PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 9, 1998)
$175,000,000
(APPROXIMATE)
FIRST GREENSBORO HOME EQUITY LOAN TRUST 1998-1
ISSUER
ASSET BACKED NOTES, SERIES 1998-1
$72,650,000 6.53% CLASS A-1 NOTES
$102,350,000 6.55% CLASS A-2 NOTES
FIRST GREENSBORO HOME EQUITY, INC.
SPONSOR AND MASTER SERVICER
HOME EQUITY SECURITIZATION CORP.
DEPOSITOR
-----------
The First Greensboro Home Equity Loan Trust 1998-1 (the "Issuer") will
be formed pursuant to a deposit trust agreement to be dated as of June 1, 1998
(the "Trust Agreement") between Home Equity Securitization Corp. (the
"Depositor") and Wilmington Trust Company, a Delaware banking corporation, as
owner trustee (the "Owner Trustee"). The Issuer is hereby offering $72,650,000
(approximate) original principal amount of its Class A-1 Asset Backed Notes,
Series 1998-1 (the "Class A-1 Notes") and $102,350,000 original principal amount
of its Class A-2 Asset Backed Notes, Series 1998-1 (the "Class A-2 Notes" and
together with the Class A-1 Notes, the "Notes"). The Notes will be issued
pursuant to an indenture, dated as of June 1, 1998 (the "Indenture"), between
the Issuer and The Chase Manhattan Bank, as indenture trustee (the "Indenture
Trustee"), and will be secured by a trust estate (the "Trust Estate") consisting
primarily of (i) two separate pools of nonconforming, fixed rate and adjustable
rate home equity loans secured by first and second lien mortgages or deeds of
trust primarily on one- to four-family residential properties (the "Home Equity
Loans") and (ii) the Issuer's rights under the Loan Transfer Agreement and the
Servicing Agreement (each as defined herein). The Issuer also will issue
instruments evidencing the residual interest in the Trust Estate (the "Residual
Interest"). Only the Notes are offered hereby.
Simultaneously with the issuance of the Notes, the Sponsor will obtain
from Financial Security Assurance Inc. (the "Note Insurer") a financial guaranty
insurance policy relating to the Notes (the "Insurance Policy") in favor of the
Indenture Trustee and the Noteholders. The Insurance Policy will require the
Note Insurer to make certain Insured Payments (as defined herein) on the Notes.
(COVER CONTINUED ON NEXT PAGE)
[FSA LOGO]
FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENT IN THE
NOTES, SEE "RISK FACTORS" BEGINNING ON PAGE S-21 HEREIN, "CERTAIN PREPAYMENT AND
YIELD CONSIDERATIONS" BEGINNING ON PAGE S-71 HEREIN AND "RISK FACTORS" BEGINNING
ON PAGE 17 IN THE PROSPECTUS.
--------------------------------
THE ASSETS PLEDGED TO SECURE THE NOTES AND PAYMENTS UNDER THE INSURANCE
POLICY ARE THE SOLE SOURCE OF PAYMENTS ON THE NOTES. THE NOTES REPRESENT
NON-RECOURSE OBLIGATIONS OF THE ISSUER ONLY AND DO NOT REPRESENT INTERESTS IN OR
OBLIGATIONS OF THE SPONSOR, THE DEPOSITOR, THE SELLER, THE MASTER SERVICER, THE
INDENTURE TRUSTEE, THE OWNER TRUSTEE, THE NOTE INSURER OR ANY OF THEIR
AFFILIATES, EXCEPT AS DESCRIBED HEREIN. NEITHER THE NOTES NOR THE HOME EQUITY
LOANS ARE OR WILL BE INSURED OR GUARANTEED BY ANY GOVERNMENT AGENCY OR
INSTRUMENTALITY.
-------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
-------------------------------
The Notes will be purchased by First Union Capital Markets, a division
of Wheat First Securities, Inc. (the "Underwriter") from the Issuer and will be
offered by the Underwriter from time to time to the public in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. Proceeds to the Issuer from the sale of the Class A-1 Notes are expected
to be approximately $72,432,050, and proceeds from the sale of the Class A-2
Notes are expected to be approximately $102,042,950, in each case, plus accrued
interest (based upon the original principal amount of the Notes set forth
above), before the deduction of expenses payable by the Issuer estimated to be
approximately $300,000.
The Notes are offered subject to prior sale, when, as, and if accepted
by the Underwriter and subject to the Underwriter's right to reject orders in
whole or in part. It is expected that delivery of the Notes will be made through
the Same-Day Funds Settlement System of The Depository Trust Company, Cedel
Bank, S.A. and the Euroclear System on or about June 26, 1998. The Notes will be
offered in Europe and the United States of America.
FIRST UNION CAPITAL MARKETS
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS JUNE 22, 1998
<PAGE>
(CONTINUED FROM FRONT COVER)
The Home Equity Loans will be divided into two groups. The Class A-1
Notes will be principally secured by one group ("Group I") of Home Equity Loans
(the "Group I Home Equity Loans") and the Class A-2 Notes will be principally
secured by the other group ("Group II") of Home Equity Loans (the "Group II Home
Equity Loans"). Payments on the Class A-1 Notes will be made generally from
Available Funds for Group I, and payments on the Class A-2 Notes will be made
generally from Available Funds for Group II. Group I and Group II are referred
to together herein as the "Home Equity Loan Groups" or the "Groups" and each
singularly, a "Home Equity Loan Group" or a "Group." As of the Cut-Off Date, the
aggregate outstanding Principal Balance (as defined herein) of the Group I Home
Equity Loans transferred to the Issuer on the Closing Date (the "Group I Initial
Home Equity Loans") was $72,650,717.11 (the "Group I Initial Aggregate Principal
Balance"). As of the Cut-Off Date, the aggregate outstanding Principal Balance
of the Group II Home Equity Loans, transferred to the Issuer on the Closing Date
(the "Group II Initial Home Equity Loans") was $75,332,394.79 (the "Group II
Initial Aggregate Principal Balance"). The Group I Initial Home Equity Loans and
the Group II Initial Home Equity Loans are collectively referred to herein as
the "Initial Home Equity Loans." The Group I Initial Aggregate Principal Balance
and the Group II Initial Aggregate Principal Balance are collectively referred
to herein as the "Initial Aggregate Principal Balance"). Approximately 94.62% of
the Group I Initial Home Equity Loans by Group I Initial Aggregate Principal
Balance are secured by first liens and the remainder are secured by second liens
and approximately 95.98% by Group I Initial Aggregate Principal Balance are
fixed rate Home Equity Loans and approximately 4.02% by Group I Initial
Aggregate Principal Balance are adjustable rate Home Equity Loans. Approximately
92.07% of the Group II Initial Home Equity Loans by Group II Initial Aggregate
Principal Balance are secured by first liens and the remainder are secured by
second liens and approximately 95.17% by Group II Initial Aggregate Principal
Balance are fixed rate Home Equity Loans and 4.83% by Group II Initial Aggregate
Principal Balance are adjustable rate Home Equity Loans. Additional Home Equity
Loans (the "Subsequent Home Equity Loans") may be transferred to the Issuer from
time to time after the Closing Date during the Funding Period from funds on
deposit in the pre-funding account (the "Pre-Funding Account"). Such Subsequent
Home Equity Loans shall be allocated solely to Group II. As used herein, the
term "Aggregate Principal Balance" means the aggregate of the Principal Balances
of the Home Equity Loans in Group I, Group II or the Trust Estate, as
applicable, at the related date of determination. On the Closing Date a cash
amount of approximately $27,017,605.21, from the proceeds of the sale of the
Class A-2 Notes will be deposited with the Indenture Trustee in the Pre-Funding
Account. On the Closing Date, cash in an amount satisfactory to the Note Insurer
will be deposited with the Indenture Trustee in the capitalized interest account
(the "Capitalized Interest Account").
The Home Equity Loans were or will be originated or acquired by First
Greensboro Home Equity, Inc. (the "Sponsor" and "Master Servicer"), sold by the
Sponsor to First Greensboro Capital Corporation (the "Seller") in the ordinary
course of the Sponsor's business and contributed by the Seller in the ordinary
course of its business to First Owner's Trust, Inc., a limited purpose, wholly
owned subsidiary of the Seller (the "Transferor"). The Transferor will cause the
Initial Home Equity Loans to be conveyed to the Depositor as of the Cut-Off Date
pursuant to a Loan Sale Agreement, dated as of June 1, 1998 (the "Loan Sale
Agreement"), between the Sponsor, the Transferor, an affiliate of the Transferor
and the Depositor. The Depositor will convey such interests to the Issuer as of
the Cut-Off Date pursuant to a Loan Transfer Agreement, dated as of June 1, 1998
(the "Loan Transfer Agreement"). The Issuer will then pledge all of its interest
in the Home Equity Loans, without recourse, to the Indenture Trustee pursuant to
the Indenture as collateral for the Notes. It is anticipated that all of the
Home Equity Loans will be serviced by the Master Servicer.
The Home Equity Loans have been or will be originated using
underwriting standards that are less stringent than the underwriting standards
applied by The Federal National Mortgage Association ("FNMA") or by The Federal
Home Loan Mortgage Corporation ("FHLMC"). SEE "Risk Factors--As a Result of the
Underwriting Standards, Home Equity Loans Are Likely to Experience Rates of
Delinquency, Foreclosure and Bankruptcy That Are Higher Than Those Experienced
by Home Equity Loans Underwritten in a More Traditional Manner" herein.
Principal and interest on the related Notes will be payable on the 25th
day of each month or, if such day is not a Business Day, the next succeeding
Business Day, beginning in July 1998 (each, a "Payment Date").
The Notes will constitute non-recourse obligations of the Issuer. The
Sponsor will have limited obligations arising in respect of certain
representations and warranties it makes in connection with the conveyance of the
Home
S-2
<PAGE>
Equity Loans to the Depositor pursuant to the Loan Sale Agreement. The Sponsor
will act as servicer of the Home Equity Loans (in such capacity, the "Master
Servicer") and, in such capacity, will have limited obligations that arise
pursuant to certain representations and warranties and to its contractual
servicing obligations under the servicing agreement (the "Servicing Agreement")
to be entered into among the Master Servicer, the Issuer, the Indenture Trustee
and Calmco, Inc., as Master Backup Servicer (the "Master Backup Servicer"),
including the obligation to advance delinquent payments of principal and
interest on the Home Equity Loans to the extent provided herein.
The Notes will be unconditionally and irrevocably guaranteed as to
timely payment of interest due to Noteholders and as to ultimate payment of the
Note Balance, in each case pursuant to the terms of the Insurance Policy issued
by the Note Insurer. SEE "The Note Insurer" herein.
The stated maturity date for the Class A-1 and Class A-2 Notes is the
Payment Date occurring in December 2029 (the "Stated Maturity Date)".
The yield to maturity on the Class A-1 and Class A-2 Notes will be
affected by, among other things, the rate of payment of principal (including by
reason of prepayments, defaults and liquidations) of the Home Equity Loans in
Group I and Group II respectively and the timing and receipt of such payments as
described herein and in the Prospectus. SEE "Risk Factors--Prepayments and
Repurchases May Adversely Affect The Yield To Maturity of the Securities" in the
Prospectus and "Risk Factors--Payments of Excess Cash May Affect The Yield To
Maturity of the Notes" and "Certain Prepayment and Yield Considerations" herein.
Each Class of Notes may be redeemed, in whole but not in part, at the
option of the Master Servicer or, if not exercised, at the option of the Note
Insurer, on or after the first Payment Date on which the Aggregate Principal
Balance of the Home Equity Loans in the related Group is less than 10% of the
Aggregate Principal Balance of the Home Equity Loans in such Group as of the
applicable Cut-Off Date. SEE "Description of the Notes--Redemption of the Notes"
herein.
No election will be made to treat the Issuer, the Trust Estate or the
arrangement by which the Notes are issued as a "real estate mortgage investment
conduit" (a "REMIC") for federal income tax purposes.
There is currently no secondary market for either Class of Notes. The
Underwriter intends to make a secondary market for each Class of Notes, but has
no obligation to do so. There can be no assurance that a secondary market for
either Class of Notes will develop or, if one does develop, that it will provide
investors with a satisfactory level of liquidity or that it will continue.
It is a condition to the issuance of each Class of Notes that they be
rated "Aaa" by Moody's Investors Service, Inc. and "AAA" by Standard & Poor's
Ratings Services, a division of The McGraw-Hill Companies, Inc.
Reference is made to the Index of Principal Terms herein for the
location in this Prospectus Supplement of the definitions of certain capitalized
terms used herein, and reference is also made to the Index of Principal Terms in
the Prospectus for the location in the Prospectus of the definitions of certain
capitalized terms used, but not otherwise defined, herein.
-------------------------
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE NOTES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE RELATED
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.
THE NOTES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE A SEPARATE
SERIES OF SECURITIES BEING OFFERED BY THE DEPOSITOR PURSUANT TO ITS PROSPECTUS
DATED JUNE 9, 1998, OF WHICH THIS PROSPECTUS SUPPLEMENT IS A PART AND THAT
ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS IMPORTANT
INFORMATION REGARDING THE OFFERING OF THE NOTES THAT IS NOT CONTAINED HEREIN,
AND PROSPECTIVE INVESTORS ARE URGED TO READ
S-3
<PAGE>
THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE NOTES MAY
NOT BE CONSUMMATED UNLESS THE PROSPECTIVE INVESTOR HAS RECEIVED BOTH THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
To the extent statements contained herein do not relate to historical
or current information, this Prospectus Supplement may be deemed to consist of
forward looking statements that involve risks and uncertainties that may
adversely affect the payments to be made on, or the yield of, each Class of
Notes, which risks and uncertainties are discussed under "Risk Factors" and
"Certain Prepayment and Yield Considerations" herein. As a consequence, no
assurance can be given as to the actual payments on, or the yield of, each Class
of Notes.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission
(the "Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Notes offered pursuant to this Prospectus
Supplement. This Prospectus Supplement and the related Prospectus, which form a
part of the Registration Statement, omit certain information contained in such
Registration Statement pursuant to the Rules and Regulations of the Commission.
The Registration Statement can be inspected and copied at the Public Reference
Room at the Commission at 450 Fifth Street, N.W., Washington, D.C. and the
Commission's regional office at Seven World Trade Center, 13th Floor, New York,
New York, 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such materials can be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C., 20549. In addition, the Commission
maintains a site on the World Wide Web containing reports, proxy materials,
information statements and other items. The address is http://www.sec.gov.
--------------------------
REPORTS TO NOTEHOLDERS
Unless and until Definitive Notes are issued, periodic and annual
unaudited reports containing information concerning the Home Equity Loans will
be prepared by the Master Servicer and sent on behalf of the Issuer only to Cede
& Company ("Cede"), as nominee of The Depository Trust Company ("DTC") and
registered holders of the Notes (as defined herein). See "Description of the
Securities -- Reports to Securityholders" in the accompanying Prospectus (the
"Prospectus"). Such reports will not constitute financial statements prepared in
accordance with generally accepted accounting principles. The Depositor will
cause to be filed with the Commission such periodic reports as are required
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
the rules and regulations thereunder and as are otherwise agreed to by the
Commission. Copies of such periodic reports may be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates.
S-4
<PAGE>
SUMMARY OF TERMS
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS. CAPITALIZED TERMS USED IN THIS PROSPECTUS SUPPLEMENT
AND NOT DEFINED HEREIN SHALL HAVE THE MEANINGS SET FORTH IN THE PROSPECTUS. SEE
"INDEX OF PRINCIPAL TERMS" IN THIS PROSPECTUS SUPPLEMENT AND IN THE PROSPECTUS
FOR THE LOCATION OF THE DEFINITIONS OF CERTAIN CAPITALIZED TERMS.
SECURITIES OFFERED ......... $72,650,000(approximate) 6.53% Class A-1 Asset
Backed Notes, Series 1998-1 (the "Class A-1
Notes") and $102,350,000 (approximate) 6.55% Class
A-2 Asset Backed Notes Series 1998-2 (the "Class
A-2 Notes," together with the Class A-1 Notes, the
"Notes")). The Notes represent non-recourse
obligations of the Issuer. Proceeds of the assets
in the Trust Estate and payments under the
Insurance Policy, if any, will be the only sources
of payments on the related Notes. The original
principal amount of the related Notes may be
increased or decreased by up to 5% on the Closing
Date, depending upon the Home Equity Loans
actually acquired by the Issuer and pledged to the
Indenture Trustee.
ISSUER ..................... First Greensboro Home Equity Loan Trust 1998-1, a
Delaware business trust (the "Issuer"),
established by the Depositor pursuant to a deposit
trust agreement, dated as of June 1, 1998 (the
"Trust Agreement"), between the Depositor and the
Owner Trustee. After the Closing Date, the
Residual Interest representing all of the
beneficial ownership interest in the Issuer will
be held by the Transferor, or an affiliate
thereof. The Issuer does not have, nor is it
expected in the future to have, any significant
assets, other than the assets included in the
Trust Estate. SEE "The Issuer" herein.
SPONSOR AND
MASTER SERVICER............. First Greensboro Home Equity, Inc., a North
Carolina corporation (the "Sponsor" and "Master
Servicer"). The Home Equity Loans were, or will
be, originated or acquired by the Sponsor through
its network of retail branches, brokers and
correspondents. The Sponsor will convey, as of the
related Cut-Off Date its interest in each Home
Equity Loan to the Seller in the ordinary course
of the Sponsor's business. The Sponsor's principal
executive offices are located at 4830 Koger
Boulevard, Greensboro, North Carolina 27407.
SELLER...................... First Greensboro Capital Corporation, a Tennessee
corporation (the "Seller"). The Home Equity Loans
were acquired by the Seller from the Sponsor. The
Seller will convey, as of the related Cut-Off Date
its interest in each Home Equity Loan to the
Transferor in the ordinary course of the Seller's
business.
TRANSFEROR.................. First Owner's Trust, Inc., a Tennessee
corporation, a limited purpose and wholly-owned
subsidiary of the Seller. The Transferor will
cause the Home Equity Loans to be conveyed to the
Depositor.
DEPOSITOR................... Home Equity Securitization Corp., a North Carolina
corporation (the "Depositor"). The Depositor will
acquire the
S-5
<PAGE>
Home Equity Loans from the Transferor and sell the
Home Equity Loans to the Issuer. SEE "The
Depositor" in the Prospectus.
MASTER BACKUP SERVICER...... Calmco, Inc. (the "Master Backup Servicer"), a
Delaware corporation. The Master Backup Servicer's
principal executive offices are located at 301
Congress Avenue, Suite 200, Austin, Texas 78701
and its telephone number is (512) 344-3633.
THE INDENTURE TRUSTEE....... The Chase Manhattan Bank, a New York banking
corporation, as indenture trustee (the "Indenture
Trustee"). The Indenture Trustee shall receive a
fee (the "Indenture Trustee Fee"), payable monthly
on each Payment Date at one twelfth of 0.0125% of
the Aggregate Principal Balance of the Home Equity
Loans in the related Group as of the first day of
the related Remittance Period. Upon a termination
of the Master Servicer and Backup Master Servicer,
the Indenture Trustee shall be obligated to
succeed to the obligations of the Master Servicer
or to appoint an eligible successor servicer.
OWNER TRUSTEE............... Wilmington Trust Company, a Delaware banking
corporation, acting not in its individual capacity
but solely as owner trustee (the "Owner Trustee")
under the Trust Agreement. The Owner Trustee shall
receive a fee (the "Owner Trustee Fee") as
provided under the Trust Agreement.
CUT-OFF DATE................ With respect to (i) each Initial Home Equity Loan,
June 1, 1998 and (ii) with respect to each
Subsequent Home Equity Loan, the later of (x) the
first day of the month in which such Subsequent
Home Equity Loan was transferred to the Issuer
(each such date, a "Subsequent Transfer Date") and
(y) the date of origination if any such Home
Equity Loan is originated in the month of the
related Subsequent Transfer Date (the "Cut-Off
Date").
CLOSING DATE................ On or about June 26, 1998.
ADMINISTRATIVE FEE AMOUNT... With respect to each Group and any Payment Date,
the sum of the related Servicing Fee, Indenture
Trustee Fee, Owner Trustee Fee and Note Insurer
Premium (as each is defined herein) relating to
such Payment Date (the "Administrative Fee
Amount").
REMITTANCE PERIOD........... With respect to each Class of Notes and any
Payment Date, the calendar month immediately
preceding the month in which such Payment Date
occurs (the "Remittance Period").
MONTHLY REMITTANCE DATE..... With respect to each Class of Notes and any
Payment Date, the 18th day of the month in which
such Payment Date occurs, or if such day is not a
Business Day, then the preceding Business Day (the
"Monthly Remittance Date").
DESCRIPTION OF THE NOTES.... The Notes represent non-recourse obligations of
the Issuer and will be issued pursuant to an
indenture to be dated as of
S-6
<PAGE>
June 1, 1998 (the "Indenture"), entered into
between the Issuer and the Indenture Trustee. The
assets included in the trust estate created by the
Indenture (the "Trust Estate") and pledged to
secure the Notes, payments under the Insurance
Policy, if any, will be the only sources of
payments on the Notes. The Notes will be issued in
a two classes (each, a "Class"). The Class A-1
Notes will be secured by the Group I Home Equity
Loans and the Class A-2 Notes will be secured by
the Group II Home Equity Loans. Each Class of
Notes will also be secured to a limited extent, as
further described herein, by funds available from
Excess Cash from the other Group or from certain
reserve accounts. Payments on the Class A-1 Notes
will be made generally from Available Funds for
Group I and payments on the Class A-2 Notes will
be made generally from Available Funds for Group
II.
The assets of the Trust Estate will consist of (i)
two Groups of nonconforming home equity loans
transferred to the Issuer on the Closing Date (the
"Initial Home Equity Loans"), additional
nonconforming, fixed rate and adjustable rate home
equity loans, if any, transferred to the Issuer
and allocated to Group II during the Funding
Period ("Subsequent Home Equity Loans," and,
together with the Initial Home Equity Loans, the
"Home Equity Loans"); (ii) all interest and
principal due under the respective Home Equity
Loans on or after the related Cut-Off Date; (iii)
security interests in the properties securing such
Home Equity Loans (the "Properties"); (iv) amounts
on deposit in the Note Account, Pre-Funding
Account and Capitalized Interest Account; (v) the
Issuer's rights under the Loan Transfer Agreement
and the Servicing Agreement; and (vi) certain
other property.
DENOMINATIONS AND
REGISTRATION................ Each Class of Notes will be issued in
denominations of not less than $25,000 principal
amount and in integral multiples of $1,000 in
excess thereof. No person acquiring a beneficial
ownership interest in any Note (any such person, a
"Beneficial Owner") will be entitled to receive
such Note in fully registered, certificated form
(a "Definitive Note"), except under the limited
circumstances described herein. Instead,
Beneficial Owners will hold their Notes through
The Depository Trust Company ("DTC"), in the
United States, or Cedel Bank, societe anonyme
("Cedel") or the Euroclear System ("Euroclear") in
Europe, each of which will effect payments and
transfers in respect of the Notes by means of
electronic record keeping services, acting through
certain participating organizations. 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 Notes are in book entry form, the
Notes will be represented by one or more global
certificates registered in the name of Cede & Co.,
as nominee of DTC, or Citibank N.A. or Morgan
Guaranty Trust Company of New York, the relevant
depositaries of Cedel and Euroclear, respectively,
and each a participating member of DTC. This may
result in certain delays in receipt of payments by
an investor and may restrict
S-7
<PAGE>
an investor's ability to pledge its Notes. SEE
"Risk Factors--Book-Entry Registration May Reduce
the Liquidity of the Notes" and "Description of
the Notes--Book-Entry Registration and Definitive
Notes" herein, "ANNEX A: Global Clearance,
Settlement and Tax Documentation Procedures"
hereto and "Description of the Securities--Form of
the Securities" in the Prospectus. Unless and
until Definitive Notes are issued, it is
anticipated that the only "Noteholder" will be
Cede & Co., as nominee of DTC. Beneficial Owners
will not be Noteholders as that term is used in
the Indenture and the Servicing Agreement.
Beneficial Owners are permitted to exercise their
rights only indirectly through DTC and its
Participants (including Cedel and Euroclear).
PAYMENTS ON THE NOTES
A. General.............. Payments on the Notes will be made on the 25th day
of each month, or if such day is not a Business
Day, on the next succeeding Business Day (each, a
"Payment Date"), commencing July, 1998, to each
Noteholder of record as of the last Business Day
preceding such Payment Date or, with respect to
Definitive Notes, as of the last Business Day of
the month preceding the month in which such
Payment Date occurs (the "Record Date").
A "Business Day" is any day other than (i) a
Saturday or Sunday or (ii) a day on which
commercial banking institutions in New York, New
York, Greensboro, North Carolina, Austin, Texas
(if the Backup Master Servicer becomes the
successor Master Servicer), or the city in which
the corporate trust office of the Indenture
Trustee is located are authorized or obligated by
law, regulation, executive order or governmental
decree to be closed.
On each Payment Date, payments of principal and
interest will be made to Noteholders as of the
immediately preceding Record Date out of Available
Funds for the related Group and such Payment Date,
together with any payments received under the
Insurance Policy. The "Available Funds" for any
Payment Date and for each Group will generally
consist of the aggregate of the following amounts:
(i) the sum of, for the Home Equity Loans in
the related Group, (a) all scheduled
payments of principal and interest received
with respect to such Home Equity Loans and
due during the related Remittance Period,
(b) all unscheduled principal payments or
recoveries on such Home Equity Loans,
including Prepayments, Insurance Proceeds
and Net Liquidation Proceeds received
during the related Remittance Period and
(c) with respect to Group II, amounts
deposited in the Note Account from the
Capitalized Interest Account and the
Pre-Funding Account, minus (w) amounts
received with respect to payments due prior
to the applicable Cut-Off Date, (x) the
related Administra-
S-8
<PAGE>
tive Fee Amount payable with respect to
such Payment Date, and (y) reimbursements
for certain Servicing Advances made with
respect to such Home Equity Loans as
described herein (other than those included
in Liquidation expenses already reimbursed
from related Liquidation Proceeds); and
(ii) the amount of any Compensating Interest
Payments and any Delinquency Advances (as
hereinafter defined) made by the Master
Servicer with respect to Home Equity Loans
in the related Group for such Payment Date,
any amounts deposited in the related Note
Account in respect of the repurchase,
release, removal or substitution of Home
Equity Loans in the related Group during
the related Remittance Period or amounts
deposited in the related Note Account in
connection with the redemption of the
related Class of Notes, all as more fully
described under "Description of the
Notes-Payments on the Notes" herein.
B. Note Interest Rate... The "Class A-1 Note Interest Rate" for the Class
A-1 Notes and for each Interest Period prior to
the Initial Redemption Date (as defined herein)
will be a per annum rate equal to 6.53%, and, for
each Interest Period thereafter, a per annum rate
equal to 7.03%. The "Class A-2 Note Interest Rate"
for the Class A-2 Notes and for each Interest
Period prior to the Initial Redemption Date (as
defined herein) will be a per annum rate equal to
6.55%, and, for each Interest Period thereafter, a
per annum rate equal to 7.05%. SEE "Description of
the Notes--Payments on the Notes" herein. The
Class A-1 Note Interest Rate and the Class A-2
Note Interest Rate are together referred to herein
as the "Note Interest Rate."
The "Interest Period" in respect of any Payment
Date will be the calendar month immediately
preceding the month in which the Payment Date
occurs. All calculations of interest on the Notes
will be computed on the basis of a year of 360
days and twelve 30 day months.
C. Payments
of Interest.......... On each Payment Date, each Class of Notes will be
entitled to payments in respect of interest
accrued during the related Interest Period ("Note
Interest") at the related Note Interest Rate on
the outstanding aggregate principal balance of the
related Class of Notes (the "Note Balance") as of
the preceding Payment Date (after giving effect to
the payment, if any, in reduction of principal
made on the Notes on such preceding Payment Date).
SEE "Description of the Notes--Payments on the
Notes" herein.
If, with respect to any Payment Date, funds are
not available from Available Funds for a Group
(or, to the limited extent provided herein, from
Excess Cash from the other Group or from certain
reserve accounts) to pay the full amount of Note
Interest due on the related Class of Notes, the
deficiency will be covered by payments made
pursuant to the Insurance
S-9
<PAGE>
Policy for such Payment Date. SEE "The Note
Insurance Policy" herein.
D. Payments of
Principal............ On each Payment Date, each Class of Notes will be
entitled to related Monthly Principal (as
hereinafter defined) in reduction of the related
Note Balance. Monthly Principal with respect to
any Payment Date and each Class of Notes will
generally consist of the aggregate of all
scheduled payments of principal received with
respect to the Home Equity Loans in the related
Group and due during the related Remittance Period
and all other amounts collected, received or
otherwise recovered in respect of principal on the
Home Equity Loans in the related Group during or
in respect of the related Remittance Period. Such
amount will be decreased to take into account any
related Overcollateralization Reduction Amount
with respect to the related Payment Date as
described herein.
E. Payments of
Excess Cash ......... "Excess Cash" for each Class on any Payment Date
will be equal to Available Funds for the related
Group on such Payment Date, reduced by the sum of
(i) any amounts payable to the Note Insurer for
Insured Payments with respect to such Class paid
on prior Payment Dates and not yet reimbursed and
for any unpaid Note Insurer Premiums for such
Group for prior Payment Dates (in each case with
interest thereon at the Late Payment Rate set
forth in the Insurance Agreement) (and to the
extent not covered by Available Funds for the
other Group, such amounts with respect to the
other Group), (ii) the Note Interest for the
related Class and Payment Date (and to the extent
not covered by Available Funds for the other
Group, such amounts with respect to the other
Group), (iii) the Monthly Principal for the
related Class and Payment Date and (iv) with
respect to Class A-2 and the first Payment Date
following the end of the Funding Period, all
amounts remaining in the Pre-Funding Account to
the extent not used to purchase Subsequent Home
Equity Loans for the related Group during such
Funding Period.
On each Payment Date with respect to which the
Overcollateralization Amount for a Class of Notes
is less than the related Required
Overcollateralization Amount for such Payment
Date, Excess Cash derived from Available Funds in
respect of the related Group, if any, will be paid
on the related Notes in reduction of the related
Note Balance, up to the amount necessary for the
related Overcollateralization Amount to equal the
applicable Required Overcollateralization Amount.
Any Excess Cash remaining with respect to a Class
after making required payments on the related
Notes (including any payments as described in the
preceding sentence) and to the Note Insurer on any
Payment Date as described herein will be used to
fund certain shortfalls with respect to the other
Class of Notes and to fund certain reserve
accounts; and, thereafter, released to the
holder(s) of the Residual Interest on such Payment
Date, free from the lien of the Indenture Trustee,
and such amounts will not be available to make any
of the payments referred to in clauses (i)-(iv)
above on any subsequent Payment Date.
S-10
<PAGE>
F. Overcollateral-
ization Feature...... Credit enhancement with respect to each Class of
Notes will be provided in part by
overcollateralization resulting from the Aggregate
Principal Balances of the Home Equity Loans in the
related Group as of the end of each Remittance
Period exceeding the related Note Balance for the
related Payment Date (after taking into account
the related Monthly Principal and related Excess
Cash to be paid on such Payment Date in reduction
of the related Note Balance). The Indenture
requires that this Overcollateralization Amount
for a Class be increased to, and thereafter
maintained at, the related Required
Overcollateralization Amount. This increase and
subsequent maintenance is intended to be
accomplished by the application of related monthly
Excess Cash to accelerate the pay down of the
related Note Balance until the related
Overcollateralization Amount reaches the related
Required Overcollateralization Amount.
The Indenture generally provides that the Required
Overcollateralization Amount for each Class may,
over time, decrease or increase, subject to
certain floors, caps and triggers including
triggers that allow the related Required
Overcollateralization Amount to decrease or "step
down" based on the performance of the Home Equity
Loans in the related Group with respect to certain
delinquency rate tests specified in the Indenture.
In addition, Excess Cash for a Group will be
applied to the payment in reduction of principal
of the related Class of Notes during the period
that the related Home Equity Loans are unable to
meet certain tests specified in the Indenture. Any
increase in a Required Overcollateralization
Amount may result in an accelerated amortization
of the related Notes until such Required
Overcollateralization Amount is reached, and any
decrease in a Required Overcollateralization
Amount will result in a decelerated amortization
of the related Notes until such Required
Overcollateralization Amount is reached. SEE
"Description of the Notes--Overcollateralization
Feature" herein.
The "Overcollateralization Amount" for each Class
of Notes on any Payment Date will be equal to the
amount by which the Aggregate Principal Balance of
the Home Equity Loans in the related Group as of
the end of the related Remittance Period plus,
with respect to the Class A-2 Notes, any amount on
deposit in the Pre-Funding Account at such time
disregarding any Pre-Funding Account Earnings
exceed the related Note Balance for such Payment
Date after taking into account payments of Monthly
Principal made on such Class of Notes.
"Pre-Funding Account Earnings" means for any
Payment Date in the Funding Period, the actual
investment earnings earned during the previous
calendar month on amounts on deposit in the
Pre-Funding Account as calculated by the Indenture
Trustee. The "Required Overcollateralization
Amount" for each Class of Notes on any Payment
Date will be equal to the amount specified as such
in the Indenture. The "Overcollateralization
Surplus" for each Class of Notes on any Payment
Date will be the amount, if any, by which the
related
S-11
<PAGE>
Overcollateralization Amount on such Payment Date
exceeds the then applicable Required
Overcollateralization Amount. The
"Overcollateralization Deficit" for each Class of
Notes on any Payment Date will be the amount, if
any, by which the related Note Balance on such
Payment Date (after taking into account the
related Monthly Principal and the related Excess
Cash to be paid on such Payment Date in reduction
of the related Note Balance) exceeds the sum of
(i) the Aggregate Principal Balance of the Home
Equity Loans in the related Group at the end of
the related Remittance Period, (ii) any amount on
deposit in the Pre-Funding Account at such time
disregarding any Pre-Funding Account Earnings, and
(iii) the Overcollateralization Amount for the
other Class.
G. Insurance Policy..... Financial Security Assurance Inc. (the "Note
Insurer") will issue a certificate guaranty
insurance policy (the "Insurance Policy") pursuant
to which it will irrevocably and unconditionally
guarantee payment on each Payment Date and with
respect to each Class of Notes to the Indenture
Trustee for the benefit of the Noteholders of an
amount equal to the related Note Interest and any
Overcollateralization Deficit for such Payment
Date. The amount of the actual payment, if any,
made by the Note Insurer to the Noteholders under
the Insurance Policy on each Payment Date and with
respect to each Class of Notes (the "Insured
Payment") is the sum (without duplication) of (i)
any shortfall in the amount required to pay the
related Overcollateralization Deficit for such
Payment Date from a source other than the
Insurance Policy, (ii) any shortfall in the amount
required to pay the related Note Interest for such
Payment Date from a source other than the
Insurance Policy, (iii) any shortfall in the
amount required to pay the Preference Amount for
such Payment Date and such Class from a source
other than the Insurance Policy and (iv) on the
Stated Maturity Date, the outstanding Principal
Balance on each Class of Notes. The effect of the
Insurance Policy is to guaranty the timely payment
of interest on, and the ultimate payment of the
principal amount of each Class of Notes.
Notwithstanding the foregoing, the Note Insurer is
permitted at its sole option, but is not required,
to pay any losses in connection with the
liquidation of any related Home Equity Loan in
accordance with the Insurance Policy.
A "Preference Amount" means any amount previously
distributed to a Noteholder recovered from such
Noteholder as a voidable preference by a trustee
in bankruptcy pursuant to the United States
Bankruptcy Code in accordance with a final,
nonappealable order of a court having competent
jurisdiction.
Except upon the occurrence of a Note Insurer
Default, the Note Insurer shall have the right to
exercise certain rights of the Noteholders, as
specified in the Indenture, without any consent of
such Noteholders. The Noteholders themselves may
exercise their rights under the Indenture only
with the prior written consent of the Note
Insurer, except as otherwise provided in the
Indenture. In addition, to the extent of
S-12
<PAGE>
unreimbursed payments under the Insurance Policy,
the Note Insurer will be subrogated to the rights
of the Noteholders on which such Insured Payments
were made. In connection with each Insured Payment
on a Note, the Indenture Trustee, as
attorney-in-fact for the holder thereof, will be
required to assign to the Note Insurer the rights
of such Noteholder with respect to the related
Note to the extent of such Insured Payment. "Note
Insurer Default" is defined under the Indenture as
(x) the failure by the Note Insurer to make a
required payment under the Insurance Policy or (y)
the bankruptcy or insolvency of the Note Insurer.
SEE "The Note Insurance Policy" herein.
The Note Insurer is a New York monoline insurance
company engaged in the business of writing
financial guaranty insurance, principally in
respect of securities offered in domestic and
foreign markets. The Note Insurer's claims paying
ability is rated "Aaa" by Moody's Investors
Services, Inc. ("Moody's) and "AAA" by each of
Standard & Poor's Ratings Services, a division of
The McGraw-Hill Companies, Inc. ("Standard &
Poor's"), Fitch IBCA, Inc. ("Fitch"), Japan Rating
and Investment Information, Inc. and Standard &
Poor's (Australia) Pty. Ltd. SEE "The Note
Insurer" herein.
H. Stated
Maturity Date ....... The Stated Maturity Date for the Class A-1 Notes
is December 25, 2029. The Stated Maturity Date for
the Class A-2 Notes is December 25, 2029. The
Stated Maturity Dates for each Class of Notes have
been determined by adding 18 months to the last
Payment Date scheduled for the Initial Home Equity
Loan of the related Group with the latest stated
maturity date. It is anticipated that the actual
final Payment Date for each Class of Notes will
occur significantly earlier than the Stated
Maturity Date. SEE "Certain Prepayment and Yield
Considerations" herein.
DELINQUENCY ADVANCES
AND COMPENSATING INTEREST.. The Master Servicer shall be required to remit to
the Indenture Trustee for deposit to the Note
Account out of the Master Servicer's own funds any
delinquent payment of interest with respect to
each delinquent Home Equity Loan in the related
Group, which payment was not received on or prior
to the related Monthly Remittance Date and was not
theretofore advanced by the Master Servicer,
unless the Master Servicer has determined, in its
reasonable business judgment, that such advance
would not be recoverable. Such amounts of the
Master Servicer's own funds so deposited are
"Delinquency Advances." Such Delinquency Advances
are reimbursable to the Master Servicer, as
provided in the Servicing Agreement. To the extent
that the Master Servicer previously has made
Delinquency Advances with respect to a Home Equity
Loan in the related Group that the Master Servicer
subsequently determines to be nonrecoverable, the
Master Servicer shall be entitled to reimbursement
from the Trust. SEE "The Servicing Agreement"
herein.
S-13
<PAGE>
If a full or partial prepayment of a Home Equity
Loan occurs during any calendar month, any
difference between the interest collected from the
Mortgagor in connection with such prepayment and
the full month's interest at the Coupon Rate that
would be due on the related due date for such Home
Equity Loan (such difference, the "Compensating
Interest"), (but not in excess of the aggregate
Servicing Fee for the related Remittance Period),
will be required to be deposited to the Principal
and Interest Account (or if such difference is an
excess, the Master Servicer shall retain such
excess) on the next succeeding Monthly Remittance
Date by the Master Servicer and shall be included
in the Monthly Remittance Amount to be made
available to the Indenture Trustee on the next
succeeding Monthly Remittance Date.
SERVICING ADVANCES.......... The Master Servicer will be required to pay all
"out of pocket" costs and expenses incurred in the
performance of its servicing obligations,
including, but not limited to, (i) expenditures in
connection with a foreclosed Home Equity Loan
prior to the liquidation thereof, including,
without limitation, expenditures for real estate
property taxes, hazard insurance premiums,
property restoration or preservation
("Preservation Expenses"), (ii) the cost of any
enforcement or judicial proceedings, including
foreclosures and (iii) the cost of the management
and liquidation of Property acquired in
satisfaction of the related Mortgage, unless the
Master Servicer has determined, in its reasonable
business judgment, that such advance would not be
recoverable. Such costs and expenses will
constitute "Servicing Advances." The Master
Servicer may recover a Servicing Advance from the
Trust as provided under the Servicing Agreement.
SEE "The Servicing Agreement" herein.
MONTHLY SERVICING FEE....... With respect to each Group, each Master Servicer
will retain a fee (the "Servicing Fee") equal to
0.50% per annum, payable monthly at one-twelfth
the annual rate of the then outstanding Principal
Balance of each Home Equity Loan in the related
Group serviced as of the first day of each
Remittance Period. The Master Servicer will also
be able to retain late fees, prepayment charges,
and certain other amounts and charges as
additional servicing compensation. The Master
Servicer will compensate the Backup Master
Servicer out of the related Servicing Fee.
THE INITIAL HOME EQUITY LOANS
A. General............ The Initial Home Equity Loans to be transferred by
the Depositor on the Closing Day will consist of
the Group I Initial Home Equity Loans and the
Group II Initial Home Equity Loans. As of the
Cut-off Date, the Group I Home Equity Loans
consisted of 1,177 Home Equity Loans with an
Aggregate Principal Balance totaling
$72,650,717.11 (the "Initial Group I Aggregate
Principal Balance") of which 1,140 were fixed rate
home equity loans and 37 adjustable rate home
equity loans. As of the Cut-Off Date, the Group II
Home Equity Loans consisted of 1,127 Home Equity
Loans with an Aggregate Principal Balance totaling
$75,332,394.79 (the
S-14
<PAGE>
"Initial Group II Aggregate Principal Balance") of
which 1,092 were fixed rate home equity loans and
35 adjustable rate home equity loans.
The Initial Home Equity Loans are secured by first
and second lien mortgages or deeds of trust
primarily on one-to-four family residential
properties located in 22 states, in the case of
Group I, and 27 states in the case of Group II.
As used herein, the term "Aggregate Principal
Balance" means the aggregate of the Principal
Balances of the Home Equity Loans in Group I,
Group II or the Trust Estate, as applicable, at
the related date of determination. None of the
Initial Home Equity Loans are insured by pool
mortgage insurance policies or primary mortgage
insurance policies; however, certain payments of
interest and principal due to the Noteholders are
insured by the Note Insurer pursuant to the Note
Insurance Policy. SEE "The Note Insurance Policy"
herein.
B. Group I Initial
Home Equity Loans.... As of the Cut-Off Date, the average Principal
Balance of the Group I Initial Home Equity Loans
was $61,725.33. The minimum and maximum Principal
Balances of the Group I Initial Home Equity Loans
as of the Cut-Off Date were $6,964.18 and
$225,024.51, respectively. As of the Cutoff Date,
the interest rates (the "Coupon Rates") of the
Group I Initial Home Equity Loans ranged from
7.70% to 17.99%; the weighted average Coupon Rate
of the Group I Initial Home Equity Loans was
approximately 10.29%; the weighted average
Combined Loan-to-Value Ratio of the Group I
Initial Home Equity Loans was approximately
80.24%; the weighted average remaining term to
maturity of the Group I Initial Home Equity Loans
was approximately 279 months; and the remaining
terms to maturity of the Group I Initial Home
Equity Loans ranged from 59 months to 360 months.
As of the Cut-Off Date, approximately 94.62% of
the Aggregate Principal Balance of the Group I
Initial Home Equity Loans were secured by first
mortgages and approximately 5.38% of the aggregate
Principal Balance of the Group I Initial Home
Equity Loans were secured by second mortgages.
Group I Initial Home Equity Loans containing
"balloon" payments represented approximately 3.24%
of the aggregate Principal Balance of the Group I
Initial Home Equity Loans. No Group I Initial Home
Equity Loan will mature later than June 1, 2028.
SEE "Description of the Home Equity Loans" herein.
As of the Cut-Off Date, the weighted average
remaining period to the next interest rate
adjustment date for the Group I Initial Home
Equity Loans with adjustable Coupon Rates (the
"Group I Adjustable Rate Initial Home Equity
Loans"") was approximately 17 months; each Group I
Adjustable Rate Initial Home Equity Loan will have
an initial payment adjustment 6 months after the
first payment date, an initial cap of 1% above the
related initial Coupon Rate (except for 28 loans
with an aggregate Principal Balance as of the
Cut-Off Date of $2,219,357.67 that adjust 24
months after the first payment date and have an
initial cap of 1.00% above the
S-15
<PAGE>
related initial Coupon Rate) and a semi-annual
rate adjustment cap of 1.00% above the then
current interest rate for such Group I Adjustable
Rate Initial Home Equity Loan. The weighted
average Coupon Rate of the Group I Adjustable Rate
Initial Home Equity Loans was approximately 9.85%
per annum. The interest rates borne by the Group I
Adjustable Rate Initial Home Equity Loans as of
the Cut-Off Date ranged from 7.70% per annum to
12.35% per annum. The Group I Adjustable Rate
Initial Home Equity Loans had a weighted average
gross margin as of the Cut-Off Date of
approximately 6.27%. The initial gross margin for
the Group I Adjustable Rate Initial Home Equity
Loans ranged from 4.80% to 8.65%. As of the
Cut-Off Date, the maximum rates at which interest
may accrue on the Group I Adjustable Rate Initial
Home Equity Loans (the "Maximum Rates") ranged
from 13.70% per annum to 18.35% per annum. The
Group I Adjustable Rate Initial Home Equity Loans
had a weighted average Maximum Rate as of the
Cut-Off Date of approximately 15.85% per annum. As
of the Cut-Off Date, the minimum rates at which
interest may accrue on the Group I Adjustable Rate
Initial Home Equity Loans (the "Minimum Rates")
ranged from 7.70% per annum to 12.35% per annum.
As of the Cut-Off Date, the weighted average
Minimum Rate on the Group I Initial Home Equity
Loans was approximately 9.85% per annum.
