.
The losses of the REMIC taken into account by a holder of a REMIC Residual
Certificate in any quarter may not exceed the holder's basis in its REMIC
Residual Certificate. Any excess losses may be carried forward indefinitely to
future quarters subject to the same limitation.
There is no REMIC counterpart to the partnership election under Code
Section 754 to increase or decrease the partnership's basis in its assets by
reference to the adjusted basis to subsequent partners of their partnership
interest. Consequently, a subsequent purchaser of a REMIC Residual Certificate
at a premium will not be able to use the premium to reduce his share of the
REMIC's taxable income.
Mismatching of Income and Deductions; Excess Inclusions. The taxable
income recognized by the holder of a REMIC Residual Certificate in any taxable
year will be affected by, among other factors, the relationship between the
timing of recognition of interest and discount income (or deductions for
amortization of premium) with respect to Mortgage Assets, on the one hand, and
the timing of deductions for interest (including original issue discount) on the
REMIC Regular Certificates, on the other. In the case of multiple classes of
REMIC Regular Certificates issued at different yields, and having different
weighted average lives, taxable income recognized by the holders of REMIC
Residual Certificates may be greater than cash flow in earlier years of the
REMIC (with a corresponding taxable loss or less taxable income than cash flow
in later years). This may result from the fact that interest expense deductions,
expressed as a percentage of the outstanding principal amount of the REMIC
Regular Certificates, will increase over time as the shorter term, lower
yielding classes of REMIC Regular Certificates are paid, whereas interest income
from the Mortgage Assets may not increase over time as a percentage of the
outstanding principal amount of the Mortgage Assets.
In the case of Tiered REMICs, the OID Regulations provide that the regular
interests in the REMIC which directly owns the Mortgage Assets (the "LOWER TIER
REMIC") will be treated as a single debt instrument for purposes of the original
issue discount provisions. Therefore, the Trust will calculate the taxable
income of Tiered REMICs by treating the Lower Tier REMIC regular interests as a
single debt instrument.
Any "excess inclusions" with respect to a REMIC Residual Certificate will
be subject to certain special rules. The excess inclusions with respect to a
REMIC Residual Certificate are equal to the excess, if any, of its share of
REMIC taxable income for the quarterly period over the sum of the daily accruals
for such quarterly period. The daily accrual for any day on which the REMIC
Residual Certificate is held is determined by allocating to each day in a
quarter its allocable share of the product of (A) 120% of the long-term
applicable Federal rate (for quarterly compounding) that would have applied to
the REMIC Residual Certificates (if they were debt instruments) on the closing
date under Code Section 1274(d)(1) and (B) the adjusted issue price of such
REMIC Residual Certificates at the beginning of a quarterly period. For this
purpose, the adjusted issue price of such REMIC Residual Certificate at the
beginning of a quarterly period is the issue price of such Certificates plus the
amount of the daily accruals of REMIC taxable income for all prior quarters,
decreased by any distributions made with respect to such Certificates prior to
the beginning of such quarterly period.
The excess inclusions of a REMIC Residual Certificate may not be offset by
other deductions, including net operating loss carryforwards, on a holder's
return.
Recently enacted provisions governing the relationship between excess
inclusions and the alternative minimum tax provide that (i) the alternative
minimum taxable income of a taxpayer is based on the
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taxpayer's regular taxable income computed without regard to the rule that
taxable income cannot be less than the amount of excess inclusions, (ii) the
alternative minimum taxable income of a taxpayer for a taxable year cannot be
less than the amount of excess inclusions for that year, and (iii) the amount of
any alternative minimum tax net operating loss is computed without regard to any
excess inclusions. While these provisions are generally effective for tax years
beginning after December 31, 1986, a taxpayer may elect to have these provisions
apply only with respect to tax years beginning after August 20, 1996.
If the holder of a REMIC Residual Certificate is an organization subject to
the tax on unrelated business income imposed by Code Section 511, the excess
inclusions will be treated as unrelated business taxable income of such holder
for purposes of Code Section 511. In addition, the Code provides that under
Treasury regulations, if a real estate investment trust ("REIT") owns a REMIC
Residual Certificate, to the extent excess inclusions of the REIT exceed its
real estate investment trust taxable income (excluding net capital gains), the
excess inclusions would be allocated among the shareholders of the REIT in
proportion to the dividends received by the shareholders from the REIT. Excess
inclusions derived by regulated investment companies ("RICS"), common trust
funds, and subchapter T cooperatives must be allocated to the shareholders of
such entities using rules similar to those applicable to REITs. The Internal
Revenue Service has not yet adopted or proposed such regulations as to REITs,
RICs, or similar entities. A life insurance company cannot adjust its reserve
with respect to variable contracts to the extent of any excess inclusion, except
as provided in regulations.
The Internal Revenue Service has authority to promulgate regulations
providing that if the aggregate value of the REMIC Residual Certificates is not
considered to be "significant," then the entire share of REMIC taxable income of
a holder of a REMIC Residual Certificate may be treated as excess inclusions
subject to the foregoing limitations. This authority has not been exercised to
date.
The REMIC is subject to tax at a rate of 100 percent on any net income it
derives from "prohibited transactions." In general, "prohibited transaction"
means the disposition of a Mortgage Asset other than pursuant to specified
exceptions, the receipt of income as compensation for services, the receipt of
income from a source other than a Mortgage Loan or certain other permitted
investments, or gain from the disposition of an asset representing a temporary
investment of payments on the Mortgage Assets pending distribution on the REMIC
Certificates. In addition, a tax is imposed on the REMIC equal to 100 percent of
the value of certain property contributed to the REMIC after its "startup day."
No REMIC in which interests are offered hereunder will accept contributions that
would cause it to be subject to such tax. This provision will not affect the
REMIC's ability to accept substitute Mortgage Loans or to sell defective
Mortgage Loans in accordance with the Agreement.
A REMIC is subject to a tax (deductible from its income) on any "net income
from foreclosure property" (determined in accordance with Section 857(b)(4)(B)
of the Code as if the REMIC were a REIT).
Any tax described in the two preceding paragraphs that may be imposed on
the Trust initially would be borne by the REMIC Residual Certificates in the
related REMIC rather than by the REMIC Regular Certificateholders, unless
otherwise specified in the Prospectus Supplement.
Dealers' Ability to Mark-to-Market REMIC Residual Certificates. Treasury
regulations provide that all REMIC Residual Certificates acquired on or after
January 4, 1995, and similar interests or arrangements acquired on or after
January 4, 1995 that are determined by the Commissioner to have substantially
the same economic effect as a REMIC Residual Certificate, are not securities and
cannot be marked to market pursuant to Section 475 of the Code.
TRANSFERS OF REMIC RESIDUAL CERTIFICATES
Tax on Disposition of REMIC Residual Certificates. The sale of a REMIC
Residual Certificate by a holder will result in gain or loss equal to the
difference between the amount realized on the sale and the adjusted basis of the
REMIC Residual Certificate.
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If the seller of a REMIC Residual Certificate held the REMIC Residual
Certificate as a capital asset, the gain or loss generally will be capital gain
or loss. However, under Code Section 582(c), the sale of a REMIC Residual
Certificate by certain banks and other financial institutions will be considered
a sale of property other than a capital asset, resulting in ordinary income or
loss. Although Federal Tax Counsel is unable to opine with respect to the tax
treatment of a REMIC Residual Certificate that has unrecovered basis after all
funds of the Trust have been distributed, the holder may be entitled to claim a
loss in the amount of the unrecovered basis.
The Code provides that, except as provided in Treasury regulations (which
have not yet been issued), if a holder sells a REMIC Residual Certificate and
acquires the same or other REMIC Residual Certificates, residual interests in
another REMIC, or any similar interests in a "taxable mortgage pool" (as defined
in Section 7701(i) of the Code) during the period beginning six months before,
and ending six months after, the date of such sale, such sale will be subject to
the "wash sale" rules of Section 1091 of the Code. In that event, any loss
realized by the seller on the sale generally will not be currently deductible.
A tax is imposed on the transfer of any residual interest in a REMIC to a
"disqualified organization." The tax is imposed on the transferor, or, where the
transfer is made through an agent of the disqualified organization, on the
agent. "Disqualified organizations" include for this purpose the United States,
any State or political subdivision thereof, any foreign government, any
international organization or agency or instrumentality of the foregoing (with
an exception for certain taxable instrumentalities of the United States, of a
State or of a political subdivision thereof), any rural electrical and telephone
cooperative, and any tax-exempt entity (other than certain farmers'
cooperatives) not subject to the tax on unrelated business income.
The amount of tax to be paid by the transferor on a transfer to a
disqualified organization is equal to the present value of the total anticipated
excess inclusions with respect to the interest transferred for periods after
such transfer multiplied by the highest corporate rate of tax. The transferor
(or agent, as the case may be) will be relieved of liability so long as the
transferee furnishes an affidavit that it is not a disqualified organization and
the transferor or agent does not have actual knowledge that the affidavit is
false. Under the REMIC Regulations, an affidavit will be sufficient if the
transferee furnishes (A) a social security number, and states under penalties of
perjury that the social security number is that of the transferee, or (B) a
statement under penalties of perjury that it is not a disqualified organization.
TREATMENT OF PAYMENTS TO A TRANSFEREE IN CONSIDERATION OF TRANSFER OF A REMIC
RESIDUAL CERTIFICATE
The federal income tax consequences of any consideration paid to a
transferee on a transfer of an interest in a REMIC Residual Certificate are
unclear and Federal Tax Counsel is unable to opine with respect to this issue.
The preamble to the REMIC Regulations indicates that the Internal Revenue
Service is considering the tax treatment of these types of residual interests. A
transferee of such an interest should consult its own tax advisors.
Restrictions on Transfer; Holding by Pass-Through Entities. An entity
cannot qualify as a REMIC absent reasonable arrangements designed to ensure that
(1) residual interests in such entity are not held by disqualified organizations
and (2) information necessary to calculate the tax due on transfers to
disqualified organizations (i.e., a computation of the present value of the
excess inclusions) is made available by the REMIC. The governing instruments of
a Trust will contain provisions designed to ensure the foregoing, and any
transferee of a REMIC Residual Certificate must execute and deliver an affidavit
stating that neither the transferee nor any person for whose account such
transferee is acquiring the REMIC Residual Certificate is a disqualified
organization. In addition, as to the requirement that reasonable arrangements be
made to ensure that disqualified organizations do not hold a residual interest
in the REMIC, the REMIC Regulations require that notice of the prohibition be
provided either through a legend on the certificate that evidences ownership, or
through a conspicuous statement in the prospectus or other offering document
used to offer the residual interest for sale. As to the requirement that
sufficient information be made available to calculate the tax on transfers to
disqualified organizations (or the tax, discussed below on pass-thru entities,
interests in which are
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held by disqualified organizations), the REMIC Regulations further require that
such information also be provided to the Internal Revenue Service.
A tax is imposed on "pass-thru entities" holding residual interests where a
disqualified organization is a record holder of an interest in the pass-thru
entity. "PASS-THRU ENTITY" is defined for this purpose to include RICs, REITs,
common trust funds, partnerships, trusts, estates and subchapter T cooperatives.
Except as provided in regulations, nominees holding interests in a "pass-thru
entity" for another person will also be treated as "pass-through entities" for
this purpose. The tax is equal to the amount of excess inclusions allocable to
the disqualified organization for the taxable year multiplied by the highest
corporate rate of tax, and is deductible by the "pass-through entity" against
the gross amount of ordinary income of the entity.
The Agreement provides that any attempted transfer of a beneficial or
record interest in a REMIC Residual Certificate will be null and void unless the
proposed transferee provides to the Trustee an affidavit that such transferee is
not a disqualified organization.
For taxable years beginning after December 31, 1997, all partners of
certain electing partnerships having 100 or more partners ("ELECTING LARGE
PARTNERSHIPS") will be treated as disqualified organizations for purposes of the
tax imposed on pass-through entities if such electing large partnerships hold
residual interests in a REMIC. However, the electing large partnership would be
entitled to exclude the excess inclusion income from gross income for purposes
of determining the taxable income of the partners.
The REMIC Regulations provide that a transfer of a "noneconomic residual
interest" will be disregarded for all federal income tax purposes unless
impeding the assessment or collection of tax was not a significant purpose of
the transfer. A residual interest will be treated as a "noneconomic residual
interest" unless, at the time of the transfer (1) the present value of the
expected future distributions on the residual interest at least equals the
product of (x) the present value of all anticipated excess inclusions with
respect to the residual interest and (y) the highest corporate tax rate,
currently 35 percent, and (2) the transferor reasonably expects that for each
anticipated excess inclusion, the transferee will receive distributions from the
REMIC, at or after the time at which taxes on such excess inclusion accrue,
sufficient to pay the taxes thereon. A significant purpose to impede the
assessment or collection of tax exists if the transferor, at the time of the
transfer, either knew or should have known (had "improper knowledge") that the
transferee would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. A transferor will be presumed not to have improper
knowledge if (i) the transferor conducts, at the time of the transfer, a
reasonable investigation of the financial condition of the transferee and, as a
result of the investigation, the transferor finds that the transferee has
historically paid its debts as they came due and finds no significant evidence
to indicate that the transferee will not continue to pay its debts as they come
due in the future, and (ii) the transferee represents to the transferor that (A)
the transferee understands that it might incur tax liabilities in excess of any
cash received with respect to the residual interest and (B) the transferee
intends to pay the taxes associated with owning the residual interest as they
come due. A different formulation of this rule applies to transfers of REMIC
Residual Certificates by or to foreign transferees. See "-- Foreign Investors"
below.
DEDUCTIBILITY OF TRUST EXPENSES
A holder that is an individual, estate or trust will be subject to the
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such deductions, in the aggregate, do not exceed two
percent of the holder's adjusted gross income, and such holder may not be able
to deduct such fees and expenses to any extent in computing such holder's
alternative minimum tax liability. In addition, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation for taxable years beginning after 1990) will be reduced
by the lesser of (i) 3 percent of the excess of adjusted gross income over the
applicable amount, or (ii) 80 percent of the amount of itemized deductions
otherwise allowable for such taxable year. Such deductions will include
servicing, guarantee, and administrative fees paid to the servicer of the
Mortgage Loans. These deductions will be allocated entirely to the holders of
the REMIC Residual Certificates in the case of REMIC Trusts with multiple
classes of REMIC Regular Certificates that do not pay their principal amounts
ratably. As a result, the REMIC will report additional taxable income to holders
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of REMIC Residual Certificates in an amount equal to their allocable share of
such deductions, and individuals, estates, or trusts holding an interest in such
REMIC Residual Certificates may have taxable income in excess of the cash
received. In the case of a "single-class REMIC," the expenses will be allocated,
under Treasury regulations, among the holders of the REMIC Regular Certificates
and the REMIC Residual Certificates on a daily basis in proportion to the
relative amounts of income accruing to each Certificateholder on that day. In
the case of a holder of a REMIC Regular Certificate who is an individual or a
"pass-through interest holder" (including certain pass-through entities, but not
including real estate investment trusts), the deductibility of such expenses
will be subject to the limitations described above. The reduction or
disallowance of these deductions may have a significant impact on the yield of
REMIC Regular Certificates 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. For taxable years
beginning after December 31, 1997, in the case of a partnership that has 100 or
more partners and elects to be treated as an "electing large partnership," 70
percent of such partnership's miscellaneous itemized deductions will be
disallowed, although the remaining deductions will generally be allowed at the
partnership level and will not be subject to the 2 percent floor that would
otherwise be applicable to individual partners.
