<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 18, 1997
REGISTRATION NO. 333-_____
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------------
AVCO ABS RECEIVABLES CORP.
(Depositor)
(Exact name of Registrant as Specified in its Charter)
NEVADA APPLICATION PENDING
(State of incorporation) (I.R.S. Employer Identification Number)
1727-B CHARLESTON
LAS VEGAS, NEVADA 89104
(702) 474-6282
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
-------------------------
HERBERT F. SMITH, ESQ.
AVCO FINANCIAL SERVICES MANAGEMENT COMPANY
600 ANTON BLVD.
COSTA MESA, CALIFORNIA 92628-5011
(714) 445-7860
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
-------------------------
Copy to:
REED D. AUERBACH, ESQ.
STROOCK & STROOCK & LAVAN LLP
180 MAIDEN LANE
NEW YORK, NEW YORK 10038
--------------------------
Approximate date of commencement of proposed sale to the public:
From time to time after the effective date of this Registration Statement.
--------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [X].
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ].
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ].
If delivery of the prospectus is expected to be made pursuant to rule 434,
please check the following box. [ ]
-----------------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===========================================================================================================
PROPOSED PROPOSED MAXIMUM
AMOUNT TO BE MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED OFFERING OFFERING REGISTRATION
REGISTERED (1) PRICE PER UNIT PRICE (1) FEE
(1)
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<S> <C> <C> <C> <C>
Asset-Backed Notes and Asset-Backed
Certificates........................ $1,000,000(2) 100% $1,000,000 $303.04
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</TABLE>
(1) Estimated solely 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 SUPPLEMENT AND THE PROSPECTUS SHALL NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE
OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD
BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
<PAGE> 3
PROSPECTUS SUPPLEMENT
(To Prospectus dated ___________ , 199_)
$----------
AVCO FINANCIAL HOME EQUITY LOAN TRUST 199_-_
Home Equity Loan Asset-Backed Certificates,
Series 199_-_
Avco ABS Receivables Corp.
(Seller)
Avco Financial Services Management Company
(Master Servicer and Representative)
-----------------------
The Home Equity Loan Asset-Backed Certificates, Series 199_-_ (the
"Certificates"), will consist of the Classes (each, a "Class") listed below
(collectively, the "Class A Certificates"), the Class S Certificates
(collectively with the Class A Certificates, the "Senior Certificates"), and one
or more Classes which are subordinated to the Senior Certificates. Only the
Class A Certificates are being offered hereby. The Senior Certificates will have
the benefit of an irrevocable and unconditional certificate guaranty insurance
policy (the "Policy") issued by [Name of Certificate Insurer] (the "Certificate
Insurer") pursuant to which the Certificate Insurer will guarantee certain
payments to the holders of Senior Certificates as described herein.
(cover continued on next page)
------------------------
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER
"RISK FACTORS" BEGINNING ON PAGE S-__ HEREIN AND ON PAGE ___ IN
THE ACCOMPANYING PROSPECTUS.
------------------------
THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST ONLY AND DO NOT REPRESENT
INTERESTS IN OR OBLIGATIONS OF THE SELLER, THE MASTER SERVICER, THE TRUSTEE OR
ANY AFFILIATE THEREOF, EXCEPT TO THE EXTENT PROVIDED HEREIN. NEITHER THE
CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
<TABLE>
<CAPTION>
===============================================================================================================
Initial Class Certificate Price to Underwriting Proceeds to
Principal Rate Public(1) Discount Seller(1)(2)
Balance
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<S> <C> <C> <C> <C> <C>
Class A-1 Certificates....... % % % %
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Class A-2 Certificates....... % % % %
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Class A-3 Certificates....... % % % %
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Class A-4 Certificates....... % % % %
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Class A-5 Certificates....... % % % %
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Class A-6 Certificates....... % % % %
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Class A-7 Certificates....... (3) % % %
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Total
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</TABLE>
(1) Plus accrued interest, if any, at the respective Certificate Rates from
______ __, 199_ (or in the case of the Class A-7 Certificates from
______ __, 199_).
(2) Before deduction of expenses payable by the Seller estimated to be $______.
(3) The Certificate Rate for this Class 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--The Certificate Rate" herein.
The Class A Certificates are offered by the Underwriters 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 Underwriters. The Underwriters
reserve the right to withdraw, cancel or modify such offer and to reject orders
in whole or in part. It is expected that the Class A Certificates will be issued
on or about _____ __, 199_ (the "Closing Date"), and will thereafter be
available from the Underwriters through the facilities of The Depository Trust
Company on the Same Day Funds Settlement System and Cedel Bank, societe anonyme,
and the Euroclear System.
------------------------
<PAGE> 4
(Cover continued from front page)
[NAME OF UNDERWRITER] [NAME OF UNDERWRITER]
_______ __, 199_
The Certificates will evidence in the aggregate the entire beneficial
interest in a pool (the "Mortgage Pool") of closed-end, fixed- and
adjustable-rate mortgage loans (the "Mortgage Loans") consisting of two groups
("Loan Group 1" and "Loan Group 2," respectively, and each a "Loan Group") held
by Avco Financial Home Equity Loan Trust 199_-_ (the "Trust") to be formed
pursuant to a Pooling and Servicing Agreement, to be dated as of ______ __,
199_, between among Avco ABS Receivables Corp., as seller (the "Seller"), Avco
Financial Services Management Company, as master servicer (the "Master
Servicer") and as representative of the Trust (the "Representative"), and [Name
of Trustee], as Trustee. Distributions on the Class S, Class A-1, Class A-2,
Class A-3, Class A-4, Class A-5 and Class A-6 Certificates (collectively, the
"Group 1 Certificates") will be calculated by reference to Loan Group 1 which
consists of Mortgage Loans with fixed interest rates. Distributions on the Class
A-7 Certificates (the "Group 2 Certificates") will be calculated by reference to
Loan Group 2 which consists of Mortgage Loans with adjustable interest rates.
The Mortgage Loans are secured by first and second deeds of trust or mortgages
primarily on one- to four-family residential properties.
Distributions on the Class A Certificates will be made on the 25th day
of each month or, if such date is not a Business Day, then on the next
succeeding Business Day (each, a "Distribution Date"), commencing in _____ 199_.
On each Distribution Date, holders of the Class A Certificates will be entitled
to receive, from and to the limited extent of funds available in the
Distribution Account (as defined herein), distributions calculated as set forth
herein.
There is currently no market for the Class A Certificates and there can
be no assurance that such a market will develop or if it does develop that it
will continue or will provide sufficient liquidity of investment. See "RISK
FACTORS" herein.
Separate elections will be made to treat certain assets of the Trust as
a "real estate mortgage investment conduit" (a "REMIC") for federal income tax
purposes. As described more fully herein and in the Prospectus, the Class A
Certificates will constitute "regular interests" in a REMIC. See "FEDERAL INCOME
TAX CONSIDERATIONS" herein and in the Prospectus.
-------------------------------
The Mortgage Loans that were identified as of ________ __, 199_ will be
collectively referred to herein as the "Initial Mortgage Loans." The Pooling and
Servicing Agreement will provide that additional closed-end, fixed- and
adjustable-rate mortgage loans (the "Subsequent Mortgage Loans") may be
purchased by the Trust from the Seller on the Closing Date. The Initial Mortgage
Loans and the Subsequent Mortgage Loans will be collectively referred to as the
"Mortgage Loans." The maximum amount of Subsequent Mortgage Loans to be
transferred to the Trust on the Closing Date for Loan Group 1 and Loan Group 2
is $__________ and $_____________, respectively (each, a "Maximum Funding
Amount").
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL
DEALERS EFFECTING TRANSACTIONS IN THE CLASS A CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS
ACTING AS UNDERWRITERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
CERTIFICATES OFFERED HEREBY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING AND THE
PURCHASE OF THE CLASS A CERTIFICATES TO COVER SYNDICATE SHORT POSITIONS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING" HEREIN.
-------------------------------
The Class A Certificates constitute part of a separate series of
Asset-Backed Securities being offered by Avco ABS Receivables Corp. from time to
time pursuant to its Prospectus dated ______ __, 199_. This Prospectus
Supplement does not contain complete information about the offering of the Class
A Certificates. Additional information is contained in the Prospectus and
investors are urged to read both this Prospectus Supplement and the Prospectus
in full. Sales of the Class A Certificates may not be consummated unless the
purchaser has received both this Prospectus Supplement and the Prospectus.
S-2
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SUMMARY
The following summary of certain pertinent information is qualified in
its entirety by reference to the detailed information appearing elsewhere in
this Prospectus Supplement and the accompanying Prospectus. Certain capitalized
terms used in the Summary are defined elsewhere in this Prospectus Supplement or
in the Prospectus. Reference is made to Index of Principal Terms beginning on
page S-___ herein and the Glossary of Terms beginning on page ___ in the
Prospectus for the definitions of certain capitalized terms.
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Trust...................... Avco Financial Home Equity Loan Trust 199_-_ (the
"Trust") will be formed pursuant to a pooling
and servicing agreement, to be dated as of
_______ __, 199_ (the "Agreement"), among Avco
ABS Receivables Corp., as seller (the "Seller"),
Avco Financial Services Management Company, as
master servicer (together with any successor in
such capacity, the "Master Servicer") and as
representative of the Trust (the
"Representative") and [Name of Trustee], as
Trustee (the "Trustee"). The property of the
Trust will include: a pool of closed- end,
fixed- and adjustable-rate mortgage loans (the
"Mortgage Loans"), secured by first and second
deeds of trust or mortgages on residential
properties that are primarily one- to
four-family properties (the "Mortgaged
Properties"); payments in respect of the
Mortgage Loans received after the Cut-Off Date,
other than payments of interest on the Initial
Mortgage Loans due on or before ______ __, 199_;
property that secured a Mortgage Loan which is
acquired by foreclosure or deed in lieu of
foreclosure; rights under certain hazard
insurance policies covering the Mortgaged
Properties; and funds on deposit in trust
accounts (the "Initial Interest Coverage
Account" and the "Funding Account"). In
addition, the Seller and the Representative have
caused the Certificate Insurer to issue an
irrevocable and unconditional certificate
guaranty insurance policy (the "Policy") for the
benefit of the holders of the Class A and the
Class S Certificates (collectively, "Senior
Certificates") pursuant to which the Certificate
Insurer will guarantee payments to the Senior
Certificateholders as described herein. The
"Cut-Off Date" for the Initial Mortgage Loans is
______ __, 199_, and the Cut-Off Date with
respect to any Mortgage Loan originated on or
after________ __, 199_ will be the date of
origination of such Mortgage Loan. The Trust
property will include the unpaid principal
balance of each Mortgage Loan as of its Cut-Off
Date. With respect to any date, the "Pool
Balance" will be equal to the aggregate of the
Principal Balances of all Mortgage Loans as of
such date. The "Cut-Off Date Principal Balance"
with respect to each Mortgage Loan is the unpaid
principal balance thereof as of the related
Cut-Off Date. With respect to any date, the
"Loan Group 1 Principal Balance" and the "Loan
Group 2 Principal Balance" will be equal to the
aggregate of the Principal Balances of all
Mortgage Loans in Loan Group 1 and Loan Group 2,
respectively, as of such date. The Loan Group 1
Principal Balance and the Loan Group 2 Principal
Balance are each sometimes referred to herein as
a
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"Loan Group Principal Balance." The "Principal
Balance" of a Mortgage Loan (other than a
Liquidated Mortgage Loan) on any day is equal to
its Cut-Off Date Principal Balance, minus all
collections applied in reduction of the Cut-Off
Date Principal Balance of such Mortgage Loan.
The Principal Balance of a Liquidated Mortgage
Loan (as defined herein) after final recovery of
related Liquidation Proceeds (as defined herein)
will be zero.
Securities Offered......... The Home Equity Loan Asset-Backed Certificates,
Series 199_-_ (the "Certificates") will consist
of the Classes listed on the cover page hereof
(the "Class A Certificates"), the Class S
Certificates (collectively with the Class A
Certificates, the "Senior Certificates") and one
or more other Classes of Certificates which are
subordinated to the Senior Certificates. Only
the Class A Certificates are offered hereby.
Each Class of Class A Certificates represents
the right to receive payments of interest at the
rates described below (with respect to each such
Class, the "Certificate Rate"), payable monthly,
and payments of principal to the extent provided
below. The Class A-7 Certificates are sometimes
referred to herein collectively as the "Variable
Rate Certificates" and the Class A-1, Class A-2,
Class A-3, Class A-4, Class A-5 and Class A-6
Certificates are sometimes referred to herein
collectively as the "Fixed Rate Certificates."
The Senior Certificates will be divided into two
groups (each a "Certificate Group").
Distributions on the Class A-1, Class A-2, Class
A-3, Class A-4, Class A-5, Class A-6 and Class S
Certificates (collectively, the "Group 1
Certificates") will be calculated by reference
to Loan Group 1 which consists of Mortgage Loans
with fixed interest rates. Distributions on the
Class A-7 Certificates (the "Group 2
Certificates") will be calculated by reference
to Loan Group 2 which consists of Mortgage Loans
with adjustable interest rates. The principal
amount of a Class of Class A Certificates (each,
a "Class Principal Balance") on any date is
equal to the applicable Class Principal Balance
on the Closing Date minus the aggregate of
amounts actually distributed as principal to the
holders of such Class of Class A Certificates
prior to such date. On any date, the
"Certificate Group Principal Balance" is the
aggregate of the Class Principal Balances of the
Class A Certificates in such Certificate Group
on such date.
Final Scheduled
Distribution Dates......... The Final Scheduled Distribution Date for each
Class of Class A Certificates is as follows:
Final Scheduled
Class Distribution Date
----- -----------------
A-1
A-2
A-3
A-4
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S-4
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A-5
A-6
A-7
Each such date has been calculated as described
under "DESCRIPTION OF THE CERTIFICATES--Final
Scheduled Distribution Date" herein.
Seller....................... Avco ABS Receivables Corp., a Nevada corporation
(the "Seller"). The principal executive offices
of the Seller are located at 1727-B Charleston,
Las Vegas, Nevada 89104 (telephone: (702)
474-6282). See "THE SELLER" in the Prospectus.
Representative and
Master Servicer.............. Avco Financial Services Management Company, a
Delaware corporation with principal executive
offices located at 600 Anton Boulevard, Costa
Mesa, California, and a telephone number of
(714) 445-7860. See "THE REPRESENTATIVE AND THE
MASTER SERVICER" in the Prospectus.
Originators and
Sub-Servicers............... The Mortgage Loans will be originated or acquired
by affiliates of the Master Servicer (each such
affiliate, an "Originator") and sold by such
Originators to the Seller. Each Originator will
sub-service the Mortgage Loans originated or
purchased by it pursuant to separate
sub-servicing agreements (each a "Sub-Servicing
Agreement") between the Master Servicer and the
applicable Originator.
The Mortgage Loans........... The Mortgage Pool consists of _____ Initial
Mortgage Loans with an aggregate Cut-Off Date
Principal Balance of $__________ (the "Cut-Off
Date Initial Pool Principal Balance") of
closed-end, fixed- and adjustable- rate home
equity loans secured by first and second deeds
of trust or mortgages on Mortgaged Properties
located in ___ states and the District of
Columbia.
The Mortgage Loans will be divided into two
groups (each, a "Loan Group"): "Loan Group 1"
and "Loan Group 2." The Initial Mortgage Loans
in such Loan Groups are referred to herein as
"Loan Group 1 Initial Mortgage Loans" and "Loan
Group 2 Initial Mortgage Loans."
Interest on each Mortgage Loan is payable
monthly on the outstanding Principal Balance
thereof at a rate per annum (the "Loan Rate")
specified in the related Mortgage Note. Each
Mortgage Loan in Loan Group 1 will bear interest
at a fixed rate that is calculated on the
'simple interest" method. Certain of the
Mortgage Loans in Loan Group 1 will have
original terms to stated maturity of up to 15
years and amortization schedules of up to 30
years ("Balloon Loans"), leaving a
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substantial payment due at the stated maturity
(each, a "Balloon Payment").
Each Mortgage Loan in Loan Group 2 will bear
interest at an adjustable rate (each an "ARM")
that is calculated on the 'simple interest"
method. The Loan Rate borne by each Loan Group 2
Mortgage Loan is subject to adjustment on the
date set forth in the related Mortgage Note and
at regular intervals thereafter (each, a "Change
Date") to equal the sum of (i) the applicable
index (the "Loan Index") and (ii) the number of
basis points set forth in such Mortgage Note
(the "Gross Margin"), subject to rounding and to
the effects of the applicable Periodic Cap, the
applicable Lifetime Cap and the applicable
Lifetime Floor. The "Periodic Cap" limits
changes in the Loan Rate for each ARM on each
Change Date. The "Lifetime Cap" is the maximum
Loan Rate that may be borne by an ARM at any
point of its life. The "Lifetime Floor" is the
minimum Loan Rate that may be borne by an ARM at
any point of its life. The Loan Group 2 Mortgage
Loans do not provide for negative amortization.
See "DESCRIPTION OF THE MORTGAGE LOANS" herein.
Initial Interest Coverage
Account....................... On the Closing Date, cash will be deposited in a
trust account (the "Initial Interest Coverage
Account") in the name of the Trustee on behalf
of the Trust. The amount on deposit in the
Initial Interest Coverage Account, including
reinvestment income thereon, will be used by the
Trustee to fund certain interest shortfalls on
the initial Distribution Date as described
herein under "DESCRIPTION OF THE
CERTIFICATES--Initial Interest Coverage
Account." Amounts remaining in the Initial
Interest Coverage Account after the initial
Distribution Date and not used for such purpose
are required to be paid to the Seller. The
Initial Interest Coverage Account will terminate
immediately following the first Distribution
Date. The Initial Interest Coverage Account will
not be an asset of any REMIC.
Funding Account.............. On the Closing Date, it is expected that
Subsequent Mortgage Loans equal to the
applicable Maximum Funding Amount will be
transferred to the Trust for Loan Group 1 and
Loan Group 2, respectively. See "DESCRIPTION OF
THE MORTGAGE LOANS--Conveyance of Subsequent
Mortgage Loans." In the event that less than
such amounts of Subsequent Mortgage Loans are
transferred to the Trust for each Loan Group,
respectively, an aggregate cash amount equal to
the excess of the applicable Maximum Funding
Amount over the aggregate Cut-Off Date Principal
Balances of the related Subsequent Mortgage
Loans for such Loan Groups, respectively, will
be deposited by the Seller in an account which
will be in the name of, and maintained by, the
Trustee on behalf of the Trust (the "Funding
Account"). Any amounts on deposit in the Funding
Account in respect of each Loan Group will be
transferred by
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the Trustee on the first Distribution Date into
the Distribution Account, and will be
and will be distributed as a principal
prepayment to Certificateholders of the related
Certificate Group then entitled to distributions
of principal. See "RISK FACTORS--The Subsequent
Mortgage Loans," "PREPAYMENT AND YIELD
CONSIDERATIONS," and "DESCRIPTION OF THE
CERTIFICATES--Distributions."
Denominations................ The Class A Certificates will be offered for
purchase in denominations of $25,000 and
integral multiples of $1,000 in excess thereof.
Registration of Class A
Certificates.................. The Class A Certificates will initially be issued
in book-entry form. Persons acquiring beneficial
ownership interests in the Class A Certificates
("Certificate Owners") will hold their Class A
Certificate interests through The Depository
Trust Company ("DTC"), in the United States, or
Cedel Bank societe anonyme ("Cedel") or the
Euroclear System ("Euroclear"), in Europe.
Transfers within DTC, Cedel or Euroclear, as the
case may be, will be in accordance with the
usual rules and operating procedures of the
relevant system. So long as the Class A
Certificates are Book-Entry Certificates (as
defined herein), such Certificates will be
evidenced by one or more Certificates registered
in the name of Cede & Co. ("Cede"), as the
nominee of DTC, or one of the relevant
depositaries (collectively, the "European
Depositaries"). Cross-market transfers between
persons holding directly or indirectly through
DTC, on the one hand, and counterparties holding
directly or indirectly through Cedel or
Euroclear, on the other, will be effected in DTC
through Citibank N.A. ("Citibank") or The Chase
Manhattan Bank ("Chase"), the relevant
depositaries of Cedel 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 and participating members
thereof. No Certificate Owner will be entitled
to receive a definitive certificate representing
such person's interest, except in the event that
Definitive Certificates (as defined herein) are
issued under the limited circumstances described
herein. All references in this Prospectus
Supplement to any Class A Certificates reflect
the rights of Certificate Owners only as such
rights may be exercised through DTC and its
participating organizations for so long as such
Class A Certificates are held by DTC. See "RISK
FACTORS-- Book-Entry Registration May Affect
Liquidity," "DESCRIPTION OF THE
CERTIFICATES--Book-Entry Certificates" and
"ANNEX I" hereto.
Certificate Rate.............. The Certificate Rate for each Class of Fixed Rate
Certificates is set forth on the cover page
hereof.
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The Certificate Rate for the Class A-7
Certificates for the first Distribution Date is
_______%. The Certificate Rate for the Class A-7
Certificates for any other Distribution Date
will equal the lesser of (A) the Class A-7
Formula Rate and (B) the Loan Group 2 Net Funds
Cap for such Distribution Date. The "Class A-7
Formula Rate" is the sum of the interbank
offered rates for one-month United States dollar
deposits in the London market (the "Certificate
Index") (calculated as described under
"DESCRIPTION OF THE CERTIFICATES--The
Certificate Rate") as of the related LIBOR
Determination Date (as defined herein) plus
____% (or ____% for each Distribution Date
occurring after the Optional Termination Date).
The "Loan Group 2 Net Funds Cap" for any
Distribution Date will equal the product of (x)
360/365 and (y) the difference between (A) the
weighted average of the Loan Rates of the Loan
Group 2 Mortgage Loans as of the first day of
the related Due Period, weighted on the basis of
the related Principal Balances as of such date
and (B) the sum of (i) the Servicing Fee Rate
and the rates at which the Trustee fee and the
premium payable to the Certificate Insurer with
respect to the Group 2 Certificates are
calculated and (ii) commencing with the
thirteenth Distribution Date, ____% per annum.
The Certificate Rate on any Distribution Date
for the Class S Certificates will equal the
average of the Strip Rates weighted on the basis
of the Class Principal Balances of the related
Classes of Group 1 Certificates immediately
prior to such Distribution Date. The Strip Rates
are as follows:
Class Strip Rate
A-1 _____%
A-2 _____%
A-3 _____%
A-4 _____%
A-5 _____%
A-6 _____%
The "Interest Period" means, with respect to
each Distribution Date and the Fixed Rate
Certificates and the Class S Certificates, the
period from the first day of the calendar month
preceding the month of such Distribution Date
through the last day of such calendar month.
Interest on the Fixed Rate Certificates in
respect of any Distribution Date will accrue
during the related Interest Period
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on the basis of a 360-day year consisting of
twelve 30-day months. The "Interest Period"
means, with respect to each Distribution Date
and the Variable Rate Certificates, the period
from the Distribution Date in the month
preceding the month of such Distribution Date
(or, in the case of the first Distribution Date,
from the Closing Date) through the day before
such Distribution Date. Interest on the Variable
Rate Certificates in respect of any Distribution
Date will accrue during the related Interest
Period on the basis of a 360-day year and the
actual number of days elapsed.
Record Date.................. With respect to the Variable Rate Certificates
and any Distribution Date, the "Record Date"
will be the day immediately preceding such
Distribution Date. With respect to the Fixed
Rate Certificates and any Distribution Date, the
"Record Date" will be the last business day of
the calendar month immediately preceding the
calendar month in which such Distribution Date
occurs.
Distributions................. On the 25th day of each month, or if such a day
is not a Business Day then the next succeeding
Business Day, commencing in _____, 199_ (each
such day, a "Distribution Date"), the Trustee
will be required to distribute from funds
available therefor in the Distribution Account
(as described herein) to the Holders of the
Senior Certificates on the related Record Date,
in the priorities described below, in the
aggregate an amount equal to the sum of (a) the
Class Interest Distribution for each Class of
Senior Certificates in a Certificate Group and
(b) the Class A Principal Distribution for each
Certificate Group. On any Distribution Date, the
Class A Principal Distribution will be
distributed as described below. See "DESCRIPTION
OF THE CERTIFICATES--Distributions" herein.
Interest
On each Distribution Date, to the extent of
funds available therefor as described herein,
interest will be distributed with respect to
each Class of Senior Certificates in an amount
(each, a "Class Interest Distribution") equal to
the sum of (a) interest for the related Interest
Period at the related Certificate Rate on the
related Class Principal Balance or, in the case
of the Class S Certificates, the Notional
Balance of such Class (the "Class Monthly
Interest Distributable Amount") and (b) any
Class Interest Carryover Shortfall for such
Class of Senior Certificates for such
Distribution Date. As to any Distribution Date
and Class of Senior Certificates, "Class
Interest Carryover Shortfall" is the sum of (i)
the excess, if any, of the related Class Monthly
Interest Distributable Amount for the preceding
Distribution Date and any outstanding Class
Interest Carryover Shortfall with respect to
such Class on such preceding Distribution Date,
over the amount in respect of interest that is
actually distributed on the Certificates of such
Class on such preceding Distribution Date plus
(ii) one month's interest on such excess, to the
extent permitted by law, at the related
Certificate Rate. The interest entitlement
described in (a) above will be reduced by such
Class" pro rata share of Civil Relief Act
Interest Shortfalls, if any, for such
Distribution Date. Civil Relief Act Interest
Shortfalls will not be covered by payments under
the Policy. See "DESCRIPTION OF THE
CERTIFICATES--Interest" herein.
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On each Distribution Date, the Class Interest
Distribution relating to each Class of Senior
Certificates in a Certificate Group will be
distributed on an equal priority and any
shortfall in the amount required to be
distributed as interest thereon to each such
Class will be allocated among such Classes pro
rata based on the amount that would have been
distributed on each such Class in the absence of
such shortfall.
The "Notional Balance" of the Class S
Certificates at any date of determination will
equal the aggregate of the Class Principal
Balances of the Group 1 Certificates on such
date. The Notional Balance of the Class S
Certificates does not entitle the Holders
thereof to any distributions in respect of
principal but is used to calculate the Class
Interest Distribution for the Class S
Certificates.
If on any Distribution Date, the Certificate
Rate for the Class A-7 Certificates is based on
the Loan Group 2 Net Funds Cap, Holders of the
Class A-7 Certificates will be entitled to
receive the Class A-7 Basis Risk Carryover
Amount (as defined herein) to the extent of
funds available therefor as described herein.
The Policy will not cover the payment of, and
the ratings assigned to the Class A-7
Certificates do not address the likelihood of
the payment of, any Class A-7 Basis Risk
Carryover Amount.
Principal
On each Distribution Date, to the extent of
funds available therefor as described herein,
principal will be distributed to the holders of
the Class A Certificates of a Certificate Group
then entitled to distributions of principal in
an amount equal to the lesser of (A) the related
Certificate Group Principal Balance and (B) the
related Class A Principal Distribution for such
Distribution Date. "Class A Principal
Distribution" means, with respect to any
Distribution Date and Certificate Group, the sum
of the related Class A Monthly Principal
Distributable Amount for such Distribution Date
and any Class A Principal Shortfall for such
Distribution Date.
So long as an Insurer Default has not occurred,
the Class A Principal Distribution relating to
the Group 1 Certificates will be distributed as
follows: (a) to the Class A-6 Certificates, the
Priority Amount for such Distribution Date until
the Class Principal Balance thereof has been
reduced to zero; and (b) sequentially, to the
Class A-1, Class A-2, Class A-3, Class A-4,
Class A-5 and Class A-6 Certificates, in that
order, until the respective Class Principal
Balances thereof have been reduced to zero. On
any Distribution Date during the occurrence and
continuance of an Insurer Default, the Class A
Principal Distribution relating to the Group 1
Certificates will be distributed to each Class
of Group 1 Certificates outstanding
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on a pro rata basis in accordance with the Class
Principal Balance of each such Class immediately
prior to such Distribution Date. The Class A
Principal Distribution relating to the Group 2
Certificates will be distributed to the Holders
of the Class A-7 Certificates. "Class A Monthly
Principal Distributable Amount" means, with
respect to any Distribution Date and Certificate
Group, to the extent of funds available therefor
as described herein, the amount equal to the sum
of the following amounts (without duplication)
with respect to the immediately preceding Due
Period (as defined below): (i) each payment of
principal on a Mortgage Loan in the related Loan
Group received by the Master Servicer or a
Sub-Servicer during such Due Period, including
all full and partial principal prepayments, (ii)
the Principal Balance as of the end of the
immediately preceding Due Period of each
Mortgage Loan in the related Loan Group that
became a Liquidated Mortgage Loan for the first
time during the related Due Period, (iii) the
portion of the Purchase Price allocable to
principal of all repurchased Defective Mortgage
Loans in the related Loan Group with respect to
such Due Period, (iv) any Substitution
Adjustment Amounts received on or prior to the
previous Determination Date and not yet
distributed with respect to the related Loan
Group, (v) the amount, if any, required to be
distributed on such Distribution Date to satisfy
the required level of overcollateralization for
the related Loan Group for such Distribution
Date (the "Distributable Excess Spread") and
(vi) with respect to the initial Distribution
Date, the amount by which the related
Certificate Group Principal Balance exceeds the
aggregate Principal Balance of the Mortgage
Loans in the related Loan Group as of the
Cut-Off Date.
"Class A Principal Shortfall Amount" means for
any Distribution Date and Certificate Group, the
amount, if any, by which the related Certificate
Group Principal Balance exceeds the related Loan
Group Principal Balance at the end of the
related Due Period after giving effect to all
distributions of the related Class A Monthly
Principal Distributable Amount (exclusive of
Distributable Excess Spread) and draws under the
Policy for such Distribution Date.
If the required level of overcollateralization
for a Certificate Group is reduced below the
then existing amount of overcollateralization
(described below) or if the required level of
overcollateralization is satisfied, the amount
of the Class A Monthly Principal Distributable
Amount for such Certificate Group will be
correspondingly reduced by the amount of such
reduction or by the amount necessary such that
the overcollateralization will not exceed the
required level of overcollateralization for such
Certificate Group after giving effect to the
distribution in respect of principal to be made
on such Distribution Date.
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The "Priority Amount" for any Distribution Date
will equal the product of (i) the applicable
Priority Percentage, and (ii) the product of (a)
percentage equivalent of a fraction, the
numerator of which is the Class Principal
Balance of the Class A-6 Certificates and the
denominator of which is the Certificate Group
Principal Balance of Certificate Group 1 (the
"Pro-Rata Percentage") and (b) the Class A
Principal Distribution for Certificate Group 1
for such Distribution Date. The "Priority
Percentage" for any Distribution Date will be as
follows:
Distribution Dates Priority Percentage
[--------]-[--------] ---%
[--------]-[--------] ---%
[--------]-[--------] ---%
[--------]-[--------] ---%
[--------]-[--------] ---%
thereafter
"Due Period" means, (a) with respect to the
first Determination Date (i) for collections of
principal, the period from and including ______
199_ through and including ______ __, 199_ and
(ii) for collections of interest, the period
from and including _______, 199_ through and
including _____ __, 199_ and (b) with respect to
each Determination Date thereafter for
collections of both interest and principal the
period from and including the ________ day of
the month preceding the month of such
Determination Date to and including the ________
day of the month of such Determination Date.
For a description of a Liquidated Mortgage Loan,
see "DESCRIPTION OF THE CERTIFICATES--Principal"
herein.
Overcollateralization.......... The credit enhancement provisions of the Trust
result in a limited acceleration of the Class A
Certificates of a Certificate Group relative to
the amortization of the Mortgage Loans in the
related Loan Group in the early months of the
transaction. The accelerated amortization is
achieved by the application of Excess Spread as
described herein to principal distributions on
the Class A Certificates of the related
Certificate Group. "Excess Spread" means, with
respect to any Distribution Date and Loan Group,
the positive excess, if any, of (x) Available
Funds (as defined herein) for the related
Certificate Group for such Distribution Date
over (y) the portion thereof to be distributed
pursuant to subclauses A and C with respect to
the Group 1 Certificates and subclauses B and C
with respect to the Group 2 Certificates, in
each case as set forth under the heading
"DESCRIPTION OF CERTIFICATES--Distributions" on
such Distribution Date. This acceleration
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feature creates, with respect to each
Certificate Group, overcollateralization (i.e.,
the excess, if any, of the aggregate outstanding
Principal Balance of the Mortgage Loans in the
related Loan Group over the related Certificate
Group Principal Balance). Once the required
level of overcollateralization is reached for a
Certificate Group, and subject to the provisions
described in the next paragraph, the
acceleration feature for such Certificate Group
will cease, until necessary to maintain the
required level of overcollateralization for such
Certificate Group.
The Agreement will provide that, subject to
certain floors, caps and triggers, the required
level of overcollateralization with respect to a
Certificate Group may increase or decrease over
time. An increase in the required level of
overcollateralization for a Certificate Group
will result in a temporary period of accelerated
amortization of the related Class A Certificates
to increase the actual level of
overcollateralization to its required level; a
decrease would result in a temporary period of
decelerated amortization to reduce the actual
level of overcollateralization for a Certificate
Group to its required level. An increase in the
required level of overcollateralization for a
Certificate Group will result if the delinquency
experience on the related Mortgage Loans exceeds
certain levels set forth in the Agreement. In
that event, amortization of the Class A
Certificates of the related Certificate Group
would be accelerated until the level of
overcollateralization reaches its required
level. The required level of
overcollateralization for a Certificate Group
may be decreased (and may be decreased to zero)
under certain circumstances, which will slow the
amortization of the related Class A
Certificates. See "PREPAYMENT AND YIELD
CONSIDERATIONS" and "DESCRIPTION OF THE
CERTIFICATES-- Overcollateralization
Provisions."
Crosscollateralization........ In addition to the foregoing, the Agreement
provides for crosscollateralization through the
application of certain Available Funds generated
by one Loan Group to fund shortfalls in
Available Funds and to create
overcollateralization in the other Loan Group,
subject to certain prior requirements of such
Available Funds. See "DESCRIPTION OF THE
CERTIFICATES--Distributions" and "PREPAYMENT AND
YIELD CONSIDERATIONS."
The Policy..................... The Policy will unconditionally and irrevocably
guarantee principal payments (as described in
the next sentence) on the Class A Certificates
plus accrued and unpaid interest due on the
Senior Certificates. On each Distribution Date,
a draw will be made on the Policy equal to the
sum of (a) the amount by which interest accrued
during the applicable Interest Period at the
applicable Certificate Rate for each Class of
Senior Certificates on the related outstanding
Class Principal Balance or, in the case of the
Class S Certificates, the Notional Balance
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(net of any Civil Relief Act Interest Shortfalls
with respect to the related Loan Group) exceeds
the amount on deposit in the Distribution
Account available to be distributed therefor on
such Distribution Date and (b) with respect to
each Certificate Group, the amount, if any, by
which the Certificate Group Principal Balance
exceeds the related Loan Group Principal Balance
at the end of the related Due Period (after
giving effect to all distributions of principal
on the related Class A Certificates on such
Distribution Date). In addition, the Policy will
guarantee the payment in full of the applicable
Certificate Group Principal Balance to the Group
1 Certificates and the Group 2 Certificates on
the Distribution Date in ________ (the "Final
Distribution Date") (after giving effect to all
other distributions of principal on such Classes
on such Distribution Date).
In the absence of payments under the Policy,
Class A Certificateholders will directly bear
the credit and other risks associated with their
undivided interest in the Trust. See
"DESCRIPTION OF THE CERTIFICATES--The Policy"
herein.
The Certificate Insurer........ [Name of Certificate Insurer], a _________ stock
insurance company (the "Certificate Insurer").
See "DESCRIPTION OF THE CERTIFICATES--The
Policy" and "THE CERTIFICATE INSURER" herein.
Certificates Involve Risks..... An investment in the Class A Certificates
involves material risks and should be considered
only by investors which, either alone or
together with their investment advisors, have
the ability to understand such risks. See "RISK
FACTORS" beginning on page S-__ herein and on
page __ in the Prospectus.
Servicing .................... The Master Servicer will be responsible for
servicing, managing and making collections on
the Mortgage Loans. The Master Servicer will
deposit, or cause each Sub-Servicer to deposit,
all collections in respect of the Mortgage Loans
into the Collection Account as described herein.
Not later than the fourth Business Day prior to
each Distribution Date (the "Determination
Date"), the Master Servicer will calculate the
amounts to be paid, as described herein, to the
Certificateholders on such Distribution Date.
See "DESCRIPTION OF THE
CERTIFICATES--Distributions." With respect to
each Due Period, the Master Servicer will
receive from each payment in respect of interest
on the Mortgage Loans a portion of such payments
as a monthly servicing fee (the "Servicing Fee")
in the amount of ____% per annum (the "Servicing
Fee Rate") on the Principal Balance of each
Mortgage Loan as of the first day of each such
Due Period. See "DESCRIPTION OF THE
CERTIFICATES--Servicing Compensation, Payment of
Expenses and Prepayment Interest Shortfalls." In
certain limited
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circumstances, the Master Servicer may resign or
be removed, in which event either the Trustee or
a third-party servicer will be appointed as
successor Master Servicer. See "DESCRIPTION OF
THE CERTIFICATES--Certain Matters Regarding the
Master Servicer," "--Events of Default" and
"--Rights Upon an Event of Default."
The Master Servicer will enter into
Sub-Servicing Agreements with the Originators
pursuant to which each originator will
sub-service the Mortgage Loans originated or
purchased by it. Such sub-servicing arrangements
will not relieve the Master Servicer of any
liability it might otherwise have, had the
sub-servicing arrangement not been entered into.
Trustee....................... [Name of Trustee], a _______ banking association
(the "Trustee").
Monthly Advances.............. The Master Servicer is required to remit to the
Trustee no later than the close of business on
the Determination Date for each Distribution
Date, for deposit in the Distribution Account,
an amount equal to the scheduled installment of
interest due on each Mortgage Loan but not
received by the Master Servicer or a
Sub-Servicer during the related Due Period (a
"Monthly Advance"). Such obligation of the
Master Servicer continues with respect to each
Mortgage Loan until such Mortgage Loan becomes a
Liquidated Mortgage Loan. The Master Servicer is
not required to make any Monthly Advances which
it determines would be nonrecoverable. Monthly
Advances are reimbursable to the Master Servicer
subject to certain conditions and restrictions,
and are intended to provide sufficient funds for
the payment of interest on the Senior
Certificates. See "DESCRIPTION OF THE
CERTIFICATES --Advances" herein.
Prepayment Interest
Shortfalls..................... Not later than the Determination Date, the
Master Servicer is required to remit to the
Trustee, without any right of reimbursement, an
amount equal to, with respect to each Mortgage
Loan as to which a principal prepayment in full
was received during the related Due Period, the
lesser of (a) the excess, if any, of (i) the sum
of 30 days" interest on the Principal Balance of
each such Mortgage Loan at the Loan Rate (or at
such lower rate as may be in effect for such
Mortgage Loan because of application of the
Soldiers" and Sailors" Civil Relief Act of 1940,
as amended (the "Civil Relief Act")), minus the
sum of the Servicing Fees for each such Mortgage
Loan over (ii) the amount of interest actually
paid by the related Mortgagor in connection with
such principal prepayment (with respect to all
such Mortgage Loans, the "Prepayment Interest
Shortfall") and (b) the Servicing Fee received
by the Master Servicer in the most recently
ended Due Period.
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Civil Relief Act Interest Shortfalls will not be
covered by the Policy, although Prepayment
Interest Shortfalls, after application of the
Servicing Fee, will be so covered. The Master
Servicer is not obligated to offset any of the
Servicing Fee against, or to provide any other
funds to cover, any shortfalls in interest
collections on the Mortgage Loans that are
attributable to the application of the Civil
Relief Act ("Civil Relief Act Interest
Shortfalls"). See "RISK FACTORS--Payments on the
Mortgage Loans" herein.
Optional Termination by the
Master Servicer................ The Master Servicer may, at its option, terminate
the Agreement on the Distribution Date following
the Due Period at the end of which the aggregate
Principal Balance of the Mortgage Loans is less
than 10% of the sum of the Principal Balances of
the Initial Mortgage Loans and Subsequent
Mortgage Loans as of the Cut-Off Date (the
"Optional Termination Date"). See "DESCRIPTION
OF THE CERTIFICATES--Termination; Purchase of
Mortgage Loans" herein.
Optional Purchase of
Defaulted Mortgage
Loans......................... The Master Servicer has the ption, but is not
obligated, to purchase from the Trust any
Mortgage Loan 90 days or more delinquent at a
purchase price equal to the outstanding
Principal Balance as of the date of purchase,
plus all accrued and unpaid interest on such
Principal Balance through the date of purchase,
computed at the Loan Rate net of the Servicing
Fee Rate. See "DESCRIPTION OF THE
CERTIFICATES--Optional Purchase of Defaulted
Mortgage Loans" herein.
Federal Income Tax
Considerations................ Separate elections will be made to treat certain
assets of the Trust (exclusive of the Initial
Interest Coverage Account and the Funding
Account) as a "real estate mortgage investment
conduit" (the "REMIC"). The Class A Certificates
will be designated as "regular interests" in a
REMIC and will be treated as debt instruments of
a REMIC for federal income tax purposes with
payment terms equivalent to the terms of such
Certificates. Upon the issuance of the
Certificates, Stroock & Stroock & Lavan LLP,
counsel to the Depositor, will deliver its
opinion generally to the effect that, assuming
compliance with all provisions of the Agreement,
for federal income tax purposes the REMIC will
qualify as a REMIC, as such term is defined in
Section 860D of the Internal Revenue Code of
1986, as amended (the "Code").
The holders of the Class A Certificates will be
required to include in income interest on such
Certificates in accordance with the accrual
method of accounting, and the Class A
Certificates may, depending on their issue
price, be treated as having been issued with
original issue discount for federal
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income tax purposes. For further information
regarding the federal income tax consequences of
investing in the Class A Certificates, see
"FEDERAL INCOME TAX CONSIDERATIONS" herein and
in the Prospectus.
ERISA Considerations......... The acquisition of a Class A Certificate by a
pension or other employee benefit plan (a
"Plan") subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), could, in some instances, result in a
"prohibited transaction" or other violation of
the fiduciary responsibility provisions of ERISA
and Code Section 4975. Certain exemptions from
the prohibited transaction rules could be
applicable to the acquisition of such
Certificates. Any Plan fiduciary considering
whether to purchase any Class A Certificate on
behalf of a Plan should consult with its counsel
regarding the applicability of the provisions of
ERISA and the Code. See "ERISA CONSIDERATIONS"
herein and in the Prospectus. Subject to the
considerations and conditions described under
"ERISA CONSIDERATIONS" herein, it is expected
that the Class A Certificates may be purchased
by a Plan.
Legal Investment
Considerations................. The Group 1 Certificates will not constitute
"mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"), because some of the Mortgages
securing the Loan Group 1 Mortgage Loans are not
first mortgages. Accordingly, many institutions
with legal authority to invest in comparably
rated securities based solely on first mortgages
may not be legally authorized to invest in the
Group 1 Certificates.
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The Group 2 Certificates will constitute
"mortgage related securities" for purposes of
SMMEA for so long as they are rated in one of
the two highest rating categories by one or more
nationally recognized statistical rating
organizations. As such, the Group 2 Certificates
will be legal investments for certain entities
to the extent provided in SMMEA, subject to
state laws overriding SMMEA. In addition,
institutions whose investment activities are
subject to review by federal or state regulatory
authorities may be or may become subject to
restrictions, which may be retroactively imposed
by such regulatory authorities, on the
investment by such institutions in certain forms
of mortgage related securities. Furthermore,
certain states have enacted legislation
overriding the legal investment provisions of
SMMEA. In addition, institutions whose
activities are subject to review by federal or
state regulatory authorities may be or may
become subject to restrictions, which may be
retroactively imposed by such regulatory
authorities, on the investment by such
institutions in certain forms of mortgage
related securities. See "LEGAL INVESTMENT
CONSIDERATIONS" herein and "LEGAL INVESTMENT" in
the Prospectus.
Certificate Rating............. It is a condition to the issuance of the Class A
Certificates that they receive ratings of "AAA"
by Standard & Poor's Rating Services ("Standard
& Poor's"), "AAA" by Fitch Investors Service,
Inc. ("Fitch") and "Aaa" by Moody's Investors
Service, Inc. ("Moody's") (each a "Rating
Agency"). In general, ratings address credit
risk and do not address the likelihood of
prepayments or the payment of any Class A-7
Basis Risk Carryover Amount. See "RATINGS"
herein and "RISK FACTORS--Ratings Are Not
Recommendations" in the Prospectus.
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RISK FACTORS
Investors should consider, among other things, the following risk
factors and the risk factors set forth on page __ of the Prospectus in
connection with the purchase of the Offered Certificates.
Prepayments May Vary. All of the Mortgage Loans may be prepaid in whole
or in part at any time. [However, Mortgage Loans secured by first liens on
Mortgaged Properties in [list states] are subject to a prepayment penalty for
the first 12 months following origination. In addition, Mortgage Loans secured
by Mortgaged Properties in other jurisdictions may be subject to prepayment
penalties to the extent permitted by law. Home equity loans, such as the
Mortgage Loans, have been originated in significant volume only during the past
few years and the Seller and Representative are unaware of any publicly
available studies or statistics on the rate of prepayment of such loans.
Generally, home equity loans are not viewed by borrowers as permanent financing.
Accordingly, the Mortgage Loans may experience a higher rate of prepayment than
traditional loans. The Trust's prepayment experience may be affected by a wide
variety of factors, including general economic conditions, interest rates, the
availability of alternative financing and homeowner mobility. In addition,
substantially all of the Mortgage Loans contain due-on-sale provisions and the
Master Servicer will be required by the Agreement to enforce such provisions
unless (i) such enforcement is not permitted by applicable law or (ii) the
Master Servicer or the applicable Sub-Servicer, in a manner consistent with
reasonable commercial practice, permits the purchaser of the related Mortgaged
Property to assume the Mortgage Loan. To the extent permitted by applicable law,
such assumption will not release the original borrower from its obligation under
any such Mortgage Loan. See "CERTAIN LEGAL ASPECTS OF THE LOANS--Due-on-Sale
Clauses in Mortgage Loans" in the Prospectus.
Underwriting Standards May Affect Performance. As described in the
Prospectus under "THE ORIGINATORS AND THE MASTER SERVICER--Underwriting," the
Originators' underwriting standards generally are less stringent than those of
FNMA or FHLMC with respect to a borrower's credit history and in certain other
respects. A borrower's past credit history may not preclude an Originator from
making a loan; however, it will reduce the size (and consequently the Combined
Loan-to-Value Ratio) of the loan that the Originator is willing to make. As a
result of this approach to underwriting, the Mortgage Loans in the Mortgage Pool
may experience higher rates of delinquencies, defaults and foreclosures than
mortgage loans underwritten in a more traditional manner.
Risk of Early Defaults. Substantially all of the Initial Mortgage Loans
were originated within ___ months prior to the Cut-Off Date. Although little
data is available, defaults on mortgage loans, including home equity loans
similar to the Initial Mortgage Loans, are generally expected to occur with
greater frequency in the early years of the terms of mortgage loans. Liquidation
proceeds received upon liquidation of a Mortgaged Property following a default
on the related Mortgage Loan will have the same effect as a principal prepayment
on the yield to maturity of the Class of Class A Certificates receiving such
proceeds. In general, the earlier a prepayment is received, the greater will be
the effect on the yield to maturity. In addition, Holders may not be able to
reinvest such prepayment at yields equal to the yields on such Holders" Class A
Certificates.
Balloon Loans May Adversely Affect Performance. With respect to
approximately _____% of the Loan Group 1 Initial Mortgage Loans (by Cut-Off Date
Loan Group 1 Principal Balance) the borrowers are not required to make monthly
payments of principal that will be sufficient to amortize such Mortgage Loans by
their maturity (collectively, "Balloon Loans"). Following the conveyance of the
Subsequent Mortgage Loans to the Trust, no more than approximately ____% (by
Cut-Off Date Loan Group 1 Principal Balance) of the Loan Group 1 Mortgage Loans
will be Balloon Loans. In the case of Balloon Loans, a borrower generally will
be required to pay the entire remaining principal amount of the Mortgage Loan at
its maturity. The general credit risk may be greater to holders of Group 1
Certificates than to holders of instruments representing interests only in level
payment fully amortizing first mortgage loans. The ability of a borrower to make
such a payment may depend on the ability of the borrower to obtain refinancing
of the balance due on the Mortgage Loan. An increase in interest rates over the
Loan Rate applicable at the time the Mortgage Loan was originated may have an
adverse effect on the borrower's ability to obtain refinancing or to pay the
required monthly payment.
Second Liens Create Risks. Based on appraisals at the time of
origination of each Mortgage Loan, each such Mortgage Loan will have been fully
secured at such time. However, even if the Mortgaged Properties provide adequate
security for the Mortgage Loans, substantial delays could be encountered in
connection with the liquidation of Mortgage Loans that are delinquent and
resulting shortfalls in distributions to Class A Certificateholders could occur
if the Certificate Insurer were unable to perform its obligations under the
Policy. Further, liquidation expenses (such as legal fees, real estate taxes,
and maintenance and preservation expenses) will reduce the proceeds payable to
Certificateholders and thereby reduce the security for the Mortgage Loans. In
the event any of the Mortgaged
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<PAGE> 22
Properties fail to provide adequate security for the related Mortgage Loans,
Class A Certificateholders could experience a loss if the Certificate Insurer
were unable to perform its obligations under the Policy.
Approximately _____ % (by Cut-Off Date Principal Balance) of the Group 1
Initial Mortgage Loans are secured by second liens on the related Mortgaged
Properties. None of the Group 2 Mortgage Loans are secured by second liens. With
respect to Mortgage Loans that are junior in priority to liens having a first
priority with respect to the related Mortgaged Property ("First Liens"), the
Master Servicer or the applicable Sub-Servicer has the power under certain
circumstances to consent to a new mortgage lien on such Mortgaged Property
having priority over such Mortgage Loan in connection with the refinancing of
such First Lien. Mortgage Loans secured by second mortgages are entitled to
proceeds that remain from the sale of the related Mortgaged Property after any
related senior mortgage loan and prior statutory liens have been satisfied. In
the event that such proceeds are insufficient to satisfy such loans and prior
liens in the aggregate and the Certificate Insurer is unable to perform its
obligations under the Policy, the Trust and, accordingly, the
Certificateholders, bear (i) the risk of delay in distributions while a
deficiency judgment against the borrower is sought and (ii) the risk of loss if
the deficiency judgment cannot be obtained or is not realized upon. See "CERTAIN
LEGAL ASPECTS OF THE LOANS" in the Prospectus.
Geographic Concentration. Approximately _____% (by Cut-Off Date
Principal Balance) of the Loan Group 1 Initial Mortgage Loans and approximately
_____ % (by Cut-Off Date Principal Balance) of the Loan Group 2 Initial Mortgage
Loans, are secured by Mortgaged Properties located in ____________. To the
extent that the ______ region has experienced or may experience in the future
weaker economic conditions or greater rates of decline in real estate values
than the United States generally, such a concentration of the Mortgage Loans may
be expected to exacerbate the foregoing risks. The Seller can neither quantify
the impact of any recent property value declines on the Mortgage Loans nor
predict whether, to what extent or for how long such declines may continue.
Hazard Insurance. The Master Servicer is not obligated to maintain
hazard insurance policies, and does not currently pay hazard insurance premiums
if a Mortgagor has not paid insurance premiums to maintain in effect the hazard
insurance policy for related Mortgaged Property. As a result, there may be
Mortgaged Properties not covered by hazard insurance policies. See "THE HOME
EQUITY LENDING PROGRAM--Underwriting-Other Issues" and "THE POOLING AND
SERVICING AGREEMENT--Hazard Insurance" in the Prospectus.
The Subsequent Mortgage Loans. The Originators will not select
Subsequent Mortgage Loans in a manner that they believe is adverse to the
interest of the Class A Certificateholders and the Certificate Insurer. However,
Subsequent Mortgage Loans sold to the Trust may have been originated using
credit criteria different from those which were applied to the Initial Mortgage
Loans and may be of a different credit quality. Therefore, following the
transfer of Subsequent Mortgage Loans to the Trust, the aggregate
characteristics of the Mortgage Loans then held in the Trust may vary from those
of the Initial Mortgage Loans. See "DESCRIPTION OF THE MORTGAGE
LOANS--Conveyance of Subsequent Mortgage Loans" herein.
In the event that on the Closing Date the aggregate principal balance of
the Mortgage Loans in a Loan Group is less than the related Certificate Group
Principal Balance, the holders of the Class A-1 Certificates in the case of
Certificate Group 1 and the holders of the Class A-7 Certificates in the case of
Certificate Group 2 will receive, on the first Distribution Date, an additional
distribution allocable to principal in an amount equal to such difference.
The ability of the Trust to invest in Subsequent Mortgage Loans is
largely dependent upon the ability of the Originators to originate and/or
purchase additional loans. The ability of the Originators to originate and/or
purchase additional loans may be affected as a result of a variety of social and
economic factors. Economic factors include interest rates, unemployment levels,
the rate of inflation and consumer perception of economic conditions generally.
Prepayments and Simple Interest Loans Affect Interest Collections. When
a principal prepayment in full is made on a Mortgage Loan, the Mortgagor is
charged interest only up to the date of such prepayment, instead of for a full
month which may result in a Prepayment Interest Shortfall. The Master Servicer
is obligated to pay, without any right of reimbursement, those shortfalls in
interest collections payable on the Senior Certificates that are attributable to
Prepayment Interest Shortfalls, but only to the extent of the Servicing Fee for
the related Due Period (any such payment, "Compensating Interest").
The Initial Mortgage Loans are simple interest mortgage loans ("Simple
Interest Loans") pursuant to which interest is computed and charged to the
Mortgagor on the outstanding Principal Balance of the related Mortgage Loan
based on the number of days elapsed between the date through which interest was
last paid on the Mortgage Loan through receipt of the Mortgagor's most current
payment, and the portions of each monthly payment that are
S-20
<PAGE> 23
allocated to interest and principal are adjusted based on the actual amount of
interest charged on such basis. Consequently, if less than a full month has
elapsed between the interest paid to date and the next payment on a Mortgage
Loan, the amount of interest actually paid by the Mortgagor will be less than a
full month's interest on the principal balance of such Mortgage Loan.
Conversely, if more than a full month has elapsed between the interest paid to
date and the next payment on a Mortgage Loan, the amount of interest actually
paid by the Mortgagor will be greater than a full month's interest on the
principal balance of such Mortgage Loan. To the extent that the aggregate of
such shortfalls exceeds the aggregate of such excesses, a "Net Simple Interest
Shortfall" will result. The Servicing Fee will not be available to cover any
shortfalls in interest collections on the Mortgage Loans that are attributable
to Civil Relief Act Interest Shortfalls or Net Simple Interest Shortfalls. Civil
Relief Act Interest Shortfalls will not be covered by payments under the Policy,
although Prepayment Interest Shortfalls, after application of the Servicing Fee
as described above, and Net Simple Interest Shortfalls, will be so covered.
Book-entry Registration May Affect Liquidity. Issuance of the Class A
Certificates in book-entry form may reduce the liquidity of such Certificates in
the secondary trading market since investors may be unwilling to purchase Class
A Certificates for which they cannot obtain physical certificates.
Since transactions in the Class A Certificates can be effected only
through DTC, Cedel, Euroclear, participating organizations, indirect
participants and certain banks, the ability of a Certificate Owner to pledge a
Class A Certificate to persons or entities that do not participate in the DTC,
Cedel or Euroclear system or otherwise to take actions in respect of such
Certificates, may be limited due to lack of a physical certificate representing
the Class A Certificates.
Certificate Owners may experience some delay in their receipt of
distributions of interest and principal on the Class A Certificates since such
distributions will be forwarded by the Trustee to DTC and DTC will credit such
distributions to the accounts of its Participants (as defined herein) which will
thereafter credit them to the accounts of Certificate Owners either directly or
indirectly through indirect participants. See "DESCRIPTION OF THE
CERTIFICATES--Book-Entry Certificates" herein.
Reduction of Rating May Affect Price. The rating of the Class A
Certificates will depend primarily on an assessment by the Rating Agencies of
the Mortgage Loans and upon the claims-paying ability of the Certificate
Insurer. Any reduction in a rating assigned to the claims-paying ability of the
Certificate Insurer below the rating initially given to the Class A Certificates
would likely result in a withdrawal or reduction in the rating of the Class A
Certificates. Any such withdrawal or downgrading of the ratings of the Class A
Certificates may adversely affect the liquidity and the prices purchasers may be
willing to pay for such Certificates. The rating by the Rating Agencies of the
Class A Certificates is not a recommendation to purchase, hold or sell the Class
A Certificates, inasmuch as such rating does not comment as to the market price
or suitability for a particular investor. There is no assurance that the ratings
will remain in place for any given period of time or that the ratings will not
be lowered or withdrawn by the Rating Agencies. In general, the ratings address
credit risk and do not address the likelihood of prepayments.
THE CERTIFICATE INSURER
The information set forth in this section and in the financial
statements of the Certificate Insurer incorporated by reference herein as
described below have been provided by the Certificate Insurer.
[Insert brief description of Certificate Insurer.]
The consolidated financial statements of the Certificate Insurer and its
subsidiaries as of December 31, 199__ and December 31, 199__ and for the three
years ended December 31, 199__, prepared in accordance with generally accepted
accounting principles, included in the Annual Report on Form 10-K of [_____] for
the year ended December 31, 199__, and the consolidated financial statements of
the Certificate Insurer and its subsidiaries for the _____ months ended
_______________ and for the periods ending _________ and ____________ included
in the Quarterly Report on Form 10-Q of [____________] for the period ending
_____________, are hereby incorporated by reference into this Prospectus
Supplement and shall be deemed to be a part hereof. Any statement contained in a
document incorporated by reference herein shall be modified or superseded for
the purposes of this Prospectus Supplement to the extent that a statement
contained herein or in any subsequently filed document which is also
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute part of this Prospectus Supplement.
All financial statements of the Certificate Insurer and its subsidiaries
included in documents filed by [___________] pursuant to Section 13(a), 13(c),
14 or 15(d) of the Securities Exchange Act of 1934, as amended,
S-21
<PAGE> 24
subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Class A Certificates shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing such documents.
The tables below present selected financial information of the
Certificate Insurer determined in accordance with statutory accounting practices
prescribed or permitted by insurance regulatory authorities ("SAP") and
generally accepted accounting principles ("GAAP"):
<TABLE>
<CAPTION>
SAP
--------------------------------------
DECEMBER 31, 199__ ___[__________]__
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Admitted Assets....................................
Liabilities........................................
Capital and Surplus................................
</TABLE>
<TABLE>
<CAPTION>
GAAP
--------------------------------------
DECEMBER 31, 199__ __[__________]_
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Assets............................................. $ $
Liabilities........................................
Shareholder's Equity...............................
</TABLE>
Copies of the financial statements of the Certificate Insurer
incorporated by reference herein and copies of the Certificate Insurer's 199__
year-end audited financial statements prepared in accordance with statutory
accounting practices are available, without charge, from the Certificate
Insurer. The address of the Certificate Insurer is
____________________________________. The telephone number of the Certificate
Insurer is
(---)--------.
The Certificate Insurer does not accept any responsibility for the
accuracy or completeness of this Prospectus Supplement or any information or
disclosure contained herein, or omitted herefrom, other than with respect to the
accuracy of the information regarding the Policy and the Certificate Insurer set
forth under the headings "DESCRIPTION OF THE CERTIFICATES--The Policy" and "THE
CERTIFICATE INSURER." Additionally, the Certificate Insurer makes no
representation regarding the Certificates or the advisability of investing in
the Certificates.
Moody's Investors Service, Inc. rates the claims paying ability of the
Certificate Insurer "Aaa".
Standard & Poor's Rating Services, a division of the McGraw-Hill
Companies, Inc. rates the claims paying ability of the Certificate Insurer
"AAA".
Fitch Investors Service L.P. rates the claims paying ability of the
Certificate Insurer "AAA".
Each rating of the Certificate Insurer should be evaluated
independently. The ratings reflect the respective rating agency's current
assessment of the creditworthiness of the Certificate Insurer and its ability to
pay claims on its policies of insurance. Any further explanation as to the
significance of the above ratings may be obtained only from the applicable
rating agency. See "RATINGS" herein.
The above ratings are not recommendations to buy, sell or hold the
Certificates, and such ratings may be subject to revision or withdrawal at any
time by the rating agencies. Any downward revision or withdrawal of any of the
above ratings may have an adverse effect on the market price of the
Certificates. The Certificate Insurer does not guaranty the market price of the
Certificates nor does it guaranty that the ratings on the Certificates will not
be revised or withdrawn.
S-22
<PAGE> 25
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
The statistical information presented in this Prospectus Supplement is
only with respect to the Initial Mortgage Loans and describes the Initial
Mortgage Loans in Loan Group 1 and Loan Group 2 and the characteristics of such
Initial Mortgage Loan as of the Cut-Off Date.
The Subsequent Mortgage Loans are intended to be purchased by the Trust
from the Seller on the Closing Date. The Initial Mortgage Loans and the
Subsequent Mortgage Loans, if available, to be purchased by the Trust will be
originated or purchased by the Seller and sold by the Seller to the Trust. The
Agreement will provide that the Mortgage Loans, following the conveyance of the
Subsequent Mortgage Loans, must in the aggregate conform to certain specified
characteristics described below under"--Conveyance of Subsequent Mortgage
Loans."
The Mortgage Loans will be divided into two groups (each, a "Loan
Group"): "Loan Group 1" and "Loan Group 2". The Initial Mortgage Loans in such
Loan Groups are referred to herein as "Loan Group 1 Initial Mortgage Loans" and
"Loan Group 2 Initial Mortgage Loans." The maximum amount of Subsequent Mortgage
Loans to be transfered to the Trust on the Closing Date for Loan Group 1 and
Loan Group 2 is $_____________ and $____________________, respectively (each, a
"Maximum Funding Amount").
Each Mortgage Loan in Loan Group 1 will bear interest at a fixed rate
that is calculated on the 'simple interest" method. Certain of the Mortgage
Loans in Loan Group 1 will have original terms to stated maturity of up to 15
years and amortization schedules of up to 30 years ("Balloon Loans"), leaving a
substantial payment due at the stated maturity (each, a "Balloon Payment").