C. Group II Initial
Home Equity Loans.... As of the Cut-Off Date, the average Principal
Balance of the Group II Initial Home Equity Loans
was $66,843.30. The minimum and maximum Principal
Balances of the Group II Initial Home Equity Loans
as of the Cut-Off Date were $6,762.38 and
$698,651.66, respectively. As of the Cutoff Date,
the Coupon Rates of the Group II Initial Home
Equity Loans ranged from 7.55% to 16.59%; the
weighted average Coupon Rate of the Group II
Initial Home Equity Loans was approximately
10.32%; the weighted average Combined
Loan-to-Value Ratio of the Group II Initial Home
Equity Loans was approximately 80.57%; the
weighted average remaining term to maturity of the
Group II Initial Home Equity Loans was
approximately 286 months; and the remaining terms
to maturity of the Group II Initial Home Equity
Loans ranged from 57 months to 360 months. As of
the Cut-Off Date, approximately 92.07% of the
Aggregate Principal Balance of the Group II
Initial Home Equity Loans were secured by first
mortgages and approximately 7.93% of the aggregate
Principal Balance of the Group II Initial Home
Equity Loans were secured by second mortgages.
Group II Initial Home Equity Loans containing
"balloon" payments represented approximately 3.35%
of the aggregate Principal Balance of the Group II
Initial Home Equity Loans. No Group II Initial
Home Equity Loan will mature later than June 5,
2028. SEE "Description of the Home Equity Loans"
herein.
As of the Cut-Off Date, the weighted average
remaining period to the next interest rate
adjustment date for the Group II Adjustable Rate
Initial Home Equity Loans with adjustable Coupon
Rates (the "Group II Adjustable Rate Initial Home
S-16
<PAGE>
Equity Loans") was approximately 17 months; each
Group II Adjustable Rate Initial Home Equity Loan
will have an initial payment adjustment 6 months
after the first payment date, an initial cap of 1%
above the related initial Coupon Rate (except for
24 loans with an aggregate Principal Balance as of
the Cut-Off Date of $2,748,209.20 that adjust 24
months after the first payment date and have an
initial cap of 1.00% above the related initial
Coupon Rate) and a semi-annual rate adjustment cap
of 1.00% above the then current interest rate for
such Group II Adjustable Rate Initial Home Equity
Loan. The weighted average Coupon Rate of the
Group II Adjustable Rate Initial Home Equity Loans
was approximately 9.55% per annum. The interest
rates borne by the Group II Adjustable Rate
Initial Home Equity Loans as of the Cut-Off Date
ranged from 7.55% per annum to 11.25% per annum.
The Group II Adjustable Rate Initial Home Equity
Loans had a weighted average gross margin as of
the Cut-Off Date of approximately 6.00%. The
initial gross margin for the Group II Adjustable
Rate Initial Home Equity Loans ranged from 4.80%
to 8.45%. As of the Cut-Off Date, the maximum
rates at which interest may accrue on the Group II
Adjustable Rate Initial Home Equity Loans (the
"Maximum Rates") ranged from 13.55% per annum to
17.25% per annum. The Group II Adjustable Rate
Initial Home Equity Loans had a weighted average
Maximum Rate as of the Cut-Off Date of
approximately 15.54% per annum. As of the Cut-Off
Date, the minimum rates at which interest may
accrue on the Group II Adjustable Rate Initial
Home Equity Loans (the "Minimum Rates") ranged
from 7.55% per annum to 11.25% per annum. As of
the Cut-Off Date, the weighted average Minimum
Rate on the Group II Initial Home Equity Loans was
approximately 9.54% per annum.
THE SUBSEQUENT
HOME EQUITY LOANS........... In addition to the Initial Home Equity Loans
transferred to the Issuer on the Closing Date, the
Issuer may acquire up to approximately
$27,017,605.21 aggregate Principal Balance in
Subsequent Home Equity Loans which would only be
allocated to Group II. The Subsequent Home Equity
Loans, if available, will be originated or
purchased by the Sponsor, sold by the Sponsor in
the ordinary course of its business, to the Seller
and transferred by the Seller in the ordinary
course of its business, to the Transferor. The
Transferor will then cause the Subsequent Home
Equity Loans to be sold to the Depositor which
will convey such interests to the Issuer. The
Subsequent Home Equity Loans, as well as all Home
Equity Loans, must conform to certain specified
characteristics. SEE "Description of the Home
Equity Loans --Conveyance of Subsequent Home
Equity Loans".
PRE-FUNDING FEATURE......... On the Closing Date, approximately $27,017,605.21
(the "Original Group II Pre-Funded Amount") will
be deposited with the Indenture Trustee and used
by the Issuer to purchase the Subsequent Home
Equity Loans. Such Subsequent Home Equity Loans
shall be allocated to Group II. The Issuer will be
obligated, subject to the satisfaction of certain
conditions described herein, to purchase the
Subsequent Home Equity
S-17
<PAGE>
Loans from time to time during the Funding Period,
subject to the availability thereof. In connection
with each purchase of a Subsequent Home Equity
Loan, the Issuer will be required to pay to the
Depositor a cash purchase price equal to the
Principal Balance thereof as of the related
Cut-Off Date from the Pre-Funding Account. The
Issuer may purchase the Subsequent Home Equity
Loans only from the Depositor and not from any
other person and the Depositor may purchase the
Subsequent Home Equity Loans only from an
affiliate of the Transferor and not from any other
person. SEE "Description of the Home Equity
Loans--Conveyance of Subsequent Home Equity Loans"
herein.
The "Funding Period" is the period from the
Closing Date until the earliest of (i) the date on
which the amount on deposit in the Pre-Funding
Account is less than $100,000.00, (ii) the date on
which a Master Servicer Termination Event occurs
under the Servicing Agreement or (iii) July 31,
1998. The Original Group II Pre-Funded Amount, as
reduced from time to time by the amount thereof
applied to the purchase of Subsequent Home Equity
Loans is referred to herein as the "Group II
Pre-Funded Amount." Any Group II Pre-Funded Amount
remaining in the Pre-Funding Account at the end of
the Funding Period will be distributed to the
related Noteholders as an additional distribution
of principal on the Payment Date which follows the
end of the Funding Period.
CAPITALIZED
INTEREST ACCOUNT............ On the Closing Date, a portion of the proceeds of
the sale of the Notes will be required to be
deposited in an account (the "Capitalized Interest
Account") in the name of the Indenture Trustee on
behalf of the Issuer. The amount deposited therein
will be used, as necessary, by the Indenture
Trustee during the Funding Period to fund the
negative carry on the Group II Pre-Funded Amount
and any Home Equity Loans in either Group that do
not have a payment due in June 1998 or July 1998.
Any amounts remaining in the Capitalized Interest
Account on the Payment Date which follows the end
of the Funding Period and not used for such
purpose on such Payment Date are required to be
paid directly to the Transferor, or an affiliate
thereof, on such Payment Date.
OPTIONAL REDEMPTION......... The Master Servicer will have the right to
purchase all the Home Equity Loans in a Group on
any Monthly Remittance Date (each, a "Master
Servicer Optional Termination Date") when the
aggregate Principal Balance of the Home Equity
Loans in such Group as of the end of the preceding
Remittance Period has declined to 10% or less of
the Initial Aggregate Principal Balance plus the
aggregate outstanding Principal Balance of any
Subsequent Home Equity Loans as of their
respective Cut-Off Dates (such sum, the "Maximum
Collateral Amount") with respect to a Group.
MATERIAL FEDERAL INCOME TAX
CONSEQUENCES................ In the opinion of Tax Counsel (as defined herein)
for Federal income tax purposes, the Notes will be
characterized as debt and the Issuer will not be
characterized as an association (or a
S-18
<PAGE>
publicly traded partnership) taxable as a
corporation or as a taxable mortgage pool. The
Depositor, the Sponsor, the Transferor, the Seller
and the Issuer agree, and each Noteholder, by the
acceptance of a Note, will agree to treat the
Notes as indebtedness for Federal income tax
purposes. See "Material Federal Income Tax
Consequences" herein and "Material Federal Income
Tax Consequences" in the Prospectus for additional
information concerning the application of Federal
income tax laws to the Trust and the Notes.
ERISA CONSIDERATIONS........ Subject to the considerations discussed under
"ERISA Considerations" herein and in the
Prospectus, the Notes may be acquired and held by
employee benefit plans and other retirement plans
and arrangements subject to the provisions of the
Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), or Section 4975 of the Code
(each, a "Plan"). The Issuer believes that the
Notes will be treated as debt obligations without
significant equity features for purposes of
regulations of the Department of Labor set forth
in 29 C.F.R.ss. 2510.3-101 (the "Plan Asset
Regulations"). Accordingly, a Plan that acquires a
Note should not be treated as having acquired a
direct interest in the assets of the Issuer for
purposes of the Plan Asset Regulations. However,
even if the Notes are treated as debt for purposes
of the Plan Asset Regulations, the acquisition or
holding of the Notes by or on behalf of a Plan
still could be considered to give rise to a
prohibited transaction under certain
circumstances. By purchasing a Note, an investor
will be deemed to represent either (i) that it is
not a Plan and is not acting on behalf of a Plan
or investing the assets of a Plan or (ii) that its
purchase and holding of a Note will be covered by
a Department of Labor Prohibited Transaction Class
Exemption. SEE "ERISA Considerations" herein.
LEGAL INVESTMENT
CONSIDERATIONS.............. The Notes will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA").
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.
RATING...................... It is a condition to the issuance of the Notes
that they be rated "AAA" by Standard & Poor's and
"Aaa" by Moody's. (Moody's and Standard & Poor's
are collectively referred to as the "Rating
Agencies"). A security rating is not a
recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any
time by the assigning Rating Agency. SEE "Rating
of the Notes" herein.
RISK FACTORS................ For a discussion of all material risk factors that
should be considered by prospective investors in
the Notes, including
S-19
<PAGE>
certain yield and prepayment risks, SEE "Risk
Factors" herein and in the Prospectus.
S-20
<PAGE>
RISK FACTORS
For a discussion of all material risk factors in connection with the
purchase of the Notes, prospective investors should consider, among other
things, the following risk factors (as well as the factors set forth under "Risk
Factors" in the Prospectus). Any statistical information presented below is
based upon the characteristics of the Initial Home Equity Loans as of the
Cut-Off Date. Such information does not take into account Subsequent Home Equity
Loans and may vary as a result of the possibility that certain Home Equity Loans
may prepay in full or be removed from the pool of Home Equity Loans prior to the
Closing Date.
AN INVESTMENT IN THE NOTES MAY BE AN ILLIQUID INVESTMENT WHICH MAY RESULT IN THE
HOLDER HOLDING SUCH INVESTMENT TO MATURITY
There is currently no secondary market for the Notes. The Underwriter
currently intends to make a market in the Notes, but it is under no obligation
to do so. There can be no assurance that a secondary market will develop or, if
a secondary market does develop, that it will provide the Noteholders with
liquidity of investment or that it will continue for the life of the Notes.
GIVEN ITS LIMITED OPERATING HISTORY, THE SPONSOR HAS LIMITED HISTORICAL LOSS AND
DELINQUENCY DATA RELATING TO ITS HOME EQUITY LOAN PORTFOLIO
The Sponsor began originating home equity loans in 1989. Prior to June
1997, the Sponsor sold all of its home equity loans in whole loan transactions
on a servicing released basis and consequently, the Sponsor has limited
historical loss and delinquency data relating to its home equity loan portfolio
that may be referred to for purposes of estimating the future delinquency and
loss experience of home equity loans similar to the Home Equity Loans being sold
to the Issuer. SEE "The Sponsor and Master Servicer--Historical Servicing
Experience of Master Servicer" herein.
THE MASTER SERVICER HAS LIMITED EXPERIENCE SERVICING HOME EQUITY LOANS
The servicing of home equity loans of the type originated or purchased
by the Sponsor requires special skill and diligence. The Master Servicer has
limited experience servicing home equity loans. In addition, the Master Servicer
is not a FNMA-approved servicer of conventional home equity loans. Under the
terms of the Servicing Agreement, the Master Servicer will be responsible for
the servicing of all the Home Equity Loans and will directly service all of the
Home Equity Loans. Any failure of the Master Servicer to adequately service the
Home Equity Loans may result in a higher default rate which may result in
accelerated prepayment on the Notes. In addition, the Servicing Agreement
provides that if the Master Servicer is terminated, servicing of the Home Equity
Loans will be transferred, with the consent of the Note Insurer, to the Master
Backup Servicer or, unless a Note Insurer Default has occurred and is
continuing, to another successor Master Servicer selected by the Note Insurer.
SEE "The Servicing Agreement" herein. During and immediately following a
servicing transfer, interruptions in servicing may occur and the Home Equity
Loans may suffer a higher default rate which may result in accelerated
prepayment on the Notes.
AS A RESULT OF THE UNDERWRITING STANDARDS, HOME EQUITY LOANS ARE LIKELY TO
EXPERIENCE RATES OF DELINQUENCY, FORECLOSURE AND BANKRUPTCY THAT ARE HIGHER THAN
THOSE EXPERIENCED BY HOME EQUITY LOANS UNDERWRITTEN IN A MORE TRADITIONAL MANNER
The Sponsor's underwriting standards generally are less stringent than
those of FNMA or FHLMC with respect to a borrower's capacity, collateral and in
certain other respects. The Home Equity Loans originated or acquired by the
Sponsor will have been made to borrowers that typically have limited access to
traditional mortgage financing for a variety of reasons, such as impaired past
credit experience, limited credit history, insufficient home equity value, or a
high level of debt-to-income ratios. As a result of this approach to
underwriting, the Home Equity Loans sold to the Issuer are likely to experience
higher rates of delinquencies, defaults and foreclosures than home equity loans
underwritten in a more traditional manner.
S-21
<PAGE>
In addition, borrowers often have financing needs in excess of the
amount that the Sponsor's first lien mortgage underwriting guidelines described
under "The Sponsor and Master Servicer" herein would otherwise permit the
Sponsor to finance. In such circumstances, the Sponsor frequently offers a
"piggyback" second lien mortgage in addition to the Sponsor's first lien
mortgage to finance such excess amount up to a maximum Combined
Loan-to-Value-Ratio of 125.01%, and, with respect to any Group I Home Equity
Loans conveyed to the Issuer, up to a maximum Combined Loan-to-Value Ratio of
100% (except for 18 loans which had a Combined Loan-to Value-Ratio not greater
than 125.00%) and, with respect to any Group II Home Equity Loans conveyed to
the Issuer, up to a maximum Combined Loan-to-Value Ratio of 100% (except for 17
loans which had a Combined Loan-to Value-Ratio not greater than 125.01%). The
Trust Estate contains "piggyback" second lien mortgages secured by the same
Properties that secure the first lien mortgages that are also included in the
Trust Estate. Furthermore, approximately 48.46% of the Aggregate Principal
Balance of the Group I Initial Home Equity Loans and approximately 44.95% of the
Aggregate Principal Balance of the Group II Initial Home Equity Loans that are
secured by first lien mortgages are subject to piggyback second lien mortgages.
As a result, although the weighted average Combined Loan-to-Value Ratio of the
Group I Initial Home Equity Loans as of the Cutoff Date is approximately 80.24%
and the weighted average Combined Loan-to-Value Ratio of the Group II Initial
Home Equity Loans as of the Cut-Off Date is 80.57%, borrowers with piggyback
second lien mortgages may have little or no equity in their homes. It is
expected that borrowers of such nonconforming Home Equity Loans with little or
no equity in their homes will have a higher incidence of default than borrowers
of such nonconforming loans with substantial equity in their homes. Any
increased prepayments on the Home Equity Loans resulting therefrom will be borne
by the Noteholders.
No assurance can be given that the values of the Properties will not
decline from those on the dates the related Home Equity Loans were originated
and any such decline could render the information set forth herein with respect
to the Combined Loan-to-Value Ratios of such Home Equity Loans an unreliable
measure of security for the related debt. If the residential real estate market
should experience an overall decline in property values such that the
outstanding Principal Balances of the Home Equity Loans become equal to or
greater than the values of such Properties, the actual rate of delinquencies,
foreclosures and losses on the related Home Equity Loans could be higher than
those now generally experienced in the mortgage lending industry. Even assuming
that the Properties provide adequate security for the Home Equity Loans,
substantial delays could be encountered in connection with the foreclosure and
liquidation of defaulted Home Equity Loans and corresponding delays in the
receipt of related proceeds by Noteholders could occur. In the event that any
Properties fail to provide adequate security for the related Home Equity Loans,
any resulting losses will be covered by funds made available through operation
of the overcollateralization feature described herein, or, if necessary, by
amounts paid under the Insurance Policy to the extent of Note Interest due to
the Noteholders on the related Payment Date and the amount of any
Overcollateralization Deficit with respect to such Payment Date. SEE
"Description of the Home Equity Loans" and "The Servicing Agreement" herein.
PRE-FUNDING ACCOUNT MAY ADVERSELY AFFECT INVESTMENT IN THE CLASS A-2 NOTES.
If the principal amount of eligible Subsequent Home Equity Loans
available during the Funding Period and sold by the Depositor to the Issuer is
less than 100% of the Original Group II Pre-Funded Amount, a prepayment of
principal to the Holders of the Class A-2 Notes will occur as described herein.
In addition, any conveyance of Subsequent Home Equity Loans is subject to the
following conditions, among others: (i) each such Subsequent Home Equity Loan
must satisfy the representations and warranties specified in the agreement
pursuant to which such Subsequent Home Equity Loans are caused to be transferred
from the Transferor to the Depositor and from the Depositor to the Issuer (each
a "Subsequent Transfer Agreement") and in the Loan Sale Agreement and the Loan
Transfer Agreement; (ii) the Transferor will not select such Subsequent Home
Equity Loans in a manner that it believes is adverse to the interests of the
Noteholders; (iii) the Transferor will deliver or cause to be delivered certain
opinions of counsel with respect to the validity of the conveyance of such
Subsequent Home Equity Loans; (iv) as of each Cut-Off Date applicable thereto,
the Home Equity Loans, including the Subsequent Home Equity Loans to be conveyed
by the Depositor to the Issuer as of such Cut-Off Date, will satisfy the
criteria described herein under "Description of the Home Equity
Loans--Conveyance of Subsequent Home Equity Loans" herein; and (v) the Master
Servicer has obtained the prior written consent of the Note Insurer.
To the extent that amounts on deposit in the Pre-Funding Account have
not been fully applied to the purchase of Subsequent Home Equity Loans by the
Issuer by the end of the Funding Period, the Class A-2 Noteholders will receive
a prepayment of principal in an amount equal to the amount remaining in the
Pre-Funding
S-22
<PAGE>
Account on the Payment Date following the end of the Funding Period.
Although no assurances can be given, the Transferor and Sponsor expect that the
principal amount of Subsequent Home Equity Loans sold to the Depositor for sale
to the Issuer will require the application of substantially all amounts on
deposit in the Pre-Funding Account and that there will be no material Prepayment
to the Class A-2 Noteholders from the Pre-Funding Account.
Each Subsequent Home Equity Loan must satisfy the eligibility criteria
referred to above at the time of its addition. Following the transfer of
Subsequent Home Equity Loans to the Trust, the Transferor anticipates that the
aggregate characteristics of the Home Equity Loans will not vary significantly
from those of the Initial Home Equity Loans. SEE "Description of the Home Equity
Loans--Conveyance of Subsequent Home Equity Loans" herein.
HOME EQUITY LOANS SECURED BY SECOND LIENS MAY RESULT IN DELAYS IN DISTRIBUTIONS
OR LOSSES
Because the Home Equity Loans are secured in certain cases by second
liens that are subordinate to the rights of the mortgagee or beneficiary under
the related first mortgage or deed of trust, the proceeds from any liquidation,
insurance or condemnation proceedings will be available to satisfy the
outstanding balance of such a second Home Equity Loan only to the extent that
the claims of such senior mortgagee or beneficiary have been satisfied in full,
including any related foreclosure costs. In addition, a junior mortgagee may not
foreclose on the property securing a second mortgage unless it forecloses
subject to the senior mortgage, in which case it must either pay the entire
amount due on the senior mortgage to the senior mortgagee at or prior to the
foreclosure sale or undertake the obligation to make payments on the senior
mortgage in the event the mortgagor is in default thereunder. In servicing
second mortgages in its portfolio, it is generally the Sponsor's practice to
satisfy the senior mortgage at or prior to the foreclosure sale. The Issuer will
have no source of funds to satisfy the senior mortgage or make payments due to
the senior mortgagee. The Master Servicer generally will be required to advance
such amounts in accordance with the Servicing Agreement. SEE "The Servicing
Agreement" herein.
Even assuming that a Mortgaged Property provides adequate security for
the related Home Equity Loan, substantial delays could be encountered in
connection with the liquidation of a Home Equity Loan that is delinquent, and
resulting shortfalls in distributions to Noteholders could occur. Liquidation
expenses (such as legal fees, real estate taxes, and maintenance and
preservation expenses) will reduce the proceeds payable to Noteholders and
thereby reduce the security for the Home Equity Loans.
Approximately 5.38% of the Group I Initial Home Equity Loans by
Principal Balance as of the Cut-Off Date and approximately 7.93% by Principal
Balance as of the Cut-Off Date of the Group II Home Equity Loans are secured by
second mortgages or deeds of trust. Home Equity 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, the Issuer and,
accordingly, the Noteholders, will 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 Home Equity Loans" in the Prospectus.
GEOGRAPHIC CONCENTRATION OF PROPERTIES MAY RESULT IN HIGHER LOSSES IF PARTICULAR
REGIONS EXPERIENCE DOWNTURNS
Approximately 35.10% and 17.34% of the Group I Initial Home Equity
Loans and 32.60% and 15.54% of the Group II Home Equity Loans (in each case by
Initial Aggregate Principal Balance) are secured by Properties located in North
Carolina and Virginia respectively. Adverse economic conditions in North
Carolina or Virginia (which may not affect real property values) may affect the
timely payment by borrowers of scheduled payments of principal and interest on
such Home Equity Loans and, accordingly, the actual rates of delinquencies,
foreclosures and losses on such Home Equity Loans could be higher than those
currently experienced in the mortgage lending industry in general.
S-23
<PAGE>
PREPAYMENT OF THE HOME EQUITY LOANS MAY ADVERSELY AFFECT THE YIELD TO MATURITY
OF THE CLASS A-1 AND CLASS A-2 NOTES
Many of the Initial Home Equity Loans may be prepaid by the related
Mortgagors in whole or in part, at any time without payment of any prepayment
fee or penalty. In addition, a substantial portion of the Initial Home Equity
Loans in Group I and Group II contain due-on-sale provisions which, to the
extent enforced by the Master Servicer, will result in prepayment of such Home
Equity Loans. SEE "Certain Prepayment and Yield Considerations" herein and
"Certain Legal Aspects of the Loans--Enforceability of Prepayment and Late
Payment Fees" in the Prospectus. The rate of prepayments on Home Equity Loans is
sensitive to prevailing interest rates. Generally, if prevailing interest rates
fall significantly below the interest rates on the fixed rate home equity loans,
the fixed rate home equity loans are likely to be subject to higher prepayment
rates than if prevailing rates remain at or above the interest rates on the
fixed rate home equity loans. In addition, in a declining interest rate
environment, adjustable rate home equity loans could be subject to higher
prepayment rates because of the availability of fixed rate home equity loans at
the lower interest rates. Conversely, if prevailing interest rates rise
significantly, the rate of prepayments on fixed rate and adjustable rate Home
Equity Loans is likely to decrease. In addition, repurchases or purchases from
the Issuer of Home Equity Loans required or permitted to be made by the Sponsor
and the Master Servicer under the Loan Sale Agreement, the Loan Transfer
Agreement and the Servicing Agreement will have the same effect on the holders
of the Notes as a prepayment of the Home Equity Loans.
The average life of the Class A-1 and Class A-2 Notes, and, if
purchased at other than par, the yields realized by holders of each Class of
Notes will be sensitive to levels of payment (including prepayments relating to
the Group I Home Equity Loans and Group II Home Equity Loans respectively (the
"Prepayments")) on the related Group of Home Equity Loans.
In general, the yield on a Class A-1 or Class A-2 Note that is
purchased at a premium from the outstanding principal amount thereof will be
adversely affected by a higher than anticipated level of Prepayments of the Home
Equity Loans in the related Group and enhanced by a lower than anticipated
level. Conversely, the yield on a Class A-1 or Class A-2 Note that is purchased
at a discount from the outstanding principal amount thereof will be enhanced by
a higher than anticipated level of Prepayments in the related Group and
adversely affected by a lower than anticipated level. SEE "Certain Prepayment
and Yield Considerations" herein.
Prepayments, liquidations, repurchases and purchases of the Home Equity
Loans will result in distributions to Noteholders of principal amounts that
would otherwise be distributed over the remaining terms of the Home Equity
Loans. The extent to which the yield to maturity of the Class A-1 and Class A-2
Notes may vary from the anticipated yield will depend upon the degree to which
it is purchased at a premium or discount and the degree to which the timing of
payment thereon is sensitive to prepayments, liquidations, repurchases and
purchases of the related Group of Home Equity Loans. In the case of any Note
purchased at a discount, an investor should consider the risk that a slower than
anticipated rate of principal payments on the related Group of Home Equity Loans
could result in an actual yield to such investor that is lower than the
anticipated yield and, in the case of any Note purchased at a premium, the risk
that a faster than anticipated rate of prepayments, liquidations, repurchases
and purchases could result in an actual yield to such investor that is lower
than the anticipated yield. Further, there can be no assurance that Noteholders
will be able to reinvest distributions in respect of prepayments, liquidations,
repurchases and purchases of the related Group of Home Equity Loans in
securities or other instruments that have a yield comparable to that of the
Note.
CREDIT ENHANCEMENT DOES NOT APPLY TO PREPAYMENT RISK
In general, the protection afforded by the Insurance Policy, the
limited use of Excess Cash with respect to one Class to fund certain shortfalls
with respect to the other Class and certain reserve accounts is protection for
credit risk and not for prepayment risk. A claim may not be made under the
Insurance Policy, in an attempt to guarantee or insure that any particular rate
of prepayment is experienced by the Trust Estate. SEE "The Note Insurance
Policy" herein.
S-24
<PAGE>
PAYMENTS OF EXCESS CASH MAY AFFECT THE YIELD TO MATURITY ON THE CLASS A-1 AND
CLASS A-2 NOTES
In respect of a Group, related Excess Cash will be paid in reduction of
the Note Balance on each Payment Date to the extent the then applicable Required
Overcollateralization Amount exceeds the applicable Overcollateralization Amount
on such Payment Date. If purchased at a premium or a discount, the yield to
maturity on the related Note will be affected by the rate at which Excess Cash
is paid to Noteholders in the related Group in reduction of the related Note
Balance. If the actual rate of such Excess Cash payments is slower than the rate
anticipated by an investor who purchases a Note at a discount, the actual yield
to such investor will be lower than such investor's anticipated yield. If the
actual rate of such Excess Cash payments is faster than the rate anticipated by
an investor who purchases a Note at a premium, the actual yield to such investor
will be lower than such investor's anticipated yield. The amount of Excess Cash
in respect of a Group on any Payment Date will be affected by the actual amount
of interest received, collected or recovered by the Master Servicer in respect
of the Home Equity Loans in the related Group during the related Remittance
Period and such amount will be influenced by changes in the weighted average of
the Coupon Rates resulting from prepayments and liquidations of Home Equity
Loans in the related Group and adjustments in the Coupon Rates of the adjustable
rate Home Equity Loans in the related Group. The amount of Excess Cash payments
applied in reduction of the related Note Balance on each Payment Date will be
based on the then applicable Required Overcollateralization Amount, which may
increase or decrease during the period the related Notes remain outstanding. The
Indenture generally provides that the Required Overcollateralization Amount may,
over time, decrease or increase, subject to certain floors, caps and triggers
including triggers that allow the related Required Overcollateralization Amount
to decrease or "step down" based on the performance on the related Home Equity
Loans with respect to certain delinquency rate tests specified in the Indenture.
Any increase in the Required Overcollateralization Amount may result in an
accelerated rate of amortization of the related Notes until the related
Overcollateralization Amount equals such Required Overcollateralization Amount
and any decrease in a Required Overcollateralization Amount will result in a
decelerated rate of amortization of the related Notes until the related
Overcollateralization Amount equals such Required Overcollateralization Amount.
SEE "Certain Prepayment and Yield Considerations" herein.
NOTES ARE NON-RECOURSE OBLIGATIONS
The Notes will be non-recourse obligations solely of the Issuer and
will not represent an obligation of or interest in the Sponsor, the Seller, the
Master Servicer, the Owner Trustee, the Depositor, the Indenture Trustee, the
Depositor, the Note Insurer or any of their respective affiliates, except as
described herein. Neither the Notes nor the Home Equity Loans are or will be
guaranteed or insured by any governmental agency or instrumentality, or by the
Sponsor, the Seller, the Master Servicer, the Owner Trustee, the Depositor, the
Indenture Trustee or any of their respective affiliates. The Notes are covered
by the Insurance Policy, as and to the extent described under the caption "The
Note Insurance Policy" herein. The assets included in the Trust Estate payments
under the Insurance Policy, if any, will be the sole source of payments on the
Notes, and there will be no recourse to the Issuer, the Sponsor, the Seller, the
Master Servicer, the Owner Trustee, the Depositor, the Indenture Trustee or any
of their respective affiliates, or any other entity, in the event that such
assets or payments are insufficient or otherwise unavailable to make all
payments provided for under the Notes.
BOOK-ENTRY REGISTRATION MAY REDUCE THE LIQUIDITY OF THE NOTES
Issuance of the Notes in book-entry form may reduce the liquidity of
the Notes in the secondary trading market because investors may be unwilling to
purchase Notes for which they cannot obtain physical certificates.
Because transactions in the Notes can be effected only through DTC,
Cedel, Euroclear, participating organizations, indirect participants and certain
banks, the ability of a Beneficial Owner to pledge a Note to persons or entities
that do not participate in the DTC, Cedel or Euroclear system, or otherwise to
take actions in respect of such Note, may be limited due to lack of a physical
certificate representing such Note.
Beneficial Owners may experience some delay in their receipt of
payments of interest of and principal on the Notes because such payments will be
forwarded by the Indenture Trustee to DTC and DTC will credit such payments to
the accounts of its Participants, which will thereafter credit them to the
accounts of Beneficial Owners either directly or indirectly through indirect
participants. SEE "Description of the Notes--Book-Entry Registration
S-25
<PAGE>
and Definitive Notes" herein; "ANNEX A: Global Clearance, Settlement and Tax
Documentation Procedures" hereto and "Description of the Securities--Form of
Securities" in the Prospectus.
OTHER LEGAL CONSIDERATIONS MAY APPLY TO THE ORIGINATION, SERVICING AND
COLLECTION OF THE HOME EQUITY LOANS.
Applicable state laws generally regulate interest rates and other
charges, require certain disclosures, and require licensing of the Sponsor. 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 Home Equity Loans. The Sponsor will be required to repurchase any Home
Equity Loans which, at the time of origination, did not comply with applicable
federal and state laws and regulations. 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 Trust to
collect all or part of the principal of or interest on the Home Equity Loans,
may entitle the borrower to a refund of amounts previously paid and, in
addition, could subject the Sponsor to damages and administrative enforcement.
SEE "Certain Legal Aspects of Loans" in the Prospectus.
The Home Equity 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 Home Equity 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; and
(iii) the Fair Credit Reporting Act, which regulates the
use and reporting of information related to the borrower's credit experience.
In addition, approximately 3.83% of the Group I Home Equity Loans by
Group I Initial Aggregate Principal Balance and approximately 3.84% of the Group
II Home Equity Loans by Group II Initial Aggregate Principal Balance will be
subject to the Riegle Community Development and Regulatory Improvement Act of
1994 (the "Riegle Act"), which incorporates the Home Ownership and Equity
Protection Act of 1994. The Riegle Act adds certain additional provisions to
Regulation Z, which is the implementing regulation of the Truth-in-Lending Act.
These provisions impose additional disclosure and other requirements on
creditors with respect to non-purchase money mortgage loans with high interest
rates or high upfront fees and charges. In general, mortgage loans within the
purview of the Riegle Act have annual percentage rates over 10% greater than the
yield on Treasury Securities of comparable maturity and/or fees and points which
exceed the greater of 8% of the total loan amount or $400. The provisions of the
Riegle Act apply on a mandatory basis to all applicable mortgage loans
originated on or after October 1, 1995. These provisions can impose specific
statutory liabilities upon creditors who fail to comply with their provisions
and may affect the enforceability of the related loans. In addition, any
assignee of the creditor would generally be subject to all claims and defenses
that the consumer could assert against the creditor, including, without
limitation, the right to rescind the home equity loan. The Sponsor will
represent and warrant in the Loan Sale Agreement that each Home Equity Loan was
originated in compliance with all applicable laws including the Truth-in-Lending
Act, as amended.
Violations of certain provisions of these federal laws may limit the
ability of the Master Servicer to collect all or part of the principal of or
interest on the Home Equity Loans and, in addition, could subject the Master
Servicer or the Sponsor to damages and administrative enforcement. The Sponsor
will be required to repurchase any Home Equity Loans which, at the time of
origination did not comply with such federal laws or regulations. SEE "Certain
Legal Aspects of Loans" in the Prospectus.
S-26
<PAGE>
CERTAIN ORIGINATION FEES MAY BE CHALLENGED IN LEGAL ACTIONS AND, IF SUCH LEGAL
ACTIONS WERE SUCCESSFUL, LEAD TO A REDUCTION IN THE PRINCIPAL BALANCE OF THE
HOME EQUITY LOAN.
Fees earned on the origination of loans, placement of related insurance
and other services provided by the Sponsor are often paid by the borrower out of
related loan proceeds. From time to time, in the ordinary course of their
businesses, originators of mortgage loans have been named in legal actions
brought by mortgagors challenging the amount or method of imposing or disclosing
such fees. To date, no such action has been decided against the Sponsor. If such
an action against the Sponsor with respect to any Home Equity Loan were
successful, a court might require that the Principal Balances of the related
Home Equity Loans be reduced by the amount of contested fees or charges. Any
such reductions could result in substantial realized losses during one or more
Remittance Periods, potentially requiring accelerated distributions in reduction
of the Aggregate Principal Balance of the Home Equity Loans.
RISK ASSOCIATED WITH THE NOTE INSURER.
If the protection afforded by over-collateralization is insufficient
and if, upon the occurrence of a Overcollateralization Deficit, the Note Insurer
is unable to meet its obligations under the Note Insurance Policy, then the
holders of the Notes could experience a loss on their investment.
DESCRIPTION OF THE NOTE
The Notes will be issued pursuant to the Indenture. The summaries of
certain provisions of the Indenture set forth below and under the caption "The
Agreements" in the Prospectus, while complete in material respects, do not
purport to be exhaustive. For more details regarding the terms of the Indenture,
prospective investors in the Notes are advised to review the Indenture, a copy
of which the Seller will provide (without exhibits) without charge upon written
request addressed to the Sponsor at 4830 Koger Boulevard, Greensboro, North
Carolina 27407.
GENERAL
The Notes will be secured by the Trust Estate created by the Indenture.
The Notes represent non-recourse obligations of the Issuer, and proceeds of the
assets in the Trust Estate and payments under the Insurance Policy, if any, will
be the only sources of payments on the Notes. The Notes will not represent an
interest in or obligation of the Sponsor, the Master Servicer, the Indenture
Trustee, the Owner Trustee, the Depositor, the Underwriter, the Note Insurer,
any of their respective affiliates or any other entity, and will not represent
an interest in or recourse obligation of the Issuer.
The assets of the Trust Estate will consist of (i) two Groups of
nonconforming, home equity loans transferred to the Issuer on the Closing Date
(the "Initial Home Equity Loans"), additional nonconforming, fixed rate and
adjustable rate home equity loans, if any, transferred to the Issuer and
allocated to Group II during the Funding Period (the "Subsequent Home Equity
Loans," and, together with the Initial Home Equity Loans, the "Home Equity
Loans"); (ii) all interest and principal due under the respective Home Equity
Loans on or after the related Cut-Off Date; (iii) security interests in the
properties securing such Home Equity Loans (the "Properties"); (iv) amounts on
deposit in the Note Account, Pre-Funding Account and Capitalized Interest
Account; (v) the Issuer's rights under the Loan Transfer Agreement and the
Servicing Agreement; and (vi) certain other property.
All payments on the Notes will be made by or on behalf of the Indenture
Trustee to each Noteholder of record on the Record Date for the related Payment
Date. Payments on Notes issued in book-entry form will be made by or on behalf
of the Indenture Trustee to DTC. Payments on Definitive Notes generally will be
made either (i) by check mailed to the address of each Noteholder as it appears
in the register maintained by the Indenture Trustee or (ii) by wire transfer of
immediately available funds to the account of a Noteholder, if such Noteholder
(a) is the registered holder of Definitive Notes having an initial principal
amount of at least $1,000,000 and (b) has provided the Indenture Trustee with
wiring instructions in writing five days prior to the related Record Date or has
provided the Indenture Trustee with such instructions for any previous Payment
Date. A fee may be charged by the Indenture
S-27
<PAGE>
Trustee to a Noteholder of Definitive Notes for any payment made by wire
transfer. Notwithstanding the above, the final payment in redemption of any
Definitive Note will be made only upon presentation and surrender of such
Definitive Note at the office or agency designated by the Indenture Trustee for
that purpose.
The Notes will be issued in denominations of not less than $25,000
principal amount and in integral dollar multiples of $1,000 in excess thereof,
with the exception of one Note of each Class which may be issued in a lesser
amount.
BOOK-ENTRY REGISTRATION AND DEFINITIVE NOTES
The Notes initially will be Book-Entry Notes (the "Book-Entry Notes").
Beneficial Owners will hold such Notes through DTC, in the United States, or
Cedel or Euroclear, in Europe, if they are participants of such systems, or
indirectly through organizations that are participants in such systems. The
Book-Entry Notes initially will be registered in the name of Cede & Co., the
nominee of DTC. Cedel and Euroclear will hold omnibus positions on behalf of
Cedel Participants and Euroclear Participants, respectively, 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 Morgan Guaranty Trust
Company of New York ("Morgan") will act as depositary for Euroclear (Citibank
and Morgan, in such capacities, individually the "Relevant Depositary" and
collectively, the "European Depositaries"). Except as described below, no person
acquiring a Book-Entry Note will be entitled to receive a Definitive Note.
Unless and until Definitive Notes are issued, it is anticipated that the only
"Noteholder" will be Cede & Co., as nominee of DTC or Citibank or Morgan, as
nominees of Cedel and Euroclear, respectively. Beneficial Owners will not be
Noteholders as that term is used in the Indenture. Beneficial Owners are
permitted to exercise their rights only indirectly through DTC and its
Participants (including Cedel and Euroclear).
The beneficial ownership of a Book-Entry Note 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 Note will be recorded on the records of DTC (or of
a participating firm that acts as agent for the Financial Intermediary, whose
interest will in turn be recorded on the records of DTC, if the Beneficial
Owner's Financial Intermediary is not a Participant and on the records of Cedel
or Euroclear, as appropriate).
Beneficial Owners will receive all payments of principal of, and
interest on, the Notes from the Indenture Trustee through DTC and its
Participants (including Cedel and Euroclear). While the Notes 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 Notes and is required to receive and transmit payments
of principal of, and interest on, such Notes. Participants and indirect
participants with whom Beneficial Owners have accounts with respect to
Book-Entry Notes are similarly required to make book-entry transfers and receive
and transmit such payments on behalf of their respective Beneficial Owners.
Accordingly, although Beneficial Owners will not possess certificates, the Rules
provide a mechanism by which Beneficial Owners will receive payments and will be
able to transfer their interests.
Beneficial Owners will not receive or be entitled to receive
certificates representing their respective interests in the Notes, except under
the limited circumstances described below. Unless and until Definitive Notes are
issued, Beneficial Owners who are not Participants may transfer ownership of
Notes only through Participants and indirect participants by instructing such
Participants and indirect participants to transfer Notes, by book-entry
transfer, through DTC for the account of the purchasers of such Notes, which
account is maintained with their respective Participants. Under the Rules and in
accordance with DTC's normal procedures, transfers of ownership of Notes 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 Beneficial 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
S-28
<PAGE>
processing will be reported to the relevant Euroclear Participants or Cedel
Participants on such business day. Cash received in Cedel or Euroclear as a
result of sales of securities by or through a Cedel Participant or Euroclear
Participant 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. For information with respect to tax
documentation procedures relating to the Notes, SEE "Material Federal Income Tax
Consequences--Debt Securities Backup Withholding," and "--Foreign Investors" in
the Prospectus and "--Information Reporting and Backup Withholding" in "ANNEX A:
Global Clearance, Settlement and Tax Documentation Procedures--Certain U.S.
Federal Income Tax Documentation Requirements" hereto.
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 ("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 Participant in the Book-Entry
Notes, whether held for its own account or as a nominee for another person. In
general, beneficial ownership of Book-Entry Notes will be subject to the rules,
regulations and procedures governing DTC and its 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 depositary, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to Cedel is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Cedel Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants, through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled through Euroclear in any of 32 currencies,
including United States Dollars. Euroclear provides 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.
S-29
<PAGE>
The Euroclear Operator is the Belgian branch of a New York banking
corporation that 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
(the "Federal Reserve Board") 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 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.
Payments on the Book-Entry Notes will be made on each Payment Date by
the Indenture Trustee to DTC. DTC will be responsible for crediting the amount
of such payments to the accounts of the applicable Participants in accordance
with DTC's normal procedures. Each Participant will be responsible for
disbursing such payments to the Beneficial 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 Beneficial Owners
that it represents.
Under a book-entry format, Beneficial Owners may experience some delay
in their receipt of payments because such payments will be forwarded by the
Indenture Trustee to Cede & Co. Payments with respect to Notes 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 payments
will be subject to tax reporting in accordance with relevant United States tax
laws and regulations. SEE "Material Federal Income Tax Consequences--Debt
Securities," "--Backup Withholding," and "--Foreign Investors" in the Prospectus
and "--Information Reporting and Backup Withholding" in "ANNEX A: Global
Clearance, Settlement and Tax Documentation Procedures--Certain U.S. Federal
Income Tax Documentation Requirements" hereto. Because DTC has indicated that it
will act only on behalf of Financial Intermediaries, the ability of Beneficial
Owners to pledge Book-Entry Notes to persons or entities that do not participate
in the depository system or otherwise take actions in respect of such Book-Entry
Notes may be limited due to the lack of physical certificates representing such
Book-Entry Notes. In addition, issuance of the Book-Entry Notes in book-entry
form may reduce the liquidity of such Notes in the secondary market because
certain potential investors may be unwilling to purchase Notes for which they
cannot obtain physical certificates.
The monthly and annual statements with respect to the Home Equity Loans
and the Notes as described under "--Reports to Noteholders" herein will be
provided by the Indenture Trustee to Cede & Co., as nominee of DTC and a
Noteholder, and may be made available by such entity to Beneficial Owners upon
request, in accordance with the Rules, and to the Financial Intermediaries to
whose DTC accounts the related Book-Entry Notes are credited.
DTC has advised the Indenture Trustee that, unless and until Definitive
Notes are issued, DTC will take any action permitted to be taken by a Noteholder
under the Indenture only at the direction of one or more Financial
Intermediaries to whose DTC accounts the Book-Entry Notes are credited, to the
extent that such actions are taken on behalf of Financial Intermediaries whose
holdings include such Book-Entry Notes. Cedel or the Euroclear Operator, as the
case may be, will take any other action permitted to be taken by a Noteholder
under the Indenture on behalf of a Cedel Participant or Euroclear Participant
only in accordance with its relevant rules and procedures and subject to the
ability of the Relevant Depositary to effect such actions on its behalf through
DTC. DTC may take actions, at the direction of the related Participants, with
respect to some Notes that conflict with actions taken with respect to other
Notes.
Definitive Notes will be issued in registered form to Beneficial
Owners, or their nominees, rather than to DTC, only if (i) DTC or the Issuer
advises the Indenture Trustee in writing that DTC is no longer willing or able
to discharge properly its responsibilities as nominee and depositary with
respect to the Notes and the Issuer or the Indenture Trustee is unable to locate
a qualified successor, (ii) the Issuer, at its option, advises the Indenture
Trustee that it elects to terminate the book-entry system through DTC, or (iii)
after a Note Event of Default under the Indenture, the Beneficial Owners
representing not less than 51% of the Note Balance of the Book-Entry Notes
S-30
<PAGE>
advise the Indenture Trustee and DTC that the book-entry system is no longer in
the best interests of such Beneficial Owners. Upon issuance of Definitive Notes
to Beneficial Owners, such Notes will be transferable directly (and not
exclusively on a book-entry basis) and registered holders will deal directly
with the Indenture Trustee with respect to transfers, notices and payments. SEE
"Description of the Securities--General" in the Prospectus.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Indenture Trustee will be required to use its best
efforts to notify all Beneficial Owners of the occurrence of such event and the
availability through DTC of Definitive Notes. Upon surrender by DTC of the
global certificates representing the Book-Entry Notes and instructions for
re-registration, the Indenture Trustee will issue Definitive Notes and
thereafter the Indenture Trustee will recognize the holders of such Definitive
Notes as Noteholders under the Indenture.
Although DTC, Cedel and Euroclear have agreed to the foregoing
procedures in order to facilitate transfer of Notes 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.
ASSIGNMENT OF HOME EQUITY LOANS
The Initial Home Equity Loans were, and the Subsequent Home Equity
Loans will be, originated by the Sponsor or acquired by the Sponsor through its
network of retail branches, brokers and correspondents, sold to the Seller in
the ordinary course of the Sponsor's business and contributed by the Seller in
the ordinary course of the Seller's business to the Transferor. On the Closing
Date, with respect to the Initial Home Equity Loans (and on the related
Subsequent Transfer Date, with respect to the Subsequent Home Equity Loans), the
Transferor will cause such interests to be conveyed to the Depositor who in turn
will convey such interests to the Issuer.