FOREIGN INVESTORS
REMIC Regular Certificates. Except as discussed below, a holder of a REMIC
Regular Certificate who is not a "United States person" (as defined below)
generally will not be subject to United States income or withholding tax in
respect of a distribution on a REMIC Regular Certificate, provided that (i) the
holder complies to the extent necessary with certain identification
requirements, including timely delivery of a statement, signed by the holder of
the REMIC Regular Certificate under penalties of perjury, certifying that the
holder of the REMIC Regular Certificate is not a United States person and
providing the name and address of the holder, (ii) the holder is not a
"10-percent shareholder" within the meaning of Code Section 871(h)(3)(B), which
could be interpreted to apply to a holder of a REMIC Regular Certificate who
holds a direct or indirect 10 percent interest in the REMIC Residual
Certificates, (iii) the holder is not a "CONTROLLED FOREIGN CORPORATION" (as
defined in the Code) related to the REMIC or related to a 10 percent holder of a
residual interest in the REMIC, and (iv) the holder is not engaged in a United
States trade or business, or otherwise subject to federal income tax as a result
of any direct or indirect connection to the United States other than through its
ownership of a REMIC Regular Certificate. For these purposes, the term "United
States person" means (a) a citizen or resident of the United States, (b) a
corporation or partnership (or other entity treated as a corporation or
partnership for federal income tax purposes) created or organized in or under
the laws of the United States or any political subdivision thereof, (c) an
estate whose income is includible in gross income for United States federal
income taxation regardless of its source, and (d) a trust for which one or more
United States persons have the authority to control all substantial decisions
and for which a court of the United States can exercise primary supervision over
the trust's administration. For years beginning before January 1, 1997, the term
"United States person" shall include a trust whose income is includible in gross
income for United States federal income taxation regardless of source, in lieu
of trusts described in (d), above, unless the trust elects to have its United
States status determined under the criteria set forth in (d) above for tax years
ending after August 20, 1996. Recently issued Treasury regulations (the "FINAL
WITHHOLDING REGULATIONS"), which are generally effective with respect to
payments made after December 31, 1999, consolidate and modify the current
certification requirements and means by which a holder may claim exemption from
United States federal income tax withholding and provide certain presumptions
regarding the status of holders when payments to the holders cannot be reliably
associated with appropriate documentation provided to the payor. All holders
should consult their tax advisers regarding the application of the Final
Withholding Regulations.
REMIC Residual Certificates. The Conference Report to the Tax Reform Act
of 1986 states that amounts paid to foreign persons with respect to residual
interests should be considered interest for purposes of the withholding rules.
Interest paid to a foreign person which is not effectively connected with a
trade or business of the foreign person in the United States is subject to a 30%
withholding tax. The withholding tax on
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interest does not apply, however, to "portfolio interest" (if certain
certifications as to beneficial ownership are made, as discussed above under
"Foreign Investors -- REMIC Regular Certificates") or to the extent a tax treaty
reduces or eliminates the tax. Treasury regulations provide that amounts paid
with respect to residual interests qualify as portfolio interest only if
interest on the qualified mortgages held by the REMIC qualifies as portfolio
interest. Generally, interest on Mortgage Loans held by a Trust will not qualify
as portfolio interest, although interest on the Private Mortgage-Backed
Securities, other pass-through certificates, or REMIC regular interests held by
a Trust may qualify. In any case, a holder of a REMIC Residual Certificate will
not be entitled to the portfolio interest exception from the 30% withholding tax
(or to any treaty exemption or rate reduction) for that portion of a payment
that constitutes excess inclusions. Generally, the withholding tax will be
imposed when REMIC gross income is paid or distributed to the holder of a
residual interest or there is a disposition of the residual interest.
The REMIC Regulations provide that a transfer of a REMIC Residual
Certificate to a foreign transferee will be disregarded for all federal income
tax purposes if the transfer has "tax avoidance potential." A transfer to a
foreign transferee will be considered to have tax avoidance potential unless at
the time of the transfer, the transferor reasonably expects that (1) the future
distributions on the REMIC Residual Certificate will equal at least 30 percent
of the anticipated excess inclusions and (2) such amounts will be distributed at
or after the time at which the excess inclusion accrues, but not later than the
close of the calendar year following the calendar year of accrual. A safe harbor
in the REMIC Regulations provides that the reasonable expectation requirement
will be satisfied if the above test would be met at all assumed prepayment rates
for the Mortgage Assets from 50 percent of the Prepayment Assumption to 200
percent of the Prepayment Assumption. A transfer by a foreign transferor to a
domestic transferee will likewise be disregarded under the REMIC Regulations if
the transfer would have the effect of allowing the foreign transferor to avoid
the tax on accrued excess inclusions.
Gain on Transfers of Certificates. A Certificateholder that is a
nonresident alien or foreign corporation will not be subject to United States
federal income tax on gain realized on the sale, exchange, or redemption of a
REMIC Certificate, provided that (i) such gain is not effectively connected with
a trade or business carried on by the Certificateholder in the United States,
(ii) in the case of a Certificateholder that is an individual, such
Certificateholder is not present in the United States for 183 days or more
during the taxable year in which such sale, exchange or redemption occurs and
(iii) in the case of gain representing accrued interest, the Certificateholder
complies to the extent necessary with certain identification requirements,
including timely delivery of a statement, signed by the Certificateholder under
penalties of perjury, certifying that such Certificateholder is not a United
States person and providing the name and address of such holder.
BACKUP WITHHOLDING
Distributions made on the REMIC Certificates and proceeds from the sale of
REMIC Certificates to or through certain brokers may be subject to a "backup"
withholding tax of 31 percent of "reportable payments" (including interest
accruals, original issue discount, and, under certain circumstances,
distributions in reduction of principal amount) unless, in general, the holder
of the REMIC Certificate complies with certain procedures or is an exempt
recipient. Any amounts so withheld from distributions on the REMIC Certificates
would be refunded by the Internal Revenue Service or allowed as a credit against
the holder's federal income tax.
REMIC ADMINISTRATIVE MATTERS
The federal information returns for a Trust (Form 1066 and Schedules Q
thereto) must be filed as if the Trust were a partnership for federal income tax
purposes. Information on Schedule Q must be provided to holders of REMIC
Residual Certificates with respect to every calendar quarter. Each holder of a
REMIC Residual Certificate will be required to treat items on its federal income
tax returns consistently with their treatment on the Trust's information returns
unless the holder either files a statement identifying the inconsistency or
establishes that the inconsistency resulted from an incorrect schedule received
from the Trust. The Trust also will 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 taxable
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income by the Internal Revenue Service. (Treasury regulations exempt from
certain of these procedural rules REMICs having no more than one residual
interest holder.) Holders of REMIC Residual Certificates will have certain
rights and obligations with respect to any administrative or judicial
proceedings involving the Internal Revenue Service. Under the Code and
Regulations, a REMIC generally is required to designate a tax matters person.
Generally, subject to various limitations, the tax matters person has authority
to act on behalf of the REMIC and the holders of the REMIC Residual Certificates
in connection with administrative determinations and judicial review respecting
returns of taxable income of the REMIC.
Unless otherwise indicated in the Prospectus Supplement, and to the extent
allowable, the Representative or its designee will act as the tax matters person
for each REMIC. Each holder of a REMIC Residual Certificate, by the acceptance
of its interest in the REMIC Residual Certificate, agrees that the
Representative or its designee will act as the holder's fiduciary in the
performance of any duties required of the holder in the event that the holder is
the tax matters person.
NON-REMIC CERTIFICATES ISSUED BY A GRANTOR TRUST
The discussion under this heading applies only to a series of Certificates
with respect to which a REMIC election is not made and for which the Trust is
classified as a grantor trust for federal income tax purposes.
Tax Status of the Trust. Upon the issuance of each series of Non-REMIC
Certificates, Federal Tax Counsel, will deliver its opinion to the effect that,
under then current law, assuming compliance with the Agreement, the related
Trust will be classified for federal income tax purposes as a grantor trust and
not as an association taxable as a corporation or a taxable mortgage pool.
Accordingly, each holder of a Non-REMIC Certificate will be treated for federal
income tax purposes as the owner of an undivided interest in the Mortgage Assets
included in the Trust. As further described below, each holder of a Non-REMIC
Certificate therefore must report on its federal income tax return the gross
income from the portion of the Mortgage Assets that is allocable to such
Non-REMIC Certificate and may deduct the portion of the expenses incurred by the
Trust that is allocable to such Non-REMIC Certificate, at the same time and to
the same extent as such items would be reported by such holder if it had
purchased and held directly such interest in the Mortgage Assets and received
directly its share of the payments on the Mortgage Assets and incurred directly
its share of expenses incurred by the Trust when those amounts are received or
incurred by the Trust.
A holder of a Non-REMIC Certificate that is an individual, estate, or trust
will be allowed deductions for such expenses only to the extent that the sum of
those expenses and the holder's other miscellaneous itemized deductions exceeds
two percent of such holder's adjusted gross income. For taxable years beginning
after December 31, 1997, in the case of a partnership that has 100 or more
partners and elects to be treated as an "electing large partnership," 70 percent
of such partnership's miscellaneous itemized deductions will be disallowed,
although the remaining deductions will generally be allowed at the partnership
level and will not be subject to the 2 percent floor that would otherwise be
applicable to individual partners. In addition, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the "applicable amount" ($100,000 (or $50,000 in
the case of a separate return by a married individual), adjusted for changes in
the cost of living subsequent to 1990) will be reduced by the lesser of (i) 3
percent of the excess of adjusted gross income over the applicable amount, or
(ii) 80 percent of the amount of itemized deductions otherwise allowable for
such taxable year. Moreover, a holder of a Non-REMIC Certificate that is not a
corporation cannot deduct such expenses for purposes of the alternative minimum
tax (if applicable). Such deductions will include servicing, guarantee and
administrative fees paid to the servicer of the Mortgage Loans. As a result,
individuals, estates, or trusts holding Non-REMIC Certificates may have taxable
income in excess of the cash received.
Status of the Non-REMIC Certificates. The Non-REMIC Certificates generally
will be "real estate assets" for purposes of Section 856(c)(4)(A) of the Code
and "loans . . . secured by an interest in real property" within the meaning of
Section 7701(a)(19)(C)(v) of the Code, and interest income on the Non-REMIC
Certificates generally will be "interest on obligations secured by mortgages on
real property" within the meaning of Section 856(c)(3)(B) of the Code. However,
the Non-REMIC Certificates may not be qualifying assets under any of the
foregoing sections of the Code to the extent that the Trust's assets include
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Buydown Funds, amounts in a Reserve Account, or payments on mortgages held
pending distribution to Certificateholders. Further, the Non-REMIC Certificates
may not be "real estate assets" to the extent loans held by the trust are not
secured by real property, and may not be "loans . . . secured by an interest in
real property" to the extent loans held by the trust are not secured by
residential real property or real property used primarily for church purposes.
In addition, to the extent that the principal amount of a loan exceeds the value
of the property securing the loan, it is unclear and Federal Tax Counsel is
unable to opine whether the loan will be a qualifying asset.
Taxation of Non-REMIC Certificates Under Stripped Bond Rules. The federal
income tax treatment of the Non-REMIC Certificates will depend on whether they
are subject to the rules of section 1286 of the Code (the "stripped bond
rules"). The Non-REMIC Certificates will be subject to those rules if stripped
interest-only Certificates are issued. In addition, whether or not stripped
interest-only Certificates are issued, the Internal Revenue Service may contend
that the stripped bond rules apply on the ground that the Servicer's servicing
fee, or other amounts, if any, paid to (or retained by) the Servicer or its
affiliates, as specified in the applicable Prospectus Supplement, represent
greater than an arm's length consideration for servicing the Mortgage Loans and
should be characterized for federal income tax purposes as an ownership interest
in the Mortgage Loans. The Internal Revenue Service has taken the position in
Revenue Ruling 91-46 that retained interest in excess of reasonable compensation
for servicing is treated as a "stripped coupon" under the rules of Code Section
1286.
If interest retained for the Servicer's servicing fee or other interest is
treated as a "stripped coupon," the Non-REMIC Certificates will either be
subject to the original issue discount rules or the market discount rules. A
holder of a Non-REMIC Certificate will account for any discount on the Non-REMIC
Certificate (other than an interest treated as a "stripped coupon") as market
discount rather than original issue discount if either (i) the amount of
original issue discount with respect to the Non-REMIC Certificate was treated as
zero under the original issue discount de minimis rule when the Non-REMIC
Certificate was stripped or (ii) no more than 100 basis points (including any
amount of servicing in excess of reasonable servicing) is stripped off from the
Mortgage Loans. If neither of the above exceptions applies, the original issue
discount rules will apply to the Non-REMIC Certificates.
Section 1272(a)(6) of the Code provides for use of a prepayment assumption
in determining original issue discount for any pool of debt instruments the
yield on which may be affected by reason of prepayments. Therefore, if there is
original issue discount, the holder of a Non-REMIC Certificate (whether a cash
or accrual method taxpayer) will be required to report interest income from the
Non-REMIC Certificate in each taxable year equal to the income that accrues on
the Non-REMIC Certificate in that year calculated under a constant yield method
based on the yield of the Non-REMIC Certificate (or, possibly, the yield of each
Mortgage Asset underlying such Non-REMIC Certificate) to such holder. Such yield
would be computed at the rate that, if used in discounting the holder's share of
the payments on the Mortgage Assets, would cause the present value of those
payments to equal the price at which the holder purchased the Non-REMIC
Certificate. If required to report interest income on the Non-REMIC Certificates
to the Internal Revenue Service under the stripped bond rules, it is anticipated
that the Trustee will calculate the yield of the Non-REMIC Certificates based on
a representative initial offering price of the Non-REMIC Certificates and a
reasonable assumed rate of prepayment of the Mortgage Assets (although such
yield may differ from the yield to any particular holder that would be used in
calculating the interest income of such holder). The Prospectus Supplement for
each series of Non-REMIC Certificates will describe the prepayment assumption
that will be used for this purpose, but no representation is made that the
Mortgage Assets will prepay at that rate or at any other rate.
In the case of a Non-REMIC Certificate acquired at a price equal to the
principal amount of the Mortgage Assets allocable to the Non-REMIC Certificate,
the use of a reasonable prepayment assumption would not have any significant
effect on the yield used in calculating accruals of interest income. In the
case, however, of a Non-REMIC Certificate acquired at a discount or premium
(that is, at a price less than or greater than such principal amount,
respectively), the use of a reasonable prepayment assumption would increase or
decrease such yield, and thus accelerate or decelerate the reporting of interest
income, respectively.
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If a Mortgage Loan is prepaid in full, the holder of a Non-REMIC
Certificate acquired at a discount or premium generally will recognize ordinary
income or loss equal to the difference between the portion of the prepaid
principal amount of the Mortgage Loan that is allocable to the Non-REMIC
Certificate and the portion of the adjusted basis of the Non-REMIC Certificate
(see "-- Sales of Non-REMIC Certificates" below) that is allocable to the
Mortgage Loan.
Non-REMIC Certificates of certain series ("VARIABLE RATE NON-REMIC
CERTIFICATES") may provide for a Pass-Through Rate based on the weighted average
of the interest rates of the Mortgage Assets held by the Trust, which interest
rates may be fixed or variable. In the case of a Variable Rate Non-REMIC
Certificate that is subject to the original issue discount rules, the daily
portions of original issue discount generally will be calculated under the
principles discussed in "-- Payment Lag REMIC Regular Certificates; Initial
Period -- Variable Rate REMIC Regular Certificates."
Taxation of Non-REMIC Certificates if Stripped Bond Rules do not Apply. If
the stripped bond rules do not apply to a Non-REMIC Certificate, then the holder
will be required to include in income its share of the interest payments on the
Mortgage Assets in accordance with its tax accounting method. In addition, if
the holder purchased the Non-REMIC Certificate at a discount or premium, the
holder will be required to account for such discount or premium in the manner
described below. The treatment of any discount will depend on whether the
discount is original issue discount as defined in the Code and, in the case of
discount other than original issue discount, whether such other discount exceeds
a de minimis amount. In the case of original issue discount, the holder (whether
a cash or accrual method taxpayer) will be required to report as additional
interest income in each month the portion of such discount that accrues in that
month, calculated based on a constant yield method. In general it is not
anticipated that the amount of original issue discount to be accrued in each
month, if any, will be significant relative to the interest paid currently on
the Mortgage Assets. However, original issue discount could arise with respect
to a Mortgage Loan ("ARM") that provides for interest at a rate equal to the sum
of an index of market interest rates and a fixed number. The original issue
discount for ARMs generally will be determined under the principles discussed in
"Payment Lag REMIC Regular Certificates; Initial Period."