Each Mortgage Loan in Loan Group 2 will bear interest at an adjustable
rate (each an "ARM") that is calculated on the 'simple interest" method. The
Loan Rate borne by each Loan Group 2 Mortgage Loan is subject to adjustment on
the date set forth in the related Mortgage Note and at regular intervals
thereafter (each, a "Change Date") to equal the sum of (i) the applicable index
(the "Loan Index") and (ii) the number of basis points set forth in such
Mortgage Note (the "Gross Margin"), subject to rounding and to the effects of
the applicable Periodic Cap, the applicable Lifetime Cap and the applicable
Lifetime Floor. The "Periodic Cap" limits changes in the Loan Rate for each ARM
on each Change Date. The "Lifetime Cap" is the maximum Loan Rate that may be
borne by an ARM at any point of its life. The "Lifetime Floor" is the minimum
Loan Rate that may be borne by an ARM at any point of its life. The Loan Group 2
Mortgage Loans do not provide for negative amortization.
For all of the Initial Mortgage Loans that are ARMS: the Loan Index is
________; the Change Dates occur every _______ months after the initial Change
Date; and the Periodic Cap is generally _____ basis points. The reference for
each applicable Loan Index and the date prior to a Change Date as of which such
Loan Index is determined is set forth in the related Mortgage Note.
As of the Cut-Off Date, substantially all of the Group 2 Initial
Mortgage Loans were accruing interest at Loan Rates that are below the sum of
the related Gross Margin and the Loan Index that would otherwise have been
applicable. On the first Change Date for each such Mortgage Loan, the related
Loan Rate will adjust to the sum of the applicable Loan Index and the related
Gross Margin subject to the application of the related Periodic Caps, the
related Lifetime Cap and the related Lifetime Floor.
The sole basis for determination of whether a Mortgage is secured by a
primary residence of a borrower ("Mortgagor") will be either (a) a
representation by the Mortgagor at origination of the Mortgage Loan that the
Mortgaged Property will be used for a period of at least six months every year,
or that he intends to use the Mortgaged Property as his primary residence or (b)
that the address of the Mortgaged Property is the Mortgagor's mailing address as
reflected in the Seller's records.
The sum of the columns below may not equal the total indicated due to
rounding. In addition, unless otherwise set forth herein, all percentages and
weighted averages set forth herein with respect to a Loan Group are
S-23
<PAGE> 26
approximate and are percentages or weighted averages of the Cut-Off Date
Principal Balances of the Initial Mortgage Loans in such Loan Group.
LOAN GROUP 1 STATISTICS
The Loan Group 1 Initial Mortgage Loans consist of _____ loans, and the
related Mortgaged Properties are located in ___ states and the District of
Columbia as set forth herein. As of the Cut-Off Date, the Loan Group 1 Initial
Mortgage Loans had an aggregate Principal Balance of $_________ (the "Cut-Off
Date Loan Group 1 Initial Principal Balance"), the maximum Cut-Off Date
Principal Balance of any of the Loan Group 1 Initial Mortgage Loans was
$________ , the minimum Cut-Off Date Principal Balance thereof was $________,
and the Cut-Off Date Principal Balance of such Initial Mortgage Loans averaged
$_______. As of the Cut-Off Date, the Loan Rates on the Loan Group 1 Initial
Mortgage Loans ranged from ______ % to _____ % per annum, and the weighted
average Loan Rate for Loan Group 1 Initial Mortgage Loans was approximately
_____ % per annum. As of the Cut-Off Date, the original term to stated maturity
of the Loan Group 1 Initial Mortgage Loans ranged from ___ months to 360 months,
the remaining term to stated maturity ranged from ___ months to 360 months, the
weighted average original term to stated maturity was approximately ___ months,
the weighted average remaining term to stated maturity was approximately ___
months and the CLTV at origination (as defined herein) ranged from approximately
_____ % to approximately _____ % with a weighted average CLTV at origination of
approximately _____ %. Approximately _____ % of the Loan Group 1 Initial
Mortgage Loans are secured by first liens, and approximately ______% by second
liens. Approximately _____% of the Loan Group 1 Initial Mortgage Loans require
monthly payments of principal that will fully amortize such Initial Mortgage
Loans by their respective maturity dates (assuming all payments are received on
the Due Date), and approximately _____ % of the Loan Group 1 Initial Mortgage
Loans are Balloon Loans. Approximately _____ % of the Loan Group 1 Initial
Mortgage Loans (by Cut-off Date Loan Group 1 Principal Balance) have payments
which, as of the Cut-off Date, are more than 30 but less than 59 days
delinquent.
<TABLE>
<CAPTION>
CUT-OFF DATE PRINCIPAL BALANCES
LOAN GROUP 1
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
INITIAL INITIAL INITIAL
RANGE OF CUT-OFF DATE PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------------------- -------------- ----------------- -----------------
<S> <C> <C>
$ 0.01-$ 25,000.00.......... $ %
$ 25,000.01-$ 50,000.00..........
$ 50,000.01-$ 75,000.00..........
$ 75,000.01-$100,000.00...........
$100,000.01-$125,000.00............
$125,000.01-$150,000.00............
$150,000.01-$175,000.00............
$175,000.01-$200,000.00............
$200,000.01-$225,000.00............
$225,000.01-$250,000.00............
$250,000.01-$275,000.00............
$275,000.01-$300,000.00............
$325,000.01-$350,000.00............
Total...................... 100.00%
=======
</TABLE>
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION BY STATE(1)
LOAN GROUP 1
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
INITIAL INITIAL INITIAL
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----- -------------- ----------------- -----------------
<S> <C> <C> <C>
Arizona............................ $ %
Arkansas...........................
California.........................
</TABLE>
S-24
<PAGE> 27
<TABLE>
<S> <C> <C> <C>
Colorado...........................
Connecticut........................
Delaware...........................
District of Columbia...............
Florida............................
Georgia............................
Illinois...........................
Indiana............................
Kansas.............................
Kentucky...........................
Maine..............................
Maryland...........................
Massachusetts......................
Michigan...........................
Minnesota..........................
Mississippi........................
Missouri...........................
Nebraska...........................
Nevada.............................
New Hampshire......................
New Jersey.........................
New York...........................
North Carolina.....................
Ohio...............................
Oklahoma...........................
Oregon.............................
Pennsylvania.......................
Rhode Island.......................
South Carolina.....................
Tennessee..........................
Texas..............................
Utah...............................
Vermont............................
Virginia...........................
Washington.........................
West Virginia......................
Wisconsin..........................
Total..................... 100.00%
=======
</TABLE>
- ------------------
(1) Determined by property address designated as such in the related Mortgage.
<TABLE>
<CAPTION>
COMBINED LOAN-TO-VALUE RATIOS(1)
LOAN GROUP 1
% OF CUT-OFF
NUMBER OF CUT-OFF DATE DATE
INITIAL INITIAL INITIAL
RANGE OF ORIGINAL COMBINED LOAN-TO-VALUE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------------------- -------------- ----------------- -----------------
RATIOS
- ------
<S> <C> <C> <C>
10.01%-15.00%...................... $ %
15.01%-20.00%......................
20.01%-25.00%......................
25.01%-30.00%......................
30.01%-35.00%......................
35.01%-40.00%......................
</TABLE>
S-25
<PAGE> 28
<TABLE>
<S> <C> <C> <C>
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%......................
Total...................... 100.00%
=======
</TABLE>
- ------------------
(1) The original Combined Loan-to-Value Ratios ("CLTV") shown above are equal,
with respect to each Initial Mortgage Loan, to (i) the sum of (a) the
original principal balance of such Mortgage Loan at the date of origination
plus (b) the remaining balance of the senior lien(s), if any, at the date of
origination of such Mortgage Loan divided by the value of the related
Mortgaged Property, based upon the lesser of the appraisal made at the time
of origination of such Mortgage Loan or the purchase price of such Mortgaged
Property (where the proceeds are used to purchase the Mortgaged Property).
No assurance can be given that the values of such Mortgaged Properties have
remained or will remain at their levels as of the dates of origination of
the related Initial Mortgage Loans. If the residential real estate market
should experience an overall decline in property values such that the
outstanding balances of such Mortgage Loans together with the outstanding
balances of the related first liens become equal to or greater than the
value of the related Mortgaged Properties, actual losses could be higher
than those now generally experienced in the mortgage lending industry.
S-26
<PAGE> 29
<TABLE>
<CAPTION>
CUT-OFF DATE LOAN RATES
LOAN GROUP 1
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
INITIAL INITIAL INITIAL
RANGE OF CUT-OFF DATE LOAN RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
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%....................
16.001%-16.500%....................
16.501%-17.000%....................
17.501%-18.000%....................
Total...................... 100.00%
=======
</TABLE>
S-27
<PAGE> 30
<TABLE>
<CAPTION>
ORIGINAL TERM TO STATED MATURITY
LOAN GROUP 1
ORIGINAL TERMS NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
TO STATED MATURITY INITIAL INITIAL INITIAL
(IN MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------- -------------- ----------------- ------------------
<S> <C> <C> <C>
1-60........................... $ %
61-120...........................
121-180...........................
181-240...........................
241-300...........................
301-360...........................
Total........................... 100.00%
=======
</TABLE>
<TABLE>
<CAPTION>
REMAINING MONTHS TO STATED MATURITY
LOAN GROUP 1
RANGE OF
REMAINING MONTHS NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
TO STATED MATURITY INITIAL INITIAL INITIAL
(IN MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------- -------------- ----------------- ------------------
<S> <C> <C> <C>
46-60........................... $ %
73-84...........................
109-120...........................
133-144...........................
169-180...........................
229-240...........................
289-300...........................
349-360...........................
Total........................... 100.00%
=======
</TABLE>
<TABLE>
<CAPTION>
MONTHS SINCE ORIGINATION
LOAN GROUP 1
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
INITIAL INITIAL INITIAL
MONTHS SINCE ORIGINATION MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
0........................... $ %
1-6...........................
7-12...........................
Total........................... 100.00%
=======
</TABLE>
S-28
<PAGE> 31
<TABLE>
<CAPTION>
PROPERTY TYPE
LOAN GROUP 1
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
INITIAL INITIAL INITIAL
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------- -------------- ----------------- ------------------
<S> <C> <C> <C>
Single Family....................... $ %
Two-to-Four Family..................
Mixed Use...........................
Four-to-Eight Family................
Condominium.........................
Cooperative.........................
Mobile Home treated as real property
Total........................... 100.00%
=======
</TABLE>
<TABLE>
<CAPTION>
OCCUPANCY TYPE(1)
LOAN GROUP 1
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
INITIAL INITIAL INITIAL
OCCUPANCY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------- -------------- ----------------- ------------------
<S> <C> <C> <C>
Owner Occupied...................... $ %
Non-Owner Occupied..................
Total........................... 100.00%
=======
</TABLE>
- ---------------------------------
(1) Based upon representations made by the borrowers at the time of origination
of such Mortgage Loans.
S-29
<PAGE> 32
LOAN GROUP 2 STATISTICS
The Loan Group 2 Initial Mortgage Loans consist of ___ loans, and the
related Mortgaged Properties are located in ___ states. As of the Cut-Off Date,
the Loan Group 2 Initial Mortgage Loans had an aggregate Principal Balance of
$___________ (the "Cut-Off Date Loan Group 2 Initial Principal Balance"), the
maximum Cut-Off Date Principal Balance of any of the Loan Group 2 Initial
Mortgage Loans was $__________, the minimum Cut-Off Date Principal Balance
thereof was $___________ and the Cut-Off Date Principal Balance of such Initial
Mortgage Loans averaged $__________. As of the Cut-Off Date, the current Loan
Rates on the Loan Group 2 Initial Mortgage Loans ranged from _____% to _____%
per annum, and the weighted average current Loan Rate for Loan Group 2 Initial
Mortgage Loans was approximately _____% per annum. As of the Cut-Off Date, the
original term to stated maturity of the Loan Group 2 Initial Mortgage Loans
ranged from 180 months to 360 months, the remaining term to stated maturity
ranged from _____ months to 360 months, the weighted average original term to
stated maturity was approximately ___ months, the weighted average remaining
term to stated maturity was approximately ____ months and the LTV (as defined
herein) ranged from approximately _____% to approximately _____ % with a
weighted average LTV of approximately ____%. All of the Loan Group 2 Initial
Mortgage Loans are secured by first liens. All of the Loan Group 2 Initial
Mortgage Loans require monthly payments of principal that will fully amortize
such Initial Mortgage Loans by their respective maturity dates (assuming all
payments are received on the Due Date). As of the Cut-Off Date the weighted
average Gross Margin of the Loan Group 2 Initial Mortgage Loans was
approximately _____ %, the weighted average Lifetime Cap was approximately _____
% and the weighted average Lifetime Floor was approximately _____%. None of the
Initial Loan Group 2 Mortgage Loans has reached its first Change Date and the
earliest such date occurs in _____ ___.
As of the Cut-off Date, substantially all of the Group 2 Initial
Mortgage Loans were accruing interest at Loan Rates that are below the sum of
the related Gross Margin and the applicable Loan Index that would otherwise have
been applicable. On the first Change Date for each such Mortgage Loan, the
related Loan Rate will adjust to the sum of the applicable Loan Index and the
related Gross Margin subject to the application of the applicable Periodic Cap,
the related Lifetime Cap and the related Lifetime Floor. The weighted average
number of months before the next Change Date for Group 2 Initial Mortgage Loans
in the Trust is approximately 9 months. Approximately _____% of the Loan Group 2
Initial Mortgage Loans (by Cut-off Date Loan Group 2 Initial Balance) have
payments which, as of the Cut-off Date, are more than 30 but less than 59 days
delinquent.
S-30
<PAGE> 33
<TABLE>
<CAPTION>
CUT-OFF DATE PRINCIPAL BALANCES
LOAN GROUP 2
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
INITIAL INITIAL INITIAL
RANGE OF CUT-OFF DATE PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
$ 0.01 - $25,000.00............... $ %
$25,000.01 - $50,000.00...............
$50,000.01 - $75,000.00...............
$75,000.01 - $100,000.00..............
$100,000.01 - $125,000.00..............
$125,000.00 - $150,000.00..............
$150,000.01 - $175,000.00..............
$175,000.01 - $200,000.00..............
$200,000.01 - $225,000.00..............
$225,000.01 - $250,000.00..............
$250,000.01 - $275,000.00..............
$275,000.01 - $300,000.00..............
$300,000.01 - $350,000.00..............
$375,000.01 - $400,000.00..............
$400,000.01 - $425,000.00..............
Total.......................... 100.00%
=======
</TABLE>
S-31
<PAGE> 34
<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION BY STATE(1)
LOAN GROUP 2
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
INITIAL INITIAL INITIAL
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----- -------------- ----------------- -----------------
<S> <C> <C> <C>
Colorado........................... $ %
Connecticut........................
Florida............................
Georgia............................
Illinois...........................
Indiana............................
Kentucky...........................
Maine..............................
Maryland...........................
Massachusetts......................
Michigan...........................
Minnesota..........................
Mississippi........................
Missouri...........................
New Hampshire......................
New Jersey.........................
New York...........................
North Carolina.....................
North Dakota.......................
Ohio...............................
Oklahoma...........................
Pennsylvania.......................
Rhode Island.......................
Texas..............................
Virginia...........................
Washington.........................
Wisconsin..........................
Total........................ 100.00%
=======
</TABLE>
- ----------------------
(1) Determined by property address designated as such in the related Mortgage.
<TABLE>
<CAPTION>
LOAN-TO-VALUE RATIOS(1)
LOAN GROUP 2
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
INITIAL INITIAL INITIAL
RANGE OF ORIGINAL LOAN TO VALUE RATIO MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
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%.....................
Total 100.00%
</TABLE>
- ------------------------
(1) The original Loan-to-Value Ratios ("LTV") shown above are equal, with
respect to each Initial Mortgage Loan, to the original principal balance of
such Mortgage Loan at the date of origination divided by the value of the
related Mortgaged Property, based upon the lesser of the appraisal made at
the time of origination of such Mortgage Loan or the purchase price for such
Mortgaged Property (where the proceeds are used to purchase the Mortgaged
Property). No assurance can be given that the values of such Mortgaged
Properties have remained or will remain at their levels as of the dates of
origination of the related Initial Mortgage Loans. If the residential real
estate market should experience an overall decline in property values such
that the outstanding balances of such Mortgage Loans together with the
outstanding balances of the related first liens become equal to or greater
than the value of the related Mortgaged Properties, the actual losses could
be higher than those now generally experienced in the mortgage lending
industry.
S-32
<PAGE> 35
<TABLE>
<CAPTION>
CUT-OFF DATE LOAN RATES
LOAN GROUP 2
NUMBER OF CUT-OFF DATE % OF CUT-OFF DATE
INITIAL INITIAL INITIAL
RANGE OF CUT-OFF DATE LOAN RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
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%...................
16.001%-16.500%...................
Total 100.00%
</TABLE>
<TABLE>
<CAPTION>
ORIGINAL TERM TO STATED MATURITY
LOAN GROUP 2
Cut-Off Date
Initial % of Cut-Off Date
Original Terms to Stated Number of Initial Principal Initial Principal
Maturity (in months) Mortgage Loans Balance Balance
- ------------------------ ---------------- ------------ -----------------
<S> <C> <C> <C>
121-180...................... $ %
181-240......................
301-360......................
Total................... 100.00%
=======
</TABLE>
S-33
<PAGE> 36
<TABLE>
<CAPTION>
REMAINING MONTHS TO STATED MATURITY
LOAN GROUP 2
Cut-Off Date
Initial % of Cut-Off Date
Range of Remaining Months to Number of Initial Principal Initial Principal
Stated Maturity (in months) Mortgage Loans Balance Balance
- ---------------------------- ---------------- ------------ -----------------
<S> <C> <C> <C>
169-180...................... $ %
229-240......................
349-360......................
Total................... 100.00%
=======
</TABLE>
<TABLE>
<CAPTION>
MONTHS SINCE ORIGINATION
LOAN GROUP 2
Cut-Off Date
Initial % of Cut-Off Date
Number of Initial Principal Initial Principal
Months Since Origination Mortgage Loans Balance Balance
- ------------------------ ---------------- ------------ -----------------
<S> <C> <C> <C>
0............................ $ %
1-6..........................
Total................... 100.00%
=======
</TABLE>
<TABLE>
<CAPTION>
PROPERTY TYPE
LOAN GROUP 2
Cut-Off Date
Initial % of Cut-Off Date
Number of Initial Principal Initial Principal
Property Type Mortgage Loans Balance Balance
- -------------- ---------------- ------------ -----------------
<S> <C> <C> <C>
Single Family................ $ %
Two-to-Four Family
Condominium
Total................... 100.00%
=======
</TABLE>
<TABLE>
<CAPTION>
OCCUPANCY TYPE
LOAN GROUP 2
Cut-Off Date
Initial % of Cut-Off Date
Number of Initial Principal Initial Principal
Occupancy Type(1) Mortgage Loans Balance Balance
- ----------------- ---------------- ------------ -----------------
<S> <C> <C> <C>
Owner Occupied............... $ %
Non-Owner Occupied...........
Total................... 100.00%
=======
</TABLE>
- ------------------
(1) Based upon representations made by the borrowers at the time of
origination of such Mortgage Loans.
S-34
<PAGE> 37
<TABLE>
<CAPTION>
GROSS MARGIN
LOAN GROUP 2
Cut-Off Date
Initial % of Cut-Off Date
Number of Initial Principal Initial Principal
Range of Gross Margins Mortgage Loans Balance Balance
- ----------------------- ---------------- ------------ -----------------
<S> <C> <C> <C>
4.001%-4.500%................ $ %
4.501%-5.000%................
5.001%-5.500%................
5.501%-6.000%................
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%...............
10.501%-11.000%..............
11.001%-11.500%..............
Total................... 100.00%
=======
</TABLE>
<TABLE>
<CAPTION>
LIFETIME CAP
LOAN GROUP 2
Cut-Off Date
Initial % of Cut-Off Date
Number of Initial Principal Initial Principal
Range of Lifetime Caps Mortgage Loans Balance Balance
- ------------------------ ---------------- ------------ -----------------
<S> <C> <C> <C>
14.001%-14.500%.............. $ %
14.501%-15.000%..............
15.001%-15.500%..............
15.501%-16.000%..............
16.001%-16.500%..............
16.501%-17.000%..............
17.001%-17.500%..............
17.501%-18.000%..............
18.001%-18.500%..............
18.501%-19.000%..............
19.001%-19.500%..............
19.501-%20.000%..............
20.501%-21.000%..............
21.001%-21.500%..............
Total................... 100.00%
=======
</TABLE>
S-35
<PAGE> 38
<TABLE>
<CAPTION>
LIFETIME FLOORS
LOAN GROUP 2
Cut-Off Date
Initial % of Cut-Off Date
Number of Initial Principal Initial Principal
Range of Gross Margins Mortgage Loans Balance Balance
- ------------------------ ---------------- ------------ -----------------
<S> <C> <C> <C>
4.001%-4.500%................ $ %
4.501%-5.000%................
5.001%-5.500%................
5.501%-6.000%................
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%..............
16.001%-16.500%..............
Total................... 100.00%
=======
</TABLE>
<TABLE>
<CAPTION>
MONTH OF NEXT CHANGE DATE
LOAN GROUP 2
Cut-Off Date
Initial % of Cut-Off Date
Number of Initial Principal Initial Principal
Month of Next Change Date Mortgage Loans Balance Balance
- ------------------------- ---------------- ------------ -----------------
<S> <C> <C> <C>
May 199_..................... $ %
June 199_....................
July 199_....................
August 199_..................
September 199_...............
October 199_.................
November 199_................
March 1998...................
December 1998................
January 1999.................
February 1999................
March 1999...................
April 1999...................
August 1999..................
September 1999...............
April 2000...................
Total................... 100.00%
=======
</TABLE>
S-36
<PAGE> 39
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS
The Agreement permits the Trust to acquire up to the applicable Maximum
Funding Amount of Subsequent Mortgage Loans for Loan Group 1 and Loan Group 2,
respectively. Accordingly, the statistical characteristics of the Mortgage Loans
in the Trust will vary as of the Closing Date upon the acquisition of Subsequent
Mortgage Loans.
The obligation of the Trust to purchase Subsequent Mortgage Loans on the
Closing Date is subject to the following requirements, any of which requirements
(except for the requirement stated in clause (v) of this paragraph) may be
waived or modified in any respect by the Certificate Insurer: (i) such
Subsequent Mortgage Loan may not be 30 or more days contractually delinquent as
of the related Cut-Off Date; (ii) the remaining term to stated maturity of such
Subsequent Mortgage Loan will not exceed 30 years for fully amortizing loans or
15 years for "Balloon Loans" in Loan Group 1; (iii) such Subsequent Mortgage
Loan will be secured by a Mortgage in a first or second lien position; (iv) such
Subsequent Mortgage Loan will not have a Loan Rate less than _____%; (v) such
Subsequent Mortgage Loan will be otherwise acceptable to the Certificate
Insurer; (vi) such Subsequent Mortgage Loan shall be secured by a mortgage on
property which, at the time of the origination of such Subsequent Mortgage Loan,
has an appraised value of not more than $________ ; (vii) following the purchase
of such Subsequent Mortgage Loan by the Trust for Loan Group 1, the Mortgage
Loans in Loan Group 1 (including such Subsequent Mortgage Loan) as of the
Closing Date: (a) will have a weighted average Loan Rate of at least _____ %;
(b) will have a weighted average remaining term to stated maturity of not less
than ___ months; (c) will have a weighted average CLTV of not more than ___%;
(d) will not have more than ___% by aggregate principal balance "Balloon Loans";
(e) will have no Mortgage Loan with a principal balance in excess of $______;
(f) will have a state concentration not in excess of ___ % for any one state;
(g) will have not more than ____% in aggregate principal balance of the Mortgage
Loans concentrated in any single zip code; (h) will have no more than ____%
Mortgage Loans relating to non-owner occupied properties; and (i) will not
include Mortgage Loans in excess of ___% by aggregate principal balance secured
by Mortgages in a second lien position; and (viii) following the purchase of
such Subsequent Mortgage Loan by the Trust for Loan Group 2, the Mortgage Loans
in Loan Group 2 (including such Subsequent Mortgage Loan) as of the Closing
Date: (a) will have a weighted average Loan Rate of at least _____%; (b) will
have a weighted average remaining term to stated maturity of not less than ____
months; (c) will have a weighted average loan-to-value ratio of not more than
____ %; (d) will have no Mortgage Loan with a principal balance in excess of
$______; (e) will have a state concentration not in excess of ____% for any one
state; (f) will have not more than ____% in aggregate principal balance of the
Mortgage Loans concentrated in any single zip code; (g) will have no more than
____% Mortgage Loans relating to non-owner occupied properties; and (h) will not
have a Mortgage Loan secured by a Mortgage in a junior lien position.
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The rate of principal payments on the Class A Certificates, the
aggregate amount of distributions on the Class A Certificates and the yield to
maturity of the Class A Certificates will be related to the rate and timing of
payments of principal on the Mortgage Loans in the related Loan Group and, in
certain circumstances, the Mortgage Loans in the other Loan Group. The rate of
principal payments on the Mortgage Loans will in turn be affected by the
amortization schedules of the Mortgage Loans and by the rate of principal
prepayments (including for this purpose prepayments resulting from refinancing,
liquidations of the Mortgage Loans due to defaults, casualties, condemnations
and repurchases by the Seller or the Master Servicer). The Mortgage Loans may be
prepaid by the Mortgagors at any time. However, Mortgage Loans secured by first
liens on Mortgaged Properties in ______ are subject to a prepayment penalty for
the first 12 months following origination. In addition, Mortgage Loans secured
by Mortgaged Properties in other jurisdictions may be subject to prepayment
penalties to the extent permitted by law.
THE VARIABLE RATE CERTIFICATES
The yield to investors in the Class A-7 Certificates will be sensitive
to, among other things, the level of the Loan Index and the Certificate Index.
As described herein, the Certificate Rate for the Class A-7 Certificates may in
no event exceed the lesser of the Class A-7 Formula Rate and the Loan Group 2
Net Funds Cap, which depends, in large part, on the Loan Rates of the Loan Group
2 Mortgage Loans in effect at the beginning of the related Due
S-37
<PAGE> 40
Period. Although each of the Mortgage Loans in Loan Group 2 bears interest at an
adjustable rate, such rate is subject to a Periodic Rate Cap, a Lifetime Floor
and a Lifetime Cap. If the Loan Index changes substantially between Change
Dates, the adjusted Loan Rate on the related Mortgage Loan may not equal the
Loan Index plus the related Gross Margin due to the constraint of such caps and
floors. In such event, the related Loan Rate will be less than would have been
the case in the absence of such caps. In addition, the Loan Rate applicable to
any Change Date will be based on the Loan Index related to the Change Date.
Thus, if the value of the Loan Index with respect to a Mortgage Loan rises, the
lag in time before the corresponding Loan Rate increases will, all other things
being equal, slow the upward adjustment of the Loan Group 2 Net Funds Cap.
Furthermore, Mortgage Loans that have not reached their first Change Date are
more likely to be subject to the Periodic Rate Cap on their first Change Date.
See "DESCRIPTION OF THE MORTGAGE LOANS" herein.
Although the Loan Rates on the Mortgage Loans in Loan Group 2 are
subject to adjustment, the Loan Rates adjust less frequently than the
Certificate Rate and adjust by reference to the Loan Index. Changes in the
Certificate Index may not correlate with changes in the Loan Index and either
may not correlate with prevailing interest rates. It is possible that an
increased level of Certificate Index could occur simultaneously with a lower
level of prevailing interest rates, which would be expected to result in faster
prepayments, thereby reducing the weighted average life of the Class A-7
Certificates.
Although the Agreement provides a mechanism to pay any Class A-7 Basis
Risk Carryover Amount, there is no assurance that funds will be available to pay
such amount. In addition, the Policy will not cover the payment of, and the
ratings assigned to the Class A-7 Certificates do not address the likelihood of
the payment of, any such amount.
PREPAYMENT CONSIDERATIONS
Prepayments, liquidations and purchases of the Mortgage Loans in a Loan
Group (including any optional purchase by the Servicer of a Delinquent Mortgage
Loan and any optional purchase of the remaining Mortgage Loans in connection
with the termination of the Trust, in each case as described herein) will result
in distributions on the related Classes of Class A Certificates then entitled to
distributions of principal which would otherwise be distributed over the
remaining terms of such Mortgage Loans. Since the rate of payment of principal
of the Mortgage Loans will depend on future events and a variety of factors, no
assurance can be given as to such rate or the rate of principal prepayments. The
extent to which the yield to maturity of a Class of Class A Certificates in
either Certificate Group may vary from the anticipated yield will depend upon
the degree to which a Certificate of such Class is purchased at a discount or
premium, and the degree to which the timing of payments thereon is sensitive to
prepayments, liquidations and purchases of the Mortgage Loans in the related
Loan Group. An additional factor affecting the yield to maturity of the Class A
Certificates is the overcollateralization amount. The overcollateralization in
either Certificate Group will accelerate the amortization of the related Class A
Certificates relative to the amortization of the Mortgage Loans in the related
Loan Group because all Excess Spread received on the Mortgage Loans in such Loan
Group will be distributed to the related Class A Certificateholders as long as
the amount of overcollateralization is less than the required level of
overcollateralization.
The rate of prepayment on the Mortgage Loans cannot be predicted. Home
equity loans such as the Mortgage Loans have been originated in significant
volume only during the past few years and the Seller is unaware of any publicly
available studies or statistics on the rate of prepayment of such home equity
loans. Generally, home equity loans are not viewed by borrowers as permanent
financing. Accordingly, the Mortgage Loans may experience a higher rate of
prepayment than traditional first mortgage loans. The prepayment experience of
the Trust with respect to the Mortgage Loans may be affected by a wide variety
of factors, including economic conditions, prevailing interest rate levels, the
availability of alternative financing and homeowner mobility and changes
affecting the deductibility for Federal income tax purposes of interest payments
on home equity loans. The increased availability of credit to borrowers with
impaired or limited credit profiles may affect the prepayment experience on the
Mortgage Loans. As borrowers re-establish or establish an acceptable credit
profile such borrowers may be able to refinance their loans at lower rates
reflecting their improved credit profiles. Substantially all of the Mortgage
Loans contain "due-on-sale" provisions and the Servicer is required by the
Agreement to enforce such provisions, unless such enforcement is not permitted
by applicable law. The enforcement of a "due-on-sale" provision will have the
same effect as a prepayment of the related Mortgage Loan. See "CERTAIN LEGAL
ASPECTS OF LOANS--Due-on-Sale Clauses in Home Equity Loans" in the Prospectus.
S-38
<PAGE> 41
As with fixed rate obligations generally, the rate of prepayment on a
pool of mortgage loans with fixed rates such as the Mortgage Loans in Loan Group
1 is affected by prevailing market rates for mortgage loans of a comparable term
and risk level. When the market interest rate is below the mortgage coupon,
mortgagors may have an increased incentive to refinance their mortgage loans.
Depending on prevailing market rates, the future outlook for market rates and
economic conditions generally, some mortgagors may sell or refinance mortgaged
properties in order to realize their equity in the mortgaged properties, to meet
cash flow needs or to make other investments.
All of the Mortgage Loans in Loan Group 2 are adjustable-rate mortgage
loans. As is the case with conventional fixed-rate mortgage loans,
adjustable-rate mortgage loans may be subject to a greater rate of principal
prepayments in a declining interest rate environment. For example, if prevailing
interest rates fall significantly, adjustable-rate mortgage loans could be
subject to higher prepayment rates than if prevailing interest rates remain
constant because the availability of fixed-rate mortgage loans at competitive
interest rates may encourage mortgagors to refinance their adjustable-rate
mortgage loans to "lock in" a lower fixed interest rate. However, no assurance
can be given as to the level of prepayments that the Mortgage Loans will
experience.
In addition to the foregoing factors affecting the weighted average
lives of the Class A Certificates, the use of Excess Spread to pay principal of
the Class A Certificates to the extent required by the Agreement will result in
acceleration of the Class A-1 and Class A-7 Certificates as applicable relative
to the amortization of the Mortgage Loans in the related Loan Group in the early
months of the transaction and may accelerate the first date on which each other
Class of Group 1 Certificates will begin to receive distributions of principal.
This acceleration feature creates overcollateralization which results from the
excess of the aggregate Principal Balance of the Mortgage Loans in a Loan Group
over the Certificate Group Principal Balance of the related Certificate Group.
Once the required level of overcollateralization for a Certificate Group is
reached, the acceleration feature will cease, unless necessary to maintain the
required level of overcollateralization for such Certificate Group.
PAYMENT DELAY FEATURE OF FIXED RATE CERTIFICATES
The effective yield to the Certificateholders of each Class of Fixed
Rate Certificates will be lower than the yield otherwise produced by the
Certificate Rate for each such Class and the purchase price of such Certificates
because distributions will not be payable to the Certificateholders until the
25th day of the month following the month of accrual (without any additional
distribution of interest or earnings thereon in respect of such delay).
MANDATORY PREPAYMENT
In the event that on the Closing Date the aggregate principal balance of
the Mortgage Loans in a Loan Group is less than the related Certificate Group
Principal Balance, the holders of the Class A-1 Certificates in the case of
Certificate Group 1 and the holders of the Class A-7 Certificates in the case of
Certificate Group 2 will receive, on the first Distribution Date, an additional
distribution allocable to principal in an amount equal to the difference, if
any, between the aggregate Principal Balance of all Mortgage Loans in the
related Loan Group as of the Cut-Off Date and the related Certificate Group
Principal Balance. Although no assurances can be given, the Seller intends that
the principal amount of Mortgage Loans in each Loan Group in the Trust on the
Closing Date will equal the related Certificate Group Principal Balance.
Accordingly, there should be no material principal prepayment to the
Certificateholders due to a lack of Subsequent Mortgage Loans.
INITIAL DISTRIBUTION DATE
With respect to a certain number of the Loan Group 1 Initial Mortgage
Loans and the Loan Group 2 Initial Mortgage Loans, the related Class A
Certificateholders will receive a distribution of principal reflecting two
installments of principal during the first Due Period. As a result, such Class A
Certificateholders will receive a larger payment in respect of principal on the
initial Distribution Date than would have been the case if the first Due Period
were a one-month period.
WEIGHTED AVERAGE LIVES
S-39
<PAGE> 42
Generally, greater than anticipated prepayments of principal will
increase the yield on Class A Certificates purchased at a price less than par
and will decrease the yield on Class A Certificates purchased at a price greater
than par. The effect on an investor's yield due to principal payments on the
Mortgage Loans occurring at a rate that is faster (or slower) than the rate
anticipated by the investor in the period immediately following the issuance of
the Certificates will not be entirely offset by a subsequent like reduction (or
increase) in the rate of principal payments. The weighted average life of the
Class A Certificates will also be affected by the amount and timing of
delinquencies and defaults on the Mortgage Loans and the recoveries, if any, on
Liquidated Mortgage Loans and foreclosed properties.
The "weighted average life" of a Certificate refers to the average
amount of time that will elapse from the date of issuance to the date each
dollar in respect of principal of such Certificate is repaid. The weighted
average life of any Class of the Class A Certificates will be influenced by,
among other factors, the rate at which principal payments are made on the
Mortgage Loans, including final payments made upon the maturity of the Balloon
Loans.
Prepayments on Mortgage Loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement
represents an assumed rate of prepayment each month relative to the then
outstanding principal balance of the pool of mortgage loans for the life of such
mortgage loans. A 100% Prepayment Assumption (the "Prepayment Assumption")
assumes a conditional prepayment rate ("CPR") of 4.0% per annum of the
outstanding principal balance of such mortgage loans in the first month of the
life of the mortgage loans and an additional 1.455% (precisely 16/11 percent per
annum) in each month thereafter until the twelfth month; beginning in the
twelfth month and in each month thereafter during the life of the mortgage
loans, a conditional prepayment rate of 20% per annum each month is assumed. As
used in the table below, 0% Prepayment Assumption assumes a conditional
prepayment rate equal to 0% of the applicable Prepayment Assumption, i.e., no
prepayments. Correspondingly, 120% Prepayment Assumption assumes prepayment
rates equal to 120% of the Prepayment Assumption, and so forth. The Prepayment
Assumption does not purport to be a historical description of prepayment
experience or a prediction of the anticipated rate of prepayment of any pool of
mortgage loans, including the Mortgage Loans. The Representative believes that
no existing statistics of which it is aware provide a reliable basis for holders
of Class A Certificates to predict the amount or the timing of receipt of
prepayments on the Mortgage Loans.
Since the tables were prepared on the basis of the assumptions in the
following paragraph, there are discrepancies between characteristics of the
actual Mortgage Loans and the characteristics of the Mortgage Loans assumed in
preparing the tables. Any such discrepancy may have an effect upon the
percentages of the Principal Balances outstanding and weighted average lives of
the Certificates set forth in the tables. In addition, since the actual Mortgage
Loans in the Trust have characteristics which differ from those assumed in
preparing the tables set forth below, the distributions of principal on the
Certificates may be made earlier or later than as indicated in the tables.
For the purposes of the tables below, it is assumed that: (i) the
Mortgage Loans consist of pools of loans with the level-pay and balloon
characteristics as set forth below, (ii) the amount of interest accrued on the
Mortgage Loans is reduced by amounts sufficient to pay servicing fees, trustee
fees and the premium for the Policy, (iii) the Closing Date for the Class A
Certificates is _______ __, 199__, (iv) distributions on the Class A
Certificates are made on the 25th day of each month regardless of the date on
which the Distribution Date actually occurs, commencing in _____ 199__, and are
made in accordance with the priorities described herein, (v) the scheduled
monthly payments of principal and interest on each Mortgage Loan will be timely
delivered on the first day of each month (with no defaults) commencing in the
calendar month following their delivery, (vi) all prepayments are prepayments in
full received on the first day of each month commencing in the calendar month
following their delivery with 30 days of accrued interest, (vii) the Mortgage
Loan prepayment rates are a multiple of the related Prepayment Assumption,
(viii) the prepayment assumed to be received during the first Due Period has
been increased to reflect that the first Due Period is longer than subsequent
Due Periods, (ix) the optional termination is not exercised, (x) each Class of
Class A Certificates has the respective Certificate Rate and initial Class
Principal Balance as set forth herein, (xi) the overcollateralization levels for
the Initial Mortgage Loans apply to the Subsequent Mortgage Loans, are set
initially as specified in the Agreement, and thereafter decrease in accordance
with the provisions of the Agreement, (xii) the Loan Index is ______% on each
Change Date, (xiii) the Certificate Index for each Interest Period will be
______%, and (xiv) the maximum amount of Subsequent Mortgage Loans is purchased
by the Trust on the Closing Date.
S-40
<PAGE> 43
<TABLE>
<CAPTION>
ORIGINAL. ORIGINAL REMAINING
TERM TO AMORTIZATION TERM TO
AMORTIZATION METHODOLOGY PRINCIPAL LOAN MATURITY TERM MATURITY
GROUP 1 MORTGAGE LOANS BALANCE RATE (MONTHS) (MONTHS) (MONTHS)
- ---------------------- -------- --- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Level Pay................... $ %
Level Pay................... $ %
Level Pay................... $ %
Level Pay................... $ %
Balloon..................... $ %
</TABLE>
<TABLE>
<CAPTION>
PERIODIC
NUMBER RATE CAP PERIOD
CURRENT ORIGINAL REMAINING OF (FIRST RATE CAP
LOAN TERM TERM TO MONTHS RESET (SUBSEQUENT
PRINCIAL RATE TO MATURITY GROSS TO NEXT DATE) RESET
BALANCE (MONTHS) MATURITY (MONTHS) MARGIN RATE CHANGE DATES)
-------- ------ -------- -------- ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GROUP 2
MORTGAGE LOANS
Level Pay.. $ % % % %
Level Pay.. $ % % % %
Level Pay.. $ % % % %
Level Pay.. $ % % % %
Level Pay.. $ % % % %
Level Pay.. $ % % % %
</TABLE>
Subject to the foregoing discussion and assumptions, the following
tables set forth the percentages of the initial Class Principal Balance of each
Class of Class A Certificates that would be outstanding after each of the dates
shown at various percentages of Prepayment Assumption and the corresponding
weighted average lives.
S-41
<PAGE> 44
<TABLE>
<CAPTION>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-1 CLASS A-2
-------------------------------- ----------------------------------
DISTRIBUTION DATE 0% 50% 100% 120% 150% 200% 0% 50% 100% 120% 150% 200%
- ----------------- --- ---- ---- ---- ---- -- --- ---- ---- ---- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
Percentage
March 25,
1998......
March 25,
1999......
March 25,
2000......
March 25,
2001......
March 25,
2002......
March 25,
2003......
March 25,
2004......
March 25,
2005......
March 25,
2006......
March 25,
2007......
March 25,
2008......
March 25,
2009......
March 25,
2010......
March 25,
2011......
March 25,
2012......
March 25,
2013......
March 25,
2014......
March 25,
2015......
March 25,
2016......
March 25,
2017......
March 25,
2018......
March 25,
2019......
March 25,
2020......
March 25,
2021......
March 25,
2022......
March 25,
2023......
March 25,
2024......
March 25,
2025......
March 25,
2026......
March 25,
2027......
Weighted
Average
Life
(years)*..
</TABLE>
<TABLE>
<CAPTION>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-3 CLASS A-4
------------------------------- -----------------------------------
DISTRIBUTION DATE 0% 50% 100% 120% 150% 200% 0% 50% 100% 120% 150% 200%
- ----------------- --- -- ---- ---- ---- --- --- --- ---- ---- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
Percentage
March 25,
1998......
March 25,
1999......
March 25,
2000......
March 25,
2001......
March 25,
2002......
March 25,
2003......
March 25,
2004......
March 25,
2005......
March 25,
2006......
March 25,
2007......
March 25,
2008......
March 25,
2009......
March 25,
2010......
March 25,
2011......
March 25,
2012......
March 25,
2013......
March 25,
2014......
March 25,
2015......
March 25,
2016......
March 25,
2017......
March 25,
2018......
March 25,
2019......
March 25,
2020......
March 25,
2021......
March 25,
2022......
March 25,
2023......
March 25,
2024......
March 25,
2025......
March 25,
2026......
March 25,
2027......
Weighted
Average
Life
(years)*..
</TABLE>
- --------------
* The weighted average life of a Certificate of any Class is determined by
(i) multiplying the amount of each distribution in reduction of the
related Certificate Principal Balance by the number of years from the
date of issuance of the Certificate to the related Distribution Date,
(ii) adding the results, and (iii) dividing the sum by the highest
related Certificate Principal Balance of the Certificate.
S-42
<PAGE> 45
<TABLE>
<CAPTION>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION - (CONTINUED)
Distribution Date Class A-5 Class A-6 Class A-7
- ----------------- ----------------------------- --------------------------- ---------------------
<S> <C> <C> <C>
Initial Percentage...............
March 25, 1998...................
March 25, 1999...................
March 25, 2000...................
March 25, 2001...................
March 25, 2002...................
March 25, 2003...................
March 25, 2004...................
March 25, 2005...................
March 25, 2006...................
March 25, 2007...................
March 25, 2008...................
March 25, 2009...................
March 25, 2010...................
March 25, 2011...................
March 25, 2012...................
March 25, 2013...................
March 25, 2014...................
March 25, 2015...................
March 25, 2016...................
March 25, 2017...................
March 25, 2018...................
March 25, 2019...................
March 25, 2020...................
March 25, 2021...................
March 25, 2022...................
March 25, 2023...................
March 25, 2024...................
March 25, 2025...................
March 25, 2026...................
March 25, 2027...................
Weighted Average Life (years)*...
</TABLE>
- --------------------
* The weighted average life of a Certificate of any Class is determined by
(i) multiplying the amount of each distribution in reduction of the
related Certificate Principal Balance by the number of years from the
date of issuance of the Certificate to the related Distribution Date,
(ii) adding the results, and (iii) dividing the sum by the highest
related Certificate Principal Balance of the Certificate.
S-43
<PAGE> 46
DESCRIPTION OF THE CERTIFICATES
The Certificates will be issued pursuant to the Agreement. A form of the
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus Supplement and the Prospectus is a part. The following summaries
together with the information in the Prospectus under the headings "DESCRIPTION
OF THE SECURITIES" and "THE AGREEMENTS" describe the material provisions of the
Agreement. The summaries do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, all of the provisions of the
Agreement. Wherever particular sections or defined terms of the Agreement are
referred to, such sections or defined terms are hereby incorporated herein by
reference.
GENERAL
The Class A Certificates will be issued in denominations of $25,000 and
integral multiples of $1,000 in excess thereof and will evidence specified
undivided interests in the Trust. The property of the Trust will consist of, to
the extent provided in the Agreement: (i) the Mortgage Loans; (ii) payments
received after the Cut-Off Date, other than payments of interest on the Initial
Mortgage Loans due on or before __________; (iii) Mortgaged Properties relating
to the Mortgage Loans that are acquired by foreclosure or deed in lieu of
foreclosure together with all collections thereon and proceeds thereof; (iv) the
Collection Account and the Distribution Account and such assets deposited
therein from time to time and any investment proceeds thereof; and (v) the
Initial Interest Coverage Account and Funding Account and funds on deposit
therein. In addition, the Seller has caused the Certificate Insurer to issue an
irrevocable and unconditional certificate guaranty insurance policy (the
"Policy") for the benefit of the Holders of the Senior Certificates pursuant to
which it will guarantee payments to such Senior Certificateholders as described
herein. Definitive Certificates (as defined under "DESCRIPTION OF THE
SECURITIES--Book-Entry Securities" in the Prospectus), if issued, will be
transferable and exchangeable at the corporate trust office of the Trustee,
which will initially act as Certificate Registrar. See "--Book-Entry
Certificates" below. No service charge will be made for any registration of
exchange or transfer of Certificates, but the Trustee may require payment of a
sum sufficient to cover any tax or other governmental charge.
Each Mortgage Loan in the Trust will be assigned to one of two mortgage
loan groups ("Loan Group 1" and "Loan Group 2," respectively, and each a "Loan
Group"). Distributions on the Class A-1, Class A-2, Class A-3, Class A-4, Class
A-5, Class A-6 and Class S Certificates (collectively, the "Group 1
Certificates") will be calculated by reference to the Mortgage Loans assigned to
Loan Group 1. Distributions on the Class A-7 Certificates will be calculated by
reference to the Mortgage Loans assigned to Loan Group 2. The principal balance
of a Class of Class A Certificates (each, a "Class Principal Balance") on any
Distribution Date is equal to the applicable Class Principal Balance on the
Closing Date minus the aggregate of amounts actually distributed as principal to
the holders of such Class of Class A Certificates prior to such date. On any
date, the "Certificate Group Principal Balance" is the aggregate of the Class
Principal Balances of the Certificates in such Certificate Group on such date.
The Person in whose name a Certificate is registered as such in the
Certificate Register is referred to herein as a "Certificateholder."
The "Percentage Interest" of a Class A Certificate as of any date of
determination will be equal to the percentage obtained by dividing the
denomination of such Certificate by the Class Principal Balance for the related
Class of Class A Certificates as of the Cut-Off Date.
SEPARATE REMIC STRUCTURE
For federal income tax purposes, the Trust other than the Funding
Account and the Initial Interest Coverage Account created by the Agreement will
include two or more segregated asset pools, each of which will be treated as a
separate REMIC. The assets of REMIC I will generally consist of the Mortgage
Loans. The assets of each other REMIC will generally consist of uncertified
regular interests issued by a REMIC, which in the aggregate will correspond to
the Certificates.
S-44
<PAGE> 47
BOOK-ENTRY CERTIFICATES
The Class A Certificates will be book-entry Certificates (the
"Book-Entry Certificates"). Persons acquiring beneficial ownership interests in
the Class A Certificates ("Certificate Owners") will hold their Class A
Certificates through the Depository Trust Company ("DTC") in the United States,
or Cedel or Euroclear in Europe, if they are participants of such systems, or
indirectly through organizations which are participants in such systems. The
Book-Entry Certificates will be issued in one or more certificates which equal
the aggregate principal balance of the Class A Certificates and will initially
be registered in the name of Cede & Co., the nominee of DTC. Cedel and Euroclear
will hold omnibus positions on behalf of their participants through customers"
securities accounts in Cedel's and Euroclear's names on the books of their
respective depositaries which in turn will hold such positions in customers"
securities accounts in the depositaries" names on the books of DTC. Citibank
will act as depositary for Cedel and Chase will act as depositary for Euroclear
(in such capacities, individually the "Relevant Depositary" and collectively the
"European Depositaries"). Investors may hold such beneficial interests in the
Book-Entry Certificates in minimum denominations representing Certificate
Principal Balances of $25,000 and in integral multiples of $1,000 in excess
thereof. Unless and until Definitive Certificates are issued, it is anticipated
that the only "Certificateholder" of the Class A Certificates will be Cede &
Co., as nominee of DTC. Certificate Owners will not be Certificateholders as
that term is used in the Agreement. Certificate Owners are only permitted to
exercise their rights indirectly through Participants and DTC. For a description
of the features of the book-entry registration system, see "DESCRIPTION OF THE
SECURITIES--Book-Entry Securities" in the Prospectus. For information with
respect to tax documentation procedures relating to the Certificates, see
"FEDERAL INCOME TAX CONSIDERATIONS--Federal Income Tax Consequences to Foreign
Investors" and "--Backup Withholding" herein and "GLOBAL CLEARANCE, SETTLEMENT
AND TAX DOCUMENTATION PROCEDURES--Certain U.S.
Federal Income Tax Documentation Requirements" in Annex I hereto.
Neither the Seller, the Master Servicer nor the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Certificates held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
ASSIGNMENT OF MORTGAGE LOANS
On the Closing Date the Seller will transfer to the Trust all of its
right, title and interest in and to each Mortgage Loan, the related mortgage
note, mortgages and other related documents (collectively, the "Related
Documents"), including all payments received after the Cut-Off Date other than
payments of interest on the Initial Mortgage Loans due on or before ___________.
The Trustee, concurrently with such initial transfer, will deliver the
Certificates to the Seller. Each Mortgage Loan transferred to the Trust will be
identified on a schedule (the "Mortgage Loan Schedule") delivered to the Trustee
pursuant to the Agreement. Such schedule will include information as to the
Principal Balance of each Mortgage Loan as of the Cut-Off Date, as well as
information with respect to the Loan Rate.
The Agreement will require that, within the time period specified
therein, the Seller will deliver to the Trustee (or a custodian, as the
Trustee's agent for such purpose) the Mortgage Loans endorsed to the Trustee and
the Related Documents. In lieu of delivery of original mortgages, if such
original is not available, the Seller may deliver true and correct copies
thereof.
Under the terms of the Agreement, the Seller will promptly and in no
event later than 30 days after the Closing Date prepare and record assignments
of the mortgages related to each Mortgage Loan in favor of the Trustee (unless
opinions of counsel satisfactory to the Rating Agencies and the Certificate
Insurer are delivered to the Trustee and the Certificate Insurer to the effect
that recordation of such assignments is not required in the relevant
jurisdictions to protect the interests of the Trustee in the Mortgage Loans). If
the recording information with respect to any assignment of Mortgage is
unavailable within 30 days of the Closing Date, such assignment will be prepared
and recorded within 30 days after receipt of such information, but in no event
later than one year after the Closing Date.
Within 30 days of the Closing Date the Trustee will review the Mortgage
Loans and the Related Documents pursuant to the Agreement and if any Mortgage
Loan or Related Document is found to be defective in any material
S-45
<PAGE> 48
respect (a "Defective Mortgage Loan") and such defect is not cured within 90
days following notification thereof to the Seller and the Representative by the
Trustee, the Representative will be obligated to either (i) cause an Eligible
Substitute Mortgage Loan to be substituted for such Mortgage Loan; however, such
substitution is permitted only within two years of the Closing Date and may not
be made unless an opinion of counsel is provided to the effect that such
substitution will not disqualify either REMIC as a REMIC or result in a
prohibited transaction tax under the Code or (ii) purchase such Mortgage Loan at
a price (the "Purchase Price") equal to the outstanding Principal Balance of
such Mortgage Loan as of the date of purchase, plus unpaid interest thereon from
the date interest was last paid or with respect to which interest was advanced
and not reimbursed through the end of the calendar month in which the purchase
occurred, computed at the Loan Rate, net of the Servicing Fee if the
Representative is the Master Servicer, plus if the Representative is not the
Master Servicer the amount of any unreimbursed Servicing Advances made by the
Master Servicer. The Purchase Price will be deposited in the Collection Account
on or prior to the next succeeding Determination Date after such obligation
arises. The obligation of the Representative to repurchase or substitute for a
Defective Mortgage Loan is the sole remedy regarding any defects in the Mortgage
Loans and Related Documents available to the Trustee or the Certificateholders.
In connection with the substitution of an Eligible Substitute Mortgage
Loan, the Represenative will be required to deposit in the Collection Account on
or prior to the next succeeding Determination Date after such obligation arises
an amount (the "Substitution Adjustment") equal to the excess of the Principal
Balance of the related Defective Mortgage Loan over the Principal Balance of
such Eligible Substitute Mortgage Loan.
An "Eligible Substitute Mortgage Loan" is a mortgage loan to be
substituted for a Defective Mortgage Loan which must, on the date of such
substitution, (i) have an outstanding principal balance after deducting all
scheduled principal payments due in the month of such substitution (or in the
case of a substitution of more than one Mortgage Loan for a Defective Mortgage
Loan, an aggregate Principal Balance), not in excess of, and not more than 5%
less than, the Principal Balance of the Defective Mortgage Loan; (ii) have a
Loan Rate not less than the Loan Rate of the Defective Mortgage Loan and not
more than 1% in excess of the Loan Rate of such Defective Mortgage Loan; (iii)
have a mortgage of the same or higher level of priority as the mortgage relating
to the Defective Mortgage Loan; (iv) have a remaining term to maturity not more
than six months earlier and not later than the remaining term to maturity of the
Defective Mortgage Loan; and (v) comply with each representation and warranty as
to the Mortgage Loans set forth in the Agreement (deemed to be made as of the
date of substitution).
The Representative will make certain representations and warranties as
to the accuracy in all material respects of certain information furnished to the
Trustee with respect to each Mortgage Loan (e.g., Cut-Off Date Principal Balance
and the Loan Rate). In addition, the Representative will represent and warrant,
on the Closing Date, that, among other things: (i) at the time of transfer to
the Trust, the Seller has transferred or assigned all of its right, title and
interest in each Mortgage Loan and the Related Documents, free of any lien; and
(ii) each Mortgage Loan complied, at the time of origination, in all material
respects with applicable state and federal laws. Upon discovery of a breach of
any such representation and warranty which materially and adversely affects the
interests of the Certificateholders or the Certificate Insurer in the related
Mortgage Loan and Related Documents, the Representative will have a period of 60
days after discovery or notice of the breach to effect a cure. If the breach
cannot be cured within the 60-day period, the Representative will be obligated
to (i) cause an Eligible Substitute Mortgage Loan to be substituted for such
Mortgage Loan or (ii) purchase such Mortgage Loan from the Trust. The same
procedure and limitations that are set forth above for the substitution or
purchase of Defective Mortgage Loans as a result of deficient documentation
relating thereto will apply to the substitution or purchase of a Mortgage Loan
as a result of a breach of a representation or warranty in the Agreement that
materially and adversely affects the interests of the Certificateholders or the
Certificate Insurer.
S-46
<PAGE> 49
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND DISTRIBUTION
ACCOUNT
The Master Servicer will establish and maintain in the name of the
Trustee a separate trust account (the "Collection Account") for the benefit of
the holders of the Certificates. The Collection Account will be an Eligible
Account (as defined herein). Subject to the investment provisions described in
the following paragraphs, upon receipt by the Servicer of amounts in respect of
the Mortgage Loans (excluding amounts representing the Servicing Fee,
reimbursement for Monthly Advances and Servicer Advances and insurance proceeds
to be applied to the restoration or repair of a Mortgaged Property or similar
items and amounts in respect of interest due on or before _________ __, 199__),
the Master Servicer will deposit, or cause the Sub-Servicer to deposit, such
amounts in the Collection Account. Amounts so deposited may be invested in
Eligible Investments (as described in the Agreement) maturing no later than one
Business Day prior to the date on which the amount on deposit therein is
required to be deposited in the Distribution Account or on such Distribution
Date if approved by the Rating Agencies and the Certificate Insurer.
The Trustee will establish an account (the "Distribution Account") into
which will be deposited amounts withdrawn from the Collection Account for
distribution to Certificateholders on each Distribution Date. The Distribution
Account will be an Eligible Account. Amounts on deposit therein (other than
Insured Payments) may be invested in Eligible Investments maturing on or before
the Business Day prior to the related Distribution Date.
An "Eligible Account" is a segregated account that is (i) maintained
with a depository institution whose debt obligations at the time of any deposit
therein have the highest short-term debt rating by the Rating Agencies and whose
accounts are fully insured by either the Savings Association Insurance Fund
("SAIF") or the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
Corporation established by such fund with a minimum long-term unsecured debt
rating of A2 by Moody's and A by Standard & Poor's, and which is any of (A) a
federal savings and loan association duly organized, validly existing and in
good standing under the federal banking laws, (B) an institution duly organized,
validly existing and in good standing under the applicable banking laws of any
state, (C) a national banking association duly organized, validly existing and
in good standing under the federal banking laws, (D) a principal subsidiary of a
bank holding company, and in each case of (A)-(D) above, approved in writing by
the Certificate Insurer; (ii) a segregated trust account maintained with the
corporate trust department of a federal or state chartered depository
institution or trust company, having capital and surplus of not less than
$50,000,000, acting in its fiduciary capacity or (iii) otherwise acceptable to
each Rating Agency and the Certificate Insurer as evidenced by a letter from
each Rating Agency and the Certificate Insurer to the Trustee, without reduction
or withdrawal of the then current ratings of the Certificates.
Eligible Investments are specified in the Agreement and are limited to
investments which meet the criteria of the Rating Agencies from time to time as
being consistent with their then current ratings of the Certificates.
ADVANCES
Not later than the close of business on the Determination Date for each
Distribution Date, the Master Servicer will remit to the Trustee for deposit in
the Collection Account an amount, to be distributed on the related Distribution
Date, equal to the sum of the interest accrued on each Mortgage Loan through the
related Due Date but not received by the Master Servicer or the applicable
Sub-Servicer as of the close of business on the last day of the related Due
Period (net of the Servicing Fee) (the "Monthly Advance"). Such obligation of
the Master Servicer continues with respect to each Mortgage Loan until such
Mortgage Loan becomes a Liquidated Mortgage Loan.
In the course of performing its master servicing obligations, the Master
Servicer will pay all reasonable and customary "out-of-pocket" costs and
expenses incurred in the performance of its servicing obligations, including,
but not limited to, the cost of (i) the preservation, restoration and protection
of the Mortgaged Properties, (ii) any enforcement or judicial proceedings,
including foreclosures, and (iii) the management and liquidation of Mortgaged
Properties acquired in satisfaction of the related Mortgage. Each such
expenditure will constitute a "Servicing Advance."
The Master Servicer's right to reimbursement for Servicing Advances is
limited to late collections on the related Mortgage Loan, including Liquidation
Proceeds, released mortgaged property proceeds, Insurance Proceeds and such
other amounts as may be collected by the Master Servicer or the applicable
Sub-Servicer from the related
S-47
<PAGE> 50
Mortgagor or otherwise relating to the Mortgage Loan in respect of which such
unreimbursed amounts are owed. The Master Servicer's right to reimbursement for
Monthly Advances is limited to late collections of interest on any Mortgage Loan
and to Liquidation Proceeds and Insurance Proceeds on the related Mortgage Loan.
The Master Servicer's right to such reimbursements is prior to the rights of
Certificateholders.
Notwithstanding the foregoing, the Master Servicer is not required to
make any Monthly Advance or Servicing Advance if in the good faith judgment and
sole discretion of the Master Servicer, the Master Servicer determines that such
advance will not be ultimately recoverable from collections received from the
Mortgagor in respect of the related Mortgage Loan or other recoveries in respect
of such Mortgage Loan (a "Nonrecoverable Advance"). However, if any Servicing
Advance or Monthly Advance is determined in good faith by the Master Servicer to
be non-recoverable from such sources, the amount of such Non-Recoverable
Advances may be reimbursed to the Master Servicer from other amounts on deposit
in the Collection Account.
DISTRIBUTION DATES
On each Distribution Date, the Holders of the Senior Certificates will
be entitled to receive, from amounts then on deposit in the Distribution
Account, to the extent of funds available therefor in accordance with the
priority and in the amounts described below under "--Distributions,"
distributions in an aggregate amount equal to the sum of (a) the related Class
Interest Distribution for each Class of Senior Certificates and (b) the Class A
Principal Distribution for each Certificate Group. Distributions will be made
(i) in immediately available funds to holders of Class A Certificates holding
Certificates the aggregate principal balance of which is at least $1,000,000, by
wire transfer or otherwise, to the account of such Certificateholder at a
domestic bank or other entity having appropriate facilities therefor, if such
Certificateholder has so notified the Trustee, or (ii) by check mailed to the
address of the person entitled thereto as it appears on the register (the
"Certificate Register") maintained by the Trustee as registrar (the "Certificate
Registrar").
DEPOSITS TO THE DISTRIBUTION ACCOUNT
No later than 11:00 a.m. (New York time) two Business Days prior to each
Distribution Date, the following amounts in respect of a Loan Group and the
related Due Period are required to be deposited into the Distribution Account
and will constitute the "Available Funds" for the related Certificate Group for
such Distribution Date: (i) scheduled and unscheduled payments of principal and
interest on the Mortgage Loans in such Loan Group (net of amounts representing
the Servicing Fee with respect to each Mortgage Loan in the related Loan Group
and reimbursement for related Monthly Advances and Servicing Advances); (ii) Net
Liquidation Proceeds and Insurance Proceeds with respect to the Mortgage Loans
in such Loan Group (net of amounts applied to the restoration or repair of a
Mortgaged Property); (iii) the Purchase Price for repurchased Defective Mortgage
Loans with respect to the Mortgage Loans in such Loan Group and any related
Substitution Adjustment Amounts; (iv) payments from the Servicer in connection
with (a) Monthly Advances, (b) Prepayment Interest Shortfalls and (c) the
termination of the Trust with respect to the Mortgage Loans in such Loan Group
as provided in the Agreement; (v) any amounts paid under the Policy in respect
of the related Certificate Group; (vi) transfers from the Initial Interest
Coverage Account of funds for the payment of interest on the Class A
Certificates; and (vii) in respect of the initial Distribution Date, an amount
equal to the amount by which the related Certificate Group Principal Balance
exceeds the aggregate Principal Balance of all Mortgage Loans in such Loan Group
of the related Cut-Off Date.
