<PAGE> 1
As filed with the Securities and Exchange Commission on November 13, 1997
Registration No. 333-_______
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
BOMBARDIER CAPITAL MORTGAGE SECURITIZATION CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Vermont 1600 Mountain View Drive 03-0355080
(State or other jurisdiction of Colchester, Vermont 05446 (I.R.S. Employer
incorporation or organization) (800) 525-5871 Identification Number)
</TABLE>
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
BLAINE FILTHAUT
Bombardier Capital Mortgage Securitization Corporation
1600 Mountain View Drive
Colchester, Vermont 05446
(802) 654-8210
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copy to:
STEVEN J. MOLITOR, ESQ.
Morgan, Lewis & Bockius LLP
101 Park Avenue
New York, New York 10178
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time 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, other than securities offered only in connection with
dividend or interest reinvestment plans, 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 of 1933, 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 of 1933, 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
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED
TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER MAXIMUM AGGREGATE AMOUNT OF
REGISTERED REGISTERED CERTIFICATE* OFFERING PRICE REGISTRATION FEE
- --------------------------------------- ------------ ------------------ ----------------- ----------------
<S> <C> <C> <C> <C>
Manufactured Housing Contract and
Mortgage Loan Pass-Through
Certificates......................... $1,000,000 100% $1,000,000 $303.03
</TABLE>
* Estimated for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
Information Contained Herein Is Subject to Completion or Amendment. A
Registration Statement Relating to These Securities Has Been Filed with The
Securities and Exchange Commission. These Securities May Not Be Sold Nor May
Offers to Buy Be Accepted Prior to the Time the Registration Statement Becomes
Effective. This Prospectus Shall Not Constitute an Offer to Sell or the
Solicitation of an Offer to Buy Nor Shall There Be Any Sale of These Securities
in Any State in Which Such Offer, Solicitation or Sale Would Be Unlawful Prior
to Registration or Qualification under the Securities Laws of Any Such State.
SUBJECT TO COMPLETION NOVEMBER 13, 1997
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED _____________, 1997)
================================================================================
$----------
MANUFACTURED HOUSING CONTRACT PASS-THROUGH CERTIFICATES,
SERIES 199_
BOMBARDIER CAPITAL MORTGAGE SECURITIZATION CORPORATION,
DEPOSITOR
BOMBARDIER CAPITAL INC.,
SERVICER
------------------------------------
The Pass-Through Certificates, Series 199_ (the "Certificates") will
represent beneficial ownership interests in a trust (the "Trust") consisting
primarily of a pool (the "Contract Pool") of actuarial manufactured housing
installment sale contracts and manufactured housing installment loan agreements
(collectively, the "Contracts"') and certain related property as described
herein. Only the Classes of Certificates listed below (collectively, the
"Offered Certificates") are being offered hereby. (cover continued on next page)
<TABLE>
<CAPTION>
INITIAL CLASS FINAL SCHEDULED
CERTIFICATE REMITTANCE REMITTANCE
BALANCE RATE(1) DATE(2)
<S> <C> <C> <C>
Class A-1................... $---- (3)
Class A-2................... $---- ----%
Class A-3................... $---- ----%
Class A-4................... $---- ----%
Class M..................... $---- ----%
Class B-1................... $---- ----%
</TABLE>
- ----------------
(1) The Remittance Rate is subject to a maximum rate equal to the weighted
average of the Net Contract Rates of the Contracts in the Contract
Pool.
(2) Determined as described under "Maturity, Prepayment and Yield
Considerations" herein.
(3) The Remittance Rate for the Class A-1 Certificates will be calculated
by reference to [the London interbank offered rate for one-month U.S.
dollar deposits ("1-Month LIBOR")] subject to the limitations described
herein. See "Description of the Certificates--Priority of
Distributions"
------------------------------------
THE OFFERED CERTIFICATES REPRESENT INTERESTS IN THE TRUST AND DO NOT REPRESENT
INTERESTS IN OR OBLIGATIONS OF THE COMPANY, THE SERVICER, THE TRUSTEE OR ANY OF
THEIR RESPECTIVE AFFILIATES. THE OFFERED CERTIFICATES AND THE CONTRACTS ARE NOT
INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR ANY OTHER PERSON NOR HAS ANY
GOVERNMENTAL AGENCY PASSED UPON THE ACCURACY OF THE INFORMATION CONTAINED IN
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS.
------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------------------
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION UNDER "RISK
FACTORS" BEGINNING ON PAGE S-10 HEREIN AND ON PAGE 18 OF THE ACCOMPANYING
PROSPECTUS.
------------------------------------
The Offered Certificates will be purchased by [Underwriter] (the
"Underwriter") from the Company and will be offered by the Underwriter from time
to time in negotiated transactions or otherwise, at varying prices to be
determined at the time of sale. Proceeds to the Company, including accrued
interest, are expected to be approximately _________% of the aggregate initial
Class Certificate Balance of the Offered Certificates before deducting expenses
payable by the Company estimated to be $_______. See "Underwriting" herein.
The Offered Certificates are offered by the Underwriter subject to
prior sale, when, as and if issued to and accepted by them, subject to approval
of certain legal matters by counsel for the Underwriter. The Underwriter
reserves the right to withdraw, cancel or modify such offer and to reject orders
in whole or in part. It is expected that the Offered Certificates will be issued
on or about ____________, 199_, and will thereafter be available from the
Underwriter through the Same Day Funds Settlement System of The Depository Trust
Company, Cedel Bank, societe anonyme, and the Euroclear System.
[UNDERWRITER]
================================================================================
The date of this Prospectus Supplement is ____________, 1997
<PAGE> 3
(Cover continued from front page)
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement, dated as of September 1, 1997 (the "Agreement"), among Bombardier
Capital Mortgage Securitization Corporation, as depositor ("BCMSC" or the
"Company"), Bombardier Capital Inc., as servicer ("BCI" or the "Servicer") and
[TRUSTEE], as trustee (the "Trustee"). Distributions of principal and interest
on the Certificates will be made to the extent funds are available therefor on
the 15th day of each month or, if such day is not a business day, on the next
succeeding business day commencing in [MONTH/YEAR] (each, a "Remittance Date")
to holders of record on the last business day of the calendar month preceding
the month of such Remittance Date (the "Record Date").
There is currently no secondary market for the Offered Certificates.
The Underwriter intends to make a secondary market for the Offered Certificates,
but the Underwriter has no obligation to do so. There can be no assurance that a
secondary market for any of the Offered Certificates will develop or, if one
does develop, that it will continue or offer Certificateholders sufficient
liquidity of investment.
As described herein, an election will be made to treat certain assets
and Accounts (as defined herein) of the Trust as a "real estate mortgage
investment conduit" ("REMIC") pursuant to the Internal Revenue Code of 1986, as
amended (the "Code"). The Offered Certificates will be designated as "regular
interests" in a REMIC. See "Federal Income Tax Considerations" herein and in the
Prospectus.
------------------------------------
The Certificates offered by this Prospectus Supplement constitute part
of a separate Series of Certificates being offered by the Company pursuant to
its Prospectus dated ______________, of which this Prospectus Supplement is a
part and which accompanies this Prospectus Supplement. The Prospectus contains
important information regarding this offering which is not contained herein, and
prospective investors are urged to read the Prospectus and this Prospectus
Supplement in full.
S-2
<PAGE> 4
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and in the
accompanying Prospectus. Capitalized terms used herein and not otherwise defined
herein shall have the respective meanings assigned them elsewhere in this
Prospectus Supplement and in the Prospectus. See "Glossary" in the Prospectus.
Title of Securities............. Manufactured Housing Contract Pass-Through
Certificates, Series 199_ (the "Certificates").
Offered Certificates............ The [Class A-1, Class A-2, Class A-3 and Class
A-4] Certificates (collectively, the "Senior
Certificates"), the Class M and Class B-1
Certificates. Only the Offered Certificates are
offered hereby.
Other Certificates.............. [In addition to the Offered Certificates, the
following Classes of Subordinated Certificates
will be issued by the Trust in the indicated
initial Class Certificate Balances and will
bear interest at the indicated Remittance
Rates, but are not offered hereby:
<TABLE>
<CAPTION>
Initial Class Remittance
Certificate Balance Rate(2)
------------------- ----------
<S> <C> <C>
Class B-2 (1) $_________ _____%
Class R (1) (3) (3)
</TABLE>
(1) The [Class B-2 and Class R] Certificates
will provide limited credit support for the
Offered Certificates as described herein.
(2) The Remittance Rate is subject to a maximum
rate equal to the weighted average of the
Net Contract Rates of the Contracts in the
Contract Pool.
(3) The Class R Certificates have no Class
Certificate Balance and do not bear
interest.
Any information contained herein with respect
to the [Class B-2 and Class R] Certificates is
provided only to permit a better understanding
of the Offered Certificates.]
Designations
Book-Entry Certificates...... All Classes of Certificates other than the
Physical Certificates.
Class B Certificates......... The [Class B-1 and Class B-2] Certificates.
Physical Certificates........ The [Class B-2 and Class R] Certificates.
Regular Certificates......... All Classes of Certificates other than the
Class R Certificates.
Residual Certificates........ The Class R Certificates.
Senior Certificates.......... The [Class A-1, Class A-2, Class A-3 and Class
A-4] Certificates.
S-3
<PAGE> 5
Subordinated Certificates............ The [Class M, Class B-1, Class B-2 and
Class R] Certificates. For all
purposes, the Class M Certificates are
deemed to have the lowest numerical
Class designation, and the Class R
Certificates are deemed to have the
highest numerical Class designation, of
any Class of Subordinated Certificates.
Fixed Rate Certificates.............. The [Class A-2, Class A-3, Class A-4,
Class M, Class B-1 and Class B-2]
Certificates.
Floating Rate Certificates........... The [Class A-1] Certificates.
Depositor............................... Bombardier Capital Mortgage
Securitization Corporation, a Vermont
corporation ("BCMSC" or the "Company").
See "The Company" in the Prospectus.
Servicer................................ Bombardier Capital Inc., a
Massachusetts corporation ("BCI" or the
"Servicer"), an indirect, wholly-owned
subsidiary of Bombardier Inc., a
Canadian corporation. The Servicer's
principal executive offices are located
at 1600 Mountain View Drive,
Colchester, Vermont 05446. See "The
Servicer" in the Prospectus.
Trustee................................. [TRUSTEE] (the "Trustee").
Originator.............................. The Contracts were originated or
purchased by BCI [or an affiliate
thereof]. See "The Manufactured Housing
Program" herein and in the Prospectus.
Approximate Cut-off Date Pool Principal
Balance................................. $__________.
Closing Date............................ On or about __________________.
Cut-off Date............................ The opening of business on
_________________, except that the
Cut-off Date with respect to any
Contract dated on or after
_________________, will be the date of
such Contract.
Remittance Date......................... The 15th day of each month or, if such
15th day is not a business day, the
next succeeding business day,
commencing in [MONTH/YEAR].
Description of Certificates............. The Certificates will be issued by the
Trust pursuant to the Pooling and
Servicing Agreement, dated as of
_________________ (the "Agreement"),
among the Company, the Servicer and the
Trustee. The Offered Certificates will
be offered in registered form, in
denominations of $25,000 and integral
multiples of $1,000 in excess thereof,
except for one Certificate of each
Class which may be issued with a
different denomination.
Priority of Distributions............... Distributions on the Certificates will
be made on each Remittance Date from
the Amount Available (as defined
herein) in the following order of
priority: (i) concurrently, to interest
on each Class of Senior Certificates;
(ii) to principal of the Classes of
Senior Certificates then entitled to
receive distributions of principal, in
the order and subject to the
limitations set forth herein under
"Description of the
Certificates--Priority of
Distributions," in each case in an
aggregate amount up to the maximum
amount of principal to be distributed
on such Classes on such Remittance
Date; and (iii) to interest on and then
principal of each Class of Subordinated
Certificates, in the order and subject
to the limitations set forth herein
under "Description of the
Certificates--Priority of
Distributions."
S-4
<PAGE> 6
Distributions of Interest.................. To the extent funds are available
therefor in the priority described
herein, each interest-bearing Class
of Certificates will be entitled to
receive interest in the amount of
the related Class Interest
Distribution Amount. See
"Description of the
Certificates--Interest" herein.
A. Class Interest Distribution Amount.. Interest will accrue on each Class
of Fixed Rate Certificates at the
applicable Remittance Rate for each
calendar month. Interest will accrue
on the Floating Rate Certificates at
the then-applicable Remittance Rate
during the period commencing on the
Remittance Date in the month
preceding the month of the
applicable Remittance Date (or, in
the case of the first Remittance
Date, beginning on the Closing Date)
and ending on the day preceding such
applicable Remittance Date. Such
period for each Class of
Certificates is its respective
"Interest Accrual Period." Interest
on the Fixed Rate Certificates will
be calculated on the basis of a
360-day year consisting of twelve
30-day months. Interest on the
Floating Rate Certificates will be
calculated on the basis of a 360-day
year and the actual number of days
elapsed in each Interest Accrual
Period.
B. Remittance Rate..................... The Remittance Rate for each Class
of Fixed Rate Certificates, except
the [Class B-2] Certificates, for
each Remittance Date will be as set
forth or described on the cover page
hereof. The Remittance Rate for the
[Class A-1] Certificates will be
calculated by reference to [the
London interbank offered rate for
one month U.S. dollar deposits
("1-Month LIBOR")]. [The "Class A-1
LIBOR Rate" for each Interest
Accrual Period will equal the sum of
1-Month LIBOR, determined as
described under "Description of the
Certificates--Interest" herein, and
__%.] Each Remittance Rate is
subject to a maximum rate on each
Remittance Date equal to the
weighted average of the Net Contract
Rates of the Contracts in the
Contract Pool. The "Net Contract
Rate" of a Contract equals the rate
of interest then borne by such
Contract (the "Contract Rate") minus
_____% per annum (the "Expense Fee
Rate").
Distributions of Principal................. On each Remittance Date, to the
extent funds are available therefor,
principal distributions in reduction
of the Class Certificate Balance of
each Class of Certificates will be
made in the order and subject to the
priorities set forth herein under
"Description of the
Certificates--Priority of
Distributions" in an aggregate
amount equal to such Class'
allocable portion of the Formula
Principal Distribution Amount.
Credit Enhancement--General................ Credit enhancement for the Senior
Certificates will be provided by the
Subordinated Certificates. Credit
enhancement for each Class of
Subordinated Certificates (other
than the Class R Certificates) will
be provided by the Class or Classes
of Subordinated Certificates with
higher numerical Class designations,
as described below.
Subordination............................. The rights of the holders of the
Subordinated Certificates to receive
distributions with respect to the
Contracts in the Trust will be
subordinated to such rights of the
holders of the Senior Certificates,
and the rights of the holders of
each Class of Subordinated
Certificates (other than the Class M
Certificates) to receive
distributions will be further
subordinated to such rights of the
holders of the Class or Classes of
Subordinated Certificates with lower
numerical Class designations, in
each case only to the extent
described herein.
S-5
<PAGE> 7
The subordination of the
Subordinated Certificates to the
Senior Certificates and the further
subordination within the
Subordinated Certificates are each
intended to increase the likelihood
of timely receipt by the holders of
Certificates with higher relative
payment priority of the maximum
amount to which they are entitled on
any Remittance Date and to provide
such holders protection against
losses resulting from defaults on
the Contracts to the extent
described herein. However, in
certain circumstances, the amount of
available subordination may be
exhausted and shortfalls in
distributions on the Offered
Certificates could result. There is
no credit enhancement available to
the Holders of the Offered
Certificates other than the
subordination feature described
above. Holders of the Offered
Certificates will bear their
proportionate share of any losses
realized on the Contracts in excess
of the available subordination
amounts.
The Contracts.............................. The Contracts consist of fixed rate
manufactured housing installment
sale contracts and manufactured
housing installment loan agreements
including any and all rights to
receive payments due thereunder on
and after the Cut-off Date and
[either (i)] security interests in
the Manufactured Homes purchased
with the proceeds of such contracts
[or (ii) with respect to certain of
the Contracts ("Land-and-Home
Contracts") liens on the real estate
to which the related Manufactured
Homes are deemed permanently
affixed]. The Contracts have been
selected by the Originator from its
portfolio of manufactured housing
contracts based on the criteria
specified in the Agreement. [All of
the Contracts are conventional
Contracts (i.e., not insured or
guaranteed by any governmental
agency). See "The Contract Pool"
herein.]
S-6
<PAGE> 8
Security Interests and Certain Other Aspects
of the Contracts; Repurchase or Substitution
Obligations................................. In connection with the transfer of
the Contracts to the Trust, the
Company will cause the Originator
to assign the security interests in
the Manufactured Homes [or, with
respect to the Land-and-Home
Contracts, the liens on the
Manufactured Homes and the
underlying real property, as
appropriate,] to the Trust. Under
the laws of most states,
Manufactured Homes that have not
been affixed to the real estate
constitute personal property, and
perfection of a security interest
in the Manufactured Home is
obtained, depending on applicable
state law, either by noting the
security interest on the
certificate of title for the
Manufactured Home or by filing a
financing statement under the
Uniform Commercial Code. If the
Manufactured Home were to be
relocated to another state without
reperfection of the security
interest, or if the Manufactured
Home were to become attached to its
site and a determination were to be
made that the security interest was
subject to real estate title and
recording laws, or as a result of
fraud or negligence, the Trust
could lose its prior perfected
security interest in a Manufactured
Home. Subject to the effect of not
amending certificates of title as
discussed under "Risk
Factors--Titles Will Not Be
Amended" in the Prospectus, the
Servicer will take such steps as
are necessary to maintain
perfection of the security interest
in each Manufactured Home. [In
addition, the assignment to the
Trustee of the mortgage or deed of
trust securing each Land-and-Home
Contract will be recorded.] Federal
and state consumer protection laws
impose requirements upon creditors
in connection with extensions of
credit and collections on
installment sale or loan contracts,
and certain of these laws make an
assignee of such a contract, such
as the Trust, liable to the obligor
thereon for any violation by the
lender. The Originator has agreed
to repurchase, or, at its option,
to substitute another contract for,
any Contract as to which it has
failed to perfect a security
interest in the Manufactured Home
securing such Contract, or as to
which a breach of federal or state
laws exists if such breach
materially adversely affects the
Trust's interest in the Contract,
unless such failure or breach has
been cured within 90 days from
notice of such breach.
Optional Termination........................ At its option, the Servicer may
purchase from the Trust all
remaining Contracts, and thereby
effect early retirement of the
Certificates, on any Remittance
Date when the Pool Principal
Balance is less than 10% of the
Cut-off Date Pool Principal Balance
(the "Servicer Optional Termination
Date"). See "Description of the
Certificates--Optional Termination"
herein.
Auction Sale................................ If the Servicer does not exercise
its optional termination right
within 90 days after the Servicer
Optional Termination Date, the
Trustee is required to solicit bids
for the purchase of all Contracts
remaining in the Trust. If
satisfactory bids are received as
set forth in the Agreement, such
remaining Contracts will be sold
and the proceeds distributed to
Certificateholders in the same
priority as distributions on a
Remittance Date. If such
satisfactory bids are not received,
the remaining Contracts will not be
sold, and the Trustee will not
solicit any other bids or otherwise
negotiate any further sale of the
Contracts. See "Description of the
Certificates--Auction Sale" herein.
S-7
<PAGE> 9
Federal Income Tax Considerations........... For federal income tax purposes, an
election will be made to treat the
assets of the Trust as a real
estate mortgage investment conduit
("REMIC"). The Regular Certificates
will be designated as "regular
interests" in the REMIC and
generally will be treated as debt
instruments of the Trust for
federal income tax purposes with
payment terms equivalent to the
terms of such Certificates. The
Class R Certificates will be
designated as the sole class of
"residual interests" in the REMIC.
The holders of the Regular
Certificates will be required to
include in income interest on such
Certificates (including any
original issue discount) in
accordance with the accrual method
of accounting.
Depending on their respective issue
prices, certain Classes of Offered
Certificates may be issued with
original issue discount ("OID") for
federal income tax purposes. The
rate that will be used to calculate
the accrual of OID will be ___% MHP
(as defined herein). No
representation is made that the
Contracts will prepay at that rate
or at any other rate. See "Federal
Income Tax Considerations" herein
and in the Prospectus.
ERISA Considerations........................ As described under "ERISA
Considerations" herein, the Offered
Certificates may not be purchased
by a pension or other employee
benefit plan subject to the
Employee Retirement Income Security
Act of 1974, as amended ("ERISA"),
or by individual retirement
accounts or Keogh plans covering
only a sole proprietor or partner
which are not subject to ERISA but
are subject to Section 4975 of the
Code ("Plans"), except pursuant to
certain exemptions from potential
prohibited transaction rules of
ERISA which prohibit a broad range
of transactions involving Plan
assets and persons having certain
specified relationships to a Plan
and related excise tax provisions
of Section 4975 of the Code.
It is believed that [Underwriter
Exemption] (the "Exemption"), which
provides an exemption for
transactions involving the
purchase, holding or transfer of
certain residential mortgage pool
pass-through certificates by Plans,
will apply to the Senior
Certificates.
Any Plan fiduciary considering
whether to purchase any Offered
Certificates on behalf of a Plan
should consult with its counsel
regarding the applicability of the
provisions of ERISA and the Code.
See "ERISA Considerations" herein
and in the Prospectus.
Legal Investment Considerations............. [The Senior Certificates and the
Class M Certificates will
constitute "mortgage related
securities" for purposes of the
Secondary Mortgage Market
Enhancement Act of 1984 ("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.
The Class B-1 Certificates will not
constitute "mortgage related
securities" for purposes of SMMEA.
Accordingly, many institutions with
legal authority to invest in
comparably rated securities may not
be legally authorized to invest in
the Class B-1 Certificates. See
"Legal Investment Considerations"
in the Prospectus.]
S-8
<PAGE> 10
Ratings..................................... It is a condition to the issuance
of the Senior Certificates that
they be rated AAA by [Rating
Agency] and [Rating Agency]. It is
a condition to the issuance of the
Class M and Class B-1 Certificates
that they be rated at least ___ and
___, respectively, by [Rating
Agency] and at least ___ and ____,
respectively, by [Rating Agency].
A security rating is not a
recommendation to buy, sell or hold
securities and may be subject to
revision or withdrawal at any time.
The Company has not requested a
rating on the Offered Certificates
by any rating agency other than the
Rating Agencies. However, there can
be no assurance as to whether any
other rating agency will rate some
or all of the Offered Certificates
or, if it does, as to the rating
that would be assigned by any such
rating agency. The rating assigned
by any such other rating agency
could be lower than the respective
ratings assigned by the Rating
Agencies.
Registration of the Offered Certificates.... Each Class of Offered Certificates
initially will be represented by
one or more certificates registered
in the name of Cede & Co. ("Cede")
as the nominee of The Depository
Trust Company ("DTC"). Persons
acquiring beneficial ownership
interests in the Offered
Certificates ("Certificate Owners")
will hold their interests through
DTC, in the United States, or Cedel
Bank, societe anonyme, ("Cedel") or
the Euroclear System ("Euroclear"),
in Europe. Transfers within DTC,
Cedel or Euroclear, as the case may
be, will be in accordance with the
usual rules and operating
procedures of the relevant system.
So long as the Offered Certificates
are in book-entry form, such
Certificates will be evidenced by
one or more Certificates registered
in the name of Cede, as the nominee
of DTC, or one of the relevant
depositaries (collectively, the
"European Depositaries").
Cross-market transfers between
persons holding directly or
indirectly through DTC, on the one
hand, and counterparties holding
directly or indirectly through
Cedel or Euroclear, on the other,
will be effected in DTC through
Citibank N.A. ("Citibank") or The
Chase Manhattan Bank ("Chase"), the
relevant depositaries of Cedel and
Euroclear, respectively, and each a
participating member of DTC. The
interests of such
Certificateholders will be
represented by book-entries on the
records of DTC, participating
members thereof and other entities,
such as banks, brokers, dealers and
trust companies that clear through
or maintain custodial relationships
with a participant, either directly
or indirectly. Certificates
representing the Offered
Certificates will be issued in
definitive form only under the
limited circumstances described
herein. All references herein to
"Holders" or "Certificateholders"
reflect the rights of Certificate
Owners as they may indirectly
exercise such rights through DTC
and participating members thereof,
except as otherwise specified
herein. See "Description of the
Certificates--Book-Entry
Certificates" herein and in the
Prospectus.
S-9
<PAGE> 11
RISK FACTORS
Before investing in the Offered Certificates, potential investors
should consider the risks discussed under the caption "Risk Factors" beginning
on Page 16 of the Prospectus and the following additional risks:
Trust Assets Are the Only Source of Credit Enhancement. The
subordination of the Subordinated Certificates to the Senior Certificates and
the further subordination within the Subordinated Certificates are the sole
sources of protection against losses on the Contracts available to Holders of
the Offered Certificates. If losses on the Contracts or other shortfalls in
available funds exceed the amount of protection afforded by such mechanisms,
Holders of the Offered Certificates will bear their proportionate share of
losses and other shortfalls in available funds. The Certificates represent
interests only in the Trust and do not represent interests in or obligations of
the Company, the Originator, the Servicer, the Trustee or any of their
respective affiliates. The assets of the Trust are the sole source of funds for
distributions on the Certificates.
Geographic Concentration May Create Additional Risks. Approximately
_____%, _____%, _____% and _____% of the Contracts delivered on the Closing Date
(by Cut-off Date Pool Principal Balance) are secured by Manufactured Homes
which, at the time of origination of such Contracts, were located in the States
of _____, ____________, ____________ and __________, respectively. Any
significant concentration of Contracts with Obligors in a particular state or
geographic region increases the exposure of the Trust to risk of loss due to
natural disasters, fluctuations in market values for manufactured housing and
deterioration of economic conditions in the particular state or region. Such
factors can affect the rates of delinquency and default on the Contracts as well
as the values of the related Manufactured Homes and the severity of losses
following repossession or foreclosure. Any natural disasters, fluctuations in
market values for manufactured housing or deterioration in economic conditions
affecting the foregoing states may adversely and disproportionately affect the
performance of the Contract Pool.
Performance May Be Affected by Start-Up Nature of Business. Although
BCI has been in business for many years, BCI created its Mortgage Division,
which originates and services manufactured housing contracts, only in December
1996. Thus, BCI's Mortgage Division has only approximately [9] months of
operating history and is subject to the risks associated with any start-up
operation. Although the management of BCI's Mortgage Division has had
considerable experience in the origination, purchase and servicing of
manufactured housing installment sales contracts and manufactured housing
installment loan agreements while employed with other companies, there can be no
assurance that the delinquency and loss experience on the Contracts will not
exceed industry norms.
Prepayments May Affect Remittance Rates. The Remittance Rate for each
Class of Certificates on any Remittance Date will not exceed the weighted
average of the Net Contract Rate of the Contracts in the Contract Pool.
Disproportionate prepayments (including prepayments due to liquidations and
repurchases or purchases by the Originators or the Servicer as required or
permitted by the Agreement) of Contracts with Net Contract Rates in excess of
the applicable Remittance Rate for a Class of Certificates will increase the
possibility that the Remittance Rate for such Class of Certificates will be less
than the otherwise applicable rate. There is no mechanism to compensate Holders
of any affected Class of Certificates. Any difference between interest at the
actual Remittance Rate and interest at the applicable fixed rate[, or the Class
A-1 LIBOR Rate for such Interest Accrual Period in the case of the Class A-1
Certificates,] will not constitute an Unpaid Interest Amount, and any such
difference will be foregone permanently.
Yields on Subordinated Certificates will be Adversely Affected by
Losses. The weighted average lives of, and the yields to maturity on, the
Subordinated Certificates will be sensitive to the rate and timing of Obligor
defaults and the severity of ensuing losses on the Contracts. The sensitivity of
the yields on the Subordinated Certificates will increase as the payment
priority of the related Class decreases so that the Class B-1 Certificates will
be more sensitive than the Class M Certificates and the Class B-2 Certificates
will be more sensitive than the Class M and Class B-1 Certificates. If the
actual rate and severity of losses on the Contracts is higher than those assumed
by a Holder of a Subordinated Certificate, the actual yield to maturity of such
Certificates will be lower than the yield expected by such Holder based on such
assumption. The timing of losses on the Contracts will also affect an investor's
actual yield to
S-10
<PAGE> 12
maturity, even if the rate of defaults and severity of losses over the life of
the Contract Pool are consistent with an investor's expectations. In general,
the earlier a loss occurs, the greater the effect on an investor's yield to
maturity.
Priority of Distributions May Increase Risks for Subordinated
Certificates. Due to the priority of the application of the Amount Available as
described herein under "Description of the Certificates--Priority of
Distributions," the Subordinated Certificates, in increasing order of their
numerical Class designations, will bear the risk of any shortfall in the
Available Funds. Thus, Holders of one or more Classes of Subordinated
Certificates may not receive distributions of interest and/or principal to which
such Holders are entitled on the applicable Remittance Date.
Distributions of principal of the Class M and Class B-1 Certificates
will not commence until at least the Remittance Date in [MONTH/YEAR] unless the
aggregate Class Certificate Balance of the Senior Certificates is reduced to
zero prior thereto. After such Remittance Date, distributions of principal of
the Class M and/or Class B-1 Certificates will only be made if certain
performance tests are satisfied, unless the aggregate Class Certificate Balance
of the Senior Certificates, and, in the case of the Class B-1 Certificates, the
Class Certificate Balance of the Class M Certificate is reduced to zero. As a
result, the weighted average lives of the Subordinated Certificates will be
longer than would be the case if distributions of principal were to be allocated
on a pro rata basis among the Senior and Subordinated Certificates. As a result
of the longer weighted average lives, the Holders of the Subordinated
Certificates have a greater risk of suffering a loss on their investments.
Book-Entry Certificates May Affect Liquidity. The issuance of the
Offered Certificates in book-entry form may reduce the liquidity of such
Certificates in the secondary trading market since some investors may be
unwilling to purchase Offered Certificates for which they cannot receive
physical certificates.
Since transactions in the Offered Certificates may be effected only
through DTC, participating organizations and indirect participating
organizations, the ability of a beneficial owner of an Offered Certificate to
pledge an Offered Certificate to persons or entities that do not participate in
the DTC system or otherwise to take actions in respect of such Certificates, may
be limited by the lack of a physical certificate representing the Offered
Certificates.
Beneficial owners of the Offered Certificates may experience some delay
in the receipt of distributions of interest on and principal of the Offered
Certificates because such distributions will be forwarded by the Trustee to DTC,
and DTC will credit such distributions to the accounts of the applicable
participating organizations which will thereafter credit such distributions to
the accounts of the applicable beneficial owners, either directly or through
indirect participants. See "Description of the Certificates--Book-Entry
Certificates" herein and in the Prospectus.
THE ASSET POOL
GENERAL
[All of the Contracts were originated by a manufactured housing dealer
and purchased by the Originator from such dealer, or were originated by the
Originators directly or indirectly through correspondents or mortgage brokers.]
All of the Contracts are conventional manufactured housing contracts, meaning
that they are not insured or guaranteed by any governmental agency.
Each Contract is (a) secured by a Manufactured Home [or, in the case of
a Land-and- Home Contract, by a lien on the Manufactured Home and the real
estate to which the Manufactured Home is deemed permanently affixed], (b) fully
amortizing with a fixed contractual rate of interest (the "Contract Rate") and
provides for level payments over the term of such Contract on a specified date
in each month (each, a "Due Date"). The Due Dates will occur throughout the
month.
[The "Value" used to calculate the original loan-to-value ratios of the
Contracts originated by BCI is equal to the lesser of the appraised value or, in
the case of a purchase, the purchase price of the Manufactured Home and the
S-11
<PAGE> 13
related real estate to which the Manufactured Home is permanently affixed.
Manufactured Homes, unlike site-built homes, generally depreciate in value.
Consequently, at any time after origination it is possible, especially in the
case of Contracts with high loan-to-value ratios at origination, that the market
value of a Manufactured Home may be lower than the principal amount outstanding
under the related Contract.]
STATISTICAL INFORMATION
Set forth below is certain statistical information as of the Cut-off
Date regarding the Contracts expected to be included in the Contract Pool as of
the Closing Date. Prior to the Closing Date, Contracts may be removed from the
Contract Pool and other Contracts may be substituted therefor. The Company
believes that the information set forth herein with respect to the Contract Pool
as presently constituted is representative of the characteristics of the
Contract Pool as it will be constituted at the Closing Date, although certain
characteristics of the Contracts may vary. All such information is approximate,
and the sum of the percentage columns in the following tables may not equal 100%
due to rounding. Percentages, other than rates of interest and Loan-to-Value
Ratios, are based on the Cut-off Date Pool Principal Balance.
As of the Cut-off Date: the Contract balances ranged from $_____ to
$_______; the average Contract balance was $______; the Contract Rates ranged
from ____% to _____% per annum; the weighted average Contract Rate was _____%
per annum; the original Loan-to-Value Ratios ranged from ____% to ______%; the
weighted average original Loan-to-Value Ratio was _____%; the original terms to
stated maturity ranged from __ months to ___ months; the weighted average
original term to stated maturity was ___ months; the remaining terms to stated
maturity ranged from __ months to ___ months; the weighted average remaining
term to stated maturity was ___ months; the number of months since origination
of the Contracts ranged from __ months to __ months; the weighted average number
of months since origination was __ months; _____% and _____% of the Contracts
are secured by new and used Manufactured Homes, respectively; _____% of the
Contracts are Land-and-Home Contracts; _____% of the Contracts are secured by
Manufactured Homes which are the Obligors' primary residences based on
representations at the time of origination of such Contracts; _____% of the
Contracts were originated in connection with the purchase of the related
Manufactured Home; _____%, _____% and ____% of the Contracts are secured by
Manufactured Homes which are single wide, double wide and triple wide,
respectively.
GEOGRAPHICAL DISTRIBUTION OF MANUFACTURED HOMES
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL % OF CUT-OFF
NUMBER OF BALANCE DATE POOL
STATES CONTRACTS OUTSTANDING PRINCIPAL BALANCE
- ------ --------- ----------- -----------------
<S> <C> <C> <C>
Arizona.................
Arkansas................
California..............
Colorado................
Delaware................
Florida.................
Georgia.................
Illinois................
Indiana.................
Iowa....................
Kansas..................
Kentucky................
Louisiana...............
Maine...................
Michigan................
</TABLE>
S-12
<PAGE> 14
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL % OF CUT-OFF
NUMBER OF BALANCE DATE POOL
STATES CONTRACTS OUTSTANDING PRINCIPAL BALANCE
- ------ --------- ----------- -----------------
<S> <C> <C> <C>
Minnesota...............
Mississippi.............
Missouri................
Nebraska................
Nevada..................
New Mexico..............
New York................
North Carolina..........
Ohio....................
Oklahoma................
Oregon..................
Pennsylvania............
South Carolina..........
Tennessee...............
Texas...................
Utah....................
Virginia................
Washington..............
West Virginia...........
Wisconsin...............
Totals:........
</TABLE>
DISTRIBUTION OF CONTRACT AMOUNTS AS OF CUT-OFF DATE
<TABLE>
<CAPTION>
AGGREGATE % OF CUT-OFF
RANGE OF PRINCIPAL DATE POOL
CONTRACT NUMBER OF BALANCE PRINCIPAL
AMOUNTS CONTRACTS OUTSTANDING BALANCE
- -------- --------- ----------- ------------
<S> <C> <C> <C>
$ 0.01 -- 5,000.00.............
5,000.01 -- 10,000.00.............
10,000.01 -- 15,000.00.............
15,000.01 -- 20,000.00.............
20,000.01 -- 25,000.00.............
25,000.01 -- 30,000.00.............
30,000.01 -- 35,000.00.............
35,000.01 -- 40,000.00.............
40,000.01 -- 45,000.00.............
45,000.01 -- 50,000.00.............
50,000.01 -- 55,000.00.............
55,000.01 -- 60,000.00.............
60,000.01 -- 65,000.00.............
65,000.01 -- 70,000.00.............
70,000.01 -- 75,000.00.............
75,000.01 -- 80,000.00.............
80,000.01 -- 85,000.00.............
85,000.01 -- 90,000.00.............
90,000.01 -- 95,000.00.............
95,000.01 -- 100,000.00.............
100,000.01 -- 150,000.00.............
150,000.01 -- 200,000.00.............
Totals:.....................
</TABLE>
S-13
<PAGE> 15
DISTRIBUTION OF ORIGINAL LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
RANGE OF AGGREGATE % OF CUT-OFF
ORIGINAL PRINCIPAL DATE POOL
LOAN-TO-VALUE NUMBER OF BALANCE PRINCIPAL
RATIOS CONTRACTS OUTSTANDING BALANCE
- ------------- --------- ----------- ------------
<S> <C> <C> <C>
5.01 -- 10.00%................
10.01 -- 15.00.................
15.01 -- 20.00.................
20.01 -- 25.00.................
25.01 -- 30.00.................
30.01 -- 35.00.................
35.01 -- 40.00.................
40.01 -- 45.00.................
45.01 -- 50.00.................
50.01 -- 55.00.................
55.01 -- 60.00.................
60.01 -- 65.00.................
65.01 -- 70.00.................
70.01 -- 75.00.................
75.01 -- 80.00.................
80.01 -- 85.00.................
85.01 -- 90.00.................
90.01 -- 95.00.................
95.01 -- 100.00.................
Totals.................
</TABLE>
S-14
<PAGE> 16
CONTRACT RATES
<TABLE>
<CAPTION>
AGGREGATE % OF CUT-OFF
PRINCIPAL DATE POOL
RANGE OF NUMBER OF BALANCE PRINCIPAL
CONTRACT RATES CONTRACTS OUTSTANDING BALANCE
- -------------- --------- ----------- ------------
<S> <C> <C> <C>
6.001 -- 6.500%..................
6.501 -- 7.000...................
7.001 -- 7.500...................
7.501 -- 8.000...................
8.001 -- 8.500...................
8.501 -- 9.000...................
9.001 -- 9.500...................
9.501 -- 10.000...................
10.001 -- 10.500...................
10.501 -- 11.000...................
11.001 -- 11.500...................
11.501 -- 12.000...................
12.001 -- 12.500...................
12.501 -- 13.000...................
13.001 -- 13.500...................
13.501 -- 14.000...................
14.001 -- 14.500...................
14.501 -- 15.000...................
15.001 -- 15.500...................
15.501 -- 16.000...................
Totals....................
</TABLE>
REMAINING MONTHS TO MATURITY
<TABLE>
<CAPTION>
AGGREGATE % OF CUT-OFF
RANGE OF PRINCIPAL DATE POOL
REMAINING NUMBER OF BALANCE PRINCIPAL
MONTHS TO MATURITY CONTRACTS OUTSTANDING BALANCE
- ------------------ --------- ----------- ------------
<S> <C> <C> <C>
Totals....................
</TABLE>
S-15
<PAGE> 17
ORIGINAL MONTHS TO MATURITY
<TABLE>
<CAPTION>
AGGREGATE % OF CUT-OFF
RANGE OF PRINCIPAL DATE POOL
ORIGINAL NUMBER OF BALANCE PRINCIPAL
MONTHS TO MATURITY CONTRACTS OUTSTANDING BALANCE
- ------------------ --------- ----------- ------------
<S> <C> <C> <C>
Totals......................
</TABLE>
DISTRIBUTION OF CONTRACT AGES (IN MONTHS)
<TABLE>
<CAPTION>
AGGREGATE % OF CUT-OFF
RANGE OF PRINCIPAL DATE POOL
CONTRACT AGES NUMBER OF BALANCE PRINCIPAL
(MONTHS) CONTRACTS OUTSTANDING BALANCE
- ------------- --------- ----------- ------------
<S> <C> <C> <C>
Totals......................
</TABLE>
S-16
<PAGE> 18
MATURITY, PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
Prepayments. The weighted average life of and, if purchased at a price
other than par, the yield to maturity on, a Class of Offered Certificates will
be directly related to the rate of payment of principal of the Contracts within
the Contract Pool, including for this purpose prepayments, delinquencies,
liquidations due to defaults, casualties and condemnations, and repurchases of
Contracts by the Originators or purchases of Contracts by the Servicer or
pursuant to an auction sale. The Contracts may be prepaid by the related
Obligors at any time, generally without payment of any prepayment fee or
penalty. The actual rate of principal prepayments on pools of manufactured
housing contracts is influenced by a variety of economic, tax, geographic,
demographic, social, legal and other factors and has fluctuated considerably in
recent years. In addition, the rate of principal prepayments may differ among
pools of manufactured housing contracts at any time because of specific factors
relating to the contracts in the particular pool, including, among other things,
the age of the contracts, the geographic locations of the properties securing
the contracts, the extent of the Obligors' equity in such properties, and
changes in the Obligors' housing needs, job transfers and unemployment.
Generally, however, because the Contracts bear interest at fixed rates, if
prevailing interest rates were to fall below the Contract Rates, the Contracts
may be subject to higher prepayment rates. Conversely, if prevailing interest
rates were to rise above the Contract Rates, the rate of prepayments on the
Contracts could decrease.
If purchased at a price other than par, the yield to maturity on an
Offered Certificate will be affected by the rate and timing of payments of
principal, including Prepayments, of the Contracts. If the actual rate of
payments on the Contracts is slower than the rate anticipated by an investor who
purchases an Offered Certificate at a discount, the actual yield to such
investor will be lower than such investor's anticipated yield. If the actual
rate of payments on the Contracts is faster than the rate anticipated by an
investor who purchases an Offered Certificate at a premium, the actual yield to
such investor will be lower than such investor's anticipated yield.
The timing of changes in the rate of prepayments on the Contracts may
significantly affect an investor's actual yield to maturity, even if the average
rate of principal payments is consistent with an investor's expectation. In
general, the earlier a prepayment of principal on the Contracts, the greater the
effect on an investor's yield to maturity. The effect on an investor's yield as
a result of principal payments occurring at a rate higher (or lower) than the
rate anticipated by the investor during the period immediately following the
issuance of the Offered Certificates may not be offset by a subsequent like
decrease (or increase) in the rate of principal payments.
Final Scheduled Remittance Dates. The Final Scheduled Remittance Dates
for each Class of Offered Certificates is set forth on the cover hereof. The
Final Scheduled Remittance Dates for the [Class A-1, Class A-2, Class A-3 and
Class B-1] Certificates were determined on the basis of the Structuring
Assumptions (defined below) and the assumption that there are no Prepayments,
the Servicer does not exercise its optional termination right and the Contracts
are not sold in an auction sale. The Final Scheduled Remittance Dates for the
[Class A-4, Class M and Class B-2] Certificates were determined by adding
fifteen months to the date of maturity of the latest possible maturing Contract.
The weighted average life of each Class of Offered Certificates is likely to be
shorter, and the final Remittance Date could occur significantly earlier than
the applicable Final Scheduled Remittance Date because (i) Prepayments are
likely to occur, (ii) the Originators may repurchase Contracts in the event of
breaches of representations and warranties and (iii) the Servicer may cause an
optional termination of the Trust or an auction sale may occur.
[Floating Rate Certificates. Each Interest Accrual Period for the
Floating Rate Certificates will consist of the actual number of days elapsed
from the Remittance Date in the month preceding the month of the applicable
Remittance Date (or, in the case of the first Interest Accrual Period, from the
Closing Date) through the day preceding such Remittance Date. After the initial
Interest Accrual Period, the Remittance Rate for the Floating Rate Certificates
will be adjusted by reference to changes in the level of 1-Month LIBOR, subject
to the effects of the applicable limitations described herein. See "Risk
Factors--Prepayments May Affect Remittance Rates" herein.]
S-17
<PAGE> 19
Priority of Distributions. On each Remittance Date, the Amount
Available will be applied in the order described under "Description of the
Certificates--Priority of Distributions." In the event that the Amount Available
is insufficient for such purposes, the shortfall will be borne first by the
Subordinated Certificates in the reverse order of their numerical Class
designations, beginning with the Class B-2 Certificates.
In addition, the Formula Principal Distribution Amount includes the
Stated Principal Balance of each Contract which became a Liquidated Contract in
the related Due Period, regardless of whether the related Net Liquidation
Proceeds equal or exceed such Stated Principal Balance. If such Net Liquidation
Proceeds are less than such Stated Principal Balance, a portion of the Amount
Available that otherwise would be available for applications with a lower
payment priority will instead be used as part of the Formula Principal
Distribution Amount.
Until the Remittance Date in [MONTH/YEAR], the Senior Certificates will
be entitled to 100% of the Formula Principal Distribution Amount. On each
Remittance Date thereafter, the Senior Certificates will continue to be entitled
to 100% of the Formula Principal Distribution Amount unless on any such
Remittance Date the performance tests applicable to the Class M and/or Class B
Certificates are satisfied. This allocation to the Senior Certificates will
accelerate the amortization of the Senior Certificates relative to that of the
Subordinated Certificates thereby increasing the interest in the Trust evidenced
by the Subordinated Certificates. Increasing the interest in the Trust evidenced
by the Subordinated Certificates relative to that evidenced by the Senior
Certificates is intended to preserve the protection afforded by the
subordination of the Subordinated Certificates to the Senior Certificates.
Unless the performance test applicable to the Class M Certificates is
satisfied on any Remittance Date on or after the Remittance Date in
[MONTH/YEAR], the Class M Certificates will not receive any distributions of
principal until the aggregate Class Certificate Balance of the Senior
Certificates has been reduced to zero. Similarly, unless the performance test
applicable to the Class B Certificates is satisfied on any Remittance Date on or
after the Remittance Date in [MONTH/YEAR], the Class B-1 Certificates will not
receive any distributions of principal until the aggregate Class Certificate
Balance of the Senior Certificates and the Class M Certificates has been reduced
to zero. The effect of these provisions is that principal distributions are made
sequentially to the Senior Certificates, then to the Class M Certificates and
then to the Class B-1 Certificates. However, after a five-year lockout period,
the Class M and Class B-1 Certificates may begin receiving principal
distributions if the Contract Pool is performing satisfactorily.
As a result of this allocation of principal distributions, the weighted
average lives of the Class M and Class B-1 Certificates will be longer than
would have been the case if principal distributions were to be made on a pro
rata basis. In addition, if the Contract Pool is not performing such that the
performance tests applicable to the Class M and/or Class B Certificates is
satisfied, the weighted average lives of such Classes will be extended at a time
when the Contract Pool is not performing. The longer weighted average lives of
the Class M and Class B-1 Certificates increase the possibility that investors
in such Certificates will suffer a loss on their investments. None of the
Company, the Servicer or the Trustee or any of their respective affiliates makes
any representation as to the rate or timing of principal distributions, the
sufficiency of the Amount Available, the rate or severity of losses or the
resulting yield to maturity of any Class of Certificates.
PAYMENT LAG FEATURE OF THE FIXED RATE CERTIFICATES
The Agreement provides that each Interest Accrual Period for the Fixed
Rate Certificates will be the calendar month prior to each Remittance Date.
Collections on the Contracts are not distributed to the Holders of the Offered
Certificates until at least the 15th day of the following month. As a result,
the yield to the Holders of the Fixed Rate Certificates will be slightly lower
than would be the case if each Interest Accrual Period were to be from
Remittance Date to Remittance Date.
S-18
<PAGE> 20
STRUCTURING ASSUMPTIONS
The information in the decrement tables has been prepared on the basis
of the following assumed characteristics of the Contracts and the following
additional assumptions (collectively, the 'Structuring Assumptions'): (i) the
Contracts prepay at the specified percentages of MHP (as defined below), (ii) no
defaults or delinquencies in the payment by Obligors of principal of and
interest on the Contracts are experienced, (iii) the initial Class Certificate
Balance of each Class of Offered Certificates is as set forth on the cover page
hereof, (iv) interest accrues on each Class of Offered Certificates in each
period at the applicable Remittance Rate or initial Remittance Rate described
herein, (v) distributions in respect of the Offered Certificates are received in
cash on the 15th day of each month commencing in [MONTH/YEAR], (vi) the Servicer
does not exercise its option to purchase the remaining Contracts and no auction
sale occurs, except as otherwise indicated in the footnotes to the tables, (vii)
the Offered Certificates are purchased on ____________, (viii) scheduled
payments on the Contracts are received on the first day of each month commencing
in the calendar month following the Closing Date and are computed prior to
giving effect to prepayments received on the last day of the prior month, (ix)
prepayments represent prepayments in full of individual Contracts and are
received on the last day of each month and include 30 days' interest thereon,
commencing in the calendar month of the Closing Date, (x) the scheduled monthly
payment for each Contract has been calculated based on the assumed
characteristics set forth in the following table such that each Contract will
amortize in amounts sufficient to repay the balance of such Contract by its
indicated remaining term to maturity, (xi) the Trust consists of [__] Contracts
with the characteristics set forth in the following table and (xii) the Expense
Fee Rate is _____% per annum for each Contract. While it is assumed that each of
the Contracts prepays at the specified percentages of MHP, this is not likely to
be the case. Moreover, discrepancies will exist between the characteristics of
the actual Contracts which will be delivered to the Trustee and characteristics
of the Contracts assumed in preparing the tables herein.
Prepayments of contracts are commonly measured relative to a prepayment
standard or model. The model used with respect to the Offered Certificates
("MHP") is based on an assumed rate of prepayment each month of the then unpaid
principal balance of a pool of manufactured housing installment sales contracts.
A prepayment assumption of 100% MHP assumes that a pool of manufactured housing
contracts prepays in the first month of the life of the manufactured housing
contract at a constant prepayment rate ("CPR") of 3.7% and increases by an
additional 0.1% each month thereafter through the 23rd month. Beginning in the
24th month, MHP assumes a constant prepayment rate of 6.0% per annum. CPR
represents an assumed constant rate of prepayment each month, expressed as an
annual rate, relative to the then outstanding principal balance of a pool of
manufactured housing contracts for the life of such manufactured housing
contracts. Neither model purports to be either an historical description of the
prepayment experience of any pool of manufactured housing contracts or a
prediction of the anticipated rate of prepayment of any manufactured housing
contracts, including the Contracts to be included in the Trust.
<TABLE>
<CAPTION>
REMAINING TERM
CONTRACT ORIGINAL TERM TO TO MATURITY
CONTRACT NO. PRINCIPAL BALANCE($) RATE(%) MATURITY (IN MONTHS) (IN MONTHS)
------------ -------------------- ------- -------------------- -----------
<S> <C> <C> <C> <C>
</TABLE>
DECREMENT TABLES
The following tables indicate, based on the Structuring Assumptions,
the percentages of the initial Class Certificate Balances of the Classes of
Offered Certificates that would be outstanding after each of the dates shown at
various percentages of MHP and the corresponding weighted average lives of such
Classes. It is not likely that (i) all
S-19
<PAGE> 21
of the Contracts will have the characteristics assumed or (ii) the Contracts
will prepay at the specified percentages of MHP or at any other constant
percentage. Moreover, the diverse remaining terms to maturity of the Contracts
could produce slower or faster principal distributions than indicated in the
tables at the specified percentages of the Prepayment Assumption, even if the
weighted average remaining term to maturity of the Contracts is consistent with
the remaining terms to maturity of the Contracts specified in the Structuring
Assumptions.
PERCENT OF INITIAL CLASS CERTIFICATE
BALANCES OUTSTANDING*
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2
PERCENTAGE OF MHP PERCENTAGE OF MHP
----------------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Remittance Date 0% ___% ___% ___% ___% 0% ___% ___% ___% ___%
Initial Percent.............
Weighted Average Life (years)**
</TABLE>
- ----------------
* Rounded to the nearest whole percentage.
** The weighted average life of an Offered Certificate is determined by
(a) multiplying the amount of the reduction, if any, of the Class
Certificate Balance of such Certificate on each Remittance Date by the
number of years from the date of issuance to such Remittance Date, (b)
summing the results and (c) dividing the sum by the aggregate amount of
the reductions in Class Certificate Balance of such Certificate
referred to in clause (a).
PERCENT OF INITIAL CLASS CERTIFICATE
BALANCES OUTSTANDING*
<TABLE>
<CAPTION>
CLASS A-3 CLASS A-4
PERCENTAGE OF MHP PERCENTAGE OF MHP
--------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Remittance Date 0% ___% ___% ___% ___% 0% ___% ___% ___% ___%
Initial Percent.............
Weighted Average Life
(years)(1)**..............
Weighted Average Life
(years)(2)**..............
</TABLE>
- ----------------
* Rounded to the nearest whole percentage.
** The weighted average life of an Offered Certificate is determined by
(a) multiplying the amount of the reduction, if any, of the Class
Certificate Balance of such Certificate on each Remittance Date by the
number of years from the date of issuance to such Remittance Date, (b)
summing the results and (c) dividing the sum by the aggregate amount of
the reductions in Class Certificate Balance of such Certificate
referred to in clause (a).
(1) Assumes no optional termination or auction sale of the Trust.
(2) Assumes optional termination on the Servicer Optional Termination Date.
S-20
<PAGE> 22
PERCENT OF INITIAL CLASS CERTIFICATE
BALANCES OUTSTANDING*
<TABLE>
<CAPTION>
CLASS M CLASS B-1
PERCENTAGE OF MHP PERCENTAGE OF MHP
--------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Remittance Date 0% ___% ___% ___% ___% 0% ___% ___% ___% ___%
Initial Percent.............
Weighted Average Life
(years)(1)**..............
Weighted Average Life
(years)(2)**..............
</TABLE>
- ---------------
* Rounded to the nearest whole percentage.
** The weighted average life of an Offered Certificate is determined by
(a) multiplying the amount of the reduction, if any, of the Class
Certificate Balance of such Certificate on each Remittance Date by the
number of years from the date of issuance to such Remittance Date, (b)
summing the results and (c) dividing the sum by the aggregate amount of
the reductions in Class Certificate Balance of such Certificate
referred to in clause (a).
(1) Assumes no optional termination or auction sale of the Trust.
(2) Assumes optional termination on the Servicer Optional Termination Date.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to the Agreement. Set forth
below are summaries of the specific terms and provisions pursuant to which the
Certificates will be issued. The following summaries do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, the provisions of the Agreement. When particular provisions or terms used in
the Agreement are referred to, the actual provisions (including definitions of
terms) are incorporated by reference.
The Pass-Through Certificates, Series 199_ will consist of the [Class
A-1, Class A-2, Class A-3 and Class A-4] Certificates (collectively, the "Senior
Certificates") and the [Class M, Class B-1, Class B-2 and Class R] Certificates
(collectively, the "Subordinated Certificates"). The Senior Certificates and the
Subordinated Certificates are collectively referred to herein as the
"Certificates." Only the Senior Certificates and the [Class M and Class B-1]
Certificates (collectively, the "Offered Certificates") are offered hereby. The
Classes of Offered Certificates will have the respective initial Class
Certificate Balances and Remittance Rates set forth or described on the cover
hereof.
The "Class Certificate Balance" of any Class of Certificates as of any
Remittance Date is the initial Class Certificate Balance thereof reduced by the
sum of all amounts previously distributed to holders of Certificates of such
Class as payments of principal.
The Senior Certificates will evidence in the aggregate an initial
beneficial ownership interest of approximately _____% in the Trust. The Class M,
Class B-1 and Class B-2 Certificates will each evidence in the aggregate an
initial beneficial ownership interest of approximately ____%, ____% and ____%,
respectively, in the Trust.
S-21
<PAGE> 23
BOOK-ENTRY CERTIFICATES
Each Class of Book-Entry Certificates will be issued in one or more
certificates which equal the aggregate initial Class Certificates Balance of
each such Class of Certificates and which will be held by a nominee of The
Depository Trust Company (together with any successor depository selected by the
Company, the "Depository"). Beneficial interests in the Book-Entry Certificates
will be held indirectly by investors through the book-entry facilities of the
Depository, as described herein. Investors may hold such beneficial interests in
the Book-Entry Certificates in minimum denominations representing an original
principal amount of $25,000 and integral multiples of $1,000 in excess thereof.
One investor of each Class of Book-Entry Certificates may hold a beneficial
interest therein that is not an integral multiple of $1,000. The Company has
been informed by the Depository that its nominee will be Cede & Co. ("Cede").
Accordingly, Cede is expected to be the holder of record of the Book-Entry
Certificates. Except as described in the Prospectus under "Description of the
Certificates Book--Entry Certificates," no person acquiring a Book-Entry
Certificate (each, a "Certificate Owner") will be entitled to receive a physical
certificate representing such Certificate (a "Definitive Certificate").
Unless and until Definitive Certificates are issued, it is anticipated
that the only "Certificateholder" of the Book-Entry Certificates will be Cede,
as nominee of the Depository. Owners of the Book-Entry Certificates will not be
Certificateholders, as that term is used in the Agreement. Certificate Owners
are only permitted to exercise the rights of Certificateholders indirectly
through Financial Intermediaries and the Depository. Monthly and annual reports
on the Trust provided to Cede, as nominee of the Depository, may be made
available to Certificate Owners upon request, in accordance with the rules,
regulations and procedures creating and affecting the Depository, and to the
Financial Intermediaries to whose Depository accounts the Book-Entry
Certificates of such Certificate Owners are credited.
For a description of the procedures generally applicable to the
Book-Entry Certificates, see "Description of the Certificates--Book-Entry
Certificates" in the Prospectus.
DISTRIBUTIONS
Distributions on the Certificates will be made by the Trustee on the
15th day of each month, or if such day is not a business day, on the next
succeeding business day thereafter, commencing in [MONTH/YEAR] (each, a
"Remittance Date"), to the persons in whose names such Certificates are
registered at the close of business on the last business day of the month
immediately preceding the month of such Remittance Date (the "Record Date").
Distributions on each Remittance Date will be made by check mailed to
the address of the person entitled thereto as it appears on the applicable
certificate register or, in the case of a Certificateholder who holds 100% of a
Class of Certificates or who holds Certificates with an aggregate initial
Certificate Balance of $1,000,000 or more and who has so notified the Trustee in
writing in accordance with the Agreement, by wire transfer in immediately
available funds to the account of such Certificateholder at a bank or other
depository institution having appropriate wire transfer facilities; provided,
however, that the final distribution in retirement of the Certificates will be
made only upon presentment and surrender of such Certificates at the Corporate
Trust Office of the Trustee.
AVAILABLE FUNDS
"Available Funds" for each Remittance Date will equal the sum of the
following amounts:
(i) the aggregate of all previously undistributed payments on
account of principal and interest (net of the Servicing Fee) on the
Contracts received on or after the Cut-off Date and due during the
related Due Period and received on or prior to the ____ day of the
month of such Remittance Date or if such ____ day is not a business
day, the preceding business day (the "Determination Date") except:
(a) all payments on the Contracts that were due before the
Cut-off Date;
S-22
<PAGE> 24
(b) all payments or collections due after the
related Due Period;
(c) amounts representing reimbursement for
Monthly Advances, such reimbursement being limited, to amounts
received on particular Contracts as late collections of
principal or interest as to which the Servicer has made an
unreimbursed Monthly Advance;
(d) amounts representing reimbursement for any
unpaid Servicing Fees and expenses from Liquidation Proceeds,
condemnation proceeds and proceeds of insurance policies with
respect to the related Contracts; and
(e) amounts representing reimbursement for
Nonrecoverable Advances;
(ii) the amount of any Monthly Advance made by the
Servicer and deposited by it in the Certificate Account.
PRIORITY OF DISTRIBUTIONS
On or prior to each Remittance Date, the Servicer will transfer the
Available Funds from the Collection Account to the Certificate Account (such
amount, the "Amount Available" for such Remittance Date). On each Remittance
Date, the Trustee will distribute out of the Certificate Account, the following
amounts in the following order of priority, in each case, to the extent of the
remaining funds:
[Description of allocation of payments of interest and principal among
the Classes.]
INTEREST
General. The Remittance Rate for each Class of Fixed Rate Certificates
(except the Class B-2 Certificates) for each Remittance Date is as set forth or
described on the cover hereof. The Remittance Rate for the Class A-1
Certificates will be calculated by reference to [the London interbank offered
rate for one month U.S. dollar deposits ("1-Month LIBOR"). The "Class A-1 LIBOR
Rate" for each Interest Accrual Period will equal the sum of 1-Month LIBOR,
determined as described herein, and ____%.] Each Remittance Rate is subject to a
maximum rate on each Remittance Date equal to the weighted average of the Net
Contract Rates of the Contracts in the Contract Pool. The "Net Contract Rate" of
a Contract equals the rate of interest then borne by such Contract (the
"Contract Rate") minus _____% per annum (the "Expense Fee Rate").
On each Remittance Date, to the extent of funds available therefor in
the priority set forth herein, each interest-bearing Class of Certificates will
be entitled to receive an amount allocable to interest (as to each such Class,
the "Class Interest Distribution Amount") with respect to the related Interest
Accrual Period. The Class Interest Distribution Amount for any interest-bearing
Class will be equal to the sum of (i) interest at the applicable Remittance Rate
on the related Class Certificate Balance and (ii) the sum of the amounts, if
any, by which the amount described in clause (i) above on each prior Remittance
Date exceeded the amount actually distributed as interest on such prior
Remittance Dates and not subsequently distributed ("Unpaid Interest Amounts").
Accrued interest to be distributed on any Remittance Date will be
calculated, in the case of each interest-bearing Class of Certificates, on the
basis of the related Class Certificate Balance immediately prior to such
Remittance Date.
Interest will accrue on each Class of Fixed Rate Certificates at the
applicable Remittance Rate for each calendar month. Interest will accrue on the
Floating Rate Certificates at the then-applicable Remittance Rate during the
period commencing on the Remittance Date in the month preceding the month of the
applicable Remittance Date (or, in the case of the first Remittance Date,
beginning on the Closing Date) and ending on the day preceding such applicable
Remittance Date. Such period for each Class of Certificates is its respective
"Interest Accrual Period." Interest on the
S-23
<PAGE> 25
Fixed Rate Certificates will be calculated on the basis of a 360-day year
consisting of twelve 30-day months. Interest on the Floating Rate Certificates
will be calculated on the basis of a 360-day year and the actual number of days
elapsed in each Interest Accrual Period.
In the event that, on a particular Remittance Date, the Amount
Available applied in the order described above under "--Priority of
Distributions" is not sufficient to make a full distribution of the interest
entitlement on the Certificates, interest will be distributed on each Class of
Certificates of equal priority based on the amount of interest each such Class
would otherwise have been entitled to receive in the absence of such shortfall.
Any such unpaid amount will be carried forward and added to the amount holders
of each such Class of Certificates will be entitled to receive on the next
Remittance Date. Such a shortfall could occur, for example, if losses realized
on the Contracts were exceptionally high or were concentrated in a particular
month. Any such unpaid amount will bear interest at the applicable Remittance
Rate to the extent permitted by law.
[Calculation of 1-Month LIBOR. The Remittance Rate for the Class A-1
Certificates for the initial Accrual Period will be determined on the business
day preceding the Closing Date. Thereafter, on the second business day preceding
each Remittance Date (each such date, an "Interest Determination Date"), the
Trustee will determine the London interbank offered rate for one-month U.S.
dollar deposits ("1-Month LIBOR") for the next Interest Accrual Period for the
Floating Rate Certificates on the basis of the offered rates of the Reference
Banks for one-month U.S. dollar deposits, as such rates appear on the Reuters
Screen LIBO Page, as of 11:00 a.m. (London time) on such Interest Determination
Date. As used in this section, "business day" means a day on which banks are
open for dealing in foreign currency and exchange in London and New York City;
"Reuters Screen LIBO Page" means the display designated as page "LIBO" on the
Reuters Monitor Money Rates Service (or such other page as may replace the LIBO
page on that service for the purpose of displaying London interbank offered
rates of major banks); and "Reference Banks" means leading banks selected by the
Trustee and engaged in transactions in Eurodollar deposits in the international
Eurocurrency market (i) with an established place of business in London, (ii)
whose quotations appear on the Reuters Screen LIBO Page on the Interest
Determination Date in question, (iii) which have been designated as such by the
Trustee and (iv) not controlling, controlled by, or under common control with,
the Company.
On each Interest Determination Date, 1-Month LIBOR for the related
Interest Accrual Period for the Floating Rate Certificates will be established
by the Trustee as follows:
(a) If on such Interest Determination Date two or more
Reference Banks provide such offered quotations, 1-Month LIBOR for the
related Interest Accrual Period for the Floating Rate Certificates
shall be the arithmetic mean of such offered quotations (rounded
upwards if necessary to the nearest whole multiple of 1/16%).
(b) If on such Interest Determination Date fewer than two
Reference Banks provide such offered quotations, 1-Month LIBOR for the
related Interest Accrual Period for the Floating Rate Certificates
shall be the higher of (x) 1-Month LIBOR as determined on the previous
Interest Determination Date and (y) the Reserve Interest Rate. The
"Reserve Interest Rate" shall be the rate per annum that the Trustee
determines to be either (i) the arithmetic mean (rounded upwards if
necessary to the nearest whole multiple of 1/16%) of the one-month U.S.
dollar lending rates which New York City banks selected by the Trustee
are quoting on the relevant Interest Determination Date to the
principal London offices of leading banks in the London interbank
market or, in the event that the Trustee cannot determine such
arithmetic mean, (ii) the lowest one-month U.S. dollar lending rate
which New York City banks selected by the Trustee are quoting on such
Interest Determination Date to leading European banks.
(c) If on the Interest Determination Date in October, the
Trustee is required but is unable to determine the Reserve Interest
Rate in the manner provided in paragraph (b) above, 1-Month LIBOR shall
be 1-Month LIBOR for the preceding Interest Accrual Period.
S-24
<PAGE> 26
The establishment of 1-Month LIBOR on each Interest Determination Date
by the Trustee and the Trustee's calculation of the rate of interest applicable
to the Floating Rate Certificates for the related Interest Accrual Period shall
(in the absence of manifest error) be final and binding. Each such rate of
interest may be obtained by telephoning the Trustee at (___) ___-____.]
SUBORDINATION OF CERTAIN CLASSES
The rights of the holders of the Subordinated Certificates to receive
distributions with respect to the Contracts will be subordinated to such rights
of the holders of the Senior Certificates, and the rights of the holders of each
Class of Subordinated Certificates (other than the Class M Certificates) to
receive such distributions will be further subordinated to such rights of the
holders of the Class or Classes of Subordinated Certificates with lower
numerical Class designations, in each case only to the extent described herein.
The subordination of the Subordinated Certificates to the Senior Certificates
and the further subordination within the Subordinated Certificates is intended
to increase the likelihood of timely receipt by the holders of Certificates with
a higher relative payment priority of the maximum amount to which they are
entitled on any Remittance Date and to provide such holders protection against
Realized Losses. The protection afforded by means of the subordination feature
will be accomplished by the preferential right of the Certificateholders with
higher relative payment priority to receive, prior to any distribution being
made on a Remittance Date in respect of the Certificates with relatively lower
payment priority, the amount of principal and interest due them on each
Remittance Date out of the Amount Available on deposit on such date in the
Certificate Account and by the right of the Certificateholders with higher
relative payment priority to receive future distributions on the Contracts that
would otherwise be payable to the holders of Certificates with relatively lower
payment priority.
LOSSES ON LIQUIDATED CONTRACTS
The Formula Principal Distribution Amount for a Remittance Date
includes the Stated Principal Balance of a Contract which became a Liquidated
Contract in the related Due Period. If Net Liquidation Proceeds attributable to
such Liquidated Contract are less than such Stated Principal Balance, Available
Funds will be used to cover such shortfall, thereby reducing the amount of funds
available to make distributions of interest and principal on Classes with
relatively lower payment priority. Any such shortfall will be borne by the
Subordinated Certificates in the reverse order of their numerical Class
designations.
SERVICING COMPENSATION
For its servicing of the Contracts, the Servicer will be entitled to
receive a monthly servicing fee equal to 1/12th of the product of ____% (the
"Servicing Fee Rate") and the Pool Principal Balance as of the first day of the
related Due Period (the "Servicing Fee"). The Available Funds will be net of the
Servicing Fee.
ADVANCES
The Servicer will be required, not later than each Remittance Date, to
deposit into the Certificate Account an amount equal to each Scheduled Payment
due, but not collected, with respect to delinquent Contracts during the prior
Due Period, but only if, in its good faith business judgment, the Servicer
believes that such amounts will ultimately be recovered on or with respect to
the related Contract (each, a "Monthly Advance"). The Servicer will be permitted
to fund its payment of Monthly Advances on any Remittance Date from collections
on any Contract deposited to the Collection Account subsequent to the related
Due Period not required to be distributed to Certificateholders on the related
Remittance Date, and will be required to reimburse the Collection Account for
such amounts from its own funds or from payments collected on the Contracts in a
Due Period that are not otherwise distributable on the related Remittance Date.
Monthly Advances are intended to maintain a regular flow of scheduled interest
payments to Certificateholders rather than to guarantee or insure against
losses.
S-25
<PAGE> 27
The Servicer is permitted to reimburse itself for Monthly Advances
funded from its own funds only from subsequent collections on the related
delinquent Contract, unless the Servicer determines that any unreimbursed
Monthly Advance constitutes a Nonrecoverable Advance, in which event it will be
reimbursable to the Servicer from collections on the Contract Pool generally.
A "Nonrecoverable Advance" is a Monthly Advance previously made by the
Servicer but which the Servicer subsequently, in its good faith business
judgment, determines not to be recoverable from the related Contract.
OPTIONAL TERMINATION
The Agreement provides that on any Remittance Date on which the Pool
Principal Balance is less than 10% of the Cut-off Date Pool Principal Balance
(the "Servicer Optional Termination Date"), the Servicer will have the option to
repurchase all outstanding Contracts at a price equal to the greater of (a) the
sum of (x) 100% of the Stated Principal Balance of each Contract (other than any
Contract as to which the related Manufactured Home has been repossessed and
whose fair market value is included pursuant to clause (y) below) as of the
final Remittance Date and (y) the fair market value of such acquired property
and (b) the aggregate fair market value of all of the assets of the Trust, plus,
in each case, any unpaid interest at the related Remittance Rates on each Class
of Certificates as well as one month's interest at the applicable Contract Rate
on the Stated Principal Balance of each Contract (including any Contract as to
which the related Manufactured Home has been repossessed) (the "Termination
Price").
AUCTION SALE
If the Servicer does not exercise its optional termination right within
ninety days after the Servicer Optional Termination Date, the Trustee is
required to solicit bids for the purchase of all Contracts remaining in the
Trust. In the event that satisfactory bids are received as described in the
Agreement, the net sale proceeds will be distributed to Certificateholders, in
the same order of priority as collections received in respect of the Contracts.
The Trustee, however, will not accept any bid for the Contracts unless certain
requirements are met, including the requirement that such bid is in an amount at
least equal to the Termination Price. The sale of the Contracts must be for an
amount no less than fair market value. [If satisfactory bids are not received,
the Trustee will not sell the Contracts and will not solicit any further bids or
otherwise negotiate any further sale of the Contracts.]
THE TRUSTEE
[TRUSTEE] (the "Trustee") has its corporate trust offices at [ADDRESS].
THE MANUFACTURED HOUSING PROGRAM
GENERAL
The Contracts were originated or purchased by BCI in accordance with
the policies and procedures described under "The Manufactured Housing Program"
in the Prospectus. BCI, which is a Massachusetts corporation, is a wholly-owned
subsidiary of Bombardier Corporation, an Idaho corporation, which in turn is
wholly-owned by Bombardier, Inc., a Canadian corporation. Although BCI has been
in business for many years, BCI created its Mortgage Division, which originates
and services manufactured housing contracts, only in December 1996.
DELINQUENCY AND LOSS EXPERIENCE
As described above, BCI only recently began originating and servicing
manufactured housing installment sales contacts and installment loans.
Consequently, such contracts and loans have not yet exhibited a delinquency and
loss experience that is likely to be representative of the delinquencies and
losses that may be experienced over a longer period of time. Although the
Management of BCI's Mortgage Division has had considerable experience in the
S-26
<PAGE> 28
origination, purchase and servicing of manufactured housing installment sales
contracts and installment loans while employed with other companies, there can
be no assurance that the delinquency and loss experience on the Contracts will
not exceed industry norms. No representation is made as to the possible
likelihood, amount, timing or severity of delinquencies or losses which might
occur with respect to the Contracts.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
the Offered Certificates will be used by the Company to purchase the Contracts.
FEDERAL INCOME TAX CONSIDERATIONS
[An election will be made to treat the assets of the Trust as a real
estate mortgage investment conduit ("REMIC") for federal income tax purposes.
The Offered Certificates will be designated as regular interests in a REMIC (the
"Regular Certificates" or the "REMIC Regular Certificates"). See "Federal Income
Tax Considerations" in the Prospectus.
Because the Offered Certificates will be considered REMIC regular
interests, they generally will be taxable as debt obligations under the Internal
Revenue Code of 1986, as amended (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, will be taxable to
Certificateholders in accordance with the accrual method of accounting.
Depending on their respective issue prices, certain Classes of Offered
Certificates may be issued with original issue discount. See "Federal Income Tax
Considerations--REMIC Regular Certificates--Original Issue Discount" in the
Prospectus. The prepayment assumption that will be used in determining the rate
of accrual of original issue discount is ___% MHP. No representation is made as
to the rate at which prepayments actually will occur. In addition, certain
Classes of Regular Certificates may be treated as having been issued at a
premium. See "Federal Income Tax Considerations--REMIC Regular
Certificates--Premium" in the Prospectus.
BACKUP WITHHOLDING
Certain Certificate Owners may be subject to backup withholding at the
rate of 31% with respect to interest paid on the Offered Certificates if the
Certificate Owners, upon issuance, fail to supply the Trustee or their broker
with their taxpayer identification number, furnish an incorrect taxpayer
identification number, fail to report interest, dividends, or other "reportable
payments" (as defined in the Code) properly, or, under certain circumstances,
fail to provide the Trustee or their broker with a certified statement, under
penalty of perjury, that they are not subject to backup withholding.
The Trustee will be required to report annually to the IRS, and to each
Holder of record, the amount of interest paid (and OID accrued, if any) on the
Offered Certificates (and the amount of interest withheld for federal income
taxes, if any) for each calendar year, except with respect to exempt Holders
(generally, Holders that are corporations, certain tax-exempt organizations or
nonresident aliens who provide certification as to their status as
nonresidents). As long as the only Holder of record is Cede, as nominee for DTC,
Certificate Owners and the IRS will receive tax and other information including
the amount of interest paid on such Certificates owned from Participants and
Indirect Participants rather than from the Trustee. (The Trustee, however, will
respond to requests for necessary information to enable Participants, Indirect
Participants and certain other persons to complete their reports.) Each
non-exempt Certificate Owner will be required to provide, under penalty of
perjury, a certificate on IRS Form W-9 containing his or her name, address,
correct Federal taxpayer identification number and a statement that he or she is
not subject to backup withholding. Should a nonexempt Certificate Owner fail to
provide the required certification, the Participants or Indirect Participants
will be required to withhold 31% of the interest (and principal) otherwise
payable to the Certificate Owner, and remit the withheld amount to the IRS as a
credit against the Certificate Owner's federal income tax liability. Such
S-27
<PAGE> 29
amounts will be deemed distributed to the affected Certificate Owner for all
purposes of the Certificates and the Agreement.