At the time of issuance of the Notes, the Issuer will pledge all of its
right, title and interest in and to the Home Equity Loans, including all
principal and interest due on each such Home Equity Loan on or after the
applicable Cut-Off Dates, without recourse, to the Indenture Trustee pursuant to
the Indenture as collateral for the Notes; PROVIDED, HOWEVER, that the Seller
will reserve and retain all its right, title and interest in and to principal
and interest due on such Home Equity Loan on or prior to the applicable Cut-Off
Date (whether or not received on or prior to such Cut-Off Date), and to
prepayments received on or prior to the applicable Cut-Off Date. The Indenture
Trustee, concurrently with such assignment, will authenticate and deliver the
Notes at the direction of the Issuer in exchange for, among other things, the
Home Equity Loans.
In connection with the transfer and assignment of the Home Equity Loans
on the Closing Day or the Subsequent Transfer Date, as applicable, the Indenture
will require the Issuer:
(i) to deliver without recourse to the Indenture Trustee or an
affiliate of the Indenture Trustee (the "Custodian") on behalf of the Indenture
Trustee on the Closing Date or the Subsequent Transfer Date, as applicable,
identified in the schedule of Home Equity Loans (the "Schedule of Home Equity
Loans") (A) the original Mortgage Notes, endorsed in blank or to the order of
the Indenture Trustee, (B) (I) the original title insurance commitment or a copy
thereof certified as a true copy by the closing agent or the Sponsor, or if
available, the original title insurance policy or a copy certified by the issuer
of the title insurance policy or (II) the attorney's opinion of title, (C)
originals or copies of all intervening assignments, if any, certified as true
copies by the closing agent or the Sponsor, showing a complete chain of title
from origination to the Indenture Trustee, including warehousing assignments, if
recorded, (D) originals of all assumption and modification agreements, if any
and (E) either: (1) the original Mortgage, with evidence of recording thereon
(if such original Mortgage has been returned to Sponsor from the applicable
recording office) or a copy (if such original Mortgage has not been returned to
Sponsor from the applicable recording office) of the Mortgage certified as a
true copy by the closing agent or the Sponsor or (2) a copy of the Mortgage
certified by the public recording office in those instances where the original
recorded Mortgage has been lost or retained by the recording office;
(ii) to cause, within 60 days following the Closing Date or the
Subsequent Transfer Date, as applicable, assignments of the Mortgages to "The
Chase Manhattan Bank, as Indenture Trustee of First Greensboro Home Equity Loan
Trust 1998-1 under the Indenture dated as of June 1, 1998" to be submitted for
recording in the appropriate jurisdictions; provided, however, that the Issuer
shall not be required to prepare any assignment of
S-31
<PAGE>
mortgage for a Mortgage with respect to which the original recording information
has not yet been received from the recording office; provided, further, that the
Issuer shall not be required to record an assignment of a mortgage if the Issuer
furnishes to the Indenture Trustee, the Note Insurer and the Rating Agencies, on
or before the Closing Date or the Subsequent Transfer Date, as applicable, with
respect to the Home Equity Loans, at the Issuer's expense, an opinion of counsel
with respect to the relevant jurisdiction that such recording is not required to
perfect the Indenture Trustee's interests in the related Mortgages Loans (in
form satisfactory to the Indenture Trustee, the Note Insurer and the Rating
Agencies); and
(iii) to deliver the title insurance policy, the original Mortgages and
such recorded assignments, together with originals or duly certified copies of
any and all prior assignments (other than unrecorded warehouse assignments), to
the Custodian on behalf of the Indenture Trustee within 15 days of receipt
thereof by the Issuer (but in any event, with respect to any Mortgage as to
which original recording information has been made available to the Issuer,
within one year after the Closing Date or the Subsequent Transfer Date, as
applicable, as the case may be).
The Indenture Trustee will agree, for the benefit of the Noteholders,
to cause the Custodian to review each Mortgage File within 45 days after the
Closing Date or the Subsequent Transfer Date, as applicable, as the case may be
(or the date of receipt of any documents delivered to the Indenture Trustee
after the Closing Date), to ascertain that all required documents (or certified
copies of documents) have been executed and received.
If the Custodian on behalf of the Indenture Trustee during such 45-day
period finds any document constituting a part of the documents delivered to the
Indenture Trustee pursuant to the Loan Sale Agreement (the "Mortgage File,"
which is not properly executed, has not been received, is unrelated to the Home
Equity Loans or that any Home Equity Loan does not conform in a material respect
to the description thereof as set forth in the Schedule of Home Equity Loans,
the Custodian on behalf of the Indenture Trustee will be required to promptly
notify the Depositor, the Seller, the Sponsor, the Noteholders and the Note
Insurer. The Seller and Sponsor will agree in the Servicing Agreement to use
reasonable efforts to remedy a material defect in a document constituting part
of a Mortgage File of which it is so notified by the Custodian on behalf of the
Indenture Trustee. If, however, within 90 days after such notice to it
respecting such defect the Seller shall not have remedied the defect and the
defect materially and adversely affects the interest in the related Home Equity
Loan of the Noteholders or the Note Insurer, the Seller or Sponsor will be
required on the next succeeding Monthly Remittance Date to (or will cause an
affiliate of the Seller to) (i) substitute in lieu of such Home Equity Loan a
Qualified Replacement Mortgage (as such is defined in the Loan Sale
Agreement)and deliver an amount equal to the excess, if any, of the Principal
Balance of the Home Equity Loan being replaced over the outstanding Principal
Balance of the replacement Home Equity Loan plus interest (the "Substitution
Amount") to the Indenture Trustee on behalf of the Trust as part of the Monthly
Remittance remitted by the Master Servicer on such Monthly Remittance Date or
(ii) purchase such Home Equity Loan at a purchase price equal to the Loan
Purchase Price thereof, which purchase price shall be delivered to the Trust
along with the Monthly Remittance Amount remitted by the Master Servicer on such
Monthly Remittance Date.
In addition to the foregoing, the Custodian on behalf of the Indenture
Trustee has agreed to make a review during the 12th month after the Closing Date
indicating the current status of the exceptions previously indicated on the pool
certification (the "Final Certification"). After delivery of the Final
Certification, the Custodian, on behalf of the Indenture Trustee and the Master
Servicer shall provide to Note Insurer no less frequently than monthly updated
certifications indicating the then current status of exceptions, until all such
exceptions have been eliminated.
PAYMENTS ON THE NOTES
Payments on the Notes will be made by the Indenture Trustee on each
Payment Date, commencing with the Payment Date in July, 1998, to Noteholders as
of the Record Date in an amount equal to the product of such Noteholders'
Percentage Interest and the amount paid in respect of the Notes. Payments on the
Class A-1 Notes will be made generally from Available Funds for Group I, and
payments on the Class A-2 Notes will be made generally from Available Funds for
Group II. The "Percentage Interest" represented by any Note will be equal to the
percentage obtained by dividing the aggregate principal balance of such Note by
the related Note Balance.
S-32
<PAGE>
On each Payment Date, the Indenture Trustee will be required to pay
with respect to each Class of Notes, to the extent such funds are then on
deposit in the related Note Account and immediately available, the following
amounts, in the following order of priority, and each such payment shall be
treated as having occurred only after all preceding payments have occurred:
(i) FIRST, on each Payment Date from amounts then on deposit
in the related Note Account, (A) to the Indenture Trustee, the
Indenture Trustee Fee together with the Indenture Trustee Reimbursable
Expenses, (B) to the Owner Trustee, the Owner Trustee Fee, (C) and
provided no Note Insurer Default has occurred and is continuing to the
Note Insurer, the related Note Insurer Premium for such Payment Date;
(ii) SECOND, to the Note Insurer, out of amounts then on
deposit in either Note Account, the aggregate amount necessary to
reimburse the Note Insurer for any unreimbursed payments of Insured
Payments (together with interest thereon at the Late Payment Rate
specified in the Insurance Agreement) in respect of the Notes of either
Class on prior Payment Dates and the amount of any unpaid Note Insurer
Premiums for prior Payment Dates (together with interest thereon at the
Late Payment Rate specified in the Insurance Agreement); PROVIDED,
HOWEVER, that the Note Insurer shall be paid unreimbursed Insured
Payments and unpaid related Note Insurer Premiums (and any interest
thereon) only after each Class of Noteholders has received Note
Interest and any Overcollateralization Deficit with respect to such
Payment Date;
(iii) THIRD, to the Noteholders of a Class, out of amounts
then on deposit in the related Note Account, the related Note Interest
with respect to such Payment Date;
(iv) FOURTH, to the Noteholders of a Class, out of amounts
then on deposit in the related Note Account, the amount of applicable
Monthly Principal for the Notes of such Class with respect to such
Payment Date, in reduction of the related Note Balance until such Note
Balance is reduced to zero;
(v) FIFTH, to the Noteholders of the other Class, out of
amounts then on deposit in the related Note Account, any Note Interest
for such other Class remaining unpaid after application of clause (iii)
above;
(vi) SIXTH, to the Noteholders of a Class, out of amounts then
on deposit in the related Note Account, in reduction of the related
Note Balance, the amount, if any, equal to the Excess Cash Payment with
respect to the related Group and with respect to such Payment Date;
(vii) SEVENTH, to the Noteholders of the other Class, out of
amounts then on deposit in the related Note Account, an amount equal to
any Overcollateralization Deficit for such other Class (after taking
into account payments of related Monthly Principal and Excess Cash for
such Class on such Payment Date) in reduction of the related Note
Balance until such Note Balance is reduced to zero.
(viii) EIGHTH, to the Note Insurer, out of amounts then on
deposit in the related Note Account, any amounts due and owing with
respect to such Class under the Insurance Agreement that are not
described in clause (i) and (ii) above; and
(ix) NINTH, out of amounts then on deposit in the related Note
Account, an amount equal to any Overcollateralization Deficiency Amount
for the other Class (after taking into account payments of related
Monthly Principal and Excess Cash for such Class on such Payment Date)
for deposit in certain reserve accounts set up for the benefit of the
Note Insurer until such Overcollateralization Deficiency Amount is
reduced to zero.
Any Available Funds for the related Class of Notes remaining after application
in the manner specified above will be released to the holder(s) of the Residual
Interest on such Payment Date, free from the lien of the Indenture Trustee, and
such amounts will not be available to make payments on the Notes or payments to
the Note Insurer on any subsequent Payment Date.
S-33
<PAGE>
In the event that, with respect to a particular Payment Date, Available
Funds for a Group (or, to the limited extent provided herein, from Excess Cash
from the other Group or from certain reserve accounts) on such date are not
sufficient to pay any portion of Note Interest for the related Class of Notes,
the Indenture Trustee will file a claim on the Insurance Policy in an amount
equal to such deficiency and apply the Insured Payment in respect of such claim
to the payment of the deficiency in such Note Interest. In addition, the
Indenture Trustee will file a claim on the Insurance Policy in an amount equal
to any Overcollateralization Deficit for a Class on a Payment Date (after taking
into account payments in respect of related Monthly Principal and Excess Cash on
such Payment Date) and apply the portion of the Insured Payment related to such
Overcollateralization Deficit to reduce the Note Balance on such Payment Date by
the amount of such Overcollateralization Deficit. Any Insured Payment paid in
respect of a Class of Notes to make up any Overcollateralization Deficit shall
be paid to the related Noteholders, in reduction of the related Note Balance,
until such Note Balance is reduced to zero.
In no event will the aggregate payments of principal to Noteholders of
a Class exceed the related Original Note Balance.
"Note Interest" for a Class of Notes and any Payment Date will be an
amount equal to interest accrued during the related Interest Period at the
related Note Interest Rate on the related Note Balance as of the preceding
Payment Date (after giving effect to the payment, if any, in reduction of
principal made on such Notes on such preceding Payment Date).
All calculations of interest on the Notes will be computed on the basis
of a year of 360 days and of twelve 30 day months.
The "Note Interest Rate", for the Class A-1 Notes and each Interest
Period prior to the Initial Redemption Date will be a per annum rate equal to
6.53%, and, for each Interest Period thereafter, a per annum rate equal to
7.03%. The Note Interest Rate for the Class A-2 Notes and each Interest Period
prior to the Initial Redemption Date will be a per annum rate equal to 6.55%,
and, for each Interest Period thereafter, a per annum rate equal to 7.05%.
The "Note Balance" for each Class of Notes will equal, as of any
Payment Date, the related Original Note Balance less all Monthly Principal and
Excess Cash paid to the Noteholders of such Class on previous Payment Dates in
reduction of the related Note Balance (exclusive, for the sole purpose of
effecting the Note Insurer's subrogation rights, of payments made by the Note
Insurer in respect of any Overcollateralization Deficit for the related Group
under the Insurance Policy, except to the extent reimbursed to the Note Insurer
pursuant to the Indenture).
"Monthly Principal" for each Class of Notes and for any Payment Date
will be an amount equal to the related Principal Remittance Amount reduced by
the amount of any Overcollateralization Reduction Amount for each Class of Notes
with respect to such Payment Date.
"Overcollateralization Reduction Amount" for each Class of Notes means,
for any Payment Date, the lesser of (x) the related Principal Remittance Amount
with respect to such Payment Date and (y) the amount by which the applicable
Overcollaterization Amount would exceed the Required Overcollateralization
Amount (as specified in the Indenture) assuming that 100% of the related
Principal Remittance Amount were to be applied as a payment of principal on the
Notes.
"Overcollateralization Deficiency Amount" for each Class of Notes
means, with respect to any Payment Date, the excess, if any, of (i) the related
Required Overcollateralization Amount applicable to such Payment Date over (ii)
the applicable Overcollateralization Amount applicable to such Payment Date,
(assuming the application of 100% of principal collections received during such
Remittance Period but prior to taking into account the payment of any related
Excess Cash Payments on such Payment Date).
"Principal Remittance Amount" means, as of any Monthly Remittance Date
and each Group of Home Equity Loans, the sum, without duplication, of the
following: (i) the principal actually collected by the Master Servicer with
respect to the related Group of Home Equity Loans during the related Remittance
Period, (ii) the Principal Balance of each such Home Equity Loan that was
purchased from the Indenture Trustee during the related
S-34
<PAGE>
Remittance Period, to the extent such Principal Balance was actually deposited
in the Principal and Interest Account, (iii) any Substitution Amounts relating
to principal delivered by the Sponsor or Seller in connection with a
substitution of a Home Equity Loan, to the extent such Substitution Amounts were
actually deposited in the Principal and Interest Account during the related
Remittance Period, (iv) the principal portion of all Net Liquidation Proceeds
actually collected by the Master Servicer with respect to such Home Equity Loans
during the related Remittance Period (to the extent such Net Liquidation
Proceeds related to principal), and (v) with respect to Group II only, on the
first Payment Date following the end of the Funding Period, all amounts
remaining in the Pre-Funding Account to the extent not used to purchase
Subsequent Home Equity Loans during such Funding Period.
The "Principal Balance" means, with respect to each Home Equity Loan
and as of any date of determination, the actual outstanding Principal Balance
thereof on the related Cut-Off Date excluding payments of principal due prior to
the Cut-Off Date or Subsequent Cut-Off Date, as the case may be, whether or not
received, less any principal payments relating to such Home Equity Loan included
in previous Monthly Remittance Amounts, provided, however, that the Principal
Balance for any Home Equity Loan that has become a Liquidated Loan shall be zero
as of the first day of the Remittance Period following the Remittance Period in
which such Home Equity Loan becomes a Liquidated Loan, and at all times
thereafter. For purposes of the statistical presentation of the Home Equity
Loans set forth in this Prospectus Supplement, the Principal Balances of the
Home Equity Loans were reduced by the amounts of the scheduled principal
payments due on June 1, 1998.
"Determination Date" means, as to any Payment Date, the last day of the
Remittance Period relating to such Payment Date.
"Indenture Trustee's Reimbursable Expenses" shall mean any amounts
payable to the Indenture Trustee (not to exceed $50,000 in the aggregate from
the Initial Cut-Off Date) pursuant to the Indenture as compensation for any
loss, liability, or "unanticipated out-of-pocket" expense incurred or paid to
third parties (excluding salaries paid to employees or allocable overhead, of
the Indenture Trustee) in connection with the acceptance or administration of
its trusts or the Notes, other than any loss, liability or expense incurred by
reason of willful misfeasance, bad faith or negligence in the performance of its
duties or by reason of reckless disregard or its obligations and duties.
"Liquidation Proceeds" means, with respect to any Liquidated Loan, all
amounts (including the proceeds of any Insurance Policy) recovered by the Master
Servicer in connection with such Liquidated Loan, whether through trustee's
sale, foreclosure sale or otherwise.
"Prepayment" means any payment of principal of a Home Equity Loan which
is received by the Master Servicer in advance of the scheduled due date for the
payment of such principal and which is not accompanied by an amount of interest
representing the full amount of scheduled interest due in any month or months
subsequent to the month of prepayment, Substitution Amounts, the portion of the
purchase price of any Home Equity Loan required to be repurchased or substituted
by the Sponsor pursuant to the Loan Sale Agreement or purchased by the Master
Servicer pursuant to the Servicing Agreement representing principal and the
proceeds of any Insurance Policy which are to be applied as a payment of
principal on the related Home Equity Loan shall be deemed to be Prepayments.
"Excess Cash Payment" for each Class of Notes and any Payment Date,
means the lesser of (x) the applicable Overcollateralization Deficiency Amount
with respect to such Payment Date and (y) the aggregate amount of Excess Cash
with respect to the related Group and such Payment Date.
"Liquidated Loan" means any Home Equity Loan as to which a Final
Recovery Determination has been made.
"Final Recovery Determination" means, with respect to any defaulted
Home Equity Loan or REO Property (other than a Home Equity Loan purchased by the
Sponsor, the Transferor, the Depositor or the Master Servicer), a determination
made by the Master Servicer that all Liquidation Proceeds which the Master
Servicer, in its reasonable business judgment expects to be finally recoverable
in respect thereof have been so recovered or that the Master Servicer believes
in its reasonable business judgment the cost of obtaining any additional
recoveries therefrom would exceed the amount of such recoveries.
S-35
<PAGE>
"Available Funds" with respect to a Home Equity Loan Group and any
Payment Date, will consist of the sum of the amounts described in clauses (a)
through (h) below, less (i) the Administrative Fee Amount for such Group in
respect of such Payment Date, (ii) Servicing Advances for such Group previously
made that are reimbursable to the Master Servicer (other than those included in
liquidation expenses for any Liquidated Loan in such Group and already
reimbursed from the related Liquidation Proceeds) in such Remittance Period to
the extent permitted by the Servicing Agreement and (iii) the aggregate amounts
(A) deposited into the Principal and Interest Account and allocable to the
related Group or into the related Note Account that may not be withdrawn
therefrom pursuant to a final and nonappealable order of a United States
bankruptcy court of competent jurisdiction imposing a stay pursuant to Section
362 of the United States Bankruptcy Code and that would otherwise have been
included in Available Funds on such Payment Date and (B) received by the
Indenture Trustee that are recoverable and sought to be recovered from the
Issuer as a voidable preference by a trustee in bankruptcy pursuant to the
United States Bankruptcy Code in accordance with a final nonappealable order of
a court of competent jurisdiction:
(a) all scheduled payments of interest received with respect
to the Home Equity Loans in such Group and due during the related
Remittance Period and all other interest payments on or in respect of
such Home Equity Loans received by or on behalf of the Master Servicer
during the related Remittance Period, net of amounts representing
interest accrued on such Home Equity Loans in respect of any period
prior to the applicable Cut-Off Dates, plus any Compensating Interest
Payments and Delinquency Advances made by the Master Servicer in
respect of the related Home Equity Loans and any net income from
related REO Properties for such Remittance Period;
(b) all scheduled payments of principal received with respect
to the Home Equity Loans in such Group and due during the related
Remittance Period and all other principal payments (including
Prepayments received or deemed to be received during the related
Remittance Period in respect of such Home Equity Loans;
(c) the aggregate of any proceeds from or in respect of any
policy of insurance covering a Mortgaged Property that are received
during the related Remittance Period and applied by the Master Servicer
to reduce the Principal Balance of the related Home Equity Loan
("Insurance Proceeds") (which proceeds will include any deductible
payable by the Master Servicer with respect to a blanket insurance
policy pursuant to the Servicing Agreement and the proceeds from any
fidelity bond or errors and omission policy pursuant to the Servicing
Agreement, net of any component thereof covering any expenses incurred
by or on behalf of the Master Servicer and specifically reimbursable
under the Servicing Agreement);
(d) the aggregate of any other proceeds received by the Master
Servicer during the related Remittance Period in connection with the
liquidation of any Mortgaged Property securing a Home Equity Loan in
such Group, whether through trustee's sale, foreclosure or otherwise
(including any Insurance Proceeds to the extent not duplicative of
amounts in clause (c) above) ("Liquidation Proceeds"), less expenses
incurred by the Master Servicer, (including unreimbursed servicing
expenses and Delinquency Advances relating to such Home Equity Loan in
connection with the liquidation of such Home Equity Loan ("Net
Liquidation Proceeds");
(e) the aggregate of the amounts received in respect of any
Home Equity Loans in such Group that are required or permitted to be
repurchased, released, removed or substituted by the Sponsor during the
related Remittance Period as described in "--Assignment of Home Equity
Loans" and "The Servicing Agreement --Principal and Interest Account"
herein, to the extent such amounts are received by the Indenture
Trustee on or before the related Monthly Remittance Date;
(f) the aggregate of amounts deposited in the related Note
Account by the Indenture Trustee, the Issuer or the Note Insurer, as
the case may be, during such Remittance Period in connection with
redemption of the Notes as described under "--Redemption of the Notes"
herein;
(g) with respect to Group II, the aggregate of amounts
deposited in the related Note Account from the Capitalized Interest
Account and the Pre-Funding Account; and
S-36
<PAGE>
(h) the aggregate of amounts which may be released by the Note
Insurer in lieu of an Insured Payment under the Insurance Policy from
certain reserve accounts maintained solely for the benefit of the Note
Insurer.
NOTE ACCOUNTS
Pursuant to the Indenture, the Indenture Trustee shall establish and
maintain an account with respect to each Class of Notes (each, a "Note Account")
from which all payments with respect to such Notes will be made. As described
below, not later than the Monthly Remittance Date, the Master Servicer will be
required pursuant to the Servicing Agreement to wire transfer to the Indenture
Trustee for deposit in each Note Account the sum (without duplication) of all
amounts on deposit in the Principal and Interest Account that constitute any
portion of Available Funds for the related Group and for the related Payment
Date. SEE "Description of Securities--Payments of Principal -- Payments of
Interest" in the Prospectus.
INVESTMENT OF NOTE ACCOUNTS. All funds held on deposit in the Note
Account will remain uninvested.
All income in each Note Account will not be available to Noteholders or
otherwise subject to any claims or rights of the Noteholders and will be held in
such Note Account for the benefit of the Indenture Trustee, subject to
withdrawal from time to time as permitted by the Indenture.
ELIGIBLE INVESTMENTS. The Indenture will define "Eligible Investments"
generally as follows:
(a) direct general obligations of, or obligations fully and
unconditionally guaranteed as to the timely payment of principal and interest
by, the United States or any agency or instrumentality thereof, provided such
obligations are backed by the full faith and credit of the United States, FHLMC
senior debt obligations, and FNMA senior debt obligations, but excluding any of
such securities whose terms do not provide for payment of a fixed dollar amount
upon maturity or call for redemption;
(b) Federal Housing Administration debentures;
(c) FHLMC participation certificates which guaranty timely payment of
principal and interest and senior debt obligations;
(d) Consolidated senior debt obligations of any Federal Home Loan
Banks;
(e) FNMA mortgage-backed securities (other than stripped mortgage
securities which are valued greater than par on the portion of unpaid principal)
and senior debt obligations;
(f) Federal funds, certificates of deposit, time deposits, and bankers'
acceptances (having original maturities of not more than 365 days) of any
domestic bank, the short-term debt obligations of which have been rated A-1 by
Standard & Poor's and P-1 by Moody's;
(g) Deposits of any bank or savings and loan association (the long-term
deposit rating of which is Baa3 or better by Moody's and BBB by Standard &
Poor's) which has combined capital, surplus and undivided profits of at least
$50,000,000 which deposits are insured by the FDIC and held up to the limits
insured by the FDIC;
(h) Repurchase agreements collateralized by securities described in
(a), (c), or (e) above with any registered broker/dealer subject to the
Securities Investors Protection Corporation's jurisdiction and subject to
applicable limits therein promulgated by Securities Investors Protection
Corporation or any commercial bank, if such broker/dealer or bank has an
uninsured, unsecured and unguaranteed short-term or long-term obligation rated
P-1 or Aa2, respectively, or better by Moody's and A-1+ or AA, respectively, or
better by Standard & Poor's, provided:
a. A master repurchase agreement or specific written repurchase
agreement governs the transaction, and
S-37
<PAGE>
b. The securities are held free and clear of any lien by the Indenture
Trustee or an independent third party acting solely as agent for the
Indenture Trustee, and such third party is (a) a Federal Reserve Bank,
(b) a bank which is a member of the FDIC and which has combined
capital, surplus and undivided profits of not less than $125 million,
or (c) a bank approved in writing for such purpose by the Insurer, and
the Indenture Trustee shall have received written confirmation from
such third party that it holds such securities, free and clear of any
lien, as agent for the Indenture Trustee, and
c. A perfected first security interest under the Uniform Commercial
Code, or book entry procedures prescribed at 31 CFR 306.1 et seq. or 31
CFR 350.0 et seq., in such securities is created for the benefit of the
Indenture Trustee, and
d. The repurchase agreement has a term of thirty days or less and the
Indenture Trustee will value the collateral securities no less
frequently than weekly and will liquidate the collateral securities if
any deficiency in the required collateral percentage is not restored
within two business days of such valuation, and
e. The fair market value of the collateral securities in relation to
the amount of the repurchase obligation, including principal and
interest, is equal to at least 106%.
(i) Commercial paper (having original maturities of not more than 270
days) rated in the highest short-term rating categories of Standard & Poor's and
Moody's;
(j) Investments in no load money market funds rated AAAm or AAAm-G by
Standard & Poor's and Aaa by Moody's; and
(k) Any other investment permitted by each of the Rating Agencies and
the Note Insurer.
No instrument described above shall 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. The interest and principal payments with respect to
such instrument shall provide a yield to maturity at par greater than 120% of
the yield to maturity at par of the underlying obligations. Furthermore, all
Eligible Investments shall mature at par on or prior to the next succeeding
Payment Date unless otherwise specified in the Indenture and none 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 Stated Maturity Date.
The Indenture Trustee may purchase from or sell to itself or an
affiliate, as principal or agent, the Eligible Investments listed above. All
Eligible Investments in a trust account under the Indenture shall be made in the
name of the Indenture Trustee for the benefit of the Noteholders and the Note
Insurer.
OVERCOLLATERALIZATION FEATURE
Credit enhancement with respect to each Class of Notes will be provided
in part by overcollateralization resulting from the Aggregate Principal Balances
of the Home Equity Loans in the related Group as of the end of each Remittance
Period exceeding the related Note Balance for the related Payment Date (after
taking into account the related Monthly Principal and Excess Cash to be paid on
such Payment Date in reduction of such Note Balance). The Indenture requires
that this Overcollateralization Amount for each Class be increased to, and
thereafter maintained at, the related Required Overcollateralization Amount.
This increase and subsequent maintenance is intended to be accomplished by the
application of monthly Excess Cash with respect of a Group to accelerate the pay
down of the related Note Balance until the related Overcollateralization Amount
reaches the related Required Overcollateralization Amount. Such applications of
Excess Cash, because they consist of interest collections on the Home Equity
Loans of a Group, but are distributed as principal on the related Notes, will
increase the related Overcollateralization Amount.
The "Excess Cash" with respect of a Group on any Payment Date will be
equal to Available Funds for such Group and Payment Date, reduced by the sum of
(i) any amounts payable to the Note Insurer for Insured Payments
S-38
<PAGE>
with respect of a Group paid on prior Payment Dates and not yet reimbursed and
for any unpaid Insurer Premiums for such Group in prior Payment Dates (in each
case with interest thereon at the Late Payment Rate set forth in the Insurance
Agreement) (and to the extent not covered by Available Funds for the other
Group, such amounts with respect to the other Group), (ii) the Note Interest for
the related Class and Payment Date (and to the extent not covered by Available
Funds for the other Group, such amounts with respect to the other Group), (iii)
the Monthly Principal for the related Class and Payment Date and (iv) with
respect to Group II and the first payment date following the end of the Funding
Period, all amounts remaining in the Pre-Funding Account to the extent not used
to purchase Subsequent Home Equity Loans during such Funding Period. Certain of
the Initial Home Equity Loans for each Group will not have their first monthly
payment due until the Remittance Period relating to the September 1998 Payment
Date. Accordingly, in the case of the July and August 1998 Payment Dates, such
Home Equity Loans will not contribute to Available Funds or to Excess Cash.
The "Overcollateralization Amount" with respect to a Class and any
Payment Date is the amount, if any, by which (x) the Aggregate Principal Balance
of the Home Equity Loans in such Group as of the end of the related Remittance
Period (and, with respect to Group II only, any amount on deposit in the
Pre-Funding Account at such time disregarding any related Pre-Funding Account
Earnings) exceeds (y) the Note Balance of the related Class of Notes as of such
Payment Date after taking into account payments of Monthly Principal made on
such Payment Date. The required level of the Overcollateralization Amount with
respect to each Class and any Payment Date (the "Required Overcollateralization
Amount") will be equal to the amount specified as such in the Indenture. The
Indenture generally provides that the related Required Overcollateralization
Amount may, over time, decrease or increase, subject to certain floors, caps and
triggers including triggers that allow the related Required
Overcollateralization Amount for a Class to decrease or "step down" based on the
performance on the Home Equity Loans in the related Group with respect to
certain delinquency rate tests specified in the Indenture. In addition, Excess
Cash for a Group will be applied to the payment in reduction of principal of the
related Notes during the period that the Home Equity Loans in such Group are
unable to meet certain tests specified in the Insurance Agreement based on
delinquency rates. Any increase in the applicable Required Overcollateralization
Amount may result in an accelerated amortization of the related Notes until such
Required Overcollateralization Amount is reached. Conversely, any decrease in
the Required Overcollateralization Amount for a Class will result in a
decelerated amortization of the Notes in the related Class until such Required
Overcollateralization Amount is reached.
The application of Excess Cash for a Group to reduce the Note Balance
for the related Class of Notes on any Payment Date will have the effect of
accelerating the amortization of such Notes relative to the amortization of the
Home Equity Loans in the related Group.
In the event that the Required Overcollateralization Amount for a Class
is permitted to decrease or "step down" on any Payment Date in the future, the
Indenture will provide that all or a portion of the Excess Cash for such Group
that would otherwise be paid to the related Notes on any such Payment Date in
reduction of the related Note Balance will be released to the holder(s) of the
Residual Interest.
With respect to a Group and any Payment Date, an "Overcollateralization
Surplus" means, the amount, if any, by which (x) the Overcollateralization
Amount for such Class and Payment Date exceeds (y) the then applicable Required
Overcollateralization Amount for such Class and such Payment Date. As a
technical matter, an Overcollateralization Surplus for a Class may result even
prior to the occurrence of any decrease or "step down" in the Required
Overcollateralization Amount for such Class because the related Class of Notes
of the related Class will be entitled to receive 100% of collected principal on
the related Home Equity Loans, even though the related Note Balance will, as a
result of the accelerated amortization caused by the application of the Excess
Cash, be less than the Aggregate Principal Balance of the Home Equity Loans in
such Group, in the absence of any Realized Losses on such Home Equity Loans.
The Indenture will provide that, on any Payment Date, all amounts
collected on the Home Equity Loans in a Group in respect of principal to be
applied on such Payment Date will be paid to Noteholders in reduction of the
related Note Balance on such Payment Date, except as provided above with respect
to any Payment Date for which there exists an Overcollateralization Surplus for
such Class. If any Home Equity Loan became a Liquidated Loan during such prior
Remittance Period, the Net Liquidation Proceeds related thereto and allocated to
principal may be less than the Principal Balance of the related Home Equity
Loan; the amount of any such deficiency is a "Realized
S-39
<PAGE>
Loss." In addition, the Indenture will provide that the Principal Balance of any
Home Equity Loan that becomes a Liquidated Loan shall equal zero. The Indenture
will not require that the amount of any Realized Loss be paid to Noteholders of
the related Class on the Payment Date following the event of loss. However, the
occurrence of a Realized Loss will reduce the Overcollateralization Amount for
the related Class of Notes, and will result in more Excess Cash, if any, being
paid on such Notes in reduction of the related Note Balance on subsequent
Payment Dates than would be the case in the absence of such Realized Loss.
OVERCOLLATERALIZATION AND THE INSURANCE POLICY. The Indenture will
require the Indenture Trustee to file a claim for an Insured Payment under the
Insurance Policy not later than 12:00 noon (New York City time) on the third
Business Day prior to any Payment Date as to which the Indenture Trustee has
determined that an Overcollateralization Deficit with respect to the Notes of
both Classes will occur for the purpose of applying the proceeds of such Insured
Payment as a payment of principal to the Noteholders on such Payment Date. With
respect to a Class and any Payment Date, an "Overcollateralization Deficit" will
mean the amount, if any, by which (x) the related Note Balance, after taking
into account all payments to be made on such Payment Date in reduction thereof,
including any related Excess Cash Payments, exceeds (y) the sum of (i) the
Aggregate Principal Balance of the Home Equity Loans in the related Group as of
the end of the applicable Remittance Period, (ii) any amount on deposit in the
Pre-Funding Account at such time disregarding any Pre-Funding Account Earnings
and (iii) the Overcollateralization Amount for the other Class. Accordingly, the
Insurance Policy is similar to the provisions described above with respect to
the overcollateralization provisions insofar as the Insurance Policy guarantees
ultimate collection of the full amount of the related Note Balance, rather than
current payments of the amounts of any Realized Losses to the Noteholders.
Investors in the Notes should realize that, under certain loss or delinquency
scenarios, they may temporarily receive no payments in reduction of the related
Note Balance.
REPORTS TO NOTEHOLDERS
Concurrently with each payment to Noteholders, the Indenture Trustee
will mail a statement on each Payment Date to each Noteholder, the Note Insurer
and the Underwriter in the form required by the Indenture and setting forth the
following information (to the extent the Master Servicer makes such information
available to the Indenture Trustee):
(a) the amount of such payment to the Noteholders of each Class on the
related Payment Date allocable to (i) Monthly Principal (separately setting
forth Prepayments) and (ii) any Excess Cash payment;
(b) the amount of such payment to the Noteholders of each Class on such
Payment Date allocable to Note Interest;
(c) the Note Balance for each Class after giving effect to the payment
of Monthly Principal and any Excess Cash applied to reduce the Note Balance on
such Payment Date;
(d) the Aggregate Principal Balance of the Home Equity Loans in each
Group as of the end of the related Remittance Period;
(e) the aggregate of the Principal Balances of the Home Equity Loans in
each Group in foreclosure or other similar proceedings or in which the borrower
is in bankruptcy and the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure as of the end of the
related Remittance Period;
(f) the number and aggregate Principal Balances of Home Equity Loans in
each Group (i) 30-59 days Delinquent, (ii) 60-89 days Delinquent and (iii) 90 or
more days Delinquent, as of the close of business on the last Business Day of
the calendar month immediately preceding the Payment Date, (iv) the numbers and
aggregate Principal Balances of all of all Home Equity Loans as of such Payment
Date, after giving effect to any payment of principal on such Payment Date, as
of the close of business on the last day of the Remittance Period immediately
preceding the Payment Date and (v) the percentage that each of the amounts
represented by clauses (i), (ii) and (iii) represent as a percentage of the
respective amounts in clause (iv);
S-40
<PAGE>
(g) the status and the number and dollar amounts of all Home Equity
Loans in each Group in foreclosure proceedings as of the close of business on
the last Business Day of the calendar month immediately preceding such Payment
Date, separately stating, for this purpose, all Home Equity Loans with respect
to which foreclosure proceedings were commenced in the immediately preceding
calendar month;
(h) the number of Mortgagors and the Principal Balances of the related
Home Equity Loans in each Group involved in bankruptcy proceedings as of the
close of business on the last Business Day of the calendar month immediately
preceding such Payment Date;
(i) the cumulative Realized Losses incurred on the Home Equity Loans in
each Group from the Cut-Off Day to and including the Remittance Period
immediately preceding the Payment Date;
(j) the amount of Net Liquidation Proceeds realized on the Home Equity
Loans in each Group during the Remittance Period immediately preceding the
Payment Date;
(k) the aggregate amount of the related Monthly Servicing Fee retained
by the Master Servicer for each Group for the related Remittance Period;
(l) the aggregate Principal Balance of the three largest outstanding
Home Equity Loans subject to this Indenture as of the related Determination
Date;
(m) the total of any Substitution Amounts and any Loan Purchase Price
amounts included in such distribution in each Group;
(n) the weighted average Coupon Rate of the Home Equity Loans in each
Group;
(o) during the Funding Period, the Loan Balance of the Subsequent Home
Equity Loans added to the Trust during the related Remittance Period;
(p) during the Funding Period, the remaining Pre-Funded Amount as of
the last day of the Remittance Period; and
(q) such other information as the Note Insurer or any Owner may
reasonably request with respect to Delinquent Home Equity Loans in each Group.
In the case of information furnished pursuant to clauses (a), (b) and
(c) above, the amounts shall be expressed as a dollar amount per Note with a
$1,000 principal denomination.
REDEMPTION OF THE CLASS A-1 AND THE CLASS A-2 NOTES
OPTIONAL REDEMPTION. Each Class of Notes will be subject to redemption,
in whole but not in part, at the option of the Master Servicer, on or after the
first Payment Date (such date, the "Initial Redemption Date") on which the
Aggregate Principal Balance of the related Group of Home Equity Loans has
declined to less than 10% of the Maximum Collateral Amount (the date on which
the Notes are to be redeemed, the "Redemption Date") for such Group.
Each Class of Notes will be redeemed at a redemption price of 100% of
the then outstanding Note Balance of each Class, plus accrued but unpaid
interest thereon through the end of the Interest Period immediately preceding
the related Payment Date; PROVIDED, HOWEVER, that no redemption may take place
unless, in connection with such redemption, any amounts due and owing to the
Note Insurer under the Insurance Agreement are paid in full to the Note Insurer.
There will be no prepayment premium in connection with such a redemption. Notice
of an optional redemption of the Notes must be mailed by the Indenture Trustee
to the Noteholders and the Note Insurer at least ten days prior to the Payment
Date set for such redemption.
S-41
<PAGE>
The payment on the final Payment Date in connection with the redemption
of the Notes shall be in lieu of the payment otherwise required to be made on
such Payment Date in respect of the Notes.
PAYMENTS TO THE HOLDER(S) OF THE RESIDUAL INTEREST
On each Payment Date, any portion of Available Funds for each Group
remaining after making payments of interest and principal due on the related
Notes and other distributions required on such Payment Date, as specified under
"--Payments on the Notes" herein, will be released to the holder(s) of the
Residual Interest, free of the lien of the Indenture Trustee. It is anticipated
that the Residual Interest will be held by the Transferor, or an affiliate
thereof.
THE INDENTURE TRUSTEE
The Chase Manhattan Bank, a New York banking corporation, will be the
Indenture Trustee under the Indenture. The Indenture will provide that the
Indenture Trustee is entitled to the Indenture Trustee Fee and reimbursement of
certain expenses. The Chase Manhattan Bank will also act as successor servicer
under the Servicing Agreement and, upon a termination of the Master Servicer and
the Backup Master Servicer, shall be obligated to succeed to the obligations of
the Master Servicer or to appoint an eligible successor servicer.
The Indenture also will provide that the Indenture Trustee may resign
at any time, upon notice to the Issuer, the Master Servicer, the Note Insurer
and any Rating Agency, in which event the Issuer will be obligated to appoint a
successor Indenture Trustee acceptable to the Note Insurer. The Issuer, with the
prior consent of the Note Insurer, may remove the Indenture Trustee if the
Indenture Trustee ceases to be eligible to continue as such under the Indenture
or if the Indenture Trustee becomes insolvent. Any resignation or removal of the
Indenture Trustee and appointment of a successor Indenture Trustee will not
become effective until acceptance of the appointment by the successor Indenture
Trustee. The Indenture will provide that the Indenture Trustee is under no
obligation to exercise any of the rights or powers vested in it by the Indenture
at the request or direction of any of the Noteholders, unless such Noteholders
shall have offered to the Indenture Trustee reasonable security or indemnity
against the costs, expenses and liabilities which might be incurred by it in
compliance with such request or direction. The Indenture Trustee may execute any
of the rights or powers granted by the Indenture or perform any duties
thereunder either directly or by or through its agents or attorneys; PROVIDED,
HOWEVER, the Indenture Trustee shall remain liable for the performance of all of
its duties. Pursuant to the Indenture, the Indenture Trustee is not liable for
any action it takes or omits to take in good faith which it reasonably believes
to be authorized by an authorized officer of any person or within its rights or
powers under the Indenture. The Indenture Trustee and any director, officer,
employee or agent of the Indenture Trustee may rely and will be protected in
acting or refraining from acting in good faith in reliance on any certificate,
notice or other document of any kind prima facie properly executed and submitted
by the authorized officer of any person respecting any matters arising under the
Indenture. The Indenture Trustee will be indemnified by the Master Servicer for
certain losses and other events to the extent described in the Servicing
Agreement.
VOTING
Unless otherwise specified in the Indenture, with respect to any
provisions of the Indenture providing for the action, consent or approval of the
Noteholders evidencing specified "Voting Interests," each Noteholder will have a
Voting Interest equal to the Percentage Interest represented by such
Noteholder's Note. Unless a Note Insurer Default has occurred and is continuing,
the Voting Interests of the Noteholders will be exercised solely by or with the
consent of the Note Insurer.
NOTE EVENTS OF DEFAULT
An Event of Default with respect to the Notes shall occur if, on any
Payment Date, after taking into account all payments made in respect of each
Class of Notes on such Payment Date, the Note Interest for such Payment Date
remains unpaid or an Overcollateralization Deficit still exists with respect to
the Notes. SEE "The Agreements--Events of Default; Rights upon Event of Default"
in the Prospectus for a description of the circumstances under which a default
on the Notes, other than a payment default, may occur. For a description of the
rights of
S-42
<PAGE>
Noteholders of a Class in connection with any Event of Default with respect
to the Notes, SEE "The Agreements--Events of Default; Rights upon Event of
Default" in the Prospectus. In the absence of a failure by the Note Insurer to
pay Insured Payments, no acceleration of the maturity of the related Notes shall
be permitted without the consent of the Note Insurer.
THE ISSUER
The Issuer is a Delaware business trust established by the Depositor
pursuant to the Trust Agreement. After the Closing Date, the Residual Interest
representing all of the beneficial ownership interest in the Issuer will be held
by the Transferor or an affiliate thereof. The principal office of the Issuer is
located in Wilmington, c/o the Owner Trustee, Rodney Square North, 1100 North
Market Street, Wilmington, DE 19890, Attention: Corporate Trust Administration.
The Issuer does not have, nor is it expected in the future to have, any
significant assets, other than the assets included in the Trust Estate.
THE SPONSOR AND MASTER SERVICER
GENERAL
First Greensboro Home Equity, Inc., a North Carolina corporation is a
specialty consumer finance company founded in 1989 that engages in originating,
purchasing and selling primarily noconforming home equity loans, both directly
and through a wholly owned subsidiary, Miracle Mortgage Inc., d.b.a. New World
Mortgage ("New World" and, together with First Greensboro Home Equity, Inc.,
"First Greensboro"), acquired by First Greensboro Home Equity, Inc. in October
1997. Since inception, First Greensboro has focused on lending to individuals
who have substantial equity in their homes but have impaired or limited credit
histories. The loans by First Greensboro to these borrowers are made for such
purposes as debt consolidation, refinancing, home improvement or educational
expenses. Substantially all of First Greensboro's loans are secured by first or
second mortgage liens on one-to-four family residences, have amortization
schedules ranging from 5 years to 30 years. Although First Greensboro's home
equity loans primarily bear interest at fixed rates, New World offers variable
rate and fixed rate home equity loans and First Greensboro Home Equity, Inc. has
begun underwriting variable rate home equity loans since its acquisition of New
World.
First Greensboro originates home equity loans primarily through First
Greensboro Home Equity, Inc.'s retail network of 51 branch offices located in
twelve states in the Southeast and Midwest regions operated under the First
Greensboro name and through New World's seven branch offices located in Utah,
Idaho and Nevada. In addition, First Greensboro also obtains loans on a
wholesale basis from approved mortgage brokers and purchases loans on a
correspondent basis from selected financial institutions. First Greensboro's
strategy is to utilize these different origination channels to generate growth
in the volume of loans originated or purchased while diversifying its sources of
loans and maintaining emphasis on its underwriting standards. First Greensboro
Home Equity, Inc.'s total loan originations and purchases increased from $139.7
million in 1995 to $246.9 million in 1996 and $379.1 million in 1997 and were
$184.4 million during the first four months of 1998. Of First Greensboro Home
Equity, Inc.'s total loan production during the first four months of 1998, 81.5%
were originated through First Greensboro Home Equity, Inc.'s branch office
network, 12.3% were purchased through brokers and 6.2% were purchased from
financial institutions. The acquisition of New World was made in furtherance of
First Greensboro's growth and diversification strategy. In addition to allowing
First Greensboro to enter the new markets of Utah, Idaho and Nevada with an
established operation and experienced personnel, First Greensboro expects New
World to generate significant increases in loan volume. In 1997, New World's
originations and purchases of mortgage loans equaled $75.9 million. First
Greensboro also evaluates products that it believes are complementary to its
existing loan offerings and that may enable it to utilize its experience in the
nonconforming home equity loan sector to achieve additional growth. In
furtherance of this strategy, First Greensboro acquired a conforming loan broker
in 1996 to originate loans for customers that could qualify for conventional
bank financing and it currently is expanding into the origination and purchase
of Title I home improvement loans insured by the United States Department of
Housing and Urban Development.