DISTRIBUTIONS
On each Distribution Date the Trustee will withdraw from the
Distribution Account the sum of (a) the Available Funds with respect to the
Group 1 Certificates and (b) the Available Funds with respect to the Group 2
Certificates (such sum, the "Amount Available"), and make the following
disbursements and transfers as described below and to the extent of the Amount
Available (except that amounts paid under the Policy will only be available for
distribution to Holders of the Senior Certificates):
A. With respect to the Group 1 Certificates, the Available Funds with
respect to such Certificate Group in the following order of priority:
S-48
<PAGE> 51
(i) to the Trustee, the Trustee fee for Loan Group 1 for such
Distribution Date and to the Certificate Insurer, the amount
owing to the Certificate Insurer under the Insurance Agreement
for the premium payable in respect of the Group 1 Certificates;
(ii) concurrently to the Holders of the Class S, Class A-1,
Class A-2, Class A-3, Class A-4, Class A-5 and Class A-6
Certificates, an amount equal to the related Class Interest
Distribution for such Distribution Date;
(iii) to the Holders of the Class A-6 Certificates, the
product of (x) the applicable Priority Percentage and (y) the
product of (A) the Pro-Rata Percentage and (B) the Class A
Principal Distribution (other than the portion of the Class A
Principal Distribution constituting Distributable Excess Spread),
until the Class Principal Balance thereof is reduced to zero;
(iv) sequentially, to the Holders of the Class A-1, Class
A-2, Class A-3, Class A-4, Class A-5 and Class A-6 Certificates,
in that order, until the respective Class Principal Balance of
each such Class is reduced to zero, the remaining Class A
Principal Distribution (other than the portion of the Class A
Principal Distribution constituting the Distributable Excess
Spread) for such Distribution Date; and
(v) to the Certificate Insurer, the amount owing to the
Certificate Insurer under the Insurance Agreement for
reimbursement for prior draws made on the Policy in respect of
the Group 1 Certificates.
B. With respect to the Group 2 Certificates, the Available Funds with
respect to such Certificate Group in the following order of priority:
(i) to the Trustee, the Trustee fee for Loan Group 2 for such
Distribution Date and to the Certificate Insurer, the amount
owing to the Certificate Insurer under the Insurance Agreement
for the premium payable in respect of the Group 2 Certificates;
(ii) to the Holders of the Class A-7 Certificates, an amount
equal to the Class Interest Distribution for the Class A-7
Certificates for such Distribution Date;
(iii) to the Holders of the Class A-7 Certificates, the
related Class A Principal Distribution for the Class A-7
Certificates (other than the portion of the Class A Principal
Distribution constituting the Distributable Excess Spread) for
such Distribution Date; and
(iv) to the Certificate Insurer, the amount owing to the
Certificate Insurer under the Insurance Agreement for
reimbursement for prior draws made on the Policy in respect of
the Group 2 Certificates.
C. On any Distribution Date, to the extent Available Funds for a
Certificate Group are insufficient to make the distributions specified in A or B
above, Available Funds for the other Certificate Group remaining after making
the distributions required to be made pursuant to A or B, as applicable, for
such other Certificate Group shall be distributed to the extent of such
insufficiency in accordance with the priorities for distribution set forth in
the subclause above with respect to the Certificate Group experiencing such
insufficiency.
D. The related remaining Available Funds, up to the related
Distributable Excess Spread for such Distribution Date as follows: (i) to the
Holders of the Class A-6 Certificates, the product of (x) the applicable
Priority Percentage, and (y) the product of (A) the Pro-Rata Percentage and (B)
the Distributable Excess Spread, until the Class Principal Balance thereof is
reduced to zero; and (ii) sequentially, to the Holders of the Class A-1, Class
A-2, Class A-3, Class A-4, Class A-5 and Class A-6 Certificates, in that order,
until the respective Class Principal Balance of each such Class is reduced to
zero.
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<PAGE> 52
E. To the Holders of the Class A-7 Certificates, to the extent of the
related Available Funds remaining, the related Distributable Excess Spread for
such Distribution Date, until the Class A-7 Principal Balance thereof is reduced
to zero.
F. After making the distributions referred to in subclauses A, B, C, D
and E above, the Trustee shall make distributions in the following order of
priority, to the extent of the balance of the Amount Available:
(i) (a) the excess of the related Distributable Excess Spread
over the amount thereof distributed pursuant to subclause D above
as follows: to the Holders of the Class A-6 Certificates, the
product of (x) the applicable Priority Percentage, (y) the
Pro-Rata Percentage and (z) such excess, until the Class
Principal Balance thereof is reduced to zero; and (ii)
sequentially, to the Holders of the Class A-1, Class A-2, Class
A-3, Class A-4, Class A-5 and Class A-6 Certificates, in that
order, until the Class Principal Balance of each such Class is
reduced to zero, and (b) to the Holders of the Class A-7
Certificates, until the Class Principal Balance thereof is
reduced to zero, the excess of the related Distributable Excess
Spread for such Distribution Date over the amount distributed to
such Certificateholders pursuant to subclause E above on such
Distribution Date;
(ii) to the Master Servicer, the amount of any accrued and
unpaid Servicing Fee;
(iii) to the Master Servicer, the amount of Nonrecoverable
Advances not previously reimbursed;
(iv) to the Certificate Insurer, any other amounts owing to
the Certificate Insurer under the Insurance Agreement;
(v) to the Holders of the Class A-7 Certificates, the Class
A-7 Basis Risk Carryover Amount but only from and to the extent
of remaining Excess Spread from Loan Group 2; and
(vi) to the Holders of one or more Classes of Certificates
which are not offered hereby.
THE CERTIFICATE RATE
The Certificate Rate for each class of Fixed Rate Certificates is set
forth on the cover page hereof.
The Certificate Rate for the Class A-7 Certificates for the first
Distribution Date is ________% per annum. The Certificate Rate on any subsequent
Distribution Date with respect to the Class A-7 Certificates will equal the
lesser of (A) Class A-7 Formula Rate and (B) the Loan Group 2 Net Funds Cap for
such Distribution Date. The "Class A-7 Formula Rate" is the sum of the
Certificate Index as of the related LIBOR Determination Date plus _____ % (or
_____% for each Distribution Date occurring after the Optional Termination
Date.) The "Loan Group 2 Net Funds Cap" for any Distribution Date will equal the
product of (x) 360/365 and (y) the difference between (A) the weighted average
of the Loan Rates of the Loan Group 2 Mortgage Loans as of the first day of the
related Due Period, weighted on the basis of the related Principal Balances as
of such date and (B) the sum of (i) the Servicing Fee Rate and the rates at
which the Trustee fee and the premium payable to the Certificate Insurer with
respect to the Group 2 Certificates are calculated and (ii) commencing with the
thirteenth Distribution Date, _____% per annum.
With respect to each Distribution Date, the "Certificate Index" will
equal the interbank offered rate for one-month United States dollar deposits in
the London market as quoted on Telerate Page 3750 as of 11:00 A.M., London time,
on the second LIBOR Business Day prior to the first day of the related Interest
Period. "Telerate Page 3750" means the display designated as page 3750 on the
Telerate Service (or such other page as may replace page 3750 on that service
for the purpose of displaying London interbank offered rates of major banks). If
such rate does not appear on such page (or such other page as may replace that
page on that service, or if such service is no longer offered, such other
service for displaying LIBOR or comparable rates as may be selected by the
Trustee after consultation with the Servicer), the rate will be the Reference
Bank Rate. The "Reference Bank Rate" will be determined on the basis of the
rates at which deposits in U.S. Dollars are offered by the reference banks
(which shall be three major banks that are engaged in transactions in the London
interbank market, selected by the Trustee after consultation with the Servicer)
as of 11:00 A.M., London time, on the day that is two LIBOR Business Days prior
to
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<PAGE> 53
the immediately preceding Distribution Date to prime banks in the London
interbank market for a period of one month in amounts approximately equal to the
sum of the Class Principal Balance of the Variable Rate Certificates then
outstanding. The Trustee will request the principal London office of each of the
reference banks to provide a quotation of its rate. If at least two such
quotations are provided, the rate will be the arithmetic mean of the quotations.
If on such date fewer than two quotations are provided as requested, the rate
will be the arithmetic mean of the rates quoted by one or more major banks in
New York City, selected by the Trustee after consultation with the Servicer, as
of 11:00 A.M., New York City time, on such date for loans in U.S. Dollars to
leading European banks for a period of one month in amounts approximately equal
to the sum of the Class Principal Balances of the Variable Rate Certificates
then outstanding. If no such quotations can be obtained, the rate will be LIBOR
for the prior Distribution Date. "LIBOR Business Day" means any day other than
(i) a Saturday or a Sunday or (i) a day on which banking institutions in the
State of New York or in the city of London, England are required or authorized
by law to be closed.
The Certificate Rate on any Distribution Date for the Class S
Certificates will equal the average of the Strip Rates, weighted on the basis of
the Class Principal Balances of the related Classes of Group 1 Certificates
immediately prior to such Distribution Date. The Strip Rates are as follows:
<TABLE>
<CAPTION>
Class Strip Rate
------ ----------
<S> <C>
A-1 %
A-2 %
A-3 %
A-4 %
A-5 %
A-6 %
</TABLE>
The "Interest Period" means, with respect to each Distribution Date and
the Fixed Rate Certificates, the period from the first day of the calendar month
preceding the month of such Distribution Date through the last day of such
calendar month. Interest on the Fixed Rate Certificates in respect of any
Distribution Date will accrue during the related Interest Period on the basis of
a 360-day year consisting of twelve 30-day months.
The "Interest Period" means, with respect to each Distribution Date and
the Variable Rate Certificates, the period from the Distribution Date in the
month preceding the month of such Distribution Date (or, in the case of the
first Distribution Date, from the Closing Date) through the day before such
Distribution Date. Interest on the Variable Rate Certificates in respect of any
Distribution Date will accrue during the related Interest Period on the basis of
a 360-day year and the actual number of days elapsed.
The "Class A-7 Basis Risk Carryover Amount" as of any Distribution Date
is equal to the sum of (A) if on such Distribution Date the Certificate Rate for
the Class A-7 Certificates is based upon the Loan Group 2 Net Funds Cap, the
excess of (i) the amount of interest the Class A-7 Certificates would otherwise
be entitled to receive on such Distribution Date had such rate been calculated
at the applicable Class A-7 Formula Rate for such Distribution Date over (ii)
the amount of interest payable on the Class A-7 Certificates at the Loan Group 2
Net Funds Cap for such Distribution Date and (B) the Class A-7 Basis Risk
Carryover Amount for all previous Distribution Dates not previously paid
together with interest thereon at a rate equal to the applicable Class A-7
Formula Rate for such Distribution Date. The Policy does not cover the payment,
nor do the ratings assigned to the Class A-7 Certificates address the likelihood
of the payment, of any Class A-7 Basis Risk Carryover Amount.
INTEREST
With respect to any Distribution Date, the amount of interest to be
distributed on the Senior Certificates, to the extent of funds available
therefor in accordance with the priorities described above under
"--Distributions," is the sum of the Class Interest Distributions for each Class
of Senior Certificates. For each Distribution Date and each class of Senior
Certificates, the "Class Interest Distribution" is the sum of (a) interest for
the related Interest Period at the related Certificate Rate on the related Class
Principal Balance or, in the case of the Class S Certificates, the Notional
Balance (the "Class Monthly Interest Distributable Amount") and (b) any Class
Interest Carryover Shortfall for such Class of Senior Certificates for such
Distribution Date. As to any Distribution Date and Class of Senior
S-51
<PAGE> 54
Certificates, "Class Interest Carryover Shortfall" is the sum of (i) the excess
of the related Class Monthly Interest Distributable Amount for the preceding
Distribution Date and any outstanding Class Interest Carryover Shortfall with
respect to such Class on such preceding Distribution Date, over the amount in
respect of interest that is actually distributed to the Holders of such Class on
such preceding Distribution Date plus (ii) one month's interest on such excess,
to the extent permitted by law, at the related Certificate Rate. The interest
entitlement described in (a) above will be reduced by such Class" pro rata share
of Civil Relief Act Interest Shortfalls, if any, for such Distribution Date.
Civil Relief Act Interest Shortfalls will not be covered by payments under the
Policy. The Class Monthly Interest Distributable Amount does not include any
Class A-7 Basis Risk Carryover Amount.
On each Distribution Date, the Class Interest Distribution for each
Class of Senior Certificates in a Certificate Group will be distributed on an
equal priority and any shortfall in the amount required to be distributed as
interest thereon to each such Class will be allocated between such Classes pro
rata based on the amount that would have been distributed on each such Class in
the absence of such shortfall.
PRINCIPAL
"Class A Principal Distribution" means, with respect to any Distribution
Date and Certificate Group, the sum of the related Class A Monthly Principal
Distributable Amount for such Distribution Date and any Class A Principal
Shortfall for such Distribution Date; provided, however, that the Class A
Principal Distribution will not exceed the related Certificate Group Principal
Balance. On any Distribution Date, the Class A Principal Distribution will be
distributed as described below.
"Class A Monthly Principal Distributable Amount" means, with respect to
any Distribution Date and Certificate Group, to the extent of funds available
therefor as described herein, the amount equal to the sum of the following
amounts (without duplication) with respect to the immediately preceding Due
Period (as defined below): (i) each payment of principal on a Mortgage Loan in
the related Loan Group received by the Master Servicer or a Sub-Servicer during
such Due Period, including all full and partial principal prepayments, (ii) the
Principal Balance as of the end of the immediately preceding Due Period of each
Mortgage Loan in the related Loan Group that became a Liquidated Mortgage Loan
for the first time during the related Due Period, (iii) the portion of the
Purchase Price allocable to principal of all repurchased Defective Mortgage
Loans in the related Loan Group with respect to such Due Period, (iv) any
Substitution Adjustment Amounts received on or prior to the previous
Determination Date and not yet distributed with respect to the related Loan
Group, (v) the amount, if any, required to be distributed on such Distribution
Date to satisfy the required level of overcollateralization for the related Loan
Group for such Distribution Date (the "Distributable Excess Spread") and (vi)
with respect to the initial Distribution Date, the amount by which the related
Certificate Group Principal Balance exceeds the aggregate Principal Balance of
the Mortgage Loans in the related Loan Group as of the Cut-Off Date.
If the required level of overcollateralization for a Certificate Group
is reduced below the then existing amount of overcollateralization (described
below) or if the required level of overcollateralization is satisfied, the
amount of the Class A Monthly Principal Distributable Amount for such
Certificate Group will be correspondingly reduced by the amount of such
reduction or by the amount necessary such that the overcollateralization will
not exceed the required level of overcollateralization after giving effect to
the distribution in respect of principal to be made on such Distribution Date.
"Class A Principal Shortfall Amount" means for any Distribution Date and
Certificate Group, the amount, if any, by which the related Certificate Group
Principal Balance exceeds the related Loan Group Principal Balance at the end of
the related Due Period after giving effect to all distributions of the related
Class A Monthly Principal Distributable Amount (exclusive of Distributable
Excess Spread) and draws under the Policy for such Distribution Date.
The application of Excess Spread to a Certificate Group as described
below is intended to create overcollateralization to provide a source of
additional cashflow to cover losses on the Mortgage Loans. If the amount of
losses in a particular Due Period exceeds the amount of Excess Spread for the
related Distribution Date, the amount distributed in respect of principal will
be reduced. A draw on the Policy in respect of principal will not be made until
the Certificate Group Principal Balance for a Certificate Group exceeds the
aggregate Principal
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<PAGE> 55
Balance of the Mortgage Loans in the related Loan Group. See "--The Policy"
herein. Accordingly, there may be Distribution Dates on which Class A
Certificateholders receive little or no distributions in respect of principal.
On each Distribution Date following an Insurer Default, net losses
realized in respect of Mortgage Loans as to which the Master Servicer has
determined that all amounts which it expects to receive have been received will
first reduce the amount of overcollateralization. In addition, on any
Distribution Date if an Insurer Default has occurred and is continuing, the
Class A Principal Distribution with respect to the Group 1 Certificates will be
applied to the distribution of principal of each such Class outstanding on a pro
rata basis in accordance with the Class Principal Balance of each such Class.
The "Priority Amount" for any Distribution Date will equal the product
of (i) the applicable Priority Percentage, and (ii) the product of (a) the
percentage equivalent of a fraction, the numerator of which is the Class
Principal Balance of the Class A-6 Certificates and the denominator of which is
the Certificate Group Principal Balance of Certificate Group 1 (the "Pro-Rata
Percentage") and (b) the Class A Principal Distribution for Certificate Group 1
for such Distribution Date. The "Priority Percentage" for any Distribution Date
will be as follows:
<TABLE>
<CAPTION>
Distribution Dates Priority Percentage
------------------ -------------------
<S> <C>
---------------------------------- %
---------------------------------- %
---------------------------------- %
---------------------------------- %
--------------------------------- %
</TABLE>
"Due Period" means, (a) with respect to the first Determination Date (i)
for collections of principal the period from and including _________, 199__
through and including _______ __, 199__ and (ii) for collections of interest the
period from and including __________, 199__ through and including ________ __,
199__ and (b) with respect to each Determination Date thereafter for collections
of both interest and principal the period from and including the sixteenth day
of the month preceding the month of such Determination Date to and including the
fifteenth day of the month of such Determination Date.
A "Liquidated Mortgage Loan," as to any Distribution Date, is a Mortgage
Loan with respect to which the Master Servicer has determined, in accordance
with the servicing procedures specified in the Agreement, as of the end of the
preceding Due Period, that all Liquidation Proceeds which it expects to recover
with respect to such Mortgage Loan (including the disposition of the related
REO) have been received.
"Excess Spread" means, with respect to any Distribution Date and Loan
Group, the positive excess, if any, of (x) Available Funds (as defined herein)
for the related Certificate Group for such Distribution Date over (y) the
portion thereof required to be distributed pursuant to subclauses A and C with
respect to the Group 1 Certificates and subclauses B and C with respect to the
Group 2 Certificates, in each case as set forth under the heading "DESCRIPTION
OF CERTIFICATES--Distributions" on such Distribution Date.
An "Insurer Default" will occur in the event the Certificate Insurer
fails to make a payment required under the Policy or if certain events of
bankruptcy or insolvency occur with respect to the Certificate Insurer.
THE POLICY
The following information has been supplied by the Certificate Insurer
for inclusion in this Prospectus Supplement.
The Certificate Insurer, in consideration of the payment of the premium
and subject to the terms of the Policy, thereby unconditionally and irrevocably
guarantees to any Owner that an amount equal to each full and complete Insured
Payment will be received by [NAME OF TRUSTEE], or its successor, as trustee for
the Owners (the "Trustee"), on behalf of the Owners from the Certificate
Insurer, for distribution by the Trustee to each Owner of each Owner's
proportionate share of the Insured Payment. The Certificate Insurer's
obligations under the Policy with respect to a particular Insured Payment shall
be discharged to the extent funds equal to the applicable Insured
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<PAGE> 56
Payment are received by the Trustee, whether or not such funds are properly
applied by the Trustee. Insured Payments shall be made only at the time set
forth in the Policy and no accelerated Insured Payments shall be made regardless
of any acceleration of the Class A Certificates, unless such acceleration is at
the sole option of the Certificate Insurer.
Notwithstanding the foregoing paragraph, the Policy does not cover
shortfalls, if any, attributable to the liability of the Trust, any REMIC or the
Trustee for withholding taxes, if any (including interest and penalties in
respect of any such liability), any Civil Relief Act Interest Shortfalls or any
Class A-7 Basis Risk Carryover Amount.
The Certificate Insurer will pay any Insured Payment that is a
Preference Amount on the Business Day following receipt on a Business Day by the
Fiscal Agent (as described below) of (i) a certified copy of the order requiring
the return of a preference payment, (ii) an opinion of counsel satisfactory to
the Certificate Insurer that such order is final and not subject to appeal,
(iii) an assignment in such form as is reasonably required by the Certificate
Insurer, irrevocably assigning to the Certificate Insurer all rights and claims
of the Owner relating to or arising under the Senior Certificates against the
debtor that made such preference payment or otherwise with respect to such
preference payment and (iv) appropriate instruments to effect the appointment of
the Certificate Insurer as agent for such Owner in any legal proceeding related
to such preference payment, such instruments being in a form satisfactory to the
Certificate Insurer, provided that if such documents are received after 12:00
noon, New York City time, on such Business Day, they will be deemed to be
received on the following Business Day. Such payments shall be disbursed to the
receiver or trustee in bankruptcy named in the final order of the court
exercising jurisdiction on behalf of the Owners and not any Owner directly
unless such Owner has returned principal or interest paid on the Senior
Certificates to such receiver or trustee in bankruptcy, in which case such
payment shall be disbursed to such Owner.
The Certificate Insurer will pay any other amount payable under the
Policy no later than 12:00 noon, New York City time, on the later of the
Distribution Date on which the related Deficiency Amount is due or the second
Business Day following receipt in New York, New York on a Business Day by
[________________________], as Fiscal Agent for the Certificate Insurer or any
successor fiscal agent appointed by the Certificate Insurer (the "Fiscal Agent")
of a Notice (as described below); provided that if such Notice is received after
12:00 noon, New York City time, on such Business Day, it will be deemed to be
received on the following Business Day. If any such Notice received by the
Fiscal Agent is not in proper form or is otherwise insufficient for the purpose
of making a claim under the Policy, it shall be deemed not to have been received
by the Fiscal Agent for purposes of this paragraph, and the Certificate Insurer
or the Fiscal Agent, as the case may be, shall promptly so advise the Trustee
and the Trustee may submit an amended Notice.
Insured Payments due under the Policy unless otherwise stated therein
will be disbursed by the Fiscal Agent to the Trustee on behalf of the Owners by
wire transfer of immediately available funds in the amount of the Insured
Payment less, in respect of Insured Payments related to Preference Amounts, any
amount held by the Trustee for the payment of such Insured Payment and legally
available therefor.
The Fiscal Agent is the agent of the Certificate Insurer only and the
Fiscal Agent shall in no event be liable to the Owners for any acts of the
Fiscal Agent or any failure of the Certificate Insurer to deposit or cause to be
deposited, sufficient funds to make payments due under the Policy.
As used in the Policy, the following terms shall have the following
meanings:
"Agreement" means the Pooling and Servicing Agreement, dated as of
________ __, 199__, among Avco ABS Receivables Corp., as Seller, Avco Financial
Services Management Company, as Master Servicer and Representative, and the
Trustee, as trustee, without regard to any amendment or supplement thereto
unless such amendment or modification has been approved in writing by the
Certificate Insurer.
"Business Day" means any day other than a Saturday, a Sunday or a day on
which the Certificate Insurer or banking institutions in New York City or the
city in which either the corporate trust office of the Trustee under the
Agreement is located are authorized or obligated by law or executive order to
close.
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<PAGE> 57
"Deficiency Amount" means for any Distribution Date the excess, if any,
of (A) (i) Class Monthly Interest Distributable Amount for each Class of Senior
Certificates (net of any Civil Relief Act Interest Shortfalls with respect to
the related Loan Group) plus any Class Interest Carryover Shortfall for each
Class of Senior Certificates and (ii) the Guaranteed Principal Amount over (B)
Available Funds with respect to the related Loan Group (after giving effect to
the cross-collateralization provisions in Section 5.01 (a)(iii) of the Agreement
and without regard to any Insured Payments to be made as of such Distribution
Date). The Policy will not cover payment of any Class A-7 Basis Risk Carryover
Amount.
"Guaranteed Principal Amount" means for any Distribution Date (a) the
amount, if any, by which the Certificate Group Principal Balance of each
Certificate Group exceeds the related Loan Group Principal Balance at the end of
the previous month (after giving effect to all distributions of principal on the
related Class A Certificates on such Distribution Date) and (b) with respect to
the Group 1 Certificates and the Group 2 Certificates, on the Distribution Date
in _____ ___ (after giving effect to all other distributions of principal on the
Group 1 Certificates and the Group 2 Certificates, respectively), an amount
equal to the applicable Certificate Group Principal Balance.
"Insured Payment" means (i) as of any Distribution Date, any Deficiency
Amount and (ii) any Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly confirmed
in writing (in the case of a telephonic notice) by telecopy, substantially in
the form of Exhibit A attached to the Policy, the original of which is
subsequently delivered by registered or certified mail, from the Trustee
specifying the Insured Payment which shall be due and owing on the applicable
Distribution Date.
"Owner" means each Holder (as defined in the Agreement) who, on the
applicable Distribution Date, is entitled under the terms of the applicable
Senior Certificates to payment thereunder.
"Preference Amount" means any amount previously distributed to an Owner
on the Senior Certificates that is recoverable and sought to be recovered as a
voidable preference by a trustee in bankruptcy pursuant to the United States
Bankruptcy Code (11 U.S.C.), as amended from time to time, in accordance with a
final nonappealable order of a court having competent jurisdiction.
Capitalized terms used in the Policy and not otherwise defined in the
Policy shall have the respective meanings set forth in the Agreement as of the
date of execution of the Policy, without giving effect to any subsequent
amendment or modification to the Agreement unless such amendment or modification
has been approved in writing by the Certificate Insurer.
Any notice under the Policy or service of process on the Fiscal Agent
may be made at the address listed below for the Fiscal Agent or such other
address as the Certificate Insurer shall specify to the Trustee in writing.
The notice address of the Fiscal Agent is______________________________
_________________________________________________, Attention: Municipal
Registrar and Paying Agency, or such other address as the Fiscal Agent shall
specify to the Trustee in writing.
The Policy is being issued under and pursuant to, and shall be construed
under, the laws of the State of New York, without giving effect to the conflict
of laws principles thereof.
The insurance provided by the Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
The Policy is not cancelable for any reason. The premium on the Policy
is not refundable for any reason including payment, or provision being made for
payment, prior to the maturity of the Class A Certificates.
OVERCOLLATERALIZATION PROVISIONS
The Agreement requires that, on each Distribution Date, the Excess
Spread will be applied on such Distribution Date as an accelerated payment of
principal on the Class or Classes of Class A Certificates then entitled
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<PAGE> 58
to a distribution of the Class A Principal Distribution. This has the effect of
accelerating the amortization of the Class A Certificates in the related
Certificate Group relative to the amortization of the Mortgage Loans in the
related Loan Group.
The required level of overcollateralization will be satisfied as of each
Distribution Date when the aggregate of the Principal Balances of the Mortgage
Loans in a Loan Group at the end of the previous Due Period exceeds the related
Certificate Group Principal Balance after distribution of principal on the
related Distribution Date by an amount specified in the Agreement. Thereafter,
the level of overcollateralization necessary to satisfy the required level of
overcollateralization may be increased or decreased from time to time based on
the loss and delinquency experience of the Mortgage Loans in accordance with the
provisions of the Agreement. In addition, the required level of
overcollateralization may be decreased, in the sole discretion of the
Certificate Insurer and with the prior consent of each Rating Agency, as low as
zero, which would have the effect of reducing the amortization of the Class A
Certificates below what it otherwise would have been.
CROSSCOLLATERALIZATION PROVISIONS
Certain Available Funds with respect to each Loan Group will be
available to cover certain shortfalls and to create overcollateralization with
respect to the Class A Certificates relating to the other Loan Group as
described above under the caption "--Distributions."
INITIAL INTEREST COVERAGE ACCOUNT
On the Closing Date cash will be deposited in the Initial Interest
Coverage Account, which account will be in the name of and maintained by the
Trustee and will be part of the Trust. The amount on deposit in the Initial
Interest Coverage Account, including reinvestment income thereon, will be used
by the Trustee to fund, on the initial Distribution Date, the amount of interest
accruing at the weighted average Certificate Rate of all Senior Certificates on
the amount by which the aggregate Class Principal Balance of the Class A
Certificates as of the Closing Date exceeds the Cut-Off Date Principal Balance
of the Initial Mortgage Loans. Any amounts remaining in the Initial Interest
Coverage Account after the initial Distribution Date and not needed for such
purpose will be paid to the Seller and will not thereafter be available for
distribution to the Holders of the Class A Certificates. The Initial Interest
Coverage Account will terminate immediately following the first Distribution
Date.
Amounts on deposit in the Initial Interest Coverage Account will be
invested in Eligible Investments. The Initial Interest Coverage Account will not
be an asset of any REMIC.
FUNDING ACCOUNT
On the Closing Date, it is expected that each Maximum Funding Amount of
Subsequent Mortgage Loans will be transferred to the Trust for Loan Group 1 and
Loan Group 2, respectively. See "DESCRIPTION OF THE MORTGAGE LOANS--Conveyance
of Subsequent Mortgage Loans." In the event that less than such amounts of
Subsequent Mortgage Loans are transferred to the Trust for each Loan Group,
respectively, an aggregate cash amount equal to the excess of the applicable
Maximum Funding Amount over the aggregate Cut-Off Date Principal Balances of the
related Subsequent Mortgage Loans for such Loan Groups, respectively, will be
deposited by the Seller in an account which will be in the name of, and
maintained by, the Trustee on behalf of the Trust (the "Funding Account"). Any
amounts on deposit in the Funding Account in respect of each Loan Group will be
transferred by the Trustee on the first Distribution Date into the Distribution
Account, and will be distributed as a principal prepayment to Certificateholders
of the related Certificate Group then entitled to distributions of principal.
See "RISK FACTORS--The Subsequent Mortgage Loans" and "PREPAYMENT AND YIELD
CONSIDERATIONS." Any reinvestment income earned on amounts on deposit in the
Funding Account is required to be paid to the Seller. The Funding Account will
terminate immediately after the first Distribution Date and will not be an asset
of any REMIC.
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<PAGE> 59
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution to Certificateholders, the Trustee
will forward to each Certificateholder a statement setting forth, among other
items:
(i) the aggregate amount of the distribution to each
Class of Certificates on such Distribution Date;
(ii) the amount of the distribution set forth in paragraph
(i) above in respect of interest and the amount thereof in
respect of any Class Interest Carryover Shortfall, and the amount
of any Class Interest Carryover Shortfall remaining;
(iii) the amount of the distribution set forth in
paragraph (i) above in respect of principal and the amount
thereof in respect of the Class A Principal Carryover Shortfall,
and any remaining Class A Principal Carryover Shortfall;
(iv) the amount of Distributable Excess Spread for each
Loan Group paid as principal;
(v) the Guaranteed Principal Amount for such
Distribution Date;
(vi) the amount paid under the Policy for such
Distribution Date in respect of the Class Interest Distribution
of each Class of Senior Certificates and the portion of the
Guaranteed Principal Amount paid to the Class A Certificates;
(vii) the Servicing Fee;
(viii) the Pool Principal Balance, the Loan Group 1
Principal Balance and the Loan Group 2 Principal Balance, in each
case as of the close of business on the last day of the preceding
Due Period;
(ix) the Certificate Group Principal Balance of each
Certificate Group and Class Principal Balance of each Class of
Class A Certificates in the Certificate Group after giving effect
to payments allocated to principal above;
(x) the amount of overcollateralization relating to each
Loan Group as of the close of business on the Distribution Date,
after giving effect to distributions of principal on such
Distribution Date;
(xi) the number and aggregate Principal Balances of the
Mortgage Loans as to which the minimum monthly payment is
delinquent for 30-59 days, 60-89 days and 90 or more days,
respectively, as of the end of the preceding month;
(xii) the book value of any real estate which is acquired
by the Trust through foreclosure or grant of deed in lieu of
foreclosure;
(xiii) the amounts of net losses for such Due Period and
the cumulative amount of net losses to date;
(xiv) the weighted average Loan Rate on the Mortgage Loans
and specifying such weighted average Loan Rate for each Loan
Group as of the first day of the month prior to the Distribution
Date; and
(xv) the Certificate Rate on the Variable Rate
Certificates for such Distribution Date.
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In the case of information furnished pursuant to clauses (ii) and (iii)
above, the amounts shall be expressed as a dollar amount per Certificate with a
$1,000 denomination.
Within 60 days after the end of each calendar year, the Trustee will
forward to each Person, if requested in writing by such Person, who was a
Certificateholder during the prior calendar year a statement containing the
information set forth in clauses (ii) and (iii) above aggregated for such
calendar year.
FINAL SCHEDULED DISTRIBUTION DATE
The Final Scheduled Distribution Date for each Class of Class A
Certificates is set forth under "SUMMARY--Final Scheduled Distribution Dates"
herein. The Final Scheduled Distribution Dates for the Class A Certificates
(other than the Class A-5, Class A-6 and Class A-7 Certificates) are based on a
0% Prepayment Assumption with no Excess Spread used to make accelerated payments
of principal to the holders of the related Class A Certificates and the
assumptions set forth above under "PREPAYMENT AND YIELD CONSIDERATIONS--Weighted
Average Lives." The Final Scheduled Distribution Date for the Class A-5, Class
A-6 and Class A-7 Certificates is the ___th Distribution Date after the month of
the latest maturing Mortgage Loan in either Loan Group. It is expected that the
last actual Distribution Date for each Class of Class A Certificates will occur
significantly earlier than such Final Scheduled Distribution Dates. See
"PREPAYMENT AND YIELD CONSIDERATIONS."
SERVICING COMPENSATION, PAYMENT OF EXPENSES AND PREPAYMENT INTEREST SHORTFALLS
With respect to each Due Period, the Master Servicer will receive from
interest payments in respect of the Mortgage Loans a portion of such interest
payments as a monthly Servicing Fee in the amount equal to_____% per annum (the
"Servicing Fee Rate") on the Principal Balance of each Mortgage Loan as of the
first day of each such Due Period. All assumption fees, late payment charges and
other fees and charges, to the extent collected from borrowers, will be retained
by the Master Servicer as additional servicing compensation. The Master Servicer
will pay any fees due the Sub-Servicers from the Servicing Fee.
The Master Servicer's right to reimbursement for unreimbursed Servicing
Advances is limited to late collections on the related Mortgage Loan, including
Liquidation Proceeds, released mortgaged property proceeds, Insurance Proceeds
and such other amounts as may be collected by the Master Servicer from the
related Mortgagor or otherwise relating to the Mortgage Loan in respect of which
such unreimbursed amounts are owed. The Master Servicer's right to reimbursement
for unreimbursed Monthly Advances shall be limited to late collections of
interest on any Mortgage Loan and to Liquidation Proceeds and Insurance Proceeds
on the related Mortgage Loan. The Master Servicer's right to such reimbursements
is prior to the rights of Certificateholders. However, if any Servicing Advance
or Monthly Advance is determined by the Master Servicer to be non-recoverable
from such sources, the amount of such non-recoverable advances may be reimbursed
to the Master Servicer from other amounts on deposit in the Collection Account.
Not later than the Determination Date, the Master Servicer is required
to remit to the Trustee, without any right of reimbursement, an amount equal to,
with respect to each Mortgage Loan as to which a principal prepayment in full
was received during the related Due Period, the lesser of (a) the excess, if
any, of the sum of 30 days" interest on the Principal Balance of such Mortgage
Loan at the Loan Rate (or at such lower rate as may be in effect for such
Mortgage Loan because of application of the Civil Relief Act) minus the sum of
the Servicing Fees for such Mortgage Loan, over the amount of interest actually
paid by the related Mortgagor in connection with such principal prepayment (with
respect to all such Mortgage Loans, the "Prepayment Interest Shortfall") and (b)
the sum of the Servicing Fees received by the Master Servicer in the most
recently ended Due Period.
Civil Relief Act Interest Shortfalls will not be covered by the Policy,
although Prepayment Interest Shortfalls, after application of the Servicing Fee,
will be so covered. The Servicer is not obligated to offset any of the Servicing
Fee against, or to provide any other funds to cover, any Civil Relief Act
Interest Shortfalls. See "RISK FACTORS--Payments on the Mortgage Loans" in this
Prospectus Supplement.
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EVIDENCE AS TO COMPLIANCE
The Agreement provides for delivery on or before the last business day
of the fifth month following the end of each fiscal year of the Master Servicer,
beginning in 199__, to the Trustee, the Certificate Insurer and the Rating
Agencies of an annual statement signed by an officer of the Master Servicer to
the effect that the Master Servicer has fulfilled its material obligations under
the Agreement throughout the preceding fiscal year, except as specified in such
statement.
On or before the last business day of the fifth month following the end
of each fiscal year of the Master Servicer, beginning in 199__, the Master
Servicer will furnish a report prepared by a firm of nationally recognized
independent public accountants (who may also render other services to the Master
Servicer or the Sub-Servicers) to the Trustee, the Certificate Insurer and the
Rating Agencies to the effect that such firm has examined certain documents and
the records relating to servicing of the Mortgage Loans under the Uniform Single
Attestation Program for Mortgage Bankers and such firm's conclusion with respect
thereto.
The Master Servicer's fiscal year is the calendar year.
CERTAIN MATTERS REGARDING THE MASTER SERVICER
The Agreement provides that the Master Servicer may not resign from its
obligations and duties thereunder, except in connection with a permitted
transfer of servicing, unless (i) such duties and obligations are no longer
permissible under applicable law as evidenced by an opinion of counsel delivered
to the Certificate Insurer or (ii) upon the satisfaction of the following
conditions: (a) the Master Servicer has proposed a successor master servicer to
the Trustee in writing and such proposed successor master servicer is reasonably
acceptable to the Trustee; (b) the Rating Agencies have confirmed to the Trustee
that the appointment of such proposed successor master servicer as the Master
Servicer will not result in the reduction or withdrawal of the then current
rating of the Certificates; and (c) such proposed successor master servicer is
reasonably acceptable to the Certificate Insurer. No such resignation will
become effective until the Trustee or a successor master servicer has assumed
the Master Servicer's obligations and duties under the Agreement.
The Master Servicer will enter into Sub-Servicing Agreements with the
Originators pursuant to which each Originator will sub-service the Mortgage
Loans originated or purchased by it. Notwithstanding any such arrangement, the
Master Servicer will remain liable and obligated to the Trustee and the
Certificateholders for the Master Servicer's duties and obligations under the
Agreement, without any diminution of such duties and obligations and as if the
Master Servicer itself were performing such duties and obligations.
Any corporation into which the Master Servicer may be merged or
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Master Servicer shall be a party, or any corporation
succeeding to the business of the Master Servicer shall be the successor of the
Master Servicer under the Agreement, without the execution or filing of any
paper or any further act on the part of any of the parties to the Agreement,
anything in the Agreement to the contrary notwithstanding.
EVENTS OF DEFAULT
"Events of Default" will consist of: (i) (A) any failure by the Master
Servicer to make any required Monthly Advance or (B) any other failure of the
Master Servicer to deposit in the Collection Account or the Distribution Account
any deposit required to be made under the Agreement, which failure continues
unremedied for three Business Days after payment was required to be made; (ii)
any failure by the Master Servicer duly to observe or perform in any material
respect any other of its covenants or agreements in the Agreement which, in each
case, materially and adversely affects the interests of the Certificateholders
or the Certificate Insurer and continues unremedied for 30 days after knowledge
or the giving of written notice of such failure to the Master Servicer by the
Trustee, or to the Master Servicer and the Trustee by the Certificate Insurer or
Certificateholders evidencing at least 25% of the Voting Rights; (iii) any
failure by the Master Servicer to make any required Servicing Advance, which
failure continues unremedied for a period of 30 days after knowledge or the
giving of written notice of such failure to the Master Servicer by the Trustee,
or to the Master Servicer and the Trustee by the Certificate Insurer or
Certificateholders evidencing at least 25% of the Voting Rights; and (iv)
certain events of insolvency, readjustment
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of debt, marshalling of assets and liabilities or similar proceedings relating
to the Master Servicer and certain actions by the Master Servicer indicating
insolvency, reorganization or inability to pay its obligations.
If any Monthly Advance is not made by 12:00 noon, New York City time, on
the second Business Day preceding the applicable Distribution Date, the Trustee
or a successor Master Servicer will immediately assume the duties of the Master
Servicer.
Upon removal or resignation of the Master Servicer, the Trustee will be
the successor master servicer (the "Successor Master Servicer "). The Trustee,
as Successor Master Servicer, will be obligated to make Monthly Advances and
Servicing Advances unless it determines reasonably and in good faith that such
advances would not be recoverable. If, however, the Trustee is unwilling or
unable to act as Successor Master Servicer, or if the majority of
Certificateholders (with the consent of the Certificate Insurer) or the
Certificate Insurer so requests, the Trustee may appoint, or petition a court of
competent jurisdiction to appoint, subject to the approval of the Certificate
Insurer, any established mortgage loan servicing institution acceptable to the
Certificate Insurer having a net worth of not less than $25,000,000 as the
Successor Master Servicer in the assumption of all or any part of the
responsibilities, duties or liabilities of the Master Servicer.
In addition, the Certificate Insurer may terminate the Master Servicer
upon the occurrence of a Trigger Event. Trigger Events will consist of, among
other things, (i) any failure by the Master Servicer to pay when due any amount
payable by it under the Agreement or the Insurance Agreement which results in a
drawing under the Policy, (ii) failure of the Master Servicer to satisfy certain
financial tests; and (iii) the loss and delinquency performance of the Mortgage
Loans exceeding certain levels.
RIGHTS UPON AN EVENT OF DEFAULT
So long as an Event of Default remains unremedied, either the Trustee,
Certificateholders holding Certificates evidencing at least 51% of the Voting
Rights in the Trust (with the consent of the Certificate Insurer) or the
Certificate Insurer may terminate all of the rights and obligations of the
Master Servicer under the Agreement and in and to the Mortgage Loans, whereupon
the Trustee will succeed to all the responsibilities, duties and liabilities of
the Master Servicer under the Agreement and will be entitled to similar
compensation arrangements. In the event that the Trustee would be obligated to
succeed the Master Servicer but is unwilling or unable so to act, it may
appoint, or petition a court of competent jurisdiction for the appointment of, a
housing and home finance institution or other mortgage loan or home equity loan
servicer with all licenses and permits required to perform its obligations under
the Agreement and having a net worth of at least $25,000,000 and acceptable to
the Certificate Insurer to act as successor to the Master Servicer under the
Agreement. Pending such appointment, the Trustee will be obligated to act in
such capacity unless prohibited by law. Such successor will be entitled to
receive the same compensation that the Master Servicer would otherwise have
received (or such lesser compensation as the Trustee and such successor may
agree). A receiver or conservator for the Master Servicer may be empowered to
prevent the termination and replacement of the Master Servicer if the only Event
of Default that has occurred is an Insolvency Event.
AMENDMENT
The Agreement may be amended from time to time by the Seller, the Master
Servicer, the Representative and the Trustee and with the consent of the
Certificate Insurer, but without the consent of the Certificateholders, to cure
any ambiguity, to correct or supplement any provisions therein which may be
inconsistent with any other provisions of the Agreement, to add to the duties of
the Master Servicer to comply with any requirements imposed by the Internal
Revenue Code or any regulation thereunder, or to add or amend any provisions of
the Agreement as required by the Rating Agencies in order to maintain or improve
any rating of the Senior Certificates (it being understood that, after obtaining
the ratings in effect on the Closing Date, none of the Seller, the Trustee, the
Certificate Insurer or the Master Servicer is obligated to obtain, maintain, or
improve any such rating) or to add any other provisions with respect to matters
or questions arising under the Agreement which shall not be inconsistent with
the provisions of the Agreement, provided that such action will not, as
evidenced by an opinion of counsel, materially and adversely affect the
interests of any Certificateholder or the Certificate Insurer; provided, that
any such amendment will not be deemed to materially and adversely affect the
Certificateholders and no such opinion will be required to be delivered if the
person requesting such amendment obtains a letter from the Rating Agencies
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stating that such amendment would not result in a downgrading of the then
current rating of the Senior Certificates. The Agreement may also be amended
from time to time by the Seller, the Master Servicer, the Representative and the
Trustee, with the consent of Certificateholders holding Certificates evidencing
at least 51% of the Voting Rights of each Class affected thereby (or 51% of all
of the Voting Rights if all Classes are affected) and the Certificate Insurer,
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the Agreement or of modifying in any manner
the rights of the Certificateholders, provided that no such amendment will (i)
reduce in any manner the amount of, or delay the timing of, collections of
payments on the Certificates or distributions or payments under the Policy which
are required to be made on any Certificate without the consent of the
Certificateholder or (ii) reduce the aforesaid percentage required to consent to
any such amendment, without the consent of the holders of all Senior
Certificates then outstanding.
TERMINATION; PURCHASE OF MORTGAGE LOANS
The Trust will terminate on the Distribution Date following the later of
(A) payment in full of all amounts owing to the Certificate Insurer unless the
Certificate Insurer shall otherwise consent and (B) the earliest of (i) the
Distribution Date on which the aggregate Class Principal Balance of the Class A
Certificates has been reduced to zero, (ii) the final payment or other
liquidation of the last Mortgage Loan in the Trust, (iii) the optional purchase
by the Master Servicer of the Mortgage Loans, as described below and (iv) the
Distribution Date in __________, on which date the Policy will be available to
pay the Group Principal Balance of the outstanding Group 1 Certificates and the
Group 2 Certificates.
Subject to provisions in the Agreement concerning adopting a plan of
complete liquidation, the Master Servicer may, at its option, terminate the
Agreement on any Distribution Date following the Due Period during which the
aggregate Principal Balance of the Mortgage Loans is less than 10% of the sum of
the Principal Balances of the Initial Mortgage Loans and Subsequent Mortgage
Loans as of the Cut-Off Date (the "Optional Termination Date") by purchasing all
of the outstanding Mortgage Loans and REO Properties at a price equal to the sum
of the outstanding Pool Balance (subject to reduction of the purchase price
based in part on the appraised value of any REO Property included in the Trust
if such appraised value is less than the Principal Balance of the related
Mortgage Loan, as provided in the Agreement) and accrued and unpaid interest
thereon at the weighted average of the Loan Rates through the end of the related
Due Period together with all amounts due and owing to the Certificate Insurer.
Any such purchase shall be accomplished by deposit into the Collection
Account of the purchase price specified above.
OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS
The Master Servicer has the option to purchase from the Trust any
Mortgage Loan 90 days or more delinquent at a purchase price equal to the
outstanding principal balance of such Mortgage Loan as of the date of purchase,
plus all accrued and unpaid interest on such principal balance computed at the
Loan Rate.
Notwithstanding the foregoing, unless the Certificate Insurer consents,
the Master Servicer may only exercise its option with respect to the Mortgage
Loan or Mortgage Loans that have been delinquent for the longest period at the
time of such repurchase. If the Certificate Insurer fails to respond to the
Master Servicer 's request for consent within 10 Business Days after receipt
thereof, the Master Servicer may repurchase the Mortgage Loan or Mortgage Loans
proposed to be repurchased without the consent of, or any further action by, the
Certificate Insurer.
VOTING RIGHTS
Under the Agreement, the Voting Rights will be allocated as follows: 95%
to the Class A Certificates; 2% to the Class S Certificates; and 1% to each of
the Class X, Class R-1 and Class R-2 Certificates. Voting Rights allocated to
the Class A Certificates will be allocated among such Classes in proportion to
their respective Class Principal Balances. Voting Rights allocated to a Class of
Certificates will be further allocated among the Certificates of such Class on
the basis of their respective Percentage Interests. So long as no Certificate
Insurer Default is continuing, the Certificate Insurer will be entitled to
exercise the Voting Rights of the Senior Certificates.
THE TRUSTEE
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[Name of Trustee], a __________ banking association with its principal
place of business in California, will be named Trustee pursuant to the
Agreement.
The Trustee may have banking relationships with the Seller and the
Master Servicer.
The Trustee may resign at any time, in which event the Representative
will be obligated to appoint a successor Trustee, as approved by the Certificate
Insurer. The Representative may also remove the Trustee if the Trustee ceases to
be eligible to continue as such under the Agreement or if the Trustee becomes
insolvent. Upon becoming aware of such circumstances, the Represenative will be
obligated to appoint a successor Trustee, as approved by the Certificate
Insurer. Any resignation or removal of the Trustee and appointment of a
successor Trustee will not become effective until acceptance of the appointment
by the successor Trustee.
No holder of a Certificate will have any right under the Agreement to
institute any proceeding with respect to the Agreement unless such holder
previously has given to the Trustee written notice of default and unless
Certificateholders evidencing at least 51% of the Voting Rights have made
written requests upon the Trustee to institute such proceeding in its own name
as Trustee thereunder and have offered to the Trustee reasonable indemnity and
the Trustee for 60 days has neglected or refused to institute any such
proceeding. The Trustee will be under no obligation to exercise any of the
trusts or powers vested in it by the Agreement or to make any investigation of
matters arising thereunder or to institute, conduct or defend any litigation
thereunder or in relation thereto at the request, order or direction of any of
the Certificateholders, unless such Certificateholders have offered to the
Trustee reasonable security or indemnity against the cost, expenses and
liabilities which may be incurred therein or thereby.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates will
be applied by the Seller to acquire the Mortgage Loans from the Originators, who
in turn will use such net proceeds for general corporate purposes, including
repayment of financing for the Mortgage Loans.
FEDERAL INCOME TAX CONSIDERATIONS
Separate elections will be made to treat certain assets of the Trust
(exclusive of the Initial Interest Coverage Account and the Funding Account) as
a "real estate mortgage investment conduit" (a "REMIC") for federal income tax
purposes under the Internal Revenue Code of 1986, as amended (the "Code"). The
Class A Certificates will be designated as "regular interests" in a REMIC. See
"FEDERAL INCOME TAX CONSIDERATIONS--Taxation of the REMIC and its Holders" in
the Prospectus.
The Class A Certificates generally will be treated as debt instruments
issued by a REMIC for federal income tax purposes. Income on the Class A must be
reported under an accrual method of accounting.
The Class A Certificates may, depending on their issue price, be issued
with original issue discount ("OID") for federal income tax purposes. In such
event, holders of such Certificates will be required to include OID in income as
it accrues under a constant yield method, in advance of the receipt of cash
attributable to such income. The OID Regulations do not contain provisions
specifically interpreting Code Section 1272(a)(6). Until the Treasury issues
guidance to the contrary, the Trustee intends to base its computation on Code
Section 1272(a)(6) and the OID Regulations as described in the Prospectus.
However, because no regulatory guidance currently exists under Code Section
1272(a)(6), there can be no assurance that such methodology represents the
correct manner of calculating OID.
The yield used to calculate accruals of OID with respect to the Class A
Certificates with OID will be the original yield to maturity of such
Certificates, determined by assuming that the Mortgage Loans in Loan Group 1 and
Loan Group 2 will prepay in accordance with 120% and 125%, respectively, of the
Prepayment Assumption. No representation is made as to the actual rate at which
the Mortgage Loans will prepay.
A reasonable application of the principles of the OID Regulations to the
Variable Rate Certificates generally would be to report all income with respect
to such Certificates as original issue discount for each period,
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computing such original issue discount (i) by assuming that the value of the
Certificate Index will remain constant for purposes of determining the original
yield to maturity of such Class of Certificates and projecting future
distributions on such Certificates, thereby treating such Certificates as fixed
rate instruments to which the original issue discount computation rules
described in the Prospectus can be applied, and (ii) by accounting for any
positive or negative variation in the actual value of the applicable index in
any period from its assumed value as a current adjustment to original issue
discount with respect to such period.
The Class A Certificates will be treated as regular interests in a REMIC
under section 860G of the Code. Accordingly, the Class A Certificates will be
treated as (i) assets described in section 7701(a)(19)(C) of the Code, and (ii)
"real estate assets" within the meaning of section 856(c)(5) of the Code, in
each case to the extent described in the Prospectus. Interest on the Class A
Certificates will be treated as interest on obligations secured by mortgages on
real property within the meaning of section 856(c)(3)(B) of the Code to the same
extent that the Class A Certificates are treated as real estate assets. See
"FEDERAL INCOME TAX CONSIDERATIONS" 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 Class A 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, fails to report interest, dividends, or other "reportable
payments" (as defined in the Code) properly, or, under certain circumstances,
fails 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
Class A Certificateholder of record, the amount of interest paid (and OID
accrued, if any) on the Class A Certificates (and the amount of interest
withheld for federal income taxes, if any) for each calendar year, except as to
exempt holders (generally, holders that are corporations, certain tax-exempt
organizations or nonresident aliens who provide certification as to their status
as nonresidents). As long as the only "Class A Certificateholder" of record is
Cede, as nominee for DTC, Certificate Owners and the IRS will receive tax and
other information including the amount of interest paid on 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 (or the Paying Agent) will be required to withhold 31%
of the interest (and principal) otherwise payable to the holder, and remit the
withheld amount to the IRS as a credit against the holder's federal income tax
liability. Such amounts will be deemed distributed to the affected Certificate
Owner for all purposes of the Certificates, the Agreement and the Policy.
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").
The term "Foreign Investor" means any person other than (i) a citizen or
resident of the United States, (ii) a corporation, partnership or other entity
organized in or under the laws of the United States or any state or political
subdivision thereof or (iii) an estate the income of which is includible in
gross income for United States federal income tax purposes, regardless of its
source or a trust if a court within the United States is able to exercise
primary supervision of the administration of the trust and one or more United
States fiduciaries have the authority to control all substantial decisions of
the trust.
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 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 Class A
Certificates will be issued in registered
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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 Class A Certificates.
For the Class A 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 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 Class A 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 immediately preceding paragraph are
satisfied.
STATE TAXES
The Seller makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Class A Certificates under the tax
laws of any state. Investors considering an investment in the Certificates
should consult their own tax advisors regarding such tax consequences.
All investors should consult their own tax advisors regarding the
federal, state, local or foreign income tax consequences of the purchase,
ownership and disposition of the Certificates.
ERISA CONSIDERATIONS
Any Plan fiduciary which proposes to cause a Plan to acquire any of the
Class A Certificates should consult with its counsel with respect to the
potential consequences under the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and the Code, of the Plans acquisition and ownership
of such Certificates. See "ERISA CONSIDERATIONS" in the Prospectus.
The U.S. Department of Labor has granted an administrative exemption to
[Name of Underwriter]. (Prohibited Transaction Exemption _____; ___ Fed. Reg.
_____ (199__)) (the "Exemption") which exempts from the application of the
prohibited transaction rules transactions relating to (1) the acquisition, sale
and holding by Plans of certain certificates representing an undivided interest
in certain asset-backed pass-through trusts, with respect to which [Name of
Underwriter] or any of its affiliates is the sole underwriter or the manager or
co-manager of the underwriting syndicate; and (2) the servicing, operation and
management of such asset-backed pass-through trusts, provided that the general
conditions and certain other conditions set forth in the Exemption are
satisfied. The Exemption will apply to the acquisition, holding and resale of
the Class A Certificates by a Plan provided that certain conditions (certain of
which are described below) are met.
Among the conditions which must be satisfied for the Exemption to apply
are the following:
(1) The acquisition of the Class A Certificates by a Plan is on terms
(including the price for such Certificates) that are at least as favorable to
the investing Plan as they would be in an arm's-length transaction with an
unrelated party;
(2) The rights and interests evidenced by the Class A Certificates
acquired by the Plan are not subordinated to the rights and interests evidenced
by other certificates of the Trust;
(3) The Class A Certificates acquired by the Plan have received a rating
at the time of such acquisition that is in one of the three highest generic
rating categories from either Standard & Poor's, Moody's, or Duff & Phelps
Credit Rating Co.;
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(4) The sum of all payments made to and retained by the Underwriters in
connection with the distribution of the Class A Certificates represents not more
than reasonable compensation for underwriting such Certificates; the sum of all
payments made to and retained by the Seller pursuant to the sale of the Mortgage
Loans to the Trust represents not more than the fair market value of such
Mortgage Loans; the sum of all payments made to and retained by the Master
Servicer represent not more than reasonable compensation for the Master
Servicer's services under the Agreement and reimbursement of the Master
Servicer's reasonable expenses in connection therewith;
(5) The Trustee is not an affiliate of the Underwriters, the Seller, the
Master Servicer, the Certificate Insurer, the Representative, any borrower whose
obligations under one or more Mortgage Loans constitute more than 5% of the
aggregate unamortized principal balance of the assets in the Trust, or any of
their respective affiliates (the "Restricted Group"); and
(6) The Plan investing in the Class A Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities and
Exchange Commission under the Securities Act of 1933, as amended.
It is expected that the Exemption will apply to the acquisition and
holding of the Class A Certificates by Plans and that all conditions of the
Exemption other than those within the control of the investors will be met.
Any Plan fiduciary considering whether to purchase any Class A
Certificates on behalf of a Plan should consult with its counsel regarding the
applicability of the fiduciary responsibility and prohibited transaction
provisions of ERISA and the Code to such investment. Among other things, before
purchasing any Class A Certificates, a fiduciary of a Plan subject to the
fiduciary responsibility provisions of ERISA or an employee benefit plan subject
to the prohibited transaction provisions of the Code should make its own
determination as to the availability of the exemptive relief provided in the
Exemption, and also consider the availability of any other prohibited
transaction exemptions.
LEGAL INVESTMENT CONSIDERATIONS
Although, as a condition to their issuance, the Group 1 Certificates
will be rated in the highest rating category of the Rating Agencies, the Group 1
Certificates will not constitute "mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"), because not all
of the Mortgages securing the Mortgage Loans are first mortgages. Accordingly,
many institutions with legal authority to invest in comparably rated securities
based on first mortgage loans may not be legally authorized to invest in the
Group 1 Certificates, which, because they evidence interests in a pool that
includes junior mortgage loans, are not "mortgage related securities" under
SMMEA. See "LEGAL INVESTMENT" in the Prospectus.
The Group 2 Certificates will constitute "mortgage related securities"
for purposes of SMMEA for so long as they are rated in one of the two highest
rating categories by one or more nationally recognized statistical rating
organizations. As such, the Group 2 Certificates will be legal investments for
certain entities to the extent provided in SMMEA, subject to state laws
overriding SMMEA. In addition, institutions whose investment activities are
subject to review by federal or state regulatory authorities may be or may
become subject to restrictions, which may be retroactively imposed by such
regulatory authorities, on the investment by such institutions in certain forms
of mortgage related securities. Furthermore, certain states have enacted
legislation overriding the legal investment provisions of SMMEA. In addition,
institutions whose activities are subject to review by federal or state
regulatory authorities may be or may become subject to restrictions, which may
be retroactively imposed by such regulatory authorities, on the investment by
such institutions in certain forms of mortgage related securities.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated _____ __, 199__ (the "Underwriting Agreement"), among the
Seller, the Representative and the Underwriters named below (the
"Underwriters"), the Seller has agreed to sell to the Underwriters and each of
the Underwriters has severally agreed to purchase from the Seller the principal
amount of Class A Certificates set forth below opposite their respective names.
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<TABLE>
<CAPTION>
Class A-1 Class A-2 Class A-3 Class A-4 Class A-5 Class A-6
Underwriter Certificates Certificates Certificates Certificates Certificates Certificates
- ----------- ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
[Name of Underwriter] $ $ $ $ $ $
[Name of Underwriter].
----------- ----------- ------------ ----------- ---------- -----------
Total.. $ $ $ $ $ $
</TABLE>
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<TABLE>
<CAPTION>
Class A-7
Underwriter Certificates
<S> <C>
[Name of Underwriter].......... $
[Name of Underwriter]........
------------
Total............ $
</TABLE>
The Seller has been advised that the Underwriters propose initially to
offer the Class A Certificates to certain dealers at such price less a selling
concession not to exceed the percentage of the Certificate denomination set
forth below, and that the Underwriters may allow and such dealers may reallow a
reallowance discount not to exceed the percentage of the Certificate
denomination set forth below:
<TABLE>
<CAPTION>
Class of Certificate Selling Concession Reallowance Discount
- -------------------- ------------------ --------------------
<S> <C> <C>
Class A-1 % %
Class A-2 % %
Class A-3 % %
Class A-4 % %
Class A-5 % %
Class A-6 % %
Class A-7 % %
</TABLE>
After the initial public offering, the public offering price, such
concessions and such discounts may be changed.
The Seller has been advised by the Underwriters that they presently
intend to make a market in the Class A Certificates offered hereby; however, no
Underwriter is obligated to do so, any market-making may be discontinued at any
time, and there can be no assurance that an active public market for the Class A
Certificates will develop.
........The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with the
Regulation M under the Exchange Act. Over-allotment involves syndicate sales in
excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so long
as the stabilizing bids do not exceed a specific maximum. Syndicate covering
transactions involve purchases of the Class A Certificates in the open market
after the distribution has been completed in order to cover syndicate short
positions. Penalty bids permit the Underwriters to reclaim a selling concession
from a syndicate member when the Class A Certificates originally sold by such
syndicate member are purchased in a syndicate covering transaction to cover
syndicate short positions. Such stabilizing transactions, syndicate covering
transactions and penalty bids may cause the price of the Class A Certificates to
be higher than it would otherwise be in the absence of such transaction.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases.
Neither the Seller nor any of the Underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the prices of the Class A Certificates.
In addition, neither the Seller nor any of the Underwriters makes any
representation that the Underwriters will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
The Underwriting Agreement provides that the Representative will
indemnify the Underwriters against certain civil liabilities, including
liabilities under the Securities Act of 1933, as amended.
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EXPERTS
The consolidated financial statements of [Certificate Insurer] as of
December 31, 199__ and 199__ and for each of the three years in the period ended
December 31, 199__, incorporated by reference in this Prospectus Supplement have
been audited by [ ______________], independent accountants, as set forth in
their report thereon, incorporated by reference herein in reliance upon the
authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters with respect to the Class A Certificates will be
passed upon for the Seller and Master Servicer by Stroock & Stroock & Lavan LLP,
New York, New York, for the Underwriters by________________________
_______________, and for the Certificate Insurer by _________________.
RATINGS
CERTIFICATES
It is a condition to issuance that the Class A Certificates receive
ratings of "AAA" by Standard & Poor's, "AAA" by Fitch and "Aaa" by Moody's.