FEDERAL INCOME TAX CONSEQUENCES TO FOREIGN INVESTORS
The following information describes the United States federal income
tax treatment of Holders that are not United States persons ("Foreign
Investors") and whose income is not effectively connected to a United States
trade or business.
The Code and Treasury regulations generally subject interest paid to a
Foreign Investor to a withholding tax at a rate of 30% (unless such rate were
changed by an applicable treaty). The withholding tax, however, is eliminated
with respect to certain "portfolio debt investments" issued to Foreign
Investors. Portfolio debt investments generally include debt instruments issued
in registered form for which the United States payor receives a statement that
the beneficial owner of the instrument is a Foreign Investor. The Offered
Certificates will be issued in registered form. Therefore, if the information
required by the Code is furnished (as described below) and no other exceptions
to the withholding tax exemption are applicable, no withholding tax will apply
to the Offered Certificates.
For the Offered Certificates to constitute portfolio debt investments
exempt from the United States withholding tax, the withholding agent must
receive from the Certificate Owner an executed IRS Form W-8 signed under penalty
of perjury by the Certificate Owner stating that the Certificate Owner
beneficially owns the certificate and is a Foreign Investor and providing such
Certificate Owner's name and address. The statement must be received by the
withholding agent in the calendar year in which the interest payment is made, or
in either of the two preceding calendar years.
A Certificate Owner 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 such Offered Certificate, provided that (i)
such gain is not effectively connected with a trade or business carried on by
the Certificate Owner in the United States, (ii) in the case of a Certificate
Owner that is an individual, such Certificate Owner 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 conditions described in the preceding paragraphs are satisfied.]
ERISA CONSIDERATIONS
[The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and Section 4975 of the Internal Revenue Code of 1986, as amended
(the "Code") impose certain restrictions on employee benefit plans and other
retirement arrangements (including individual retirement accounts) ("Plans") and
on persons who are fiduciaries or "parties in interest" or "disqualified
persons" with respect to such Plans. (See "ERISA Considerations" in the
Prospectus.) Employee benefit plans that are 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 requirements. Accordingly, assets of such plans
may be invested in the Senior Certificates without regards to the ERISA
restrictions described above, subject to applicable provisions of other federal
and state laws. However, any such governmental or church plan which is qualified
under Section 401(a) of the Code and exempt from taxation under Section 501(a)
of the Code is subject to the prohibited transaction rules set forth in Section
503 of the Code.
The U.S. Department of Labor ("DOL") has granted an administrative
exemption to [UNDERWRITER] (the "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 by Plans of certificates representing
interests in asset-backed pass-through trusts that consist of certain
receivables, loans and other obligations that meet the conditions and
requirements of the Exemption. The receivables covered by the Exemption include
manufactured housing installment sales contracts and installment loan agreements
such as the Contracts.
S-28
<PAGE> 30
Among the conditions which must be satisfied for the Exemption to apply
to the Senior Certificates are the following:
(1) The acquisition of the Senior Certificates by a Plan is on
terms (including the price for the Senior Certificates) that are at
least as favorable to the Plan as they would be in an arm's-length
transaction with an unrelated party;
(2) The rights and interests evidenced by the Senior
Certificates acquired by the Plan are not subordinated to the rights
and interests evidenced by other certificates of the Trust;
(3) The Senior 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 Standard & Poor's Ratings
Services, a division of the McGraw-Hill Companies, Inc., Moody's
Investors Service, Inc., Duff & Phelps Credit Rating Co. or Fitch
Investors Service, Inc. ("National Credit Rating Agencies");
(4) The Trustee is not an affiliate of any member of the
Restricted Group (as defined below);
(5) The sum of all payments made to the Underwriter in
connection with the distribution of the Senior Certificates represents
not more than reasonable compensation for underwriting the Senior
Certificates. The sum of all payments made to and retained by the
Company pursuant to the sale of the Contracts to the Trust represents
not more than the fair market value of such Contracts. The sum of all
payments made to and retained by the Servicer represents not more than
reasonable compensation for the Servicer's services under the Agreement
and reimbursement of the Servicer's reasonable expenses in connection
therewith;
(6) (i) The investment pool consists only of assets of the
type enumerated in the exemption and which have been included in other
investment pools; (ii) certificates evidencing interests in such other
investment pools have been rated in one of the three highest generic
rating categories by one of the National Credit Rating Agencies for at
least one year prior to a Plan's acquisition of certificates; and (iii)
certificates evidencing interests in such investment pools have been
purchased by investors other than Plans for at least one year prior to
a Plan's acquisition of certificates; and
(7) The Plan investing in the Senior Certificates is an
"accredited investor" as defined in Rule 501 (a)(1) of Regulation D of
the Securities and Exchange Commission under the Securities Act of
1933.
Moreover, the Exemption would provide relief from certain
self-dealing/conflict of interest prohibited transactions only if, among other
requirements, (i) in the case of the acquisition of Senior Certificates in
connection with the initial issuance, at least fifty (50) percent of the Senior
Certificates are acquired by persons independent of the Restricted Group (as
defined below), (ii) the Plan's investment in Senior Certificates does not
exceed twenty-five (25) percent of all of the Senior Certificates outstanding at
the time of the acquisition and (iii) immediately after the acquisition, no more
than twenty-five (25) percent of the assets of the Plan are invested in
certificates representing an interest in one or more trusts containing assets
sold or serviced by the same entity. The Exemption does not apply to Plans
sponsored by the Originator, the Company, the Underwriter, the Trustee, the
Servicer, any obligor with respect to Contracts included in the Trust
constituting more than five (5) percent of the aggregate unamortized principal
balance of the assets in the Trust or any affiliate of such parties (the
"Restricted Group").
It is believed that the Exemption will apply to the purchase, holding
and resale of the Senior Certificates.
BECAUSE THE CHARACTERISTICS OF THE CLASS M AND CLASS B-1 CERTIFICATES
MAY NOT MEET THE REQUIREMENTS OF PTCE 83-1 (AS DESCRIBED UNDER "ERISA
CONSIDERATIONS" IN THE PROSPECTUS), THE EXEMPTION OR ANY OTHER ISSUED EXEMPTION
UNDER ERISA, THE PURCHASE AND HOLDING OF THE CLASS M AND CLASS B-1 CERTIFICATES
BY A PLAN MAY RESULT IN PROHIBITED TRANSACTIONS OR THE IMPOSITION OF EXCISE
TAXES OR CIVIL PENALTIES. CONSEQUENTLY, TRANSFERS OF THE CLASS
S-29
<PAGE> 31
M AND CLASS B-1 CERTIFICATES WILL NOT BE REGISTERED BY THE TRUSTEE UNLESS THE
TRUSTEE RECEIVES: (i) A REPRESENTATION FROM THE TRANSFEREE OF SUCH CERTIFICATE,
ACCEPTABLE TO AND IN FORM AND SUBSTANCE SATISFACTORY TO THE TRUSTEE, TO THE
EFFECT THAT SUCH TRANSFEREE IS NOT AN EMPLOYEE BENEFIT PLAN SUBJECT TO SECTION
406 OF ERISA OR A PLAN OR ARRANGEMENT SUBJECT TO SECTION 4975 OF THE CODE, NOR A
PERSON ACTING ON BEHALF OF ANY SUCH PLAN OR ARRANGEMENT NOR USING THE ASSETS OF
ANY SUCH PLAN OR ARRANGEMENT TO EFFECT SUCH TRANSFER; (ii) IF THE PURCHASER IS
AN INSURANCE COMPANY, A REPRESENTATION THAT THE PURCHASER IS AN INSURANCE
COMPANY WHICH IS PURCHASING SUCH CERTIFICATES WITH FUNDS CONTAINED IN AN
"INSURANCE COMPANY GENERAL ACCOUNT" (AS SUCH TERM IS DEFINED IN SECTION V(e) OF
PROHIBITED TRANSACTION CLASS EXEMPTION 95-60 ("PTCE 95-60")) AND THAT THE
PURCHASE AND HOLDING OF SUCH CERTIFICATES ARE COVERED UNDER PTCE 95-60; OR (iii)
AN OPINION OF COUNSEL SATISFACTORY TO THE TRUSTEE THAT THE PURCHASE OR HOLDING
OF SUCH CERTIFICATE BY A PLAN, ANY PERSON ACTING ON BEHALF OF A PLAN OR USING
SUCH PLAN'S ASSETS, WILL NOT RESULT IN A NON-EXEMPT PROHIBITED TRANSACTION UNDER
ERISA OR THE CODE AND WILL NOT SUBJECT THE TRUSTEE TO ANY OBLIGATION IN ADDITION
TO THOSE UNDERTAKEN IN THE AGREEMENT. SUCH REPRESENTATION AS DESCRIBED ABOVE
SHALL BE DEEMED TO HAVE BEEN MADE TO THE TRUSTEE BY THE TRANSFEREE'S ACCEPTANCE
OF A CLASS M OR CLASS B-1 CERTIFICATE. IN THE EVENT THAT SUCH REPRESENTATION IS
VIOLATED, OR ANY ATTEMPT TO TRANSFER TO A PLAN OR PERSON ACTING ON BEHALF OF A
PLAN OR USING SUCH PLAN'S ASSETS IS ATTEMPTED WITHOUT SUCH OPINION OF COUNSEL,
SUCH ATTEMPTED TRANSFER OR ACQUISITION SHALL BE VOID AND OF NO EFFECT.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of PTCE 83-1 and
the Exemption, and the potential consequences in their specific circumstances,
prior to making an investment in the Offered Certificates. Moreover, each Plan
fiduciary should determine whether under the general fiduciary standards of
investment prudence and diversification, an investment in the Offered
Certificates is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio.]
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement (the "Underwriting Agreement") between the Company and [UNDERWRITER]
(the "Underwriter"), the Company has agreed to sell to the Underwriter and the
Underwriter has agreed to purchase from the Company, all of the Offered
Certificates.
The Offered Certificates will be offered by the Underwriter from time
to time in negotiated transactions or otherwise, at varying prices to be
determined at the time of sale. Proceeds to the Company, including accrued
interest, are expected to be approximately ___________% of the initial aggregate
Class Certificate Balance of the Offered Certificates, before deducting expenses
payable by the Company in connection with the Offered Certificates, estimated to
be $_______. In connection with the purchase and sale of the Offered
Certificates, the Underwriter may be deemed to have received compensation from
the Company in the form of underwriting discounts.
The Underwriting Agreement provides that the Company and BCI will
jointly and severally indemnify the Underwriter against certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
CERTAIN LEGAL MATTERS
Certain legal matters concerning the issuance of the Certificates will
be passed upon for the Company by Morgan, Lewis & Bockius LLP and for the
Underwriter by __________. The material federal income tax consequences of the
Certificates will be passed upon for the Company by Morgan, Lewis & Bockius LLP.
RATINGS
It is a condition of the original issuance of the Senior Certificates
that they be rated [AAA by Fitch Investors Service, L.P. ("Fitch") and Aaa by
Moody's Investors Service Inc. ("Moody's" and together with Fitch, the "Rating
S-30
<PAGE> 32
Agencies"). It is a condition to the issuance of the Class M and Class B-1
Certificates that they be rated at least AA- and BBB, respectively, by Fitch and
at least Aa3 and Baa2, respectively, by Moody's.]
The ratings do not address the possibility that, as a result of
principal prepayments, Certificateholders may receive a lower than anticipated
yield. The ratings will be the views only of such rating agencies. There is no
assurance that any such ratings will continue for any period of time or that
such ratings will not be revised or withdrawn. Any such revision or withdrawal
of such ratings may have an adverse effect on the market price of the Offered
Certificates. A security rating is not a recommendation to buy, sell or hold
securities.
The Company has not requested a rating on the Offered Certificates by
any rating agency other than the Rating Agencies. However, there can be no
assurance as to whether any other rating agency will rate some or all of the
Offered Certificates or, if it does, as to the rating that would be assigned by
any such rating agency. The rating assigned by any such other rating agency
could be lower than the respective ratings assigned by the Rating Agencies.
S-31
<PAGE> 33
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered
Pass-Through Certificates, Series 199_ (the "Global Securities") will be
available only in book-entry form. Investors in the Global Securities may hold
such Global Securities through any of DTC, Cedel or Euroclear. The Global
Securities will be tradeable as home market instruments in both the European and
U.S. domestic markets. Initial settlement and all secondary trades will settle
in same-day funds.
Secondary market trading investors holding Global Securities through
Cedel and Euroclear will be conducted in the ordinary way in accordance with
their normal rules and operating procedures and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedel and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their Participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the
name of Cede as nominee of DTC. Investors' interests in the Global Securities
will be represented through financial institutions acting on their behalf as
Direct and Indirect Participants in DTC. As a result, Cedel and Euroclear will
hold positions on behalf of their participants through their respective
Depositaries, which in turn will hold such positions in accounts as DTC
Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices specified by the Underwriters. Investor
securities custody accounts will be credited with their holdings against payment
in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global 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 in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
S-32
<PAGE> 34
Trading between DTC seller and Cedel or Euroclear purchaser. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Cedel Participant or a Euroclear Participant, the purchaser
will send instructions to Cedel or Euroclear through a Cedel Participant or
Euroclear Participant at least one business day prior to settlement. Cedel or
Euroclear will instruct the respective Depositary, as the case may be, to
receive the Global Securities against payment. Payment will include interest
accrued on the Global Securities from and including the last coupon payment date
to and excluding the settlement date, on the basis of either 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 to the related class of
Global Securities. For transactions settling on the 31st of the month, payment
will include interest accrued to and excluding the first day of the following
month. Payment will then be made by the respective Depositary of the DTC
Participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Cedel Participant's or Euroclear Participant's account.
The securities credit will appear the next day (European time) and the cash debt
will be back-valued to, and the interest on the Global Securities will accrue
from, the value date (which would be the preceding day when settlement occurred
in New York). If settlement is not completed on the intended value date (i.e.,
the trade fails), the Cedel or Euroclear cash debt will be valued instead as of
the actual settlement date.
Cedel Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedel or Euroclear. Under this
approach, they may take on credit exposure to Cedel or Euroclear until the
Global Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit
to them, Cedel Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Cedel Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day, assuming
they cleared the overdraft when the Global Securities were credited to their
accounts. However, interest on the Global Securities would accrue from the value
date. Therefore, in many cases the investment income on the Global Securities
earned during that one-day period may substantially reduce or offset the amount
of such overdraft charges, although this result will depend on each Cedel
Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for sending Global Securities
to the respective European Depositary for the benefit of Cedel Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
Trading between Cedel or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Cedel Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depositary, to a DTC Participant. The seller will send
instructions to Cedel Participants or Euroclear Participants through a Cedel
Participant or Euroclear Participant at least one business day prior to
settlement. In these cases Cedel or Euroclear will instruct the respective
Depositary, as appropriate, to deliver the Global Securities to the DTC
Participant's account against payment. Payment will include interest accrued on
the Global Securities from and including the last coupon payment to and
excluding the settlement date on the basis of either 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 to the related class of Global
Securities. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
The payment will then be reflected in the account of the Cedel Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
Cedel Participant's or Euroclear Participant's account would be back-valued to
the value date (which would be the preceding day, when settlement occurred in
New York). Should the Cedel Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any
S-33
<PAGE> 35
overdraft incurred over that one-day period. If settlement is not completed on
the intended value date (i.e., the trade fails), receipt of the cash proceeds in
the Cedel Participant's or Euroclear Participant's account would instead be
valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedel Participants or
Euroclear Participants should note that these trades would automatically fail on
the sale side unless affirmative action were taken. At least three techniques
should be readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until
the purchase side of the day trade is reflected in their Cedel or
Euroclear accounts) in accordance with the clearing system's customary
procedures;
(b) borrowing the Global Securities in the U.S. from a DTC
Participant no later than one day prior to settlement, which would give
the Global Securities sufficient time to be reflected in their Cedel or
Euroclear account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of
the trade so that the value date for the purchase from the DTC
Participant is at least one day prior to the value date for the sale to
the Cedel Participant or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Cedel or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business in the chain of intermediaries between such beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (ii) such beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons that are Certificate Owners residing in
a country that has a tax treaty with the United States can obtain an exemption
or reduced tax rate (depending on the treaty terms) by filing Form 1001
(Ownership, Exemption or Reduced Rate Certificate). If the treaty provides only
for a reduced rate, withholding tax will be imposed at that rate unless the
filer alternatively files Form W-8. Form 1001 may be filed by the Owner or his
agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
S-34
<PAGE> 36
U.S. Federal Income Tax Reporting Procedure. The 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). Generally, Form W-8 and Form 1001 are effective for three
calendar years and Form 4224 is effective for one calendar year.
The Treasury has recently issued final regulations, effective for
payments made after December 31, 1998, modifying the U.S. federal income tax
reporting procedures for beneficial owners of Global Securities who are non-U.S.
Persons. Non-U.S. Investors should consult their own tax advisors in determining
the impact and applicability of such regulations to them.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof or (iii) an estate or trust
described in Section 7701(a)(30)(e) of the Code. This summary does not deal with
all aspects of U.S. Federal income tax withholding that may be relevant to
foreign holders of the Global Securities. Investors are advised to consult their
own tax advisors for specific tax advice concerning their holding and disposing
of the Global Securities.
S-35
<PAGE> 37
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION NOVEMBER 13, 1997
PROSPECTUS
BOMBARDIER CAPITAL MORTGAGE SECURITIZATION CORPORATION, DEPOSITOR
MANUFACTURED HOUSING CONTRACT AND MORTGAGE LOAN PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
The Manufactured Housing Contract and Mortgage Loan Pass-Through
Certificates (the "Certificates") offered hereby and by the related Prospectus
Supplements will be offered from time to time in one or more series (each, a
"Series"). Capitalized terms used herein and not defined herein shall have the
respective meanings assigned to them in the Glossary on page [98].
The Certificates of each Series will evidence specified interests in
separate pools ("Asset Pools") comprised of manufactured housing installment
sales contracts and manufactured housing installment sales agreements
("Contracts") and/or mortgage loans secured by first liens on one- to
four-family residential real properties ("Mortgage Loans"). The Asset Pool
underlying a Series of Certificates (collectively, the "Trust Estate") will be
conveyed by Bombardier Capital Mortgage Securitization Corporation ("BCMSC" or
the "Company") to the trust (the "Trust") that issues such Series. The Contracts
and Mortgage Loans included in any Asset Pool will be described in the related
Prospectus Supplement. The Asset Pool is expected to be acquired by the Company
from Bombardier Capital Inc. ("BCI"), an affiliate of the Company, or another
Seller. The seller of Contracts or Mortgage Loans to the Company, whether it be
BCI or another entity, is sometimes referred to herein as the "Seller." The
Assets in a Trust Estate will be serviced by one or more servicers specified in
the related Prospectus Supplement (each, a "Servicer"), which is expected to be
BCI. In addition to the related Asset Pool, if so specified in the related
Prospectus Supplement, the Trust Estate will include monies on deposit in a
trust account to be established with the Trustee (a "Pre-Funding Account"),
which will be used by the Trust to purchase additional Assets beyond those
delivered on the related Closing Date ("Pre-Funded Assets") from the Company
from time to time during a Pre-Funding Period specified in the related
Prospectus Supplement. In addition, if so specified in the related Prospectus
Supplement, a pool insurance policy, letter of credit, cash reserve fund, surety
bond, guarantee, derivative product, or other forms of credit enhancement, or
any combination of the foregoing, may be provided with respect to a Series of
Certificates or certain Classes of Certificates of a Series and may be included
in the related Trust Estate.
The Certificates of a Series are obligations of the related Trust only,
and holders of Certificates of a Series may look only to the assets of the
related Trust for distributions on such Certificates. The only obligations of
the Company with respect to the Certificates will be pursuant to certain limited
representations and warranties, as described further herein. The Servicer's
obligations with respect to the Certificates are limited to its contractual
servicing and certificate administration obligations. The Seller of Assets to
the Company will make certain representations, warranties and covenants to the
Company concerning such Assets, and the Company will assign its rights to
enforce such representations, warranties and covenants to the related Trust. See
"Description of the Certificates" herein.
The effective yield on the Certificates will be reduced by any Shortfalls
and Realized Losses allocated to such Certificates.
CERTAIN RISK FACTORS SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF ANY
CERTIFICATES OFFERED HEREBY. SEE "RISK FACTORS" HEREIN AT PAGE 18 AND IN THE
RELATED PROSPECTUS SUPPLEMENT.
THIS PROSPECTUS MAY NOT BE USED TO CONSUMMATE SALES OF CERTIFICATES UNLESS
ACCOMPANIED BY THE RELATED PROSPECTUS SUPPLEMENT.
THE CERTIFICATES WILL NOT BE INSURED OR GUARANTEED BY ANY GOVERNMENTAL
AGENCY OR BY ANY OTHER PERSON OR ENTITY, INCLUDING THE COMPANY, THE SERVICER OR
ANY OF THEIR AFFILIATES. SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BEFORE PURCHASING THE CERTIFICATES OF ANY SERIES.
<PAGE> 38
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE RELATED PROSPECTUS
SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is __________, 1997.
Each Series of Certificates will consist of one or more Classes of
Certificates, which may include one or more senior Classes of Certificates (the
"Senior Certificates") and one or more subordinate Classes of Certificates (the
"Subordinated Certificates"). The related Prospectus Supplement will specify the
Classes of each Series being offered thereby. Such Classes may represent
interests in specified percentages of distributions of principal or interest, or
both, on the Asset Pool relating to such Series, as specified in the related
Prospectus Supplement. Each Prospectus Supplement will describe the Series and
Classes of Certificates offered thereby.
The Company may elect to cause the Trust Estate relating to a Series of
Certificates (or one or more segregated Asset Pools thereof) to be treated as
one or more "real estate mortgage investment conduits" ("REMICs") for federal
income tax purposes. See "Federal Income Tax Consequences" herein.
The Prospectus Supplement relating to a Series of Certificates will set
forth, among other things, the following information if applicable to such
Series: (1) the allocations and order of application of principal and interest
collections on the Asset Pool held by the related Trust to the respective
Classes of such Certificates; (2) certain information as to the nature of the
Contracts or Mortgage Loans and any other assets assigned or pledged to the
related Trust; (3) the dates on which periodic distributions will be made on the
Certificates of such Series; (4) the aggregate principal amount or notional
amount and the Pass-Through Rate (or the manner of determining the Pass-Through
Rate) for each Class of the Certificates of such Series; (5) the optional
redemption or termination features pertaining to such Certificates; (6) certain
information regarding the subordination of certain Classes' rights to receive
distributions to the rights of other Classes; and (7) additional information
concerning the plan of distribution of such Certificates.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act"), as amended, and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports and other information filed by the
Company with the Commission can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Regional Offices of the Commission at 7 World Trade
Center New York, New York 10048; and Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material can be obtained from the Public Reference Section of the Commission at
its principal office in Washington, D.C., at prescribed rates. The Commission
maintains a web site that contains reports, proxy and information statements and
other information regarding registrants, including the Company, that file
electronically with the Commission at http://www.sec.gov.
This Prospectus does not contain all the information set forth in the
Registration Statement (of which this Prospectus is a part) and exhibits
relating thereto which the Company has filed with the Commission in Washington,
D.C. Copies of the information and the exhibits are on file at the offices of
the Commission and may be obtained, upon payment of the fee prescribed by the
Commission, or may be examined without charge at the offices of the Commission.
Copies of the Pooling and Servicing Agreement for a Series will be filed by the
Company with the Commission (without exhibits) on a Current Report on Form 8-K
within 15 days after the applicable Closing Date.
The Trustee, on behalf of each Trust, will file periodic reports with the
Commission in compliance with the requirements of the Exchange Act.
The Company and the Servicer are not obligated with respect to the
Certificates. Accordingly, the Company has determined that financial statements
of the Company and the Servicer are not material to the offering made hereby.
3
<PAGE> 39
REPORTS TO CERTIFICATEHOLDERS
Periodic and annual reports concerning the Certificates and the related
Trust will be provided to the Certificateholders. See "Description of the
Certificates--Reports to Certificateholders." If the Certificates of a Series
are to be issued in book-entry form, such reports will be provided to the
Certificateholder of record and beneficial owners of such Certificates will have
to rely on the procedures described herein under "Description of the
Certificates--Book- Entry Registration." The Company will file or cause to be
filed with the Commission such periodic reports with respect to each Trust as
may be required under the Securities Exchange Act of 1934, as amended, as the
same may be modified by the Commission pursuant to the request of the Company.
Because of the limited number of Certificateholders expected for each Series,
the Company anticipates that such reporting obligations will be permanently
suspended following the first fiscal year of each Trust. The Company does not
intend to file such reports if its obligation to do so is suspended.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, after the date of this
Prospectus and prior to the termination of the offering of the Certificates
shall be deemed to be incorporated by reference into this Prospectus to be a
part thereof from the respective dates of filing of such documents. Any
statement contained herein or in a document all or any portion of which is
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus and the related
Prospectus Supplement to the extent that a statement contained herein or therein
or in any other subsequently filed document which also is or deemed to be
incorporated by reference herein or therein 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 and the
related Prospectus Supplement.
The Company will provide without charge to each person to whom this
Prospectus and any Prospectus Supplement are delivered, on request of such
person, a copy of any or all of the documents incorporated herein by reference
other than the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Requests should be directed to the
Company in writing at 1600 Mountain View Drive, Colchester, Vermont 05446.
4
<PAGE> 40
TABLE OF CONTENTS
Page
SUMMARY OF TERMS......................................................... 8
RISK FACTORS............................................................. 18
DESCRIPTION OF THE CERTIFICATES.......................................... 23
General............................................................. 23
Book-Entry Procedures............................................... 24
Allocation of Collections from the Assets........................... 26
Optional Redemption or Termination.................................. 27
MATURITY AND PREPAYMENT CONSIDERATIONS................................... 28
YIELD CONSIDERATIONS..................................................... 29
THE TRUSTS............................................................... 30
General............................................................. 30
The Assets.......................................................... 30
Substitution of Contracts or Mortgage Loans......................... 34
Pre-Funding......................................................... 35
Distribution Account................................................ 36
Reserve Funds or Liquidity Accounts................................. 36
Insurance........................................................... 36
Hazard Insurance.................................................... 36
Obligor Bankruptcy Insurance........................................ 44
Delivery of Additional Assets....................................... 44
Investment of Funds................................................. 45
Certificate Guarantee Insurance..................................... 45
Alternate Credit Enhancement........................................ 45
THE MANUFACTURED HOUSING PROGRAM......................................... 46
SALE AND SERVICING OF CONTRACTS AND MORTGAGE LOANS....................... 49
Assignment of Contracts and Mortgage Loans.......................... 49
Representations and Warranties...................................... 50
Servicing........................................................... 51
Advances............................................................ 55
Compensating Interest............................................... 55
Maintenance of Insurance Policies and Other Servicing Procedures.... 55
THE POOLING AND SERVICING AGREEMENTS..................................... 59
The Servicer........................................................ 59
The Trustee......................................................... 59
Reports to Certificateholders....................................... 60
Events of Default................................................... 61
Certificateholder Rights............................................ 61
Amendment........................................................... 61
Termination......................................................... 62
5
<PAGE> 41
CERTAIN LEGAL ASPECTS OF CONTRACTS AND MORTGAGE LOANS.................... 62
The Contracts....................................................... 63
The Mortgage Loans.................................................. 68
Environmental Considerations........................................ 71
Enforceability of Certain Provisions................................ 72
USE OF PROCEEDS.......................................................... 72
THE COMPANY.............................................................. 73
THE SERVICER............................................................. 73
FEDERAL INCOME TAX CONSEQUENCES.......................................... 73
General............................................................. 74
REMIC Certificates.................................................. 74
Tax Treatment of Regular Certificates............................... 75
Original Issue Discount............................................. 75
Variable Rate Certificates.......................................... 80
Interest Weighted Certificates and Non-VRDI Certificates............ 82
Anti-abuse Rule..................................................... 82
Market Discount..................................................... 82
Amortizable Premium................................................. 84
Consequences of Realized Losses..................................... 84
Gain or Loss on Disposition......................................... 85
Tax Treatment of Residual Certificates.............................. 86
Limitations on Offset or Exemption of REMIC Income.................. 88
Non-recognition of Certain Transfers for Federal Income Tax Purposes 89
Ownership of Residual Interests by Disqualified Organizations....... 89
Special Considerations for Certain Types of Investors............... 90
Disposition of Residual Certificates................................ 92
Liquidation of the REMIC............................................ 93
REMIC-Level Taxes................................................... 94
REMIC Qualification................................................. 95
Asset Composition................................................... 95
Investors' Interests................................................ 96
Taxation of Certain Foreign Holders of REMIC Certificates........... 97
Reporting and Tax Administration.................................... 99
Non-REMIC Certificates.............................................. 100
Taxation of Certain Foreign Holders of Non-REMIC Certificates....... 104
STATE TAX CONSIDERATIONS................................................. 105
ERISA CONSIDERATIONS..................................................... 105
PLAN OF DISTRIBUTION..................................................... 107
LEGAL INVESTMENT CONSIDERATIONS.......................................... 108
LEGAL MATTERS............................................................ 108
6
<PAGE> 42
GLOSSARY................................................................. 110
7
<PAGE> 43
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the accompanying
Prospectus Supplement. Capitalized terms used herein shall have the respective
meanings assigned them in the "Glossary" herein on page [98].
Securities Offered................. Pass-Through Certificates (the
"Certificates") evidencing
interests in separate pools of
Contracts and/or Mortgage
Loans (each as defined below)
may be issued from time to
time in one or more Series
(each, a "Series") pursuant to
separate Pooling and Servicing
Agreements (each, an
"Agreement") among Bombardier
Capital Mortgage
Securitization Corporation
("BCMSC" or the "Company"),
Bombardier Capital Inc. ("BCI"
or the "Servicer"), and the
Trustee (the "Trustee")
specified in the Prospectus
Supplement for such Series of
Certificates.
Depositor.......................... The Company is a wholly owned
limited purpose subsidiary of
Bombardier Capital Inc. The
Company's officers are also
officers of Bombardier Capital
Inc.
Servicer........................... Unless otherwise specified in
the related Prospectus
Supplement, Bombardier Capital
Inc., an affiliate of the
Company, will service the
Contracts and Mortgage Loans
and administer the
Certificates.
The Asset Pools.................... The Asset Pools supporting the
Certificates will consist of
Contracts and Mortgage Loans
(collectively, the "Assets").
The Contracts supporting a
Series of Certificates will
consist of manufactured
housing installment sales
contracts and manufactured
housing installment sales
agreements. Each Contract may
be secured by a new, used or
repossessed Manufactured Home
or by a Manufactured Home that
has been transferred from a
previous owner to a new
Obligor. The Contracts may be
fixed or adjustable rate
Contracts and may be
conventional Contracts or
Contracts insured by the FHA
or partially guaranteed by the
VA. The Mortgage Loans
supporting a Series of
Certificates, as specified in
the related Prospectus
Supplement, will be first
mortgage loans secured by
one-to four-family residential
properties (each a "Mortgaged
Property"). The Mortgage Loans
may be fixed or adjustable
rate Mortgage Loans. The
Mortgage Loans may be
conventional Mortgage Loans
("Conventional Mortgage
Loans") or Mortgage Loans
insured by the FHA ("FHA
Mortgage Loans") or partially
guaranteed by the VA ("VA
Mortgage Loans"). Mortgage
Loans generally will have a
15- to 30-year term to
maturity at origination and a
loan-to-value ratio at
origination (as defined
herein, the "Mortgage
Loan-to-Value Ratio") not to
exceed 95%. See "The Trusts --
Insurance -- Credit Insurance"
herein. The adjustable rate
Contracts and Mortgage Loans
(together, the "Adjustable
Rate Assets") will, as
described in the related
Prospectus Supplement, permit
or require periodic changes in
the interest rates borne by
the Mortgage Loans, and in the
Monthly Payments made on such
Assets. The Assets included in
a Trust Estate may be subject
to various types of payment
provisions, and may include
Level Payment Loans, Buy-Down
Loans, GPM Loans, Step-up Rate
Loans, Interest Reduction
Loans, GEM Loans, Balloon
Payment Loans, Convertible
Loans, Bi-Weekly Loans, Level
Payment Buy-Down Loans,
Increasing Payment Loans or
other types of Assets
specified and described in the
related Prospectus Supplement.
See "The Trusts -- General"
herein.
8
<PAGE> 44
The Prospectus Supplement for
each Series will provide
information with respect to,
among other things, (1) the
approximate aggregate
principal balance of the
Assets comprising the Asset
Pool, as of the date specified
in the Prospectus Supplement
(the "Calculation Date") and
the percentage of the Assets
(by principal balance as of
the Calculation Date)
comprised of Contracts and
Mortgage Loans, respectively;
(2) the weighted average
Contract Rate on the
Contracts, the weighted
average Mortgage Rate on the
Mortgage Loans, the weighted
average Asset Rate on the
Assets (each based on
outstanding principal balances
as of the Calculation Date)
and the range of Contract
Rates, Mortgage Rates and
Asset Rates as of the
Calculation Date and, in the
case of Adjustable Rate
Assets, the method to be used
to determine the Contract
Rates, Mortgage Rates and
Asset Rates on the Assets; (3)
the weighted average term to
scheduled maturity of the
Assets as of origination
(based on outstanding
principal balances as of the
Calculation Date); (4) the
weighted average remaining
term to scheduled maturity of
the Assets as of the
Calculation Date (based on
outstanding principal balances
as of the Calculation Date)
and the range of remaining
terms to maturity of the
Assets; (5) the weighted
average (based on outstanding
principal balances as of the
Calculation Date) and range of
Contract Loan-to-Value Ratios
of the Contracts and Mortgage
Loan-to-Value Ratios of the
Mortgage Loans; (6) the amount
of any Pool Insurance Policy,
Special Hazard Insurance
Policy and Obligor Bankruptcy
Insurance (each as hereinafter
described) to be maintained
with respect to all or any
portion of the Asset Pool; (7)
the amount and terms of any
form of credit enhancement to
be provided with respect to
the related Series, if any;
and (8) the geographic
location of the Manufactured
Homes and Mortgaged Properties
securing the Contracts and the
Mortgage Loans.
The Company will acquire the
Contracts and the Mortgage
Loans from BCI or another
Seller, which may have
originated the Contracts or
may have acquired them in the
open market or in privately
negotiated transactions.
Description of Certificates........ Each Series of Certificates
may consist of one or more
Classes, one or more of which
may be Senior Certificates and
one or more of which may be
Subordinated Certificates.
Each such Class will evidence
the right to receive a
specified portion of
collections of principal or
interest, or both, on the
underlying Assets and certain
other property held in trust
for the benefit of the
Certificateholders (the "Trust
Estate"). Each Class of a
Series may be assigned a
principal balance (the
"Certificate Balance") and a
fixed or adjustable stated
annual interest rate (the
"Pass-Through Rate"), and may
represent entitlement to
receive distributions in
reduction of its Certificate
Balance to the extent of funds
available therefor in the
manner, priority and amounts
specified in the related
Prospectus Supplement. A Class
of Certificates may be a
"Compound Interest Class,"
which consists of Certificates
on which interest will accrue,
but on which interest will not
be paid for the period set
forth in the related
Prospectus Supplement. The
Certificates may be Book-Entry
Certificates or Definitive
Certificates issuable in fully
registered form, in either
case in the authorized
denominations specified in the
related Prospectus Supplement.
See "Description of the
Certificates" herein. Certain
Series or Classes of
Certificates may be enhanced
by pool insurance, letters of
credit, surety bonds,
guarantees, or any combination
thereof, or other forms of
credit enhancement including
the subordination of
Subordinated Certificates, if
any.
9
<PAGE> 45
THE CERTIFICATES WILL NOT BE
GUARANTEED OR INSURED BY ANY
GOVERNMENT AGENCY. NEITHER THE
CONTRACTS NOR THE MORTGAGE
LOANS COMPRISING ANY RELATED
ASSET POOL WILL BE GUARANTEED
OR INSURED BY ANY GOVERNMENT
AGENCY OR ANY OTHER INSURER
EXCEPT TO THE EXTENT SPECIFIED
IN THE RELATED PROSPECTUS
SUPPLEMENT.
Subordinated Certificates and Reserve Funds .. One or more Classes of any
Series of Certificates may be
Subordinated Certificates, as
specified in the related
Prospectus Supplement. The
rights of the Subordinated
Certificateholders to receive
any or a specified portion of
distributions with respect to
the Assets will be
subordinated to the rights of
Senior Certificateholders to
the extent and in the manner
specified in the related
Prospectus Supplement. In
addition, Realized Losses
and/or Unpaid Interest Amounts
may be allocated on each
Remittance Date to
Subordinated Certificates
before being allocated to
Senior Certificates, in any
event to the extent and in the
manner described in the
related Prospectus Supplement.
This subordination is intended
to enhance the likelihood of
regular receipt by Senior
Certificateholders of the full
amount of scheduled monthly
distributions of principal and
interest due them and to
protect the Senior
Certificateholders against
losses. If a Series of
Certificates contains more
than one Class of Subordinated
Certificates, distributions
and losses will be allocated
among such Classes in the
manner specified in the
related Agreement and
described, as to those Classes
offered hereby, in the related
Prospectus Supplement.
Certain Classes of
Certificates may be granted
preferential rights over the
rights of other Classes of
Certificates to receive
current distributions from the
related Asset Pool or as to
the allocation of Realized
Losses and/or Unpaid Interest
Amounts to the extent
specified in the related
Prospectus Supplement.
Protection also may be
afforded certain Classes of
Certificates by the
establishment of a reserve
fund (a "Reserve Fund"). A
Reserve Fund may be funded, to
the extent specified in the
related Prospectus Supplement,
by an initial cash deposit,
the retention of specified
periodic distributions of
principal or interest or both
otherwise payable to holders
of Subordinated or Residual
Certificates, or the provision
of a letter of credit,
guarantee, insurance policy or
other form of credit
enhancement, or any
combination of any of the
aforementioned methods.
Insurance and Credit Enhancement... As an alternative, or in
addition, to the credit
enhancement afforded by
subordination of Subordinated
Certificates and/or the
establishment of a Reserve
Fund, credit enhancement with
respect to a Series of
Certificates may be provided
by contract pool insurance
and/or mortgage pool
insurance, or other forms of
credit enhancement or
liquidity enhancement
acceptable to a nationally
recognized rating agency
rating one or more Classes of
a Series of Certificates.
Credit enhancement through
hazard insurance or credit
insurance is summarized below.
See "The Trusts -- Insurance"
below.
10
<PAGE> 46
Standard Hazard Insurance and Special
Hazard Insurance........................ All of the Manufactured Homes
and Mortgaged Properties will
be covered by Standard Hazard
Insurance Policies insuring
against losses due to various
causes, including fire,
lightning and windstorm.
Certain other physical risks
that are not otherwise insured
against (such as earthquake,
flood, nuclear accident or
war) may be covered by a
Special Hazard Insurance
Policy or Policies, as
specified in the related
Prospectus Supplement. Each
Special Hazard Insurance
Policy will be limited in
scope and will cover losses in
an initial amount equal to a
set percentage of the
aggregate principal balance of
the covered Mortgage Loans
and/or Contracts as of the
Cut-off Date or other maximum
coverage, as set forth in the
related Prospectus Supplement.
Any hazard losses not covered
by insurance or other credit
enhancement will be borne by
the related
Certificateholders. See "The
Trusts -- Insurance -- Hazard
Insurance" herein.
Pool Insurance..................... A Pool Insurance Policy or
Policies may be obtained with
respect to all or part of an
Asset Pool. Any Pool Insurance
Policy will be limited in
scope, covering defaults on
the related Contracts and/or
Mortgage Loans in an initial
amount of not less than a
specified percentage of the
aggregate principal balance
thereof as of the related
Cut-off Date as set forth in
the related Prospectus
Supplement. See "The Trusts --
Insurance -- Credit Insurance
-- Pool Insurance" herein.
Obligor Bankruptcy Insurance....... As specified in the related
Prospectus Supplement, Obligor
Bankruptcy Insurance may be
obtained to cover certain
losses resulting from action
which may be taken by a
bankruptcy court in connection
with a Mortgage Loan or
Contract. The level of
coverage of such insurance, if
any, will be specified in the
applicable Prospectus
Supplement. See "The Trusts --
Insurance -- Credit Insurance
-- Obligor Bankruptcy
Insurance" herein.
FHA Insurance and VA Guarantees.... To the extent specified in the
related Prospectus Supplement,
all or a portion of the
Contracts or Mortgage Loans
may be subject to FHA
insurance and all or a portion
of the Contracts or Mortgage
Loans may be partially
guaranteed by the VA. See "The
Trusts -- Insurance -- Credit
Insurance -- FHA Insurance and
VA Guarantees on Contracts"
herein.
Certificate Guarantee Insurance.... If so specified in the related
Prospectus Supplement, credit
enhancement for a Series may
be provided by an insurance
policy (the "Certificate
Guarantee Insurance") issued
by one or more insurers. Such
Certificate Guarantee
Insurance may guarantee timely
distributions of interest and
full distributions of
principal on the basis of a
schedule of principal
distributions set forth in or
determined in the manner
specified in the related
Prospectus Supplement. See
"The Trusts -- Certificate
Guarantee Insurance" herein.
Alternate Credit Enhancement....... To the extent specified in the
related Prospectus Supplement,
the Company may provide for
alternative credit enhancement
for all or part of the related
Trust Estate or Asset Pool, in
the form of a letter of
credit, guarantee, surety bond
or insurance policy,
derivative products, or any
combination thereof, in each
case satisfactory to a rating
agency rating the Series of
Certificates. See "The Trusts
-- Delivery of Additional
Assets" herein.
11
<PAGE> 47
Certain insurance policies or
other forms of credit
enhancement obtained for any
particular Series of
Certificates may previously
have been pledged to secure
other Series of Certificates
or other pass-through
securities or collateralized
mortgage or manufactured
housing contract obligations
to the extent described in the
related Prospectus Supplement.
In addition, any such
insurance policies or other
forms of credit enhancement
provided for a Series may be
further pledged to secure
other securities or
obligations after the issuance
of such Series to the extent
so provided in the related
Prospectus Supplement and to
the extent such further pledge
will not result in a
downgrading of any rating
assigned to Certificates of
such Series by a nationally
recognized rating agency
identified in the related
Prospectus Supplement.
With respect to any Series of
Certificates secured by
insurance policies or other
forms of credit enhancement,
the Company will have the
right to substitute comparable
coverage from another insurer
or to provide equivalent
protection for any of such
insurance policies or other
forms of credit enhancement so
long as such substitution will
not result in the downgrading
of any rating assigned to
Certificates of such Series by
a nationally recognized rating
agency identified in the
related Prospectus Supplement.
Advances........................... The Servicer will make
advances of delinquent
payments of principal and
interest ("P&I Advances"), as
well as advances of delinquent
payments of taxes, insurance
premiums and escrowed items,
as well as liquidation-
related expenses ("Servicing
Advances" and, together with
P&I Advances, "Advances"),
with respect to the Contracts
and Mortgage Loans unless (i)
the Servicer concludes that
the advance cannot be
recovered out of the
Liquidation Proceeds of the
related Asset or (ii) the
Advance would exceed a limit
specified by the applicable
Rating Agencies.
Compensating Interest.............. If a Contract or Mortgage Loan
is prepaid in full or
liquidated other than on a Due
Date, the Obligor generally is
only required to pay interest
to the date of prepayment or
liquidation. In such event, to
the extent provided in the
related Prospectus Supplement,
for so long as BCI is the
Servicer of the related Asset,
the Servicer is obligated to
pay interest from the last day
for which interest was due
from the Obligor to the next
succeeding Due Date, so long
as such amount does not exceed
the Servicer's servicing
compensation for such month
("Compensating Interest").
Pooling and Servicing Agreement.... Each Series of Certificates
will be issued pursuant to a
Pooling and Servicing
Agreement (each, an
"Agreement") among the
Company, the Servicer and the
Trustee identified in the
related Prospectus Supplement.
Pursuant to the Agreement, the
Company will sell and assign
the Asset Pool and other
assets comprising the related
Trust Estate to the trustee
named in the related
Prospectus Supplement (the
"Trustee") in exchange for a
Series of Certificates.
Following the closing for a
Series, payments of principal,
including prepayments, and
interest on the Contracts and
Mortgage Loans with respect to
the Series (together with
payments from any Reserve Fund
or other funds for such
Series) and, if applicable,
reinvestment income thereon,
will be passed through to the
Trust as specified in the
Prospectus Supplement.
12
<PAGE> 48
The Trustee will periodically
allocate such amounts, to the
extent actually collected,
advanced or received during
the applicable Collection
Period or Prepayment Period
(as appropriate), net of
various fees, premiums and
expenses (the "Available
Distribution") among the
Classes of Certificates of the
related Series in the
proportion and order of
application set forth in the
related Agreement and
described in the related
Prospectus Supplement. The
Available Distribution may be
allocated so that amounts paid
as interest on the Contracts
and Mortgage Loans may be
distributed as principal on
the Certificates and amounts
paid as principal on the
Contracts and Mortgage Loans
may be distributed as interest
on the Certificates.
Distributions of Interest.......... Interest will be distributed
periodically by the Trustee on
each Class of Certificates
entitled to interest
distributions on the dates
specified in the related
Prospectus Supplement (each, a
"Remittance Date"). Interest
will accrue on each Class of
the Certificates entitled to
interest distributions at the
applicable Pass-Through Rate
on the outstanding actual or
notional principal amount of
such Certificates or in
accordance with such other
formula as may be specified in
the related Prospectus
Supplement. Each periodic
distribution of interest on
the Certificates of a
particular Class will be
distributed among holders of
such Class pro rata in
accordance with their
respective percentage
ownership interests in the
outstanding Certificates of
such Class. Each such
distribution of interest will
include all interest accrued
through the Accounting Date
immediately preceding the
applicable Remittance Date or
to another date specified in
the related Prospectus
Supplement, provided that
distributions of interest on
the Certificates of a Series
may be reduced as a result of
delinquencies or losses on
Contracts and Mortgage Loans
in the related Trust.
Distributions of Principal......... Principal will be distributed
periodically by the Trustee on
each Class of Certificates
entitled to principal
distributions on the
Remittance Dates specified in
the related Prospectus
Supplement. Each periodic
distribution of principal on
the Certificates of a
particular Class will be
distributed among holders of
such Class pro rata in
accordance with their
respective percentage
ownership interests in the
outstanding Certificates of
such Class, or in such other
manner specified in the
related Prospectus Supplement.
Distributions of principal on
the Certificates of a Series
may be reduced to the extent
of delinquencies or losses on
the Contracts and Mortgage
Loans in the related Trust.
The Final Scheduled Remittance
Date for each Class of a
Series is the date after which
no Certificates of such Class
will remain outstanding,
assuming timely payments are
made on the Contracts and
Mortgage Loans in the related
Trust in accordance with their
terms, and that no Contracts
or Mortgage Loans are prepaid
in whole or in part. The Final
Scheduled Remittance Date for
a Class will be determined by
reference to the maturity date
of the Contract or Mortgage
Loan in the related Trust
which has the latest stated
maturity or will be determined
on the basis of the
assumptions set forth in the
related Prospectus Supplement.
The actual maturity date of
the Certificates of a Series
will depend primarily upon the
level of prepayments and
defaults with respect to the
Contracts and Mortgage Loans
comprising the related Asset
Pool. The actual maturity of
any Certificate is likely to
occur earlier and may occur
substantially earlier than its
Final Scheduled Remittance
Date as a result of the
application of prepayments to
the reduction of the principal
amounts of the Certificates.
See "Maturity and Prepayment
Considerations" and "Yield
Considerations" herein.
13
<PAGE> 49
Allocation of Losses and Unpaid Interest
Amounts............................ With respect to any defaulted
Contract or Mortgage Loan that
is finally liquidated for cash
(a "Liquidated Loan") through
repossession and resale of the
underlying Manufactured Home
or through foreclosure sale or
other liquidation of the
underlying Mortgaged Property,
disposition of the related
Mortgaged Property if acquired
by deed in lieu of
foreclosure, or otherwise, the
amount of loss realized, if
any (a "Realized Loss"), will
equal the sum of (a) (1) the
Unpaid Principal Balance of
the Liquidated Loan, plus (2)
amounts reimbursable to the
Servicer or Trustee for
related previously
unreimbursed costs, expenses
and advances, plus (3) amounts
attributable to interest
accrued but not paid on such
Liquidated Loan, minus (b)
Liquidation Proceeds with
respect to the Liquidated
Loan. Liquidation Proceeds
will be allocated first to
reimburse the Servicer or
Trustee for previously
unreimbursed Advances it made
in respect of the related
Asset, second to reduce
accrued and unpaid interest on
such Asset, and finally to
reduce the Unpaid Principal
Balance of such Asset.
Realized Losses also include
Obligor Bankruptcy Losses,
Special Hazard Losses and
Fraud Losses. Obligor
Bankruptcy Losses result when
the Unpaid Principal Balance
of a Contract or Mortgage Loan
is reduced in connection with
bankruptcy proceedings
concerning the Obligor.
Special Hazard Losses are
losses attributable to
physical damage to Mortgaged
Properties or Manufactured
Homes of a type which is not
covered by standard hazard
insurance policies, but do not
include losses caused by war,
nuclear reaction, nuclear or
atomic weapons, insurrection
or normal wear and tear. Fraud
Losses are losses on Contracts
or Mortgage Loans as to which
there was fraud in connection
with the origination of the
Contract or Mortgage Loan or
fraud, dishonesty or
misrepresentation in
connection with the
application for any insurance
obtained as to such Contract
or Mortgage Loan.
In the event that P&I Advances
are not made or are
insufficient to cover
delinquencies in principal and
interest payments on the
related Asset Pool, such
delinquencies may result in
reduced principal and interest
distributions on the
Certificates. A Unpaid
Interest Amount of interest
may also result (1) from the
application of the Soldiers'
and Sailors' Civil Relief Act
of 1940, which caps the
interest rate payable by
certain Obligors who enter
military service after
entering into their Contracts
or Mortgage Loans ("Soldiers'
and Sailors' Shortfall"); (2)
from the receipt of
Liquidation Proceeds and
Insurance Proceeds in an
amount insufficient to pay
accrued and unpaid interest on
a liquidated Contract or
Mortgage Loan ("Realized
Interest Losses"); (3) from
the prepayment in full or
liquidation of a Contract or
Mortgage Loan to the extent
such Unpaid Interest Amount is
not covered by a Compensating
Interest payment by the
Servicer as described above
("Due Date Interest
Shortfall") and (4) from a
Unpaid Interest Amount in
interest collected on an Asset
that accompanies a Special
Hazard Loss, Obligor
Bankruptcy Loss or Fraud Loss.
14
<PAGE> 50
A Series may include one or
more Classes of Certificates
as to which the right to
receive distributions with
respect to the Asset Pool will
be subordinate to the rights
of holders of more Senior
Certificates of such Series.
Such subordination may only be
to the extent of a specific
amount specified in the
related Prospectus Supplement
(the "Subordination Amount")
or may require allocation of
all Realized Losses or other
Unpaid Interest Amounts to a
Subordinated Class of
Certificates until its
Certificate Balance has been
reduced to zero. If so
provided in the related
Prospectus Supplement, certain
types of Realized Losses or
Unpaid Interest Amounts may be
allocated differently than
other Realized Losses or
Unpaid Interest Amounts. Any
allocation of a Realized Loss
to a Class of Certificates
generally will be made by
reducing the Certificate
Balance thereof as of the
applicable Remittance Date by
an amount equal to the amount
of such Realized Loss.
Optional Redemption or
Termination...................... To the extent specified in the
related Prospectus Supplement,
the Certificates of a Series
may be redeemed or otherwise
retired early by the party
specified therein under
certain circumstances. See
"Description of the
Certificates -- Termination"
herein.
Auction Sale....................... The Trustee, the Servicer or
certain other entities
specified in the related
Prospectus Supplement may be
required to effect early
retirement of a series of
Securities by soliciting
competitive bids for the
purchase of the related Trust
Estate or otherwise, under
other circumstances and in the
manner specified in the
related Prospectus Supplement.
Federal Income Tax
Considerations................... If an election is made to
treat all or a portion of the
Trust Estate relating to a
Series of Certificates as a
real estate mortgage
investment conduit (a
"REMIC"), each Class of
Certificates of such Series
will constitute "regular
interests" in a REMIC or
"residual interests" in a
REMIC, as specified in the
related Prospectus Supplement.
If no election is made to
treat all or any portion of
the Trust Estate relating to a
Series of Certificates as a
REMIC, the Trust Estate will
be classified as a grantor
trust and not as an
association taxable as a
corporation for federal income
tax purposes, and therefore
holders of Certificates will
be treated as the owners of
undivided pro rata interests
in the Asset Pool and any
other assets held by the
Trust. See "Federal Income Tax
Consequences" herein.
Yield Considerations............... The Prospectus Supplement for
a Series may specify certain
weighted average life
calculations, based upon an
assumed rate of prepayment or
a range of prepayment
assumptions on the related
Asset Pool. A higher level of
principal prepayments on the
Contracts and Mortgage Loans
than anticipated is likely to
have an adverse effect on the
yield on any Certificate that
has a purchase price greater
than its principal amount
("Premium Certificates") and a
lower level of principal
prepayments on the Contracts
and Mortgage Loans than
anticipated is likely to have
an adverse effect on the yield
on any Certificate that has a
purchase price less than its
principal amount ("Discount
Certificates"). It is possible
under certain circumstances
for holders of Premium
Certificates not only to
suffer a lower than
anticipated yield but, in
extreme cases, to fail to
recoup fully their initial
investment.
15
<PAGE> 51
Pre-Funding........................ If so specified in the related
Prospectus Supplement, a
portion of the issuance
proceeds of the Certificates
of a particular Series (such
amount, the "Pre-Funded
Amount") will be deposited in
an account (the "Pre-Funding
Account") to be established
with the Trustee, which will
be used to acquire additional
Mortgage Loans or Contracts
from time to time during the
period specified in the
related Prospectus Supplement
(the "Pre-Funding Period").
Prior to the investment of the
Pre-Funded Amount in
additional Mortgage Loans or
Contracts, such Pre-Funded
Amount may be invested in one
or more Eligible Investments.
Any Eligible Investment must
mature no later than the
Business Day prior to the next
Remittance Date. See "The
Trusts -- Pre-Funding" herein.
During any Pre-Funding Period,
the Company will be obligated
(subject only to the
availability thereof) to
transfer to the related Trust
additional Mortgage Loans or
Contracts from time to time
during such Pre-Funding
Period. Such additional
Mortgage Loans or Contracts
will be required to satisfy
certain eligibility criteria
more fully set forth in the
related Prospectus Supplement,
which eligibility criteria
will be consistent with the
eligibility criteria of the
Mortgage Loans or Contracts
included in the Trust as of
the Closing Date, subject to
such exceptions as are
expressly stated in such
Prospectus Supplement.
Although the specific
parameters of the Pre-Funding
Account with respect to any
issuance of Certificates will
be specified in the related
Prospectus Supplement, it is
anticipated that: (a) the
Pre-Funding Period will not
exceed three months from the
related Closing Date, (b) the
additional Mortgage Loans or
Contracts to be acquired
during the Pre-Funding Period
will be subject to the same
representations and warranties
as the Mortgage Loans or
Contracts included in the
related Trust on the Closing
Date (although additional
criteria may also be required
to be satisfied, as described
in the related Prospectus
Supplement) and (c) the
Pre-Funded Amount will not
exceed 25% of the principal
amount of the Certificates
issued pursuant to a
particular offering.
ERISA Considerations............... A fiduciary of any employee
benefit plan subject to the
Employee Retirement Income
Security Act of 1974, as
amended ("ERISA"), or the
Code, should review carefully
with its legal advisors
whether the purchase or
holding of Certificates could
give rise to a transaction
prohibited under ERISA or the
Code. See "ERISA
Considerations" herein.
16
<PAGE> 52
Legal Investment Considerations.... If so specified in the
Prospectus Supplement relating
to a Series of Certificates,
one or more Classes within
such Series will constitute
"mortgage related securities"
under the Secondary Mortgage
Market Enhancement Act of 1984
("SMMEA") if and for so long
as they are rated in one of
the two highest rating
categories by the Rating
Agency or Agencies identified
in the related Prospectus
Supplement. Certificates that
are "mortgage related
securities" for SMMEA purposes
would be "legal investments"
for certain types of
institutional investors to the
extent provided in SMMEA,
subject to state laws
overriding SMMEA. A number of
states have enacted
legislation overriding the
state securities registration
and/or legal investment
provisions of SMMEA. Some
Classes of Certificates
offered hereby may not be
rated in one of the two
highest rating categories by
the appropriate Rating Agency
or Agencies, and thus would
not constitute "mortgage
related securities" under
SMMEA. Certificates may not
qualify as "mortgage related
securities" for other reasons
as well. Certificates that do
not constitute
"mortgage-related securities"
under SMMEA may require
registration, qualification or
an exemption under applicable
state securities laws and may
not be "legal investments" to
the same extent as "mortgage
related securities." See
"Legal Investment
Considerations" herein.
Use of Proceeds.................... Substantially all of the net
proceeds from the sale of a
Series of Certificates offered
hereby and by the related
Prospectus Supplement will be
applied to the simultaneous
purchase of the Contracts and
Mortgage Loans underlying such
Series of Certificates or to
reimburse the amounts
previously used to effect the
purchase of the Contracts and
Mortgage Loans underlying the
Certificates, the costs of
carrying the Contracts and
Mortgage Loans until sale of
the Certificates and to pay
other expenses connected with
pooling the Contracts and
Mortgage Loans and issuing the
Certificates. Any excess will
be used by the Company for its
general corporate purposes.
See "Use of Proceeds" herein.
Rating............................. It is a condition to the
issuance of the Certificates
to be offered hereunder that
they be rated in one of the
four highest rating categories
(without regard to modifiers)
by at least one nationally
recognized statistical rating
organization, such as Standard
& Poor's Rating Services, a
division of The McGraw-Hill
Companies, Inc., Moody's
Investors Service, Inc., Fitch
Investors Service, L.P. or
Duff & Phelps Credit Rating
Co.
17
<PAGE> 53
RISK FACTORS
Prospective Certificateholders should consider the following factors,
among others, in connection with the purchase of the Certificates.
1. VALUE OF CONTRACTS AND MORTGAGE LOANS IN WHICH CERTIFICATEHOLDERS HAVE
INVESTED IS DEPENDENT ON CONDITIONS BEYOND THE COMPANY'S CONTROL.
Value of Contracts Sensitive to Economic Conditions and Likely Will
Decrease over Time. An investment in Certificates evidencing interests in
Contracts may be affected by, among other things, downturns in regional or local
economic conditions. Regional or local economic conditions are often volatile,
and historically have affected the delinquency, loan loss and repossession
experience of manufactured housing installment sales contracts and manufactured
housing installment loan agreements. Holders of the Certificates of a Series
will bear all risk of loss resulting from defaults by Obligors on the underlying
Contracts and will have to look primarily to the value of the related
Manufactured Homes for recovery of the outstanding principal and unpaid interest
of the defaulted Contracts to the extent that losses on the Contracts underlying
such Series are not absorbed by other Certificates, if any, that are
subordinated to such Holders' Certificates, by applicable insurance policies, if
any, or by any other credit enhancement. The value of Manufactured Homes
typically declines over time, and the amount recoverable upon repossession and
resale of a Manufactured Home may not be sufficient to pay all principal and
interest due on the defaulted Contract it secured. See "The Trusts -- The Assets
- -- The Contracts" herein.
Contracts differ from Mortgage Loans in certain material respects. In
general, Contracts may experience a higher level of delinquencies than Mortgage
Loans, because the credit underwriting standards applied to borrowers under
manufactured housing installment sales contracts generally are not as stringent
as those applied to borrowers under many conventional residential first-lien
mortgage loans. See "Underwriting Policies -- Contract Underwriting Guidelines"
herein. As noted above, Manufactured Homes generally decline in value over time,
which may not necessarily be the case with respect to Mortgaged Properties
underlying Mortgage Loans. Consequently, the losses incurred upon repossession
of or foreclosure on Manufactured Homes securing the Contracts generally may be
expected to be more severe than the losses that would be incurred upon
foreclosure on Mortgaged Properties securing Mortgage Loans (in each case
measured as a percentage of the outstanding principal balances of the related
Assets). See "Certain Legal Aspects of Contracts and Mortgage Loans" herein.
Certificates evidencing interests in Contracts may also be subject to other
risks that are not present in the case of Certificates evidencing interests in
Mortgage Loans. See " -- 3. Certificateholders May Realize Losses If the
Servicer Is Unable to Realize on Assets Because of Provisions of Applicable
State Law," and " -- 4. Compliance with Federal And State Lender Regulations May
Cause Certain Credit and Prepayment Risks to Certificateholders" below and
"Certain Legal Aspects of Contracts and Mortgage Loans" herein.
Value of Mortgage Loans Sensitive to Changes in Residential Real Estate
Markets. An investment in Certificates evidencing interests in mortgage loans
may be affected, among other things, by declines in real estate values or
downturns in regional or local economic conditions. If the residential real
estate market should experience an overall decline in property values such that
the outstanding balances of the Mortgage Loans underlying a Series, together
with any secondary financing on the related Mortgaged Properties, become equal
to or greater than the value of the related Mortgaged Properties, the actual
rates of delinquencies, foreclosures and losses on such Mortgage Loans could be
higher than those now generally experienced in the mortgage lending industry.
Holders of the Certificates evidencing interests in such Mortgage Loans will
bear all risk of loss resulting from default by the related mortgagors and will
have to look primarily to the value of the related Mortgaged Properties for
recovery of the outstanding principal of and unpaid interest on the defaulted
Mortgage Loans to the extent that such losses are not covered by other
Certificates, if any, that are subordinated to such Holders' Certificates, by
applicable insurance policies, if any, or by any other credit enhancement. See
"The Trusts -- The Assets -- The Mortgage Loans" herein.
18
<PAGE> 54
Value of Assets Transferred to the Trust Estate May Decrease. If the
assets assigned to a Trust were to be sold, there can be no assurance that the
proceeds of any such sale would be sufficient to distribute in full the
outstanding principal amount of the related Certificates and all accrued
interest due thereon. The market value of the Assets included in any Trust
Estate generally will fluctuate with changes in prevailing rates of interest,
among other factors. Consequently, the assets included in the Trust Estate for a
Series may be liquidated at a discount from their par value or from their
purchase price, in which case the proceeds of such liquidation might be less
than the aggregate outstanding principal amount of the Certificates of that
Series, plus interest at the Pass-Through Rate allocated to each Class of such
Certificates. In such event, any Unpaid Interest Amounts in the amounts
necessary to make required distributions on the Certificates would be borne by
the Certificateholders.
2. PREPAYMENTS, YIELD AND CREDIT RISKS TO CERTIFICATEHOLDERS FROM
OWNERSHIP OF FIXED POOL OF CONTRACTS AND MORTGAGE LOANS.
Prepayment Timing and Frequency May Adversely Affect Yield of
Certificateholder. Yields realized by holders of certain Classes of Certificates
entitled to disproportionate allocations of principal or interest on the
underlying Asset Pool will be extremely sensitive to levels of prepayments
(including for this purpose, payments resulting from refinancings, liquidations
due to defaults, casualties, condemnations and purchases by or on behalf of the
Company or the Seller) on the Assets in the related Trust. In general, yields on
Premium Certificates will be adversely affected by higher than anticipated
levels of prepayments on the Assets and enhanced by lower than anticipated
levels of prepayments. Conversely, yields on Discount Certificates are likely to
be enhanced by higher than expected levels of prepayments and adversely affected
by lower than anticipated levels of prepayments. The level of sensitivity of a
Class to prepayment levels will be magnified as the disproportion of the
allocation of principal and interest payments on the Assets to such Class
increases. Holders of certain Classes of Certificates could fail to recover
their initial investments.
The rate of principal payments on the Contracts and Mortgage Loans will be
affected by the amortization schedules of such Contracts and Mortgage Loans and
the rate of principal prepayments thereon (including for this purpose payments
resulting from refinancings, liquidations due to defaults, casualties,
condemnations and purchases by or on behalf of the Company or the Seller). The
rate of principal prepayments on pools of Contracts and Mortgage Loans is
influenced by a variety of economic, geographic, social, tax, legal and other
factors. In general, however, if the Contracts and Mortgage Loans are not
subject to prepayment penalties and if prevailing interest rates fall
significantly below the interest rates on the Contracts and Mortgage Loans, such
Contracts and Mortgage Loans are likely to be the subject of higher principal
prepayments than if prevailing rates remain at or above the rates borne by such
Contracts and Mortgage Loans. This is because, in a declining interest rate
environment, the Obligors may be able to secure alternative financing of their
Manufactured Homes or Mortgaged Properties with lower interest rates and lower
Monthly Payments than those borne by their current Contracts or Mortgage Loans.
Conversely, an Obligor is less likely to prepay his Contract or Mortgage Loan
when market interest rates are higher than those in effect when the Contract or
Mortgage Loan was originated. This general causal relationship may be more
pronounced in the case of Mortgage Loans than in the case of Contracts, because
Contracts typically have smaller principal balances than Mortgage Loans and,
consequently, the effect of interest rate changes on Monthly Payments due on
Contracts may be less dramatic than the effect of such changes on Monthly
Payments due on Mortgage Loans.
The holder of a Contract or Mortgage Loan (i.e., the Trustee, and through
it, the Certificateholders) generally does not want the Contract or Mortgage
Loan to be prepaid when prevailing interest rates are lower than they were at
the time of the holder's investment in the related Certificates and generally
does want the Contract or Mortgage Loan to be prepaid when prevailing interest
rates are higher than they were at the time of the holder's investment in the
related Certificates. This conflict between the Obligor and the holder of the
Contract or Mortgage Loan exposes the holder to reinvestment risk when
prevailing interest rates are lower than at the time of the holder's investment
(it can only reinvest the proceeds of prepayment of a Contract or Mortgage Loan
in investments bearing a lower rate of interest than that borne by the
Certificate backed by the prepaid Contract or Mortgage Loan) and the loss of
reinvestment opportunity when prevailing interest rates are higher than at the
time of the holder's investment (it cannot reinvest its funds in higher yielding
instruments).
19
<PAGE> 55
Credit Ratings Provided by Rating Agencies Do Not Address All Risks in an
Investment in the Offered Certificates. Each Class of Certificates of a Series
offered hereby and by means of the related Prospectus Supplement will be rated
in not less than the fourth highest rating category by the Rating Agency or
Agencies identified in such Prospectus Supplement. Any such rating does not
constitute a recommendation to buy, sell or hold the rated Certificates and is
subject to revision or withdrawal at any time by the Rating Agency that issued
the rating. An investor may obtain further details with respect to any rating on
the Certificates from the Rating Agency that issued the rating. In addition, any
such rating will be based, among other things, on the credit quality of the
underlying Asset Pool only and will represent only an assessment of the
likelihood of receipt by Certificateholders of payments with respect to such
Asset Pool. Such rating will not represent any assessment of the likelihood that
prepayment experience may differ from prepayment assumptions and, accordingly,
will not constitute any assessment of the possibility that holders of Premium
Certificates will fail to recoup their initial investment if a high rate of
principal prepayments is experienced on the related Assets. Security ratings
assigned to Classes of Certificates representing a disproportionate entitlement
to principal or interest collections on the underlying Assets should be
evaluated independently of similar security ratings assigned to other kinds of
securities.
3. CERTIFICATEHOLDERS MAY REALIZE LOSSES IF THE SERVICER IS UNABLE TO
REALIZE ON ASSETS BECAUSE OF PROVISIONS OF APPLICABLE STATE LAW. Each Contract
is secured by a security interest in a Manufactured Home. Perfection of security
interests in Manufactured Homes are subject to a number of state laws,
including, in some states, the Uniform Commercial Code (the "UCC") as adopted in
such states and, in other states, such states' motor vehicle titling statutes.
In some states, perfection of security interests in Manufactured Homes is
governed both by the applicable UCC and by motor vehicle titling statutes. The
steps necessary to perfect a security interest in a Manufactured Home will vary
from state to state. Because of the expense and administrative inconvenience
involved, neither the Seller nor the Company will amend any certificates of
title to change the lienholder specified therein from BCI (or any other Seller)
to the Trustee or take any other steps to effect re-registration of any
Manufactured Home in the Trustee's name with the appropriate state motor vehicle
authority. In addition, neither the Seller nor the Company will deliver any
certificate of title to the Trustee or note thereon the Trustee's interest or
file any UCC-3 financing statements or other instruments evidencing the
assignment to the Trustee of the Seller's security interest in any Manufactured
Home. In some states, in the absence of such an amendment to the certificate of
title or such a filing under the applicable UCC, it is unclear whether the
assignment to the Trustee of the security interest created by a Contract in the
underlying Manufactured Home will be effective or whether the Trustee's security
interest in the Manufactured Home will be perfected. In addition, in the absence
of notation of the Trustee's interest in a Manufactured Home on the related
certificate of title or re-registration of the Manufactured Home in the
Trustee's name with the appropriate state motor vehicle authority or delivery of
the certificate of title to the Trustee or filing of an appropriate transfer
instrument under the applicable UCC, it is unclear whether the assignment to the
Trustee of the security interest created by a Contract in the underlying
Manufactured Home will be effective against creditors of the Seller or a trustee
in bankruptcy of the Seller. The Seller will make certain warranties relating to
the validity, perfection and priority of the security interest created by each
Contract in the underlying Manufactured Home in favor of the Contract's
originator. A breach of any such warranty that materially and adversely affects
the Trust's interest in any Contract or Mortgage Loan would create an obligation
on the part of the Seller to repurchase or substitute for such Contract or
Mortgage Loan unless such breach is cured within 90 days after the Seller's
discovery of or receipt of notice of such breach.
4. COMPLIANCE WITH FEDERAL AND STATE LENDER REGULATIONS MAY CAUSE CERTAIN
CREDIT AND PREPAYMENT RISKS TO CERTIFICATEHOLDERS. Numerous federal and state
consumer protection laws impose requirements on lending under mortgage loans or
retail installment sales contracts such as the Contracts, and the failure by the
lender or seller of goods to comply with such requirements could give rise to
liabilities on the part of such lender's assignees to the Obligors for amounts
due under such mortgage loans or contracts or to an Obligor's right of set-off
against claims by such assignees as a result of such lender's or seller's
noncompliance. To the extent these laws affect the Contracts or the Mortgage
Loans, these laws would apply to the Trustee as assignee of the Contracts and
the Mortgage Loans. Except as may be set forth in the related Prospectus
Supplement, the Seller will warrant that the origination of each Contract and
Mortgage Loan complied with all requirements of law and that there exists no
right of rescission, set-off, counterclaim or defense in favor of the Obligor
under any Contract and that each Asset is enforceable against the related
20
<PAGE> 56
Obligor in accordance with its terms, subject to applicable bankruptcy and
similar laws, laws affecting creditors' rights generally and general principles
of equity. A breach of any such warranty that materially and adversely affects
the Trust's interest in any Contract or Mortgage Loan would create an obligation
on the part of the Seller to repurchase or substitute for such Contract or
Mortgage Loan unless such breach is cured within 90 days after the Seller's
discovery of such breach or after notice of such breach is provided to the
Seller. If the credit support provided by any Subordinated Certificates, any
insurance or any other credit enhancement is exhausted, application of these
consumer protection laws could limit the ability of the Certificateholders to
realize upon Manufactured Homes or Mortgaged Properties securing defaulted
Contracts and Mortgage Loans or could limit the amount collected on such
defaulted Contracts and Mortgage Loans to less than the amount due thereunder.
See "Certain Legal Aspects of the Contracts and Mortgage Loans -- The Contracts
- -- Enforcement of Security Interests in Manufactured Homes" and " -- Consumer
Protection Laws" herein and "Certain Legal Aspects of the Contracts and Mortgage
Loans -- The Mortgage Loans -- Anti-Deficiency Legislation and Other Limitations
on Lenders" herein.
5. CERTIFICATEHOLDERS MUST LOOK SOLELY TO THE TRUST ESTATE FOR
DISTRIBUTIONS OF PRINCIPAL AND INTEREST. The Certificates of a Series are
obligations of the related Trust only, and holders of Certificates of a Series
may look only to the assets of the related Trust for distributions on such
Certificates. The Certificates will not represent an interest in or obligation
of the Company, the Servicer or any Underwriter, or any affiliates of the
Company, the Servicer or any Underwriter, except to the extent described herein
or in the related Prospectus Supplement. See "The Trusts -- Certificate
Guarantee Insurance" and " -- Alternate Credit Enhancement" herein. The
Certificates will not be insured or guaranteed by any government agency or
instrumentality, the Company, or any Underwriter or any of their affiliates, or
the Servicer, except described herein. See "The Trusts -- Certificate Guarantee
Insurance" and " -- Alternate Credit Enhancement" herein.
6. THERE WILL BE A LIMITED MARKET FOR THE OFFERED CERTIFICATES. There can
be no assurance that a secondary market will develop for the Certificates of any
Series or, if it does develop, that it will provide the holders of such
Certificates with liquidity of investment or that any such liquidity will
continue to exist for the term of such Certificates. Certificates issued in
book-entry form may be less liquid than Certificates issued in fully-registered
certificated form. See "Description of the Certificates -- Book-Entry
Procedures" herein.
7. AVAILABILITY OF EXTERNAL CREDIT ENHANCEMENT DOES NOT ELIMINATE RISKS OF
REALIZED LOSSES ON THE OFFERED CERTIFICATES. If insurance policies or other
credit enhancement are provided with respect to a Series of Certificates, the
insurance policies (including FHA insurance and any VA guarantees) or other
credit enhancement on the Contracts or the Mortgage Loans or any other part of
the related Trust Estate will not provide protection against all contingencies
and will cover certain contingencies only to a limited extent. See "The Trusts
- -- Insurance" herein.