First Greensboro's customers generally place a premium on a high degree
of personalized service and fast response to their loan applications. As a
result, First Greensboro endeavors, consistent with its underwriting guidelines,
to grant preliminary approval of applications within 24 hours of receipt and
complete the funding of
S-43
<PAGE>
loans within 14 to 21 days of preliminary approval, whether the loan application
originates through its retail network or from a broker or financial institution.
In addition, First Greensboro's branch personnel, underwriting staff and loan
processors follow loans through each step in the application and closing
process.
First Greensboro believes that the depth and experience of its
management team enables it to compete effectively. The five members of First
Greensboro's senior management team average over 16 years of experience in the
consumer finance and/or mortgage lending business. In addition, in October 1996,
Centura Banks, Inc. ("Centura"), a bank holding company with over $6.3 billion
in total assets and headquartered in Rocky Mount, North Carolina, purchased 49%
of the outstanding common stock of First Greensboro. First Greensboro's board of
directors consists of four members of First Greensboro's senior management, five
persons affiliated with Centura, one unaffiliated member who is president of
another mortgage bank and one unaffiliated member who is an attorney.
As of May 19 1998, First Greensboro had 676 full and part-time
employees. First Greensboro's headquarters are located at 4830 Koger Blvd. in
Greensboro, North Carolina 27407 and its telephone number is (910) 855-4925.
CREDIT AND UNDERWRITING GUIDELINES
Loans are underwritten in accordance with First Greensboro's
underwriting guidelines. The underwriting process is intended to assess the
prospective mortgagor's willingness and ability to repay the loan and the value
and adequacy of the real property security as collateral for the loan. While
First Greensboro's primary consideration in underwriting a mortgage loan is the
mortgagor's employment stability and debt-to-income ratio, the value of the
mortgaged property relative to the amount of the mortgage loan is also a
critical factor. In addition, First Greensboro considers, among other things, a
mortgagor's credit history and repayment ability, as well as the type and use of
the mortgaged property.
First Greensboro's loan program includes (i) a full documentation
("Full Documentation") program, (ii) a stated income from the application
("Stated 1003") program which was developed as a streamlined documentation
program but is also used for wage earners who have a second job paying cash and
(iii) a non-income qualified ("NIQ") program for prospective self-employed
mortgagors whose income shown on their application cannot be verified with tax
returns. Under each of these programs, First Greensboro reviews the loan
applicant's source of income, calculates the amount of income from sources
indicated on the loan application or similar documentation, reviews the credit
history of the applicant, calculates the debt- to-income ratio to determine the
applicant's ability to repay the loan, reviews the type and use of the property
being financed and reviews the property for compliance with its underwriting
standards.
Loan applications are evaluated by members of First Greensboro's
underwriting department and applicants with less favorable evaluations generally
are offered loans with higher interest rates and lower Loan-to-Value Ratios. The
following is a general description of the loan criteria used by First
Greensboro's underwriting staff:
"A" RISK. Under the "A" risk category, First Greensboro offers several
different products to prospective mortgagors. The standard "A" risk product is
the "A-80" (for 80% Loan-to-Value Ratio) which allows a maximum of up to two
30-day late payment on the prospective mortgagor's existing mortgage in the last
12 months, installment and revolving credit having no more than one 30-day late
on major credit ($750 or more) and three 30-day late payments and one 60-day
late payment on minor credit (less than $750) in the last 24 months.
Bankruptcies must be discharged for at least two years with re-established good
credit. Prospective mortgagors are generally required to have remained in the
same line of work for the previous two years. The prospective mortgagor's
mortgage history generally must be current on his or her credit report. Other
delinquent collections indicated on the credit report cannot exceed $1,000 and
judgments, liens or charge-offs are generally not acceptable.
The "SUPER A" product is a preferred rate product for the prospective
mortgagor who falls under the "A+" category. The prospective mortgagor must not
have any 30-day late payments on their credit history for the preceding 24
months and a maximum of three 30-day late payments on their credit history on
revolving and installment debt in the preceding two years. The prospective
borrower may not have any charge-offs, liens, judgments and may not have any
bankruptcies within the past five years. Where there are two or more prospective
S-44
<PAGE>
mortgagors, the primary prospective mortgagor's credit score is the one used for
the purposes of determining the maximum Loan-to-Value Ratio. A primary
prospective mortgagor is classified as the prospective co-mortgagor with the
highest income. If two or more prospective mortgagors are each applying to
qualify individually, the prospective mortgagor with the lower income must have
a minimum credit score of 600. Loan-to-Value Ratios range from 80% for a credit
score of 640 to 95% for a credit score of 700 or more. First Greensboro
determines which credit scores to use according to a state by state preferred
repository list.
This is a first lien product on owner occupied properties. No
manufactured housing is allowed. Prospective mortgagors are required to have two
years of current employment history, verifiable income and a maximum
debt-to-income ratio of 45%. Generally, co-mortgagors must have a minimum
combined monthly income of $4,000. However, where the prospective mortgagor has
been in the same field of employment and has an otherwise satisfactory level of
disposable income, exceptions may be made with respect to current employment
history and income requirements.
Other products in the "A" risk category are similar to the A-80 product
with the interest rate and Loan-to-Value Ratio being the main variables. Credit
requirements tighten on "A" risk products with greater than 80% Loan-to-Value
Ratios generally to no derogatory ratings on mortgages and major credit with
minor credit remaining the same as the A-80 product. Under this category, the
maximum Loan-to-Value Ratio is 95% for first lien mortgage loans and the maximum
Combined Loan-to-Value Ratio generally is 100% for second lien mortgage loans.
"A" risk products range from minimum loan amounts of $15,000 with
respect to first lien mortgages and $1,000 with respect to second lien mortgages
to a maximum of $650,000 with exception to $700,000. Bankruptcies generally are
not allowed for the higher Loan-to-Value Ratio products in the "A" risk
category. NIQ and Stated 1003 products permit Loan-to-Value Ratios of 80% and
70%, respectively.
"B" RISK. Under the "B" risk category, the most widely used product is
the 80% Loan-to-Value Ratio loan, the "B-80." Mortgage credit history generally
may have a maximum of three 30-day late payments in the last twelve months on
the existing mortgage and up to six 60-day cumulative derogatories in the last
two years on revolving and installment debt. Bankruptcies must have been
discharged for at least two years with re-established good credit. Prospective
mortgagors are generally required to have been employed in their current
position for at least one year and to have at least two years of experience
within the same field of employment. Other delinquent collections indicated on
the credit report generally cannot exceed $2,000 and judgments, liens or
charge-offs over $500 generally are not permitted within the previous 24 months.
There are also 75% and 85% Loan-to-Value Ratio products in the "B" risk
category. Like the "A" risk product, credit requirements tighten on products
with Loan-to-Value Ratios exceeding 80% while requirements are less stringent
for products with Loan-to-Value Ratios less than 80%. The NIQ and Stated 1003
products have 70% and 65% respectively Loan-to-Value Ratios. The minimum loan
amount under this product category is $10,000 with respect to first lien
mortgages and $1,000 with respect to second lien mortgages and the maximum loan
amount is $400,000.
"C" RISK. First Greensboro has five products under the "C" risk
category, with the most widely used product being the "C-80," the 80%
Loan-to-Value Ratio product. There may be a maximum of four 30-day, one 60-day
and no 90-day delinquent payments on the prospective mortgagor's mortgage
history in the last 12 months. Installment and revolving credit can only have
four 90-day derogatories in the last 24 months. Bankruptcies must have been
discharged for at least one year with re-established good credit. Prospective
mortgagors are generally required to have been employed in their current
position for at least one year and to generally have at least two years of
experience within the same field of employment. Stand-alone second mortgages
cannot have any 60-day delinquent payments on the present mortgage and must be
current on the credit report.
The C-75 product allows a maximum of four 30-day, two 60-day and one
90-day delinquent payment(s) on the prospective mortgagor's existing mortgage in
the last twelve months. Installment and revolving debt may have up to eight
90-day derogatory ratings in the previous two years. The C-70 product has the
same characteristics as the C-75 but has a lower interest rate. The NIQ and
Stated 1003 products have maximum Loan-to-Value Ratios of
S-45
<PAGE>
65% and 60%, respectively. The minimum loan amount for the "C" risk category is
$10,000 with respect to first lien mortgages and $1,000 with respect to second
lien mortgages and the maximum loan amount is $250,000.
M-85. First Greensboro developed the M-85 product for the prospective
mortgagor who falls under a "C" or "D" risk category with respect to installment
and revolving debt, but the "A" risk category with respect to their existing
mortgage history. The M-85 product allows a maximum of up to one 30-day late
payment on the prospective mortgagor's existing mortgage in the last 12 months
and three 30-day late payments in the last 24 months. Mortgage delinquencies are
counted individually. For example, where a customer is 30 days late in January,
February and March, this program would register this history as three 30-day
late payments, instead of a single rolling 30-day late payment. The existing
mortgage must be with institutional lenders. Prospective mortgagors may not have
a previous foreclosure in their credit history. Bankruptcies must be discharged
for at least 24 months and the borrower must have a re-established mortgage
history with an institutional lender. The M-85 product is a first lien mortgage
product for owner occupied properties. No condominiums or townhouses are
allowed. Prospective mortgagors are also required to have two years of
employment history and verifiable income.
"D" RISK. Under the "D" risk category, First Greensboro has three
different products with the 65% Loan-to-Value Ratio product, the "D-65," being
the most prevalent. The prospective mortgagor can be as much as 120 days past
due and his or her mortgage and his or her ratings for installment and revolving
credit usually are poor. Only active bankruptcies are not permitted. The amount
of equity the prospective mortgagor is allowed to cash-out cannot exceed 10% of
the loan amount or $10,000, whichever is less. Prospective mortgagors are
generally required to have been employed in their current position for at least
six months and to have at least one year of experience within the same field of
employment and a two-year employment history.
The "D-70" (70% Loan-to-Value Ratio) product has the same
characteristics as the D-65 product except for the prospective mortgagor's
mortgage history; existing mortgages cannot be more than 60 days past due. The
"D-55" (55% Loan-to-Value Ratio) is primarily a loan based on the prospective
mortgagor's home equity that can be used to buy the prospective mortgagor out of
bankruptcy or foreclosure. This product allows a cash-out of equity to clear the
title only.
No stand alone second mortgages are allowed on "D" risk products nor
are NIQ or Stated 1003 products available in this risk category. Loan amounts
can range from $10,000 to $150,000.
EQUIMOST. Equimost is First Greensboro's 125% Loan-to-Value Ratio
product. This extended Loan-to-Value home equity loan is offered as a
"piggyback" loan (i.e. originated at the same time as a first lien mortgage on
the same property) or a stand-alone second lien mortgage loan. While all
Equimost customers fall under the "A" risk category, it is their credit score
which determines the maximum loan amount and the availability of a cash-out of
equity.
The Equimost has had allowable credit scores as low as a 640 FICO,
Beacon or Empirica in the past. However, on May 21, 1998, the minimum credit
score permitted was raised to 660. Where there are two prospective mortgagors,
the primary prospective mortgagor's credit score is the one used for the
purposes of the program guidelines. A primary prospective mortgagor is
classified as the prospective co-mortgagor with the highest income. First
Greensboro determines which credit scores to use according to a state by state
preferred repository list. The minimum loan amount for Equimost is $10,000 and
the maximum loan amount, which was originally $100,000, has been reduced to
$75,000. The amount of equity which the prospective mortgagor is allowed to
cash-out ranges from $10,000 to $35,000 depending on prospective mortgagor's
credit score. The applicable interest rates also vary according to the credit
score, but the maximum debt-to-income ratio is 45%.
The average credit score on Equimost loans included in the Trust Estate is 713.
PIGGYBACK SECOND MORTGAGE. Borrowers often have financial needs in
excess of the amount that First Greensboro's first lien mortgage underwriting
guidelines would otherwise permit First Greensboro to finance. As a result, a
"piggyback" second lien mortgage loan with a Combined Loan-to-Value Ratio as
high as 125% and, with respect to any Home Equity Loans conveyed to the Trust,
up to a maximum Combined Loan-to-Value Ratio of 100% (except for 34 home equity
loans which had a Combined Loan-to-Value Ratio not exceeding 125.01%), may be
made to a prospective mortgagor to whom First Greensboro is making a first
mortgage loan, usually under circumstances where First Greensboro believes that
such prospective mortgagor is a good credit risk but does not
S-46
<PAGE>
have sufficient equity to complete the transaction. A majority of the first lien
mortgages in the Trust Estate are subject to piggyback second lien mortgages.
EXCEPTIONS. First Greensboro will originate loans outside of its
underwriting guidelines in certain circumstances where sufficient compensating
factors indicate originating the loan is warranted and the loan is approved by a
supervisory employee. On a case by case basis, it may determine that the
prospective mortgagor warrants a risk category upgrade, a debt service-to-income
ratio exception, a pricing exception, a Loan-to-Value Ratio exception or an
exception from certain requirements of a particular risk category (collectively
called an "upgrade" or "exception"). An upgrade or exception may be allowed if
the application reflects certain compensating factors, among others; low
Loan-to-Value Ratio; pride of ownership; stable employment; an "A" mortgage
history; and the subject property's condition. Accordingly, First Greensboro may
classify certain mortgage applications that, in the absence of such compensating
factors, would satisfy only the criteria of a less favorable risk category. The
compensating factors are documented in the loan file.
The permitted Loan-to-Value Ratio is reduced by 10% for each product in
the "A" and "B" risk categories for loans secured by non-owner occupied
properties, and loans are generally not permitted in the "C" and "D" risk
categories with this type of security. Debt-to-income ratios range from 42% to
55% depending on the risk category and residual income left to the prospective
mortgagor. First Greensboro also generally increases the applicable interest
rate by approximately 50 basis points for non-owner-occupied properties. Rural
properties may have a 10% reduction in permitted Loan-to-Value ratio, determined
on a case by case basis. Under all of the foregoing programs, all documentation
must be no more than 45 days old at the time of the underwriting and closing of
the related loan. Credit reports must be no more than 30 days old.
The collateral securing First Greensboro's loans are generally one- to
four-family residences, including townhomes and condominiums. In most cases,
First Greensboro reduces its permitted Loan-to-Value Ratio for loans secured by
condominiums by 10%. Loans secured by townhomes have a maximum permitted
Loan-to-Value Ratio of 90%. Manufactured homes are not accepted as collateral
except for doublewide manufactured homes with masonry skirting or those without
masonry skirting exhibiting pride of ownership by the borrower.
THE UNDERWRITING PROCESS
First Greensboro's loan application process is conducted by First
Greensboro's branch officers and approved mortgage brokers who compile
information necessary for First Greensboro's underwriting department to evaluate
the loan. The approval process generally is coordinated over the telephone with
applications and credit reports obtained by branch officers or brokers usually
sent by facsimile transmission to the underwriting department at one of First
Greensboro's offices. Branch officers communicate with First Greensboro's retail
underwriting staff, which consists of 29 underwriters and loan processors
located in Greensboro, North Carolina and Orem, Utah, and mortgage brokers work
with First Greensboro's wholesale underwriting staff of 13 underwriters and
processors located in Greensboro, North Carolina and Orem, Utah. A retail or
wholesale underwriter reviews the applicant's credit history, based on the
information contained in the application as well as reports available from
credit reporting bureaus, to see if the credit history is acceptable given First
Greensboro's underwriting guidelines. Based on this review, the proposed terms
of the loan are then communicated to the branch officer or broker responsible
for the application who in turn discusses the proposal with the loan applicant.
If the applicant accepts the proposed terms, a branch officer or broker will
gather additional information necessary for the closing and funding of the loan.
First Greensboro's underwriting criteria require it to verify the
income of each borrower. Under the Full Documentation Program, salaried
borrowers and wage earners are generally required to submit two current pay
stubs and W-2 forms for the most recent past two years and First Greensboro also
performs a verbal verification of employment prior to closing the mortgage loan.
Income for self-employed borrowers is verified by examination of copies of tax
returns for the two most recent years and a current year-to-date income
statement or bank statements for the borrower's business for the last six
months. Under the NIQ program, a standard form of verification of income is not
required; however, the borrower's application must show reasonable assets in
relation to the stated income and verification that the borrower has been
self-employed for two years is obtained by examination of copies of tax returns
for the two most recent years. Under the Stated 1003 program, W-2 forms and pay
stubs are not required but the borrower must have reasonable assets in relation
to the stated income, income must be reasonable and consistent with the
borrower's profession and his or her employment must be verbally verified. In
computing
S-47
<PAGE>
income, First Greensboro has developed specific guidelines for inclusion of
various sources of income if the borrower can demonstrate an earnings history.
For example, rental income is allowed if the borrower can produce tax returns
and rental agreements showing receipt of this income.
As part of its underwriting guidelines, First Greensboro has developed
a list of approved credit repositories for each of its geographic markets that
it believes provides the most accurate borrower credit profile. A credit report
from one approved repositories is required for pre-approval and at least two
reports are required prior to closing. These credit reports are the primary
means utilized to verify each borrower's mortgage and other debt payment
histories.
First Greensboro places a strong emphasis on establishing the adequacy
of the collateral for loans. Except for certain loans with a 125%
Loan-to-Value-Ratio, prior to closing any loan, First Greensboro requires an
appraisal of the collateral property by a First Greensboro-approved independent
licensed appraiser. First Greensboro selects appraisers based upon a review of
sample appraisals, professional experience, education, and by contacting clients
of the appraiser and reviewing the appraiser's experience with the particular
types of properties that secure First Greensboro's loans. In the case of loans
purchased on a wholesale basis from financial institutions, if the original
appraisal was performed by an appraiser that is not company approved, then First
Greensboro obtains an additional appraisal from an approved appraiser or
requires that an approved appraiser review the original appraisal. First
Greensboro generally has a minimum property value of $40,000 for all loans.
However, First Greensboro will accept properties of lower values based on
compensating factors such as low Loan-to-Value Ratios and particularly strong
appraisals as evidenced by closely related comparable sales.
Upon completion of the underwriting processing, the closing of the loan
is scheduled with a First Greensboro-approved closing attorney or agent. The
closing attorney or agent is responsible for completing the loan closing
transaction in accordance with applicable law and First Greensboro's operating
procedures. Except for loans with a 125% Loan-to-Value-Ratio, Title insurance,
insuring First Greensboro's interest as mortgagee, is required on all loans as
is evidence of adequate homeowner's insurance naming First Greensboro as an
additional insured.
SERVICING
The servicing department of the Master Servicer, First Greensboro Home
Equity, Inc. is located in Greensboro, North Carolina and was established in
1992 to service new accounts before sale on a servicing released basis as well
as to service a limited number of retained loans.
The Master Servicer is responsible for all recorded documents,
insurance records, customer inquiries, and all aspects of collections including
bankruptcy, foreclosure and ultimately the disposition of REO (real estate
owned) properties. The Master Servicer currently utilizes the "LSAMS" computer
servicing system to bridge, notate, and track all loans. The Master Servicer
may, with the consent of the Note Insurer, utilize third-party entities as
subservicers of loans. At such times, if any, that a third party commences
servicing any loans, temporary interruptions in servicing may occur.
Initial contact with a borrower is usually made through a welcome call
placed five to ten days prior to the initial due date of a mortgage. The call is
made to ensure that the borrower is in receipt of his or her coupon book, that
all the information contained in the book is correct and to answer any questions
regarding loan closing.
The Master Servicer's servicing philosophy is to reach delinquent
borrowers by telephone when possible in order to prompt a borrower to remit
payment. Since no grace period is associated with the mortgages, collectors are
instructed to begin a calling effort to all delinquent accounts five or more
days past due. "LSAMS" has the capability of automatically assigning past due
accounts into a loan collector's "auto queue" and prompts a collector to place a
telephone call to such accounts. All activity with an account is logged on
"LSAMS" so that any servicing personnel may retrieve all collections history and
use it in all borrower contact. Mail is sent when a borrower cannot be contacted
by telephone.
When an account becomes thirty days past due, loss mitigation is
initiated. Loss mitigation consists of the following: Collectors will send
thirty day demand notices to any account which is thirty days past due and has
not
S-48
<PAGE>
made any arrangements or has failed to satisfy arrangements to bring such
account current. Field calls, which may also serve as property inspections, when
feasible will be conducted at forty-five days past due. When an account reaches
fifty days past due, a pre-foreclosure letter is sent to the borrower. This
letter serves a ten day notice of the intent to hire an attorney and begin
foreclosure proceedings.
For those loans in which collection and loss mitigation efforts have
been exhausted without success, the foreclosure manager will determine the best
course of action given current market value and reason for borrower default such
as foreclosure action or "DIL" ("deed in lieu of foreclosure"). Should
foreclosure action be taken, the foreclosure department is then responsible for
the loan and tracking its progression through the foreclosure process including
placing the case with the appropriate attorney, tracking sale date, bids, and
fees incurred. Since regulations and practices for foreclosure and foreclosure
sale vary greatly from state to state, attorneys are retained on a regional or
state basis to ensure state laws and practices are followed. The foreclosure
department currently has a list of approved attorneys for use in connection with
defaulted loans which it utilizes as the need arises. "LSAMS" is also utilized
with foreclosure accounts to track account activity.
Once title to a property is obtained, REO personnel in the servicing
department handle all aspects of disposing of the property. REO personnel are
responsible for placing the property with a real estate agent and tracking the
property through liquidation.
The bankruptcy personnel in the servicing department file claims for
all bankruptcy accounts. The bankruptcy personnel track all creditor meetings,
hearing dates and disbursement dates. In addition, if a borrower makes mortgage
payments outside the bankruptcy court plan, telephone contact is reestablished
with the borrower. Again, "LSAMS" is utilized to track account activity.
In servicing junior lien loans in its portfolio, First Greensboro
intends to satisfy each such senior mortgage at or prior to the foreclosure sale
only to the extent that it determines any amount so paid will be recoverable
from future payments and collections on such junior lien loans or otherwise. In
servicing junior lien loans, First Greensboro intends to advance funds to keep
the senior lien current in the event the mortgagor is in default thereunder
until such time as First Greensboro satisfies the senior lien by sale of the
mortgaged property, but only to the extent that it determines such advances will
be recoverable from future payments and collections on that junior lien or
otherwise.
HISTORICAL SERVICING EXPERIENCE OF THE MASTER SERVICER
The Master Servicer has provided the following information regarding
the servicing of home equity loans which it considers nonconforming credits and
none of the Backup Master Servicer, the Transferor, the Depositor, the Issuer
nor the Underwriter makes any representations or warranties as to the accuracy
or completeness of such information. The table below sets forth the overall
delinquency experience on residential one-to-four family mortgage loans for
nonconforming credits which are currently serviced by the Master Servicer. No
home equity loan is considered delinquent for the purposes of this table until a
payment is 30 days past due on a contractual basis. It should be noted that the
Master Servicer commenced its servicing activities in September 1997.
Accordingly, the Master Servicer has limited historical delinquency, bankruptcy
foreclosure or default experience that may be referred to for estimating the
future delinquency and loss experience of the home equity. The delinquency and
loss percentages may be affected by the increase in size of, and the relative
lack of seasoning of a substantial portion of the portfolio. THE INFORMATION IN
THE TABLE BELOW IS NOT INTENDED TO INDICATE OR PREDICT THE EXPECTED DELINQUENCY
EXPERIENCE ON PAST CURRENT OR FUTURE POOLS OF HOME EQUITY LOANS FOR WHICH THE
MASTER SERVICER IS THE PRIMARY SERVICER. SEE "Risk Factors--The Master Servicer
Has Limited Experience Servicing Home Equity Loans.
S-49
<PAGE>
<TABLE>
<CAPTION>
FIRST GREENSBORO HOME EQUITY, INC.
NONCONFORMING HOME EQUITY LOAN PORTFOLIO EXPERIENCE
(DOLLARS IN THOUSANDS)
March 31, 1998 December 31, 1997 September 30, 1997
--------------------- -------------------- --------------------
<S> <C> <C> <C>
Total Servicing Portfolio $ 228,910 $ 171,235 $ 83,256
30-59 days delinquent 2,549 2,184 600
60-89 days delinquent 911 249 249
90 days or more delinquent 2,513 1,028 495
--------------------- --------------------- --------------------
Total Delinquencies $ 5,974 $ 3,461 $ 1,344
===================== ===================== ====================
Total Delinquency Percentage 2.6% 2.0% 1.6%
REO Properties $ 365 $ 311 $ 252
</TABLE>
Although the Master Servicer's home equity loan portfolio has a
relative lack of seasoning, the Master Servicer has experienced no realized
losses on its servicing portfolio to date. The figures stated for 90 days or
more delinquent Home Equity Loans include those Home Equity Loans which are in
foreclosure.
THE SELLER
The Seller, First Greensboro Capital Corporation is a Tennessee
corporation. The principal executive offices of the Seller are located at 5909
Shelby Oak, Suite 137, Memphis, Tennessee 38139.
THE TRANSFEROR
First Owner's Trust, Inc., a Tennessee corporation, a limited purpose,
wholly-owned subsidiary of the Seller. The Seller has conveyed its interest in
each Home Equity Loan to the Transferor which in turn will cause such interests
to be conveyed to the Depositor. The principal executive offices of the
Transferor are located at 5909 Shelby Oak, Suite 137, Memphis, Tennessee 38139.
THE DEPOSITOR
Home Equity Securitization Corp., a North Carolina corporation was
incorporated in the State of North Carolina and is a wholly-owned, special
purpose subsidiary of First Union National Bank, a national banking association
with its headquarters in Charlotte, North Carolina. The principal executive
offices of the Depositor are located at 301 South College Street, Charlotte
North Carolina 28202-6001.
THE MASTER BACKUP SERVICER
Calmco, Inc., a Delaware corporation, with its principal executive
offices located at 301 Congress Avenue, Suite 200, Austin, Texas 78701
(Telephone number: (512) 344-3633) will serve as the Master Backup Servicer for
the Home Equity Loans pursuant to the Servicing Agreement (in such capacity, the
"Master Backup Servicer"). The Master Backup Servicer is a wholly owned
subsidiary of DLJ Mortgage Capital, Inc. As of March 31, 1998, the Master Backup
Servicer had approximately $10,621,744 in assets, approximately $4,624,203 in
liabilities and approximately $5,997,541 in equity. For the year ended December
31, 1997, the Master Backup Servicer's revenue from continuing operations was
approximately $6.898 million.
The major business of the Master Backup Servicer has been active in the
acquisition and servicing of non-performing and sub-performing single family
mortgage loan portfolios acquired from private investors.
S-50
<PAGE>
DESCRIPTION OF THE HOME EQUITY LOANS
GENERAL
The statistical information presented in this Prospectus Supplement
concerning the Home Equity Loans is based on the Initial Home Equity Loans in
Group I and Group II as of the Cut-Off Date.
This subsection describes generally certain characteristics of the Home
Equity Loans. Unless otherwise noted, all statistical percentages in this
Prospectus Supplement are measured by the Aggregate Principal Balance of the
related Initial Home Equity Loans in the related Group as of the Cut-Off Date.
The Home Equity Loans are generally not assumable pursuant to the terms
of the related Mortgage Note. SEE "Certain Prepayment and Yield Considerations"
herein.
None of the Home Equity Loans is or will be insured or guaranteed by
the Issuer, the Seller, the Transferor, the Sponsor, the Depositor, the Master
Servicer, the Indenture Trustee, the Note Insurer, any originator or any of
their respective affiliates, or by any governmental agency or other person,
except as described herein.
As of the Cut-off Date, the Group I Home Equity Loans consisted of
1,177 Home Equity Loans with an
<PAGE>
Aggregate Principal Balance totaling $72,650,717.11 (the "Initial Group I
Aggregate Principal Balance"), the Group II Home Equity Loans consisted of
1,127 Home Equity Loans with an Aggregate Principal Balance totaling
$75,332,394.79 (the "Initial Group II Aggregate Principal Balance") and the
Home Equity Loans in the Trust Estate consisted of 2,304 Home Equity Loans
with an Aggregate Principal Balance totaling $147,983,111.90 (the "Initial
Aggregate Principal Balance"). As used herein, the term "Aggregate Principal
Balance" means the aggregate of the Principal Balances of the Home Equity Loans
in Group I and Group II in the Trust Estate at the related date of
determination.
The "Combined Loan-to-Value Ratio" of a Home Equity Loan is the ratio,
expressed as a percentage, equal to the sum of (a) the original balance of the
Home Equity Loan and (b) the outstanding balance of any senior lien mortgage
divided by the lesser of (x) the appraised value of the Mortgaged Property at
the time of origination (the "Appraised Value") or (y) the sales price of such
Mortgaged Property if such property was sold within 12 months of the time of
loan origination. In a limited number of circumstances, and within the Sponsor's
underwriting guidelines, the Sponsor discounts the Appraised Value of Properties
(when calculating maximum Loan-to-Value Ratios) where the Properties are unique,
have a high value or where the comparables are not within FNMA guidelines. The
purpose for making these reductions is to value the Properties more conserva-
tively than would otherwise be the case if the appraisal were accepted as
written. In the instance where more than one appraisal was performed on the
subject property, the lesser of the two values was used to determine the Loan-
to-Value Ratio and the Combined Loan-to-Value Ratio. SEE "Risk Factors--As a
Result of the Underwriting Standards, Home Equity Loans Are Likely to Experience
Rates of Delinquency, Foreclosure and Bankruptcy That Are Higher Than Those
Experienced by Home Equity Loans Underwritten in a More Traditional Manner"
herein.
No assurance can be given that values of the Properties have remained or
will remain at their levels on the dates of origination of the related Home
Equity Loans. If the residential real estate market has experienced or should
experience an overall decline in property values such that the outstanding
balances of the Home Equity Loans, together with the outstanding balances of
any first mortgage, become equal to or greater than the value of the Properties,
the actual rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the mortgage lending industry.
HOME EQUITY LOAN CHARACTERISTICS--GROUP I
The Group I Initial Home Equity Loans to be transferred by the Depositor to
the Issuer on the Closing Date will consist of 1,177 home equity loans, of which
1,140 are fixed rate home equity loans and 37 are adjustable rate home equity
loans, evidenced by promissory notes (the "Mortgage Notes") secured by first
and second lien deeds of trust, security deeds or mortgages, which are located
in 22 states. The aggregate outstanding Principal Balance of the fixed rate
Group I Initial Home Equity Loans as of the Cutoff Date is $69,729,875.15 or
95.98% of the
S-51
<PAGE>
Aggregate Principal Balance of the Group I Initial Home Equity Loans; the
aggregate outstanding Principal Balance of the Group I Adjustable Rate Initial
Home Equity Loans as of the Cutoff Date is $2,920,841.96 or 4.02% of the
aggregate Principal Balance of the Group I Initial Home Equity Loans. The
Properties securing the Group I Home Equity Loans consist primarily of
one-to-four family residential properties. The Properties may be owner-occupied
and non-owner occupied investment properties (which includes second and vacation
homes). All of the Group I Initial Home Equity Loans were originated or
purchased on or after November 27, 1996. Group I Initial Home Equity Loans
aggregating 94.62% of the aggregate Principal Balances of the Group I Initial
Home Equity Loans as of the Cut-Off Date are secured by first liens on the
related properties, and the remaining Group I Initial Home Equity Loans are
secured by second liens on the related properties. No Combined Loan-to-Value
Ratio relating to any Group I Initial Home Equity Loan exceeded 100% as of the
Cut-Off Date except for 18 loans with an aggregate Principal Balance of
$537,716.75 (or 0.74% of the Group I Initial Aggregate Principal Balance of the
Group I Initial Home Equity Loans), which had a Combined Loan-to-Value Ratio not
greater than 125%. None of the Group I Initial Home Equity Loans is insured by
pool mortgage insurance policies or primary mortgage insurance policies;
however, certain payments of principal and interest due to the Noteholders are
insured by the Note Insurer pursuant to the Note Insurance Policy. SEE "The Note
Insurer--Note Insurance Policy" herein.
As of the Cut-Off Date, the average Principal Balance of the Group I
Initial Home Equity Loans was $61,725.33. The minimum and maximum Principal
Balances of the Group I Initial Home Equity Loans as of the Cut-Off Date were
$6,964.18 and $225,024.51, respectively. As of the Cut-Off Date, the interest
rates (the "Coupon Rates") of the Group I Initial Home Equity Loans ranged from
7,70% to 17.99%; the weighted average Coupon Rate of the Group I Initial Home
Equity Loans was approximately 10.285%; the weighted average Combined
Loan-to-Value Ratio of the Group I Initial Home Equity Loans was approximately
80.24%; the weighted average remaining term to maturity of the Group I Initial
Home Equity Loans was approximately 279 months; and the remaining terms to
maturity of the Group I Initial Home Equity Loans ranged from 59 months to 360
months. As of the Cut-Off Date, approximately 94.62% of the aggregate Principal
Balance of the Group I Initial Home Equity Loans were secured by first mortgages
and approximately 5.38% of the aggregate Principal Balance of the Group I
Initial Home Equity Loans were secured by second mortgages. Group I Initial Home
Equity Loans containing "balloon" payments represented approximately 3.24% of
the aggregate Principal Balance of the Group I Initial Home Equity Loans. No
Group I Initial Home Equity Loan will mature later than June,1 2028.
Approximately 0.79% of the Group I Initial Home Equity Loans by Principal
Balance as of the Cut-Off Date were greater than or equal to 30 days, but less
than 60 days, past due as of the Cut-Off Date. Approximately 0.06% of the Group
I Initial Home Equity Loans by Principal Balance as of the Cut-Off Date were
greater than or equal to 60 days, but less than 90 days, past due as of the
Cut-Off Date. However, investors in the Notes should be aware that 57.28% of the
Group I Initial Home Equity Loans by Initial Aggregate Principal Balance had a
first monthly payment due on or after May 1,1998 and it was not possible for
such Initial Home Equity Loans to be more than 30 days past due as of the
Cut-Off Date.
The Group I Adjustable Rate Initial Home Equity Loans bear interest rates
relating to payments that on the first payment date after a period of six months
(except for 28 loans with an aggregate Principal Balance as of the Cut-Off Date
of $2,219,357.67 that adjust 24 months after the first payment date and have an
initial cap of 1.00% above the related initial Coupon Rate) following the
related first payment date adjust based on the six-month London Interbank
Offered Rate based on quotations of major banks as published in The Wall Street
Journal. The Group I Adjustable Rate Initial Home Equity Loans have semi-annual
interest rate and payment adjustment frequencies after the first interest rate
adjustment date. As of the initial Cut-Off Date, the weighted average remaining
period to the next interest rate adjustment date for the Group I Adjustable Rate
Initial Home Equity Loans was approximately 17 months. Each Group I Adjustable
Rate Initial Home Equity Loan will have an initial payment adjustment 6 months
after the first payment date, an initial cap of 1.00% above the related initial
Coupon Rate (except for 28 loans with an aggregate Principal Balance as of the
Cut-Off Date of $2,219,357.67 that adjust 24 months after the first payment date
and have an initial cap of 1.00% above the related initial Coupon Rate) and a
semi-annual rate adjustment cap of 1.00% above the then current interest rate
for such Group I Adjustable Rate Initial Home Equity Loan. The weighted average
Coupon Rate of the Group I Adjustable Rate Initial Home Equity Loans was
approximately 9.85% per annum. The interest rates borne by the Group I
Adjustable Rate Initial Home Equity Loans as of the Cut-Off Date ranged from
7.70% per annum to 12.35% per annum. The Group I Adjustable Rate Initial Home
Equity Loans had a weighted average gross margin as of the Cut-Off Date of
approximately 6.27%. The initial gross margin for the Group I Adjustable Rate
Initial Home Equity Loans ranged from 4.80% to 8.65%. As of the Cut-Off Date,
the Maximum Rates at which interest may accrue on the Group I Adjustable Rate
S-52
<PAGE>
Initial Home Equity Loans ranged from 13.70% per annum to 18.35% per annum. The
Group I Adjustable Rate Initial Home Equity Loans had a weighted average Maximum
Rate as of the Cut-Off Date of approximately 15.85 per annum. As of the Cut-Off
Date, the Minimum Rates at which interest may accrue on the Group I Adjustable
Rate Initial Home Equity ranged from 7.70% per annum to 12.35% per annum.
HOME EQUITY LOAN CHARACTERISTICS - GROUP II
The Group II Initial Home Equity Loans to be transferred by the Depositor
to the Issuer on the Closing Date will consist of 1,127 home equity loans, of
which 1,092 are fixed rate home equity loans and 35 are Group II Adjustable Rate
Initial Home Equity Loans, evidenced by the Mortgage Notes secured by first and
second lien deeds of trust, security deeds or mortgages, which are located in 27
states. The aggregate outstanding Principal Balance of the fixed rate Group II
Initial Home Equity Loans as of the Cutoff Date is $71,695,911.63 or 95.17% of
the aggregate Principal Balance of the Group II Initial Home Equity Loans; the
aggregate outstanding Principal Balance of the Group II Adjustable Rate Initial
Home Equity Loans as of the Cutoff Date is $3,636,483.16 or 4.83% of the
aggregate Principal Balance of the Group II Initial Home Equity Loans. The
Properties securing the Group II Home Equity Loans consist primarily of
one-to-four family residential properties. The Properties may be owner-occupied
and non-owner occupied investment properties (which includes second and vacation
homes). All of the Group II Initial Home Equity Loans were originated or
purchased on or after December 31, 1996. Group II Initial Home Equity Loans
aggregating 92.07% of the aggregate Principal Balances of the Group II Initial
Home Equity Loans as of the Cut-Off Date (the "Group II Initial Aggregate
Principal Balance") are secured by first liens on the related properties, and
the remaining Group II Initial Home Equity Loans are secured by second liens on
the related properties. No Combined Loan-to-Value Ratio relating to any Group II
Initial Home Equity Loan exceeded 100% as of the Cut-Off Date except for 17
loans with an aggregate Principal Balance of $574,731.22 (or 0.76% of the Group
II Initial Aggregate Principal Balance of the Group II Initial Home Equity
Loans), which had a Combined Loan-to-Value Ratio not greater than 125.01%. None
of the Group II Initial Home Equity Loans is insured by pool mortgage insurance
policies or primary mortgage insurance policies; however, certain payments of
principal and interest due to the Noteholders are insured by the Note Insurer
pursuant to the Note Insurance Policy. SEE "The Note Insurer--Note Insurance
Policy" herein.
As of the Cut-Off Date, the average Principal Balance of the Group II
Initial Home Equity Loans was $66,843.30. The minimum and maximum Principal
Balances of the Group II Initial Home Equity Loans as of the Cut-Off Date were
$6,762.38 and $698,651.66, respectively. As of the Cut-Off Date, the Coupon
Rates" of the Group II Initial Home Equity Loans ranged from 7.55% to 16.59%;
the weighted average Coupon Rate of the Group II Initial Home Equity Loans was
approximately 10.315%; the weighted average Combined Loan-to-Value Ratio of the
Group II Initial Home Equity Loans was approximately 80.57%; the weighted
average remaining term to maturity of the Group II Initial Home Equity Loans was
approximately 286 months; and the remaining terms to maturity of the Group II
Initial Home Equity Loans ranged from 57 months to 360 months. As of the Cut-Off
Date, approximately 92.07% of the aggregate Principal Balance of the Group II
Initial Home Equity Loans were secured by first mortgages and approximately
7.93% of the aggregate Principal Balance of the Group II Initial Home Equity
Loans were secured by second mortgages. Group II Initial Home Equity Loans
containing "balloon" payments represented approximately 3.35% of the aggregate
Principal Balance of the Group II Initial Home Equity Loans. No Group II Initial
Home Equity Loan will mature later than June 5, 2028. Approximately 1.44% of the
Group II Initial Home Equity Loans by Principal Balance as of the Cut-Off Date
were greater than or equal to 30 days, but less than 60 days, past due as of the
Cut-Off Date. Approximately 0.06% of the Group II Initial Home Equity Loans by
Principal Balance as of the Cut-Off Date were greater than or equal to 60 days,
but less than 90 days, past due as of the Cut-Off Date. However, investors in
the Notes should be aware that 54.11% of the Group II Initial Home Equity Loans
by Initial Aggregate Principal Balance had a first monthly payment due on or
after May 1, 1998 and it was not possible for such Initial Home Equity Loans to
be more than 30 days past due as of the Cut-Off Date.
The Group II Adjustable Rate Initial Home Equity Loans bear interest rates
relating to payments that on the first payment date after a period of six months
(except for 24 loans with an aggregate Principal Balance as of the Cut-Off Date
of $2,748,209.20 that adjust 24 months after the first payment date and have an
initial cap of 1.00% above the related initial Coupon Rate) following the
related first payment date adjust based on the six-month London Interbank
Offered Rate based on quotations of major banks as published in The Wall Street
Journal. The Group II Adjustable Rate Initial Home Equity Loans have semi-annual
interest rate and payment adjustment frequencies after the first interest rate
adjustment date. As of the initial Cut-Off Date, the weighted average
S-53
<PAGE>
remaining period to the next interest rate adjustment date for the Group II
Adjustable Rate Initial Home Equity Loans was approximately 17 months. Each
Group II Adjustable Rate Initial Home Equity Loan will have an initial payment
adjustment 6 months after the first payment date, an initial cap of 1.00% above
the related initial Coupon Rate (except for 24 loans with an aggregate Principal
Balance as of the Cut-Off Date of $2,748,209.20 that adjust 24 months after the
first payment date and have an initial cap of 1.00% above the related initial
Coupon Rate) and a semi-annual rate adjustment cap of 1.00% above the then
current interest rate for such Group II Adjustable Rate Initial Home Equity
Loan. The weighted average Coupon Rate of the Group II Adjustable Rate Initial
Home Equity Loans was approximately 9.55% per annum. The interest rates borne by
the Group II Adjustable Rate Initial Home Equity Loans as of the Cut-Off Date
ranged from 7.55% per annum to 11.25% per annum. The Group II Adjustable Rate
Initial Home Equity Loans had a weighted average gross margin as of the Cut-Off
Date of approximately 6.00%. The initial gross margin for the Group II
Adjustable Rate Initial Home Equity Loans ranged from 4.80% to 8.45%. As of the
Cut-Off Date, the Maximum Rates at which interest may accrue on the Group II
Adjustable Rate Initial Home Equity Loans ranged from 13.55% per annum to 17.25%
per annum. The Group II Adjustable Rate Initial Home Equity Loans had a weighted
average Maximum Rate as of the Cut-Off Date of approximately 15.54% per annum.
As of the Cut-Off Date, the Minimum Rates at which interest may accrue on the
Group II Adjustable Rate Initial Home Equity ranged from 7.55% per annum to
11.25% per annum.
Set forth below in the following tables are descriptions of certain
additional characteristics of the Initial Home Equity Loans as of the Cut-Off
Date (except as otherwise indicated). The information expressed below as a
percentage of the Initial Aggregate Principal Balance may not total 100% due to
rounding.
SUMMARY OF CHARACTERISTICS OF THE GROUP I INITIAL HOME EQUITY LOANS
<TABLE>
<CAPTION>
<S> <C>
Aggregate Number of Initial Home Equity Loans 1,177
Principal Balance
Aggregate Principal Balance $ 72,650,717.11
Average Principal Balance $ 61,725.33
Range of Principal Balances $ 6,964.18 - $ 225,024.51
Coupon Rates
Weighted Average Coupon Rate 10.285%
Range of Coupon Rates 7.700% - 17.990%
Original Term to Maturity
Weighted Average Original Term to Maturity 280
Range of Original Terms to Maturity 60 - 360 Months
Remaining Term to Maturity
Weighted Average Remaining Term to Maturity 279
Range of Remaining Term to Maturity 59 - 360 Months
Percentage of Fixed Rate Home Equity Loans 95.98%
Percentage of Group I Adjustable Rate Initial Home Equity 4.02%
Loans
Percentage of First Lien Initial Home Equity Loans 94.62%
Percentage of Second Lien Initial Home Equity Loans 5.38%
</TABLE>
S-54
<PAGE>
PRINCIPAL BALANCES OF THE GROUP I INITIAL HOME EQUITY LOANS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
RANGE OF NUMBER OF AGGREGATE PERCENTAGE OF
PRINCIPAL GROUP I INITIAL UNPAID GROUP I INITIAL
BALANCES HOME EQUITY PRINCIPAL AGGREGATE
--------- LOANS BALANCE PRINCIPAL
------------- --------- BALANCES
---------------
$ 5,000.01 - 10,000.00 10 $ 95,469.08 0.13%
10,000.01 - 15,000.00 28 373,591.70 0.51%
15,000.01 - 20,000.00 37 660,037.90 0.91%
20,000.01 - 25,000.00 45 1,040,260.06 1.43%
25,000.01 - 30,000.00 59 1,665,775.92 2.29%
30,000.01 - 35,000.00 60 1,959,701.22 2.70%
35,000.01 - 40,000.00 72 2,732,361.66 3.76%
40,000.01 - 45,000.00 70 3,008,088.42 4.14%
45,000.01 - 50,000.00 82 3,939,690.56 5.42%
50,000.01 - 55,000.00 90 4,714,044.41 6.49%
55,000.01 - 60,000.00 113 6,549,585.34 9.02%
60,000.01 - 65,000.00 82 5,117,397.87 7.04%
65,000.01 - 70,000.00 79 5,337,520.04 7.35%
70,000.01 - 75,000.00 58 4,194,173.88 5.77%
75,000.01 - 80,000.00 48 3,704,159.48 5.10%
80,000.01 - 85,000.00 28 2,317,269.51 3.19%
85,000.01 - 90,000.00 35 3,073,498.70 4.23%
90,000.01 - 95,000.00 23 2,129,133.10 2.93%
95,000.01 -100,000.00 26 2,536,042.27 3.49%
100,000.01 -125,000.00 66 7,365,133.10 10.14%
125,000.01 -150,000.00 39 5,284,187.24 7.27%
150,000.01 -200,000.00 22 3,766,242.02 5.18%
200,000.01 -250,000.00 5 1,087,353.63 1.50%
----- ---------------- -------
Total 1,177 $72,650,717.11 100.00%
</TABLE>
As of the Cut-Off Date, the average Principal Balance of the Group I
Initial Home Equity Loans was approximately $61,725.33.