If discount other than original issue discount exceeds a de minimis amount
(described below), the holder will also generally be required to include in
income in each month the amount of such discount accrued through such month and
not previously included in income, but limited, with respect to the portion of
such discount allocable to any Mortgage Asset, to the amount of principal on
such Mortgage Asset received by the Trust in that month. Because the Mortgage
Assets will provide for monthly principal payments, such discount may be
required to be included in income at a rate that is not significantly slower
than the rate at which such discount accrues (and therefore at a rate not
significantly slower than the rate at which such discount would be included in
income if it were original issue discount). The holder may elect to accrue such
discount under a constant yield method based on the yield of the Non-REMIC
Certificate to such holder. In the absence of such an election, it may be
necessary to accrue such discount under a more rapid straight-line method. Under
the de minimis rule, market discount with respect to a Non-REMIC Certificate
will be considered to be zero if it is less than the product of (i) 0.25% of the
principal amount of the Mortgage Assets allocable to the Non-REMIC Certificate
and (ii) the weighted average life (in complete years) of the Mortgage Assets
remaining at the time of purchase of the Non-REMIC Certificate.
If a holder purchases a Non-REMIC Certificate at a premium, such holder may
elect under Section 171 of the Code to amortize the portion of such premium that
is allocable to a Mortgage Loan under a constant yield method based on the yield
of the Mortgage Loan to such holder, provided that such Mortgage Loan was
originated after September 27, 1985. Premium allocable to a Mortgage Loan
originated on or before that date should be allocated among the principal
payments on the Mortgage Loan and allowed as an ordinary deduction as principal
payments are made or, perhaps, upon termination.
It is not clear whether the foregoing adjustments for discount or premium
would be made based on the scheduled payments on the Mortgage Loans or taking
account of a reasonable prepayment assumption, and Federal Tax Counsel is unable
to opine on this issue.
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If a Mortgage Loan is prepaid in full, the holder of a Non-REMIC
Certificate acquired at a discount or premium will recognize ordinary income or
loss equal to the difference between the portion of the prepaid principal amount
of the Mortgage Loan that is allocable to the Non-REMIC Certificate and the
portion of the adjusted basis of the Non-REMIC Certificate (see "-- Sales of
Non-REMIC Certificates" below) that is allocable to the Mortgage Loan.
Sales of Non-REMIC Certificates. A holder that sells a Non-REMIC
Certificate will recognize gain or loss equal to the difference between the
amount realized in the sale and its adjusted basis in the Non-REMIC Certificate.
In general, such adjusted basis will equal the holder's cost for the Non-REMIC
Certificate, increased by the amount of any income previously reported with
respect to the Non-REMIC Certificate and decreased by the amount of any losses
previously reported with respect to the Non-REMIC Certificate and the amount of
any distributions received thereon. Any such gain or loss generally will be
capital gain or loss if the assets underlying the Non-REMIC Certificate were
held as capital assets, except that, for a Non-REMIC Certificate to which the
stripped bond rules do not apply and that was acquired with more than a de
minimis amount of discount other than original issue discount (see "-- Taxation
of Non-REMIC Certificates if Stripped Bond Rules Do Not Apply" above), such gain
will be treated as ordinary interest income to the extent of the portion of such
discount that accrued during the period in which the seller held the Non-REMIC
Certificate and that was not previously included in income.
Foreign Investors. A holder of a Non-REMIC Certificate who is not a
"United States person" (as defined below) and is not subject to federal income
tax as a result of any direct or indirect connection to the United States other
than its ownership of a Non-REMIC Certificate generally will not be subject to
United States income or withholding tax in respect of payments of interest or
original issue discount on a Non-REMIC Certificate to the extent attributable to
Mortgage Loans that were originated after July 18, 1984, provided that the
holder complies to the extent necessary with certain identification requirements
(including delivery of a statement, signed by the holder of the Non-REMIC
Certificate under penalties of perjury, certifying that such holder is not a
United States person and providing the name and address of such holder). The
Final Withholding Regulations, which are generally effective with respect to
payments made after December 31, 1999, consolidate and modify the current
certification requirements and means by which a holder may claim exemption from
United States federal income tax withholding and provide certain presumptions
regarding the status of holders when payments to the holders cannot be reliably
associated with appropriate documentation provided to the payor. All holders
should consult their tax advisors regarding the application of the final
Withholding Regulations. Interest or original issue discount on a Non-REMIC
Certificate attributable to Mortgage Loans that were originated prior to July
19, 1984 will be subject to a 30% withholding tax (unless such tax is reduced or
eliminated by an applicable tax treaty). For these purposes, the term "United
States person" means a citizen or a resident of the United States, a corporation
or partnership (or other entity treated as a corporation or partnership for
federal income tax purposes) created or organized in, or under the laws of, the
United States or any political subdivision thereof, an estate the income of
which is subject to United States federal income taxation regardless of its
source, and a trust for which one or more United States persons have the
authority to control all substantial decisions and for which a court of the
United States can exercise primary supervision over the trust's administration.
For years beginning before January 1, 1997, the term "United States person"
shall include a trust whose income is includible in gross income for United
States federal income taxation regardless of source, in lieu of trusts just
described, unless the trust elects to have its United States status determined
under the criteria described in the previous sentence for tax years ending after
August 20, 1996.
TAXABLE MORTGAGE POOLS
Effective January 1, 1992, certain entities classified as "taxable mortgage
pools" are subject to corporate level tax on their net income. A "TAXABLE
MORTGAGE POOL" is generally defined as an entity that meets the following
requirements: (i) the entity is not a REMIC (or, after September 1, 1997, a
FASIT) (ii) substantially all of the assets of the entity are debt obligations,
and more than 50 percent of such debt obligations consist of real estate
mortgages (or interests therein), (iii) the entity is the obligor under debt
obligations with two or more maturities, and (iv) payments on the debt
obligations on which the entity is the
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obligor bear a relationship to the payments on the debt obligations which the
entity holds as assets. With respect to requirement (iii), the Code authorizes
the Internal Revenue Service to provide by regulations that equity interests may
be treated as debt for purposes of determining whether there are two or more
maturities. If a Series of Non-REMIC Certificates were treated as obligations of
a taxable mortgage pool, the Trust would be ineligible to file consolidated
returns with any other corporation and could be liable for corporate tax.
Treasury regulations do not provide for the recharacterization of equity as debt
for purposes of determining whether an entity has issued debt with two
maturities, except in the case of transactions structured to avoid the taxable
mortgage pool rules.
NON-REMIC CERTIFICATES AND NOTES OF A TRUST INTENDED TO BE CHARACTERIZED AS A
PARTNERSHIP OR DIVISION
The discussion under this heading applies only to a series of Certificates
and Notes with respect to which a REMIC election is not made and for which the
Trust is intended to be classified as a partnership or a division for federal
income tax purposes.
Federal Tax Counsel will deliver its opinion for a Trust which is intended
to be a partnership for federal income tax purposes, as specified in the related
Prospectus Supplement, generally to the effect that the Trust will not be an
association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the Agreements and related documents will be complied with, such
that an election has not been and will not be made to treat the Trust as an
association taxable as a corporation, and on counsel's conclusion that the
nature of the income of the Trust will exempt it from the rule that certain
publicly traded partnerships are taxable as corporations or such rule is
otherwise inapplicable to the Trust, so that the Trust will not be characterized
as a publicly traded partnership taxable as a corporation, assuming that no
action will be taken that is inconsistent with the treatment of the Trust as a
partnership (such as an election to treat the Trust as a corporation for federal
income tax purposes ("CORPORATION ELECTION")). If, however, the Trust has a
single owner for federal income tax purposes, it will be treated as a division
of its owner and as such will be disregarded as an entity separate from its
owner for federal income tax purposes, assuming that no Corporation Election is
made.
Certain entities classified as "taxable mortgage pools" are subject to
corporate level tax on their net income. A "TAXABLE MORTGAGE POOL" is generally
defined as an entity that meets the following requirements: (i) the entity is
not a REMIC (or, after September 1, 1997, a FASIT), (ii) substantially all of
the assets of the entity are debt obligations, and more than 50 percent of such
debt obligations consists of real estate mortgages (or interests therein), (iii)
the entity is the obligor under debt obligations with two or more maturities,
and (iv) payments on the debt obligations on which the entity is the obligor
bear a relationship to the payments on the debt obligations which the entity
holds as assets. With respect to requirement (iii), the Code authorizes the
Internal Revenue Service to provide by regulations that equity interests may be
treated as debt for purposes of determining whether there are two or more
maturities. If the Trust were treated as a taxable mortgage pool, it would be
ineligible to file consolidated returns with any other corporation and could be
liable for corporate tax. Treasury regulations do not provide for the
recharacterization of equity as debt for purposes of determining whether an
entity has issued debt with two maturities, except in the case of transactions
structured to avoid the taxable mortgage pool rules. Federal Tax Counsel will
deliver its opinion for a Trust which is intended to be a partnership for
federal income tax purposes, as specified in the related Prospectus Supplement,
generally to the effect that the Trust will not be a taxable mortgage pool. This
opinion will be based on the assumption that the terms of the Agreements and
related documents will be complied with, and on counsel's conclusion that either
the number of classes of debt obligations issued be the Trust, or the nature of
the assets held by the Trust, will exempt the Trust from treatment as a taxable
mortgage pool.
If the Trust were taxable as a corporation for federal income tax purposes,
the Trust would be subject to corporate income tax on its taxable income. The
Trust'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. In additions, all distributions to the Certificateholders
would be taxable as dividends.
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TAX CONSEQUENCES TO HOLDERS OF THE NOTES ISSUED BY A PARTNERSHIP OR DIVISION
Treatment of the Notes as Indebtedness. The Trust will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Except as otherwise provided in the related
Prospectus Supplement, Federal Tax Counsel will advise the Representative that
in its opinion the Notes will be classified as debt for federal income tax
purposes.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of counsel, the IRS successfully asserted that one or more of the Notes did not
represent debt for federal income tax purposes, the Notes might be treated as
equity interests in the Trust. If so treated, the Trust might be taxable as a
corporation with the adverse consequences described above (and the taxable
corporation would not be able to reduce its taxable income by deductions for
interest expense on Notes recharacterized as equity). Alternatively, the Trust
might be treated as a publicly traded partnership that would not be taxable as a
corporation because it would meet certain qualifying income tests. Nonetheless,
treatment of the Notes as equity interests in such a publicly traded partnership
could have adverse tax consequences to certain holders. For example, income to
foreign holders generally would be subject to United States federal income tax
and United States federal income tax return filing and withholding requirements,
and individual holders might be subject to certain limitations on their ability
to deduct their share of the Trust's expenses.
Interest Income on the Notes. The stated interest on the Notes will be
taxable to a Noteholder as ordinary income when received or accrued in
accordance with such Noteholder's method of tax accounting. It is not
anticipated that the Notes will be issued with original issue discount within
the meaning of Section 1273 of the Code. A subsequent holder who purchases a
Note at a discount that exceeds a statutorily defined de minimis amount will be
subject to the "market discount" rules of the Code, and a holder who purchases a
Note at a premium will be subject to the premium amortization rules of the Code.
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 original issue discount (if any), market
discount 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. Subject to the rules of the Code
concerning market discount on the Notes, any such gain or loss generally will be
capital gain or loss if the Note was held as a capital asset. Capital losses
generally may be deducted only to the extent the Noteholder has capital gains
for the taxable year, although under certain circumstances non-corporate
Noteholders can deduct losses in excess of available capital gains.
Foreign Holders. If interest paid (or accrued) to a Noteholder who is a
nonresident alien, foreign corporation or other non-United States person (a
"FOREIGN PERSON") is not effectively connected with the conduct of a trade or
business within the United States by the foreign person, the interest generally
will be considered "portfolio interest," and generally will not be subject to
United States Federal income tax and withholding tax, if the foreign person (i)
is not actually or constructively a "10 percent shareholder" of the Trust or the
Representative (including a holder of 10% of the outstanding Certificates) or a
"controlled foreign corporation" with respect to which the Trust or the
Representative is a "related person" within the meaning of the Code and (ii)
provides the person otherwise required to withhold United States tax with an
appropriate statement, 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 the information provided in the statement changes,
the foreign person must so inform the person otherwise required to withhold
United States tax within 30 days of such change. The statement generally must be
provided in the year a payment occurs (prior to such payment) or in either of
the two preceding years. If a Note is held through a securities clearing
organization or certain other financial institutions, the organization or
institution may provide a signed statement to the withholding agent. However, in
that case, the signed statement must be accompanies by a Form W-8 or substitute
form provided by the foreign person that owns the Note. If such interest in not
portfolio interest, then it will be subject to United States federal income and
withholding tax at a rate of 30%, unless reduced or eliminated pursuant to an
applicable tax treaty.
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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) the 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 individual is not present in the United States for 183 days
or more in the taxable year.
If the interest, gain or income on a Note held by a foreign person is
effectively connected with the conduct of a trade or business in the United
States by the foreign person (although exempt from the withholding tax
previously discussed if the holder provides an appropriate statement), the
holder generally will be subject to United States federal income tax on the
interest, gain or income at regular federal income tax rates. In addition, if
the foreign person is a foreign corporation, it may be subject to a branch
profits tax equal to 30% of its "effectively connected earnings and profits"
within the meaning of the Code for the taxable year, as adjusted for certain
items, unless it qualifies for a lower rate under an applicable tax treaty (as
modified by the branch profits tax rules).
The Final Withholding Regulations consolidate and modify the current
certification requirements and means by which a Non-United States holder may
claim exemption from United States federal income tax withholding. All
Non-United States holders should consult their tax advisors regarding the
application of the Final Withholding Regulations, which are generally effective
with respect to payments made after December 31, 1999.
Information Reporting and Backup Withholding. The Trust will be required
to report annually to the IRS, and to each Noteholder of record, the amount of
interest paid on the Notes (and the amount of interest withheld for federal
income taxes, if any) for each calendar year, except as to exempt holders
(generally, holders that are corporations, tax-exempt organizations, qualified
pension and profit-sharing trusts, individual retirement accounts, or
nonresident aliens who provide certification as to their status as
nonresidents). Accordingly, each holder (other than exempt holders who are not
subject to the reporting requirements) 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 will be required to withhold 31%
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.
TAX CONSEQUENCES TO HOLDERS OF CERTIFICATES ISSUED BY A PARTNERSHIP
Treatment of the Issuer as a Partnership. In the case of a Trust intended
to qualify as a partnership for federal income tax purposes, the Trust and the
Representative will agree, and the Certificateholders will agree by their
purchase of Certificates, to treat the Trust as a partnership for purposes of
United States 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, the partners of the partnership being the
Certificateholders, and the Notes, if any, being debt of the partnership.
However, the proper characterization of the arrangement involving the Trust, the
Certificates, the Notes, and the Master 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. Generally, provided the
Certificates are issued at or close to face value, any such characterization
should not result in materially adverse tax consequences to Certificateholders
as compared to the consequences from treatment of the Certificates as equity in
a partnership, described below. The following discussion assumes that the
Certificates represent equity interests in a partnership.
Partnership Taxation. As a partnership, the Trust 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. The Trust's income will consist
primarily of interest and finance charges earned on the Mortgage Loans
(including appropriate adjustments for market discount, original issue discount
and bond premium) and any gain upon collection or disposition of Mortgage Loans.
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The Trust's deductions will consist primarily of interest and original issue
discount accruing with respect to the Notes, servicing and other fees, and
losses or deductions upon collection or disposition of Mortgage 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 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
income attributable to discount on the Mortgage 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
of premium on Mortgage Loans that corresponds to any excess of the issue price
of Certificates over their principal amount. All remaining taxable income of the
Trust will be allocated to the Representative. Based on the economic arrangement
of the parties, this approach for allocating Trust 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 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
income even if they have not received cash from the Trust 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.
If Notes are also issued, some or all of the taxable income allocated to a
Certificateholder that is a pension, profit sharing or employee benefit plan or
other tax-exempt entity (including an individual retirement account) will
constitute "unrelated business taxable income" generally taxable to such a
holder under the Code.
An individual taxpayer's share of expenses of the Trust (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.
The Trust 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 Mortgage Loan, the
Trust 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 Mortgage Loans were not
issued with original issue discount and, therefore, the Trust should not have
original issue discount income. However, the purchase price paid by the Trust
for the Mortgage Loans may be greater or less than the remaining principal
balance of the Mortgage Loans at the time of purchase. If so, the Mortgage Loan
will have been acquired at a premium or discount, as the case may be. (As
indicated above, the Trust will make this calculation on an aggregate basis, but
might be required to recompute it on a Mortgage Loan by Mortgage Loan basis.)