8. CERTIFICATEHOLDERS SUBJECT TO LOSS IF RATE OF DELINQUENCIES AND AMOUNT
OF REALIZED LOSSES EXCEED CERTAIN LEVELS. With respect to Certificates of a
Series that includes a Class of Subordinated Certificates, while the
subordination feature is intended to enhance the likelihood of timely payment of
principal and interest to Senior Certificateholders, the available subordination
may be limited, as specified in the related Prospectus Supplement. In addition,
with respect to Certificates of a Series supported by a Reserve Fund, the
Reserve Fund could be depleted under certain circumstances. In either case,
Unpaid Interest Amounts could result for both the Senior Certificates and the
Subordinated Certificates of such Series. Prospective purchasers of a Class of
Certificates should carefully review the credit risks entailed in such Class
resulting from its subordination or from the timing of the distributions
intended to be made on such Class.
9. CERTIFICATES PURCHASED AT A DISCOUNT OR PREMIUM FROM THEIR PARITY PRICE
ARE SUBJECT TO PARTICULAR TAX RISKS. Discount Certificates generally will be
treated as issued with original issue discount for federal income tax purposes.
In addition, certain classes of Premium Certificates (e.g., interest-only
securities) may be treated by the Trustee under applicable provisions of the
Code as stripped coupons issued with original issue discount. The Trustee will
report original issue discount with respect to such Discount and Premium
Certificates on an accrual basis, which may be prior to the receipt of cash
associated with such income. See "Federal Income Tax Consequences" herein.
21
<PAGE> 57
10. REMIC RESIDUAL CERTIFICATES SUBJECT TO PARTICULAR TAX RISKS. Residual
Certificates are subject to certain special tax considerations that differ from
those applicable to REMIC Regular Certificates and to Certificates in a Series
for which no REMIC election is made. See "Federal Income Tax Consequences"
herein.
11. RECHARACTERIZATION OF THE TRANSACTION IN BANKRUPTCY CASES COULD RESULT
IN DELAYS OR ACCELERATION OF DISTRIBUTIONS ON THE OFFERED CERTIFICATES. The
Company intends that the transfer of an Asset Pool to the related Trust
constitute a sale rather than a pledge of such Asset Pool to secure indebtedness
of the Seller. However, if the Seller were to become a debtor under the federal
Bankruptcy Code, it is possible that a creditor, a bankruptcy trustee of the
Seller, or the Seller itself as debtor-in-possession may argue that the sale of
the Asset Pool by the Seller is a pledge of the Asset Pool rather than a sale.
This position, if argued before or accepted by a court, could result in a delay
in or reduction of distributions to the related Certificateholders. In addition,
if an affiliate of the Seller were to become insolvent, a creditor, a bankruptcy
trustee of such affiliate, or such affiliate itself as debtor-in-possession may
argue that the Seller's assets should be substantively consolidated into such
affiliate's estate. This position, if argued before or accepted by a court,
could similarly result in a delay in or reduction of distributions to the
related Certificateholders.
A case (Octagon Gas Systems, Inc. v. Rimmer, 995 F.2D 948 (10th Cir.),
Cert. Denied 114 S. Ct. 554 (1993)) decided by the United States Court of
Appeals for the Tenth Circuit contains language to the effect that accounts sold
by a debtor under Article 9 of the UCC would remain property of the debtor's
bankruptcy estate. Although the Contracts constitute chattel paper under the UCC
rather than accounts, sales of chattel paper are similarly governed by Article 9
of the UCC. If, following a bankruptcy of BCI, a court were to follow the
reasoning of the Tenth Circuit and apply such reasoning to chattel paper, then
delays or reductions in payments of collections on or in respect of the
Contracts could occur.
12. THE RATE OF PAYMENTS ON THE CERTIFICATES IS DEPENDENT ON THE PAYMENT
PROVISIONS OF THE ASSETS AND THE ASSETS MAY CONTAIN A VARIETY OF PAYMENT
PROVISIONS. The Assets included in the Trust for a Series may be subject to
various types of payment provisions. As more fully described herein under "The
Trusts -- The Assets," such Assets may consist of Level Payment Loans,
Adjustable Rate Assets, Buy-Down Loans, Interest Reduction Loans, GEM Loans, GPM
Loans, Step-up Rate Loans, Balloon Payment Loans, Convertible Loans, Bi-Weekly
Loans, Level Payment Buy-Down Loans, Increasing Payment Loans, and such other
types of Assets as are specified and described in the related Prospectus
Supplement.
In general, Buy-Down Loans, Level Payment Buy-Down Loans, Increasing
Payment Loans, GEM Loans, GPM Loans and Step-up Rate Loans involve lower Monthly
Payment obligations for some period following their origination, followed by
higher Monthly Payment obligations thereafter. Obligors on these types of Assets
may be more likely to default on their obligations to make Monthly Payments than
Obligors on Level Payment Loans, particularly as their Monthly Payments
increase. The Monthly Payments payable by Obligors on Balloon Payment Loans are
not sufficient to provide for complete amortization of their loans by their
stated maturity dates, and, on the stated maturity date for a Balloon Payment
Loan, the related Obligor is required to make a "balloon" payment in excess, and
likely substantially in excess, of the Monthly Payments required from such
Obligor during preceding months. Obligors on Balloon Payment Loans are generally
more likely to default on their final "balloon" payments than are Obligors on
Level Payment Loans to default in making their Monthly Payments. As a result,
the rate of repossession of and foreclosure on Manufactured Homes and Mortgaged
Properties securing Buy-Down Loans, Level Payment Buy-Down Loans, Increasing
Payment Loans, GEM Loans, GPM Loans, Step-up Rate Loans and Balloon Payment
Loans may be higher than the rate of repossession of and foreclosure on
Manufactured Homes and Mortgaged Properties securing Level Payment Loans, and
the likelihood that Realized Losses will be allocated to Certificates may be
higher than would otherwise be the case to the extent the related Trust Estate
includes Buy-Down Loans, Level Payment Buy-Down Loans, Increasing Payment Loans,
GEM Loans, GPM Loans, Step-up Rate Loans and/or Balloon Payment Loans in
addition to or instead of Level Payment Loans.
22
<PAGE> 58
The interest rates on Adjustable Rate Assets will adjust periodically to
equal the sum of the applicable Index and Gross Margin. As the Index applicable
to an Adjustable Rate Asset increases, the amount of the related Obligor's
Monthly Payments will be increased, subject to certain limitations. As a result,
Obligors on Adjustable Rate Assets may be more likely to default on their
obligations to make Monthly Payments than Obligors on Assets bearing interest at
fixed rates in rising interest rate environments. In addition, the Seller of any
Convertible Loan, to the extent provided in the related Prospectus Supplement,
may be required to repurchase such Asset if the related Obligor elects to
convert the related Asset Rate from an adjustable rate to a fixed rate of
interest. Any such repurchase of a Convertible Loan included in an Asset Pool
will have the same effect on the holders of the Certificates of the related
Series as a prepayment in full of such Asset. Certificates may be subject to a
higher rate of prepayments of the underlying Assets than would otherwise be the
case to the extent the related Trust Estate includes Convertible Loans and to
the extent the related Seller has such a repurchase obligation.
13. BOMBARDIER CAPITAL INC. HAS LIMITED LOAN LOSS OR DELINQUENCY
EXPERIENCE. BCI commenced funding and underwriting manufactured housing
installment sales contracts and mortgage loans in [January 1997]. BCI's
experience with its underwriting guidelines is limited. Consequently, the loan
loss and delinquency experience of BCI's servicing portfolio may not be
representative of the loan loss and delinquency experience of loans in any
Series underwritten to BCI's guidelines.
DESCRIPTION OF THE CERTIFICATES
GENERAL
Each Series of Certificates will be issued pursuant to a Pooling and
Servicing Agreement (the "Agreement") among the Company, as seller of the
Certificates, BCI, as the Servicer (or another Servicer if one is named in the
related Prospectus Supplement) and the Trustee named in the related Prospectus
Supplement. A copy of the form of the Agreement is filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The Prospectus
Supplement for each Series will describe any provisions of the Agreement
relating to such Series which differ materially from the form of the Agreement
filed as an exhibit to the Registration Statement.
The Company may sell to investors one or more Classes of a Series of
Certificates in transactions not requiring registration under the Securities Act
of 1933, as amended.
The Offered Certificates of each Series of Certificates will be rated upon
issuance as specified in the related Prospectus Supplement by the Rating Agency
or Agencies identified therein. The following summaries describe certain
provisions common to each Series of Certificates. The summaries do not purport
to be complete and are subject to, and are qualified in their entirety by
reference to, the provisions of the particular Agreement relating to the Series
of Certificates. When particular provisions or terms used in the Agreement are
referred to, the actual provisions thereof (including definitions of terms
therein) are incorporated by reference.
The Certificates of each Series will represent interests in a separate
Trust created pursuant to the related Agreement, as specified in the related
Prospectus Supplement. The Trust Estate for a Series will be held by the related
Trustee for the benefit of the related Certificateholders. Each Trust Estate, to
the extent specified in the related Prospectus Supplement, will include: (1) the
Assets which are subject to the related Agreement from time to time; (2) such
assets as from time to time are identified as deposited in any account held for
the benefit of the Certificateholders (including the Certificate Account and the
Distribution Account maintained pursuant to the related Agreement); (3) with
respect to a Series of Certificates evidencing interests in Contracts,
underlying Manufactured Homes and Real Properties acquired by the Trust through
repossession, foreclosure or otherwise; (4) with respect to a Series of
Certificates evidencing interests in Mortgage Loans, property which secured a
Mortgage Loan and which was acquired by foreclosure or deed in lieu of
foreclosure; (5) (a) the Standard Hazard Insurance Policies maintained with
respect to the underlying Manufactured Homes and Mortgaged Properties, (b) the
related Pool Insurance Policy, if any, (c) the related Special Hazard Insurance
Policy, if any, (d) the related Obligor Bankruptcy Insurance, if any, (e) any
Primary Mortgage
23
<PAGE> 59
Insurance Policies, FHA insurance and VA guarantees and (f) the Buy-Down Fund
and GPM Fund, if any; (6) the Reserve Fund, if any; (7) any letter of credit,
guarantee or surety bond, insurance policy or other credit enhancement securing
payment of all or part of the related Series of Certificates; (8) if specified
in the related Prospectus Supplement, any related Pre-Funding Account; (9) such
other property as may be specified in the related Prospectus Supplement; and
(10) proceeds of any of the foregoing.
The Agreement for a Series will generally provide that Certificates may be
issued thereunder up to the aggregate principal amount authorized by the
Company. Each Series will consist of one or more Classes of Certificates and may
include: (1) one or more Classes of Senior Certificates entitled to certain
preferential rights to distributions of principal and interest; (2) one or more
Classes of Subordinated Certificates; (3) one or more Classes of Certificates
representing an interest only in a specified portion of interest payments on the
Assets in the related Trust and that may have no principal balance, a nominal
principal balance or a Notional Principal Amount ("Strip Classes"); (4) one or
more Classes of Certificates representing an interest only in specified payments
of principal on the Assets ("Principal Only Classes"); (5) one or more Classes
of Certificates upon which interest will accrue but will not be distributed
until certain other Classes of Certificates of the same Series have received
their final distributions ("Compound Interest Classes" and "Capital Appreciation
Classes" and, collectively, "Accretion Classes"); and (6) one or more Classes of
Certificates entitled to fixed principal payments under certain conditions ("PAC
Classes") and companion classes thereto ("Companion Classes"). Each Series as to
which a REMIC election has been or is to be made will consist of one or more
Classes of REMIC Regular Certificates (which may consist of Certificates of the
types specified in the preceding sentence) and one Class of Residual
Certificates for each related REMIC.
The Certificates of each Series will be issued in fully-registered
certificated or book-entry form in authorized denominations for each related
Class as specified in the related Prospectus Supplement. The Certificates of
each Series issued in certificated form may be transferred or exchanged at the
corporate trust office of the Trustee without the payment of any service charge,
other than any tax or other governmental charge payable in connection with a
transfer. The Trustee will make distributions of principal and interest on each
certificated Certificate by check or wire transfer to each person in whose name
such Certificate is registered as of the close of business on the Record Date
for such distribution (as specified in the related Prospectus Supplement) at the
address appearing in the Certificate Register, except that the final
distributions in retirement of each certificated Certificate will be made only
upon presentation and surrender of such Certificate at the corporate trust
office of the Trustee. The Trustee will make distributions with respect to
Book-Entry Certificates as set forth below.
BOOK-ENTRY PROCEDURES
The Prospectus Supplement for a Series may specify that certain Classes of
Certificates initially will be issued as Book-Entry Certificates in the
authorized denominations specified in such Prospectus Supplement. Each such
Class will be represented by a single certificate registered in the Certificate
Register in the name of a nominee of the depository, which is expected to be The
Depository Trust Company ("DTC" and, together with any successor or other
depository (which must be a Clearing Agency) selected by the Company, the
"Depository"). No person acquiring a Book-Entry Certificate (a "Beneficial
Owner") will be entitled to receive a definitive certificate representing its
Certificate.
DTC performs services for its Participants, some of whom (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 the Depository and
Depository Participants as in effect from time to time.
A Beneficial Owner's ownership of a Book-Entry Certificate will be
reflected in the records of the brokerage firm, bank, thrift institution or
other financial intermediary (any of the foregoing, a "Financial Intermediary")
that maintains such Beneficial Owner's account for such purpose. In turn, the
Financial Intermediary's ownership of such
24
<PAGE> 60
Book-Entry Certificate will be reflected in the records of the Depository (or of
a participating firm that acts as agent for the Financial Intermediary whose
interest in turn will be reflected in the records of the Depository, if the
Beneficial Owner's Financial Intermediary is not a direct Depository
Participant). Therefore, the Beneficial Owner must rely on the procedures of its
Financial Intermediary or Intermediaries and of the Depository in order to
evidence its beneficial ownership of a Book-Entry Certificate, and beneficial
ownership of a Book-Entry Certificate may only be transferred by compliance with
the procedures of such Financial Intermediaries and Depository participants.
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 New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC accepts securities for deposit
from its participating organizations ("Depository Participants") and facilitates
the clearance and settlement of securities transactions between Depository
Participants in such securities through electronic book-entry changes in
accounts of Depository Participants, thereby eliminating the need for physical
movement of certificates. Depository Participants include securities brokers and
dealers, banks and trust companies and clearing corporations and may include
certain other organizations. Indirect access to the DTC system is also available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Depository Participant, either
directly or indirectly ("Indirect Participants").
Distributions of principal and interest on the Book-Entry Certificates
will be made on each Remittance Date to the Depository. The Depository will be
responsible for crediting the amount of such distributions to the accounts of
the applicable Depository Participants in accordance with the Depository's
normal procedures. Each Depository 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. As a
result of the foregoing procedures, Beneficial Owners of the Book Entry
Certificates may experience some delay in their receipt of payments.
While the Offered Certificates are outstanding (except if the Offered
Certificates are subsequently issued in certificated, fully-registered form,
which can only occur under the limited 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 Offered Certificates and is required
to receive and transmit distributions of principal of, and interest on, the
Offered Certificates. Unless and until the Offered Certificates are issued in
certificated form, Beneficial Owners who are not Participants may transfer
ownership of the Offered Certificates only through Participants by instructing
such Participants to transfer the Offered Certificates, by book-entry transfer,
through DTC for the account of the purchasers of such Certificates, which
account is maintained with such purchasers' respective Participants. Under the
Rules and in accordance with DTC's normal procedures, transfers of ownership of
the Offered Certificates will be executed through DTC and the accounts of the
respective Participants at DTC will be debited and credited. Because
transactions in Book-Entry Certificates can be effected only through the
Depository, participating organizations, Indirect Participants and certain
banks, the ability of a Beneficial Owner of a Book-Entry Certificate to pledge
such Certificate to persons or entities that are not Depository Participants, or
otherwise to take actions in respect of such Certificate, may be limited due to
the lack of a physical certificate representing such Certificate. Issuance of
the Book-Entry Certificates in book-entry form may reduce the liquidity of such
Certificates in the secondary trading market because investors may be unwilling
to purchase Book-Entry Certificates for which they cannot obtain physical
certificates.
The Book-Entry Certificates will be issued in fully-registered,
certificated form to Beneficial Owners of such Book-Entry Certificates or their
nominees, rather than to the Depository or its nominee, only if (1) the Company
advises the Trustee in writing that the Depository is no longer willing or able
to discharge properly its responsibilities as depository with respect to the
Book-Entry Certificates and the Company is unable to locate a qualified
successor within 30 days or (2) the Company, at its option, elects to terminate
the book-entry system maintained through the Depository. Upon the occurrence of
either event described in the preceding sentence, the Trustee is required to
notify the Depository,
25
<PAGE> 61
which in turn will notify all Beneficial Owners of Book-Entry Certificates
through Depository participants, of the availability of certificated
Certificates. Upon surrender of the Depository of the certificates representing
the Book-Entry Certificates and receipt of instructions for re-registration, the
Trustee will reissue the Book-Entry Certificates as certificated Certificates to
the Beneficial Owners of the Book-Entry Certificates. Upon issuance of
certificated Certificates to Beneficial Owners, such Certificates will be
transferable directly (and not exclusively on a book-entry basis) and registered
holders will deal directly with the Trustee with respect to transfers, notices
and distributions.
DTC has advised the Company and the Trustee that, unless and until the
Offered Certificates are issued in certificated, fully-registered form under the
circumstances described above, DTC will take any action permitted to be taken by
a Certificateholder under the Agreement only at the direction of one or more
Participants to whose DTC accounts the Certificates are credited. DTC has
advised the Company that DTC will take such action with respect to any
Percentage Interests of the Offered Certificates only at the direction of and on
behalf of such Participants with respect to such Percentage Interests of the
Offered Certificates. DTC may take action, at the direction of the related
Participants, with respect to some Offered Certificates which conflict with
actions taken with respect to other Offered Certificates.
Neither the Company, BCI, the Servicer nor the Trustee will have any
liability for any aspect of the records relating to or payment made on account
of beneficial ownership interests of the Book-Entry Certificates held by the
Depository, or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
ALLOCATION OF COLLECTIONS FROM THE ASSETS
The Prospectus Supplement for a Series will specify the Available Funds
for such Series, which in general will be equal to the amount of principal and
interest actually collected, advanced or otherwise received with respect to the
related Asset Pool during the applicable Collection Period or Prepayment Period,
net of applicable servicing, administrative, guarantee and other fees, insurance
premiums, the costs of any other credit enhancement and amounts required to
reimburse any unreimbursed advances. The Available Distribution will be
allocated among the Classes of Certificates of the related Series in the
proportion and order of application set forth in the related Agreement and
described in the related Prospectus Supplement. The Available Distribution may
be allocated so that amounts paid as interest on the Assets may be distributed
as principal on the Certificates and amounts paid as principal on the Assets may
be distributed as interest on the Certificates.
A Class of Certificates entitled to distributions of interest may receive
such interest at a specified rate (a "Remittance Rate"), which may be fixed or
adjustable. The Classes of Certificates within a Series may have the same or
different Remittance Rate. The related Prospectus Supplement will specify the
Remittance Rate, or the method for determining the Remittance Rate, for each
applicable Class, and the method of determining the amount to be distributed on
any Strip Classes on each Remittance Date. Residual Certificates offered hereby
may or may not have a Remittance Rate. In addition to representing entitlement
to regular distributions of principal and interest, if any, that are allocated
to the Residual Certificates, Residual Certificates also generally will
represent entitlement to receive amounts remaining in the Distribution Account
on any Remittance Date after allocation of scheduled distributions to all other
outstanding Classes of Certificates of that Series and after all required
deposits have been made into any related Reserve Funds. Certain Classes of
Certificates may have a Notional Principal Amount. A "Notional Principal Amount"
of a Certificate is used solely for purposes of determining the amount of
interest distributions and certain other rights and obligations of the holder of
such Certificate and does not represent any beneficial interest in principal
payments on the Assets in the related Trust. Interest distributions on the
Certificates generally will include interest accrued through the Accounting Date
preceding the applicable Remittance Date or through another date specified in
the related Prospectus Supplement. Interest will be computed on the basis of a
360-day year consisting of twelve 30-day months or on the basis of actual
elapsed days, as specified in the related Prospectus Supplement.
With respect to a Series that includes one or more Classes of Subordinated
Certificates, the Senior Certificates will generally not bear any Realized
Losses on the related Contracts or Mortgage Loans, until the Subordinated
Certificates of that Series have borne Realized Losses up to a specified
Subordination Amount or loss limit or until the
26
<PAGE> 62
principal amount of the Subordinated Certificates has been reduced to zero,
either through the allocation of Realized Losses, distributions of principal, or
both. Distributions of interest may be reduced to the extent of Unpaid Interest
Amounts on Contracts or Mortgage Loans comprising the Assets of the related
Trust. With respect to a Series that includes a Class of Subordinated
Certificates, any Unpaid Interest Amount may result in a reallocation of amounts
otherwise distributable to less senior Certificates for distribution to more
senior Certificates.
Principal and interest distributable on a Class of Certificates may be
distributed among the Certificates of such Class pro rata in the proportion that
the outstanding principal or notional amount of each Certificate of such Class
(or each Certificate's designated "percentage interest," in the case of
Certificates with no Certificate Balance or notional principal amount) bears to
the aggregate outstanding principal or notional amount of all Certificates of
such Class (or to a "percentage interest" of 100%, in the case of Certificates
with no Certificate Balance or notional principal amount), or in such other
manner as may be detailed in the related Prospectus Supplement. Interest
distributable on a Class of Certificates may be allocated among the Certificates
of such Class pro rata in the proportion that the outstanding principal or
notional amount of each Certificate of such Class (or each Certificate's
designated "percentage interest," in the case of Certificates with no
Certificate Balance or notional principal amount) bears to the aggregate
outstanding principal or notional amount of all Certificates of such Class (or
to a "percentage interest" of 100%, in the case of Certificates with no
Certificate Balance or notional principal amount), or in such other manner as
may be detailed in the related Prospectus Supplement.
The Final Scheduled Remittance Date for each Class of Certificates will be
the date on which the last distribution of the principal thereof is scheduled to
occur, assuming no prepayments of principal with respect to the Assets included
in the Trust for that Series.
OPTIONAL REDEMPTION OR TERMINATION
To the extent and under the circumstances specified in the related
Prospectus Supplement, the Certificates of a Series may be redeemed prior to
their Final Scheduled Remittance Date at the option of the Company, the Servicer
or such other party as may be specified in the related Prospectus Supplement by
purchase of the outstanding Certificates of such Series. The right so to redeem
the Certificates of a Series will be conditioned upon (1) the passage of a
certain date specified in the Prospectus Supplement and/or (2) (a) the decline
of the aggregate Scheduled Principal Balance of the Assets in the Trust to less
than a percentage (specified in the related Prospectus Supplement) of the
aggregate Scheduled Principal Balance of the Assets in the Trust at the related
Cut-off Date or (b) the decline of the aggregate Certificate Balance of a
specified Class or Classes of Certificates to less than a percentage (specified
in the related Prospectus Supplement) of the aggregate Certificate Balance of
the applicable Class or Classes of Certificates at the Closing Date for the
Series. The percentage balances of the aggregate Scheduled Principal Balance of
the Assets and the aggregate Certificate Balance of a Class referred to in
(2)(a) and (2)(b), respectively, above, may range from 5% to 25%. In the event
the option to redeem the Certificates is exercised, the purchase price
distributed with respect to each Certificate offered hereby and by the related
Prospectus Supplement will equal 100% of its then outstanding principal amount,
plus accrued and unpaid interest thereon at the applicable Pass-Through Rate,
less any unreimbursed Advances and unrealized losses allocable to such
Certificate. Notice of the redemption of the Certificates will be given to
Certificateholders as provided in the related Agreement.
In addition, the Company or the Servicer or the holders of a majority in
interest of any Class of Residual Certificates of the related Series may at
their respective options repurchase all related Contracts and Mortgage Loans
remaining outstanding at a time specified in the related Prospectus Supplement,
which will be when the aggregate Scheduled Principal Balance of such Contracts
or Mortgage Loans is less than a percentage (specified in the related Prospectus
Supplement, but may range from 5% to 25%) of the aggregate Scheduled Principal
Balance of the Contracts or Mortgage Loans on the Cut-off Date, or when the
aggregate Certificate Balance of a specified Class or Classes of Certificates is
less than a percentage (specified in the related Prospectus Supplement, but may
range from 5% to 25%) of the aggregate Certificate Balance of such Class or
Classes at the Closing Date. The termination price for a Trust will be specified
in the related Agreement, and will generally equal the sum of (1) any
Liquidation Expenses incurred by
27
<PAGE> 63
the Servicer in respect of any Contract or Mortgage Loan that has not yet been
liquidated; (2) all amounts required to be reimbursed or paid to the Servicer in
respect of previously unreimbursed Servicing Advances; and (3) the greater of
(a) the sum of (i) the aggregate Unpaid Principal Balance of the related
Contracts and Mortgage Loans, plus accrued and unpaid interest thereon through
the preceding Accounting Date for the date of repurchase at the Asset Rates
borne by such Contracts and Mortgage Loans, plus (ii) the lesser of (A) the
aggregate Unpaid Principal Balance of each Contract and Mortgage Loan that had
been secured by any Repo Property or REO Property remaining in the Trust, plus
accrued interest thereon at the Asset Rates borne by such Contracts and Mortgage
Loans through the Accounting Date preceding such purchase, and (B) the current
appraised value of any such Repo Property or REO Property (net of Liquidation
Expenses to be incurred in connection with the disposition of such property
estimated in good faith by the Servicer), such appraisal to be conducted by an
appraiser mutually agreed upon by the Servicer and the Trustee, plus all
previously unreimbursed P&I Advances made in respect of such Repo Property or
REO Property, and (b) the aggregate fair market value of the assets of the
related Trust (as reasonably determined by the Servicer as described in the
related Agreement) plus all previously unreimbursed P&I Advances made with
respect to the related Assets. The fair market value of the assets of a Trust as
determined for purposes of a terminating purchase shall be deemed to include
accrued interest through the Accounting Date preceding the date of such purchase
at the applicable Asset Rate on the Unpaid Principal Balance of each Contract
and Mortgage Loan (including any Contract that has become a Repo Property and
any Mortgage Loan that has become a REO Property, which Repo Property or REO
Property has not yet been disposed of by the Servicer). The basis for any such
valuation shall be furnished by the Servicer to the Certificateholders upon
request.
On the date set for termination of a Trust, the termination price shall be
distributed (1) first to the Servicer and the Trustee to reimburse them for all
previously unreimbursed Liquidation Expenses paid and Advances made by the
Servicer or the Trustee with respect to the related Assets and any other
reimbursable and (2) second o the Certificateholders in accordance with the
payment priorities that apply on each Remittance Date as described in the
related Prospectus Supplement. This will result in the distribution with respect
to each Certificate offered hereby and by the related Prospectus Supplement of
an amount equal to 100% of its then outstanding principal amount, plus accrued
and unpaid interest thereon at the applicable Pass-Through Rate, less any
unreimbursed Advances and unrealized losses allocable to such Certificate.
MATURITY AND PREPAYMENT CONSIDERATIONS
The prepayment experience on an Asset Pool will affect (1) the average
life of the related Certificates and each Class thereof issued by the related
Trust; (2) the timing of the final distribution for each Class (and whether such
final distribution occurs prior to its Final Scheduled Remittance Date); and (3)
the effective yield on each Class of such Certificates. Because prepayments will
be passed through to the holders of Certificates of each Series as distributions
of principal, it is likely that in the event of such prepayments, the final
distribution on each Class of Certificates of a Series will occur prior to its
Final Scheduled Remittance Date.
Contracts and Mortgage Loans generally may be prepaid in full or in part
without penalty. FHA Contracts and Mortgage Loans and VA Contracts and Mortgage
Loans may be prepaid at any time without penalty. The Company anticipates that a
significant number of the Contracts and Mortgage Loans will be paid in full
prior to their maturity. A number of factors, including homeowner mobility,
national and local economic conditions, age of the Contracts and Mortgage Loans,
interest rates and the availability of alternative financing may affect the
prepayment experience of a particular Asset Pool.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing market
interest rates fall significantly below the interest rates borne by particular
Contracts or Mortgage Loans, the Contracts and Mortgage Loans are likely to be
subject to higher prepayment rates than if prevailing interest rates remain at
or above the interest rates borne by such Contracts and Mortgage Loans. However,
the rate of principal prepayments on Contracts and Mortgage Loans is influenced
by a variety of economic, geographic,
28
<PAGE> 64
social, tax, legal and other factors. Accordingly, there can be no assurance
that any Contracts or Mortgage Loans included in an Asset Pool will conform to
past prepayment experience or any assumed rate of prepayment.
It is customary in the mortgage industry in quoting yields (1) on a pool
of 30-year fixed-rate, level payment mortgages, to compute the yield as if the
pool were a single loan that is amortized according to a 30-year schedule and is
then prepaid in full at the end of the 12th year and (2) on a pool of 15-year
fixed-rate, level payment mortgages, to compute the yield as if the pool were a
single loan that is amortized according to a 15-year schedule and then is
prepaid in full at the end of the seventh year.
Information regarding the prepayment assumptions utilized in preparing any
Prospectus Supplement will be set forth in the Prospectus Supplement with
respect to a Series of Certificates.
See "Description of the Certificates -- Optional Redemption or
Termination" herein for a description of the Company's or other party's option
to repurchase the Contracts or Mortgage Loans comprising part of a Trust Estate
when certain triggering events occur. See also "The Trusts -- The Contracts" and
" -- The Mortgage Loans" and "Sale and Servicing of Contracts and Mortgage Loans
- -- Representations and Warranties" herein for a description of the obligations
of the Company, the Servicer or another party, as specified in the related
Prospectus Supplement, to repurchase a Contract or Mortgage Loan in case of a
breach of a representation or warranty relative to such Contract or Mortgage
Loan. Any such repurchase will have the effect of a full prepayment of the
outstanding principal balance of the related Contract or Mortgage Loan. See also
"Yield Considerations" herein.
YIELD CONSIDERATIONS
Distributions of interest on the Certificates generally will include
interest accrued through the Determination Date for the applicable Remittance
Date. Because distributions to the Certificateholders generally will not be made
until the Remittance Date following the preceding Determination Date, the
effective yield to the holder of a Certificate will be lower than the yield
otherwise produced by the applicable Remittance Rate and purchase price for the
Certificate.
The yield to maturity of any Certificate will be affected by the rate and
timing of payment of principal of the underlying Contracts and Mortgage Loans.
If the purchaser of a Certificate offered at a discount from its Parity Price
(as defined below) calculates the anticipated yield to maturity of such
Certificate based on an assumed rate of payment of principal that is faster than
that actually received on the underlying Contracts and Mortgage Loans, the
actual yield to maturity will be lower than that so calculated. Similarly, if
the purchaser of a Certificate offered at a premium over its Parity Price
calculates the anticipated yield to maturity of such Certificate based on an
assumed rate of payment of principal that is slower than that actually received
on the underlying Contracts and Mortgage Loans, the actual yield to maturity
will be lower than that so calculated. "Parity Price" is the price at which a
Certificate will yield its coupon, after giving effect to any payment delay.
The timing of changes in the rate of prepayments on the Contracts and
Mortgage Loans may significantly affect an investor's actual yield to maturity,
even if the average rate of principal payments experienced over time is
consistent with an investor's expectation. In general, the earlier a prepayment
of principal on an Asset, the greater will be the effect on a related investor's
yield to maturity. As a result, the effect on an investor's yield of principal
payments occurring at a rate higher (or lower) than the rate anticipated by the
investor during the period immediately following the issuance of the
Certificates would not be fully offset by a subsequent like reduction (or
increase) in the rate of principal payments. Because the rate of principal
payments on the underlying Assets affects the weighted average life and other
characteristics of any Class of Certificates, prospective investors are urged to
consider their own estimates as to the anticipated rate of future prepayments on
the underlying Contracts and Mortgage Loans and the suitability of the
applicable Certificates to their investment objectives. For a discussion of
factors affecting principal prepayments on the Contracts and Mortgage Loans
underlying a Series of Certificates, see "Maturity and Prepayment
Considerations" above.
29
<PAGE> 65
The yield on each Class of Certificates also will be affected by Realized
Losses or Unpaid Interest Amounts allocated to such Class.
THE TRUSTS
GENERAL
A Trust Estate may include Contracts and/or Mortgage Loans. Each Trust
Estate also may include (1) such assets as from time to time are identified as
deposited in any account held for the benefit of the Certificateholders
(including the Certificate Account and the Distribution Account) maintained
pursuant to the related Agreement; (2) any Manufactured Home or Real Property
which initially secured a related Contract and which is acquired by
repossession, foreclosure or otherwise; (3) any property which initially secured
a related Mortgage Loan and which is acquired by foreclosure or deed in lieu of
foreclosure or otherwise; (4) if so specified in the related Prospectus
Supplement, any related Reserve Fund; (5) if specified in the related Prospectus
Supplement, any related Pre-Funding Account; (6) any insurance policies,
guarantees and any other credit enhancement maintained with respect to the
related Certificates, the related Contracts, the related Mortgage Loans or all
or any part of such Trust Estate that is required to be maintained pursuant to
the related Agreement; and (7) such other property as is specified in the
related Prospectus Supplement.
THE ASSETS
General
Each Certificate will evidence an interest in one Trust Estate, containing
one or more Asset Pools comprised of Contracts and/or Mortgage Loans having the
aggregate principal balance as of the Cut-off Date specified in the related
Prospectus Supplement. Holders of Certificates of a Series will have interests
only in the related Asset Pool(s) and will have no interest in any Asset Pools
created with respect to any other Series of Certificates.
The Company will acquire the underlying Contracts and Mortgage Loans from
BCI or another Seller, which may have originated the Contracts and Mortgage
Loans or may have acquired them in the open market or in privately negotiated
transactions. A brief description of the Contracts and Mortgage Loans expected
to be included in the Trust Estates is set forth under " -- The Contracts" and "
- -- The Mortgage Loans" below. Specific information respecting the Contracts and
Mortgage Loans included in a particular Trust Estate will be provided in the
related Prospectus Supplement and, to the extent such information is not fully
provided in the related Prospectus Supplement, in a Current Report on Form 8-K
to be filed with the Securities and Exchange Commission within fifteen days
after the initial issuance of such Certificates. A copy of the Agreement with
respect to each Series of Certificates will be attached to the related Current
Report on Form 8-K and will be available for inspection at the corporate trust
office of the Trustee (the location of which will be specified in the related
Prospectus Supplement).
Whenever in this Prospectus terms such as "Asset Pool," "Trust Estate,"
"Agreement" or "Pass-Through Rate" are used, those terms apply, unless the
context otherwise indicates, to one specific Asset Pool, Trust Estate, Agreement
and the Pass-Through Rates applicable to the related Series of Certificates.
For each Series of Certificates, the Company will cause the Contracts and
Mortgage Loans included in the related Asset Pool to be assigned to the trustee
named in the related Prospectus Supplement (the "Trustee"). The Contracts and
Mortgage Loans will be serviced, and Certificates administered, by BCI (in such
capacity, the "Servicer"), a wholly owned subsidiary of Bombardier Corporation
and an affiliate of the Company, or another Servicer. The Servicer may perform
such activities directly or through other servicing institutions
("Sub-servicers"). See "Sale and Servicing of the Contracts and Mortgage Loans
- -- Servicing" herein. With respect to those Contracts and Mortgage Loans
serviced by the Servicer through a Sub-servicer, the Servicer will remain liable
for its servicing obligations under the Agreement as if the Servicer alone were
servicing such Contracts and Mortgage Loans. The Servicer may delegate certain
computational, data processing, collection and foreclosure (including
repossession) duties under any Agreement
30
<PAGE> 66
without appointing a Sub-servicer and without any notice to or consent from the
Company or the Trustee, provided that the Servicer remains fully responsible for
the performance of such duties.
Types of Assets
The Assets included in the Trust for a Series may be subject to various
types of payment provisions. Such Assets may consist of (1) "Level Payment
Loans," which may provide for the payment of interest and full repayment of
principal in level Monthly Payments with a fixed rate of interest computed on
their declining principal balances; (2) "Adjustable Rate Assets," which may
provide for periodic adjustments to their rates of interest to equal the sum
(which may be rounded) of a fixed margin and an index; (3) "Buy-Down Loans,"
which are Assets for which funds have been provided by someone other than the
related Obligors to reduce the Obligors' Monthly Payments during the early
period after origination of such Assets; (4) "Level Payment Buy-Down Loans," as
described below; (5) "Increasing Payment Loans," as described below; (6)
"Interest Reduction Loans," which provide for the one-time reduction of the
interest rate payable thereon; (7) "GEM Loans," which provide for (a) Monthly
Payments during the first year after origination that are at least sufficient to
pay interest due thereon, and (b) an increase in such Monthly Payments in
subsequent years at a predetermined rate resulting in full repayment over a
shorter term than the initial amortization terms of such Assets; (8) "GPM
Loans," which allow for payments during a portion of their terms which are or
may be less than the amount of interest due on the Unpaid Principal Balances
thereof, and which unpaid interest will be added to the principal balances of
such Assets and will be paid, together with interest thereon, in later years;
(9) "Step-up Rate Loans," which provide for Asset Rates that increase over time;
(10) "Balloon Payment Loans," which include Assets on which only interest is
payable until maturity, as well as Assets that provide for the full amortization
of principal over a certain amortization period, but require all remaining
principal to be paid at the end of a shorter period; (11) "Convertible Loans,"
which are Adjustable Rate Assets subject to provisions pursuant to which,
subject to certain limitations, the related Obligors may exercise an option to
convert the adjustable Asset Rate to a fixed Asset Rate; and (12) "Bi-Weekly
Loans," which provide for Obligor payments to be made on a bi-weekly basis.
A Level Payment Buy-Down Loan is an Asset that provides for a reduction in
the Obligor's Monthly Payments thereunder for a period of up to the first four
years after origination of such Asset and as to which funds have been provided
by someone other than the Obligor to cover such reductions during those years.
Accordingly, payments due on Level Payment Buy-Down Loans will be the same as
payments due on Level Payment Loans without buy-down provisions, except that the
former will include amounts to be collected from the related Servicers pursuant
to either buy-down or subsidy agreements in addition to amounts to be collected
from the related Obligors.
An Increasing Payment Loan is an Asset that provides for Obligor Monthly
Payments that are fixed for an initial period of six, 12 or 24 months, and which
increase thereafter (at a predetermined rate expressed as a percentage of the
Obligor's Monthly Payment during the preceding payment period, subject to any
caps on the amount of any single Monthly Payment increase) for a period not to
exceed nine years from the date of origination, after which the Obligor's
Monthly Payment is fixed at a level-payment amount so as to fully amortize the
Asset over its remaining term to maturity. The scheduled Monthly Payment with
respect to an Increasing Payment Loan is the total amount required to be paid
each month in accordance with its terms and equals the sum of (1) the Obligor's
Monthly Payments referred to in the preceding sentence and (2) in the case of
certain Increasing Payment Loans, payments made by the respective Servicers
pursuant to buy-down or subsidy agreements. The Obligor's initial Monthly
Payments for each Increasing Payment Loan are set at the level-payment amount
that would apply to an otherwise identical Level Payment Loan having an Asset
Rate a certain number of percentage points below the Asset Rate of such
Increasing Payment Loan. The Obligor's Monthly Payments on each Increasing
Payment Loan, together with any payments made thereon by the related Servicers
pursuant to buy-down or subsidy agreements, will in all cases be sufficient to
allow payment of accrued interest on such Increasing Payment Loan at the related
Asset Rate, without negative amortization. An Obligor's Monthly Payments on such
an Asset may, however, not be sufficient to result in any reduction of the
principal balance of such Asset until after the period when such payments may be
increased.
"Due-on-Sale" Clauses
31
<PAGE> 67
A Contract or the Mortgage Note or Mortgage used in originating a
conventional Mortgage Loan may contain a "due-on-sale" provision permitting the
holder of the Contract or Mortgage Loan to accelerate the maturity of the
Contract or Mortgage Loan upon the Obligor's conveyance of the underlying
Manufactured Home or Mortgaged Property. See " -- The Contracts -- Transfers of
Manufactured Homes; Enforceability of "Due-on-Sale" Clauses" and " -- The
Mortgage Loans -- "Due-On-Sale" Clauses," in each case under the heading
"Certain Legal Aspects of Contracts and Mortgage Loans" herein. The Prospectus
Supplement for a Series will specify the approximate percentages of the
underlying Contracts and Mortgage Loans, respectively, that contain
"due-on-sale" provisions. Enforcement of a "due-on-sale" clause applicable to a
Contract or Mortgage Loan will have the same effect on Certificates backed by
such Contract or Mortgage Loan as a prepayment in full of such Contract or
Mortgage Loan. The weighted average lives of Certificates of a Series will be
decreased to the extent that sales of Manufactured Homes and Mortgaged
Properties result in prepayments of the Assets underlying such Certificates. See
"Maturity and Prepayment Considerations" and "Yield Considerations" herein for a
discussion of the effect of Asset prepayments on the weighted average lives of
and yields to maturity on the related Certificates.
To the extent the Assets underlying a Series do not contain "due-on-sale"
clauses, or to the extent the Servicer does not enforce "due-on-sale" clauses,
the weighted average lives of the Certificates of such Series may be expected to
be longer than would have been the case had such Assets been subject to
"due-on-sale" clauses and had the Servicer enforced such clauses, because the
assumption of a Contract or Mortgage Loan by the buyer of the underlying
Manufactured Home or Mortgaged Property would have the effect of avoiding a
prepayment of the assumed Contract or Mortgage Loan. While it is expected that
most Contracts will contain "due-on-sale" provisions, the Servicer will be
permitted to allow proposed assumptions of Contracts in accordance with the
guidelines described below. To the extent the Servicer has knowledge of any
conveyance or prospective conveyance by any Mortgagor of any property securing a
Mortgage Loan, the Servicer will be required to exercise the right to accelerate
the maturity of such Mortgage Loan under any applicable "due-on-sale" clause to
the extent, under the circumstances, and in the manner in which the Servicer
enforces such clauses with respect to other Mortgage Loans held in its own
portfolio. The Servicer will not be permitted to allow assumptions of Assets if
prohibited by law from doing so or if the exercise of such rights would affect
adversely or jeopardize any coverage under any applicable insurance policy, and
the Servicer will only be permitted to allow the assumption of an Asset if the
Servicer has reasonably determined that the assumption will not increase
materially the risk of nonpayment of amounts due under the Asset.
If the Servicer determines not to enforce such "due-on-sale" clause, the
Servicer will be required to enter into an assumption and/or modification
agreement with the person to whom such property has been conveyed or is proposed
to be conveyed, pursuant to which such person becomes liable under the Asset and
pursuant to which, to the extent permitted by applicable law and deemed
appropriate in the Servicer's reasonable judgment, the original obligor remains
liable thereon. FHA Contracts, FHA Mortgage Loans, VA Contracts and VA Mortgage
Loans are not permitted to contain "due-on-sale" clauses, and so are freely
assumable. The rate of prepayments of FHA Contracts, FHA Mortgage Loans, VA
Contracts and VA Mortgage Loans therefore may be lower than the rate of
prepayments of Conventional Mortgage Loans bearing interest at comparable rates.
Prepayments on manufactured housing installment sales contracts and
mortgage loans are commonly measured relative to a prepayment standard or model
(a "Prepayment Assumptions"), which represents an assumed rate of prepayment of
Assets in an Asset Pool relative to the aggregate outstanding principal balance
of such Asset Pool from time to time. The Prospectus Supplement for a Series of
Certificates may contain a table setting forth percentages of the original
Certificate Balances of certain Classes of Certificates of such Series
anticipated to be outstanding on certain dates specified in the table assuming
that prepayments of the underlying Assets occur in accordance with the
applicable Prepayment Assumptions and at different rates determined by applying
different percentages to the rates of prepayment assumed under the Prepayment
Assumptions. It is unlikely that the prepayment of the Assets of any Trust will
conform to any of the percentages of the rates assumed under the applicable
Prepayment Assumptions set forth in any such table.
The FHA has compiled prepayment statistics relating to one- to
four-family, level payment mortgage loans insured by the FHA under the National
Housing Act of 1934, as amended, at various interest rates, all of which permit
32
<PAGE> 68
assumption by a new buyer of the mortgaged property. Such statistics indicate
that while some of such mortgage loans remain outstanding until their scheduled
maturities, a substantial number are paid prior to their respective stated
maturities. The Actuarial Division of HUD has prepared tables which, assuming
full mortgage loan prepayments at the rates experienced by FHA on FHA mortgage
loans, set forth the percentages of the original number of FHA mortgage loans
included in pools of Level Payment Mortgage Loans with varying maturities that
will remain outstanding on each anniversary of the origination date of such
mortgage loans (assuming they all have the same origination date) (such tables
being referred to as the "FHA Prepayment Experience").
Representations and Warranties
The Seller will make certain representations and warranties concerning the
Contracts and Mortgage Loans included in an Asset Pool, in order to ensure the
accuracy in all material respects of certain information furnished to the
Trustee in respect of each Contract and Mortgage Loan included in such Asset
Pool. Upon a breach of any representation that materially and adversely affects
the interests of the Certificateholders in a Contract or Mortgage Loan, the
Seller will be obligated to cure the breach in all material respects within 90
days after the Seller's discovery of or receipt of written notice of such breach
or, in the alternative, either to repurchase the Contract or Mortgage Loan from
the Trust, or to substitute another Contract or Mortgage Loan as described
below. The Seller's obligations to repurchase or substitute for an Asset
affected by a breach of a representation or warranty constitute the sole
remedies available to the Certificateholders or the Trustee for a breach of
representation by the Seller. See "Sale and Servicing of the Contracts and
Mortgage Loans -- Representations and Warranties" herein.
The Contracts
The Contracts supporting a Series of Certificates will consist of
manufactured housing installment sales contracts originated by BCI (which may
have been originated in the name of a manufactured housing dealer with funds
provided by BCI) or originated by other originators not affiliated with BCI, in
any case in the ordinary course of the originator's business. The Contracts may
be conventional manufactured housing contracts or contracts insured by the FHA
or partially guaranteed by the VA. Each Contract is secured by a Manufactured
Home. The Contracts will be fully amortizing and will bear interest at a fixed
or adjustable annual percentage rate ("Contract Rate") or at a Contract Rate
which steps up on a particular date (a "Step-up Rate").
The Seller will represent that the Manufactured Homes securing the
Contracts 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 Chapter 70 under Title 42 of the United States Code."
Each Contract will bear interest at a fixed or adjustable Contract Rate or
at a Step-up Rate, as specified in the related Prospectus Supplement. Unless
otherwise specified in the related Prospectus Supplement, the Monthly Payments
for Contracts bearing interest at an interest rate that increases over time
(sometimes referred to herein as "Step-up Rate Contracts") will increase on the
dates on which the Contract Rates are stepped up.
With respect to the Contracts expected to be contained in an Asset Pool,
the related Prospectus Supplement will specify, to the extent known, (1) the
range of dates of origination of the Contracts; (2) the range of Contract Rates
on the Contracts and the weighted average Contract Rate as of the Cut-off Date;
(3) the range of Contract Loan-to-Value Ratios; (4) the minimum and maximum
outstanding principal balances of the Contracts as of the Cut-off Date and the
33
<PAGE> 69
weighted average outstanding principal balance of the Contracts as of the
Cut-off Date; (5) the range of original terms to maturity of the Contracts, the
range of remaining terms to maturity of the Contracts and the last maturity date
of any of the Contracts; (6) the geographic distribution of the underlying
Manufactured Homes; and (7) the range of original principal balances of the
Contracts.
The Mortgage Loans
The Mortgage Loans supporting a Series of Certificates will consist of
conventional mortgage loans, FHA-insured mortgage loans or VA-guaranteed
mortgage loans evidenced by promissory notes (the "Mortgage Notes") secured by
mortgages or deeds of trust or other similar security instruments ("Mortgages")
creating first liens on one-to four-family residential properties (the
"Mortgaged Properties"). To the extent specified in the related Prospectus
Supplement, the Mortgaged Properties may include investment properties, vacation
and second homes, or land upon which a residence is to be built. The Company
expects that the Mortgage Loans will have been originated by FHA-approved
mortgagees or FNMA/FHLMC-approved seller/servicers in the ordinary course of
their real estate lending activities.
Each Mortgage Loan will bear interest at a fixed or adjustable annual rate
of interest ("Mortgage Rate") or at a Mortgage Rate which steps up on a
particular date (a "Step-up Rate"), as specified in the Prospectus Supplement.
Each registered holder of a Certificate will be entitled to receive periodic
distributions of all or a portion of the payments of principal and/or interest
collected on the underlying Mortgage Loans.
With respect to the Mortgage Loans expected to be contained in an Asset
Pool, the related Prospectus Supplement will specify, to the extent known, (1)
the range of dates of origination of the Mortgage Loans; (2) the range of
Mortgage Rates, and in the case of Adjustable Rate Assets, the range of initial
adjustable mortgage rates, the Index, if any, used to determine the adjustable
mortgage rate and the range of maximum permitted adjustable mortgage rates, if
any, and the range of then-current adjustable mortgage rates; (3) the range of
Mortgage Loan-to-Value Ratios; (4) the minimum and maximum outstanding principal
balances of the Mortgage Loans as of the Cut-off Date and the average
outstanding principal balance of the Mortgage Loans as of the Cut-off Date; (5)
the range of outstanding principal balances of the Conventional Mortgage Loans,
FHA Mortgage Loans and VA Mortgage Loans (in each case to the extent such
Mortgage Loans are included in such Asset Pool) included in the Asset Pool; (6)
the range of original maturities of the Mortgage Loans and the last maturity
date of any of the Mortgage Loans; (7) the geographic distribution of the
underlying Mortgaged Properties; and (8) the range of original principal
balances of the Mortgage Loans.
SUBSTITUTION OF CONTRACTS OR MORTGAGE LOANS
The Company or the Seller may, within three months after the Closing Date,
deliver to the Trustee other Assets in substitution for any one or more Assets
initially included in the Trust Estate for such Series. In addition, if there is
a breach of any representation or warranty made as to an Asset by the Company or
the Seller (or in certain cases where an incomplete or defective Contract File
or Trustee Mortgage Loan File is delivered by the Seller), which breach, defect
or incompleteness is not cured within 90 days after the breaching party's
receipt of notice of such breach, defect or incompleteness, the breaching party
generally must repurchase the affected Asset for its Repurchase Price, but may,
as an alternative to such a repurchase, substitute one or more new Assets for
the affected Asset (but only if the substitution is to take place no later than
two years after the related Closing Date). In general, any substitute Asset
must, on the date of such substitution (1) have an Unpaid Principal Balance not
greater than (and not more than $10,000 less than) the Unpaid Principal Balance
of the replaced Asset; (2) have an Asset Rate not less than (and not more than
one percentage point in excess of) the Asset Rate of the replaced Asset; (3)
have a Net Rate equal to the Net Rate of the replaced Asset; (4) have a
remaining term to maturity not greater than (and not more than one year less
than) that of the replaced Asset; and (5) comply with each representation and
warranty relating to the replaced Asset and, if the Seller is effecting the
substitution, comply with each representation and warranty set forth in the
Sales Agreement pursuant to which the Seller conveyed the replaced Asset(s) to
the Company. If Contracts or Mortgage Loans are being substituted, the
substitute
34
<PAGE> 70
Contract or Mortgage Loan must have a Loan-to-Value Ratio as of the first day of
the month in which the substitution occurs equal to or less than the
Loan-to-Value Ratio of the replaced Contract or Mortgage Loan as of such date
(in each case, using the value of the underlying Manufactured Home or Mortgaged
Property at origination, and after taking into account the payments due on the
substituted Asset and the replaced Asset on such date). Further, no Adjustable
Rate Asset may be substituted for any Asset in a Trust Estate unless the deleted
Asset is also an Adjustable Rate Asset. A substituted Adjustable Rate Asset must
(1) have a minimum lifetime Mortgage Rate that is not less than the minimum
lifetime Mortgage Rate on the replaced Adjustable Rate Asset; (2) have a maximum
lifetime Mortgage Rate that is not less than the maximum lifetime Mortgage Rate
on the replaced Adjustable Rate Asset; (3) provide for a lowest possible Net
Rate that is not lower than the lowest possible Net Rate for the replaced
Adjustable Rate Asset and a highest possible Net Rate that is not lower than the
highest possible Net Rate for the replaced Adjustable Rate Asset; (4) have a
Gross Margin not less than the Gross Margin of the replaced Adjustable Rate
Asset; (5) have a Periodic Rate Cap equal to the Periodic Rate Cap on the
replaced Adjustable Rate Asset; (6) have a next Interest Adjustment Date that is
the same as the next Interest Adjustment Date for the replaced Adjustable Rate
Asset or occurs not more than two months prior to the next Interest Adjustment
Date for the replaced Adjustable Rate Asset; and (7) not have an interest rate
that is convertible from an adjustable rate to a fixed rate unless the Asset
Rate on the replaced Adjustable Rate Asset is so convertible. In the event that
more than one Asset is substituted for one or more replaced Assets, one or more
of the foregoing characteristics may be applied on a weighted average basis as
described in the Agreement.
PRE-FUNDING
If so specified in the related Prospectus Supplement, a portion of the
issuance proceeds of the Certificates of a particular Series (such amount, the
"Pre-Funded Amount") will be deposited in an account (the "Pre-Funding Account")
to be established with the Trustee, which will be used to acquire additional
Contracts or Mortgage Loans from time to time during the time period specified
in the related Prospectus Supplement (the "Pre-Funding Period"). Prior to the
investment of the Pre-Funded Amount in additional Contracts or Mortgage Loans,
such Pre-Funded Amount may be invested in one or more Eligible Investments. Any
Eligible Investment must mature no later than the Business Day prior to the next
Remittance Date.
During any Pre-Funding Period, the Company will be obligated (subject only
to the availability thereof) to transfer to the related Trust additional
Contracts or Mortgage Loans from time to time during such Pre-Funding Period.
Such additional Contracts or Mortgage Loans will be required to satisfy certain
eligibility criteria more fully set forth in the related Prospectus Supplement,
which eligibility criteria will be consistent with the eligibility criteria of
the Contracts or Mortgage Loans included in the Trust as of the Closing Date,
subject to such exceptions as are expressly stated in such Prospectus
Supplement.
Use of a Pre-Funding Account with respect to any issuance of Certificates
will be subject to the following general conditions: (a) the Pre-Funding Period
will not exceed three months from the related Closing Date, (b) the additional
Assets to be acquired during the Pre-Funding Period will be subject to the same
underwriting standards, representations and warranties as the Contracts or
Mortgage Loans included in the related Trust on the Closing Date (although
additional criteria may also be required to be satisfied, as described in the
related Prospectus Supplement), (c) the Pre-Funded Amount will not exceed 25% of
the principal amount of the Certificates issued pursuant to a particular
offering, (d) the Pre-Funded Amount will not exceed 25% of the Scheduled
Principal Balance of the Assets (inclusive of the related Pre-Funding Account)
as of the Cut-off Date, and (e) the Pre-Funded Amount shall be invested in
Eligible Investments.
To the extent that amounts on deposit in the Pre-Funding Account have not
been fully applied to the purchase of additional Contracts or Mortgage Loans by
the end of the Pre-Funding Period, the Certificateholders of the related Series
of Certificates then entitled to receive distributions of principal will receive
a prepayment of principal in an amount equal to the related Pre-Funded Amount
remaining in the Pre-Funding Account on the first Remittance Date following the
end of the Pre-Funding Period. Any such prepayment of principal would have an
adverse effect on the
35
<PAGE> 71
yield to maturity of Certificates purchased at a premium, and would expose
Certificateholders to the risk that alternative investments of equivalent value
may not be available at such later time.
Further, information regarding additional Assets acquired by a Trust
Estate during the Pre-Funding Period comparable to the disclosure regarding the
Assets in the related Prospectus Supplement will be filed on a Current Report in
Form 8-K (in addition to any other reporting requirements of the Trust under the
Exchange Act) within fifteen days following the end of the Pre-Funding Period.
DISTRIBUTION ACCOUNT
Payments on the Contracts and Mortgage Loans included in the Trust for a
Series will be remitted to the Certificate Account and then to the Distribution
Account for such Series. Such deposits may be made net of amounts required to
pay servicing fees and any amounts which are to be included in any Reserve Fund
as set forth in the related Prospectus Supplement. All or a portion of the
amounts in such Distribution Account, together with reinvestment income thereon
if payable to the Certificateholders, will be available, to the extent specified
in the related Prospectus Supplement, for the payment of previously unpaid
servicing and administrative fees and distributions of principal and interest on
each Class of the Certificates of such Series in the manner described in the
related Prospectus Supplement.
RESERVE FUNDS OR LIQUIDITY ACCOUNTS
If so stated in the Prospectus Supplement for a Series, the Company will
establish one or more Reserve Funds or Liquidity Accounts, which may be used by
the Trustee to make any required distributions of principal or interest on the
Certificates of the Series to the extent funds are not otherwise available. The
Company may fund a Reserve Fund by depositing cash, certificates of deposit
and/or letters of credit therein at the Closing Date, or a Reserve Fund may be
funded by the Trustee's deposit therein of Available Funds not required to pay
servicing or administrative fees or to make distributions on the Certificates on
each Remittance Date until amounts on deposit in the Reserve Fund equal an
initial required amount. The method of funding any Reserve Fund will be
described in the related Prospectus Supplement. Any Reserve Fund will be
maintained in trust but may or may not constitute a part of the Trust Estate for
the related Series. The Company may have certain rights on any Remittance Date
to cause the Trustee to make withdrawals from the Reserve Fund for a Series and
to pay such amounts in accordance with the instructions of the Company to the
extent that such funds are no longer required to be maintained for the
Certificateholders.
INSURANCE
To the extent specified in the related Prospectus Supplement, the
Certificates of a Series or all or any part of the related Trust Estate may be
supported by insurance policies or alternate forms of credit enhancement
described below.
The insurers under Standard Hazard Insurance Policies are selected by the
related Obligors and are generally not required to meet any credit rating
criteria. Any other type of insurance supporting a Series of Certificates will
not in and of itself be subject to any specific credit rating requirements.
However, any such insurance obtained with respect to a Series will be considered
a part of the aggregate credit enhancement provided for such Series, and the
total credit enhancement obtained to support any Series must be in sufficient
quantity and of sufficient quality for the Classes of the Certificates of such
Series to merit the ratings assigned to such Classes by each applicable Rating
Agency, as described in the related Prospectus Supplement. The acceptability of
the insurers to the applicable Rating Agencies is the only criterion used in the
selection of any insurers other than insurers under Standard Hazard Insurance
Policies.
HAZARD INSURANCE
The following descriptions are general and do not purport to be complete.
Such descriptions are qualified in their entirety by reference to the
description of any material variances from such description contained in the
related
36
<PAGE> 72
Prospectus Supplement. In general, coverage under Standard Hazard Insurance
Policies and Special Hazard Insurance Policies varies among insurers.
Standard Hazard Insurance Policies. The terms of an Agreement may require
the Servicer to cause to be maintained with respect to each Contract and
Mortgage Loan one or more Standard Hazard Insurance Policies. With respect to
Contracts, each such policy will provide, at a minimum, the same coverage as
that provided by a standard fire and extended coverage insurance policy that is
customary for manufactured housing and issued by a company authorized to issue
such policies in the state in which the related Manufactured Home is located.
The Standard Hazard Insurance Policies maintained for Mortgage Loans will
provide coverage at least equal to the applicable state standard form of fire
insurance policy with extended coverage. In general, the standard form of fire
and extended coverage policy will cover physical damage to, or destruction of,
the improvements on the related Manufactured Home or Mortgaged Property caused
by fire, lightning, explosion, smoke, windstorm, hail, riot, strike and civil
commotion, subject to the conditions and exclusions specific to each policy.
Because the Standard Hazard Insurance Policies relating to the Contracts and
Mortgage Loans will be underwritten by different insurers and will cover
Manufactured Homes and Mortgaged Properties located in various states, such
policies will not contain identical terms and conditions. The basic terms,
however, generally will be determined by state law and generally will be
similar. Most such policies typically will not cover any physical damage
resulting from war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides, and
mudflows), nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all-inclusive. When a Manufactured Home or Mortgaged Property is located (at the
time of origination of the related Contract or Mortgage Loan) in a flood area
identified by HUD pursuant to the National Flood Insurance Act of 1968, as
amended, the Servicer will cause to be maintained flood insurance providing
coverage in the same amount as that provided by the related Standard Hazard
Insurance Policy with respect to such Manufactured Home or Mortgaged Property,
to the extent such coverage is available.
Each Standard Hazard Insurance Policy must provide coverage in an amount
at least equal to the lesser of (1) the maximum insurable value of the
Manufactured Home or Mortgage Property or (2) the principal balance due from the
Obligor on the related Contract or Mortgage Loan; provided, however, that the
amount of coverage provided by each Standard Hazard Insurance Policy must in any
event be sufficient to avoid the application of any co-insurance clause
contained in the policy.1/
Each Standard Hazard Insurance Policy caused to be maintained by the
Servicer shall contain a standard loss payee clause in favor of the Servicer and
its successors and assigns. If any Obligor is in default in the payment of
premiums on its Standard Hazard Insurance Policy or Policies, the Servicer shall
pay such premiums out of its own funds, and may add such premium to the
Obligor's obligation as provided by the Contract or Mortgage Loan, but may not
add such premium to the remaining principal balance of the Contract or Mortgage
Loan. All amounts collected by the Servicer under any Standard Hazard Insurance
Policy maintained with respect to a Mortgage Loan (less amounts to be applied to
the restoration or repair of the Mortgaged Property and other amounts necessary
to reimburse the Servicer for previously incurred advances or approved expenses,
which may be retained by the Servicer) will be deposited to the applicable
Certificate Account.
--------
1/ Each Standard Hazard Insurance Policy may contain a "coinsurance" clause
which, in effect, will require - the insured at all times to carry
insurance of a specified percentage (generally 80% to 90%) of the full
replacement value of the dwellings, structures and other improvements on
the related Manufactured Home or Mortgaged Property in order to recover
the full amount of any partial loss. If the insured's coverage falls below
this specified percentage, such clause will provide that the insurer's
liability in the event of partial loss will not exceed the lesser of (1)
the actual cash value (the replacement cost less physical depreciation) of
the dwellings, structures and other improvements damaged or destroyed or
(2) such proportion of the loss, without deduction for depreciation, as
the amount of insurance carried bears to the specified percentage of the
full replacement cost of such dwellings, structures and other
improvements.
37
<PAGE> 73
To the extent a Standard Hazard Insurance Policy is not maintained with
respect to a Manufactured Home or Mortgaged Property, the related Contract or
Mortgage Loan will be covered by one or more blanket insurance policies
maintained by the Servicer to insure against losses on the Contracts and
Mortgage Loans resulting from the absence or insufficiency of individual
Standard Hazard Insurance Policies. The Servicer shall pay the premium for such
blanket policy and shall pay any deductible amount with respect to claims under
such blanket policy.
If the Servicer repossesses a Manufactured Home or forecloses on a
Mortgaged Property on behalf of the Trustee, the Servicer shall either (1)
maintain at its expense hazard insurance with respect to such Manufactured Home
or Mortgaged Property, or (2) indemnify the Trustee against any damage to such
Manufactured Home or Mortgaged Property prior to resale, foreclosure sale, or
other disposition thereof.
Any losses incurred with respect to Contracts or Mortgage Loans due to
uninsured risks (including earthquakes, mudflows and floods) or insufficient
hazard insurance proceeds may, to the extent such losses are not covered by the
Special Hazard Insurance Policy for a Series, affect payments to holders of
Certificates of such Series.
Special Hazard Insurance Policy. To the extent provided in the related
Prospectus Supplement, a special hazard insurance policy ("Special Hazard
Insurance Policy") will be obtained from the insurer or insurers (the "Special
Hazard Insurer") specified in the related Prospectus Supplement. Subject to the
limitations described below, a Special Hazard Insurance Policy will insure
against (1) loss by reason of damage to Manufactured Homes or Mortgaged
Properties underlying defaulted Contracts or Mortgage Loans caused by certain
hazards (including vandalism and earthquakes and, except where the related
Obligor is required to obtain flood insurance, floods and mudflows) not covered
by the Standard Hazard Insurance Policies covering such Contracts or Mortgage
Loans and (2) loss from partial damage to the Manufactured Homes or Mortgaged
Properties securing such defaulted Contracts or Mortgage Loans caused by reason
of the application of the coinsurance clause contained in the applicable
Standard Hazard Insurance Policies. The Special Hazard Insurance Policy for a
Series, however, will not cover losses occasioned by war, certain governmental
actions, nuclear reaction and certain other perils. The amount of coverage, if
any, under the Special Hazard Insurance Policy with respect to a Series will be
specified in the related Prospectus Supplement.
Subject to the foregoing limitations, the Special Hazard Insurance Policy
with respect to a Series will provide that, when there has been damage to the
Manufactured Home or Mortgaged Property securing a defaulted Contract or
Mortgage Loan and such damage is not covered by the Standard Hazard Insurance
Policy maintained by the related Obligor or the Servicer, the Special Hazard
Insurer will pay the lesser of (a) the cost of repair of such property or (b)
upon transfer of such property to the Special Hazard Insurer, the unpaid
principal amount of such Contract or Mortgage Loan at the time of the
acquisition of such property, plus accrued interest to the date of claim
settlement (excluding late charges and penalty interest) and certain expenses
incurred in respect of such property. No claim may be validly presented under a
Special Hazard Insurance Policy unless (1) the Standard Hazard Insurance Policy
covering the Manufactured Home or Mortgaged Property securing the Contract or
Mortgage Loan has been kept in force and other reimbursable protection,
preservation and foreclosure expenses have been paid (all of which must be
approved in advance as necessary by the Special Hazard Insurer) and (2) the
insured has acquired title to the Manufactured Home or Mortgaged Property as a
result of default by the related Obligor. If the sum of the unpaid principal
amount plus accrued interest on a Contract or Mortgage Loan, plus certain
related expenses, is paid by the Special Hazard Insurer, the amount of further
coverage under the Special Hazard Insurance Policy will be reduced by the amount
of such payment less any net proceeds from the sale of the Manufactured Home or
Mortgaged Property. Any amount paid as the cost of repair of the Manufactured
Home or Mortgaged Property will reduce coverage by such amount.
The Agreement with respect to a Series will require the Servicer to
maintain any Special Hazard Insurance Policy for such Series in full force and
effect, subject to certain conditions. See "Sale and Servicing of the Mortgage
Loans -- Maintenance of Insurance Policies and Other Servicing Procedures"
herein. The Servicer also must present claims, on behalf of the
Certificateholders and the Trustee, for all losses not otherwise covered by the
applicable Standard Hazard Insurance Policies and take all reasonable steps
necessary to permit recoveries on such claims. See
38
<PAGE> 74
"Sale and Servicing of the Mortgage Loans -- Maintenance of Insurance Policies
and Other Servicing Procedures -- Presentation of Claims" herein.
To the extent provided in the related Prospectus Supplement, in lieu
(partially or wholly) of maintaining a Special Hazard Insurance Policy with
respect to a Series, a deposit of cash, a certificate of deposit, a letter of
credit or any other instrument acceptable to each Rating Agency rating the
Series as described in the related Prospectus Supplement may be Provided in an
amount and for a term acceptable to each such Rating Agency. Such a deposit will
be credited to a Special Hazard or similar fund and the Trustee or Servicer will
be permitted to draw on the fund to recover losses that would otherwise be
covered by a Special Hazard Insurance Policy ("Special Hazard Losses"). Special
Hazard Losses may also be allocated to the Certificates of a Series on the terms
and subject to the conditions and limitations set forth in the related
Prospectus Supplement. The Company may also elect to insure against Special
Hazard Losses by the delivery of Additional Assets to the Trust rather than
through a Special Hazard Insurance Policy or special hazard fund.
A Special Hazard Insurance Policy, if any, securing a Series may insure
against losses on Contracts or Mortgage Loans assigned to Trusts for other
Series of Certificates or that secure other pass-through securities or
collateralized mortgage or manufactured housing contract obligations issued by
the Company or one of its affiliates; provided, however, that the extension of
coverage (and corresponding assignment of the Special Hazard Insurance Policy)
to secure any other Series or such other securities or obligations will not be
permitted if it would result in the downgrading of the credit rating of any
outstanding Certificates of any Series offered hereby assigned by any Rating
Agency identified in the related Prospectus Supplement.
Credit Insurance
Any credit insurance relating to the Contracts or Mortgage Loans
underlying a Series of Certificates will be described in the Prospectus
Supplement.
Mortgage Loans underlying a Series of Certificates will, to the extent
described in the related Prospectus Supplement, be covered by primary mortgage
insurance policies ("Primary Mortgage Insurance Policies"). Contracts and
Mortgage Loans underlying a Series may, to the extent described in the related
Prospectus Supplement, be supported by FHA insurance, VA guarantees or one or
more pool insurance policies (each a "Pool Insurance Policy") or any combination
thereof (collectively, and together with any related Primary Mortgage Insurance
Policies, FHA insurance or VA guarantees, the "Credit Insurance" for such
Series).
To the extent so specified in the related Prospectus Supplement, the
Servicer will maintain a Primary Mortgage Insurance Policy on any Conventional
Mortgage Loan with an initial Mortgage Loan-to-Value Ratio of greater than 80%.
Any Primary Mortgage Insurance Policy that is so maintained will provide
coverage on at least the principal amount of the covered Mortgage Loan in excess
of 75% of the original appraised value of the related Mortgaged Property, which
coverage will remain in force until the principal balance of such Mortgage Loan
is reduced to 80% of such original appraised value. A Primary Mortgage Insurance
Policy also may be canceled, with the consent of the Servicer and any applicable
Pool Insurer, after the policy has been in effect for more than two years if the
Mortgage Loan-to-Value Ratio of such Mortgage Loan has declined to 80% or less
based upon the current fair market value of the related Mortgaged Property.
Certain other Mortgage Loans may also be covered by Primary Mortgage
Insurance Policies. Certain Primary Mortgage Insurance Policies may, to the
extent required by the related Prospectus Supplement, and subject to their
provisions and to certain conditions and exclusions described below, provide
full coverage against any loss sustained by reason of nonpayments by the related
Mortgagor (a "Full Coverage Insurance Policy").
The Pool Insurance Policy or Policies for a Series, if any, will be
designed to provide coverage for all Conventional Mortgage Loans which are not
covered by Full Coverage Insurance Policies. However, neither the Primary
39
<PAGE> 75
Mortgage Insurance Policies nor the Pool Insurance Policies will insure against
certain losses sustained in the event of a personal bankruptcy of the Mortgagor
under a Mortgage Loan. See "Certain Legal Aspects of Contracts and Mortgage
Loans -- The Mortgage Loans -- Anti-Deficiency Legislation and Other Limitations
on Lenders" herein. Such losses may be covered to the extent provided by the
Obligor Bankruptcy Insurance, if any, described below for such Series.
The Credit Insurance policies will not provide coverage against hazard
losses. Certain hazard risks will be covered by Standard Hazard Insurance
Policies or Special Hazard Insurance Policies, but other hazard risks will not
be insured and thus may affect payments to holders of related Certificates. See
" -- Hazard Insurance" above.
To the extent that Primary Mortgage Insurance Policies, FHA insurance or
VA guarantees do not cover all losses on a defaulted or foreclosed Contract or
Mortgage Loan, and to the extent such losses are not covered by the Pool
Insurance Policy for the related Series of Certificates, if any, such losses
would affect payments to holders of related Certificates.
The following descriptions of Credit Insurance policies and the coverage
thereunder are provided for general informational purposes only, and do not
purport to be complete. There can be no assurance that the actual policies and
coverage with respect to a specific Series will comply with these descriptions.
Primary Mortgage Insurance. Any Primary Mortgage Insurance Policy covering
Mortgage Loans will be issued by the related Mortgage Insurer pursuant to the
Mortgage Insurer's applicable master policy. The Company and the Trustee as
assignee of the Mortgage Loans will be the insureds or assignees of record (the
"Insured"), as their interests may appear, under each such Primary Mortgage
Insurance Policy. The Agreement with respect to such Series will require the
Servicer to cause a Primary Mortgage Insurance Policy to be maintained in full
force and effect with respect to each Mortgage Loan covered by the Agreement (to
the extent such insurance is required by such Agreement) and to act on behalf of
the Insured with respect to all actions required to be taken by the Insured
under each such Primary Mortgage Insurance Policy.
The amount of a claim for benefits (the "Loss") under a Primary Mortgage
Insurance Policy covering a Mortgage Loan will generally consist of the insured
portion of the unpaid principal balance of the covered Mortgage Loan (as
described herein) and accrued and unpaid interest thereon and reimbursement of
certain expenses, less (1) all rents or other payments collected or received by
the Insured (other than the proceeds of hazard insurance) that are derived from
or in any way related to the related Mortgaged Property; (2) hazard insurance
proceeds in excess of the amount required to restore the related Mortgaged
Property and which have not been applied to the payment of the Mortgage Loan;
(3) amounts expended but not approved by the Mortgage Insurer; (4) claim
payments previously made by the Mortgage Insurer; and (5) unpaid premiums.
As conditions precedent to the filing of or payment of a claim under a
Primary Mortgage Insurance Policy covering a Mortgage Loan, the Insured will
generally be required to (1) pay (a) all hazard insurance premiums and (b) as
necessary and approved in advance by the Mortgage Insurer, (i) real estate
property taxes, (ii) all expenses required to maintain the related Mortgaged
Property in at least as good a condition as existed at the effective date of
such Primary Mortgage Insurance Policy, ordinary wear and tear excepted, (iii)
property sales expenses, (iv) any outstanding liens (as defined in such Primary
Mortgage Insurance Policy) on the Mortgaged Property and (v) foreclosure costs,
including court costs and reasonable attorneys' fees; (2) in the event of any
physical loss or damage to the related Mortgaged Property, restore and repair
the Mortgaged Property to at least as good a condition as existed at the
effective date of such Primary Mortgage Insurance Policy, ordinary wear and tear
excepted; and (3) tender to the Mortgage Insurer good and merchantable title to
and possession of the related Mortgaged Property. A Primary Mortgage Insurance
Policy may not reimburse the Insured for attorneys' fees in respect of a
foreclosed Mortgage Loan in excess of 3% of the unpaid principal balance plus
accrued and unpaid interest on such Mortgage Loan. As a result, legal expenses
in excess of such reimbursement limitation may be charged as a loss on the
related Certificates.