A securities rating addresses the likelihood of the receipt by Class A
Certificateholders of distributions on the Mortgage Loans to which they are
entitled. The rating takes into consideration the characteristics of the
Mortgage Loans and the structural and legal aspects associated with the Class A
Certificates. The ratings on the Class A Certificates do not, however,
constitute statements regarding the likelihood or frequency of prepayments on
the Mortgage Loans or the possibility that Class A Certificateholders might
realize a lower than anticipated yield due to prepayments. The ratings do not
address the likelihood of the payment of any Class A-7 Basis Risk Carryover
Amount.
The ratings assigned to the Class A Certificates will depend primarily
upon the creditworthiness of the Certificate Insurer. Any reduction in a rating
assigned to the claims-paying ability of the Certificate Insurer below the
ratings initially assigned to the Class A Certificates may result in a reduction
of one or more of the ratings assigned to the Class A Certificates.
A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each securities rating should be evaluated
independently of similar ratings on different securities.
CERTIFICATE INSURER
Moody's Investors Service, Inc. ("Moody's") rates the claims paying
ability of the Certificate Insurer "Aaa". Insurance companies rated Aaa offer
exceptional financial security. While the financial strength of these companies
is likely to change, such changes as can be visualized are most unlikely to
impair their fundamentally strong position.
Standard & Poor's Rating Services ("S&P") rates the claims paying
ability of the Certificate Insurer "AAA". "AAA" is the highest rating assigned
by S&P. Capacity to pay claims is extremely strong.
Fitch Investors Service, L.P. ("Fitch") rates the claims paying ability
of the Certificate Insurer "AAA". AAA is the highest claims paying ability. Risk
factors are negligible.
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INDEX OF PRINCIPAL TERMS
Set forth below are the pages on which certain principal terms are first
defined. Additional defined terms can be found in THE GLOSSARY OF TERMS
beginning on page ___ of the Prospectus.
<TABLE>
<CAPTION>
Terms Page
- ----- ----
<S> <C>
Agreement....................................................................................3
Amount Available............................................................................48
ARM..........................................................................................6
Available Funds.............................................................................48
Balloon Loans................................................................................6
Balloon Payment..............................................................................6
Book-Entry Certificates.....................................................................45
Business Day................................................................................55
Cede.........................................................................................7
Cedel........................................................................................7
Certificate Group............................................................................4
Certificate Group Principal Balance..........................................................4
Certificate Index............................................................................8
Certificate Insurer.........................................................................14
Certificate Owners..........................................................................45
Certificate Rate.............................................................................4
Certificate Register........................................................................48
Certificate Registrar.......................................................................48
Certificateholder...........................................................................45
Certificates.................................................................................1
Change Date..................................................................................6
Chase........................................................................................7
Citibank.....................................................................................7
Civil Relief Act............................................................................16
Civil Relief Act Interest Shortfalls........................................................16
Class........................................................................................1
Class A Certificates.........................................................................1
Class A Monthly Principal Distributable Amount..............................................11
Class A Principal Distribution..............................................................52
Class A Principal Shortfall Amount..........................................................11
Class A-7 Formula Rate.......................................................................8
Class Interest Carryover Shortfall...........................................................9
Class Interest Distribution.................................................................51
Class Monthly Interest Distributable Amount.................................................52
Class Principal Balance......................................................................4
Class R-1...................................................................................62
Class R-2...................................................................................62
Closing Date.................................................................................1
CLTV........................................................................................26
Code........................................................................................17
Collection Account..........................................................................47
Compensating Interest.......................................................................21
CPR.........................................................................................40
Cut-Off Date.................................................................................3
Cut-Off Date Initial Pool Principal Balance..................................................5
Cut-Off Date Loan Group 1 Initial Principal Balance.........................................24
Cut-Off Date Loan Group 2 Initial Principal Balance.........................................30
Cut-Off Date Principal Balance...............................................................3
Defective Mortgage Loans....................................................................11
</TABLE>
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<TABLE>
<S> <C>
Deficiency Amount...........................................................................54
Determination Date..........................................................................15
Distributable Excess Spread.................................................................52
Distribution Account........................................................................47
Distribution Date............................................................................2
DTC..........................................................................................7
Due Period..................................................................................12
Eligible Account............................................................................47
Eligible Substitute Mortgage Loan...........................................................46
ERISA.......................................................................................64
Euroclear....................................................................................7
European Depositaries........................................................................7
Events of Default...........................................................................59
Excess Spread...............................................................................13
Exemption...................................................................................64
Final Distribution Date.....................................................................14
First Liens.................................................................................20
Fiscal Agent................................................................................54
Fixed Rate Certificates......................................................................4
Funding Account..............................................................................3
GAAP........................................................................................22
Gross Margin................................................................................23
Group 1 Certificates.........................................................................4
Group 2 Certificates.........................................................................2
Guaranteed Principal Amount.................................................................55
Initial Interest Coverage Account............................................................3
Initial Mortgage Loans.......................................................................2
Insured Payment.............................................................................55
Insurer Default.............................................................................53
Interest Period.............................................................................51
LIBOR Business Day..........................................................................51
Lifetime Cap.................................................................................6
Lifetime Floor...............................................................................6
Liquidated Mortgage Loan....................................................................53
Loan Group...................................................................................2
Loan Group 1.................................................................................2
Loan Group 1 Initial Mortgage Loans..........................................................5
Loan Group 1 Principal Balance...............................................................3
Loan Group 2.................................................................................2
Loan Group 2 Initial Mortgage Loans..........................................................5
Loan Group 2 Net Funds Cap...................................................................8
Loan Group 2 Principal Balance...............................................................3
Loan Group Principal Balance.................................................................4
Loan Index...................................................................................6
Loan Rate....................................................................................6
Master Servicer..............................................................................2
Maximum Funding Amount.......................................................................2
Monthly Advance.............................................................................15
Moody's.....................................................................................18
Mortgage Loan Schedule......................................................................45
Mortgage Loans...............................................................................3
Mortgage Pool................................................................................2
Mortgaged Properties.........................................................................3
Mortgagor...................................................................................24
Net Simple Interest Shortfall...............................................................21
Nonrecoverable Advance......................................................................48
</TABLE>
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<TABLE>
<S> <C>
Notice......................................................................................55
Notional Balance............................................................................10
Optional Termination Date...................................................................16
Originators..................................................................................5
Owner.......................................................................................55
Percentage Interest.........................................................................44
Periodic Cap.................................................................................6
Plan........................................................................................17
Policy.......................................................................................1
Pool Balance.................................................................................3
Preference Amount...........................................................................55
Prepayment Assumption.......................................................................40
Prepayment Interest Shortfall...............................................................16
Principal Balance............................................................................4
Priority Amount.............................................................................12
Priority Percentage.........................................................................12
Purchase Price..............................................................................46
Rating Agency...............................................................................18
Record Date..................................................................................9
Related Documents...........................................................................45
Relevant Depositary.........................................................................45
REMIC........................................................................................2
Representative...............................................................................3
Restricted Group............................................................................65
SAP.........................................................................................22
Seller.......................................................................................2
Senior Certificates..........................................................................1
Servicing Advance...........................................................................47
Servicing Fee...............................................................................15
Servicing Fee Rate..........................................................................58
Simple Interest Loans.......................................................................21
SMMEA.......................................................................................17
Standard & Poor's...........................................................................18
Strip Rates..................................................................................8
Subsequent Mortgage Loans....................................................................2
Sub-Servicer................................................................................11
Sub-Servicing Agreement......................................................................5
Substitution Adjustment.....................................................................46
Trust........................................................................................2
Trustee......................................................................................3
Underwriters................................................................................66
Underwriting Agreement......................................................................66
Variable Rate Certificates...................................................................4
</TABLE>
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Home
Equity Loan Asset-Backed 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 The Depository Trust Company
("DTC"), Cedel or Euroclear. The Global Securities will be tradeable as home
market instruments in both the European and U.S. domestic markets. Initial
settlement and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through Cedel and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior Home Equity Loan Asset-Backed
Certificates issues.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedel and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
Initial Settlement
All Global Securities will be held in book-entry form by DTC in the name
of Cede & Co. as nominee of DTC. Investors" interests in the Global Securities
will be represented through financial institutions acting on their behalf as
direct and indirect Participants in DTC. As a result, Cedel and Euroclear will
hold positions on behalf of their participants through their respective
Depositaries, which in turn will hold such positions in accounts as DTC
Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to prior Home Equity Loan
Asset-Backed Certificates issues. Investor securities custody accounts will be
credited with their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
Secondary Market Trading
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior Home
Equity Loan Asset-Backed Certificates issues in same-day funds.
Trading between Cedel 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.
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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 or Euroclear through a Cedel Participant or Euroclear Participant at
least one business day prior to settlement. In these cases Cedel or Euroclear
will instruct the respective Depositary, as appropriate, to deliver the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of 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 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.
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<PAGE> 76
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) S-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) S-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) S-staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the Cedel Participant or
Euroclear Participant.
Certain U.S. Federal Income Tax Documentation Requirements
A beneficial owner of Global Securities holding securities through
Cedel or Euroclear (or through DTC if the holder has an address outside the
U.S.) will be subject to the 30% U.S. withholding tax that generally applies to
payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers" securities in the ordinary course of its trade
or business in the chain of intermediaries between such beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (ii) such beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form 1001). Non-U.S. Persons that are Certificate Owners residing in
a country that has a tax treaty with the United States can obtain an exemption
or reduced tax rate (depending on the treaty terms) by filing Form 1001
(Ownership, Exemption or Reduced Rate Certificate). If the treaty provides only
for a reduced rate, withholding tax will be imposed at that rate unless the
filer alternatively files Form W-8.
Form 1001 may be filed by the Certificate Owners or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payer's Request
for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (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 the income
of which is includible in gross income for United States tax purposes,
regardless of its source or a trust if a court within
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<PAGE> 77
the United States is able to exercise primary supervision of the administration
of the trust and one or more United States fiduciaries have the authority to
control all substantial decisions of the trust. This summary does not deal with
all aspects of U.S. Federal income tax withholding that may be relevant to
foreign holders of the Global Securities. Investors are advised to consult their
own tax advisors for specific tax advice concerning their holding and disposing
of the Global Securities.
No dealer, salesman or other person has been authorized to give any
information or to make any representation not contained in this Prospectus
Supplement or the Prospectus and, if given or made, such information or
representation must not be relied upon as having been authorized by the Seller
or the Underwriters. This Prospectus Supplement and the Prospectus do not
constitute an offer of any securities other than those to which they relate or
an offer to sell, or a solicitation of an offer to buy, to any person in any
jurisdiction where such an offer or solicitation would be unlawful. Neither the
delivery of this Prospectus Supplement and the Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information contained herein is correct as of any time subsequent to their
respective dates.
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<PAGE> 78
PROSPECTUS
ASSET-BACKED CERTIFICATES
ASSET-BACKED NOTES
(ISSUABLE IN SERIES)
------------------------
AVCO ABS RECEIVABLES CORP.
(SELLER)
AVCO FINANCIAL SERVICES MANAGEMENT COMPANY
(MASTER SERVICER AND REPRESENTATIVE)
------------------------
The Asset-Backed Certificates (the "Certificates") and the Asset-Backed
Notes (the "Notes" and, collectively with the Certificates, the "Securities")
described herein may be sold from time to time in one or more series (each, a
"Series") in amounts, at prices and on terms to be determined at the time of
sale and to be set forth in a supplement to this Prospectus (a "Prospectus
Supplement"). Each series (each a "Series") of Securities will include either
one or more classes of Certificates or, if Notes are issued as part of a Series,
one or more Classes of Notes and one or more Classes of Certificates, as set
forth in the related Prospectus Supplement. Certain capitalized terms used
herein are defined in "GLOSSARY OF TERMS" beginning on page __.
The Certificates of a Series will evidence undivided interests in
certain assets deposited into a trust (each, a "Trust Fund") by Avco ABS
Receivables Corp. (the "Seller") pursuant to a Pooling and Servicing Agreement
or a Trust Agreement, as described herein. The Notes of a Series will be issued
and secured pursuant to an Indenture and will represent indebtedness of the
related Trust Fund. The Trust Fund for a Series of Securities will include (a)
Primary Assets, which may include one or more pools of (i) closed-end home
equity loans (the "Home Equity Loans"), secured by mortgages on one- to
four-family residential or mixed use properties, and (ii) securities ("Private
Securities") backed or secured by Home Equity Loans (the "Underlying Loans"),
(b) certain monies received or due thereunder on or after the date specified in
the related Prospectus Supplement (the "Cutoff Date") net of certain amounts
payable to Avco Financial Services Management Company, as master servicer (the
"Master Servicer") of the Home Equity Loans, (c) if specified in the related
Prospectus Supplement, funds on deposit in one or more pre-funding accounts
and/or capitalized interest accounts and (d) reserve funds, letters of credit,
surety bonds, insurance policies or other forms of credit support as described
herein and in the related Prospectus Supplement. Amounts on deposit in a
pre-funding account for any Series will be used to purchase additional Home
Equity Loans during the funding period specified in the related Prospectus
Supplement in the manner specified therein. The amount initially deposited in a
pre-funding account for a Series of Securities will not exceed fifty percent of
the aggregate principal amount of such Series of Securities.
Each Series of Securities will be issued in one or more classes (each, a
"Class"). Interest on and principal of the Securities of a Series will be
payable on the date or dates specified in the related Prospectus Supplement
(each, a "Distribution Date"), at the times, at the rates, in the amounts and in
the order of priority set forth in the related Prospectus Supplement.
If a Series includes multiple Classes, such Classes may vary with
respect to the amount, percentage (which may be 0%) and timing of distributions
of principal, interest or both and one or more Classes may be subordinated to
other Classes with respect to distributions of principal, interest or both as
described herein and in the related Prospectus Supplement. The Primary Assets
and other assets comprising the Trust Fund may be divided into one or more Asset
Groups and each Class of the related Series will evidence beneficial ownership
of the corresponding Asset Group, as applicable.
SEE "RISK FACTORS" BEGINNING ON PAGE __ FOR CERTAIN FACTORS TO BE
CONSIDERED IN PURCHASING THE SECURITIES.
The rate of reduction of the aggregate principal balance of each Class
of a Series may depend principally upon the rate of payment (including
prepayments) with respect to the Home Equity Loans or Underlying Loans relating
to the Private Securities, as applicable. A rate of prepayment lower or higher
than anticipated will affect the yield on the Securities of a Series in the
manner described herein and in the related Prospectus Supplement. Under certain
limited circumstances described herein and in the related Prospectus Supplement,
a Series of Securities may be subject to termination or redemption.
If specified in the related Prospectus Supplement, one or more elections
may be made to treat certain assets comprising the Trust Fund for a Series as a
"real estate mortgage investment conduit" (a "REMIC") for federal income tax
purposes. See "FEDERAL INCOME TAX CONSIDERATIONS."
There currently is no secondary market for the Securities. There can be
no assurance that any such market will develop or, if it does develop, that it
will continue.
---------------------------------------
NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS OF, AND CERTIFICATES OF A SERIES
EVIDENCE BENEFICIAL INTERESTS IN, THE RELATED TRUST FUND ONLY AND ARE NOT
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR BY THE SELLER, THE TRUSTEE,
THE MASTER SERVICER, THE REPRESENTATIVE OR BY ANY OF THEIR RESPECTIVE
AFFILIATES OR, UNLESS OTHERWISE SPECIFIED IN THE RELATED PROSPECTUS
SUPPLEMENT, BY ANY OTHER PERSON OR ENTITY. THE REPRESENTATIVE'S
ONLY OBLIGATIONS WITH RESPECT TO ANY SERIES OF SECURITIES WILL
BE PURSUANT TO CERTAIN REPRESENTATIONS AND WARRANTIES
SET FORTH IN THE RELATED AGREEMENT AS DESCRIBED
HEREIN OR IN THE RELATED PROSPECTUS
SUPPLEMENT.
---------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR THE PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------------------------
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of securities offered hereby unless accompanied by a
Prospectus Supplement.
The date of this Prospectus is ____________, 1997.
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PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Securities to be
offered hereunder will, among other things, set forth with respect to such
Series of Securities: (i) the aggregate principal amount, interest rate, and
authorized denominations of each Class of such Securities; (ii) certain
information concerning the Primary Assets; (iii) the terms of any Enhancement
(as defined herein) with respect to such Series; (iv) the terms of any insurance
related to the Primary Assets; (v) information concerning any other assets in
the related Trust Fund, including any Reserve Fund; (vi) the Final Scheduled
Distribution Date (as defined herein) of each Class of such Securities; (vii)
the method to be used to calculate the amount of interest and principal required
to be applied to the Securities of each Class of such Series on each
Distribution Date, the timing of the application of interest and principal and
the order of priority of the application of such interest and principal to the
respective Classes and the allocation of interest and principal to be so
applied; (viii) the Distribution Dates and any Assumed Reinvestment Rate (as
defined herein); (ix) the amount, if any, deposited in the Pre-Funding Account
(as defined herein) available to purchase additional Home Equity Loans, the
length of the Pre-Funding Period (as defined herein) and the criteria for
determining which additional Home Equity Loans may become part of the Trust
Fund; (x) additional information with respect to the plan of distribution of
such Securities; and (xi) whether one or more REMIC elections will be made with
respect to some or all of the Trust Fund for such Series and if so, the
designation of the Securities offered hereunder as regular interests or residual
interests in a REMIC.
REPORTS TO HOLDERS
Periodic and annual reports concerning the related Trust Fund for a
Series of Securities are required under the related Agreements to be forwarded
to Holders. Unless otherwise specified in the related Prospectus Supplement,
such reports will not be examined and reported on by an independent public
accountant. If so specified in the Prospectus Supplement for a Series of
Securities, such Series or one or more Classes of such Series will be issued in
book-entry form. In such event, (i) owners of beneficial interests in such
Securities will not be considered "Holders" under the Agreements and will not
receive such reports directly from the related Trust Fund; rather, such reports
will be furnished to such owners through the participants and indirect
participants of the applicable book-entry system and (ii) references herein to
the rights of "Holders" shall refer to the rights of such owners as they may be
exercised indirectly through such participants. See "THE AGREEMENTS--Reports to
Holders."
AVAILABLE INFORMATION
The Seller has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Securities. This Prospectus, which forms a part of
the Registration Statement, and the Prospectus Supplement relating to each
Series of Securities contain summaries of the material terms of the documents
referred to herein and therein, but do not contain all of the information set
forth in the Registration Statement pursuant to the Rules and Regulations of the
Commission. For further information, reference is made to such Registration
Statement and the exhibits thereto. Such Registration Statement and exhibits can
be inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at its Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at its Regional Office located as follows,
Midwest Regional Office, 500 West Madison Street, Chicago, Illinois 60661; and
Northeast Regional Office, Seven World Trade Center, New York, New York 10048.
The Commission maintains an Internet Web site that contains reports, proxy and
information statements and other information regarding the registrants that file
electronically with the Commission, including the Seller. The address of such
Internet Web site is (http://www.sec.gov).
Each Trust Fund will be required to file certain reports with the
Commission pursuant to the requirements of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). The Seller and the Representative intend to
cause each Trust Fund to suspend filing such reports if and when such reports
are no longer required under the Exchange Act.
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Securities offered
hereby and thereby nor an offer of the Securities to any person in any state or
other jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus at any time does not imply that information herein is correct as of
any time subsequent to its date.
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<PAGE> 80
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the Trust Fund
referred to in the accompanying Prospectus Supplement with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, after the
date of this Prospectus and prior to the termination of any offering of the
Securities issued by such Trust Fund shall be deemed to be incorporated by
reference in this Prospectus and to be a part of this Prospectus from the date
of the filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for all purposes of this Prospectus to the extent that
a statement contained herein (or in the accompanying Prospectus Supplement) or
in any other subsequently filed document which also is or is deemed to be
incorporated by reference modifies or replaces such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Representative on behalf of any Trust Fund will provide without
charge to each person to whom this Prospectus is delivered, on the written or
oral request of such person, a copy of any or all of the documents referred to
above that have been or may be incorporated by reference in this Prospectus (not
including exhibits to the information that is incorporated by reference unless
such exhibits are specifically incorporated by reference into the information
that this Prospectus incorporates). Such requests should be directed to Chief
Financial Officer, Avco Financial Services Management Company, 600 Anton
Boulevard, Costa Mesa, CA 92626 (telephone: (714) 445-7815; facsimile: (714)
445-7875).
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SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each Series of Securities contained in the
Prospectus Supplement to be prepared and delivered in connection with the
offering of Securities of such Series. Capitalized terms used and not otherwise
defined herein or in the related Prospectus Supplement shall have the meanings
set forth in the "GLOSSARY OF TERMS" beginning on page __.
SECURITIES OFFERED............ Asset-Backed Certificates (the "Certificates")
and Asset-Backed Notes (the "Notes").
Certificates are issuable from time to time in
Series pursuant to a Pooling and Servicing
Agreement or Trust Agreement. Each Certificate
of a Series will evidence an interest in the
Trust Fund for such Series, or in an Asset Group
specified in the related Prospectus Supplement.
Notes are issuable from time to time in a Series
pursuant to an Indenture. Each Series of
Securities will consist of one or more Classes,
one or more of which may be Classes of Compound
Interest Securities, Planned Amortization Class
("PAC") Securities, Variable Interest
Securities, Zero Coupon Securities, Principal
Only Securities, Interest Only Securities,
Senior Securities or Subordinate Securities
(each of which is generally described in the
"GLOSSARY OF TERMS"). Each Class may differ in,
among other things, the amounts allocated to and
the priority of principal and interest payments,
Final Scheduled Distribution Dates, Distribution
Dates and interest rates. The Securities of each
Class will be issued in fully registered form in
the denominations specified in the related
Prospectus Supplement. If so specified in the
related Prospectus Supplement, the Securities or
certain Classes of such Securities offered
thereby may be available in book-entry form
only.
SELLER........................ Avco ABS Receivables Corp., a Nevada
corporation, with its principal executive
offices located at 1727-B Charleston, Las Vegas,
Nevada 89104, and a telephone number of (702)
474-6282. See "THE SELLER."
REPRESENTATIVE AND
MASTER SERVICER............. Avco Financial Services Management Company, a
Delaware corporation with its principal
executive offices located at 600 Anton
Boulevard, Costa Mesa, CA 92626, and a telephone
number of (714) 445-7815. See "THE ORIGINATORS
AND THE MASTER SERVICER."
ORIGINATORS AND
SUB-SERVICERS............... The Home Equity Loans will be originated or
acquired by affiliates of the Master Servicer
(each such affiliate, an "Originator") and sold
by such Originators to the Seller. Unless
otherwise set forth in a Prospectus Supplement,
each Originator will sub-service the Home Equity
Loans originated or purchased by it pursuant to
separate sub-servicing agreements (each a
"Sub-Servicing Agreement") between the Master
Servicer and the applicable Originator.
INTEREST PAYMENTS............. Interest payments on the Securities of a Series
entitled by their terms to receive interest will
be made on each Distribution Date, to the extent
set forth in, and at the applicable rate
specified in (or determined in the manner set
forth in), the related Prospectus Supplement.
The interest rate on Securities of a Series may
be variable or change with changes in the rates
of interest on the related Home Equity Loans or
Underlying Loans relating to the Private
Securities, as
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applicable and/or as prepayments occur with
respect to such Home Equity Loans or Underlying
Loans, as applicable. Interest Only Securities
may be assigned a "Notional Amount" which is
used solely for convenience in expressing the
calculation of interest and for certain other
purposes and does not represent the right to
receive any distributions allocable to
principal. Principal Only Securities may not be
entitled to receive any interest payments or may
be entitled to receive only nominal interest
payments. Interest payable on the Securities of
a Series on a Distribution Date will include all
interest accrued during the period specified in
the related Prospectus Supplement. See
"DESCRIPTION OF THE SECURITIES--Payments of
Interest."
PRINCIPAL PAYMENTS............ All payments of principal of a Series of
Securities will be made in an aggregate amount
determined as set forth in the related
Prospectus Supplement and will be paid at the
times and will be allocated among the Classes of
such Series in the order and amounts, and will
be applied either on a pro rata or a random lot
basis among all Securities of any such Class,
all as specified in the related Prospectus
Supplement.
FINAL SCHEDULED
DISTRIBUTION DATE
OF THE SECURITIES........... The Final Scheduled Distribution Date with
respect to each Class of Notes is the date no
later than the date on which principal thereof
will be fully paid and with respect to each
Class of Certificates is the date after which no
Certificates of such Class are expected to
remain outstanding, in each case calculated on
the basis of the assumptions applicable to such
Series described in the related Prospectus
Supplement. The Final Scheduled Distribution
Date of a Class may equal the maturity date of
the Primary Asset in the related Trust Fund
which has the latest stated maturity or will be
determined as described herein and in the
related Prospectus Supplement.
The actual final Distribution Date of the
Securities of a Series will depend primarily
upon the rate of payment (including prepayments,
liquidations due to default, the receipt of
proceeds from casualty insurance policies and
repurchases) of the Home Equity Loans or
Underlying Loans relating to the Private
Securities, as applicable, in the related Trust
Fund. In general, the actual final Distribution
Date of any Security is likely to occur earlier
and may occur substantially earlier or, with
respect to a Class of Certificates, may occur
later than its Final Scheduled Distribution Date
as a result of the application of prepayments to
the reduction of the principal balances of the
Securities and as a result of defaults on the
Primary Assets. The rate of payments on the Home
Equity Loans or Underlying Loans relating to the
Private Securities, as applicable, in the Trust
Fund for a Series will depend on a variety of
factors, including certain characteristics of
such Home Equity Loans or Underlying Loans, as
applicable, and the prevailing level of interest
rates from time to time, economic, demographic,
tax and legal factors and servicing decisions.
No assurance can be given as to the actual
prepayment experience with respect to a Series.
See "RISK FACTORS--Yield May Vary" and
"DESCRIPTION OF THE SECURITIES--Weighted Average
Life of the Securities."
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<PAGE> 83
OPTIONAL TERMINATION.......... The Seller, the Master Servicer, or such other
entity that is specified in the related
Prospectus Supplement, may, at its option, cause
an early termination of one or more Classes of
Securities by purchasing all or part of the
Primary Assets remaining in the Trust Fund on or
after a specified date, or on or after such time
as the aggregate principal balance of the
Securities of the Series or the Primary Assets
relating to such Series, as specified in the
related Prospectus Supplement, is less than the
amount or percentage, not more than 25%,
specified in the related Prospectus Supplement.
See "DESCRIPTION OF THE SECURITIES--Optional
Redemption, Purchase or Termination."
SECURITIES INVOLVE
RISKS....................... An investment in the Securities of any Series
involves material risks and should only be
considered by investors which, either alone or
together with their investment advisors, have
the ability to understand such risks. See "RISK
FACTORS" beginning on page __ herein.
THE TRUST FUND................ The Trust Fund for a Series of Securities will
consist of one or more of the assets described
below, as described in the related Prospectus
Supplement.
A. PRIMARY ASSETS............ The Primary Assets for a Series may consist of
any combination of the following assets, to the
extent and as specified in the related
Prospectus Supplement.
(1) HOME EQUITY
LOANS.................... Primary Assets for a Series will consist, in
whole or in part, of "closed-end" home equity
loans (the "Home Equity Loans"). The Home Equity
Loans may, as specified in the related
Prospectus Supplement, have various payment
characteristics, including balloon or other
irregular payment features, and may accrue
interest at a fixed rate or an adjustable rate.
Some Home Equity Loans may be delinquent or
non-performing as specified in the related
Prospectus Supplement. The Home Equity Loans
will be originated or acquired by the
Originators in the ordinary course of their
business. The Home Equity Loans will be
nonconventional loans. Additional Home Equity
Loans may be periodically added to the Trust
Fund, or may be removed from time to time if
certain asset tests are met, all as described
herein under "THE TRUST FUNDS" and in the
related Prospectus Supplement.
The Home Equity Loans will be secured by
mortgages or deeds of trust or other similar
security instruments creating a lien on a
Mortgaged Property, which may be subordinated to
one or more senior liens on such Mortgaged
Property, as described herein under "THE TRUST
FUNDS" and in the related Prospectus Supplement.
The related Prospectus Supplement will describe
certain characteristics of the Home Equity Loans
for a Series, including, without limitation, and
to the extent relevant: (a) the aggregate unpaid
principal balance of the Home Equity Loans; (b)
the range and weighted average Home Equity Loan
Rate on the Home Equity Loans and in the case of
adjustable rate Home Equity Loans, the range and
weighted average of the Current Home Equity Loan
Rates and the Lifetime Rate
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<PAGE> 84
Caps, if any; (c) the range and the average
outstanding principal balance of the Home Equity
Loans; (d) the weighted average original and
remaining term-to-stated maturity of the Home
Equity Loans and the range of original and
remaining terms-to-stated maturity, if
applicable; (e) the range of Combined
Loan-to-Value Ratios or Loan-to-Value Ratios, as
applicable, of the Home Equity Loans, computed
in the manner described in the related
Prospectus Supplement; (f) the percentage (by
principal balance as of the Cut-off Date) of
Home Equity Loans that accrue interest at
adjustable or fixed interest rates; (g) any
enhancement relating to the Home Equity Loans;
(h) the geographic distribution of the Mortgaged
Properties securing the Home Equity Loans; (i)
the use and type of each Mortgaged Property
securing a Home Equity Loan; (j) the lien
priority of the Home Equity Loans; and (k) the
delinquency status and year of origination of
the Home Equity Loans.
(2) PRIVATE
SECURITIES................. Primary Assets for a Series may consist, in
whole or in part, of Private Securities which
include (a) pass-through certificates
representing beneficial interests in loans of
the type that would otherwise be eligible to be
Home Equity Loans (the "Underlying Loans") or
(b) collateralized obligations secured by
Underlying Loans. Although individual Underlying
Loans may be insured or guaranteed by the United
States or an agency or instrumentality thereof,
they need not be, and the Private Securities
themselves will not be so insured or guaranteed.
See "THE TRUST FUNDS--Private Securities."
Payments on the Private Securities will be
distributed directly to the Trustee as
registered owner of such Private Securities. The
related Prospectus Supplement for a Series will
specify (such disclosure may be on an
approximate basis, as described above and will
be as of the date specified in the related
Prospectus Supplement) to the extent relevant
and to the extent such information is reasonably
available to the Seller and the Seller
reasonably believes such information to be
reliable: (i) the aggregate approximate
principal amount and type of any Private
Securities to be included in the Trust Fund for
such Series; (ii) certain characteristics of the
Underlying Loans including (A) the payment
features of such Underlying Loans (i.e., whether
they are fixed rate or adjustable rate and
whether they provide for fixed level payments,
negative amortization or other payment
features), (B) the approximate aggregate
principal amount of such Underlying Loans which
are insured or guaranteed by a governmental
entity, (C) the servicing fee or range of
servicing fees with respect to such Underlying
Loans, (D) the minimum and maximum stated
maturities of such Underlying Loans at
origination, (E) the lien priority of such
Underlying Loans, and (F) the delinquency status
and year of origination of such Underlying
Loans; (iii) the maximum original term-to-stated
maturity of the Private Securities; (iv) the
weighted average term-to-stated maturity of the
Private Securities; (v) the pass-through or
certificate rate or ranges thereof for the
Private Securities; (vi) the sponsor or
depositor of the Private Securities (the "PS
Sponsor"), the servicer of the Private
Securities (the "PS Servicer") and the trustee
of the Private Securities (the "PS Trustee");
(vii) certain characteristics of Enhancement, if
any, such as reserve funds, insurance policies,
letters of credit or guarantees,
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<PAGE> 85
relating to the Underlying Loans, or to such
Private Securities themselves; (viii) the terms
on which the Underlying Loans may, or are
required to, be repurchased prior to stated
maturity; and (ix) the terms on which substitute
Underlying Loans may be delivered to replace
those initially deposited with the PS Trustee.
See "THE TRUST FUNDS--Private Securities--
Additional Information."
B. COLLECTION, CERTIFICATE
AND DISTRIBUTION ACCOUNTS... All payments on or with respect to the Primary
Assets for a Series, net of amounts permitted to
be retained by the Master Servicer or
Sub-Servicer pursuant to the Agreement, will be
remitted by the Master Servicer or Sub-Servicer
directly to an account (the "Collection Account"
or the "Certificate Account") to be established
for such Series. The Trustee will be required to
apply a portion of the amount in the Collection
Account or the Certificate Account, to the
payment of certain amounts payable to the Master
Servicer or Sub-Servicer under the related
Agreement and any other person specified in the
Prospectus Supplement, and to deposit a portion
of the amount in the Collection Account into one
or more separate accounts (each, a "Distribution
Account") to be established for such Series,
each in the manner and at the times established
in the related Prospectus Supplement. All
amounts deposited in such Distribution Account
(or, if there is no Distribution Account,
amounts remaining in the Certificate Account)
will be available for (i) application to the
payment of principal of and interest on such
Series of Securities (or such Class or Classes
specified in the related Prospectus Supplement)
on the next Distribution Date, (ii) the making
of adequate provision for future payments on
certain Classes of Securities and (iii) any
other purpose specified in the related
Prospectus Supplement. After applying the funds
in the Collection Account or the Certificate
Account as described above, any funds remaining
in such Accounts may be paid over to the Master
Servicer, the Sub-Servicer, the Seller, any
provider of Enhancement with respect to such
Series (an "Enhancer") or any other person
entitled thereto in the manner and at the times
established in the related Prospectus
Supplement.
C. PRE-FUNDING AND CAPITALIZED
INTEREST ACCOUNTS.......... A Trust Fund may include one or more segregated
trust accounts (each, a "Pre-Funding Account")
for the related Series. On the closing date for
such a Series, a portion of the proceeds of the
sale of the Securities of such Series (such
amount, the "Pre-Funded Amount") will be
deposited in the Pre-Funding Account and may be
used to purchase additional Primary Assets
during the period of time, not to exceed six
months, specified in the related Prospectus
Supplement (the "Pre-Funding Period"). The
Primary Assets to be so purchased will be
required to have certain characteristics
specified in the related Prospectus Supplement.
If any Pre-Funded Amount remains on deposit in
the Pre-Funding Account at the end of the
Pre-Funding Period, such amount will be applied
in the manner specified in the related
Prospectus Supplement to prepay the Classes of
Notes and/or the Certificates of the applicable
Series specified in the related Prospectus
Supplement. The amount initially deposited in a
Pre-Funding Account for a Series of Securities
will not exceed fifty percent of the aggregate
principal amount of such Series
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<PAGE> 86
of Securities. If a Pre-Funding Account is
established, one or more segregated trust
accounts (each, a "Capitalized Interest
Account") may be established for the related
Series. On the closing date for such Series, a
portion of the proceeds of the sale of the
Securities of such Series may be deposited in
the Capitalized Interest Account and used to
fund the excess, if any, of (x) the sum of (i)
the amount of interest accrued on the Classes of
Securities of such Series specified in the
related Prospectus Supplement and (ii) if
specified in the related Prospectus Supplement,
certain fees or expenses during the Pre-Funding
Period such as Trustee fees and credit
enhancement fees, over (y) the amount of
interest available therefor from the Primary
Assets in the Trust Fund. If so specified in the
related Prospectus Supplement, amounts on
deposit in the Capitalized Interest Account may
be released to the Seller prior to the end of
the Pre-Funding Period subject to the
satisfaction of certain tests specified in the
related Prospectus Supplement. Any amounts on
deposit in the Capitalized Interest Account at
the end of the Pre-Funding Period that are not
necessary for such purposes will be distributed
to the person specified in the related
Prospectus Supplement.
REVOLVING PERIOD AND
AMORTIZATION PERIOD;
RETAINED INTEREST............ If the related Prospectus Supplement so
provides, there may be a period commencing on
the date of issuance of a Class or Classes of
Notes and/or Certificates of a Series and ending
on the date set forth in the related Prospectus
Supplement (each, a "Revolving Period") during
which limited or no principal payments will be
made to one or more Classes of Notes and/or
Certificates of the related Series as are
identified in such Prospectus Supplement. Some
or all collections of principal otherwise
allocated to such Classes of Notes or
Certificates may be (i) utilized during the
Revolving Period to acquire additional Primary
Assets which satisfy the criteria described
under "The Trust Funds" and the criteria set
forth in the related Prospectus Supplement, (ii)
held in an account and invested in Eligible
Investments for later distribution to
Securityholders, (iii) applied to those Notes or
Certificates for such Series, if any, specified
in the related Prospectus Supplement as then are
in amortization, or (iv) otherwise applied as
specified in the related Prospectus Supplement.
An "Amortization Period" is the period during
which an amount of principal is payable to
Holders of Securities which, during the
Revolving Period, were not otherwise entitled to
such payments. If so specified in the related
Prospectus Supplement, during an Amortization
Period all or a portion of principal collections
on the Primary Assets may be applied as
specified above for a Revolving Period and, to
the extent not so applied, will be distributed
to the Classes of Notes and/or Certificates for
such Series specified in the related Prospectus
Supplement as then being entitled to payments of
principal. In addition, if so specified in the
related Prospectus Supplement, amounts deposited
in certain accounts for the benefit of one or
more Classes of Notes or Certificates for such
Series may be released from time to time or on a
specified date and applied as a payment of
principal on such Classes of Notes and/or
Certificates. The related Prospectus Supplement
will set forth
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<PAGE> 87
the circumstances which will result in the
commencement of an Amortization Period.
Each Series which has a Revolving Period may
also issue to the Representative or one of its
affiliates a certificate evidencing an undivided
beneficial interest (a "Retained Interest") in
such Series not represented by the other
Securities issued by the related Trusts. As
further described in the related Prospectus
Supplement, the value of such Retained Interest
will fluctuate as the amount of Notes and
Certificates of the related Series of Securities
outstanding is reduced.
ENHANCEMENT................... If and to the extent specified in the related
Prospectus Supplement, enhancement with respect
to a Series or any Class of Securities may
include any one or more of the following: a
financial guaranty insurance policy,
overcollateralization, a letter of credit, a
cash reserve fund, insurance policies, one or
more Classes of Subordinate Securities,
derivative products or other forms of credit
enhancement, or any combination thereof
(collectively, "Enhancement"). The Enhancement
with respect to any Series or any Class of
Securities may be structured to provide
protection against delinquencies and/or losses
on the Primary Assets, against changes in
interest rates, or other risks, to the extent
and under the conditions specified in the
related Prospectus Supplement. Forms of
Enhancement may provide for one or more Classes
of Securities to be paid in foreign currencies.
Any form of Enhancement will have certain
limitations and exclusions from coverage
thereunder, which will be described in the
related Prospectus Supplement. Further
information regarding any Enhancer, including
financial information when material, will be
included in the related Prospectus Supplement.
See "ENHANCEMENT." With respect to any Series of
Securities including one or more Classes of
Notes, distributions in respect of the
Certificates may be subordinated in priority of
payment to payments on the Notes, to the extent
specified in the related Prospectus Supplement.
CREDIT QUALITY OF HOME
EQUITY LOANS................. Throughout 70 years of operating history, the
Originators have focused on lending to middle
and lower middle income individuals who have an
established credit history and who typically
have equity in their homes. See "RISK FACTORS--
Underwriting Standards May Affect Performance"
and "THE ORIGINATORS AND THE MASTER SERVICER--
General" and "--Underwriting Standards" herein.
The Originators have in the past and will in the
future change their underwriting guidelines and
procedures when, in their business judgment,
competition or other conditions in their market
so warrant. As a result, Home Equity Loans
originated at different times may reflect
different underwriting guidelines and be of
different credit quality. However, any such
differences will be reflected in the levels of
Enhancement for the related Series of
Securities.
SERVICING..................... The Master Servicer will be responsible for
servicing, managing and making collections on
the Home Equity Loans for a Series. The Master
Servicer will enter into sub-servicing
agreements with the Originators or such other
entities as may be named in a Prospectus
Supplement (each a "Sub-Servicer"). Such
sub-servicing arrangements will not relieve the
Master
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Servicer of any liability it might otherwise
have, had the sub-servicing arrangement not been
entered into. In addition, the Master Servicer
or a Sub-Servicer, if so specified in the
related Prospectus Supplement, will act as
custodian and will be responsible for
maintaining custody of the Home Equity Loans and
related documentation on behalf of the Trustee.
Advances with respect to delinquent payments of
principal and/or interest on a Home Equity Loan
("Delinquency Advances") will be made by the
Master Servicer or a Sub-Servicer if and only to
the extent described in the related Prospectus
Supplement. Such advances will be intended to
provide liquidity only and will be reimbursable
to the extent specified in the related
Prospectus Supplement, from scheduled payments
of principal and/or interest, late collections,
or from the proceeds of liquidation of the
related Home Equity Loans or from other
recoveries relating to such Home Equity Loans
(including any insurance proceeds or payments
from other credit support) or, to the extent
specified in the related Prospectus Supplement,
from payments or proceeds from other Home Equity
Loans. If and to the extent specified in the
related Prospectus Supplement, the Master
Servicer or a Sub-Servicer will be entitled to
advance its own funds to pay for any related
expenses of foreclosure and disposition of any
liquidated Home Equity Loan or related Mortgaged
Property (the "Servicer Advances"). See
"SERVICING OF LOANS--Advances and Limitations
Thereon." The Master Servicer or such
Sub-Servicer will be entitled to be reimbursed
for any such Servicer Advances as specified in
the related Prospectus Supplement. In performing
these functions, the Master Servicer and
Sub-Servicer will exercise the same degree of
skill and care that it customarily exercises
with respect to similar Home Equity Loans owned
or serviced by it. Under certain limited
circumstances, the Master Servicer may resign or
be removed, in which event either the Trustee or
a third-party servicer will be appointed as
successor master servicer. The Master Servicer
will receive a periodic fee as servicing
compensation (the "Servicing Fee") and may, as
specified in the related Prospectus Supplement,
receive certain additional compensation. The
Master Servicer will pay any fees due the
Sub-Servicers from the Servicing Fee. See
"SERVICING OF LOANS--Servicing Compensation and
Payment of Expenses."
FEDERAL INCOME TAX
CONSIDERATIONS
A. DEBT SECURITIES
AND REMIC RESIDUAL
SECURITIES................. The federal income tax consequences to
Securityholders will vary depending upon whether
one or more elections are made to treat the
Trust Fund or specified portions thereof as a
REMIC under the provisions of the Internal
Revenue Code of 1986, as amended (the "Code").
The Prospectus Supplement for each Series of
Securities will specify whether such an election
will be made. If a REMIC election is made,
Securities representing regular interests in a
REMIC (a "Regular Interest") will generally be
taxable to holders in the same manner as
evidences of indebtedness issued by the REMIC.
Stated interest on such regular interests will
be taxable as ordinary income and taken into
account using the accrual method of accounting,
regardless of the holder's normal accounting
method.
Securities that are Compound Interest
Securities, Zero Coupon Securities or Interest
Only Securities will, and certain other
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Classes of Securities may, be issued with
original issue discount that is not de minimis.
In such cases, the Holder will be required to
include original issue discount in gross income
as it accrues, which may be prior to the receipt
of cash attributable to such income. If a
Security is issued at a premium, the Holder may
be entitled to make an election to amortize such
premium on a constant yield method.
If a REMIC election is made with respect to a
Series of Securities, then, upon the issuance of
those Securities, special counsel to the
Depositor will issue an opinion generally to the
effect that the arrangement by which such
Securities are issued will be treated as a REMIC
as long as all of the provisions of the
applicable Agreement are complied with and the
statutory and regulatory requirements are
satisfied. Such Securities will be designated as
"regular interests" or "residual interests" in a
REMIC. A REMIC will not be subject to
entity-level tax. Rather, the taxable income or
net loss of a REMIC will be taken into account
by the holders of residual interests (a
"Residual Interest"). In certain circumstances,
the Holder of a Residual Interest may have REMIC
taxable income or tax liability attributable to
REMIC taxable income for a particular period in
excess of cash distributions for such period or
have an after-tax return that is less than the
after-tax return on comparable debt instruments.
In addition, a portion (or, in some cases, all)
of the income from a Residual Interest (i)
except in certain circumstances with respect to
a Holder classified as a thrift institution
under the Code, may not be subject to offset by
losses from other activities or investments,
(ii) for a Holder that is subject to tax under
the Code on unrelated business taxable income,
may be treated as unrelated business taxable
income and (iii) for a foreign holder, may not
qualify for exemption from or reduction of
withholding. In addition, (i) Residual Interests
are subject to transfer restrictions and (ii)
certain transfers of Residual Interests will not
be recognized for federal income tax purposes.
Further, individual holders are subject to
limitations on the deductibility of expenses of
the REMIC. See "FEDERAL INCOME TAX
CONSIDERATIONS."
B. NON-REMIC PASS-THROUGH
SECURITIES............... If so specified in the related Prospectus
Supplement for a Series of Securities, then,
upon issuance of those Securities, special
counsel to the Depositor will issue an opinion
generally to the effect that the arrangement by
which such Securities are issued will be
classified as a grantor trust under Subpart E,
Part I of Subchapter J of the Code and not as an
association taxable as a corporation. If so
provided in the Prospectus Supplement, holders
of Securities of such Series ("Pass-Through
Securities") will be treated as owning directly
rights to receive certain payments of interest
or principal, or both, on the Primary Assets
held in the Trust Fund for such Series. All
income with respect to a Stripped Security (as
defined herein) will be accounted for as
original issue discount and, unless otherwise
specified in the related Prospectus Supplement,
will be reported by the Trustee on an accrual
basis, which may be prior to the receipt of cash
associated with such income.
C. OWNER TRUST SECURITIES..... If so specified in the Prospectus Supplement for
a Series of Securities, special counsel to the
Depositor will issue an opinion generally to the
effect that the Trust Fund will not be
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treated as an association, taxable mortgage
pool, or a publicly traded partnership taxable
as a corporation as long as all of the
provisions of the applicable Agreement are
complied with and statutory and regulatory
requirements are satisfied. Each Noteholder, by
the acceptance of a Note of a given Series, will
agree to treat such Note as indebtedness, and
each Certificateholder, by the acceptance of a
Certificate of a given Series, will agree to
treat the related Trust Fund for Federal tax
purposes as a partnership in which such
Certificateholder is a partner if there is more
than one Certificateholder for federal income
tax purposes, or to disregard the Trust as an
entity separate from the Certificateholder if
there is only one Certificateholder for federal
income tax purposes. Alternative
characterizations of such Trust Fund and such
Certificates are possible, but would not result
in materially adverse tax consequences to
Certificateholders. See "FEDERAL INCOME TAX
CONSIDERATIONS."
Generally, gain or loss will be recognized on a
sale of Securities in the amount equal to the
difference between the amount realized and the
seller's tax basis in the Securities sold. The
material federal income tax consequences for
investors associated with the purchase,
ownership and disposition of the Securities are
set forth herein under "FEDERAL INCOME TAX
CONSIDERATIONS." The material federal income tax
consequences for investors associated with the
purchase, ownership and disposition of
Securities of any particular Series will be set
forth under the heading "FEDERAL INCOME TAX
CONSIDERATIONS" in the related Prospectus
Supplement. See "FEDERAL INCOME TAX
CONSIDERATIONS."
ERISA CONSIDERATIONS.......... Subject to the considerations discussed under
"ERISA CONSIDERATIONS" herein and in the related
Prospectus Supplement, the Notes may be eligible
for purchase by employee benefit plans. The
related Prospectus Supplement will provide
further information with respect to the
eligibility of a Class of Certificates for
purchase by employee benefit plans. A fiduciary
of any employee benefit plan subject to the
Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), or the Code should
carefully review with its own legal advisors
whether the purchase or holding of Securities
could give rise to a transaction prohibited or
otherwise impermissible under ERISA or the Code.
See "ERISA CONSIDERATIONS" herein and in the
related Prospectus Supplement.
LEGAL INVESTMENT.............. Unless otherwise specified in the related
Prospectus Supplement, Securities of each Series
offered by this Prospectus and the related
Prospectus Supplement will not constitute
"mortgage related securities" under the
Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"). Investors whose investment
authority is subject to legal restrictions
should consult their own legal advisors to
determine whether and to what extent the
Securities constitute legal investments for
them. See "LEGAL INVESTMENT."
RATINGS....................... It will be a requirement for issuance of any
Series that each Class of Securities offered by
this Prospectus and the related
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Prospectus Supplement be rated by at least one
Rating Agency in one of its four highest
applicable rating categories. The rating or
ratings applicable to Securities of each Series
offered hereby and by the related Prospectus
Supplement will be as set forth in the related
Prospectus Supplement. A securities rating
should be evaluated independently of similar
ratings on different types of securities. In
general, a securities rating addresses the
likelihood that Holders will receive the
distributions to which they are entitled. A
securities rating is not a recommendation to
buy, hold or sell securities and does not
address the effect that the rate of prepayments
on the Home Equity Loans or Underlying Loans
relating to Private Securities, as applicable,
for a Series may have on the yield to investors
in the Securities of such Series. There is no
assurance that the rating initially assigned to
such Securities will not be subsequently lowered
or withdrawn by the Rating Agency. In the event
the rating initially assigned to any Securities
is subsequently lowered for any reason, no
person or entity will be obligated to provide
any credit enhancement in addition to the
Enhancement, if any, specified in the related
Prospectus Supplement. See "RISK
FACTORS--Ratings Are Not Recommendations."
REGISTRATION OF SECURITIES.... Securities may be represented by global
certificates and notes registered in the name of
Cede, as nominee of DTC or another nominee. In
such case, Securityholders will not be entitled
to receive definitive certificates and/or notes
representing such interests, except in certain
circumstances described in the related
Prospectus Supplement. See "DESCRIPTION OF THE
SECURITIES--BOOK-ENTRY SECURITIES" herein.
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RISK FACTORS
Investors should consider, among other things, the following risk
factors in connection with the purchase of the Securities.
LACK OF SECONDARY MARKET LIMITS LIQUIDITY. There will be no market for
the Securities of any Series prior to the issuance thereof, and there can be no
assurance that a secondary market will develop or, if it does develop, that it
will provide Holders with liquidity of investment or will continue for the life
of the Securities of such Series. See "PLAN OF DISTRIBUTION."
PRIMARY ASSETS ARE ONLY SOURCE OF REPAYMENT. The Securities of a Series
will be payable solely from the assets of the Trust Fund for such Securities and
any related Enhancement. There will be no recourse to the Seller, the Master
Servicer, the Representative or any other person for any default on the Notes or
any failure to receive distributions on the Certificates. Further, unless
otherwise stated in the related Prospectus Supplement, at the times set forth in
the related Prospectus Supplement, certain Primary Assets and/or any balance
remaining in the Collection Account, Certificate Account or Distribution Account
immediately after making all payments due on the Securities of such Series and
other payments specified in the related Prospectus Supplement, may be promptly
released or remitted to the Seller, the Master Servicer, the Enhancer or any
other person entitled thereto and will no longer be available for making
payments to Holders. Consequently, Holders of Securities of each Series must
rely solely upon payments with respect to the Primary Assets and the other
assets constituting the Trust Fund for a Series of Securities, including, if
applicable, any amounts available pursuant to any Enhancement for such Series,
for the payment of principal of and interest on the Securities of such Series.
Holders of Notes will be required under the Indenture to proceed only
against the Primary Assets and other assets constituting the related Trust Fund
in the case of a default with respect to such Notes and may not proceed against
any assets of the Seller, the Master Servicer or the Representative. There is no
assurance that the market value of the Primary Assets or any other assets for a
Series will at any time be equal to or greater than the aggregate principal
amount of the Securities of such Series then outstanding, plus accrued interest
thereon. Moreover, upon an event of default under the Indenture for a Series of
Notes and a sale of the assets in the Trust Fund or upon a sale of the assets of
a Trust Fund for a Series of Certificates, the Trustee, the Master Servicer, the
Enhancer, if any, and any other service provider specified in the related
Prospectus Supplement generally will be entitled to receive the proceeds of any
such sale to the extent of unpaid fees and other amounts owing to such persons
under the related Agreement prior to distributions to Holders of Securities.
Upon any such sale, the proceeds thereof may be insufficient to pay in full the
principal of and interest on the Securities of such Series.
LIMITED PROTECTION AGAINST LOSSES. Although any Enhancement is intended
to reduce the risk of delinquent payments or losses to Holders entitled to the
benefit thereof, the amount of such Enhancement will be limited, as set forth in
the related Prospectus Supplement, and will decline and could be depleted under
certain circumstances prior to the payment in full of the related Series of
Securities. As a result Holders may suffer losses. See "ENHANCEMENT."
YIELD MAY VARY. The yield to maturity experienced by a Holder of
Securities may be affected by the rate of payment of principal of the Home
Equity Loans or Underlying Loans relating to the Private Securities, as
applicable. The timing of principal payments of the Securities of a Series will
be affected by a number of factors, including the following: (i) the extent of
prepayments of the Home Equity Loans or Underlying Loans relating to the Private
Securities, as applicable; (ii) the manner of allocating principal payments
among the Classes of Securities of a Series as specified in the related
Prospectus Supplement; and (iii) the exercise by the party entitled thereto of
any right of optional termination. See "DESCRIPTION OF THE SECURITIES--Weighted
Average Life of the Securities." The rate of prepayments may be affected by the
characteristics of the Home Equity Loans, such as the loans-to-value ratios,
interest rates and purposes of such loans, the prevailing level of interest
rates, demographic, tax, and legal factors and servicing decisions. Prepayments
may also result from repurchases of Home Equity Loans or Underlying Loans
relating to the Private Securities, as applicable, due to material breaches of
the Seller's representations and warranties.
Interest payable on the Securities of a Series on a Distribution Date
will include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues during the calendar month
prior to a Distribution Date, the effective yield to Holders will be reduced
from the yield that would otherwise be obtainable if interest payable on the
Security were to accrue through the day immediately preceding each Distribution
Date, and the effective yield (at par) to Holders will be less than the
indicated coupon rate. See "DESCRIPTION OF THE SECURITIES--Payments of
Interest."
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[UNDERWRITING STANDARDS MAY AFFECT PERFORMANCE. As described herein
under "THE ORIGINATORS AND THE MASTER SERVICER--Underwriting Standards," the
Originators' underwriting standards generally are less stringent than those of
Fannie Mae or Freddie Mac with respect to a borrower's credit history and in
certain other respects. A borrower's past credit history may not preclude an
Originator from making a loan; however, it generally will reduce the size (and
consequently the Combined Loan-to-Value Ratio) of the loan that an Originator is
willing to make. As a result of this approach to underwriting, the Home Equity
Loans may experience higher rates of delinquencies, defaults and foreclosures
than mortgage loans underwritten in a more traditional manner.]
JUNIOR LIENS CREATE ADDITIONAL RISK OF LOSS. If the Home Equity Loans in
a Trust Fund are secured primarily by junior liens subordinate to the rights of
the mortgagee under the related senior mortgage(s) or deed(s) of trust, the
proceeds from any liquidation, insurance or condemnation proceedings will be
available to satisfy the outstanding balance of such Home Equity Loans only to
the extent that the claims of such senior mortgagees or beneficiaries have been
satisfied in full, including any related foreclosure costs. In addition, a
junior mortgagee may not foreclose on the Mortgaged Property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees at or prior to the foreclosure sale or undertake the obligation to
make payments on the senior mortgages in the event the mortgagor is in default
thereunder. The Trust Fund will not have any source of funds to satisfy the
senior mortgages or deeds of trust or make payments due to the senior mortgagees
or beneficiaries.
PROPERTY VALUES MAY BE INSUFFICIENT. There are several factors that
could adversely affect the value of the Mortgaged Properties such that the
outstanding balance of the related Home Equity Loan, together with any senior
financing on the Mortgaged Properties, would equal or exceed the value of the
Mortgaged Properties. Among the factors that could adversely affect the value of
the Mortgaged Properties are an overall decline in the residential real estate
market in the areas in which the Mortgaged Properties are located or a decline
in the general condition of the Mortgaged Properties as a result of failure of
borrowers to maintain adequately the Mortgaged Properties or of natural
disasters that are not necessarily covered by insurance, such as earthquakes and
floods. Any such decline could extinguish the value of a junior interest in a
Property before having any effect on the related senior interest therein. If
such a decline occurs, the actual rates of delinquencies, foreclosure and losses
on the junior Loans could be higher than those currently experienced in the
mortgage and home improvement lending industry in general.
INSUFFICIENT ADDITIONAL PRIMARY ASSETS MAY ADVERSELY AFFECT YIELD. The
ability of a Trust Fund to invest in additional Home Equity Loans during the
related Pre-Funding Period will be dependent on the ability of the Originators
to originate or acquire Home Equity Loans that satisfy the requirements for
transfer to the Trust Fund specified in the related Prospectus Supplement. The
ability of the Originators to originate or acquire such Loans will be affected
by a variety of factors, including the prevailing level of market interest
rates, unemployment levels and consumer perceptions of general economic
conditions. If the principal balance of additional Primary Assets delivered to
the Trust Fund during the Pre-Funding Period is less than the Pre-Funded Amount,
the Holders of the Securities of the related Series will receive a prepayment of
principal as and to the extent described in the related Prospectus Supplement.
Any such principal prepayment may adversely affect the yield to maturity of the
applicable Securities. Since prevailing interest rates are subject to
fluctuation, there can be no assurance that investors will be able to reinvest
such a prepayment at yields equaling or exceeding the yields on the related
Securities. It is possible that the yield on any such reinvestment will be
lower, and may be significantly lower, than the yield on the related Securities.
POTENTIAL LIABILITY FOR ENVIRONMENTAL CONDITIONS. Real property pledged
as security to a lender may be subject to certain environmental risks. Under the
laws of certain states, contamination of a property may give rise to a lien on
the property to assure the costs of clean-up. In several states, such a lien has
priority over the lien of an existing mortgage or owner's interest against such
property. In addition, under the laws of some states and under the federal
Comprehensive Environmental Response, Compensation, and Liability Act of 1980
("CERCLA"), a lender may be liable, as an "owner" or "operator," for costs of
addressing releases or threatened releases of hazardous substances that require
remedy at a property, if agents or employees of the lender have become
sufficiently involved in the operations of the borrower, regardless of whether
or not the environmental damage or threat was caused by a prior owner. A lender
also risks such liability on foreclosure of the Mortgaged Property.
CONSUMER PROTECTION LAWS MAY AFFECT LOANS. Applicable state laws
generally regulate interest rates and other charges and require certain
disclosures. In addition, other state laws, public policy and general principles
of equity relating to the protection of consumers, unfair and deceptive
practices and debt collection practices may apply to the origination, servicing
and collection of the Loans. Depending on the provisions of the applicable law
and the specific facts and circumstances involved, violations of these laws,
policies and principles may limit the ability of the Master Servicer or a
Sub-Servicer to collect all or part of the principal of or interest on the
Loans, may
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entitle the borrower to a refund of amounts previously paid and, in
addition, could subject the owner of the Home Equity Loan to damages and
administrative enforcement.
The Loans are also subject to federal laws, including:
(i) the federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding
the terms of the Loans;
(ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of
age, race, color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right under the
Consumer Credit Protection Act, in the extension of credit;
(iii) the Americans with Disabilities Act, which, among other
things, prohibits discrimination on the basis of disability in the full
and equal enjoyment of the goods, services, facilities, privileges,
advantages or accommodations of any place of public accommodation; and
(iv) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience.
Violations of certain provisions of these federal laws may limit the
ability of the Master Servicer or a Sub-Servicer to collect all or part of the
principal of or interest on the Loans and in addition could subject the Trust
Fund to damages and administrative enforcement. The Loans may be subject to the
Home Ownership and Equity Protection Act of 1994 (the "Act") which amended the
Truth in Lending Act as it applies to mortgages subject to the Act. The Act
requires certain additional disclosures, specifies the timing of such
disclosures and limits or prohibits inclusion of certain provisions in mortgages
subject to the Act. The Act also provides that any purchaser or assignee of a
mortgage covered by the Act is subject to all of the claims and defenses which
the borrower could assert against the original lender. The maximum damages that
may be recovered under the Act from an assignee is the remaining amount of
indebtedness plus the total amount paid by the borrower in connection with the
Loan. If the Trust Fund includes Loans subject to the Act, it will be subject to
all of the claims and defenses which the borrower could assert against the
applicable Originator. Any violation of the Act which would result in such
liability would be a breach of the Originators' and the Representative's
representations and warranties, and the applicable Originator or the Master
Servicer would be obligated to cure, repurchase or, if permitted by the
Agreement, substitute for the Home Equity Loan in question. In addition,
numerous other federal and state statutory provisions, including the federal
bankruptcy laws, the Soldiers' and Sailors' Civil Relief Act of 1940 and state
debtor relief laws, may also adversely affect the Master Servicer's or a
Sub-Servicer's ability to collect the principal of or interest on the Loans and
also would affect the interests of the Securityholders in such Loans if such
laws result in the Loans being uncollectible. See "CERTAIN LEGAL ASPECTS OF THE
LOANS."
INSOLVENCY OF ORIGINATORS MAY CAUSE LOSSES. The Originators intend that
their transfer of the Primary Assets to a Trust Fund will constitute a sale, and
the Originators and the Trust Fund will agree to treat each such transfer as a
sale. In the event of the insolvency of an Originator, the trustee in bankruptcy
or the Originator, as debtor-in-possession, may attempt to recharacterize such a
sale as a loan by the Trust Fund to the Originator secured by the pledge of the
related Primary Assets. If such an attempt were to be successful, Holders of
Securities could receive a prepayment of all or part of their Securities. Any
such prepayment would adversely affect the yield on such Securities and could
result in a loss. Even if such an attempt were to be unsuccessful, Holders of
Securities could experience delays in distributions which would adversely affect
the yield on the related Securities.
RATINGS ARE NOT RECOMMENDATIONS. It will be a condition to the issuance
of a Series of Securities that each Class be rated in one of the four highest
rating categories by the Rating Agency identified in the related Prospectus
Supplement. Any such rating would be based on, among other things, the adequacy
of the value of the Primary Assets and any Enhancement with respect to such
Series. In general, a securities rating addresses the likelihood that Holders
will receive the distributions to which they are entitled. Such rating should
not be deemed a recommendation to purchase, hold or sell Securities, inasmuch as
it does not address market price or suitability for a particular investor and
does not address the likelihood of prepayments or the possibility that investors
may receive a lower than anticipated yield. There is also no assurance that any
such rating will remain in effect for any given period of time or may not be
lowered or withdrawn entirely by the Rating Agency if in its judgment
circumstances in the future so warrant. In addition to being lowered or
withdrawn due to any erosion in the adequacy of the value of the Primary Assets,
such rating might also be lowered or withdrawn, among other reasons, because of
an adverse change in the financial or other condition of an Enhancer or a change
in the rating of such Enhancer's long term debt.