If the Trust acquires the Mortgage Loans at a market discount or premium,
the Trust will elect to include any such discount in income currently as it
accrues over the life of the Mortgage Loans or to offset any such premium
against interest income on the Mortgage 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 will be
deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Trust are sold or exchanged within a
12-month period. If such a termination occurs, the partnership will be
considered to
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transfer its assets and liabilities to a new partnership in exchange for
interests in that new partnership, which it would then be treated as
transferring to its partners. The Trust will not comply with certain technical
requirements that might apply when such a constructive termination occurs. As a
result, the Trust may be subject to certain tax penalties and may incur
additional expenses if it is required to comply with those requirements.
Furthermore, the Trust 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 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. 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 Mortgage Loans would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Trust 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 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 Representative and Transferees. In general, the
Trust's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificateholders
in proportion to the principal amount of Certificates owned by them as of the
close of the last day of such month. As a result, a holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations and federal tax counsel is unable to opine on the matter. If a
monthly convention is not allowed (or only applies to transfers of less than all
of the partner's interest), taxable income or losses of the Trust might be
reallocated among the Certificateholders. The Trust'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's assets will not be adjusted to reflect that higher
(or lower) basis unless the Trust 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 currently does not intend to make
such election. As a result, Certificateholders might be allocated a greater or
lesser amount of Trust 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. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust 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 and will report each Certificateholder's allocable share of items of Trust
income and expense to holders and the IRS on Schedule K-1. The Trust will
provide the Schedule K-1 information to nominees that fail to provide the Trust
with the information statement described below and such nominees will be
required to forward such information to the beneficial owners of
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the Certificates. Generally, holders must file tax returns that are consistent
with the information return filed by the Trust 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 with
a statement containing certain information on the nominee, the beneficial owners
and the Certificates so held. Such information includes (i) the name, address
and taxpayer identification number of the nominee and (ii) as to each beneficial
owner (x) the name, address and identification number of such person, (y)
whether such person is a United States person, a tax-exempt entity or a foreign
government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust information as
to themselves and their ownership of Certificates. A clearing agency registered
under Section 17A of the Securities Exchange Act of 1934, as amended, is not
required to furnish any such information statement to the Trust. The information
referred to above for any calendar year must be furnished to the Trust on or
before the following January 31. Nominees, brokers and financial institutions
that fail to provide the Trust with the information described above may be
subject to penalties.
The Representative 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 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. 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.
Tax Consequences to Foreign Certificateholders. It is not clear and
federal tax counsel is unable to opine whether the Trust would be considered to
be engaged in a trade or business in the United States for purposes of federal
withholding taxes with respect to non-United States 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 would be
engaged in a trade or business in the United States for such purposes, the Trust
will withhold as if it were so engaged in order to protect the Trust from
possible adverse consequences of a failure to withhold. The Trust expects to
withhold on the portion of its taxable income that is allocable to foreign
Certificateholders pursuant to Section 1446 of the Code, as if such income were
effectively connected to a United States trade or business, at a rate of 35% for
foreign holders that are taxable as corporations and 39.6% for all other foreign
holders. Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the Trust to change its withholding
procedures.
If the trust is engaged in a United States trade or business, each foreign
holder 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's income. A foreign holder generally would be entitled to
file with the IRS a claim for refund with respect to taxes withheld by the Trust
taking the position that no taxes were due because the Trust 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, and for that reason or because of the nature of the
assets of the Trust probably will not be considered "portfolio interest." As a
result, even if the Trust was not considered to be engaged in a United States
trade or business, Certificateholders will be subject to United States federal
income tax which must be withheld at a rate of 30%, unless reduced or eliminated
pursuant to an applicable treaty. A foreign holder would be entitled to claim a
refund for such withheld tax, taking the position that the interest was
portfolio interest and therefore not subject to United States tax. However, the
IRS may disagree and no assurance can be given as to the appropriate amount of
tax liability. As a result, each potential foreign Certificateholder should
consult its tax advisor as to whether an interest in a Certificate is an
unsuitable investment.
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Backup Withholding. 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.
ERISA CONSIDERATIONS
ERISA imposes certain requirements on employee benefit plans and collective
investment funds, separate accounts and insurance company general accounts in
which such plans or arrangements are invested to which it applies and on those
persons who are fiduciaries with respect to such benefit plans. Certain employee
benefit plans, such as governmental plans (as defined in Section 3(32) of ERISA)
and certain church plans (as defined in Section 3(33) of ERISA), are not subject
to ERISA. In accordance with ERISA's general fiduciary standards, before
investing in a Security a benefit plan fiduciary should determine whether such
an investment is permitted under the governing benefit plan instruments and is
appropriate for the benefit plan in view of its overall investment policy and
the composition and diversification of its portfolio and is prudent.
In addition, benefit plans subject to ERISA and individual retirement
accounts or certain types of Keogh plans not subject to ERISA but subject to
Section 4975 of the Code (each a "PLAN") are prohibited from engaging in a broad
range of transactions involving Plan assets and persons having certain specified
relationships to a Plan ("PARTIES IN INTEREST" and "DISQUALIFIED PERSONS"). Such
transactions are treated as "prohibited transactions" under Sections 406 and 407
of ERISA and excise taxes are imposed upon such persons by Section 4975 of the
Code. The Representative, the Originators, the Security Guaranty Insurer, the
Underwriter and the Trustee and certain of their affiliates might be considered
"parties in interest" or "disqualified persons" with respect to a Plan. If so,
the acquisition or holding or transfer of Securities by or on behalf of such
Plan could be considered to give rise to a "PROHIBITED TRANSACTION" within the
meaning of ERISA and the Code unless an exemption is available. In addition, the
U.S. Department of Labor ("DOL") has issued a regulation (29 C.F.R. Section
2510.3-101) concerning the definition of what constitutes the assets of a Plan
(the "PLAN ASSET REGULATIONS"), which provides that, as a general rule, the
underlying assets and properties of corporations, partnerships, trusts and
certain other entities in which a Plan makes an "equity" investment will be
deemed for purposes of ERISA to be assets of the investing Plan unless certain
exceptions apply. If an investing Plan's assets were deemed to include an
interest in the Mortgage Loans and any other assets of the Trust and not merely
an interest in the Securities, the assets of the Trust would become subject to
the fiduciary investment standards of ERISA, and transactions occurring between
the Representative, the Trustee, the Servicer, the Security Guaranty Insurer or
any of their affiliates might constitute prohibited transactions, unless an
administrative exemption applies. Certain such exemptions which may be
applicable to the acquisition and holding of the Securities or to the servicing
of the Mortgage Loans are noted below.
Regardless of whether the Securities are treated as debt or equity for
purposes of ERISA, the acquisition or holding of Securities which are Notes by
or behalf of a Plan could still be considered to give rise to a prohibited
transaction if the Trust is or becomes a party in interest or disqualified
person with respect to such Plan or in the event that a subsequent transfer of a
Note is made between a Plan and such party in interest or disqualified person.
However, one or more Investor Based Exemptions referred to below may be
applicable to exempt such prohibited transaction.
The DOL has issued an administrative exemption, Prohibited Transaction
Class Exemption 83-1 ("PTCE 83-1"), which, under certain conditions, exempts
from the application of the prohibited transaction rules of ERISA and the excise
tax provisions of Section 4975 of the Code transactions involving a Plan in
connection with the operation of a "mortgage pool" and the purchase, sale and
holding of "mortgage pool pass-through certificates." A "mortgage pool" is
defined as an investment pool, consisting solely of interest bearing obligations
secured by first or second mortgages or deeds of trust on single-family
residential property, property acquired in foreclosure and undistributed cash. A
"mortgage pool pass-through certificate" is defined as a certificate which
represents a beneficial undivided interest in a mortgage pool which entitles the
holder to pass-through payments of principal and interest from the mortgage
loans.
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For the exemption to apply, PTCE 83-1 requires that (i) the Representative
and the Trustee maintain a system of insurance or other protection for the
Mortgage Loans and the property securing such Mortgage Loans, and for
indemnifying Certificateholders (except holders of the Class R Certificates)
against reductions in pass-through payments due to defaults in loan payments or
property damage in an amount at least equal to the greater of 1% of the
aggregate principal balance of the Mortgage Loans, or 1% of the principal
balance of the largest covered pooled Mortgage Loan; (ii) the Trustee may not be
an affiliate of the Representative; and (iii) the payments made to and retained
by the Representative in connection with the Trust, together with all funds
inuring to its benefit for administering the Trust, represent no more than
"adequate consideration" for selling the Mortgage Loans, plus reasonable
compensation for services provided to the Trust.
In addition, PTCE 83-1 exempts the initial sale of Securities to a Plan
with respect to which the Representative, the Security Guaranty Insurer, the
Servicer, or the Trustee is a party in interest if the Plan does not pay more
than fair market value for such Securities and the rights and interests
evidenced by such Securities are not subordinated to the rights and interests
evidenced by other Securities of the same pool. PTCE 83-1 also exempts from the
prohibited transaction rules and transactions in connection with the servicing
and operation of the Pool, provided that any payments made to the Servicer in
connection with the servicing of the Trust are made in accordance with a binding
agreement, copies of which must be made available to prospective investors.
In the case of any Plan with respect to which the Representative, the
Servicer, the Security Guaranty Insurer, or the Trustee is a fiduciary, PTCE
83-1 will only apply if, in addition to the other requirements: (i) the initial
sale, exchange or transfer of Securities is expressly approved by an independent
fiduciary who has authority to manage and control those plan assets being
invested in Securities; (ii) the Plan pays no more for the Securities than would
be paid in an arm's length transaction; (iii) no investment management, advisory
or underwriting fee, sale commission, or similar compensation is paid to the
Representative with regard to the sale, exchange or transfer of Securities to
the Plan; (iv) the total value of the Securities purchased by such Plan does not
exceed 25% of the amount issued; and (v) at least 50% of the aggregate amount of
Securities is acquired by persons independent of the Representative, the
Trustee, the Servicer, and the Security Guaranty Insurer.
Before purchasing Securities, a fiduciary of a Plan should confirm that the
Trust is a "mortgage pool," that the Securities constitute "mortgage pool
pass-through certificates," and that the conditions set forth in PTCE 83-1 would
be satisfied. In addition to making its own determination as to the availability
of the exemptive relief provided in PTCE 83-1, the Plan fiduciary should
consider the availability of any other prohibited transaction exemptions. The
Plan fiduciary also should consider its general fiduciary obligations under
ERISA in determining whether to purchase any Securities on behalf of a Plan.
In addition, the DOL has granted to certain underwriters and/or placement
agents individual prohibited transaction exemptions (each an "UNDERWRITER
EXEMPTION") which may be applicable to avoid certain of the prohibited
transaction rules of ERISA with respect to the initial purchase, the holding and
the subsequent resale in the secondary market by Plans of pass-through
certificates representing a beneficial undivided ownership interest in the
assets of a trust that consist of certain receivables, loans and other
obligations that meet the conditions and requirements of the Underwriter
Exemption which may be applicable to the Securities. The conditions of
Underwriter Exemption, if applicable, will be set forth in "ERISA
Considerations" in the Prospectus Supplement.
One or more other prohibited transaction exemptions issued by the DOL may
be available to a Plan investing in Securities, depending in part upon the type
of Plan fiduciary making the decision to acquire a Security and the
circumstances under which such decision is made, including but not limited to:
PTCE 90-1, regarding investments by insurance company pooled separate accounts,
PTCE 91-38, regarding investments by bank collective investment funds, PTCE
84-14, regarding investments effectuated by "qualified plan asset managers",
PTCE 96-23, regarding investments effectuated by "in-house asset managers" and
PTCE 95-60, regarding investments by insurance company general accounts
("INVESTOR BASED EXEMPTIONS"). However, even if the conditions specified in an
Underwriter Exemption or one or more of these other exemptions are
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met, the scope of the relief provided might or might not cover all acts which
might be construed as prohibited transactions.
Any Plan fiduciary considering the purchase of a Security should consult
with its counsel with respect to the potential applicability of ERISA and the
Code to such investment. Moreover, each Plan fiduciary should 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.
LEGAL INVESTMENT CONSIDERATIONS
Each Prospectus Supplement will describe the extent, if any, to which the
Classes of Securities offered thereby will constitute "mortgage related
securities" for purposes of SMMEA. No representation is made herein as to
whether the Securities will constitute legal investments for any entity under
any applicable statute, law, rule, regulation or order. Prospective purchasers
are urged to consult with their counsel concerning the status of the Securities
as legal investments for such purchasers prior to investing in any Class of
Securities.
PLAN OF DISTRIBUTION
The Securities offered hereby and by the Prospectus Supplement will be
offered in Series. The distribution of the Securities may be effected from time
to time in one or more transactions, including negotiated transactions, at a
fixed public offering price or at varying prices to be determined at the time of
sale or at the time of commitment therefor. If so specified in the related
Prospectus Supplement, the Securities will be distributed in a firm commitment
underwriting, subject to the terms and conditions of the underwriting agreement,
by First Union Capital Markets, a division of Wheat First Securities, Inc.
("FIRST UNION CAPITAL MARKETS"), an affiliate of the Representative, acting as
underwriter with other underwriters, if any, named therein. In such event, the
Prospectus Supplement may also specify that the underwriters will not be
obligated to pay for any Securities agreed to be purchased by purchasers
pursuant to purchase agreements acceptable to the Representative. In connection
with the sale of the Securities, underwriters may receive compensation from the
Representative or from purchasers of the Securities in the form of discounts,
concessions or commissions. The Prospectus Supplement will describe any such
compensation paid by the Representative.
Alternatively, the Prospectus Supplement may specify that the Securities
will be distributed by First Union Capital Markets acting as agent or in some
cases as principal with respect to the Securities that it has previously
purchased or agreed to purchase. If First Union Capital Markets acts as agent in
the sale of Securities, First Union Capital Markets will receive a selling
commission with respect to each Series of Securities, depending on market
conditions, expressed as a percentage of the aggregate principal balance of the
Securities sold hereunder as of the Cut-off Date. The exact percentage for each
Series of Securities will be disclosed in the related Prospectus Supplement. To
the extent that First Union Capital Markets elects to purchase Securities as
principal, First Union Capital Markets may realize losses or profits based upon
the difference between its purchase price and the sales price. The Prospectus
Supplement with respect to any Series offered other than through underwriters
will contain information regarding the nature of such offering and any
agreements to be entered into between the Representative and purchasers of
Securities of each Series.
This Prospectus and the related Prospectus Supplement may be used by First
Union Capital Markets, an affiliate of the Representative, in connection with
offers and sales related to market-making transactions in the Securities. First
Union Capital Markets may act as principal or agent in such transactions. Such
sales will be made at prices related to prevailing market prices at the time of
sale or otherwise.
The Representative shall indemnify First Union Capital Markets and any
underwriters against certain civil liabilities, including liabilities under the
Securities Act of 1933, or will contribute to payments First Union Capital
Markets and any underwriters may be required to make in respect thereof.
In the ordinary course of business, First Union Capital Markets and the
Representative may engage in various securities and financing transactions,
including repurchase agreements to provide interim financing of
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the Representative's Mortgage Loans pending the sale of such Mortgage Loans or
interests therein, including the Securities.
The Representative anticipates that the Securities will be sold primarily
to institutional investors. Purchasers of Securities, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with reoffers and sales by them of Securities. Holders of Securities should
consult with their legal advisers in this regard prior to any such reoffer or
sale.
Underwriters or agents and their associates may be customers of (including
borrowers from), engage in transactions with and/or perform services for, the
Representative, its affiliates and the Trustee in the ordinary course of
business.
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APPENDIX I
AUCTION PROCEDURES
The following description of the Auction Procedures applies to each Class
of Auction Rate Securities (and may be different if otherwise set forth in a
related Prospectus Supplement). The term "Security," as used in this Appendix,
refers to each Class of Auction Rate Securities that are either Notes or
Certificates and the term "Securityholder" refers to Holders of Auction Rate
Securities.
DEFINITIONS
Capitalized terms used herein and not otherwise defined have the meanings
ascribed in the accompanying Prospectus and Prospectus Supplement. Additionally,
the following terms have the meanings ascribed to them:
"ALL HOLD RATE" means ninety percent (90%) of One-Month LIBOR or such other
rate as may be set forth in the related Prospectus Supplement.
"AUCTION" means the implementation of the Auction Procedures on an Auction
Date.
"AUCTION AGENT" means the initial auction agent under the initial Auction
Agent Agreement unless and until a substitute Auction Agent Agreement becomes
effective, after which "Auction Agent" shall mean the substitute auction agent.