40
<PAGE> 76
Other provisions and conditions of each Primary Mortgage Insurance Policy
covering a Mortgage Loan generally will provide that: (1) no change may be made
in the terms of such Mortgage Loan without the consent of the Mortgage Insurer;
(2) written notice must be given to the Mortgage Insurer within 10 days after
the Insured becomes aware that a Mortgagor is delinquent in the payment of a sum
equal to the aggregate of two Monthly Payments due under such Mortgage Loan or
that any proceedings affecting the mortgagor's interest in the Mortgaged
Property securing such Mortgage Loan have been commenced, and thereafter the
Insured must report monthly to the Mortgage Insurer the status of any such
Mortgage Loan until such Mortgage Loan is brought current, such proceedings are
terminated or a claim is filed; (3) the Mortgage Insurer will have the right to
purchase such Mortgage Loan, at any time after the 10 days' notice described in
clause (2) above and prior to the commencement of foreclosure proceedings, at a
price equal to the unpaid principal amount of the Mortgage Loan plus (a) accrued
and unpaid interest thereon and (b) reimbursable amounts expended by the Insured
for the real estate taxes and fire and extended coverage insurance on the
related Mortgaged Property for a period not exceeding 12 months, less the sum of
any claim previously paid under the policy with respect to such Mortgage Loan
and any due and unpaid premium with respect to such policy; (4) the Insured must
commence proceedings at certain times specified in the policy and diligently
proceed to obtain good and merchantable title to and possession of the related
Mortgaged Property; (5) the Insured must (a) notify the Mortgage Insurer of any
proceedings described in clause (4) above and provide the Mortgage Insurer with
copies of documents relating thereto, (b) notify the Mortgage Insurer of the
price amounts specified in clause (3) above at least 15 days prior to the sale
of the related Mortgaged Property by foreclosure, and (c) bid such amount unless
the Mortgage Insurer specifies a lower or higher amount; (6) the Insured may
accept a conveyance of the related Mortgaged Property in lieu of foreclosure
with written approval of the Mortgage Insurer provided the ability of the
Insured to assign specified rights to the Mortgage Insurer are not thereby
impaired or the specified rights of the Mortgage Insurer are not thereby
adversely affected by such conveyance; (7) the Insured agrees that the Mortgage
Insurer has issued the policy in reliance upon the correctness and completeness
of the statements contained in the application for the policy and in the
appraisal, plans and specifications and other exhibits and documentation
submitted therewith or at any time thereafter; (8) under certain policies, the
Mortgage Insurer will not pay claims involving or arising out of
misrepresentation or dishonest, fraudulent, criminal or knowingly wrongful acts
(including errors or omissions) by certain persons, or claims involving or
arising out of the negligence of certain persons if such negligence is material
either to the acceptance of the risk or to the hazard assumed by the Mortgage
Insurer; and (9) the Insured must comply with other notice provisions in the
policy.
The Mortgage Insurer will generally be required to pay to the Insured
either: (1) the insured percentage of the Loss; or (2) at its option under
certain of the Primary Mortgage Insurance Policies, the sum of the delinquent
monthly payments plus any advances made by the Insured, each to the date of the
claim payment, and thereafter, monthly payments in the amount that would have
become due under the Mortgage Loan if it had not been discharged plus any
advances made by the Insured until the earlier of (A) the date the Mortgage Loan
would have been discharged in full if the default had not occurred, or (B) an
Approved Sale (as defined below under " -- Pool Insurance"). Any rents or other
payments collected or received by the Insured which are derived from or are in
any way related to the related Mortgaged Property will be deducted from any
claim payment.
FHA Insurance and Va Guarantees on Contracts. If so specified in the
related Prospectus Supplement, certain of the Contracts may be FHA-insured or
VA-guaranteed. The nature of any such FHA insurance or VA guarantees is
described generally below.
The regulations governing FHA manufactured home contract insurance provide
that insurance benefits are payable upon the repossession and resale of the
collateral and assignment of the contract to HUD. With respect to a defaulted
FHA contract, the servicer must follow applicable regulations before initiating
repossession procedures as a prerequisite to payment. These regulations include
requirements that the lender arrange a face-to-face meeting with the borrower,
initiate a modification or repayment plan, if feasible, and give the borrower 30
days' notice of default prior to any repossession. The insurance claim is paid
in cash by HUD. For manufactured housing contracts, the amount of insurance
benefits generally paid by the FHA currently is equal to 90% of the sum of (1)
the unpaid principal amount of the contract at the date of default and
uncollected interest earned to the date of default computed at the applicable
contract interest rate, after deducting the best price obtainable for the
collateral (based in part on a HUD-approved
41
<PAGE> 77
appraisal) and all amounts retained or collected by the lender from other
sources with respect to the contract; (2) accrued and unpaid interest on the
unpaid amount of the contract from the date of default to the date of submission
of the claim plus 15 calendar days (but in no event more than nine months)
computed at a rate of 7.00% per annum; (3) costs paid to a dealer or other third
party to repossess or preserve the related manufactured home; (4) the amount of
any sales commission paid to a dealer or other third party for the resale of the
property; (5) with respect to any Land Secured Contract, property taxes, special
assessments and other similar charges and hazard insurance premiums, prorated to
the date of disposition of the property; (6) uncollected court costs; (7) legal
fees, not to exceed $1,000; and (8) expenses for recording the assignment of the
lien on the collateral to the United States, in each case subject to applicable
caps as set by regulations governing the FHA from time to time.
The insurance available to a lender under FHA Title I insurance is subject
to the limit of a reserve amount equal to 10% of the original principal balance
of all Title I insured loans originated by the lender, which amount is reduced
by all claims paid to the lender and by an annual reduction in the reserve
amount of 10% of the reserve amount, and which is increased by an amount equal
to 10% of the original principal balance of insured loans subsequently
originated by the lender. The obligation to pay insurance premiums, if any, to
the FHA is the obligation of BCI, as the servicer of the FHA-insured Contracts.
The maximum guarantee that may be issued by the VA for a VA-guaranteed
contract is the lesser of (a) the lesser of $20,000 and 40% of the principal
amount of the contract and (b) the maximum amount of guaranty entitlement
available to the obligor veteran (which may range from $20,000 to zero). The
amount payable under any VA guarantee will be a percentage of the VA contract
originally guaranteed applied to indebtedness outstanding as of the applicable
date of computation specified in the VA regulations, interest accrued on the
unpaid balance of the loan to the appropriate date of computation and limited
expenses of the contract holder, but in each case only to the extent that such
amounts have not been recovered through resale of the manufactured home. The
amount payable under the guarantee may in no event exceed the original
guaranteed amount.
Pool Insurance. The Company may obtain a Pool Insurance Policy to cover
any loss (subject to the limitations described below) incurred by reason of
default by the Obligors on the Contracts and/or Mortgage Loans (in the case of
Mortgage Loans, to the extent such loss is not covered by any Primary Mortgage
Insurance Policy). The amount of the Pool Insurance Policy (or Policies) for a
Series, if any, will be specified in the related Prospectus Supplement. A Pool
Insurance Policy for a Series, however, will not be a blanket policy against
loss, because claims thereunder may only be made for particular defaulted
Contracts or Mortgage Loans and only upon satisfaction of certain conditions
precedent described below.
The Servicer will be required to maintain any Pool Insurance Policies for
each Series and to present or cause the Sub-servicers, if any, to present claims
to the Pool Insurer on behalf of the Trustee and the Certificateholders. As set
forth in the related Prospectus Supplement, any Pool Insurance Policy for a
Series will provide that as a condition precedent to the payment of any claim
the insured will be required (1) to advance hazard premiums on the Manufactured
Home or Mortgaged Property securing the defaulted Contract or Mortgage Loan; (2)
to advance, as necessary and approved in advance by the related insurer, (a)
real estate or personal property taxes, (b) all expenses required to preserve
and repair the Manufactured Home or Mortgaged Property, to protect the
Manufactured Home or Mortgaged Property from waste, so that the Manufactured
Home or Mortgaged Property is in at least as good a condition as it was in on
the date upon which coverage under the Pool Insurance Policy with respect to
such Manufactured Home or Mortgaged Property first became effective, ordinary
wear and tear excepted, (c) property sales expenses, (d) any outstanding liens
on the Manufactured Home or Mortgaged Property, and (e) foreclosure costs,
including court costs and reasonable attorneys' fees; and (3) if there has been
physical loss or damage to the Manufactured Home or Mortgaged Property, to
restore the Manufactured Home or Mortgaged Property to its condition (ordinary
wear and tear excepted) as of the issue date of the Pool Insurance Policy. It
also will be a condition precedent to the payment of any claim relating to a
Mortgage Loan under a Pool Insurance Policy that the Insured maintain a Primary
Mortgage Insurance Policy that is acceptable to the Pool Insurer on all Mortgage
Loans covered by the Pool Insurance Policy that have Mortgage Loan-to-Value
Ratios at the time of origination in excess of 80%. Assuming satisfaction of
these
42
<PAGE> 78
conditions, the Pool Insurer will pay to the Insured the amount of the "loss"
which will generally be (1) the amount of the unpaid principal balance of the
Contract or Mortgage Loan immediately prior to an Approved Sale of the related
Manufactured Home or Mortgaged Property, plus (2) the amount of the accumulated
unpaid interest on such Contract or Mortgage Loan to the date of claim
settlement at the contractual rate of interest, plus (3) advances made by the
Insured as described above, less certain payments (including the proceeds of any
prior Approved Sale and any Primary Mortgage Insurance Policies). An "Approved
Sale" is (1) a sale of the related Manufactured Home or Mortgaged Property
acquired by the Insured because of a default by the Obligor if the Pool Insurer
has given prior approval to such sale; (2) a foreclosure or trustee's sale of
the related Manufactured Home or Mortgaged Property at a price exceeding the
minimum amount specified by the Pool Insurer; (3) the acquisition of the
Mortgaged Property under the Primary Mortgage Insurance Policy by the Mortgage
Insurer; or (4) the acquisition of the related Manufactured Home or Mortgaged
Property by the Pool Insurer. As a condition precedent to the payment of any
"loss" on any covered Contract or Mortgage Loan, the Insured must provide the
Pool Insurer with good and merchantable title to the related Manufactured Home
or Mortgaged Property if the Pool Insurer elects to take title to such
Manufactured Home or Mortgaged Property. If any property securing a defaulted
Contract or Mortgage Loan covered by a Pool Insurance Policy is damaged and the
proceeds, if any, from the related Standard Hazard Insurance Policy or the
applicable Special Hazard Insurance Policy are insufficient to restore the
damaged property to a condition sufficient to permit recovery under the Pool
Insurance Policy, the Servicer will not be required to expend its own funds to
restore the damaged Manufactured Home or Mortgaged Property unless it determines
(A) that such restoration will increase the proceeds on liquidation of the
Contract or Mortgage Loan after reimbursement of the Servicer for its expenses
and (B) that such expenses will be recoverable by it through Liquidation
Proceeds or Insurance Proceeds.
The Pool Insurance Policies will generally not insure (and many Primary
Mortgage Insurance Policies may not insure) against losses sustained by reason
of defaults arising from, among other things, (1) fraud or negligence in the
origination or servicing of a Contract or Mortgage Loan, including
misrepresentation by the Obligor or the originator; (2) failure to construct
Manufactured Homes or Mortgaged Properties in accordance with plans and
specifications; and (3) a claim in respect of a defaulted Mortgage Loan
occurring when the Servicer, at the time of default or thereafter, was not
approved by the Mortgage Insurer.
The original amount of coverage under any Pool Insurance Policy securing a
Series will be reduced over the life of the Certificates of such Series by the
aggregate dollar amount of claims paid under such policy, less the aggregate of
net amounts realized by the Pool Insurer upon disposition of all repossessed or
foreclosed Manufactured Home or Mortgaged Properties covered thereby. The amount
of claims paid includes certain expenses incurred by the Servicer as well as
accrued interest on delinquent Contracts or Mortgage Loans to the date of
payment of the claim. The net amounts realized by a Pool Insurer in respect of a
Contract or Mortgage Loan will depend primarily on the market value of the
Manufactured Home or Mortgaged Property securing the defaulted Contract or
Mortgage Loan. The market value of a Manufactured Home or Mortgaged Property
will be determined by a variety of economic, geographic, social, environmental
and other factors and may be affected by matters that were unknown and could not
reasonably be anticipated at the time the original loan was made.
If aggregate net claims paid under a Pool Insurance Policy securing a
Series reach the original policy limit, coverage under the Pool Insurance Policy
will lapse and any further losses will be borne by the related Trust, and thus
may affect adversely payments to the Certificateholders of such Series. In
addition, unless the Servicer can determine that a P&I Advance in respect of a
delinquent Contract or Mortgage Loan would be recoverable from the proceeds of
the liquidation of such Contract or Mortgage Loan or any other source, the
Servicer will not be obligated to make a P&I Advance with respect to such
delinquency. See "Sale and Servicing of Contracts and Mortgage Loans --
Advances" herein. The original amount of coverage under any Pool Insurance
Policy assigned to the Trust for a Series may also be reduced or canceled to the
extent each Rating Agency rating the Series confirms that such reduction will
not result in the lowering of the rating of the Certificates of such Series.
A Pool Insurance Policy for a Series may insure against losses on the
Contracts or Mortgage Loans assigned to Trusts for other Series of Certificates
or that secure other pass-through securities or collateralized mortgage or
43
<PAGE> 79
manufactured housing contract obligations issued by the Company or one of its
affiliates; provided, however, that the extension of coverage (and corresponding
assignment of the Pool Insurance Policy) to secure any other Series or such
other securities or obligations will not be permitted if it would result in the
downgrading of the credit rating of any outstanding Certificates of any Series
offered hereby assigned by any Rating Agency identified in the related
Prospectus Supplement.
OBLIGOR BANKRUPTCY INSURANCE
In the event of a personal bankruptcy of an Obligor, the bankruptcy court
may establish the value of the related Manufactured Home or Mortgaged Property
at an amount less than the then Unpaid Principal Balance of the Contract or
Mortgage Loan secured by such Manufactured Home or Mortgaged Property. The
amount of the secured debt could be reduced to the value of the collateral
property, and the holder of the Contract or Mortgage Loan thus would become an
unsecured creditor to the extent the outstanding principal balance of such
Contract or Mortgage Loan exceeds the value assigned to the underlying
Manufactured Home or Mortgaged Property by the bankruptcy court. In addition,
certain other modifications of the terms of a Contract or Mortgage Loan can
result from a bankruptcy proceeding. See " -- The Contracts -- Enforcement of
Security Interests in Manufactured Homes" and " -- The Mortgage Loans --
Anti-Deficiency Legislation and Other Limitations on Lenders," each under the
heading "Certain Legal Aspects of Contracts and Mortgage Loans" herein. Losses
resulting from a bankruptcy proceeding affecting Contracts or Mortgage Loans
will, to the extent specified in the related Prospectus Supplement, be covered
by obligor bankruptcy insurance for the related Series (the "Obligor Bankruptcy
Insurance"). The amount and term of any Obligor Bankruptcy Insurance for a
Series must be acceptable to each Rating Agency rating the Series. Subject to
the terms of any Obligor Bankruptcy Insurance, the insurer may have the right to
purchase any Contract or Mortgage Loan with respect to which a payment has been
made or may be made, for an amount equal to the Unpaid Principal Balance of such
Contract or Mortgage Loan plus accrued and unpaid interest thereon. To the
extent Obligor Bankruptcy Insurance is required by a Prospectus Supplement, the
Company may, partially or entirely in lieu of Obligor Bankruptcy Insurance,
deposit or cause to be deposited cash, a certificate of deposit, a letter of
credit or any other instrument acceptable to each Rating Agency rating the
related Series as described in the related Prospectus Supplement. Such a deposit
will be credited to a Obligor Bankruptcy or similar fund and the Trustee or
Servicer will be able to draw on the fund to recover losses that otherwise would
be insured against by Obligor Bankruptcy Insurance. The amount of any Obligor
Bankruptcy Insurance for a Series or any deposit in lieu thereof may be reduced
as long as any such reduction will not result in a reduction of the then
applicable rating of the Series by any Rating Agency rating the Series as
described in the related Prospectus Supplement. Any Obligor Bankruptcy Insurance
or any obligor bankruptcy fund maintained with respect to a Series may insure
against losses on Contracts or Mortgage Loans assigned to Trusts for other
Series of Certificates or that secure other pass-through securities or
collateralized mortgage or manufactured contract obligations issued by the
Company or one of its affiliates; provided, however, that the extension of
coverage (and corresponding assignment of an Obligor Bankruptcy Insurance policy
or obligor bankruptcy fund) to secure any other Series or such other securities
or obligations will not be permitted if it would result in the downgrading of
the credit rating of any outstanding Certificates of any Series offered hereby
assigned by a Rating Agency identified in the related Prospectus Supplement. The
Company may elect to deposit Additional Assets to the Trust in lieu of obtaining
any required Obligor Bankruptcy Insurance or establishing a obligor bankruptcy
fund.
The foregoing description does not purport to be complete and is qualified
in its entirety by reference to any description of Obligator Bankruptcy
Insurance contained in the related Prospectus Supplement.
DELIVERY OF ADDITIONAL ASSETS
To the extent provided in the related Prospectus Supplement, in lieu of or
in addition to providing Pool Insurance, Special Hazard Insurance, Obligor
Bankruptcy Insurance or other insurance, the Company may assign to the Trust for
a Series of Certificates non-recourse guaranties of the timely payment of
principal and interest on Contracts and Mortgage Loans included in the Trust
secured by other assets satisfactory to each Rating Agency rating the Series.
The Company may also assign or undertake to deliver such other assets to any
Trust by such other means as may be
44
<PAGE> 80
specified in the related Prospectus Supplement. Such other assets may consist of
additional Contracts or Mortgage Loans, letters of credit or other Eligible
Investments ("Additional Assets").
INVESTMENT OF FUNDS
Funds deposited in or remitted to the Certificate Account, the
Distribution Account, any Reserve Fund and any other funds and accounts for a
Series are to be invested by the Trustee, as directed by the Servicer, in
certain eligible investments ("Eligible Investments"), which include (1)
obligations of the United States or any agency thereof provided such obligations
are backed by the full faith and credit of the United States; (2) within certain
limitations, securities bearing interest or sold at a discount issued by any
corporation, which securities are rated in the rating category required to
support the then applicable ratings assigned to that Series; (3) commercial
paper which is then rated in the commercial paper rating category required to
support the then applicable ratings assigned to that Series; (4) demand and time
deposits, certificates of deposit, bankers' acceptances and federal funds sold
by any depository institution or trust company incorporated under the laws of
the United States or of any state thereof, provided that either the senior debt
obligations or commercial paper of such depository institution or trust company
(or provided that either the senior debt obligations or commercial paper of the
parent company of such depository institution or trust company) are then rated
in the security rating category required to support the then applicable ratings
assigned to that Series; (5) demand and time deposits and certificates of
deposit issued by any bank or trust company or savings and loan association and
fully insured by the Federal Deposit Insurance Corporation (the "FDIC"); (6)
guaranteed reinvestment agreements issued by any insurance company, corporation
or other entity acceptable to each Rating Agency rating that Series at the time
of issuance of the Series; (7) certain repurchase agreements relating to United
States government securities; and (8) certain money market mutual funds
investing primarily in the obligations of the United States; provided, such
mutual funds are rated in a rating category sufficient to support the initial
ratings assigned to that Series.
Eligible Investments with respect to a Series will include only
obligations or securities that mature on or before the date on which the
invested funds are required or may be anticipated to be required to be applied
for the benefit of the holders of such Series. Any income, gain or loss from
such investments for a Series will be credited or charged to the appropriate
fund or account for such Series. Reinvestment income from Eligible Investments
may be payable to the Servicer as additional servicing compensation and, in that
event, will not accrue for the benefit of the Certificateholders of that Series.
If a reinvestment agreement is obtained with respect to a Series, the
related Agreement will require the Trustee to invest funds deposited in the
Certificate Account, the Distribution Account and the Reserve Fund, if any, for
that Series pursuant to the terms of the reinvestment agreement.
CERTIFICATE GUARANTEE INSURANCE
If so specified in the related Prospectus Supplement, Certificate
Guarantee Insurance, if any, with respect to a Series of Certificates may be
provided by one or more insurers. Such Certificate Guarantee Insurance may
guarantee, with respect to one or more Classes of Certificates of the related
Series, timely distributions of interest and full distributions of principal on
the basis of a schedule of principal distributions set forth in or determined in
the manner specified in the related Prospectus Supplement. A copy of the
Certificate Guarantee Insurance documentation for a Series, if any, will be
filed with the Commission as an exhibit to a Current Report on Form 8-K within
15 days of issuance of the Certificates of the related Series.
ALTERNATE CREDIT ENHANCEMENT
From time to time with respect to a Series of Certificates, the Company or
the Servicer may obtain or cause to be obtained further or other liquidity
enhancement, insurance policies, guarantees, letters of credit, derivative
products, surety bonds or other forms of credit enhancement or any combinations
thereof (or make deposits in lieu thereof or in addition thereto) to provide for
the enhancement of the credit rating of such Certificates. To the extent any
45
<PAGE> 81
such other enhancements are obtained or provided for with respect to a Series of
Certificates, or deposits are made in lieu thereof or in addition thereto, a
description thereof will be set forth in the related Prospectus Supplement.
THE MANUFACTURED HOUSING PROGRAM
CONTRACT UNDERWRITING GUIDELINES
Unless otherwise specified in the related Prospectus Supplement, contracts
included in an Asset Pool will have been underwritten by BCI in accordance with
its standard operating practices. These Contacts may have been originated in the
name of BCI, or by a third party manufactured housing broker or dealer, in
either case, with funds provided by BCI. The following is a description of the
underwriting practices generally followed by BCI in connection with the
origination of the Contracts.
A customer desiring to obtain financing for the purchase of a manufactured
home through BCI must complete a loan application form at an approved dealer's
sales center. Loan applications are forwarded electronically or by facsimile by
the dealer to BCI's credit department for consideration.
UNDERWRITING PRACTICES
Credit investigation begins with an application package from an approved
dealer. Each package is thoroughly reviewed to determine the applicant's
creditworthiness.
The dealer submits the customer's credit application, manufacturer's
invoice (if the contract is for a new home) and certain other information
relating to the contract to the Credit Department. If the creditworthiness of
the customer and certain other aspects of the transaction are approved by the
Credit Department, the customer and the dealer execute a contract on a form
provided or approved in advance by BCI. After the manufactured home financed
under such contract is delivered and set up by the dealer and the home is ready
to be occupied, BCI will purchase the contract from the dealer.
Because manufactured homes generally depreciate in value, BCI's management
believes that the creditworthiness of a potential obligor is the most important
factor in determining whether to approve the purchase or origination of a
contract. As a result, BCI's underwriting guidelines generally require credit
personnel to examine each applicant's credit history, residence history,
employment history and debt-to-income ratio. There is no minimum requirement for
any of these criteria, although BCI has developed certain guidelines.
In the case of employment, the applicant should generally have been with
the same employer for a minimum of two years. If not, BCI will consider whether
the applicant has been employed in the same field for a minimum of two years
and, if the applicant's occupational field has changed, whether employment in
prior field was long term. The applicant's debt-to-income ratio normally must
not exceed 45%. The applicant should show stability at present or previous
residence. The credit history of all applicants and co-applicants is carefully
reviewed. A limited credit history is investigated and further information is
obtained when applicable and all credit derogatories are taken into account.
Income is verified by pay stubs or tax returns or by direct verification in the
absence of available documentation. Credit managers are trained to be
particularly sensitive to the following:
- Derogatory information from credit reference
- Debt ratio exceeding 45%
- Employment of less than two years
- No residential telephone or unlisted number
- Job or residence out of the area
- Residential occupancy of less than one year
46
<PAGE> 82
- No savings or checking account
Although BCI has guidelines for some of these criteria, BCI management
does not believe that an applicant's inability to satisfy some of these
guidelines warrants denial of credit in all cases. For example, if an applicant
fails to meet a guideline by a certain margin for one of the criteria mentioned
above, the applicant generally must exceed the threshold for one or more other
criteria by a compensating margin for such applicant's credit application to be
approved. In addition, in special cases, credit applications are approved even
if certain of the criteria are not met. For these reasons, BCI's management
believes that the ultimate decision whether to approve or reject a credit
application should be made by credit personnel. To assist personnel in
evaluating credit applications, BCI uses a Fair-Isaacs credit scoring system.
The Fair-Isaacs credit scoring system generates a recommendation to approve or
deny a credit application based on certain criteria established by BCI's
management. BCI's underwriting guidelines allow the recommendation generated by
the Fair-Isaacs credit scoring system to be used by credit personnel as a guide
in determining whether to extend credit to an applicant, but do not require
credit personnel to make credit decisions based solely on the system's
recommendations. BCI does not disclose the criteria used by this credit scoring
system either to credit personnel or to the dealers assisting in the preparation
of credit applications. The criteria are periodically reviewed by BCI's
management, and modified as necessary.
Credit buying authority is delegated to each Credit Manager only with the
approval by two higher authority credit officers. Each Credit Manager must have
the properly delegated authority prior to making any credit decisions.
Delegation of authority does not relieve the delegating manager from overall
responsibility for credit decisions made by subordinates. All requests for
credit approval where the structuring of the contract deviates from underwriting
guidelines and procedures must be submitted to a Director of Credit for review
and approval. All exceptions are tracked and reviewed by appropriate BCI
management.
The review and approval practices of the Credit Department are subject to
ongoing internal review by the Compliance Department which, through sampling,
examines the degree of compliance with BCI's standard operating procedures and
publishes a report of deviations. A response to these deviations is required
within ten days and such response is reviewed and discussed by senior management
for any needed action. The files selected for review are generally chosen by
personnel conducting the review without prior knowledge of Credit Department
personnel. Although BCI policy dictates the percentage of loans that are
selected for review, no assurance can be given that files reviewed in the
examination are representative of contract originations taken as a whole.
Conventional manufactured housing contracts (that is, contracts that are
not insured or guaranteed by a governmental agency or instrumentality) currently
comprise all of the manufactured housing contracts purchased or originated by
BCI. However, BCI can provide no assurance that it will not seek to originate or
purchase manufactured housing contracts, whether on an individual basis from
authorized dealers or in bulk from bulk sellers, that are partially insured or
guaranteed by one or more governmental agencies or instrumentalities.
It is generally the policy of BCI to finance no more than the lesser of
130% of the manufacturer's invoice or 95% of buyer's total cost for a new
manufactured home. A buyer's costs include certain fees, prepaid finance charges
(points), sales tax, titling fees and certain insurance premiums (including up
to one year of premiums on required hazard insurance). In the case of
conventional manufactured housing contracts secured by used homes, the maximum
amount financed by BCI is the lower of 95% of the home's retail value, as
specified in the National Auto Dealer Association (NADA) Mobile/Manufactured
Housing Appraisal Guide, plus taxes and certain set-up costs, or an appraisal
provided by a licensed appraiser. If an appraisal is not obtained on a used
home, photographs or an inspection by BCI personnel are required.
The customer's ability and willingness to make a cash or equivalent down
payment is an important underwriting factor. BCI requires a minimum down payment
of 5% for an owner occupied primary residence. For secondary residence (vacation
home), the required minimum down payment is 10%. Required down payments, which
47
<PAGE> 83
are to be paid in cash or qualified trade-in, are calculated based on the total
amount financed, including points, fees and taxes.
Underwriting policies for the origination or purchase of manufactured
housing contracts are established by BCI's management at its service center in
Jacksonville, Florida and are applicable to all BCI's manufactured housing
credit operations.
BCI originates and purchases installment sales contracts on manufactured
homes which are secured by a purchase money security interest in the home as
evidenced by a lien on the home's title or a UCC-1 filing depending on the laws
of the state where the home is located. BCI also originates land and home
contracts, in which case the manufactured home becomes an improvement to the
real property, and land in lieu contracts, in which case the customer provides
the land in lieu of a cash down payment. In either case, the loan is secured by
a mortgage on the property. BCI's underwriting guidelines are not substantially
different between installment sales programs and "Land" programs.
The Company will obtain representations and warranties from the Seller
that each related Mortgage Loan was originated in accordance with the
underwriting guidelines described above and in the applicable Prospectus
Supplement. Any Mortgage Loan that does not comply with such standards after
inclusion in an Asset Pool must be repurchased or substituted for by its Seller,
unless such Mortgage Loan is otherwise demonstrated to be includible in the
Asset Pool, to the satisfaction of the Company. See "Description of the
Certificates -- Representations and Warranties" herein.
SERVICING
BCI, through its Jacksonville service center, services all of the
manufactured housing contracts that it purchases or originates, whether on an
individual basis or in bulk. Generally, whenever contracts are sold, BCI will
retain servicing responsibilities with respect to such contracts. BCI utilizes
billing statements to notify its customers of payment is due. With respect to
each billing cycle, a statement is sent approximately two weeks in advance of
the date on which payment is due.
Collection procedures include repossession and resale of manufactured
homes securing defaulted contracts and, if deemed advisable by BCI, entering
into workout arrangements with obligors under certain defaulted contracts.
Although decisions as to whether to repossess any manufactured home are made on
an individual basis, BCI's general policy is to institute repossession
procedures promptly after collection personnel determine that it is unlikely
that a defaulted contract will be brought current, and thereafter to diligently
pursue the resale of such manufactured homes.
BCI believes it is important to establish regular customer payment habits
at the beginning of its relationship with each customer. BCI initiates phone
collection efforts for the first three monthly payments on a contract whenever
such contract becomes two days delinquent. Subsequent to the first three payment
periods, mail reminder notices are sent at 5 days delinquent and again at 10
days delinquent. Phone collection contact with the customer begins at 15 days
delinquent. Phone collectors work with the aid of an automated collection
management system which arranges delinquent accounts in a predetermined
sequence. A cure letter is sent to the customer whenever an account reaches 30
days delinquent. It is BCI's policy to report delinquencies on a contractual
basis. BCI utilizes various other collection aids such as ACH automatic payment
and Western Union Quick Collect service, both of which facilitate electronic
funds transfer from the customer to BCI.
At least monthly, all contracts which are 30 days or more delinquent are
reviewed by BCI to determine those accounts that will be repossessed and/or
charged off. Every reasonable effort is made to bring an account current and
avoid a charge off or repossession. However, once management has determined an
account to be uncollectible, and appropriate notices to the customer have
expired, the related manufactured home is repossessed and retitled. The decision
to repossess typically takes place before the account is 90 days delinquent. In
cases where a mortgage secures the property, BCI may foreclose on the property
or repossess the related manufactured home separately from the real estate
depending local laws and other considerations. Repossessed homes are assessed as
to condition and refurbished
48
<PAGE> 84
if necessary. Typically within 120 days after repossession, such homes are sold
through manufactured home dealers, brokers or park managers. If liquidation
proceeds are less than the outstanding principal balance of the contract plus
expenses, the shortfall is charged off. Any loan amount, or portion thereof,
that is determined to be uncollectible, such as a payoff shortage, insurance
shortfall or bankruptcy cram down, is charged off in the same month as the
determination that such loss is unlikely to be recovered.
SALE AND SERVICING OF CONTRACTS AND MORTGAGE LOANS
ASSIGNMENT OF CONTRACTS AND MORTGAGE LOANS
Pursuant to the applicable Agreement, the Company will cause the Contracts
and Mortgage Loans and all other assets comprising the related Trust Estate to
be sold, assigned and transferred to the related Trustee, together with all
principal and interest payments due on such Contracts and Mortgage Loans after
the date specified in the related Prospectus Supplement (the "Cut-off Date") and
all prepayments of principal collected on or after such Cut-off Date. In
exchange for the Contracts and Mortgage Loans assigned to the Trustee, the
Trustee will deliver Certificates of the related Series in authorized
denominations, registered in such names as the Company may request, representing
the beneficial ownership interest in the related Trust Estate, to the Company or
its designee. Each Contract and Mortgage Loan included in a Trust Estate will be
identified in a schedule appearing as an exhibit to the related Agreement. Such
schedule will contain information as to the Cut-off Date Principal Balance of
each Contract or Mortgage Loan and the Asset Rate, original principal balance
and certain other information concerning each such Contract and Mortgage Loan.
Such schedule is referred to herein as the "Contract Schedule" to the extent it
identifies Contracts, the "Mortgage Loan Schedule" to the extent it identifies
Mortgage Loans, and is referred to in its entirety as the "Asset Schedule."
Conveyance of Contracts. Prior to the conveyance of the Contracts to the
Trustee, the Servicer's operations department will complete a review of all of
the Contract Files, including the certificates of title to, or other evidence of
a perfected security interest in, the related Manufactured Homes, confirming the
accuracy of the related Contract Schedule delivered to the Trustee. With respect
to any Land Secured Contract, the Servicer will also review the Mortgage and any
necessary assignments thereof evidencing the Seller's interest in the related
Real Property. Any Contract discovered not to agree with such Contract Schedule,
or any Contract for which any required Contract Document is discovered to be
missing or defective, in either case in a manner that is materially adverse to
the interests of the Certificateholders, will be required to be repurchased by
the Seller at the related Repurchase Price or replaced with another Contract as
described herein if such discrepancy, incompleteness or defect is not cured
within 90 days after notice of such discrepancy, incompleteness or defect is
delivered to the Seller, except that in the case of a discrepancy between the
terms of a Contract and the Contract Schedule relating to the Unpaid Principal
Balance of a Contract, the Seller may deposit cash in the Certificate Account in
an amount sufficient to offset such discrepancy.
The Servicer (or a custodian appointed by the Servicer) will hold the
original Contracts and copies of all material documents and instruments relating
to each Contract and evidencing the security interest created by each Contract
in the related Manufactured Home or real estate as custodian on behalf of the
Certificateholders in accordance with the related Agreement. In order to give
notice of the Trustee's right, title and interest in and to the Contracts, UCC-1
financing statements identifying the Trustee or a co-trustee as the secured
party or purchaser and identifying all the Contracts as collateral will be filed
in the appropriate offices in the appropriate state. If a subsequent purchaser
were able to take physical possession of the Contracts without notice of the
assignment of the Contracts to the Trustee, the Trustee's interest in the
Contracts could be defeated. To provide some protection against this
possibility, in addition to filing UCC-1 financing statements, within one week
after the initial delivery of the Certificates, the Contracts will be stamped or
otherwise marked by the Servicer to reflect their assignment to the Trustee. See
"Certain Legal Aspects of Contracts and Mortgage Loans -- The Contracts" herein.
Conveyance of Mortgage Loans. On or prior to the date of conveyance of the
Mortgage Loans to the Trustee, the Company will, as to each Mortgage Loan,
deliver or cause to be delivered to the Trustee or a custodian acting on behalf
of the Trustee (a "Custodian") the related mortgage note (a "Mortgage Note")
endorsed in blank or to the order
49
<PAGE> 85
of the Trustee, an original or a certified copy of the related Mortgage, with
evidence of recordation of the Mortgage noted thereon or attached thereto, an
assignment of the related Mortgage in recordable form naming the Trustee as
assignee (together with originals or certified copies of all recorded
assignments necessary to show an unbroken chain of assignment of the related
Mortgage from the original mortgagee thereunder to the Trustee), and certain
other original documents evidencing or relating to the Mortgage Loan. Within one
year after the Closing Date for a Series, the Company will cause assignments
(which may be in blanket form) of each related Mortgage to be recorded in the
appropriate public recording offices for real property records wherever
necessary to protect the Trustee's interest in the related Mortgage Loans. In
lieu of recording assignments of Mortgages in a particular jurisdiction, the
Company may deliver or cause to be delivered to the Trustee an opinion of local
counsel to the effect that such recording is not necessary to protect the right,
title and interest of the Trustee in the related Mortgage Loans. In addition,
the Seller of a Mortgage Loan is required to submit to the Trustee with each
Trustee Mortgage Loan File a mortgagee title insurance policy, title insurance
binder, preliminary title report, or satisfactory evidence of title insurance
for the jurisdiction in which the related Mortgaged Property is located. If a
preliminary title report is delivered initially, the Seller is required to
deliver a final title insurance policy or other satisfactory evidence of the
existence of adequate title insurance. The Trustee or a Custodian will hold the
Trustee Mortgage Loan Files for the related Mortgage Loans, except to the extent
that any of the documents contained in such files are released to the Servicer
or a Sub-servicer for servicing purposes in accordance with the terms of the
related Agreement.
The Trustee or the Custodian (the latter if so specified in the related
Prospectus Supplement) will review any Trustee Mortgage Loan Files relating to a
Series. If any Mortgage Loan Document required to be included in a Trustee
Mortgage Loan File is missing or is found to be defective in any material
respect, and the Seller does not cure such defect within 90 days after its
receipt of notice of such missing document or document defect, the Seller will
be required to repurchase the Mortgage Loan at the related Repurchase Price or
replace such Mortgage Loan with a substitute Mortgage Loan as described under
"The Trusts -- Substitution of Contracts or Mortgage Loans" herein. This
repurchase or substitution obligation constitutes the sole remedy available to
the Certificateholder or the Trustee for a missing or defective Mortgage Loan
Document.
REPRESENTATIONS AND WARRANTIES
The Company will make certain representations and warranties for each
Series in the related Agreement with respect to the related Contracts and
Mortgage Loans, including representations that it either is the owner of such
Contracts and Mortgage Loans or has a perfected first priority security interest
in the Contracts and Mortgage Loans. In addition, the Seller will make
representations and warranties with respect to the Contracts and Mortgage Loans
in the sales agreement pursuant to which the Contracts and Mortgage Loans were
transferred to the Company, including representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Company and the Trustee in respect of each Contract and Mortgage Loan.
The Seller will have represented, among other things, that (1) immediately
prior to the transfer and assignment of the Contracts and Mortgage Loans to the
Company, the Seller had good title to, and was the sole owner of, each Contract
and Mortgage Loan and there had been no other sale or assignment thereof from
the Seller; (2) as of the date of such transfer, the Contracts and Mortgage
Loans are subject to no offsets, defenses or counterclaims; (3) each Contract
and Mortgage Loan at the time it was made complied in all material respects with
applicable state and federal laws, including usury, equal credit opportunity and
disclosure laws; (4) as of the date of such transfer, each Contract creates a
valid first lien on the related Manufactured Home and such Manufactured Home is
free of material damage and is in good repair; (5) as of the date of such
transfer, no Contract or Mortgage Loan is more than the number of days
delinquent in payment set forth in the Prospectus Supplement and there are no
delinquent tax or assessment liens against the related Manufactured Home or
Mortgaged Property; (6) the Manufactured Home or Mortgaged Property securing
each Contract or Mortgage Loan is covered by a Standard Hazard Insurance Policy
providing coverage in the amount required by the related Agreement and that all
premiums now due on such insurance have been paid in full; (7) a lender's policy
of title insurance was issued on the date of the origination of each Mortgage
Loan and each such policy is valid and remains in full force and effect; (8) as
of the date of such transfer, each Mortgage subject to the Agreement
50
<PAGE> 86
evidences a valid first lien on the related Mortgaged Property (subject only to
(a) the lien of current real property taxes and assessments, (b) covenants,
conditions and restrictions, rights of way, easements and other matters of
public record as of the date of the recording of such Mortgage, such exceptions
appearing of record and either being acceptable to mortgage lending institutions
generally or specifically reflected in the appraisal made in connection with the
origination of the related Mortgage Loan and (c) other matters to which like
properties are commonly subject which do not materially interfere with the
benefits of the security intended to be provided by the Mortgage) and such
property is free of material damage and is in good repair; (9) with respect to
each Mortgage Loan, if the related Mortgaged Property is located in an area
identified by the Federal Emergency Management Agency as having special flood
hazards and subject in certain circumstances to the availability of flood
insurance under the National Flood Insurance Act of 1968, as amended, such
Mortgaged Property is covered by flood insurance, if applicable regulations at
the time such Mortgage Loan was originated required that such flood insurance
coverage be obtained; (10) for any Trust for which a REMIC election is to be
made, each related Asset is a Qualified Mortgage; and (11) any FHA Contract, FHA
Mortgage Loan, VA Contract or VA Mortgage Loan has been serviced in compliance
with applicable FHA or VA regulations, and the FHA insurance or VA guarantee
with respect to any such Asset is in full force and effect.
The Company's right to enforce a Seller's representations and warranties
with respect to an Asset Pool will be assigned to the Trustee under the related
Agreement. To the extent that a Seller makes representations and warranties
regarding the characteristics of certain Contracts and Mortgage Loans, the
Company generally will not make such representations and warranties as to such
Contracts and Mortgage Loans. In the event that the representations and
warranties of the Seller are breached, and such breach or breaches materially
and adversely affect the interests of the Certificateholders in the related
Contracts and Mortgage Loans, the Seller will be required to cure such breach
or, if such cure is not effected within 90 days after the Seller is notified in
writing of such breach, to repurchase the affected Contracts or Mortgage Loans,
in general at a price equal to the Unpaid Principal Balance of such Contracts or
Mortgage Loans, together with unpaid interest thereon at the applicable Asset
Rates through the end of the month in which such repurchase is made, or to
substitute Contracts or Mortgage Loans in accordance with the criteria set forth
herein under "The Trusts -- Substitution of Contracts or Mortgage Loans."
The Servicer will be required under each Agreement to enforce the Seller's
obligations to cure breaches or to repurchase or substitute for Assets for the
benefit of the Trustee and the Certificateholders. The Seller's obligations to
repurchase or substitute for Assets affected by its breaches will constitute the
sole remedies available to Certificateholders or the Trustee for a breach of
representation by a Seller.
Neither the Company nor the Servicer will be obligated to repurchase or
substitute for a Contract or Mortgage Loan if a Seller defaults on its
obligation to repurchase or substitute for such Asset, and no assurance can be
given that a Seller will carry out its repurchase or substitution obligations
with respect to Contracts and Mortgage Loans.
SERVICING
General. The Servicer will service and administer each Asset Pool assigned
to the Trustee either exclusively or through other servicing institutions
("Sub-servicers"), as more fully set forth below.
The Servicer and any Sub-servicer (the latter subject to general
supervision by the Servicer) for any Asset Pool will perform diligently all
services and duties specified in the related Agreement, consistently with the
servicing standards and practices of prudent lending institutions with respect
to manufactured housing installment sales contracts of the same type as the
Contracts and mortgage loans of the same type as the Mortgage Loans in those
jurisdictions where the related Manufactured Homes and Mortgaged Properties are
located or as otherwise specified in the Agreement. The Servicer will monitor
the performance of each Sub-servicer, if any, and will have the right to remove
a Sub-servicer at any time if it considers such removal to be in the best
interest of the related Certificateholders. The duties to be performed by the
Servicer, directly or through a Sub-servicer, with respect to a Series will
include (1) collection and remittance of principal and interest payments on the
related Assets; (2) administration of any related mortgage escrow accounts; (3)
collection of related insurance claims; (4) if necessary, repossession of
related
51
<PAGE> 87
Manufactured Homes and/or foreclosure on related Mortgaged Properties; and (5)
if necessary, advance funds to the extent certain payments are not made by the
Obligors and are considered recoverable from the Obligor, from proceeds of any
applicable insurance policies, or from Liquidation Proceeds of the related
Contract or Mortgage Loan. The Servicer shall also provide information on a
periodic basis to the Company and the Trustee concerning the Contracts and
Mortgage Loans, and shall file required reports with the Commission concerning
the Trusts as required by the Agreements. If a Sub-servicer shall be terminated
by the Servicer, the servicing function of the Sub-servicer either shall be
transferred to a substitute Sub-servicer or performed by the Servicer.
The Servicer shall keep in force throughout the term of each Agreement (1)
a policy or policies of insurance covering errors and omissions with respect to
its duties under such Agreement, and (2) a fidelity bond.
The Servicer, to the extent practicable, shall cause the Obligors to pay
all taxes and similar governmental charges when and as due. To the extent that
nonpayment of any taxes or charges would result in the creation of a lien upon
any Manufactured Home or Mortgaged Property having a priority equal or senior to
the lien of the related Contract or Mortgage Loan, the Servicer shall advance
any such delinquent tax or charge to the extent it determines that it will be
able to recover such advance from the related Obligor or from Liquidation
Proceeds of the related Contract or Mortgage Loan.
Collection Procedures. The Servicer, directly or through Sub-servicers,
will make reasonable efforts to collect all payments called for under the
Contracts or Mortgage Loans and, consistently with the Agreement and any Pool
Insurance Policy, any Primary Mortgage Insurance Policy, any FHA insurance, any
VA guaranty and any Obligor Bankruptcy Insurance, will follow such collection
procedures as it follows with respect to contracts or mortgage loans serviced by
it that are comparable to the Contracts or Mortgage Loans.
Under the Agreement, the Servicer will repossess, foreclose upon or
otherwise convert the ownership of properties that secure a defaulted Contract
or Mortgage Loan if no satisfactory arrangements can be made for collection of
delinquent payments. In connection with such repossession, foreclosure or other
conversion, the Servicer will follow such practices and procedures as it shall
deem necessary or advisable and as shall be normal and usual in its general
Contract and Mortgage Loan servicing activities. The Servicer, however, will not
be required to expend its own funds in connection with any repossession or the
restoration of any property unless it determines (1) that such restoration or
repossession will increase the proceeds of liquidation of the related Contract
or Mortgage Loan to the Certificateholders after reimbursement to itself for
such expenses and (2) that such expenses will be recoverable to it either
through Liquidation Proceeds or through Insurance Proceeds.
A Contract or the Mortgage Note or Mortgage used in originating a
conventional Mortgage Loan may contain a "due-on-sale" clause. See " -- The
Contracts -- Transfers of Manufactured Homes; Enforceability of "Due-on-Sale
Clauses" and " -- The Mortgage Loans -- Due-on-Sale Clauses," in each case under
the heading "Certain Legal Aspects of Contracts and Mortgage Loans" herein. The
Servicer may enforce "due-on-sale" clauses with respect to any Contract,
Mortgage Note or Mortgage containing such a clause, provided that such
enforcement has no adverse effect on the coverage of any applicable Insurance
Policy. In any case in which a Manufactured Home or Mortgaged Property has been
or is about to be conveyed by the Obligor on the related Contract or Mortgage
Loan and the due-on-sale clause has not been enforced (or the related Contract
or Mortgage Note is by its terms assumable), the Servicer will be authorized, on
behalf of the Trustee, to enter into an assumption agreement with the person to
whom such Manufactured Home or Mortgaged Property has been or is about to be
conveyed, if such person meets certain loan underwriting criteria, including the
criteria necessary to maintain the coverage provided by any applicable Credit
Insurance policies. In the event that the Servicer enters into an assumption
agreement in connection with any such conveyance of a Manufactured Home or
Mortgaged Property, the Servicer, on behalf of the Trustee, may release the
original Obligor from liability upon the Contract or Mortgage Loan and
substitute the assuming party as the new obligor thereon. In no event can the
assumption agreement permit a decrease in the Asset Rate or an increase in the
term of the assumed Contract or Mortgage Loan. Fees collected for entering into
an assumption agreement will be retained by the Servicer as additional servicing
compensation.
52
<PAGE> 88
The Servicer, either directly or through Sub-servicers, to the extent
permitted by law, may establish and maintain an escrow account (the "Escrow
Account") in which mortgagors under Mortgage Loans may be required to deposit
amounts sufficient to pay taxes, assessments, mortgage insurance premiums and
standard hazard insurance premiums and other comparable items and in which
Obligors under Contracts will be required to deposit amounts sufficient to pay
standard hazard insurance premiums and other comparable items. Withdrawals from
the Escrow Account maintained for mortgagors may be made to effect timely
payment of taxes, assessments, mortgage insurance and hazard insurance, to
refund to mortgagors amounts determined to be overages, to pay interest to
mortgagors on balances in the Escrow Account to the extent required by law, to
repair or otherwise protect the related Mortgaged Properties and to clear and
terminate the Escrow Account. The Servicer will be responsible for the
administration of the Escrow Account and will be obligated to make advances to
such account when a deficiency exists therein, so long as it determines that
such advances will be recoverable from the related Obligors or from Liquidation
Proceeds collected with respect to the related Assets. The Servicer may decline
to establish Escrow Accounts with respect to any Contracts or Mortgage Loans in
its discretion.
Collection of Payments on Contracts and Mortgage Loans. The Servicer
will establish and maintain a Certificate Account for the benefit of the
Trustee. The Certificate Account must be an "Eligible Account;" i.e., it must be
maintained (1) at a depository institution organized under the laws of the
United States or any state, the deposits of which are insured to the full extent
permitted by law by the Federal Deposit Insurance Corporation (the "FDIC"),
whose commercial paper or long-term unsecured debt has a rating, as specified in
the related Agreement, sufficient to support the ratings requested on the
Certificates of the related Series, and which institution is subject to
examination by federal or state authorities; (2) in the corporate trust
department of the Trustee; or (3) at an institution otherwise acceptable to each
applicable Rating Agency. The Certificate Account is to be held in trust for the
benefit of the Trustee on behalf of the Certificateholders and shall be
designated as specified in the related Agreement. Funds in the Certificate
Account will be invested in Eligible Investments (as defined in the Agreement)
that will mature or be subject to redemption not later than the business day
preceding the applicable monthly Remittance Date. Earnings on amounts deposited
into a Certificate Account shall be credited to the account of the Servicer as
servicing compensation in addition to its monthly Servicing Fee. The Servicer
may use such earnings to offset P&I Advances due from the Servicer in respect of
the Remittance Date next succeeding the date on which such earnings were made
or, at the Servicer's option, such earnings may be released to the Servicer on
such Remittance Date. The amount of any losses incurred in respect of any such
investments shall be deposited into the Certificate Account by the Servicer out
of its own funds promptly after such losses are incurred.
All payments in respect of principal and interest on the Contracts and
Mortgage Loans in the Asset Pool for a Series that are received by the Servicer
on or after the applicable Cut-off Date (exclusive of collections relating to
scheduled payments due on or prior to the Cut-off Date) will be deposited into
the Certificate Account no later than the second business day following the
Servicer's receipt thereof. Such payments shall include the following:
(1) all Obligor payments in respect of principal, including principal
prepayments, on the Contracts and Mortgage Loans;
(2) all Obligor payments in respect of interest on the Contracts and
Mortgage Loans, together with moneys transferred from any Buy-Down Fund or GPM
Fund;
(3) all Net Liquidation Proceeds received and retained in connection
with the liquidation or disposition of defaulted Contracts, Mortgage Loans or
property acquired in respect thereof through repossession, foreclosure or
otherwise;
(4) all proceeds received under any title, hazard or other insurance
policy covering any Contract or Mortgage Loan, other than proceeds received as
part of Liquidation Proceeds or such proceeds that are to be applied to the
restoration or repair of the related Manufactured Home or Mortgaged Property or
released to the Obligor;
53
<PAGE> 89
(5) any condemnation awards or settlements which are not released to
Obligors in accordance with normal servicing procedures;
(6) all amounts received from credit enhancement provided with respect
to a Series of Certificates;
(7) all proceeds of any Contract or Mortgage Loan (or property acquired
in respect thereof) that is repurchased by the related Seller or by a
terminating party as described above or under "The Pooling and Servicing
Agreements -- Termination" below; and
(8) all amounts, if any, required to be transferred to the Certificate
Account from a Reserve Fund pursuant to the Agreement.
In those cases where a Sub-servicer is servicing a Contract or Mortgage
Loan, the Sub-servicer will establish and maintain an Eligible Account (a
"Sub-servicing Account") that will comply with the standards set forth above for
the Certificate Account and which is otherwise acceptable to the Servicer. The
Sub-servicer is required to deposit into the Sub-servicing Account on a daily
basis all amounts enumerated in the preceding paragraph in respect of the
Contracts or Mortgage Loans as received by the Sub-servicer, less its servicing
compensation. On the date specified in the related Prospectus Supplement, the
Sub-servicer shall remit to the Servicer all funds held in the Sub-servicing
Account with respect to each related Contract or Mortgage Loan. The
Sub-servicer, to the extent described in the related Prospectus Supplement, may
be required to advance any monthly installment of principal and interest that
was not received, less its servicing fee, by the date specified in the related
Prospectus Supplement.
With respect to each Buy-Down Loan, the Servicer will deposit into a
custodial Eligible Account (which may be interest-bearing) complying with the
requirements set forth above for the Certificate Account (the "Buy-Down Fund")
an amount which, together with investment earnings thereon, will provide funds
sufficient to support the payments on such Buy-Down Loan on a level debt service
basis. The Servicer will not be obligated to supplement any Buy-Down Fund should
investment earnings prove insufficient to maintain the scheduled level of
payments on the Buy-Down Loans (in which event distributions to the
Certificateholders may be affected).
With respect to each GPM Loan, the Servicer will, if and to the extent
provided in the related Prospectus Supplement, deposit in a custodial Eligible
Account (which may be interest-bearing) complying with the requirements set
forth above for the Certificate Account (the "GPM Fund") an amount which,
together with investment earnings thereon, will provide funds sufficient to
support the payments thereon on a level debt service basis. The Servicer will
not be obligated to supplement any GPM Fund should investment earnings thereon
prove insufficient to maintain the scheduled level of payments (in which event
distributions to the Certificateholders may be affected).
Distributions on Certificates. On each Remittance Date, the Servicer
will withdraw from the applicable Certificate Account and remit to the Trustee
for deposit into the Distribution Account (1) all scheduled payments of
principal and interest due on the related Contracts and Mortgage Loans during
the related Collection Period and collected by the Servicer from the related
Obligors or otherwise and (2) all unscheduled collections in respect of
principal and interest on the Contracts and Mortgage Loans received during the
related Prepayment Period, in each case to the extent such collections comprise
part of the Available Distribution (as specified in the related Prospectus
Supplement) for the upcoming Remittance Date (collectively, the "Remittance
Amount"). In addition, on each Remittance Date, the Servicer shall remit to the
Trustee, for deposit into the Distribution Account, the amount of its required
P&I Advance and of any Compensating Interest required to be paid by the Servicer
for the upcoming Remittance Date. See " -- Advances" and " -- Compensating
Interest" below. The Remittance Date for any Remittance Date shall be the
business day preceding such Remittance Date.
The Available Distribution for any Series will be allocated among the
related Classes of Certificates in the proportion and order of application set
forth in the related Agreement and described in the related Prospectus
Supplement. Prior to each Remittance Date for a Series, the Servicer will
furnish to the Trustee a report setting forth
54
<PAGE> 90
certain information concerning the underlying Asset Pool and amounts to be
distributed on each related Class of Certificates.
ADVANCES
The Servicer shall not be required to make an Advance to the extent it
determines, in its reasonable judgment, that such Advance, if made, would not be
recoverable from late collections from the related Obligor or from Liquidation
Proceeds or other collections in respect of the related Contract or Mortgage
Loan (such an advance being referred to as a "Non-Recoverable Advance"). The
advance obligation of a Trustee or Pool Insurer may also be limited to an amount
specified by the Rating Agency or Agencies rating the Certificates. Otherwise,
the Servicer will be required to advance funds to cover (1) delinquent payments
of principal and interest on related Contracts and Mortgage Loans ("P&I
Advances") and (2) to the extent specified in the related Prospectus Supplement,
delinquent payments of taxes, insurance premiums and escrowed items in respect
of related Contracts and Mortgage Loans and liquidation-related expenses
("Servicing Advances," and together with P&I Advances, "Advances"). The failure
of the Servicer to make any required Advances under an Agreement constitutes a
default under such Agreement for which the Servicer may be terminated. Upon a
default by the Servicer, the Trustee (as substitute Servicer) may, if so
provided in the related Agreement, be required to make Advances, provided that,
in its reasonable discretion, it deems such Advances not to be Non-Recoverable
Advances. With respect to certain Assets, the Company may obtain an endorsement
to an applicable Pool Insurance Policy which obligates the Pool Insurer to
advance delinquent payments of principal and interest. The Pool Insurer would
only be obligated under such endorsement to the extent the Obligor fails to make
such payment and the Servicer fails to make a required Advance. The Servicer may
agree to reimburse the Pool Insurer for any sums the Pool Insurer pays under
such endorsement.
Any P&I Advances by the Servicer, the Trustee or a Pool Insurer, as the
case may be, must be deposited into the applicable Certificate Account or into
the Distribution Account and will be due not later than the Remittance Date to
which such delinquent payment relates. Any Advance made by the Servicer or the
Trustee or a Pool Insurer, as the case may be, will be reimbursable out of
future collections in respect of the particular Contract or Mortgage Loan in
respect of which the Advance was made (including collections of or from
Insurance Proceeds, Additional Assets or Liquidation Proceeds relating to such
Contract or Mortgage Loan) ("Related Proceeds"). If an Advance made by the
Servicer or a Trustee or a Pool Insurer later proves to be unrecoverable from
Related Proceeds, the Servicer or the Trustee or Pool Insurer, as the case may
be, will be entitled to reimbursement from funds in the Certificate Account or
Distribution Account prior to the disbursement of distributions to the
Certificateholders.
Any P&I Advances with respect to Contracts or Mortgage Loans included
in the Trust for any Series are intended to enable the Trustee to make timely
payment of the scheduled distributions of principal and interest on the
Certificates of such Series. However, neither the Servicer nor the Trustee nor
any Pool Insurer will insure or guarantee the Certificates of any Series or the
Contracts or Mortgage Loans included in the Trust for any Series.
COMPENSATING INTEREST
To the extent provided in a Prospectus Supplement, if a Contract or
Mortgage Loan is prepaid in full or liquidated other than on a Due Date, the
Obligor generally is only required to pay interest to the date of prepayment or
liquidation. In such event, for so long as BCI is the Servicer of the related
Asset, the Servicer may be obligated to pay interest from the last day for which
interest is due from the Obligor to the next Due Date, so long as such amount
does not exceed the Servicer's servicing compensation for such month
("Compensating Interest").
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES
Standard Hazard Insurance. The Servicer will cause to be maintained for
each Asset underlying a Series, or use its best reasonable efforts to cause each
Sub-servicer to cause to be maintained for each such Asset, a Standard Hazard
Insurance Policy providing coverage in an amount at least equal to the lesser of
(a) 100% of the replacement
55
<PAGE> 91
value of the related Manufactured Home or Mortgaged Property or (b) the
outstanding principal balance of such Contract or Mortgage Loan. The Servicer
also shall maintain on any Manufactured Home acquired by repossession or on any
Real Property or Mortgaged Property acquired through foreclosure or deed in lieu
of foreclosure of any Mortgage Loan, a Standard Hazard Insurance Policy in an
amount that is at least equal to the lesser of the Unpaid Principal Balance of
the defaulted Contract or Mortgage Loan or the maximum insurable value of the
Manufactured Home or Mortgaged Property. To the extent permitted by applicable
law and if so specified in the related Prospectus Supplement, the Servicer may
require Obligors on Contracts or Mortgage Loans secured by Manufactured Homes,
Real Properties or Mortgaged Properties located in California to maintain
earthquake insurance on their Manufactured Homes, Real Properties or Mortgaged
Properties. Otherwise, no earthquake or other additional insurance is to be
required of any Obligor or maintained on property acquired in respect of a
Contract or Mortgage Loan, other than as required by applicable laws and
regulations. If, at the time of origination of a Contract or Mortgage Loan, the
related Manufactured Home or Mortgaged Property is located in a federally
designated special flood hazard area, the Servicer will cause to be maintained,
or to use its best reasonable efforts to cause the related Sub-servicer to cause
to be maintained, flood insurance, limited, under certain circumstances, to
availability under the National Flood Insurance Act of 1968, as amended. In the
event that an Asset is covered by a blanket policy providing coverage against
losses incurred on Assets as a result of the absence or insufficiency of
individual Standard Hazard Insurance Policies, the Servicer will be deemed
conclusively to have satisfied its obligations to cause to be maintained a
Standard Hazard Insurance Policy for such Asset. This blanket policy may contain
a deductible clause, in which case the Servicer will, in the event that there
has been a loss that would have been covered by such policy absent such
deductible clause, deposit in the Certificate Account the amount not otherwise
payable under the blanket policy because of the application of such deductible
clause.
Any amounts collected by the Servicer under any such policies (other
than amounts to be applied to the restoration or repair of the related
Manufactured Home or Mortgaged Property or released to the Obligor in accordance
with normal servicing procedures) shall be deposited into the Certificate
Account.
Other Insurance. To the extent specified in the related Prospectus
Supplement, the Servicer will maintain a Primary Mortgage Insurance Policy on
any Conventional Mortgage Loan with an initial Mortgage Loan-to-Value Ratio in
excess of 80% unless the conditions for waiver of such insurance by the Servicer
are met. See "The Trusts -- Insurance -- Credit Insurance -- Primary Mortgage
Insurance" herein.
The Servicer will be required to maintain any Special Hazard Insurance
Policy, any Obligor Bankruptcy Insurance and any Pool Insurance Policy for any
Series in full force and effect throughout the term of the related Trust,
subject to payment of the applicable premiums by the Trustee. The Servicer will
be required to notify the Trustee to pay from amounts in the Trust Estate the
premiums for any such Special Hazard Insurance Policy, any such Obligor
Bankruptcy Insurance and any such Pool Insurance Policy for such Series on a
timely basis. Any such premiums may be payable on a monthly basis in advance, or
pursuant to any other payment schedule acceptable to the applicable insurer. In
the event that the Special Hazard Insurance Policy, Obligor Bankruptcy Insurance
or Pool Insurance Policy for a Series is canceled or terminated for any reason
(other than the exhaustion of total policy coverage), the Servicer will be
obligated to obtain from another insurer a comparable replacement policy with a
total coverage which is equal to the remaining coverage (or a lesser amount if
the Servicer confirms in writing with each Rating Agency rating any Certificates
of such Series that such lesser amount will not impair the rating on such
Certificates) provided by the canceled or terminated Special Hazard Insurance
Policy, Obligor Bankruptcy Insurance or Pool Insurance Policy. However, if the
cost of any such replacement policy or bond is greater than the cost of the
policy or bond which has been terminated, then the amount of the coverage will
be reduced to a level such that the applicable premium will not exceed the cost
of the premium for the policy or bond that was terminated.
Presentation of Claims. The Servicer, on behalf of itself, the Trustee
and the Certificateholders, will present claims to the issuer of each insurance
policy described herein (including the FHA and the VA), and will take such
reasonable steps as are necessary to permit recovery under such insurance
policies respecting defaulted Contracts or Mortgage Loans that are the subject
of bankruptcy proceedings. As set forth above, all collections by the Servicer
under
56
<PAGE> 92
any insurance policy are to be deposited into the Certificate Account for he
related Series and are subject to withdrawal as described above. With respect to
a Mortgage Loan or Contract that is serviced by a Sub-servicer, the
Sub-servicer, on behalf of itself, the Trustee and the Certificateholders will
present claims to the applicable insurer, and all collections shall be deposited
into the applicable Sub-servicing Account for deposit into the Certificate
Account.
If any property securing a defaulted Contract or Mortgage Loan is
damaged and proceeds, if any, from the related Standard Hazard Insurance Policy
or the applicable Special Hazard Insurance Policy are insufficient to restore
the damaged property to a condition sufficient to permit recovery under any Pool
Insurance Policy or any Primary Mortgage Insurance Policy, any FHA insurance or
any VA guarantee, as the case may be, the Servicer is not required to expend its
own funds to restore the damaged property unless it determines (1) that such
restoration will increase the proceeds to the Certificateholders upon
liquidation of the Contract or Mortgage Loan after reimbursement of the expenses
incurred by the Servicer and (2) that such expenses will be recoverable by it
through proceeds of the sale of the property or proceeds of the related Pool
Insurance Policy or any related Primary Mortgage Insurance Policy, any FHA
insurance, or any VA guarantee, as the case may be.
If, in respect of any defaulted Contract or Mortgage Loan, recovery
under any related Pool Insurance Policy or any related Primary Mortgage
Insurance Policy, any FHA insurance, or any VA guarantee, as the case may be, is
not available, the Servicer nevertheless is obligated to follow such normal
practices and procedures as it deems necessary or advisable to liquidate the
collateral for the defaulted Contract or Mortgage Loan. If the proceeds of any
liquidation of the related Manufactured Home or Mortgaged Property are less than
the principal balance of the defaulted Contract or Mortgage Loan plus interest
accrued thereon at the applicable Asset Rate, the related Trust will realize a
loss in the amount of such difference plus the aggregate of expenses incurred by
the Servicer in connection with such proceedings.
Alternate Credit Enhancement. To the extent provided in a Prospectus
Supplement, the Company, the Servicer or another party, from time to time, may
be required to obtain or cause to be obtained an insurance policy, guarantee,
letter of credit, surety bond, derivative products or other forms of credit
enhancement or any combinations thereof (or make deposits in lieu thereof) to
enhance the credit rating of the related Series of Certificates.
Servicing Compensation and Payment of Expenses. As compensation for its
servicing duties in respect of any Series, the Servicer will be entitled to the
Servicing Fee specified in a particular Prospectus Supplement. In addition, the
Servicer may be entitled to servicing compensation in the form of assumption
fees, late payment charges or otherwise, which fees or charges shall be retained
by the Servicer to the extent not required to be deposited into the related
Certificate Account.
The Servicer will pay from its servicing compensation certain expenses
incurred in connection with the servicing of the Contracts and Mortgage Loans
included in a Trust Estate, including, without limitation, payment of the fees
and expenses of the Trustee, payment of related insurance policy premiums (other
than premiums for Standard Hazard Insurance Policies or Primary Mortgage
Insurance Policies) and payment of expenses incurred in enforcing the
obligations of any Sub-servicers. Certain of these expenses may be reimbursable
from Liquidation Proceeds and proceeds of Pool Insurance and from specific
recoveries of costs.
The Servicer will be entitled to reimbursement for certain expenses
incurred by it in connection with the liquidation of defaulted Contracts or
Mortgage Loans. The related Trust will suffer no loss by reason of such expenses
to the extent claims are paid under the related Pool Insurance Policies, if any.
If no Pool Insurance Policy is in effect for the Series, or if claims are either
not made or paid under the related Pool Insurance Policies or coverage
thereunder has been terminated or canceled, the related Trust will suffer a loss
to the extent that the Liquidation Proceeds of a defaulted Asset, after
reimbursement of the Servicer's related expenses, are less than the principal
balance of the Asset plus accrued interest thereon at the related Asset Rate. In
addition, the Servicer will be entitled to reimbursement of expenditures
incurred by it in connection with the restoration of any Manufactured Home or
Mortgaged Property, such right of reimbursement being prior to the rights of the
related Certificateholders to receive any related Pool Insurance proceeds or
Liquidation Proceeds.
57
<PAGE> 93
Evidence as to Compliance. With respect to each Series of Certificates,
the Servicer will deliver each year to the Trustee an officer's certificate
stating that (i) a review of the activities of the Servicer and any
Sub-servicers during the preceding calendar year and of the Servicer's
performance under the related Agreement has been made under the supervision of
such officer, and (ii) to the best of such officer's knowledge, the Servicer has
fulfilled all its obligations under the Agreement throughout such year, and, to
the best of such officer's knowledge, based on such review, each Sub-servicer
has fulfilled its obligations throughout such year, or, if there has been a
default in the fulfillment of any such obligation, specifying each such default
known to such officer and the nature and status thereof. Such officer's
certificate shall be accompanied by a statement by a firm of independent public
accountants to the effect that (1) such firm has audited the financial
statements of the Servicer for the Servicer's most recently ended fiscal year
and issued its report thereon; (2) such audit included tests of the records and
documents relating to manufactured housing installment sale contracts and
mortgage loans serviced by the Servicer for others in accordance with the
requirements of the Uniform Single Attestation Program for Mortgage Bankers, or
any successor program promulgated by the accounting profession ("USAP"); and (3)
such other statements as are contemplated under USAP, including, if called for
under USAP, a statement as to whether the Servicer's management's written
assertion to such firm (which shall be attached to the statement of such firm)
that its servicing during the applicable fiscal year complied with USAP's
minimum servicing standards in all material respects is fairly stated in all
material respects. The audit tests referred to in clause (2) of the preceding
sentence in respect of any Series shall be applied to manufactured housing
installment sale contracts and mortgage loans serviced under the related
Agreement and/or, in the sole discretion of such firm, manufactured housing
installment sale contracts and mortgage loans serviced under pooling and
servicing agreements, trust agreements or indentures substantially similar to
such Agreement (hereinafter referred to as "Pooling Agreements"). For purposes
of such statement, such firm may assume conclusively that all Pooling Agreements
under which the Servicer is the servicer of manufactured housing installment
sale contracts and mortgage loans for a trustee relating to certificates
evidencing an interest in manufactured housing installment sale contracts and
mortgage loans are substantially similar to one another except for any such
Pooling Agreement which by its terms specifically states otherwise.
58
<PAGE> 94
THE POOLING AND SERVICING AGREEMENTS
The following summaries describe certain provisions of each Agreements.
Although the Company believes that the foregoing is a fair summary of the
material terms of the Agreement, the summaries do not purport to be complete and
are subject to, and qualified in their entirety by reference to, the provisions
of the Agreement for each Series. When particular provisions or terms used in an
Agreement are referred to, the actual provisions (including definitions of
terms) are incorporated by reference as part of such summaries.
THE SERVICER
The Servicer shall not resign from the obligations and duties imposed
on it under an Agreement, except (1) upon appointment of a successor servicer
and receipt by the Trustee of a letter from each applicable Rating Agency that
the Servicer's resignation and the appointment of the successor will not, in and
of itself, result in a downgrading of any rated Certificates of the affected
Series or (2) upon determination by the Servicer's Board of Directors that the
performance of its duties under the Agreement are no longer permissible under
applicable law. No such resignation shall become effective until the Trustee or
a successor servicer shall have assumed the responsibilities and obligations of
the Servicer in accordance with the applicable Agreement.
Neither the Servicer nor any of its directors, officers, employees or
agents shall be under any liability to the Trust or the Certificateholders, and
all such Persons shall be held harmless, for any action taken or not taken in
good faith pursuant to each Agreement, or for errors in judgment; provided,
however, that no such Person shall be protected from liability (1) for actions
or omissions resulting from willful misfeasance, bad faith or gross negligence
in the performance of such Person's duties or by reason of reckless disregard of
such Person's obligations and duties under the Agreement or (2) for breaches of
representations or warranties made by such Person in the Agreement. The Servicer
and any of the directors, officers, employees or agents of the Servicer may rely
in good faith on any document of any kind which, prima facie, is properly
executed and submitted by any Person respecting any matters arising under an
Agreement. The Servicer shall be under no obligation to appear in, prosecute or
defend any legal action unless such action is related to its duties under an
Agreement and such action in its opinion does not involve it in any expense or
liability, except as otherwise explicitly provided in the Agreement; provided,
however, that the Servicer may in its discretion undertake any such action that
it deems necessary or desirable with respect to an Agreement if the
Certificateholders offer to the Servicer reasonable security or indemnity
against the costs, expenses and liabilities that may be incurred therein or
thereby.
THE TRUSTEE
The Prospectus Supplement for a Series of Certificates will specify the
Trustee for that Series. The Trustee for a Series may resign at any time, in
which event the Company will be obligated to attempt to appoint a successor
Trustee. The Company may remove a Trustee if the Trustee ceases to be eligible
to continue as Trustee under the applicable Agreement or upon the occurrence of
certain bankruptcy- or insolvency-related events with respect to the Trustee.
The Trustee for a Series will also be subject to removal at any time by the
holders of Certificates of such Series evidencing at least 51% of the Voting
Rights of such of Series, as specified in the related Agreement. If the
Certificateholders remove the Trustee other than for reasonable cause based upon
the Trustee's failure to continue to meet the eligibility requirements set forth
in the related Agreement or the Trustee's failure to perform its duties as
described therein, then the Certificateholders so removing the Trustee shall
bear any and all costs and expenses arising from such removal and substitution.
Any resignation or removal of the Trustee and appointment of a successor Trustee
will not become effective until acceptance by the Company of the appointment of
the successor Trustee.
A Trustee must be a corporation or a national banking association
organized under the laws of the United States or any state and authorized under
the laws of the jurisdiction in which it is organized to have corporate trust
powers. It must also have combined capital and surplus of at least $50,000,000
(or be a Qualified Bank) and be subject to regulation and examination by state
or federal regulatory authorities. Although a Trustee may not be an affiliate of
the
59
<PAGE> 95
Company or the Servicer, either the Company or the Servicer may maintain normal
banking relations with the Trustee if the Trustee is a depository institution.
REPORTS TO CERTIFICATEHOLDERS
The Trustee for a Series will furnish the related Certificateholders
with monthly statements prepared by the Servicer (each a "Remittance Report")
containing information with respect to principal and interest distributions and
Realized Losses for such Series and the assets of the related Trust. Any
financial information contained in such reports will not have been examined or
reported upon by an independent public accountant. Copies of such monthly
statements and any annual reports prepared by the Servicer evidencing the status
of its compliance with the provisions of an Agreement will be furnished to
related Certificateholders upon request addressed to the Trustee.
A Remittance Report for a Remittance Date in respect of any Series of
Certificates will identify the following items:
(1) the related Available Distribution for such Remittance Date;
(2) the amount of interest distributable on such Remittance Date on
each Class of the Certificates of such Series, and the amount of interest to be
distributed on each such Class based upon the Available Distribution for such
Remittance Date;
(3) the amount to be distributed on such Remittance Date on each Class
of the Certificates of such Series to be applied to reduce the Certificate
Balance of such Class, separately identifying any portion of such amount
attributable to prepayments;
(4) any other amounts to be distributed on the Certificates of such
Series (to the extent not covered by clauses (2) and (3) above);
(5) the aggregate amount of P&I Advances required to be made by the
related Servicer with respect to such Remittance Date in connection with the
related Asset Pool;
(6) the amount of any Realized Losses to be allocated to reduce the
Certificate Balance of any Class of the Certificates of such Series on such
Remittance Date;
(7) the Certificate Balance of each Class of the Certificates of such
Series after giving effect to the distributions and allocations of any Realized
Losses to be made on such Remittance Date;
(8) the amount of Due Date Interest Shortfall, Soldiers' and Sailors'
Shortfall and Realized Interest Loss, in each case if any, incurred during the
related Collection Period on the related Assets;
(9) the aggregate interest remaining unpaid, if any, for each Class of
the Certificates of such Series (exclusive of Unpaid Interest Amount allocated
to such Class), after giving effect to the distribution made on such Remittance
Date;
(10) the aggregate amount of withdrawals, if any, from any Reserve Fund
or any other form of credit enhancement, and the amount, if any, available
thereunder;
(11) the amount of the Servicing Fee in respect of such Remittance
Date;
(12) the aggregate number and the aggregate of the Unpaid Principal
Balances of outstanding Contracts and outstanding Mortgage Loans, stated
separately, that are (i) delinquent one month (i.e., 30 to 59 days) as of the
end
60
<PAGE> 96
of the related Prepayment Period, (ii) delinquent two months (i.e., 60 to 89
days) as of the end of the related Prepayment Period, (iii) delinquent three
months (i.e., 90 days or longer) as of the end of the related Prepayment Period
and (iv) as to which repossession, foreclosure or other comparable proceedings
have been commenced as of the end of the related Prepayment Period; and
(13) in the case of a Trust (or designated assets thereof) for which a
REMIC election has been or will be made, any other information required to be
provided to Certificateholders by the REMIC Provisions.