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Any such reduction or withdrawal in the rating assigned to the Securities may
adversely affect the liquidity of and yield on such Securities.
THE SELLER
Avco ABS Receivables Corp. (the "Seller") was incorporated in the State
of Nevada on November 7, 1997, and is an indirect, wholly-owned subsidiary of
AFS, Inc. The Seller maintains its principal offices at 1727-B Charleston, Las
Vegas, Nevada 89104. Its telephone number is (702) 474-6282.
The Seller does not have, nor is it expected in the future to have, any
significant assets.
THE ORIGINATOR AND THE MASTER SERVICER
GENERAL
Avco Financial Services, Inc., a Delaware corporation ("AFS, Inc." or
the "Parent") together with all of its United States consumer finance
subsidiaries (collectively and individually, the "Originator" or the "Company")
is a consumer finance company that has engaged in originating, acquiring and
servicing retail installment sales contracts, secured and unsecured consumer
finance loans since 1927 and consumer closed end loans secured by first and
second mortgages ("Home Equity Loans") since 1968. More recently, it has also
purchased revolving sales accounts and made revolving consumer and real estate
loans. Throughout its operating history, the Originator has focused on lending
to individuals who have demonstrated reasonably good credit histories and the
capacity to repay the moneys lent to them. The Company makes Home Equity Loans
to these borrowers for a variety of purposes, including debt consolidation.
These Home Equity Loans are secured by first or second mortgages on one- to
four-family residential properties. As of December 31, 1996, AFS, Inc. and all
of its subsidiaries had approximately 7,600 employees and 1,235 finance offices
located in all states of the United States (except Arkansas, Kansas,
Mississippi, Oklahoma and Vermont), the commonwealth of Puerto Rico, the Virgin
Islands, all Canadian provinces and the Yukon Territory, six Australia states
and the Australian Capital Territory, Hong Kong, New Zealand, Spain and the
United Kingdom.
The Originator originates Home Equity Loans through its full service
offices and supporting sales offices ("Branch Offices"), and acquires Home
Equity Loans through its central mortgage center (the "Central Mortgage
Center"), from Brokers and Correspondents.
The Originator has ___ Branch Offices in all states of the United States
except Arkansas, Kansas, Mississippi, Oklahoma and Vermont. The Central Mortgage
Center has __ sales offices ("Sales Offices") located in California, Florida,
Maryland, Nevada, Ohio and Oregon. Substantially all of the Home Equity Loans
originated at the Branch Offices ("Branch Originated Loans") are originated
directly with the borrowers. Through its Central Mortgage Center, the Originator
underwrites, acquires and services Home Equity Loans ("Brokered Loans")
originated in the Sales Offices through licensed mortgage brokers and other real
estate professionals ("Brokers") who submit loan applications on behalf of the
borrower. The Originator also purchases Home Equity Loans ("Correspondent
Loans") through its Central Mortgage Center from approved mortgage bankers and
financial institutions ("Correspondents").
At December 31, 1996, the Originator serviced a portfolio of $__________
of Home Equity Loans. __% of the portfolio was serviced in the Branch Offices
and __% was serviced in the Central Mortgage Center.
The Originator's headquarters are located at 600 Anton Boulevard, Costa
Mesa, California 92626. Its telephone number is (714) 435-1200.
LOAN PROGRAM
The Home Equity Loans will have been originated or purchased by the
Originator in accordance with the underwriting criteria specified below under
"Underwriting Standards" and "Specific Underwriting Criteria; Underwriting
Programs."
UNDERWRITING STANDARDS
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The Originator operates under certain underwriting standards that have
been approved by the Originator and are generally described below (the
"Originator Standards"). Seller will represent and warrant that all Home Equity
Loans conveyed by it to the Trustee will have been underwritten in accordance
with the Originator Standards.
Underwriting standards are applied to evaluate the borrower's credit
standing and repayment ability, and the value and adequacy of the related
Mortgaged Property as collateral. In general, a prospective borrower applying
for a Home Equity Loan is required to fill out a detailed application designed
to provide to the underwriting officer pertinent information with respect to the
applicant's liabilities, income, credit history, including the principal balance
and payment history with respect to any senior mortgage, and employment history,
as well as certain other personal information, which, to the extent specified in
the related Prospectus Supplement, have been verified by the related Originator.
The Originator generally obtains a credit report which summarizes the
borrower's credit history with local and national merchants and lenders,
installment debt payments and any record of defaults, bankruptcies,
repossessions, suits or judgments. The applicant's employment history for the
prior three years is obtained. Current employment status is verified. In most
cases, an employment verification is obtained either through employee ID, a pay
stub or in writing or verbally from the borrower's employer, which verification
reports, among other things, verify the length of employment with that
organization and the borrower's current salary. If a prospective borrower is
self-employed, the borrower may be required to submit copies of signed tax
returns.
Income is verified by reviewing the borrower's recent paycheck stub
(within the last 60 days), a recent 1040 or W2, written statement of earnings
from employer on business letterhead, a savings bond/bank statement of interest
paid, and retirement income. Verification is not required of present or former
customers if the customer has the same job, at the same place of employment, at
the same salary or higher. If the customer has changed place of employment, the
same verification process is used for a new customer.
A Credit Bureau report is generally required for all Home Equity Loans,
regardless of any other conditions. Once all applicable employment, credit and
property information is received, a determination generally is made, with the
assistance of a Debt Ratio, as to whether the prospective borrower has
sufficient monthly gross income available (i) to meet the borrower's monthly
obligations on the proposed mortgage loan (generally determined on the basis of
the monthly payments due in the year of origination) and other expenses related
to the property (such as property taxes and hazard insurance) and (ii) to meet
other financial obligations and monthly living expenses. The "Debt Ratio" is the
ratio of the borrower's total monthly payments described in (i) and (ii) above
to the borrower's gross monthly income. The maximum monthly Debt Ratio varies
depending upon a borrower's credit grade and loan documentation level (as
described below) but does not generally exceed 42% for Grade A Credits or 50%
for Grade B Credits or Grade C Credits (as more specifically described below).
Variations in the maximum monthly Debt Ratios are permitted based on
compensating factors.
The underwriting standards applied by the Originator, particularly with
respect to the level of loan documentation and the borrower's income and credit
history, may be varied in appropriate cases where factors such as low combined
loan-to value ratios or other favorable credit exist. The maximum combined
loan-to-value ratio ("CLTV") is based upon the type of Mortgaged Property, the
occupancy status and lien priority of the related mortgage. The maximum combined
loan-to-value ratio is generally 85%. Generally, the Originator requires lower
combined loan-to-value ratios for non-single family detached and non-owner
occupied properties, second lien mortgages and when the value of the property
increases. The maximum term for Branch Originated Loans is generally 180 months
and for Brokered Loans and Correspondent Loans is 360 months. Balloon Home
Equity Loans may be amortized over 30 years with a maturity date or subject to
call date, as applicable, within fifteen years.
APPRAISALS
In determining the adequacy of the property to be used as collateral, an
appraisal from an approved independent appraiser will generally be made of each
property considered for financing. The appraiser is generally required to
inspect the property, issue a report generally on a FNMA form regarding the
condition of the property and, if applicable, verify the construction, with
respect to new properties, has been completed. The appraisal is based on the
market value of comparable homes, the estimated rental income (if considered
applicable by the appraiser) and the cost of replacing the home. The value of
the property being financed, as indicated by the appraisal, must be such that it
currently supports, and is anticipated to support in the future, the outstanding
loan balance.
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<PAGE> 97
The Originator Standards limit the types of property which may serve as
collateral for a Home Equity Loan to the following: Single family,
owner-occupied residences, including town homes and condominiums, or rental
properties up to four units. Any exception requires written approval of the
Originator's U.S. Finance Chief Credit Officer. In addition, Home Equity Loans
may also be secured by, mixed use properties which are underwritten to the same
standards as Home Equity Loans secured by residential property.
Appraisals are required for each new or refinanced Home Equity Loan, by
an Originator-approved appraiser. New appraisals are not always required on
refinances, but the most recent appraisal must never by more than two years old.
With respect to Home Equity Loans acquired by the Originator through Brokers or
Correspondents, the Originator reviews and re-underwrites each Home Equity Loan.
A hazardous waste investigation must be conducted and the fact that it was
conducted must be noted on the appraisal. Title insurance or an attorney's
opinion of title must be obtained where the amount of the Home Equity Loan
exceeds $10,000. Dwelling insurance is required in an amount sufficient to
ensure all mortgage/deeds of trust on the property, including the Originator's
mortgage/deed of trust. At the time of origination, the Originator's policy is
to require that it be named as loss payee on all insurance policies. The
Originator does not, however, track whether dwelling insurance is maintained on
the property or force place insurance.
SPECIFIC UNDERWRITING CRITERIA; UNDERWRITING PROGRAMS
The Originator Standards allow for the origination and purchase of Home
Equity Loans generally under three underwriting programs, known as Grade A
Credits, Grade B Credits and Grade C Credits, all of which are summarized in the
table below. These programs and their underwriting criteria may change from time
to time. Deviations from the specific criteria of an underwriting program are
permitted to reflect local economic trends and real estate valuations, as well
as other credit factors specific to each Home Equity Loan application and/or
each portfolio acquired. Some Home Equity Loans may be to borrowers whose
creditworthiness may not coincide with program criteria. Overall, the goal is to
maintain the integrity of these programs and simultaneously provide lending
officers and correspondent networks with the flexibility to consider the
specific circumstances of each Home Equity Loan. However, the minimum standards
must be adhered to without prior approval.
BRANCH ORIGINATED HOME EQUITY LOANS:
<TABLE>
<CAPTION>
GRADE A GRADE B GRADE C
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum Debt Ratio 40% of gross 45% of gross 45% of gross
monthly income monthly income monthly income
Credit Report During the last 3 During the last 3 No account is
years no account years no account currently more
was more than 60 was more than 90 than 90 days
days contractually days contractually contractually past
past due past due due
First mortgage must First mortgage must First mortgage
must be current and not be current and not not be more than
more than 30 days more than 30 days 30 days contractually
contractually past contractually past past due twice during
due during the last due more than once the last two 12 months
12 months during the last 12
months.
No judgments or No judgments or No collections over
repossessions or collections over $300 during the
collections over $300 during the last 2 years
$200 last 2 years
No foreclosures No foreclosures No foreclosures
- ----------------------------------------------------------------------------------------------------
Employment
Wage Earner: 3 years same 2 years same 2 years same
occupation occupation occupation
Self-Employed 4 years same 3 years same No self employed
Professional: occupation occupation
</TABLE>
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<PAGE> 98
<TABLE>
<S> <C> <C> <C>
Self-Employed 4 years same 3 years same No self employed
Non-Professional:occupation; reduces occupation; reduces
maximum CLTV by 10% maximum CLTV by 10%
- ----------------------------------------------------------------------------------------------------
Property Types Residential 1-4, Residential 1-4, Residential 1-4,
single family single family single family
residence, Condo, residence, Condo, residence, Condo,
Townhome Townhome Townhome; Rural
properties 65%
maximum CLTV, 1%
increase in rate
- ----------------------------------------------------------------------------------------------------
Occupancy Owner/non-owner Owner/non-owner Owner only
- ----------------------------------------------------------------------------------------------------
</TABLE>
The Originator will provide Home Equity Loans to persons who have
obtained a discharge of debts under the Bankruptcy Code provided the discharge
has not resulted in a credit loss to the Originator. The origination of Home
Equity Loans to such persons requires the approval of the Originator's
applicable credit manager.
The Originator's underwriting criteria differs slightly in the case of
Brokered Loans and Correspondent Loans. Generally, in the case of Brokered
Loans, the Originator allows a maximum debt ratio not to exceed 50% of gross
monthly income, a minimum gross monthly income of $2,000, up to 4 accounts which
are 120 days contractually delinquent and on mortgage debt up to 4 occasions
which are not more than 30 days contractually past due or not more than 30 days
delinquent on 2 occasions and 60 days delinquent on 1 occasion in the last 12
months, non medical collections or liens of $5,000 or more. On Correspondent
Loans the criteria is substantially the same.
The Originator controls quality of lending by limiting the lending
authority of its employees to prescribed ranges with specific lending authority
based on the individual's experience. Lending quality and compliance is audited
regularly by supervisors of the Branch Offices and the Central Mortgage Center
and periodically by the Originator's Management Audit Department. The Originator
has recently added credit supervisors and field auditors at various locations in
the United States to further monitor quality and compliance.
SERVICING
The Originator owns and services with employees of the Master Servicer
all of the Home Equity Loans that it has originated or purchased except those
which it has sold in bulk to other companies. Servicing involves, among other
things, collecting payments when due, enforcing the Originator's rights with
respect to the Home Equity Loans, including, recovering delinquent payments,
instituting foreclosure and liquidating the underlying collateral.
The Originator generally services all Branch Originated Loans out of its
Branch Offices throughout the United States and the Brokered Loans and
Correspondent Loans out of its Central Mortgage Center, utilizing a system
("BOSCMS") which was developed in 1975 and has been updated from time to time to
include a ledgerless computer tracking system. The Originator's servicing
offices include Branch Offices and the Central Mortgage Center. BOSCMS is used
to provide detailed tracking of all key events in foreclosure and bankruptcy on
a loan-by-loan and portfolio-wide basis.
Centralized controls and standards have been established by the
Originator for the servicing and collection of Home Equity Loans in its
portfolio. The Originator revises such policies and procedures from time to time
in connection with changing economic and market conditions and changing legal
and regulatory requirements.
The Originator's collections policy is designed to identify payment
problems sufficiently early to permit the Originator to quickly address
delinquency problems. The Originator believes that these policies, combined with
the experience level of independent appraisers engaged by the Originator, help
to reduce the incidence of charge-offs of first or second Home Equity Loans.
With the exception of "360 day amortized loans", borrowers are billed on
a monthly basis in advance of the due date. 360 day amortization Home Equity
Loans annually are sent a set of 12 payment coupons. Collection procedures
commence upon identification of a past due account by the Originator's BOSCMS.
If timely payment is not received, BOSCMS automatically places the Home Equity
Loan in collection "queue" and collection procedures
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<PAGE> 99
are generally initiated on the day immediately following the grace period. The
account returns to the queue whenever payment is not made on the date promised.
The Originator generally initiates its pre-foreclosure process if a payment is
not received on an account within 90 days following its due date.
When a Home Equity Loans appears in a collection auto queue, a collector
will telephone to remind the borrower that a payment is due. Follow-up telephone
contacts are attempted until the account is current, the debtor requests no
further contact or foreclosure is instituted or other payment arrangements have
been made. Standard form letters are utilized when attempts to reach the
borrower by telephone fail and/or, in some circumstances, to supplement the
phone contacts. Company collectors have computer access to telephone numbers,
payment histories, loan information and all past collection notes. All
collection activity, including the date collection letters were sent and
detailed notes on the substance of each collection telephone call, is entered
into a permanent collection history for each account on BOSCMS. Additional
guidance with the collection process is derived through frequent communication
with the Originator's supervision and management.
For those Home Equity Loans in which collection efforts have been
exhausted without success, the office's manager recommends the Home Equity Loans
be sent to foreclosure and the Company's supervisors review and approve or
instruct the action to be taken. Supervisors determine whether foreclosure
proceedings are appropriate, based upon their analysis of all relevant factors,
including a market value analysis, reason for default and efforts by the
borrower to cure the default.
Regulations and practices regarding the liquidation of properties (e.g.,
foreclosure) and the rights of a borrower in default vary greatly from state to
state. As such, all foreclosures are assigned to outside counsel or a
foreclosure specialist, located in the same state as the secured property.
Bankruptcies filed by borrowers are generally assigned to appropriate local
counsel. All aspects of foreclosures and bankruptcies are closely monitored by
the Originator.
Prior to foreclosure sale, the Originator performs an in-depth market
value analysis on all defaulted Home Equity Loans. This analysis includes: (i) a
current valuation of the property obtained through a drive-by appraisal or
broker's price opinion conducted by an independent appraiser and/or a broker
from the Originator's network of real estate brokers, complete with a
description of the condition of the property, recent price lists of comparable
properties, recent closed comparables, estimated marketing time and required or
suggested repairs, and an estimate of the sales price; (ii) an evaluation of the
amount owed, if any, for real estate taxes; (iii) an evaluation of the amount
owed, if any, to a senior mortgagee; and (iv) estimated carrying costs, broker
fees, repair costs and other related costs associated with real estate owned
properties. The Originator bases the amount it will bid at foreclosure sales on
this analysis.
If the Originator acquires title to a property at a foreclosure sale or
otherwise, the Originator immediately begins working the file by obtaining an
estimate of the sale price of the property by sending a local real estate broker
to inspect the premises, and then hiring one to begin marketing the property. If
the property is not vacant when acquired, local eviction attorneys are hired to
commence eviction proceedings and/or negotiations are held with occupants in an
attempt to get them to vacate without incurring the additional time and cost of
eviction. Repairs are performed if it is determined that they will increase the
net liquidation proceeds, taking into consideration the cost of repairs, the
carrying costs during the repair period and the marketability of the property
both before and after the repairs.
DELINQUENCY AND LOSS EXPERIENCE
The following table sets forth information relating to the delinquency
and loss experience of the Originator for its servicing portfolio of home equity
loans (including home equity loans serviced for others) for the periods
indicated. This table includes lines of credit with outstanding principal
balances of $______, $_______ and $________ for the years ended December 31,
1994, 1995 and 1996, respectively. While the Originator believes that the lines
of credit perform similarly with the home equity loans, there is no assurance
that the delinquency and foreclosure and loss experiences on the lines of credit
will be similar to that of the home equity loans.
ORIGINATOR'S
HISTORIC SERVICING PORTFOLIO INFORMATION
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Total Outstanding Principal Balance.........
</TABLE>
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<PAGE> 100
<TABLE>
<S> <C> <C> <C>
Average Outstanding (1).....................
DELINQUENCY
30-59 Days:
Principal Balance...........................
Percent of Delinquency by Dollar (2)........
60 Days or more:
Total Delinquencies
Principal Balance...........................
Percent of Delinquency by Dollar (2)........
REO (3).....................................
Gross Losses................................
Recoveries..................................
Net Losses (4)..............................
Percentage of Net Losses
(based on Average Outstanding Principal
Balance)....................................
</TABLE>
- ------------------
(1) Calculated by summing the monthly average receivable balances (sum of
beginning and ending of the month principal balance divided by two) and
dividing the total by the number of months in the applicable period.
(2) Represents home equity loans on which one or more installments were 30 -59
or 60 or more days, as applicable, delinquent on a contractual basis
(expressed as a percentage of the related gross receivables outstanding).
(3) [Foreclosed home equity loans are transferred out of receivables into REO
which are included in other assets at the lower of fair value (less
estimated cost to sell) or the outstanding loan balance.]
(4) Net Losses equal Gross Losses less recoveries.
While the above delinquency and foreclosure and loss experiences reflect
the Originator's experiences for the periods indicated, there can be no
assurance that the delinquency and foreclosure and loss experiences on the Home
Equity Loans, included in the Trust will be similar. Accordingly, this
information should not be considered to reflect the credit quality of the Home
Equity Loans included in the Trust, or as a basis of assessing the likelihood,
amount or severity of losses on the Home Equity Loans, included in the Trust.
The statistical data in the table is based on all of the loans in the
Originator's servicing portfolio.
DESCRIPTION OF THE SECURITIES
GENERAL
Each Series of Notes will be issued pursuant to an indenture (the
"Indenture") between the related Trust Fund and the entity named in the related
Prospectus Supplement as trustee (the "Trustee") with respect to such Series. A
form of Indenture has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part. The Certificates will also be issued in
Series pursuant to separate agreements (each, a "Pooling and Servicing
Agreement" or a "Trust Agreement") among the Seller, the Originators, the Master
Servicer, if the Series relates to Loans, and the Trustee. A form of Pooling and
Servicing Agreement has been filed as an exhibit to the Registration Statement
of which this Prospectus forms a part. A Series may consist of both Notes and
Certificates.
The following summaries describe the material provisions in the
Agreements common to each Series of Securities. The summaries do not purport to
be complete and are subject to, and are qualified in their entirety by reference
to, the provisions of the Agreements and the Prospectus Supplement relating to
each Series of Securities. Where particular provisions or terms used in the
Agreements are referred to, the actual provisions (including definitions of
terms) are incorporated herein by reference as part of such summaries.
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<PAGE> 101
Each Series of Securities will consist of one or more Classes of
Securities, one or more of which may be Compound Interest Securities, Variable
Interest Securities, PAC Securities, Zero Coupon Securities, Principal Only
Securities or Interest Only Securities (each of which is generally described in
the "GLOSSARY OF TERMS"). A Series may also include one or more Classes of
Subordinate Securities. The Securities of each Series will be issued only in
fully registered form, without coupons, in the authorized denominations for each
Class specified in the related Prospectus Supplement. Upon satisfaction of the
conditions, if any, applicable to a Class of a Series, as described in the
related Prospectus Supplement, the transfer of the Securities may be registered
and the Securities may be exchanged at the office of the Trustee specified in
the Prospectus Supplement without the payment of any service charge other than
any tax or governmental charge payable in connection with such registration of
transfer or exchange. If specified in the related Prospectus Supplement, one or
more Classes of a Series may be available in book-entry form only.
Unless otherwise provided in the related Prospectus Supplement, payments
of principal of and interest on a Series of Securities will be made on the
Distribution Dates specified in the related Prospectus Supplement (which may be
different for each Class or for the payment of principal and interest) by check
mailed to Holders of such Series, registered as such at the close of business on
the record date specified in the related Prospectus Supplement applicable to
such Distribution Dates at their addresses appearing on the security register,
except that (a) payments may be made by wire transfer (which, unless otherwise
specified in the related Prospectus Supplement, shall be at the expense of the
Holder requesting payment by wire transfer) in certain circumstances described
in the related Prospectus Supplement and (b) final payments of principal in
retirement of each Security will be made only upon presentation and surrender of
such Security at the office of the Trustee specified in the Prospectus
Supplement. Notice of the final payment on a Security will be mailed to the
Holder of such Security before the Distribution Date on which the final
principal payment on any Security is expected to be made to the holder of such
Security.
Payments of principal of and interest on the Securities will be made by
the Trustee, or a paying agent on behalf of the Trustee, as specified in the
related Prospectus Supplement. Unless otherwise provided in the related
Prospectus Supplement, all payments with respect to the Primary Assets for a
Series, together with reinvestment income thereon, amounts withdrawn from any
Reserve Fund, and amounts available pursuant to any other Enhancement will be
deposited directly into the Collection Account or the Certificate Account. If
provided in the related Prospectus Supplement, such amounts may be net of
certain amounts payable to the Servicer and any other person specified in the
Prospectus Supplement. Such amounts thereafter may be deposited into the
Distribution Account and will be available to make payments on the Securities of
such Series on the next applicable Distribution Date. See "THE TRUST
FUNDS--Collection, Certificate and Distribution Accounts."
BOOK-ENTRY SECURITIES
If specified in the related Prospectus Supplement, one or more Classes
of Securities may be issued in book-entry form (the "Book-Entry Securities").
Persons acquiring beneficial ownership interests in the Book-Entry Securities
("Owners") will hold their Securities through the Depository Trust Company
("DTC") in the United States, or CEDEL Bank societe anonyme ("CEDEL") or the
Euroclear System ("Euroclear") (in Europe) if they are participants of such
systems, or indirectly through organizations which are participants in such
systems. The Book-Entry Securities will be issued in one or more certificates
which equal the aggregate principal balance of the applicable Class or Classes
of Securities and will initially be registered in the name of Cede & Co., the
nominee of DTC. CEDEL and Euroclear will hold omnibus positions on behalf of
their participants through customers" securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers" securities accounts in the depositaries"
names on the books of DTC. Citibank N.A. ("Citibank") will act as depositary for
CEDEL and The Chase Manhattan Bank ("Chase") will act as depositary for
Euroclear (in such capacities, individually the "Relevant Depositary" and
collectively the "European Depositaries"). Except as described below, no person
acquiring a Book-Entry Security will be entitled to receive a physical
certificate representing such Security (a "Definitive Security"). Unless and
until Definitive Securities are issued, it is anticipated that the only
"Certificateholder" or Noteholder, as applicable, will be Cede & Co., as nominee
of DTC. Owners are only permitted to exercise their rights indirectly through
Participants and DTC.
The Owner's ownership of a Book-Entry Security will be recorded on the
records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the beneficial
owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such Book-Entry Security will be recorded on the records of DTC (or
of a participating firm that acts as agent for the Financial Intermediary, whose
interest will in turn he recorded on the records of DTC, if the beneficial
owner's Financial Intermediary is not a DTC participant and on the records of
CEDEL or Euroclear, as appropriate).
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<PAGE> 102
Owners will receive all distributions of principal of, and interest on,
the Book-Entry Securities from the Trustee through DTC and DTC participants.
While the Book-Entry Securities are outstanding (except under the circumstances
described below), under the rules, regulations and procedures creating and
affecting DTC and its operations (the "Rules"), DTC is required to make
book-entry transfers among Participants on whose behalf it acts with respect to
the Securities and is required to receive and transmit distributions of
principal of, and interest on, the Securities. Participants and indirect
participants with whom Certificate Owners have accounts with respect to
Securities are similarly required to make book-entry transfers and receive and
transmit such distributions on behalf of their respective Owners. Accordingly,
although Owners will not possess certificates, the Rules provide a mechanism by
which Owners will receive distributions and will be able to transfer their
interest.
Owners will not receive or be entitled to receive certificates
representing their respective interests in the Securities, except under the
limited circumstances described below. Unless and until Definitive Securities
are issued, Owners who are not Participants may transfer ownership of Securities
only through Participants and indirect participants by instructing such
Participants and indirect participants to transfer Securities, by book-entry
transfer, through DTC for the account of the purchasers of such Securities,
which account is maintained with their respective Participants. Under the Rules
and in accordance with DTC's normal procedures, transfers of ownership of
Securities will be executed through DTC and the accounts of the respective
Participants at DTC will be debited and credited. Similarly, the Participants
and indirect participants will make debits or credits, as the case may be, on
their records on behalf of the selling and purchasing Owners.
Because of time zone differences, credits of securities received in
CEDEL or Euroclear as a result of a transaction with a Participant will be made
during subsequent securities settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or CEDEL Participants on such business day. Cash received in CEDEL or
Euroclear as a result of sales of securities by or through a CEDEL Participant
(as defined below) or Euroclear Participant (as defined below) to a DTC
Participant will be received with value on the DTC settlement date but will be
available in the relevant CEDEL or Euroclear cash account only as of the
business day following settlement in DTC.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company,
performs services for its participants, some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
expected to record the positions held by each DTC participant in the Book-Entry
Certificates, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Book-Entry Certificates will be
subject to the rules, regulations and procedures governing DTC and DTC
participants as in effect from time to time.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is
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<PAGE> 103
also available to others, such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a CEDEL
Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Securities will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC Participant will be
responsible for disbursing such payments to the Owners that it represents and to
each Financial Intermediary for which it acts as agent. Each such Financial
Intermediary will be responsible for disbursing funds to the Owners that it
represents.
Under a book-entry format, Owners may experience some delay in their
receipt of payments, since such payments will be forwarded by the Trustee to
Cede. Distributions with respect to Securities held through CEDEL or Euroclear
will be credited to the cash accounts of CEDEL Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by the Relevant Depositary. Such distributions will be
subject to tax reporting in accordance with relevant United States tax laws and
regulations. Because DTC can only act on behalf of Financial Intermediaries, the
ability of an Owner to pledge Book-Entry Securities to persons or entities that
do not participate in the Depository system, or otherwise take actions in
respect of such Book-Entry Securities, may be limited due to the lack of
physical certificates for such Book-Entry Securities. In addition, issuance of
the Book-Entry Securities in book-entry form may reduce the liquidity of such
Securities in the secondary market since certain potential investors may be
unwilling to purchase Securities for which they cannot obtain physical
certificates.
Monthly and annual reports on the applicable Trust Fund will be provided
to Cede, as nominee of DTC, and may be made available by Cede to Owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Securities of such Owners are credited.
DTC has advised the Trustee that, unless and until Definitive Securities
are issued, DTC will take any action permitted to be taken by the holders of the
Book-Entry Securities under the Agreement only at the direction of one or more
Financial Intermediaries to whose DTC accounts the Book-Entry Securities are
credited, to the extent that such actions are taken on behalf of Financial
Intermediaries whose holdings include such Book-Entry Securities. CEDEL or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by a Holder under the Agreement on behalf of a CEDEL Participant or
Euroclear Participant only in accordance with its relevant
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rules and procedures and subject to the ability of the Relevant Depositary to
effect such actions on its behalf through DTC. DTC may take actions, at the
direction of the related Participants, with respect to some Securities which
conflict with actions taken with respect to other Securities.
Definitive Securities will be issued to Owners, or their nominees,
rather than to DTC, only if (a) DTC or the Seller advises the Trustee in writing
that DTC is no longer willing, qualified or able to discharge properly its
responsibilities as nominee and depository with respect to the Book-Entry
Securities and the Seller or the Trustee is unable to locate a qualified
successor, (b) the Seller, at its sole option, elects to terminate a book-entry
system through DTC or (c) after the occurrence of an Event of Default (as
defined herein), Owners owning a majority in principal amount of the applicable
Securities advise the Trustee and DTC through the Financial Intermediaries and
the DTC participants in writing that the continuation of a book-entry system
through DTC (or a successor thereto) is no longer in the best interests of
Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all applicable
Owners of the occurrence of such event and the availability through DTC of
Definitive Securities. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Securities and instructions for
re-registration, the Trustee will issue Definitive Securities, and thereafter
the Trustee will recognize the holders of such Definitive Securities as
Certificateholders or Noteholders, as applicable, under the Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Securities among participants of
DTC, CEDEL and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
Neither the Seller, the Servicer nor the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Securities held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
VALUATION OF THE PRIMARY ASSETS
If specified in the related Prospectus Supplement for a Series of Notes,
each Primary Asset included in the related Trust Fund for a Series will be
assigned an initial "Asset Value." Unless otherwise specified in the related
Prospectus Supplement, at any time the Asset Value of the Primary Assets will be
equal to the product of the Asset Value Percentage as set forth in the Indenture
and the lesser of (a) the stream of remaining regularly scheduled payments on
the Primary Assets, net, unless otherwise provided in the related Prospectus
Supplement, of certain amounts payable as expenses, together with income earned
on each such scheduled payment received through the day preceding the next
Distribution Date at the Assumed Reinvestment Rate, if any, discounted to
present value at the highest interest rate on the Notes of such Series over
periods equal to the interval between payments on the Notes, and (b) the then
principal balance of the Primary Assets. Unless otherwise specified in the
related Prospectus Supplement, the initial Asset Value of the Primary Assets
will be at least equal to the principal amount of the Notes of the related
Series at the date of issuance thereof.
The "Assumed Reinvestment Rate," if any, for a Series will be the
highest rate permitted by the Rating Agency or a rate insured by means of a
surety bond, guaranteed investment contract, or other arrangement satisfactory
to the Rating Agency. If the Assumed Reinvestment Rate is so insured, the
related Prospectus Supplement will set forth the terms of such arrangement.
PAYMENTS OF INTEREST
The Securities of each Class by their terms entitled to receive interest
will bear interest (calculated, unless otherwise specified in the related
Prospectus Supplement, on the basis of a 360 day year of twelve 30-day months)
from the date and at the rate per annum specified, or calculated in the method
described, in the related Prospectus Supplement. Interest on such Securities of
a Series will be payable on the Distribution Date specified in the related
Prospectus Supplement. If so specified in the related Prospectus Supplement, the
Distribution Date for the payment of interest of a Class may be different from,
or occur more or less frequently than, the Distribution Date for the payment of
principal of such Class. The rate of interest on Securities of a Series may be
variable or may change with changes in the annual percentage rates of the Loans
or Underlying Loans relating to the Private Securities, as applicable, included
in the related Trust Fund and/or as prepayments occur with respect to such Loans
or Underlying Loans, as applicable. Principal Only Securities may not be
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entitled to receive any interest distributions or may be entitled to receive
only nominal interest distributions. Any interest on Zero Coupon Securities that
is not paid on the related Distribution Date will accrue and be added to the
principal thereof on such Distribution Date.
Interest payable on the Securities on a Distribution Date will include
all interest accrued during the period specified in the related Prospectus
Supplement. In the event interest accrues during the calendar month preceding a
Distribution Date, the effective yield to Holders will be reduced from the yield
that would otherwise be obtainable if interest payable on the Securities were to
accrue through the day immediately preceding such Distribution Date.
PAYMENTS OF PRINCIPAL
On each Distribution Date for a Series, principal payments will be made
to the Holders of the Securities of such Series on which principal is then
payable, to the extent set forth in the related Prospectus Supplement. Such
payments will be made in an aggregate amount determined as specified in the
related Prospectus Supplement and will be allocated among the respective Classes
of a Series in the manner, at the times and in the priority set forth in the
related Prospectus Supplement. The Holders of one or more Classes of Securities
may have the right to request that principal distributions allocable to such
Holder's Class of Securities be distributed to such Holder. If the requests of
Holders exceed the amount of principal to be distributed, the requests generally
will be filled in the order in which they were received. If the amount of
principal to be distributed exceeds the amount of requests, the Trustee will
select random lots of $1,000 each to receive such principal distribution. Thus,
some Holders of the applicable Class of Securities may receive no principal
distributions or a disproportionate amount of such principal distributions. If
so specified in the related Prospectus Supplement, the Distribution Date for the
payment of principal of a Class may be different from, or occur more or less
frequently than, the Distribution Date for the payment of interest for such
Class.
FINAL SCHEDULED DISTRIBUTION DATE
The Final Scheduled Distribution Date with respect to each Class of
Notes is the date no later than the date on which the principal thereof will be
fully paid and with respect to each Class of Certificates will be the date on
which the entire aggregate principal balance of such Class is expected to be
reduced to zero, in each case calculated on the basis of the assumptions
applicable to such Series described in the related Prospectus Supplement. The
Final Scheduled Distribution Date for each Class of a Series will be specified
in the related Prospectus Supplement. Since payments on the Primary Assets will
be used to make distributions in reduction of the outstanding principal amount
of the Securities, it is likely that the actual final Distribution Date of any
such Class will occur earlier, and may occur substantially earlier, than its
Final Scheduled Distribution Date. Furthermore, with respect to a Series of
Certificates, as a result of delinquencies, defaults and liquidations of the
Primary Assets in the Trust Fund, the actual final Distribution Date of any
Certificate may occur later than its Final Scheduled Distribution Date. No
assurance can be given as to the actual prepayment experience with respect to a
Series. See "--Weighted Average Life of the Securities" below.
SPECIAL REDEMPTION
If so specified in the Prospectus Supplement relating to a Series of
Securities having other than monthly Distribution Dates, one or more Classes of
Securities of such Series may be subject to special redemption, in whole or in
part, on the day specified in the related Prospectus Supplement (a "Special
Redemption Date") if, as a consequence of prepayments on the Loans or Underlying
Loans, as applicable, relating to such Securities or low yields then available
for reinvestment the entity specified in the related Prospectus Supplement
determines, based on assumptions specified in the applicable Agreement, that the
amount available for the payment of interest that will have accrued on such
Securities (the "Available Interest Amount") through the designated interest
accrual date specified in the related Prospectus Supplement is less than the
amount of interest that will have accrued on such Securities to such date. In
such event and as further described in the related Prospectus Supplement, the
Trustee will redeem a principal amount of outstanding Securities of such Series
as will cause the Available Interest Amount to equal the amount of interest that
will have accrued through such designated interest accrual date for such Series
of Securities outstanding immediately after such redemption.
OPTIONAL REDEMPTION, PURCHASE OR TERMINATION
The Seller, the Master Servicer, or another entity designated in the
related Prospectus Supplement may, at its option, cause an early termination of
one or more Classes of Securities by purchasing all or part of the Primary
Assets from such Trust Fund on or after a date specified in the related
Prospectus Supplement, or on or after such time as the aggregate outstanding
principal amount of the Securities or Primary Assets, as specified in the
related
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Prospectus Supplement is less than the amount or percentage, not more
than 25%, specified in the related Prospectus Supplement. In addition, if so
specified in the related Prospectus Supplement upon certain events of insolvency
or receivership of the Seller or another affiliated entity specified in the
related Prospectus Supplement, the related Primary Assets of the Trust Fund will
be liquidated and the Trust Fund will be terminated, subject to the conditions
set forth in the related Prospectus Supplement. In each such event, the
Securities of the related Series will experience a prepayment. The redemption,
purchase or repurchase price will be set forth in the related Prospectus
Supplement. If specified in the related Prospectus Supplement, in the event that
a REMIC election has been made, the Trustee will receive a satisfactory opinion
of counsel that the optional redemption, purchase or termination will be
conducted so as to constitute a "qualified liquidation" under Section 860F of
the Code.
WEIGHTED AVERAGE LIFE OF THE SECURITIES
Weighted average life refers to the average amount of time that will
elapse from the date of issue of a security until each dollar of principal of
such security will be repaid to the investor. Unless otherwise specified in the
related Prospectus Supplement, the weighted average life of a Class of the
Securities will be influenced by the rate at which the amount financed under the
Loans or Underlying Loans relating to the Private Securities, as applicable,
included in the Trust Fund for a Series is paid, which may be in the form of
scheduled amortization or prepayments.
Prepayments on loans and other receivables can be measured relative to a
prepayment standard or model. The Prospectus Supplement for a Series of
Securities will describe the prepayment standard or model, if any, used and may
contain tables setting forth the weighted average life of each Class of
Securities of such Series, and the percentage of the original principal amount
of each Class of Securities of such Series that would be outstanding on
specified Distribution Dates for such Series, in each case based on the
assumptions stated in such Prospectus Supplement, including assumptions that
prepayments on the Loans or Underlying Loans relating to the Private Securities,
as applicable, included in the related Trust Fund are made at rates
corresponding to various percentages of the prepayment standard or model
specified in such Prospectus Supplement.
There is, however, no assurance that prepayment of the Loans or
Underlying Loans relating to the Private Securities, as applicable, included in
the related Trust Fund will conform to any level of any prepayment standard or
model specified in the related Prospectus Supplement. The rate of principal
prepayments on pools of loans may be influenced by a variety of factors,
including job related factors such as transfers, layoffs or promotions and
personal factors such as divorce, disability or prolonged illness. Economic
conditions, either generally or within a particular geographic area or industry,
also may affect the rate of principal prepayments. Demographic and social
factors may influence the rate of principal prepayments in that some borrowers
have greater financial flexibility to move or refinance than do other borrowers.
The deductibility of mortgage interest payments, and servicing decisions also
affect the rate of principal prepayments. As a result, there can be no assurance
as to the rate or timing of principal prepayments of the Loans or Underlying
Loans either from time to time or over the lives of such Loans or Underlying
Loans.
The rate of prepayments of conventional housing loans and other
receivables has fluctuated significantly in recent years. In general, however,
if prevailing interest rates fall significantly below the interest rates on the
Loans or Underlying Loans relating to the Private Securities, as applicable, for
a Series, such loans are likely to prepay at rates higher than if prevailing
interest rates remain at or above the interest rates borne by such loans. In
this regard, it should be noted that the Loans or Underlying Loans, as
applicable, for a Series may have different interest rates. In addition, the
weighted average life of the Securities may be affected by the varying
maturities of the Loans or Underlying Loans relating to the Private Securities,
as applicable. If any Loans or Underlying Loans relating to the Private
Securities, as applicable, for a Series have actual terms-to-stated maturity of
less than those assumed in calculating the Final Scheduled Distribution Date of
the related Securities, one or more Classes of the Series may be fully paid
prior to their respective Final Scheduled Distribution Date, even in the absence
of prepayments and a reinvestment return higher than the Assumed Reinvestment
Rate.
THE TRUST FUNDS
GENERAL
The Notes of each Series will be secured by the pledge of the assets of
the related Trust Fund, and the Certificates of each Series will represent
interests in the assets of the related Trust Fund. The Trust Fund of each Series
will include (i) the Primary Assets, (ii) amounts available from the
reinvestment of payments on such Primary Assets at the Assumed Reinvestment
Rate, if any, specified in the related Prospectus Supplement, (iii) any
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Enhancement or the rights thereto, (iv) any Mortgaged Property that secured a
Home Equity Loan but which is acquired by foreclosure or deed in lieu of
foreclosure or repossession and (v) the amount, if any, initially deposited in
the Pre-Funding Account, Capitalized Interest Account, Collection Account,
Certificate Account or Distribution Account for a Series as specified in the
related Prospectus Supplement.
The Securities will be non-recourse obligations of the related Trust
Fund. The assets of the Trust Fund specified in the related Prospectus
Supplement for a Series of Securities, unless otherwise specified in the related
Prospectus Supplement, will serve as collateral only for that Series of
Securities. Holders of a Series of Notes may only proceed against such
collateral securing such Series of Notes in the case of a default with respect
to such Series of Notes and may not proceed against any assets of the Seller or
the related Trust Fund not pledged to secure such Notes.
The Primary Assets for a Series will be transferred by the Seller to the
Trust Fund. Loans relating to a Series will be master serviced by the Master
Servicer pursuant to a Pooling and Servicing Agreement, with respect to a Series
consisting of only Certificates or a Sale and Servicing Agreement (each, a "Sale
and Servicing Agreement") between the Seller, the Trust Fund, the Originators
and the Master Servicer, with respect to a Series that includes Notes.
As used herein, "Agreement" means, with respect to a Series of
Certificates, the Pooling and Servicing Agreement or Trust Agreement, and with
respect to a Series that includes Notes, the Indenture and the Sale and
Servicing Agreement, as the context requires.
If so specified in the related Prospectus Supplement, a Trust Fund
relating to a Series of Securities may be a business trust formed under the laws
of the state specified in the related Prospectus Supplement pursuant to a trust
agreement (each, a "Trust Agreement") between the Seller and the Trustee of such
Trust Fund specified in the related Prospectus Supplement.
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or liabilities.
No Trust Fund is expected to engage in any activities other than acquiring,
managing and holding the related Primary Assets and other assets contemplated
herein and in the related Prospectus Supplement and the proceeds thereof,
issuing Securities and making payments and distributions thereon and certain
related activities. No Trust Fund is expected to have any source of capital
other than its assets and any related Enhancement.
Primary Assets included in the Trust Fund for a Series may consist of
any combination of Loans and Private Securities, to the extent and as specified
in the related Prospectus Supplement.
An Agreement may provide that additional Home Equity Loans may be added
to the Trust Fund if such Home Equity Loans were originated or acquired by the
Seller in the ordinary course of its business, the inclusion of such Home Equity
Loans will maintain or increase the level of overcollateralization and the
inclusion of such Home Equity Loans will not result in the withdrawal or
downgrading of the ratings then assigned to the Securities of the related
Series. In addition, an Agreement may provide that Home Equity Loans may be
removed from a Trust Fund from time to time if the actual level of
overcollateralization exceeds the amount of overcollateralization required to be
maintained and such removal will not result in the withdrawal or downgrading of
the ratings then assigned to the Securities of the related Series.
THE LOANS
The Primary Assets for a Series may consist, in whole or in part, of
closed-end home equity loans (the "Home Equity Loans") secured by mortgages
primarily on Single Family Mortgaged Properties which may be subordinated to
other mortgages on the same Mortgaged Property. The Home Equity Loans may have
fixed interest rates or adjustable interest rates and may provide for other
payment characteristics as described below.
The full principal amount of a Home Equity Loan is advanced at
origination of the loan and generally is repayable in equal (or substantially
equal) installments of an amount sufficient to fully amortize such loan at its
stated maturity. As more fully described in the related Prospectus Supplement,
interest on each Home Equity Loan is calculated on the basis of the outstanding
principal balance of such loan multiplied by the Home Equity Loan Rate thereon
and, in the case of simple interest loans, further multiplied by a fraction, the
numerator of which is the number of days in the period elapsed since the
preceding payment of interest was made and the denominator is the number of days
in the annual period for which interest accrues on such loan. Interest on Home
Equity Loans also
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may be calculated on the actuarial basis, in which case each monthly
payment consists of a decreasing amount of interest and an increasing amount of
principal, and the payment either earlier or later then the due date therefor
will not affect the relative applications of principal and interest. The Loans
for a Series may include Home Equity Loans that do not amortize their entire
principal balance by their stated maturity in accordance with their terms and
require a balloon payment of the remaining principal balance at maturity, as
specified in the related Prospectus Supplement. The original terms to stated
maturity of Home Equity Loans will generally not exceed 360 months.
The Mortgaged Properties will include Single Family Property (i.e., one-
to four-family residential housing, including Condominium Units and Cooperative
Dwellings) and may include mixed-use property. Mixed-use properties will consist
of structures of no more than three stories, which include one to four
residential dwelling units and space used for retail, professional or other
commercial uses. Such uses, which will not involve more than 50% of the space in
the structure, may include doctor, dentist or law offices, real estate agencies,
boutiques, newsstands, convenience stores or other similar types of uses
intended to cater to individual customers as specified in the related Prospectus
Supplement. The properties may be located in suburban or metropolitan districts.
Any such non-residential use will be in compliance with local zoning laws and
regulations. The Mortgaged Properties may consist of detached individual
dwellings, individual condominiums, townhouses, duplexes, row houses, individual
units in planned unit developments and other attached dwelling units. The
Mortgaged Properties also may include module or manufactured homes which are
treated as real estate under local law. Except for Condominium Units and
Cooperative Dwellings, each Single Family Property will be located on land owned
in fee simple by the borrower or on land leased by the borrower for a term at
least as long as the term of the related Loan. Attached dwellings may include
owner-occupied structures where each borrower owns the land upon which the unit
is built, with the remaining adjacent land owned in common or dwelling units
subject to a proprietary lease or occupancy agreement in a cooperatively owned
apartment building. Mortgages on Cooperative Dwellings consist of a lien on the
shares issued by such Cooperative Dwelling and the proprietary lease or
occupancy agreement relating to such Cooperative Dwelling.
The aggregate principal balance of Loans secured by Mortgaged Properties
that are owner-occupied will be disclosed in the related Prospectus Supplement.
The sole basis for determining that a given percentage of the Loans are secured
by Single Family Property that is owner-occupied will be either (i) the making
of an oral representation by the Mortgagor at origination of the Home Equity
Loan either that the underlying Mortgaged Property will be used by the Mortgagor
for a period of at least six months every year or that the Mortgagor intends to
use the Mortgaged Property as a primary residence, or (ii) a finding that the
address of the underlying Mortgaged Property is the Mortgagor's mailing address
as reflected in the Servicer's records. The Mortgaged Properties also may
include non-owner occupied investment properties and vacation and second homes.
ADDITIONAL INFORMATION. The related Prospectus Supplement for each
Series will provide information with respect to the Loans that are Primary
Assets as of the Cut-off Date, including, among other things, and to the extent
relevant: (a) the aggregate unpaid principal balance of the Loans (b) the range
and weighted average Home Equity Loan Rate on the Loans, and, in the case of
adjustable rate Loans, the range and weighted average of the current Home Equity
Loan Rates and the Lifetime Rate Caps, if any; (c) the range and average
outstanding principal balance of the Loans; (d) the weighted average original
and remaining term-to-stated maturity of the Loans and the range of original and
remaining terms-to-stated maturity, if applicable; (e) the range and weighted
average of Combined Loan-to-Value Ratios or Loan-to-Value Ratios for the Loans,
as applicable; (f) the percentage (by outstanding principal balance as of the
Cut-off Date) of Loans that accrue interest at adjustable or fixed interest
rates; (g) any special hazard insurance policy or bankruptcy bond or other
enhancement relating to the Loans; (h) the geographic distribution of the
Mortgaged Properties securing the Loans; (i) the percentage of Loans (by
principal balance as of the Cut-off Date) that are secured by Single Family
Mortgaged Properties, shares relating to Cooperative Dwellings, Condominium
Units, investment property and vacation or second homes; (j) the lien priority
of the Home Equity Loans; and (k) the delinquency status and year of origination
of the Loans. The related Prospectus Supplement will also specify any other
limitations on the types or characteristics of Loans for a Series.
If information of the nature described above respecting the Loans is not
known to the Seller at the time the Securities are initially offered,
approximate or more general information of the nature described above will be
provided in the Prospectus Supplement and additional information will be set
forth in a Current Report on Form 8-K to be available to investors on the date
of issuance of the related Series and to be filed with the Commission within 15
days after the initial issuance of such Securities.
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PRIVATE SECURITIES
GENERAL. Primary Assets for a Series may consist, in whole or in part,
of Private Securities which include pass-through certificates representing
beneficial interests in loans of the type that would otherwise be eligible to be
Loans (the "Underlying Loans") or (b) collateralized obligations secured by
Underlying Loans.
Private Securities will have been issued pursuant to a pooling and
servicing agreement, a trust agreement or similar agreement (a "PS Agreement").
The seller/servicer of the Underlying Loans will have entered into the PS
Agreement with the trustee under such PS Agreement (the "PS Trustee"). The PS
Trustee or its agent, or a custodian, will possess the Underlying Loans.
Underlying Loans will be serviced by a servicer (the "PS Servicer") directly or
by one or more sub-servicers who may be subject to the supervision of the PS
Servicer.
The sponsor of the Private Securities (the "PS Sponsor") will be a
financial institution or other entity engaged generally in the business of
lending; a public agency or instrumentality of a state, local or federal
government; or a limited purpose corporation organized for the purpose of, among
other things, establishing trusts and acquiring and selling loans to such
trusts, and selling beneficial interests in such trusts. The obligations of the
PS Sponsor will generally be limited to certain representations and warranties
with respect to the assets conveyed by it to the related trust. Additionally,
although the Underlying Loans may be guaranteed by an agency or instrumentality
of the United States, the Private Securities themselves will not be so
guaranteed.
Distributions of principal and interest will be made on the Private
Securities on the dates specified in the related Prospectus Supplement. The
Private Securities may be entitled to receive nominal or no principal
distributions or nominal or no interest distributions. Principal and interest
distributions will be made on the Private Securities by the PS Trustee or the PS
Servicer. The PS Sponsor or the PS Servicer may have the right to repurchase the
Underlying Loans after a certain date or under other circumstances specified in
the related Prospectus Supplement. The Underlying Loans may be fixed rate, level
payment, fully amortizing loans or adjustable rate loans or loans having balloon
or other irregular payment features.
CREDIT SUPPORT RELATING TO PRIVATE SECURITIES. Credit support in the
form of Reserve Funds, subordination of other private securities issued under
the PS Agreement, guarantees, letters of credit, cash collateral accounts,
insurance policies or other types of credit support may be provided with respect
to the Underlying Loans or with respect to the Private Securities themselves.
The type, characteristics and amount of credit support will be a function of
certain characteristics of the Underlying Loans and other factors, such as the
operating history and degree of securitization experience of the seller/servicer
of the Underlying Loans and the then current market for various types of credit
enhancement, and will have been established for the Private Securities on the
basis of requirements of the nationally recognized statistical rating
organization that rated the Private Securities.
ADDITIONAL INFORMATION. The Prospectus Supplement for a Series for which
the Primary Assets include Private Securities will specify (such disclosure may
be on an approximate basis and will be as of the date specified in the related
Prospectus Supplement), to the extent relevant and to the extent such
information is reasonably available to the Seller and the Seller reasonably
believes such information to be reliable: (i) the aggregate approximate
principal amount and type of the Private Securities to be included in the Trust
Fund for such Series; (ii) certain characteristics of the Underlying Loans
including (A) the payment features of such Underlying Loans (i.e., whether they
are fixed rate or adjustable rate and whether they provide for fixed level
payments or other payment features), (B) the approximate aggregate principal
balance, if known, of such Underlying Loans insured or guaranteed by a
governmental entity, (C) the servicing fee or range of servicing fees with
respect to the Underlying Loans, (D) the minimum and maximum stated maturities
of such Underlying Loans at origination, (E) the lien priority of such
Underlying Loans, and (F) the delinquency status and year of origination of such
Underlying Loans; (iii) the maximum original term-to-stated maturity of the
Private Securities; (iv) the weighted average term-to-stated maturity of the
Private Securities; (v) the pass-through or certificate rate or ranges thereof
for the Private Securities; (vi) the PS Sponsor, the PS Servicer (if other than
the PS Sponsor) and the PS Trustee for such Private Securities; (vii) certain
characteristics of credit support if any, such as Reserve Funds, insurance
policies, letters of credit or guarantees relating to such Loans underlying the
Private Securities or to such Private Securities themselves; (viii) the terms on
which Underlying Loans may, or are required to, be purchased prior to their
stated maturity or the stated maturity of the Private Securities; and (ix) the
terms on which Underlying Loans may be substituted for those originally
underlying the Private Securities.
If information of the nature described above representing the Private
Securities is not known to the Seller at the time the Securities are initially
offered, approximate or more general information of the nature described above
will be provided in the Prospectus Supplement and the additional information, if
available, will be set forth in a
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Current Report on Form 8-K to be available to investors on the date of issuance
of the related Series and to be filed with the Commission within 15 days of the
initial issuance of such Securities.
COLLECTION, CERTIFICATE AND DISTRIBUTION ACCOUNTS
A separate Collection Account or Certificate Account will be established
for each Series of Securities for receipt of all amounts received on or with
respect to the Primary Assets. Certain amounts on deposit in such Collection
Account and certain amounts available pursuant to any Enhancement, as provided
in the related Prospectus Supplement, may be deposited in one or more
Distribution Accounts. Funds in the Collection, Certificate and Distribution
Accounts generally will be invested in Eligible Investments maturing, with
certain exceptions, not later, in the case of funds in the Collection Account,
than the day preceding the date such funds are due to be deposited in the
Distribution Account or otherwise distributed and, in the case of funds in the
Distribution Account and the Certificate Account, than the day preceding the
next Distribution Date for the related Series of Securities. See "--Eligible
Investments" below.
PRE-FUNDING AND CAPITALIZED INTEREST ACCOUNTS
If specified in the related Prospectus Supplement, a Trust Fund will
include one or more segregated trust accounts (each, a "Pre-Funding Account")
established and maintained with the Trustee for the related Series. If so
specified, on the closing date for such Series, a portion of the proceeds of the
sale of the Securities of such Series not to exceed fifty percent of the
aggregate principal amount of such Series (such amount, the "Pre-Funded Amount")
may be deposited in the Pre-Funding Account and may be used to purchase
additional Primary Assets during the period of time not to exceed six months
specified in the related Prospectus Supplement (the "Pre-Funding Period").
Pending the purchase of such additional Primary Assets, funds deposited in the
Pre-Funding Account will be invested in Eligible Investments. If any Pre-Funded
Amount remains on deposit in the Pre-Funding Account at the end of the
Pre-Funding Period, such amount will be applied in the manner specified in the
related Prospectus Supplement to prepay the Notes and/or the Certificates of the
applicable Series.
Each additional Primary Asset must satisfy the eligibility criteria
specified in the related Prospectus Supplement and related Agreements. Such
eligibility criteria will be determined in consultation with each Rating Agency
(and/or any Enhancer) prior to the issuance of the related Series and are
designed to ensure that if such additional Primary Assets were included as part
of the initial Primary Assets, the credit quality of such assets would be
consistent with the initial rating of the Securities of such Series. The
eligibility criteria will apply to the pool of Primary Assets, including the
subsequent Primary Assets, and will include a minimum weighted average interest
rate, a maximum weighted average remaining term to maturity and a maximum
weighted average Combined Loan-to-Value Ratio. Depending on the composition of
the original Primary Assets and the type of Enhancement, additional eligibility
criteria such as a minimum interest rate, a maximum principal balance, a
limitation on geographic concentration and a limit on certain types of Primary
Assets such as Balloon Loans or loans secured by other than primary residences.
The Seller and the Representative will certify to the Trustee that all
conditions precedent to the transfer of the additional Primary Assets, including
the satisfaction of the eligibility criteria to the Trust Fund, have been
satisfied. It is a condition to the transfer of any additional Primary Assets to
the Trust Fund that each Rating Agency, after receiving prior notice of the
proposed transfer of the additional Primary Assets to the Trust Fund, shall not
have advised the Seller or the Trustee or any Enhancer that the conveyance of
such additional Primary Assets will result in a qualification, modification or
withdrawal of its then current rating of any Class of Notes or Certificates of
such Series. Following the transfer of additional Primary Assets to the Trust
Fund, the aggregate characteristics of the Primary Assets then held in the Trust
Fund may vary from those of the initial Primary Assets of such Trust Fund. As a
result, the additional Primary Assets may adversely affect the performance of
the related Securities.
If a Pre-Funding Account is established, one or more segregated trust
accounts (each, a "Capitalized Interest Account") may be established and
maintained with the Trustee for the related Series. On the closing date for such
Series, a portion of the proceeds of the sale of the Securities of such Series
will be deposited in the Capitalized Interest Account and used to fund the
excess, if any, of the sum of (i) the amount of interest accrued on the
Securities of such Series and (ii) if specified in the related Prospectus
Supplement, certain fees or expenses during the Pre-Funding Period such as
Trustee fees and credit enhancement fees, over the amount of interest available
therefor from the Primary Assets in the Trust Fund. If so specified in the
related Prospectus Supplement, amounts on deposit in the Capitalized Interest
Account may be released to the Seller prior to the end of the Pre-Funding Period
subject to the satisfaction of certain tests specified in the related Prospectus
Supplement. Any amounts on deposit in the Capitalized Interest Account at the
end of the Pre-Funding Period that are not necessary for such purposes will be
distributed to the person specified in the related Prospectus Supplement.
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ELIGIBLE INVESTMENTS
Each Agreement generally will define Eligible Investments to include the
following:
(i) direct obligations of, or obligations fully guaranteed as to
timely payment of principal and interest by, the United States or any
agency or instrumentality thereof, provided that such obligations are
backed by the full faith and credit of the United States;
(ii) repurchase agreements on obligations specified in clause (i)
maturing not more than three months from the date of acquisition
thereof, provided that the short-term unsecured debt obligations of the
party agreeing to repurchase such obligations are at the time rated by
each Rating Agency in its highest short-term rating category;
(iii) certificates of deposit, time deposits and bankers"
acceptances of any U.S. depository institution or trust company
incorporated under the laws of the United States or any state thereof
and subject to supervision and examination by federal and/or state
banking authorities, provided that the unsecured short-term debt
obligations of such depository institution or trust company at the date
of acquisition thereof have been rated by each Rating Agency in its
highest unsecured short-term debt rating category;
(iv) commercial paper (having original maturities of not more
than 90 days) of any corporation incorporated under the laws of the
United States or any state thereof which on the date of acquisition has
been rated by each Rating Agency in their highest short-term rating
categories;
(v) short-term investment funds ("STIFS") sponsored by any trust
company or national banking association incorporated under the laws of
the United States or any state thereof which on the date of acquisition
has been rated by each Rating Agency in their respective highest rating
category of long-term unsecured debt; and
(vi) interests in any money market fund which at the date of
acquisition of the interests in such fund and throughout the time as the
interest is held in such fund has a rating of "Aaa" by Moody's Investors
Service, Inc., and either "AAAm" or "AAAm-G" by Standard & Poor's Rating
Group, a division of The McGraw-Hill Companies, Inc.;
provided that no instrument described above may evidence either the right to
receive (a) only interest with respect to the obligations underlying such
instrument or (b) both principal and interest payments derived from obligations
underlying such instrument and the interest and principal payments with respect
to such instrument provided a yield to maturity at par greater than 120% of the
yield to maturity at par of the underlying obligations; and provided, further,
that no instrument described above may be purchased at a price greater than par
if such instrument may be prepaid or called at a price less than its purchase
price prior to its stated maturity.
To the extent any such investment would require registration of the
Trust Fund as an investment company, such investment will not constitute an
Eligible Investment.
REVOLVING PERIOD AND AMORTIZATION PERIOD; RETAINED INTEREST
If the related Prospectus Supplement so provides, there may be a period
commencing on the date of issuance of a Class or Classes of Notes and/or
Certificates of a Series and ending on the date set forth in the related
Prospectus Supplement (each, a "Revolving Period") during which limited or no
principal payments will be made to one or more Classes of Notes or Certificates
of the related Series as are identified in such Prospectus Supplement. Some or
all collections of principal otherwise allocated to such Classes of Notes or
Certificates may be (i) utilized during the Revolving Period to acquire
additional Primary Assets which satisfy the criteria specified above and the
criteria set forth in the related Prospectus Supplement, (ii) held in an account
and invested in Eligible Investments for later distribution to Securityholders,
(iii) applied to those Notes or Certificates for such Series, if any, specified
in the related Prospectus Supplement as then are in amortization, or (iv)
otherwise applied as specified in the related Prospectus Supplement.
An "Amortization Period" is the period during which an amount of
principal is payable to Holders of a Series which, during the Revolving Period,
were not otherwise entitled to such payments. If so specified in the related
Prospectus Supplement, during an Amortization Period all or a portion of
principal collections on the Primary Assets may be applied as specified above
for a Revolving Period and, to the extent not so applied, will be distributed to
the
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Classes of Notes or Certificates for such Series specified in the related
Prospectus Supplement as then being entitled to payments of principal. In
addition, if so specified in the related Prospectus Supplement, amounts
deposited in certain accounts for the benefit of one or more Classes of Notes or
Certificates for such Series may be released from time to time or on a specified
date and applied as a payment of principal on such Classes of Notes or
Certificates. The related Prospectus Supplement will set forth the circumstances
which will result in the commencement of an Amortization Period.
Each Series which has a Revolving Period may also issue to the
Representative or one of its affiliates a certificate evidencing an undivided
beneficial interest (a "Retained Interest") in such Series not represented by
the other Securities issued by the Representative. As further described in the
related Prospectus Supplement, the value of such Retained Interest will
fluctuate as the amount of Notes and Certificates of the related Series of
Securities outstanding is reduced.
ENHANCEMENT
The amounts and types of credit enhancement ("Enhancement") arrangements
and the provider thereof, if applicable, with respect to a Series or any Class
of Securities will be set forth in the related Prospectus Supplement. If
specified in the applicable Prospectus Supplement, Enhancement for any Series of
Securities may cover one or more Classes of Notes or Certificates, and
accordingly may be exhausted for the benefit of a particular Class of Notes or
Certificates and thereafter be unavailable to such other Classes of Notes or
Certificates. Further information regarding any provider of credit enhancement,
including financial information when material, will be included in the related
Prospectus Supplement.