"AUCTION AGENT AGREEMENT" means the initial Auction Agent Agreement unless
and until a substitute Auction Agent Agreement is entered into, after which
"Auction Agent Agreement" shall mean such substitute Auction Agent Agreement.
"AUCTION AGENT FEE" has the meaning set forth in the Auction Agent
Agreement.
"AUCTION AGENT FEE RATE" has the meaning set forth in the Auction Agent
Agreement.
"AUCTION DATE" means, with respect to the Initial Period for each Class of
Securities, the date set forth in the related Prospectus Supplement and
thereafter, the Business Day immediately preceding the first day of each Auction
Period for each Security, other than:
(A) each Auction Period commencing after the ownership of the
Securities is no longer maintained in Book-Entry Form by DTC;
(B) each Auction Period commencing after and during the continuance of
an Event of Default; or
(C) each Auction Period commencing less than two Business Days after
the cure or waiver of an Event of Default.
Notwithstanding the foregoing, the Auction Date for one or more Auction Periods
may be changed pursuant to the related Agreement and the related Terms
Supplement, as described herein.
"AUCTION PERIOD" means, with respect to each Security, the Interest Period
applicable to such Security during which time the applicable Security Interest
Rate is determined pursuant to the related Agreement and the related Terms
Supplement, which Auction Period (after the Initial Period for such Security)
initially shall consist of between 7 days and one year (as set forth in the
related Prospectus Supplement), as the same may be adjusted pursuant to such
related Agreement and the related Terms Supplement.
"AUCTION PERIOD ADJUSTMENT" means an adjustment to the Auction Period as
provided in the related Terms Supplement, as described herein.
"AUCTION PROCEDURES" means the procedures set forth in the related Terms
Supplement and described herein by which the Auction Rate applicable to a
Security is determined.
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"AUCTION RATE" means, with respect to any Security, the rate of interest
per annum that results from the implementation of the Auction Procedures and is
determined as described in the related Agreement and the related Terms
Supplement and this Appendix I.
"AUTHORIZED DENOMINATIONS" means, the dollar amount set forth in the
related Prospectus Supplement and any integral multiple in excess thereof.
"BROKER-DEALER" means the initial broker-dealer under the initial
Broker-Dealer Agreement or any other broker or dealer (each as defined in the
Securities Exchange Act of 1934, as amended), commercial bank or other entity
permitted by law to perform the functions required of a Broker-Dealer set forth
in the Auction Procedures that (a) is a Participant (or an affiliate of a
Participant), (b) has been appointed as such by the Representative and the
Trustee pursuant to the related Agreement and (c) has entered into a
Broker-Dealer Agreement that is in effect on the date of reference.
"BROKER-DEALER AGREEMENT" means each agreement between the Auction Agent
and a Broker-Dealer, and approved by Representative and the Trust, pursuant to
which the Broker-Dealer agrees to participate in Auctions as set forth in the
Auction Procedures, as from time to time amended or supplemented.
"BROKER-DEALER FEE" has the meaning set forth in the Auction Agent
Agreement.
"BROKER-DEALER FEE RATE" has the meaning set forth in the Auction Agent
Agreement.
"EFFECTIVE INTEREST RATE" means, for any Mortgage Loan and any collection
period, the per annum rate at which such Mortgage Loan accrues interest during
such collection period.
"EXISTING SECURITYHOLDER" means (i) with respect to and for the purpose of
dealing with the Auction Agent in connection with an Auction, a Person who is a
Broker-Dealer listed in the Existing Securityholder Registry at the close of
business on the Business Day immediately preceding such Auction and (ii) with
respect to and for the purpose of dealing with the Broker-Dealer in connection
with an Auction, a Person who is a beneficial owner of any Security.
"EXISTING SECURITYHOLDER REGISTRY" means the registry of Persons who are
owners of the Securities, maintained by the Auction Agent as provided in the
Auction Agent Agreement.
"FEDERAL FUNDS RATE" means, for any date of determination, the federal
funds (effective) rate as published on page 118 of 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) on the immediately preceding
Business Day. If no such rate is published on such page on such date, "Federal
Funds Rate" shall mean for any date of determination, the Federal funds
(effective) rate as published by the Federal Reserve Board in the most recent
edition of Federal Reserve Statistical Release No. H.15 (519) that is available
on the Business Day immediately preceding such date.
"INITIAL PERIOD" means, as to any Security, the period commencing on the
Closing Date of such Security and continuing through the day immediately
preceding the Security Initial Rate Adjustment Date for such Security.
"INTEREST PERIOD" means, with respect to a Security, the Initial Period for
such Security and each period commencing on the Rate Adjustment Date for such
Security and ending on the day before (i) the next Rate Adjustment Date for such
Security or (ii) the final maturity date of such Security, as applicable.
"MARKET AGENT" means the entity named as market agent under the related
Agreement, or any successor to it in such capacity thereunder.
"MAXIMUM AUCTION RATE" generally means (i) for Auction Periods of 34 days
or less, either (A) the greater of (1) One-Month LIBOR plus 0.60% or (2) the
Federal Funds Rate plus 0.60% (if both ratings assigned by the Rating Agencies
to the applicable Security are "Aa3" or "AA-" or better) or (B) One-Month LIBOR
plus 1.50% (if any one of the ratings assigned by the Rating Agencies to the
Security is less than "Aa3" or "AA-") or (ii) for Auction Periods of greater
than or equal to 35 days, either (A) the greater of One-Month LIBOR or
Three-Month LIBOR, plus in either case, 0.60% (if both of the ratings assigned
by the
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Rating Agencies to the applicable Security are "Aa3" or "AA-" or better) or (B)
the greater of One-Month LIBOR or Three-Month LIBOR, plus in either case, 1.50%
(if any one of the ratings assigned by the Rating Agencies to the applicable
Security is less than "Aa3" or "AA-") or such other rate as may be set forth in
the related Prospectus Supplement. For purposes of the Auction Agent and the
Auction Procedures, the ratings referred to in this definition shall be the last
ratings of which the Auction Agent has been given notice pursuant to the Auction
Agent Agreement.
"NET LOAN RATE" for any Interest Period will equal the weighted average
Effective Interest Rate for the Collection Period immediately preceding such
Interest Period less the amount set forth in the related Prospectus Supplement.
"NON-PAYMENT RATE" means One-Month LIBOR plus 1.50%, as the same may be
adjusted pursuant to a Terms Supplement or such other rate as may be set forth
in the related Prospectus Supplement.
"PERSON" means any individual, corporation, estate, partnership, joint
venture, association, joint stock company, trust (including any beneficiary
thereof), unincorporated organization or government or any agency or political
subdivision thereof.
"POTENTIAL SECURITYHOLDER" means any Person (including an Existing
Securityholder that is (i) a Broker-Dealer when dealing with the Auction Agent
and (ii) a potential beneficial owner when dealing with a Broker-Dealer) who may
be interested in acquiring Securities (or, in the case of an Existing
Securityholder thereof, an additional principal amount of Securities).
"RATE ADJUSTMENT DATE" means, with respect to each Security, the date on
which the applicable Security Interest Rate is effective and means, with respect
to each such Security, the date of commencement of each Auction Period.
"RATE DETERMINATION DATE" means, with respect to any Security, the Auction
Date, or if no Auction Date is applicable to such Series, the Business Day
immediately preceding the date of commencement of an Auction Period.
"SECURITY INITIAL RATE" means, with respect to any Class of Notes or
Certificates, the rate identified as such in the related Prospectus Supplement.
"SECURITY INITIAL RATE ADJUSTMENT DATE" means, with respect to any Class of
Notes, the date identified as such in the related Prospectus Supplement and,
with respect to any Class of Certificates, the date set forth in the related
Agreement or the related Terms Supplement.
"THREE-MONTH LIBOR" means the London interbank offered rate for deposits in
U.S. dollars having a maturity of three months commencing on the related LIBOR
Determination Date (the "Three-Month Index Maturity") which appears on Telerate
Page 3750 as of 11:00 a.m., London time, on such LIBOR Determination Date. If
such rate does not appear on Telerate Page 3750, the rate for that day will be
determined on the basis of the rates at which deposits in U.S. dollars, having
the Three Month Index Maturity and in a principal amount of not less than U.S.
$1,000,000, are offered at approximately 11:00 a.m., London time, on such LIBOR
Determination Date to prime banks in the London interbank market by the
Reference Banks. The Auction Agent will request the principal London office of
each of such Reference Banks to provide a quotation of its rate. If at least two
such quotations are provided, the rate for that day will be the arithmetic mean
of the quotations. If fewer than two quotations are provided, the rate for that
day will be the arithmetic mean of the rates quoted by major banks in New York
City, selected by the Auction Agent, at approximately 11:00 a.m., New York City
time, on such LIBOR Determination Date for loans in U.S. dollars to leading
European banks having the Three Month Index Maturity and in a principal amount
equal to an amount of not less than U.S. $1,000,000; provided that if the banks
selected as aforesaid are not quoting as mentioned in this sentence, Three-Month
LIBOR in effect for the applicable Interest Period will be Three-Month LIBOR in
effect for the previous Interest Period.
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EXISTING SECURITYHOLDERS AND POTENTIAL SECURITYHOLDERS
Participants in each Auction will include: (1) "Existing Securityholders,"
which shall mean any Securityholder according to the records of the Auction
Agent at the close of business on the Business Day preceding each Auction Date;
and (ii) "Potential Securityholders," which shall mean any person, including any
Existing Securityholder or a Broker/Dealer, who may be interested in acquiring
Securities (or, in the case of an Existing Securityholder, an additional
principal amount of the Security such Securityholder then holds). See
"-- Broker-Dealer."
By purchasing a Security, whether in an Auction or otherwise, each
prospective purchaser of Securities or its Broker-Dealer must agree and will be
deemed to have agreed: (i) to participate in Auctions on the terms described
herein; (ii) so long as the beneficial ownership of the Securities is maintained
in Book-Entry Form to sell, transfer or otherwise dispose of the Securities only
pursuant to a Bid (as defined below) or a Sell Order (as defined below) in an
Auction, or to or through a Broker-Dealer, provided that in the case of all
transfers other than those pursuant to an Auction, the Existing Securityholder
of the Securities so transferred, its Participant or Broker-Dealer advises the
Auction Agent of such transfer; (iii) to have its beneficial ownership of
Securities maintained at all times in Book-Entry Form for the account of its
Participant, which in turn will maintain records of such beneficial ownership,
and to authorize such Participant to disclose to the Auction Agent such
information with respect to such beneficial ownership as the Auction Agent may
request; (iv) that a Sell Order placed by an Existing Securityholder will
constitute an irrevocable offer to sell the principal amount of the Security
specified in such Sell Order; (v) that a Bid placed by an Existing
Securityholder will constitute an irrevocable offer to sell the principal amount
of the Security specified in such Bid if the rate specified in such Bid is
greater than, or in some cases equal to, the Security Interest Rate of such
Security, determined as described herein; and (vi) that a Bid placed by a
Potential Securityholder will constitute an irrevocable offer to purchase the
amount, or a lesser principal amount, of the Security specified in such Bid if
the rate specified in such Bid is, respectively, less than or equal to the
Security Interest Rate of the specified Security, determined as described
herein.
The principal amount of the Securities purchased or sold may be subject to
probation procedures on the Auction Date. Each purchase or sale of Securities on
the Auction Date will be made for settlement on the first day of the Interest
Period immediately following such Auction Date at a price equal to 100% of the
principal amount thereof, plus accrued but unpaid interest thereon. The Auction
Agent is entitled to rely upon the terms of any Order submitted to it by a
Broker-Dealer.
Auction Agent
The entity named in the related Prospectus Supplement, will be appointed as
Auction Agent to serve as agent for a Trust in connection with Auctions. The
Trustee and the Representative will enter into the Auction Agreement with the
Auction Agent. Any Auction Agent or Substitute Auction Agent will be (i) a bank,
national banking association or trust company duly organized under the laws of
the United States of America or any state or territory thereof having its
principal place of business in the Borough of Manhattan, New York, or such other
location as approved by the Trustee and the Market Agent in writing and having a
combined capital stock or surplus of at least $50,000,000, or (ii) a member of
the National Association of Securities Dealers, Inc. having a capitalization of
at least $50,000,000, and, in either case, authorized by law to perform all the
duties imposed upon it under the related Agreement and under the Auction Agent
Agreement. The Auction Agent may at any time resign and be discharged of the
duties and obligations created by the related Agreement by giving at least 90
days notice to the Trustee, the Trust, the Representative and the Market Agent.
The Auction Agent may be removed at any time by the Trustee upon the written
direction of the Security Guaranty Insurer, if applicable, or, with the consent
of the Security Guaranty Insurer, if applicable, the Securityholders of 66 2/3%
of the aggregate principal amount of the Securities then outstanding, by an
instrument signed by the Security Guaranty Insurer, if applicable, or such
Securityholders or their attorneys and filed with the Auction Agent, the
Representative, the Trustee and the Market Agent upon at least 90 days' notice.
Neither resignation nor removal of the Auction Agent pursuant to the preceding
two sentences will be effective until and unless a Substitute Auction Agent has
been appointed and has accepted such appointment. If required by the Trust or
the Representative or by the Market Agent, with the Trust's and the
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Representative's consent, a Substitute Auction Agent Agreement shall be entered
into with a Substitute Auction Agent. Notwithstanding the foregoing, the Auction
Agent may terminate the Auction Agent Agreement if, within 25 days after
notifying the Trustee, the Trust, the Representative, the Security Guaranty
Insurer, if applicable, and the Market Agent in writing that it has not received
payment of any Auction Agent Fee due it in accordance with the terms of the
Auction Agent Agreement, the Auction Agent does not receive such payment.
If the Auction Agent should resign or be removed or be dissolved, or if the
property or affairs of the Auction Agent shall be taken under the control of any
state or federal court or administrative body because of bankruptcy or
insolvency, or for any other reason, the Trustee, at the direction of the
Representative (after receipt of a certificate from the Market Agent confirming
that any proposed Substitute Auction Agent meets the requirements described in
the immediately preceding paragraph above), shall use its best efforts to
appoint a Substitute Auction Agent.
The Auction Agent is acting as agent for the Trust in connection with
Auctions. In the absence of bad, faith, negligent failure to act or negligence
on its part, the Auction Agent will not be liable for any action taken, suffered
or omitted or any error of judgment made by it in the performance of its duties
under the Auction Agent Agreement and will not be liable for any error of
judgment made in good faith unless the Auction Agent will have been negligent in
ascertaining (or failing to ascertain) the pertinent facts.
The Trustee will pay the Auction Agent the Auction Agent Fee on the Note
Remittance Date or Certificate Remittance Date set forth in the related
Prospectus Supplement, and will reimburse the Auction Agent upon its request for
all reasonable expenses, disbursements and advances incurred or made by the
Auction Agent in accordance with any provision of the Auction Agent Agreement or
the Broker-Dealer Agreements (including the reasonable compensation and the
expenses and disbursements of its agents and counsel). The Trust will indemnify
and hold harmless the Auction Agent for and against any loss, liability or
expense incurred without negligence or bad faith on the Auction Agent's part,
arising out of or in connection with the acceptance or administration of its
agency under the Auction Agent Agreement and the Broker-Dealer Agreements
including the reasonable costs and expenses (including the reasonable fees and
expenses of its counsel) of defending itself against any such claim or liability
in connection with its exercise or performance of any of its respective duties
thereunder and of enforcing this indemnification provision; provided that the
Trust will not indemnify the Auction Agent as described in this paragraph for
any fees and expenses incurred by the Auction Agent in the normal course of
performing its duties under the Auction Agent Agreement and under the
Broker-Dealer Agreements, such fees and expenses being payable as described
above.
Broker-Dealer
Existing Securityholders and Potential Securityholders may participate in
Auctions only by submitting orders (in the manner described below) through a
"Broker-Dealer," including the Broker-Dealer, as the sole Broker-Dealer or any
other broker or dealer (each as defined in the Securities Exchange Act of 1934,
as amended), commercial bank or other entity permitted by law to perform the
functions required of a Broker-Dealer set forth below which (i) is a Participant
or an affiliate of a Participant, (ii) has been selected by the Trust and (iii)
has entered into a Broker-Dealer Agreement with the Auction Agent that remains
effective, in which the Broker-Dealer agrees to participate in Auctions as
described in the Auction Procedures, as from time to time amended or
supplemented.