S-55
<PAGE>
COUPON RATES OF THE GROUP I INITIAL HOME EQUITY LOANS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
RANGE OF COUPON NUMBER OF AGGREGATE PERCENTAGE OF
RATES(%) GROUP I INITIAL UNPAID GROUP I INITIAL
- --------------- HOME EQUITY PRINCIPAL AGGREGATE
LOANS BALANCE PRINCIPAL
----------------- ---------------- BALANCES
---------------
7.51 - 8.00 1 $ 32,025.34 0.04%
8.01 - 8.50 62 5,210,029.93 7.17%
8.51 - 9.00 123 9,715,898.93 13.37%
9.01 - 9.50 149 10,156,914.88 13.98%
9.51 - 10.00 222 14,846,585.61 20.44%
10.01 - 10.50 139 8,443,926.40 11.62%
10.51 - 11.00 133 8,117,035.69 11.17%
11.01 - 11.50 90 5,381,961.45 7.41%
11.51 - 12.00 88 4,066,900.34 5.60%
12.01 - 12.50 54 2,399,012.69 3.30%
12.51 - 13.00 40 1,656,059.20 2.28%
13.01 - 13.50 13 492,951.93 0.68%
13.51 - 14.00 20 864,944.50 1.19%
14.01 - 14.50 6 249,677.55 0.34%
14.51 - 15.00 12 339,603.74 0.47%
15.01 - 15.50 8 262,252.74 0.36%
15.51 - 16.00 12 271,523.77 0.37%
16.01 - 16.50 2 58,753.06 0.08%
16.51 - 17.00 1 24,989.34 0.03%
17.01 - 17.50 1 13,686.82 0.02%
17.51 - 18.00 1 45,983.20 0.06%
----- -------------- ------
Total 1,177 $72,650,717.11 100.00%
</TABLE>
As of the Cut-Off Date, the weighted average Coupon Rate of the Group I
Initial Home Equity Loans was approximately 10.29% per annum.
S-56
<PAGE>
ORIGINAL COMBINED LOAN-TO-VALUE RATIOS OF THE GROUP I INITIAL HOME EQUITY LOANS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
RANGE OF ORIGINAL NUMBER OF AGGREGATE PERCENTAGE OF
COMBINED ORIGINAL LOAN- GROUP I INITIAL UNPAID GROUP I INITIAL
TO-VALUE RATIOS(%) HOME EQUITY PRINCIPAL AGGREGATE
- ------------------------ LOANS BALANCE PRINCIPAL BALANCE
--------------- ---------- -------------------
15.01 - 20.00 3 $ 78,216.40 0.11%
20.01 - 25.00 2 39,760.03 0.05%
25.01 - 30.00 4 78,071.89 0.11%
30.01 - 35.00 8 215,434.02 0.30%
35.01 - 40.00 11 323,575.99 0.45%
40.01 - 45.00 10 315,464.62 0.43%
45.01 - 50.00 11 436,537.11 0.60%
50.01 - 55.00 16 914,013.46 1.26%
55.01 - 60.00 18 743,487.49 1.02%
60.01 - 65.00 45 2,385,008.63 3.28%
65.01 - 70.00 76 3,812,303.12 5.25%
70.01 - 75.00 116 6,651,737.70 9.16%
75.01 - 80.00 491 30,247,766.32 41.63%
80.01 - 85.00 119 8,437,495.69 11.61%
85.01 - 90.00 144 11,426,574.39 15.73%
90.01 - 95.00 64 5,407,653.84 7.44%
95.01 or greater 39 1,137,616.41 1.57%
-------------- ----------------- ---------------
Total 1,177 $ 72,650,717.11 100.00%
</TABLE>
The weighted average Combined Loan-to-Value Ratio at origination of the
Group I Initial Home Equity Loans was approximately 80.24%.
S-57
<PAGE>
REMAINING TERMS TO MATURITY OF THE GROUP I INITIAL HOME EQUITY LOANS
MONTHS REMAINING TO NUMBER OF AGGREGATE PERCENTAGE OF
MATURITY (MONTHS) GROUP 1 INITIAL UNPAID GROUP I INITIAL
------------------- HOME EQUITY PRINCIPAL AGGREGATE
LOANS BALANCE PRINCIPAL
--------------- --------- BALANCE
---------------
49 - 60 4 $ 89,823.47 0.12%
61 - 72 1 30,595.34 0.04%
73 - 84 7 126,573.16 0.17%
85 - 96 1 47,968.03 0.07%
97 - 108 1 32,925.17 0.05%
109 - 120 53 1,847,496.81 2.54%
133 - 144 4 142,675.65 0.20%
157 - 168 1 13,686.82 0.02%
169 - 180 302 14,176,778.96 19.51%
181 - 192 1 85,798.12 0.12%
217 - 228 1 16,600.56 0.02%
229 - 240 178 10,375,840.90 14.28%
289 - 300 358 23,432,921.89 32.25%
325 - 336 4 257,021.01 0.35%
353 - 356 28 2,015,807.99 2.77%
357 40 3,315,356.23 4.56%
358 58 5,282,903.66 7.27%
359 59 5,184,832.74 7.14%
360 76 6,175,110.60 8.50%
----------------- ------------------- ----------------
Total 1,177 $72,650,717.11 100.00%
As of the Cut-Off Date, the weighted average remaining term to maturity
of the Group I Initial Home Equity Loans was approximately 279 months.
S-58
<PAGE>
GEOGRAPHIC DISTRIBUTION OF PROPERTIES OF THE GROUP I INITIAL HOME EQUITY LOANS
PERCENTAGE OF
NUMBER OF AGGREGATE GROUP I INITIAL
GROUP 1 INITIAL UNPAID AGGREGATE
HOME EQUITY PRINCIPAL PRINCIPAL
STATE LOANS BALANCE BALANCE
- -------------------- --------------- ---------------- ---------------
Arkansas 93 $ 6,112,266.18 8.41%
Florida 31 1,850,675.65 2.55%
Georgia 46 2,932,475.95 4.04%
Idaho 12 1,043,056.67 1.44%
Illinois 24 1,382,898.86 1.90%
Indiana 6 342,586.04 0.47%
Kansas 4 366,004.80 0.50%
Kentucky 3 178,240.44 0.25%
Mississippi 4 188,625.10 0.26%
Missouri 22 1,217,454.83 1.68%
New Mexico 2 174,901.31 0.24%
North Carolina 402 25,497,300.90 35.10%
Oklahoma 45 2,011,433.26 2.77%
Oregon 1 99,563.00 0.14%
South Carolina 76 4,264,205.04 5.87%
Tennessee 41 2,714,562.71 3.74%
Texas 53 2,699,895.62 3.72%
Utah 63 5,668,309.07 7.80%
Virginia 229 12,599,298.11 17.34%
West Virginia 5 243,315.69 0.33%
Wisconsin 14 970,147.88 1.34%
Wyoming 1 93,500.00 0.13%
----- ------------- -------
Total 1,177 $ 72,650,717.11 100.00%
No more than 2.06% of the Group I Initial Home Equity Loans will be secured
by Properties located in any one zip code area.
TYPES OF PROPERTIES OF THE GROUP I INITIAL HOME EQUITY LOANS
<TABLE>
<S> <C> <C> <C>
TYPE NUMBER OF GROUP I AGGREGATE UNPAID PERCENTAGE OF GROUP I
---- INITIAL HOME EQUITY PRINCIPAL BALANCE INITIAL AGGREGATE
LOANS ------------------- PRINCIPAL BALANCE
------------------- ---------------------
Single Family 985 $ 61,494,903.80 84.64%
2-4 Unit 6 385,732.71 0.53%
Condominium 6 263,093.61 0.36%
Manufactured Home 163 9,162,639.03 12.61%
Mixed Use 1 128,700.00 0.18%
PUD 16 1,215,647.96 1.67%
----- -------------------- --------
Total 1,177 $ 72,650,717.11 100.00%
S-59
<PAGE>
OCCUPANCY STATUS OF THE GROUP I INITIAL HOME EQUITY LOANS
PERCENTAGE OF
NUMBER OF AGGREGATE GROUP I INITIAL
GROUP I INITIAL UNPAID AGGREGATE
HOME EQUITY PRINCIPAL PRINCIPAL
OCCUPANCY LOANS BALANCE BALANCE
- -------------------- --------------- --------------- ---------------
Non-Owner Occupied homes 53 $ 2,583,986.51 3.56%
Owner Occupied 1,124 70,066,730.60 96.44%
----- --------------- ------
Total 1,177 $ 72,650,717.11 100.00%
DOCUMENTATION TYPES OF THE GROUP I INITIAL HOME EQUITY LOANS
DOCUMENTATION TYPE NUMBER OF AGGREGATE PERCENTAGE OF
------------------- GROUP I INITIAL UNPAID GROUP I INITIAL
HOME EQUITY PRINCIPAL AGGREGATE
LOANS BALANCE PRINCIPAL
--------------- --------- BALANCE
---------------
Full Documentation 1,100 $ 66,733,196.02 91.85%
NIQ Documentation 70 5,567,609.76 7.66%
Stated 1003 Documentation 7 349,911.33 0.48%
----- --------------- -------
Total 1,177 $ 72,650,717.11 100.00%
PURPOSE OF THE GROUP I INITIAL HOME EQUITY LOANS
PERCENTAGE OF
NUMBER OF AGGREGATE GROUP I INITIAL
GROUP I INITIAL UNPAID AGGREGATE
HOME EQUITY PRINCIPAL PRINCIPAL
LOAN PURPOSE LOANS BALANCE BALANCE
- -------------------- --------------- ---------------- ---------------
Cashout Refinance 773 $ 45,566,599.37 62.72%
No Cashout Refinance 321 20,857,885.01 28.71%
Purchase 83 6,226,232.73 8.57%
----- ---------------- -------
Total 1,177 $ 72,650,717.11 100.00%
S-60
<PAGE>
DISTRIBUTION OF GROUP I ADJUSTABLE RATE INITIAL HOME EQUITY LOANS
BY GROSS MARGINS
PERCENTAGE OF
AGGREGATE
NUMBER OF GROUP I PRINCIPAL BALANCE
ADJUSTABLE RATE OF GROUP I
RANGE OF INITIAL HOME AGGREGATE UNPAID ADJUSTABLE RATE
GROSS MARGIN EQUITY LOANS PRINCIPAL BALANCE HOME EQUITY LOANS
- -------------------- ----------------- ----------------- -----------------
4.51 - 5.00 2 $ 90,320.61 3.09%
- --------------------
5.01 - 5.50 15 1,092,961.63 37.42%
- --------------------
5.51 - 6.00 5 536,846.03 18.38%
- --------------------
6.01 - 6.50 4 274,705.61 9.41%
- --------------------
6.51 - 7.00 2 138,178.71 4.73%
- --------------------
7.01 - 7.50 3 168,911.69 5.78%
- --------------------
7.51 - 8.00 3 312,119.44 10.69%
- --------------------
8.01 - 8.50 2 167,509.47 5.73%
- --------------------
8.51 - 9.00 1 139,288.77 4.77%
- --------------------
Total 37 $ 2,920,841.96 100.00%
- --------------------
The weighted average Gross Margin for the Group I Adjustable Rate
Initial Home Equity Loans was 6.27%.
DISTRIBUTION OF GROUP I ADJUSTABLE RATE INITIAL HOME EQUITY LOANS
BY MAXIMUM RATE
PERCENTAGE OF
AGGREGATE
NUMBER OF GROUP I PRINCIPAL BALANCE
ADJUSTABLE RATE OF GROUP I
RANGE OF INITIAL HOME AGGREGATE UNPAID ADJUSTABLE RATE
MAXIMUM RATE % EQUITY LOANS PRINCIPAL BALANCE HOME EQUITY LOANS
- -------------------- ----------------- ----------------- -----------------
13.51 - 14.00 1 $ 32,025.34 1.10%
- -----------------------
14.01 - 14.50 3 138,699.71 4.75%
- -----------------------
14.51 - 15.00 5 437,217.31 14.97%
- -----------------------
15.01 - 15.50 7 501,597.90 17.17%
- -----------------------
15.51 - 16.00 10 886,982.06 30.37%
- -----------------------
16.01 - 16.50 2 74,416.31 2.55%
- -----------------------
16.51 - 17.00 3 314,050.17 10.75%
- -----------------------
17.01 - 17.50 4 406,928.61 13.93%
- -----------------------
18.01 - 18.50 2 128,924.55 4.41%
- -----------------------
Total 37 $ 2,920,841.96 100.00%
- -----------------------
The weighted average Maximum Rate for the Group I Adjustable Rate
Initial Home Equity Loans was 15.85%.
S-61
<PAGE>
DISTRIBUTION OF GROUP I ADJUSTABLE RATE INITIAL HOME EQUITY LOANS
BY MINIMUM RATE
PERCENTAGE OF
AGGREGATE
NUMBER OF GROUP I PRINCIPAL BALANCE
ADJUSTABLE RATE OF GROUP I
RANGE OF INITIAL HOME AGGREGATE UNPAID ADJUSTABLE RATE
MAXIMUM RATE % EQUITY LOANS PRINCIPAL BALANCE HOME EQUITY LOANS
- -------------------- ----------------- ----------------- -----------------
7.51 - 8.00 1 $ 32,025.34 1.10%
- -----------------------
8.01 - 8.50 3 138,699.71 4.75%
- -----------------------
8.51 - 9.00 5 437,217.31 14.97%
- -----------------------
9.01 - 9.50 7 501,597.90 17.17%
- -----------------------
9.51 - 10.00 10 886,982.06 30.37%
- -----------------------
10.01 - 10.50 2 74,416.31 2.55%
- -----------------------
10.51 - 11.00 3 314,050.17 10.75%
- -----------------------
11.01 - 11.50 4 406,928.61 13.93%
- -----------------------
12.01 - 12.50 2 128,924.55 4.41%
- -----------------------
Total 37 $ 2,920,841.96 100.00%
- -----------------------
The weighted average Minimum Rate for the Group I Adjustable Rate
Initial Home Equity Loans was 9.85%.
</TABLE>
SUMMARY OF CHARACTERISTICS OF THE GROUP II INITIAL HOME EQUITY LOANS
Aggregate Number of Initial Home Equity Loans 1,127
Principal Balance
Aggregate Principal Balance $75,332,394.79
Average Principal Balance $66,843.30
Range of Principal Balances $6,762.38 - $698,651.66
Coupon Rates
Weighted Average Coupon Rate 10.315%
Range of Coupon Rates 7.550% - 16.590%
Original Term to Maturity
Weighted Average Original Term to Maturity 287
Range of Original Terms to Maturity 60 - 360 Months
Remaining Term to Maturity
Weighted Average Remaining Term to Maturity 286
Range of Remaining Term to Maturity 57 - 360 Months
Percentage of Fixed Rate Home Equity Loans 95.17%
Percentage of Group II Adjustable Rate Initial Home 4.83%
Equity Loans
Percentage of First Lien Initial Home Equity Loans 92.07%
Percentage of Second Lien Initial Home Equity Loans 7.93%
S-62
<PAGE>
PRINCIPAL BALANCES OF THE GROUP II INITIAL HOME EQUITY LOANS
<TABLE>
<CAPTION>
` PERCENTAGE OF
NUMBER OF GROUP II GROUP II
RANGE OF INITIAL HOME AGGREGATE UNPAID AGGREGATE PRINCIPAL
PRINCIPAL BALANCES EQUITY LOANS PRINCIPAL BALANCE BALANCES
- ----------------------- ----------------- ----------------- -----------------
<S><C>
$ 5,000.01 - 10,000.00 4 $ 35,529.98 0.05%
- -----------------------
10,000.01 - 15,000.00 31 413,527.01 0.55%
- -----------------------
15,000.01 - 20,000.00 54 966,161.55 1.28%
- -----------------------
20,000.01 - 25,000.00 55 1,246,236.17 1.65%
- -----------------------
25,000.01 - 30,000.00 59 1,635,299.80 2.17%
- -----------------------
30,000.01 - 35,000.00 55 1,791,777.48 2.38%
- -----------------------
35,000.01 - 40,000.00 67 2,551,884.27 3.39%
- -----------------------
40,000.01 - 45,000.00 78 3,357,861.12 4.46%
- -----------------------
45,000.01 - 50,000.00 70 3,362,938.71 4.46%
- -----------------------
50,000.01 - 55,000.00 66 3,485,104.02 4.63%
- -----------------------
55,000.01 - 60,000.00 95 5,503,919.86 7.31%
- -----------------------
60,000.01 - 65,000.00 76 4,755,642.79 6.31%
- -----------------------
65,000.01 - 70,000.00 70 4,718,274.07 6.26%
- -----------------------
70,000.01 - 75,000.00 50 3,640,479.97 4.83%
- -----------------------
75,000.01 - 80,000.00 44 3,414,656.34 4.53%
- -----------------------
80,000.01 - 85,000.00 33 2,726,968.54 3.62%
- -----------------------
85,000.01 - 90,000.00 27 2,354,998.88 3.13%
- -----------------------
90,000.01 - 95,000.00 20 1,853,261.58 2.46%
- -----------------------
95,000.01 -100,000.00 24 2,331,657.20 3.10%
- -----------------------
100,000.01 -125,000.00 58 6,513,191.78 8.65%
- -----------------------
125,000.01 -150,000.00 33 4,366,567.91 5.80%
- -----------------------
150,000.01 -200,000.00 28 4,796,240.94 6.37%
- -----------------------
200,000.01 -250,000.00 12 2,734,255.54 3.63%
- -----------------------
250,000.01 -300,000.00 9 2,471,654.52 3.28%
- -----------------------
300,000.01 -350,000.00 2 655,886.18 0.87%
- -----------------------
350,000.01 -400,000.00 1 365,750.00 0.49%
- -----------------------
400,000.01 -450,000.00 1 427,000.00 0.57%
- -----------------------
450,000.01 -500,000.00 3 1,463,684.53 1.94%
- -----------------------
650,000.00 -700,000.00 2 1,391,984.05 1.85%
- ----------------------- --------------------------------------------------------
Total 1,127 $75,332,394.79 100.00%
- -----------------------
</TABLE>
As of the Cut-Off Date, the average Principal Balance of the Group II
Initial Home Equity Loans was approximately $66,843.30.
S-63
<PAGE>
COUPON RATES OF THE GROUP II INITIAL HOME EQUITY LOANS
RANGE OF COUPON NUMBER OF GROUP II AGGREGATE UNPAID PERCENTAGE OF
RATES (%) INITIAL HOME PRINCIPAL BALANCE GROUP II INITIAL
EQUITY LOANS AGGREGATE
PRINCIPAL BALANCES
- ---------------- ------------------ ------------------ ------------------
7.51 - 8.00 1 $ 69,792.32 0.09%
- ----------------
8.01 - 8.50 67 8,270,809.18 10.98%
- ----------------
8.51 - 9.00 111 10,755,925.88 14.28%
- ----------------
9.01 - 9.50 108 7,579,747.23 10.06%
- ----------------
9.51 - 10.00 182 13,015,221.00 17.28%
- ----------------
10.01 - 10.50 126 8,453,756.46 11.22%
- ----------------
10.51 - 11.00 157 9,398,446.80 12.48%
- ----------------
11.01 - 11.50 84 5,044,671.23 6.70%
- ----------------
11.51 - 12.00 99 4,762,204.01 6.32%
- ----------------
12.01 - 12.50 50 2,833,106.84 3.76%
- ----------------
12.51 - 13.00 28 1,068,490.34 1.42%
- ----------------
13.01 - 13.50 21 1,087,130.78 1.44%
- ----------------
13.51 - 14.00 28 1,096,014.57 1.45%
- ----------------
14.01 - 14.50 12 444,658.31 0.59%
- ----------------
14.51 - 15.00 22 645,610.03 0.86%
- ----------------
15.01 - 15.50 12 334,121.21 0.44%
- ----------------
15.51 - 16.00 16 399,194.03 0.53%
- ----------------
16.01 - 16.50 2 57,501.06 0.08%
- ----------------
16.51 - 17.00 1 15,993.51 0.02%
- ----------------
------------------ ------------------ --------------------
Total 1,127 $ 75,332,394.79 100.00%
As of the Cut-Off Date, the weighted average Coupon Rate of the Group
II Initial Home Equity Loans was approximately 10.32% per annum.
S-64
<PAGE>
ORIGINAL COMBINED LOAN-TO-VALUE RATIOS OF THE
GROUP II INITIAL HOME EQUITY LOANS
RANGE OF NUMBER OF GROUP II AGGREGATE UNPAID PERCENTAGE OF
ORIGINAL COMBINED INITIAL HOME PRINCIPAL BALANCE GROUP II INITIAL
ORIGINAL LOAN-TO- EQUITY LOANS AGGREGATE
VALUE RATIOS (%) PRINCIPAL BALANCE
- ----------------- ------------------ ----------------- ------------------
15.01 - 20.00 1 $ 12,000.00 0.02%
- -------------------
25.01 - 30.00 2 27,000.00 0.04%
- -------------------
30.01 - 35.00 12 302,333.57 0.40%
- -------------------
35.01 - 40.00 7 198,210.16 0.26%
- -------------------
40.01 - 45.00 13 504,937.52 0.67%
- -------------------
45.01 - 50.00 16 625,136.82 0.83%
- -------------------
50.01 - 55.00 21 783,966.81 1.04%
- -------------------
55.01 - 60.00 18 1,303,391.66 1.73%
- -------------------
60.01 - 65.00 33 2,326,444.00 3.09%
- -------------------
65.01 - 70.00 64 3,340,920.07 4.43%
- -------------------
70.01 - 75.00 128 7,305,143.47 9.70%
- -------------------
75.01 - 80.00 431 28,815,623.45 38.25%
- -------------------
80.01 - 85.00 109 8,846,082.60 11.74%
- -------------------
85.01 - 90.00 152 13,657,663.88 18.13%
- -------------------
90.01 - 95.00 64 5,376,511.82 7.14%
- -------------------
95.01 or greater 56 1,907,028.96 2.53%
- ----------------- ------------------ ----------------- ------------------
Total 1,127 $ 75,332,394.79 100.00%
The weighted average Combined Loan-to-Value Ratio at origination of the
Group II Initial Home Equity Loans was approximately 80.57%.
S-65
<PAGE>
REMAINING TERMS TO MATURITY OF THE GROUP II INITIAL HOME EQUITY LOANS
NUMBER OF GROUP II AGGREGATE UNPAID PERCENTAGE OF
MONTHS REMAINING INITIAL HOME PRINCIPAL BALANCE GROUP II INITIAL
TO MATURITY EQUITY LOANS AGGREGATE
(MONTHS) PRINCIPAL BALANCE
- ---------------- ------------------ ----------------- ------------------
49 - 60 4 $ 54,398.53 0.07%
- ------------------
61 - 72 1 27,000.00 0.04%
- ------------------
73 - 84 8 216,043.84 0.29%
- ------------------
109 - 120 47 1,359,708.38 1.80%
- ------------------
133 - 144 6 280,202.96 0.37%
- ------------------
145 - 156 2 113,711.56 0.15%
- ------------------
169 - 180 325 14,664,283.40 19.47%
- ------------------
193 - 204 1 88,315.28 0.12%
- ------------------
217 - 228 3 98,089.78 0.13%
- ------------------
229 - 240 142 8,365,144.92 11.10%
- ------------------
289 - 300 311 21,966,502.41 29.16%
- ------------------
325 - 336 1 75,854.11 0.10%
- ------------------
337 - 348 6 664,716.50 0.88%
- ------------------
349 - 352 1 280,427.65 0.37%
- ------------------
353 - 356 27 3,153,909.23 4.19%
- ------------------
357 36 4,488,096.77 5.96%
- ------------------
358 72 6,624,549.02 8.79%
- ------------------
359 50 4,554,348.90 6.05%
- ------------------
360 84 8,257,091.55 10.96%
- ---------------- ------------------ ----------------- ------------------
Total 1,127 $ 75,332,394.79 100.00%
As of the Cut-Off Date, the weighted average remaining terms to
maturity of the Group II Initial Home Equity Loans was approximately 286 months.
S-66
<PAGE>
GEOGRAPHIC DISTRIBUTION OF PROPERTIES OF THE GROUP II INITIAL HOME EQUITY LOANS
PERCENTAGE OF
NUMBER OF GROUP II GROUP II INITIAL
INITIAL HOME EQUITY AGGREGATE UNPAID AGGREGATE
STATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------- ------------------- ------------------ -----------------
Arkansas 98 $ 7,681,093.68 10.20%
Colorado 5 333,560.47 0.44%
Florida 10 607,691.23 0.81%
Georgia 48 3,692,681.79 4.90%
Idaho 13 908,933.83 1.21%
Illinois 20 1,713,691.45 2.27%
Indiana 12 868,024.17 1.15%
Kansas 3 169,396.98 0.22%
Kentucky 1 83,136.24 0.11%
Louisiana 1 16,798.96 0.02%
Mississippi 5 450,459.75 0.60%
Missouri 22 1,180,421.62 1.57%
Montana 1 89,247.81 0.12%
Nevada 2 340,333.39 0.45%
New Mexico 6 313,552.27 0.42%
North Carolina 373 24,561,628.31 32.60%
Oklahoma 41 1,905,834.91 2.53%
Oregon 2 133,930.91 0.18%
South Carolina 89 4,961,742.55 6.59%
Tennessee 33 2,344,849.90 3.11%
Texas 42 2,406,030.38 3.19%
Utah 72 6,835,226.30 9.07%
Virginia 197 11,706,591.54 15.54%
Washington 1 124,793.21 0.17%
West Virginia 9 454,935.04 0.60%
Wisconsin 20 1,402,970.65 1.86%
Wyoming 1 44,837.45 0.06%
---------------------------------------------------------------
Total 1,127 $ 75,332,394.79 100.00%
No more than 2.38% of the Group II Initial Home Equity Loans will be
secured by Properties located in any one zip code area.
TYPES OF PROPERTIES OF THE GROUP II INITIAL HOME EQUITY LOANS
NUMBER OF GROUP II AGGREGATE UNPAID PERCENTAGE OF
INITIAL HOME PRINCIPAL BALANCE GROUP II INITIAL
EQUITY LOANS AGGREGATE
TYPE PRINCIPAL BALANCE
- ------------------- ------------------ ------------------ ------------------
Single Family 964 $64,915,703.75 86.17%
- -------------------
2-4 Unit 6 401,505.91 0.53%
- -------------------
Condominium 5 468,893.52 0.62%
- -------------------
Manufactured Home 133 7,067,127.82 9.38%
- -------------------
PUD 19 2,479,163.79 3.29%
- ------------------- ----------------------------------------------------------
Total 1,127 $75,332,394.79 100.00%
- -------------------
S-67
<PAGE>
OCCUPANCY STATUS OF THE GROUP II INITIAL HOME EQUITY LOANS
<TABLE>
<CAPTION>
NUMBER OF GROUP II AGGREGATE UNPAID PERCENTAGE OF
INITIAL HOME PRINCIPAL BALANCE GROUP II INITIAL
EQUITY LOANS AGGREGATE
OCCUPANCY PRINCIPAL BALANCE
- ------------------- ------------------ -----------------------------------
<S> <C>
Non-Owner Occupied homes 31 $ 1,486,682.44 1.97%
- ------------------------
Owner Occupied 1,096 73,845,712.35 98.03%
- ------------------------ -------------------------------------------------------
Total 1,127 $ 75,332,394.79 100.00%
- ------------------------
</TABLE>
DOCUMENTATION TYPES OF THE GROUP II INITIAL HOME EQUITY LOANS
<TABLE>
<CAPTION>
NUMBER OF GROUP II AGGREGATE UNPAID PERCENTAGE OF
INITIAL HOME PRINCIPAL BALANCE GROUP II INITIAL
DOCUMENTATION EQUITY LOANS AGGREGATE
TYPE PRINCIPAL BALANCE
- ------------------- ------------------ ----------------- -----------------
<S> <C>
Full Documentation 1,085 $ 72,033,550.58 95.62%
- --------------------------
NIQ Documentation 35 2,865,909.12 3.80%
- --------------------------
Stated 1003 Documentation 7 432,935.09 0.57%
- -------------------------- -----------------------------------------------------
Total 1,127 $ 75,332,394.79 100.00%
- --------------------------
</TABLE>
PURPOSE OF THE GROUP II INITIAL HOME EQUITY LOANS
<TABLE>
<CAPTION>
NUMBER OF GROUP II AGGREGATE UNPAID PERCENTAGE OF
INITIAL HOME PRINCIPAL BALANCE GROUP II INITIAL
LOAN EQUITY LOANS AGGREGATE
PURPOSE PRINCIPAL BALANCE
- ------------------- ------------------ ----------------- -----------------
<S> <C>
Cashout Refinance 740 $ 48,071,798.19 63.81%
- -------------------------
No Cashout Refinance 309 20,256,197.84 26.89%
- -------------------------
Purchase 78 7,004,398.76 9.30%
- ------------------------- ------------------------------------------------------
Total 1,127 $ 75,332,394.79 100.00%
- -------------------------
</TABLE>
S-68
<PAGE>
DISTRIBUTION OF GROUP II ADJUSTABLE RATE INITIAL HOME EQUITY LOANS
BY GROSS MARGINS
` PERCENTAGE OF
AGGREGATE
NUMBER OF GROUP II PRINCIPAL BALANCE
ADJUSTABLE RATE OF GROUP II
RANGE OF INITIAL HOME AGGREGATE UNPAID ADJUSTABLE RATE
GROSS MARGIN EQUITY LOANS PRINCIPAL BALANCE HOME EQUITY LOANS
- ----------------- ----------------- ----------------- -----------------
4.51-5.00 4 $ 944,342.44 25.97%
- ------------------
5.01-5.50 13 824,153.33 22.66%
- ------------------
5.51-6.00 2 262,479.71 7.22%
- ------------------
6.01-6.50 8 695,628.01 19.13%
- ------------------
6.51-7.00 1 124,793.21 3.43%
- ------------------
7.01-7.50 2 281,693.68 7.75%
- ------------------
7.51-8.00 2 207,078.58 5.69%
- ------------------
8.01-8.50 3 296,314.20 8.15%
- ----------------- ----------------- ----------------- -----------------
Total 35 $ 3,636,483.16 100.00%
The weighted average Gross Margin for the Group II Adjustable Rate
Initial Home Equity Loans was 6.00%.
DISTRIBUTION OF GROUP II ADJUSTABLE RATE INITIAL HOME EQUITY LOANS
BY MAXIMUM RATE
` PERCENTAGE OF
AGGREGATE
NUMBER OF GROUP II PRINCIPAL BALANCE
ADJUSTABLE RATE OF GROUP II
RANGE OF INITIAL HOME AGGREGATE UNPAID ADJUSTABLE RATE
MAXIMUM RATE % EQUITY LOANS PRINCIPAL BALANCE HOME EQUITY LOANS
- ----------------- ----------------- ----------------- -----------------
13.51 - 14.00 1 $ 69,792.32 1.92%
- -------------------
14.01 - 14.50 2 111,107.82 3.06%
- -------------------
14.51 - 15.00 6 1,157,876.96 31.84%
- -------------------
15.01 - 15.50 8 476,843.77 13.11%
- -------------------
15.51 - 16.00 6 552,046.56 15.18%
- -------------------
16.01 - 16.50 5 549,866.06 15.12%
- -------------------
16.51 - 17.00 5 531,820.37 14.62%
- -------------------
17.01 - 17.50 2 187,129.30 5.15%
- ----------------- ----------------- ----------------- -----------------
Total 35 $ 3,636,483.16 100.00%
The weighted average Maximum Rate for the Group II Adjustable Rate
Initial Home Equity Loans was 15.54%.
S-69
<PAGE>
DISTRIBUTION OF GROUP II ADJUSTABLE RATE INITIAL HOME EQUITY LOANS
BY MINIMUM RATE
` PERCENTAGE OF
AGGREGATE
NUMBER OF GROUP II PRINCIPAL BALANCE
ADJUSTABLE RATE OF GROUP II
RANGE OF INITIAL HOME AGGREGATE UNPAID ADJUSTABLE RATE
MAXIMUM RATE % EQUITY LOANS PRINCIPAL BALANCE HOME EQUITY LOANS
- ----------------- ----------------- ----------------- -----------------
7.51-8.00 1 $ 69,792.32 1.92%
- -----------------
8.01-8.50 2 111,107.82 3.06%
- -----------------
8.51-9.00 6 1,157,876.96 31.84%
- -----------------
9.01-9.50 8 476,843.77 13.11%
- -----------------
9.51-10.00 6 552,046.56 15.18%
- -----------------
10.01-10.50 5 549,866.06 15.12%
- -----------------
10.51-11.00 5 531,820.37 14.62%
- -----------------
11.01-11.50 2 187,129.30 5.15%
- -----------------
-------------------- ------------------- --------------------
Total 35 $ 3,636,483.16 100.00%
The weighted average Minimum Rate for the Group II Adjustable Rate
Initial Home Equity Loans was 9.54%.
INTEREST PAYMENTS ON THE HOME EQUITY LOANS
All of the Home Equity Loans will provide that interest is charged to
the obligor (the "Mortgagor") thereunder, and payments are due from such
Mortgagors as of a scheduled day of each month which is fixed at the time of
origination. Scheduled monthly payments made by the Mortgagors on the Home
Equity Loans either earlier or later than the scheduled due dates thereof will
not affect the amortization schedule or the relative application of such
payments to principal and interest.
CONVEYANCE OF SUBSEQUENT HOME EQUITY LOANS
The Loan Sale Agreement and the Loan Transfer Agreement permit the
Issuer to acquire approximately $27,017,605.21 in aggregate Principal Balance of
Subsequent Home Equity Loans. Accordingly, the statistical characteristics of
the Home Equity Loans will vary as of any subsequent Cut-Off Date upon the
acquisition of Subsequent Home Equity Loans.
The obligation of the Issuer to purchase Subsequent Home Equity Loans
on a Subsequent Transfer Date is subject to the following requirements, among
others, individually or in the aggregate, as applicable: (i) the remaining term
to maturity of each Subsequent Home Equity Loan may not exceed 30 years; (ii)
none will be greater than 30 days contractually Delinquent as of the related
Subsequent Cut-Off Date; (iii) will have Minimum Rates no lower than 7.50%; (iv)
will have Coupon Rates no lower than 7.50%; (v) less than 47% of first lien
Mortgages may have piggyback second lien Mortgages; (vi) will have a weighted
average Coupon Rate that is at least 10.25%; (vii) up to 7.0% are second lien
Mortgages (viii) no piggyback second lien Mortgages; (ix) will have a weighted
average Combined Loan-to-Value Ratio of less than 82%; (x) Principal Balance at
the time of origination was less than $700,000; (xi) less than 4% are balloon
loans; (xii) at least 93% are fixed rate Home Equity Loans, and (xiii) the
Issuer has obtained the prior written consent of the Note Insurer; provided that
any of the conditions set forth in clauses (v), (vi), (vii), (ix), (xi) or (xii)
may be waived with the consent of the Note Insurer.
S-70
<PAGE>
CERTAIN PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The weighted average life of, and, if purchased at other than par, the
yield to maturity on, each Class of Note will relate to the rate of payment of
principal of the Home Equity Loans, including, for this purpose, prepayments,
liquidations due to defaults, casualties and condemnations, and repurchases of
Home Equity Loans from each Group by the Sponsor. A substantial percentage of
the Initial Home Equity Loans in Group I and Group II may be prepaid by the
related Mortgagors, in whole or in part, at any time without payment of any
prepayment fee or penalty. The actual rate of Prepayments on pools of each Group
of Home Equity Loans is influenced by a variety of economic, tax, geographic,
demographic, social, legal and other factors and has fluctuated considerably in
recent years. In addition, the rate of Prepayments may differ among pools of
home equity loans at any time because of specific factors relating to the home
equity loans in the particular pool, including, among other things, the age of
the home equity loans, the geographic locations of the properties securing the
loans and the extent of the mortgagors' equity in such properties, and changes
in the mortgagors' housing needs, job transfers and unemployment.
As with fixed rate obligations generally, the rate of prepayment on a
pool of home equity loans with fixed rates is affected by prevailing market
rates for home equity 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 home equity loans. Depending on prevailing market
rates, the future outlook for market rates and economic conditions generally,
some mortgagors may sell or refinance Properties in order to realize their
equity in the Properties, to meet cash flow needs or to make other investments.
As is the case with fixed rate mortgage loans, adjustable rate mortgage loans
may be subject to a greater rate of Prepayments in a declining interest rate
environment. For example, if prevailing interest rates fall appreciably,
adjustable rate home equity loans are likely to be subject to a higher
prepayment rate 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 home equity loans to
"lock in" a lower fixed interest rate.
The effective yield of each Class of Notes will be affected by the rate
and timing of payments of principal on the Home Equity Loans in the Group
securing such Notes (including, for this purpose, prepayments and amounts
received by virtue of refinancings, liquidations of Home Equity Loans due to
defaults, casualties, condemnations, and repurchases, whether optional or
required, by the Seller or the Note Insurer), the amount and timing of mortgagor
delinquencies and defaults resulting in realized losses, and the application of
related Excess Cash on such Notes. Such yield may be adversely affected by a
higher or lower than anticipated rate of principal payments (including
Prepayments) on the related Home Equity Loans. The rate of Principal Payments on
such Home Equity Loans will in turn be affected by the amortization schedules of
such Home Equity Loans, the rate and timing of Prepayments thereon by the
mortgagors, liquidations of defaulted Home Equity Loans and optional or required
repurchases of related Home Equity Loans as described herein. The timing of
changes in the rate of prepayments, liquidations and repurchases of the Home
Equity Loans may, and the timing of Realized Losses could, significantly affect
the yield to an investor, even if the average rate of Principal Payments
experienced over time is consistent with an investor's expectation. Since the
rate and timing of Principal Payments on the Home Equity Loans will depend on
future events and on a variety of factors (as described more fully herein), no
assurance can be given as to such rate or the timing of Prepayments on the
Notes.
Because all amounts available for payment on the related Notes after
payments in respect of interest on such Notes, including all or a portion of the
Excess Cash for the related Group, are applied as reductions of the related Note
Balance, the weighted average life of such Notes will also be influenced by the
amount of Excess Cash so applied. Because Excess Cash for a Group attributable
to the overcollateralization feature is derived, in part, from interest
collections on the related Home Equity Loans and will be applied to reduce the
Note Balance, for the related Class, the aggregate payments in reduction of the
related Note Balance on a Payment Date will usually be greater than the
aggregate amount of principal payments (including Prepayments) on the related
Home Equity Loans payable on such Payment Date until the Required
Overcollateralization Amount for such Group is reached and assuming an
Overcollateralization Deficit for such Group does not occur. As a consequence,
Excess Cash in a Group available for payment in reduction of the Note Balance
for the related Class of Notes will increase in
S-71
<PAGE>
proportion to the outstanding related Note Balance over time in the absence of
offsetting Realized Losses for the Home Equity Loans in such Group.
Excess Cash for a Group will be paid on the Notes in the related Class
in reduction of the related Note Balance on each Payment Date to the extent the
then applicable Required Overcollateralization Amount for such Group exceeds the
related Overcollateralization Amount on such Payment Date. Excess Cash for such
Group may be used to fund certain shortfalls with respect to the other Class of
Notes and to fund certain reserve accounts; and, thereafter, will be released to
the holder(s) of the Residual Interest. If a Note is purchased at other than
par, its yield to maturity will be affected by the rate at which the related
Excess Cash is paid to the Noteholders. If the actual rate of related Excess
Cash payments on such Class of Notes applied in reduction of the related Note
Balance is slower than the rate anticipated by an investor who purchases a Note
at a discount, the actual yield to such investor will be lower than such
investor's anticipated yield. If the actual rate of related Excess Cash payments
applied in reduction of the related Note Balance is faster than the rate
anticipated by an investor who purchases a Note at a premium, the actual yield
to such investor will be lower than such investor's anticipated yield. The
amount of related Excess Cash on any Payment Date will be affected by, among
other things, the actual amount of interest received, collected or recovered in
respect of the related Home Equity Loans during the related Remittance Period
and such amount will be influenced by changes in the weighted average of the
Coupon Rates resulting from prepayment and liquidations of the related Home
Equity Loans. The amount of related Excess Cash paid to the Noteholders of a
Class of Notes applied to the related Note Balance on each Payment Date will be
based on the Required Overcollateralization Amount. The Indenture generally
provides that the Required Overcollateralization Amount for a Group may, over
time, decrease, or increase, subject to certain floors, caps and triggers,
including triggers that allow the related Required Overcollateralization Amount
to decrease or "step down" based on the performance on the Home Equity Loans in
such Group with respect to certain tests specified in the Indenture based on
delinquency rates. Any increase in the Required Overcollateralization Amount for
a Group may result in an accelerated amortization until such Required
Overcollateralization Amount is reached. Conversely, any decrease in the
Required Overcollateralization Amount for a Group will result in a decelerated
amortization of the Notes until such Required Overcollateralization Amount is
reached.
The Home Equity Loans generally may be prepaid in full or in part at
any time, although some have prepayment fees or penalties. The Home Equity Loans
generally are not assumable and the related Mortgage Note will be due on sale,
in which case the Master Servicer shall enforce any due-on-sale clause contained
in any Mortgage Note or Mortgage, to the extent permitted under applicable law
and governmental regulations; PROVIDED, HOWEVER, if the Master Servicer
determines that it is reasonably likely that the mortgagor will bring, or if any
mortgagor does bring legal action to declare invalid or otherwise avoid
enforcement of a due-on-sale clause contained in any Mortgage Note or Mortgage,
the Master Servicer shall not be required to enforce the due-on-sale clause or
to contest such action.
The rate of defaults on the Home Equity Loans will also affect the rate
and timing of Principal Payments on the Home Equity Loans. SEE "Risk Factors"
herein and in the Prospectus. The rate of default on Home Equity Loans that are
refinance or limited documentation mortgage loans, and on Home Equity Loans with
high Loan-to-Value Ratios, may be higher than for other types of Home Equity
Loans. As a result of the underwriting standards applicable to the Home Equity
Loans, the Home Equity Loans are likely to experience rates of delinquency,
foreclosure, bankruptcy and loss that are higher, and that may be substantially
higher, than those experienced by mortgage loans underwritten in accordance with
the standards applied by FNMA and FHLMC mortgage loan purchase programs. SEE
"The Sponsor and Servicer--Credit and Underwriting Guidelines." In addition,
because of such underwriting criteria and their likely effect on the
delinquency, foreclosure, bankruptcy and loss experience of the Home Equity
Loans, the Home Equity Loans will generally be serviced in a manner intended to
result in a faster exercise of remedies, which may include foreclosure, in the
event Home Equity Loan delinquencies and defaults occur, than would be the case
of the Home Equity Loans were serviced in accordance with such other programs.
Furthermore, the rate and timing of prepayments, defaults and liquidations on
the Home Equity Loans will be affected by the general economic condition of the
region of the country in which the related Properties are located. The risk of
delinquencies and loss is greater and prepayments are less likely in regions
where a weak or deteriorating economy exists, as may be evidenced by, among
other factors, increasing unemployment or falling property values. To the extent
that the locations of the Properties are concentrated in a given region, the
risk of delinquencies, loss and involuntary prepayments resulting from adverse
economic conditions in such region or from other factors, such as fires, storms,
landslides and mudflows and earthquakes, is increased. Certain
S-72
<PAGE>
information regarding the location of the Properties is set forth under
"Description of the Home Equity Loans--Home Equity Loan Characteristics" herein.
SEE "Risk Factors--Risks Associated with Geographic Concentration of the
Mortgage Properties" herein.
Certain of the Home Equity Loans are Balloon Loans. Balloon Loans
involve a greater degree of risk than fully amortizing loans because the ability
of the borrower to make a Balloon Payment typically will depend upon its ability
either to refinance the loan or to sell the related Mortgaged Property. The
ability of a borrower to accomplish either of these goals will be affected by a
number of factors, including the level of available mortgage rates at the time
of the attempted sale or refinancing, the borrower's equity in the related
Mortgaged Property, the financial condition of the borrower and operating
history of the related Mortgaged Property, tax laws, prevailing economic
conditions and the availability of credit for real estate projects generally.
Other factors affecting prepayment of Home Equity Loans include changes
in mortgagors' housing needs, job transfers, unemployment and mortgagors' net
equity in the Properties. Since the rate of payment of principal of each Class
of Notes will depend on the rate of payment (including prepayments) of the
principal of the Home Equity Loans of the related Group, the actual maturity of
the Notes could occur significantly earlier than the Stated Maturity Date. SEE
"--Weighted Average Life" herein.
In addition, the yield to maturity of each Class of Notes will depend
on the price paid by the holders of such Notes and the related Note Interest
Rate. The extent to which the yield to maturity of a Note is sensitive to
prepayments will depend upon the degree to which it is purchased at a discount
or premium.