If and to the extent provided in the related Prospectus Supplement,
Enhancement may include one or more of the following or any combination thereof:
Financial Guaranty Insurance Policy which will be issued by a monoline
insurance company and which, subject to the terms of such policy, will guarantee
timely payment of interest on, and ultimate (as opposed to timely) payment of
principal of, the applicable Class or Classes of Securities;
Overcollateralization which will equal the excess of the aggregate
principal balance of the Primary Assets over the aggregate principal balance of
the Securities. Overcollateralization may take the form of the initial or
subsequent deposit of Primary Assets to create such excess or may build over
time from the application of certain excess cash amounts generated by the
Primary Assets to accelerate the amortization of the applicable Class or Classes
of Securities;
Letter of Credit which will be issued by a bank or other financial
institution in a maximum amount which may be permanently reduced as draws are
made or may be replenished as previous draws are repaid from certain excess cash
amounts generated by the Primary Assets. Draws may be made to cover shortfalls
generally in collections, with respect to particular types of shortfalls such as
those due to particular types of losses or with respect to specific situations
such as shortfalls in amounts necessary to pay current interest;
Cash Reserve Fund which may be partially or fully funded on the date of
issuance or may be funded over time from certain excess cash amounts generated
by the Primary Assets. Withdrawals may be made in circumstances similar to those
for which draws may be made on a letter of credit;
Insurance Policies which may insure a portion of the Home Equity Loans
or Underlying Loans against credit losses, bankruptcy losses, fraud losses or
special hazard losses not covered by typical homeowners insurance policies;
Subordinate Securities which will be subordinated in the right to
receive distributions to one or more other Classes of Securities of the same
Series, some or all of which may themselves be subordinated to other Classes of
such Series. Subordination may be with respect to distributions of interest,
principal or both. In addition, all or portions of certain types of losses on
the Primary Assets may be allocated to one or more Classes of the Subordinate
Securities prior to the allocation thereof to other Classes of Subordinate
Certificates and/or the Senior Securities of the applicable Series; or
Derivative Products which may include a swap to convert floating or
fixed rate payments, as applicable, on the Primary Assets into fixed or floating
rate payments, as applicable, on the Securities or a cap or floor agreement
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intended to provide protection against changes in floating rates of interest
payable on the Primary Assets and/or the Securities.
The presence of Enhancement is intended to increase the likelihood of
receipt by the Certificateholders and the Noteholders of the full amount of
principal and interest due thereon and to decrease the likelihood that the
Certificateholders and the Noteholders will experience losses, or may be
structured to provide protection against changes in interest rates or against
other risks, to the extent and under the conditions specified in the related
Prospectus Supplement. Forms of Enhancement may provide for one or more Classes
of Securities to be paid in foreign currencies. The Enhancement for a Class of
Securities generally will not provide protection against all risks of loss and
may not guarantee repayment of the entire principal and interest thereon. If
losses occur which exceed the amount covered by any Enhancement or which are not
covered by any Enhancement, Securityholders will bear their allocable share of
deficiencies. In addition, if a form of Enhancement covers more than one Class
of Securities of a Series, Securityholders of any such Class will be subject to
the risk that such Enhancement will be exhausted by the claims of
Securityholders of other Classes.
SERVICING OF LOANS
GENERAL
The Loans comprising the Primary Assets in the Trust Fund will be master
serviced by the Master Servicer pursuant to the related Sale and Servicing
Agreement or Pooling and Servicing Agreement, as the case may be, with respect
to a Series of Securities. Unless otherwise set forth in a Prospectus
Supplement, it is expected that the Master Servicer will enter into
sub-servicing agreements with the Originators pursuant to which each Originator
will act as sub-servicer with respect to the Loans sold by such Originator to
the Seller. No such sub-servicing agreement will relieve the Master Servicer of
any liability it might otherwise have, had the sub-servicing arrangement not
been entered into. As used in this section, unless otherwise described, the term
"Servicer" refers to both the Master Servicer and each Originator in its role as
a sub-servicer.
COLLECTION PROCEDURES; ESCROW ACCOUNTS
The Servicer will make reasonable efforts to collect all payments
required to be made under the Loans and will, consistent with the terms of the
related Agreement for a Series and any applicable Enhancement, follow such
collection procedures as it follows with respect to comparable loans held in its
own portfolio. Consistent with the above, the Servicer may, in its discretion,
(i) waive any assumption fee, late payment charge, or other charge in connection
with a Home Equity Loan and (ii) arrange with an obligor a schedule for the
liquidation of delinquencies by extending the Due Dates for Scheduled Payments
on such Loan.
The Servicer will not establish or maintain escrow or impound accounts
("Escrow Accounts") with respect to Home Equity Loans for any purpose.
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT OR THE CERTIFICATE
ACCOUNT
The Trustee or the Servicer will establish a separate account (the
"Collection Account" or the "Certificate Account") in the name or for the
benefit of the Trustee. The Collection Account and/or Certificate Account will
be an account maintained (i) at a depository institution, the long-term
unsecured debt obligations of which at the time of any deposit therein are rated
by each Rating Agency rating the Securities of such Series at levels
satisfactory to each Rating Agency or (ii) in an account or accounts the
deposits in which are insured to the maximum extent available by the Federal
Deposit Insurance Corporation (the "FDIC") or which are secured in a manner
meeting requirements established by each Rating Agency.
The funds held in the Collection Account or the Certificate Account may
be invested, pending remittance to the Trustee, in Eligible Investments. The
Servicer will be entitled to receive as additional compensation any interest or
other income earned on funds in the Collection Account or Certificate Account.
The Servicer, the Seller or the Trustee will deposit into the Collection
Account for each Series, within the period specified in the related Prospectus
Supplement, the following payments and collections received or made by it (other
than, in respect of principal of and interest on the related Primary Assets due
or, in the case of simple interest Loans, received, on or before such Cut-off
Date):
(i) all payments on account of principal, including prepayments,
on such Primary Assets;
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(ii) all payments on account of interest on such Primary Assets
after deducting therefrom, at the discretion of the Servicer but only to
the extent of the amount permitted to be withdrawn or withheld from the
Collection Account in accordance with the related Agreement, the
Servicing Fee in respect of such Primary Assets;
(iii) all amounts received by the Servicer in connection with the
liquidation of Primary Assets or property acquired in respect thereof,
whether through foreclosure sale, repossession or otherwise, including
payments in connection with such Primary Assets received from the
obligor, other than amounts required to be paid or refunded to the
obligor pursuant to the terms of the applicable loan documents or
otherwise pursuant to law ("Liquidation Proceeds"), exclusive of, in the
discretion of the Servicer, but only to the extent of the amount
permitted to be withdrawn from the Collection Account or the Certificate
Account in accordance with the related Agreement, the Servicing Fee, if
any, in respect of the related Primary Asset and, to the extent
specified in the related Prospectus Supplement, net of reimbursements
for related Delinquency Advances and Servicer Advances;
(iv) all proceeds under any title insurance, hazard insurance or
other insurance policy covering any such Primary Asset, other than
proceeds to be applied to the restoration or repair of the related
Property or released to the obligor in accordance with the related
Agreement;
(v) all amounts required to be deposited therein from any
applicable Reserve Fund for such Series pursuant to the related
Agreement;
(vi) all Delinquency Advances made by the Servicer required
pursuant to the related Agreement; and
(vii) all repurchase prices of any such Primary Assets
repurchased by the Servicer or the Seller pursuant to the related
Agreement.
The Servicer is permitted, from time to time, to make withdrawals from
the Collection Account or the Certificate Account for each Series for the
following purposes:
(i) to reimburse itself for Delinquency Advances and Servicing
Advances for such Series made by it pursuant to the related Agreement;
the Servicer's right to reimburse itself for Delinquency Advances and
Servicing Advances is limited to amounts received on or in respect of
particular Loans (including, for this purpose, Liquidation Proceeds and
amounts representing proceeds of insurance policies covering the related
Property) which represent late recoveries of Scheduled Payments
respecting which any such advance was made;
(ii) to reimburse itself for any Delinquency Advances for such
Series that the Servicer determines in good faith it will be unable to
recover from amounts representing late recoveries of Scheduled Payments
respecting which such Advance was made or from Liquidation Proceeds or
the proceeds of insurance policies;
(iii) in the event it has elected not to pay itself the Servicing
Fee out of the interest component of any Scheduled Payment, late payment
or other recovery with respect to a particular Home Equity Loan prior to
the deposit of such Scheduled Payment, late payment or recovery into the
Collection Account, to pay to itself the Servicing Fee, as adjusted
pursuant to the related Agreement, from any such Scheduled Payment, late
payment or such other recovery, to the extent permitted by the related
Agreement;
(iv) to reimburse itself or the Seller for expenses incurred by
and recoverable by or reimbursable to it pursuant to the related
Agreement;
(v) to pay to the applicable person with respect to each Primary
Asset or REO Property acquired in respect thereof that has been
repurchased or removed from the Trust Fund by the Seller or the Servicer
pursuant to the related Agreement, all amounts received thereon and not
distributed as of the date on which the related repurchase price was
determined;
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(vi) to make payments to the Trustee of such Series for deposit
into the Distribution Account, if any, or for remittance to the Holders
of such Series in the amounts and in the manner provided for in the
related Agreement; and
(vii) to clear and terminate the Collection Account pursuant to
the related Agreement.
In addition, if the Servicer deposits in the Collection Account for a
Series any amount not required to be deposited therein, it may, at any time,
withdraw such amount from such Collection Account.
ADVANCES AND LIMITATIONS THEREON
The related Prospectus Supplement will describe the circumstances, if
any, under which the Servicer will make advances with respect to delinquent
payments of principal and/or interest on Loans ("Delinquency Advances"). If
specified in the related Prospectus Supplement, the Servicer will be obligated
to make Delinquency Advances, and such obligation may be limited in amount, or
may not be activated until a certain portion of a specified Reserve Fund is
depleted. Such advances are intended to provide liquidity and, except to the
extent specified in the related Prospectus Supplement, not to guarantee or
insure against losses. Accordingly, to the extent specified in the related
Prospectus Supplement, any funds advanced are recoverable by the Servicer out of
amounts received on particular Loans which represent late recoveries of
principal or interest, proceeds of insurance policies or Liquidation Proceeds
respecting which any such Delinquency Advance was made or, to the extent
provided in the Prospectus Supplement, from payments or proceeds from other
Loans. If and to the extent specified in the related Prospectus Supplement, the
Servicer will advance its own funds to pay for any related expenses of
foreclosure and disposition of any liquidated Mortgage Home Equity Loan or
related Property (the "Servicing Advances"). The Servicer will be entitled to be
reimbursed for any such Servicing Advances to the extent provided in the
Prospectus Supplement. If a Servicer Advance is made and subsequently determined
to be nonrecoverable from late collections, proceeds of insurance policies, or
Liquidation Proceeds from the related Loan, the Servicer may be entitled to
reimbursement from other funds in the Collection Account, Certificate Account or
Distribution Account, as the case may be, or from a specified Reserve Fund as
applicable, to the extent specified in the related Prospectus Supplement.
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES
Except as otherwise specified in the related Prospectus Supplement, all
Mortgages will contain provisions requiring the obligor on each Home Equity Loan
to maintain a hazard insurance policy naming the Servicer as loss payee
thereunder and providing for extended coverage of the standard form of fire
insurance with extended coverage for certain other hazards as is customary in
the state in which the related Mortgaged Property is located. Except as
specified in the related Prospectus Supplement, the Servicer will not be
required to maintain or to cause the obligor on each Home Equity Loan to
maintain a hazard insurance policy. The standard hazard insurance policies will
provide for coverage at least equal to the applicable state standard form of
fire insurance policy with extended coverage for property of the type securing
the related Home Equity Loans.
In general, the standard form of fire and extended coverage insurance
policy covers physical damage to or destruction of the improvements on the
Mortgaged Property by fire, lightning, explosion, smoke, windstorm and hail, and
riot, strike and civil commotion, subject to the conditions and exclusions
specified in each policy. Although the policies relating to the Home Equity
Loans will be underwritten by different insurers under different state laws in
accordance with different applicable state forms and therefore will not contain
identical terms and conditions, the basic terms thereof are dictated by
respective state laws, and most such policies typically do not cover any
physical damage resulting from any of the following: war, revolution,
governmental actions, floods and other water-related causes, earth movement
(including earthquakes, landslides and mudflows), nuclear reactions, wet or dry
rot, vermin, rodents, insects or domestic animals, theft and, in certain cases,
vandalism. The foregoing list is merely indicative of certain kinds of uninsured
risks and is not intended to be all-inclusive.
The hazard insurance policies initially covering the Mortgaged
Properties typically contain a co-insurance clause that in effect requires the
insured at all times to carry insurance of a specified percentage (generally 80%
to 90% of the full replacement value of the improvements on the property in
order to recover the full amount of any partial loss. If the insured's coverage
falls below this specified percentage, such clause generally provides that the
insurer's liability in the event of partial loss does not exceed the greater of
(i) the replacement cost of the improvements less physical depreciation or (ii)
such proportion of the loss as the amount of insurance carried bears to the
specified percentage of the full replacement cost of such improvements.
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Unless otherwise specified in the related Prospectus Supplement,
coverage will be in an amount at least equal to the greater of (i) the amount
necessary to avoid the enforcement of any co-insurance clause contained in the
policy or (ii) the outstanding principal balance of the related loan plus the
balance of any senior mortgage. [Unless otherwise specified in the related
Prospectus Supplement, the Servicer will also maintain on REO Property that
secured a defaulted Home Equity Loan and that has been acquired upon
foreclosure, deed in lieu of foreclosure, or repossession, a standard hazard
insurance policy in an amount that is equal to the maximum insurable value of
such REO Property.] No earthquake or other additional insurance will be required
of any obligor or will be maintained on REO Property acquired in respect of a
default Loan, other than pursuant to such applicable laws and regulations as
shall at any time be in force and shall require such additional insurance.
The ability of the Servicer to assure that hazard insurance proceeds are
appropriately applied may depend on its being named as an additional insured
under any hazard insurance policy and under any flood insurance policy, or upon
the extent to which information in this regard is furnished to the Servicer by a
borrower. Except as described below, all amounts collected by the Servicer under
any hazard policy (except for amounts applied or expected to be applied to the
restoration or repair of the Mortgaged Property or released to the borrower in
accordance with the Servicer's normal servicing procedures), will be deposited
in the Collection Account.
REALIZATION UPON DEFAULTED LOANS
The Servicer will use its reasonable best efforts to foreclose upon,
repossess or otherwise comparably convert the ownership of the Mortgaged
Properties securing the related Loans as come into and continue in default and
as to which no satisfactory arrangements can be made for collection of
delinquent payments. In connection with such foreclosure or other conversion,
the Servicer will follow such practices and procedures as it deems necessary or
advisable and as are normal and usual in its servicing activities with respect
to comparable loans owned by it. However, the Servicer will not be required to
expend its own funds in connection with any foreclosure or towards the
restoration of the Property unless it determines that (i) such restoration or
foreclosure will increase the Liquidation Proceeds in respect of the related
Home Equity Loan available to the Holders after reimbursement to itself for such
expenses and (ii) such expenses will be recoverable by it either through
Liquidation Proceeds or the proceeds of insurance. Notwithstanding anything to
the contrary herein, in the case of a Trust Fund for which a REMIC election has
been made, the Servicer will be required to liquidate any Mortgaged Property
acquired through foreclosure within three years after the acquisition of the
beneficial ownership of such Mortgaged Property. While the holder of a Mortgaged
Property acquired through foreclosure can often maximize its recovery by
providing financing to a new purchaser, the Trust Fund, if applicable, will have
no ability to do so and neither the Servicer nor the Seller will be required to
do so.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
When a Borrower on a Home Equity Loan notifies the Servicer that the
Mortgaged Property is being conveyed by the obligor, the Servicer will be
obligated to exercise its rights to accelerate the maturity of the related Home
Equity Loan under the applicable "due-on-sale" clause, if any, unless such
exercise is not permitted under applicable law or if the enforcement of such
clause would result in loss of coverage under any primary mortgage insurance
policy. In such event, the Servicer is authorized to accept from or enter into
an assumption agreement with the person to whom such property has been or is
about to be conveyed, pursuant to which such person becomes liable under the
Loan. To the extent permitted by applicable law, such assumption will not
release the original borrower from its obligation under the Loan. Any fee
collected in connection with an assumption will be retained by the Servicer as
additional servicing compensation. The terms of a Home Equity Loan may not be
changed in connection with an assumption except to the extent specified in the
related Prospectus Supplement.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Master Servicer will be entitled to a periodic fee as servicing
compensation (the "Servicing Fee") in an amount to be determined as specified in
the related Prospectus Supplement. The Servicing Fee may be fixed or variable,
as specified in the related Prospectus Supplement. In addition, the Master
Servicer will be entitled to servicing compensation in the form of assumption
fees, late payment charges and similar items, or excess proceeds following
disposition of Property in connection with defaulted Loans. The Master Servicer
will pay any fees due the Sub-Servicers from the Servicing Fee.
Except to the extent otherwise specified in the related Prospectus
Supplement, the Servicer will pay certain expenses incurred in connection with
the servicing of the Loans, including, without limitation, the payment of the
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fees and expenses of the Trustee and independent accountants, and the cost of
credit support, if any, and payment of expenses incurred in preparation of
reports to Holders.
When an obligor makes a principal prepayment in full between Due Dates
on the related Loan, the obligor will generally be required to pay interest on
the amount prepaid only to the date of prepayment. If and to the extent provided
in the related Prospectus Supplement in order that one or more Classes of the
Holders of a Series will not be adversely affected by any resulting shortfall in
interest, the amount of the Servicing Fee may be reduced to the extent necessary
to include in the Servicer's remittance to the Trustee for distribution to
Securityholders an amount equal to one month's interest on the related Home
Equity Loan (less the Servicing Fee). If the aggregate amount of such shortfalls
in a month exceeds the Servicing Fee for such month, a shortfall to Holders may
occur.
The Servicer will be entitled to reimbursement for Servicing Advances.
The related Holders will suffer no loss by reason of such Servicing Advances to
the extent expenses are covered under related insurance policies or from excess
Liquidation Proceeds. If claims are either not made or paid under the applicable
insurance policies or if coverage thereunder has been exhausted, the related
Holders will suffer a loss to the extent that Liquidation Proceeds, after
reimbursement of the Servicing Advances, are less than the outstanding principal
balance of and unpaid interest on the related Home Equity Loan which would be
distributable to Holders. The Servicer is generally also entitled to
reimbursement from the Collection Account for Servicing Advances. In addition,
the Servicer will be entitled to reimbursement for Delinquency Advances as
described above under "--Advances and Limitations Thereon."
The rights of the Servicer to receive funds from the Collection Account
for a Series, whether as the Servicing Fee or other compensation, or for the
reimbursement of Delinquency Advances and Servicing Advances, expenses or
otherwise, are not subordinate to the rights of Holders of such Series.
EVIDENCE AS TO COMPLIANCE
The applicable Agreement for each Series will provide that each year, a
firm of independent public accountants will furnish a statement to the Trustee
to the effect that such firm has examined certain documents and records relating
to the servicing of the Loans by the Master Servicer and that such examination,
which has been conducted substantially in compliance with either (i) the audit
guide for audits of non-supervised mortgagees approved by the Department of
Housing and Urban Development or (ii) the requirements of the Uniform Single
Attestation Program for Mortgage Bankers, has disclosed no items of
non-compliance with the provisions of the applicable Agreement that, in the
opinion of the firm, are material, except for such items of non-compliance as
shall be referred in the report.
The applicable Agreement for each Series will also provide for delivery
to the Trustee for such Series of an annual statement signed by an officer of
the Master Servicer to the effect that the Master Servicer has fulfilled its
material obligations under such Agreement throughout the preceding calendar
year.
CERTAIN MATTERS REGARDING THE SERVICER
If an Event of Default occurs under either a Sale and Servicing
Agreement or a Pooling and Servicing Agreement, the Master Servicer may be
replaced by the Trustee or a successor Master Servicer. Unless otherwise
specified in the related Prospectus Supplement, such Events of Default and the
rights of the Trustee upon such a default under the Agreement for the related
Series will be substantially similar to those described under "THE
AGREEMENTS--Events of Default; Rights Upon Event of Default--Pooling and
Servicing Agreement; Sale and Servicing Agreement."
The Master Servicer may assign its rights and delegate its duties and
obligations under the related Agreement for each Series if the successor Master
Servicer accepting such assignment or delegation (i) services or master services
similar loans in the ordinary course of its business, (ii) is reasonably
satisfactory to the Trustee for the related Series, (iii) would not cause any
Rating Agency's rating of the Securities for such Series in effect immediately
prior to such assignment, sale or transfer to be qualified, downgraded or
withdrawn as a result of such assignment, sale or transfer and (iv) executes and
delivers to the Trustee and the Enhancer, if any, an agreement, in form and
substance reasonably satisfactory to the Trustee, and the Enhancer, if any,
which contains an assumption by such Master Servicer of the due and punctual
performance and observance of each covenant and condition to be performed or
observed by the Master Servicer under the related Agreement from and after the
date of such agreement. No such assignment will become effective until the
Trustee or a successor Master Servicer has assumed the servicer's obligations
and duties under the related Agreement. To the extent that the Master Servicer
transfers its
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obligations to a wholly-owned subsidiary or affiliate, such subsidiary or
affiliate need not satisfy the criteria set forth above; however, in such
instance, the assigning Master Servicer will remain liable for the servicing
obligations under the related Agreement. Any entity into which the Master
Servicer is merged or consolidated or any successor corporation resulting from
any merger, conversion or consolidation will succeed to the Master Servicer's
obligations under the related Agreement provided that such successor or
surviving entity meets the requirements for a successor Master Servicer set
forth above.
The Master Servicer will not be under any liability to the Trust Fund or
the Securityholders for taking any action or for refraining from taking any
action in good faith pursuant to the Agreement, or for errors in judgment;
provided, however, that the Master Servicer will not be protected against any
liability that otherwise would be imposed by reason of willful misfeasance, bad
faith or gross negligence in the performance of duties or by reason of its
reckless disregard of its obligations and duties thereunder. Except to the
extent otherwise provided therein, each Agreement further will provide that the
Master Servicer and any director, officer, employee or agent of the Master
Servicer will be entitled to indemnification by the Trust Fund and will be held
harmless to the extent provided in the Agreement against any loss, liability or
expense incurred in connection with any legal action relating to the Agreement
or the Securities, other than any loss, liability or expense related to any
specific Home Equity Loan or Loans (except any such loss, liability or expense
otherwise reimbursable pursuant to the Agreement) and any loss, liability or
expense incurred by the Master Servicer by reason of its willful misfeasance,
bad faith or gross negligence in the performance of its duties thereunder or by
reason of the Master Servicer's reckless disregard of its obligations and duties
thereunder.
Each Agreement will provide that the Master Servicer will not be under
any obligation to appear in, prosecute or defend any legal action that is not
incidental to its duties under the Agreement and that in its opinion may involve
it in any expense or liability. The Master Servicer, however, in its discretion,
may undertake any such action that it may deem necessary or desirable with
respect to the Agreement and the rights and duties of the parties thereto and
the interest of the Securityholders and the Enhancer, if any, thereunder. In
such event, the legal expenses and costs of such action and any liability
resulting therefrom will be expenses, costs and liabilities of the Trust Fund
and the Master Servicer will be entitled to be reimbursed therefor to the extent
provided in the Agreement. The Master Servicer's right to such indemnity or
reimbursement will survive any resignation or termination of the Master Servicer
with respect to any losses, expenses, costs or liabilities arising prior to such
resignation or termination (or arising from events that occurred prior to such
resignation or termination). Any claims by or on behalf of the Securityholders
or the Trust Fund will be made only against the Master Servicer, who will be
liable with respect to its own acts and omissions as well as the acts and
omissions of its directors, officer, employees and agents.
THE AGREEMENTS
The following summaries describe the material provisions of the
Agreements common to each Series of Securities. The summaries do not purport to
be complete and are subject to, and qualified in their entirety by reference to,
the provisions of the Agreements. Where particular provisions or terms used in
the Agreements are referred to, such provisions or terms are as specified in the
related Agreements. Assignment of Primary Assets
GENERAL
At the time of issuance of the Securities of a Series, the Seller will
transfer, convey and assign to the Trust Fund all right, title and interest of
the Seller in the Primary Assets and other property to be transferred to the
Trust Fund for a Series. Such assignment will include all principal and interest
due or received on or with respect to the Primary Assets after the Cut-off Date
to the extent specified in the related Prospectus Supplement (except for any
Retained Interests). The Trustee will, concurrently with such assignment,
execute and deliver the Securities.
ASSIGNMENT OF LOANS
The Seller will, as to each Loan, deliver or cause to be delivered to
the Trustee, or, as specified in the related Prospectus Supplement a custodian
on behalf of the Trustee (the "Custodian"), the Mortgage Note endorsed without
recourse to the order of the Trustee or in blank, the original Mortgage with
evidence of recording indicated thereon (except for any Mortgage not returned
from the public recording office, in which case the Seller will certify that the
original of such Mortgage was delivered to such recording office) and an
assignment of the Mortgage in recordable form. The Trustee, or, if so specified
in the related Prospectus Supplement, the Custodian, will hold such documents in
trust for the benefit of the Holders.
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The Seller will, at the time of issuance of the Securities, cause
assignments to the Trustee of the Mortgages relating to the Loans for a Series
to be recorded in the appropriate public office for real property records,
except in states where, in the opinion of counsel acceptable to the Trustee,
such recording is not required to protect the Trustee's interest in the related
Loans. If specified in the related Prospectus Supplement, the Seller will cause
such assignments to be so recorded within the time after issuance of the
Securities as is specified in the related Prospectus Supplement, in which event,
the Agreement may require the Seller to repurchase from the Trustee any Home
Equity Loan the related Mortgage of which is not recorded within such time, at
the price described below with respect to repurchases by reason of defective
documentation. Unless otherwise provided in the related Prospectus Supplement,
the enforcement of the repurchase obligation would constitute the sole remedy
available to the Holders or the Trustee for the failure of a Mortgage to be
recorded.
Each Home Equity Loan will be identified in a schedule appearing as an
exhibit to the related Agreement (the "Home Equity Loan Schedule"). Such Home
Equity Loan Schedule will specify with respect to each Loan: the original
principal amount and unpaid principal balance as of the Cut-off Date; the
current interest rate; the current Scheduled Payment of principal and interest;
the maturity date, if any, of the related Mortgage Note; and if the Home Equity
Loan is an adjustable rate Loan, the Lifetime Rate Cap, if any, and the index.
The Seller does not intend to file the Home Equity Loan Schedules or the related
Agreements.
ASSIGNMENT OF PRIVATE SECURITIES
The Seller will cause Private Securities to be registered in the name of
the Trustee (or its nominee or correspondent). The Trustee (or its nominee or
correspondent) will have possession of any certificated Private Securities. The
Trustee generally will not be in possession of or be assignee of record of any
underlying assets for a Private Security. See "THE TRUST FUNDS--Private
Securities." Each Private Security will be identified in a schedule appearing as
an exhibit to the related Agreement (the "Certificate Schedule"), which will
specify the original principal amount, outstanding principal balance as of the
Cut-off Date, annual pass-through rate or interest rate and maturity date for
each Private Security conveyed to the Trust Fund. In the Agreement, the Seller
will represent and warrant to the Trustee regarding the Private Securities: (i)
that the information contained in the Certificate Schedule is true and correct
in all material respects; (ii) that, immediately prior to the conveyance of the
Private Securities, the Seller had good title thereto, and was the sole owner
thereof (subject to any Retained Interest); (iii) that there has been no other
sale by it of such Private Securities; and (iv) that there is no existing lien,
charge, security interest or other encumbrance (other than any Retained
Interest) on such Private Securities.
REPURCHASE AND SUBSTITUTION OF NON-CONFORMING PRIMARY ASSETS
If any document in the file relating to the Primary Assets delivered by
the Seller to the Trustee (or Custodian) is found by the Trustee within 90 days
of the execution of the related Agreement (or promptly after the Trustee's
receipt of any document permitted to be delivered after the Closing Date) to be
defective in any material respect and the Seller does not cure such defect
within 90 days, or within such other period specified in the related Prospectus
Supplement, the Representative will, not later than 90 days or within such other
period specified in the related Prospectus Supplement, after the Trustee's
notice to the Seller and the Representative of the defect, repurchase the
related Primary Asset or any property acquired in respect thereof from the
Trustee at a price equal to, unless otherwise specified in the related
Prospectus Supplement, (a) the outstanding principal balance of such Primary
Asset and (b) accrued and unpaid interest to the date of the
repurchase/substitution of such Primary Asset at the rate set forth in the
related Agreement.
The Representative, may, rather than repurchase the Primary Asset as
described above, remove such Primary Asset from the Trust Fund (the "Deleted
Primary Asset") and cause to be substituted in its place one or more other
Primary Assets (each, a "Qualifying Substitute Primary Asset") provided,
however, that (i) with respect to a Trust Fund for which no REMIC election is
made, such substitution must be effected within 120 days of the date of initial
issuance of the Securities and (ii) with respect to a Trust Fund for which a
REMIC election is made, after a specified time period, the Trustee must have
received a satisfactory opinion of counsel that such substitution will not cause
the Trust Fund to lose its status as a REMIC or otherwise subject the Trust Fund
to a prohibited transaction tax.
Any Qualifying Substitute Primary Asset will have, on the date of
substitution, (i) an outstanding principal balance, after deduction of all
Scheduled Payments due in the month of substitution, not in excess of the
outstanding principal balance of the Deleted Primary Asset (the amount of any
shortfall to be deposited to the Collection Account in the month of substitution
for distribution to Holders), (ii) an interest rate not less than (and not more
than 2% greater than) the interest rate or Margin of the Deleted Primary Asset,
(iii) a remaining term-to-stated maturity
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not greater than (and not more than two years less than) that of the Deleted
Primary Asset, and will comply with all of the representations and warranties
set forth in the applicable Agreement as of the date of substitution.
The above-described cure, repurchase or substitution obligations
constitute the sole remedies available to the Holders or the Trustee for a
material defect in a document for a Primary Asset.
The Representative will make representations and warranties with respect
to Primary Assets for a Series. If the Representative cannot cure a breach of
any such representations and warranties in all material respects within the time
period specified in the related Prospectus Supplement after notification by the
Trustee of such breach, and if such breach is of a nature that materially and
adversely affects the value of such Primary Asset, the Representative is
obligated to repurchase the affected Primary Asset or, if provided in the
related Prospectus Supplement, provide a Qualifying Substitute Primary Asset
therefor, subject to the same conditions and limitations on purchases and
substitutions as described above.
REPORTS TO HOLDERS
The Trustee or other entity specified in the related Prospectus
Supplement will prepare and forward to each Holder on each Distribution Date, or
as soon thereafter as is practicable, a statement setting forth, to the extent
applicable to any Series, among other things:
(i) the amount of principal distributed to Holders of the related
Securities and the outstanding principal balance of such Securities
following such distribution;
(ii) the amount of interest distributed to Holders of the related
Securities and the current interest on such Securities;
(iii) the amounts of (a) any overdue accrued interest included in
such distribution, (b) any remaining overdue accrued interest with
respect to such Securities or (c) any current shortfall in amounts to be
distributed as accrued interest to Holders of such Securities;
(iv) the amounts of (a) any overdue payments of scheduled
principal included in such distribution, (b) any remaining overdue
principal amounts with respect to such Securities, (c) any current
shortfall in receipt of scheduled principal payments on the related
Primary Assets or (d) any realized losses or Liquidation Proceeds to be
allocated as reductions in the outstanding principal balances of such
Securities;
(v) the amount received under any related Enhancement, the
remaining amount available under such Enhancement and the amount
reimbursed to the Enhancer, if any;
(vi) the number and aggregate principal balance of Loans that
were delinquent (a) one monthly payment, (b) two monthly payments and
(c) three or more monthly payments, as of the end of the prior
collection period;
(vii) the number and aggregate principal balance of Loans in
foreclosure, as of the end of the prior collection period;
(viii) the aggregate principal balance of Loans which became REO
during the prior collection period;
(ix) the book value of any REO Property acquired by the related
Trust Fund;
(x) the amount of losses realized during the prior collection
period;
(xi) the aggregate principal balance of Loans repurchased during
the prior collection period;
(xii) the amount of the Servicing Fee for the prior collection
period;
(xiii) during the Pre-Funding Period, the remaining Pre-Funded
Amount and the portion of the Pre-Funding Amount used to acquire
additional Primary Assets since the preceding Distribution Date;
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(xiv) during the Pre-Funding Period, the amount remaining in the
Capitalized Interest Account; and
(xv) such other information as specified in the related
Agreement.
In addition, within a reasonable period of time after the end of each
calendar year the Trustee, unless otherwise specified in the related Prospectus
Supplement, will furnish to each Holder of record at any time during such
calendar year (a) the aggregate of amounts reported pursuant to (i), (ii), and
(iv)(d) above for such calendar year and (b) such information specified in the
related Agreement to enable Holders to prepare their tax returns including,
without limitation, the amount of original issue discount accrued on the
Securities, if applicable. Information in the Distribution Date and annual
statements provided to the Holders will not have been examined and reported upon
by an independent public accountant. However, the Master Servicer will provide
to the Trustee a report by independent public accountants with respect to the
Master Servicer's servicing of the Loans. See "SERVICING OF LOANS--Evidence as
to Compliance."
If so specified in the Prospectus Supplement for a Series of Securities,
such Series or one or more Classes of such Series will be issued in book-entry
form. In such event, owners of beneficial interests in such Securities will not
be considered Holders and will not receive such reports directly from the
Trustee. The Trustee will forward such reports only to the entity or its nominee
which is the registered holder of the global certificate which evidences such
book-entry securities. Beneficial owners will receive such reports from the
participants and indirect participants of the applicable book-entry system in
accordance with the practices and procedures of such entities.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
POOLING AND SERVICING AGREEMENT; SALE AND SERVICING AGREEMENT. Unless
otherwise specified in the related Prospectus Supplement, Events of Default
under the Pooling and Servicing Agreement or Sale and Servicing Agreement for
each Series of Securities relating to Loans include (i) any failure by the
Master Servicer to deposit amounts in the Collection Account and/or Certificate
Account and/or Distribution Account required to be made thereunder, which
failure continues unremedied for three business days after the giving of written
notice of such failure to the Master Servicer by the Trustee for such Series, or
to the Master Servicer and the Trustee by the Enhancer or by the Holders of such
Series evidencing not less than 51% of the aggregate voting rights of the
Securities for such Series, (ii) any failure by the Master Servicer duly to
observe or perform in any material respect any other of its covenants or
agreements in the applicable Agreement which continues unremedied for 30 days
after the giving of written notice of such failure to the Master Servicer by the
Trustee, or to the Master Servicer and the Trustee by the Enhancer or by the
Holders of such Series evidencing not less than 51% of the aggregate voting
rights of the Securities for such Series, and (iii) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings and certain actions by the Master Servicer indicating its
insolvency, reorganization or inability to pay its obligations.
So long as an Event of Default remains unremedied under the applicable
Agreement for a Series of Securities relating to the servicing of Loans, unless
otherwise specified in the related Prospectus Supplement, the Trustee for such
Series or Holders of Securities of such Series evidencing not less than 51% of
the aggregate voting rights of the Securities for such Series with, if specified
in the related Prospectus Supplement, the consent of the Enhancer, may terminate
all of the rights and obligations of the Master Servicer as servicer under the
applicable Agreement (other than its right to recovery of other expenses and
amounts advanced pursuant to the terms of such Agreement which rights the Master
Servicer will retain under all circumstances), whereupon the Trustee will
succeed to all the responsibilities, duties and liabilities of the Master
Servicer under such Agreement and will be entitled to reasonable servicing
compensation not to exceed the applicable servicing fee, together with other
servicing compensation in the form of assumption fees, late payment charges or
otherwise as provided in such Agreement.
In the event that the Trustee is unwilling or unable so to act, it may
select, or petition a court of competent jurisdiction to appoint, a finance
institution, bank or loan servicing institution with a net worth of at least
$15,000,000 to act as successor Master Servicer under the provisions of the
applicable Agreement. The successor Master Servicer would be entitled to
reasonable servicing compensation in an amount not to exceed the Servicing Fee
as set forth in the related Prospectus Supplement, together with the other
servicing compensation in the form of assumption fees, late payment charges or
otherwise, as provided in such Agreement.
During the continuance of any Event of Default of a Master Servicer
under an Agreement for a Series of Securities, the Trustee for such Series will
have the right to take action to enforce its rights and remedies and to protect
and enforce the rights and remedies of the Holders of such Series, and, unless
otherwise specified in the
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related Prospectus Supplement, Holders of Securities evidencing not less than
51% of the aggregate voting rights of the Securities for such Series may direct
the time, method and place of conducting any proceeding for any remedy available
to the Trustee or exercising any trust or power conferred upon that Trustee.
However, the Trustee will not be under any obligation to pursue any such remedy
or to exercise any of such trusts or powers unless such Holders have offered the
Trustee reasonable security or indemnity against the cost, expenses and
liabilities which may be incurred by the Trustee therein or thereby. The Trustee
may decline to follow any such direction if the Trustee determines that the
action or proceeding so directed may not lawfully be taken or would involve it
in personal liability or be unjustly prejudicial to the nonassenting Holders.
INDENTURE. Unless otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for 30 days or more in the payment of any principal of or
interest on any Note of such Series; (ii) failure to perform any other covenant
of the Seller or the Trust Fund in the Indenture which continues for a period of
60 days after notice thereof is given in accordance with the procedures
described in the related Prospectus Supplement; (iii) any representation or
warranty made by the Representative or the Trust Fund in the Indenture or in any
certificate or other writing delivered pursuant thereto or in connection
therewith with respect to or affecting such Series having been incorrect in a
material respect as of the time made, and such breach is not cured within 60
days after notice thereof is given in accordance with the procedures described
in the related Prospectus Supplement; (iv) certain events of bankruptcy,
insolvency, receivership or liquidation of the Seller or the Trust Fund; or (v)
any other Event of Default provided with respect to Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the
time outstanding occurs and is continuing, either the Trustee or the Holders of
a majority of the then aggregate outstanding amount of the Notes of such Series
with, if specified in the related Prospectus Supplement, the consent of the
Enhancer, may declare the principal amount (or, if the Notes of that Series are
Zero Coupon Securities, such portion of the principal amount as may be specified
in the terms of that Series, as provided in the related Prospectus Supplement)
of all the Notes of such Series to be due and payable immediately. Such
declaration may, under certain circumstances, be rescinded and annulled by the
Holders of a majority in aggregate outstanding amount of the Notes of such
Series.
If, following an Event of Default with respect to any Series of Notes,
the Notes of such Series have been declared to be due and payable, the Trustee
may, in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such Series as they would
have become due if there had not been such a declaration. In addition, unless
otherwise specified in the related Prospectus Supplement, the Trustee may not
sell or otherwise liquidate the collateral securing the Notes of a Series
following an Event of Default other than a default in the payment of any
principal or interest on any Note of such Series for 30 days or more, unless (a)
the Holders of 100% of the then aggregate outstanding amount of the Notes of
such Series consent to such sale, (b) the proceeds of such sale or liquidation
are sufficient to pay in full the principal of and accrued interest due and
unpaid on the outstanding Notes of such Series at the date of such sale or (c)
the Trustee determines that such collateral would not be sufficient on an
ongoing basis to make all payments on such Notes as such payments would have
become due if such Notes had not been declared due and payable, and the Trustee
obtains the consent of the Holders of 66 2/3% of the then aggregate outstanding
amount of the Notes of such Series.
In the event that the Trustee liquidates the collateral in connection
with an Event of Default involving a default for 30 days or more in the payment
of principal of or interest on the Notes of a Series, the Indenture provides
that the Trustee will have a prior lien on the proceeds of any such liquidation
for unpaid fees and expenses. As a result, upon the occurrence of such an Event
of Default, the amount available for distribution to the Noteholders may be less
than would otherwise be the case. However, the Trustee may not institute a
proceeding for the enforcement of its lien except in connection with a
proceeding for the enforcement of the lien of the Indenture for the benefit of
the Noteholders after the occurrence of such an Event of Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a Series is declared due and payable, as
described above, the Holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing with respect
to a Series of Notes, the Trustee will be under no obligation to exercise any of
the rights or powers under the Indenture at the request or direction of any of
the Holders of Notes of such Series, unless such Holders offered to the Trustee
security or indemnity satisfactory to it against the costs, expenses
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and liabilities which might be incurred by it in complying with such request or
direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, the Holders of a majority of the then
aggregate outstanding amount of the Notes of such Series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee with respect to the Notes of such Series, and the Holders of a majority
of the then aggregate outstanding amount of the Notes of such Series may, in
certain cases, waive any default with respect thereto, except a default in the
payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all the Holders of the outstanding Notes of such Series affected thereby.
THE TRUSTEE
The identity of the commercial bank, savings and loan association or
trust company named as the Trustee for each Series of Securities will be set
forth in the related Prospectus Supplement. The entity serving as Trustee may
have normal banking relationships with the Seller and its affiliates. In
addition, for the purpose of meeting the legal requirements of certain local
jurisdictions, the Trustee will have the power to appoint co-trustees or
separate trustees of all or any part of the Trust Fund relating to a Series of
Securities. In the event of such appointment, all rights, powers, duties and
obligations conferred or imposed upon the Trustee by the Agreement relating to
such Series will be conferred or imposed upon the Trustee and each such separate
trustee or co-trustee jointly, or, in any jurisdiction in which the Trustee
shall be incompetent or unqualified to perform certain acts, singly upon such
separate trustee or co-trustee who will exercise and perform such rights,
powers, duties and obligations solely at the direction of the Trustee. The
Trustee may also appoint agents to perform any of the responsibilities of the
Trustee, which agents will have any or all of the rights, powers, duties and
obligations of the Trustee conferred on them by such appointment; provided that
the Trustee will continue to be responsible for its duties and obligations under
the Agreement. In the event a Series includes both Notes and Certificates, a
separate Trustee identified in the related Prospectus Supplement will serve as
Trustee for the Certificateholders and for the Notes.
DUTIES OF THE TRUSTEE
The Trustee will not make any representations as to the validity or
sufficiency of the Agreement, the Securities or of any Primary Asset or related
documents. If no Event of Default (as defined in the related Agreement) has
occurred, the Trustee is required to perform only those duties specifically
required of it under the Agreement. Upon receipt of the various certificates,
statements, reports or other instruments required to be furnished to it, the
Trustee is required to examine them to determine whether they are in the form
required by the related Agreement. However, the Trustee will not be responsible
for the accuracy or content of any such documents furnished to it by the Holders
or the Servicer under the Agreement.
The Trustee may be held liable for its own negligent action or failure
to act, or for its own misconduct; provided, however, that the Trustee will not
be personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction of the Holders in an
Event of Default. The Trustee is not required to expend or risk its own funds or
otherwise incur any financial liability in the performance of any of its duties
under the Agreement, or in the exercise of any of its rights or powers, if it
has reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
RESIGNATION OF TRUSTEE
The Trustee may, upon written notice to the Representative, and if
specified in the related Prospectus Supplement, the Enhancer, if any, resign at
any time, in which event the Representative will be obligated to use its best
efforts to appoint a successor Trustee. If no successor Trustee has been
appointed and has accepted the appointment within the period specified in the
Agreement after the giving of such notice of resignation, the resigning Trustee
may petition any court of competent jurisdiction for appointment of a successor
Trustee. The Trustee may also be removed at any time (i) if the Trustee ceases
to be eligible to continue as such under the Agreement, (ii) if the Trustee
becomes insolvent or (iii) by the Holders of Securities evidencing over 50% of
the aggregate voting rights of the Securities in the Trust Fund upon written
notice to the Trustee and to the Representative. Any resignation or removal of
the Trustee and appointment of a successor Trustee will not become effective
until acceptance of the appointment by the successor Trustee.
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AMENDMENT OF AGREEMENT
The Agreement for each Series of Securities may be amended by the
Seller, the Master Servicer, the Originators and the Trustee with respect to
such Series, without notice to or consent of the Holders (i) to cure any
ambiguity, (ii) to correct any defective provisions or to correct or supplement
any provision therein, (iii) to add to the duties of the Seller, the Trust Fund
or Master Servicer, (iv) to add any other provisions with respect to matters or
questions arising under such Agreement or related Enhancement, (v) to add or
amend any provisions of such Agreement as required by a Rating Agency in order
to maintain or improve the rating of the Securities (it being understood that
none of the Seller, the Servicer or Trustee is obligated to maintain or improve
such rating), or (vi) to comply with any requirements imposed by the Code;
provided that any such amendment except pursuant to clause (vi) above will not
materially and adversely affect the interests of any Holders of such Series or,
if specified in the related Prospectus Supplement, the Enhancer, as evidenced by
an opinion of counsel. Any such amendment except pursuant to clause (vi) of the
preceding sentence shall be deemed not to adversely affect in any material
respect the interests of any Holder if the Trustee receives written confirmation
from each Rating Agency rating such Securities that such amendment will not
cause such Rating Agency to withdraw or reduce the then current rating thereof.
The Agreement for each Series may also be amended by the Trustee, the Master
Servicer, if applicable, and the Seller with respect to such Series with the
consent of the Enhancer, if specified in the related Prospectus Supplement or
the Holders possessing not less than 51% of the aggregate outstanding principal
amount of the Securities of such Series or, if only certain Classes of such
Series are affected by such amendment, 51% of the aggregate outstanding
principal amount of the Securities of each Class of such Series affected
thereby, for the purpose of adding any provisions to or changing in any manner
or eliminating any of the provisions of such Agreement or modifying in any
manner the rights of Holders of such Series; provided, however, that no such
amendment may (a) reduce the amount or delay the timing of payments on any
Security without the consent of the Holder of such Security; or (b) reduce the
aforesaid percentage of the aggregate outstanding principal amount of Securities
of each Class, the Holders of which are required to consent to any such
amendment or (c) if specified in the related Prospectus Supplement, adversely
affect the interests of the Enhancer, without, in the case of clauses (a) or
(b), the consent of the Holders of 100% of the aggregate outstanding principal
amount of each Class of Securities affected thereby.
VOTING RIGHTS
The related Prospectus Supplement will set forth the method of
determining allocation of voting rights with respect to a Series. Unless
otherwise provided in the related Prospectus Supplement, no Holder of Securities
of a Series, solely by virtue of such Holder's status as a Holder, will have any
right under the applicable Agreement for such Series to institute any proceeding
with respect to such Agreement, unless such Holder previously has given to the
Trustee for such Series written notice of default and unless the Holders of
Securities evidencing not less than 51% of the aggregate voting rights of the
Securities for such Series have made written request upon the Trustee to
institute such proceeding in its own name as Trustee thereunder and have offered
to the Trustee reasonable indemnity, and the Trustee for 60 days has neglected
or refused to institute any such proceeding.
LIST OF HOLDERS
Upon written request of three or more Holders of record of a Series for
purposes of communicating with other Holders with respect to their rights under
the Agreement, which request is accompanied by a copy of the communication which
such Holders propose to transmit, the Trustee will afford such Holders access
during business hours to the most recent list of Holders of that Series held by
the Trustee.
No Agreement will provide for the holding of any annual or other meeting
of Holders.
BOOK-ENTRY SECURITIES
If specified in the Prospectus Supplement for a Series of Securities,
such Series or one or more Classes of such Series may be issued in book-entry
form. In such event, beneficial owners of such Securities will not be considered
"Holders" under the Agreements and may exercise the rights of Holders only
indirectly through the participants in the applicable book-entry system.
REMIC ADMINISTRATOR
For any Series with respect to which a REMIC election is made,
preparation of certain reports and certain other administrative duties with
respect to the Trust Fund may be performed by a REMIC administrator, who may be
the Seller or an affiliate of the Seller.
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TERMINATION
POOLING AND SERVICING AGREEMENT; TRUST AGREEMENT. The obligations
created by the Pooling and Servicing Agreement or Trust Agreement for a Series
will terminate upon the distribution to Holders of all amounts distributable to
them pursuant to such Agreement after the earlier of (i) the later of (a) the
final payment or other liquidation of the last Primary Asset remaining in the
Trust Fund for such Series and (b) the disposition of all property acquired upon
foreclosure or deed in lieu of foreclosure or repossession in respect of any
Primary Asset or (ii) the repurchase, as described below, by the Master Servicer
or other entity specified in the related Prospectus Supplement from the Trustee
for such Series of all Primary Assets and other property at that time subject to
such Agreement. The Agreement for each Series permits, but does not require, the
Master Servicer or other entity specified in the related Prospectus Supplement
to purchase from the Trust Fund for such Series all remaining Primary Assets at
a price equal to, unless otherwise specified in the related Prospectus
Supplement, 100% of the aggregate Principal Balance of such Primary Assets plus,
with respect to any property acquired in respect of a Primary Asset, if any, the
outstanding Principal Balance of the related Primary Asset at the time of
foreclosure, less, in either case, related unreimbursed Advances (in the case of
the Primary Assets, only to the extent not already reflected in the computation
of the aggregate Principal Balance of such Primary Assets) and unreimbursed
expenses (that are reimbursable pursuant to the terms of the Pooling and
Servicing Agreement) plus, in either case, accrued interest thereon at the
weighted average rate on the related Primary Assets through the last day of the
Due Period in which such repurchase occurs; provided, however, that if an
election is made for treatment as a REMIC under the Code, the repurchase price
may equal the greater of (a) 100% of the aggregate Principal Balance of such
Primary Assets, plus accrued interest thereon at the applicable net rates on the
Primary Assets through the last day of the month of such repurchase and (b) the
aggregate fair market value of such Primary Assets plus the fair market value of
any property acquired in respect of a Primary Asset and remaining in the Trust
Fund. The exercise of such right will effect early retirement of the Securities
of such Series, but such entity's right to so purchase is subject to the
aggregate Principal Balance of the Primary Assets at the time of repurchase
being less than a fixed percentage, not more than 25%, to be set forth in the
related Prospectus Supplement, of the aggregate Principal Balance of the Primary
Assets as of the Cut-off Date. In no event, however, will the trust created by
the Agreement continue beyond the expiration of 21 years from the death of the
last survivor of certain persons identified therein. For each Series, the Master
Servicer or the Trustee, as applicable, will give written notice of termination
of the Agreement to each Holder, and the final distribution will be made only
upon surrender and cancellation of the Securities at an office or agency
specified in the notice of termination. If so provided in the related Prospectus
Supplement for a Series, the Master Servicer or another entity may effect an
optional termination of the Trust Fund under the circumstances described in such
Prospectus Supplement. See "DESCRIPTION OF THE SECURITIES--Optional Redemption,
Purchase or Termination."
INDENTURE. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes of
such Series or, with certain limitations, upon deposit with the Trustee of funds
sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture
will provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such Series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such Series, to replace stolen, lost or mutilated Notes of such Series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States of America which, through the
payment of interest and principal in respect thereof in accordance with their
terms, will provide money in an amount sufficient to pay the principal of and
each installment of interest on the Notes of such Series on the Final Scheduled
Distribution Date for such Notes and any installment of interest on such Notes
in accordance with the terms of the Indenture and the Notes of such Series. In
the event of any such defeasance and discharge of Notes of such Series, holders
of Notes of such Series would be able to look only to such money and/or direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
CERTAIN LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans which are general in nature. Because certain of such legal
aspects are governed by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete or to reflect the
laws of any particular state (other than
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the State of California where it is anticipated that a material percentage of
the Mortgaged Properties will be located), or to encompass the laws of all
states in which the properties securing the Loans are situated.
MORTGAGES
The Home Equity Loans for a Series will be secured by either mortgages,
deeds of trust, deeds to secure debt or similar security instruments (such Home
Equity Loans are hereinafter referred to in this section as "mortgage loans"),
depending upon the prevailing practice in the state in which the property
subject to a mortgage loan is located. In California, the prevailing practice is
to use deeds of trust. The filing of a mortgage, deed of trust, deed to secure
debt or similar security instrument creates a lien or title interest upon the
real property covered by such instrument and represents the security for the
repayment of an obligation that is customarily evidenced by a promissory note.
The priority of the liens is important because, among other things, the
foreclosure of a senior lien will extinguish a junior lien, and because the
holder of a senior lien generally will have a right to receive insurance,
condemnation or other proceeds before the holder of a junior lien.
Priority between mortgages and deeds of trust (or other instruments of
record) generally depends in the first instance on the order of filing with the
appropriate government records office. Priority also may be affected by the
express terms of the mortgage or the deed of trust and any subordination
agreement among the lenders.
Although priority among liens on the same property generally depends in
the first instance on the order of filing, there are a number of ways in which a
lien that is a senior lien when it is filed can become subordinate to a lien
filed at a later date. A deed of trust or mortgage generally is not prior to any
liens for real estate taxes and assessments, certain federal liens (including
certain federal criminal liens, environmental liens and tax liens), certain
mechanics and materialmen's liens, and other liens given priority by applicable
law.
There are two parties to a mortgage, the mortgagor, who is the
borrower/property owner or the land trustee (as described below), and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. In the case of a land
trust, there are three parties because title to the property is held by a land
trustee under a land trust agreement of which the borrower/property owner is the
beneficiary; at origination of a mortgage loan, the borrower executes a separate
undertaking to make payments on the mortgage note. Under a deed of trust or
similar security instrument, the homeowner or borrower, called the "grantor,"
grants the security property to a third-party grantee, called the "trustee," for
the benefit of the lender, called the "beneficiary." The deed of trust gives the
trustee the authority, if the borrower defaults and upon the instructions of the
beneficiary, to sell the security property in a "foreclosure" or "trustee's
sale" and to apply the sale proceeds to the secured debt. The mortgagee's
authority under a mortgage and the trustee's authority under a deed of trust are
governed by the law of the state in which the real property is located, the
express provisions of the mortgage or deed of trust, and, in some cases,
particularly in deed of trust transactions, the directions of the beneficiary.
FORECLOSURE
Foreclosure of a mortgage is generally accomplished by judicial action,
and foreclosure of a deed of trust may be accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure occasionally may result from difficulties in effecting
service on necessary parties defendant. When the mortgagee's right to
foreclosure is contested, the legal proceedings necessary to resolve the issue
can be time-consuming and expensive. After the completion of a judicial
foreclosure proceeding, the court may issue a judgment of foreclosure and
appoint a receiver or other officer to conduct the sale of the property. In some
states, mortgages may also be foreclosed by advertisement or pursuant to a power
of sale provided in the mortgage. Foreclosure of a mortgage by advertisement is
essentially similar to foreclosure of a deed of trust by nonjudicial power of
sale.
If a borrower defaults under a loan secured by a deed of trust, the
lender generally may bring suit against the borrower. The lender generally also
may attempt to collect the loan by causing the deed of trust to be enforced
against the property it encumbers. Enforcement of a deed of trust is
accomplished in most cases by a trustee's sale in which the trustee, upon
default of the grantor, and subject to the expiration of applicable cure
periods, sells the security property at a public sale under the terms of the
loan documents and subject to the applicable procedural provisions of state law.
In certain states, the lender must exhaust the security through foreclosure
(either judicially or non-judicially) prior to other efforts to collect the
balance of the promissory note. Whether a lender may thereafter collect on the
unpaid balance of the loan is governed by the anti-deficiency statute in the
applicable state governing the collectibility of deficiency balances.
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The trustee's sale generally must be conducted by public auction in the
county or city in which all or some part of the security property is located. At
the sale, the trustee generally requires a bidder to deposit with the trustee a
set amount or a percentage of the full amount of the bidder's final bid in cash
(or an equivalent thereto satisfactory to the trustee) prior to and as a
condition to recognizing such bid, and may conditionally accept and hold these
amounts for the duration of the sale. The beneficiary of the deed of trust
generally need not bid cash at the sale, but may instead make a "credit bid" up
to the extent of the total amount due under the deed of trust, including costs
and expenses actually incurred in enforcing the deed of trust, as well as the
trustee's fees and expenses. The trustee will sell the security property to the
highest proper bidder at the sale.
A sale conducted in accordance with the terms of the power of sale
contained in the deed of trust generally is presumed to be conducted regularly
and fairly, and, on a conveyance of the property by trustee's deed, confers
absolute legal title to the property to the purchaser, free of all junior deeds
of trust and free of all other liens and claims subordinate to the deed of trust
under which the sale is made. The purchaser's title, however, is subject to all
senior liens and other senior claims. Thus, if the deed of trust being enforced
is a junior deed of trust, the trustee will convey title to the property to the
purchaser subject to the first deed of trust and any other prior liens and
claims. A trustee's sale or judicial foreclosure under a junior deed of trust
generally has no effect on the first deed of trust, with the possible exception
of the right of a senior beneficiary to accelerate its indebtedness under a
default clause or a "due-on-sale" clause contained in the senior deed of trust.
See "--Due-on-Sale Clauses in Home Equity Loans" below.
Because a potential buyer at the sale may find it difficult to determine
the exact status of title and other facts about the security property, and
because the physical condition of the security property may have deteriorated,
it generally is more common for the lender, rather than an unrelated third
party, to purchase the security property at a trustee's sale or judicial
foreclosure sale. The lender (or other purchaser at the judicial foreclosure or
trustee's sale) will be subject to the burdens of ownership, including the
obligations to service any senior mortgage or deed of trust, to obtain hazard
insurance and to make such repairs at its own expense as are necessary to render
the security property suitable for resale. The lender commonly will attempt to
resell the security property and obtain the services of a real estate broker and
agree to pay the broker a commission in connection with the resale. Depending
upon market conditions, the ultimate proceeds of the resale of the security
property may not be high enough to equal the lender's investment.
The proceeds received by the trustee from the sale generally are applied
first to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the deed of trust under which the sale was conducted.
Any remaining proceeds generally are payable to the holders of junior deeds of
trust and other liens and claims in order of their priority. Any balance
remaining generally is payable to the grantor. Following the sale, if there are
insufficient proceeds to repay the secured debt, the beneficiary under the
foreclosed lien generally may obtain a deficiency judgment against the grantor.
See "--Deficiency Judgments" below.
Some courts have been faced with the issue of whether federal or state
constitutional due process requires that borrowers under deeds of trust receive
notices in addition to the statutorily prescribed minimum. For the most part,
the courts in these cases have upheld the notice provisions and procedures
described above.
An action to foreclose a mortgage is an action to recover the mortgage
debt by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the related mortgage note and
the mortgage as made and cannot be relieved from his default if the mortgagee
has exercised his rights in a commercially reasonable manner. However, since a
foreclosure action is equitable in nature, the court may exercise equitable
powers to relieve a mortgagor of a default and deny the mortgagee foreclosure on
proof that either the mortgagor's default was excusable or the mortgagee's
action established a waiver, fraud, bad faith, or oppressive or unconscionable
conduct such as to warrant a court of equity to refuse affirmative relief to the
mortgagee. Under certain circumstances a court of equity may relieve the
mortgagor from an entirely technical default where such default was not willful.
A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses or counterclaims are interposed, sometimes requiring
up to several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of the
parties' intent, if a court determines that the sale was for less than fair
consideration and such sale occurred while the mortgagor was insolvent and
within one year (or within the state statute of limitations if the trustee in
bankruptcy elects to proceed under state fraudulent conveyance law) of the
filing of bankruptcy. Similarly, a suit against the debtor on the related
mortgage note may take several years and, generally, is a remedy alternative to
foreclosure, the mortgagee being precluded from pursuing both at the same time.
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In the case of foreclosure under either a mortgage or a deed of trust,
the sale by the referee or other designated officer or by the trustee is a
public sale. However, because of the difficulty potential third party purchasers
at the sale have in determining the exact status of title and because the
physical condition of the property may have deteriorated during the foreclosure
proceedings, it is relatively uncommon for a third party to purchase the
property at a foreclosure sale. Rather, it is more common for the lender to
purchase the property from the trustee or referee for an amount which may be
equal to the unpaid principal amount of the mortgage note secured by the
mortgage or deed of trust plus accrued and unpaid interest and the expenses of
foreclosure, in which event the mortgagor's debt will be extinguished or the
lender may purchase for a lesser amount in order to preserve its right against a
borrower to seek a deficiency judgment in states where such a judgment can be
obtained. Thereafter, subject to the right of the borrower in some states to
remain in possession during the redemption period, the lender will assume the
burdens of ownership, including obtaining hazard insurance, paying taxes and
making such repairs at its own expense as are necessary to render the property
suitable for sale. The lender will commonly obtain the services of a real estate
broker and pay the broker's commission in connection with the sale of the
property. Depending upon market conditions, the ultimate proceeds of the sale of
the property may not equal the lender's investment in the property. Any loss may
be reduced by the receipt of any mortgage guaranty insurance proceeds.
RIGHTS OF REDEMPTION
In some states, after foreclosure of a mortgage, the mortgagor and
foreclosed junior lienors are given a statutory period in which to redeem the
property from the foreclosure sale. The right of redemption should be
distinguished from the equity of redemption, which is a statutory or
non-statutory right that must be exercised prior to the foreclosure sale. In
some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest, expenses of foreclosure and reasonable
expenses incurred in maintaining the property. In other states, redemption may
be authorized if the former borrower pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
will defeat the title of any purchaser at a foreclosure sale, or of any
purchaser from the lender subsequent to foreclosure. Consequently the practical
effect of a right of redemption is to force the lender to retain the property
and pay the expenses of ownership until the redemption period has run. In many
states, there is no right to redeem property after a trustee's sale under a deed
of trust, unless a deficiency judgment is sought by the lender.
In California, the debtor (or anyone on the debtor's behalf) may cure a
default by paying the past due amount of the debt, plus costs and expenses
actually incurred in enforcing the obligation and statutorily limited trustee's
fees prior to the trustee's sale. In California, the right of redemption is
forever barred by a valid foreclosure by private power of sale.