The Broker-Dealers are entitled to a Broker-Dealer Fee, which is payable by
the Auction Agent from monies received from the Trustee, on the Note Remittance
Date or Certificate Remittance Date set forth in the related Prospectus
Supplement.
Market Agent
In connection with each Series of Notes and the Certificates, the "Market
Agent," will act solely as agent of the Trust and will not assume any obligation
or relationship of agency or trust for or with any of the Securityholders.
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AUCTION PROCEDURES
General
Pursuant to the related Agreement and the related Terms Supplement,
Auctions to establish the Auction Rate for each Security issued by the Trust
will be held on each applicable Auction Date, except as described below, by
application of the Auction Procedures described herein. Such procedures are to
be applicable separately to each Class of Notes and each Class of Certificates.
The Auction Agent will calculate the Maximum Auction Rate, the All Hold
Rate and One-Month LIBOR or Three-Month LIBOR, as the case may be, on each
Auction Date. The Administrator will calculate and, no later than the Business
Day preceding each Auction Date, will report to the Auction Agent in writing,
the Net Loan Rate. If the ownership of a Security is no longer maintained in
Book-Entry Form, the Trustee will calculate the Maximum Auction Rate, and
Administrator will report to the Trustee in writing the Net Loan Rate, on the
Business Day immediately preceding the first day of each Interest Period
commencing after delivery of such Security. If an Event of Default has occurred,
under the Indenture or the Pooling and Servicing Agreement, as applicable, the
Trustee will calculate the Non-Payment Rate on the Rate Determination Date for
(i) each Interest Period commencing after the occurrence and during the
continuance of such Payment Default and (ii) any Interest Period commencing less
than two Business Days after the cure of any Event of Default. The Auction Agent
will determine One-Month LIBOR or the Three-Month LIBOR, as applicable, for each
Interest Period other than the Initial Period for a Security; provided, that if
the ownership of the Securities is no longer maintained in Book-Entry Form, or
if an Event of Default has occurred, then the Trustee will determine the
One-Month LIBOR or the Three-Month LIBOR, as applicable, for each such Interest
Period. The determination by the Trustee or the Auction Agent, as the case may
be, of the One-Month LIBOR or the Three-Month LIBOR, as applicable, will (in the
absence of manifest error) be final and binding upon the Securityholders and all
other parties. If calculated or determined by the Auction Agent, the Auction
Agent will promptly advise the Trustee of the One- Month LIBOR or the
Three-Month LIBOR, as applicable.
Submission of Orders
So long as the ownership of the Securities is maintained in Book-Entry
Form, an Existing Securityholder may sell, transfer or otherwise dispose of
Securities only pursuant to a Bid or Sell Order (as hereinafter defined) placed
in an Auction or through a Broker-Dealer, provided that, in the case of all
transfers other than pursuant to Auctions, such Existing Securityholder, its
Broker-Dealer or its Participant advises the Auction Agent of such transfer.
Auctions for each Class of Notes and each Class of Certificates will be
conducted on each applicable Auction Date, if there is an Auction Agent on such
Auction Date, in the following manner (such procedures to be applicable
separately to each Class of Notes and each Class of Certificates).
Prior to the Submission Deadline (defined as 1:00 p.m., eastern time, on
any Auction Date or such other time on any Auction Date by which Broker-Dealers
are required to submit Orders to the Auction Agent as specified by the Auction
Agent from time to time) on each Auction Date relating to a Security:
(a) each Existing Securityholder of the applicable Security may submit
to a Broker-Dealer by telephone or otherwise information as to: (i) the
principal amount and Class of outstanding Securities, if any, held by such
Existing Securityholder which such Existing Securityholder desires to
continue to hold without regard to the Security Interest Rate for such
Securities for the next succeeding Auction Period (a "Hold Order"); (ii)
the principal amount and Class of outstanding Securities, if any, which
such Existing Securityholder offers to sell if the Security Interest Rate
for such Securities for the next succeeding Auction Period will be less
than the rate per annum specified by such Existing Securityholder (a
"Bid"); and/or (iii) the principal amount and Class of outstanding
Securities, if any, held by such Existing Securityholder which such
Existing Securityholder offers to sell without regard to the Security
Interest Rate for such Securities for the next succeeding Auction Period (a
"Sell Order"); and
(b) one or more Broker-Dealers may contact Potential Securityholders
to determine the principal amount and Class of Securities which each such
Potential Securityholder offers to purchase, if the
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Security Interest Rate for such Securities for the next succeeding Auction
Period will not be less than the rate per annum specified by such Potential
Securityholder (also a "Bid").
Each Hold Order, Bid and Sell Order will be an "Order." Each Existing
Securityholder and each Potential Securityholder placing an Order is referred to
as a "Bidder."
Subject to the provisions described below under "Validity of Orders," a Bid
by an Existing Securityholder will constitute an irrevocable offer to sell: (i)
the principal amount and Class of the outstanding Securities specified in such
Bid if the Security Interest Rate for such Securities will be less than the rate
specified in such Bid, (ii) such principal amount or a lesser principal amount
and Class of the outstanding Securities to be determined as described below in
"Acceptance and Rejection of Orders," if the Security Interest Rate for such
Securities will be equal to the rate specified in such Bid or (iii) such
principal amount or a lesser principal amount of the then outstanding Securities
to be determined as described below under "Acceptance and Rejection of Orders,"
if the rate specified therein will be higher than the Security Interest Rate for
such Securities and Sufficient Bids (as defined below) have not been made.
Subject to the provisions described below under "Validity of Orders," a
Sell Order by an Existing Securityholder will constitute an irrevocable offer to
sell: (i) the principal amount of the Security specified in such Sell Order or
(ii) such principal amount or a lesser principal amount of outstanding
Securities of the specified Security as described below under "Acceptance and
Rejection of Orders," if Sufficient Bids have not been made.
Subject to the provisions described below under "Validity of Orders," a Bid
by a Potential Securityholder will constitute an irrevocable offer to purchase:
(i) the principal amount of the Security specified in such Bid if the Security
Interest Rate for such Securities will be higher than the rate specified in such
Bid or (ii) such principal amount or a lesser principal amount of such
Securities as described below in "Acceptance and Rejection of Orders," if the
Security Interest Rate is equal to the rate specified in such Bid.
Each Broker-Dealer will submit in writing to the Auction Agent prior to the
Submission Deadline on each Auction Date all Orders obtained by such
Broker-Dealer and will specify with respect to each such Order: (i) the name of
the Bidder placing such Order; (ii) the aggregate principal amount and Class of
Security that are the subject of such Order; (iii) to the extent that such
Bidder is an Existing Securityholder: (a) the principal amount and Class of
Securities, if any, subject to any Hold Order placed by such Existing
Securityholder; (b) the principal amount, and Class of Securities, if any,
subject to any Bid placed by such Existing Securityholder and the rate specified
in such Bid; and (c) the principal amount, and Class of Securities, if any,
subject to any Sell Order placed by such Existing Securityholder, and (iv) to
the extent such Bidder is a Potential Securityholder, the rate specified in such
Potential Securityholder's Bid.
If any rate specified in any Bid contains more than three figures to the
right of the decimal point, the Auction Agent will round such rate up to the
next highest one-thousandth (.001) of one percent.
If an Order or Orders covering all Securities of the applicable Class held
by any Existing Securityholder are not submitted to the Auction Agent prior to
the Submission Deadline, the Auction Agent will deem a Hold Order to have been
submitted on behalf of such Existing Securityholder covering the principal
amount of Securities held by such Existing Securityholder and not subject to an
Order submitted to the Auction Agent.
Neither the Trust, the Representative, the Trustee nor the Auction Agent
will be responsible for any failure of a Broker-Dealer to submit an Order to the
Auction Agent on behalf of any Existing Securityholder or Potential
Securityholder.
An Existing Securityholder may submit multiple Orders, of different types
and specifying different rates, in an Auction with respect to Securities then
held by such Existing Securityholder. An Existing Securityholder that offers to
purchase additional Securities is, for purposes of such offer, treated as a
Potential Securityholder.
Any Bid specifying a rate higher than the Maximum Auction Rate will (i) be
treated as a Sell Order if submitted by a Existing Securityholder and (ii) not
be accepted if submitted by a Potential Securityholder.
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Validity of Orders
If any Existing Securityholder submits through a Broker-Dealer to the
Auction Agent one or more Orders covering in the aggregate more than the
principal amount of the Class of Securities held by such Existing
Securityholder, such Orders will be considered valid as follows and in the order
of priority described below.
Hold Orders. All Hold Orders will be considered valid, but only up to the
aggregate principal amount of the Class of Securities held by such Existing
Securityholder, and if the aggregate principal amount of the Class of Securities
subject to such Hold Orders exceeds the aggregate principal amount of the Class
of Securities held by such Existing Securityholder, the aggregate principal
amount of the Class of Securities subject to each such Hold Order will be
reduced pro rata so that the aggregate principal amount of the Class of
Securities subject to all such Hold Orders equals the aggregate principal amount
of the Class of Securities held by such Existing Securityholder.
Bids. Any Bid will be considered valid up to an amount equal to the excess
of the principal amount of the Class of Securities held by such Existing
Securityholder over the aggregate principal amount of such Security, subject to
any Hold Orders referred to above. Subject to the preceding sentence, if
multiple Bids with the same rate are submitted on behalf of such Existing
Securityholder and the aggregate principal amount of Securities subject to such
Bids is greater than such excess, such Bids will be considered valid up to an
amount equal to such excess. Subject to the two preceding sentences, if more
than one Bid with different rates are submitted on behalf of such Existing
Securityholder, such Bids will be considered valid first in the ascending order
of their respective rates until the highest rate is reached at which such excess
exists and then at such rate up to the amount of such excess. In any event, the
aggregate principal amount of Securities, if any, subject to Bids not valid
under the provisions described above will be treated as the subject of a Bid by
a Potential Securityholder at the rate therein specified.
Sell Orders. All Sell Orders will be considered valid up to an amount
equal to the excess of the principal amount of Securities of the Class held by
such Existing Securityholder over the aggregate principal amount of Securities
subject to valid Hold Orders and valid Bids as referred to above.
If more than one Bid for a Class of Security is submitted on behalf of any
Potential Securityholder, each Bid submitted will be a separate Bid with the
rate and principal amount therein specified. Any Bid or Sell Order submitted by
an Existing Securityholder covering an aggregate principal amount of Securities
not equal to an Authorized Denomination or an integral multiple thereof will be
rejected and will be deemed a Hold Order. Any Bid submitted by a Potential
Securityholder covering an aggregate principal amount of Securities not equal to
an Authorized Denomination or an integral multiple thereof will be rejected. Any
Order submitted in an Auction by a Broker-Dealer to the Auction Agent prior to
the Submission Deadline on any Auction Date will be irrevocable.
A Hold Order, a Bid or a Sell Order that has been determined valid pursuant
to the procedures described above is referred to as a "Submitted Hold Order," a
"Submitted Bid" and a "Submitted Sell Order," respectively (collectively,
"Submitted Orders").
Determination of Sufficient Bid and Bid Auction Rate
Not earlier than the Submission Deadline on each Auction Date, the Auction
Agent will assemble all valid Submitted Orders and will determine:
(a) for the applicable Security, the excess of the total principal
amount of such Securities over the sum of the aggregate principal amount of
such Securities subject to Submitted Hold Orders (such excess being
hereinafter referred to as the "Available Securities"); and
(b) from such Submitted Orders whether the aggregate principal amount
of Securities of such Class subject to Submitted Bids by Potential
Securityholders specifying one or more rates equal to or lower than the
Maximum Auction Rate exceeds or is equal to the sum of (i) the aggregate
principal amount of Securities of such Class subject to Submitted Bids by
Existing Securityholders specifying one or more rates higher than the
Maximum Auction Rate and (ii) the aggregate principal amount of Securities
of such Class subject to Submitted Sell Orders (in the event such excess or
such equality exists
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other than because all of the Securities are subject to Submitted Hold
Orders, such Submitted Bids by Potential Securityholders above will be
hereinafter referred to collectively as "Sufficient Bids"); and
(c) if Sufficient Bids exist, the "Bid Auction Rate," which will be
the lowest rate specified in such Submitted Bids such that if:
(i) each such Submitted Bid from Existing Securityholders of such
Security specifying such lowest rate and all other Submitted Bids from
Existing Securityholders of such Security specifying lower rates were
rejected (thus entitling such Existing Securityholders to continue to
hold the principal amount of Securities subject to such Submitted Bids);
and
(ii) each such Submitted Bid from Potential Securityholders of such
Security specifying such lowest rate and all other Submitted Bids from
Potential Securityholders specifying lower rates, were accepted, the
result would be that such Existing Securityholders described in
subparagraph (c)(i) above would continue to hold an aggregate principal
amount of Securities which, when added to the aggregate principal amount
of Securities to be purchased by such Potential Securityholders
described in this subparagraph (ii) would equal not less than the
Available Securities.
Determination of Auction Rate and Security Interest Rate, Notice
Promptly after the Auction Agent has made the determinations described
above, the Auction Agent is to advise the Trustee of the Net Loan Rate, the
Maximum Auction Rate, the All Hold Rate and the components thereof on the
Auction Date, and based on such determinations, the Auction Rate for the next
succeeding Interest Period for the applicable Security as follows:
(a) if Sufficient Bids exist, that the Auction Rate for the next
succeeding Interest Period will be equal to the Bid Auction Rate so
determined;
(b) if Sufficient Bids do not exist (other than because all of the
Securities of the applicable Security are subject to Submitted Hold
Orders), that the Auction Rate for the next succeeding Interest Period will
be equal to the Maximum Auction Rate; or
(c) if all Securities of the applicable Security are subject to
Submitted Hold Orders, that the Auction Rate for the next succeeding
Interest Period will be equal to the All Hold Rate.
Promptly after the Auction Agent has determined the Auction Rate, the
Auction Agent will determine and advise the Trustee of the Security Interest
Rate for each applicable Security, which rate will be the lesser of (a) the
Auction Rate for each such Security and (b) the Net Loan Rate. In no event shall
a Security Interest Rate exceed the rate (the "Security Interest Rate
Limitation") set forth in the related Prospectus Supplement.
Acceptance and Rejection of Orders
Existing Securityholders of the applicable Security will continue to hold
the principal amount of Securities of such Class that are subject to Submitted
Hold Orders. If, with respect to a Security, the Net Loan Rate is equal to or
greater than the Bid Auction Rate and if Sufficient Bids, as described above
under "Determination of Sufficient Bids and Bid Auction Rate," have been
received by the Auction Agent, the Bid Auction Rate will be the Security
Interest Rate, and Submitted Bids and Submitted Sell Orders will be accepted or
rejected and the Auction Agent will take such other action as provided in the
related Agreement and described below under "Sufficient Bids."
If the Net Loan Rate is less than the Auction Rate, the Security Interest
Rate will be the Net Loan Rate. If the Auction Rate and the Net Loan Rate are
both greater than the Security Interest Rate Limitation, the Security Interest
Rate for each series shall be equal to the Security Interest Rate Limitation. If
the Auction Agent has not received Sufficient Bids as described above under
"Determination of Sufficient Bids and Bid Auction Rate" (other than because all
of the Securities are subject to Submitted Holds Orders), the Security Interest
Rate will be the lesser of the Maximum Auction Rate or the Net Loan Rate. In any
of the cases
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described above in this paragraph, Submitted Orders will be accepted or rejected
and the Auction Agent will take such other action as described below under
"Insufficient Bids."