Prepayments of principal on the Home Equity Loans will generally be
passed through to the Indenture Trustee and included in the Available Funds for
such Group in the month following the month of receipt thereof by the Master
Servicer. Any prepayment of a Home Equity Loan or liquidation of a Home Equity
Loan (by foreclosure proceedings or by virtue of the repurchase of a Home Equity
Loan) may result in payments on the Notes in the related Class of amounts that
otherwise would be paid in amortized increments over the remaining term of such
Home Equity Loan.
To the extent that Prepayments with respect to the Home Equity Loans
result in prepayments on the related Notes during periods of generally lower
interest rates, Noteholders may be unable to reinvest such Prepayments in
securities having a yield and rating comparable to such Notes.
The yield on the Notes may be affected by any delays in receipt of
payments thereon as described under "Description of the Notes--Book-Entry
Registration and Definitive Notes" herein and "Risk Factors--Book Entry
Registration" and "Description of the Securities--Form of the Securities" in the
Prospectus.
The yield on the Notes may also be affected by a redemption of the
Notes as described under " Description of the Notes--Redemption of the Notes"
herein.
NO REPRESENTATION IS MADE AS TO THE RATE OF PRINCIPAL PAYMENTS ON THE
HOME EQUITY LOANS OR AS TO THE YIELD TO MATURITY OF ANY NOTE. AN INVESTOR IS
URGED TO MAKE AN INVESTMENT DECISION WITH RESPECT TO A NOTE BASED ON THE
ANTICIPATED YIELD TO MATURITY OF SUCH NOTE RESULTING FROM ITS PRICE AND SUCH
INVESTOR'S OWN DETERMINATION AS TO ANTICIPATED HOME EQUITY LOAN PREPAYMENT
RATES. PROSPECTIVE INVESTORS ARE URGED TO ANALYZE FULLY THE EFFECT OF HOME
EQUITY LOAN PREPAYMENTS AND MARKET CONDITIONS ON THE YIELD AND VALUE OF THE
NOTES, BEFORE ACQUIRING ANY NOTES. IN PARTICULAR, INVESTORS THAT ARE REQUIRED TO
PERFORM PERIODIC VALUATIONS ON THEIR INVESTMENT PORTFOLIOS SHOULD CONSIDER THE
EFFECT OF SUCH FLUCTUATIONS IN VALUE. IN ADDITION, INVESTORS SHOULD CAREFULLY
CONSIDER THE FACTORS DISCUSSED UNDER "RISK FACTORS--PREPAYMENT OF THE HOME
EQUITY LOANS MAY ADVERSELY AFFECT THE YIELD TO MATURITY OF THE CLASS A-1 AND
CLASS A-2 NOTES" HEREIN.
MANDATORY PREPAYMENT
In the event that at the end of the Funding Period, not all of the
Original Group II Pre-Funded Amount has been used to acquire Subsequent Home
Equity Loans, then the related Noteholders then entitled to receive principal
S-73
<PAGE>
will receive an additional prepayment in an amount equal to the remaining Group
II Pre-Funded Amount in the Pre-Funding Account.
Although no assurances can be given, the Transferor and the Sponsor
expect that the Principal Balance of Subsequent Home Equity Loans sold to the
Issuer will require the application of substantially all the amount on deposit
in the Pre-Funding Account and that there should be no material principal
prepaid to the Noteholders with respect to the Original Group II Pre-Funded
Amount.
WEIGHTED AVERAGE LIFE
Weighted average life refers to the amount of time that will elapse
from the date of issuance of a security until each dollar of principal of such
security will be repaid to the investor. The weighted average lives of each
Class of Notes will be influenced by the rate at which principal on the related
Home Equity Loans is paid, which may be in the form of scheduled payments or
prepayments (including prepayments of principal by the borrower as well as
amounts received by virtue of repurchases, condemnation, insurance or
foreclosure with respect to the related Home Equity Loans), and the timing
thereof.
The weighted average life of each Class of Notes also will be
influenced by the overcollateralization of the Notes because collections are
applied as Prepayments to the Notes until the outstanding related Note Balance
is less than the Aggregate Principal Balance of the Home Equity Loans in the
related Group by an amount equal to the related Required Overcollateralization
Amount. These prepayments have the effect of accelerating the amortization of
the Notes, thereby shortening their respective weighted average life.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement
("Home Equity Prepayment" or "HEP") assumes that the pool of loans prepays in
the first month at a constant annual prepayment rate of 2.50% and increases by
an additional 2.50% each month thereafter until the tenth month, where it
remains at a constant annual prepayment rate equal to 25.0% (the "Prepayment
Assumption"). HEP represents an assumed annualized rate of prepayment relative
to the then outstanding Principal Balance on a pool of new mortgage loans.
Neither the prepayment model used herein nor any other prepayment model or
assumption purports to be an historical description of prepayment experience or
a prediction of the anticipated rate of prepayment of any pool of mortgage
loans, including the Home Equity Loans included in the Trust Estate.
The tables following the next paragraph indicates the percentage of the
initial Note Balance that would be outstanding after each of the dates shown at
various percentage HEPs and the corresponding weighted average lives of the
Notes. Each table is based on the following assumptions (the "Modeling
Assumptions"): (i) the pool consists of Home Equity Loans in the related Group
with the characteristics set forth in the table below, (ii) distributions on
such Notes are received, in cash, on the 25th day of each month, commencing in
July 1998 in accordance with the priorities described herein, (iii) the Home
Equity Loans in the related Group prepay at the percentage HEP indicated, (iv)
the Notes are redeemed on the Initial Redemption Date, (v) no defaults or
delinquencies occur in the payment by mortgagors of principal and interest on
the related Home Equity Loans and no shortfalls due to the application of the
Relief Act are incurred, (vi) none of the Seller, the Master Servicer or any
other person purchases from any Home Equity Loan from the related Group pursuant
to any obligation or option under the Loan Sale Agreement, Loan Transfer
Agreement, the Servicing Agreement or others, (vii) scheduled monthly payments
on each Home Equity Loan are received on the first day of each month commencing
with the month indicated in the table below, and are computed prior to giving
effect to any prepayments received in the current month, (viii) prepayments
representing payment in full of individual Home Equity Loans are received on the
last day of each month, and include 30 days' interest thereon, (ix) the
scheduled monthly payment for each Home Equity Loan is calculated based on its
Principal Balance, Coupon Rate, original term to maturity and remaining term to
maturity such that the Home Equity Loan will amortize in amounts sufficient to
repay the remaining Principal Balance of such Home Equity Loan by its remaining
term to maturity, (x) the coupon on the Class A-1 Notes remains constant at
6.53% and the coupon on the Class A-2 Notes remains constant at 6.55%, (xi) the
Notes are purchased on June 26, 1998, (xii) the overcollateralization levels are
set initially as specified in the Insurance Agreement and thereafter decrease in
accordance with the provisions of the Insurance Agreement, (xiii) the
Pre-Funding Account accrues interest of the weighted average loan rate on the
Subsequent Home Equity Loans net of the related Servicing Fee, and (xiv) all of
the Original Group II Pre-Funded Amount is used to acquire Home Equity Loans.
S-74
<PAGE>
GROUP I CHARACTERISTICS
<TABLE>
<CAPTION>
<S> <C>
REMAINING
POOL PRINCIPAL NET COUPON SEASONING REMAINING AMORTIZATION ASSUMED INITIAL
NUMBER BALANCE ($) RATE (%) (MONTHS) TERM (MONTHS) MONTHS TO MATURITY PAYMENT MONTH
- ------ ------------ ---------- --------- ------------- ------------------ ---------------
1 701,484.29 8.35476 3 357 357 7/1/98
2 2,219,357.67 9.66522 2 358 358 7/1/98
3 2,318,057.63 10.03530 1 114 114 7/1/98
4 11,839,971.94 10.07323 1 179 179 7/1/98
5 2,350,493.64 10.10870 3 177 357 7/1/98
6 10,478,239.58 9.72783 1 238 238 7/1/98
7 42,743,112.16 9.71725 1 326 326 7/1/98
<CAPTION>
POOL MONTHS TO FIRST RATE CHANGE PERIODIC CAP GROSS MARGIN MAXIMUM RATE MINIMUM RATE
NUMBER RATE CHANGE FREQUENCY (%) (%) (%) (%)
- ------ --------------- ----------- ------------ ------------ ------------ ------------
1 2 6 1 6.20204 14.85476 8.85476
2 21 6 1 6.28646 16.16522 10.16522
3
4
5
6
7
</TABLE>
GROUP II CHARACTERISTICS
<TABLE>
<CAPTION>
<S> <C>
REMAINING
POOL PRINCIPAL NET COUPON SEASONING REMAINING AMORTIZATION ASSUMED INITIAL
NUMBER BALANCE ($) RATE (%) (MONTHS) TERM (MONTHS) MONTHS TO MATURITY PAYMENT MONTH
- ------ ------------ ---------- --------- ------------- ------------------ ---------------
1 888,273.96 8.78484 3 357 357 7/1/98
2 2,748,209.20 9.12866 3 357 357 7/1/98
3 2,051,065.27 9.80656 1 118 118 7/1/98
4 12,141,585.29 10.31078 2 178 178 7/1/98
5 2,522,698.11 10.36845 3 177 357 7/1/98
6 8,551,549.98 9.89074 1 238 238 7/1/98
7 46,429,012.98 9.70134 1 330 330 7/1/98
8 165,599.05 11.4280 0 131 131 8/1/98
9 1,012,593.69 10.2530 0 180 180 8/1/98
10 703,486.11 9.9780 0 240 240 8/1/98
11 2,470,844.80 10.0010 0 300 300 8/1/98
12 2,401,877.67 9.6600 0 360 360 8/1/98
13 496,797.14 11.4280 0 131 131 9/1/98
14 3,037,781.06 10.2530 0 180 180 9/1/98
15 2,110,458.32 9.9780 0 240 240 9/1/98
16 7,412,534.39 10.0010 0 300 300 9/1/98
17 7,205,632.98 9.6600 0 360 360 9/1/98
<CAPTION>
POOL MONTHS TO FIRST RATE CHANGE PERIODIC CAP GROSS MARGIN MAXIMUM RATE MINIMUM RATE
NUMBER RATE CHANGE FREQUENCY (%) (%) (%) (%)
- ------ --------------- ----------- ------------ ------------ ------------ ------------
1 3 6 1 6.21440 15.28484 9.28484
2 21 6 1 5.93680 15.62866 9.62866
3
4
5
6
7
</TABLE>
S-75
<PAGE>
There will be discrepancies between the characteristics of the actual
Home Equity Loans and the characteristics assumed in preparing the table. Any
such discrepancy may have an effect upon the percentages of the initial Note
Balance outstanding (and the weighted average life) of the Notes set forth in
the table. In addition, since the actual Home Equity Loans will have
characteristics that differ from those assumed in preparing the table set forth
below the Notes may mature earlier or later than indicated by the table. Based
on the foregoing assumptions, the table indicates the weighted average life of
the Notes and sets forth the percentages of the initial Note Balance that would
be outstanding after each of the Payment Dates shown, at various percentage
HEPs. Variations in the prepayment experience and the balance of the related
Home Equity Loans that prepay may increase or decrease the percentages of
initial Note Balances (and weighted average lives) shown in the following table.
Such variations may occur even if the average prepayment experience of all such
Home Equity Loans equals any of the specified percentage HEPs.
CLASS A-1 NOTES
PERCENT OF STATED PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF HEP
<TABLE>
<CAPTION>
<S><C>
Payment Date 20.00% 23.00% 25.00% 27.00% 30.00%
- ------------ --------- --------- ---------- --------- ---------
Initial Percent 100 100 100 100 100
June 25, 1999 81 79 78 76 74
June 25, 2000 62 58 55 52 48
June 25, 2001 48 43 40 37 33
June 25, 2002 37 32 29 27 23
June 25, 2003 29 24 21 19 16
June 25, 2004 23 18 16 13 11
June 25, 2005 18 14 11 10 7
June 25, 2006 14 10 8 7 5
June 25, 2007 10 8 6 5 3
June 25, 2008 8 6 4 3 2
June 25, 2009 6 4 3 2 1
June 25, 2010 5 3 2 1 1
June 25, 2011 3 2 1 1 *
June 25, 2012 2 1 1 * 0
June 25, 2013 2 1 * * 0
June 25, 2014 1 * * 0 0
June 25, 2015 1 * 0 0 0
June 25, 2016 * 0 0 0 0
June 25, 2017 * 0 0 0 0
June 25, 2018 0 0 0 0 0
Weighted Average Life to Maturity(1) 4.03 3.56 3.30 3.07 2.77
Weighted Average Life to Call(1) 3.75 3.30 3.06 2.84 2.57
</TABLE>
* OUTSTANDING PRINCIPAL BALANCE ON THE NOTES IS LESS THAN 0.5%
(1) The weighted average life is determined by (a) multiplying the amount of
each principal payment by the number of years from the Closing Date to the
related Payment Date; (b) adding the results; and (c) dividing the sum by
the original Note Balance. The weighted average life to call assumes that
the Mortgagor's optional redemption is exercised on the first possible
Payment Date.
S-76
<PAGE>
CLASS A-2 NOTES
PERCENT OF STATED PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF HEP
<TABLE>
<CAPTION>
<S><C>
Payment Date 20.00% 23.00% 25.00% 27.00% 30.00%
- ------------ -------- --------- ---------- --------- ---------
Initial Percent 100 100 100 100 100
June 25, 1999 83 81 79 78 76
June 25, 2000 63 59 56 53 50
June 25, 2001 48 43 41 38 34
June 25, 2002 38 33 30 27 23
June 25, 2003 30 25 22 19 16
June 25, 2004 23 19 16 14 11
June 25, 2005 18 14 12 10 7
June 25, 2006 14 10 9 7 5
June 25, 2007 11 8 6 5 3
June 25, 2008 8 6 4 3 2
June 25, 2009 6 4 3 2 1
June 25, 2010 5 3 2 1 1
June 25, 2011 4 2 1 1 *
June 25, 2012 3 1 1 * 0
June 25, 2013 2 1 * * 0
June 25, 2014 1 * * 0 0
June 25, 2015 1 * 0 0 0
June 25, 2016 * 0 0 0 0
June 25, 2017 * 0 0 0 0
June 25, 2018 0 0 0 0 0
Weighted Average Life to Maturity (1) 4.10 3.62 3.36 3.13 2.83
Weighted Average Life to call (1) 3.82 3.37 3.12 2.90 2.62
</TABLE>
* OUTSTANDING PRINCIPAL BALANCE ON THE NOTES IS LESS THAN 0.5%
(1) The weighted average life is determined by (a) multiplying the
amount of each principal payment by the number of years from the Closing Date to
the related Payment Date; (b) adding the results; and (c) dividing the sum by
the original Note Balance. The weighted average life to call assumes that the
Mortgagor's optional redemption is exercised on the first possible Payment Date.
There is no assurance that prepayments of the Home Equity Loans will
conform to any of the levels of the Prepayment Assumption indicated in the
tables above, or to any other level, or that the actual weighted average life of
the Notes will conform to any of the weighted average lives set forth in the
tables above. Furthermore, the information contained in the tables with respect
to the weighted average life of the Notes is not necessarily indicative of the
weighted average life that might be calculated or projected under different or
varying prepayment assumptions.
The characteristics of the Home Equity Loans will differ from those
assumed in preparing the tables above. In addition, it is unlikely that any Home
Equity Loan will prepay at any constant percentage until maturity or that all of
the Home Equity Loans will prepay at the same rate. The timing of changes in the
rate of prepayments may significantly affect the actual yield to maturity to
investors, even if the average rate of Prepayments is consistent with the
expectations of investors.
S-77
<PAGE>
THE SERVICING AGREEMENT
The summaries of certain provisions of the Servicing Agreement set
forth below and in other places in this Prospectus Supplement, while complete in
material respects, do not purport to be exhaustive. For more details regarding
the terms of the Servicing Agreement, prospective investors in the Notes are
advised to review the Servicing Agreement, a copy of which the Sponsor will
provide (without exhibits) without charge upon written request addressed to the
Sponsor.
Generally, the Master Servicer will be authorized and empowered
pursuant to the Servicing Agreement (i) to execute and deliver (or procure the
execution and delivery by the Indenture Trustee of) any and all instruments of
satisfaction or cancellation or of partial or full release or discharge and all
other comparable instruments with respect to the Home Equity Loans and with
respect to the Properties and (ii) to institute foreclosure proceedings or
obtain deeds in lieu of foreclosure so as to convert title to of any Mortgaged
Property in the name of the Indenture Trustee on behalf of the Noteholders and
the Note Insurer.
ASSIGNMENT. The Sponsor will also serve as the Master Servicer of each
Home Equity Loan. On the date of issuance of the Notes, it is anticipated that
all of the Home Equity Loans will be serviced by the Master Servicer. The Master
Servicer may not assign its obligations under the Servicing Agreement, in whole
or in part, unless it shall have first obtained the written consent of the
Indenture Trustee and the Note Insurer, which consent is required not to be
unreasonably withheld; provided, however, that any assignee must meet the
eligibility requirements for a successor Master Servicer set forth in the
Servicing Agreement.
The Notes will not represent an interest in or obligation of, nor are
the Home Equity Loans guaranteed by, the Indenture Trustee, the Depositor, the
Sponsor, the Seller, the Transferor, the Master Servicer or Backup Master
Servicer, except as described herein, or any of their affiliates.
First Greensboro Home Equity, Inc. is not a FNMA-approved servicer of
conventional mortgage loans. The Master Servicer (other than the Backup Master
Servicer as successor Master Servicer) is required to service the Home Equity
Loans in accordance with the Servicing Agreement, the terms of the respective
Home Equity Loans, and the servicing standards set forth in FNMA's Servicing
Guide (the "FNMA Guide"); provided, however, that to the extent such standards,
such obligations or the FNMA Guide is amended by FNMA after the date of the
Servicing Agreement and the effect of such amendment would be to impose upon the
Master Servicer any material additional costs or other burdens relating to such
servicing obligations, the Master Servicer may, at its option, determine not to
comply with such amendment in accordance with the servicing standards set forth
in the Servicing Agreement. The Backup Master Servicer, as the successor Master
Servicer, is required to service the Home Equity Loans in accordance with the
Servicing Agreement, the terms of the respective Home Equity Loans and in the
same manner in which it services and administers similar mortgage loans for its
own portfolio, giving due consideration to customary and usual standards of
practice of prudent mortgage lenders and loan servicers administering similar
mortgage loans.
The Master Servicer may retain from the interest portion of each
monthly payment, the related Servicing Fee with respect to each Group. In
addition, the Master Servicer will be entitled to retain additional servicing
compensation in the form of prepayment charges, release fees, bad check charges,
assumption fees, late payment charges, prepayment penalties, or any other
servicing-related fees, Net Liquidation Proceeds not required to be deposited in
the Principal and Interest Account pursuant to the Servicing Agreement, and
similar items. The Master Servicer shall pay the fees of the Backup Master
Servicer out of the related Servicing Fee.
When a borrower prepays all of a Home Equity Loan, the borrower pays
interest on the amount prepaid only to the date of prepayment and accordingly,
an interest shortfall (a "Prepayment Interest Shortfall") may result. In order
to mitigate the effect of any such shortfall in interest distributions to
Noteholders of each Class on any Payment Date, the related Servicing Fee
otherwise payable to the Master Servicer for such month and such Group shall, to
the extent of such shortfall, be deposited by the Master Servicer in the
Principal and Interest Account for distribution to related Noteholders on such
Payment Date. Any such deposit by the Master Servicer will be reflected in the
distributions to related Noteholders made on the related Payment Date.
S-78
<PAGE>
The Master Servicer is required to make reasonable efforts to collect
all payments called for under the terms and provisions of the Home Equity Loans,
and, to the extent such procedures are consistent with the Servicing Agreement
and the terms and provisions of any applicable insurance policy, to follow
collection procedures consistent with the applicable servicing standards.
Consistent with the foregoing, the Master Servicer may in its discretion waive
or permit to be waived any late payment charge, prepayment charge, assumption
fee or any penalty interest in connection with the prepayment of a Home Equity
Loan or any other fee or charge which the Master Servicer would be entitled to
retain as additional servicing compensation. In the event the Master Servicer
consents to the deferment of the due dates for payments due on a Note, the
Master Servicer will nonetheless be required to make payment of any required
Delinquency Advances with respect to the interest payments so extended to the
same extent as if the interest portion of such installment were due, owing and
delinquent and had not been deferred.
PRE-FUNDING ACCOUNT. On the Closing Date, the Original Group II
Pre-Funded Amount will be deposited in the Pre-Funding Account, which account
shall be in the name of and maintained by the Indenture Trustee and shall be
part of the Trust Estate. During the Funding Period, the Group II Pre-Funded
Amount will be maintained in the Pre-Funding Account. The Original Group II
Pre-Funded Amount will be reduced during the Funding Period by the amount
thereof used to purchase Subsequent Home Equity Loans for allocation to Group II
in accordance with the Loan Sale Agreement. Any Group II Pre-Funded Amount
remaining at the end of the Funding Period will be distributed to the related
Noteholders on the Payment Date after the expiration of the Funding Period as a
payment of Principal Balance, thus resulting in a principal prepayment of such
Notes.
Amounts on deposit in the Pre-Funding Account will be invested in
Eligible Investments. All interest and any other investment earnings on amounts
on deposit in the Pre-Funding Account will be deposited in the Capitalized
Interest Account prior to each Payment Date during the related Funding Period.
CAPITALIZED INTEREST ACCOUNT. On the Closing Date cash will be
deposited with respect to Group II in the Capitalized Interest Account, which
account shall be in the name of and maintained by the Indenture Trustee and
shall be part of the Trust Estate. The amounts on deposit in the Capitalized
Interest Account, including reinvestment income, taxes thereon and amounts
deposited thereto from the Pre-Funding Account, will be used by the Indenture
Trustee to fund the excess, if any, of (i) the sum of the amount of interest
accruing at the related Note Interest Rate on the amount by which the aggregate
related Note Principal Balance exceeds the related Aggregate Principal Balance
of the Home Equity Loans plus the related Indenture Trustee Fee, Owner Trustee
Fee, Servicing Fee and Note Insurer Premium accruing on such excess balance over
(ii) the amount of any reinvestment income on monies on deposit in the
Pre-Funding Account; such amounts on deposit will be so applied by the Indenture
Trustee on the July and August 1998 Payment Date to fund such excess, if any.
Any amounts remaining in the Capitalized Interest Account at the end of the
Funding Period and not needed for such purpose will be paid to the Transferor,
or an affiliate thereof, and will not thereafter be available for distribution
to the Holders of the Class A-2 Notes.
PRINCIPAL AND INTEREST ACCOUNT. The Master Servicer is required to
create, or cause to be created, in the name of the Indenture Trustee, at one or
more depository institutions, which institutions may be affiliates of the Master
Servicer, a principal and interest account maintained as a trust account in the
trust department of such institution (the "Principal and Interest Account"). All
funds in the Principal and Interest Account are required to be held (i)
uninvested, or (ii) invested in Eligible Investments. Any investment of funds in
the Principal and Interest Account must mature or be withdrawable at par on or
prior to the immediately succeeding Monthly Remittance Date. Any investment
earnings on funds held in the Principal and Interest Account are for the account
of, and any losses therein are also for the account of, and must be promptly
replenished by, the Master Servicer.
The Master Servicer is required to deposit, or cause to be deposited,
to the Principal and Interest Account, within one business day following
receipt, all principal and interest due on the Home Equity Loans on or after the
Cut-Off Date, including any Prepayments, the proceeds of any liquidation of a
Home Equity Loan net of expenses and unreimbursed Delinquency Advances ("Net
Liquidation Proceeds"), any income from REO Properties and Delinquency Advances,
but net of (i) Net Liquidation Proceeds to the extent that such Net Liquidation
Proceeds exceed the sum of (a) the Principal Balance of the related Home Equity
Loan immediately prior to liquidation, (b) accrued and unpaid interest on such
Home Equity Loan (net of the related Servicing Fee) to the date of such
liquidation, (c) any Realized Losses during the related Remittance Period, and
(d) any related Servicing Advances, (ii) principal (including Prepayments)
collected and interest due on the Home Equity Loans prior to the Cut-Off Date
excluding payments received and applied prior to the Cut-Off Date which are
applicable to periods on and after
S-79
<PAGE>
the Cut-Off Date, (iii) reimbursements for Delinquency Advances and Servicing
Advances to the extent provided below, and (iv) reimbursement for amounts
deposited in the Principal and Interest Account representing payments of
principal and/or interest on a Note by a Mortgagor which are subsequently
returned by a depository institution as unpaid (all such net amounts being
referred to herein as the "Daily Collections").
The Master Servicer may make withdrawals for its own account from the
Principal and Interest Account for the following purposes:
(i) on each Monthly Remittance Date, to pay itself the related
Servicing Fee;
(ii) to withdraw investment earnings on amounts on deposit in the
Principal and Interest Account;
(iii) to withdraw amounts that have been deposited to the Principal and
Interest Account in error;
(iv) to reimburse itself for unrecovered Delinquency Advances and
Servicing Advances;
(v) to clear and terminate the Principal and Interest Account following
the termination of the Trust; and
(vi) to reimburse the Master Servicer for expenses incurred by or
reimbursable to the Master Servicer to the extent provided in the Servicing
Agreement
The Master Servicer will remit to the Indenture Trustee for deposit in
the Note Account the Daily Collections allocable to a Remittance Period not
later than the related Monthly Remittance Date, and Loan Purchase Prices and
Substitution Amounts two Business Days following the related repurchase or
substitution, as the case may be.
DELINQUENCY ADVANCES. On each Monthly Remittance Date, the Master
Servicer shall be required to remit to the Indenture Trustee for deposit to the
Note Account out of the Master Servicer's own funds any delinquent payment of
interest with respect to each delinquent Home Equity Loan, which payment was not
received on or prior to the related Monthly Remittance Date and was not
theretofore advanced by the Master Servicer. Such amounts of the Master
Servicer's own funds so deposited are "Delinquency Advances." The Master
Servicer may reimburse itself on any Business Day for any Delinquency Advances
paid from the Master Servicer's own funds, from collections on any Home Equity
Loan in each Group that are not required to be distributed on the Payment Date
occurring during the month in which such reimbursement is made (such amount to
be replaced on future dates to the extent necessary).
Notwithstanding the foregoing, in the event that the Master Servicer
determines in its reasonable business judgment in accordance with the servicing
standards of the Servicing Agreement that any proposed Delinquency Advance if
made would not be recoverable, the Master Servicer shall not be required to make
such Delinquency Advances with respect to such Home Equity Loan. To the extent
that the Master Servicer previously has made Delinquency Advances with respect
to a Home Equity Loan that the Master Servicer subsequently determines to be
nonrecoverable, the Master Servicer shall be entitled to reimbursement for such
aggregate unreimbursed Delinquency Advances as provided above or may withdraw
such amounts from the Principal and Interest Account. The Master Servicer shall
give written notice of such determination as to why such amount is or would or
may withdraw such amounts from the principal and Interest Account be
nonrecoverable to the Indenture Trustee and the Note Insurer.
SERVICING ADVANCES. The Master Servicer will be required to pay all
"out of pocket" costs and expenses incurred in the performance of its servicing
obligations, including, but not limited to, (i) expenditures in connection with
a foreclosed Home Equity Loan prior to the liquidation thereof, including,
without limitation, expenditures for real estate property taxes, hazard
insurance premiums, property restoration or preservation ("Preservation
Expenses"), (ii) the cost of any enforcement or judicial proceedings, including
foreclosures and (iii) the cost of the
S-80
<PAGE>
management and liquidation of Property (including broker's fees) acquired in
satisfaction of the related Mortgage, except to the extent that the Master
Servicer in its reasonable business judgment determines that any such proposed
amount would not be recoverable. Such costs and expenses will constitute
"Servicing Advances." The Master Servicer may recover a Servicing Advance to the
extent permitted by the Home Equity Loans or, if not theretofore recovered from
the Mortgagor on whose behalf such Servicing Advance was made, from Liquidation
Proceeds realized upon the liquidation of the related Home Equity Loan or from
certain amounts on deposit in the Note Account as provided in the Servicing
Agreement. In the event a Servicing Advance previously made is deemed to be
nonrecoverable, the Master Servicer may withdraw such amounts from the Principal
and Interest Account.
COMPENSATING INTEREST. A full month's interest at the Coupon Rate will
be due on the outstanding Principal Balance of each Home Equity Loan as of the
beginning of each Remittance Period. If a full or partial prepayment of a Home
Equity Loan occurs during any calendar month, any difference between the
interest collected from the Mortgagor in connection with such payoff and the
full month's interest at the Coupon Rate that would be due on the related due
date for such Home Equity Loan (such difference, the "Compensating Interest")
(but not in excess of the aggregate Servicing Fee for the related Remittance
Period), will be required to be deposited to the Principal and Interest Account
(or if such difference is an excess, the Master Servicer shall retain such
excess) on the next succeeding Monthly Remittance Date by the Master Servicer
and shall be included in the Monthly Remittance Amount to be made available to
the Indenture Trustee on the next succeeding Monthly Remittance Date.
DELINQUENT HOME EQUITY LOANS. The Master Servicer, and in the absence
of the exercise thereof by the Master Servicer, the Note Insurer will have the
right and the option, but not the obligation, to purchase for its own account
any Home Equity Loan which becomes delinquent as to three consecutive monthly
installments or any Home Equity Loan as to which enforcement proceedings have
been brought by the Master Servicer; provided, that the Master Servicer must, if
it elects to purchase such Home Equity Loans, purchase the most delinquent Home
Equity Loans first unless the Note Insurer otherwise consents. The purchase
price for any such Home Equity Loan is equal to the Loan Purchase Price thereof,
which purchase price shall be deposited in the Principal and Interest Account.
HAZARD INSURANCE. The Master Servicer will be required to cause hazard
insurance to be maintained with respect to the related Property and to advance
sums on account of the premiums therefor if not paid by the Mortgagor if
permitted by the terms of such Home Equity Loan.
RELEASES OF MORTGAGES, ALTERATIONS, REMOVAL, DEMOLITION OR DIVISION OF
PROPERTIES. The Master Servicer will have the right under the Servicing
Agreement (upon receiving the consent of the Note Insurer) to accept
applications of Mortgagors for consent to (i) partial releases of Mortgages,
(ii) alterations and (iii) removal, demolition or division of Properties. No
application for approval may be considered by the Master Servicer unless: (i)
the provisions of the related Note and Mortgage have been complied with; (ii)
the loan-to-value ratio and debt-to-income ratio after any release does not
exceed the loan-to-value ratio and debt-to-income ratio of such Note on the
Cut-Off Date and any increase in the loan-to-value shall not exceed 5% unless
approved in writing by the Note Insurer; and (iii) the lien priority of the
related Mortgage is not affected.
AMENDMENT. The Master Servicer shall not agree to any modification,
waiver or amendment of any provision of any Home Equity Loan unless, in the
Master Servicer's good faith judgment, such modification, waiver or amendment
would minimize the loss that might otherwise be experienced with respect to such
Home Equity Loan and only in the event of a payment default with respect to such
Home Equity Loan or in the event that a payment default with respect to such
Home Equity Loan is reasonably foreseeable by the Master Servicer; provided,
however, that no such modification, waiver or amendment shall extend the
maturity date of such Home Equity Loan beyond June 5, 2028. Notwithstanding
anything set forth in the Servicing Agreement to the contrary, the Master
Servicer shall be permitted to modify, waive or amend any provision of a Home
Equity Loan if required by statute or a court of competent jurisdiction to do
so.
The Master Servicer shall provide written notice to the Indenture
Trustee and the Note Insurer prior to the execution of any modification, waiver
or amendment of any provision of any Home Equity Loan; provided that if the Note
Insurer does not object in writing to the modification, waiver or amendment
specified in such notice within five Business Days after its receipt thereof,
the Master Servicer may effectuate such modification, waiver or amendment and
shall deliver to the Custodian, on behalf of the Indenture Trustee for deposit
in the related Mortgage
S-81
<PAGE>
File, an original counterpart of the agreement relating to such modification,
waiver or amendment, promptly following the execution thereof.
SUB-SERVICING AGREEMENTS. The Master Servicer, with the consent of the
Note Insurer, except as provided below, will be permitted under the Servicing
Agreement to enter into servicing agreements (the "Sub-Servicing Agreements")
with other qualified servicers (the "Sub-Servicers") for any servicing and
administration of Home Equity Loans with any institution that (x) is in
compliance with the laws of each state necessary to enable it to perform its
obligations under such Sub-Servicing Agreement, (y) has experience servicing
home equity loans that are similar to the Home Equity Loans and (z) has equity
of not less than $5,000,000 (as determined in accordance with generally accepted
accounting principles).
With the consent of the Note Insurer, the Master Servicer may enter
into Sub-Servicing Agreements with Sub-Servicers with respect to the servicing
of the Home Equity Loans; provided that the Master Servicer will not need the
consent of the Note Insurer to enter into Sub-Servicing Agreement with an
affiliate of the Master Servicer. Notwithstanding any Sub-Servicing Agreement,
the Master Servicer will not be relieved of its obligations under the Servicing
Agreement and the Master Servicer will be obligated to the same extent and under
the same terms and conditions as if it alone were servicing and administering
the Home Equity Loans. The Master Servicer shall be entitled to enter into any
agreement with a Sub-Servicer for indemnification of the Master Servicer by such
Sub-Servicer and nothing contained in such Sub-Servicing Agreement shall be
deemed to limit or modify the Servicing Agreement.
INDEMNIFICATION. The Master Servicer has agreed to indemnify and hold
the Indenture Trustee and the Note Insurer harmless against any and all claims,
losses, penalties, fines, forfeitures, legal fees and related costs, judgments,
and any other costs, fees and expenses that the Indenture Trustee and the Note
Insurer may sustain in any way related to the failure of the Master Servicer to
perform its duties and service the Home Equity Loans in compliance with the
terms of the Servicing Agreement except as may be limited in the Servicing
Agreement. The Master Servicer shall immediately notify the Indenture Trustee
and the Note Insurer if a claim is made by a third party with respect to the
Servicing Agreement, and the Master Servicer shall assume the defense of any
such claim and pay all expenses in connection therewith, including reasonable
counsel fees, and promptly pay, discharge and satisfy any judgment or decree
which may be entered against the Master Servicer, the Indenture Trustee, the
Note Insurer and/or the Backup Master Servicer in respect of such claim. The
Indenture Trustee shall reimburse the Master Servicer from amounts otherwise
distributable on the Residual Interest for all amounts advanced by it pursuant
to the preceding sentence, except when a final nonappealable adjudication
determines that the claim relates directly to the failure of the Master Servicer
to perform its duties in compliance with the Servicing Agreement. The
indemnification provisions shall survive the termination of the Servicing
Agreement and the payment of the outstanding Notes and the Residual Interest.
REPORTS BY THE MASTER SERVICER. The Master Servicer will be required to
deliver to the Indenture Trustee, the Note Insurer, and the Rating Agencies on
or before April 30 of each year, commencing in 1999: (1) an officers'
certificate stating, as to each signer thereof, that (i) a review of the
activities of the Master Servicer during such preceding calendar year and of
performance under the Servicing Agreement has been made under such officers'
supervision, and (ii) to the best of such officers' knowledge, based on such
review, the Master Servicer has fulfilled all its obligations under the
Servicing Agreement for such year, or, if there has been a default in the
fulfillment of all such obligation, specifying each such default known to such
officers and the nature and status thereof including the steps being taken by
the Master Servicer to remedy such default and (2) a letter or letters of a firm
of independent, nationally recognized certified public accountants reasonably
acceptable to the Note Insurer stating that such firm has examined the Master
Servicer's overall servicing operations in accordance with the requirements of
the Uniform Single Attestation Program for Mortgage Bankers, and stating such
firm's conclusions relating thereto.
REMOVAL AND RESIGNATION OF MASTER SERVICER. The Note Insurer (or, the
Noteholders, with the consent of the Note Insurer) will have the right, pursuant
to the Servicing Agreement, to remove the Master Servicer upon the occurrence of
certain events (collectively, the "Master Servicer Termination Events")
including, without limitation: (a) certain acts of bankruptcy or insolvency on
the part of the Master Servicer; (b) certain failures on the part of the Master
Servicer to perform its obligations under the Servicing Agreement (including
certain performance tests related to the delinquency rate and cumulative losses
of the Home Equity Loans); or (c) the failure to cure material breaches of the
Master Servicer's representations in the Servicing Agreement.
S-82
<PAGE>
The Master Servicer is not permitted to resign from the obligations and
duties imposed on it under the Servicing Agreement except upon determination
that its duties thereunder are no longer permissible under applicable law or are
in material conflict by reason of applicable law with any other activities
carried on by it, the other activities of the Master Servicer so causing such
conflict being of a type and nature carried on by the Master Servicer on the
date of the Servicing Agreement. Any such determination permitting the
resignation of the Master Servicer is required to be evidenced by an opinion of
counsel to such effect which shall be delivered, and reasonably acceptable, to
the Indenture Trustee and the Note Insurer.
Upon removal or resignation of the Master Servicer, subject to the
right of the Note Insurer to direct the Indenture Trustee to assign such duties
to another party acceptable to the Note Insurer, the Backup Master Servicer
shall assume the duties of Master Servicer. Any successor (including the Backup
Master Servicer) other than an affiliate of First Greensboro Home Equity, Inc.
is required to be a housing and home finance institution, bank or mortgage
servicing institution which has been designated as an approved seller-servicer
by FNMA or FHLMC for first and second lien home equity loans having equity of
not less than $5,000,000 as determined in accordance with generally accepted
accounting principles, and which is acceptable to the Note Insurer and shall
assume all or any part of the responsibilities, duties or liabilities of the
Master Servicer.
No removal or resignation of the Master Servicer will become effective
until the Backup Master Servicer or a successor Master Servicer shall have
assumed the Master Servicer's responsibilities and obligations in accordance
with the Servicing Agreement.
THE NOTE INSURER
The information set forth in this section has been provided by the Note
Insurer. No representation is made by the Underwriter, the Seller, the Master
Servicer, the Master Backup Servicer, the Depositor or any of their affiliates
as to the accuracy or completeness of such information or any information
related to the Note Insurer incorporated by reference herein.
GENERAL
The Note Insurer is a monoline insurance company incorporated in 1984
under the laws of the State of New York. The Note Insurer is licensed to engage
in financial guaranty insurance business in all 50 states, the District of
Columbia and Puerto Rico.
The Note Insurer and its subsidiaries are engaged in the business of
writing financial guaranty insurance, principally in respect of securities
offered in domestic and foreign markets. In general, financial guaranty
insurance consists of the issuance of a guaranty of scheduled payments of an
issuer's securities --thereby enhancing the credit rating of those securities
- --in consideration for the payment of a premium to the insurer. The Note Insurer
and its subsidiaries principally insure asset-backed, collateralized and
municipal securities. Asset-backed securities are generally supported by
residential mortgage loans, consumer or trade receivables, securities or other
assets having an ascertainable cash flow or market value. Collateralized
securities include public utility first mortgage bonds and sale/leaseback
obligation bonds. Municipal securities consist largely of general obligation
bonds, special revenue bonds and other special obligations of state and local
governments. The Note Insurer insures both newly issued securities sold in the
primary market and outstanding securities sold in the secondary market that
satisfy the Note Insurer's underwriting criteria.
The Note Insurer is a wholly owned subsidiary of Financial Security
Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange listed company.
Major shareholders of Holdings include Fund American Enterprises Holdings, Inc.,
US WEST Capital Corporation and The Tokyo Marine and Fire Insurance Co., Ltd. No
shareholder of Holdings is obligated to pay any debt of the Note Insurer or any
claim under any insurance policy issued by the Note Insurer or to make any
additional contribution to the capital of the Note Insurer.
The principal executive offices of the Note Insurer are located at 350
Park Avenue, New York, New York 10022, and its telephone number at that location
is (212) 826-0100.
S-83
<PAGE>
REINSURANCE
Pursuant to an intercompany agreement, liabilities on financial
guaranty insurance written or reinsured from third parties by the Note Insurer
or any of its domestic operating insurance company subsidiaries are reinsured
among such companies on an agreed-upon percentage substantially proportional to
their respective capital, surplus and reserves, subject to applicable statutory
risk limitations. In addition, the Note Insurer reinsures a portion of its
liabilities under certain of its financial guaranty insurance policies with
other reinsurers under various quota share treaties and on a
transaction-by-transaction basis. Such reinsurance is utilized by the Note
Insurer as a risk management device and to comply with certain statutory and
rating agency requirements; it does not alter or limit the Note Insurer's
obligations under any financial guaranty insurance policy.
RATINGS OF CLAIMS-PAYING ABILITY
The Note Insurer's claims-paying ability is rated "Aaa" by Moody's and
"AAA" by Standard & Poor's, Fitch IBCA, Inc., Japan Rating and Investment
Information, Inc. and Standard & Poor's (Australia) Pty. Ltd. Such ratings
reflect only the views of the respective rating agencies, are not
recommendations to buy, sell or hold securities and are subject to revision or
withdrawal at any time by such rating agencies.
CAPITALIZATION
The following table sets forth the capitalization of the Note Insurer
and its wholly owned subsidiaries on the basis of generally accepted accounting
principles as of March 31, 1998 (in thousands)
March 31, 1998
(Unaudited)
Deferred Premium Revenue (net of prepaid reinsurance premiums) $ 428,157
----------
Shareholders' Equity:
Common Stock 15,000
Additional Paid-In Capital 618,317
Unrealized Gain on Investments (net of deferred
income taxes) 24,700
Accumulated earnings 265,030
-------
Total Shareholders' Equity $ 923,047
==========
Total Deferred Premium Revenue and Shareholder's Equity $1,351,204
=========
---------------------------------------
For further information concerning the Note Insurer, see the
Consolidated Financial Statements of the Note Insurer and subsidiaries, and the
notes thereto incorporated herein by reference. Copies of the statutory
quarterly and annual statements filed with the State of New York Insurance
Department by the Note Insurer are available upon request to the State of New
York Insurance Department.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The consolidated financial statements of the Note Insurer and
subsidiaries included as an exhibit to the Annual Report on Form 10-K for the
period ended December 31, 1997 and the unaudited financial statements of the
Note Insurer and subsidiaries for the quarter ended March 31, 1998 included as
an exhibit to the Quarterly Report on Form 10-Q for the period ended March 31,
1998, each of which have been filed with the Securities and Exchange Commission
by Holdings, are hereby incorporated by reference in this Prospectus Supplement.
All financial statements of the Note Insurer and subsidiaries included
in documents filed by Holdings pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), subsequent
to the date of this Prospectus Supplement and prior to the termination of the
offering of the Notes 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.
S-84
<PAGE>
The Depositor will provide without charge to any person to whom this
Prospectus Supplement is delivered, upon oral or written request of such person,
a copy of any or all of the foregoing financial statements incorporated by
reference. Requests for such copies should be directed to the Secretary, One
First Union Center 301 S. College Street, Charlotte, North Carolina 28288-0630.
INSURANCE REGULATION
The Note Insurer is licensed and subject to regulation as a financial
guaranty insurance corporation under the laws of the State of New York, its
state of domicile. In addition, the Note Insurer and its insurance subsidiaries
are subject to regulation by insurance laws of the various other jurisdictions
in which they are licensed to do business. As a financial guaranty insurance
corporation licensed to do business in the State of New York, the Note Insurer
is subject to Article 69 of the New York Insurance Law which, among other
things, limits the business of each such insurer to financial guaranty insurance
and related lines, requires that each such insurer maintain a minimum surplus to
policyholders, establishes contingency, loss and unearned premium reserve
requirements for each such insurer, and limits the size of individual
transactions ("single risks") and the volume of transactions ("aggregate risks")
that may be underwritten by each such insurer. Other provisions of the New York
Insurance Law, applicable to non-life insurance companies such as the Note
Insurer, regulate, among other things, Eligible Investments, payment of
dividends, transactions with affiliates, mergers, consolidations, acquisitions
or sales of assets and incurrence of liability for borrowings.
The Note 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 information regarding the Note Insurer set forth or incorporated under the
heading "The Note Insurer" herein.
THE INSURANCE POLICY
Simultaneously with the issuance of the Notes, the Note Insurer will
issue the Insurance Policy to the Indenture Trustee for the benefit of the
Noteholders pursuant to which it will irrevocably and unconditionally guaranty
payment on each Payment Date to the Indenture Trustee for the benefit of the
Noteholders of an amount equal to the Note Interest plus any
Overcollateralization Deficit for such Payment Date calculated in accordance
with the original terms of the Notes when issued and without regard to any
amendment or modification of the Notes or the Indenture except amendments or
modifications to which the Note Insurer has given its prior written consent. The
amount of the Insured Payment, if any, made by the Note Insurer to the
Noteholders under the Insurance Policy on each Payment Date is the sum (without
duplication) of (i) any shortfall in the amount required to pay the
Overcollateralization Deficit for such Payment Date from a source other than the
Insurance Policy, (ii) any shortfall in the amount required to pay Note Interest
for such Payment Date from a source other than the Insurance Policy, (iii) any
shortfall in the amount required to pay the Preference Amount from a source
other than the Insurance Policy and (iv) on the Stated Maturity Date, the
outstanding Principal Balance on the Notes. Payments which become due on an
accelerated basis as a result of (a) a default by the Issuer, (b) an election by
the Issuer to pay principal on an accelerated basis or (c) any other cause do
not constitute "Insured Payments," unless the Note Insurer elects, in its sole
discretion, to pay such principal due upon acceleration, together with any
accrued interest to the date of acceleration. The effect of the Insurance Policy
is to guaranty the timely payment of interest on, and the ultimate principal
amount of the Notes. Notwithstanding the foregoing, the Note Insurer is
permitted at its sole option, but is not required, to pay any losses in
connection with the liquidation of a Home Equity Loan in accordance with the
Insurance Policy.