In the case of information furnished pursuant to clauses (2), (3) and (4) above,
the amounts shall be expressed, with respect to any Certificate, as a dollar
amount per $1,000 denomination; provided, however, that if any Class of
Certificates does not have a Certificate Balance, then the amounts shall be
expressed as a dollar amount per 10% Percentage Interest.
EVENTS OF DEFAULT
Events of Default by the Servicer under any Agreement will include (1)
any failure by the Servicer to remit funds to the Distribution Account as
required by the applicable Agreement, which failure continues unremedied for
five days (or such other period specified in the related Agreement) after the
date upon which such remittance was due; (2) any failure or breach by the
Servicer duly to observe or perform in any material respect any other of its
covenants or agreements that materially and adversely affects the interests of
Certificateholders, which, in either case, continues unremedied for 60 days
after the giving of written notice of such failure or breach to the Servicer by
the related Trustee or by the Holders of Certificates evidencing at least 25% of
the Voting Rights for the applicable Series; and (3) certain events involving
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings regarding the Servicer.
So long as an Event of Default remains unremedied, the Trustee may,
and, at the written direction of the Certificateholders of the applicable Series
evidencing greater than 50% of the Voting Rights for such Series, shall,
terminate all of the rights and obligations of the Servicer under the related
Agreement and in and to the related Contracts and Mortgage Loans and the
proceeds thereof, whereupon (subject to applicable law regarding the Trustee's
ability to make advances) the related Trustee or a successor Servicer will
succeed to all the responsibilities, duties and liabilities of the terminated
Servicer under the Agreement and such successor Servicer will be entitled to
similar compensation arrangements to those provided for the terminated Servicer.
In the event that the Trustee would be obligated to succeed the Servicer but is
unwilling or unable to do so, it may appoint, or petition a court of competent
jurisdiction for the appointment of, a successor Servicer meeting the criteria
set forth in the related Agreement. Pending such appointment, the Trustee is
obligated to act as successor Servicer unless prohibited by law from doing so.
The Trustee and such successor Servicer may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
paid to the terminated Servicer under the Agreement.
CERTIFICATEHOLDER RIGHTS
No Certificateholder will have any right under the related Agreement to
institute any proceeding with respect to such Agreement unless such holder
previously has provided the Trustee with written notice of a default thereunder
and unless the holders of Certificates evidencing at least 25% of the Voting
Rights for the applicable Series (a) requested the Trustee in writing to
institute such proceeding in its own name as Trustee and (b) have offered to the
Trustee reasonable indemnity and the Trustee for 15 days has neglected or
refused to institute any such proceeding. The Trustee will be under no
obligation to take any action or to institute, conduct or defend any litigation
under the related Agreement at the request, order or direction of any of the
holders of Certificates, unless such Certificateholders have offered to the
Trustee reasonable security or indemnity against the costs, expenses and
liabilities which the Trustee may incur.
AMENDMENT
61
<PAGE> 97
An Agreement may be amended by the Company, the Servicer, and the
related Trustee without the consent of the related Certificateholders, (1) to
cure any ambiguity therein; (2) to correct or supplement any provision therein
that may be inconsistent with any other provision therein; (3) to maintain the
REMIC status of the Trust and to avoid the imposition of certain taxes on any
related REMIC (if applicable); or (4) to make any other provisions with respect
to matters or questions arising under such Agreement that are not covered by
such Agreement, provided that such action will not adversely affect in any
material respect the interests any holder of Certificates of the related Series,
as evidenced by (A) an opinion of counsel independent of the Company, the
Servicer and the Trustee or (B) a letter from each Rating Agency from whom the
Company requested a rating of any of the Certificates of such Series stating
that the proposed amendment will not result in a downgrading of the rating of
any of the Certificates of such Series rated by such Rating Agency. An Agreement
may also be amended by the Company, the Servicer and the related Trustee with
the consent of the related Certificateholders evidencing a majority of the
Voting Rights of each affected Class for the purpose of adding any provisions
to, or for the purpose of eliminating any provisions from, or for the purpose of
changing in any manner any of the provisions of, such Agreement, or for the
purpose of modifying in any manner the rights of the Certificateholders;
provided, however, that no such amendment that (a) reduces in any manner the
amount of, or delays the timing of, any payment received on or with respect to
Contracts or Mortgage Loans which are required to be distributed on any
Certificate; (b) otherwise materially adversely affects the rights of any
Certificateholder; or (c) reduces the percentage of Certificateholders required
to consent to any amendment of the related Agreement, may be effective without
the consent of the holder of each such Certificate.
TERMINATION
The obligations created by each Agreement will terminate upon the date
calculated as specified in the Agreement, generally upon (1) the later of the
final payment or other liquidation of the last Contract or Mortgage Loan subject
thereto and the disposition of all property acquired upon repossession of any
Manufactured Home or foreclosure of (or other realization on) any Mortgage Loan
and (2) the payment to the related Certificateholders of all amounts held by the
Servicer or the Trustee and required to be paid to them pursuant to the
Agreement. In addition, (1) subject to the specifications in the related
Prospectus Supplement, a Trust may be subject to early termination at the option
of the Company, the Servicer or the holders of a majority in interest of any
related Residual Certificates and (2) if so specified in the related Prospectus
Supplement, the Certificates of a Series shall be subject to redemption by the
Company, the Servicer or any other party specified in the related Prospectus
Supplement, as described more fully herein under "Description of the
Certificates --Optional Redemption or Termination."
CERTAIN LEGAL ASPECTS OF CONTRACTS AND MORTGAGE LOANS
The following discussion contains general summaries of certain legal
aspects of manufactured housing installment sales contracts and mortgage loans.
Because such legal aspects are governed by applicable state law (which laws may
differ substantially from state to state), the summaries do not purport to be
complete or to reflect the laws of any particular state, or to encompass the
laws of all states in which the security for the Contracts or Mortgage Loans is
situated. The summaries are qualified in their entirety by reference to the
applicable federal and state laws governing the Contracts and Mortgage Loans.
Contracts differ from Mortgage Loans in certain material respects. In
general, Contracts may experience a higher level of delinquencies than Mortgage
Loans, because the credit underwriting standards applied to borrowers under
manufactured housing installment sales contracts generally are not as stringent
as those applied to borrowers under many conventional residential first-lien
mortgage loans. See "The Manufactured Housing Program -- Contract Underwriting
Guidelines" herein. In addition, Manufactured Homes generally decline in value
over time, which may not necessarily be the case with respect to the Mortgaged
Properties underlying Mortgage Loans. Consequently, the losses incurred upon
repossession of or foreclosure on Manufactured Homes securing the Contracts may
be expected to be more severe in many cases than the losses that would be
incurred upon foreclosure on Mortgaged Properties securing Mortgage Loans (in
each case measured as a percentage of the outstanding principal balances of the
related Assets). The servicing of manufactured housing installment sales
contracts is generally similar to the servicing of
62
<PAGE> 98
conventional residential mortgage loans, except that, in general, servicers of
manufactured housing installment sales contracts place greater emphasis on
making prompt telephone contact with delinquent borrowers than is generally
customary in the case of the servicing of conventional residential mortgage
loans. See "Sale and Servicing of Contracts and Mortgage Loans -- Servicing"
herein. Realization on defaulted Contracts is generally accomplished through
repossession and subsequent resale of the underlying Manufactured Homes by or on
behalf of the Servicer, as described below under " -- The Contracts," whereas
realization on defaulted Mortgage Loans is generally accomplished through
foreclosure on the underlying Mortgaged Properties or similar proceedings, as
described below under " -- The Mortgage Loans." Realization on defaulted Land
Secured Contracts may involve a combination of repossession and
foreclosure-related procedures. See " -- The Contracts" below. Certificates
evidencing interests in Contracts may also be subject to other risks that are
not present in the case of Certificates evidencing interests in Mortgage Loans.
See "Risk Factors -- 3. Security Interests in Manufactured Homes," " -- 4.
Conveyance of Contracts," and " -- 5. Lender Regulations" herein.
THE CONTRACTS
General. As a result of the assignment of the Contracts underlying a
Series to the related Trustee, the related Trust will succeed to all of the
rights (including the right to receive payments on the Contracts), and will
assume the obligations, of the obligee under the Contracts. Each Contract
evidences both (1) the obligation of the Obligor to repay the loan evidenced
thereby, and (2) the grant of a security interest in the related Manufactured
Home to secure repayment of such loan. Certain aspects of both features of the
Contracts are described more fully below.
The Contracts generally are "chattel paper" as defined in the Uniform
Commercial Code (the "UCC") in effect in the states in which the Manufactured
Homes initially were located. Pursuant to the UCC, the sale of chattel paper is
treated in a manner similar to perfection of a security interest in chattel
paper. Under the Agreement, the Servicer will retain possession of the Contracts
as custodian for the Trustee. Because the Servicer is not relinquishing
possession of the Contracts, the Servicer will file a UCC-1 financing statement
in the appropriate recording offices in the State of Vermont and the State of
Florida as necessary to perfect the Trustee's ownership interest in the
Contracts. Notwithstanding such filings, if, through negligence, fraud or
otherwise, a subsequent purchaser from the Company or from a predecessor owner
of the Contracts were able to take physical possession of the Contracts without
notice of the assignment of the Contracts to the Trustee, the Trustee's interest
in Contracts could be subordinated to the interest of such purchaser. To provide
a measure of protection against this possibility, within ten days after the
Closing Date, the Contracts will be stamped or marked otherwise to reflect their
assignment from the Company to the Trustee.
Security Interests in the Manufactured Homes. The Manufactured Homes
securing the Contracts may be located in any or all of the 50 states and the
District of Columbia. The manner in which liens on Manufactured Homes are
"perfected" is governed by applicable state law. In many states ("Title
States"), a lien on a manufactured home may be "perfected" under applicable
motor vehicle titling statutes by notation of the secured party's lien on the
related certificate of title or by delivery of certain required documents and
payment of a fee to the state motor vehicle authority to re-register the home,
depending upon applicable state law. In some states ("UCC States"), perfection
of a lien on a manufactured home is accomplished pursuant to the provisions of
the applicable UCC by filing UCC-1 financing statements or other appropriate
transfer instruments with all appropriate UCC filing offices. Some states are
both Title States and UCC States. The Company will cause the security interests
created by the Contracts in the related Manufactured Homes to be assigned to the
Trustee on behalf of the Certificateholders. However, because of the expense and
administrative inconvenience involved, neither BCI nor any other Seller are
expected to amend any certificate of title to change the lienholder specified
therein from BCI or such Seller to the Trustee, deliver any documents or pay
fees to re-register any Manufactured Home, or file any UCC transfer instruments,
and neither BCI nor such Seller will deliver any certificate of title to the
Trustee or note thereon the Trustee's interest. In some states, simple
assignment of the security interest created by a Contract in the related
Manufactured Home constitutes an effective conveyance of such security interest
without amendment of any lien noted on the related certificate of title,
re-registration of the underlying home, or filing of any statement under the
applicable UCC, and the assignee succeeds to the seller's rights as the secured
party as to such Manufactured Home. In other states, however, the law is unclear
whether a security interest in a
63
<PAGE> 99
Manufactured Home is effectively assigned in the absence of an amendment to a
certificate of title, re-registration of the underlying home, or the filing of
an appropriate UCC transfer instrument, as appropriate under applicable state
law. In such event, the assignment of the security interest created by a
Contract in the related Manufactured Home may not be effective against creditors
of the Company or the Seller or a trustee in bankruptcy of the Company or the
Seller.
In recent years, manufactured homes have become increasingly large and
often are attached to their sites, without appearing to be readily mobile.
Perhaps in response to these trends, courts in many states have held that
manufactured homes, under certain circumstances, are subject to real estate
title and recording laws. As a result, a security interest created by an
installment sales contract in a manufactured home located in such a state 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 applicable UCC or a real estate mortgage, deed of trust, deed to secure
debt or security deed, as appropriate under the real estate laws of the state in
which the related home is located (any of the foregoing, a "Mortgage"). These
filings must be made in the real estate records office of the jurisdiction in
which the home is located. Neither BCI nor any other Seller will be required to
make fixture filings or to file Mortgages with respect to any of the
Manufactured Homes (except in the case of Land Secured Contracts, as described
below). Consequently, if a Manufactured Home is deemed subject to real estate
title or recording laws because the owner attaches it to its site or otherwise,
the Trustee's interest therein may be subordinated to the interests of others
that may claim an interest therein under applicable real estate laws.
The Trustee's security interest in a Manufactured Home would be
subordinate to, among others, subsequent purchasers for value of the
Manufactured Home and holders of perfected security interests therein, in either
case without notice of the Trustee's adverse interest in such home. In the
absence of fraud, forgery or 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 BCI (or another Seller) on the related
certificate of title or delivery of the required documents and fees necessary to
register the home in the name of BCI (or the other Seller) or the public filing
of appropriate transfer instruments reflecting the lien of BCI (or another
Seller), in each case as required under applicable state law, will be sufficient
to protect the Certificateholders against the rights of subsequent purchasers of
a Manufactured Home or subsequent lenders who take a security interest in the
Manufactured Home from anyone other than the entity whose lien is perfected
under state law (be it BCI or another Seller), because they will be on notice of
the interest in the home held by such entity.
Certain of the Contracts ("Land Secured Contracts") will be secured by
real estate as well as a Manufactured Home. The Seller will cause the liens
created by the Land Secured Contracts on the related real estate to be assigned
to the Trustee. The Contract File for each Land Secured Contract will be
required to include an original or a certified copy of the recorded Mortgage
relating to such Contract, together with originals or certified copies of a
chain of recorded assignments of such Mortgage sufficient to reflect the Seller
as the record holder of such Mortgage and the lien it evidences on the related
real estate. Assignments in recordable form for such Mortgages naming the
Trustee as assignee will not be prepared by the Servicer or any Seller. However,
the Seller will deliver to the Trustee a power of attorney entitling the Trustee
to prepare, execute and record such assignments of Mortgages, in the event that
recordation thereof becomes necessary to enable the Servicer to foreclose on the
related real property.
Under the laws of most states, in the event that a manufactured home is
moved to a state other than the state in which it initially is registered, any
perfected security interest in such home would continue automatically for four
months after such relocation, during which time the security interest must be
re-perfected in the new state in order to remain perfected after such four-month
period. Generally, a security interest in such a manufactured home may be
re-perfected after the expiration of such four-month period, but, for the period
between the end of such four-month period and the date of such re-perfection,
the security interest would be unperfected.
If a Manufactured Home is moved to a UCC State, an appropriate UCC
financing statement generally would have to be filed in such state within the
four-month period after the move in order for the Seller's security interest in
the
64
<PAGE> 100
Manufactured Home to remain perfected continuously. If a Manufactured
Home is moved to a Title State, re-perfection of a security interest in such
home generally would be accomplished by registering the Manufactured Home with
the Title State's motor vehicle authority. In the ordinary course of servicing
its portfolio of manufactured housing installment sales contracts, the Servicer
takes steps to re-perfect its security interests in the related manufactured
homes upon its receipt of notice of registration of such home in a new state
(which it should receive by virtue of the notation of its lien on the original
certificate of title, if the home is moved from a Title State to a Title State)
or of information from a related borrower as to relocation of such home. In some
Title States, the certificate of title to a Manufactured Home (which is required
to be in the Servicer's possession) must be surrendered before the home could be
re-registered; in such states an Obligor could not re-register a Manufactured
Home to a transferee without the Servicer's assistance. In other Title States,
when an Obligor under a Contract sells the related Manufactured Home (if it is
located in a Title State both before and after the sale), the Seller should at
least receive notice of any attempted re-registration thereof because its lien
is noted on the related certificate of title and accordingly should have the
opportunity to require satisfaction of the related Contract before releasing its
lien on the home. If the motor vehicle authority of a Title State to which a
Manufactured Home is relocated or in which a Manufactured Home is located when
it is transferred registers such Manufactured Home in the name of the owner
thereof or such owner's transferee without noting the Seller's lien on the
related certificate of title, whether because (1) such state did not require the
owner to surrender the certificate of title issued prior to the transfer or
issued by the Title State from which such home was moved or failed to notify the
Seller of re-registration and failed to note the Seller's lien on the new
certificate of title issued upon re-registration or (2) such Manufactured Home
was moved from a state that is not a Title State, such re-registration could
defeat the perfection of the Seller's lien in the Manufactured Home. In
addition, re-registration of a Manufactured Home (whether due to a transfer or
relocation thereof) in a state, such as a UCC State, which does not require a
certificate of title for registration of a Manufactured Home, could defeat
perfection of the Seller's lien thereon.
The Seller will be required to report to the Servicer any notice it
receives of any re-registration of a Manufactured Home. Under the Agreement, the
Servicer is obligated to take all necessary steps, at its own expense, to
maintain perfection of the Trustee's security interests in the Manufactured
Homes, to the extent it receives notice of relocation, sale or re-registration
thereof (provided that, as long as BCI remains the Servicer, the Servicer will
not be required to cause notations to be made on any certificate of title or to
execute any instrument relating to any Manufactured Home (other than a notation
or a transfer instrument necessary to show BCI (or another Seller if
applicable)) as the lienholder or legal titleholder). However, the Servicer has
no independent obligation to monitor the status of the Seller's lien on any
Manufactured Home.
Under the laws of most states, liens for repairs performed on a
manufactured home and for property taxes on a manufactured home take priority
even over a prior perfected security interest. Such liens could arise at any
time during the term of a Contract. No notice will be given to the Trustee or
Certificateholders in the event such a lien arises.
Enforcement of Security Interests in Manufactured Homes. The 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
defaulted Contracts. So long as the manufactured home has not become subject to
the real estate laws of a state, a creditor is entitled, in most states, to
repossess a manufactured home through the voluntary surrender thereof, by
"self-help" repossession that is "peaceful" (i.e., not including any breach of
the peace) or, if the creditor is unable to repossess through either of the
foregoing means, by judicial process. The holder of a Contract must give the
debtor a number of days' notice, which varies depending on the state (usually
ranging from 10 to 30 days depending on applicable state law), prior to
commencement of any repossession action. The UCC and consumer protection laws in
most states place restrictions on repossession sales; among other things, such
laws require 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 prior to any resale of a repossessed home so that the debtor may
redeem the home at or before such resale. In the event of such repossession and
resale of a Manufactured Home, the Trustee would be entitled to receive the net
proceeds of such resale up to the amount of the Unpaid Principal Balance of the
related Contract plus all accrued and unpaid interest thereon at the related
Contract Rate.
65
<PAGE> 101
Under applicable laws of most states, a creditor is entitled to obtain
a judgment against a debtor for any deficiency remaining after repossession and
resale of the manufactured home securing such debtor's loan. However, obtaining
and collecting such deficiency judgments may not be economically feasible. In
addition, some states impose prohibitions or limitations on deficiency
judgments, and certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, the federal
Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the "Relief Act")
and state laws affording relief to debtors, may interfere with or affect the
ability of a secured lender to repossess and resell collateral or to enforce a
deficiency judgment. For example, in certain proceedings under the federal
Bankruptcy Code, when a court determines that the value of a home is less than
the principal balance of the loan it secures, the court may prevent a lender
from repossessing or foreclosing on the home, and, as part of the debtor's
rehabilitation plan, reduce the amount of the secured indebtedness to the value
of the home as it exists at the time of the proceeding, leaving the lender as a
general unsecured creditor for the difference between that value and the amount
of outstanding indebtedness. A bankruptcy court may grant the debtor a
reasonable time to cure a payment default, and in the case of a manufactured
housing installment sales contract not secured by the debtor's principal
residence, also may reduce the monthly payments due under such contract, change
the rate of interest and alter the repayment schedule. Certain court decisions
have applied such relief to claims secured by the debtor's principal residence.
If a court relieves an Obligor's obligation to repay all or any portion of the
amounts otherwise due on a Contract, the Servicer will not be required to
advance such amounts, and any loss in respect thereof may reduce amounts
available for distribution on the related Certificates.
Under the terms of the Relief Act, an Obligor who enters military
service after the origination of such Obligor's Contract (including an Obligor
who is a member of the National Guard or who is in reserve status at the time of
the origination of the Contract and is later called to active duty) may not be
charged interest above an annual rate of 6.00% during the period of such
Obligor'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 Contracts. Any Unpaid Interest Amount in
interest collections resulting from the application of the Relief Act, to the
extent not covered by the subordination of a Class of Subordinated Certificates,
could result in losses to Certificateholders. In addition, the Relief Act
imposes limitations which would impair the ability of the Servicer to repossess
or foreclose on the Manufactured Home securing an affected Contract during the
Obligor's period of active duty status. Thus, in the event that such a Contract
goes into default, there may be delays and losses occasioned by the inability to
liquidate the related Manufactured Home in a timely fashion.
Because of certain requirements of the REMIC Provisions, a Trust as to
which a REMIC election has been made generally must dispose of any related
Manufactured Homes acquired pursuant to repossession, foreclosure, or similar
proceedings within two years after acquisition. Consequently, if the Servicer,
acting on behalf of the Trust, is unable to sell a Manufactured Home in the
course of its ordinary commercial practices within 22 months after its
acquisition thereof (or a longer period as permitted by the Agreement), the
Servicer will auction such home to the highest bidder (which bidder may be the
Servicer) in an auction reasonably designed to produce a fair price. There can
be no assurance that the price for any Manufactured Home would not be
substantially lower than the Unpaid Principal Balance of the Contract relating
thereto. In fact, manufactured homes, unlike site-built homes, generally
depreciate in value, and it has been industry experience that, upon repossession
and resale, the amount recoverable on a manufactured home securing an
installment sales contract is generally lower than the principal balance of the
contract.
Foreclosure under Real Property Laws. If a Manufactured Home has become
attached to real estate to a degree such that the home would be treated as real
property under the laws of the state in which it is located, it may not be
legally permissible for the Servicer to repossess the home under the provisions
of the UCC or other applicable personal property laws. If so, the Servicer could
obtain possession of the home only pursuant to real estate mortgage foreclosure
laws. See " -- The Mortgage Loans -- Foreclosure" below. In addition, in order
to realize upon the Real Property securing any Land Secured Contract, the
Servicer must proceed under applicable state real estate mortgage foreclosure
laws. The requirements that the Servicer must meet in order to foreclose on the
Real Property securing a Land Secured Contract, and the restrictions on such
foreclosure, are identical to the requirements and restrictions that would apply
to foreclosure of any Mortgage Loan. For a description of such foreclosure, see
" -- The Mortgage Loans" below.
66
<PAGE> 102
Mortgage foreclosure generally is accomplished through judicial action, rather
than by private action as permitted under personal property laws, and real
estate laws generally impose stricter notice requirements and require public
sale of the collateral. In addition, real estate mortgage foreclosure is usually
far more time-consuming and expensive than repossession under personal property
laws, and applicable real estate law generally affords debtors many more
protections than are provided under personal property laws. Rights of redemption
under real estate laws generally are more favorable to debtors than they are
under personal property laws, and in many states antideficiency judgment
legislation will be applicable in the real estate foreclosure context even if it
would not apply to repossessions under personal property laws. If real estate
laws apply to a Manufactured Home, to the extent the Seller has not perfected
its security interest in a Manufactured Home under applicable real estate laws,
the Seller's security interest in such Manufactured Home would be subordinate to
a lien on such home recorded pursuant to applicable real estate laws.
Consumer Protection Laws. The so-called "Holder-in-Due-Course" rule of
the Federal Trade Commission is intended to prevent a seller of goods pursuant
to a consumer credit contract (and certain related lenders and assignees) from
transferring such contract free of claims by the debtor thereunder against the
seller. The effect of this rule is to subject the assignee of a consumer credit
contract to all claims and defenses that the debtor could have asserted against
the seller under the contract. Assignee liability under this rule (which would
be applicable to the Trust, as assignee of the Contracts) is limited to amounts
paid by the debtor under the assigned contract; however, a borrower also may
assert the rule to set off remaining amounts due under such a contract as a
defense against a claim brought by the assignee of such contract against such
borrower. Numerous other federal and state consumer protection laws impose
requirements applicable to the origination and lending pursuant to the
Contracts, including the Truth in Lending Act, the Federal Trade Commission Act,
the Magnuson-Moss Warranty -- Federal Trade Commission Improvement Act, the Fair
Credit Reporting Act, the Equal Credit Opportunity Act, the Fair Debt Collection
Practices Act and the Uniform Consumer Credit Code. The failure of the
originator of a Contract to have complied with the provisions of some of these
laws may result in liability of the related Trust to the Obligor thereunder or
in a reduction of the amount payable under such Contract. However, each Seller
(a) will be required to represent and warrant that each Contract it sells to the
Company complied, at the time of its origination, with all requirements of law
and (b) will be required to make certain representations and warranties as to
each Contract to be included in an Asset Pool concerning the validity,
existence, perfection and priority of its security interest in each underlying
Manufactured Home as of the related Cut-off Date. A breach of any such
representation or warranty that materially and adversely affects a Trust's
interest in any Contract would create an obligation on the part of the related
Seller to use its best efforts to cure such breach to the satisfaction of the
Trustee or to repurchase such Contract. Nevertheless, this requirement may not
eliminate the Trust's liability to an Obligor.
Transfers of Manufactured Homes; Enforceability of "Due-on-Sale"
Clauses. The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without the consent of the Servicer and permit the
acceleration of the maturity of the Contracts by the Servicer upon any such sale
or transfer to which consent has not been obtained. The Servicer will act in
accordance with its customary underwriting procedures and with the terms of the
related Agreement in determining whether to permit such transfers in respect of
Contracts included in an Asset Pool. The Servicer will require, among other
things, a satisfactory credit review of any person proposing to assume any
Contract. If the Servicer permits an assumption of a Contract, no material term
of the Contract (including the interest rate or the remaining term to maturity
of the Contract) may be modified unless the Servicer has received an opinion of
independent counsel to the effect that such modification will not be treated,
for federal income tax purposes, as an acquisition of the modified Contract by
the Trust in exchange for the unmodified Contract on the date the modification
occurs. In certain cases, a delinquent borrower may transfer his or her
manufactured home in order to avoid a repossession proceeding with respect to
such manufactured home.
Applicability of Usury Laws. Title V of the Depository Institutions
Deregulation and Monetary Control Act of 1980, as amended ("Title V"), provides,
subject to certain conditions described in the next sentence, that state usury
limitations shall not apply to any loan that is secured by a first lien on
certain kinds of manufactured housing. The Contracts would be covered under
Title V if they satisfy certain conditions governing, among other things, the
terms
67
<PAGE> 103
of any prepayments, late charges and deferral fees and requiring 30 days' prior
notice before the institution of any action leading to repossession of or
foreclosure with respect to the related manufactured home.
Title V authorized any state to reimpose limitations on interest rates
and finance charges by adopting a law or constitutional provision which
expressly rejects application of the federal law before April 1, 1983.
Approximately 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. The Servicer will represent that all of the
Contracts comply with applicable usury laws.
THE MORTGAGE LOANS
General. Mortgage Loans as described herein are distinct from Land
Secured Contracts (which are discussed above under " -- The Contracts --
Foreclosure under Real Property Laws"). A Mortgage Loan is secured by a
Mortgaged Property on which a one- to four-family residential structure is
located, whereas a Land Secured Contract is secured primarily by a Manufactured
Home and is secured only secondarily by a parcel of Real Property.
The Mortgage Loans will be secured by either first mortgages, deeds of
trust, deeds to secure debt or security deeds (any of the foregoing, a
"Mortgage"), depending upon the prevailing practice in the state in which the
underlying Mortgaged Property is located. A mortgage creates a lien upon the
real property described in the mortgage. There are two parties to a mortgage:
the mortgagor, who is the obligor, and the mortgagee, who is the lender. Under a
first mortgage, the mortgagor delivers to the mortgagee a note or bond
evidencing the loan and the mortgage. Although a deed of trust is similar to a
mortgage, a deed of trust has three parties; the borrower, a lender as
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
loan. The trustee's authority under a deed of trust and the mortgagee's
authority under a mortgage are governed by the express provisions of the deed of
trust or mortgage, applicable law, and, in some cases, with respect to the deed
of trust, the directions of the beneficiary.
Foreclosure. Foreclosure of a mortgage is generally accomplished by
judicial action. Generally, the action is initiated by the service of legal
pleadings upon all parties having an interest of record in the Mortgaged
Property. Delays in completion of the foreclosure occasionally may 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 may issue a judgment of foreclosure and appoint a receiver
or other officer to conduct the sale of the property. In some states, mortgages
may also be foreclosed by advertisement, pursuant to a power of sale provided in
the mortgage. Foreclosure of a mortgage by advertisement is essentially similar
to foreclosure of a deed of trust by non-judicial power of sale as discussed
below.
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale under a specific provision in the deed of trust that
authorizes the trustee to sell the property to a third party upon any default by
the borrower under the terms of the related note or the deed of trust. In
certain states, such foreclosure also may be accomplished by judicial action in
the manner provided for foreclosure of mortgages. In some states, the trustee
must record a notice of default and send a copy to the borrower-trustor and to
any person who has recorded a request for a copy of a notice of default and
notice of sale. In addition, the trustee must provide notice in some states to
any other individual having an interest of record in the underlying real
property, including any junior lienholders. If the deed of trust is not
reinstated within any applicable cure period, a notice of sale must be posted in
a public place and, in most states, must be published for a specified period of
time in one or more newspapers. In addition, some state laws require that a copy
of the notice of sale be posted on the property and sent to all parties having
an interest of record in the property. In some states, the borrower has the
right to reinstate the loan at any time following default until shortly before
the trustee's sale. See " -- Rights of Reinstatement and Redemption" below.
In the case of foreclosure under either a mortgage or a deed of trust,
the sale by the receiver or other designated officer, or by the trustee, is a
public sale. However, because of the difficulty a potential buyer at the sale
would have
68
<PAGE> 104
in determining the exact status of title and because the physical condition of
the property may have deteriorated during the foreclosure proceedings, it is not
common for a third party to purchase the property at the foreclosure sale.
Rather, the lender generally purchases the property from the trustee or receiver
for an amount which may be as great as (but is more often somewhat less than)
the unpaid principal amount of the note, accrued and unpaid interest and the
expenses of foreclosure. Thereafter, subject to the right of the obligor in some
states to remain in possession during the redemption period, the lender will
assume the burdens 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 commonly will obtain the services of a real estate broker
and pay the broker a commission in connection with the sale of the property.
Depending upon market conditions, the ultimate proceeds of the sale of the
property may not equal the lender's investment in the property. Any loss with
respect to a Mortgage Loan may be reduced by the receipt of mortgage insurance
proceeds. See "The Trusts -- Insurance -- Credit Insurance" and "The Trusts --
Insurance -- Hazard Insurance" herein.
Courts have imposed general equitable principles upon foreclosure.
These equitable principles are generally designed to relieve obligors from the
legal effect of defaults under the loan documents. Examples of judicial remedies
that may be fashioned include judicial requirements that the lender undertake
affirmative actions to determine the causes for the obligor's default and the
likelihood that the obligors will be able to reinstate the loan. In some cases,
courts have required lenders to reinstate loans or recast payment schedules to
accommodate obligors who are suffering temporary financial disabilities. In some
cases, courts have limited the right of a lender to foreclose if the default
under the related mortgage instrument is not monetary, such as a default arising
from the obligor's failure to maintain the property adequately or the obligor's
executing a second mortgage or deed of trust affecting the property. In other
cases, some courts have been faced with the issue whether federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that obligors under deeds of trust receive notices in addition to
statutorily-prescribed minimum requirements. For the most part, these cases have
upheld state statutory notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust or under a mortgage having a power
of sale does not involve sufficient state action to afford constitutional
protections to the obligor.
Rights of Reinstatement and Redemption. In some states, an obligor, or
any other person having a junior encumbrance on the related real estate, may,
during a reinstatement or redemption period, cure an obligor default by paying
the entire amount in arrears plus certain of the costs and expenses incurred by
or on behalf of the lender in attempting to enforce the obligor's obligation.
Certain state laws control the amount of foreclosure expenses and costs,
including attorneys' fees, which may be recovered by a lender. In some states,
an obligor under a mortgage loan has the right to reinstate the loan at any time
following default until shortly before the foreclosure sale.
In some states, after sale pursuant to a deed of trust or foreclosure
of a mortgage, the related obligor and certain foreclosed junior lienors are
given a statutory period in which to redeem the related property from the
foreclosure sale. In certain other states, this right of redemption applies only
to sale following judicial foreclosure, and not to sale pursuant to a
non-judicial power of sale. In most states where the right of redemption is
available, statutory redemption may occur upon payment of the foreclosure
purchase price, accrued interest and taxes. The effect of a right of redemption
is to diminish the ability of the lender to sell the foreclosed property that it
purchased. The exercise of a right of redemption would defeat the title of any
purchaser at a foreclosure sale, or of any purchaser from the lender subsequent
to its purchase of the related property at a judicial foreclosure sale or sale
under a deed of trust. Consequently, the practical effect of the redemption
right is to force the lender (or other purchaser of property at a foreclosure
sale) to maintain the property and pay the expenses of ownership until the
redemption period has run.
Anti-deficiency Legislation and Other Limitations on Lenders. Certain
states have imposed statutory restrictions that limit the remedies of a
beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against a borrower following foreclosure on the related
property or sale of the related property under a deed of trust. A deficiency
judgment is a personal judgment against the obligor equal in most cases to the
difference between the amount due to the lender and the greater of the net
amount realized upon the foreclosure sale or the market value of the related
mortgaged property.
69
<PAGE> 105
Some state statutes may require the beneficiary or mortgagee to exhaust
the security afforded under a deed of trust or mortgage by foreclosure in an
attempt to satisfy the full debt before bringing a personal action against the
obligor. In certain other states, the lender has the option of bringing a
personal action against the obligor on the debt without first exhausting such
security; however, in some of these states, the lender, following judgment on
such personal action, may be deemed to have elected a remedy and may be
precluded from exercising other remedies with respect to such security.
Consequently, the practical effect of the election requirement, when applicable,
is that lenders will usually proceed first against the security for a mortgage
or deed of trust rather than bringing a personal action against the obligor.
Other statutory provisions may limit any deficiency judgment against
the former obligor under a mortgage loan following a foreclosure sale to the
excess of the outstanding debt over the fair market value of the property at the
time of such sale. The purpose of these statutes is to prevent a beneficiary or
a mortgagee from obtaining a large deficiency judgment against the former
obligor as a result of low or no bids at the foreclosure sale or sale pursuant
to a deed of trust.
In some states, exceptions to the anti-deficiency statutes are provided
in certain instances where the value of the lender's security has been impaired
by acts or omissions of the obligor, for example, in the event of waste of the
property by the obligor.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal and state
bankruptcy and insolvency laws and general equitable principles, the federal
Relief Act and state laws affording relief to debtors, may interfere with or
affect the ability of a secured mortgage lender to realize upon its security.
For example, in certain proceedings under the federal Bankruptcy Code, when a
court determines that the value of a home is less than the principal balance of
the loan it secures, the court may prevent a lender from foreclosing on the
home, and, as part of the debtor's rehabilitation plan, reduce the amount of the
secured indebtedness to the value of the home as it exists at the time of the
proceeding, leaving the lender as a general unsecured creditor for the
difference between that value and the amount of outstanding indebtedness. A
bankruptcy court may grant the debtor a reasonable time to cure a payment
default, and in the case of a mortgage loan not secured by the debtor's
principal residence, also may reduce the monthly payments due under such
mortgage loan, change the rate of interest and alter the mortgage loan repayment
schedule. Certain court decisions have applied such relief to claims secured by
the debtor's principal residence. If a court relieves an Obligor's obligation to
repay all or any portion of the amounts otherwise due on a Mortgage Loan, the
Servicer will not be required to advance such amounts, and any loss in respect
thereof may reduce amounts available for distribution on the related
Certificates.
Under the terms of the federal Relief Act, an obligor who enters
military service after the origination of such obligor's Mortgage Loan
(including an obligor who is a member of the National Guard or who 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 6.00% during
the period of such obligor'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. Any Unpaid
Interest Amount in interest collections resulting from the application of the
Relief Act, to the extent not covered by the subordination of a Class of
Subordinated Certificates, would result in losses to Certificateholders. In
addition, the Relief Act imposes limitations which would impair the ability of
the Servicer to foreclose on an affected Mortgage Loan during the obligor'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
liquidate the related Mortgaged Property in a timely fashion.
The Internal Revenue Code of 1986, as amended (the "Code") and the laws
of some states provide priority to certain tax liens over the lien of a mortgage
or deed of trust. Numerous federal and some state consumer protection laws
impose substantive requirements upon mortgage lenders in connection with the
origination, servicing and the enforcement of mortgage loans. These laws include
the federal Truth in Lending Act, Real Property Settlement Procedures Act, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act, and
related statutes
70
<PAGE> 106
and regulations. These federal laws and state laws impose specific statutory
liabilities upon lenders who originate or service mortgage loans and who fail to
comply with the provisions of the law. In some cases, this liability may affect
the lender's assignees as to the mortgage loans.
"Due-on-Sale" Clauses. The forms of note, mortgage and deed of trust
relating to conventional Mortgage Loans may contain a "due-on-sale" clause
permitting acceleration of the maturity of a loan if the Mortgagor transfers its
interest in the underlying property. In recent years, court decisions and
legislative actions placed substantial restrictions on the right of lenders to
enforce such clauses in many states. However, effective October 15, 1982,
Congress enacted the Garn-St. Germain Act, which purports to pre-empt state laws
that prohibit the enforcement of "due-on-sale" clauses and provides, among other
things, that "due-on-sale" clauses in certain loans (which loans include the
Conventional Mortgage Loans) made after the effective date of the Garn-St.
Germain Act are enforceable, within certain limitations as set forth in the
Garn-St. Germain Act and the regulations promulgated thereunder.
By virtue of the Garn-St. Germain Act, the Servicer may generally be
permitted to accelerate any conventional Mortgage Loan which contains a
"due-on-sale" clause upon transfer by the Obligor of an interest in the property
subject to the related mortgage or deed of trust. With respect to any Mortgage
Loan secured by a residence occupied or to be occupied by the mortgagor, this
ability to accelerate will not apply to certain types of transfers, including
(1) the granting of a leasehold interest which has a term of three years or less
and which does not contain an option to purchase; (2) a transfer to a family
relative resulting from the death of a mortgagor, or a transfer where the spouse
or child(ren) becomes an owner of the property in each case where the
transferee(s) will occupy the property; (3) a transfer resulting from a decree
of dissolution of marriage, legal separation agreement or from an incidental
property settlement agreement by which the spouse of the mortgagor becomes an
owner of the property; (4) the creation of a lien or other encumbrance
subordinate to the lender's security instrument which does not relate to a
transfer of rights of occupancy in the property (provided that such lien or
encumbrance is not created pursuant to a contract for deed); (5) a transfer by
devise, descent or operation of law on the death of a joint tenant or tenant by
the entirety; and (6) other transfers as set forth in the Garn-St. Germain Act
and the regulations thereunder. FHA and VA loans do not contain "due-on-sale"
clauses. See "Maturity and Prepayment Considerations" herein.
Adjustable Rate Assets. The laws of certain states may provide that
mortgage notes relating to adjustable rate loans are not negotiable instruments
under the UCC. In such event, the Trustee under a deed of trust arrangement will
not be deemed to be a "holder in due course" within the meaning of the UCC and
may take such a mortgage note subject to certain restrictions on its ability to
foreclose on the related Mortgaged Property and to certain contractual defenses
available to the related Obligor.
ENVIRONMENTAL CONSIDERATIONS
Real property pledged as security to a lender may be subject to certain
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to secure recovery of the costs
of clean-up. In several states, such a lien has priority over the lien of an
existing mortgage against such property. In addition, under the laws of some
states and under the federal Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, as amended ("CERCLA"), a lender may be liable, as an
"owner" or "operator," for costs of addressing releases or threatened releases
of hazardous substances that require remedy at a property securing a mortgage
loan owned by such lender, if agents or employees of the lender have become
sufficiently involved in the operations of the related obligor, regardless of
whether or not the environmental damage or threat was caused by such lender's
obligor or by a prior owner. A lender also risks such liability arising out of
foreclosure of a mortgaged property securing a mortgage loan owned by such
lender. Until recent legislation was adopted, it was uncertain what actions
could be taken by a secured lender in the event of a loan default without it
incurring exposure under CERCLA in the event the property was environmentally
contaminated. The Asset Conservation, Lender Liability and Deposit Insurance Act
of 1996 (the "1996 Lender Liability Act") provides for a safe harbor for secured
lenders from CERCLA liability even though the lender forecloses and sells the
real estate securing the loan, provided the secured lender sells "at the
earliest practicable, commercially reasonable time, at commercially reasonable
terms, taking into account market conditions
71
<PAGE> 107
and legal and regulatory requirements." Although the 1996 Lender Liability Act
provides significant protection to secured lenders, it has not been construed by
the courts, and there are circumstances in which actions taken could expose a
secured lender to CERCLA liability. And, the transferee from the secured lender
is not entitled to the protections enjoyed by a secured lender. Thus,
contamination may decrease the amount that prospective buyers are willing to pay
for an Asset and, thus, decrease the likelihood that a Trust will recover fully
on the Asset through foreclosure.
Application of environmental laws other than CERCLA could also result
in the imposition of liability on lenders for costs associated with
environmental hazards. The most significant of these other laws is the Resource
Conservation and Recovery Act of 1976, as amended ("RCRA"), and state regulatory
programs implemented thereunder. Subtitle I of RCRA imposes cleanup liabilities
on owners or operators of underground storage tanks. Some states also impose
similar liabilities on owners and operators of aboveground storage tanks. The
definition of "owner" under RCRA Subtitle I contains a security interest
exemption nearly identical to the CERCLA security interest exemption. However,
as with CERCLA costs, it is possible that such costs, if imposed in connection
with a Mortgage Loan or a Land Secured Contract included in a Trust Estate,
could become a liability of the related Trust in certain circumstances.
At the time the Mortgage Loans or Land Secured Contracts underlying a
Series were originated, it is possible that no environmental assessment or a
very limited environmental assessment of the related Mortgaged Properties or
Real Properties was conducted. No representations or warranties are made by the
Seller of Mortgage Loans or Contracts (including Land Secured Contracts) as to
the absence or effect of hazardous wastes or hazardous substances on any of the
related Mortgaged Properties or Real Properties. In addition, the Servicer has
not made any representations or warranties or assumed any liability with respect
to the absence or effect of hazardous wastes or hazardous substances on any
Mortgaged Property or Real Property or any casualty resulting from the presence
or effect of hazardous wastes or hazardous substances on any Mortgaged Property
or Real Property, and any loss or liability resulting from the presence or
effect of such hazardous wastes or hazardous substances will reduce the amounts
otherwise available to pay to the holders of the related Certificates.
Pursuant to the Agreement, the Servicer is not required to foreclose on
any Mortgaged Property or Real Property if one of its principal officers has
actual knowledge that such property is contaminated with or affected by
hazardous wastes or hazardous substances. If the Servicer does not foreclose on
the Mortgaged Property underlying a defaulted Mortgage Loan or the Real Property
securing a Land Secured Contract, the amounts otherwise available to pay to the
holders of the Certificates may be reduced. The Servicer will not be liable to
the holders of the Certificates if it fails to foreclose on a Mortgaged Property
or Real Property that it believes may be so contaminated or affected, even if
such Mortgaged Property or Real Property is, in fact, not so contaminated or
affected. Similarly, the Servicer will not be liable to the holders of any
Certificates if the Servicer forecloses on a Mortgaged Property or Real Property
and takes title to a Mortgaged Property or Real Property that is so contaminated
or affected.
ENFORCEABILITY OF CERTAIN PROVISIONS
The standard forms of Contract, Note, mortgage and deed of trust used
by the originators of Contracts and Mortgage Loans may contain provisions
obligating the Obligor to pay a late charge if payments are not timely made and
in some circumstances may provide for prepayment fees or penalties if the
obligation is paid prior to maturity. In certain states, there are or may be
specific limitations upon late charges which a lender may collect from a
borrower for delinquent payments. Certain states also limit the amounts that a
lender may collect from a borrower as an additional charge if the loan is
prepaid. Under each Agreement, late charges and prepayment fees on Assets in the
related Trust Estate (to the extent permitted by law and not waived by the
Servicer) will be retained by the Servicer as additional servicing compensation.
USE OF PROCEEDS
Substantially all of the net proceeds to be received from the sale of
each Series of Certificates will be used to purchase the Contracts and Mortgage
Loans related to such Series or to reimburse the amounts previously used to
effect
72
<PAGE> 108
such a purchase, the costs of carrying such Contracts and Mortgage Loans until
the sale of the related Certificates and other expenses connected with pooling
the Contracts and Mortgage Loans and issuing the Certificates.
THE COMPANY
Bombardier Capital Mortgage Securitization Corporation ("BCMSC" or the
"Company") was organized in the State of Vermont on November 7, 1997 as a
limited purpose company owned by Bombardier Capital Inc. ("BCI"). The Company
currently maintains its principal executive office at 1600 Mountain View Drive,
Colchester, Vermont 05446. Its telephone number is (802) 654-8100.
As described herein under "The Trusts," "The Manufactured Housing
Program," and "Sale and Servicing of Contracts and Mortgage Loans --
Representations and Warranties," the only obligations, if any, of the Company
with respect to a Series of Certificates may be pursuant to certain limited
representations and warranties and limited undertakings to repurchase or
substitute Contracts or Mortgage Loans under certain circumstances. The Company
will have no ongoing servicing obligations or responsibilities with respect to
any Asset Pool. The Company does not have, nor is it expected in the future to
have, any significant assets.
The Company will not insure or guarantee the Certificates of any
Series.
THE SERVICER
Bombardier Capital Inc. ("BCI" or, in its capacity as servicer, the
"Servicer") is a U.S. financial services company which, among other things,
provides inventory financing for dealers selling recreational and consumer
products (including both products manufactured by its affiliates and products
manufactured by unaffiliated third parties). In addition, BCI provides both
domestic and international loan, leasing and management services in connection
with a range of business aircraft and other commercial and industrial products.
BCI also provides factoring of accounts receivable and other financial services
to its affiliated companies. BCI has also recently entered new market segments
of (i) consumer finance (focused on retail sales finance for recreational
products), (ii) mortgage loan financing for the manufactured housing market and
(iii) commercial loan, leasing and management services relating to railcars and
computer and telecommunications hardware and software. The executive offices of
BCI currently are located at 1600 Mountain View Drive, Colchester, VT 05446. The
telephone number of the executive office is (802) 654-8100. BCI operates its
mortgage division from its offices at 12735 Gran Bay Parkway West, Suite 1000,
Jacksonville, FL 32258. The telephone number of the mortgage division is (904)
288-1100.
The Corporation is an indirect wholly-owned subsidiary of Bombardier
Inc., a Canadian corporation. Bombardier Inc., directly and through its
subsidiaries, is engaged in design, development, manufacture and marketing in
the transportation equipment, aerospace, defense and motorized consumer products
industries. In addition, Bombardier Inc. and its subsidiaries offer support,
maintenance and training services, as well as operations management, in the
public and private sectors. Seven subsidiaries of Bombardier Inc. are engaged in
financial services and one division of Bombardier Inc. offers real estate
services.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the anticipated material
federal income tax consequences of the purchase, ownership and disposition of
the Certificates offered hereunder. The summary is based upon laws, regulations,
rulings, and decisions now in effect, all of which are subject to change.
Because REMIC status may be elected with respect to certain Series of
Certificates, the discussion includes a summary of the federal income tax
consequences to holders of REMIC Certificates.
The discussion does not purport to deal with the federal income tax
consequences to all categories of investors, some of which may be subject to
special rules. The discussion focuses primarily on investors who will hold the
73
<PAGE> 109
Certificates as "capital assets" (generally, property held for investment)
within the meaning of section 1221 of the Code, although much of the discussion
is applicable to other investors as well. Investors should note that, although
final regulations under the REMIC Provisions have been issued by the Treasury,
no currently effective regulations or other administrative guidance has been
issued with respect to certain provisions of the Code that are or may be
applicable to Certificateholders, particularly the provisions dealing with
market discount and stripped debt instruments. Although the Treasury has issued
regulations dealing with original issue discount and premium, such regulations
do not address directly the treatment of Regular Certificates and certain other
types of Certificates. Furthermore, the REMIC Provisions do not address all of
the issues that arise in connection with the formation and operation of a REMIC.
Hence, definitive guidance cannot be provided with respect to many aspects of
the tax treatment of Certificateholders. Moreover, this summary and the opinion
referred to below is based on current law, and there can be no assurance that
the law will not change or that the Internal Revenue Service (the "Service")
will not take positions that would be materially adverse to investors. Finally,
the summary does not purport to address the anticipated state income tax
consequences to investors of owning and disposing of the Certificates.
Consequently, investors should consult their own tax advisors in determining the
federal, state, local, and any other tax consequences to them of the purchase,
ownership, and disposition of the Certificates.
GENERAL
Many aspects of the federal income tax treatment of the Certificates of
a particular Series will depend upon whether an election is made to treat the
Trust, or one or more segregated Asset Pools thereof, as a Series REMIC. The
Prospectus Supplement for each Series will indicate whether a REMIC election or
elections will be made with respect to the related Trust Estate and, if such an
election or elections are to be made, will identify all "regular interests" and
the "residual interest" in each Series REMIC. For each Series with respect to
which one or more REMIC elections are to be made, Morgan, Lewis & Bockius LLP,
counsel to the Company, will deliver a separate opinion generally to the effect
that, assuming timely filing of the REMIC election or elections and compliance
with the related Agreement and certain other documents specified in the opinion,
the Trust (or one or more segregated Asset Pools thereof) will qualify as one or
more Series REMICs. For each Series with respect to which a REMIC election is
not to be made, Morgan, Lewis & Bockius LLP will deliver a separate opinion
generally to the effect that, assuming compliance with the Agreement and certain
other documents, the Trust will be treated as a grantor trust under subpart E,
Part I of subchapter J of the Code and not as an association taxable as a
corporation. Those opinions will be based on existing law and there can be no
assurance that the law will not change or that contrary positions will not be
taken by the Service.
REMIC CERTIFICATES
REMIC Certificates will be classified as either Regular Certificates,
which generally are treated as debt for federal income tax purposes, or Residual
Certificates, which generally are not treated as debt for such purposes, but
rather as representing rights and responsibilities with respect to the taxable
income or loss of the related Series REMIC. The Prospectus Supplement for each
Series of Certificates will indicate whether one or more REMIC elections will be
made for that Series and which of the Certificates of such Series will be
designated as Regular Certificates, and which will be designated as Residual
Certificates.
REMIC Certificates held by a REIT will qualify as "real estate assets"
within the meaning of section 856(c)(5)(B) of the Code, and interest on such
Certificates will be considered Qualifying REIT Interest, in the same proportion
that the assets of the related Series REMIC would qualify as real estate assets
for REIT purposes. Similarly, REMIC Certificates held by a Thrift Institution
taxed as a "domestic building and loan association" will-qualify as a "loan
secured by an interest in real property," for purposes of the qualification
requirements of domestic building and loan associations set forth in section
7701(a)(19) of the Code, in the same proportion that the assets of the related
Series REMIC would so qualify. However, if 95% or more of the assets of a given
Series REMIC constitute real estate assets for REIT purposes, the REMIC
Certificates issued by such REMIC will be treated entirely as such assets and
100% of the interest income derived from such REMIC will be treated as
Qualifying REIT Interest. Similarly, if 95% or more of the assets of a given
Series REMIC constitute loans secured by interests in real property, the REMIC
Certificates will
74
<PAGE> 110
be treated entirely as such assets for purposes of the qualification requirement
of domestic building and loan associations. REMIC Regular and Residual
Certificates held by a financial institution to which Section 585 of the Code
applies will be treated as evidences of indebtedness for purposes of Section
582(c)(1) of the Code. The Regular Certificates generally will be "qualified
mortgages" within the meaning of Section 860G(a)(3) of the Code with respect to
other REMICs. Regular Certificates held by a financial asset securitization
investment trust (a "FASIT") will qualify for treatment as "permitted assets"
within the meaning of Section 860L(c)(1)(F) of the Code. In the case of a Series
for which two or more REMICs will be created, all such Series REMICs will be
treated as a single REMIC for purposes of determining the extent to which the
related Certificates and the income thereon will be treated as qualifying assets
and income for such purposes. However, REMIC Certificates will not qualify as
"Government securities" for either REIT or RIC qualification purposes.
TAX TREATMENT OF REGULAR CERTIFICATES
Payments received by holders of Regular Certificates generally should
be accorded the same tax treatment under the Code as payments received on other
taxable corporate debt instruments. Except as described below for Regular
Certificates issued with original issue discount or acquired with market
discount or premium, interest paid or accrued on a Regular Certificate will be
treated as ordinary income to the Certificateholder and a principal payment on
such Certificate will be treated as a return of capital to the extent that the
Certificateholder's basis in the Certificate is allocable to that payment.
Holders of REMIC Regular or Residual Certificates must report income from such
Certificates under an accrual method of accounting, even if they otherwise would
have used the cash receipts and disbursements method. The Tax Administrator, the
Servicer or the Trustee will report annually to the Service and to
Certificateholders of record with respect to interest paid or accrued and
original issue discount, if any, accrued on the Certificates.
Under temporary Treasury regulations, holders of Regular Certificates
issued by "single-class REMICs" who are individuals, trusts, estates, or
pass-through entities in which such investors hold interests may be required to
recognize certain amounts of income in addition to interest and discount income.
A single-class REMIC, in general, is a REMIC that (i) would be classified as an
investment trust in the absence of a REMIC election or (ii) is substantially
similar to an investment trust. Under the temporary Treasury regulations, each
holder of a regular or residual interest in a single-class REMIC is allocated
(i) a share of the REMIC's "allocable investment expenses" (i.e., expenses
normally allowable under section 212 of the Code, which may include servicing
and administrative fees and insurance premiums) and (ii) a corresponding amount
of additional income. Section 67 of the Code permits an individual, trust or
estate to deduct miscellaneous itemized expenses (including expenses allowable
under section 212 of the Code) only to the extent that such expenses, in the
aggregate, exceed 2% of its adjusted gross income. Consequently, an individual,
trust or estate that holds a regular interest in a single-class REMIC (either
directly or through a pass-through entity) will recognize additional income with
respect to such regular interest to the extent that its share of allocable
investment expenses, when combined with its other miscellaneous itemized
deductions for the taxable year, fails to exceed 2% of its adjusted gross
income. Any such additional income will be treated as interest income. In
addition, Code section 68 provides that 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 within the meaning of Code section 7703
for taxable year 1991 and adjusted for inflation each year thereafter) will be
reduced by the lesser of (i) 3% of the excess of adjusted gross income over the
applicable amount, or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year. The amount of such additional taxable income
recognized by holders who are subject to the limitations of either section 67 or
section 68 of the Code may be substantial and may reduce or eliminate the
after-tax yield to such holders of an investment in the Certificates of an
affected Series. Where appropriate, the Prospectus Supplement for a particular
Series will indicate that the holders of Certificates of such Series may be
required to recognize additional income as a result of the application of the
limitations of either section 67 or section 68 of the Code. Non-corporate
holders of Regular Certificates evidencing an interest in a single-class REMIC
also should be aware that miscellaneous itemized deductions, including allocable
investment expenses attributable to such REMIC, are not deductible for purposes
of the alternative minimum tax.
ORIGINAL ISSUE DISCOUNT
75
<PAGE> 111
Certain Classes of Regular Certificates may be issued with "original
issue discount" within the meaning of section 1273(a) of the Code. In general,
such original issue discount will equal the difference between the "stated
redemption price at maturity" of the Regular Certificate (generally, its
principal amount) and its issue price. Holders of Regular Certificates as to
which there is original issue discount should be aware that they generally must
include original issue discount in income for federal income tax purposes on an
annual basis under a constant yield accrual method that reflects compounding. In
general, original issue discount is treated as ordinary interest income and must
be included in income in advance of the receipt of the cash to which it relates.
The amount of original issue discount required to be included in the
income of the holder of a Regular Certificate in any taxable year will be
computed in accordance with section 1272(a)(6) of the Code, which provides rules
for the accrual of original issue discount under a constant yield method for
certain debt instruments, such as the Regular Certificates, that are subject to
prepayment by reason of the prepayment of the underlying obligations. Under
section 1272(a)(6), the amount and rate of accrual of original issue discount on
a Regular Certificate generally is calculated based on (i) a single constant
yield to maturity and (ii) the Pricing Prepayment Assumptions. No regulatory
guidance currently exists under Code section 1272(a)(6). Accordingly, until the
Treasury issues guidance to the contrary, the Tax Administrator will, except as
otherwise provided herein, base its computations on Code section 1272(a)(6), the
OID Regulations, and certain other guidance, all as described below. There can
be no assurance, however, that the methodology described below represents the
correct manner of calculating original issue discount on the Regular
Certificates. The Tax Administrator will account for income on certain Regular
Certificates that provide for one or more contingent payments as described
herein under "Federal Income Tax Consequences -- REMIC Certificates -- Interest
Weighted Certificates and Non-VRDI Certificates." Prospective purchasers should
be aware that neither the Company, any Servicer, nor the Trustee will make any
representation that the Assets underlying a Series will in fact prepay at a rate
conforming to the Pricing Prepayment Assumptions or at any other rate.
The amount of original issue discount on a Regular Certificate equals
the excess, if any, of the Certificate's "stated redemption price at maturity"
over its "issue price." Under the OID Regulations, a debt instrument's stated
redemption price at maturity is the sum of all payments of principal and
interest provided for on the instrument other than Qualified Stated Interest
(i.e., the sum of its Deemed Principal Payments). Thus, in the case of any
Regular Certificate, the stated redemption price at maturity will equal the
total amount of all Deemed Principal Payments due on that Certificate. Since a
Certificate that is part of an Accretion Class generally will not require
unconditional payments of interest at least annually, the stated redemption
price at maturity of such a Certificate will equal the aggregate of all payments
due, whether designated as principal, accrued interest, or current interest. The
issue price of a Regular Certificate generally will equal the initial price at
which a substantial amount of such Certificates is sold to the public.
Although the OID Regulations contain an aggregation rule (the
"Aggregation Rule"), under which two or more debt instruments issued in
connection with the same transaction (or related transactions in certain
circumstances) generally are treated as a single debt instrument for federal
income tax accounting purposes if issued by a single issuer to a single holder,
that Rule does not apply if the debt instruments are part of an issue (i) a
substantial portion of which is traded on an established market or (ii) a
substantial portion of which is issued for cash (or property traded on an
established market) to parties who are not related to the issuer or holder and
who do not purchase other debt instruments of the same issuer in connection with
the same transaction or related transactions. In most cases, the Aggregation
Rule will not apply to Regular Certificates of different Classes because one or
both of the exceptions to the Aggregation Rule will have been met. Although the
Tax Administrator will apply the Aggregation Rule to all regular interests in a
Series REMIC that are held by another REMIC created with respect to the same
Series, it generally will not apply the Aggregation Rule to Regular Certificates
for purposes of reporting to Certificateholders.
Under a de minimis rule, a Regular Certificate will be considered to
have no original issue discount if the amount of original issue discount on the
Certificate is less than 0.25% of the Certificate's stated redemption price at
maturity multiplied by the Certificate's WAM. Although no Treasury regulations
have been issued under the relevant provisions of the 1986 Act, it is expected
that the WAM of a Regular Certificate will be computed using the Pricing
76
<PAGE> 112
Prepayment Assumptions. The holder of a Regular Certificate will include de
minimis original issue discount in income on a pro rata basis as stated
principal payments on the Certificate are received or, if earlier, upon
disposition of the Certificate, unless the holder of such Certificate makes the
All OID Election.
Regular Certificates of certain Series may constitute Teaser
Certificates. Under certain circumstances, a Teaser Certificate may be
considered to have a de minimis amount of original issue discount even though
the amount of original issue discount on such Certificate would be more than de
minimis if determined as described above. If the stated interest on a Teaser
Certificate would be Qualified Stated Interest but for the fact that during one
or more accrual periods its interest rate is below the rate applicable for the
remainder of its term, the amount of original issue discount on such Certificate
that is measured against the de minimis amount of original issue discount
allowable on the Certificate is the greater of (i) the excess of the stated
principal amount of the Certificate over its issue price and (ii) the amount of
interest that would be necessary to be payable on the Certificate in order for
all stated interest to be Qualified Stated Interest.
The holder of a Regular Certificate generally must include in gross
income the sum, for all days during his taxable year on which he holds the
Regular Certificate, of the "daily portions" of the original issue discount on
such Certificate. In the case of an original holder of a Regular Certificate,
the daily portions of original issue discount with respect to such Certificate
generally will be determined by allocating to each day in any accrual period the
Certificate's ratable portion of the excess, if any, of (i) the sum of (a) the
present value of all payments under the Certificate yet to be received as of the
close of such period and (b) the amount of any Deemed Principal Payments
received on the Certificate during such period over (ii) the Certificate's
"adjusted issue price" at the beginning of such period. The present value of
payments yet to be received on a Regular Certificate is computed by using the
Pricing Prepayment Assumptions and the Certificate's original yield to maturity
(adjusted to take into account the length of the particular accrual period), and
taking into account Deemed Principal Payments actually received on the
Certificate prior to the close of the accrual period. The adjusted issue price
of a Regular Certificate at the beginning of the first accrual period is its
issue price. The adjusted issue price at the beginning of each subsequent period
is the adjusted issue price of the Certificate at the beginning of the preceding
period increased by the amount of original issue discount allocable to that
period and decreased by the amount of any Deemed Principal Payments received
during that period. Thus, an increased (or decreased) rate of prepayments
received with respect to a Regular Certificate will be accompanied by a
correspondingly increased (or decreased) rate of recognition of original issue
discount by the holder of such Certificate.
The yield to maturity of a Regular Certificate is calculated based on
(i) the Pricing Prepayment Assumptions and (ii) any contingencies not already
taken into account under the Pricing Prepayment Assumptions that, considering
all of the facts and circumstances as of the issue date, are more likely than
not to occur. Contingencies, such as the exercise of "mandatory redemptions,"
that are taken into account by the parties in pricing the Regular Certificate
typically will be subsumed in the Pricing Prepayment Assumptions and thus will
be reflected in the Certificate's yield to maturity. The Tax Administrator's
determination of whether a contingency relating to a Class of Regular
Certificates is more likely than not to occur is binding on each holder of a
Certificate of such Class unless the holder explicitly discloses on its federal
income tax return that its determination of the yield and maturity of such
Certificate is different from that of the Tax Administrator.
In many cases, Regular Certificates will be subject to optional
redemption before their stated maturity dates. Under the OID Regulations, any
party entitled to redeem Certificates will be presumed to exercise its option to
redeem for purposes of computing the accrual of original issue discount if, and
only if, by using the optional redemption date as the maturity date and the
optional redemption price as the stated redemption price at maturity, the yield
to maturity of the Certificates is lower than it would be if the Certificates
were not redeemed early. If a party entitled to do so is presumed to exercise
its option to redeem the Certificates, original issue discount on such
Certificates will be calculated as if the redemption date were the maturity date
and the optional redemption price were the stated redemption price at maturity.
In cases in which all of the Certificates of a particular Series are issued at
par or at a discount, the Certificates will not be presumed to have been
redeemed because a redemption would not lower the yield to maturity of the
Certificates. If, however, some Certificates of a particular Series are issued
at a premium, a party entitled to redeem Certificates may be able to lower the
yield to maturity of the Certificates by exercising its redemption option. In
77
<PAGE> 113
determining whether such a party will be presumed to exercise its option to
redeem Certificates when one or more Classes of the Certificates is issued at a
premium, the Tax Administrator will take into account all Classes of
Certificates that are subject to the possibility of optional redemption to the
extent that they are expected to remain outstanding as of the optional
redemption date, based on the Pricing Prepayment Assumptions. If, determined on
a combined weighted average basis, the Certificates of such Classes were issued
at a premium, the Tax Administrator will presume that a party entitled to redeem
such Certificates will exercise its option to do so. However, the OID
Regulations are unclear as to how the redemption presumption rules should apply
to instruments such as the Certificates, and there can be no assurance that the
Service will agree with the Tax Administrator's position.
Under the OID Regulations, the holder of a Regular Certificate
generally may make an All OID Election to include in gross income all stated
interest, original issue discount, de minimis original issue discount, market
discount, and de minimis market discount that accrues on such Certificate
(reduced by any amortizable premium or acquisition premium on such Certificate)
under the constant yield method used to account for original issue discount. To
make an All OID Election, the holder of the Certificate must attach a statement
to its timely filed federal income tax return for the taxable year in which the
holder acquired the Certificate. The statement must identify the instruments to
which the election applies. An All OID Election is irrevocable unless the holder
obtains the consent of the Service. If an All OID Election is made for a debt
instrument with market discount, the holder is deemed to have made an election
to include in income currently the market discount on all of the holder's other
debt instruments with market discount, as described below under "Federal Income
Tax Consequences -- REMIC Certificates -- Tax Treatment of Regular Certificates
- -- Market Discount." In addition, if an All OID Election is made for a debt
instrument with amortizable premium, the holder is deemed to have made an
election to amortize the premium on all of the holder's other debt instruments
with amortizable premium under the constant yield method. See "Federal Income
Tax Consequences -- REMIC Certificates -- Tax Treatment of Regular Certificates
- --Amortizable Premium" below. Certificateholders should be aware that the law is
unclear as to whether an All OID Election is effective for Interest Weighted
Certificates or Non-VRDI Certificates. See "Federal Income Tax Consequences --
REMIC Certificates -- Tax Treatment of Regular Certificates -- Interest Weighted
Certificates and Non-VRDI Certificates" below.
A Regular Certificate having original issue discount may be acquired in
a transaction subsequent to its issuance for more than its adjusted issue price.
If the subsequent holder's adjusted basis in such a Regular Certificate,
immediately after its acquisition, exceeds the sum of all Deemed Principal
Payments to be received on the Certificate after the acquisition date, the
Certificate will no longer have original issue discount, and the holder may be
entitled to reduce the amount of interest income recognized on the Certificate
by the amount of amortizable premium. See "Federal Income Tax Consequences --
REMIC Certificates -- Tax Treatment of Regular Certificates -- Amortizable
Premium" below. If the subsequent holder's adjusted basis in the Certificate
immediately after the acquisition exceeds the adjusted issue price of the
Certificate, but is less than or equal to the sum of the Deemed Principal
Payments to be received under the Certificate after the acquisition date, the
amount of original issue discount on the Certificate will be reduced by a
fraction, the numerator of which is the excess of the Certificate's adjusted
basis immediately after its acquisition over the adjusted issue price of the
Certificate and the denominator of which is the excess of the sum of all Deemed
Principal Payments to be received on the Certificate after the acquisition date
over the adjusted issue price of the Certificate. For that purpose, the adjusted
basis of a Regular Certificate generally is reduced by the amount of any
Qualified Stated Interest that is accrued but unpaid as of the acquisition date.
Alternatively, the subsequent purchaser of a Regular Certificate having original
issue discount may make an All OID Election with respect to the Certificate.
If the First Distribution Period with respect to a Regular Certificate
contains more days than the number of days of stated interest that are payable
on the first Remittance Date, the effective interest rate received by the holder
of such Certificate during the first Distribution Period will be less than the
Certificate's stated interest rate, making such Certificate a Teaser
Certificate. If the amount of original issue discount on the Teaser Certificate
measured under the expanded de minimis test described above exceeds the de
minimis amount of original issue discount allowable on the Certificate, the
amount by which the stated interest on the Certificate exceeds the interest that
would be payable on the Certificate at the effective rate of interest for the
First Distribution Period would be treated as part of the Certificate's
78
<PAGE> 114
stated redemption price at maturity. Accordingly, the holder of a Teaser
Certificate may be required to recognize ordinary income arising from original
issue discount in addition to any Qualified Stated Interest that accrues in a
period.
Similarly, if the First Distribution Period with respect to a Regular
Certificate is shorter than the interval between subsequent Remittance Dates,
and the holder of such Certificate receives interest on the first Remittance
Date based on a full accrual period, the effective rate of interest payable on
such Certificate during the First Distribution Period will be higher than the
stated rate of interest on such Certificate, making such Certificate a Rate
Bubble Certificate. A Rate Bubble Certificate that otherwise bears Qualified
Stated Interest would be issued with original issue discount unless the
Pre-Issuance Accrued Interest Rule applies or the amount of original issue
discount on the Certificate is de minimis. The amount of original issue discount
on a Rate Bubble Certificate attributable to the First Distribution Period would
be the amount by which the interest payment due on the first Remittance Date
exceeds the amount that would have been payable had the effective rate for that
Period been equal to the stated interest rate. However, if a portion of the
initial purchase price of a Rate Bubble Certificate is allocable to Pre-Issuance
Accrued Interest and such Certificate provides for a payment of stated interest
on the first payment date within one year of its issue date that equals or
exceeds the amount of such Pre-Issuance Accrued Interest, the Tax Administrator
will apply the Pre-Issuance Accrued Interest Rule to such Certificate. Under the
Pre-Issuance Accrued Interest Rule, the Tax Administrator will (i) subtract from
the issue price of a Rate Bubble Certificate an amount of Pre-Issuance Accrued
Interest equal to the excess of (a) the amount of stated interest paid on the
Certificate on the first Remittance Date over (b) the portion of such interest
that is economically allocable to the period after the issue date, which
generally should be an amount equal to the stated interest rate on the
Certificate expressed as a daily percentage multiplied by the number of days in
the first payment period (i.e., from the issue date to the first payment date)
multiplied by the Certificates initial principal amount and (ii) treat a portion
of the interest received on the first Remittance Date with respect to such
Certificate as a return of the Pre-Issuance Accrued Interest excluded from the
issue price of such Certificate rather than as a payment on the Certificate.
Thus, where the Pre-Issuance Accrued Interest Rule applies, a Rate Bubble
Certificate will not have original issue discount attributable to the First
Distribution Period, provided that the increased effective interest rate for
that Period is attributable solely to Pre-Issuance Accrued Interest, as
typically will be the case. The Tax Administrator will apply the Pre-Issuance
Accrued Interest Rule as described above to each Rate Bubble Certificate for
which it is available if the Certificate's stated interest otherwise would be
Qualified Stated Interest. If, however, the First Distribution Period for a Rate
Bubble Certificate is longer than subsequent Distribution Periods, the
application of the Pre-Issuance Accrued Interest Rule typically will not prevent
disqualification of the Certificate's stated interest because its effective
interest rate during the First Distribution Period will be less than its stated
interest rate. Thus, a Regular Certificate with a long First Distribution Period
typically will be a Teaser Certificate, as discussed above. The Pre-Issuance
Accrued Interest Rule will not apply to any amount paid at issuance for such a
Teaser Certificate that is nominally allocable to interest accrued under the
terms of such Certificate before its issue date. All amounts paid for such a
Teaser Certificate at issuance, regardless of how designated, will be included
in the issue price of such Certificate for federal income tax accounting
purposes.
It is not entirely clear how income should be accrued with respect to
Interest Weighted Certificates. Unless and until the Service provides contrary
administrative guidance on the income tax treatment of an Interest Weighted
Certificate, the Tax Administrator will take the position that an Interest
Weighted Certificate does not bear Qualified Stated Interest, and will account
for the income thereon as described in "Federal Income Tax Consequences -- REMIC
Certificates -- Interest Weighted Certificates and Non-VRDI Certificates"
herein. Some Interest Weighted Certificates may be Superpremium Certificates.
Superpremium Certificates technically are issued with amortizable premium.
However, because of their close similarity to other Interest Weighted
Certificates it appears more appropriate to account for Superpremium
Certificates in the same manner as for other Interest Weighted Certificates.
Consequently, in the absence of further administrative guidance, the Tax
Administrator will account for Superpremium Certificates in the same manner as
other Interest Weighted Certificates. However, there can be no assurance that
the Service will not assert a position contrary to that taken by the Tax
Administrator, and, therefore, holders of Superpremium Certificates should
consider making a protective election to amortize premium on such Certificates.
79
<PAGE> 115
In view of the complexities and current uncertainties as to the manner
of inclusion in income of original issue discount on the Regular Certificates,
each investor should consult its own tax advisor to determine the appropriate
amount and method of inclusion in income of original issue discount on such
Certificates for federal income tax purposes.
VARIABLE RATE CERTIFICATES
Under the OID Regulations, a Variable Rate Certificate will qualify as
a VRDI Certificate only if (i) the Certificate is not issued at an Excess
Premium; (ii) stated interest on the Certificate compounds or is payable
unconditionally 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) the qualified floating rate or
the objective rate in effect during an accrual period is set at a current value
of that rate (i.e., the value of the rate on any day occurring during the
interval that begins three months prior to the first day on which that value is
in effect under the Certificate and ends one year following that day). VRDI
Certificates are subject to the rules applicable to VRDIs in the OID Regulations
that are described below.
Under the OID Regulations, a rate is a qualified floating rate if
variations in the rate reasonably can be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the debt
instrument is denominated. A qualified floating rate may measure contemporaneous
variations in borrowing costs for the issuer of the debt instrument or for
issuers in general. A multiple of a qualified floating rate is considered a
qualified floating rate only if the rate is equal to either (a) the product of a
qualified floating rate and a fixed multiple that is greater than zero but not
more than 1.35 or (b) the product of a qualified floating rate and a fixed
multiple that is greater than zero but not more than 1.35, increased or
decreased by a fixed rate. If a Regular Certificate provides for two or more
qualified floating rates that reasonably can be expected to have approximately
the same values throughout the term of such Certificate, the qualified floating
rates together will constitute a single qualified floating rate. Two or more
qualified floating rates conclusively will be presumed to have approximately the
same values throughout the term of a Certificate if the values of all rates on
the issue date of such Certificate are within 25 basis points of each other.
A variable rate will be considered a qualified floating rate if it is
subject to a Cap, Floor, Governor, or other similar restriction only if: (a) the
Cap, Floor, or Governor is fixed throughout the term of the related Certificate
or (b) the Cap, Floor, Governor, or similar restriction is not reasonably
expected, as of the issue date, to cause the yield on the Certificate to be
significantly less or significantly more than the expected yield on such
Certificate determined without such Cap, Floor, Governor, or similar
restriction, as the case may be. Although the OID Regulations are unclear, it
appears that a VRDI Certificate, the principal rate on which is subject to a
Cap, Floor, or Governor that itself is a qualified floating rate, bears interest
at an objective rate.