Sufficient Bids. If Sufficient Bids have been made with a respect to a
Security and the Net Loan Rate is equal to or greater than the Bid Auction Rate
(in which case the Interest Rate shall be the Bid Auction Rate), all Submitted
Sell Orders will be accepted and, subject to the denomination requirements
described below, Submitted Bids will be accepted or rejected as follows in the
following order of priority and all other Submitted Bids will be rejected:
(a) Existing Securityholders' Submitted Bids specifying any rate that
is higher than the Security Interest Rate will be accepted, thus requiring
each such Existing Securityholder to sell the aggregate principal amount of
Securities subject to such Submitted Bids;
(b) Existing Securityholders' Submitted Bids specifying any rate that
is lower than the Security Interest Rate will be rejected, thus entitling
each such Existing Securityholder to continue to hold the aggregate
principal amount of Securities subject to such Submitted Bids;
(c) Potential Securityholders' Submitted Bids specifying any rate that
is lower than the Security Interest Rate will be accepted;
(d) Each Existing Securityholder's Submitted Bid specifying a rate
that is equal to the Security Interest Rate will be rejected, thus
entitling such Existing Securityholder to continue to hold the aggregate
principal amount of Securities subject to such Submitted Bid, unless the
aggregate principal amount of Securities subject to such Submitted Bids
will be greater than the principal amount of Securities (the "remaining
principal amount") equal to the excess of the Available Securities over the
aggregate principal amount of Securities subject to Submitted Bids
described in subparagraphs (b) and (c) above, in which event such Submitted
Bid of such Existing Securityholder will be rejected in part and such
Existing Securityholder will be entitled to continue to hold the principal
amount of Securities subject to such Submitted Bid, but only in an amount
equal to the aggregate principal amount of Securities obtained by
multiplying the remaining principal amount by a fraction, the numerator of
which will be the principal amount of Securities held by such Existing
Securityholder subject to such Submitted Bid and the denominator of which
will be the sum of the principal amount of Securities subject to such
Submitted Bids made by all such Existing Securityholders that specified a
rate equal to the Security Interest Rate; and
(e) Each Potential Securityholder's Submitted Bid specifying a rate
that is equal to the Security Interest Rate will be accepted, but only in
an amount equal to the principal amount of Securities obtained by
multiplying the excess of the aggregate principal amount of Available
Securities over the aggregate principal amount of Securities subject to
Submitted Bids described in subparagraphs (b), (c) and (d) above by a
fraction, the numerator of which will be the aggregate principal amount of
Securities subject to such Submitted Bid and the denominator of which will
be the sum of the principal amount of Securities subject to Submitted Bids
made by all such Potential Securityholders that specified a rate equal to
the Security Interest Rate.
Insufficient Bids. If Sufficient Bids have not been made with respect to a
Security (other than because all of the Securities of such Class are subject to
Submitted Hold Orders) or if the Net Loan Rate is less than the Bid Auction Rate
(in which case the Security Interest Rate shall be the Net Loan Rate) or if the
Security Interest Rate Limitation applies, subject to the denomination
requirements described below, Submitted Orders will be accepted or rejected as
follows in the following order of priority and all other Submitted Bids will be
rejected:
(a) Existing Securityholders' Submitted Bids specifying any rate that
is equal to or lower than the Security Interest Rate will be rejected, thus
entitling such Existing Securityholders to continue to hold the aggregate
principal amount of Securities subject to such Submitted Bids;
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(b) Potential Securityholders' Submitted Bids specifying any rate that
is equal to or lower than the Security Interest Rate will be accepted, and
specifying any rate that is higher than the Security Interest Rate will be
rejected; and
(c) Each Existing Securityholder's Submitted Bid specifying any rate
that is higher than the Security Interest Rate and the Submitted Sell Order
of each Existing Securityholder will be accepted, thus entitling each
Existing Securityholder that submitted any such Submitted Bid or Submitted
Sell Order to sell the Securities subject to such Submitted Bid or
Submitted Sell Order, but in both cases only in an amount equal to the
aggregate principal amount of Securities obtained by multiplying the
aggregate principal amount of Securities subject to Submitted Bids
described in subparagraph (b) above by a fraction, the numerator of which
will be the aggregate principal amount of Securities held by such Existing
Securityholder subject to such Submitted Bid or Submitted Sell Order and
the denominator of which will be the aggregate principal amount of
Securities subject to all such Submitted Bids and Submitted Sell Orders.
All Hold Orders. If all Securities of a Class are subject to Submitted
Hold Orders, all Submitted Bids will be rejected.
Authorized Denominations Requirement. If, as a result of the procedures
described above regarding Sufficient Bids and Insufficient Bids, any Existing
Securityholder would be entitled or required to sell, or any Potential
Securityholder would be entitled or required to purchase, a principal amount of
Securities that is not equal to an Authorized Denomination or an integral
multiple thereof, the Auction Agent will, in such manner as in its sole
discretion it will determine, round up or down the principal amount of
Securities to be purchased or sold by any Existing Securityholder or Potential
Securityholder so that the principal amount of Securities purchased or sold by
each Existing Securityholder or Potential Securityholder will be equal to an
Authorized Denomination or an integral multiple in excess thereof. If, as a
result of the procedures described above regarding Insufficient Bids, any
Potential Securityholder would be entitled or required to purchase less than a
principal amount of Securities equal to an Authorized Denomination or any
integral multiple thereof, the Auction Agent will, in such manner as in its sole
discretion it will determine, allocate Securities for purchase among Potential
Securityholders so that only Securities in an Authorized Denomination or any
integral multiples in excess thereof are purchased by any Potential
Securityholder, even if such allocation results in one or more of such Potential
Securityholders not purchasing any Securities.
Based on the results of each Auction, the Auction Agent is to determine the
aggregate principal amount of Securities of each Class to be purchased and the
aggregate principal amount of Securities of each Class to be sold by Potential
Securityholders and Existing Securityholders on whose behalf each Broker-Dealer
submitted Bids or Sell Orders and, with respect to each Broker-Dealer, to the
extent that such aggregate principal amount of Securities to be sold differs
from such aggregate principal amount of Securities to be purchased, determine to
which other Broker-Dealer or Broker-Dealers acting for one or more purchasers
such Broker-Dealer will deliver, or from which Broker-Dealers acting for one or
more sellers such Broker-Dealer will receive, as the case may be, Securities.
Any calculation by the Auction Agent (or the Trustee, if applicable) of the
Security Interest Rate, One-Month LIBOR, Three-Month LIBOR, the Maximum Auction
Rate, the All Hold Rate, the Net Loan Rate and the Non-Payment Rate will, in the
absence of manifest error, be binding on all other parties.
Notwithstanding anything in any related Agreement or, a related Terms
Supplement to the contrary, no Auction is to be held on any Auction Date on
which there are insufficient moneys held by the Trustee under the related
Agreement and available to pay the principal of and interest due on the
applicable Security on the Note Remittance Date or Certificate Remittance Date
immediately following such Auction Date.
Settlement Procedures
The Auction Agent is required to advise each Broker-Dealer that submitted
an Order in an Auction of the Security Interest Rate for a Security for the next
Interest Period and, if such Order was a Bid or Sell Order, whether such Bid or
Sell Order was accepted or rejected, in whole or in part, by telephone not later
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than 3:00 p.m., eastern time, on the Auction Date if the Interest Rate is the
Auction Rate and not later than 4:00 p.m. eastern time on the Auction Date if
the Interest Rate is the Net Loan Rate. Each Broker-Dealer that submitted an
Order on behalf of a Bidder is required to then advise such Bidder of the
applicable Security Interest Rate for the next Interest Period and, if such
Order was a Bid or a Sell Order, whether such Bid or Sell Order was accepted or
rejected, in whole or in part, confirm purchases and sales with each Bidder
purchasing or selling Securities as a result of the Auction and advise each
Bidder purchasing or selling Securities as a result of the Auction to give
instructions to its Participant to pay the purchase price against delivery of
such Securities or to deliver such Securities against payment therefor, as
appropriate. Pursuant to the Auction Agent Agreement, the Auction Agent is to
record each transfer of Securities on the Existing Securityholders Registry to
be maintained by the Auction Agent.
In accordance with DTC's normal procedures, on the Business Day after the
Auction Date, the transactions described above will be executed through DTC, so
long as DTC is the depository, and the accounts of the respective Participants
at DTC will be debited and credited and Securities delivered as necessary to
effect the purchases and sales of Securities as determined in the Auction.
Purchasers are required to make payment through their Participants in same-day
funds to DTC against delivery through their Participants. DTC will make payment
in accordance with its normal procedures, which now provide for payment against
delivery by its Participants in immediately available funds.
If any Existing Securityholder selling Securities in an Auction fails to
deliver such Securities, the Broker-Dealer of any person that was to have
purchased Securities in such Auction may deliver to such person a principal
amount of Securities that is less than the principal amount of Securities that
otherwise was to be purchased by such person but in any event equal to an
Authorized Denomination or any integral multiple thereof. In such event, the
principal amount of Securities to be delivered will be determined by such
Broker-Dealer. Delivery of such lesser principal amount of Securities will
constitute good delivery. Neither the Trustee nor the Auction Agent will have
any responsibility or liability with respect to the failure of a Potential
Securityholder, Existing Securityholder or their respective Broker-Dealer or
Participant to deliver the principal amount of Securities or to pay for the
Securities purchased or sold pursuant to an Auction or otherwise. For a further
description of the settlement procedures, see "SETTLEMENT PROCEDURES."
TRUSTEE NOT RESPONSIBLE FOR AUCTION AGENT, MARKET AGENT AND BROKER-DEALERS
The Trustee shall not be liable or responsible for the actions of or
failure to act by the Auction Agent, Market Agent or any Broker-Dealer under the
related Agreement, the related Terms Supplement or under the Auction Agent
Agreement, the Market Agent Agreement or any Broker-Dealer Agreement. The
Trustee may conclusively rely upon any information required to be furnished by
the Auction Agent, the Market Agent or any Broker-Dealer without undertaking any
independent review or investigation of the truth or accuracy of such
information.
CHANGES IN AUCTION TERMS
Changes in Auction Period or Periods
While any of the Securities are outstanding, the Administrator, may, from
time to time, change the length of the one or more Auction Periods in order to
conform with then current market practice with respect to similar securities or
to accommodate economic and financial factors that may affect or be relevant to
the length of the Auction Period and the interest rate borne by the Securities
(an "Auction Period Adjustment"). The Administrator will not initiate such
change in the length of the Auction Period unless it shall have received the
written consent from the Market Agent, which consent will not be unreasonably
withheld, not less than three days nor more than 20 days prior to the effective
date of an Auction Period Adjustment. The Administrator will initiate an Auction
Period Adjustment by giving written notice to the Trustee, the Auction Agent,
the Market Agent, the Security Guaranty Insurer and DTC in substantially the
form of, or containing substantially the information contained in, the related
Agreement at least 10 days prior to the Auction Date for such Auction Period.
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Any such Auction Period Adjustment shall not result in an Auction Period of
less than 7 days nor more than 91 days. If any such Auction Period Adjustment
will result in an Auction Period of less than the number of days in the then
current Auction Period, the notice described above will be effective only if it
is accompanied by a written statement of the Trustee, the Auction Agent and DTC
to the effect that they are capable of performing their duties, if any, under
the related Agreement, the Auction Agent Agreement and any Broker-Dealer
Agreement with respect to such changed Auction Period.
An Auction Period Adjustment will take effect only if (A)the Trustee and
the Auction Agent receive, by 11:00 a.m., eastern time, on the Business Day
before the Auction Date for the first such Auction Period, a certificate from
the Representative authorizing an Auction Period Adjustment specified in such
certificate, the certificate of the Market Agent described above and the written
statement of the Trustee, the Auction Agent DTC described above and (B)
Sufficient Bids exist at the Auction on the Auction Date for such first Auction
Period. If the condition referred to in (A) is not met, the Security Interest
Rate applicable for the next Auction Period will be determined pursuant to the
Auction Procedures and the Auction Period will be the Auction Period determined
without reference to the proposed change. If the condition referred to in (A) is
met, but the condition referred to in (B) above is not met, the Security
Interest Rate applicable for the next Auction Period will be the lesser of the
Maximum Auction Rate and the Net Loan Rate and the Auction Period will be the
Auction Period determined without reference to the proposed change.
Changes in the Auction Date
The Market Agent, at the written direction of the Representative, may
specify an earlier Auction Date (but in no event more than five Business Days
earlier) than the Auction Date that would otherwise be determined in accordance
with the definition of "Auction Date" with respect to one or more specified
Auction Periods in order to conform with then current market practice with
respect to similar securities or to accommodate economic and financial factors
that may affect or be relevant to the day of the week constituting an Auction
Date and the interest rate borne on the Securities. The Representative will not
consent to such change in the Auction Date unless the Representative will have
received from the Market Agent not less than three days nor more than 20 days
prior to the effective date of such change a written request for consent
together with a certificate demonstrating the need for change in reliance on
such factors. The Market Agent will provide notice of its determination to
specify an earlier Auction Date for one or more Auction Periods by means of a
written notice delivered at least 10 days prior to the proposed changed Auction
Date to the Trustee, the Auction Agent, the Trust, the Representative, and DTC.
The changes in Auction terms described above may be made with respect to
any Class of the Securities. In connection with any change in Auction Terms
described above, the Auction Agent is to provide such further notice to such
parties as is specified in the Auction Agent Agreement.
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APPENDIX II
SETTLEMENT PROCEDURES
These Settlement Procedures apply separately to each Class of Securities
and may be different if specified in the Prospectus.
(a) Not later than (1) 3:00 p.m. if the Security Interest Rate is the
Auction Rate or (2) 4:00 p.m. if the Security Interest Rate is the Net Loan
Rate, the Auction Agent is to notify by telephone each Broker-Dealer that
participated in the Auction held on such Auction Date and submitted an Order on
behalf of an Existing Securityholder or Potential Securityholder of:
(i) the Security Interest Rate fixed for the next Interest Period;
(ii) whether there were Sufficient Bids in such Auction;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer") submitted
Bids or Sell Orders on behalf of an Existing Securityholder, whether such
Bid or Sell Order was accepted or rejected, in whole or in part, and the
principal amount of Securities, if any, to be sold by such Existing
Securityholder;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer") submitted a Bid
on behalf of a Potential Securityholder, whether such Bid was accepted or
rejected, in whole or in part, and the principal amount of securities, if
any, to be purchased by such Potential Securityholder;
(v) if the aggregate amount of Securities to be sold by all Existing
Securityholders on whose behalf such Seller's Broker-Dealer submitted Bids
or Sell Orders exceeds the aggregate principal amount of Securities to be
purchased by all Potential Securityholders on whose behalf such Buyer's
Broker-Dealer submitted a Bid, the name or names of one or more Buyer's
Broker-Dealers and the name of the Participant, if any, of each such
Buyer's Broker-Dealer (a "Participant") acting for one or more purchasers
of such excess principal amount of Securities and the principal amount of
Securities to be purchased from one or more Existing Securityholders on
whose behalf such Seller's Broker-Dealer acted by one or more Potential
Securityholders on whose behalf each of such Buyer's Broker-Dealers acted;
(vi) if the principal amount of Securities to be purchased by all
Potential Securityholders on whose behalf such Buyer's Broker-Dealer
submitted a Bid exceeds the amount of Securities to be sold by all Existing
Securityholders on whose behalf such Seller's Broker-Dealer submitted a Bid
or a Sell Order, the name or names of one or more Seller's Broker-Dealers
(and the name of the Participant, if any, of each such Seller's
Broker-Dealer) acting for one or more sellers of such excess principal
amount of Securities and the principal amount of Securities to be sold to
one or more Potential Securityholders on whose behalf such Buyer's
Broker-Dealer acted by one or more Existing Securityholder on whose behalf
each of such Seller's Broker-Dealers acted; and
(vii) the Auction Date for the next succeeding Auction.
(b) On each Auction Date, each Broker-Dealer that submitted an Order on
behalf of any Existing Securityholder or Potential Securityholder is to:
(i) advise each Existing Securityholder and Potential Securityholder
on whose behalf such Broker-Dealer submitted a Bid or Sell Order in the
Auction on such Auction Date whether such Bid or Sell Order was accepted or
rejected, in whole or in part;
(ii) in the case of a Broker-Dealer that is a Buyer's Broker-Dealer,
advise each Potential Securityholder on whose behalf such Buyer's
Broker-Dealer submitted a Bid that was accepted, in whole or in part, to
instruct such Potential Securityholder's Participant to pay to such Buyer's
Broker-Dealer (or its Participant) through DTC the amount necessary to
purchase the principal amount of the Securities to be purchased pursuant to
such Bid against receipt of such Securities together with accrued interest;
(iii) in the case of a Broker-Dealer that is a Seller's Broker-Dealer,
instruct each Existing Securityholder on whose behalf such Seller's
Broker-Dealer submitted a Sell Order that was accepted, in
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whole or in part, or a Bid that was accepted, in whole or in part, to
instruct such Existing Securityholder's Participant to deliver to such
Seller's Broker-Dealer (or its Participant) through DTC the principal
amount of the Securities to be sold pursuant to such Order against payment
therefor;
(iv) advise each Existing Securityholder on whose behalf such
Broker-Dealer submitted an Order and each Potential Securityholder on whose
behalf such Broker-Dealer submitted a Bid of the Security Interest Rate for
the next Interest Period;
(v) advise each Existing Securityholder on whose behalf such
Broker-Dealer submitted an Order of the next Auction Date; and
(vi) advise each Potential Securityholder on whose behalf such
Broker-Dealer submitted a Bid that was accepted, in whole or in part, of
the next Auction Date.