When the lender under a junior mortgage or deed of trust cures the
default and reinstates or redeems the senior mortgage or deed of trust, the
amount paid by the lender for such cure generally becomes a part of the
indebtedness secured by the junior deed of trust.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGES
The mortgage loans comprising or underlying the Primary Assets included
in the Trust Fund for a Series will be secured by mortgages or deeds of trust
which may be junior to one or more other mortgages or deeds of trust held by
other lenders or institutional investors. The rights of the Trust Fund (and
therefore the Holders), as mortgagee under a junior mortgage, are subordinate to
those of the mortgagee under the senior mortgage, including the prior rights of
the senior mortgagee to receive hazard insurance and condemnation proceeds and
to cause the property securing the mortgage loan to be sold upon default of the
mortgagor, thereby extinguishing the junior mortgagee's lien unless the junior
mortgagee asserts its subordinate interest in the property in foreclosure
litigation and, possibly, satisfies the defaulted senior mortgage. A junior
mortgagee may satisfy a defaulted senior loan in full and, in some states, may
cure such default and bring the senior loan current, in either event adding the
amounts expended to the balance due on the junior loan. In some states, absent a
provision in the mortgage or deed of trust, no notice of default is required to
be given to a junior mortgagee. In addition, as described above, the rights of
the Trust Fund may be or become subject to liens for real estate taxes and other
obligations. Although the Seller generally does not cure defaults under a senior
deed of trust or other lien, it is the Seller's standard practice to protect its
interest by monitoring any such sale of which it is aware and bidding for
property if it determines that it is in the Seller's best interests to do so.
The standard form of the mortgage or deed of trust used by most
institutional lenders, like that used by the Seller, confers on the mortgagee or
beneficiary the right both to receive all proceeds collected under any hazard
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insurance policy required to be maintained by the borrower and all awards made
in connection with condemnation proceedings. The lender generally has the right,
subject to the specific provisions of the mortgage or deed of trust securing its
loan, to apply such proceeds and awards to repair of any damage to the security
property or to payment of any indebtedness secured by the mortgage or deed of
trust, in such order as the mortgagee or beneficiary may determine. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages or deeds of trust. If
available, proceeds in excess of the amount of senior mortgage indebtedness, in
most cases, will be applied to the junior indebtedness.
Another provision typically found in the form of the mortgage or deed of
trust used by institutional lenders obligates the grantor or mortgagor to pay
before delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee or beneficiary under the
mortgage. Upon a failure of the grantor or mortgagor to perform any of these
obligations, the mortgagee or beneficiary is given the right to perform the
obligation itself, at its election, with the mortgagor or grantor agreeing to
reimburse the mortgagee or beneficiary for any sums expended by the mortgagee or
beneficiary on behalf of the mortgagor or grantor. The mortgage or deed of trust
typically provides that all sums so expended by the mortgagee or beneficiary
become part of the indebtedness secured by the mortgage or deed of trust.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions which limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage.
In some states, including California, statutes limit the right of the
beneficiary or mortgagee to obtain a deficiency judgment against the borrower
following foreclosure or sale under a deed of trust. A deficiency judgment is a
personal judgment against the former borrower equal in most cases to the
difference between the net amount realized upon the public sale of the real
property and the amount due to the lender. However, some states calculate the
deficiency as the difference between the outstanding indebtedness and the
greater of the fair market value of the property and the sales price of the
property. Other states require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
In certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, when applicable, is that lenders
will usually proceed first against the security rather than bringing a personal
action against the borrower. Finally, other statutory provisions limit any
deficiency judgment against the former borrower following a foreclosure sale to
the excess of the outstanding debt over the fair market value of the property at
the time of the public sale. The purpose of these statutes is generally to
prevent a beneficiary or a mortgagee from obtaining a large deficiency judgment
against the former borrower as a result of low or no bids at the foreclosure
sale. In California, no deficiency judgment may be obtained after exercise of a
private power of sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including the federal bankruptcy laws, the
Federal Soldiers' and Sailors' Civil Relief Act and state laws affording relief
to debtors, may interfere with or affect the ability of the secured lender to
realize upon collateral and/or enforce a deficiency judgment. For example, with
respect to federal bankruptcy law, the filing of a petition acts as a stay
against the enforcement of remedies for collection of a debt. Foreclosure is
permitted during the pendency of this proceeding only with court permission
Moreover, a court with federal bankruptcy jurisdiction may permit a debtor
through a Chapter 13 Bankruptcy Code rehabilitative plan to cure a monetary
default with respect to a loan on a debtor's residence by paying arrearages
within a reasonable time period and reinstating the original loan payment
schedule even though the lender accelerated the loan and the lender has taken
all steps to realize upon its security (provided no sale of the property has yet
occurred) prior to the filing of the debtor's Chapter 13 petition. Some courts
with federal bankruptcy jurisdiction have approved plans, based on the
particular facts of the reorganization case, that effected the curing of a loan
default by permitting the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan may be modified if the borrower has filed a petition
under Chapter 13. These courts have suggested that such modifications
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may include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Federal bankruptcy law and limited case law
indicate that the foregoing modifications cannot be applied to the terms of a
loan secured by property that is the principal residence of the debtor. In all
cases, the secured creditor is entitled to the value of its security plus
post-petition interest, attorney's fees and costs to the extent the value of the
security exceeds the debt.
In a Chapter 11 case under the Bankruptcy Code, the lender is precluded
from foreclosing without authorization from the bankruptcy court. The lender's
lien may be transferred to other collateral and/or be limited in amount to the
value of the lender's interest in the collateral as of the date of the
bankruptcy. The loan term may be extended, the interest rate may be adjusted to
market rates and the priority of the loan may be subordinated to bankruptcy
court-approved financing. The bankruptcy court can, in effect, invalidate
due-on-sale clauses through confirmed Chapter 11 plans of reorganization.
The Bankruptcy Code provides priority to certain tax liens over the
lender's security. This may delay or interfere with the enforcement of rights in
respect of a defaulted Loan. In addition, substantive requirements are imposed
upon lenders in connection with the origination and the servicing of mortgage
loans by numerous federal and some state consumer protection laws. The laws
include the federal Truth-in-Lending Act, Real Estate Settlement Procedures Act,
Equal Credit Opportunity Act, Fair Credit Reporting Act and related statutes and
regulations. These federal laws impose specific statutory liabilities upon
lenders who originate loans and who fail to comply with the provisions of the
law. In most cases, this liability will affect assignees of the loans.
DUE-ON-SALE CLAUSES IN MORTGAGE LOANS
Due-on-sale clauses permit the lender to accelerate the maturity of the
loan if the borrower sells or transfers, whether voluntarily or involuntarily,
all or part of the real property securing the loan without the lender's prior
written consent. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases, typically involving
single family residential mortgage transactions, their enforceability has been
limited or denied. In any event, the Garn-St Germain Depository Institutions Act
of 1982 (the "Garn-St Germain Act") preempts state constitutional, statutory and
case law that prohibits the enforcement of due-on-sale clauses and permits
lenders to enforce these clauses in accordance with their terms, subject to
certain exceptions. As a result, due-on-sale clauses have become generally
enforceable except in those states whose legislatures exercised their authority
to regulate the enforceability of such clauses with respect to mortgage loans
that were (i) originated or assumed during the "window period" under the Garn-St
Germain Act which ended in all cases not later than October 15, 1982, and (ii)
originated by lenders other than national banks, federal savings institutions
and federal credit unions. FHLMC has taken the position in its published
mortgage servicing standards that, out of a total of eleven "window period
states," five states (Arizona, Michigan, Minnesota, New Mexico and Utah) have
enacted statutes extending, on various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to certain
categories of window period loans. Also, the Garn-St Germain Act does
"encourage" lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
In addition, under federal bankruptcy law, due-on-sale clauses may not
be enforceable in bankruptcy proceedings and may, under certain circumstances,
be eliminated in any modified mortgage resulting from such bankruptcy
proceeding.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations, upon the late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if the
loan is prepaid. Late charges and prepayment fees are typically retained by
servicers as additional servicing compensation.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security,
courts have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his
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defaults under the loan documents. Examples of judicial remedies that have been
fashioned include judicial requirements that the lender undertake affirmative
and expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon its
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in cases involving the
sale by a trustee under a deed of trust or by a mortgagee under a mortgage
having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
Most conventional single-family mortgage loans may be prepaid in full or
in part without penalty. A mortgagee to whom a prepayment in full has been
tendered may be compelled to give either a release of the mortgage or an
instrument assigning the existing mortgage. The absence of a restraint on
prepayment, particularly with respect to mortgage loans having higher mortgage
rates, may increase the likelihood of refinancing or other early retirements of
such mortgage loans.
APPLICABILITY OF USURY LAWS
Many states have usury laws which limit the interest and other amounts
that may be charged under certain loans. Title V of the Depository Institutions
Deregulation and Monetary Control Act of 1980, enacted in March 1980 ("Title
V"), provides that state usury limitations shall not apply to certain types of
residential first mortgage loans originated by certain lenders after March 31,
1980. Similar federal statutes were in effect with respect to mortgage loans
made during the first three months of 1980. Title V authorizes any state to
reimpose interest rate limits by adopting, before April 1, 1983, a state law, or
by certifying that the voters of such state have voted in favor of any
provision, constitutional or otherwise, which expressly rejects an application
of the federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V is not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V.
ENVIRONMENTAL LEGISLATION
A federal statute, the Comprehensive Environmental Response,
Compensation, and Liability Act, and a growing number of state laws impose a
statutory lien for associated costs on property that is the subject of a cleanup
action on account of hazardous wastes or hazardous substances released or
disposed of on the property. Such a lien generally will have priority over all
subsequent liens on the property and, in certain of these states, will have
priority over prior recorded liens, including the lien of a mortgage or deed of
trust. The priority of the environmental lien under federal law depends on the
time of perfection of the federal lien compared to the time of perfection of any
competing liens under applicable state law. In addition, under federal
environmental legislation and possibly under state law in a number of states, a
secured party that takes a deed in lieu of foreclosure or acquires a property at
a foreclosure sale may be liable for the costs of cleaning up a contaminated
site. Although such costs could be substantial, they would probably not be
imposed on a secured lender (such as the applicable Trust Fund) if it promptly
marketed the foreclosed property for resale. In the event that a Trust Fund
acquired title to a property securing a Mortgage Home Equity Loan and cleanup
costs were incurred in respect of the property, the holders of the Securities
might incur a delay in the payment if such costs were required to be paid by
such Trust Fund.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of
all branches of the military on active duty, including draftees and reservists
in military service, (i) are entitled to have interest rates reduced and capped
at 6% per annum, on obligations (including Loans) incurred prior to the
commencement of military service for the duration of military service, (ii) may
be entitled to a stay of proceedings on any kind of foreclosure or repossession
action in the case of defaults on such obligations entered into prior to
military service for the duration of military service and (iii) may have the
maturity of such obligations incurred prior to military service extended, the
payments lowered and the payment schedule readjusted for a period of time after
the completion of military service. However, the benefits of (i), (ii), or (iii)
above are subject to challenge by creditors and if, in the opinion of the court,
the ability of a person to comply with such obligations has not been materially
impaired by military service, the court
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may apply equitable principles accordingly. If a borrower's obligation to repay
amounts otherwise due on a Home Equity Loan included in a Trust Fund for a
Series is relieved pursuant to the Soldiers' and Sailors' Civil Relief Act of
1940, none of the Trust Fund, the Servicer, the Seller nor the Trustee will be
required to advance such amounts, and any loss in respect thereof may reduce the
amounts available to be paid to the Holders of the Securities of such Series.
Unless otherwise specified in the related Prospectus Supplement, any shortfalls
in interest collections on Loans or Underlying Loans relating to the Private
Securities, as applicable, included in a Trust Fund for a Series resulting from
application of the Soldiers' and Sailors' Civil Relief Act of 1940 will be
allocated to each Class of Securities of such Series that is entitled to receive
interest in respect of such Loans or Underlying Loans in proportion to the
interest that each such Class of Securities would have otherwise been entitled
to receive in respect of such Loans or Underlying Loans had such interest
shortfall not occurred.
USE OF PROCEEDS
The Seller will apply all or substantially all of the net proceeds from
the sale of each Series of Securities for one or more of the following purposes:
(i) to establish any Reserve Fund, Pre-Funding Account or Capitalized Interest
Account, (ii) to pay costs of structuring and issuing such Securities, including
the costs of obtaining Enhancement, and (iii) to acquire the Primary Assets from
the Originators, who in turn will use such proceeds for general corporate
purposes.
FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
This section sets forth (i) certain federal income tax opinions of
Stroock & Stroock & Lavan LLP, special counsel to the Seller ("Federal Tax
Counsel"), and (ii) a summary, based on the advice of Federal Tax Counsel, of
the material federal income tax consequences of the purchase, ownership and
disposition of Securities. The summary does not purport to deal with all aspects
of federal income taxation that may affect particular investors in light of
their individual circumstances, nor with certain types of investors subject to
special treatment under the federal income tax laws. The summary focuses
primarily upon investors who will hold Securities as "capital assets"
(generally, property held for investment) within the meaning of Section 1221 of
the of the Internal Revenue Code of 1986, as amended (the "Code"), but much of
the discussion is applicable to other investors as well. Because tax
consequences may vary based on the status or tax attributes of the owner of a
Security, prospective investors are advised to consult their own tax advisers
concerning the federal, state, local and any other tax consequences to them of
the purchase, ownership and disposition of the Securities. For purposes of this
tax discussion (except with respect to information reporting, or where the
context indicates otherwise), any reference to the "Holder" means the beneficial
owner of a Security, and unless the context requires otherwise, any reference to
Loans includes both Home Equity Loans and Underlying Loans.
The summary is based upon the provisions of the Code, the regulations
promulgated thereunder, including, where applicable, proposed regulations, and
the judicial and administrative rulings and decisions now in effect, all of
which are subject to change or possible differing interpretations. The statutory
provisions, regulations, and interpretations on which this interpretation is
based are subject to change, and such a change could apply retroactively.
The federal income tax consequences to Holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness for
federal income tax purposes; (ii) an election is made to treat the Trust Fund
(or certain assets of the Trust Fund) relating to a particular Series of
Securities as a real estate mortgage investment conduit ("REMIC") under the
Code; (iii) the Securities represent an ownership interest for federal income
tax purposes in some or all of the assets included in the Trust Fund for a
Series; or (iv) for federal income tax purposes the Trust Fund relating to a
particular Series of Certificates is classified as a partnership or is
disregarded as an entity separate from its owner. The Prospectus Supplement for
each Series of Securities will specify how the Securities will be treated for
federal income tax purposes and will discuss whether a REMIC election, if any,
will be made with respect to such Series.
OPINIONS
Federal Tax Counsel is of the opinion that:
(i) If a Prospectus Supplement indicates that one or more Classes
of Securities of the related Series are to be treated as indebtedness
for federal income tax purposes, assuming that all of the provisions
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of the applicable Agreement are complied with, the Securities so
designated will be considered indebtedness for federal income tax
purposes;
(ii) If a Prospectus Supplement indicates that one or more REMIC
elections will be made with respect to the related Trust Fund, assuming
that such elections are timely made and all of the provisions of the
applicable Agreement are complied with (a) each segregated pool of
assets specified as a REMIC in such Agreement will constitute a REMIC
for federal income tax purposes, (b) the Class or Classes of Securities
of the related Series which are designated as "regular interests" in
such Prospectus Supplement will be considered "regular interests" in a
REMIC for federal income tax purposes and (c) the Class of Securities of
the related Series which is designated as the "residual interest" in
such Prospectus Supplement will be considered the sole class of
"residual interests" in the applicable REMIC for federal income tax
purposes;
(iii) If a Prospectus Supplement indicates that a Trust Fund will
be treated as a grantor trust for federal income tax purposes, assuming
compliance with all of the provisions of the applicable Agreement, (a)
the Trust Fund will be considered to be a grantor trust under Subpart E,
Part 1 of Subchapter J of the Code and will not be considered to be an
association taxable as a corporation and (b) a Holder of the related
Certificates will be treated for federal income tax purposes as the
owner of an undivided interest in the Primary Assets included in the
Trust Fund; and
(iv) If a Prospectus Supplement indicates that a Trust Fund is to
be treated as a partnership for federal income tax purposes, assuming
that all of the provisions of the applicable Agreements are complied
with, such Trust Fund will not be considered to be an association,
publicly traded partnership, or taxable mortgage pool taxable as a
corporation.
Each such opinion is an expression of an opinion only, is not a
guarantee of results and is not binding on the Internal Revenue Service or any
third-party.
TAXATION OF DEBT SECURITIES (INCLUDING REGULAR INTEREST SECURITIES)
INTEREST AND ACQUISITION DISCOUNT. Securities representing regular
interest in a REMIC ("Regular Interest Securities") are generally taxable to
Holders in the same manner as evidences of indebtedness issued by the REMIC.
Stated interest on the Regular Interest Securities will be taxable as ordinary
income and taken into account using the accrual method of accounting, regardless
of the Holder's normal accounting method. Interest (other than original issue
discount) on Securities (other than Regular Interest Securities) that are
characterized as indebtedness for federal income tax purposes will be includible
in income by Holders thereof in accordance with their usual methods of
accounting. Securities characterized as debt for federal income tax purposes and
Regular Interest Securities will be referred to hereinafter collectively as
"Debt Securities."
Debt Securities that are Compound Interest Securities will, and certain
of the other Debt Securities may, be issued with "original issue discount"
("OID"). The following discussion is based in part on the rules governing OID
which are set forth in Sections 1271-1275 of the Code and the Treasury
regulations issued thereunder (the "OID Regulations"). A Holder should be aware,
however, that the OID Regulations do not adequately address certain issues
relevant to prepayable securities, such as the Debt Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. A Holder of
a Debt Security must include such OID in gross income as ordinary interest
income as it accrues under a prescribed method which takes into account an
economic accrual of the discount. In general, OID must be included in income in
advance of the receipt of the cash representing that income. The amount of OID
on a Debt Security will be considered to be zero if it is less than a de minimis
amount determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of Debt Securities is sold for cash on
or prior to the Closing Date, the issue price for such class will be treated as
the fair market value of such class on the Closing Date. The stated redemption
price at maturity of a Debt Security includes the original principal amount of
the Debt Security, but generally will not include distributions of interest if
such distributions constitute "qualified stated interest."
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Under the OID Regulations, interest payments will not be qualified
stated interest unless the interest payments are "unconditionally payable." The
OID Regulations state that interest is unconditionally payable if reasonable
legal remedies exist to compel timely payment or the debt instrument otherwise
provides terms and conditions that make the likelihood of late payment of
interest (other than late payment that occurs within a reasonable grace period)
or nonpayment of interest a remote contingency. It is unclear whether the terms
and conditions of the debt instruments underlying the Debt Securities or of the
Debt Securities themselves are determinative of whether the likelihood of late
payment or non-payment is a remote contingency. Accordingly, Federal Tax Counsel
is unable to opine whether the interest with respect to a Debt Security is
qualified stated interest, and consequently whether a Debt Security has OID as a
result of the failure of such interest to be treated as qualified stated
interest.
Certain Debt Securities will provide for distributions of interest based
on a period that is the same length as the interval between Distribution Dates
but ends prior to each Distribution Date. Any interest that accrues prior to the
Closing Date may be treated under the OID Regulations either (i) as part of the
issue price and the stated redemption price at maturity of the Debt Securities
or (ii) as not included in the issue price or stated redemption price. The OID
Regulations provide a special application of the de minimis rule for debt
instruments with long first accrual periods where the interest payable for the
first period is at a rate which is effectively less than that which applies in
all other periods. In such cases, for the sole purpose of determining whether
original issue discount is de minimis, the OID Regulations provide that the
stated redemption price is equal to the instrument's issue price plus the
greater of the amount of foregone interest or the excess (if any) of the
instrument's stated principal amount over its issue price.
Under the de minimis rule, OID on a Debt Security will be considered to
be zero if such OID is less than 0.25% of the stated redemption price at
maturity of the Debt Security multiplied by the weighted average maturity of the
Debt Security. For this purpose, the weighted average maturity of the Debt
Security is computed as the sum of the amounts determined by multiplying the
number of full years (i.e., rounding down partial years) from the issue date
until each distribution in reduction of stated redemption price at maturity is
scheduled to be made by a fraction, the numerator of which is the amount of each
distribution included in the stated redemption price at maturity of the Debt
Security and the denominator of which is the stated redemption price at maturity
of the Debt Security. Holders generally must report de minimis OID pro rata as
principal payments are received, and such income will be capital gain if the
Debt Security is held as a capital asset. However, accrual method Holders may
elect to accrue all de minimis OID as well as market discount under a constant
interest method. See "--Election to Treat All Interest as Original Issue
Discount."
The Holder of a Debt Security issued with OID must include in gross
income, for all days during its taxable year on which it holds such Debt
Security, the sum of the "daily portions" of such original issue discount. The
amount of OID includible in income by a Holder will be computed by allocating to
each day during a taxable year a pro rata portion of the original issue discount
that accrued during the relevant accrual period. In the case of a Debt Security
that is not a Regular Interest Security and the principal payments on which are
not subject to acceleration resulting from prepayments on the Loans, the amount
of OID includible in income of a Holder for an accrual period (generally the
period over which interest accrues on the debt instrument) will equal the
product of the yield to maturity of the Debt Security and the adjusted issue
price of the Debt Security, reduced by any payments of qualified stated
interest. The adjusted issue price is the sum of its issue price plus prior
accruals of OID, reduced by the total payments made with respect to such Debt
Security in all prior periods, other than qualified stated interest payments.
The amount of OID to be included in income by a Holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a "Pay-Through Security"), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
"Prepayment Assumption"). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and (b) the payments during the accrual
period of amounts included in the stated redemption price of the Pay-Through
Security, over the adjusted issue price of the Pay-Through Security at the
beginning of the accrual period. The present value of the remaining payments is
to be determined on the basis of three factors: (i) the original yield to
maturity of the Pay-Through Security (determined on the basis of compounding at
the end of each accrual period and properly adjusted for the length of the
accrual period), (ii) events which have occurred before the end of the accrual
period and (iii) the assumption that the remaining payments will be made in
accordance with the original Prepayment Assumption. The effect of this method is
to increase the portions of OID required to be included in income by a Holder to
take into account prepayments with respect to the Loans at a rate that exceeds
the Prepayment Assumption, and to decrease (but not below zero for any period)
the portions of OID required to be included in income by a Holder of a
Pay-
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Through Security to take into account prepayments with respect to the Loans
at a rate that is slower than the Prepayment Assumption. Although OID will be
reported to Holders of Pay-Through Securities based on the Prepayment
Assumption, no representation is made to Holders that Loans will be prepaid at
that rate or at any other rate.
The Seller may adjust the accrual of OID on a Class of Regular Interest
Securities (or other regular interests in a REMIC) in a manner that it believes
to be appropriate, to take account of realized losses on the Loans, although the
OID Regulations do not provide for such adjustments. If the Internal Revenue
Service were to require that OID be accrued without such adjustments, the rate
of accrual of OID for a Class of Regular Interest Securities could increase.
Certain classes of Regular Interest Securities may represent more than
one class of REMIC regular interests. Unless the applicable Prospectus
Supplement specifies otherwise, the Trustee intends, based on the OID
Regulations, to calculate OID on such Securities as if, solely for the purposes
of computing OID, the separate regular interests were a single debt instrument.
A subsequent Holder of a Debt Security will also be required to include
OID in gross income, but such a Holder who purchases such Debt Security for an
amount that exceeds its adjusted issue price will be entitled (as will an
initial Holder who pays more than a Debt Security's issue price) to offset such
OID by comparable economic accruals of portions of such excess.
EFFECTS OF DEFAULTS AND DELINQUENCIES. Holders will be required to
report income with respect to the related Securities under an accrual method
without giving effect to delays and reductions in distributions attributable to
a default or delinquency on the Loans, except possibly to the extent that it can
be established that such amounts are uncollectible. As a result, the amount of
income (including OID) reported by a Holder of such a Security in any period
could significantly exceed the amount of cash distributed to such Holder in that
period. The Holder will eventually be allowed a loss (or will be allowed to
report a lesser amount of income) to the extent that the aggregate amount of
distributions on the Securities is reduced as a result of a Home Equity Loan
default. However, the timing and character of such losses or reductions in
income are uncertain and, accordingly, Holders of Securities should consult
their own tax advisors on this point.
INTEREST WEIGHTED SECURITIES. It is not clear how income should be
accrued on Debt Securities the payments on which consist solely or primarily of
a specified portion of the interest payments on qualified mortgages held by the
REMIC or on Loans underlying Pass-Through Securities ("Interest Weighted
Securities"). The Trust Fund intends to take the position that all of the income
derived from an Interest Weighted Security should be treated as OID and that the
amount and rate of accrual of such OID should be calculated by treating the
Interest Weighted Security as a Compound Interest Security. However, in the case
of Interest Weighted Securities that are entitled to some payments of principal
and that are Regular Interest Securities the IRS could assert that income
derived from an Interest Weighted Security should be calculated as if the
Security were purchased at a premium equal to the excess of the price paid by
such holder for such Security over its stated principal amount, if any. Under
this approach, a holder would be entitled to amortize such premium amount, if
any. Under this approach, a holder would be entitled to amortize such premium
only if it has in effect an election under Section 171 of the Code with respect
to all taxable debt instruments held by such holder, as described below.
VARIABLE RATE DEBT SECURITIES. Under the OID Regulations, Debt
Securities paying interest at a variable rate (a "Variable Rate Debt Security")
are subject to special rules. A Variable Rate Debt Security will qualify as a
"variable rate debt instrument" if (i) its issue price does not exceed the total
noncontingent principal payments due under the Variable Rate Debt Security by
more than a specified de minimis amount, (ii) it provides for stated interest,
paid or compounded at least annually, at (a) one or more qualified floating
rates, (b) a single fixed rate and one or more qualified floating rates, (c) a
single objective rate or (d) a single fixed rate and a single objective rate
that is a qualified inverse floating rate, and (iii) it does not provide for any
principal payments that are contingent, as defined in the OID Regulations,
except as provided in clause (i) above.
A "qualified floating rate" is any variable rate where variations in the
value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Rate Debt Security is denominated. A multiple of a qualified floating
rate will generally not itself constitute a qualified floating rate for purposes
of the OID Regulations. However, a variable rate equal to (i) the product of a
qualified floating rate and a fixed multiple that is greater than 0.65 but not
more than 1.35 or (ii) the product of a qualified floating rate and a fixed
multiple that is greater than 0.65 but not more than 1.35, increased or
decreased by a fixed rate will constitute a qualified floating rate for purposes
of the OID Regulations. In addition,
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under the OID Regulations, two or more qualified floating rates that can
reasonably be expected to have approximately the same values throughout the term
of the Variable Rate Debt Security will be treated as a single qualified
floating rate (a "Presumed Single Qualified Floating Rate"). Two or more
qualified floating rates with values within 25 basis points of each other as
determined on the Variable Rate Debt Security's issue date will be conclusively
presumed to be a Presumed Single Qualified Floating Rate. Notwithstanding the
foregoing, a variable rate that would otherwise constitute a qualified floating
rate but which is subject to one or more restrictions such as a cap or floor,
will not be a qualified floating rate for purposes of the OID Regulations unless
the restriction is fixed throughout the term of the Variable Rate Debt Security
or the restriction will not significantly affect the yield of the Variable Rate
Debt Security.
An "objective rate" is a rate that is not itself a qualified floating
rate but which is determined using a single fixed formula and which is based
upon objective financial or economic information. The OID Regulations also
provide that other variable rates may be treated as objective rates if so
designated by the Internal Revenue Service in the future. Despite the foregoing,
a variable rate of interest on a Variable Rate Debt Security will not constitute
an objective rate if it is reasonably expected that the average value of such
rate during the first half of the Variable Rate Debt Security's term will be
either significantly less than or significantly greater than the average value
of the rate during the final half of the Variable Rate Debt Security's term.
Further, an objective rate does not include a rate that is based on information
that is within the control of or unique to the circumstances of the issuer or a
party related to the issuer. An objective rate will qualify as a "qualified
inverse floating rate" if such rate is equal to a fixed rate minus a qualified
floating rate and variations in the rate can reasonably be expected to inversely
reflect contemporaneous variations in the qualified floating rate. The OID
Regulations also provide that if a Variable Rate Debt Security provides for
stated interest at a fixed rate for an initial period of less than one year
followed by a variable rate that is either a qualified floating rate or an
objective rate and if the variable rate on the Variable Rate Debt Security's
issue date is intended to approximate the fixed rate, then the fixed rate and
the variable rate together will constitute either a single qualified floating
rate or objective rate, as the case may be (a "Presumed Single Variable Rate").
If the value of the variable rate and the initial fixed rate are within 25 basis
points of each other as determined on the Variable Rate Debt Security's issue
date, the variable rate will be conclusively presumed to approximate the fixed
rate.
For Variable Rate Debt Securities that qualify as a "variable rate debt
instrument" under the OID Regulations and provide for interest at either a
single qualified floating rate, a single objective rate, a Presumed Single
Qualified Floating Rate or a Presumed Single Variable Rate throughout the term
(a "Single Variable Rate Debt Security"), original issue discount is computed as
described above based on the following: (i) stated interest on the Single
Variable Rate Debt Security which is unconditionally payable in cash or property
(other than debt instruments of the issuer) at least annually will constitute
qualified stated interest; (ii) by assuming that the variable rate on the Single
Variable Debt Security is a fixed rate equal to: (a) in the case of a Single
Variable Rate Debt Security with a qualified floating rate or a qualified
inverse floating rate, the value of, as of the issue date, of the qualified
floating rate or the qualified inverse floating rate or (b) in the case of a
Single Variable Rate Debt Security with an objective rate (other than a
qualified inverse floating rate), a fixed rate which reflects the reasonably
expected yield for such Single Variable Debt Security; and (iii) the qualified
stated interest allocable to an accrual period is increased (or decreased) if
the interest actually paid during an accrual period exceeds (or is less than)
the interest assumed to be paid under the assumed fixed rate described in clause
(ii) above.
In general, any Variable Rate Debt Security other than a Single Variable
Rate Debt Security (a "Multiple Variable Rate Debt Security") that qualifies as
a "variable rate debt instrument" will be converted into an "equivalent" fixed
rate debt instrument for purposes of determining the amount and accrual of
original issue discount and qualified stated interest on the Multiple Variable
Rate Debt Security. The OID Regulations generally require that such a Multiple
Variable Rate Debt Security be converted into an "equivalent" fixed rate debt
instrument by substituting any qualified floating rate or qualified inverse
floating rate provided for under the terms of the Multiple Variable Rate Debt
Security with a fixed rate equal to the value of the qualified floating rate or
qualified inverse floating rate, as the case may be, as of the Multiple Variable
Rate Debt Security's issue date. Any objective rate (other than a qualified
inverse floating rate) provided for under the terms of the Multiple Variable
Rate Debt Security is converted into a fixed rate that reflects the yield that
is reasonably expected for the Multiple Variable Rate Debt Security. In the case
of a Multiple Variable Rate Debt Security that qualifies as a "variable rate
debt instrument" and provides for stated interest at a fixed rate in addition to
either one or more qualified floating rates or a qualified inverse floating
rate, the fixed rate is initially converted into a qualified floating rate (or a
qualified inverse floating rate, if the Multiple Variable Rate Debt Security
provides for a qualified inverse floating rate). Under such circumstances, the
qualified floating rate or qualified inverse floating rate that replaces the
fixed rate must be such that the fair market value of the Multiple Variable Rate
Debt Security as of the Multiple Variable Rate Debt Security's issue date is
approximately the same as the fair market value of an otherwise identical debt
instrument that
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provides for either the qualified floating rate or qualified inverse floating
rate rather than the fixed rate. Subsequent to converting the fixed rate into
either a qualified floating rate or a qualified inverse floating rate, the
Multiple Variable Rate Debt Security is then converted into an "equivalent"
fixed rate debt instrument in the manner described above.
Once the Multiple Variable Rate Debt Security is converted into an
"equivalent" fixed rate debt instrument pursuant to the foregoing rules, the
amount of original issue discount and qualified stated interest, if any, are
determined for the "equivalent" fixed rate debt instrument by applying the
original issue discount rules to the "equivalent" fixed rate debt instrument in
the manner described above. A Holder of the Multiple Variable Rate Debt Security
will account for such original issue discount and qualified stated interest as
if the Holder held the "equivalent" fixed rate debt instrument. Each accrual
period appropriate adjustments will be made to the amount of qualified stated
interest or original issue discount assumed to have been accrued or paid with
respect to the "equivalent" fixed rate debt instrument in the event that such
amounts differ from the accrual amount of interest accrued or paid on the
Multiple Variable Rate Debt Security during the accrual period.
If a Variable Rate Debt Security does not qualify as a "variable rate
debt instrument" under the OID Regulations, then the Variable Rate Debt Security
would be treated as a contingent payment debt obligation. It is not clear under
current law how a Variable Rate Debt Security would be taxed if such Debt
Security were treated as a contingent payment debt obligation.
The Internal Revenue Services (the "IRS") recently issued final
regulations (the "Contingent Regulations") governing the calculation of OID on
instruments having contingent interest payments. The Contingent Regulations
specifically do not apply however to debt instruments to which Code Section
1272(a)(6) is applicable, such as a Pay-Through Security. Additionally, the OID
Regulations do not contain provisions specifically interpreting Code Section
1272(a)(6). Until the Treasury issues guidelines to the contrary, the Trustee
intends to base its computation of OID on Pay-Through Securities as described in
this Prospectus. However, because no regulatory guidance exists under Code
Section 1272(a)(6), there can be no assurance that such methodology represents
the correct manner of calculating OID.
MARKET DISCOUNT. A purchaser of a Security may be subject to the market
discount rules of Sections 1276-1278 of the Code. A Holder that acquires a Debt
Security with more than a prescribed de minimis amount of "market discount"
(generally, the excess of the principal amount of the Debt Security over the
purchaser's purchase price) will be required to include accrued market discount
in income as ordinary income in each month, but limited to an amount not
exceeding the principal payments on the Debt Security received in that month
and, if the Securities are sold, the gain realized. Such market discount would
accrue in a manner to be provided in Treasury regulations but, until such
regulations are issued, such market discount would in general accrue either (i)
on the basis of a constant yield (in the case of a Pay-Through Security, taking
into account a prepayment assumption) or (ii) in the ratio of (a) in the case of
Securities (or in the case of a Pass-Through Security, as set forth below, the
Loans underlying such Security) not originally issued with original issue
discount, stated interest payable in the relevant period to total stated
interest remaining to be paid at the beginning of the period or (b) in the case
of Securities (or, in the case of a Pass-Through Security, as described below,
the Loans underlying such Security) originally issued at a discount, OID in the
relevant period to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination
date of the Debt Security (or, in the case of a Pass-Through Security, the
Loans), the excess of interest paid or accrued to purchase or carry a Security
(or, in the case of a Pass-Through Security, as described below, the underlying
Loans) with market discount over interest received on such Security is allowed
as a current deduction only to the extent such excess is greater than the market
discount that accrued during the taxable year in which such interest expense was
incurred. In general, the deferred portion of any interest expense will be
deductible when such market discount is included in income, including upon the
sale, disposition, or repayment of the Security (or in the case of a
Pass-Through Security, an underlying Loan). A Holder may elect to include market
discount in income currently as it accrues, on all market discount obligations
acquired by such Holder during the taxable year such election is made and
thereafter, in which case the interest deferral rule will not apply.
PREMIUM. A Holder who purchases a Debt Security (other than an Interest
Weighted Security to the extent described above) at a cost greater than its
stated redemption price at maturity, generally will be considered to have
purchased the Security at a premium, which it may elect to amortize as an offset
to interest income on such Security (and not as a separate deduction item) on a
constant yield method. Although no regulations addressing the computation of
premium accrual on securities similar to the Securities have been issued, the
legislative history of the 1986 Act indicates that premium is to be accrued in
the same manner as market discount. Accordingly, it appears that
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the accrual of premium on a Class of Pay-Through Securities will be calculated
using the prepayment assumption used in pricing such Class. If a Holder makes an
election to amortize premium on a Debt Security, such election will apply to all
taxable debt instruments (including all REMIC regular interests and all
pass-through certificates representing ownership interests in a trust holding
debt obligations) held by the Holder at the beginning of the taxable year in
which the election is made, and to all taxable debt instruments acquired
thereafter by such Holder, and will be irrevocable without the consent of the
Internal Revenue Service. Purchasers who pay a premium for the Securities should
consult their tax advisers regarding the election to amortize premium and the
method to be employed.
On June 27, 1996 the IRS issued proposed regulations (the "Amortizable
Bond Premium Regulations") dealing with amortizable bond premium. These
regulations specifically do not apply to prepayable debt instruments subject to
Code Section 1272(a)(6) such as the Pay-Through Securities. Absent further
guidance from the IRS, the Trustee intends to account for amortizable bond
premium in the manner described above. Prospective purchasers of the Securities
should consult their tax advisors regarding the possible application of the
proposed Amortizable Bond Premium Regulations.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT. The OID
Regulations permit a Holder of a Debt Security to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method for Debt Securities
acquired on or after April 4, 1994. If such an election were to be made with
respect to a Debt Security with market discount, the Holder of the Debt Security
would be deemed to have made an election to include in income currently market
discount with respect to all other debt instruments having market discount that
such Holder of the Debt Security acquires during the year of the election or
thereafter. Similarly, a Holder of a Debt Security that makes this election for
a Debt Security that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Holder owns or acquires. The election to
accrue interest, discount and premium on a constant yield method with respect to
a Debt Security is irrevocable.
SALE OR EXCHANGE. A Holder's tax basis in its Debt Security is the price
such Holder pays for a Debt Security, plus amounts of OID or market discount
included in income and reduced by any payments received (other than qualified
stated interest payments) and any amortized premium. Gain or loss recognized on
a sale, exchange, or redemption of a Debt Security, measured by the difference
between the amount realized and the Debt Security's basis as so adjusted, will
generally be capital gain or loss, assuming that the Debt Security is held as a
capital asset. In the case of a Debt Security held by a bank, thrift, or similar
institution described in Section 582 of the Code, however, gain or loss realized
on the sale or exchange of a Debt Security will be taxable as ordinary income or
loss. In addition, gain from the disposition of a Regular Interest Security that
might otherwise be capital gain will be treated as ordinary income to the extent
of the excess, if any, of (i) the amount that would have been includible in the
Holder's income if the yield on such Regular Interest Security had equaled 110%
of the applicable federal rate as of the beginning of such Holder's holding
period, over the amount of ordinary income actually recognized by the Holder
with respect to such Regular Interest Security.
TAXATION OF THE REMIC AND ITS HOLDERS
STATUS OF REGULAR INTEREST SECURITIES. Regular Interest Securities and
Securities representing a residual interest in a REMIC (both types of securities
collectively referred to as "REMIC Securities") will be "real estate assets" for
purposes of Section 856(c)(4)(A) of the Code and assets described in Section
7701(a)(19)(C) of the Code (assets qualifying under one or more of those
sections, applying each section separately, "qualifying assets") to the extent
that the REMIC's assets are qualifying assets. However, if at least 95 percent
of the REMIC's assets are qualifying assets, then 100 percent of the REMIC
Securities will be qualifying assets. Similarly, income on the REMIC Securities
will be treated as "interest on obligations secured by mortgages on real
property" within the meaning of Section 856(c)(3)(B) of the Code, subject to the
limitations of the preceding two sentences. In addition to Loans, the REMIC's
assets will include payments on Loans held pending distribution to Holders of
REMIC Securities, amounts in reserve accounts (if any), other credit
enhancements (if any) and possibly buydown funds ("Buydown Funds"). The Loans
generally will be qualifying assets under all three of the foregoing sections of
the Code. However, Loans that are not secured by residential real property or
real property used primarily for church purposes may not constitute qualifying
assets under Section 7701(a)(19)(C)(v) of the Code. In addition, to the extent
that the principal amount of a Home Equity Loan exceeds the value of the
property securing the Loan, it is unclear and Federal Tax Counsel is unable to
opine whether the Loans will be qualifying assets. The regulations under
Sections 860A through 860G of the Code (the "REMIC Regulations") treat credit
enhancements as part of the mortgage or pool of mortgages to which they relate,
and therefore credit enhancements generally should be qualifying assets.
Regulations issued in conjunction with the REMIC Regulations provide that
amounts paid on
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loans and held pending distribution to Holders of Regular Interest Securities
("cash flow investments") will be treated as qualifying assets. It is unclear
whether reserve funds or Buydown Funds would also constitute qualifying assets
under any of those provisions.
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, all of the expenses of a REMIC will be taken into
account by Holders of the Residual Interest Securities. In the case of a "single
class REMIC," however, the expenses will be allocated, under Treasury
regulations, among the Holders of the Regular Interest Securities and the
Holders of the Residual Interest Securities on a daily basis in proportion to
the relative amounts of income accruing to each Holder on that day. In the case
of a Holder of a Regular Interest Security who is an individual or a
"pass-through interest Holder" (including certain pass-through entities but not
including real estate investment trusts), such expenses will be deductible only
to the extern that such expenses, plus other "miscellaneous itemized deductions"
of the Holder, exceed 2% of such Holder's adjusted gross income and such Holder
may not be able to deduct such fees and expenses to any extent in computing such
Holder's alternative minimum tax liability. In addition, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the applicable amount 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. For taxable years beginning after December 31, 1997, in the
case of a partnership that has 100 or more partners and elects to be treated as
an "electing large partnership," 70 percent of such partnership's miscellaneous
itemized deductions will be disallowed, although the remaining deductions will
generally be allowed at the partnership level and will not be subject to the 2
percent floor that would otherwise be applicable to individual partners. The
reduction or disallowance of this deduction may have a significant impact on the
yield of the Regular Interest Security to such a Holder. In general terms, a
single class REMIC is one that either (i) would qualify, under existing Treasury
regulations, as a grantor trust if it were not a REMIC (treating all interests
as ownership interests, even if they would be classified as debt for federal
income tax purposes) or (ii) is similar to such a trust and which is structured
with the principal purpose of avoiding the single class REMIC rules. Unless
otherwise stated in the applicable Prospectus Supplement, the expenses of the
REMIC will be allocated to Holders of the related Residual Interest Securities.
TAXATION OF THE REMIC
GENERAL. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the Holders of
residual interests. As described above, the regular interests are generally
taxable as debt of the REMIC.
TIERED REMIC STRUCTURES. For certain Series of Securities, two or more
separate elections may be made to treat designated portions of the related Trust
Fund as REMICs ("Tiered REMICs") for federal income tax purposes. Solely for
purposes of determining whether the REMIC Certificates will be "real estate
assets" within the meaning of Section 856(c)(4)(A) of the Code, and "loans
secured by an interest in real property" under Section 7701(a)(19)(C) of the
Code, and whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
CALCULATION OF REMIC INCOME. The taxable income or net loss of a REMIC
is determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between (i) the gross income produced
by the REMIC's assets, including stated interest and any original issue discount
or market discount on loans and other assets, and (ii) deductions, including
stated interest and original issue discount accrued on Regular Interest
Securities, amortization of any premium with respect to Loans, and servicing
fees and other expenses of the REMIC. A Holder of a Residual Interest Security
that is an individual or a "pass-through interest Holder" (including certain
pass-through entities, but not including real estate investment trusts) will be
unable to deduct servicing fees payable on the Loans or other administrative
expenses of the REMIC for a given taxable year, to the extent that such
expenses, when aggregated with such Holder's other miscellaneous itemized
deductions for that year, do not exceed two percent of such Holder's adjusted
gross income and such Holder may not be able to deduct such fees and expenses to
any extent in computing such holders alternative minimum tax liability. For
taxable years beginning after December 31, 1997, in the case of a partnership
that has 100 or more partners and elects to be treated as an "electing large
partnership," 70 percent of such partnership's miscellaneous itemized deductions
will be disallowed, although the remaining deductions will generally be allowed
at the partnership level and will not be subject to the 2 percent floor that
would otherwise be applicable to individual partners.
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For purposes of computing its taxable income or net loss, the REMIC
should have an initial aggregate tax basis in its assets equal to the aggregate
fair market value of the regular interests and the residual interests on the
Startup Day (generally, the day that the interests are issued). Such aggregate
basis will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated
on or after March 2, 1984. Subject to possible application of the de minimis
rules, the method of accrual by the REMIC of OID income on such loans will be
equivalent to the method under which Holders of Pay-Through Securities accrue
original issue discount (i.e., under the constant yield method taking into
account the Prepayment Assumption). The REMIC will deduct OID on the Regular
Interest Securities in the same manner that the Holders of the Regular Interest
Securities include such discount in income, but without regard to the de minimis
rules. See "Taxation of Debt Securities (Including Regular Interest Securities)"
above. A REMIC that acquires loans at a market discount must include such market
discount in income currently, as it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (presumably taking into account the Prepayment Assumption) on a
constant yield method. Although the law is somewhat unclear regarding recovery
of premium attributable to loans originated on or before such date, it is
possible that such premium may be recovered in proportion to payments of loan
principal.
PROHIBITED TRANSACTIONS AND CONTRIBUTIONS TAX. The REMIC will be subject
to a 100% tax on any net income derived from a "prohibited transaction." For
this purpose, net income will be calculated without taking into account any
losses from prohibited transactions or any deductions attributable to any
prohibited transaction that resulted in a loss. In general, prohibited
transactions include: (i) subject to limited exceptions, the sale or other
disposition of any qualified mortgage transferred to the REMIC; (ii) subject to
a limited exception, the sale or other disposition of a cash flow investment;
(iii) the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code; or (iv) the receipt of any fees or other
compensation for services rendered by the REMIC. It is anticipated that a REMIC
will not engage in any prohibited transactions in which it would recognize a
material amount of net income. In addition, subject to a number of exceptions, a
tax is imposed at the rate of 100% on amounts contributed to a REMIC after the
Startup Day. The Holders of Residual Interest Securities will generally be
responsible for the payment of any such taxes imposed on the REMIC. To the
extent not paid by such Holders or otherwise, however, such taxes will be paid
out of the Trust Fund and will be allocated pro rata to all outstanding Classes
of Securities of such REMIC.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES
The Holder of a Security representing a residual interest (a "Residual
Interest Security") will take into account the "daily portion" of the taxable
income or net loss of the REMIC for each day during the taxable year on which
such Holder held the Residual Interest Security. The daily portion is determined
by allocating to each day in any calendar quarter its ratable portion of the
taxable income or net loss of the REMIC for such quarter, and by allocating that
amount among the Holders (on such day) of the Residual Interest Securities in
proportion to their respective holdings on such day.
The Holder of a Residual Interest Security must report its proportionate
share of the taxable income of the REMIC whether or not it receives cash
distributions from the REMIC attributable to such income or loss. The reporting
of taxable income without corresponding distributions could occur, for example,
in certain REMIC issues in which the Loans held by the REMIC were issued or
acquired at a discount, since mortgage prepayments cause recognition of discount
income, while the corresponding portion of the prepayment could be used in whole
or in part to make principal payments on REMIC Regular Interests issued without
any discount or at an insubstantial discount. (If this occurs, it is likely that
cash distributions will exceed taxable income in later years.) Taxable income
may also be greater in earlier years of certain REMIC issues as a result of the
fact that interest expense deductions, as a percentage of outstanding principal
on REMIC Regular Interest Securities, will typically increase over time as lower
yielding Securities are paid, whereas interest income with respect to loans will
generally remain constant over time as a percentage of loan principal.
In any event, because the Holder of a residual interest is taxed on the
net income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond or
instrument.
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LIMITATION ON LOSSES. The amount of the REMIC's net loss that a Holder
may take into account currently is limited to the Holder's adjusted basis at the
end of the calendar quarter in which such loss arises. A Holder's basis in a
Residual Interest Security will initially equal such Holder's purchase price,
and will subsequently be increased by the amount of the REMIC's taxable income
allocated to the Holder, and decreased (but not below zero) by the amount of
distributions made and the amount of the REMIC's net loss allocated to the
Holder. Any disallowed loss may be carried forward indefinitely, but may be used
only to offset income of the REMIC generated by the same REMIC. The ability of
Holders of Residual Interest Securities to deduct net losses may be subject to
additional limitations under the Code, as to which such Holders should consult
their tax advisers.
DISTRIBUTIONS. Distributions on a Residual Interest Security (whether at
their scheduled times or as a result of prepayments) will generally not result
in any additional taxable income or loss to a Holder of a Residual Interest
Security. If the amount of such payment exceeds a Holder's adjusted basis in the
Residual Interest Security, however, the Holder will recognize gain (treated as
gain from the sale of the Residual Interest Security) to the extent of such
excess.
SALE OR EXCHANGE. A Holder of a Residual Interest Security will
recognize gain or loss on the sale or exchange of a Residual Interest Security
equal to the difference, if any, between the amount realized and such Holder's
adjusted basis in the Residual Interest Security at the time of such sale or
exchange. Except to the extent provided in regulations, which have not yet been
issued, any loss upon disposition of a Residual Interest Security will be
disallowed if the selling Holder acquires any residual interest in a REMIC or
similar mortgage pool within six months before or after such disposition.
EXCESS INCLUSIONS. The portion of the REMIC taxable income of a Holder
of a Residual Interest Security consisting of "excess inclusion" income may not
be offset by other deductions or losses, including net operating losses, on such
Holder's federal income tax return. Further, if the Holder of a Residual
Interest Security is an organization subject to the tax on unrelated business
income imposed by Code Section 511, such Holder's excess inclusion income will
be treated as unrelated business taxable income of such Holder. In addition,
under Treasury regulations yet to be issued, if a real estate investment trust,
a regulated investment company, a common trust fund, or certain cooperatives
were to own a Residual Interest Security, a portion of dividends (or other
distributions) paid by the real estate investment trust (or other entity) would
be treated as excess inclusion income. If a Residual Security is owned by a
foreign person, excess inclusion income is subject to tax at a rate of 30% which
may not be reduced by treaty, is not eligible for treatment as "portfolio
interest" and is subject to certain additional limitations. See "Tax Treatment
of Foreign Investors."
The Small Business Job Protection Act of 1996 eliminated the special
rule permitting Section 593 institutions ("thrift institutions") to use net
operating losses and other allowable deductions to offset their excess inclusion
income from REMIC residual certificates that have "significant value" within the
meaning of the REMIC Regulations, effective for taxable years beginning after
December 31, 1995, except with respect to residual certificates held by thrift
institutions since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides
three rules for determining the effect on excess inclusions on the alternative
minimum taxable income of a residual holder. First, alternative minimum taxable
income for such residual holder is determined without regard to the special rule
that taxable income cannot be less than excess inclusions. Second, a residual
holder's alternative minimum income for a tax year cannot be less than excess
inclusions for the year. Third, the amount of any alternative minimum tax net
operating loss deductions must be computed without regard to any excess
inclusions. These rules are effective for tax years beginning after December 31,
1986, unless a residual holder elects to have such rules apply only to tax years
beginning after August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal to
the excess, if any, of REMIC taxable income for the quarterly period allocable
to a Residual Interest Security, over the daily accruals for such quarterly
period of (i) 120% of the long term applicable federal rate on the Startup Date
multiplied by (ii) the adjusted issue price of such Residual Interest Security
at the beginning of such quarterly period. The adjusted issue price of a
Residual Interest Security at the beginning of each calendar quarter will equal
its issue price (calculated in a manner analogous to the determination of the
issue price of a Regular Interest Security), increased by the aggregate of the
daily accruals for prior calendar quarters, and decreased (but not below zero)
by the amount of loss allocated to a Holder and the amount of distributions made
on the Residual Interest Security before the beginning of the quarter. The
long-term federal rate, which is announced monthly by the Treasury Department,
is an interest rate that
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is based on the average market yield of outstanding marketable obligations of
the United States government having remaining maturities in excess of nine
years.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Interest Securities may be disregarded. See "--Restrictions on
Ownership and Transfer of Residual Interest Securities" and "Tax Treatment of
Foreign Investors" below.
Restrictions on Ownership and Transfer of Residual Interest Securities.
As a condition to qualification as a REMIC, reasonable arrangements must be made
to prevent the ownership of a REMIC residual interest by any "Disqualified
Organization." Disqualified Organizations include the United States, any State
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing, a rural
electric or telephone cooperative described in Section 1381(a)(2)(C) of the
Code, or any entity exempt from the tax imposed by Sections 1-1399 of the Code,
if such entity is not subject to tax on its unrelated business income.
Accordingly, the applicable Agreement will prohibit Disqualified Organizations
from owning a Residual Interest Security. In addition, no transfer of a Residual
Interest Security will be permitted unless the proposed transferee shall have
furnished to the Trustee an affidavit representing and warranting that it is
neither a Disqualified Organization nor an agent or nominee acing on behalf of a
Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization (in violation of the restrictions set forth above), a substantial
tax will be imposed on the transferor of such Residual Interest Security at the
time of the transfer. In addition, if a Disqualified Organization holds an
interest in a pass-through entity (including, among others, a partnership,
trust, real estate investment trust, regulated investment company, or any person
holding as nominee an interest in a pass-through entity), that owns a Residual
Interest Security, the pass-through entity will be required to pay an annual tax
on its allocable share of the excess inclusion income of the REMIC. For taxable
years beginning after December 31, 1997, all partners of certain electing
partnerships having 100 or more partners ("electing large partnerships") will be
treated as disqualified organizations for purposes of the tax imposed on
pass-through entities if such electing large partnerships hold residual
interests in a REMIC. However, the electing large partnership would be entitled
to exclude the excess inclusion income from gross income for purposes of
determining the taxable income of the partners.
The REMIC Regulations provide that a transfer of a "noneconomic residual
interest" will be disregarded for all federal income tax purposes unless
impeding the assessment or collection of tax was not a significant purpose of
the transfer. A residual interest will be treated as a "noneconomic residual
interest" unless, at the time of the transfer (1) the present value of the
expected future distributions on the residual interest at least equals the
product of (x) the present value of all anticipated excess inclusions with
respect to the residual interest and (y) the highest corporate tax rate,
currently 35 percent, and (2) the transferor reasonably expects that for each
anticipated excess inclusion, the transferee will receive distributions from the
REMIC, at or after the time at which taxes on such excess inclusion accrue,
sufficient to pay the taxes thereon. A significant purpose to impede the
assessment or collection of tax exists if the transferor, at the time of the
transfer, either knew or should have known (had "improper knowledge") that the
transferee would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. A transferor will be presumed not to have improper
knowledge if (i) the transferor conducts, at the time of the transfer, a
reasonable investigation of the financial condition of the transferee and, as a
result of the investigation, the transferor finds that the transferee has
historically paid its debts as they came due and finds no significant evidence
to indicate that the transferee will not continue to pay its debts as they come
due in the future, and (ii) the transferee represents to the transferor that (A)
the transferee understands that it might incur tax liabilities in excess of any
cash received with respect to the residual interest and (B) the transferee
intends to pay the taxes associated with owning the residual interest as they
come due. A different formulation of this rule applies to transfers of Residual
Interest Security by or to foreign transferees. See "Tax Treatment to Foreign
Investors".
MARK TO MARKET RULES. Treasury regulations provide that any REMIC
Residual Interest acquired after January 3, 1995 is not a security and cannot be
marked to market under Section 475.
ADMINISTRATIVE MATTERS
The REMIC's books must be maintained on a calendar year basis and the
REMIC must file an annual federal income tax return. The REMIC will also be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit, by the IRS in a
unified administrative proceeding.
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TAX STATUS AS A GRANTOR TRUST
GENERAL. As further described below, each Holder of a Security issued by
a grantor trust (a "Pass-Through Security") must report on its federal income
tax return the gross income from the portion of the Loans that is allocable to
such Pass-Through Security and may deduct the portion of the expenses incurred
or accrued by the Trust Fund that is allocable to such Pass-Through Security, at
the same time and to the same extent as such items would be reported by such
Holder if it had purchased and held directly such interest in the Loans and
received or accrued directly its share of the payments on the Loans and incurred
or accrued directly its share of expenses incurred or accrued by the Trust Fund
when those amounts are received, incurred or accrued by the Trust Fund.
A Holder of a Pass-Through Security that is an individual, estate, or
trust will be allowed deductions for such expenses only to the extent that the
sum of those expenses and the Holder's other miscellaneous itemized deductions
exceeds two percent of such Holder's adjusted gross income. Moreover, a Holder
of a Pass-Through Security that is not a corporation cannot deduct such expenses
for purposes of the alternative minimum tax (if applicable). Such deductions
will include servicing, guarantee and administrative fees paid to the servicer
of the Mortgage Loans. As a result, the Trust Fund will report additional
taxable income to Holders of Pass-Through Securities in an amount equal to their
allocable share of such deductions, and individuals, estates, or trusts holding
Pass-Through Securities may have taxable income in excess of the cash received.
STATUS OF THE PASS-THROUGH SECURITIES. The Pass-Through Securities will
be "real estate assets" for purposes of Section 856(c)(4)(A) of the Code and
"loans secured by an interest in real property" within the meaning of Section
7701(a)(19)(C)(v) of the Code (assets qualifying under one or both of those
sections, applying each section separately, "qualifying assets") to the extent
that the Trust Fund's assets are qualifying assets. The Pass-Through Securities
may not be qualifying assets under any of the foregoing sections of the Code to
the extent that the Trust Fund's assets include Buydown Funds, reserve funds, or
payments on mortgages held pending distribution to Certificateholders. Further,
the Pass-Through Securities may not be "real estate assets" to the extent loans
held by the trust are not secured by real property, and may not be "loans
secured by an interest in real property" to the extent loans held by the trust
are not secured by residential real property or real property used primarily for
church purposes. In addition, to the extent that the principal amount of a loan
exceeds the value of the property securing the loan, it is unclear and Federal
Tax Counsel is unable to opine whether the loans will be qualifying assets.
TAXATION OF PASS-THROUGH SECURITIES UNDER STRIPPED BOND RULES. The
federal income tax treatment of the Pass-Through Securities will depend on
whether they are Securities ("Stripped Securities") subject to the "stripped
bond" rules of section 1286 of the Code. The Pass-Through Securities will be
Stripped Securities if stripped interest-only Certificates are issued. In
addition, whether or not stripped interest-only Certificates are issued, the
Internal Revenue Service may contend that the stripped bond rules apply on the
ground that the Servicer's servicing fee, or other amounts, if any, paid to (or
retained by) the Servicer or its affiliates, as specified in the applicable
Prospectus Supplement, represent greater than an arm's length consideration for
servicing the Loans and should be characterized for federal income tax purposes
as an ownership interest in the Loans. The Internal Revenue Service has taken
the position in Revenue Ruling 91-46 that a retained interest in excess of
reasonable compensation for servicing is treated as a "stripped coupon" under
the rules of Code Section 1286.
If interest retained for the Servicer's servicing fee or other interest
is treated as a "stripped coupon," the Pass-Through Securities will either be
subject to the OID rules or the market discount rules. A Holder of a Pass-
Through Security will account for any discount on the Pass-Through Security as
market discount rather than OID if either (i) the amount of OID with respect to
the Pass-Through Security was treated as zero under the OID de minimis rule when
the Pass-Through Security was stripped or (ii) no more than 100 basis points
(including any amount of servicing in excess of reasonable servicing) is
stripped off from the Loans. If neither of the above exceptions applies, the OID
rules will apply to the Pass-Through Securities.
If the OID rules apply, the Holder of a Pass-Through Security (whether a
cash or accrual method taxpayer) will be required to report interest income from
the Pass-Through Security in each taxable year equal to the income that accrues
on the Pass-Through Security in that year calculated under a constant yield
method based on the yield of the Pass-Through Security (or, possibly, the yield
of each Mortgage underlying such Pass-Through Security) to such Holder. Such
yield would be computed at the rate (assuming monthly compounding) that, if used
in discounting the Holder's share of the payments on the Mortgages, would cause
the present value of those payments to equal the price at which the Holder
purchased the Pass-Through Security. With respect to certain categories of debt
instruments including "any pool of debt instruments the yield on which may be
affected by reason of prepayments (or to the extent provided in regulations, by
reason of other events)," Section 1272(a)(6) of the Code requires that OID be
accrued based on a prepayment assumption determined in a manner prescribed by
forthcoming regulations. If
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required to report interest income on the Pass-Through Securities to the
Internal Revenue Service under the stripped bond rules, it is anticipated that
the Trustee will calculate the yield of the Pass-Through Securities based on a
representative initial offering price of the Pass-Through Securities and a
reasonable assumed rate of prepayment of the Loans (although such yield may
differ from the yield to any particular Holder that would be used in calculating
the interest income of such Holder). The Prospectus Supplement for each series
of Pass-Through Securities will describe the prepayment assumption that will be
used for this purpose, but no representation is made that the Loans will prepay
at that rate or at any other rate.
If a Home Equity Loan is prepaid in full, the Holder of a Pass-Through
Security acquired at a discount or premium generally will recognize ordinary
income or loss equal to the difference between the portion of the prepaid
principal amount of the Home Equity Loan that is allocable to the Pass-Through
Security and the portion of the adjusted basis of the Pass-Through Security (see
"Sales of Pass-Through Securities" below) that is allocable to the Loan. It is
not clear whether any other adjustments would be required to reflect differences
between the prepayment rate that was assumed in calculating yield and the actual
rate of prepayments.
TAXATION OF PASS-THROUGH SECURITIES IF STRIPPED BOND RULES DO NOT APPLY.
If the stripped bond rules do not apply to a Pass-Through Security, then the
Holder will be required to include in income its share of the interest payments
on the Loans in accordance with its tax accounting method. In addition, if the
Holder purchased the Pass-Through Security at a discount or premium, the Holder
will be required to account for such discount or premium in the manner described
below. The treatment of any discount will depend on whether the discount is OID
as defined in the Code and, in the case of discount other than OID, whether such
other discount exceeds a de minimis amount. In the case of OID, the Holder
(whether a cash or accrual method taxpayer) will be required to report as
additional interest income in each month the portion of such discount that
accrues in that month, calculated based on a constant yield method. In general
it is not anticipated that the amount of OID to be accrued in each month, if
any, will be significant relative to the interest paid currently on the Loans.
However, OID could arise with respect to a Home Equity Loan ("ARM") that
provides for interest at a rate equal to the sum of an index of market interest
rates and a fixed number. The OID for ARMs generally will be determined under
the principles discussed in "Taxation of Debt Securities (Including Regular
Interest Securities)--Variable Rate Debt Securities."