Under final Treasury regulations issued on June 12, 1996, an objective
rate is a rate (other than a qualified floating rate) that (i) is determined
using a single fixed formula, (ii) is based on objective financial or economic
information, and (iii) is not based on information that either is within the
control of the issuer (or a related party) or is unique to the circumstances of
the issuer (or related party), such as dividends, profits, or the value of the
issuer's (or related party's) stock. That definition is broader than the former
definition of objective rate set forth in the OID Regulations and would include,
in addition to a rate that is based on one or more qualified floating rates or
on the yield of actively traded personal property, a rate that is based on
changes in a general inflation index. In addition, a rate would not fail to be
an objective rate merely because it is based on the credit quality of the
issuer.
Under the OID Regulations, if interest on a Certificate is stated 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 for a
subsequent period, and the value of the variable rate on the issue date is
intended to approximate the fixed rate, the fixed rate and the variable rate
together constitute a single qualified floating rate or objective rate. A
variable rate conclusively will be presumed to approximate an initial fixed rate
if the value of the variable rate on the issue date does not differ from the
value of the fixed rate by more than 25 basis points.
80
<PAGE> 116
Under the OID Regulations, all interest payable on a Single Rate VRDI
Certificate is treated as Qualified Stated Interest. The amount and accrual of
OID on a Single Rate VRDI Certificate is determined, in general, by converting
such Certificate into a hypothetical fixed rate certificate and applying the
rules applicable to fixed rate certificates described under "Federal Income Tax
Consequences -- REMIC Certificates -- Original Issue Discount" above to such
hypothetical fixed rate certificate. Qualified Stated Interest or original issue
discount allocable to an accrual period with respect to a Single Rate VRDI
Certificate also must be increased (or decreased) if the interest actually
accrued or paid during such accrual period exceeds (or is less than) the
interest assumed to be accrued or paid during such accrual period under the
related hypothetical equivalent fixed rate certificate.
Except as provided below, the amount and accrual of OID on a Multiple
Rate VRDI Certificate is determined by converting such Certificate into a
hypothetical equivalent fixed rate certificate that has terms that are identical
to those provided under the Multiple Rate VRDI Certificate, except that such
hypothetical equivalent fixed rate certificate will provide for fixed rate
substitutes in lieu of the qualified floating rates or objective rate provided
for under the Multiple Rate VRDI Certificate. A Multiple Rate VRDI Certificate
providing for a qualified floating rate or rates or a qualified inverse floating
rate is converted to a hypothetical equivalent fixed rate certificate by
assuming that each qualified floating rate or the qualified inverse floating
rate will remain at its value as of the issue date. A Multiple Rate VRDI
Certificate providing for an objective rate or rates is converted to a
hypothetical equivalent fixed rate certificate by assuming that each objective
rate will equal a fixed rate that reflects the yield that reasonably is expected
for such Multiple Rate VRDI Certificate. Qualified Stated Interest or original
issue discount allocable to an accrual period with respect to a Multiple Rate
VRDI Certificate must be increased (or decreased) if the interest actually
accrued or paid during such accrual period exceeds (or is less than) the
interest assumed to be accrued or paid during such accrual period under the
related hypothetical equivalent fixed rate certificate.
Under the OID Regulations, the amount and accrual of OID on a Multiple
Rate VRDI Certificate that provides for stated interest at either one or more
qualified floating rates or at a qualified inverse floating rate and in addition
provides for stated interest at a single fixed rate (other than an initial fixed
rate that is intended to approximate the subsequent variable rate), is
determined using the method described in the preceding paragraph except that
prior to its conversion to a hypothetical equivalent fixed rate certificate,
such Multiple Rate VRDI Certificate is treated as if it provided for a qualified
floating rate (or a qualified inverse floating rate) rather than the fixed rate
during the period in which the fixed rate applies. The qualified floating rate
(or qualified inverse floating rate) replacing the fixed rate must be such that
the fair market value of the Multiple Rate VRDI Certificate as of its issue date
would be approximately the same as the fair market value of an otherwise
identical debt instrument that provides for the qualified floating rate (or
qualified inverse floating rate), rather than the fixed rate.
It is not entirely clear how income should be accrued with respect to
Weighted Average Certificates. Under the OID Regulations, Weighted Average
Certificates relating to a Trust (or a designated Asset Pool thereof) whose
Assets are exclusively Adjustable Rate Assets appear to bear interest at an
objective rate provided the Adjustable Rate Assets themselves bear interest at
qualified floating rates. However, Weighted Average Certificates relating to a
Trust (or a designated Asset Pool thereof) whose Assets do not bear interest at
qualified floating rates (i.e., NOWA Certificates), do not bear interest at an
objective or a qualified floating rate and, consequently, do not qualify as VRDI
Certificates described above. Accordingly, unless and until the Service provides
contrary administrative guidance on the income tax treatment of NOWA
Certificates, the Tax Administrator will treat such Certificates as debt
obligations that provide for one or more contingent payments, and will account
for the income thereon as described in "Federal Income Tax Consequences -- REMIC
Certificates -- Interest Weighted Certificates and Non-VRDI Certificates" below.
Under the OID Regulations, Inverse Floater Certificates generally bear
interest at objective rates because their rates either constitute qualified
inverse floating rates under those Regulations or, although not qualified
floating rates themselves, are based on one or more qualified floating rates.
Consequently, if such Certificates are not issued at an Excess Premium and their
interest rates otherwise meet the test for Qualified Stated Interest, the income
on such Certificates will be accounted for under the rules applicable to VRDI
Certificates described above. However, an Inverse Floater Certificate may have
an interest rate parameter equal to the weighted average of the interest rates
on some or
81
<PAGE> 117
all of the Assets of the related Trust (or designated Asset Pool thereof) in a
case where one or more of the interest rates on such Assets is a fixed rate or
otherwise may not qualify as a VRDI Certificate. Unless and until the Service
provides contrary administrative guidance on the income tax treatment of such
Inverse Floater Certificates, the Tax Administrator will treat such Certificates
as debt obligations that provide for one or more contingent payments, and will
account for the income thereon as described in "Federal Income Tax Consequences
- -- REMIC Certificates -- Interest Weighted Certificates and Non-VRDI
Certificates" below.
INTEREST WEIGHTED CERTIFICATES AND NON-VRDI CERTIFICATES
The treatment of a NOWA Certificate, a Variable Rate Certificate that
is issued at an Excess Premium, any other Variable Rate Certificate that does
not qualify as a VRDl Certificate (each a Non-VRDI Certificate) or an Interest
Weighted Certificate is unclear under current law. The OID Regulations contain
provisions (the "Contingent Payment Regulations") that address the federal
income tax treatment of debt obligations that provide for one or more contingent
payments ("Contingent Payment Obligations").
Under the Contingent Payment Regulations, any variable rate debt
instrument that is not a VRDI is classified as a Contingent Payment Obligation.
However, the Contingent Payment Regulations, by their terms, do not apply to
REMIC regular interests and other instruments that are subject to section
1272(a)(6) of the Code. In the absence of further guidance, the Tax
Administrator will account for Non-VRDI Certificates, Interest Weighted
Certificates, and other Regular Certificates that are Contingent Payment
Obligations in accordance with Code section 1272(a)(6) and the accounting
methodology described in this paragraph. Income will be accrued on such
Certificates based on a constant yield that is derived from a projected payment
schedule as of the Closing Date. The projected payment schedule will take into
account the Pricing Prepayment Assumptions and the interest payments that are
expected to be made based on the value of any relevant indices on the issue
date. To the extent that actual payments differ from projected payments for a
particular taxable year, appropriate adjustments to interest income and expense
accruals will be made for that year. In the case of a Weighted Average
Certificate, the projected payment schedule will be derived based on the
assumption that the principal balances of the Assets that collateralize the
Certificate pay down pro rata.
The method described in the foregoing paragraph for accounting for
Interest Weighted Certificates, Non-VRDI Certificates, and any other Regular
Certificates that are Contingent Payment Obligations is consistent with Code
section 1272(a)(6) and the legislative history thereto. Because of the
uncertainty with respect to the treatment of such Certificates under the OID
Regulations, however, there can be no assurance that the Service will not assert
successfully that a method less favorable to Certificateholders should apply. In
view of the complexities and the current uncertainties as to income inclusions
with respect to Non-VRDI Certificates, Interest Weighted Certificates and any
other Regular Certificates that are Contingent Payment obligations, each
investor should consult his or her own tax advisor to determine the appropriate
amount and method of income inclusion on such Certificates for federal income
tax purposes.
ANTI-ABUSE RULE
Concerned that taxpayers might be able to structure debt instruments or
transactions, or apply the bright-line or mechanical rules of the OID
Regulations, in a way that produces unreasonable tax results, the Treasury
issued regulations containing an anti-abuse rule. These regulations provide that
if a principal purpose in structuring a debt instrument, engaging in a
transaction, or applying the OID Regulations is to achieve a result that is
unreasonable in light of the purposes of the applicable statutes, the Service
can apply or depart from the OID Regulations as necessary or appropriate to
achieve a reasonable result. A result is not considered unreasonable under the
regulations, however, in the absence of a substantial effect on the present
value of a taxpayer's tax liability.
MARKET DISCOUNT
A subsequent purchaser of a Regular Certificate at a discount from its
outstanding principal amount (or, in the case of a Regular Certificate having
original issue discount, its "adjusted issue price") will acquire such
Certificate with
82
<PAGE> 118
market discount. The purchaser generally will be required to recognize the
market discount (in addition to any original issue discount remaining with
respect to the Certificate) as ordinary income. A person who purchases a Regular
Certificate at a price lower than the remaining outstanding Deemed Principal
Payments but higher than its adjusted issue price does not acquire the
Certificate with market discount, but will be required to report original issue
discount, appropriately adjusted to reflect the excess of the price paid over
the adjusted issue price. See "Federal Income Tax Consequences -- REMIC
Certificates --Original Issue Discount" above. A Regular Certificate will not be
considered to have market discount if the amount of such market discount is de
minimis, i.e., less than the product of (i) 0.25% of the remaining principal
amount (or, in the case of a Regular Certificate having original issue discount,
the adjusted issue price of such Certificate), multiplied by (ii) the WAM of the
Certificate remaining after the date of purchase. Regardless of whether the
subsequent purchaser of a Regular Certificate with more than a de minimis amount
of market discount is a cash-basis or accrual-basis taxpayer, market discount
generally will be taken into income as principal payments (including, in the
case of a Regular Certificate having original issue discount, any Deemed
Principal Payments) are received, in an amount equal to the lesser of (i) the
amount of the principal payment received or (ii) the amount of market discount
that has "accrued" (as described below), but that has not yet been included in
income. The purchaser may make a Current Recognition Election, which generally
will apply to all market discount instruments held or acquired by the purchaser
in the taxable year of election or thereafter, to recognize market discount
currently on an uncapped accrual basis. The Service has indicated in Revenue
Procedure 92-67 the manner in which a Current Recognition Election may be made.
The purchaser also may make an All OID Election with respect to a Regular
Certificate purchased with market discount. See "Federal Income Tax Consequences
- -- REMIC Certificates -- Original Issue Discount" above.
Until the Treasury promulgates applicable regulations, the purchaser of
a Regular Certificate with market discount generally may elect to accrue the
market discount either: (i) on the basis of a constant interest rate; (ii) in
the case of a Regular Certificate not issued with original issue discount, in
the ratio of stated interest payable in the relevant period to the total stated
interest remaining to be paid from the beginning of such period; or (iii) in the
case of a Regular Certificate issued with original issue discount, in the ratio
of original issue discount accrued for the relevant period to the total
remaining original issue discount at the beginning of such period. The Service
indicated in Revenue Ruling 92-67 the manner in which an election may be made to
accrue market discount on a Regular Certificate on the basis of a constant
interest rate. Regardless of which computation method is elected, the Pricing
Prepayment Assumptions must be used to calculate the accrual of market discount.
A Certificateholder who has acquired any Regular Certificate with
market discount generally will be required to treat a portion of any gain on a
sale or exchange of the Certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the foregoing
methods, less any accrued market discount previously reported as ordinary income
as partial principal payments were received. Moreover, such Certificateholder
generally must defer interest deductions attributable to any indebtedness
incurred or continued to purchase or carry the Certificate to the extent they
exceed income on the Certificate. Any such deferred interest expense, in
general, is allowed as a deduction not later than the year in which the related
market discount income is recognized. If a holder of a Regular Certificate makes
a Current Recognition Election or an All OID Election, the interest deferral
rule will not apply. Under the Contingent Payment Regulations, a secondary
market purchaser of a Non-VRDI Certificate or an Interest Weighted Certificate
at a discount generally would continue to accrue interest and determine
adjustments on such Certificate based on the original projected payment schedule
devised by the issuer of such Certificate. See "Federal Income Tax Consequences
- -- REMIC Certificates -- Original Issue Discount -- Interest Weighted
Certificates and Non-VRDI Certificates" herein. The holder of such a Certificate
would be required, however, to allocate the difference between the adjusted
issue price of the Certificate and its basis in the Certificate as positive
adjustments to the accruals or projected payments on the Certificate over the
remaining term of the Certificate in a manner that is reasonable (e.g., based on
a constant yield to maturity).
Treasury regulations implementing the market discount rules have not
yet been issued, and uncertainty exists with respect to many aspects of those
rules. For example, the treatment of a Regular Certificate subject to optional
redemption that is acquired at a market discount is unclear. It appears likely,
however, that the market discount rules
83
<PAGE> 119
applicable in such a case would be similar to the rules pertaining to original
issue discount. Due to the substantial lack of regulatory guidance with respect
to the market discount rules, it is unclear how those rules will affect any
secondary market that develops for a given Class of Regular Certificates.
Prospective investors in Regular Certificates should consult their own tax
advisors regarding the application of the market discount rules to those
certificates.
AMORTIZABLE PREMIUM
A purchaser of a Regular Certificate who purchases the Certificate at a
premium over the total of its Deemed Principal Payments may elect to amortize
such premium under a constant yield method that reflects compounding based on
the interval between payments on the Certificates. The legislative history of
the 1986 Act indicates that premium is to be accrued in the same manner as
market discount. Accordingly, it appears that the accrual of premium on a
Regular Certificate will be calculated using the Pricing Prepayment Assumptions.
Under the Code, except as otherwise provided in Treasury regulations issued,
amortized premium would be treated as an offset to interest income on a Regular
Certificate and not as a separate deduction item. If a holder makes an election
to amortize premium on a Regular Certificate, such election will apply to all
taxable debt instruments (including all REMIC regular interests) held by the
holder at the beginning of the taxable year in which the election is made, and
to all taxable debt instruments acquired thereafter by such holder, and will be
irrevocable without the consent of the Service. Purchasers who pay a premium for
the Regular Certificates should consult their tax advisors regarding the
election to amortize premium and the method to be employed.
Amortizable premium on a Regular Certificate that is subject to
redemption at the option of the Company generally must be amortized as if the
optional redemption price and date were the Certificate's principal amount and
maturity date if doing so would result in a smaller amount of premium
amortization during the period ending with the optional redemption date. Thus, a
Certificateholder would not be able to amortize any premium on a Regular
Certificate that is subject to optional redemption at a price equal to or
greater than the Certificateholder's acquisition price unless and until the
redemption option expires. In cases where premium must be amortized on the basis
of the price and date of an optional redemption, the Certificate will be treated
as having matured on the redemption date for the redemption price and then
having been reissued on that date for that price. Any premium remaining on the
Certificate at the time of the deemed reissuance will be amortized on the basis
of (i) the original principal amount and maturity date or (ii) the price and
date of any succeeding optional redemption, under the principles described
above. Under the Contingent Payment Regulations, a secondary market purchaser of
a Non-VRDI Certificate or an Interest Weighted Certificate at a premium
generally would continue to accrue interest and determine adjustments on such
Certificate based on the original projected payment schedule devised by the
issuer of such Certificate. See "Federal Income Tax Consequences -- REMIC
Certificates -- Interest Weighted Certificates and Non-VRDI Certificates"
herein. The holder of such a Certificate would be required, however, to allocate
the difference between its basis in the Certificate and the adjusted issue price
of the Certificate as negative adjustments to the accruals or projected payments
on the Certificate over the remaining term of the Certificate in a manner that
is reasonable (e.g., based on a constant yield to maturity).
CONSEQUENCES OF REALIZED LOSSES
Under section 166 of the Code, both corporate holders of Regular
Certificates and noncorporate holders that acquire Regular Certificates in
connection with a trade or business should be allowed to deduct, as ordinary
losses, any losses sustained during a taxable year in which their Regular
Certificates become wholly or partially worthless as the result of one or more
Realized Losses on the underlying Assets. However, a noncorporate holder that
does not acquire a Regular Certificate in connection with its trade or business
will not be entitled to deduct a loss under Code section 166 until its Regular
Certificate becomes wholly worthless (i.e., until its outstanding principal
balance has been reduced to zero), and the loss will be characterized as
short-term capital loss.
Each holder of a Regular Certificate will be required to accrue
original issue discount income with respect to such Certificate without giving
effect to any reduction in distributions attributable to a default or
delinquency on the underlying Assets until a Realized Loss is allocated to such
Certificate or until such earlier time as it can be established
84
<PAGE> 120
that any such reduction ultimately will not be recoverable. As a result, the
amount of original issue discount reported in any period by the holder of a
Regular Certificate could exceed significantly the amount of economic income
actually realized by the holder in such period. Although the holder of a Regular
Certificate eventually will recognize a loss or a reduction in income
attributable to previously included original issue discount that, as a result of
a Realized Loss, ultimately will not be realized, the law is unclear with
respect to the timing and character of such loss or reduction in income.
Accordingly, holders of Regular Certificates should consult with their own tax
advisors with respect to the federal income tax consequences of Realized Losses
on original issue discount.
The Tax Administrator will adjust the accrual of original issue
discount on Regular Certificates in a manner that it believes to be appropriate
to reflect Realized Losses. However, there can be no assurance that the Service
will not contend successfully that a different method of accounting for the
effect of Realized Losses is correct and that such method will not have an
adverse effect upon the holders of Regular Certificates.
GAIN OR LOSS ON DISPOSITION
If a Regular Certificate is sold, the Certificateholder will recognize
gain or loss equal to the difference between the amount realized on the sale and
his adjusted basis in the Certificate. The adjusted basis of a Regular
Certificate generally will equal the cost of the Certificate to the
Certificateholder, increased by any original issue discount or market discount
previously includible in the Certificateholder's gross income with respect to
the Certificate, and reduced by the portion of the basis of the Certificate
allocable to payments on the Certificate (other than Qualified Stated Interest)
previously received by the Certificateholder and by any amortized premium.
Similarly, a Certificateholder who receives a scheduled or prepaid principal
payment with respect to a Regular Certificate will recognize gain or loss equal
to the difference between the amount of the payment and the allocable portion of
his adjusted basis in the Certificate. Except to the extent that the market
discount rules apply and except as provided below, any gain or loss on the sale
or other disposition of a Regular Certificate generally will be capital gain or
loss. Such gain or loss will be long-term gain or loss if the Certificate is
held as a capital asset for the long-term capital gain holding period
(currently, more than eighteen months), or mid-term gain or loss if the
Certificate is held as a capital asset for the mid-term capital gain holding
period (currently, more than twelve months but not more than eighteen months).
If the holder of a Regular Certificate is a bank, thrift, or similar
institution described in section 582 of the Code, any gain or loss on the sale
or exchange of such Certificate will be treated as ordinary income or loss. In
the case of other types of holders, gain from the disposition of a Regular
Certificate that otherwise would be capital gain will be treated as ordinary
income to the extent that the amount actually includible in income with respect
to the Certificate by the Certificateholder during his holding period is less
than the amount that would have been includible in income if the yield on that
Certificate during the holding period had been 110% of a specified U.S. Treasury
borrowing rate as of the date that the Certificateholder acquired the
Certificate. Although the legislative history to the 1986 Act indicates that the
portion of the gain from disposition of a Regular Certificate that will be
recharacterized as ordinary income is limited to the amount of original issue
discount (if any) on the Certificate that was not previously includible in
income, the applicable Code provision contains no such limitation.
A portion of any gain from the sale of a Regular Certificate that might
otherwise be capital gain may be treated as ordinary income to the extent that
such Certificate is held as part of a "conversion transaction" within the
meaning of section 1258 of the Code. A conversion transaction generally is one
in which the taxpayer has taken two or more positions in Certificates or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's net
investment in such transaction. The amount of gain realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable federal rate" (which rate is computed and
published monthly by the Service) at the time the taxpayer entered into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income from the transaction.
85
<PAGE> 121
Currently, the highest marginal individual income tax bracket is 36%,
and a 10% surtax is imposed on taxpayers whose taxable income for 1993 and later
years exceeds $250,000 (resulting in a 39.6% marginal rate). The alternative
minimum tax rate for individuals is 26% with respect to alternative minimum tax
income up to $175,000 and 28% with respect to alternative minimum tax income
over $175,000. Because the highest marginal federal tax rate on long-term
capital gains for individuals is 20% and because the highest marginal federal
tax rate on mid-term capital gains for individuals is 28%, there is a
significant marginal tax rate differential between net capital gains and
ordinary income for individuals. The highest marginal corporate tax rate is 35%
for corporate taxable income over $10 million, and the marginal tax rate on
corporate net capital gains is 35%.
TAX TREATMENT OF RESIDUAL CERTIFICATES
Overview
A Residual Certificate will represent beneficial ownership of a
percentage of the "residual interest" in the Series REMIC to which it relates,
and a Regular Certificate generally will represent beneficial ownership of a
percentage of a "regular interest" in the Series REMIC to it relates. A REMIC is
an entity for federal income tax purposes consisting of a fixed pool of
mortgages (including manufactured housing installment sales contracts) or other
mortgage-backed assets in which investors hold multiple classes of interests. To
be treated as a REMIC, the Trust (or a segregated Asset Pool thereof) underlying
a Series must meet certain continuing qualification requirements, and a REMIC
election must be in effect. See "Federal Income Tax Consequences -- REMIC
Certificates -- REMIC Qualification" below. A REMIC generally is treated as a
pass-through entity for federal income tax purposes, i.e., as not subject to
entity-level tax. All interests in a REMIC other than the residual interest must
be regular interests. As described in "Federal Income Tax Consequences -- REMIC
Certificates -- Tax Treatment of Regular Certificates" above, a regular interest
has terms analogous to those of a debt instrument and generally is treated as a
debt instrument for all federal income tax purposes. The Regular Certificates
will generate interest and, depending upon the issue price of the Regular
Certificates, original issue discount deductions or income attributable to
premium for the related Series REMIC. As a residual interest, a Residual
Certificate represents the right to (i) the stated principal and interest on
such Certificate, if any, and (ii) such Certificate's pro rata share of the
income generated by the related Series REMIC's assets in excess of the amount
necessary to service that REMIC's regular interests and pay that REMIC's
expenses.
In a manner similar to that employed in the taxation of partnerships,
REMIC taxable income or loss will be determined at the REMIC level, but passed
through to the Residual Certificateholders. Thus, REMIC taxable income or loss
will be allocated pro rata to the related Residual Certificateholders, and each
such Certificateholder will report his share of REMIC taxable income or loss on
his own federal income tax return. Prospective investors in Residual
Certificates should be aware that the obligation to account for the related
Series REMIC's income or loss will continue until all of that REMIC's Regular
Certificates have been retired, which may not occur until well beyond the date
on which the last payments on Residual Certificates are made. In addition,
because of the way in which REMIC taxable income is calculated, a Residual
Certificateholder may recognize "phantom income" (i.e., income recognized for
tax purposes in excess of income as determined under financial accounting or
economic principles) which will be matched in later years by a corresponding tax
loss or reduction in taxable income, but which could lower the yield to Residual
Certificateholders due to the lower present value of such loss or reduction.
A portion of the income of a Residual Certificateholder may be treated
unfavorably in three contexts: (i) it may not be offset by current or net
operating loss deductions (except in the case of certain thrift institutions
holding Residual Certificates with significant value); (ii) it will be
considered UBTI to tax-exempt entities; and (iii) it is ineligible for any
statutory or treaty reduction in the 30% withholding tax otherwise available to
a foreign Residual Certificateholder.
The concepts presented in this overview are discussed more fully below.
Taxation of Residual Certificateholders
86
<PAGE> 122
A Residual Certificateholder will recognize his share of the related
Series REMIC's taxable income or loss for each day during his taxable year on
which he holds the Residual Certificate. The amount so recognized will be
characterized as ordinary income or loss and will not be taxed separately to the
Series REMIC. If a Residual Certificate is transferred during a calendar
quarter, REMIC taxable income or loss for that quarter will be prorated between
the transferor and the transferee on a daily basis.
A REMIC generally determines its taxable income or loss in a manner
similar to that of an individual using a calendar year and the accrual method of
accounting. A REMIC's taxable income or loss generally will be characterized as
ordinary income or loss, and will consist of the REMIC's gross income, including
interest, original issue discount, and market discount income, if any, on the
REMIC's assets (including temporary cash flow investments), premium amortization
on the REMIC's Regular Certificates, income from foreclosure property, and any
cancellation of indebtedness income due to the allocation of realized losses to
the REMIC's Regular Certificates, reduced by the REMIC's deductions, including
deductions for interest and original issue discount expense on the REMIC's
Regular Certificates, premium amortization and servicing fees with respect to
the REMIC's assets, the administrative expenses of the REMIC and the Regular
Certificates, any tax imposed on the REMIC's income from foreclosure property,
and any bad debt deductions with respect to the related Assets. The REMIC may
not take into account any items allocable to a "prohibited transaction." See
"Federal Income Tax Consequences -- REMIC Certificates -- REMIC-Level Taxes"
below. The deduction of REMIC expenses by Residual Certificateholders who are
individuals is subject to certain limitations as described below in "Federal
Income Tax Consequences -- REMIC Certificates -- Special Considerations for
Certain Types of Investors -- Individuals and Pass-Through Entities" below.
The amount of the REMIC's net loss with respect to a calendar quarter
that may be deducted by a Residual Certificateholder is limited to such
Certificateholder's adjusted basis in the Residual Certificate as of the end of
that quarter (or time of disposition of the Residual Certificate, if earlier),
determined without taking into account the net loss for that quarter. A Residual
Certificateholder's basis in its Residual Certificate initially is equal to the
price paid for such Certificate. Such basis is increased by the amount of
taxable income of the REMIC reportable by the Residual Certificateholder with
respect to the Residual Certificate and decreased (but not below zero) by the
amount of distributions made and the amount of net losses recognized with
respect to that Certificate. The amount of the REMIC's net loss allocable to a
Residual Certificateholder that is disallowed under the basis limitation may be
carried forward indefinitely, but may be used only to offset income with respect
to the related Residual Certificate. The ability of Residual Certificateholders
to deduct net losses with respect to a Residual Certificate may be subject to
additional limitations under the Code, as to which Certificateholders should
consult their tax advisors. A distribution with respect to a Residual
Certificate is treated as a non-taxable return of capital up to the amount of
the Residual Certificateholder's adjusted basis in his Residual Certificate. If
a distribution exceeds the adjusted basis of the Residual Certificate, the
excess is treated as gain from the sale of such Residual Certificate.
Although the law is unclear in certain respects, a Residual
Certificateholder effectively should be able to recover some or all of the basis
in his Residual Certificate as the related REMIC recovers the basis of its
assets through either the amortization of premium on such assets or the
allocation of basis to principal payments received on such assets. A REMIC's
initial aggregate basis in its assets generally will equal the sum of the issue
prices of its Regular Certificates and Residual Certificates. In general, the
issue price of a Regular Certificate of a particular Class is the initial price
at which a substantial amount of the Certificates of such Class is sold to the
public. In the case of a Regular Certificate of a Class not offered to the
public in substantial amounts, the issue price is either the price paid by the
first purchaser of such Certificate or the fair market value of the property
received in exchange for such Certificate, as appropriate. The REMIC's aggregate
basis will be allocated among its assets in proportion to their respective fair
market values.
The assets of certain Series REMICs may have bases that exceed their
principal amounts. Except as indicated in "Federal Income Tax Consequences --
REMIC Certificates -- Treatment by the REMIC of Original Issue Discount, Market
Discount, and Amortizable Premium" below, the premium on such assets will be
amortizable under the constant yield method and the same prepayment assumptions
used in pricing the Certificates. The amortized premium will reduce
87
<PAGE> 123
the REMIC's taxable income or increase its tax loss for each year, which will
offset a corresponding amount of the stated interest or other residual cash
flow, if any, allocable to the Residual Certificateholders. It should be noted,
however, that the law concerning the amortization of premium on Assets is
unclear in certain respects. If the Service were to contend successfully that
part or all of the premium on the assets underlying a REMIC is not amortizable,
the holders of the Residual Certificates in such REMIC would recover the basis
attributable to the unamortizable premium only as principal payments are
received on such assets or upon the disposition or worthlessness of their
Residual Certificates. The inability to amortize part or all of the premium
could give rise to timing differences between the REMIC's income and deductions,
creating phantom income (as described below).
In the first years after the issuance of the Regular Certificates,
REMIC taxable income may include significant amounts of phantom income. Phantom
income arises from timing differences between income on the underlying Assets
and deductions on the Regular Certificates that result from the multiple-class
structure of the Certificates. Since phantom income will arise from timing
differences between income and deductions, it will be matched by a corresponding
loss or reduction in taxable income in later years, during which economic or
financial income will exceed REMIC taxable income. Any acceleration of taxable
income, however, could lower the yield to a Residual Certificateholder, since
the present value of the tax paid on that income will exceed the present value
of the corresponding tax reduction in the later years. The amount and timing of
any phantom income are dependent upon (i) the structure of the particular REMIC
and (ii) the rate of prepayment on the Assets held by the REMIC and, therefore,
cannot be predicted without reference to a particular REMIC.
The assets of certain Series REMICs may have bases that are less than
their principal amounts. In such a case, a Residual Certificateholder will
recover the basis in his Residual Certificate as the REMIC recovers the portion
of its basis in the assets that is attributable to the residual interest. The
REMIC's basis in the assets is recovered as it is allocated to principal
payments received by the REMIC.
A portion of a Series REMIC's taxable income may be subject to special
treatment. That portion (known as "excess inclusion income") generally is any
taxable income beyond that which the Residual Certificateholder would have
recognized had the Residual Certificate been a conventional debt instrument
bearing interest at 120% of the applicable long-term federal rate (based on
quarterly compounding) as of the date on which the Residual Certificate was
issued. Excess inclusion income generally is intended to approximate phantom
income and may result in unfavorable tax consequences for certain investors. See
"Federal Income Tax Consequences -- REMIC Certificates -- Tax Treatment of
Residual Certificates -- Limitations on Offset or Exemption of REMIC Income" and
" -- Special Considerations for Certain Types of Investors" below.
LIMITATIONS ON OFFSET OR EXEMPTION OF REMIC INCOME
Generally, a Residual Certificateholder's taxable income for any
taxable year may not be less than such Certificateholder's excess inclusion
income for that taxable year. Excess inclusion income is equal to the excess of
REMIC taxable income for the quarterly period for the Residual Certificates over
the product of (i) 120% of the long-term applicable federal rate that would have
applied to the Residual Certificates if they were debt instruments for federal
income tax purposes on the Closing Date and (ii) the adjusted issue price of
such Residual Certificates at the beginning of such quarterly period. For this
purpose, the adjusted issue price of a Residual Certificate at the beginning of
a quarter is the issue price of the Residual Certificate, increased by the
amount of the daily accruals of REMIC income for all prior quarters, and
decreased by any distributions made with respect to such Residual Certificate
prior to the beginning of such quarterly period. If the Residual
Certificateholder is an organization subject to the tax on UBTI imposed by Code
section 511, the Residual Certificateholder's excess inclusion income will be
treated as UBTI. In addition, under Treasury regulations yet to be issued, if a
REIT or a RIC owns a Residual Certificate that generates excess inclusion
income, a pro rata portion of the dividends paid by the REIT or the RIC
generally will constitute excess inclusion income for their shareholders.
Finally, Residual Certificateholders who are foreign persons will not be
entitled to any exemption from the 30% withholding tax or a reduced treaty rate
with respect to their excess inclusion income
88
<PAGE> 124
from the REMIC. See "Federal Income Tax Consequences --REMIC Certificates --
Taxation of Certain Foreign Holders of REMIC Certificates -- Residual
Certificates" below.
NON-RECOGNITION OF CERTAIN TRANSFERS FOR FEDERAL INCOME TAX PURPOSES
In addition to the limitations specified above, the REMIC Provisions
provide that the transfer of a "noneconomic residual interest" to a United
States person will be disregarded for tax purposes if a significant purpose of
the transfer was to impede the assessment or collection of tax. A Residual
Certificate will constitute a noneconomic residual interest unless, at the time
the interest is transferred, (i) the present value of the expected future
distributions with respect to the Residual Certificate equals or exceeds the
product of the present value of the anticipated excess inclusion income and the
highest corporate tax rate for the year in which the transfer occurs, and (ii)
the transferor reasonably expects that the transferee will receive distributions
from the REMIC in amounts sufficient to satisfy the taxes on excess inclusion
income as they accrue. If a transfer of a residual interest is disregarded, the
transferor would continue to be treated as the owner of the Residual Certificate
and thus would continue to be subject to tax on its allocable portion of the net
income of the related REMIC. 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 that the transferee would be unwilling or unable to
pay taxes due on its share of the taxable income of the REMIC, (i.e., the
transferor had "improper knowledge"). Under the REMIC Provisions, a transferor
is presumed not to have such improper knowledge if (i) the transferor conducted,
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 found that the transferee had historically paid its debts as they
came due and found no significant evidence to indicate that the transferee would
not continue to pay its debts as they come due and (ii) the transferee
represents to the transferor that it understands that, as the holder of a
noneconomic residual interest, it may incur tax liabilities in excess of any
cash flows generated by the interest and that it intends to pay the taxes
associated with holding the residual interest as they become due. A similar
limitation exists with respect to transfers of certain residual interests to
foreign investors. See "Federal Income Tax Consequences -- REMIC Certificates --
Taxation of Certain Foreign Holders of REMIC Certificates -- Residual
Certificates" below.
OWNERSHIP OF RESIDUAL INTERESTS BY DISQUALIFIED ORGANIZATIONS
The Code contains three sanctions that are designed to prevent or
discourage the direct or indirect ownership of a REMIC residual interest (such
as a Residual Certificate) by the United States, any state or political
subdivision thereof, any foreign government, any international organization, any
agency or instrumentality of any of the foregoing, any tax-exempt organization
(other than a farmers' cooperative described in section 521 of the Code) unless
such organization is subject to the tax on UBTI, or any rural electrical or
telephone cooperative (each a "Disqualified Organization"). A corporation is not
treated as an instrumentality of the United States or any state or political
subdivision thereof if all of its activities are subject to tax and, with the
exception of FHLMC, a majority of its board of directors is not selected by such
governmental unit.
First, REMIC status is dependent upon the presence of reasonable
arrangements designed to prevent a Disqualified Organization from acquiring
record ownership of any portion of the REMIC's residual interest. No residual
interest issued pursuant to an Agreement (whether or not such interest is
represented by a Residual Certificate) will be offered for sale to Disqualified
Organizations. Furthermore, (i) the residual interest in each Series REMIC will
be registered as to both principal and any stated interest with the Trustee (or
its agent) and transfer of such residual interest (or a percentage interest
therein) may be effected only (A) by surrender of the old residual interest
instrument and reissuance by the Trustee of a new residual interest instrument
to the new holder or (B) through a book-entry system maintained by the Trustee;
(ii) the applicable Agreement will prohibit the ownership of residual interests
by Disqualified Organizations; and (iii) each residual interest instrument will
contain a legend providing notice of that prohibition. Consequently, each Series
REMIC should be considered to have made reasonable arrangements designed to
prevent the ownership of its residual interest by Disqualified Organizations.
89
<PAGE> 125
Second, the Code imposes a one-time tax on the transferor of a residual
interest (including a Residual Certificate or an interest therein) to a
Disqualified Organization. The one-time tax equals the product of (i) the
present value of the total anticipated excess inclusions with respect to the
transferred residual interest for periods after the transfer and (ii) the
highest marginal federal income tax rate applicable to corporations. Under the
REMIC Provisions, the anticipated excess inclusions with respect to a
transferred residual interest must be based on (i) both actual prior prepayment
experience and the prepayment assumptions used in pricing the related REMIC's
interests and (ii) any required or permitted clean up calls, or required
qualified liquidation provided for in the REMIC's organizational documents. The
present value of anticipated excess inclusions is determined using a discount
rate equal to the applicable federal rate that would apply to a debt instrument
that was issued on the date the Disqualified Organization acquired the residual
interest and whose term ends on the close of the last quarter in which excess
inclusions are expected to accrue with respect to the residual interest. Where a
transferee is acting as an agent for a Disqualified Organization, the transferee
is subject to the one-time tax. For that purpose, the term "agent" includes a
broker, nominee, or other middleman. Upon the request of such transferee or the
transferor, the REMIC must furnish to the requesting party and to the Service
information sufficient to permit the computation of the present value of the
anticipated excess inclusions. The transferor of a residual interest (including
a Residual Certificate or interest therein) will not be liable for the one-time
tax if the transferee furnishes to the transferor an affidavit that states,
under penalties of perjury, that the transferee is not a Disqualified
Organization, and, as of the time of the transfer, the transferor does not have
actual knowledge that such affidavit is false. The one-time tax must be paid by
April 15th of the year following the calendar year in which the residual
interest is transferred to a Disqualified Organization. The one-time tax may be
waived by the Secretary of the Treasury if, upon discovery that a transfer is
subject to the one-time tax, the Disqualified Organization promptly disposes of
the residual interest and the transferor pays any amounts that the Secretary of
the Treasury may require.
Third, the Code imposes an annual tax on any pass-through entity (i.e.,
RIC, REIT, common trust fund, partnership, trust, estate or cooperative
described in Code section 1381) that owns a direct or indirect interest in a
residual interest (including a Residual Certificate), if record ownership of an
interest in the pass-through entity is held by one or more Disqualified
Organizations. The tax imposed equals the highest corporate income tax rate
multiplied by the share of any excess inclusion income of the pass-through
entity for the taxable year allocable to interests in the pass-through entity
held by Disqualified Organizations. The same tax applies to a nominee who
acquires an interest in a residual interest (including a Residual Certificate)
on behalf of a Disqualified Organization. For example, a broker that holds an
interest in a Residual Certificate in "street name" for a Disqualified
Organization is subject to the tax. The tax due must be paid by the fifteenth
day of the fourth month following the close of the taxable year of the
pass-through entity in which the Disqualified Organization is a record holder.
Any such tax imposed on a pass-through entity would be deductible against that
entity's ordinary income in determining the amount of its required
distributions. In addition, dividends paid by a RIC or a REIT are not considered
preferential dividends within the meaning of section 562(c) of the Code solely
because the RIC or REIT allocates such tax expense only to the shares held by
Disqualified Organizations. A pass-through entity will not be liable for the
annual tax if the record holder of the interest in the pass-through entity
furnishes to the pass-through entity an affidavit that states, under penalties
of perjury, that the record holder is not a Disqualified Organization, and the
pass-through entity does not have actual knowledge that such affidavit is false.
The REMIC Provisions also require that reasonable arrangements be made
with respect to each REMIC to enable the REMIC to provide the Treasury and the
transferor with information necessary for the application of the one-time tax
described above. Consequently, the applicable Agreement will provide for the
Servicer or an Affiliate thereof to perform such information services as may be
required for the application of the one-time tax. If a Residual
Certificateholder transfers an interest in a Residual Certificate in violation
of the relevant transfer restrictions and triggers the information requirement,
the Servicer or Affiliate thereof may charge such Residual Certificateholder a
reasonable fee for providing the information.
SPECIAL CONSIDERATIONS FOR CERTAIN TYPES OF INVESTORS
90
<PAGE> 126
Dealers in Securities. Residual Certificateholders that are dealers in
securities should be aware that, under Treasury regulations (the "Mark-to-Market
Regulations") relating to the requirement under section 475 of the Code that
dealers in securities use mark-to-market accounting for federal income tax
purposes, dealers in securities are not permitted to mark to market any REMIC
residual interests acquired on or after January 4, 1995. Prospective purchasers
of Residual Certificates should consult with their tax advisors regarding the
possible application of the Mark-to-Market Regulations to such Certificates.
Tax-exempt Entities. Any excess inclusion income with respect to a
Residual Certificate held by a tax-exempt entity, including a qualified
profit-sharing, pension, or other employee benefit plan, will be treated as
UBTI. Although the legislative history and statutory provisions imply otherwise,
the Treasury conceivably could take the position that, under pre-existing Code
provisions, substantially all income on a Residual Certificate (including
non-excess inclusion income) is to be treated as UBTI. See "Federal Income Tax
Consequences -- REMIC Certificates -- Taxation of Residual Certificateholders"
above.
Individuals and Pass-through Entities. A Residual Certificateholder who
is an individual, trust, or estate will be permitted to deduct its allocable
share of the fees or expenses relating to servicing the assets of and
administering the related REMIC under section 212 of the Code only to the extent
that the amount of such fees and expenses, when combined with the Residual
Certificateholder's other miscellaneous itemized deductions for the taxable
year, exceeds 2% of that holder's adjusted gross income. That same limitation
will apply to individuals, trusts, or estates that hold Residual Certificates
indirectly through a grantor trust, a partnership, an S corporation, a common
trust fund, a REMIC, or a nonpublicly offered RIC. A nonpublicly offered RIC is
a RIC other than one whose shares are (i) continuously offered pursuant to a
public offering; (ii) regularly traded on an established securities market; or
(iii) held by no fewer than 500 persons at all times during the taxable year. In
addition, that limitation will apply to individuals, trusts, or estates that
hold Residual Certificates through any other person (i) that is not generally
subject to federal income tax and (ii) the character of whose income may affect
the character of the income generated by that person for its owners or
beneficiaries. Further, Code section 68 provides that 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 within the meaning of Code
section 7703 for taxable year 1991 and adjusted for inflation each year
thereafter) will be reduced by the lesser of (i) 3% of the excess of adjusted
gross income over the applicable amount, or (ii) 80% of the amount of itemized
deductions otherwise allowable for such taxable year. In some cases, the amount
of additional income that would be recognized as a result of the foregoing
limitations by a Residual Certificateholder who is an individual, trust, or
estate could be substantial. Non-corporate holders of Residual Certificates also
should be aware that miscellaneous itemized deductions, including allocable
investment expenses attributable to the related Series REMIC, are not deductible
for purposes of the alternative minimum tax. Finally, persons holding an
interest in a Residual Certificate indirectly through an interest in a RIC,
common trust fund or one of certain corporations doing business as a cooperative
generally will recognize a share of any excess inclusion allocable to that
Residual Certificate.
Employee Benefit Plans. See "Federal Income Tax Consequences -- REMIC
Certificates -- Special Considerations for Certain Types of Investors --
Tax-exempt entities" above and "ERISA Considerations" below.
REITS and RICS. If a Residual Certificateholder is a REIT and the
related Series REMIC generates excess inclusion income, a portion of REIT
dividends will be treated as excess inclusion income for the REIT's
shareholders, in a manner to be provided by regulations. Thus, shareholders in a
REIT that invests in Residual Certificates could face unfavorable treatment of a
portion of their REIT dividend income for purposes of (i) using current
deductions or net operating loss carryovers or carrybacks; (ii) UBTI in the case
of tax-exempt shareholders; and (iii) withholding tax in the case of foreign
shareholders (see "Federal Income Tax Consequences -- REMIC Certificates --
Special Considerations for Certain Types of Investors -- Foreign Residual
Certificateholders" below). Moreover, because Residual Certificateholders may
recognize phantom income (see "Federal Income Tax Consequences -- REMIC
Certificates -- Taxation of Residual Certificateholders" above), a REIT
contemplating an investment in Residual Certificates should consider carefully
the effect of any phantom income upon its ability to meet its income
distribution
91
<PAGE> 127
requirements under the Code. The same rules regarding excess inclusion will
apply to a Residual Certificateholder that is a RIC, common trust fund, or one
of certain corporations doing business as a cooperative.
A Residual Certificate held by a REIT will be treated as a real estate
asset for purposes of the REIT qualification requirements in the same proportion
that the related Series REMIC's assets would be treated as real estate assets if
held directly by the REIT, and interest income derived from such Residual
Certificate will be treated as Qualifying REIT Interest to the same extent. If
95% or more of a Series REMIC's assets qualify as real estate assets for REIT
purposes, 100% of that REMIC's regular and residual interests (including
Residual Certificates) will be treated as real estate assets for REIT purposes,
and all of the income derived from such interests will be treated as Qualifying
REIT Interest. The REMIC Provisions provide that payments of principal and
interest on Assets that are reinvested pending distribution to the holders of
the REMIC Certificates constitute real estate assets for REIT purposes. Two
REMICs that are part of a tiered structure will be treated as one REMIC for
purposes of determining the percentage of assets of each REMIC that constitutes
real estate assets. It is expected that at least 95% of the assets of each
Series REMIC will be real estate assets throughout such REMIC's life. The amount
treated as a real estate asset in the case of a Residual Certificate apparently
is limited to the REIT's adjusted basis in the Certificate.
Significant uncertainty exists with respect to the treatment of a
Residual Certificate for purposes of the various asset composition requirements
applicable to RICs. A Residual Certificate should be treated as a "security,"
but probably will not be considered a "Government security" for purposes of
section 851(b)(4) of the Code. Moreover, it is unclear whether a Residual
Certificate will be treated as a "voting security" under that Code section.
Finally, because a Series REMIC will be treated as the "issuer" of the Residual
Certificate for purposes of that section, a RIC would be unable to invest more
than 25% of the value of its total assets in Residual Certificates issued by the
same Series REMIC.
Foreign Residual Certificateholders. Certain adverse tax consequences
may be associated with the holding of certain Residual Certificates by a foreign
person or with the transfer of such Certificates to or from a foreign person.
See "Federal Income Tax Consequences -- REMIC Certificates -- Taxation of
Certain Foreign Holders of REMIC Certificates -- Residual Certificates" below.
Thrift Institutions, Banks, and Certain Other Financial Institutions.
Residual Certificates will be treated as loans secured by interests in real
property ("qualifying assets") for Thrift Institutions in the same proportion
that the assets of the Series REMIC to which they relate would be so treated.
However, if 95% or more of the assets of a given Series REMIC are qualifying
assets for Thrift Institutions, 100% of that REMIC's regular and residual
interests (including Residual Certificates) would be treated as qualifying
assets. In addition, the REMIC Provisions provide that payments of principal and
interest on Assets included in a REMIC that are reinvested pending their
distribution to the holders of the related REMIC Certificates will be treated as
qualifying assets for Thrift Institutions. Moreover, two REMICs that are part of
a tiered structure will be treated as one REMIC for purposes of determining the
percentage of assets of each REMIC that constitutes qualifying assets for Thrift
Institution purposes. It is expected that at least 95% of the assets of each
Series REMIC will be qualifying assets for Thrift Institutions throughout such
REMIC's life. The amount of a Residual Certificate treated as a qualifying asset
for Thrift Institutions, however, cannot exceed the holder's adjusted basis in
that Residual Certificate.
Generally, gain or loss arising from the sale or exchange of Residual
Certificates held by certain financial institutions will give rise to ordinary
income or loss, regardless of the length of the holding period for the Residual
Certificates. Those financial institutions include banks, mutual savings banks,
cooperative banks, domestic building and loan institutions, savings and loan
institutions, and similar institutions. See "Federal Income Tax Consequences --
REMIC Certificates -- Tax Treatment of Residual Certificates -- Disposition of
Residual Certificates" below.
DISPOSITION OF RESIDUAL CERTIFICATES
Upon the sale or exchange of a Residual Certificate, a Residual
Certificateholder will recognize gain or loss equal to the difference between
the amount realized and its adjusted basis in the Residual Certificate. It is
possible that
92
<PAGE> 128
a disqualification of a Series REMIC (other than an inadvertent disqualification
for which relief may be provided in Treasury regulations) may be treated as a
sale or exchange of a related Residual Certificate. If the holder has held the
Residual Certificate for the long-term capital gain holding period (currently,
more than eighteen months), gain or loss on its disposition generally will be
characterized as long-term capital gain or loss. If the holder has held the
Residual Certificate for the mid-term capital gain holding period (currently,
more than twelve months but not more than eighteen months), gain or loss on its
disposition generally will be characterized as mid-term capital gains or loss.
In the case of banks, thrifts, and certain other financial institutions
described in section 582 of the Code, however, gain or loss on the disposition
of a Residual Certificate will be treated as ordinary gain or loss, regardless
of the length of the holding period. See "Federal Income Tax Consequences --
REMIC Certificates -- Special Considerations for Certain Types of Investors"
herein.
A special version of the wash sale rules of the Code applies to
dispositions of Residual Certificates. Under that rule, losses on dispositions
of Residual Certificates generally will be disallowed where, within six months
before or after the disposition, the seller of such Certificates acquires any
residual interest in a REMIC or any interest in a Taxable Mortgage Pool that is
economically comparable to a Residual Certificate. Treasury Regulations
providing for appropriate exceptions to the application of the wash sale rules
have been authorized, but have not yet been promulgated.
LIQUIDATION OF THE REMIC
A REMIC may liquidate without the imposition of entity-level tax only
in a qualified liquidation. A liquidation is considered a "qualified
liquidation" if the REMIC (i) adopts a plan of complete liquidation; (ii) sells
all of its non-cash assets within 90 days of the date on which it adopts the
plan; and (iii) credits or distributes in liquidation all of the sale proceeds
plus its cash (other than amounts retained to meet claims against it) to its
Certificateholders within that 90-day period. An early termination of a REMIC
caused by the redemption of all outstanding classes of Certificates issued by
such REMIC, and the distribution to the Residual Certificateholders of the
excess, if any, of the fair market value of the REMIC's assets at the time of
such redemption over the unpaid principal balance and accrued and unpaid
interest of such REMIC Certificates (and any administrative costs associated
with such REMIC), will constitute a complete liquidation as described in the
preceding sentence. Under the REMIC Provisions, a plan of liquidation need not
be in any special form. Furthermore, if a REMIC specifies the first day in the
90-day liquidation period in a statement attached to its final tax return, the
REMIC will be considered to have adopted a plan of liquidation on that date.
Treatment by the REMIC of Original Issue Discount, Market Discount, and
Amortizable Premium.
Original Issue Discount. Generally, a REMIC's deductions for original
issue discount expense on its REMIC Certificates will be determined in the same
manner as for determining the original issue discount income on such
Certificates as described in "Federal Income Tax Consequences -- REMIC
Certificates -- Tax Treatment of Regular Certificates --Original Issue Discount"
above, without regard to the de minimis rule described therein.
Market Discount. In general, a REMIC will have market discount income
with respect to its Qualified Mortgages if the basis of the REMIC in such assets
is exceeded by their adjusted issue prices. A REMIC's aggregate initial basis in
its Qualified Mortgages (and any other assets transferred to the REMIC on the
startup day) equals the aggregate of the issue prices of the regular and
residual interests in the REMIC. That basis is allocated among the REMIC's
Qualified Mortgages based on their relative fair market values. Any market
discount that accrues on a REMIC's Qualified Mortgages will be recognized
currently as an item of REMIC ordinary income. The amount of market discount
income to be recognized in any period is determined in a manner generally
similar to that used in the determination of original issue discount, as if the
Qualified Mortgages had been issued (i) on the date they were acquired by the
REMIC and (ii) for a price equal to the REMIC's initial basis in the Qualified
Mortgages. The same prepayment assumptions used in pricing the Certificates are
used to compute the yield to maturity of a REMIC's Qualified Mortgages.
93
<PAGE> 129
Premium. Generally, if the basis of a REMIC in its Qualified Mortgages
exceeds the unpaid principal balances of those assets the REMIC will be
considered to have acquired such assets at a premium equal to the amount of such
excess. A REMIC that holds a Qualified Mortgage as a capital asset may elect
under Code section 171 to amortize premium on such asset under a constant
interest method, to the extent such asset was originated, or treated as
originated, after September 27, 1985. The legislative history to the 1986 Act
indicates that, while the deduction for amortization of premium will not be
subject to the limitations on miscellaneous itemized deductions of individuals,
it will be treated as interest expense for purposes of other provisions in the
1986 Act limiting the deductibility of interest for non-corporate taxpayers.
Because substantially all of the obligors on the Assets are expected to be
individuals, section 171 of the Code will not be available for the amortization
of premium on such Assets to the extent they were originated on or prior to
September 27, 1985. Such premium may be amortizable under more general
provisions and principles of federal income tax law in accordance with a
reasonable method regularly employed by the holder of such Assets. The
allocation of such premium pro rata among principal payments should be
considered a reasonable method; however, the Service may argue that such premium
should be allocated in a different manner, such as allocating such premium
entirely to the final payment of principal.
REMIC-LEVEL TAXES
Income from certain transactions by a REMIC, called prohibited
transactions, will not be part of the calculation of the REMIC's income or loss
that is includible in the federal income tax returns of Residual
Certificateholders, but rather will be taxed directly to the REMIC at a 100%
rate. In addition, net income from one prohibited transaction may not be offset
by losses from other prohibited transactions. Prohibited transactions generally
include: (i) the disposition of Qualified Mortgages other than pursuant to (a)
the repurchase of a defective asset, (b) the substitution for a defective asset
within two years of the closing date, (c) a substitution for any Qualified
Mortgage within three months of the closing date, (d) the foreclosure, default,
or imminent default of a Qualified Mortgage, (e) the bankruptcy or insolvency of
the REMIC, (f) the sale of an adjustable-rate asset the interest rate on which
is convertible to a fixed rate of interest upon its conversion for an amount
equal to the asset's current principal balance plus accrued but unpaid interest
(and provided that certain other requirements are met) or (g) a qualified
liquidation of the REMIC; (ii) the receipt of income from assets that are not
the type of assets or investments that a REMIC is permitted to hold; (iii) the
receipt of compensation for services by a REMIC; and (iv) the receipt of gain
from disposition of cash-flow investments other than pursuant to a qualified
liquidation of the REMIC. A disposition of a Qualified Mortgage or cash flow
investment will not give rise to a prohibited transaction, however, if the
disposition was (i) required to prevent default on a regular interest resulting
from a default on one or more of the REMIC's Qualified Mortgages or (ii) made to
facilitate a clean-up call. The REMIC Provisions define a clean-up call as the
redemption of a class of regular interests when, by reason of prior payments
with respect to those interests, the administrative costs associated with
servicing the class outweigh the benefits of maintaining the class. Under those
regulations, the redemption of a class of regular interests with an outstanding
principal balance of no more than 10% of the original principal balance
qualifies as a clean-up call. The REMIC Provisions also provide that the
modification of an asset generally will not be treated as a disposition of that
asset if it is occasioned by a default or a reasonably foreseeable default, an
assumption of the asset, the waiver of a due-on-sale or encumbrance clause, or
the conversion of an interest rate by an obligor pursuant to the terms of a
convertible adjustable rate asset.
In addition, a REMIC generally will be taxed at a 100% rate on any
contribution to the REMIC after the closing date unless such contribution is a
cash contribution that (i) takes place within the three-month period beginning
on the closing date; (ii) is made to facilitate a clean-up call (as defined in
the preceding paragraph) or a qualified liquidation (as defined in "Federal
Income Tax consequences -- REMIC Certificates -- Liquidation of the REMIC"
above); (iii) is a payment in the nature of a guarantee; (iv) constitutes a
contribution by the holder of the Residual Certificates in the REMIC to a
qualified reserve fund; or (v) is otherwise permitted by Treasury regulations
yet to be issued. The structure and operation of each Series REMIC will be
designed to avoid the imposition of the 100% tax on contributions.
To the extent that a REMIC derives certain types of income from
foreclosure property (generally, income relating to dealer activities of the
REMIC), it will be taxed on such income at the highest corporate income tax
rate.
94
<PAGE> 130
Although the relevant law is unclear, it is not anticipated that any Series
REMIC will receive significant amounts of such income.
The organizational documents governing the Regular and Residual
Certificates of a Series REMIC will be designed to prevent the imposition of the
foregoing taxes on such REMIC in any material amounts. If any of the foregoing
taxes is imposed on a Series REMIC, the Trustee will seek to place the burden
thereof on the person whose action or inaction gave rise to such taxes. To the
extent that the Trustee is unsuccessful in doing so, the burden of such taxes
will be borne by any outstanding subordinated Class of Certificates before it is
borne by a more senior Class of Certificates.
REMIC QUALIFICATION
The Trust underlying a Series (or one or more designated Asset Pools
thereof) will qualify under the Code as a REMIC if a REMIC election is in effect
and certain tests concerning (i) the composition of the assets of the REMIC and
(ii) the nature of the Certificateholders' interests in the REMIC are met on a
continuing basis.
ASSET COMPOSITION
In order for a Trust (or one or more designated Asset Pools thereof) to
be eligible for REMIC status, substantially all of the assets of the Trust (or
the designated Asset Pool) must consist of "qualified mortgages" and "permitted
investments" as of the close of the third month beginning after the closing date
and at all times thereafter. Substantially all of a REMIC's assets will be
deemed to consist of "Qualified Mortgages" and "permitted investments" if no
more than a de minimis amount of its assets (i.e., assets with an aggregate
adjusted basis that is less than 1% of the aggregate adjusted basis of all the
REMIC's assets) are assets other than qualified mortgages and permitted
investments.
A "Qualified Mortgage" is any obligation that is principally secured by
an interest in real property, including a regular interest in another REMIC, and
that is either transferred to the REMIC on the closing date or purchased by the
REMIC pursuant to a fixed price contract within a three-month period thereafter.
Under the REMIC Provisions, a Qualified Mortgage includes any obligation secured
by manufactured housing that qualifies as a "single family residence" within the
meaning of Code section 25(e)(10). Manufactured housing qualifies as a "single
family residence" under Code Section 25(e)(10) if it: (i) is used as a single
family residence; (ii) has a minimum of 400 square feet of living space and a
minimum width in excess of 102 inches; and (iii) is of a kind customarily used
at a fixed location. A Qualified Mortgage also includes a "qualified replacement
mortgage," which is any property that would have been treated as a Qualified
Mortgage if it were transferred to the REMIC on the closing date and that is
received either in exchange for a defective asset within a two-year period
beginning on the closing date or in exchange for any Qualified Mortgage within a
three-month period beginning on that date.
The Mortgage Loans of each Series REMIC will be treated as Qualified
Mortgages. In addition, the Seller will represent and warrant in the related
Agreement or Sales Agreement, as the case may be, that each Contract will be
secured by a Manufactured Home that meets the definition of "single family
residence" in section 25(e)(10) of the Code. Accordingly the Contracts of each
Series REMIC will be treated as Qualified Mortgages.
"Permitted Investments" include cash flow investments, qualified
reserve assets, and foreclosure property. Cash flow investments are investments
of amounts received with respect to Qualified Mortgages for a temporary period
(not to exceed thirteen months) before distribution to holders of regular or
residual interests in the REMIC. Qualified reserve assets are intangible
investment assets (other than REMIC residual interests) that are part of a
qualified reserve fund maintained by the REMIC. A qualified reserve fund is any
reasonably required reserve maintained by a REMIC to provide for full payment of
expenses of the REMIC or amounts due on the regular interests or residual
interest in such REMIC in the event of (i) defaults or delinquencies on the
Qualified Mortgages held by such REMIC; (ii) interest Unpaid Interest Amounts on
such Qualified Mortgages caused by prepayments of those assets; (iii) lower than
expected returns on cash-flow investments; or (iv) unanticipated losses or
expenses incurred by the REMIC. A qualified reserve
95
<PAGE> 131
fund will be disqualified if more than 30% of the gross income from the assets
in such fund for the year is derived from the sale of property held for less
than three months, unless such sale was required to prevent a default on the
regular interests caused by a default on one or more Qualified Mortgages. To the
extent that the amount in a qualified reserve fund exceeds a reasonably required
amount, it must be reduced "promptly and appropriately." Foreclosure property
generally is property acquired by the REMIC in connection with the default or
imminent default of a Qualified Mortgage. Foreclosure property may not be held
for more than two years, unless it is established to the satisfaction of the
Secretary of the Treasury that an extension of the two-year period is necessary
for the orderly liquidation of the foreclosure property. The Secretary of the
Treasury may grant one or more extensions, but any such extension shall not
extend the grace period beyond the date which is six years after the date such
foreclosure property is acquired.
INVESTORS' INTERESTS
In addition to the foregoing asset qualification requirements, the
various interests in a REMIC also must meet certain requirements. All of the
interests in a REMIC must be issued on the Closing Date (or within a specified
10-day period) and belong to either of the following: (i) one or more classes of
regular interests; or (ii) a single class of residual interests on which
distributions are made pro rata. For each Series REMIC with respect to which
REMIC Certificates are issued, the Regular Certificates will constitute one or
more classes of "regular interests" in that REMIC and the Residual Certificates
will constitute the single class of "residual interests" in that REMIC.
A REMIC interest qualifies as a regular interest if (i) it is issued on
the startup day with fixed terms; (ii) it is designated as a regular interest;
(iii) it entitles its holder to a specified principal amount; and (iv) if it
pays interest, such interest either (a) constitutes a specified portion of the
interest payable on one or more of the REMIC's Qualified Mortgages, and that
portion does not vary during the period that the regular interest is outstanding
(a "specified nonvarying portion"), (b) is payable at a fixed rate with respect
to the principal amount of the regular interest, or (c) to the extent permitted
under the REMIC Provisions, is payable at a variable rate with respect to such
principal amount. Pursuant to the REMIC Provisions, the following rates are
permissible variable rates for REMIC regular interests: (i) a qualified floating
rate set at a current value as described in "Federal Income Tax Consequences --
REMIC Certificates -- Variable Rate Certificates" above, without regard to the
rules in the OID Regulations limiting the use of Caps, Floors, and Governors
with respect to such a rate; (ii) a rate equal to the highest, lowest, or
average of two or more qualified floating rates (e.g., a rate based on the
average cost of funds of one or more financial institutions); or (iii) a rate
equal to the weighted average of the interest rates on one or more of the
Qualified Mortgages held by the REMIC provided, however, that the Qualified
Mortgages taken into account in determining the weighted average rate bear
interest at a fixed rate or a rate that would be a permissible variable rate for
a REMIC regular interest as described in this sentence. Under the REMIC
Provisions, the presence of a ceiling or floor on the interest payable on a
variable rate regular interest will not prevent such an interest from qualifying
as a regular interest. In addition, a qualifying variable rate may be expressed
as a multiple of, or a constant number of basis points more or less than, one of
the permissible types of variable rates described above. Finally, a limitation
on the amount of interest to be paid on a variable rate regular interest based
on the total amount available for distribution is permissible, provided that it
is not designed to avoid the restrictions on qualifying variable rates. The
REMIC Provisions also provide that the specified principal amount of a REMIC
regular interest may be zero if the interest associated with such regular
interest constitutes a specified nonvarying portion of the interest on one or
more of the REMIC's Qualified Mortgages.
If the interest payable on a REMIC regular interest is
disproportionately high relative to the specified principal amount of that
interest, that interest may be treated, in whole or in part, as a second
residual interest, which could result in the disqualification of the REMIC.
Under the REMIC Provisions, interest payments (or similar amounts) are
considered disproportionately high if the issue price of a regular interest
exceeds 125% of its specified principal amount. Under the REMIC Provisions,
however, interest payable at a disproportionately high rate will not cause a
regular interest to be recharacterized as a residual interest if the interest
payable on that regular interest consists of a specified nonvarying portion of
the interest payable on one or more of the REMIC's Qualified Mortgages. None of
the Regular Certificates will have an issue price that exceeds 125% of their
respective specified principal amounts unless the interest
96
<PAGE> 132
payable on those Certificates consists of a specified nonvarying portion of the
interest payable on one or more of the REMIC's Qualified Mortgages.
The Code requires certain arrangements to be made with respect to all
REMICs. Those arrangements, which are intended to prevent acquisitions of REMIC
residual interests (including the Residual Certificates) by certain
organizations that are not subject to federal income tax, are described in
"Federal Income Tax Consequences -- REMIC Certificates -- Tax Treatment of
Residual Certificates -- Ownership of Residual Interests by Disqualified
Organizations" above. Each Series REMIC will be structured to provide for such
arrangements.
Consequences of Disqualification
If a Series REMIC fails to comply with one or more of the Code's
ongoing requirements for REMIC status during any taxable year, the Code provides
that its REMIC status may be lost for that year and thereafter. If REMIC status
is lost, the treatment of the former REMIC and the interests therein for federal
income tax purposes is uncertain. The former REMIC might be entitled to
treatment as a grantor trust under Subpart E, Part 1 of Subchapter J of the
Code, in which case no entity-level tax would be imposed on the former REMIC.
Alternatively, the Regular Certificates may continue to be treated as debt
instruments for federal income tax purposes, but the arrangement could be
treated as a Taxable Mortgage Pool. See "Federal Income Tax Consequences --
REMIC Certificates -- Taxable Mortgage Pools" below. If a Series REMIC is
treated as a Taxable Mortgage Pool, any residual income of the former REMIC
(i.e., interest and discount income from the underlying Assets less interest and
original issue discount expense allocable to the Regular Certificates and any
administrative expenses of the REMIC) would be subject to corporate income tax
at the Taxable Mortgage Pool level. On the other hand, the arrangement could be
treated as a separate association taxable as a corporation and the Regular
Certificates could be treated as stock interests therein, rather than debt
instruments. Alternatively, the arrangement could be treated as a partnership at
the Series REMIC's election and the Regular Certificates could be treated as
partnership interests therein. In the event the arrangement were treated as
either a Taxable Mortgage Pool or an association, Residual Certificates would be
treated as stock interests in such Taxable Mortgage Pool or association,
respectively. The Code authorizes the Treasury to issue regulations that address
situations where a failure to meet the requirements for REMIC status occurs
inadvertently and in good faith. Such regulations have not yet been issued. The
conference report accompanying the 1986 Act indicates that disqualification
relief may be accompanied by sanctions, such as the imposition of a corporate
tax on all or a portion of the REMIC's income for the period of time in which
the requirements for REMIC status are not satisfied.
TAXABLE MORTGAGE POOLS
Corporate income tax can be imposed on the net income of certain
entities issuing non-REMIC debt obligations secured by real estate mortgages
("Taxable Mortgage Pools"). Any entity other than a REMIC or a REIT will be
considered a Taxable Mortgage Pool if (i) substantially all of the assets of the
entity consist of debt obligations and more than 50% of such obligations consist
of "real estate mortgages" (which term, for purposes of this paragraph, includes
Mortgage Loans and Contracts), (ii) such entity is the obligor under debt
obligations with two or more maturities, and (iii) under the terms of the debt
obligations on which the entity is the obligor, payments on such obligations
bear a relationship to payment on the obligations held by the entity.
Furthermore, a group of assets held by an entity can be treated as a separate
Taxable Mortgage Pool if the assets are expected to produce significant cash
flow that will support one or more of the entity's issues of debt obligations.
The Company generally will structure offerings of non-REMIC Certificates to
avoid the application of the Taxable Mortgage Pool rules.
TAXATION OF CERTAIN FOREIGN HOLDERS OF REMIC CERTIFICATES
Regular Certificates
Interest, including original issue discount, paid on a Regular
Certificate to a Foreign Person generally will be treated as "portfolio
interest" and, therefore, will not be subject to any United States withholding
tax, provided that (i)
97
<PAGE> 133
such interest is not effectively connected with a trade or business in the
United States of the Certificateholder, and (ii) the Trustee (or other person
who would otherwise be required to withhold tax) is provided with a Foreign
Person Certification. If the holder of a Regular Certificate does not provide
the Trustee (or other person who would otherwise be required to withhold tax)
with a Foreign Person Certification, interest (including original issue
discount) paid on such a Certificate may be subject to either a 30% withholding
tax or 31% backup withholding. See "Federal Income Tax Consequences -- Taxation
of Certain Foreign Holders of REMIC Certificates -- Backup Withholding" below.
Residual Certificates
Amounts paid to Residual Certificateholders who are Foreign Persons are
treated as interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Under temporary Treasury Regulations, non-excess inclusion
income received by Residual Certificateholders who are Foreign Persons generally
would qualify as "portfolio interest" exempt from the 30% withholding tax (as
described in the preceding paragraph) only to the extent that (i) the Assets
held by the related Series REMIC were issued in registered form and (ii) such
Assets were originated after July 18, 1984. Because the Assets held by a Series
REMIC will not be issued in registered form, amounts received by Residual
Certificateholders who are Foreign Persons will not be exempt from the 30%
withholding tax. Such amounts generally will be subject to United States
withholding tax when paid or otherwise distributed (or when the Residual
Certificate is disposed of) under rules similar to those for withholding on debt
instruments that have original issue discount. However, the Code grants the
Treasury authority to issue regulations requiring that those amounts be taken
into account earlier than otherwise provided where necessary to prevent
avoidance of tax (i.e., where the Residual Certificates, as a Class, do not have
significant value). Further, a Residual Certificateholder will not be entitled
to any exemption from the 30% withholding tax or a reduced treaty rate on excess
inclusion income.
Under the REMIC Provisions, the transfer of a Residual Certificate that
has tax avoidance potential to a Foreign Person will be disregarded for all
federal income tax purposes. A Residual Certificate is deemed to have "tax
avoidance potential" under those regulations unless, at the time of the
transfer, the transferor reasonably expects that, for each accrual of excess
inclusion, the REMIC will distribute to the transferee an amount that will equal
at least 30% of the excess inclusion, and that each such amount will be
distributed no later than the close of the calendar year following the calendar
year of accrual. A transferor of a Residual Certificate to a Foreign Person will
be presumed to have had a reasonable expectation at the time of the transfer
that, for each accrual of excess inclusion, the REMIC will distribute to the
transferee an amount that will equal at least 30% of the excess inclusion, and
that each such amount will be distributed no later than the close of the
calendar year following the calendar year of accrual, if such distributions
would be made under all Asset prepayment rates between 50% and 200% of the
Pricing Prepayment Assumption. See "Federal Income Tax Consequences -- REMIC
Certificates -- Tax Treatment of Regular Certificates -- Original Issue
Discount" above. If a Foreign Person transfers a Residual Certificate to a
United States person and the transfer, if respected, would permit avoidance of
withholding tax on accrued excess inclusion income, that transfer also will be
disregarded for federal income tax purposes and distributions with respect to
the Residual Certificate will continue to be subject to 30% withholding as
though the Foreign Person still owned the Residual Certificate. Investors who
are Foreign Persons should consult their own tax advisors regarding the specific
tax consequences to them of owning and disposing of a Residual Certificate.
Backup Withholding
Under federal income tax law, a Certificateholder may be subject to
"backup withholding" under certain circumstances. Backup withholding applies to
a Certificateholder who is a United States person if the Certificateholder,
among other things, (i) fails to furnish his social security number or other
taxpayer identification number to the Trustee; (ii) furnishes the Trustee an
incorrect taxpayer identification number; (iii) fails to report properly
interest and dividends; or (iv) under certain circumstances, fails to provide
the Trustee or the Certificateholder's securities broker with a certified
statement, signed under penalties of perjury, that the taxpayer identification
number provided to the Trustee is correct and that the Certificateholder is not
subject to backup withholding. Backup withholding applies, under certain
circumstances, to a Certificateholder who is a foreign person if the
Certificateholder fails to provide the Trustee or the
98
<PAGE> 134
Certificateholder's securities broker with a Foreign Person Certification (as
described in "Federal Income Tax Consequences -- REMIC Certificates -- Taxation
of Certain Foreign Holders of REMIC Certificates -- Regular Certificates"
above). Backup withholding applies to "reportable payments," which include
interest payments and principal payments to the extent of accrued original issue
discount, as well as distributions of proceeds from the sale of Regular
Certificates or REMIC Residual Certificates. The backup withholding rate for
reportable payments made on or after January 1, 1993 is 31%. Backup withholding,
however, does not apply to payments on Certificates made to certain exempt
recipients, such as tax-exempt organizations, and to certain Foreign Persons.
Certificateholders should consult their tax advisors for additional information
concerning the potential application of backup withholding to payments received
by them with respect to a Certificate.
REPORTING AND TAX ADMINISTRATION
Regular Certificates
Reports will be made at least annually to holders of record of Regular
Certificates (other than those with respect to whom reporting is not required)
and to the Service as may be required by statute, regulation, or administrative
ruling with respect to (i) interest paid or accrued on the Certificates; (ii)
original issue discount, if any, accrued on the Certificates; and (iii)
information necessary to compute the accrual of any market discount or the
amortization of any premium on the Certificates.
Residual Certificates
For purposes of federal income tax reporting and administration, a
Series REMIC generally will be treated as a partnership, and the related
Residual Certificateholders as its partners. A Series REMIC will file an annual
return on Form 1066 and will be responsible for providing information to
Residual Certificateholders sufficient to enable them to report properly their
shares of the REMIC's taxable income or loss, although it is anticipated that
such information actually will be supplied by the Trustee based upon information
it receives from the Servicer in its monthly reports delivered pursuant to the
Agreement. The REMIC Provisions require reports to be made by a REMIC to its
Residual Certificateholders each calendar quarter in order to permit such
Certificateholders to compute their taxable income accurately. A person that
holds a Residual Certificate as a nominee for another person is required to
furnish those quarterly reports to the person for whom it is a nominee within 30
days of receiving such reports. A REMIC is required to file all such quarterly
reports for a taxable year with the Service as an attachment to the REMIC's
income tax return for that year. As required by the Code, a Series REMIC's
taxable year will be the calendar year.
Residual Certificateholders should be aware that their responsibilities
as holders of the residual interest in a REMIC, including the duty to account
for their shares of the REMIC's income or loss on their returns, continue for
the life of the REMIC, even after the principal and interest on their Residual
Certificates have been paid in full.
The Treasury has issued regulations concerning certain aspects of REMIC
tax administration. Under those regulations, a Residual Certificateholder must
be designated as the REMIC's tax matters person or TMP. The TMP generally has
responsibility for overseeing and providing notice to the other Residual
Certificateholders of certain administrative and judicial proceedings regarding
the REMIC's tax affairs, although other holders of the Residual Certificates of
the same Series would be able to participate in such proceedings in appropriate
circumstances. It is expected that the Servicer or an Affiliate thereof will
acquire a portion of the residual interest in each Series REMIC in order to
permit it to be designated as TMP for the REMIC and will prepare and file the
REMIC's federal and state income tax and information returns.