Payment of claims under the Insurance Policy will be made by the Note
Insurer following Receipt by the Note Insurer of the appropriate notice for
payment on the later to occur of (a) 12:00 noon, New York City time, on the
second Business Day following Receipt of such notice for payment, and (b) 12:00
noon, New York City time, on the relevant Payment Date.
If any payment of an amount guaranteed by the Note Insurer pursuant to
the Insurance Policy is avoided as a preference payment under applicable
bankruptcy, insolvency, receivership or similar law the Note Insurer will pay
such amount out of the funds of the Note Insurer on the later of (a) the date
when due to be paid pursuant to the Order referred to below or (b) the first to
occur of (i) the fourth Business Day following Receipt by the Note Insurer
S-85
<PAGE>
from the Indenture Trustee of (A) a certified copy of the order (the "Order") of
the court or other governmental body which exercised jurisdiction to the effect
that a Noteholder is required to return principal or interest distributed with
respect to a Note during the term of the Insurance Policy because such
distributions were avoidable preferences under applicable bankruptcy law, (B) a
certificate of the Noteholder that the Order has been entered and is not subject
to any stay, and (C) an assignment duly executed and delivered by the
Noteholder, in such form as is reasonably required by the Note Insurer and
provided to the Noteholder by the Note Insurer, irrevocably assigning to the
Note Insurer all rights and claims of the Noteholder relating to or arising
under the Notes against the debtor which made such preference payment or
otherwise with respect to such preference payment, or (ii) the date of Receipt
by the Note Insurer from the Indenture Trustee of the items referred to in
clauses (A), (B) and (C) above if, at least four Business Days prior to such
date of Receipt, the Note Insurer shall have Received written notice from the
Indenture Trustee that such items were to be delivered on such date and such
date was specified in such notice. Such payment shall be disbursed to the
receiver, conservator, debtor-in-possession or trustee in bankruptcy named in
the Order and not to the Indenture Trustee or any Noteholder directly (unless a
Noteholder has previously paid such amount to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order, in which case
such payment shall be disbursed to the Indenture Trustee for distribution to
such Noteholder upon proof of such payment reasonably satisfactory to the Note
Insurer).
The terms "Receipt" and "Received," with respect to the Insurance
Policy, means actual delivery to the Note Insurer and to its fiscal agent
appointed by the Note Insurer at its option, if any, prior to 12:00 p.m., New
York City time, on a Business Day; delivery either on a day that is not a
Business Day or after 12:00 p.m., New York City time, shall be deemed to be
Receipt on the next succeeding Business Day. If any notice or certificate given
under the Insurance Policy by the Indenture Trustee is not in proper form or is
not properly completed, executed or delivered, it shall be deemed not to have
been Received, and the Note Insurer or the fiscal agent shall promptly so advise
the Indenture Trustee and the Indenture Trustee may submit an amended notice.
Under the Insurance Policy, "Business Day" means any day other than (i)
a Saturday or Sunday or (ii) a day on which banking institutions in The City of
New York, New York are authorized or obligated by law or executive order to be
closed.
The Note Insurer's obligations under the Insurance Policy in respect of
Insured Payments shall be discharged to the extent funds are transferred to the
Indenture Trustee as provided in the Insurance Policy, whether or not such funds
are properly applied by the Indenture Trustee.
The Note Insurer shall be subrogated to the rights of each Noteholder
to receive payments of principal and interest, as applicable, with respect to
distributions on the Notes to the extent of any payment by the Note Insurer
under the Insurance Policy. To the extent the Note Insurer makes Insured
Payments, either directly or indirectly (as by paying through the Indenture
Trustee), to the Noteholders, the Note Insurer will be subrogated to the rights
of the Noteholders, as applicable, with respect to such Insured Payment, shall
be deemed to the extent of the payments so made to be a registered Noteholder
for purposes of payment and shall receive all future payments of principal and
interest, as applicable, until all such Insured Payments by the Note Insurer
have been fully reimbursed, provided that the Noteholders have received the full
amount of the payments of principal and interest, as applicable.
Claims under the Insurance Policy will rank equally with any other
unsecured and unsubordinated obligations of the Note Insurer except for certain
obligations in respect of tax and other payments to which preference is or may
become afforded by statute. The terms of the Insurance Policy cannot be
modified, altered or affected by any other agreement or instrument, or by the
merger, consolidation or dissolution of the Master Servicer. The Insurance
Policy by its terms may not be canceled or revoked. The Insurance Policy is
governed by the laws of the State of New York.
The Insurance Policy is not covered by the Property/Casualty Insurance
Security Fund specified in Article 76 of the New York Insurance Law. The
Insurance Policy is not covered by the Florida Insurance Guaranty Association
created under Part II of Chapter 631 of the Florida Insurance Code. In the event
the Note Insurer were to become insolvent, any claims arising under the
Insurance Policy are excluded from coverage by the California Insurance Guaranty
Association, established pursuant to Article 14.2 of Chapter 1 of part 2 of
Division 1 of the California Insurance Code.
S-86
<PAGE>
PURSUANT TO THE TERMS OF THE INDENTURE, UNLESS A NOTE INSURER DEFAULT EXISTS,
THE NOTE INSURER SHALL BE DEEMED TO BE THE NOTEHOLDER FOR CERTAIN PURPOSES
(OTHER THAN WITH RESPECT TO PAYMENT ON THE NOTES), WILL BE ENTITLED TO EXERCISE
ALL RIGHTS OF THE NOTEHOLDER THEREUNDER, WITHOUT THE CONSENT OF SUCH NOTEHOLDERS
AND THE NOTEHOLDERS MAY EXERCISE SUCH RIGHTS ONLY WITH THE PRIOR WRITTEN CONSENT
OF THE NOTE INSURER. IN ADDITION, THE NOTE INSURER WILL HAVE CERTAIN ADDITIONAL
RIGHTS AS A THIRD PARTY BENEFICIARY TO THE INDENTURE.
The Note Insurer does not accept any responsibility for the accuracy of
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 Note Insurer set forth under the heading "The
Note Insurer" herein. Additionally, the Note Insurer makes no representation
regarding the Notes or the advisability of investing in the Notes.
Each rating of the Note Insurer should be evaluated independently. The
ratings reflect the respective rating agency's current assessment of the
creditworthiness of the Note 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.
The above ratings are not recommendations to buy, sell or hold the
Notes 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 Notes. The Note
Insurer does not guaranty the market price of the Notes nor does it guaranty
that the ratings on the Notes will not be revised or withdrawn.
INSURANCE POLICY DOES NOT APPLY TO PREPAYMENT RISK
In general, the protection afforded by the Insurance Policy is
protection for credit risk and not for prepayment risk. A claim may not be made
under the Insurance Policy, in an attempt to guarantee or insure that any
particular rate of prepayment is experienced by the Trust Estate.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and Section 4975 of the Internal Revenue Code of 1986, as
amended (the "Code"), prohibit a pension, profit sharing or other employee
benefit plan, as well as individual retirement accounts and annuities and
certain Keogh Plans, and entities deemed to hold assets of such plans (each, a
"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 such Plan. A violation of these "prohibited
transaction rules" may generate excise tax and other penalties and liabilities
under ERISA and the Code for such persons. Title I of ERISA also requires that
fiduciaries of a Plan subject to ERISA make investments that are prudent,
diversified (except if prudent not to do so) and in accordance with governing
plan documents.
Under regulations of the Department of Labor set forth in 29 C.F.R. ss.
2510.3-101 (the "Plan Asset Regulations"), the assets of a Plan generally
include not only securities held by a Plan but also the underlying assets of the
issuer of any equity securities (the "Look-Through Rule") unless one or more
exceptions specified in the Plan Asset Regulations are satisfied. For purposes
of those Regulations, an equity security is a security other than a security
that is treated as debt under applicable local law and that has no substantial
equity features. The Issuer believes that the Notes will be treated as debt
obligations without significant equity features for purposes of the Plan Asset
Regulations. Accordingly, a Plan that acquires a Note should not be treated as
having acquired a direct interest in the assets of the Issuer. However, there
can be no complete assurance that the Notes will be treated as debt obligations
without significant equity features for purposes of the Plan Asset Regulations.
If the Notes are treated as having substantial equity features, the purchaser of
a Note could be treated as having acquired a direct interest in the Home Equity
Loans securing the Notes. In that event, the purchase, holding, or resale of the
Notes could result in a transaction that is prohibited under ERISA or the Code.
However, even if the Notes are treated as debt for such purposes, the
acquisition or holding of Notes by or on behalf of a Plan could be considered to
give rise to a prohibited transaction if the Issuer or any of its affiliates is
S-87
<PAGE>
or becomes a "party in interest" under ERISA or a "disqualified person" under
the Code with respect to such Plan. In such case, certain exemptions from the
prohibited transaction rules could be applicable depending on the type and
circumstances of the plan fiduciary making the decision to acquire Notes.
Included among these exemptions are: Prohibited Transaction Class Exemption
("PTCE") 96-23, regarding transactions effected by "in-house asset managers";
PTCE 90-1, regarding investments by insurance company pooled separate accounts;
PTCE 95-60, regarding investments by insurance company general accounts; PTCE
91-38, regarding investments by bank collective investment funds; and PTCE
84-14, regarding transactions effected by "qualified professional asset
managers". A purchaser of a Note should be aware, however, that even if the
conditions specified in one or more exemptions are met, the scope of the relief
provided by an exemption might not cover all acts that might be construed as
prohibited transactions. The purchase of a Note will be deemed a representation
by the acquirer that either (i) it is not, and is not purchasing a Note on
behalf of, or with the assets of, a Plan, or (ii) the acquisition and holding of
a Note by the acquirer qualifies for exemptive relief under PTCE 95-60, PTCE
96-23, PTCE 91-38, PTCE 90-1, PTCE 84-14 or another Department of Labor Class
Exemption.
A governmental plan as defined in Section 3(32) of ERISA is not subject
to Title I of ERISA or Section 4975 of the Code. However, such a governmental
plan may be subject to a federal, state, or local law which is, to a material
extent, similar to the foregoing provisions of ERISA or the Code ("Similar
Law"). A fiduciary of a governmental plan should make its own determination as
to the need for and the availability of any exemptive relief under Similar Law.
A Plan fiduciary considering the purchase of Notes should consult its
tax and/or legal advisors regarding the applicability of the fiduciary
responsibility provisions of ERISA to such investment, whether the assets of the
Issuer would be considered plan assets, the possibility of exemptive relief from
the prohibited transaction rules, and other related issues and their potential
consequences. The sale of Notes to a Plan is in no respect a representation by
the Issuer or the Underwriter that this investment meets all relevant legal
requirements with respect to investments by Plans generally or any particular
Plan, or that this investment is appropriate for Plans generally or any
particular Plan. SEE "ERISA Considerations" in the Prospectus.
USE OF PROCEEDS
The Issuer intends to use the net proceeds to be received from the sale
of the Notes to acquire the Home Equity Loans from the Depositor and the Seller
and to pay other expenses associated with the pooling of the Home Equity Loans
and the issuance of the Notes.
LEGAL INVESTMENT CONSIDERATIONS
The Notes will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA").
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" in the Prospectus.
UNDERWRITING
Under the terms set forth in the Underwriting Agreement, dated the date
hereof (the "Underwriting Agreement"), the Depositor has agreed to cause the
Issuer to sell, and the Underwriter has agreed, subject to the terms and
conditions set forth therein, to purchase the entire principal amount of the
Notes.
The Underwriter has informed the Depositor that it proposes to offer
the Notes for sale from time to time in one or more negotiated transactions, or
otherwise, at varying prices to be determined, in each case, at the time of the
related sale. The Underwriter may effect such transactions by selling the Notes
to or through dealers, and such dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from the Underwriter. In
connection with the sale of the Notes, the Underwriter may be deemed to have
received compensation from the Depositor in the form of underwriting
compensation. The Underwriter and any dealers that participate with the
Underwriter in the distribution of the Notes may be deemed to be underwriters
and any
S-88
<PAGE>
commissions received by them and any profit on the resale of the Notes by them
may be deemed to be underwriting discounts and commissions under the Securities
Act of 1933, as amended (the "Securities Act").
The Depositor and the Sponsor have agreed to indemnify the Underwriter
against certain liabilities including liabilities under the Securities Act.
The Depositor has been advised by the Underwriter that the Underwriter
intends to make a market in the Notes, as permitted by applicable laws and
regulations and subject to the provisions of Rule 104 of Regulation M. The
Underwriter is not obligated, however, to make a market in the Notes and such
market-making may be discontinued at any time at the sole discretion of the
Underwriter. Accordingly, no assurance can be given as to the liquidity of, or
trading markets for, the Notes.
First Union Capital Markets, a division of Wheat First Securities, Inc.
("First Union"), or affiliates of First Union (collectively referred to as First
Union for the purposes of this paragraph) provide warehouse financing facilities
to the Seller.
All of the Home Equity Loans included in the Trust Estate will have
been acquired in a privately negotiated transaction with the Sponsor.
EXPERTS
The consolidated balance sheets of Financial Security Assurance Inc.
and its subsidiaries as of December 31, 1997 and December 31, 1996 and the
related consolidated statements of income, changes in shareholder's equity, and
cash flows for each of the three years in the period ended December 31, 1997,
incorporated by reference in this Prospectus Supplement, have been incorporated
herein in reliance on the report of Coopers & Lybrand L. L. P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material anticipated
federal income tax considerations to investors of the purchase, ownership and
disposition of the securities offered hereby. The discussion is based upon laws,
regulations, rulings and decisions now in effect, all of which are subject to
change. The discussion below does not purport to deal with all federal tax
considerations applicable to all categories of investors, some of which may be
subject to special rules. Investors should consult their own tax advisors in
determining the federal, state, local and any other tax consequences to them of
the purchase, ownership and disposition of the Notes.
The Notes will not represent "real estate assets" for purposes of
Section 856(c)(4)(A) of the Code or "[l]oans . . . principally secured by an
interest in real property" within the meaning of Section 7701(a)(19)(C) of the
Code.
TREATMENT OF THE NOTES AS INDEBTEDNESS. The Depositor, the Sponsor, the
Transferor, the Seller and the Issuer agree, and the Noteholders will agree by
their purchase of Notes, to treat the Notes as debt for all federal, state and
local income tax purposes. There are no regulations, published rulings or
judicial decisions involving the characterization for federal income tax
purposes of securities with terms substantially the same as the Notes. In
general, whether instruments such as the Notes constitute indebtedness for
federal income tax purposes is a question of fact, the resolution of which is
based primarily upon the economic substance of the instruments and the
transaction pursuant to which they are issued rather than merely upon the form
of the transaction or the manner in which the instruments are labeled. The
Internal Revenue Service (the "IRS") and the courts have set forth various
factors to be taken into account in determining, for federal income tax
purposes, whether or not an instrument constitutes indebtedness and whether a
transfer of property is a sale because the transferor has relinquished
substantial incidents of ownership in the property or whether such transfer is a
borrowing secured by the property. On the basis of its analysis of such factors
as applied to the facts and its analysis of the economic substance of the
contemplated transaction, Dewey Ballantine LLP, tax counsel to the Depositor
("Tax Counsel"), is of the opinion that, for federal income tax purposes, the
Notes will be treated as indebtedness and not as an ownership interest in the
Home Equity Loans, or an equity interest in the Trust or in a separate
association taxable as a corporation or
S-89
<PAGE>
other taxable entity. Further, Tax Counsel is of the opinion that the Issuer
will not be characterized as an association (or a publicly traded partnership)
taxable as a corporation or as a taxable mortgage pool. See "Material Federal
Income Consequences -- Debt Securities" in the Prospectus.
If the Notes are characterized as indebtedness, interest paid or
accrued on a Note will be treated as ordinary income to the Noteholders and
principal payments on a Note will be treated as a return of capital to the
extent of the Noteholder's basis in the Note allocable thereto. An accrual
method taxpayer will be required to include in income interest on the Notes when
earned, even if not paid, unless it is determined to be uncollectible. The Trust
will report to Noteholders of record and the IRS in respect of the interest paid
and original issue discount, if any, accrued on the Notes to the extent required
by law.
Although, as described above, it is the opinion of Tax Counsel that,
for federal income tax purposes, the Notes will be characterized as debt, such
opinion is not binding on the IRS and thus no assurance can be given that such a
characterization will prevail. If the IRS successfully asserted that the Notes
did not represent debt for federal income tax purposes, holders of the Notes
would likely be treated as owning an interest in a partnership and not an
interest in an association (or publicly traded partnership) taxable as a
corporation. If the Noteholders were treated as owning an equitable interest in
a partnership, the partnership itself would not be subject to federal income
tax; rather each partner would be taxed individually on their respective
distributive share of the partnership's income, gain, loss, deductions and
credits. The amount, timing and characterization of items of income and
deductions for a Noteholder would differ if the Notes were held to constitute
partnership interests, rather than indebtedness. Since the parties will treat
the Notes as indebtedness for federal income tax purposes, none of the Master
Servicer, the Indenture Trustee or the Owner Trustee will attempt to satisfy the
tax reporting requirements that would apply under this alternative
characterization of the Notes. Investors that are foreign persons are strongly
advised to consult their own tax advisors in determining the federal, state,
local and other tax consequences to them of the purchase, ownership and
disposition of the Notes.
ORIGINAL ISSUE DISCOUNT. It is anticipated, and this discussion
assumes, that the Notes will not have any original issue discount ("OID") other
than possibly OID within a DE MINIMIS exception and that accordingly the
provisions of sections 1271 through 1273 and 1275 of the Internal Revenue Code
of 1986, as amended (the "Code"), generally will not apply to the Notes. OID
will be considered DE MINIMIS if it is less than 0.25% of the principal amount
of a Note multiplied by its expected weighted average life. The prepayment
assumption that will be used for purposes of computing original issue discount,
if any, for federal income tax purposes is the Prepayment Assumption. See
"Material Federal Income Consequences -- Discount and Premium -- Original Issue
Discount" in the Prospectus.
MARKET DISCOUNT. A subsequent purchaser who buys a Note for less than
its principal amount may be subject to the "market discount" rules of Section
1276 through 1278 of the Code. If a subsequent purchaser of a Note disposes of
such Note (including certain nontaxable dispositions such as a gift), or
receives a principal payment, any gain upon such sale or other disposition will
be recognized, or the amount of such principal payment will be treated, as
ordinary income to the extent of any "market discount" accrued for the period
that such purchaser holds the Note. Such holder may instead elect to include
market discount in income as it accrues with respect to all debt instruments
acquired in the year of acquisition of the Notes and thereafter. Market discount
generally will equal the excess, if any, of the then current unpaid principal
balance of the Note over the purchaser's basis in the Note immediately after
such purchaser acquired the Note. In general, market discount on a Note will be
treated as accruing over the term of such Note in the ratio of interest for the
current period over the sum of such current interest and the expected amount of
all remaining interest payments, or at the election of the holder, under a
constant yield method (taking into account the Prepayment Assumption). At the
request of a holder of a Note, information will be made available that will
allow the holder to compute the accrual of market discount under the first
method described in the preceding sentence. See "Material Federal Income
Consequences -- Discount and Premium -- Market Discount" in the Prospectus.
The market discount rules also provide that a holder who incurs or
continues indebtedness to acquire a Note at a market discount may be required to
defer the deduction of all or a portion of the interest on such indebtedness
until the corresponding amount of market discount is included in income.
S-90
<PAGE>
Notwithstanding the above rules, market discount on a Note will be
considered to be zero if it is less than a DE MINIMIS amount, which is 0.25% of
the remaining principal balance of the Note multiplied by its expected weighted
average remaining life. If OID or market discount is DE MINIMIS, the actual
amount of discount must be allocated to the remaining principal distributions on
the Notes and, when each such distribution is received, capital gain equal to
the discount allocated to such distribution will be recognized.
MARKET PREMIUM. A subsequent purchaser who buys a Note for more than
its principal amount generally will be considered to have purchased the Note at
a premium. Such holder may amortize such premium, using a constant yield method,
over the remaining term of the Note and, except as future regulations may
otherwise provide, may apply such amortized amounts to reduce the amount of
interest reportable with respect to such note over the period from the purchase
date to the date of maturity of the Note. The amortization of such premium on an
obligation that provides for partial principal payments prior to maturity should
be governed by the methods for accrual of market discount on such an obligation
(described above). A holder that elects to amortize premium must reduce the tax
basis in the related obligation by the amount of the aggregate deductions (or
interest offsets) allowable for amortizable premium. If a debt instrument
purchased at a premium is redeemed in full prior to its maturity, a purchaser
who has elected to amortize premium should be entitled to a deduction for any
remaining unamortized premium in the taxable year of redemption. See "Material
Federal Income Consequences -- Discount and Premium -- Premium" in the
Prospectus.
SALE OR REDEMPTION OF NOTES. If a Note is sold or retired, the seller
will recognize gain or loss equal to the difference between the amount realized
on the sale and such holder's adjusted basis in the Note. Such adjusted basis
generally will equal the cost of the Note to the seller, increased by any
original issue discount included in the seller's gross income in respect of the
Note (and by any market discount which the taxpayer elected to include in income
or was required to include in income), and reduced by payments other than
payments of qualified stated interest in respect of the Note received by the
seller and by any amortized premium. Similarly, a holder who receives a payment
other than a payment of qualified stated interest in respect of a Note, either
on the date on which such payment is scheduled to be made or as a prepayment,
will recognize gain equal to the excess, if any, of the amount of the payment
over his adjusted basis in the Note allocable thereto. A Noteholder who receives
a final payment which is less than his adjusted basis in the Note will generally
recognize a loss in the amount of the shortfall on the last day of his taxable
year. Generally, any such gain or loss realized by an investor who holds a Note
as a "capital asset" within the meaning of Code Section 1221 should be capital
gain or loss, except as described above in respect of market discount and except
that a loss attributable to accrued but unpaid interest may be an ordinary loss.
See "Material Federal Income Consequences -- Debt Securities" in the Prospectus.
TAXATION OF CERTAIN FOREIGN INVESTORS. Interest payments (including
OID, if any) on the Notes made to a Noteholder who is a nonresident alien
individual, foreign corporation or other non-United States person (a "foreign
person") generally will be "portfolio interest" which is not subject to United
States tax if such payments are not effectively connected with the conduct of a
trade or business in the United States by such foreign person and if the Trust
(or other person who would otherwise be required to withhold tax from such
payments) is provided with an appropriate statement that the beneficial owner of
the Note identified on the statement is a foreign person. See "Material Federal
Income Consequences -- Foreign Investors" in the Prospectus.
BACKUP WITHHOLDING. Distributions of interest and principal as well as
distributions of proceeds from the sale of the Notes, may be subject to the
"backup withholding tax" under Section 3406 of the Code at rate of 31% if
recipients of such distributions fail to furnish to the payor certain
information, including their taxpayer identification numbers, or otherwise fail
to establish an exemption from such tax. Any amounts deducted and withheld from
a distribution to a recipient would be allowed as a credit against such
recipient's federal income tax. Furthermore, certain penalties may be imposed by
the IRS on a recipient of distributions that is required to supply information
but does not do so in the proper manner. See "Material Federal Income
Consequences -- Backup Withholding" in the Prospectus.
STATE TAX CONSIDERATIONS
Potential Noteholders should consider the state and local income tax
consequences of the purchase, ownership and disposition of the Notes. State and
local income tax laws 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
S-91
<PAGE>
state or locality. Therefore, potential Noteholders should consult their own tax
advisors with respect to the various state and local tax consequences of an
investment in the Notes.
LEGAL MATTERS
Certain legal matters will be passed upon for the Sponsor by Stroock &
Stroock & Lavan LLP, New York, New York and Shell, Bray, Aycock, Able and
Livingston, Greensboro, North Carolina. Dewey Ballantine LLP, New York, New York
or Dewey Ballantine LLP, Washington, D.C., will act as counsel for the
Underwriter and will pass upon certain federal income tax matters for the
Issuer. Certain legal matters relating to the Note Insurer and the Insurance
Policy will be passed upon for the Note Insurer by the internal general counsel
of the Note Insurer.
RATING OF THE NOTES
It is a condition to the issuance of the Notes that each shall be rated
"Aaa" by Moody's. and "AAA" by Standard & Poor's.
Explanations of the significance of such ratings may be obtained from
Moody's, 99 Church Street, New York, New York 10007, and Standard & Poor's, 25
Broadway, New York, New York 10004. Each rating will be the view only of the
assigning Rating Agency.
The ratings on the Notes are based in substantial part on the
claims-paying ability of the Note Insurer. Any changes in the ratings of the
Note Insurer by the Rating Agencies may result in a change in the ratings of the
Notes.
The ratings assigned to the Notes do not represent any assessment of
the likelihood or rate of Prepayments and do not address the possibility that
Noteholders might suffer a lower than anticipated yield.
There is no assurance that any rating assigned to the Notes will
continue for any period of time or that such ratings will not be revised or
withdrawn. Any such revision or withdrawal of such ratings may have an adverse
effect on the market price or liquidity of the Notes.
The ratings of the Notes should be evaluated independently form similar
ratings on other types of securities. A security rating is not a recommendation
to buy, sell or hold securities.
There can be no assurances as to whether any other rating agency will
rate the Notes, or, if one does, what rating will be assigned by such other
rating agency. A rating on the Notes by another rating agency, if assigned at
all, may be lower than the ratings assigned to the Notes by Moody's or Standard
& Poor's.
S-92
<PAGE>
INDEX OF PRINCIPAL TERMS
Administrative Fee Amount, 6
Aggregate Principal Balance, 2, 15, 51
Appraised Value, 51
Available Funds, 8, 36
Beneficial Owner, 7
Book-Entry Notes, 28
Business Day, 8, 86
Capitalized Interest Account, 2, 18
Cedel, 7
Cedel Participants, 29
Citibank, 28
Class, 7
Class A-1 Note Interest Rate, 9
Class A-1 Notes, 5
Class A-2 Note Interest Rate, 9
Code, 87
Combined Loan-to-Value Ratio, 51
Commission, 4
Compensating Interest, 14, 81
Coupon, 16, 53
Coupon Rates, 15, 52
Custodian, 31
Cut-Off Date, 6
Daily Collections, 80
Definitive Note, 7
Delinquency Advance, 13
Depositor, 1, 5
Determination Date, 35
DIL, 49
DTC, 7
Eligible Investments, 37
ERISA, 19, 87
Euroclear, 7
Euroclear Operator, 29
Euroclear Participants, 29
European Depositaries, 28
Excess Cash, 10, 38
Excess Cash Payment, 35
Exchange Act, 84
Final Certification, 32
Final Recovery Determination, 35
Financial Intermediary, 28
First Greensboro, 43
First Union, 89
Fitch, 13
Funding Period, 18
Group I Adjustable Rate Initial Home Equity Loans, 15
Group II Adjustable Rate Initial Home Equity Loans, 17
Group II Initial Aggregate Principal Balance, 2
Group II Initial Home Equity Loans, 2
Group II Pre-Funded Amount, 18
HEP, 74
Home Equity Loans, 1, 7, 27
Home Equity Prepayment, 74
Indenture, 1
Indenture Trustee, 1, 6
Indenture Trustee Fee, 6
Initial Aggregate Principal Balance, 2, 53
Initial Group I Aggregate Principal Balance, 14, 51
Initial Group II Aggregate Principal Balance, 15, 51
Initial Home Equity Loans, 2, 7, 27
Initial Mortgage Pool Balance, 51
Insurance Policy, 1, 12
Insured Payment, 12
Interest Period, 9
Issuer, 1, 5
Liquidated Loan, 35
Liquidation Proceeds, 35, 36
Loan Sale Agreement, 2
Loan Transfer Agreement, 2
Look-Through Rule, 87
Master Backup Servicer, 3, 6, 50
Master Servicer, 2, 3, 5
Master Servicer Optional Termination Date, 18, 41
Master Servicer Termination Events, 82
Maximum Collateral Amount, 18
Maximum Collateral Amount, 18
Maximum Rates, 16, 17
Minimum Rates, 16, 17
Modeling Assumptions, 74
Monthly Principal, 34
Monthly Remittance Date, 6
Moody's, 13
Mortgage File, 32
Mortgage Notes, 51
Mortgagor, 70
Net Liquidation Proceeds, 36, 79
New World, 43
Note Account, 37
Note Balance, 9, 34
Note Insurer, 1, 12
Note Insurer Default, 13
Note Interest, 9, 34
Note Interest Rate, 9, 34
Noteholder, 8, 28
Notes, 1
Original Group II Pre-Funded Amount, 17
Overcollateralization Amount, 11, 39
Overcollateralization Deficiency Amount, 34
Overcollateralization Deficit, 12, 40
Overcollateralization Reduction Amount, 34
Overcollateralization Surplus, 11, 39
S-93
<PAGE>
Owner Trustee, 1, 6
Owner Trustee Fee, 6
Participants, 29
Payment Date, 2, 8
Percentage Interest, 32
Plan, 19, 87
Plan Asset Regulations, 19, 87
Preference Amount, 12
Pre-Funding Account, 2
Prepayment, 35
Prepayment Assumption, 74
Prepayment Interest Shortfall, 78
Preservation Expenses, 14
Preservation Expenses, 80
Principal and Interest Account, 79
Principal Balance, 35
Principal Remittance Amount, 34
PTCE, 88
Rating Agencies, 19
Realized Loss, 40
Record Date, 8
Redemption Date, 41
REMIC, 3
Remittance Period, 6
Required Overcollateralization Amount, 11, 39
Residual Interest, 1
Schedule of Home Equity Loans, 31
Securities Act, 89
Seller, 2, 5
Servicing Advances, 14
Servicing Advances, 81
Servicing Fee, 14
Similar Law, 88
SMMEA, 19, 88
Sponsor, 2, 5
Standard & Poor's, 13
Stated Maturity Date, 3
Subsequent Home Equity Loans, 2, 7, 27
Subsequent Transfer Date, 6
Sub-Servicers, 82
Sub-Servicing Agreements, 82
Substitution Amount, 32
Transferor, 2
Trust Agreement, 1, 5
Trust Estate, 1
Underwriter, 1
Underwriting Agreement, 88
S-94
<PAGE>
ANNEX A
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Asset
Backed Notes, Series 1998-1 (the "Global Securities"), will be available only in
book-entry form. Investors in the Global Securities may hold such Global
Securities through DTC, Cedel or Euroclear. The Global Securities will be
traceable 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 euroNote practice (I.E., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between participants of Cedel or
Euroclear and Participants holding Notes will be effected on a
delivery-against-payment basis through the Relevant Depositaries of Cedel and
Euroclear (in such capacity) and as Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the
name of Cede, as nominee of DTC. Investors' interests in the Global Securities
will be represented through financial institutions acting on their behalf as
direct and indirect participants in DTC. As a result, Cedel and Euroclear will
hold positions on behalf of their participants through their Relevant
Depositaries, which in turn will hold such positions in accounts as
Participants.
Investors selecting to hold their Global Securities through DTC will
follow DTC settlement practice. 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 euroNotes, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Because 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 PARTICIPANTS. Secondary market trading between
Participants will be settled using the procedures applicable to prior
asset-backed Note 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 euroNotes in same-day funds.
S-95
<PAGE>
TRADING BETWEEN DTC SELLER AND CEDEL OR EUROCLEAR PARTICIPANTS. When
Global Securities are to be transferred from the account of a 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 the actual number of days in such
accrual period and a year assumed to consist of 360 days. For transactions
settling on the 31st of the month, payment will include interest accrued to and
excluding the first day of the following month. Payment will then be made by the
respective Depositary to the Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be credited to the respective clearing system and by the clearing system,
in accordance with its usual procedures, to the Cedel Participant's or Euroclear
Participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (I.E., the trade fails), the Cedel or Euroclear cash debt
will be valued instead as of the actual settlement date.
Cedel Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Cedel or Euroclear. Under this
approach, they may take on credit exposure to Cedel or Euroclear until the
Global Securities are credited to their accounts one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit
to them, Cedel Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon to finance
settlement. Under this procedure, Cedel Participants or Euroclear Participants
purchasing Global Securities would incur overdraft charges for one day, assuming
they clear the overdraft when the Global Securities are 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.
Because the settlement is taking place during New York business hours,
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 Participants a cross-market transaction will
settle no differently than a trade between two 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 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 Relevant Depositary, as appropriate, to deliver
the Global Securities to the Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in such accrual period and a year assumed to consist of 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of the Cedel Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
Cedel Participant's or Euroclear Participant's account would be back-valued to
the value date (which would be the preceding day, when settlement occurred in
New York). Should the Cedel Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (I.E., the trade fails), receipt of
the cash proceeds in the Cedel Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase
Global Securities from Participants for delivery to Cedel Participants or
Euroclear Participants should note that these trades would automatically fail on
the
S-96
<PAGE>
sale side unless affirmative action were taken. At least three techniques should
be readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedel or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a Participant no
later than one day prior to settlement, which would give the Global Securities
sufficient time to be reflected in their Cedel or Euroclear account in order to
settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the 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 of Business in the
United States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN
TREATY COUNTRIES (FORM 1001). Non-U.S. Persons 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 beneficial owners or their agents.
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 beneficial
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, (iii) an estate that is
subject to United States federal income tax, regardless of the source of its
income or (iv) a trust if (a) a court in the United
S-97
<PAGE>
States is able to exercise primary supervision over the administration of the
trust, and (b) one or more United States persons have the authority to control
all substantial decisions of the trust. The term "Non-U.S. Person" means any
person who is not a U.S. Person. This summary does not deal with all aspects of
U.S. federal income tax withholding that may be relevant to foreign holders of
Global Securities or with the application of recently issued Treasury
Regulations relating to tax documentation requirements that are generally
effective with respect to payments made after December 31, 1999. Investors are
advised to consult their own tax advisors for specific tax advice concerning
their holding and disposing of Global Securities.
S-98
<PAGE>
=================================================================
No dealer, salesman, or any other person has been authorized to
give any information or to make any representation not
contained in this Prospectus Supplement or the accompanying
Prospectus, and, if given or made, such information or
representation must not be relied upon as having been
authorized by the Issuer, the Sponsor or the Underwriter.
Neither this Prospectus Supplement nor the accompanying
Prospectus constitutes an offer to sell or a solicitation of an
offer to buy any of the Notes offered hereby in any
jurisdiction to any person to whom it is unlawful to make such
offer in such jurisdiction. Neither the delivery of this
Prospectus Supplement or the accompanying Prospectus nor any
sale made hereunder shall, under any circumstances, create an
implication that the information herein is correct as of any
time subsequent to the date hereof or that there has been no
change in the affairs of the Issuer or the Depositor since such
date.
___________________
TABLE OF CONTENTS PAGE
PROSPECTUS SUPPLEMENT
SUMMARY OF TERMS.........................................5
RISK FACTORS............................................21
DESCRIPTION OF THE NOTES................................27
THE ISSUER..............................................43
THE SPONSOR AND MASTER SERVICER.........................43
THE SELLER..............................................50
THE TRANSFEROR..........................................50
THE DEPOSITOR...........................................50
THE MASTER BACKUP SERVICER..............................50
DESCRIPTION OF THE HOME EQUITY LOANS....................51
CERTAIN PREPAYMENT AND YIELD CONSIDERATIONS.............71
THE SERVICING AGREEMENT.................................82
THE NOTE INSURER........................................87
THE INSURANCE POLICY....................................89
ERISA CONSIDERATIONS....................................91
USE OF PROCEEDS.........................................92
LEGAL INVESTMENT CONSIDERATIONS.........................92
UNDERWRITING............................................92
EXPERTS.................................................93
MATERIAL FEDERAL INCOME TAX CONSEQUENCES................93
STATE TAX CONSIDERATIONS................................95
LEGAL MATTERS...........................................96
RATING OF THE NOTES.....................................96
PROSPECTUS
SUMMARY OF PROSPECTUS ........................5
RISK FACTORS .......................17
DESCRIPTION OF THE SECURITIES .......................21
THE TRUST FUNDS .......................24
CREDIT ENHANCEMENT .......................31
SERVICING OF HOME EQUITY LOANS .......................33
THE AGREEMENTS .......................39
CERTAIN LEGAL ASPECTS OF HOME
EQUITY LOANS .......................48
THE DEPOSITOR .......................54
USE OF PROCEEDS .......................54
MATERIAL FEDERAL INCOME TAX
CONSEQUENCES .......................55
STATE TAX CONSIDERATIONS .......................71
ERISA CONSIDERATIONS .......................71
LEGAL INVESTMENT .......................73
PLAN OF DISTRIBUTION .......................74
LEGAL MATTERS .......................74
FINANCIAL INFORMATION .......................74
GLOSSARY OF TERMS .......................75
===========================================================
===========================================================
$175,000,000
(APPROXIMATE)
FIRST GREENSBORO HOME EQUITY LOAN
TRUST 1998-1
ISSUER
ASSET BACKED NOTES,
SERIES 1998-1
$72,650,000 6.53% CLASS A-1 NOTES
$102,350,000 6.55% CLASS A-2 NOTES
FIRST GREENSBORO HOME EQUITY, INC.
SPONSOR AND MASTER SERVICER
HOME EQUITY SECURITIZATION CORP.
DEPOSITOR
PROSPECTUS SUPPLEMENT
FIRST UNION
CAPITAL MARKETS
JUNE 22, 1998
===========================================================
<PAGE>
PROSPECTUS
Asset Backed Notes and Asset Backed Certificates, issuable in Series
Home Equity Securitization Corp.
(Depositor)
Home Equity Securitization Corp. (the "Depositor") may offer from time
to time under this Prospectus and the related prospectus supplements (the
related "Prospectus Supplements") the Asset-Backed Notes (the "Notes") and the
Asset-Backed Certificates (the "Certificates" and, together with the Notes, the
"Securities") which may be sold from time to time in one or more series (each, a
"Series").
The Certificates of a Series will evidence undivided interests in
certain assets deposited into a trust (each, a "Trust Fund") by the Depositor
pursuant to a Pooling and Servicing Agreement or a Trust Agreement (an
"Agreement"), as described herein. The Notes of a Series will be issued and
secured pursuant to an Indenture and will represent indebtedness secured the
related Trust Fund. The Trust Fund for a Series of Securities will include
assets originated or acquired by the originator or originators (the
"Originator") specified in the related Prospectus Supplement composed of (a)
primary assets, which may include one or more pools (each, a "Pool") of (i)
loans (the "Home Equity Loans") that are secured by mortgages on residential
properties and that may be secured by fixtures, as further described herein and
(ii) securities backed or secured by Home Equity Loans (collectively, the
"Primary Assets"), (b) all monies due thereunder net, if and as provided in the
related Prospectus Supplement, of certain amounts payable to the servicer of the
Home Equity Loans, which servicer may also be the related Originator, specified
in the related Prospectus Supplement (the "Servicer"), (c) as more fully
described in the related Prospectus Supplement, funds on deposit in one or more
pre-funding amounts 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. The Home
Equity Loans will be secured by mortgages and 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 the Mortgaged Property.
(cover continued on next page)
NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS SECURED BY, 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 DEPOSITOR,
THE RELATED ORIGINATOR, THE TRUSTEE, THE SERVICER OR BY ANY OF THEIR RESPECTIVE
AFFILIATES. THE DEPOSITOR'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.
--------------------
For a discussion of material risks associated with an investment in the
Securities, see the information herein under "Risk Factors" beginning on page
15.
--------------------
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.
--------------------
The Securities offered by this Prospectus and by the related Prospectus
Supplement are offered by First Union Capital Markets Corp. and the other
underwriters set forth in the related Prospectus Supplement, if any, subject to
prior sale, to withdrawal, cancellation or modification of the offer without
notice, to delivery to and acceptance by First Union Capital Markets Corp. and
the other underwriters, if any, and certain further conditions. Retain this
Prospectus for future reference. This Prospectus may not be used to consummate
sales of the Securities offered hereby unless accompanied by a Prospectus
Supplement.
--------------------
First Union Capital Markets Corp.
June __, 1998
<PAGE>
(Continued from previous page)
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 each distribution date specified in the related Prospectus Supplement
(the "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 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.
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 under the
circumstances described herein and in the related Prospectus Supplement.
2
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Securities to be
offered hereunder will, among other things, set forth with respect to such
Series of Securities: (i) the aggregate principal amount, interest rate, and
authorized denominations of each Class of such Securities; (ii) certain
information concerning the Primary Assets, the Originator and any Servicer;
(iii) the terms of any credit enhancement 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 of each Class of such Securities; (vii) the
method to be used to calculate the amount of principal required to be applied to
the Securities of each Class of such Series on each Distribution Date, the
timing of the application of principal and the order of priority of the
application of such principal to the respective Classes and the allocation of
principal to be so applied; (viii) the Distribution Dates and any Assumed
Reinvestment Rate (as defined herein); (ix) additional information with respect
to the plan of distribution of such Securities; and (x) the federal income tax
characterization of the Securities.
REPORTS TO HOLDERS
Periodic and annual reports concerning the related Trust Fund for a
Series of Securities are required under the related Agreement to be forwarded to
holders of the related Series of Securities (the "Holders"). If the Securities
are issued in book-entry form, (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" herein.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission
(the "Commission ") a Registration Statement under the Securities Act of 1933,
as amended, with respect to the Securities. This Prospectus, which forms a part
of the Registration Statement, and the Prospectus Supplement relating to each
Series of Securities contain summaries of the material terms of the documents
referred to herein and therein, but do not contain all of the information set
forth in the Registration Statement pursuant to the Rules and Regulations of the
Commission. For further information, reference is made to such Registration
Statement and the exhibits thereto. Such Registration Statement and exhibits can
be inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at its Public Reference Section, 450 Fifth Street,
NW, 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.
In addition, the Commission maintains a World Wide Web site at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants, including the Depositor, that file
electronically with the Commission.
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 Depositor intends to cause each Trust Fund to suspend filing
such reports if and when such reports are no longer required under said 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.
3
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the Trust Fund
referred to in the accompanying Prospectus Supplement with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), after the date of this Prospectus and
prior to the 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 Depositor 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 the
Depositor at One First Union Center, 301 S. College Street, Charlotte, North
Carolina 28288-0630.
4
<PAGE>
SUMMARY OF PROSPECTUS
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" herein.
<TABLE>
<S> <C>
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 (the related
"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 Series pursuant to an
Indenture between the Issuer and the related trustee (the
"Trustee") whereby the Issuer will pledge the Trust Fund to
secure the Notes under the lien of the Indenture. Each
series of Notes will represent the indebtedness of the
Issuer. 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, participating securities, senior securities or
subordinate securities. Each Class may differ in, among
other things, the amounts allocated to and the priority of
principal and interest payments, final scheduled
distribution dates, Distribution Dates and interest rates.
The Securities of each Class will be issued in fully
registered form in the denominations specified in the
related Prospectus Supplement. The Securities or certain
Classes of such Securities offered thereby may be available
in book-entry form only.
Depositor ...........................................Home Equity Securitization Corp. (the "Depositor") was
incorporated in the State of North Carolina in December
1997, and is a wholly-owned, special purpose subsidiary of
First Union National Bank, a national banking association
with its headquarters in Charlotte, North Carolina. Neither
First Union National Bank nor any other affiliate of the
Depositor, the Servicer, the Trustee or the Originator has
guaranteed or is otherwise obligated with respect to the
Securities of any Series. See "THE DEPOSITOR" herein.
Issuer ..............................................With respect to each series of Notes, the issuer (the
"Issuer") will be an owner trust (the "Owner Trust")
established for the purpose of issuing such series of
Notes. Each such Owner Trust will be created pursuant to
the Trust Agreement (the "Trust Agreement") between the
Depositor and the Owner Trustee. With respect to each series
of Certificates, the Issuer will be the Trust established
pursuant to the related Agreement.
Trustees ............................................The trustee or indenture trustee (each, the "Trustee") for each
series of Certificates and Notes, respectively, will be named
in the related Prospectus Supplement. The Owner Trustee (the
5
<PAGE>
<CAPTION>
<S> <C>
"Owner Trustee") for each series of Notes will be named in the
related Prospectus Supplement. See "The Agreements--The
Trustee" herein.
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 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" set forth
in the related Prospectus Supplement which is used solely for
convenience in expressing the calculation of interest and for
certain other purposes and does not represent the right to
receive any distributions allocable to principal. Principal
Only Securities may not be entitled to receive any interest
payments or may be entitled to receive only nominal interest
payments. Interest payable on the Securities of a Series on a
Distribution Date will include all interest accrued during the
period specified in the related Prospectus Supplement. See
"DESCRIPTION OF THE SECURITIES--Payments of Interest" herein.
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 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. The actual final Distribution Date of a
Security may occur substantially earlier or may occur later
than its Final
6
<PAGE>
<CAPTION>
<S> <C>
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, as well as on a variety of
economic, demographic, tax, legal, social and other factors. No
assurance can be given as to the actual prepayment experience
with respect to a Series. See "RISK FACTORS--Yield May Vary"
and "DESCRIPTION OF THE SECURITIES--Weighted Average Life of
the Securities" herein.
Optional Termination................................ One or more Classes of Securities of any Series may be redeemed
or repurchased in whole or in part, at such time, by the
related Originator, Servicer, Credit Enhancer, or an affiliate
thereof at the price set forth in the related Agreement (which
would not be less than an amount necessary to pay all principal
and interest or the securities outstanding). Each such
redemption or repurchase may occur on or after such time as the
aggregate principal balance of the Securities of the Series or
the Primary Assets relating to such Series is less than the
percentage (which percentage shall not exceed 20%) specified in
the related Agreement. See "DESCRIPTION OF THE
SECURITIES--Optional Redemption, Purchase or Termination"
herein.