(c) On the basis of the information provided to it pursuant to paragraph
(a) above, each Broker-Dealer that submitted a Bid or Sell Order in an Auction
is required to allocate any funds received by it in connection with such Auction
pursuant to paragraph (b)(ii) above, and any Securities received by it in
connection with such Auction pursuant to paragraph (b)(iii) above, among the
Potential Securityholders, if any, on whose behalf such Broker-Dealer submitted
Bids, the Existing Securityholder, if any, on whose behalf such Broker-Dealer
submitted Bids or Sell Orders in such Auction, and any Broker-Dealers identified
to it by the Auction Agent following such Auction pursuant to paragraph (a)(v)
or (a)(vi) above.
(d) On each Auction Date:
(i) each Potential Securityholder and Existing Securityholder with an
Order in the Auction on such Auction Date will instruct its Participant as
provided in (b)(ii) or (b)(iii) above, as the case may be;
(ii) each Seller's Broker-Dealer that is not a Participant in DTC's
system will instruct its Participant to deliver such Securities through DTC
to a Buyer's Broker-Dealer (or its Participant) identified to such Seller's
Broker-Dealer pursuant to (a)(v) above against payment therefor; and
(iii) each Buyer's Broker-Dealer that is not a Participant in DTC's
system will instruct its Participant to pay through DTC to Seller's
Broker-Dealer (or its Participant) identified following such Auction
pursuant to (a)(vi) above the amount necessary to purchase the Securities
to be purchased pursuant to (b)(ii) above against receipt of such
Securities.
(e) On the Business Day following each Auction Date;
(i) each Participant for a Bidder in the Auction on such Auction Date
referred to in (d)(i) above will instruct DTC to execute the transactions
described under (b)(ii) or (b)(iii) above for such Auction, and DTC will
execute such transactions;
(ii) each Seller's Broker-Dealer or its Participant will instruct DTC
to execute the transactions described in (d)(ii) above for such Auction,
and DTC will execute such transactions; and
(iii) each Buyer's Broker-Dealer or its Participant will instruct DTC
to execute the transactions described in (d)(iii) above for such Auction,
and DTC will execute such transactions.
(f) If an Existing Securityholder selling Securities in an Auction fails to
deliver such Securities (by authorized book-entry), a Broker-Dealer may deliver
to the Potential Securityholder on behalf of which it submitted a Bid that was
accepted a principal amount of Securities that is less than the principal amount
of Securities that otherwise was to be purchased by such Potential
Securityholder. In such event, the principal amount of Securities to be so
delivered will be determined solely by such Broker-Dealer (but only in
Authorized Denominations). Delivery of such lesser principal amount of
Securities will constitute good delivery. Notwithstanding the foregoing terms of
this paragraph (f), any delivery or nondelivery of Securities which will
represent any departure from the results of an Auction, as determined by the
Auction Agent, will be of no effect unless and until the Auction Agent will have
been notified of such delivery or nondelivery in accordance with the provisions
of the Auction Agent Agreement and the Broker-Dealer Agreements. Neither the
Trustee nor the Auction Agent will have any responsibility or liability with
respect to the failure of a
175
<PAGE> 177
Potential Securityholder, Existing Securityholder or their Respective
Broker-Dealer or Participant to take delivery of or deliver, as the case may be,
the principal amount of the Securities purchased or sold pursuant to an Auction
or otherwise.
176
<PAGE> 178
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses payable in connection with the registration of
market-making transactions in the Certificates, all of which will be paid by
First Union Capital Markets, are as follows:
<TABLE>
<CAPTION>
EXPENSES AMOUNTS
-------- -------
<S> <C>
Printing and EDGAR expenses................................. $ *
Legal fees and expenses..................................... *
Accountant's fees and expenses.............................. *
Miscellaneous............................................... *
---
Total............................................. $ *
===
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 15. INDEMNIFICATION OF TRUSTEE, SERVICER, REPRESENTATIVE AND CLAIMS
ADMINISTRATOR
The Trust acts through the Trustee, Servicer, Representative and Claims
Administrator. The contractual indemnification provisions relating to any of the
above-mentioned parties are described below. The Pooling and Servicing Agreement
provides that the Servicer will indemnify and hold harmless the Trustee against
any and all claims, losses, penalties, fines, forfeitures, legal fees and
related costs, judgments, and any other costs, fees and expenses that the
Trustee may sustain in any way related to the failure of the Servicer to perform
its duties in compliance with the terms of the Pooling and Servicing Agreement.
The Pooling and Servicing Agreement also provides that the Representative will
indemnify and hold harmless the Trustee against any and all claims, losses,
penalties, fines, forfeitures, legal fees and related costs, judgments, and any
other costs, fees and expenses that the Trustee may sustain in any way related
to the failure of the Servicer, if it is an affiliate of the Representative, or
the failure of the Representative to perform their respective duties in
compliance with the terms of the Pooling and Servicing Agreement and in the best
interests of MBIA and the Certificateholders, or resulting from a breach of the
Representative's or any Originator's representations and warranties contained in
the Agreement. Additionally, the Pooling and Servicing Agreement provides that
the Servicer will indemnify and hold harmless the Trustee or any director,
officer, employee or agent of the Trustee against any loss, liability or expense
incurred in connection with any legal action relating to the Pooling and
Servicing Agreement or the Certificates, other than losses, liabilities or
expenses incurred by reason of willful misfeasance, bad faith or reckless
disregard of the Trustee's obligations and duties, and in connection with any
erroneous tax information provided by the Servicer.
II-1
<PAGE> 179
ITEM 16. EXHIBITS
The exhibits included as part of this Registration Statement are as
follows:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<C> <C> <S>
4.1 -- Pooling and Servicing Agreement, dated May 31, 1997, among
The Money Store Inc., the Originators and The Bank of New
York, as Trustee (incorporated by reference to Exhibit 1.3
to the Current Report on Form 8-K of The Money Store Home
Equity Trust 1997-B and the Originators (Commission File
Number 333-20817) filed with the Commission on July 10,
1997)
4.2 -- Omnibus Amendment to Pooling and Servicing Agreements, dated
as of January 19, 1999, among The Money Store Inc. and the
Trustee (amending Exhibit 4.1)
5.1 -- Opinion of Stroock & Stroock & Lavan LLP as to validity of
the Certificates
8.1 -- Opinion of Stroock & Stroock & Lavan LLP as to certain tax
matters (included in Exhibit 5.1)
23.1 -- Consent of Stroock & Stroock & Lavan LLP (included in
Exhibit 5.1)
23.2 -- Consent of Stroock & Stroock & Lavan LLP (included in
Exhibit 8.1)
23.3 -- Consent of PricewaterhouseCoopers LLP
</TABLE>
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. 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 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 the Registration Statement
or any material change to such information in the Registration
Statement;
provided, however, that (i) and (ii) do not apply if the Registration Statement
is on Form S-3 or Form S-8, and the information required to be included in a
post-effective amendment by (i) and (ii) is contained in periodic reports filed
by the Registrant pursuant to Section 13 or Section 15 of the Securities
Exchange Act of 1934 that are incorporated by reference in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or
II-2
<PAGE> 180
Section 15(d) of the Securities Exchange Act of 1934 that is incorporated by
reference in the 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.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the 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.
II-3
<PAGE> 181
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of West Sacramento, State of California, on the 19th day
of January, 1999.
THE MONEY STORE HOME EQUITY TRUST 1997-B
By: The Money Store Inc., as
Representative
By: /s/ Bruce Hurwitz
-------------------------------------
Name: Bruce Hurwitz
Title: Senior Vice President
II-4
<PAGE> 182
EXHIBIT INDEX TO
REGISTRATION STATEMENT ON FORM S-3
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<C> <S> <C>
4.1 -- Pooling and Servicing Agreement, dated May 31, 1997, among
The Money Store Inc., the Originators and The Bank of New
York, as Trustee (incorporated by reference to Exhibit 1.3
to the Current Report on Form 8-K of The Money Store Home
Equity Trust 1997-B and the Originators (Commission File
Number 333-20817) filed with the Commission on July 10,
1997)
4.2 -- Omnibus Amendment to Pooling and Servicing Agreements, dated
as of January 19, 1999, among The Money Store Inc. and the
Trustee (amending Exhibit 4.1)
5.1 -- Opinion of Stroock & Stroock & Lavan LLP as to validity of
the Certificates
8.1 -- Opinion of Stroock & Stroock & Lavan LLP as to certain tax
matters (included in Exhibit 5.1)
23.1 -- Consent of Stroock & Stroock & Lavan LLP (included in
Exhibit 5.1)
23.2 -- Consent of Stroock & Stroock & Lavan LLP (included in
Exhibit 8.1)
23.3 -- Consent of PricewaterhouseCoopers LLP
</TABLE>
II-5
<PAGE> 1
EXHIBIT 4.2
AMENDMENT TO
POOLING AND SERVICING AGREEMENT
THIS AMENDMENT (the "Amendment") to the Pooling and Servicing Agreement
set forth in Schedule I attached hereto, and hereby made a part hereof (the
"Agreement"), is made as of the 19th day of January, 1999, by The Money Store
Inc., as Servicer, and the Trustee under the Agreement set forth in Schedule I.
WHEREAS, The Money Store Inc., the Originators and the Trustee (as set
forth in Schedule I) entered into the Agreement on the date set forth in
Schedule I;
WHEREAS, Section 13.02 of the Agreement provides, inter alia, that the
Agreement may be amended from time to time by the Servicer and the Trustees by
written agreement, upon the prior written consent of the Certificate Insurer, to
cure any ambiguity, to correct or supplement any provisions in the Agreement, or
to make any other provisions with respect to matters or questions arising under
the Agreement which shall not be inconsistent with the provisions of the
Agreement; provided, that the Trustee is first delivered an Opinion of Counsel
opining that such amendment does not adversely affect the interests of any
Certificateholder in any material respect or any other party; and
WHEREAS, the Servicer and the Trustee deems it to be in their mutual
best interests to amend the Agreement as set forth herein;
NOW THEREFORE, for good and valuable consideration, the sufficiency of
which is hereby acknowledged, the undersigned hereby agree as follows:
1. Definitions. Capitalized terms used but not defined in this
Amendment have the meanings ascribed to them in the Agreement.
2. Opinion of Counsel. The Servicer hereby acknowledges delivery of the
Opinion of Counsel to the Trustee, opining substantially to the effect that the
amendments to the Agreement described in this Amendment do not adversely affect
the interests of any Certificateholder in any material respect.
3. Consent of Certificate Insurer. The undersigned hereby acknowledges
receipt of the Consent of the Certificate Insurer, set forth below, consenting
to the amendment to the Agreement contemplated in this Amendment.
4. Amendment to Agreement. The Agreement is hereby amended by adding
the section set forth in Exhibit A attached hereto, and hereby made a part
<PAGE> 2
thereof, which cures ambiguities and makes provisions with respect to matters
arising in connection with the Agreement.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the date first above written.
THE SERVICER The Money Store Inc.,
as Servicer for The Money Store
Home Equity Trust 1997-B.
By: /s/ Robert L. Anderson
--------------------------------
Name: Robert L. Anderson
Title: Senior Vice President
THE TRUSTEE The Bank of New York, as
Trustee for The Money Store Home
Equity Trust 1997-B.
By: /s/ Robert Muller
--------------------------------
Name: Robert Muller
Title: Assistant Vice President
THE CERTIFICATE MBIA Insurance Corporation
INSURER
By: /s/ John D. Lohrs
--------------------------------
Name: John D. Lohrs
Title: Managing Director
2
<PAGE> 3
EXHIBIT A
TEXT OF AMENDMENT
"Section 13.16. Securities Filings.
The Servicer and/or the Representative shall:
(a) prepare and file on behalf of the Trust Fund with the Securities
and Exchange Commission and any exchange, and execute on behalf of the Trust
Fund, registration statements, and annual, quarterly and current reports,
including any amendments thereto, under applicable federal securities laws;
(b) take any action on behalf of the Trust Fund with respect to
applicable state securities laws and prepare, file and execute on behalf of the
Trust Fund any documents pursuant to such laws; and
(c) take any other actions necessary or desirable to carry out any of
the foregoing activities."
<PAGE> 4
SCHEDULE I
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Trust Agreement Trustee
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
The Money Store Home Equity Trust 1997-B Pooling and Servicing Agreement, dated as of May 31, 1997, Bank of New York
among The Money Store Inc., the Originators and The Bank of
New York, as Trustee.
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
Exhibit 5.1 and 8.1
Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York 10038
January 19, 1999
The Money Store Inc.
707 West Third Street
West Sacramento, California 95605
Re: The Money Store Home Equity Trust 1997-B-
Registration Statement on Form S-3
Ladies and Gentlemen:
We have acted as special counsel to The Money Store Home Equity Trust 1997-B
(the "Trust"), in connection with the preparation of the above-referenced
registration statement (the "Registration Statement") relating to the proposed
offering from time to time of certain classes of The Money Store Home Equity
Asset Backed Certificates, Series 1997-B, issued previously by the Trust (the
"Certificates"). The Registration Statement has been filed with the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Act"). The Certificates were issued pursuant to a Pooling and
Servicing Agreement dated as of May 31, 1997 (the "Agreement"), among The Bank
of New York, as Trustee, The Money Store Inc., as representative and servicer
(the "Company"), and certain wholly owned subsidiaries of the Company (the
"Originators"). The Registration Statement was filed to register certain market
making transactions involving the Certificates by (i) First Union Capital
Markets, a division of Wheat First Securities, Inc., an affiliate of the
Company, and (ii) other affiliates of the Company.
As such counsel, we have examined the Registration Statement, the Market Making
Prospectus (including Annexes I, II, III and IV thereto) included therein, the
Agreement, and originals or copies of such other agreements and other
instruments of the Company, certificates of public officials and other documents
and have made such examinations of law, as we have deemed necessary to form the
basis for the opinions hereinafter expressed. In our examination of such
materials, we have assumed the genuineness of all signatures, the authenticity
of all documents submitted to us as originals and the conformity to original
documents of all copies submitted to
<PAGE> 2
The Money Store
Page 2
us. As to various questions of fact material to such opinions, we have relied,
to the extent we deemed appropriate, upon representations, statements and
certificates of officers and representatives of the Company and others.
Attorneys involved in the preparation of this opinion are admitted to practice
law in the State of New York and we do not express any opinion herein concerning
any law other than the federal laws of the United States of America and the laws
of the State of New York.
Based upon and subject to the foregoing, we are of the opinion that:
1. Assuming that the execution and delivery of the Agreement were
authorized by all necessary corporate action of the Company and the Originators,
the Certificates are legally issued, fully paid and non-assessable and entitled
to the benefits of the Agreement.
2. Assuming that all parties to the Agreement have complied with all
provisions thereof, the information in the Market Making Prospectus under the
caption "Federal Income Tax Considerations," and in Annex IV to the Market
Making Prospectus under the caption "Federal Income Tax Consequences," to the
extent that it constitutes matters of law or legal conclusions, sets forth our
opinion with respect to the material federal income tax consequences of an
investment in the Certificates.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, to the references to this firm in the Prospectus and in
Annex IV thereto and to the filing of this opinion as an exhibit to any
application made by or on behalf of the Company or any dealer in connection with
the registration of the Certificates under the securities or blue sky laws of
any state or jurisdiction. In giving such consent, we do not admit hereby that
we come within the category of persons whose consent is required under Section 7
of the Act or the Rules and Regulations of the Commission thereunder.
Very truly yours,
/s/ Stroock & Stroock & Lavan LLP
STROOCK & STROOCK & LAVAN LLP
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Prospectus and
Registration Statement on Form S-3 of The Money Store Home Equity Trust 1997-B
relating to The Money Store Home Equity Asset Backed Certificates, Series
1997-B, of our report dated February 3, 1998, on our audits of the consolidated
financial statements of MBIA Insurance Corporation and Subsidiaries as of
December 31, 1997 and 1996 and for each of the three years in the period ended
December 31, 1997. We also consent to the reference to our firm under the
caption "Experts".
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
January 19, 1999