Treasury regulations provide that a Residual Certificateholder is not
required to treat items on its return consistently with their treatment on the
REMIC's return if the Certificateholder owns 100% of the Residual Certificates
for the entire calendar year. Otherwise, each Residual Certificateholder is
required to treat items on its returns consistently with their treatment on the
REMIC's return, unless the Certificateholder either files a statement
identifying
99
<PAGE> 135
the inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC. The Service may assess a deficiency
resulting from a failure to comply with the consistency requirement without
instituting an administrative proceeding at the REMIC level. A Series REMIC
typically will not register as a tax shelter pursuant to Code section 6111
because it generally will not have a net loss for any of the first five taxable
years of its existence. Any person that holds a Residual Certificate as a
nominee for another person may be required to furnish the related Series REMIC,
in a manner to be provided in Treasury regulations, with the name and address of
such person and other specified information.
NON-REMIC CERTIFICATES
Treatment of the Trust for Federal Income Tax Purposes
In the case of Series with respect to which a REMIC election is not
made, the Trust will be classified as a grantor trust under Subpart E, Part I of
subchapter J of the Code and not as an association taxable as a corporation.
Thus, the owner of a Non-REMIC Certificate issued by such a Trust generally will
be treated as the beneficial owner of an appropriate portion of the principal
and interest payments (according to the characteristics of the Certificate in
question) to be received on the Assets assigned to a Trust for federal income
tax purposes.
Treatment of the Non-REMIC Certificates for Federal Income Tax Purposes
Generally
The types of Non-REMIC Certificates offered in a Series may include:
(i) Strip Certificates (i.e., IO Certificates, PO Certificates, and Ratio
Certificates) and (ii) Participation Certificates. The federal income tax
treatment of Strip Certificates will be determined in part by section 1286 of
the Code. Little administrative guidance has been issued under that section and,
thus, many aspects of its operation are unclear, particularly the interaction
between that section and the rules pertaining to discount and premium. Hence,
significant uncertainty exists with respect to the federal income tax treatment
of Strip Certificates, and potential investors should consult their own tax
advisors concerning such treatment.
Several Code sections provide beneficial treatment to certain taxpayers
that invest in certain types of mortgage assets. For purposes of those Code
sections, Participation Certificates will be characterized with reference to the
Assets in the related Trust, but it is not clear whether Strip Certificates will
be so characterized. The Service could take the position that the character of
the Assets is not attributable to Strip Certificates for purposes of those Code
sections. However, because Strip Certificates represent sole ownership rights in
the principal and interest payments on the Assets, Strip Certificates, like
Participation Certificates, should be characterized with reference to the Assets
in the Trust. Accordingly, all Non-REMIC Certificates should be treated as
qualifying assets for Thrift Institutions, and as real estate assets for REITs
in the same proportion that the Assets in the Trust would be so treated.
Similarly, the interest income attributable to Non-REMIC Certificates should be
considered Qualifying REIT Interest for REIT purposes to the extent that the
Assets in the Trust qualify as real estate assets for REIT purposes.
One or more Classes of Non-REMIC Certificates may be subordinated to
one or more other Classes of Non-REMIC Certificates of the same Series. In
general, such subordination should not affect the federal income tax treatment
of either the subordinated Non-REMIC Certificates or the senior Non-REMIC
Certificates. However, to the extent indicated in "Description of the
Certificates -- Allocation of Distributions from the Assets" herein and to the
extent provided in the relevant Prospectus Supplement, holders of such
subordinated Certificates will be allocated losses prior to their allocation to
the holders of more senior Classes of Certificates. Holders of such subordinated
Certificates should be able to recognize any such losses no later than the
taxable year in which they become Realized Losses. Employee benefit plans
subject to ERISA should consult their own tax advisors before purchasing any
subordinated Certificates. See "ERISA Considerations" herein and in the
Prospectus Supplement.
Treatment of Participation Certificates
100
<PAGE> 136
The holder of a Participation Certificate issued by a Trust generally
will be treated as owning a pro rata undivided interest in each of the Assets
held by such Trust. Accordingly, each holder of a Participation Certificate will
be required to include in income its pro rata share of the entire income from
the Trust's assets, including interest and discount income, if any. Such
Certificateholder generally will be able to deduct from its income its pro rata
share of the administrative fees and expenses incurred with respect to the
Trust's assets (provided that such fees and expenses represent reasonable
compensation for the services rendered). An individual, trust, or estate that
holds a Participation Certificate directly or through a pass-through entity will
be entitled to deduct such fees and expenses under section 212 of the Code only
to the extent that the amount of the fees and expenses, when combined with its
other miscellaneous itemized deductions for the taxable year in question,
exceeds 2% of its adjusted gross income. In addition, Code section 68 provides
that 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
within the meaning of Code section 7703 for taxable year 1991, adjusted each
year thereafter for inflation) will be reduced by the lesser of (i) 3% of the
excess of adjusted gross income over the applicable amount, or (ii) 80% of the
amount of itemized deductions otherwise allowable for such taxable year. Each
Participation Certificateholder generally will determine its net income or loss
with respect to the Trust in accordance with its own method of accounting,
although income arising from original issue discount must be taken into account
under the accrual method even though the Certificateholder otherwise would use
the cash receipts and disbursements method.
The Code provisions concerning original issue discount, market
discount, and amortizable premium will apply to the Trust assets. The rules
regarding discount and premium that are applicable to Non-REMIC Certificates
generally are the same as those that apply to REMIC Regular Certificates. See
the discussions under "Federal Income Tax Consequences -- REMIC Certificates --
Original Issue Discount," " -- Variable Rate Certificates," " -- Market
Discount," and " -- Amortizable Premium" above.
For instruments to which it applies, Code section 1272(a)(6) requires
the use of an income tax accounting methodology that utilizes (i) a single
constant yield to maturity and (ii) the Pricing Prepayment Assumptions. Unlike
in the case of Regular Certificates, Code section 1272(a)(6) technically does
not apply to Non-REMIC Certificates. Although the Treasury has authority to
apply that section to certificates such as the Non-REMIC Certificates, it has
not yet done so. Nonetheless, unless and until the release of administrative
guidance to the contrary, the Tax Administrator will account for the Non-REMIC
Certificates as though section 1272(a)(6) applied to them. Thus, the Tax
Administrator will account for a class of Non-REMIC Certificates in the same
manner as it would account for a class of Regular Certificates with the same
terms. There can be no assurance, however, that the Service ultimately will
sanction the Tax Administrator's position.
The original issue discount rules generally apply to residential
mortgage loans originated after March 2, 1984, and the market discount rules
apply to any such loans originated after July 18, 1984. The rules allowing for
the amortization of premium are available with respect to mortgage loans
originated after September 27, 1985. It is anticipated that most or all of the
Assets securing any Series will be subject to the original issue discount,
market discount, and amortizable premium rules. Although most Mortgage Loans and
Contracts nominally are issued at their original principal amounts, original
issue discount could arise from the payment of points or certain other
origination charges by the Obligors if the discount attributable to such
payments exceeds the de minimis amount. If the Trust contains Assets purchased
for prices below their outstanding principal amounts, holders of Participation
Certificates will be required to take into account original issue discount not
previously accrued to the prior holder of such Assets. Moreover, if such Assets
were purchased for less than their adjusted issue prices, Participation
Certificateholders generally will be required to take into account market
discount, unless the amount of such market discount is de minimis under the
market discount rules. Finally, Participation Certificateholders generally may
elect to amortize any premium paid for Assets over the aggregate adjusted issue
price of such Assets. For a more complete elaboration of the rules pertaining to
original issue discount, market discount, and acquisition premium, see the
discussion under "Federal Income Tax Consequences -- REMIC Certificates -- Tax
Treatment of Regular Certificates" above.
Treatment of Strip Certificates
101
<PAGE> 137
Many aspects of the federal income tax treatment of Strip Certificates
are uncertain. The discussion below describes the treatment that the Company
believes is fair and accurate, but there can be no assurance that the Service
will not take a contrary position. Potential investors, therefore, should
consult their own tax advisors with respect to the federal income tax treatment
of Strip Certificates.
Under section 1286 of the Code, the separation of ownership of the
right to receive some or all of the interest payments on an obligation from
ownership of the right to receive some or all of the principal payments on such
obligation results in the creation of "stripped coupons" with respect to the
separated rights to interest payments and "stripped bonds" with respect to the
principal and any undetached interest payments associated with that principal.
The issuance of IO or PO Certificates effects a separation of the ownership of
the interest and principal payments on some or all of the Assets in the Trust.
In addition, the issuance of Ratio Certificates effectively separates and
reallocates the proportionate ownership of the interest and principal payments
on the Assets. Therefore, Strip Certificates will be subject to section 1286.
For federal income tax accounting purposes, section 1286 treats a
stripped bond or a stripped coupon as a new debt instrument issued (i) on the
date that the stripped interest is purchased and (ii) at a price equal to its
purchase price or, if more than one stripped interest is purchased, the share of
the purchase price allocable to such stripped interest. Each stripped bond or
coupon generally will have original issue discount equal to the excess of its
stated redemption price at maturity (or, in the case of a stripped coupon, the
amount payable on the due date of such coupon) over its issue price. The
Stripping Regulations, however, provide that the original issue discount on a
stripped bond or stripped coupon is zero if the amount of the original issue
discount would be de minimis under rules generally applicable to debt
instruments. For purposes of that determination, (i) the number of complete
years to maturity is measured from the date the stripped bond or stripped coupon
is purchased; (ii) an aggregation approach similar to the Aggregation Rule (as
described in "Federal Income Tax Consequences -- REMIC Certificates -- Original
Issue Discount" above) may be applied; and (iii) unstripped coupons may be
treated as stated interest with respect to the related bonds and, therefore, may
be excluded from stated redemption price at maturity in appropriate
circumstances. In addition, the Stripping Regulations provide that, in certain
circumstances, the excess of a stripped bond's stated redemption price at
maturity over its issue price is treated as market discount, rather than as
original issue discount. See "Federal Income Tax Consequences -- Non-REMIC
Certificates -- Treatment of Strip Certificates -- Determination of Income With
Respect to Strip Certificates" below.
The application of section 1286 to the Strip Certificates is not
entirely clear under current law. It could be interpreted as causing: (i) in the
case of an IO Certificate, each interest payment due on the underlying Assets to
be treated as a separate debt instrument; (ii) in the case of a Ratio
Certificate entitled to a disproportionately high share of principal, each
excess principal amount (i.e., the portion of each principal payment on such
Assets that exceeds the amount to which the Ratio Certificateholder would have
been entitled if he had held an undivided interest in the underlying Assets) to
be treated as a separate debt instrument; and (iii) in the case of a Ratio
Certificate entitled to a disproportionately high share of interest, each excess
interest amount to be treated as a separate debt instrument. In addition,
section 1286 would require the purchase price of a Strip Certificate to be
allocated among each of the rights to payment on the underlying Assets to which
the Certificateholder is entitled that are treated as separate debt instruments.
Despite the foregoing, it may be appropriate to treat stripped coupons and
stripped bonds issued to the same holder as a single debt instrument under an
aggregation approach, depending on the facts and circumstances surrounding the
issuance. Facts and circumstances considered relevant for this purpose should
include the likelihood of the debt instruments trading as a unit and the
difficulty of allocating the purchase price of the unit among the individual
payments. Strip Certificates are designed to trade as whole investment units
and, to the extent that the Underwriter develops a secondary market for the
Strip Certificates, it anticipates that the Strip Certificates would trade in
such market as whole units. In addition, because no market exists for individual
payments on Assets, the proper allocation of the Certificate's purchase price to
each separate payment on the Assets in the Trust would be difficult and
burdensome to determine. Based on those facts and circumstances, it appears that
all payments of principal and interest to which the holder of a Strip
Certificate is entitled should be treated as a single installment obligation.
Although the OID Regulations do not refer directly to debt instruments that are
governed by section 1286 of the Code, the application of the OID
102
<PAGE> 138
Regulations to such instruments is consistent with the overall statutory and
regulatory scheme. Therefore, the Tax Administrator will treat each Strip
Certificate as a single debt instrument for income tax accounting purposes.
Determination of Income with Respect to Strip Certificates
For purposes of determining the amount of income on a Strip Certificate
that accrues in any period, the rules described under "Federal Income Tax
Consequences -- REMIC Certificates -- Original Issue Discount," " -- Variable
Rate Certificates," " -- Anti-Abuse Rule," " -- Interest Weighted Certificates
and Non-VRDI Certificates," " -- Market Discount," and " -- Amortizable Premium"
will apply. PO Certificates and certain Classes of Ratio Certificates will be
issued at a price that is less than their stated principal amount and thus
generally will be issued with original issue discount. A Strip Certificate that
would meet the definition of an Interest Weighted Certificate or a Weighted
Average Certificate if it were a Regular Certificate is subject to the same tax
accounting considerations applicable to the Regular Certificate to which it
corresponds. Thus, as described in "Federal Income Tax Consequences -- REMIC
Certificates -- Interest Weighted Certificates and Non-VRDI Certificates,"
certain aspects of the tax accounting treatment of such a Strip Certificate are
unclear. Unless and until the Service provides administrative guidance to the
contrary, the Tax Administrator will account for such a Strip Certificate in the
manner described for the corresponding Regular Certificate. See "Federal Income
Tax Consequences -- REMIC Certificates -- Interest Weighted Certificates and
Non-VRDI Certificates."
If a PO Certificate or a Ratio Certificate that is not considered a
Contingent Payment Obligation (an "Ordinary Ratio Certificate") subsequently is
sold, the purchaser apparently would be required to treat the difference between
the purchase price and the stated redemption price at maturity as original issue
discount. The holder of such a Certificate generally will be required to include
such original issue discount in income as described in "Federal Income Tax
Consequences -- REMIC Certificates -- Original Issue Discount" above. PO
Certificates and Ordinary Ratio Certificates issued at a price less than their
stated principal amount will be treated as issued with market discount rather
than with original issue discount if, after the most recent disposition of the
related Certificate, either (i) the amount of original issue discount on the
Certificate is considered to be de minimis under the Stripping Regulations or
(ii) the annual stated rate of interest payable on the Certificate is no more
than 1% lower than the annual stated rate of interest payable on the Asset from
which the Certificate was stripped. The holders of such Certificates generally
would be required to include market discount in income in the manner described
in "Federal Income Tax Consequences -- REMIC Certificates -- Market Discount"
above. Some Classes of Ordinary Ratio Certificates may be issued at a price that
exceeds their stated principal amount. Subject to the discussion of Superpremium
Certificates in "Federal Income Tax Consequences -- REMIC Certificates --
Original Issue Discount" above, holders of such Ordinary Ratio Certificates
generally should be able to amortize that premium as described in "Federal
Income Tax Consequences -- REMIC Certificates -- Amortizable Premium" above.
IO Certificates do not represent a right to stated principal amounts.
Rather, IO Certificates represent rights only to payments of interest which, as
a result of prepayments on the Assets in the related Trust, may never be made.
The Tax Administrator will account for IO Certificates in the same manner as for
Interest Weighted Certificates. See "Federal Income Tax Consequences -- REMIC
Certificates -- Original Issue Discount," " -- Variable Rate Certificates," and
" -- Interest Weighted Certificates and Non-VRDI Certificates" above.
Purchase of Complementary Classes of Strip Certificates
Complementary Strip Certificates, when held in combination, provide an
aggregate economic effect equivalent to that of a Participation Certificate.
When an investor purchases Complementary Strip Certificates, it appears that,
for federal income tax purposes, each such Certificate should be treated
separately and should be subject to the rules described above. The Service could
assert, however, that Complementary Strip Certificates held in combination
should be treated as a single pass-through type instrument, with the result that
the rules governing stripped bonds and stripped coupons under section 1286 of
the Code would not be applied. Consequently, investors who acquire Complementary
Strip Certificates should consult their own tax advisors as to the proper
treatment of such Certificates.
103
<PAGE> 139
Possible Alternative Characterizations
The Service could assert that the Strip Certificates should be
characterized for tax purposes in a manner different from that described above.
For example, the Service could contend that each Ratio Certificate whose
interest rate is higher than the related Series Rate is to be treated as being
composed of two certificates: (i) a Participation Certificate of the same
principal amount as the Ratio Certificate but generating interest at the Series
Rate; and (ii) an IO Certificate representing the excess of the rate on the
Ratio Certificate over the Series Rate. Similarly, a Ratio Certificate whose
interest rate is lower than the Series Rate could be treated as composed of a
Participation Certificate with an interest rate equal to the Series Rate and a
PO Certificate. Alternatively, the Service could interpret section 1286 to
require that each individual interest payment with respect to an IO Certificate
or a Ratio Certificate be treated as a separate debt instrument for original
issue discount purposes. The Service also might challenge the manner in which
original issue discount is calculated, contending that (i) the stated maturity
should be used to calculate yield on a Non-REMIC Certificate; (ii) the
Contingent Payment Regulations should not apply to IO Certificates; or (iii) the
Contingent Payment Regulations should apply to the Ordinary Ratio Certificates.
Given the variety of alternative treatments of Strip Certificates and the
different federal income tax consequences that could result from each
alternative, a potential investor is urged to consult its own tax advisor
regarding the proper treatment of such Certificates for federal income tax
purposes.
Limitations on Deductions with Respect to Strip Certificates
The holder of a Strip Certificate will be treated as owning an interest
in each of the Assets of the related Trust and will recognize an appropriate
share of the income and expenses associated with those Assets. Accordingly, an
individual, trust, or estate that holds a Strip Certificate directly or through
a pass-through entity will be subject to the same limitations on deductions with
respect to such Certificate as are applicable to holders of Participation
Certificates. See "Federal Income Tax Consequences -- Non-REMIC Certificates ---
Treatment of Participation Certificates" above.
Sale of a Non-REMIC Certificate
A sale of a non-REMIC Certificate prior to its maturity will result in
gain or loss equal to the difference between the amount received and the
holder's adjusted basis in such Certificate. The rules for computing the
adjusted basis of a Non-REMIC Certificate are the same as in the case of a
Regular Certificate. See "Federal Income Tax Consequences -- REMIC Certificates
- -- Tax Treatment of Regular Certificates -- Gain or Loss on Disposition" above.
Gain or loss from the sale or other disposition of a Non-REMIC Certificate
generally will be capital gain or loss to the Certificateholder if the
Certificate is held as a "capital asset" within the meaning of section 1221 of
the Code, and will be long-term, mid-term or short-term depending on whether the
Certificate has been held for the long-term capital gain holding period
(currently, more than eighteen months) or the mid-term capital gain holding
period (currently, more than twelve months but not more than eighteen months).
Ordinary income treatment, however, will apply to the extent mandated by the
original issue discount and market discount rules or if the Certificateholder is
a financial institution described in section 582 of the Code. See "Federal
Income Tax Consequences -- REMIC Certificates -- Gain or Loss on Disposition"
above.
TAXATION OF CERTAIN FOREIGN HOLDERS OF NON-REMIC CERTIFICATES
Interest, including original issue discount, paid on a Non-REMIC
Certificate to a Foreign Person generally is treated as "portfolio interest"
and, therefore, is not subject to any United States tax, provided that (i) such
interest is not effectively connected with a trade or business in the United
States of the Certificateholder, and (ii) the Trustee (or other person who would
otherwise be required to withhold tax) is provided with Foreign Person
Certification. If the holder of a Non-REMIC Certificate does not provide the
Trustee (or other person who would otherwise be required to withhold tax) with a
Foreign Person Certification, interest (including original issue discount) paid
on such a Certificate may be subject to either a 30% withholding tax or 31%
backup withholding.
104
<PAGE> 140
In the case of certain Series, portfolio interest treatment will not be
available for interest paid with respect to certain classes of Non-REMIC
Certificates. Interest on debt instruments issued on or before July 18, 1984
does not qualify as "portfolio interest" and, therefore, is subject to United
States withholding tax at a 30% rate (or lower treaty rate, if applicable). IO
Certificates and PO Certificates generally are treated, and Ratio Certificates
generally should be treated, as having been issued when they are sold to an
investor. In the case of Participation Certificates, however, the issuance date
of the Certificate is determined by the issuance date of the underlying Assets.
Thus, to the extent that the interest received by a holder of a Participation
Certificate is attributable to Assets issued on or before July 18, 1984, such
interest will be subject to the 30% withholding tax. Moreover, to the extent
that a Ratio Certificate is characterized as a pass-through type certificate and
the underlying Assets were issued on or before July 18, 1984, interest generated
by the Certificate may be subject to the withholding tax. See "Federal Income
Tax Consequences -- Non-REMIC Certificates -- Treatment of Strip Certificates --
Possible Alternative Characterizations" above. Although recently enacted tax
legislation denies portfolio interest treatment to certain types of contingent
interest, that legislation generally applies only to interest based on the
income, profits, or property values of the debtor. Accordingly, it is not
anticipated that such legislation will apply to deny portfolio interest
treatment to Certificateholders who are Foreign Persons. However, because the
scope of the new legislation is not entirely clear, investors who are Foreign
Persons should consult their tax advisors regarding the potential application of
the legislation before purchasing a Certificate.
Backup Withholding
The application of backup withholding to Non-REMIC Certificates
generally is the same as in the case of REMIC Certificates. See "Federal Income
Tax Consequences -- REMIC Certificates -- Backup Withholding" above.
Reporting and Tax Administration
For purposes of reporting and tax administration, the holders of
Non-REMIC Certificates will be treated in the same fashion as the holders of
Regular Certificates. See "Federal Income Tax Consequences -- REMIC Certificates
- --Reporting and Tax Administration" above.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
CERTIFICATEHOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO
MANY ASPECTS OF THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND
DISPOSITION OF THE CERTIFICATES.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described above
under "Federal Income Tax Consequences" above, potential investors should
consider the state income tax consequences of the acquisition, ownership, and
disposition of the Certificates. State income tax law may differ substantially
from the corresponding federal law, and this discussion does not purport to
describe any aspect of the income tax laws of any state. Therefore, potential
investors should consult their own tax advisors with respect to the various
state tax consequences of an investment in the Certificates.
ERISA CONSIDERATIONS
In considering an investment in a Certificate of the assets of any
employee benefit plan or retirement arrangement, including individual retirement
accounts and annuities, Keogh plans, and collective investment funds in which
such plans, accounts, annuities or arrangements are invested, that are described
in or subject to the Plan Asset Regulations, ERISA, or corresponding provisions
of the Code (each hereinafter referred to as a Plan), a fiduciary should
consider, among other things, (i) the purposes, requirements, and liquidity
needs of such Plan; (ii) the impact of the plan asset provisions of ERISA and
DOL regulations concerning the definition of plan assets; (iii) whether the
investment
105
<PAGE> 141
satisfies the diversification requirements of section 404(a)(1)(C) of ERISA; and
(iv) whether the investment is prudent, considering the nature of an investment
in a Certificate and the fact that no market in which such fiduciary can sell or
otherwise dispose of Certificates may be created or, if created, will continue
to exist for the life of the Certificates. The prudence of a particular
investment must be determined by the responsible fiduciary (usually the trustee
or investment manager) with respect to each Plan taking into account all of the
facts and circumstances of the investment.
Sections 406 and 407 of ERISA and section 4975 of the Code prohibit
certain transactions that involve (i) a Plan and any "party in interest" or
"disqualified person" with respect to such Plan, and (ii) plan assets. The Plan
Asset Regulations issued by the DOL define "plan assets" to include not only
securities (such as the Certificates) held by a Plan but also the underlying
assets of the issuer of any equity securities, unless one or more exceptions
specified in those Regulations are satisfied. Thus, under the Plan Asset
Regulations, a Plan that acquires a Certificate could be treated for ERISA
purposes as having acquired a direct interest in some or all of the assets in
the related Trust. Such treatment could cause certain transactions with respect
to such assets to be deemed "prohibited transactions" under ERISA and, in
addition, could result in a finding of an improper delegation by the plan
fiduciary of its duty to manage plan assets.
The DOL has issued several exemptions from certain of the prohibited
transaction rules of ERISA and the related excise tax provisions of section 4975
of the Code. Those exemptions include, but are not limited to: (1) Prohibited
Transaction Class Exemption 95-60 ("PTCE 95-60"), regarding investments by
insurance company general accounts; (2) Prohibited Transaction Class Exemption
91-38, regarding investments by bank collective investment funds; (3) Prohibited
Transaction Class Exemption 90-1, regarding investments by insurance company
pooled separate accounts; (4) Prohibited Transaction Class Exemption 84-14,
regarding investment effected by "qualified plan asset managers"; (5) Prohibited
Transaction Class Exemption 96-23, regarding investments effected by "in-house
asset managers"; (6) Prohibited Transaction Class Exemption 83-1, regarding
acquisitions by Plans of interests in mortgage pools; and (7) various
underwriter exemptions. Before purchasing any Certificates, a Plan subject to
the fiduciary responsibility provisions of ERISA or described in section
4975(e)(1) of the Code should consult with its counsel to determine whether the
conditions of any exemption would be met. A purchaser of Certificates should be
aware, however, that certain of the exemptions do not apply to the purchase,
sale, and holding of subordinated certificates. In addition, PTCE 83-1 will not
apply to Certificates evidencing interests in a Trust Estate that contains
Contracts. Moreover, even if the conditions specified in one or more exemptions
are met, the scope of the relief provided by an exemption might not cover all
acts that might be construed as prohibited transactions.
The Plan Asset Regulations will not apply to a Certificate if (1) the
Certificate is registered under the Securities Exchange Act of 1934, is freely
transferable and is part of a class of Certificates that is held by more than
100 unrelated investors (the "Publicly Offered Exception") or (2) immediately
after the most recent acquisition of a Certificate of the same Series, benefit
plan investors do not own 25% or more of the value of any class of Certificates
in that Series (the "Insignificant Participation Exception"). A purchaser of
Certificates should be aware, however, that determining whether the
Insignificant Participation Exception applies is administratively impracticable
in many situations. Prior to purchasing a Certificate, a Plan should consult
with its counsel to determine whether the Publicly Offered Exception, the
Insignificant Participation Exception, or any other exception to the Plan Asset
Regulations would apply to the purchase of the Certificate.
Section 403 of ERISA requires that all plan assets be held in trust.
However, under regulations that became effective on June 17, 1982, even if the
underlying assets of an issuer of securities (such as the Certificates) are
deemed to be plan assets of a Plan investing in such securities, the "holding in
trust" requirement of section 403 of ERISA will be satisfied if such securities
are held in trust on behalf of the Plan.
Because the purchase or holding of Certificates may result in
unfavorable consequences for a Plan or its fiduciaries under the Plan Asset
Regulations or the prohibited transaction provisions of ERISA or the Code, (i)
certain classes of Certificates will not be offered for sale to, and are not
transferable to, any Plan Investor and (ii) certain Classes of Certificates will
not be offered for sale to, and are not transferable to, any Plan Investor
unless such Plan Investor provides the Company with a Benefit Plan Opinion
(i.e., an opinion of counsel satisfactory to the Company and the
106
<PAGE> 142
Servicer (and upon which the Company, the Servicer, the Trustee, the TMP, and
their respective counsel are authorized to rely) generally to the effect that
the ownership of a Certificate of such class will not (1) cause any of the
assets in the related Trust to be regarded as plan assets for purposes of the
Plan Asset Regulations; (2) give rise to any fiduciary duty under ERISA on the
part of the Company, the Trustee, a Servicer, or the TMP; or (3) be treated as,
or result in, a prohibited transaction under sections 406 and 407 of ERISA or
section 4975 of the Code.) The Prospectus Supplement for an affected Series will
indicate which classes of Certificates are restricted in their availability to
benefit plan investors.
In considering the possible application of the Plan Asset Regulations,
potential Plan Investors should be aware that, with respect to certain Series
and under certain circumstances, the Servicer and the holders of a majority in
interest of the related Residual Certificates may have a right to redeem the
Certificates of such Series, at its option. In such cases, the Servicer's
purpose for the retention of such a redemption right is to enable the Servicer
to terminate its administration obligations with respect to the Certificates in
the event such obligations become unprofitable. The Servicer undertakes no
obligation to consider the interests of Certificateholders in deciding whether
to exercise any redemption right.
As described in "Federal Income Tax Consequences" above, an investment
in a Certificate may produce UBTI for tax-exempt employee benefit plans.
Potential investors also should be aware that ERISA requires that the assets of
a Plan be valued at their fair market value as of the close of the plan year.
Neither the Company, BCI, the Servicer nor the Underwriters currently intend to
provide valuations to Certificateholders.
Prospective purchasers of Certificates that are insurance companies
should be aware that the United States Supreme Court interpreted the fiduciary
responsibility rules of ERISA in John Hancock Mutual Life Insurance Co. v.
Harris Bank and Trust. In John Hancock, the Supreme Court ruled that assets held
in an insurance company's general account may be deemed to be "plan assets" for
ERISA purposes under certain circumstances. Prospective purchasers of
Certificates that are insurance companies should consult with their counsel with
respect to the application of the John Hancock case and PTCE 95-60 to their
purchase of Certificates, and should be aware that certain restrictions may
apply to their purchase of Certificates.
Due to the complexity of the rules applicable to Plans and Plan
fiduciaries, and the considerable uncertainty that exists with respect to many
aspects of those rules, Plan Investors contemplating the acquisition of
Certificates should consult their legal advisors with respect to the ERISA,
Code, and other consequences of an investment in the Certificates.
PLAN OF DISTRIBUTION
The Company may sell the Certificates offered hereby either directly or
through one or more underwriters or underwriting syndicates. The Prospectus
Supplement with respect to each Series of Certificates will set forth the terms
of the offering of such Series of Certificates and each Class within such
Series, including the name or names of the Underwriter(s), the proceeds to and
their intended use by the Company, and either the initial public offering price,
the discounts and commissions to the Underwriter(s) and any discounts or
concessions allowed or reallowed to certain dealers, or the method by which the
price at which the related Underwriter(s) will sell the Certificates will be
determined.
The Certificates of a Series may be acquired by Underwriters for their
own account and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices determined at the time of sale. The obligations of any
Underwriters will be subject to certain conditions precedent, and such
Underwriters will be severally obligated to purchase all the Certificates of a
Series offered pursuant to the related Prospectus Supplement, if any are
purchased. If Certificates of a Series are offered otherwise than through
Underwriters, the related Prospectus Supplement will contain information
regarding the nature of such offering and any agreements to be entered into
between the Company and purchasers of Certificates of such Series.
107
<PAGE> 143
The place and time of delivery for the Certificates of a Series in
respect of which this Prospectus is delivered will be set forth in the related
Prospectus Supplement.
LEGAL INVESTMENT CONSIDERATIONS
The Prospectus Supplement for each Series of Certificates will specify
which, if any, of the Classes of Certificates of such Series will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"). If so, Certificates designated as qualifying
as "mortgage related securities" will continue to qualify as such for so long as
they are rated in one of the two highest categories by at least one nationally
recognized statistical rating agency. Classes of Certificates that qualify as
"mortgage related securities" under SMMEA will be legal investments for persons,
trusts, corporations, partnerships, associations, business trusts and business
entities (including depository institutions, life insurance companies and
pension funds) created pursuant to or existing under the laws of the United
States or of any state whose authorized investments are subject to state
regulation to the same extent as, under applicable law, obligations issued by or
guaranteed as to principal and interest by the United States or any agency or
instrumentality thereof constitute legal investments for any such entities.
Certain states have enacted legislation specifically limiting, to varying
degrees, the legal investment authority of such entities with respect to
"mortgage related securities," in most cases requiring investors to rely solely
upon existing state law and not SMMEA. In any case in which any such legislation
is applicable, the Certificates will constitute legal investments for entities
subject to such legislation only to the extent provided in such state
legislation.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal in
"mortgage-related securities" without limitation as to the percentage of their
assets represented thereby; federal credit unions may invest in
"mortgage-related securities;" and national banks may purchase "mortgage-related
securities" for their own account without regard to the limitations generally
applicable to investment securities set forth in 12 U.S.C. Section24 (Seventh),
subject in each case to such regulations as the applicable federal regulatory
authority may prescribe.
The Federal Financial Institutions Examination Council, The Federal
Deposit Insurance Corporation, the Office of Thrift Supervision, the Office of
the Comptroller of the Currency and the National Credit Union Administration
have proposed or adopted guidelines regarding investment in various types of
mortgage-backed securities. In addition, certain state regulators have taken
positions that may prohibit regulated institutions subject to their jurisdiction
from holding securities representing residual interests, including securities
previously purchased. There may be other restrictions on the ability of certain
investors, including depository institutions, either to purchase Certificates or
to purchase Certificates representing more than a specified percentage of the
investor's assets. Investors should consult their own legal advisors in
determining whether and to what extent any particular Certificates constitute
legal investments for such investors.
Certificates that do not constitute "mortgage related securities" under
SMMEA will require registration, qualification or an exemption under applicable
state securities laws in those states that have enacted legislation overriding
SMMEA's provisions pre-empting state "blue sky" laws. In addition, such
Certificates may not be "legal investments" to the same extent as "mortgage
related securities" under SMMEA. The appropriate characterization under various
legal investment restrictions of the Classes of Certificates that do not qualify
as "mortgage related securities" under SMMEA and thus the ability of investors
subject to these restrictions to purchase such Classes of Certificates, may be
subject to significant interpretive uncertainties. All investors whose
investment authority is subject to legal restrictions should consult their own
legal advisors to determine whether, and to what extent, the Classes of
Certificates that do not qualify as "mortgage related securities" will
constitute legal investments for them.
LEGAL MATTERS
108
<PAGE> 144
Certain legal matters relating to the Certificates, including the
material federal income tax consequences concerning the Certificates, will be
passed upon for the Company by Morgan, Lewis & Bockius LLP, New York, New York.
109
<PAGE> 145
GLOSSARY
There follows abbreviated definitions of certain capitalized terms used
in this Prospectus and each Prospectus Supplement, except as may be otherwise
specified in the Prospectus Supplement for a particular Series. The related
Agreement may contain a more complete definition of certain of the terms defined
herein and reference should be made to the Agreement for a more complete
definition of all such terms.
"1986 ACT" means the Tax Reform Act of 1986.
"ACCRETION CLASS" means a Compound Interest Class or a Capital
Appreciation Class.
"ADDITIONAL ASSETS" means, with respect to any Series, non-recourse
guarantees on Contracts and/or Mortgage Loans, additional Contracts and/or
Mortgage Loans beyond those included in the related Asset Pool, letters of
credit or other Eligible Investments delivered to any Trust in addition to the
related Trust Estate.
"ADJUSTABLE RATE ASSET" means a Contract or Mortgage Loan bearing
interest at an adjustable rate.
"ADJUSTED CERTIFICATE BALANCE" means, with respect to each Class of
Subordinated Certificates on any date of determination, its Certificate Balance
immediately following the most recently preceding Remittance Date reduced by all
Writedown Amounts allocated to such Class on such Remittance Date.
"AFFILIATE" means, as to any specified Person, any other Person
controlling or controlled by or under common control with such specified Person.
For the purposes of this definition, "control," when used with respect to any
specified Person, means the power to direct the management and Policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise, and the terms "controlling" and
"controlled" have the meanings correlative to the foregoing.
"AGGREGATION RULE" means the rule in the OID Regulations under which
two or more debt instruments issued in connection with the same transaction (or
related transactions in certain circumstances) are treated as a single debt
instrument for federal income tax accounting purposes if issued by a single
issuer to a single holder.
"AGREEMENT" means, with respect to any Series, the pooling and
servicing agreement pursuant to which the related Trust was established and the
related Certificates were issued, which will be among the Company, the Servicer
and the related Trustee.
"ALL OID ELECTION" means, with respect to a Regular Certificate, an
election to include in gross income all stated interest, original issue
discount, de minimis original issue discount, market discount, and de minimis
market discount that accrues on such Certificate (reduced by any amortizable
premium or acquisition premium on such Certificate) under the constant yield
method used to account for original issue discount.
"APPROVED SALE" means, as to any Asset, (1) a sale of the related
Manufactured Home or Mortgaged Property acquired by the Insured because of a
default by the borrower if the related Pool Insurer has given prior approval to
such sale, (2) a foreclosure or trustee's sale of the related Manufactured Home
or Mortgaged Property at a price exceeding the maximum amount specified by the
Pool Insurer, (3) the acquisition of the Mortgaged Property under any related
Primary Mortgage Insurance Policy by the related Mortgage Insurer or (4) the
acquisition of the related Manufactured Home or Mortgaged Property by the Pool
Insurer.
"ASSET" means a Contract or Mortgage Loan underlying a Series of
Certificates.
"ASSET FILE" means a Contract File or Mortgage Loan File, as
applicable.
110
<PAGE> 146
"ASSET POOL" means, with respect to any Series, the pool of Contracts
and/or Mortgage Loans included in the related Trust Estate.
"ASSET RATE" means, with respect to any Asset, the related Contract
Rate or Mortgage Rate, as applicable.
"ASSET SCHEDULE" means the schedule which identifies each Asset
supporting a Series (and includes certain other information regarding each such
Asset, including its Cut-off Date Principal Balance, its Asset Rate, its
original principal balance and other information) and appears as an exhibit to
the related Agreement.
"AVAILABLE FUNDS" means, as to any Remittance Date and any Series, the
amount to be distributed on the Certificates of such Series on such Remittance
Date, which will be described in the related Prospectus Supplement.
"BALLOON PAYMENT LOAN" means an Asset that does not require any
scheduled amortization of principal prior to its scheduled maturity, or the
principal of which is amortized over a longer period than the Asset's scheduled
term to maturity.
"BANKRUPTCY CODE" means the United States Bankruptcy Code, as amended,
as set forth in Title 11 of the United States Code.
"BENEFICIAL OWNER" means, as to any Book-Entry Certificate, the
beneficial owner thereof, whose interest therein is reflected in the records of
a Financial Intermediary.
"BENEFIT PLAN OPINION" means an opinion of counsel satisfactory to the
Company and the Servicer (and upon which the Company, the Servicer, the Trustee,
the TMP, and their respective counsel are authorized to rely) generally to the
effect that the proposed transfer of a Certificate will not (1) cause any of the
assets in the related Trust to be regarded as "plan assets" for purposes of the
Plan Asset Regulations; (2) give rise to any fiduciary duty under ERISA on the
part of the Company, the Trustee, the Servicer, or the TMP; or (3) be treated
as, or result in, a prohibited transaction under section 406 or section 407 of
ERISA or section 4975 of the Code.
"BCI" means Bombardier Capital Inc., a Massachusetts corporation.
"BCMSC" means Bombardier Capital Mortgage Securitization Corporation, a
Vermont corporation.
"BI-WEEKLY LOAN" means an Asset that provides for Obligor payments to
be made on a bi-weekly basis.
"BOOK-ENTRY CERTIFICATES" means Certificates of any Class specified as
such in the Prospectus Supplement for a Series and as to which Definitive
Certificates will not be issued, beneficial interests therein being maintained
through Participants or Indirect Participants in the Depository.
"BUY-DOWN FUND" means a custodial Eligible Account established by the
Servicer for any Buy-Down Loan, which must comply with the standards applicable
to the related Certificate Account, to be funded with an amount which, together
with projected reinvestment earnings thereon at a rate specified in the related
Prospectus Supplement, will provide funds sufficient to support the payments
required on such Buy-Down Loan on a level debt service basis.
"BUY-DOWN LOAN" means an Asset the amortization of which includes
payments made by the seller of the related Mortgaged Property or Manufactured
Home or by someone else other than the related Obligor.
"CAP" means a restriction or restrictions on the maximum stated
interest rate on a Certificate.
"CAPITAL APPRECIATION CLASS" means a Class of Certificates upon which
interest will accrue but will not be distributed until certain other Classes of
Certificates of the same Series have received their final distributions.
111
<PAGE> 147
"CERCLA" means the Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, as amended.
"CERTIFICATE" means any Pass-Through Certificate issued pursuant to an
Agreement.
"CERTIFICATE ACCOUNT" means an account or accounts maintained by the
Servicer for any Series, into which the Servicer must deposit collections in
respect of the related Assets pending remittance thereof to the related
Distribution Account on the applicable Remittance Date.
"CERTIFICATE REGISTER" means, for any Series, the register maintained
by or at the direction of the Trustee containing the names and addresses of all
current Holders of Certificates of each Class of such Series, and noting the
Class and denomination of each Certificate of such Series held by each such
holder.
"CERTIFICATEHOLDER" means the registered holder of a Certificate.
"CERTIFICATE BALANCE" means the outstanding principal balance of a
Certificate or Class of Certificates.
"CLASS" means any class of the Certificates of a Series, as specified
in the related Prospectus Supplement.
"CLEARING AGENCY" means an entity registered pursuant to Section 17A of
the Securities Act of 1934, as amended.
"CLOSING DATE" means, for any Series, the date on which such Series is
issued, which will be specified in the related Agreement.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COLLECTION PERIOD" means, unless otherwise provided in a related
Prospectus Supplement, with respect to any Remittance Date, the period
commencing on the second day of the calendar month preceding the month in which
such Remittance Date occurs and ending on the first day of the month in which
such Remittance Date occurs.
"COMMISSION" means the Securities and Exchange Commission.
"COMPANION CLASS" means a Class of Certificates structured to receive
principal payments on the underlying Assets on any Remittance Date only to the
extent those principal payments exceed the principal distribution amounts
scheduled to be made on a related PAC Class on such Remittance Date.
"COMPANY" means Bombardier Capital Mortgage Securitization Corporation,
a Vermont corporation.
"COMPENSATING INTEREST" means, for any Remittance Date, the amount of
all Due Date Interest Shortfalls for the preceding Prepayment Period to the
extent such Unpaid Interest Amounts do not exceed the Servicer's aggregate
servicing compensation in respect of such Prepayment Period.
"COMPLEMENTARY STRIP CERTIFICATES" means different Classes of Strip
Certificates of the same Series that, when held in combination, provide an
aggregate economic effect equivalent to that of a Participation Certificate.
"COMPOUND INTEREST CERTIFICATE" means a Certificate on which interest
is accrued and is compounded and added to the principal balance thereof
periodically, but which is not unconditionally entitled to distributions of
interest at least annually.
112
<PAGE> 148
"COMPOUND INTEREST CLASS" means a Class of Certificates on which
interest may accrue but not be paid for the period described in the related
Prospectus Supplement.
"CONTINGENT PAYMENT OBLIGATION" means a debt obligation with one or
more contingent payments as defined in the Contingent Payment Regulations.
"CONTINGENT PAYMENT REGULATIONS" means those provisions of the OID
Regulations that address the federal income tax treatment of Contingent Payment
Obligations.
"CONTRACT" means a manufactured housing installment sales contract
including any and all rights to receive payments due thereunder on and after the
Cut-off Date and any security interest in a Manufactured Home purchased with the
proceeds of such contract.
"CONTRACT DOCUMENTS" means, with respect to each Contract:
(1) the original Contract;
(2) either (a) the original title document for the related
Manufactured Home, a duplicate certified by the appropriate
governmental authority that issued the original thereof or, if such
original is not yet available, a copy of the application filed with the
appropriate governmental authority pursuant to which the original title
document will issue (which copy may be on microfilm or optical disk
maintained by the Servicer in its records separate from the other
related Contract Documents), or (b) if the laws of the jurisdiction in
which the related Manufactured Home is located do not provide for the
issuance of title documents for manufactured housing units, other
evidence of ownership of the related Manufactured Home that is
customarily relied upon in such jurisdiction as evidence of title to a
manufactured housing unit;
(3) unless such Contract is a Land Secured Contract, evidence
of one or more of the following types of perfection of the Seller's or
the Trustee's security interest in the related Manufactured Home
granted by such Contract (or, if such evidence is not yet available, a
copy of the application or other filing used to obtain such security
interest (which copy may be on microfilm or optical disk maintained by
the Servicer in its records separate from the other related Contract
Documents)), as appropriate in the applicable jurisdiction: (a)
notation of such security interest on the title document, (b) a
financing statement meeting the requirements of the UCC, with evidence
of recording indicated thereon, (c) a fixture filing in accordance with
the UCC, with evidence of filing indicated thereon, or (d) such other
evidence of perfection of a security interest in a manufactured housing
unit as is customarily relied upon in the jurisdiction in which the
related Manufactured Home is located;
(4) an original assignment of the Contract from the initial
named payee thereunder to the Seller (unless the Seller is the initial
named payee for such Contract);
(5) originals of any assumption agreements relating to such
Contract, together with originals of any surety or guaranty agreement
relating to such Contract or to any such assumption agreement, payable
to the order of the Trustee, or, if not so payable, endorsed to the
order of, or assigned to, the Trustee by the holder/payee thereunder
without recourse;
(6) originals of any extension, modification or waiver
agreement(s) relating to such Contract; and
(7) proof of maintenance of a Standard Hazard Insurance Policy
(and a flood insurance policy, if applicable) for the related
Manufactured Home.
113
<PAGE> 149
In the case of any Land Secured Contract, the related Contract
Documents shall consist of the following documents in lieu of those listed in
clause (3) of the foregoing paragraph: (a) the original recorded Mortgage for
the related Real Property, with evidence of recordation noted thereon or
attached thereto, or a certified copy thereof issued by the appropriate
recording office (or, if the Mortgage is in the process of being recorded, a
photocopy of the Mortgage, which may be on microfilm or optical disk maintained
by the Servicer in its records separate from the other related Contract
Documents); (b) if the Mortgage does not name the Seller as mortgagee therein or
beneficiary thereof, an original recorded assignment or assignments of the
Mortgage from the Persons named as mortgagee in, or beneficiary of, such
Mortgage, to the Seller, with evidence of recordation noted thereon or attached
thereto, or a certified copy of each such assignment issued by the appropriate
recording office (or, if such an original assignment is in the process of being
recorded, a photocopy of each such assignment, which may be on microfilm or
optical disk maintained by the Servicer in its records separate from the other
related Contract Documents); and (c) if such Land Secured Contract's original
principal balance was $40,000 or greater, a copy of the title search report and
bring-down thereof (or evidence of title insurance) with respect to the related
Real Property.
"CONTRACT FILE" means, with respect to any Contract, all of the related
Contract Documents.
"CONTRACT LOAN-TO-VALUE RATIO" means, (i) as to each Contract with
respect to which a lien on land is required for underwriting purposes, the
ratio, expressed as a percentage, of the principal amount of such Contract to
the sum of the purchase price of the home (including taxes and insurance) and
the appraised value of the land; and (ii) as to each other Contract, the ratio,
expressed as a percentage, of the principal amount of such Contract to the
purchase price of the home (including taxes and insurance).
"CONTRACT RATE" means the annual percentage rate or "APR" specified in
a Contract.
"CONTRACT SCHEDULE" means an Asset Schedule to the extent it identifies
Contracts.
"CONVENTIONAL MORTGAGE LOANS" means Mortgage Loans that are not insured
by the FHA or partially guaranteed by the VA.
"CONVERTIBLE LOAN" means an Adjustable Rate Asset subject to a
provision pursuant to which, subject to certain limitations, the related Obligor
may exercise an option to convert the adjustable Asset Rate to a fixed Asset
Rate.
"CREDIT INSURANCE" means the Primary Mortgage Insurance Policies, FHA
insurance, VA guarantees, and Pool Insurance Policies, if any, obtained with
respect to any Asset Pool.
"CREDIT INSURER" means a Mortgage Insurer or a Pool Insurer.
"CURRENT RECOGNITION ELECTION" means the election under section 1278(b)
of the Code to recognize market discount on a debt instrument currently on an
uncapped accrual basis.
"CUSTODIAL AGREEMENT" means the agreement, if any, among the Company, a
Trustee and a Custodian, by which the Custodian is appointed to hold the
Mortgage Loan Documents for a Trust Estate for the benefit of the Trustee.
"CUSTODIAN" means the custodian, if any, appointed pursuant to a
Custodial Agreement to hold the Mortgage Loan Documents for a Trust Estate for
the benefit of the related Trustee.
"CUT-OFF DATE" means, for any Series, the date specified in the related
Prospectus Supplement as the date after which scheduled principal and interest
payments on the related Contracts and Mortgage Loans, and on and after which
unscheduled collections of principal on the related Contracts and Mortgage
Loans, are to be included in the related Trust Estate.
114
<PAGE> 150
"CUT-OFF DATE PRINCIPAL BALANCE" means, as to any Asset, the original
principal amount of such Asset, minus the principal portion of all Monthly
Payments due on such Asset on or before the applicable Cut-off Date and minus
all other payments applied to reduce such original principal amount before the
applicable Cut-off Date.
"DEEMED PRINCIPAL PAYMENTS" means all payments of principal and
interest provided for on a debt instrument other than Qualified Stated Interest.
"DEFINITIVE CERTIFICATE" means any Certificate that will be issued in
fully-registered, certificated form to the owners thereof, or their nominees.
"DEPOSITORY" means DTC or any successor or other Clearing Agency
selected by the Company as depository for any Book-Entry Certificates.
"DETERMINATION DATE" means, unless otherwise specified in a Prospectus
Supplement, for any Remittance Date, the last day of the preceding calendar
month.
"DISCOUNT CERTIFICATE" means a Certificate that has a purchase price
less than its principal amount.
"DISQUALIFIED ORGANIZATION" means either (1) the United States; (2) any
state or political subdivision thereof; (3) any foreign government; (4) any
international organization; (5) any agency or instrumentality of any of the
foregoing; (6) any tax-exempt organization (other than a farmers' cooperative
described in section 521 of the Code) unless such organization is subject to the
tax on UBTI; or (7) any rural electrical or telephone cooperative; provided,
however, that a corporation will not be treated as an instrumentality of the
United States or any state or political subdivision thereof if all of its
activities are subject to tax and, with the exception of FHLMC, a majority of
its board of directors is not selected by such governmental unit.
"DISTRIBUTION ACCOUNT" means the account maintained by the Trustee, as
specified in the related Prospectus Supplement, from which distributions are
made on the Certificates.
"DISTRIBUTION PERIOD" means, for any Certificate, the interval between
one Remittance Date and the next Remittance Date.
"DOL" means the United States Department of Labor.
"DTC" means The Depository Trust Company.
"DUE DATE" means, for any Asset, the date on which a Monthly Payment is
due on such Asset from the Obligor thereunder (without regard to any grace
period).
"DUE DATE INTEREST SHORTFALL" means, for any Asset that is prepaid in
full or liquidated on other than a Due Date for such Asset, the difference
between (1) the amount of interest that would have accrued on such Asset through
the day preceding the first Due Date after such prepayment in full or
liquidation had the Asset not been prepaid in full or liquidated (net of
Servicing Fees and any other administrative fees payable out of such interest
had it accrued and been paid) and (2) the amount of interest that actually
accrued on such Asset prior to the prepayment in full or liquidation (net of an
allocable portion of Servicing Fees and any other administrative fees payable
from interest payments on such Asset during the related Collection Period).
"ELIGIBLE ACCOUNT" means, as to any Series, an account which is
maintained (1) at a depository institution organized under the laws of the
United States or any state, the deposits of which are insured to the full extent
permitted by law by the Federal Deposit Insurance Corporation (the "FDIC"),
whose commercial paper or long-term unsecured
115
<PAGE> 151
debt has a rating, as specified in the related Agreement, sufficient to support
the ratings requested on the Certificates of the related Series, and which
institution is subject to examination by federal or state authorities, (2) in
the corporate trust department of the Trustee or (3) at an institution otherwise
acceptable to each applicable Rating Agency.
"ELIGIBLE INVESTMENTS" means one or more of the investments specified
in an Agreement in which moneys in the related Distribution Account and certain
other accounts are permitted to be invested.
"EPA" means the United States Environmental Protection Agency.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ESCROW ACCOUNT" means an account established and maintained by the
Servicer with respect to Mortgage Loans in which Mortgagors under certain
Mortgage Loans are required to deposit amounts sufficient, as applicable, to pay
taxes, assessments, hazard insurance premiums and other comparable items.
"EVENT OF DEFAULT" means, with respect to an Agreement, the occurrence
of a default as specified in such Agreement, coupled with the passage of a
period of any cure period specified in the Agreement for a default of such type
without such default having been cured. Events of Default will be as specified
in the Agreements, but will generally include (1) any failure by the Servicer to
remit funds to the Distribution Account as required by the applicable Agreement,
which failure continues unremedied for five days (or such other period specified
in the related Agreement) after the date upon which such remittance was due; (2)
any failure or breach by the Servicer duly to observe or perform in any material
respect any other of its covenants or agreements that materially and adversely
affects the interests of Certificateholders, which, in either case, continues
unremedied for 60 days after the giving of written notice of such failure or
breach to the Servicer by the related Trustee or by the Holders of Certificates
evidencing at least 25% of the Voting Rights for the applicable Series; and (3)
certain events involving insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings regarding the Servicer.
"EXCESS PREMIUM" means, with respect to a Regular Certificate, a
premium over such Certificate's noncontingent principal amount in excess of the
lesser of (1) .015 multiplied by the product of such noncontingent principal
amount and the WAM of the Certificate or (2) 15% of such noncontingent principal
amount.
"FDIC" means the Federal Deposit Insurance Corporation.
"FHA" means the Federal Housing Administration.
"FHA CONTRACT" or "FHA MORTGAGE LOAN" means a Contract or Mortgage Loan
that is insured by the FHA.
"FHA PREPAYMENT EXPERIENCE" means certain statistical data compiled by
the Actuarial Division of HUD concerning prepayment rates on FHA mortgage loans,
Ias set forth in tables which, assuming full mortgage loan prepayments at the
rates experienced by FHA on FHA mortgage loans, set forth the percentages of the
original number of FHA mortgage loans included in pools of Level Payment
Mortgage Loans with varying maturities that will remain outstanding on each
anniversary of the origination date of such mortgage loans (assuming they all
have the same origination date).
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"FINAL SCHEDULED REMITTANCE DATE" means, for any Class, unless
otherwise provided in the related Prospectus Supplement, the date, based on the
assumptions set forth in the related Prospectus Supplement, on which the
Certificate Balance of all Certificates of such Class is scheduled to be reduced
to zero, assuming no prepayments.
116
<PAGE> 152
"FINANCIAL INTERMEDIARY" means a brokerage firm, bank, thrift
institution or any other entity that is a Depository Participant or Indirect
Participant, and that maintains a Beneficial Owner's account for the purpose of
reflecting such Beneficial Owner's interest in a Book-Entry Certificate.
"FIRST DISTRIBUTION PERIOD" means, with respect to a Certificate, the
interval between its issue date and its first Remittance Date.
"FLOOR" means a restriction or restrictions on the minimum stated
interest rate on a Certificate.
"FNMA" means the Federal National Mortgage Association.
"FOREIGN PERSON" means a nonresident alien individual, foreign
corporation, foreign partnership, or other non-United States Person.
"FOREIGN PERSON CERTIFICATION" means a written certification (signed
under penalty of perjury) provided by the beneficial owner of a Certificate that
such owner is, INTER ALIA, a Foreign Person.
"FRAUD LOSS" means a loss incurred on a Contract or Mortgage Loan with
respect to which there was fraud in connection with the origination of such
Contract or Mortgage Loan or fraud, dishonesty or misrepresentation in
connection with the application for any insurance obtained with respect to such
Contract or Mortgage Loan.
"FULL COVERAGE INSURANCE POLICY" means a Primary Mortgage Insurance
Policy which provides full coverage against any loss maintained by reason of
nonpayments by the related Mortgagor.
"GARN-ST. GERMAIN ACT" means the Garn-St. Germain Depository
Institutions Act of 1982, as amended.
"GEM LOAN" means a fixed-rate fully-amortizing Asset providing for (1)
Monthly Payments during the first year after origination that are at least
sufficient to pay interest due on the Asset, and (2) an increase in such Monthly
Payments in subsequent years at a predetermined rate generally not more than a
specified percentage of the Monthly Payments due on such Asset during the
preceding year.
"GOVERNOR" means a restriction or restrictions on the amount of
increase or decrease in the stated interest rate on a Certificate on any
Interest Adjustment Date.
"GPM FUND" means a custodial Eligible Account established by the
Servicer for any GPM Loan, which must comply with the standards applicable to
the related Certificate Account, to be funded with an amount which, together
with projected reinvestment earnings thereon at a rate specified in the related
Prospectus Supplement, will provide funds sufficient to support the payments
required on such GPM Loan on a level debt service basis.
"GPM LOAN" means a "graduated payment" Asset the terms of which provide
for Monthly Payments during the initial years of its term that are less than the
actual amount of principal and interest that would be payable on a level debt
service basis.
"GROSS MARGIN" means, with respect to any Adjustable Rate Asset, the
fixed percentage per annum specified in the related Contract or Mortgage Note
that is added to the applicable Index on each related Interest Adjustment Date
to determine the new Asset Rate for such Adjustable Rate Asset.
"HOUSING ACT" means Section 306(g) of Title III of the National Housing
Act of 1934, as amended.
"HUD" means the United States Department of Housing and Urban
Development.
117
<PAGE> 153
"INCREASING PAYMENT LOAN" means an Asset that provides for Obligor
Monthly Payments that are fixed for an initial period of six, 12 or 24 months
following origination, and which increase thereafter at a predetermined rate
expressed as a percentage of the Obligor's Monthly Payment during the preceding
period, subject to any caps on the amount of any single Monthly Payment
increase, for a period not to exceed nine years after origination, after which
the Monthly Payment amount is fixed at a level-payment amount so as to amortize
the Asset fully over its remaining term.
"INDEX" means, with respect to any Adjustable Rate Asset, the index
specified in the related Contract or Mortgage Note that is added to the related
Gross Margin on each related Interest Adjustment Date to determine the new Asset
Rate for such Adjustable Rate Asset.
"INDIRECT PARTICIPANTS" means organizations which have indirect access
to a Clearing Agency, such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly.
"INSURANCE PROCEEDS" means amounts paid or payable (as the context
requires) under any insurance policy maintained with respect to a Series, to the
extent such amounts are not applied to the restoration or repair of the
Manufactured Home or Mortgaged Property in respect of which such amounts were
paid.
"INSURED" means the Company and the Trustee, each as assignee of the
Seller.
"INTEREST ADJUSTMENT RATES" means, with respect to any Adjustable Rate
Asset, the dates on which the related Asset Rate changes in accordance with the
terms of the related Contract or Mortgage Note.
"INTEREST REDUCTION LOAN" means an Asset for which, subject to certain
conditions, the related Obligor has a one-time option to reduce the interest
rate payable with respect to such Asset.
"INTEREST WEIGHTED CERTIFICATE" means a Regular Certificate, the
payments on which consist entirely or primarily of a specified nonvarying
portion of the interest payable on one or more of the Assets held by the related
Series REMIC.
"INVERSE FLOATER CERTIFICATE" means a Regular Certificate that provides
for the payment of interest at a rate determined as the difference between two
interest rate parameters, one of which is a variable rate and the other of which
is a fixed rate or a different variable rate.
"IO CERTIFICATE" means a Non-REMIC Certificate evidencing ownership of
a percentage of the interest payments (net of certain fees) on the Assets
assigned to the related Trust.
"LAND SECURED CONTRACT" means a Contract secured at origination by a
parcel of real estate in addition to a Manufactured Home.
"LEVEL PAYMENT LOAN" means an Asset the terms of which provide for
regular level payments of principal and interest throughout its entire term.
"LEVEL PAYMENT BUY-DOWN LOAN" means an Asset that provides for a
reduction in the amount of the related Obligor's Monthly Payments for a period
of up to the first four years following origination of such Asset and as to
which funds have been provided by someone other than the Obligor to cover the
reductions in such Monthly Payments during those years, but for which the
aggregate monthly amount due on such Asset from the Obligor and anyone else are
level for the term of such Asset.
118
<PAGE> 154
"LIQUIDATED LOAN" means a defaulted Contract or Mortgage Loan as to
which all amounts that the Servicer expects to recover through the date of
disposition of the related Manufactured Home or Mortgaged Property have been
received.
"LIQUIDATION EXPENSES" means all reasonable, out-of-pocket costs and
expenses (exclusive of the Servicer's overhead costs) incurred by the Servicer
in connection with liquidation of any Contract or Mortgage Loan or disposition
of any related Repo Property or REO Property.
"LIQUIDATION PROCEEDS" means amounts received and retained by the
Servicer in connection with the liquidation of a Liquidated Loan, whether
through foreclosure thereon or repossession and resale of the related
Manufactured Home or otherwise (including Insurance Proceeds collected in
connection with such liquidation).
"LIQUIDITY ACCOUNT" means a fund established and funded by the Company
or such other party specified in the related Prospectus Supplement to make
payments on certain Certificates to the extent funds are not otherwise
available.
"LOAN-TO-VALUE RATIO" means the Contract Loan-to-Value Ratio or the
Mortgage Loan-to-Value Ratio of an Asset, as applicable.
"MANUFACTURED HOME" means a unit of manufactured housing, including all
accessions thereto, securing the indebtedness of the Obligor under the related
Contract.
"MARK-TO-MARKET REGULATIONS" means Treasury regulations relating to the
requirement under section 475 of the Code that dealers in securities use
mark-to-market accounting for federal income tax purposes.
"MONTHLY ADVANCE" means any P&I Advance or Servicing Advance.
"MONTHLY PAYMENT" means the scheduled monthly payment of principal and
interest on a Contract or Mortgage Loan.
"MORTGAGE" means the mortgage, deed of trust or other instrument
creating a first lien on a first priority ownership interest in or estate in fee
simple in real property securing a Mortgage Note.
"MORTGAGE INSURER" means the insurance company or companies which issue
any Primary Mortgage Insurance Policies with respect to any Mortgage Loans.
"MORTGAGE LOAN" means a mortgage loan secured by a first lien on a
one-to four-family residential real property which is sold and assigned by the
Company to a Trustee and included in the Trust Estate for a Series of
Certificates.
"MORTGAGE LOAN DOCUMENTS" means, with respect to each Mortgage Loan,
the following documents:
(1) the original Mortgage Note bearing a complete chain of
endorsements, if necessary, from the initial payee thereunder to the
Seller, with a further endorsement without recourse from the Seller in
blank or to the Trustee or its Custodian, in a form specified in the
related Sales Agreement, together with all related riders and addenda
and any related surety or guaranty agreement, power of attorney and
buydown agreement;
(2) the original recorded Mortgage (or a copy thereof
certified to be a true and correct reproduction of the original thereof
by the appropriate public recording office) with evidence of
recordation noted thereon or attached thereto, or, if the Mortgage is
in the process of being recorded, a photocopy of the Mortgage,
certified by an officer of the Seller or the originator, the related
title insurance company, the related
119
<PAGE> 155
closing/settlement/escrow agent or the related closing attorney to be a true and
correct copy of the Mortgage submitted for recordation;
(3) the original recorded assignment of the Mortgage from the
Seller to the Trustee or its Custodian, in a form specified in the
related Sales Agreement (or a copy thereof certified to be a true and
correct reproduction of the original thereof by the appropriate public
recording office) with evidence of recordation noted thereon or
attached thereto, or, if the assignment is in the process of being
recorded, a photocopy of the assignment, certified by an officer of the
Seller to be a true and correct copy of the assignment submitted for
recordation;
(4) each original recorded intervening assignment of the
Mortgage as is necessary to show a complete chain of title from the
original mortgagee (or beneficiary, in the case of a deed of trust) to
the Seller (or a copy of each such assignment certified to be a true
and correct reproduction of the original thereof by the appropriate
public recording office) with evidence of recordation noted thereon or
attached thereto, or, if an assignment is in the process of being
recorded, a photocopy of the assignment, certified by an officer of the
Seller to be a true and correct copy of the assignment submitted for
recordation;
(5) an original Title Insurance Policy or, if such policy has
not yet been issued or is otherwise not available, (a) a written
commitment to issue such policy issued by the applicable title
insurance company and an officer's certificate of the Seller certifying
that all of the requirements specified in such commitment have been
satisfied, (b) a preliminary title report if the related Mortgaged
Property is located in a state in which preliminary title reports are
acceptable evidence of title insurance or (c) a certificate of an
officer of the Seller certifying that a Title Insurance Policy is in
full force and effect as to the related Mortgage;
(6) for each Mortgage Loan identified in the related Agreement
as having in place a Primary Mortgage Insurance Policy, a Primary
Mortgage Insurance Policy or a certificate of primary mortgage
insurance issued by the related Mortgage Insurer or its agent
indicating that such a policy is in effect as to such Mortgage Loan or,
if neither a policy nor a certificate of insurance from the related
Mortgage Insurer is available, a certificate of an officer of the
Seller certifying that a Primary Mortgage Insurance Policy is in effect
as to such Mortgage Loan;
(7) each related assumption agreement, modification, written
assurance or substitution agreement, if any; and
(8) proof of the maintenance of a Standard Hazard Insurance
Policy (and a flood insurance policy, if applicable) as to the related
Mortgaged Property.
"MORTGAGE LOAN FILE" means, as to any Mortgage Loan, all the related
Mortgage Loan Documents.
"MORTGAGE LOAN SCHEDULE" means an Asset Schedule to the extent it
identifies Mortgage Loans.
"MORTGAGE LOAN-TO-VALUE RATIO" means, as to a Mortgage Loan, the ratio,
expressed as a percentage, of the principal amount of such Mortgage Loan at the
time of determination, to the sum of the appraised value of the land and
improvements, and the amount of any prepaid finance charges or closing costs
that are financed.
"MORTGAGE NOTE" means the note or other evidence of indebtedness of a
mortgagor secured by a Mortgage.
"MORTGAGE RATE" means, with respect to each Mortgage Loan, the interest
rate specified in the related Mortgage Note.
"MORTGAGED PROPERTY" means the mortgaged property securing a Mortgage
Loan.
120
<PAGE> 156
"MORTGAGOR" means the obligor on a Mortgage Note.
"MULTIPLE RATE VRDI CERTIFICATE" means a VRDI Certificate that does not
qualify as a Single Rate VRDI Certificate.
"NEGATIVE ADJUSTMENT" means any reduction in the income accrual on a
Certificate for a period below zero.
"NET LIQUIDATION PROCEEDS" means the amount of Liquidation Proceeds
received with respect to any Liquidated Loan, net of the amount of any
Liquidation Expenses incurred with respect to such Liquidated Loan and not
previously reimbursed to the Servicer at the time of liquidation.
"NET RATE" means, as to any Asset, the Asset Rate thereon minus
applicable servicing, administration and guarantee fees and insurance premiums,
if any (plus reinvestment income thereon if payable to the related
Certificateholders), expressed as a percentage per annum of the principal
balance of such Asset.
"NON-RECOVERABLE ADVANCE" means any Advance previously made or proposed
to be made in respect of a Contract or Mortgage Loan by the Servicer (or a
Trustee or Pool Insurer) pursuant to the related Agreement, which, in the good
faith judgment of the Servicer (or such Trustee or Pool Insurer), will not or,
in the case of a proposed Advance, would not, be ultimately recoverable by the
Servicer (or such Trustee or Pool Insurer) from Related Proceeds of such
Contract or Mortgage Loan.
"NON-REMIC CERTIFICATE" means a Certificate representing an interest in
a Trust Estate as to which no REMIC elections have been made.
"NON-REMIC STRIP CERTIFICATE" means an IO Certificate, a PO
Certificate, or a Ratio Certificate.
"NON-VRDI CERTIFICATE" means a NOWA Certificate, a Variable Rate
Certificate that is issued at an Excess Premium, or any other Variable Rate
Certificate that does not qualify as a VRDl Certificate.
"NOTIONAL PRINCIPAL AMOUNT" means a fictional principal balance that
may be assigned to a Certificate or a Class of Certificates that is to be used
solely for purposes of determining the amount of interest distributions and
certain other rights and obligations of the holder(s) of such Certificate or
Class and does not represent any beneficial interest in principal payments on
the Assets in the related Trust.
"NOWA CERTIFICATE" means a Weighted Average Certificate relating to a
Trust (or a designated Asset Pool thereof) whose Assets do not bear interest at
qualified floating rates.
"NVRI" means a residual interest that has negative value because, on
the date it is acquired, the present value of the anticipated tax liabilities
associated with holding the interest exceeds the sum of (1) the present value of
the expected future distributions on the interest and (2) the present value of
the anticipated tax savings associated with holding the interest as the related
REMIC generates losses.
"OBLIGOR" means a person who is indebted under a Contract or who has
acquired a Manufactured Home subject to a Contract or a person who is the
mortgagor or borrower under a Mortgage Loan or who has acquired a Mortgaged
Property subject to a Mortgage Loan.
"OBLIGOR BANKRUPTCY INSURANCE" means an insurance policy, reserve fund
or other form of credit enhancement that provides protection against losses
resulting from the bankruptcy of an Obligor.
"OBLIGOR BANKRUPTCY LOSS" means, for any Remittance Date as to any
Asset that was the subject of a Principal Cramdown during the preceding
Prepayment Period, the related Principal Cramdown Amount.
121
<PAGE> 157
"OFFERED CERTIFICATES" means, as to any Series, the Certificates of
Classes of such Series that are offered pursuant to the related Prospectus
Supplement and this Prospectus.
"OID REGULATIONS" means the final regulations governing original issue
discount that were issued by the Treasury.
"ORDINARY RATIO CERTIFICATE" means a Ratio Certificate that is not
considered a Contingent Payment Obligation.
"ORIGINAL CONTINGENT PAYMENT REGULATIONS" means the proposed
regulations relating to debt instruments issued with contingent payments that
were issued as part of the Original Proposed OID Regulations.
"ORIGINAL PROPOSED OID REGULATIONS" means the proposed regulations
governing original issue discount that were issued by the Treasury in 1986.
"PAC CLASS" means a "planned amortization" Class of Certificates
structured to receive fixed principal distribution amounts on designated
Remittance Dates so long as principal payments on the underlying Assets are
received at a rate that is within a range of constant percentages of the
prepayment assumption model used (as specified in the related Prospectus
Supplement).
"PARITY PRICE" means the price at which a Certificate will yield its
coupon, after giving effect to any payment delay.
"PARTICIPANTS" means the participating organizations that utilize the
services of the Depository, including securities brokers and dealers, banks and
trust companies and clearing corporations and may include certain other
organizations.
"PARTICIPATION CERTIFICATE" means a Non-REMIC Certificate evidencing
ownership of equal percentages of the principal and interest payments on the
Assets assigned to the related Trust.
"PASS-THROUGH RATE" means, with respect to any Class of Certificates,
the per annum interest rate, if any, which will accrue on the Certificate
Balance of such Class.
"PERCENTAGE INTEREST" means, with respect to a Certificate to which an
initial principal amount is assigned as of the Closing Date, the portion of the
Class of which such Certificate is a part evidenced by such Certificate,
expressed as a percentage, the numerator of which is the denomination
represented by such Certificate and the denominator of which is the initial
Certificate Balance of such Class. With respect to a Certificate to which an
initial principal balance is not assigned as of the Closing Date, the portion of
the Class of which such Certificate is a part evidenced by such Certificate,
expressed as a percentage stated on the face of such Certificate.
"PERIODIC RATE CAP" means, with respect to any Adjustable Rate Asset,
the limit on the percentage increase that may be made to the related Asset Rate
on any Interest Adjustment Date.
"PERSON" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust (including any beneficiary thereof),
unincorporated organization or government or any agency or political subdivision
thereof.
"P&I ADVANCE" means any amount advanced (or required to be advanced, as
the context requires) by the Servicer in respect of a delinquent payment of
principal and interest on a Contract or Mortgage Loan.
122
<PAGE> 158
"PLAN" means any employee benefit plan or retirement arrangement,
including individual retirement accounts and annuities, Keogh plans, and
collective investment funds in which such plans, accounts, annuities or
arrangements are invested, that are described in or subject to the Plan Asset
Regulations, ERISA, or corresponding provisions of the Code.
"PLAN ASSET REGULATIONS" means the DOL regulations set forth in 29
C.F.R. (section mark) 2510.3-101, as amended from time to time.
"PLAN INVESTOR" means any Plan, any Person acting on behalf of a Plan,
or any Person using the assets of a Plan.
"PO CERTIFICATE" means a Non-REMIC Certificate evidencing ownership of
a percentage of the principal payments on some or all of the Assets assigned to
the related Trust.
"POOL INSURANCE POLICY" shall have the meaning assigned and shall be as
described herein under "The Trusts -- Insurance -- Credit Insurance."
"POOL INSURER" means the insurer under any Pool Insurance Policy.
"POOL SCHEDULED PRINCIPAL BALANCE" means, on any Remittance Date for a
Series, the aggregate of the Scheduled Principal Balances, immediately prior to
the beginning of the related Collection Period, of the related Assets that were
outstanding at the beginning of such Collection Period, without giving effect to
any principal prepayments, Net Liquidation Proceeds or Repurchase Prices
received (or Realized Losses incurred) on such Assets on the day preceding the
beginning of such Collection Period, plus the aggregate of the principal
components of any Monthly Payments that were due at or prior to the beginning of
such Collection Period on such Assets, but which Monthly Payments were not
collected from a related Obligor or advanced by the Servicer and which were not
reflected in a corresponding reduction of the Certificate Balance of the
Certificates on the related Remittance Date. The Pool Scheduled Principal
Balance as of any date of determination that is not a Remittance Date shall be
the Pool Scheduled Principal Balance for the next upcoming Remittance Date.
"PRE-FUNDED AMOUNT" means the amount initially deposited into a
Pre-Funding Account for a Series.
"PRE-FUNDED ASSET" means an Asset acquired by a Trust after the related
Closing Date using funds on deposit in the related Pre-Funding Account.
"PRE-FUNDING ACCOUNT" means an account established for the purpose of
enabling a Trust to purchase Pre-Funded Assets, with an aggregate principal
balance not to exceed 25% of the Certificate Balance of Certificates issued by
such Trust during the applicable Pre-Funding Period, as described herein under
"The Trusts -- Pre-Funding Accounts."
"PRE-FUNDING PERIOD" means any period specified as such in a Prospectus
Supplement not to exceed three months, during which the related Trust may
acquire Pre-Funded Assets using funds on deposit in a related Pre-Funding
Account.
"PRE-ISSUANCE ACCRUED INTEREST" means interest that has accrued under
the terms of a Certificate prior to the issue date of such Certificate.
"PRE-ISSUANCE ACCRUED INTEREST RULE" means the rule in the OID
Regulations under which a Certificate's issue price may be computed by
subtracting from the issue price the amount of Pre-Issuance Accrued Interest on
the Certificate, and a portion of the interest received on the first Remittance
Date with respect to such Certificate would be treated as a return of such
Pre-Issuance Accrued Interest rather than as a payment on the Certificate,
provided: (i) a
123
<PAGE> 159
portion of the initial purchase price of the Certificate is allocable to
Pre-Issuance Accrued Interest and (ii) the Certificate provides for a payment of
stated interest on the first payment date within one year of the issue date that
equals or exceeds the amount of such Pre-Issuance Accrued Interest.