If discount other than OID exceeds a de minimis amount (described
below), the Holder will also generally be required to include in income in each
month the amount of such discount accrued through such month and not previously
included in income, but limited, with respect to the portion of such discount
allocable to any Loan, to the amount of principal on such Loan received by the
Trust Fund in that month. Because the Loans will provide for monthly principal
payments, such discount may be required to be included in income at a rate that
is not significantly slower than the rate at which such discount accrues (and
therefore at a rate not significantly slower than the rate at which such
discount would be included in income if it were OID). The Holder may elect to
accrue such discount under a constant yield method based on the yield of the
Pass-Through Security to such Holder (or possibly based on the yields of each
Loan). In the absence of such an election, it may be necessary to accrue such
discount under a more rapid straight-line method. Under the de minimis rule,
market discount with respect to a Pass-Through Security will be considered to be
zero if it is less than the product of (i) 0.25% of the principal amount of the
Loans allocable to the Pass-Through Security and (ii) the weighted average life
(in complete years) of the Loans remaining at the time of purchase of the
Pass-Through Security.
If a Holder purchases a Pass-Through Security at a premium, such Holder
may elect under Section 171 of the Code to amortize the portion of such premium
that is allocable to a Home Equity Loan under a constant yield method based on
the yield of the Home Equity Loan to such Holder, provided that such Home Equity
Loan was originated after September 27, 1985. Premium allocable to a Home Equity
Loan originated on or before that date should be allocated among the principal
payments on the Home Equity Loan and allowed as an ordinary deduction as
principal payments are made or, perhaps, upon termination.
It is not clear whether the foregoing adjustments for discount or
premium would be made based on the scheduled payments on the Loans or taking
account of a reasonable prepayment assumption, and Federal Tax Counsel is unable
to opine on this issue.
If a Home Equity Loan is prepaid in full, the Holder of a Pass-Through
Security acquired at a discount or premium will recognize ordinary income or
loss equal to the difference between the portion of the prepaid principal amount
of the Home Equity Loan that is allocable to the Pass-Through Security and the
portion of the adjusted basis of the Pass-Through Security (see "Sales of
Pass-Through Securities" below) that is allocable to the Loan. The method of
allocating such basis among the Mortgage Loans may differ depending on whether a
reasonable prepayment assumption is used in calculating the yield of the
Pass-Through Securities for purposes of accruing OID.
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Other adjustments might be required to reflect differences between the
prepayment rate that was assumed in accounting for discount or premium and the
actual rate of prepayments.
MISCELLANEOUS TAX ASPECTS
BACKUP WITHHOLDING. A Holder, other than a Holder of a Residual Interest
Security, may, under certain circumstances, be subject to "backup withholding"
at a rate of 31% with respect to distributions or the proceeds of a sale of
Securities to or through brokers that represent interest or original issue
discount on the Securities. This withholding generally applies if the Holder of
a Security (i) fails to furnish the Trustee with its taxpayer identification
number ("TIN"); (ii) furnishes the Trustee an incorrect TIN; (iii) fails to
report properly interest, dividends or other "reportable payments" as defined in
the Code; or (iv) under certain circumstances, fails to provide the Trustee or
such Holder's securities broker with a certified statement, signed under penalty
of perjury, that the TIN provided is its correct number and that the Holder is
not subject to backup withholding. Backup withholding will not apply, however,
with respect to certain payments made to Holders, including payments to certain
exempt recipients (such as exempt organizations) and to certain Foreign
Investors (as defined below). Holders should consult their tax advisers as to
their qualification for exemption from backup withholding and the procedure for
obtaining the exemption.
The Trustee will report to the Holders and to the Servicer for each
calendar year the amount of any "reportable payments" during such year and the
amount of tax withheld, if any, with respect to payments on the Securities.
TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to Trust Funds which are
treated as partnerships for federal income tax purposes unless interest
(including OID) paid on a Security (other than a Residual Interest Security) is
considered to be "effectively connected" with a trade or business conducted in
the United States by a Foreign Investor, such interest will normally qualify as
portfolio interest (except where (i) the recipient is a Holder, directly or by
attribution, of 10% or more of the capital or profits interest in the issuer, or
(ii) the recipient is a controlled foreign corporation to which the issuer is a
related person) and will be exempt from federal income tax. For this purpose, a
Foreign Investor is any Holder that is not (i) a citizen or resident of the
United States; (ii) a corporation or partnership organized in or under the laws
of the United States (unless, in the case of a partnership, future Treasury
regulations provide otherwise); (iii) an estate the income of which is
includible in gross income regardless of its source; or (iv) a trust other than
a "foreign trust," as defined in Section 7701(a)(31) of the Code. See "--Tax
Consequences to Holders of the Certificates Issued by a Partnership--Tax
Consequences to Foreign Certificateholders". Upon receipt of appropriate
ownership statements, the issuer normally will be relieved of obligations to
withhold tax from such interest payments. These provisions supersede the
generally applicable provisions of United States law that would otherwise
require the issuer to withhold at a 30% rate (unless such rate were reduced or
eliminated by an applicable tax treaty) on, among other things, interest and
other fixed or determinable, annual or periodic income paid to Foreign
Investors. Holders of Pass- Through Securities however, may be subject to
withholding to the extent that the Loans were originated on or before July 18,
1984.
Interest and OID of a Foreign Investor are not subject to withholding if
they are effectively connected with a United States business conducted by the
Holder and the Holder timely provides an IRS Form 4224. They will, however,
generally be subject to the regular United States income tax.
Payments to Holders of Residual Interest Securities who are Foreign
Investors will generally be treated as interest for purposes of the 30% (or
lower treaty rate) United States withholding tax. Holders should assume that
such income does not qualify for exemption from United States withholding tax as
"portfolio interest." It is clear that, to the extent that a payment represents
a portion of REMIC taxable income that constitutes excess inclusion income, a
Holder of a Residual Interest Security will not be entitled to an exemption from
or reduction of the 30% (or lower treaty rate) withholding tax rule. If the
payments are subject to United States withholding tax, they generally will be
taken into account for withholding tax purposes only when paid or distributed
(or when the Residual Interest Security is disposed of). The Treasury has
statutory authority, however, to promulgate regulations which would require such
amounts to be taken into account at an earlier time in order to prevent the
avoidance of tax. Such regulations could, for example, require withholding prior
to the distribution of cash in the case of Residual Interest Securities that do
not have significant value. Under the REMIC Regulations, if a Residual Interest
Security has tax avoidance potential, a transfer of a Residual Interest Security
to a Foreign Investor will be disregarded for all federal tax purposes. A
Residual Interest Security has tax avoidance potential unless, at the time of
the transfer the transferor reasonably expects that the REMIC will distribute to
the transferee residual interest Holder amounts that
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will equal at least 30% of each excess inclusion, and that such amounts will be
distributed at or after the time at which the excess inclusions accrue and not
later than the calendar year following the calendar year of accrual. If a
Foreign Investor transfers a Residual Interest Security to a United States
person (that is, a person that is not a Foreign Investor), and if the transfer
has the effect of allowing the transferor to avoid tax on accrued excess
inclusions, then the transfer is disregarded and the transferor continues to be
treated as the owner of the Residual Interest Security for purposes of the
withholding tax provisions of the Code. See "Taxation of Holders of Residual
Interest Securities--Excess Inclusions."
Subject to the discussion in the previous paragraph, any capital gain
realized on the sale, redemption, retirement or other taxable disposition of a
Security by a foreign person will be exempt from United States federal income
and withholding tax, provided that (i) such gain is not effectively connected
with the conduct of a trade or business in the United States by the foreign
person and (ii) in the case of an individual foreign person, the foreign person
is not present in the United States for 183 days or more in the taxable year.
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP OR DIVISION
If a Trust Fund is intended to be a partnership for federal income tax
purposes the applicable Agreements will provide that the nature of the income of
the Trust Fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the Certificates
will be structured as a private placement under an IRS safe harbor, so that the
Trust Fund will not be characterized as a publicly traded partnership taxable as
a corporation, and that no action will be taken that is inconsistent with the
treatment of the Trust Fund as a partnership (such as election to treat the
Trust Fund as a corporation for federal income tax purposes). If, however, the
Trust Fund has a single owner for federal income tax purposes, it will be
treated as a division of its owner and as such will be disregarded as an entity
separate from its owner for federal income tax purposes, assuming no election
will be made to treat the Trust Fund as a corporation for federal income tax
purposes.
Certain entities classified as "taxable mortgage pools" are subject to
corporate level tax on their net income. A "taxable mortgage pool" is generally
defined as an entity that meets the following requirements: (i) the entity is
not a REMIC (or, after September 1, 1997, a FASIT), (ii) substantially all of
the assets of the entity are debt obligations, and more than 50 percent of such
debt obligations consists of real estate mortgages (or interests therein), (iii)
the entity is the obligor under debt obligations with two or more maturities,
and (iv) payments on the debt obligations on which the entity is the obligor
bear a relationship to the payments on the debt obligations which the entity
holds as assets. With respect to requirement (iii), the Code authorizes the
Internal Revenue Service to provide by regulations that equity interests may be
treated as debt for purposes of determining whether there are two or more
maturities. If the Trust Fund were treated as a taxable mortgage pool, it would
be ineligible to file consolidated returns with any other corporation and could
be liable for corporate tax. Treasury regulations do not provide for the
recharacterization of equity as debt for purposes of determining whether an
entity has issued debt with two maturities, except in the case of transactions
structured to avoid the taxable mortgage pool rules. Federal Tax Counsel will
deliver its opinion for a Trust Fund which is intended to be a partnership for
federal income tax purposes, as specified in the related Prospectus Supplement,
generally to the effect that the Trust Fund will not be a taxable mortgage pool.
This opinion will be based on the assumption that the terms of the Agreements
and related documents will be complied with, and on Federal Tax Counsel's
conclusion that either the number of classes of debt obligations issued be the
Trust Fund, or the nature of the assets held by the Trust Fund will exempt the
Trust Fund from treatment as a taxable mortgage pool.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES ISSUED BY A PARTNERSHIP OR DIVISION
TREATMENT OF THE NOTES AS INDEBTEDNESS. The Trust Fund will agree, and
the Noteholders will agree by their purchase of Notes, to treat the Notes as
debt for federal income tax purposes. Except as otherwise provided in the
related Prospectus Supplement, Federal Tax Counsel will advise the Seller that
the Notes will be classified as debt for federal income tax purposes.
Consequently, Holders of Notes will be subject to taxation as described in
"Taxation of Debt Securities (Including Regular Interest Securities)" above for
Debt Securities which are not Regular Interest Securities.
POSSIBLE ALTERNATIVE TREATMENT OF THE NOTES. If, contrary to the opinion
of Federal Tax Counsel, the IRS successfully asserted that one or more of the
Notes did not represent debt for federal income tax purposes, the Notes might be
treated as equity interests in the Trust Fund. If so treated, the Trust Fund
would likely be treated as a publicly traded partnership that would not be
taxable as a corporation because it would meet certain qualifying income tests.
Nonetheless, treatment of the Notes as equity interests in such a publicly
traded partnership could have adverse tax consequences to certain Holders. For
example, income to Foreign Investors generally would be subject
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to U.S. federal income tax and U.S. federal income tax return filing and
withholding requirements, income to certain tax-exempt entities would be
"unrelated business taxable income," and individual Holders might be subject to
certain limitations on their ability to deduct their share of the Trust Fund's
expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES ISSUED BY A PARTNERSHIP
TREATMENT OF THE TRUST FUND AS A PARTNERSHIP. In the case of a Trust
Fund intended to qualify as a partnership for federal income tax purposes, the
Trust Fund and the Seller will agree, and the Certificateholders will agree by
their purchase of Certificates, to treat the Trust Fund as a partnership for
purposes of federal and state income tax, franchise tax and any other tax
measured in whole or in part by income, with the assets of the partnership being
the assets held by the Trust Fund, the partners of the partnership being the
Certificateholders, and the Notes, if any, being debt of the partnership, or if
there is a single Certificateholder for federal income tax purposes, to
disregard the Trust Fund as an entity separate from the Certificateholder.
However, the proper characterization of the arrangement involving the
Certificates, the Notes, the Trust Fund and the Servicer is not clear because
there is no authority on transactions closely comparable to that contemplated
herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Generally, provided
such Certificates are issued at or close to face value, any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership. The following discussion also assumes that all payments on the
Certificates are denominated in U.S. dollars, none of the Certificates have
interest rates which would qualify as contingent interest under the OID
regulations, and that a Series of Securities includes a single Class of
Certificates. If these conditions are not satisfied with respect to any given
Series of Certificates, additional tax considerations with respect to such
Certificates will be disclosed in the applicable Prospectus Supplement.
PARTNERSHIP TAXATION. As a partnership, the Trust Fund will not be
subject to federal income tax. Rather, each CertificateHolder will be required
to separately take into account such Holder's allocated share of income, gains,
losses, deductions and credits of the Trust Fund. The Trust Fund's income will
consist primarily of interest and finance charges earned on the Loans (including
appropriate adjustments for market discount, OID and bond premium) and any gain
upon collection or disposition of Loans. The Trust Fund's deductions will
consist primarily of interest and OID accruing with respect to the Notes,
servicing and other fees, and losses or deductions upon collection or
disposition of Loans.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(here, the Trust Agreement and related documents). The Trust Agreement will
provide, in general, that the Certificateholders will be allocated taxable
income of the Trust Fund for each month equal to the sum of (i) the interest
that accrues on the Certificates in accordance with their terms for such month,
including interest accruing at the Pass-Through Rate for such month and interest
on amounts previously due on the Certificates but not yet distributed; (ii) any
Trust Fund income attributable to discount on the Loans that corresponds to any
excess of the principal amount of the Certificates over their initial issue
price; (iii) prepayment premium payable to the Certificateholders for such
month; and (iv) any other amounts of income payable to the Certificateholders
for such month. Such allocation will be reduced by any amortization by the Trust
Fund of premium on Loans that corresponds to any excess of the issue price of
Certificates over their principal amount. All remaining taxable income of the
Trust Fund will be allocated to the Seller. Based on the economic arrangement of
the parties, this approach for allocating Trust Fund income should be
permissible under applicable Treasury regulations, although no assurance can be
given that the IRS would not require a greater amount of income to be allocated
to Certificateholders. Moreover, even under the foregoing method of allocation,
Certificateholders may be allocated income equal to the entire Pass-Through Rate
plus the other items described above even though the Trust Fund might not have
sufficient cash to make current cash distributions of such amount. Thus, cash
basis Holders will in effect be required to report income from the Certificates
on the accrual basis and Certificateholders may become liable for taxes on Trust
Fund income even if they have not received cash from the Trust Fund to pay such
taxes. In addition, because tax allocations and tax reporting will be done on a
uniform basis for all Certificateholders but Certificateholders may be
purchasing Certificates at different times and at different prices,
Certificateholders may be required to report on their tax returns taxable income
that is greater or less than the amount reported to them by the Trust Fund.
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If Notes are also issued, all of the taxable income allocated to a
Certificateholder that is a pension, profit sharing or employee benefit plan or
other tax-exempt entity (including an individual retirement account) will
constitute "unrelated business taxable income" generally taxable to such a
Holder under the Code.
An individual taxpayer's share of expenses of the Trust Fund (including
fees to the Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual in whole or in
part and might result in such Holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to such Holder over the life of
the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income
and allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Loan, the Trust Fund
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on Certificateholders.
DISCOUNT AND PREMIUM. It is believed that the Loans will not have been
issued with OID and, therefore, the Trust should not have OID income. However,
the purchase price paid by the Trust Fund for the Loans may be greater or less
than the remaining principal balance of the Loans at the time of purchase. If
so, the Home Equity Loan will have been acquired at a premium or discount, as
the case may be. (As indicated above, the Trust Fund will make this calculation
on an aggregate basis, but might be required to recompute it on a Home Equity
Loan by Home Equity Loan basis.)
If the Trust Fund acquires the Loans at a market discount or premium,
the Trust Fund will elect to include any such discount in income currently as it
accrues over the life of the Loans or to offset any such premium against
interest income on the Loans. As indicated above, a portion of such market
discount income or premium deduction may be allocated to CertificateHolders.
SECTION 708 TERMINATION. Under Section 708 of the Code, the Trust Fund
will be deemed to terminate for federal income tax purposes if 50% or more of
the capital and profits interests in the Trust Fund are sold or exchanged within
a 12-month period. If such a termination occurs, the Trust Fund will be
considered to distribute its assets to the partners, who would then be treated
as recontributing those assets to the Trust Fund as a new partnership. The Trust
Fund will not comply with certain technical requirements that might apply when
such a constructive termination occurs. As a result, the Trust Fund may be
subject to certain tax penalties and may incur additional expenses if it is
required to comply with those requirements. Furthermore, the Trust Fund might
not be able to comply due to lack of data.
DISPOSITION OF CERTIFICATES. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
Holder's cost increased by the Holder's share of Trust Fund income (includible
in income) and decreased by any distributions received with respect to such
Certificate. In addition, both the tax basis in the Certificates and the amount
realized on a sale of a Certificate would include the Holder's share of the
Notes and other liabilities of the Trust Fund. A Holder acquiring Certificates
at different prices may be required to maintain a single aggregate adjusted tax
basis in such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the Certificates
sold (rather than maintaining a separate tax basis in each Certificate for
purposes of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the Holder's share
of unrecognized accrued market discount on the Loans would generally be treated
as ordinary income to the Holder and would give rise to special tax reporting
requirements. The Trust Fund does not expect to have any other assets that would
give rise to such special reporting requirements. Thus, to avoid those special
reporting requirements, the Trust Fund will elect to include market discount in
income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
ALLOCATIONS BETWEEN SELLERS AND TRANSFEREES. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificateholders
in proportion to the principal amount of Certificates owned by them as of the
close of the last day
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of such month. As a result, a Holder purchasing Certificates may be allocated
tax items (which will affect its tax liability and tax basis) attributable to
periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the Certificateholders. The Trust
Fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
SECTION 754 ELECTION. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust Fund" s assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust Fund were to file an election under
Section 754 of the Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the Trust Fund currently does not
intend to make such election. As a result, Certificateholders might be allocated
a greater or lesser amount of Trust Fund income than would be appropriate based
on their own purchase price for Certificates.
ADMINISTRATIVE MATTERS. The Owner Trustee is required to keep or have
kept complete and accurate books of the Trust Fund. Such books will be
maintained for financial reporting and tax purposes on an accrual basis and the
fiscal year of the Trust Fund will be the calendar year. The Trustee will file a
partnership information return (IRS Form 1065) with the IRS for each taxable
year of the Trust Fund and will report each Certificateholder's allocable share
of items of Trust Fund income and expense to Holders and the IRS on Schedule
K-1. The Trust Fund will provide the Schedule K-1 information to nominees that
fail to provide the Trust Fund with the information statement described below
and such nominees will be required to forward such information to the beneficial
owners of the Certificates. Generally, Holders must file tax returns that are
consistent with the information return filed by the Trust Fund or be subject to
penalties unless the Holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust Fund
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of such person,
(y) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust Fund information
as to themselves and their ownership of Certificates. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such information statement to the Trust Fund. The information referred to above
for any calendar year must be furnished to the Trust Fund on or before the
following January 31. Nominees, brokers and financial institutions that fail to
provide the Trust Fund with the information described above may be subject to
penalties.
The Seller will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust Fund by the appropriate taxing authorities
could result in an adjustment of the returns of the Certificateholders, and,
under certain circumstances, a Certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the Trust Fund. An
adjustment could also result in an audit of a Certificateholder's returns and
adjustments of items not related to the income and losses of the Trust Fund.
TAX CONSEQUENCES TO FOREIGN CERTIFICATEHOLDERS. It is not clear whether
the Trust Fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to Foreign
Investors because there is no clear authority dealing with that issue under
facts substantially similar to those described herein. Although it is not
expected that the Trust Fund would be engaged in a trade or business in the
United States for such purposes, the Trust Fund will withhold as if it were so
engaged in order to protect the Trust Fund from possible adverse consequences of
a failure to withhold. The Trust Fund expects to withhold pursuant to Section
1446 of the Code on the portion of its taxable income that is allocable to
Certificateholders that are Foreign Investors, as if such income were
effectively connected to a U.S. trade or business, at a rate of 35% for foreign
Holders that are taxable as corporations and 39.6% for all other foreign
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Holders. Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the Trust Fund to change its
withholding procedures.
Each Certificateholder that is a Foreign Investor might be required to
file a U.S. individual or corporate income tax return (including, in the case of
a corporation, the branch profits tax) on its share of the Trust Fund's income.
A foreign Holder generally would be entitled to file with the IRS a claim for
refund with respect to taxes withheld by the Trust Fund taking the position that
no taxes were due because the Trust Fund was not engaged in a U.S. trade or
business. However, interest payments made (or accrued) to a Certificateholder
who is a Foreign Investor generally will be considered guaranteed payments to
the extent such payments are determined without regard to the income of the
Trust Fund. If these interest payments are properly characterized as guaranteed
payments, then the interest probably will not be considered "portfolio
interest." As a result, Certificateholders will be subject to United States
federal income tax and withholding tax at a rate of 30%, unless reduced or
eliminated pursuant to an applicable treaty. In such case, a Foreign Investor
would only be entitled to claim a refund for that portion of the taxes, if any,
in excess of the taxes that should be withheld with respect to the guaranteed
payments.
BACKUP WITHHOLDING. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the Holder is an exempt recipient under
applicable provisions of the Code.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Federal
Income Tax Considerations," potential investors should consider the state and
local income tax consequences of the acquisition, ownership, and disposition of
the Securities. State and local income tax law may differ substantially from the
corresponding federal law, and this discussion does not purport to describe any
aspect of the income tax laws of any state or locality. Therefore, potential
investors should consult their own tax advisors with respect to the various
state and local tax consequences of an investment in the Securities.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and Section 4975 of the Code prohibit a pension, profit
sharing or other employee benefit plan (each, a "Benefit Plan") from engaging in
certain transactions involving "plan assets" with persons that are "parties in
interest" under ERISA or "disqualified persons" under the Code with respect to
the plan. ERISA also imposes certain duties and certain prohibitions on persons
who are fiduciaries of plans subject to ERISA. Under ERISA, generally any person
who exercises any authority or control with respect to the management or
disposition of the assets of a plan is considered to be a fiduciary of such
plan. A violation of these "prohibited transaction" rules may generate excise
tax and other liabilities under ERISA and the Code for such persons.
Certain transactions involving the related Trust Fund might be deemed to
constitute prohibited transactions under ERISA and the Code with respect to a
Benefit Plan that purchased Securities if assets of the related Trust Fund were
deemed to be assets of the Benefit Plan. Under a regulation issued by the United
States Department of Labor (the "Plan Assets Regulation"), the assets of a Trust
Fund would be treated as plan assets of a Benefit Plan for the purposes of ERISA
and the Code only if the Benefit Plan acquired an "equity interest" in the Trust
Fund and none of the exceptions contained in the Plan Assets Regulation was
applicable. An equity interest is defined under the Plan Assets Regulation as an
interest other than an instrument which is treated as indebtedness under
applicable local law and which has no substantial equity features. The likely
treatment of Notes and Certificates will be discussed in the related Prospectus
Supplement.
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.
A plan fiduciary considering the purchase of Securities should consult
its tax and/or legal advisors regarding whether the assets of the Trust Fund
would be considered plan assets, the possibility of exemptive relief from the
prohibited transaction rules and other issues and their potential consequences.
LEGAL INVESTMENT
Unless otherwise specified in the related Prospectus Supplement, the
Securities will not constitute "mortgage-related securities" within the meaning
of SMMEA. Accordingly, investors whose investment authority is
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subject to legal restrictions should consult their own legal advisors to
determine whether and the extent to which the Securities constitute legal
investments for them.
PLAN OF DISTRIBUTION
On the terms and conditions set forth in an underwriting agreement (the
"Underwriting Agreement") with respect to each Trust Fund, the Seller will agree
to sell to each of the underwriters named therein and in the related Prospectus
Supplement, and each of such underwriters will severally agree to purchase from
the Seller, the principal amount of each Class of Securities of the related
Series set forth therein and in the related Prospectus Supplement.
In each Underwriting Agreement, the several underwriters will agree,
subject to the terms and conditions set forth therein, to purchase all of the
Securities described therein which are offered hereby and by the related
Prospectus Supplement if any of such Securities are purchased. In the event of a
default by any such underwriter, each Underwriting Agreement will provide that,
in certain circumstances, purchase commitments of the nondefaulting underwriters
may be increased, or the Underwriting Agreement may be terminated.
Each Prospectus Supplement will either (i) set forth the price at which
each Class of Securities being offered thereby will be offered to the public and
any concessions that may be offered to certain dealers participating in the
offering of such Securities or (ii) specify that the related Securities are to
be resold by the underwriters in negotiated transactions at varying prices to be
determined at the time of such sale. After the initial public offering of any
Securities, the public offering price and such concessions may be changed.
Each Underwriting Agreement will provide that the Representative will
indemnify underwriters against certain liabilities, including liabilities under
the Securities Act.
Under each Underwriting Agreement, the closing of the sale of any Class
of Securities subject thereto will be conditioned on the closing of the sale of
all other such Classes.
The place and time of delivery for the Securities in respect of which
this Prospectus is delivered will be set forth in the related Prospectus
Supplement.
LEGAL MATTERS
Unless otherwise specified in the related Prospectus Supplement, certain
legal matters in connection with the Securities will be passed upon for the
Seller by Stroock & Stroock & Lavan LLP, New York, New York.
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GLOSSARY OF TERMS
The following are abbreviated definitions of certain capitalized terms
used in this Prospectus. Unless otherwise provided in a "Supplemental Glossary"
or "Index of Principal Terms" in the Prospectus Supplement for a Series, such
definitions will apply to capitalized terms used in such Prospectus Supplement.
The definitions may vary from those in the related Agreement for a Series and
the related Agreement for a Series generally provides a more complete definition
of certain of the terms. Reference should be made to the related Agreement for a
Series for a more complete definition of such terms.
"Accrual Termination Date" means, with respect to a Class of Compound
Interest Securities, the Distribution Date on which accrued interest on such
Securities becomes payable currently.
"Agreement" means, with respect to a Series of Certificates, the Pooling
and Servicing Agreement or Trust Agreement, and, with respect to a Series of
Notes, the Indenture and the Sale and Servicing Agreement, as the context
requires.
"Appraised Value" means, with respect to property securing a Loan, the
lesser of the appraised value determined in an appraisal obtained at origination
of the Home Equity Loan or sales price of such property at such time.
"Asset Group" means, with respect to the Primary Assets and other assets
comprising the Trust Fund of a Series, a group of such Primary Assets and other
assets having the characteristics described in the related Prospectus
Supplement.
"Assumed Reinvestment Rate" means, with respect to a Series, the per
annum rate or rates specified in the related Prospectus Supplement for a
particular period or periods as the "Assumed Reinvestment Rate" for funds held
in any fund or account for the Series.
"Available Distribution Amount" means the amount in the Distribution
Account (including amounts deposited therein from any reserve fund or other fund
or account) eligible for distribution to Holders on a Distribution Date.
"Bankruptcy Code" means the federal bankruptcy code, 11 United States
Code 101 et seq., and related rules and regulations promulgated thereunder.
"Business Day" means a day that, in the City of New York or in the city
or cities in which the corporate trust office of the Trustee are located, is
neither a legal holiday nor a day on which banking institutions are authorized
or obligated by law, regulations or executive order to be closed.
"Certificates" means the Asset-Backed Certificates.
"Certificate Account" or "Collection Account" means, with respect to a
Series, the account established for the deposit by the Servicer of payments
received from the Primary Assets.
"Class" means a Class of Securities of a Series.
"Closing Date" means, with respect to a Series, the date specified in
the related Prospectus Supplement as the date on which Securities of such Series
are first issued.
"Code" means the Internal Revenue Code of 1986, as amended, and
regulations (including proposed regulations) or other pronouncements of the
Internal Revenue Service promulgated thereunder.
"Combined Loan-to-Value Ratio" means, with respect to a Loan, the
percentage equivalent of a fraction, the numerator of which is the sum of (i)
the original principal amount of such Loan at the date of origination thereof
and (ii) the outstanding principal amount of any senior loan on the Mortgaged
Property at the time of origination of such Loan, and the denominator of which
is the Appraised Value of such Mortgaged Property at such date of origination.
"Commission" means the Securities and Exchange Commission.
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"Compound Interest Security" means any Security of a Series on which all
or a portion of the interest accrued thereon is added to the principal balance
of such Security on each Distribution Date, through the Accrual Termination
Date, and with respect to which no interest shall be payable until such Accrual
Termination Date, after which interest payments will be made on the Compound
Value thereof.
"Compound Value" means, with respect to a Class of Compound Interest
Securities, the original principal balance of such Class, plus all accrued and
unpaid interest, if any, previously added to the principal balance thereof and
reduced by any payments of principal previously made on such Class of Compound
Interest Securities.
"Condominium" means a form of ownership of real property wherein each
owner is entitled to the exclusive ownership and possession of his or her
individual Condominium Unit and also owns a proportionate undivided interest in
all parts of the Condominium Building (other than the individual Condominium
Units) and all areas or facilities, if any, for the common use of the
Condominium Units.
"Condominium Association" means the person(s) appointed or elected by
the Condominium Unit owners to govern the affairs of the Condominium.
"Condominium Building" means a multi-unit building or buildings, or a
group of buildings whether or not attached to each other, located on property
subject to Condominium ownership.
"Condominium Loan" means a Home Equity Loan secured by a Mortgage on a
Condominium Unit (together with its appurtenant interest in the common
elements).
"Condominium Unit" means an individual housing unit in a Condominium
Building.
"Cooperative" means a corporation owned by tenant-stockholders who,
through the ownership of stock, shares or membership securities in the
corporation, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy specific units and which is described in Section 216
of the Code.
"Cooperative Dwelling" means an individual housing unit in a building
owned by a Cooperative.
"Cooperative Loan" means a housing loan made with respect to a
Cooperative Dwelling and secured by an assignment by the borrower
(tenant-stockholder) or security interest in shares issued by the applicable
Cooperative.
"Cut-off Date" means the date designated as such in the related
Prospectus Supplement for a Series.
"Debt Securities" means Securities characterized as indebtedness for
federal income tax purposes, and Regular Interest Securities.
"Deferred Interest" means the excess of the interest accrued on the
outstanding principal balance of a Home Equity Loan during a specified period
over the amount of interest required to be paid by an obligor on such Home
Equity Loan on the related Due Date.
"Delinquency Advance" means cash advanced by the Servicer in respect of
delinquent payments of principal of and/or interest on a Home Equity Loan to the
extent specified in the related Prospectus Supplement.
"Disqualified Organization" means the United States, any State or
political subdivision thereof, any possession of the United States, any foreign
government, any international organization, or any agency or instrumentality of
any of the foregoing, a rural electric or telephone cooperative described in
section 1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by
sections 1-1399 of the Code, if such entity is not subject to tax on its
unrelated business income.
"Distribution Account" means, with respect to a Series, the account or
accounts established for the deposit of remittances from the Collection Account
for distribution to Securityholders.
"Distribution Date" means, with respect to a Series or Class of
Securities, each date specified as a distribution date for such Series or Class
in the related Prospectus Supplement.
"Due Date" means each date, as specified in the related Prospectus
Supplement for a Series, on which any payment of principal or interest is due
and payable by the obligor on any Primary Asset pursuant to the terms thereof.
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"Eligible Investments" means any one or more of the obligations or
securities described herein under "THE TRUST FUNDS--Eligible Investments."
"Enhancement" means a mechanism or instrument which is intended to
provide limited protection to Holders of the applicable Class or Classes of
Securities against losses on the related Primary Assets or other shortfalls in
funds necessary to make required distributions on such Class or Classes of
Securities.
"Enhancer" means the provider of the Enhancement for a Series specified
in the related Prospectus Supplement.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Account" means an account, established and maintained by the
Servicer for a Loan, into which payments by borrowers to pay taxes, assessments,
mortgage and hazard insurance premiums and other comparable items required to be
paid to the mortgagee are deposited.
"FDIC" means the Federal Deposit Insurance Corporation.
"FHLMC" or "Freddie Mac" means the Federal Home Loan Mortgage
Corporation.
"Final Scheduled Distribution Date" means, with respect to a Class of
Notes of a Series, the date no later than which principal thereof will be fully
paid and with respect to a Class of Certificates of a Series, the date after
which no Certificates of such Class will remain outstanding, in each case based
on the assumptions set forth in the related Prospectus Supplement.
"FNMA" or "Fannie Mae" means the Federal National Mortgage Association.
"Holder" or "Securityholder" means the person or entity in whose name a
Security is registered.
"Home Equity Loan" means a closed-end home equity loan secured by a
Mortgaged Property.
"Home Equity Loan Rate" means, unless otherwise indicated herein or in
the Prospectus Supplement, the interest rate borne by a Loan.
"HUD" means the United States Department of Housing and Urban
Development.
"Indenture" means the indenture relating to a Series of Notes between
the Trust Fund and the Trustee.
"Insurance Policies" means certain mortgage insurance, hazard insurance
and other insurance policies required to be maintained with respect to Loans.
"Insurance Proceeds" means amount paid by the insurer under any of the
Insurance Policies covering any Home Equity Loan or Mortgaged Property.
"Interest Only Securities" means a Class of Securities entitled solely
or primarily to distributions of interest and which is identified as such in the
related Prospectus Supplement.
"IRS" means the Internal Revenue Service.
"Lifetime Rate Cap" means the lifetime limit if any, on the Home Equity
Loan Rate during the life of each adjustable rate Loan.
"Liquidation Proceeds" means amounts received by the Servicer in
connection with the liquidation of a Loan, net of liquidation expenses.
"Loan-to-Value Ratio" means, with respect to a Loan, the percentage
equivalent of a fraction, the numerator of which is the original principal
amount of such Loan at the time of origination thereof, and the denominator of
which is the Appraised Value of the related Mortgaged Property at such time of
origination.
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"Master Servicer" means Avco Financial Services Management Company, or
its successors or assigns.
"Minimum Rate" means the lifetime minimum Home Equity Loan Rate during
the life of each adjustable rate Loan.
"Mixed-Use Properties" means structures of no more than three stories,
which include one to four residential dwelling units and 50% or less of the
space in which is used for retail, professional or other commercial uses
including doctor, dentist or law offices, real estate agencies, boutiques,
newsstands, convenience stores or other uses intended to cater to individual
customers.
"Mortgage" means the mortgage, deed of trust or other similar security
instrument securing a Mortgage Note.
"Mortgaged Property" means the real property and improvements thereon
securing a Home Equity Loan.
"Mortgage Note" means the note or other evidence of indebtedness of a
Mortgagor under the Loan.
"Mortgagor" means the obligor on a Mortgage Note.
"1986 Act" means the Tax Reform Act of 1986.
"Notes" means the Asset-Backed Notes.
"Notional Amount" means the amount set forth in the related Prospectus
Supplement for a Class of Interest Only Securities.
"Originator" means any affiliate of the Seller that originates or
acquires Primary Assets.
"OTS" means the Office of Thrift Supervision.
"PAC" ("Planned Amortization Class Securities") means a Class of
Securities of a Series on which payments of principal are made in accordance
with a schedule specified in the related Prospectus Supplement, based on certain
assumptions stated therein.
"Pay Through Security" means Regular Interest Securities and certain
Debt Securities that are subject to acceleration due to prepayment on the
underlying Primary Assets.
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust (including any beneficiary thereof),
unincorporated organization, or government or any agency or political
subdivision thereof.
"Pooling and Servicing Agreement" means the pooling and servicing
agreement relating to a Series of Certificates among the Seller, the Master
Servicer and the Originators (if such Series relates to Loans) and the Trustee.
"Primary Assets" means the Private Securities and/or Loans, as the case
may be, which are included in the Trust Fund for such Series. A Primary Asset
refers to a specific Private Security or Loan, as the case may be.
"Principal Balance" means, with respect to a Primary Asset and as of a
Due Date, the original principal amount of the Primary Asset, plus the amount of
any Deferred Interest added to such principal amount, reduced by all payments,
both scheduled or otherwise, received on such Primary Asset prior to such Due
Date and applied to principal in accordance with the terms of the Primary Asset.
"Principal Only Securities" means a Class of Securities entitled solely
or primarily to distributions of principal and identified as such in the
Prospectus Supplement.
"Private Security" means a participation or pass-through certificate
representing a fractional, undivided interest in Underlying Loans or
collateralized obligations secured by Underlying Loans.
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"PS Agreement" means the pooling and servicing agreement, indenture,
trust agreement or similar agreement pursuant to which a Private Security is
issued.
"PS Servicer" means the servicer of the Underlying Loans.
"PS Sponsor" means, with respect to Private Securities, the sponsor or
depositor under a PS Agreement.
"PS Trustee" means the trustee designated under a PS Agreement.
"Qualified Insurer" means a mortgage guarantee or insurance company duly
qualified as such under the laws of the states in which the Mortgaged Properties
are located duly authorized and licensed in such states to transact the
applicable insurance business and to write the insurance provided.
"Rating Agency" means the nationally recognized statistical rating
organization (or organizations) which was (or were) requested by the Seller to
rate the Securities upon the original issuance thereof.
"Regular Interest" means a regular interest in a REMIC.
"REMIC" means a real estate mortgage investment conduit.
"REMIC Administrator" means the Person, if any, specified in the related
Prospectus Supplement for a Series for which a REMIC election is made, to serve
as administrator of the Series.
"REMIC Provisions" means the provisions of the federal income tax law
relating to real estate mortgage investment conduits, which appear at sections
860A through 860G of Subchapter M of Chapter 1 of the Code, and related
provisions, and regulations, including proposed regulations and rulings, and
administrative pronouncements promulgated thereunder, as the foregoing may be in
effect from time to time.
"REO Property" means real property which secured a defaulted Loan,
beneficial ownership of which has been acquired upon foreclosure, deed in lieu
of foreclosure, repossession or otherwise.
"Representative" means Avco Financial Services Management Company, or
its successors or assigns.
"Reserve Fund" means, with respect to a Series, a segregated trust
account into which funds may be deposited on the Closing Date and/or over time
in order to provide a source of funds to provide limited protection to the
Holders of one or more Classes of Securities against losses on the related
Primary Assets or other shortfalls in amounts necessary to make required
distributions to such Holders.
"Residual Interest" means a residual interest in a REMIC.
"Retained Interest" means, with respect to a Primary Asset, the amount
or percentage specified in the related Prospectus Supplement which is not
included in the Trust Fund for the related Series.
"Scheduled Payments" means the scheduled payments of principal and
interest to be made by the borrower on a Primary Asset.
"Securities" means the Notes or the Certificates.
"Seller" means Avco ABS Receivables Corp., or its successors.
"Senior Securityholder" means a holder of a Senior Security.
"Senior Securities" means a Class of Securities as to which the holders"
rights to receive distributions of principal and interest are senior to the
rights of holders of Subordinate Securities, to the extent specified in the
related Prospectus Supplement.
"Series" means a separate series of Securities sold pursuant to this
Prospectus and the related Prospectus Supplement.
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"Servicing Fee" means the fee payable to the Master Servicer on a
periodic basis for servicing and administering the Primary Assets in a Trust
Fund and calculated at the rate and on the basis set forth in the related
Prospectus Supplement.
"Single Family Property" means property securing a Home Equity Loan
consisting of one- to four-family attached or detached residential housing,
including Cooperative Dwellings.
"Stripped Securities" means Pass-Through Securities representing
interests in Primary Assets with respect to which all or a portion of the
principal payments have been separated from all or a portion of the interest
payments.
"Subordinated Securities" means a Class of Securities as to which the
rights of holders to receive distributions of principal, interest or both is
subordinated to the rights of holders of Senior Securities or other Classes of
securities which are themselves subordinate to other Classes, and may be
allocated losses and shortfalls prior to the allocation thereof to other Classes
of Securities, to the extent and under the circumstances specified in the
related Prospectus Supplement.
"Trustee" means the trustee under the applicable Agreement and its
successors.
"Trust Fund" means, with respect to any Series of Securities, the trust
holding all money, instruments, securities and other property, including all
proceeds thereof, which are, with respect to a Series of Certificates, held for
the benefit of the Holders by the Trustee under the Pooling and Servicing
Agreement or Trust Agreement or, with respect to a Series of Notes, pledged to
the Trustee under the Indenture as a security for such Notes, including, without
limitation, the Primary Assets (except any Retained Interests), rights to all
amounts in the Distribution Account Collection Account, Certificate Account,
Pre-Funding Account, Capitalized Interest Account or Reserve Funds, if any,
distributions on the Primary Assets (net of servicing fees), and reinvestment
earnings on such net distributions and rights to any Enhancement and all other
property and interest held by or pledged to the Trustee pursuant to the related
Agreement for such Series.
"UCC" means the Uniform Commercial Code.
"Underlying Loans" means loans of the type eligible to be Loans
underlying or securing Private Securities. "Variable Interest Security" means a
Security on which interest accrues at a rate that is adjusted, based upon a
predetermined index, at fixed periodic intervals, all as set forth in the
related Prospectus Supplement.
"Variable Interest Securities" means a Class of Securities on which
interest will accrue at a per annum rate that will vary from Distribution Date
to Distribution Date based on changes in the weighted average of the interest
rates borne by the related Primary Assets or changes in the level of an index
used to calculate such per annum rate of interest.
"Zero Coupon Security" means a Security entitled to receive payments of
principal only.
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===============================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON. THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANYONE IN ANY JURISDICTION IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO
ANYONE TO WHOM IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT INFORMATION
HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS
PROSPECTUS SUPPLEMENT OR PROSPECTUS.
TABLE OF CONTENTS PAGE
PROSPECTUS SUPPLEMENT
Summary....................................S-
Risk Factors...............................S-
The Certificate Insurer....................S-
Description of the Mortgage Loans..........S-
Prepayment and Yield Considerations........S-
Description of the Certificates............S-
Use of Proceeds............................S-
Federal Income Tax Considerations..........S-
State Taxes................................S-
ERISA Considerations.......................S-
Legal Investment Considerations............S-
Underwriting...............................S-
Experts....................................S-
Legal Matters..............................S-
Ratings....................................S-
Index of Principal Terms...................S-
Annex I....................................S-
PROSPECTUS
Prospectus Supplement........................
Reports to Holders...........................
Available Information........................
Incorporation of Certain Documents by Reference
Summary of Terms.............................
Risk Factors.................................
The Seller...................................
The Originators and the Master Servicer......
Description of the Securities................
The Trust Funds..............................
Enhancement..................................
Servicing of Loans...........................
The Agreements...............................
Certain Legal Aspects of the Loans...........
Use of Proceeds..............................
Federal Income Tax Considerations............
State Tax Considerations.....................
ERISA Considerations.........................
Legal Investment.............................
Plan of Distribution.........................
Legal Matters................................
Glossary of Terms............................
===============================================================================
AVCO FINANCIAL HOME EQUITY
LOAN TRUST 1997-1
$__________
AVCO FINANCIAL HOME EQUITY
LOAN TRUST 199_-_
AVCO ABS RECEIVABLES CORP.
SELLER
AVCO FINANCIAL SERVICES MANAGEMENT COMPANY
MASTER SERVICER AND REPRESENTATIVE
[NAME OF UNDERWRITER]
PROSPECTUS SUPPLEMENT
DATED _________ __, 199_
================================================================================
<PAGE> 159
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemized list of the estimated expenses to be incurred in
connection with the offering of the securities being offered hereunder other
than underwriting discounts and commissions.
<TABLE>
<S> <C>
SEC Registration Fee..................... $303.04
Printing and Engraving................... *
Trustee's Fees........................... *
Legal Fees and Expenses.................. *
Blue Sky Fees and Expenses............... *
Accountant's Fees and Expenses........... *
Rating Agency Fees....................... *
Miscellaneous Fees and Expenses.......... *
--------
Total Expenses................... *
========
</TABLE>
* To be filed by Amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article 12 of the Articles of Incorporation of the Seller provides for the
indemnification of any person who is or was an officer or director of the Seller
with respect to actions taken or omitted by such person in any capacity in which
such person serves or served the Issuer, to the full extent authorized or
permitted by the Nevada Private Corporation Law. Reference is made to the
Articles of Incorporation filed as an exhibit to this Registration Statement for
the complete text of Article 12 of the Articles of Incorporation.
The Registrant maintains liability insurance policies such that each of the
directors and officers of the Registrant is insured against certain liabilities
which they might incur in their capacity as a director or officer.
The Underwriting Agreement filed as Exhibit 1.1 hereto provides for
indemnification by the Underwriters of the Registrant and its directors,
officers and controlling persons for certain liabilities arising under the
Securities Act of 1933 or otherwise.
The general effect of any statute, charter provision, by-law, contract or other
arrangement under which any controlling person, director or officer of the
Registrant is insured or indemnified against liability when acting on behalf of
the Registrant is to reduce the deterrent effect for such indemnified
individuals for violating the Securities Act of 1933.
The Registrant is aware that the Securities and Exchange Commission takes the
position that indemnification of directors and officers is against public policy
and is therefore unenforceable.
ITEM 16. EXHIBITS
<TABLE>
<S> <C>
1.1. Form of Underwriting Agreement**
3.1. Articles of Incorporation of Avco ABS Receivables Corp.
3.2. By-laws of Avco ABS Receivables Corp.**
4.1. Form of Pooling and Servicing Agreement**
4.2. Form of Certificate (included as part of Exhibit 4.1)**
4.3 Form of Indenture**
4.4 Form of Trust Agreement**
5.1. Opinion of Stroock & Stroock & Lavan LLP with respect to legality**
8.1. Opinion of Stroock & Stroock & Lavan LLP with respect to federal income
tax matters (contained in Exhibit 5.1)**
10.1 Form of Sale and Servicing Agreement**
23.1. Consent of Stroock & Stroock & Lavan LLP (contained in Exhibit 5.1)**
24.1. Powers of Attorney (included as part of signature page)
25.1 Statement of Eligibility and Qualification of Indenture Trustee
(Form T-1)**
</TABLE>
- -------------------------
** To be filed by amendment.
<PAGE> 160
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, as amended (the "Securities Act"), the information omitted from
the form of prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus filed by
the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration statement
as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at the
time shall be deemed to be the initial bona fide offering thereof.
(3) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(4) For purposes of determining any liability under the Securities Act,
each filing of the Registrant's annual report pursuant to section 13(a)
or section 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") 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.
(5) To provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered
in such names as required by the Underwriters to permit prompt delivery
to each purchaser.
(6) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement;
(i) To include any prospectus required by Section 10(a) (3) of
the Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising
after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(7) 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.
II-2
<PAGE> 161
(8) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-3
<PAGE> 162
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Avco ABS Receivables
Corp. certifies that it has reasonable grounds to believe that it meets all of
the requirements for filing on Form S-3, it believes that the securities rating
requirement for use of Form S-3 will be met by the time of sale of the
securities and it has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the State of Nevada
on November 18, 1997.
AVCO ABS RECEIVABLES CORP.
By: /s/ EUGENE R. SCHUTT, JR.
-------------------------------
Name: Eugene R. Schutt, Jr.
Title: President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each of the undersigned does hereby
constitute and appoint Jon Frojen, Herbert F. Smith, Ronald Bukow, Gary L. Fite
or Eugene R. Schutt, Jr., or any of them (with full power to each of them to act
alone), his or her true and lawful attorney-in-fact and agent with full power of
substitution, for him or her and on his or her behalf to sign, execute and file
this Registration Statement and any and all amendments (including, without
limitation, post-effective amendments and any amendments increasing the amount
of securities for which registration is being sought) to this Registration
Statement, with all exhibits and any and all documents to be filed with respect
thereto, with the Securities and Exchange Commission or any regulatory
authority, 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 in order to
effectuate the same as fully to all intents and purposes as he or she might or
could do if personally present, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done.
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.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ EUGENE R. SCHUTT, JR. President and Director November 18, 1997
- -------------------------------- (principal executive officer)
Eugene R. Schutt, Jr.
/s/ RONALD BUKOW Executive Vice President and November 18, 1997
- -------------------------------- Director (principal
Ronald Bukow financial officer)
/s/ GARY L. FITE Executive Vice President and November 18, 1997
- -------------------------------- Director (principal
Gary L. Fite accounting officer)
</TABLE>
II-4
<PAGE> 163
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Page
<S> <C> <C>
1.1. Form of Underwriting Agreement**
3.1. Articles of Incorporation of Avco ABS Receivables Corp.
3.2. By-laws of Avco ABS Receivables Corp.**
4.1. Form of Pooling and Servicing Agreement**
4.2. Form of Certificate (included as part of Exhibit 4.1)**
4.3. Form of Indenture**
4.4 Form of Trust Agreement**
5.1. Opinion of Stroock & Stroock & Lavan LLP with respect to
legality**
8.1 Opinion of Stroock & Stroock & Lavan LLP with respect to
federal income tax matters (contained in Exhibit 5.1)**
10.1 Form of Sale and Servicing Agreement**
23.1. Consent of Stroock & Stroock & Lavan LLP (contained in
Exhibit 5.1)**
24.1. Powers of Attorney (included as part of signature page)**
25.1. Statement of Eligibility and Qualification of Indenture
Trustee (Form T-1)**
</TABLE>
- ---------------------
** To be filed by Amendment.
<PAGE> 1
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
AVCO ABS RECEIVABLES CORP.
Under Chapter 78
of the
Nevada Revised Statutes
The undersigned, a natural person being at least 18 years of age, for
the purpose of organizing a corporation for conducting the business and
promoting the purposes hereinafter stated, under the provisions and subject to
the requirements of the Nevada Private Corporations Law hereby certifies that:
1. The name of the corporation is Avco ABS Receivables Corp. (the
"Corporation").
2. The purpose for which the Corporation is organized is to engage
exclusively in any of the following activities:
(a) to acquire, issue, cause to be issued, dispose of and or
hold certificates or other evidences of interests (the "Certificates")
in, or to issue notes or other evidences of indebtedness ("Notes," and
together with the Certificates, the "Securities") that may be secured by
certain payment obligations of dealers in consumer, commercial and
capital products ("Dealers") or payment obligations of buyers of such
products or of obligors under any notes, mortgages, installment
contracts or other payment obligations (collectively, "Obligors")
secured by such products, including but not limited to, new and
1
<PAGE> 2
used automobiles and trucks, recreational vehicles, new and used boats,
boat motors, boat trailers, manufactured housing, industrial machinery,
musical instruments, agricultural, household and garden equipment, or
payment obligations under notes, mortgages, installment contracts, or
other payment obligations, including but not limited to, leases, home
equity lines of credit, second mortgages, unsecured credit cards, other
obligations arising out of or relating to closed end and revolving loans
of money secured by first and second mortgages on one- to four-family
residential properties, proceeds from claims on insurance policies
related thereto, and related rights, and other installment obligations
(collectively, "Receivables");
(b) to acquire, own, hold, service, sell, assign, pledge and
otherwise deal with the Receivables, collateral securing the
Receivables, related insurance policies and insurance certificates,
agreements with originators or servicers of Receivables and any proceeds
or further rights associated with any of the foregoing;
(c) to transfer Receivables to trusts (the "Trusts") pursuant to
one or more pooling and servicing agreements, sale and servicing
agreements, or other agreements (the "Agreements") to be entered into
by, among others, the Corporation, the trustee named therein (the
"Trustee") and any entity acting as servicer of the Receivables;
(d) to authorize, sell and deliver any class of certificates
("Certificates") or other securities issued by the Trusts under the
related Agreements;
(e) to acquire from the Trustee the Certificates issued by
Trusts to which the Corporation transferred Receivables;
2
<PAGE> 3
(f) to authorize, issue, sell and deliver one or more series and
classes of bonds, notes or other evidence of indebtedness secured or
collateralized by one or more pools of Receivables or by certificates of
any class issued by one or more Trusts or by certificates of any class
issued by a trust established by the Corporation (collectively, the
"Notes"), provided that the Corporation shall have no liability under
any Notes except to the extent of the Receivables or the certificates
securing or collateralizing such Notes;
(g) to hold and enjoy all of the rights and privileges of any
Certificates issued by Trustee to the Corporation under the related
Agreements and to hold and enjoy all of the rights and privileges of any
class of any series of Notes, including any class of Notes or
Certificates which may be subordinate to any other class of Notes or
Certificates, respectively;
(h) to perform its obligations under the Agreements and any
indenture or other agreement (each, an "Indenture") pursuant to which
any Notes are issued;
(i) to negotiate, authorize, execute, deliver, assume the
obligations under, and perform, any agreement or instrument or document
relating to the activities set forth in clauses (a) through (h) above;
and
(j) to engage in any activity and to exercise any powers
permitted to corporations under the laws of the State of Nevada that are
related or incidental to the foregoing and necessary, convenient or
advisable to accomplish the foregoing. The Corporation shall not engage
in any business or activity other than in connection with or relating to
the activities described above.
3. The office of the Corporation is to be located in the State of
Nevada.
3
<PAGE> 4
4. The total number of shares of stock that the Corporation shall have
authority to issue is 25,000 shares of Common Stock, $1.00 par value.
5. The address of the Corporation's registered office is 502 East John
Street, Carson City, Nevada 89706. The name of the resident agent at this
address is CSC Services of Nevada, Inc..
6. (a) The affairs of the Corporation shall be managed by a Board of
Directors (the "Board" or the Board of Directors"), which shall at all times, no
later than immediately prior to the issuance of any Securities, include two
Outside Directors. The number of directors of the Corporation shall be no less
than three (3) and no more than twelve (12) as provided according to and in the
By-laws of the Corporation, with the initial Board consisting of three (3)
members. The name and post office box or street address, either residence or
business, of the members of the initial Board of Directors is as follows:...
<TABLE>
<CAPTION>
NAME ADDRESS
<S> <C>
Ronald Bukow 600 Anton Blvd., Costa Mesa, CA 92626
Gary L. Fite 600 Anton Blvd., Costa Mesa, CA 92626
Eugene R. Schutt, Jr. 600 Anton Blvd., Costa Mesa, CA 92626
</TABLE>
The initial Board of Directors will serve as Directors until the first
annual meeting of the shareholders, or until their successors are elected and
qualified. When voting on matters subject to the vote of the Board, including
those matters specified in these Articles 6 and in Article 8 hereof,
notwithstanding that the Corporation is not then insolvent, the Outside
Directors shall take into account the interests of the creditors of the
4
<PAGE> 5
Corporation as well as the interests of the Corporation. An "Outside Director"
shall be an individual who, for at least five years prior to being appointed by
the Board, shall not have been, a director, officer or employee of, customer or
supplier or indirect beneficial owner of 5% or more of the immediate family of
any such director, officer, employee, beneficial owner, customer or supplier of,
Textron Inc., or any corporate affiliate of Textron Inc. Notwithstanding the
foregoing, an Outside Director may be a director or officer of one or more other
corporations that is an affiliate or are affiliates Textron Inc., provided that
(i) each such corporation is or was formed with limited purposes similar to the
Corporation and (ii) such person does not earn, in the aggregate, material
compensation for serving in such positions. For the purposes of the foregoing,
an "affiliate" of an entity is an entity controlling, controlled by, or under
common control with such entity. Notwithstanding any other provision of these
Articles of Incorporation or any other provision of law that so empowers the
Corporation, in the event of the death, incapacity, or resignation of an Outside
Director or such position is otherwise vacated, a successor Outside Director
shall be appointed by the remaining directors of the Corporation and no action
requiring the unanimous affirmative vote of the Board of Directors of the
Corporation shall be taken until a successor Outside Director is elected and
qualified and approves such action.
(b) The Corporation shall not, without the affirmative vote of
100% of the members of the Board of Directors of the Corporation
(including at least two Outside Directors), institute proceedings to be
adjudicated a bankrupt or insolvent, or consent to the institution of
bankruptcy or insolvency proceedings against it, or file a petition
seeking or consent to reorganization or relief under any applicable
federal or state law
5
<PAGE> 6
relating to bankruptcy, or consent to the appointment of a receiver,
liquidator, assignee, trustee, sequestrator (or other similar official)
of the Corporation or a substantial part of its property, or make any
assignment for the benefit of creditors, or admit in writing its
inability to pay its debts generally as they become due, or take any
corporate action in furtherance of any such action.
(c) The Corporation shall maintain a separate principal office
through which its business shall be conducted, and if such office is
located in identifiable space within an affiliate of Textron Inc.,
allocate fairly and reasonably any overhead for shared office space.
(d) The Corporation shall maintain corporate records and books
of account separate from any other person or entity and shall not
commingle its corporate records and books of account with the corporate
records and books of account any other entity.
(e) The Board of Directors of the Corporation shall hold
appropriate meetings to authorize all of its corporate actions. Regular
meetings of the Board of Directors shall be held not less frequently
than three times per annum.
(f) The funds and other assets of the Corporation shall not be
commingled with those of any other entity.
(g) The Corporation shall pay its own expenses and shall not
guarantee or hold itself out as being liable for the debts of Textron
Inc. or any of its affiliates.
(h) The Corporation shall not form, or cause to be formed, any
subsidiaries.
(i) The Corporation shall act solely in its corporate name and
through its
6
<PAGE> 7
duly authorized officers or agents in the conduct of its business, and
shall conduct its business so as not to mislead others as to the
identity of the entity with which they are concerned.
(j) Meetings of the shareholders of the Corporation shall be
held not less frequently than one time per annum.
(k) The Corporation shall operate in such a manner that it would
not be substantively consolidated with any other entity.
(l) The Corporation shall maintain separate financial statements
from any other entity.
(m) The Corporation shall observe all corporate formalities.
(n) The Corporation shall maintain an arm's length relationship
with its affiliates.
(o) The Corporation shall use separate stationery, invoices and
checks.
(p) The Corporation shall not pledge its assets for the benefit
of any other entity.
7. In furtherance and not in limitation of the powers conferred upon the
Board of Directors by law, the Board of Directors shall have the power to adopt,
amend and repeal from time to time By-laws of the Corporation.
8. Notwithstanding any other provision of these Articles of
Incorporation and any provision of law that otherwise so empowers the
Corporation, the Corporation shall not, without (i) satisfaction of the Rating
Agency Condition if any Securities are outstanding and (ii) unanimous approval
of the Board of Directors of the Corporation (which shall include, at all times
following the initial appointment of Outside Directors
7
<PAGE> 8
pursuant to Article 6, the approval of at least two Outside Directors), do any
of the following:
(a) engage in any business or activity other than the business
and activities which the Corporation is permitted to engage in under
Article 2;
(b) incur any indebtedness, or assume or guaranty any
indebtedness of any other entity other than in connection with the
issuance of Securities pursuant to Agreements;
(c) merge or consolidate with or into any other entity or convey
or transfer its properties and assets substantially as an entirety to an
entity, unless:
(i) the entity (if other than the Corporation) formed or
surviving the consolidation or merger or which acquires the
properties and assets of the Corporation expressly assumes the
due and punctual payment of, and all obligations of the
Corporation in connection with the indebtedness of the
Corporation, and has Articles or a Certificate of Incorporation
containing provisions identical to the provisions of Articles 2,
6, 10 and this Article 8; and
(ii) immediately after giving effect to the transaction,
no default or event of default has occurred and is continuing
under any indebtedness of the Corporation or any agreements
relating to such indebtedness; or
(d) amend these Articles of Incorporation to alter in any manner
or delete Article 2, Article 6, Article 10 or this Article 8.
"Rating Agency Condition" means, with respect to any action, (i) that
each nationally recognized rating agency (other than Standard & Poor's
Ratings Services, a
8
<PAGE> 9
division of the McGraw-Hill Company ("S&P")), that has rated the
Securities (each, a "Rating Agency") shall have been given 10 days'
prior notice thereof (or such shorter period as shall be acceptable to
the Rating Agencies) and that none of the Rating Agencies shall have
notified the Corporation in writing that such action will, in and of
itself, result in a reduction or withdrawal of the then current rating
of any class of the Notes or Certificates and (ii) that S&P, if it has
rated any Securities, shall have notified the Corporation, in writing
that such action will not, in and of itself, result in a reduction or
withdrawal of the then current rating of any class of the Notes or
Certificates .
9. The Corporation is to have perpetual existence.
10. Subject to the limitations set forth in Article 8(d), the
Corporation reserves the right to amend, alter, change or repeal any provision
contained in this Certificate of Incorporation, in the manner now or hereafter
prescribed by statute, and all rights conferred upon stockholders herein are
granted subject to this reservation.
11. No director or officer of the Corporation shall be personally liable
to the Corporation or any of its stockholders for monetary damages for breach of
fiduciary duty as a director or officer; provided, that nothing contained in
this provision shall eliminate or limit the liability of a director or officer
for (a) acts or omissions which involve intentional misconduct, fraud or a
knowing violation of law, or (b) the payment of distributions in violation of
Nevada Revised Statutes Section 78.300. If the Nevada Private Corporations Law
is amended to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the Nevada Private Corporations Law, as so amended. No amendment or repeal of
this provision
9
<PAGE> 10
applies to or has any effect on the liability or alleged liability of any
director or officer of this Corporation for or with respect to any acts or
omissions of the director or officer occurring prior to the amendment or repeal,
except as otherwise required by law.
12. The Corporation shall, to the fullest extent permitted by Nevada
Private Corporations Law, as the same may be amended and supplemented, or by any
successor thereto, indemnify any and all persons whom it shall have power to
indemnify under said section from and against any and all of the expenses,
liabilities or other matters referred to in or covered by said section. The
Corporation shall advance expenses to the fullest extent permitted by the Nevada
Private Corporations Law. Such right to indemnification and advancement of
expenses shall continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person. The indemnification and advancement of expenses
provided for herein shall not be deemed exclusive of any other rights to which
those seeking indemnification or advancement of expenses may be entitled under
any By-Law, agreement, vote of shareholders or disinterested directors or
otherwise.
13. The name and post office address of the incorporator signing these
Articles of Incorporation is as follows:
NAME ADDRESS
Jon C. Frojen. 600 Anton Blvd., Costa Mesa, CA 92626
IN WITNESS WHEREOF, these Articles of Incorporation has been subscribed
the day of October, 1997 by the undersigned, being the sole incorporator of the
Corporation, who affirms that the statements made herein are true under the
penalties of perjury.
10
<PAGE> 11
Jon C. Frojen
Sole Incorporator
600 Anton Blvd., Costa Mesa, CA 92626
STATE OF CALIFORNIA )
)
COUNTY OF ORANGE )
This instrument was acknowledged before me on October __,
1997, Jon C. Frojen as Incorporator of Avco ABS Receivables Corp.
(Seal, if any) .
Notary
(My commission expires: )
----------------
11