"PREMIUM CERTIFICATE" means a Certificate that has a purchase price
greater than its principal amount.
"PREPAYMENT ASSUMPTIONS" means a set of prepayment standards or models
which represent an assumed rate of prepayment of the Assets in an Asset Pool
relative to the aggregate outstanding principal balance of such Asset Pool from
time to time.
"PREPAYMENT PERIOD" means, unless otherwise provided in a related
Prospectus Supplement, with respect to any Remittance Date, the calendar month
immediately preceding the calendar month in which such Remittance Date occurs.
"PRICING PREPAYMENT ASSUMPTIONS" means, with respect to a Series of
Certificates, the assumptions concerning the rate and timing of principal
prepayments on the underlying Assets and concerning the reinvestment rate on
amounts held pending distribution that were assumed in pricing such
Certificates.
"PRIMARY MORTGAGE INSURANCE" means the insurance provided under any
Primary Mortgage Insurance Policy.
"PRIMARY MORTGAGE INSURANCE POLICY" means the primary mortgage
insurance policy, if applicable, covering certain Conventional Mortgage Loans
for which the initial Mortgage Loan-to-Value Ratios exceeded 80%.
"PRINCIPAL CRAMDOWN" means, as to any Asset, either (a) a decree by a
bankruptcy court to the effect that the portion of such Asset that is secured by
the underlying Manufactured Home or Mortgaged Property is less than its Unpaid
Principal Balance due to the fact that the value of such Manufactured Home or
Mortgaged Property is less than such Unpaid Principal Balance or (b) the
permanent forgiveness by a bankruptcy court of some or all of the Unpaid
Principal Balance owed by the related Obligor.
"PRINCIPAL CRAMDOWN AMOUNT" means, with respect to any Prepayment
Period as to any Asset that has been the subject of a Principal Cramdown, the
amount by which (a) the Unpaid Principal Balance of such Asset exceeds (b) as
applicable, depending upon the type of Principal Cramdown that was applied to
such Asset, either (1) the portion of such Unpaid Principal Balance that remains
secured by the related Manufactured Home or Mortgaged Property after taking the
related Principal Cramdown into account or (2) the Unpaid Principal Balance
after taking into account the permanent forgiveness of debt ordered by the
bankruptcy court in connection with the related Principal Cramdown.
"PRINCIPAL DISTRIBUTION AMOUNT" means, for any Series, except as
otherwise defined in the related Agreement, on any Remittance Date other than
the Remittance Date on which the related Trust is to be terminated, the sum of
the following amounts: (1) the sum of the principal components of all Monthly
Payments scheduled to be made on the Due Date occurring during the related
Collection Period on the related Assets that were Outstanding at the opening of
business on such Due Date (regardless of whether such Monthly Payments were
received by the Servicer from the related Obligors), not including any Monthly
Payments due on Liquidated Loans or repurchased Assets; (2) the sum of the
amounts of all Principal Prepayments received by the Servicer on the related
Assets during the related Prepayment Period; (3) with respect to any related
Asset that became a Liquidated Loan during the related Prepayment Period, the
Scheduled Principal Balance thereof on the date of liquidation thereof
(determined without giving effect to such liquidation), plus an amount equal to
the principal components of all Monthly Payments due on or prior to such date on
such Asset but theretofore unpaid by the related Obligors and not advanced by
the Servicer; (4) with respect to any related Asset that was purchased or
repurchased by the Servicer, OAC or the Company pursuant to the related
Agreement during the related Prepayment Period, the Scheduled Principal Balance
thereof on the date of purchase or repurchase thereof (determined without giving
effect to such purchase or repurchase), plus an amount equal to the principal
components of all Monthly Payments due on or prior to such date on such Asset
but theretofore unpaid by the
124
<PAGE> 160
related Obligor and not advanced by the Servicer; and (5) an amount equal to all
Principal Distribution Amounts from previous Remittance Dates that have not yet
been distributed on the Certificates (not including any portion of such previous
Principal Distribution Amounts that is included in either of the amounts
described in clause (3) or clause (4) above) minus the amount of any Writedown
Amounts that have previously been allocated to the Class of Certificates then
entitled to receive the Principal Distribution Amount in accordance with the
related Agreement.
On the Remittance Date on which the Trust is terminated, the Pool
Scheduled Principal Balance for such Remittance Date.
"PRINCIPAL PREPAYMENT" means, with respect to any Asset, a payment
attributable to principal of such Asset, other than a scheduled principal
payment on such Asset, which may be received (1) from the related Obligor
together with a regular Monthly Payment, (2) from the related Obligor together
with an early Monthly Payment, or (3) in the form of net Insurance Proceeds
received by the Servicer otherwise than as a component of Liquidation Proceeds.
"PRINCIPAL-ONLY CLASS" means a Class of Certificates representing an
interest only in specified collections of principal on the underlying Assets,
which will have no Pass-Through Rate.
"QUALIFIED BANK" means any domestic bank not affiliated with BCI or the
Company (1) having long-term unsecured debt obligations rated in one of the two
highest rating categories of each applicable Rating Agency or short-term
unsecured debt obligations rated in each applicable Rating Agency's highest
applicable rating category, (2) having commercial paper or short-term unsecured
debt obligations rated in each Rating Agency's highest applicable rating
category, or (3) that is otherwise acceptable to each applicable Rating Agency.
"QUALIFIED MORTGAGE" has the meaning assigned to such term herein under
"Federal Income Tax Consequences -- REMIC Certificates -- REMIC Qualification --
Asset Composition."
"QUALIFIED STATED INTEREST" means, in general, stated interest that is
unconditionally payable in cash or property (other than debt instruments of the
issuer) at least annually at (1) a single fixed rate or (2) a variable rate that
meets certain requirements set out in the OID Regulations.
"QUALIFIED SUBSTITUTE ASSET" means an Asset substituted by the Company,
the Seller or the Servicer for a Replaced Asset which must, on the date of such
substitution, (1) have an Unpaid Principal Balance not greater than (and not
more than $10,000 less than) the Unpaid Principal Balance of the Replaced Asset,
(2) have an Asset Rate not less than (and not more than one percentage point in
excess of) the Asset Rate of the Replaced Asset, (3) have a Net Rate equal to
the Net Rate of the Replaced Asset, (4) have a remaining term to maturity not
greater than (and not more than one year less than) that of the Replaced Asset,
(5) have a Loan-to-Value Ratio as of the first day of the month in which the
substitution occurs equal to or less than the Loan-to-Value Ratio of the
Replaced Asset as of such date (in each case, using the appraised value at
origination, and after taking into account the Monthly Payment due on such
date), and (6) comply with each representation and warranty set forth in Section
2.05 of the Standard Terms and in the related Sales Agreement. In the event that
more than one Asset is substituted for a Replaced Asset, the amount described in
clause (1) hereof shall be determined on the basis of aggregate Unpaid Principal
Balances, the rates described in clauses (2) and (3) hereof shall be determined
on the basis of weighted average Asset Rates and Net Rates, as the case may be,
and the term described in clause (4) hereof shall be determined on the basis of
weighted average remaining terms to maturity, provided that no Qualified
Substitute Asset may have an original term to maturity beyond the latest
original term to maturity of any Asset assigned to the Trust on the Closing
Date. In the case of a Trust for which a REMIC election has been or will be
made, a Qualified Substitute Asset also shall satisfy the following criteria as
of the date of its substitution for a Replaced Asset: (A) the Obligor shall not
be 90 or more days delinquent in payment on the Qualified Substitute Asset, (B)
the Asset File for such Asset shall not contain any material deficiencies in
documentation, and shall include an executed Contract or Mortgage Note, as
applicable, and, if it is a Land Secured Contract or a Mortgage Loan, a recorded
Mortgage; (C) the Loan-to-Value Ratio of the Asset must be 125% or less either
(i) on the date of origination of the Asset, or, if any of the terms of such
Asset were modified other than in connection with a default or imminent
125
<PAGE> 161
default on such Asset, on the date of such modification, or (ii) on the date of
the substitution, based on an appraisal conducted within the 60 day period prior
to the date of the substitution; (D) no property securing such Asset may be
subject to foreclosure, bankruptcy, or insolvency proceedings; and (E) such
Asset, if a Land Secured Contract or a Mortgage Loan, must be secured by a valid
first lien on the related Real Property or Mortgaged Property.
"QUALIFYING REIT INTEREST" means interest that is treated as "interest
on obligations secured by mortgages on real property" for REIT qualification
purposes.
"RATE BUBBLE CERTIFICATE" means a Regular Certificate, the effective
interest rate on which is higher during the Certificate's First Distribution
Period than during the remainder of the life of the Certificate.
"RATING AGENCY" means a nationally-recognized statistical securities
rating organization, such as Standard & Poor's Ratings Group, a division of
McGraw-Hill, Inc., Moody's investors Service, Inc., Fitch Investors Service,
Inc., and Duff & Phelps Credit Rating Co. With respect to any Series, each
Rating Agency rating any Certificates of such Series offered hereunder will be
identified in the related Prospectus Supplement.
"RATIO CERTIFICATE" means a Non-REMIC Certificate evidencing ownership
of a percentage of the interest payments and a different percentage of the
principal payments on the Assets assigned to the related Trust.
" RCRA" means the Resource Conservation and Recovery Act of 1976, as
amended.
"REALIZED INTEREST LOSS" means a Unpaid Interest Amount in interest
resulting from the receipt of Net Liquidation Proceeds in respect of a Contract
or Mortgage Loan in an amount that is insufficient to pay accrued and unpaid
interest thereon.
"REALIZED LOSS" means (1) the amount of any loss realized by a Trust in
respect of any related Liquidated Loan (which may be a Special Hazard Loss or a
Fraud Loss), which shall generally equal (a) the Unpaid Principal Balance of the
Liquidated Loan, plus accrued and unpaid interest on such Liquidated Loan, plus
amounts reimbursable to the Servicer for previously unreimbursed Servicing
Advances, minus (b) Net Liquidation Proceeds in respect of the Liquidated Loan
or (2) any Obligor Bankruptcy Loss.
"REAL PROPERTY" means a parcel of real estate securing a Land Secured
Contract.
"RECORD DATE" means, for any Remittance Date, the date on which the
identities of the Certificateholders entitled to distributions on the related
Certificates on such Remittance Date are fixed, which shall be the last day of
the preceding calendar month unless otherwise specified in the related
Prospectus Supplement.
"REGULAR CERTIFICATE" means a Certificate evidencing a "regular
interest" in a REMIC.
"REIT" means a "real estate investment trust" as defined in the Code.
"RELATED PROCEEDS" means, with respect to any Contract or Mortgage Loan
in respect of which an Advance has been or is to be made, future collections in
respect of such Contract or Mortgage Loan (including collections of or from
Insurance Proceeds, Additional Assets or Liquidation Proceeds relating to such
Contract or Mortgage Loan).
"RELIEF ACT" means the federal Soldiers' and Sailors' Civil Relief Act
of 1940, as amended.
"REMIC" means a "real estate mortgage investment conduit" as defined in
the Code.
"REMIC CERTIFICATE" means a Certificate representing an interest in a
Trust Estate as to which one or more REMIC elections have been made.
126
<PAGE> 162
"REMIC PROVISIONS" means provisions of the Code relating to REMICs,
which appear at Sections 860A through 860G of the Code, related Code provisions,
regulations (whether in proposed, temporary or final form), announcements and
rulings thereunder, as the foregoing may be in effect from time to time.
"REMITTANCE ACCOUNT" shall have the meaning assigned to such term
herein under "Sale and Servicing of Contracts and Mortgage Loans -- Servicing --
Distributions on Certificates."
"REMITTANCE DATE" means the business day preceding any monthly
Remittance Date.
"REMITTANCE DATE" means, with respect to each Series, unless otherwise
provided in the related Prospectus Supplement, the 15th day of each month (or
the next business day if such 15th day is not a business day), commencing in the
month following the month in which the related Closing Date occurs.
"REMITTANCE REPORT" means, with respect to any Remittance Date, the
monthly statement relating to such Remittance Date which is to be prepared by
the Servicer and furnished by the Trustee to the related Certificateholders, as
more fully described herein under "The Pooling and Servicing Agreements --
Reports to Certificateholders."
"REO PROPERTY" means a Mortgaged Property acquired by the Servicer on
behalf of a Trust pursuant to a foreclosure or other similar proceeding in
respect of a related Mortgage Loan.
"REPLACED ASSET" means an Asset replaced or to be replaced by a
Qualified Substitute Asset.
"REPO PROPERTY" means a Manufactured Home (and any related Real
Property) acquired by the Servicer on behalf of a Trust pursuant to a
repossession, foreclosure or other similar proceeding in respect of a related
Contract.
"REPURCHASE PRICE" shall, for any Asset, have the meaning assigned in
the related Agreement. Generally, the "Repurchase Price" of an Asset will equal
the Unpaid Principal Balance thereof, plus unpaid interest thereon at the
applicable Asset Rate through the end of the month in which such price is paid
for the Asset.
"RESERVE FUND" means a fund established and funded by the Company or
such other party specified in the related Prospectus Supplement to make payments
on certain Certificates to the extent funds are not otherwise available.
"RESIDUAL CERTIFICATE" means a Certificate evidencing a "residual
interest" in a REMIC.
"RIC" means a "regulated investment company" as defined in the Code.
"SALES AGREEMENT" means, with respect to any Asset, the agreement
pursuant to which the related Seller sold such Asset to the Company.
"SCHEDULED PRINCIPAL BALANCE" means, as of any date of determination
with respect to any Contract, Repo Property, Mortgage Loan or REO Property, (1)
the Cut-off Date Principal Balance of such Contract or Mortgage Loan (or of the
related Contract or Mortgage Loan, in the case of a Repo Property or REO
Property) minus (2) the sum of (a) the principal components of any Monthly
Payments due on such Contract or Mortgage Loan (or on the related Contract or
Mortgage Loan, in the case of a Repo Property or REO Property) after the related
Cut-off Date and on or before such date of determination (regardless of whether
such Monthly Payments were received from the related Obligor) plus (b) all
principal prepayments received by the Servicer on such Contract or Mortgage Loan
(or on the related Contract or Mortgage Loan, in the case of a Repo Property or
REO Property) (including the principal portion of Net Liquidation Proceeds and
the principal portion of all amounts paid by the Seller or another party to
repurchase such Contract or Mortgage Loan) on or after the Cut-off Date and on
or prior to such date of determination, plus (c) all Realized Losses incurred on
such Contract or Mortgage Loan (or the related Contract or Mortgage Loan, in the
case of a Repo Property or REO Property) on or after the Cut-off Date and on or
prior to such date of determination.
127
<PAGE> 163
"SELLER" means, as to any Contract or Mortgage Loan included in the
Trust Estate for a Series, the entity that sold such Contract or Mortgage Loan
to the Company under a Sales Agreement, which will be BCI unless otherwise
specified in the related Prospectus Supplement.
"SENIOR CERTIFICATES" means, with respect to each Series of
Certificates, the Class or Classes which have rights to receive distributions or
with respect to allocations of Realized Losses and/or Unpaid Interest Amounts
that are preferential to those of another Class or Classes in such Series.
"SERIES" means a series of Certificates offered pursuant to this
Prospectus and a Prospectus Supplement thereto.
"SERIES RATE" means, with respect to a Series, the interest rate equal
to a weighted average of the interest rates on all of the Non-REMIC Certificates
issued in such Series.
"SERIES REMIC" means a REMIC created with respect to a particular
Series.
"SERVICE" means the Internal Revenue Service.
"SERVICER" means BCI, in its capacity as servicer of the Mortgage Loans
and/or Contracts underlying a Series of Certificates, or such other entity
specified as the servicer in the related Prospectus Supplement.
"SERVICING ADVANCE" means an advance required to be made by the
Servicer in respect of Contracts or Mortgage Loans (other than P&I Advances)
including, but not limited to, advances for the payment of personal property
taxes, real property taxes and premiums for Standard Hazard Insurance Policies.
"SERVICING FEE" means the monthly fee paid to the Servicer in respect
of a Series, as specified in the related Prospectus Supplement, which is
typically a fixed percentage of the Pool Scheduled Principal Balance of the
related Asset Pool.
"SINGLE RATE VRDI CERTIFICATE"means a VRDI Certificate that provides
for stated interest unconditionally payable in cash or property at least
annually at a single qualified floating rate or a single objective rate.
"SMMEA" means the Secondary Mortgage Market Enhancement Act of 1984.
"SOLDIERS' AND SAILORS' SHORTFALL" means a Unpaid Interest Amount in
respect of a Contract or Mortgage Loan resulting from application of the Relief
Act.
"SPECIAL HAZARD INSURANCE POLICY" shall have the meaning assigned and
shall be as described herein under "The Trusts -- Insurance -- Hazard Insurance
- -- Special Hazard Insurance Policy."
"SPECIAL HAZARD INSURER" means the insurer under any Special Hazard
Insurance Policy.
"SPECIAL HAZARD LOSS" means a loss incurred on a Contract or Mortgage
Loan attributable to physical damage to the related Manufactured Home or
Mortgaged Property of a type which is not covered by standard hazard insurance
policies, excluding losses caused by war, nuclear reaction, nuclear or atomic
weapons, insurrection or normal wear and tear.
"STANDARD HAZARD INSURANCE POLICY" shall mean a policy providing
standard hazard insurance coverage with respect to a Manufactured Home or
Mortgaged Property as described herein under "The Trusts -- Insurance -- Hazard
Insurance -- Standard Hazard Insurance Policies."
128
<PAGE> 164
"STEP-UP RATE" means the Asset Rate on a Step-up Rate Loan.
"STEP-UP RATE LOAN" means an Asset which bears interest at an Asset
Rate that increases over time.
"STRIP CLASS" means a Class of Certificates representing an interest
only in a specified portion of interest collections on the underlying Assets,
which may have no principal balance, a nominal principal balance or a Notional
Principal Amount.
"STRIPPING REGULATIONS" means the regulations issued by the Treasury
under section 1286 of the Code.
"SUBORDINATED CERTIFICATES" means, with respect to each Series of
Certificates, the Class or Classes with rights to receive distributions or with
respect to the allocation of Realized Losses and/or Unpaid Interest Amounts that
are subordinate to those of another Class or Classes of such Series.
"SUBORDINATION AMOUNT" means a specific amount of subordination
provided by Subordinated Certificates, as specified, if applicable, in the
related Prospectus Supplement.
"SUB-SERVICER" means any party, if any, with whom the Servicer has
entered into a Sub-servicing Agreement.
"SUB-SERVICING ACCOUNT" means an Eligible Account established by a
Sub-servicer that must comply with all standards applicable to the related
Certificate Account, into which the Sub-servicer must deposit collections in
respect of the related Assets pending remittance thereof to the related
Certificate Account.
"SUB-SERVICING AGREEMENT" means the written contract between the
Servicer and any Sub-servicer relating to servicing and/or administration of
certain Mortgage Loans or Contracts as provided in the Agreement.
"SUPERPREMIUM CERTIFICATE" means a Certificate that provides for a
relatively small amount of principal and for interest that can be expressed as
Qualified Stated Interest at a very high fixed rate with respect to that
principal.
"TAX ADMINISTRATOR" means the entity responsible for computing the
amount of original issue discount to be reported to the holders of Regular
Certificates each taxable year, which, unless otherwise provided in the related
Agreement, will be [BCI or an Affiliate thereof].
"TAXABLE MORTGAGE POOL" means any entity other than a REMIC or a REIT
if (i) substantially all of the assets of the entity consist of debt obligations
and more than 50% of such obligations consist of "real estate mortgages" (which
term, for purposes of this definition, includes Mortgage Loans and Contracts),
(ii) such entity is the obligor under debt obligations with two or more
maturities, and (iii) under the terms of the debt obligations on which the
entity is the obligor, payments on such obligations bear a relationship to
payment on the obligations held by the entity.
"TAXABLE MORTGAGE POOL RULES" means the Code sections governing Taxable
Mortgage Pools, and the regulations that were issued by the Treasury thereunder.
"TEASER CERTIFICATE" means a Regular Certificate that bears interest
under terms that provide for a teaser rate period, interest holiday, or other
period during which the rate of interest payable on such Certificate is lower
than the rate payable during the remainder of the life of the Certificate.
"THRIFT INSTITUTION" means a thrift institution taxed as a "mutual
savings bank" or a "domestic building and loan association."
"TITLE I" means Title I of the National Housing Act, as amended.
129
<PAGE> 165
"TITLE STATE" means a state in which a lien on a Manufactured Home is
"perfected" under applicable motor vehicle titling statues, either by notation
of the secured party's lien on the related certificate of title or by delivery
of the required documents and payment of a fee to the state motor vehicle
authority to re-register the Manufactured Home.
"TITLE V" means Title V of the Depository Institutions Deregulation and
Monetary Control Act of 1980, as amended.
"TMP" means the holder of a residual interest in a REMIC that is
designated as the tax matters person of such REMIC.
"TREASURY" means the United States Treasury Department.
"TRUST" means a trust that issues a Series of Certificates.
"TRUSTEE" means the Trustee for a Series of Certificates specified in
the related Prospectus Supplement.
"TRUSTEE MORTGAGE LOAN FILE" means, as to any Mortgage Loan, a file
which is required to contain all of the Mortgage Loan Documents for such
Mortgage Loan.
"TRUST ESTATE" means, with respect to each Series of Certificates, the
corpus of the trust created by the related Agreement, to the extent described in
such Agreement, consisting of, among other things, Contracts and/or Mortgage
Loans, such assets as shall from time to time be identified as deposited in the
related Distribution Account, property which secured a Contract or Mortgage Loan
but which has been acquired by the related Trust through repossession or
foreclosure or otherwise, any related insurance policy, any related Reserve Fund
and any related alternate credit enhancement, if any.
"UBTI" means "unrelated business taxable income" as defined in the
Code.
"UCC" means the Uniform Commercial Code.
"UCC STATE" means a state in which a lien on a Manufactured Home is
"perfected" pursuant to the provisions of the applicable UCC, by filing UCC-3
financing statements or other appropriate transfer instruments with all
appropriate UCC filing offices.
"UNDERWRITER" means any firm that underwrites the purchase of the
Certificates of a Series.
"UNOFFICIAL CONTINGENT PAYMENT REGULATIONS" means the proposed Treasury
regulations applicable to instruments with contingent payments that were
unofficially released by the Service on January 19, 1993.
"UNPAID INTEREST AMOUNT" means, for any month and any Contract or
Mortgage Loan, the amount by which the amount of interest due on such Contract
or Mortgage Loan for such month exceeds the amount of interest collected or
advanced in respect of such Contract, which may be due to Due Date Interest
Shortfall or Soldiers' and Sailors' Shortfall.
"UNPAID PRINCIPAL BALANCE" means the unpaid principal balance of a
particular Contract or Mortgage Loan.
"VA" means the United States Department of Veterans Affairs.
"VA CONTRACT" or "VA MORTGAGE LOAN" means a Contract or Mortgage Loan
that is partially guaranteed by the VA.
130
<PAGE> 166
"VARIABLE RATE CERTIFICATE" means a Regular Certificate that bears
interest at a variable rate.
"VOTING RIGHTS" means, with respect to a Certificate, the portion of
the voting rights of all of the Certificates of the related Series which is
allocated to any such Certificate. Unless otherwise provided in the related
Agreement, (1) if any Class of Certificates does not have a Certificate Balance
or has an initial Certificate Balance that is less than or equal to 1% of the
aggregate Certificate Balance of all the Certificates of its Series, then 1% of
the Voting Rights for such Series shall be allocated to each such Class, and the
balance of the Voting Rights for such Series shall be allocated among the
remaining Classes of Certificates of such Series in proportion to their
respective Certificate Balances following the most recent Remittance Date, and
(b) if no Class of Certificates of such Series has an initial Certificate
Balance less than 1% of the aggregate Certificate Balance of all Certificates of
such Series, then all of the Voting Rights for such Series shall be allocated
among all the Classes of Certificates of such Series in proportion to their
respective Certificate Balances following the most recent Remittance Date.
Voting Rights allocated to each Class of Certificates shall be allocated among
the Certificates of such Class in proportion to the respective Percentage
Interests of the Holders thereof.
"VRDI" means a "variable rate debt instrument" as defined in section
1.1275-5 of the OID Regulations.
"VRDI CERTIFICATE" means a Variable Rate Certificate that qualifies as
a VRDI under the OID Regulations.
"WAM" means, with respect to a Regular Certificate, the sum of the
amounts obtained by multiplying the amount of each Deemed Principal Payment on
the Certificate by a fraction, the numerator of which is the number of complete
years from the Certificate's issue date until the payment is made, and the
denominator of which is the Certificate's stated redemption price at maturity.
"WEIGHTED AVERAGE CERTIFICATE" means a Regular Certificate that
provides for interest based on a weighted average of the interest rates on some
or all of the Assets held by the related REMIC.
"WEIGHTED AVERAGE NET ASSET RATE" means, for any Remittance Date, a
rate equal to (i) the weighted average of the Asset Rates applicable to the
scheduled Monthly Payments that were due in the related Collection Period on
outstanding Assets less (ii) the Servicing Fee Rate.
"WRITEDOWN AMOUNT" means with respect to each Remittance Date, the
amount, if any, by which (i) the aggregate Certificate Balance of all the
Certificates, after all distributions have been made on the Certificates on such
Remittance Date, exceeds (ii) the Pool Scheduled Principal Balance of the Assets
for the next Remittance Date.
131
<PAGE> 167
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE SECURITIES DESCRIBED IN THIS
PROSPECTUS SUPPLEMENT OR AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE
THEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN OR THEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE OF SUCH INFORMATION.
---------------
TABLE OF CONTENTS
Summary of Terms........................................
Risk Factors............................................
The Asset Pool..........................................
Maturity, Prepayment and Yield Considerations...........
Description of the Certificates.........................
The Manufactured Housing Program........................
Use of Proceeds.........................................
Federal Income Tax Consequences.........................
ERISA Considerations....................................
Underwriting............................................
Certain Legal Matters...................................
Ratings.................................................
PROSPECTUS
Available Information...................................
Incorporation of Certain Documents by Reference.........
Summary of Terms........................................
Risk Factors............................................
Description of the Certificates.........................
Yield Considerations....................................
The Trusts..............................................
The Manufactured Housing Program........................
Sale and Servicing of Contracts and Mortgage Loans......
The Pooling and Servicing Agreements....................
Certain Legal Aspects of Contracts and
Mortgage Loans......................................
Use of Proceeds.........................................
The Company.............................................
The Servicer............................................
Federal Income Tax Consequences.........................
State Tax Considerations................................
ERISA Considerations....................................
Plan of Distribution....................................
Legal Investment Considerations.........................
Legal Matters...........................................
========================================================
BOMBARDIER CAPITAL
MORTGAGE
SECURITIZATION CORPORATION
$___________ (Approximate)
PASS-THROUGH CERTIFICATES
SERIES _____
CLASS A-1 CLASS A-4
CLASS A-2 CLASS M
CLASS A-3 CLASS B-1
BOMBARDIER CAPITAL INC.
SERVICER
_______________
PROSPECTUS
SUPPLEMENT
_______________
[UNDERWRITER]
[DATE]
========================================================
<PAGE> 168
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses expected to be incurred in connection with the issuance
and distribution of the securities being registered, other than underwriting
compensation, are as set forth below. All such expenses, except for the filing
fee, are estimated.
SEC Registration Fee........................... $*
Legal Fees and Expenses........................ *
Accounting Fees and Expenses................... *
Trustee's Fees and Expenses.................... *
Printing and Engraving Fees.................... *
Rating Agency Fees............................. *
Miscellaneous.................................. *
Total.......................................... $*
- ---------------
* To be filed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 8.50 of the Vermont Business Corporation Act (the "VBCA")
empowers a Vermont corporation to indemnify any persons who are, or are
threatened to be made, parties to any threatened, pending or completed legal
action, suit or proceeding, whether civil, criminal, administrative or
investigative and whether formal or informal (other than an action by or in the
right of such corporation), by reason of the fact that such person was an
officer or director of such corporation, or is or was serving at the request of
such corporation as a director, officer, partner, trustee, employee or agent of
another foreign or domestic partnership, joint venture, trust, employee benefit
plan, corporation or enterprise. The indemnity may include expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided that such officer or director acted in good faith and in a
manner he reasonably believed to be in or not opposed to the corporation's best
interests, and, for proceedings, had no reasonable cause to believe his conduct
was unlawful. A Vermont corporation may indemnify officers and directors in an
action by or in the right of the corporation under the same conditions, except
that no indemnification is permitted without judicial approval if the officer or
director is adjudged to be liable to the corporation in the performance of his
duty, in which case the indemnification is limited to reasonable expenses
incurred. Where an officer or director is wholly successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him against the expenses which such officer or director actually and
reasonably incurred.
Article Fourteenth of the Registrant's Articles of Incorporation
provides that the Registrant must indemnify all persons whom it may indemnify
pursuant to Section 8.50 of the VBCA to the full extent provided therein.
Article XII of the Registrant's By-Laws provides that the Registrant
shall indemnify to the full extent permitted by law and hold harmless each
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative and whether or not by or in the right
of the Registrant, by reason of the fact that he is or was a director or officer
of the Registrant, or by reason of the fact that he is or was serving at the
request of the Registrant as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, of any type
or kind, domestic or foreign, against expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement, actually and reasonably
incurred as a result of such action, suit or proceeding.
II-1
<PAGE> 169
<TABLE>
<CAPTION>
ITEM 16. EXHIBITS.
<S> <C>
1.1 Underwriting Agreement (to be filed as an exhibit to a Current Report on Form
8-K subsequent to the effectiveness of this Registration Statement).
3.1* Articles of Incorporation of the Registrant
3.2* By-laws of the Registrant
4.1** Form of Pooling and Servicing Agreement for Senior/Subordinated Securities.
5.1* Opinion of Morgan, Lewis & Bockius LLP regarding the legality of the
securities being registered.
8.1* Opinion of Morgan, Lewis & Bockius LLP regarding certain federal income tax
matters with respect to the securities being registered.
23.1* Consent of Morgan, Lewis & Bockius LLP (incorporated in Exhibits 5.1 and
8.1).
24.1* Powers of Attorney (incorporated in Signatures).
</TABLE>
- ---------------
* Filed herewith.
** To be filed subsequently by amendment.
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 to
include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or
any material change to such information in this Registration Statement.
(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.
(4) 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 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 Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its
II-2
<PAGE> 170
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> 171
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, that it reasonably believes that the
security rating requirement set forth in Transaction Requirement B.5 will be met
by the time of sale of the registered securities and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Burlington, State of Vermont, on the 11th day of
November, 1997.
BOMBARDIER CAPITAL MORTGAGE
SECURITIES CORPORATION
By: /s/ Blaine H. Filthaut
--------------------------
Name: Blaine H. Filthaut
Title: Treasurer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Blaine H. Filthaut and James Dolan, and
each of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for and in his name, place and stead, in any
and all capacities to sign any or all amendments (including post-effective
amendments) to this Registration Statement and any or all other documents in
connection therewith, and to file the same, with all exhibits thereto, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as might or could be done in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ Pierre-Andre Roy President and Director November 11, 1997
- -----------------------
Pierre-Andre Roy (Principal Executive Officer)
/s/ Blaine H. Filthaut Treasurer and Director November 11, 1997
- -----------------------
Blaine H. Filthaut (Principal Financial Officer)
/s/ R. William Crowe Director November 11, 1997
- -----------------------
R. William Crowe
/s/ Ronald G. Peace Director November 11, 1997
- -----------------------
Ronald G. Peace
/s/ Louis Villenuve Director November 11, 1997
- -----------------------
Louis Villenuve
/s/ Julie Rheault Director November 11, 1997
- -----------------------
Julie Rheault
/s/ Davis Austin Director November 11, 1997
- -----------------------
David Austin
II-4
<PAGE> 172
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
1.1 Underwriting Agreement (to be filed as an exhibit to a Current Report on Form 8-K subsequent to
the effectiveness of this Registration Statement).
3.1* Articles of Incorporation of the Registrant
3.2* By-laws of the Registrant
4.1** Form of Pooling and Servicing Agreement for Senior/Subordinated Securities.
5.1* Opinion of Morgan, Lewis & Bockius LLP regarding the legality of the securities being
registered.
8.1* Opinion of Morgan, Lewis & Bockius LLP regarding certain federal income tax matters with
respect to the securities being registered.
23.1* Consent of Morgan, Lewis & Bockius LLP (incorporated in Exhibits 5.1 and 8.1).
24.1* Powers of Attorney (incorporated in Signatures).
</TABLE>
- ---------------
* Filed herewith.
** To be filed subsequently by amendment.
<PAGE> 1
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
BOMBARDIER CAPITAL MORTGAGE SECURITIZATION CORPORATION
FIRST: The name of the corporation is Bombardier Capital
Mortgage Securitization Corporation (the "Corporation").
SECOND: The total number of shares of stock which the
Corporation shall have authority to issue is One Thousand (1,000) shares of
Common Stock, and the par value of each such share is One Dollar ($1.00) (the
"Common Stock").
THIRD: The Common Stock shall be the only class of shares in
the Corporation.
FOURTH: The Common Stock shall have unlimited voting rights
and shall be entitled to receive the net assets of the Corporation upon
dissolution.
FIFTH: The street address of the Corporation's initial
registered office in the State of Vermont is CT Corporation System, 148 College
Street, Burlington, Vermont 05401.
SIXTH: The name and street address of the incorporator is
David J. Sylvester, Downs Rachlin & Martin, PC, 199 Main Street, Burlington,
Vermont 05401.
SEVENTH: The nature of business or purposes to be conducted or
promoted by the Corporation is to acquire interests in, or interests in pools
of, manufactured housing retail sale contracts and installment agreements,
mortgage loans and similar agreements (and interests
<PAGE> 2
therein) ("Receivables"), enter into and comply with receivables transfer
agreements, receivables purchase agreements, pooling and servicing agreements,
underwriting agreements and other similar agreements for the acquisition and
disposition of such Receivables, investing the proceeds derived from such
activities and engaging in any lawful act or activity for which a corporation
may be organized under the laws of the State of Vermont, which act or activity
is incidental to and necessary or convenient to accomplish the foregoing.
EIGHTH: The Corporation's Board of Directors must be elected
separately from the Boards of Directors of its Affiliates (as defined in Article
TWELFTH below).
NINTH: The Board of Directors of the Corporation may make
By-laws and from time to time may alter, amend or repeal such By-laws. Meetings
of shareholders may be held within or without the State of Vermont, as the
By-laws may provide. The books of the Corporation may (except as otherwise
required by law) be kept within or without the State of Vermont at such place or
places as may be designated from time to time by the Board of Directors.
TENTH: No director of the Corporation shall be liable to the
Corporation or its shareholders for monetary damages for any action taken or any
failure to take any action, solely as a director, based on a failure to
discharge his or her duties in accordance with Section 8.30 of the Vermont
Business Corporation Act, except liability for: (i) the amount of a financial
benefit received by a director to which the director is not entitled; (ii) an
intentional or reckless infliction of harm on the Corporation or the
shareholders; (iii) a violation of Section 8.33 of the Vermont Business
Corporation Act; or (iv) an intentional or reckless criminal act.
ELEVENTH: The Corporation shall not make or commence any
bankruptcy or insolvency filing or proceeding or any similar filing or
proceeding or make or commence any
2
<PAGE> 3
dissolution, liquidation, consolidation, merger or sale of all or substantially
all of its assets without the unanimous vote of 100% of the entire Board of
Directors (the phrase "entire Board of Directors," whenever used in these
Articles of Incorporation, shall mean all of the directors of the Corporation
who would be in office (including at least one Independent (as defined in
Article TWELFTH below) Director) if there were at such time neither any
vacancies nor any unfilled newly-created directorships on the Board of
Directors), and the Corporation shall not acquiesce, petition or otherwise
invoke or cause any other person or entity to invoke the process of the United
States of America, any state or other political subdivision thereof or any other
jurisdiction, any entity exercising executive, legislative, judicial, regulatory
or administrative functions of or pertaining to government for the purpose of
commencing or sustaining a case against the Corporation under a federal or state
bankruptcy, insolvency or similar law or appointing a receiver, liquidator,
assignee, trustee, custodian, sequestrator or other similar official of the
Corporation for all or any part of its property or assets or ordering the
winding-up, dissolution or liquidation of the affairs of the Corporation or a
consolidation, merger or sale of all or substantially all of the assets of the
Corporation if in any such case such action has not been approved by the vote of
100% of the entire Board of Directors.
Notwithstanding any other provision hereof, if there shall not
be one Independent Director as required pursuant to Article TWELFTH of these
Articles of Incorporation then in office and acting, no vote upon any matter set
forth in this Article ELEVENTH shall be taken unless and until one such
Independent Director shall have been duly elected and qualified.
TWELFTH: The Corporation shall at all times have at least one
Independent (as hereinafter defined) Director and such Independent Director
cannot be removed without the
3
<PAGE> 4
appointment of a successor Independent Director. In order for the Corporation to
amend its Articles of Incorporation to modify any provision of Article SEVENTH,
Article ELEVENTH, Article TWELFTH or Article THIRTEENTH, such amendment must be
approved by the entire Board of Directors (including the Independent Director).
For purposes of these Articles of Incorporation, (a) "Independent" shall mean,
when used with respect to any individual, an individual who (i) is in fact
independent, (ii) does not have any direct financial interest or any material
indirect financial interest in the Corporation, or in any Affiliate of the
Corporation, (iii) is not, and has not been, connected with the Corporation or
any Affiliate of the Corporation as an officer, employee, promoter, underwriter,
trustee, partner or person performing similar functions and is not a member of
the immediate family of any such officer or employee and (iv) is not, and has
not been, a director or stockholder of any Affiliate of the Corporation and is
not a member of the immediate family of any such director or stockholder; (b)
"Person" shall mean any individual, corporation, partnership, joint venture,
joint stock company, estate, trust, unincorporated association, any federal,
state, county or municipal government or any bureau, department or agency
thereof and any fiduciary acting in such capacity on behalf of any of the
foregoing; and (c) "Affiliate" shall mean, as to any Person, any other Person
that, directly or indirectly, is in control of, is controlled by or is under
common control with such Person. For purposes of this definition, control of a
Person shall mean the power, directly or indirectly to direct or cause the
direction of the management and policies of such Person whether through the
ownership of voting securities, by contract or otherwise. In the event of the
death, incapacity, resignation or removal of the Independent Director, the Board
of Directors of the Corporation shall in a reasonably prompt manner elect a new
Independent Director. Any Independent Director so elected by the Board of
4
<PAGE> 5
Directors shall hold office until the next annual election of directors and
until his or her successor shall be duly elected and qualified. The Board of
Directors of the Corporation shall not vote on any matter unless and until the
Independent Director has been duly elected and qualified to serve on the Board
of Directors.
THIRTEENTH: The Corporation
(a) shall not direct or participate in the management of any
other Person's operations, and no other Person shall be permitted to direct or
participate in the management of the Corporation;
(b) shall maintain a principal executive and administrative
office through which its business is conducted separate from those of any other
Person, and, to the extent that the Corporation and any other Persons have
offices in contiguous space, there shall be fair and appropriate allocation of
overhead costs among them, and each such entity shall bear its fair share of
such expenses;
(c) engage only in those transactions described in the SEVENTH
section hereof and matters necessarily incident thereto;
(d) shall have stationery and other business forms and a
mailing address and a telephone number separate from that of any other Person;
(e) shall ensure that, to the extent that it jointly contracts
with any of its stockholders or Affiliates to do business with vendors or
service providers or to share overhead expenses, the costs incurred in so doing
shall be allocated fairly among such entities and that each such entity shall
bear its fair share of such costs and shall ensure that, to the extent that the
Corporation contracts or does business with vendors or service providers where
the goods and
5
<PAGE> 6
services provided are partially for the benefit of any other Person, the costs
incurred in so doing shall be fairly allocated to or among such entities for
whose benefit the goods and services are provided and that each such entity
shall bear its fare share of such costs;
(f) shall at all times be adequately capitalized in light of
its contemplated business;
(g) shall at all times provide for its own operating expenses
and liabilities from its own funds, shall not allow its funds to be diverted to
any other Person or for other than the corporate use of the Corporation, and
shall not, except as may be expressly permitted by agreements of the
Corporation, allow its funds to be commingled with those of any Affiliate of the
Corporation;
(h) shall maintain its assets and transactions separately from
those of any other Person, reflect such assets and transactions in financial
statements separate and distinct from those of any other Person and evidence
such assets and transactions by appropriate entries in books and records
separate and distinct from those of any other Person;
(i) shall ensure that all material transactions between the
Corporation and any of its Affiliates shall be only on an arms'-length basis and
shall receive the approval of the Board of Directors, including at least one
Independent Director;
(j) shall hold itself out to the public under its own name as
a legal entity separate and distinct from any other Person, shall act solely in
its own corporate name and through its own authorized officers and agents, and
no Affiliate of the Corporation shall be appointed to act as agent by the
Corporation, except as may be expressly permitted by any written agreements of
the Corporation;
6
<PAGE> 7
(k) shall not hold itself out as having agreed to pay, or as
being liable, primarily or secondarily, for any obligations of any other Person,
except as may be expressly permitted in any written agreements of the
Corporation;
(l) shall not maintain any joint account with any other Person
or become liable as a guarantor or otherwise with respect to any debt or
contractual obligation of any other Person;
(m) shall not make any payment or distribution of assets with
respect to any obligation of any other Person or grant any lien, security
interest or encumbrance on any of its assets to secure any obligation of any
other Person;
(n) shall not make loans, advances or otherwise extend credit
to any other Person, except on an arm's length basis, and shall not permit any
Affiliate of the Corporation to advance funds to the Corporation or otherwise
supply funds to, or guaranty debts of, the Corporation, except as may be
expressly permitted by any written agreements of the Corporation;
(o) shall hold regular duly noticed meetings of its
shareholders and Board of Directors, no less than once annually, and make and
retain minutes of such meetings;
(p) shall ensure that decisions with respect to its business
and daily operations shall be independently made by the Corporation (although
the officer making any particular decision may also be an officer or director of
any Affiliate of the Corporation) and shall not be dictated by an Affiliate of
the Corporation;
(q) shall have bills of sale (or other similar instruments of
assignment) and, if appropriate, UCC-1 financing statements, with respect to all
assets purchased from any other Person;
7
<PAGE> 8
(r) shall file its own tax returns or, if it is a member of a
consolidated group, will join in the consolidated return of such group as a
separate member thereof and shall ensure that any financial reports required of
the Corporation shall comply with generally accepted accounting principles and
shall be issued separately from, but may be consolidated with, any reports
prepared for any of its Affiliates;
(s) shall not fail to maintain its assets in such a manner
that it will not be costly or difficult to segregate, ascertain or identify its
individual assets from those of any other Person; and
(t) shall comply with all provisions of these Articles of
Incorporation and Bylaws and shall observe all necessary, appropriate and
customary corporate formalities.
FOURTEENTH: Each Person who at any time is or shall have been
a director, officer employee or agent of the Corporation and is threatened to be
or is made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he is or was a director, officer, employee or agent of the
Corporation or is or was serving at the request of the Corporation as s
director, officer, employee, trustee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall be indemnified
against expenses (including attorney's fees), judgments, fines, and amounts paid
in settlement actually and reasonably incurred by him in connection with any
such action, suit or proceeding to the fullest extent authorized under Section
8.50 et seq. of the Vermont Business Corporation Act. The foregoing right of
indemnification shall in no way be exclusive of any other rights of
indemnification to which such director, officer, employee or agent may be
entitled under any By-law, agreement, vote of stockholders or disinterested
directors, or otherwise.
8
<PAGE> 9
FIFTEENTH: Any and all right, title, interest and claim in or
to any dividends declared by the Corporation, whether in cash, stock or
otherwise, which are unclaimed by the shareholder entitled thereto for a period
of six (6) years after the close of business on the payment date, shall be and
be deemed to be extinguished and abandoned, and such unclaimed dividends in the
possession of the Corporation, its transfer agents or other agents or
depositories, shall at such time become the absolute property of the
Corporation, free and clear of any and all claims of any persons whatsoever.
IN WITNESS WHEREOF, I have signed these Articles of
Incorporation as of this 7th day of November 1997.
/s/ David J. Sylvester
---------------------------
David J. Sylvester
Incorporator
9
<PAGE> 1
EXHIBIT 3.2
BOMBARDIER CAPITAL MORTGAGE
SECURITIZATION CORPORATION
BY-LAWS
ARTICLE I -STOCKHOLDERS
1. Annual and Special Meetings. The annual meeting of stockholders for
the election of directors and for the transaction of any other business which
may properly come before the meeting shall be held each year on a business day
and at a time designated by the Board of Directors. Special meetings of
stockholders may be called by resolution of the Board of Directors or by the
President and shall be called at any time by the President or the Secretary at
the request in writing of stockholders owning a majority in amount of the entire
capital stock of the Corporation issued and outstanding and who would be
entitled to vote at such meeting. Such request shall state the purpose or
purposes of the proposed meeting.
2. Place of Meetings. The annual and special meetings of stockholders
shall be held at the principal place of business of the Corporation, or at such
other place as shall be determined from time to time by the Board of Directors,
within or without the State of Vermont, except as otherwise specifically
required by statute. The place at which any meeting is to be held shall be
specified in the notice calling such meeting.
3. Notice of Meetings. Except as otherwise expressly provided by
statute, notice of the place, date, hour and purpose or purposes of the annual
and any special meeting of stockholders shall be in writing and signed by the
Chairman of the Board or the President or any Vice President, or the Secretary
or other person lawfully calling said meeting; a copy thereof shall be served,
either personally or by mail, at least ten days before the meeting, upon each
stockholder of record entitled to vote at such meeting and to any stockholder
who, by reason of any action proposed at such meeting, would be entitled to have
his stock appraised if such action were taken. If mailed, such notice shall be
directed to a stockholder at his address as it appears on the records of the
Corporation. Notice by mail shall be deemed to be given when deposited, with
postage thereon prepaid, in the United States mail. If a meeting is adjourned to
another time, not more than thirty days thereafter, and/or to another place, and
if an announcement of the adjourned time and/or place is made at the meeting, it
shall not be necessary to give notice of the adjourned meeting unless, after
adjournment, a new record date is fixed for the adjourned meeting.
4. Stockholder List. The officer who has charge of the stock ledger of
the Corporation shall prepare and make, at least ten days before every meeting
of stockholders, a complete list of the stockholders, arranged in alphabetical
order, and showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten days prior to the meeting,
either at a place within the city or other municipality or community where the
meeting is to be held, which place shall be specified in the
<PAGE> 2
notice of the meeting, or if not so specified, at the place where the meeting is
to be held. The list shall also be produced and kept at the time and place where
the meeting is to be held and during the whole time of the meeting, and may be
inspected by any stockholder who is present.
5. Quorum; Adjournment. Except as otherwise provided by law, a quorum
for the transaction of business at any meeting of stockholders shall consist of
the holders of record of a majority of the issued and outstanding shares of
capital stock of the Corporation entitled to vote at the meeting, in person or
by proxy. In the absence of a quorum at any meeting or any adjournment thereof,
the holders of record of a majority of the shares present in person or by proxy
and entitled to vote at such meeting may adjourn such meeting from time to time,
without notice other than announcement at the meeting, until the requisite
number of shares shall be present or represented. At any such adjourned meeting
at which a quorum is present, any business may be transacted which might have
been transacted at the meeting as originally called.
6. Conduct of Meetings. Meetings of stockholders shall be presided over
by the Chairman of the Board, the President, a Vice-President, or, if none of
the foregoing is present, by a chairman chosen by the stockholders entitled to
vote who are present in person or by proxy at the meeting. The Secretary of the
Corporation shall act as secretary of every meeting, but if the Secretary is not
present, the presiding officer of the meeting shall appoint any person present
to act as secretary of the meeting.
7. Voting; Proxy Representation. Unless otherwise provided in the
articles of incorporation or other certificate filed pursuant to law, every
holder of record of Common Stock shall be entitled at every meeting of the
Corporation to one vote, in person or by proxy, for each share of Common Stock
outstanding in his name on the books of the Corporation. Every proxy must be
executed in writing by the stockholder or by his duly authorized attorney. No
proxy shall be valid after the expiration of eleven months from the date of its
execution unless the person executing it shall have specified therein its
duration for a longer period. Unless otherwise provided by law or by the
articles of incorporation or other certificate filed pursuant to law or these
By-laws, all questions shall be decided by a majority of a quorum.
8. Stockholder Action Without Meetings. Whenever the vote of
stockholders at a meeting thereof is required or permitted to be taken for or in
connection with any corporate action, the meeting, notice thereof and vote of
stockholders may be dispensed with if holders of all of the outstanding stock
consent in writing to such corporate action being taken, and such consent is
delivered to the Corporation for filing in the corporate records.
ARTICLE II -FIXING DATE FOR DETERMINATION
OF STOCKHOLDERS OF RECORD
In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of Stockholders or any adjournment
thereof, or to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
2
<PAGE> 3
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which shall
not be more than seventy nor less than ten days before the date of such meeting,
nor more than seventy days prior to any other action.
ARTICLE III -BOARD OF DIRECTORS
1. Number. The business and affairs of the Corporation shall be managed
by and under the discretion of its Board of Directors. The number of directors
constituting the entire Board shall be seven (7) unless otherwise determined by
the Board of Directors. The Corporation shall at all times, except as noted
hereafter, have one director (the "Independent Director") who meets the
qualifications set forth in Section 1 of ARTICLE XIV hereof.
2. Election. The members of the Board of Directors shall be elected at
the annual meeting of stockholders by a plurality of the votes cast in such
election except for the initial Board of Directors, which shall be appointed by
the Incorporator and which shall hold office until the first annual meeting of
stockholders or until their successors are elected and qualified or until their
earlier resignation or removal. The directors shall be elected separately from
the Board of Directors of the Corporation's Affiliates (as defined in Section 3
of ARTICLE XIV herein). Subject to the provisions of Sections 12 and 13 of this
ARTICLE III, each director so elected shall hold office for one year and until
his successor is elected and qualified. A director need not be a stockholder, a
citizen of the United States, or a resident of Vermont. If the members of the
Board of Directors are not elected at the annual meeting of stockholders on the
day designated in these By-laws, the incumbent directors shall continue to hold
office and discharge their respective duties until successors have been elected.
3. Vacancies. All vacancies on the Board of Directors, whether caused
by resignation, death, disqualification, removal, an increase in the authorized
number of directors between annual meetings of stockholders or otherwise, may be
filled by a majority of the directors in office after the vacancy has occurred,
or, if not so elected prior to the next annual meeting of the stockholders, by
vote of the stockholders at any special meeting. In the event of the death,
incapacity, resignation or removal of the Independent Director, the Board of
Directors shall promptly appoint a replacement Independent Director.
4. Annual Meeting. The annual meeting of the Board of Directors for the
election of officers and the transaction of such other business as may properly
come before the meeting, may be held each year within or without the United
States, without notice immediately after the annual meeting of stockholders at
the same place as such meeting of stockholders, or may be called by any
newly-elected director on one day's notice to each director, either personally
or by telegram, telecopier, letter, radio or cable.
5. Regular Meetings. Regular meetings of the Board of Directors may be
held without notice at such time and place, within or without the United States,
as shall from time to time be
3
<PAGE> 4
determined by resolution of the Board. In case of change in the time, place or
date of any such regular meeting, notice of such change shall be mailed to each
director at least three days prior to the meeting.
6. Special Meetings. Special meetings of the Board of Directors may be
called at any time by the Chairman of the Board or the President or by a
majority of directors then in office. Notices of special meetings stating the
time, place and purpose of the meeting shall be mailed to each director at least
three days before such meeting. Special meetings may be held within or without
the United States.
7. Board Action Without a Meeting. Any action required or permitted to
be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting (and any notice of such meeting may be dispensed
with), if all members of the Board or of such committee, as the case may be,
consent thereto in writing and such consent is filed with the minutes of
proceedings of the Board or committee.
8. Quorum. At all meetings of the Board, the presence of a majority of
the directors then in office shall be necessary to constitute a quorum and shall
be sufficient for the transaction of business and any act of a majority of the
directors who are present at a meeting at which there is a quorum shall be the
act of the Board of Directors, except as may be otherwise specifically provided
by statute or by the articles of incorporation or other certificate filed
pursuant to law or by these By-laws. Any business may be transacted by the Board
at a meeting at which every member of the Board is present, though held without
notice.
9. Committees. The Board of Directors may by resolution or resolutions
passed by a majority of the whole Board designate one or more committees, each
committee to consist of two or more of the directors, which, to the extent
provided in said resolution or resolutions, shall have and may exercise powers
of the Board of Directors in the management of the business and affairs of the
Corporation and may have power to authorize the seal of the Corporation to be
affixed to all papers which may require it; provided, however, that the Board of
Directors may not authorize a committee to exercise any of the Board's powers to
the extent that the Articles of Incorporation requires the Independent Directors
to approve such Board action. Such committee or committees shall have such name
or names as may be determined from time to time by resolution adopted by the
Board of Directors. All committees so appointed shall keep regular minutes of
the business transacted at their meetings.
10. Organization. At all meetings of the Board of Directors, the
Chairman of the Board, or in his absence, the President, or in his absence any
Vice President who is a member of the Board of Directors, or in their absence, a
chairman chosen by the directors shall preside. The Secretary of the Corporation
shall act as secretary at all meetings of the Board of Directors when present,
and, in his absence, the presiding officer may appoint any person to act as
secretary.
4
<PAGE> 5
11. Salaries. The Directors shall receive such compensation for their
services as may be prescribed by the Board of Directors from time to time and
shall be reimbursed by the Corporation for ordinary and reasonable expenses
incurred in the performance of their duties.
12. Resignation. Any director may resign at any time upon written
notice to the Corporation. Such resignation will take effect upon receipt
thereof by the Corporation unless otherwise stated in the resignation.
13. Removal. Any director may be removed, either with or without cause,
at any special meeting of stockholders by vote of a majority of the shares of
stock outstanding and entitled to vote at an election of directors, provided
that notice of such vote shall have been given in the notice calling such
meeting. If the notice calling such meeting shall so provide, the vacancy caused
by such removal shall be filled at such meeting by the vote of a majority of the
shares of stock outstanding, present and entitled to vote for the election of
directors.
14. Telephone Meetings. Members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors, or committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation shall constitute
presence in person at such a meeting.
15. No Action Without the Independent Directors. No action described in
ARTICLE XIII of these By-Laws requiring approval of the Directors of the
Corporation shall be taken without the approval or consent of the Independent
Directors(s).
16. Limitation of Voting Power of Independent Directors. In order for
the Corporation to amend or modify any provision of Section 1, Section 2,
Section 3, Section 8, Section 9, Section 13, Section 15, or Section 16 of this
ARTICLE III, ARTICLE XIII or Section 1, Section 2 or Section 3 of ARTICLE XIV of
these By-Laws, the Independent Directors must consent to or approve of such
amendment or modification. For purposes of determining the presence of a quorum
at any meeting of the Board of Directors, or the vote or consent that is
required for any action of the Board of Directors on any matter other than such
an action specified in ARTICLE XIII hereof, the terms "majority" and "unanimous"
(or any words of like import) shall be interpreted without reference to any
Independent Director.
ARTICLE IV -OFFICERS
1. Election. The officers of the Corporation shall be a President and a
Secretary. The Board of Directors may also elect or appoint a Treasurer, one or
more Vice-Presidents, one or more Assistant Treasurers, one or more Assistant
Secretaries, and such other officers, agents and employees as, in the opinion of
the Board, the business of the Corporation requires. Each officer, agent or
employee elected or appointed by the Board of Directors shall have such powers
and
5
<PAGE> 6
perform such duties as may be prescribed by these By-laws and as may be assigned
from time to time by the Board of Directors. Unless otherwise provided in the
resolution of election, each officer shall hold office until the next annual
election of directors and until his successor shall have been qualified or until
his earlier resignation or removal. Any number of offices may be held by the
same person, except the offices of President and Secretary.
2. President. The President shall be the Chief Executive Officer and
the Chief Operating Officer of the Corporation. The President shall be
responsible for the management of the business affairs and operations of the
Corporation. The President shall also perform all duties incident to the office
of President and such other duties as may from time to time be assigned to him
by the Board of Directors.
3. Vice Presidents. The Vice Presidents, if any, in the order
designated by the Board of Directors, shall, in the absence or disability of the
President, perform the duties and exercise the powers of the President. A Vice
President may execute and deliver contracts and other obligations and
instruments pertaining to the regular course of his duties, and shall perform
such other duties and shall have such other authority as from time to time may
be assigned to him by the Board of Directors or the President.
4. The Secretary. The Secretary shall record all the proceedings of all
sessions of the Board of Directors and all meetings of stockholders in a book to
be kept for that purpose and shall perform like duties for any committee of the
Board of Directors when required, of which he shall be the custodian. He shall
cause to be given notice of all meetings of stockholders and directors. He shall
keep in safe custody the seal of the Corporation and, when authorized by the
Board of Directors, affix it to any instrument. He shall have charge of the
stock certificate books of the Corporation and such other books and papers as
the Board of Directors may direct. He shall in general perform all the duties
incident to the office of the Secretary and such other duties as may be assigned
to him by the Board of Directors or the President.
5. The Treasurer. Subject to the direction of the Board of Directors,
the Treasurer, if any, shall have the custody of all funds and securities of the
Corporation, except as otherwise provided by the Board of Directors or any
committee thereof, and shall keep full and accurate accounts of receipts and
disbursements. He shall deposit all moneys and other valuable effects in the
name and to the credit of the Corporation in such depositories as may be
designated by the Board of Directors. He shall disburse the funds of the
Corporation as may be ordered by the Board of Directors, taking proper vouchers
for such disbursements, and shall render to the President and Directors at the
regular meetings of the Board of Directors or whenever they may require it, an
account of all his transactions as Treasurer and of the financial condition of
the Corporation. The Treasurer shall in general perform all duties incident to
the office of the Treasurer and such other duties as may be assigned to him by
the Board of Directors or the President.
6. Vacancies. Vacancies in any office occurring by death, resignation,
disqualification, removal or otherwise, may be filled by the Board of Directors
at any regular or special meeting.
6
<PAGE> 7
7. Resignation. Any officer may resign his Office at any time, such
resignation to take effect upon receipt thereof by the Corporation, unless
otherwise stated in the resignation.
8. Removal. Any officer may be removed at any time, with or without
cause, by the affirmative vote of a majority of the entire Board of Directors.
The power to remove agents and employees, other than officers or agents elected
or appointed by the Board of Directors, may be delegated as the Board of
Directors shall determine.
9. Salaries. Salaries of all officers and agents of the Corporation
shall be fixed from time to time by or in the manner determined by the Board of
Directors.
10. Duties of Officers may be Delegated. In case of the absence of any
officer of the Corporation, or for any other reason that the Board of Directors
may deem sufficient, the Board of Directors may delegate the powers or duties of
such officer to any other officer or to any director for the time being.
11. Powers with Respect to Ownership of Stock. Unless otherwise ordered
by the Board of Directors, each of the President or any Vice President shall
have full power and authority on behalf of the Corporation to attend and to vote
at any meeting of stockholders of any corporation in which the Corporation may
hold stock, and may exercise on behalf of the Corporation any and all of the
rights and powers incident to the ownership of such stock at any such meeting,
and shall have power and authority to execute and deliver proxies and consents
on behalf of the Corporation in connection with the exercise by the Corporation
of the rights and powers incident to the ownership of such stock. The Board of
Directors, from time to time, may confer like powers upon any other person or
persons.
ARTICLE V -STOCK
1. Issuance of Stock Certificates. Stock of the Corporation shall be
represented by certificates in such form as shall be approved by the Board of
Directors. Each such certificate shall be signed by the Chairman of the Board of
Directors or the President or a Vice President and a Secretary or an Assistant
Secretary or the Treasurer or an Assistant Treasurer and sealed with the seal of
the Corporation. Such seal may be a facsimile, engraved or printed. In case any
officer who has signed such certificate shall have ceased to be such officer
before such certificate is issued, it may be issued by the Corporation with the
same effect as if he were such officer at the date of its issue.
2. Lost Stock Certificates. The officers of the Corporation may issue a
new certificate of stock in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen or destroyed, if the owner of such
certificate or his legal representative shall execute and deliver to the
Corporation and/or its transfer agent and register a satisfactory bond
sufficient to indemnify the Corporation against any claim that may be made
against it on account of the lost, stolen or destroyed certificate and shall
execute and deliver to the Corporation an affidavit setting
7
<PAGE> 8
forth the facts regarding such loss, theft or destruction. The foregoing
requirements may be waived in whole or in part by the President or the Board of
Directors when, in his or its judgment, it is proper to do so.
3. Transfer of Stock. Upon compliance with provisions restricting the
transfer or registration of transfer of shares of stock, if any, transfers or
registrations of transfers of shares of stock of the Corporation shall be made
only on the stock transfer books of the Corporation by the person named in the
certificate or by his attorney lawfully constituted, and, except in the case of
lost, stolen or destroyed certificates, only upon surrender of the certificate
or certificates therefor properly endorsed and the payment of all taxes due
thereon.
4. Regulations. The Board of Directors shall have power to make all
such regulations as it shall deem expedient concerning the issuance, transfer,
conversion and registration of stock certificates, not inconsistent with
statutory requirements or the certificates of incorporation or other certificate
filed pursuant to law or these By-laws.
ARTICLE VI -SEAL
The seal of the Corporation shall be circular in form and contain the
name of the Corporation, and the words "Corporate Seal, 1997, Vermont." The seal
shall be in the charge of the Secretary to be used as directed by the Board of
Directors.
ARTICLE VII -CHECKS, CONTRACTS, ETC.
All checks, notes, drafts, acceptances, securities, evidences of
indebtedness and contracts of the Corporation shall be signed or endorsed by or
on behalf of the Corporation by such officers, directors, employees or agents of
the Corporation as the Board of Directors from time to time designate. Such
authorization may be general or specific.
ARTICLE VIII -BOOKS OF ACCOUNT AND STOCK BOOK
The Corporation shall keep books of account of all the business and
transactions of the Corporation. A book to be known as the stock register,
containing the names, alphabetically arranged, of all persons who are
stockholders of the Corporation, showing their places of residence, the number
of shares of stock held by them respectively, and the times when they
respectively became the owners thereof, and the amount paid thereon, shall be
kept by the Corporation or its transfer agent.
ARTICLE IX -FISCAL YEAR
The fiscal year of the Corporation shall end on the 31st day of
January, or otherwise as the Board of Directors may determine.
8
<PAGE> 9
ARTICLE X -OFFICES
The Corporation may have an office or offices in such place or places
as may be determined from time to time by the Board of Directors.
ARTICLE XI -NOTICES AND WAIVERS
1. Kind of Notice Required. Whenever under the provisions of these
By-laws notice is required to be given to any director, officer or stockholder,
it shall not be construed to mean personal notice, but unless otherwise
expressly stated in these By-laws such notice may be given in writing by
depositing the same in a post-office or letter box in a postpaid sealed wrapper,
addressed to such director officer or stockholder, at such address as appears on
the books of the Corporation, and such notice shall be deemed to have been given
at the time when the same was mailed.
2. Waiver of Notice. Whenever notice is required to be given under any
provision of the articles of incorporation or these By-laws, a written waiver
thereof, signed by the person entitled to notice, whether before or after the
time stated therein shall be deemed equivalent to notice. Attendance of a person
at a meeting shall constitute a waiver of notice of such meeting, except when
the person attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the stockholders,
directors, or members of a committee of directors need be specified in any
written waiver of notice.
ARTICLE XII -INDEMNIFICATION
1. Every person who is or was a director, officer, employee or agent of
the Corporation, or of any other corporation, partnership, joint venture, trust
or other enterprise (hereinafter collectively referred to as an "other company")
which he serves or served as such at the request of the Corporation, shall,
subject to the provisions of Section 2 hereof and except as prohibited by law,
be indemnified by the Corporation against any and all liabilities and expenses
actually and reasonably incurred by him in connection with any threatened,
pending or completed action, suit or proceeding (whether brought by or in the
right of the Corporation or such other company or otherwise), whether civil,
criminal, administrative or investigative, or in connection with an appeal
relating thereto, in which he was or is a party or is threatened to be made a
party by reason of his being or having been a director, officer, employee or
agent of the Corporation or of such other company, or by reason of any action
taken or not taken in his capacity as such director, officer, employee or agent,
whether or not he continues to be such director, officer, employee or agent at
the time such liabilities or expenses are incurred, provided such person acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Corporation or such other company, as case may be,
and, in addition, in any criminal action or proceeding, had no reasonable cause
to believe that his conduct was unlawful; provided that no indemnification shall
be made in respect of any claim, issue or matter in any action, suit or
proceeding by or in the right
9
<PAGE> 10
of the Corporation or such other company, as the case may be, as to which such
person shall have been adjudged to be liable to the Corporation or such other
company, as the case may be, unless and only to the extent that the court in
which such action or suit was brought shall determine upon application that,
despite his adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses as such court shall deem proper. As used in this Article, the term
"expenses" shall include, but shall not be limited to, counsel fees and
disbursements and the term "liabilities" shall include, but shall not be limited
to, judgments, fines, penalties and amounts paid in settlement. The termination
of any action, suit or proceeding, civil or criminal, by judgment, order,
settlement (whether with or without court approval) or conviction or upon a plea
of guilty or of nolo contendere, or its equivalent, shall not, of itself, create
a presumption that a director, officer, employee or agent did not meet the
standards of conduct set forth in this Section.
2. Every person referred to in Section 1 hereof who has been
successful, on the merits or otherwise, in defense of any action, suit or
proceeding referred to in Section 1 hereof, or in defense of any claim, issue or
matter therein, shall be deemed to have met the standards of conduct set forth
therein and shall be entitled to indemnification as of right. Except as provided
in the preceding sentence, any indemnification under Section 1 hereof (unless
ordered by a court) shall be made at the discretion of the Corporation, but only
if the determination that the standards of conduct set forth therein have been
met by the person seeking indemnification hereunder is made by either (i) the
Board of Directors, acting by a majority vote of a quorum consisting of
directors who (a) are not parties to such action, suit or proceeding or (b) have
been wholly successful in such respect of such action, suit or proceeding or
(ii) independent legal counsel in a written opinion.
3. Expenses incurred in defending a civil or criminal action, suit or
proceeding may be paid by the Corporation, in advance of the final disposition
of such action, suit or proceeding upon receipt of a written affirmation by the
director that he or she has met the applicable standard of conduct and an
undertaking by or on behalf of the person to be indemnified to repay such amount
if it shall ultimately be determined that he is not entitled to be indemnified
by the Corporation.
4. The rights of indemnification and advancement of expenses provided
in this Article shall be in addition to any rights to which any person referred
to in Section 1 hereof may otherwise be entitled by law or under any by-law,
agreement, vote of stockholders or disinterested directors, or otherwise, and
such rights shall inure to the benefit of his heirs, executors and
administrators.
5. To the extent permitted by law, the foregoing provisions of this
Article shall be applicable to every person (and the heirs, executors and
administrators of such person) who is or was a director, officer, employee or
agent of any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger involving the Corporation, as
well as the resulting or surviving corporation therefrom, and in any such case
the references to "the Corporation" in the foregoing provisions of this Article
shall include, in addition to the Corporation, any such constituent corporation
or any such resulting or surviving corporation, as the case may be.
10
<PAGE> 11
6. The Corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the Corporation,
or is or was serving at the request of the Corporation as a director, officer,
employee or agent of any other company, against any liability or expense
asserted against or incurred by him in any such capacity, or arising out of his
status as such, whether or not the Corporation would have the power to indemnify
him against such liability or expense under the provisions of this Article or
otherwise.
ARTICLE XIII -BANKRUPTCY, INSOLVENCY
The Corporation shall not make or commence any bankruptcy or insolvency
filing or proceeding or similar filing or proceeding or make or commence any
dissolution, liquidation, consolidation, merger or sale of all or substantially
all of its assets without the unanimous vote of all Directors, and the
Corporation shall not acquiesce, petition or otherwise invoke or cause any other
person or entity to invoke the process of the United States of America, any
state or other political subdivision thereof or any other jurisdiction, or any
entity exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government for the purpose of commencing or
sustaining a case against the Corporation under a federal or state bankruptcy,
insolvency or similar law or appointing a receiver, liquidator, assignee,
trustee, custodian, sequestrator or other similar official of the Corporation
for all or any part of its property or assets or ordering the winding-up,
dissolution or liquidation of the affairs of the Corporation or a consolidation,
merger or sale of all or substantially all of the assets of the Corporation if
such action has not been approved by the unanimous vote of all of the Directors.
ARTICLE XIV -DEFINITIONS
1. Independent Director. "Independent" shall mean, when used with
respect to any individual, an individual who (i) is in fact independent, (ii)
does not have any direct financial interest or any material indirect financial
interest in the Corporation, or in any Affiliate of the Corporation, (iii) is
not, and has not been, connected with the Corporation or any Affiliate of the
Corporation as an officer, employee, promotor, underwriter, trustee, partner or
person performing similar functions and is not a member of the immediate family
of any such officer or employee and (iv) is not, and has not been, a director or
stockholder of any Affiliate of the Corporation and is not a member of the
immediate family of any such director or stockholder.
2. Person. "Person" shall mean any individual, corporation,
partnership, joint venture, joint stock company, estate, trust, unincorporated
association, any federal, state, county or municipal government or any bureau,
department or agency thereof and any fiduciary acting in such capacity on behalf
of any of the foregoing.
3. Affiliate. "Affiliate" shall mean, as to any Person, any other
Person that, directly or indirectly, is in control of, is controlled by or is
under common control with such Person. For purposes of this definition, control
of a Person shall mean the power, directly or indirectly to direct
11
<PAGE> 12
or cause the direction of the management and policies of such Person whether
through the ownership of voting securities, by contract or otherwise.
ARTICLE XV -AMENDMENT
Subject to the provisions of Section 16 of ARTICLE III, the By-laws,
regardless of whether made by stockholders or by the Board of Directors, may be
amended, added to or repealed, or new By-laws may be made, at any meeting of the
stockholders, or (except such By-laws or such amendments as shall have been
adopted by the stockholders and at the time of such adoption expressly
designated as revocable only by the stockholders) at a meeting of the Board of
Directors, provided that notice of the proposed change (unless waived as herein
provided by a waiver or presence at the meeting) be given in notice of the
meeting.
12
<PAGE> 1
EXHIBIT 5.1
November 12, 1997
Bombardier Capital Mortgage Securitization Corporation
1600 Mountain View Drive
Colchester Vermont 05446
Ladies and Gentlemen:
We have acted as your counsel in connection with the Registration Statement on
Form S-3 (the "Registration Statement") filed on November 12, 1997 with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
amended (the "Act") in respect of Pass-Through Certificates ("Certificates")
which you plan to offer in series, each series to be issued under a separate
pooling and servicing agreement (a "Pooling and Servicing Agreement"), among
Bombardier Capital Mortgage Securitization Corporation (the "Company"),
Bombardier Capital Inc. or another servicer to be identified in the prospectus
supplement for such series of Certificates (the "Servicer" for such series), and
a bank, trust company or other entity with trust powers, to be identified in the
prospectus supplement for such series of Certificates, as trustee (the "Trustee"
for such series).
We have examined originals or copies certified or otherwise identified to our
satisfaction of such documents and records of the Company, and such public
documents and records, as we have deemed necessary as a basis for the opinions
hereinafter expressed.
Based on the foregoing and having regard for such legal considerations as we
have deemed relevant, we are of the opinion that:
1. When, in respect of a series of Certificates, a Pooling and Servicing
Agreement has been duly authorized by all necessary action and duly executed and
delivered by the Company, the Servicer and the Trustee for such series, such
Pooling and Servicing Agreement will be a legal and valid obligation of the
Company; and
<PAGE> 2
Bombardier Capital Mortgage Securitization Corporation
November 12, 1997
Page 2
2. When a Pooling and Servicing Agreement for a series of Certificates has been
duly authorized by all necessary action and duly executed and delivered by the
Company, the Servicer and the Trustee for such series, and when the certificates
of such series of Certificates have been duly executed, countersigned, issued
and sold as contemplated in the Registration Statement and the prospectus
delivered pursuant to Section 5 of the Act in connection therewith, such
Certificates will be legally and validly issued, and the holders of such
Certificates will be entitled to the benefits of such Pooling and Servicing
Agreement.
The form of Pooling and Servicing Agreement indicates that it is governed by the
laws of the State of New York. We express no opinion as to the law of any
jurisdiction other than the law of the State of New York and the federal law of
the United States of America.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to this firm in the Registration
Statement and the related prospectus under the heading "Legal Matters", without
admitting that we are "experts" within the meaning of the Act or the rules and
regulations of the Securities and Exchange Commission issued thereunder with
respect to any part of the Registration Statement including this Exhibit.
Very truly yours,
MORGAN, LEWIS & BOCKIUS LLP
<PAGE> 1
EXHIBIT 8.1
November 12, 1997
Bombardier Capital Mortgage Securitization Corporation
1600 Mountain View Drive
Colchester, Vermont 05446
Ladies and Gentlemen:
We have acted as your counsel in connection with the Registration Statement on
Form S-3 (the "Registration Statement") filed with the Securities and Exchange
Commission on November 12, 1997, pursuant to the Securities Act of 1933, as
amended (the "Act") in respect of Pass-Through Certificates ("Certificates")
that you plan to offer in series. Our advice formed the basis for the discussion
of federal income tax consequences appearing in the Registration Statement under
the heading "Federal Income Tax Consequences." Such discussion does not purport
to deal with all possible federal income tax consequences of an investment in
Certificates, but with respect to those tax consequences which are discussed, in
our opinion, the discussion is a fair and accurate summary of the matters
addressed therein under existing law and the assumptions stated therein.
Our opinion is based upon existing federal income tax laws, regulations,
administrative pronouncements and judicial decisions. All such authorities are
subject to change, either prospectively or retroactively. No assurance can be
provided as to the effect of any such change upon our opinion.
The opinion set forth herein has no binding effect. No assurance can be given
that, if the matter were contested, a court would agree with the opinion set
forth herein.
In giving the foregoing opinion, we express no opinion other than as to the
federal income tax law.
<PAGE> 2
Bombardier Capital Mortgage Securitization Corporation
November 12, 1997
Page 2
We hereby consent to the filing of this letter as an Exhibit to the Registration
Statement and to the reference to this firm in the Registration Statement under
the heading "Federal Income Tax Consequences", without admitting that we are
"experts" within the meaning of the Act or the rules and regulations of the
Securities and Exchange Commission issued thereunder.
Very truly yours,
MORGAN, LEWIS & BOCKIUS LLP