Mandatory Termination; Auction Sale .................The Trustee, the Servicer or the related Originator may be
required to effect early retirement of a series of Securities
by soliciting competitive bids for the purchase of the related
Primary Assets or otherwise, under other circumstances and in
the manner specified in "THE AGREEMENTS--Termination" and in
the related Agreement.
A mandatory termination may take the form of an auction sale.
Within a certain period following the failure of the holder of
the optional termination right to exercise such right, the
required party shall solicit bids for the purchase of all Home
Equity Loans remaining in the Trust. In the event that
satisfactory bids are received, (which would not be less than
an amount necessary to pay all principal and interest on the
securities outstanding), the net sale proceeds will be
distributed to Holders, in the same order of priority as
collections received in respect of the Home Equity Loans. If
satisfactory bids are not received, such party shall decline to
sell the Home Equity Loans and shall not be under any
obligation to solicit any further bids or otherwise negotiate
any further sale of the Home Equity Loans. Such sale and
consequent termination of the Trust must constitute a
"qualified liquidation" of each REMIC established by the Trust
under Section 860F of the Internal Revenue Code of 1986, as
amended, including, without limitation, the requirement that
the qualified liquidation takes place over a period not to
exceed 90 days.
7
<PAGE>
<CAPTION>
<S> <C>
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. The Primary
Assets will be acquired by the related Trust Fund from the
related Originator, or may be acquired in the open market or
in privately negotiated transactions.
(1) Home Equity Loans......................... The Primary Assets for a Series will consist, in whole or in
part, of loans which are secured by mortgages on residential
properties and which may be secured by fixtures (the "Home Equity
Loans"). Some Home Equity Loans may be delinquent to the extent
specified in the related Prospectus Supplement. The percentage of
those Home Equity Loans which are delinquent shall not exceed 10%
of the aggregate principal balance of the Primary Assets as of
the cut-off date for that Series (the "Cut-Off Date").
The Home Equity Loans will consist of what are commonly
referred to as "home equity" loans, as distinguished from
"purchase money" loans. Both of these concepts refer to the use
of proceeds made by the related borrower, rather than to any
legal or other documentary differences between the two types of
loans, except that "home equity" loans are usually (but not
always) secured by mortgages which are in a subordinate lien
position while "purchase money" loans are usually (but not
always) secured by mortgages which are in a senior lien
position, and "home equity" loans are typically (but not
always) shorter in maturity than "purchase money" loans (i.e.,
fifteen rather than thirty years). The Home Equity Loans, in
addition to being secured by mortgages on real estate, may also
be secured by "fixtures" treated as personal property under
local state law. Although fixtures may turn up more frequently
in the case of loans in which the proceeds are used to fund
home improvements, fixtures as a part of the collateral package
may be a part of either a "home equity" or "purchase money"
loan.
A "home equity" loan is a loan the proceeds of which are not
used to purchase the related mortgaged property; the proceeds
of a "purchase money" mortgage are applied to the purchase of
the related mortgaged property. Typical uses of proceeds of
"home equity" loans would be home improvement, debt
consolidation and the funding of large expenses such as college
tuition.
Payment Features of Home Equity Loans; Balloon Loans. The Trust
Fund may contain loans which have various payment
characteristics, including balloon or other non-traditional
payment features, and may accrue interest at a fixed rate or an
adjustable rate. Balloon loans do not amortize their entire
principal balance by their stated maturity in accordance
8
<PAGE>
<CAPTION>
<S> <C>
with their terms and require a balloon payment of the remaining
principal balance at maturity (each such Home Equity Loan, a
"Balloon Loan"). See "RISK FACTORS--Balloon Loans" and
"DESCRIPTION OF THE SECURITIES--Weighted Average Life of the
Securities" herein.
The Home Equity Loans will be secured by mortgages and 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 the Mortgaged Property. 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 (or the aggregate unpaid
principal balance included in the Trust Fund for the related
Series); (b) the range and weighted average interest rate (the
"Loan Rate") on the loans and in the case of adjustable rate
loans, the range and weighted average of the current rate of
interest borne by such loans (the "Current Interest Rates") and
any maximum lifetime interest rates thereon (the "Lifetime Rate
Caps"); (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 and
combined loan-to-value ratios (each a "Combined Loan-to-Value
Ratio") or loan-to-value ratios, (each a "Loan-to-Value Ratio")
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 Credit Enhancement relating to the Home
Equity Loans; (h) the geographic distribution of any 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. Such pass-through certificates or
collateralized obligations will have previously been (a)
offered and distributed to the public pursuant to an effective
registration statement and not purchased as part of the
original distribution or (b) acquired in a transaction not
involving any public offering from a person who is not an
affiliate of the issuer of such securities at the time of
transfer (nor an affiliate thereof at any time during the three
preceding months); provided a period of three years has elapsed
since the later of the date the securities were acquired from
the issuer or an affiliate thereof. Although individual
Underlying Loans may be insured or guaranteed by the United
States or an
9
<PAGE>
<CAPTION>
<S> <C>
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" herein.
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 Depositor and
the Depositor 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 Credit Enhancement, if any, such as
reserve funds, insurance policies, letters of credit or
guarantees, relating to the Home Equity Loans underlying the
Private Securities, 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; (ix) the
terms on which substitute Underlying Loans may be delivered to
replace those initially deposited with the PS Trustee; and (x)
a description of the limited purpose and business of the issuer
of the Private Securities, the availability of public
information concerning such issuer and market information with
respect to the Private Securities. See "THE TRUST
FUNDS--Additional Information" herein.
B. Collection and Distribution
Accounts....................................All payments on or with respect to the Primary Assets for a
Series will be remitted directly to an account (the "Collection
Account") to be established for such Series with the Trustee or
the Servicer, in the name of the Trustee. The Trustee shall be
required to apply a portion of the amount in the Collection
Account, together with reinvestment earnings from eligible
investments specified in the related Prospectus Supplement, to
the payment of certain amounts payable to the Servicer under
10
<PAGE>
<CAPTION>
<S> <C>
the related Agreement and any other person specified in the
Prospectus Supplement, and to deposit a portion of the amount
in the Collection Account into a separate account (the
"Distribution Account") to be established for such Series, each
in the manner and at the times established in the related
Prospectus Supplement. The amounts deposited in such
Distribution Account will be available for (i) application to
the payment of principal of and interest on such Series of
Securities on the next Distribution Date, (ii) the making of
adequate provision for future payments on certain Classes of
Securities and (iii) any other purpose specified in the related
Prospectus Supplement. After applying the funds in the
Collection Account as described above, any funds remaining in
the Collection Account may be paid over to the Servicer, the
Depositor, any provider of Credit Enhancement with respect to
such Series (a "Credit 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") 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 (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 specified in the related Prospectus Supplement (the
"Pre-Funding Period"). 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. If a
Trust Fund includes a Pre-Funding Account and the principal
balance of additional Primary Assets delivered to the Trust
Fund during the Pre-Funding Period is less than the original
Pre-Funded Amount, the Holders of the Securities of the related
Series will receive a prepayment of principal as and to the
extent described in the related Prospectus Supplement. Any such
principal prepayment may adversely affect the yield to maturity
of the applicable Securities.
If a Pre-Funding Account is established, (a) the Pre-Funding
Period will not exceed 90 days from the related closing date,
(b) the additional Primary Assets to be acquired during the
Pre-Funding Period will be subject to the same representations
and warranties and satisfy the same eligibility requirements as
the Primary Assets included in the related Trust Fund on the
closing date, subject to such exceptions as are expressly
stated in such Prospectus Supplement, (c) the Pre-Funding
Amount will not exceed 25% of the principal amount of the
Securities issued pursuant to a particular offering and (d)
prior to the investment of the Pre-Funded Amount in additional
Primary Assets, such Pre-Funded Amount will be invested in one
or more "Eligible Investments" specified in the related
11
<PAGE>
<CAPTION>
<S> <C>
Agreement and described herein under "THE TRUST FUNDS --
Collection and Distribution Accounts." Any Eligible Investment
must mature no later than the Business Day prior to the next
Distribution Date. "Business Day" means any day other than a
Saturday, Sunday or other day on which commercial banking
institutions or trust companies in New York, New York or the
principal place of business of the Trustee are closed.
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 (x) the sum of (i) the amount of
interest accrued on the Securities of such Series and (ii)
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. Any amounts on deposit in the Capitalized Interest
Account at the end of the Pre-Funding Period that are not
necessary for such purposes will be distributed to the person
specified in the related Prospectus Supplement. See "THE TRUST
FUNDS--Pre-Funding Account" herein.
Credit Enhancement...................................If stated in the Prospectus Supplement relating to a Series,
the Depositor will obtain an irrevocable letter of credit,
surety bond, certificate insurance policy, insurance policy or
other form of credit support (collectively, "Credit
Enhancement") in favor of the Trustee on behalf of the Holders
of such Series and any other person specified in such
Prospectus Supplement from an institution (a "Credit Enhancer")
acceptable to the rating agency or agencies identified in the
related Prospectus Supplement as rating such Series of
Securities (collectively, the "Rating Agency") for the purposes
specified in such Prospectus Supplement. The Credit Enhancement
will support the payments on the Securities and may be used for
other purposes, to the extent and under the conditions
specified in such Prospectus Supplement. See "CREDIT
ENHANCEMENT" herein. Credit Enhancement for a Series may
include one or more of the following types of Credit
Enhancement, or such other type of Credit Enhancement specified
in the related Prospectus Supplement.
A. Subordinate Securities......................Credit Enhancement for a Series may consist of one or more
Classes of Subordinate Securities. The rights of Holders of
such Subordinate Securities to receive distributions on any
Distribution Date will be subordinate in right and priority to
the rights of holders of Senior Securities of the Series, but
only to the extent described in the related Prospectus
Supplement.
B. Insurance ..................................Credit Enhancement for a Series may consist of special hazard
insurance policies, bankruptcy bonds and other types of
insurance supporting payments on the Securities.
12
<PAGE>
<CAPTION>
<S> <C>
C. Reserve Funds ..............................If stated in the Prospectus Supplement, the Depositor may
deposit cash, a letter or letters of credit, short-term
investments, or other instruments acceptable to the Rating
Agency in one or more reserve funds to be established in the
name of the Trustee (each a "Reserve Fund"), which will be used
by the Trustee to make required payments of principal of or
interest on the Securities of such Series, to make adequate
provision for future payments on such Securities or for any
other purpose specified in the Agreement, with respect to such
Series, to the extent that funds are not otherwise available.
In the alternative or in addition to such deposit, a Reserve
Fund for a Series may be funded through application of all or a
portion of the excess cash flow from the Primary Assets for
such Series, to the extent described in the related Prospectus
Supplement.
D. Minimum Principal Payment
Agreement...................................If stated in the Prospectus Supplement relating to a Series
of Securities, the Depositor will enter into a minimum
principal payment agreement (the "Minimum Principal Payment
Agreement") with an entity meeting the criteria of the
Rating Agency, pursuant to which such entity will provide
funds in the event that aggregate principal payments on the
Primary Assets for such Series are not sufficient to make
certain payments. See "CREDIT ENHANCEMENT--Minimum
Principal Payment Agreement" herein.
E. Deposit Agreement...........................If stated in the Prospectus Supplement, the Depositor and
the Trustee will enter into a guaranteed investment contract
or an investment agreement (the "Deposit Agreement")
pursuant to which all or a portion of amounts held in the
Collection Account, the Distribution Account or in any
Reserve Fund will be invested with the entity specified in
such Prospectus Supplement. The Trustee will be entitled to
withdraw amounts so invested, plus interest at a rate equal
to the Assumed Reinvestment Rate, in the manner specified in
the Prospectus Supplement. See "CREDIT ENHANCEMENT--Deposit
Agreement" herein.
Servicing............................................The Servicer will be responsible for servicing, managing and
making collections on the Home Equity Loans for a Series. In
addition, the Servicer may act as custodian and 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 or interest on a Home
Equity Loan will be made by the Servicer only to the extent
described in the related Prospectus Supplement. Such advances
will be intended to provide liquidity only and the related
Prospectus Supplement will specify the extent to which they are
reimbursable to the Servicer from scheduled payments of
principal and interest, late collections, or from the proceeds
of liquidation of the related Home Equity Loans or from other
recoveries relating to such Home Equity Loan (including any
insurance proceeds or payments from other credit support). In
performing these functions, the Servicer will exercise the same
13
<PAGE>
<CAPTION>
<S> <C>
degree of skill and care that it customarily exercises with
respect to similar receivables or Home Equity Loans owned or
serviced by it. Under certain limited circumstances, the
Servicer may resign or be removed, in which event either the
Trustee or a third-party servicer will be appointed as
successor servicer. The Servicer will receive a periodic fee as
servicing compensation (the "Servicing Fee") and may, as
specified herein and in the related Prospectus Supplement,
receive certain additional compensation. See "SERVICING OF HOME
EQUITY LOANS -- Servicing Compensation and Payment of Expenses"
herein.
Material Federal Income
Tax Consequences.....................................Securities of each series offered hereby will, for federal
income tax purposes, constitute either (i) interests ("Grantor
Trust Securities") in a Trust treated as a grantor trust under
applicable provisions of the Code, (ii) "regular interests"
("REMIC Regular Securities") or "residual interests" ("REMIC
Residual Securities") in a Trust treated as a real estate
mortgage investment conduit ("REMIC") (or, in certain
instances, containing one or more REMICs) under Sections 860A
through 860G of the Code, (iii) debt issued by an Issuer ("Debt
Securities") (iv) interests in an Issuer which is treated as a
partnership ("Partnership Interests"), or (v) "regular
interests" ("FASIT Regular Securities"), "high-yield interests"
("FASIT High-Yield Securities") or an ownership interest
("FASIT Ownership Security") in a Trust treated as a financial
asset securitization investment conduit ("FASIT") (or, in
certain circumstances containing one or more FASITs) under
Sections 860H through 860L of the Code. In the event that FASIT
securities are issued, any revolving period, or addition or
substitution of collateral provisions otherwise available by
means of the FASIT election will be restricted so as to conform
to the requirements of REMICs.
Dewey Ballantine LLP, special tax counsel to the Depositor,
will render an opinion upon issuance of a series of Securities
which will be filed with the Commission as an exhibit to a
post-effective amendment or in a current report on Form 8-K.
Investors are urged to consult their tax advisors and to review
"Material Federal Income Tax Consequences" herein and in the
related Prospectus Supplement.
ERISA Considerations.................................A fiduciary of any employee benefit plan subject to the
Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or the Code should 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. A violation of the
prohibited transaction rules may generate excise tax and other
liabilities under ERISA and the Code. If the Securities offered
are Certificates, an individual prohibited transaction
exemption issued by the Department of Labor to various
underwriters may exempt the purchase, holding and resale of
such Certificates. In addition, Prohibited Transaction Class
Exemption 83-1 may exempt the sale or exchange of the
14
<PAGE>
<CAPTION>
<S> <C>
Certificates. If the Securities offered are Notes which are
treated as indebtedness without substantial equity features for
purposes of ERISA, various Department of Labor Class Exemptions
may exempt the purchase and holding of such Notes, and each
purchaser and transferee of such Notes may be required to
represent and warrant that such an exemption is applicable to
its purchase and holding of the Notes. See "ERISA
CONSIDERATIONS" herein.
Legal Investment ....................................The related Prospectus Supplement will state whether or not
the Securities of each Series offered by this Prospectus and
the related Prospectus Supplement will 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" herein.
Use of Proceeds .....................................The net proceeds from the sale of each Series will be
applied to one or more of the following purposes: (i) to the
acquisition of the related Primary Assets, (ii) to repay
indebtedness which has been incurred to obtain funds to acquire
such Primary Assets, (iii) to establish any Reserve Funds
described in the related Prospectus Supplement and (iv) to pay
costs of structuring and issuing such Securities, including the
costs of obtaining Credit Enhancement, if any. The acquisition
of the Primary Assets for a Series may be effected by an
exchange of Securities with the Originator of such Primary
Assets. See "USE OF PROCEEDS" herein.
Ratings .............................................It will be a requirement for issuance of any Series that the
Securities offered by this Prospectus and the related
Prospectus Supplement be rated by at least one Rating Agency in
one of its four highest applicable rating categories. The
rating or ratings applicable to Securities of each Series
offered hereby and by the related Prospectus Supplement will be
as set forth in the related Prospectus Supplement. A securities
rating should be evaluated independently of similar ratings on
different types of securities. A securities rating is not a
recommendation to buy, hold or sell securities and does not
address the effect that the rate of prepayments on 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. See "RISK FACTORS--Ratings Are
Not Recommendations" herein.
Absence of Market ...................................The Securities will be a new issue of securities with no
established trading market. The Issuer does not expect to
apply for listing of the Securities on any national
securities exchange or quote the Securities in the automated
quotation system of a registered securities association.
The Underwriter(s) specified in the related Prospectus
Supplement expects to make a secondary market in the
Securities, but has no obligation to do so. See "RISK
FACTORS" herein.
15
<PAGE>
<CAPTION>
<S> <C>
Risk Factors ........................................There are material risks associated with an investment in the
Securities. For a discussion of all material factors that
should be considered by prospective investors in the
Securities, see "RISK FACTORS" herein and in the related
Prospectus Supplement.
</TABLE>
16
<PAGE>
RISK FACTORS
For a discussion of all material risk factors that could make the
offering of the Securities speculative or one of high risk, Investors should
consider the following factors and "Risk Factors" in the related Prospectus
Supplement.
An Investment in Any Security May Be an Illiquid Investment, which May Result in
the Holder Holding such Investment to Maturity.
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. The
Underwriter(s) specified in the related Prospectus Supplement expects to make a
secondary market in the Securities, but has no obligation to do so.
The Assets of the Trust Fund, as Well as Any Applicable Credit Enhancement, Will
Be Limited and, if such Assets and/or Credit Enhancement Become Insufficient to
Service the Related Securities, Losses May Result.
The Securities of a Series will be payable solely from the assets of
the Trust Fund for such Securities. There will be no recourse to the Depositor
or any other person for any default on the Notes or any failure to receive
distributions on the Certificates. Further, at the times and to the extent set
forth in the related Prospectus Supplement, certain Primary Assets and/or any
balance remaining in the Collection Account or Distribution Account immediately
after making all payments due on the Securities of such Series and other
payments specified in the related Prospectus Supplement, may be promptly
released or remitted to the Depositor, the Servicer, the Credit 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 Credit 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 Depositor. 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 Servicer, if any, the Credit Enhancer 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.
The only obligations, if any, of the Depositor with respect to the
Securities of any Series will be pursuant to certain representations and
warranties. See "THE AGREEMENTS--Assignment of Primary Assets" herein.
Credit Enhancement Will Be Limited in Amount and Scope of Coverage and May Not
be Sufficient to Cover Losses.
Although any Credit Enhancement is intended to reduce the risk of
delinquent payments or losses to Holders entitled to the benefit thereof, the
amount of such Credit Enhancement will be limited and will decline and could be
depleted under certain circumstances prior to the payment in full of the related
Series of Securities, and as a result Holders may suffer losses. Furthermore,
such Credit Enhancement may provide only very limited coverage as to certain
types of losses and may provide no coverage as to certain other types of losses.
Generally, Credit Enhancements do not directly or indirectly guarantee to the
holders of Securities, any specific rate of prepayment. See "CREDIT ENHANCEMENT"
herein.
17
<PAGE>
The Timing of Principal Payments May Adversely Affect the Yield to Maturity of
the Securities.
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;
(iii) the exercise by the party entitled thereto of any right of optional
termination; (iv) liquidations due to defaults and (v) repurchases of Home
Equity Loans or Underlying Loans due to conversion of adjustable-rate loans
("ARM Loans") to fixed-rate loans or breaches of the related Originator's or
Servicer's representations and warranties). See "DESCRIPTION OF THE
SECURITIES--Weighted Average Life of Securities.".
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."
Prepayments May Adversely Affect the Yield to Maturity of the Securities.
The yield to maturity of the Securities of each series may be adversely
affected by a higher or lower than anticipated rate of prepayments on the
related Home Equity Loans. The yield to maturity on interest-only Private
Securities or Private Securities purchased at premiums or discounted to par will
be extremely sensitive to the rate of prepayments on the related Home Equity
Loans. In addition, the yield to maturity on certain other types of classes of
Securities, including certain classes in a series including more than one class
of Securities, may be relatively more sensitive to the rate of prepayment on the
related Home Equity Loans than other classes of Securities.
The Home Equity Loans may be prepaid in full or in part at any time;
however, a prepayment penalty or premium may be imposed in connection therewith.
Unless so specified in the related Prospectus Supplement, such penalties will
not be property of the related Trust. The rate of prepayments of the Home Equity
Loans cannot be predicted and is influenced by a wide variety of economic,
social and other factors, including prevailing mortgage market interest rates,
the availability of alternative financing, local and regional economic
conditions and homeowner mobility. Therefore, no assurance can be given as to
the level of prepayments that a Trust will experience.
Prepayments may result from mandatory prepayments relating to unused
monies held in Pre-Funding Accounts, if any, voluntary early payments by
borrowers (including payments in connection with refinancings of the related
senior Home Equity Loan or Loans), sales of Mortgaged Properties subject to
"due-on-sale" provisions and liquidations due to default, as well as the receipt
of proceeds from physical damage, credit life and disability insurance policies.
In addition, repurchases or purchases from a Trust of Home Equity Loans or
substitution adjustments required to be made under the Pooling and Servicing
Agreement will have the same effect on the Securityholders as a prepayment of
such Home Equity Loans. The related Prospectus Supplement will specify whether
any or all of the Home Equity Loans contain "due-on-sale" provisions.
Collections on the Home Equity Loans may vary due to the level of
incidence of delinquent payments and of prepayments. Collections on the Home
Equity Loans may also vary due to seasonal purchasing and payment habits of
borrowers.
18
<PAGE>
As a Result of Optional Redemption or Repurchase or Auction Sale, Holders Could
Be Fully Paid Significantly Earlier than Would Otherwise Be the Case.
One or more Classes of Securities of any Series may be subject to
optional redemption or repurchase, in whole or in part, on or after such time as
the aggregate outstanding principal amount of the Primary Assets is less than
the amount or percentage specified in the related Agreement, such amount or
percentage not to exceed 20% of the aggregate principal balance of the Primary
Assets as of the Cut-off Date for that Series. Neither the Trust nor the Holders
will have any continuing liability under such optional redemption or repurchase.
If the optional termination is not exercised, then one or more Classes of
Securities may be subject to early retirement by an auction sale. See "THE
AGREEMENTS--Termination" herein. The risk of reinvesting unscheduled
distributions resulting from redemption or repurchase of the Securities will be
borne by the Holders. See "DESCRIPTION OF THE SECURITIES--Optional Redemption,
Purchase or Termination." The optional termination and mandatory termination
described herein are the only circumstances in which the Securities could be
retired earlier than would be the case if the Trust were allowed to go to term.
Home Equity Loans with Balloon and Non-Traditional Payment Methods May Create
Greater Default Risk.
A portion of the aggregate principal balance of the Home Equity Loans
at any time may be Balloon Loans that provide for the payment of the unamortized
principal balance of such Home Equity Loan in a single payment at maturity Such
Balloon Loans provide for equal monthly payments, consisting of principal and
interest, generally based on a 30-year amortization schedule, and a single
payment of the remaining balance of the Balloon Loan generally 5, 7, 10, or 15
years after origination. Amortization of a Balloon Loan based on a scheduled
period that is longer than the term of the loan results in a remaining principal
balance at maturity that is substantially larger than the regular scheduled
payments. The Depositor does not have any information regarding the default
history or prepayment history of payments on Balloon Loans. Because borrowers of
Balloon Loans are required to make substantial single payments upon maturity, it
is possible that the default risk associated with the Balloon Loans is greater
than that associated with fully-amortizing Home Equity Loans.
Other types of loans that may be included in the Trust Fund may involve
additional uncertainties not present in traditional types of loans. For example,
certain of the Home Equity Loans may provide for escalating or variable payments
by the borrower under the Home Equity Loan, as to which the borrower is
generally qualified on the basis of the initial payment amount. In some
instances the borrower's income may not be sufficient to enable them to continue
to make their loan payments as such payments increase and thus the likelihood of
default will increase. The Depositor does not have any information regarding the
default history or prepayment history of payments on these non-traditional loans
Junior Liens May Experience Higher Rates of Delinquencies and Losses.
If the Mortgages in a Trust Fund are primarily junior liens subordinate
to the rights of the mortgagee under the related senior mortgage or mortgages,
the proceeds from any liquidation, insurance or condemnation proceedings will be
available to satisfy the outstanding balance of such junior mortgage only to the
extent that the claims of such senior mortgagees have been satisfied in full,
including any related foreclosure costs. In addition, a junior mortgagee may not
foreclose on the 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 make
payments due to the senior mortgagees.
Property Values May Decline, Leading to Higher Losses.
There are several factors that could adversely affect the value of
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
19
<PAGE>
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 Mortgaged 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
lending industry in general.
Geographic Concentration of Mortgaged Properties May Result in Higher Losses, if
Particular Regions Experience Downturns.
Certain geographic regions from time to time will experience weaker
regional economic conditions and housing markets than will other regions, and,
consequently, will experience higher rates of loss and delinquency on home
equity loans generally. The Home Equity Loans underlying certain Series of
Securities may be concentrated in such regions, and such concentrations may
present risk considerations in addition to those generally present for similar
home equity loan asset-backed securities without such concentrations.
Information with respect to geographic concentration of Mortgaged Properties
that is known at the time of the offering will be specified in the related
Prospectus Supplement.
Pre-Funding May Adversely Affect Investment.
If a Trust Fund includes a Pre-Funding Account and the principal
balance of additional Primary Assets delivered to the Trust Fund during the
Pre-Funding Period is less than the original Pre-Funded Amount, the Holders of
the Securities of the related Series will receive a prepayment of principal as
and to the extent described in the related Prospectus Supplement. Any such
principal prepayment may adversely affect the yield to maturity of the
applicable Securities. Since prevailing interest rates are subject to
fluctuation, there can be no assurance that investors will be able to reinvest
such a prepayment at yields equaling or exceeding the yields on the related
Securities. It is possible that the yield on any such reinvestment will be
lower, and may be significantly lower, than the yield on the related Securities.
Each additional Primary Asset must satisfy the eligibility criteria
specified in the related Prospectus Supplement and the related agreements. Such
eligibility criteria will be determined in consultation with each Rating Agency
(and/or Credit Enhancer) prior to the issuance of the related Series and are
designed to ensure that if such additional Primary Asset were included as part
of the initial Trust Fund, the credit quality of such assets would be consistent
with the initial rating of each Class of Securities of such Series. Following
the transfer of additional Primary Assets to the Trust, the aggregate
characteristics of the Primary Assets then held in the Trust may vary from those
of the initial Primary Assets of such Trust. As a result, the additional Primary
Assets may adversely affect the performance of the related Securities
The ability of a Trust to invest in additional Primary Assets during
the related Pre-Funding Period will be dependant on the ability of the
Originator to originate or acquire Primary Assets that satisfy the requirements
for transfer to the Trust Fund. The ability of the Originator to originate or
acquire such Primary Assets will be affected by a variety of social and economic
factors, including the prevailing level of market interest rates, unemployment
levels and consumer perceptions of general economic conditions.
Environmental Conditions on the Mortgaged Property May Give Rise to Liability.
Real property pledged as security to a lender may be subject to certain
environmental risks. Under the laws of certain states, contamination of a
Mortgaged Property may give rise to a lien on the Mortgaged 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 Mortgaged 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.
20
<PAGE>
State and Federal Credit Protection Laws May Limit Collection of Principal and
Interest on the Home Equity 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 Home Equity Loans.
The Home Equity Loans may also be subject to Federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z promulgated thereunder,
which require certain disclosures to the borrowers regarding the terms of the
Home Equity 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; and (iii) the Fair Credit Reporting Act, which
regulates the use and reporting of information related to the borrower's credit
experience.
Depending on the provisions of the applicable law and the specific
facts and circumstances involved, violations of these laws, policies and
principles may limit the ability of the Servicer to collect all or part of the
principal of or interest on the Home Equity Loans, may 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. See "CERTAIN
LEGAL ASPECTS OF THE HOME EQUITY LOANS" herein.
Ratings Are Not Recommendations. A Reduction in the Rating of Any Credit
Enhancer Would Likely Adversely Impact the Rating of the Securities.
It will be a condition to the issuance of a Series of Securities that
they be rated in one of the four highest rating categories by the Rating Agency
identified in the related Prospectus Supplement. Any such rating would be based
on, among other things, the adequacy of the value of the Primary Assets and any
Credit Enhancement with respect to such Series. 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.
A Reduction in the Rating of Any Credit Enhancer Would Likely Adversely Impact
the Rating of the Securities.
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 a Credit Enhancer or a change in the rating of such Credit
Enhancer's long term debt.
ERISA May Restrict the Acquisition, Ownership and Disposition of Securities.
Generally, ERISA applies to investments made by benefit plans and
transactions involving the assets of such plans. Due to the complexity of
regulations which govern such plans, prospective investors that are subject to
ERISA are urged to consult their own counsel regarding consequences under ERISA
of acquisition, ownership and disposition of Securities. See "ERISA
CONSIDERATIONS" herein.
DESCRIPTION OF THE SECURITIES
General
Each Series of Notes will be issued pursuant to an indenture (the
"Indenture") between the related Issuer and the entity named in the related
Prospectus Supplement as trustee (the "Trustee") with respect to such Series. A
form of Indenture has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part. The Certificates will also be issued in
Series pursuant to separate agreements (each, a "Pooling and Servicing
21
<PAGE>
Agreement" or a "Trust Agreement") among the Depositor, the Servicer, if the
Series relates to Home Equity 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 Originator may agree to reimburse the Depositor for certain fees
and expenses of the Depositor incurred in connection with the offering of the
Securities.
The following summaries describe certain provisions in the Agreements
common to each Series of Securities. The summaries do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, the
provisions of the Agreements and the Prospectus Supplement relating to each
Series of Securities. Where particular provisions or terms used in the
Agreements are referred to, the actual provisions (including definitions of
terms) are incorporated herein by reference as part of such summaries.
Each Series of Securities will consist of one or more Classes of
Securities, one or more of which may be compound interest securities, variable
interest securities, PAC securities, zero coupon securities, principal only
securities, interest only securities or participating securities. 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, 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. One or more Classes of a Series may be available in book-entry form
only.
Payments of principal of and interest on a Series of Securities will be
made on the Distribution Dates specified in the Prospectus Supplement relating
to such Series 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 (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. 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 Credit Enhancement
will be deposited into the Collection Account. Such amounts may be net of
certain amounts payable to the related Servicer and any other person specified
in the Prospectus Supplement. Such amounts thereafter will be deposited into the
Distribution Account and will be available to make payments on the Securities of
such Series on the next Distribution Date. See "THE TRUST FUNDS--Collection and
Distribution Accounts" herein.
Payments of Interest
The Securities of each Class by their terms entitled to receive
interest will bear interest 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. The rate of interest on
Securities of a Series may be variable or may change with changes in the annual
percentage rates of the Home Equity 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 Home Equity Loans or Underlying Loans, as
applicable. Principal Only Securities may not be entitled to receive any
interest distributions or may be entitled to receive only nominal interest
distributions. Any interest on Zero Coupon Securities that is not paid on the
related Distribution Date will accrue and be added to the principal thereof on
such Distribution Date.
22
<PAGE>
Interest payable on the Securities on a Distribution Date will include
all interest accrued during the period specified in the related Prospectus
Supplement. In the event interest accrues during the calendar month preceding a
Distribution Date, the effective yield to Holders will be reduced from the yield
that would otherwise be obtainable if interest payable on the Securities were to
accrue through the day immediately preceding such Distribution Date.
Payments of Principal
On each Distribution Date for a Series, principal payments will be made
to the Holders of the Securities of such Series on which principal is then
payable, to the extent set forth in the related Prospectus Supplement. Such
payments will be made in an aggregate amount determined as specified in the
related Prospectus Supplement and will be allocated among the respective Classes
of a Series in the manner, at the times and in the priority (which may, in
certain cases, include allocation by random lot) set forth in the related
Prospectus Supplement.
Final Scheduled Distribution Date
The Final Scheduled Distribution Date with respect to each Class of
Notes is the date no later than which the principal thereof will be fully paid
and with respect to each Class of a Series of Certificates will be the date on
which the entire aggregate principal balance of such Class is expected to be
reduced to zero, in each case calculated on the basis of the assumptions
applicable to such Series described in the related Prospectus Supplement. The
Final Scheduled Distribution Date for each Class of a Series will be specified
in the related Prospectus Supplement. Since payments on the 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 will be
further described in the related Prospectus Supplement, 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.
Optional Redemption, Purchase or Termination
One or more Classes of Securities of any Series may be subject to
optional redemption or repurchase, in whole or in part, on any Distribution Date
by the related Originator, Servicer or Credit Enhancer or an affiliate thereof.
Such redemption or repurchase may occur or 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, is less than a
percentage not to exceed 20% of the aggregate principal balance of the Primary
Assets as of the Cut-off Date for that Series. Notice of such redemption,
purchase or termination must be given by the Depositor or the Trustee prior to
the related date. The redemption, purchase or repurchase price (which would not
be less than an amount necessary to pay all principal and interest on the
securities outstanding) will be set forth in the related Prospectus Supplement.
In the event that a REMIC election has been made, the Trustee shall receive a
satisfactory opinion of counsel that the optional redemption, purchase or
termination will be conducted so as to
23
<PAGE>
constitute a "qualified liquidation" under Section 860F of the Code. The risk of
reinvesting unscheduled distributions resulting form prepayments of the
Securities will be borne by the Holders. Neither the Trust nor the Holders will
have any continuing liability under such optional redemption or repurchase.
In addition, the Trustee, the Servicer or certain other entities
specified in the related Prospectus Supplement may be required to effect early
retirement of a series of Securities by soliciting competitive bids for the
purchase of the related Primary Assets or otherwise, under other circumstances
and in the manner specified in "THE AGREEMENTS--Termination " herein.
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. The weighted average life of the
Securities of a Class will be influenced by the rate at which the amount
financed under Primary Assets included in the Trust Fund for a Series is paid.
Such repayment may be in the form of scheduled amortization or prepayments.
Prepayments on loans and other receivables can be measured relative to
a prepayment standard or model. The Prospectus Supplement for a Series of
Securities will describe the prepayment standard or model, if any, used and may
contain tables setting forth the projected weighted average life of each Class
of Securities of such Series and the percentage of the original principal amount
of each Class of Securities of such Series that would be outstanding on
specified Distribution Dates for such Series based on the assumptions stated in
such Prospectus Supplement, including assumptions that prepayments on the Home
Equity 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 Home Equity
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, servicing decisions and other
factors also affect the rate of principal prepayments. As a result, there can be
no assurance as to the rate or timing of principal prepayments of the Home
Equity Loans or Underlying Loans either from time to time or over the lives of
such Home Equity 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
Home Equity 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 Home Equity 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 Home Equity Loans or Underlying Loans relating to the
Private Securities, as applicable. If any Home Equity 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.
24
<PAGE>
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 assets acquired from the Originator composed of (i) the Primary
Assets, (ii) any Credit Enhancement, (iii) any Mortgaged Property that secured a
Home Equity Loan but which is acquired by foreclosure or deed in lieu of
foreclosure or repossession and (iv) the amount, if any, initially deposited in
the Collection Account or Distribution Account for a Series as specified in the
related Prospectus Supplement. A maximum of 5% (by Cut-off Date Principal
Balance) of the aggregate Primary Assets that are included in a Trust Fund as
such Trust Fund will be constituted at the closing date will deviate from the
characteristics that are described in the related Prospectus Supplement.
The Securities will be non-recourse obligations secured by the related
Trust Fund. 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 Depositor
or the related Trust Fund not pledged to secure such Notes.
The Primary Assets for a Series will be acquired by the related Trust
Fund from the related Originator, or may be acquired in the open market or in
privately negotiated transactions. Home Equity Loans relating to a Series will
be serviced by the Servicer, which may be the Originator, specified in the
related Prospectus Supplement, pursuant to a Pooling and Servicing Agreement,
with respect to a Series of Certificates or a servicing agreement (each, a
"Servicing Agreement") between the Trust Fund and Servicer, with respect to a
Series of 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 of Notes, the Indenture and the Servicing Agreement, as the
context requires.
A Trust Fund relating to a Series of Securities may be a business trust
formed under the laws of the state specified in the related Prospectus
Supplement pursuant to a trust agreement (each, a "Trust Agreement") between the
Depositor and the trustee of such Trust Fund 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 Credit Enhancement.
Primary Assets included in the Trust Fund for a Series may consist of
any combination of Home Equity Loans and Private Securities, to the extent and
as specified in the related Prospectus Supplement. Some of the Home Equity Loans
may be delinquent to the extent and as specified in the related Prospectus
Supplement. The percentage of those Home Equity Loans which are delinquent shall
not exceed 10% of the aggregate principal balance of the Primary Assets as of
the Cut-off Date for that Series. The following is a brief description of the
Home Equity Loans expected to be included in the related Trusts.
The Home Equity Loans
Home Equity Loans. The Primary Assets for a Series may consist, in
whole or in part, of loans (the "Home Equity Loans") secured by mortgages on
one- to four-family residential housing ("Single Family Properties"), including
condominium units ("Condominium Units") and cooperative dwellings ("Cooperative
Dwellings") 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 and in the related Prospectus Supplement.
25
<PAGE>
The Home Equity Loans will consist of what are commonly referred to as
"home equity" loans, as distinguished from "purchase money" loans. Both of these
concepts refer to the use of proceeds made by the related borrower, rather than
to any legal or other documentary differences between the two types of loans,
except that "home equity" loans are usually (but not always) secured by
mortgages which are in a subordinate lien position while "purchase money" loans
are usually (but not always) secured by mortgages which are in a senior lien
position, and "home equity" loans are typically (but not always) shorter in
maturity than "purchase money" loans (i.e., fifteen rather than thirty years).
The Home Equity Loans, in addition to being secured by mortgages on real estate,
may also be secured by "fixtures" treated as personal property under local state
law. Although fixtures may turn up more frequently in the case of loans in which
the proceeds are used to fund home improvements, fixtures as a part of the
collateral package may be a part of either a "home equity" or "purchase money"
loan.
A "home equity" loan is a loan the proceeds of which are not used to
purchase the related mortgaged property; the proceeds of a "purchase money"
mortgage are applied to the purchase of the related mortgaged property. Typical
uses of proceeds of "home equity" loans would be home improvement, debt
consolidation and the funding of large expenses such as college tuition.
The Home Equity Loans may be (i) "conventional" loans, that is, they
will not be insured or guaranteed by any governmental agency, (ii) insured by
the Federal Housing Authority ("FHA") or (iii) partially guaranteed by the
Veteran's Administration, as specified in the related Prospectus Supplement. The
Home Equity Loans may be either "closed-end" loans (i.e., loans which do not
permit the related borrower to obtain the proceeds of future advances) or
"open-end" loans (i.e., loans structured as lines of credit, which permit the
related borrower, subject to a maximum dollar amount, to obtain more than one
advance of proceeds). The Home Equity Loans will be secured by first, second or
more junior liens on fee simple or leasehold interests in one- to four-family
residential properties. The principal and interest on the Home Equity Loans
included in the Trust for a Series of Securities will be payable either on the
first day of each month or on different scheduled days throughout each month,
and the interest will be calculated either on a simple interest, actuarial
method or "Rule of 78s" method, as described herein and in the related
Prospectus Supplement. When a full principal prepayment is paid on a Home Equity
Loan during a month, the Mortgagor is generally charged interest only on the
days of the month actually elapsed up to the date of such prepayment, at a daily
interest rate that is applied to the principal amount of the Home Equity Loan so
prepaid.
Payment Terms. The payment terms of the Home Equity Loans to be
included in a Trust for a Series will be described in the related Prospectus
Supplement and may include any of the following features of combinations thereof
or other features described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate
adjustable from time to time in relation to an index (which will be
specified in the related Prospectus Supplement), a rate that is fixed
for a period of time or under certain circumstances and is followed by
an adjustable rate, a rate that otherwise varies from time to time, or
a rate that is convertible from and adjustable rate to a fixed rate.
Changes to an adjustable rate may be subject to periodic limitations,
maximum rates, minimum rates or a combination of such limitations.
Accrued interest may be deferred and added to the principal of a Home
Equity Loan for such periods and under such circumstances as may be
specified in the related Prospectus Supplement. Home Equity Loans may
provide for the payment of interest at a rate lower than the specified
Loan Rate for a period of time of for the life of the Home Equity Loan,
and the amount of any difference may be contributed from funds supplied
by the seller of the Mortgaged Property or another source.
(b) Principal may be payable on a level debt service
basis to fully amortize the Home Equity Loan over its term, may be
calculated on the basis of an assumed amortization schedule that is
significantly longer than the original term to maturity or on an
interest rate that is different from the Loan Rate or may not be
amortized during all or a portion of the original term. Payment of all
or a substantial portion of the principal may be due on maturity.
Principal may include interest that has been deferred and added to the
principal balance of the Home Equity Loan.
(c) Monthly Payments of principal and interest may
be fixed for the life of the Home Equity Loan, may increase over a
specified period of time or may change from period to period. Home
26
<PAGE>
Equity Loans may include limits on periodic increases or decreases in
the amount of Monthly Payments and may include maximum or minimum
amounts of Monthly Payments.
(d) Prepayments of principal may be subject to a
prepayment fee, which may be fixed for the life of the Home Equity Loan
or may decline over time, and may be prohibited for the life of the
Home Equity Loan or for certain periods. Certain Home Equity Loans may
permit prepayments after expiration of the applicable lockout period
and may require the payment of a prepayment fee in connection with any
such subsequent prepayment. Other Home Equity Loans may permit
prepayments without payment of a fee unless the prepayment occurs
during specified time periods. The Home Equity Loans may include "due
on sale" clauses which permit the mortgagee to demand payment of the
entire Home Equity Loan in connection with the sale or certain
transfers of the related Mortgaged Property. Other Home Equity Loans
may be assumable by persons meeting the then applicable underwriting
standards of the Originator.
Amortization of the Home Equity Loans. The Home Equity Loans will
provide for payments that are allocated to principal and interest according to
either the actuarial method (an "Actuarial Home Equity Loan"), the simple
interest method (a "Simple Interest Home Equity Loan") or the "Rule of 78s"
method (a "Rule of 78s Home Equity Loan"), as set forth in the related
Prospectus Supplement. The related Prospectus Supplement will set forth whether
any of the Home Equity Loans will provide for deferred interest or negative
amortization.
An Actuarial Home Equity Loan provides for payments in level monthly
installments (except, in the case of a Balloon Loan, the final payment)
consisting of interest equal to one-twelfth of the applicable Loan Rate times
the unpaid principal balance, with the remainder of such payment applied to
principal.
A Simple Interest Home Equity Loan provides for the amortization of the
amount financed under such Home Equity Loan over a series of equal Monthly
Payments (except, in the case of a Balloon Loan, the final payment). Each
Monthly Payment consists of an installment of interest which is calculated on
the basis of the outstanding principal balance of the Home Equity Loan being
multiplied by the stated Loan Rate and further multiplied by a fraction, the
numerator of which is the number of days in the period elapsed since the
preceding payment of interest was made and the denominator of which is the
number of days in the annual period for which interest accrues on such Home
Equity Loan. As payments are received under a Simple Interest Home Equity Loan,
the amount received is applied first to interest accrued to the date of payment
and the balance is applied to reduce the unpaid principal balance. Accordingly,
if a borrower pays a fixed monthly installment on a Simple Interest Home Equity
Loan before its scheduled due date, the portion of the payment allocable to
interest for the period since the preceding payment was made will be less than
it would have been had the payment been made as scheduled, and the portion of
the payment applied to reduce the unpaid principal balance will be
correspondingly greater. However, the next succeeding payment will result in an
allocation of a greater amount to interest if such payment is made on its
scheduled due date.
Conversely, if a borrower pays a fixed monthly installment after its
scheduled due date, the portion of the payment allocable to interest for the
period since the preceding payment was made will be greater than it would have
been had the payment been made as scheduled, and the remaining portion, if any,
of the payment applied to reduce the unpaid principal balance will be
correspondingly less. If each scheduled payment under a Simple Interest Home
Equity Loan is made on or prior to its scheduled due date, the principal balance
of the Home Equity Loan will amortize in the manner described in the preceding
paragraph. However, if the borrower consistently makes scheduled payments after
the scheduled due date, the Home Equity Loan will amortize more slowly than
scheduled. If a Simple Interest Home Equity Loan is prepaid, the borrower is
required to pay interest only to the date of prepayment.
Certain of the Home Equity Loans contained in a Trust may be loans
insured under the FHA Title I credit insurance program created pursuant to
Sections 1 and 2(a) of the National Housing Act of 1934 (the "Title I Program").
Under the Title I Program, the FHA is authorized and empowered to insure
qualified lending institutions against losses on eligible loans. The Title I
Program operates as a coinsurance program in which the FHA insures up to 90% of
certain losses incurred on an individual insured loan, including the unpaid
principal balance of the loan, but only to the extent of the insurance coverage
available in the lender's FHA insurance coverage reserve account. The owner of
the loan bears the uninsured loss on each loan.
27
<PAGE>
The Mortgaged Properties will include Single Family Property (i.e.,
one-to four-family residential housing, including Condominium Units and
Cooperative Dwellings) 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.
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 equal to the term
of the related Mortgage. 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.
The related Prospectus Supplement will specify whether or not 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 Home Equity Loans secured by
Mortgaged Properties that are owner-occupied will be disclosed in the related
Prospectus Supplement. The sole basis for a representation that a given
percentage of the Home Equity Loans are secured by Single Family Property that
is owner-occupied will be either (i) the making of a 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. To the extent specified in the related Prospectus
Supplement, the Mortgaged Properties may include non-owner occupied investment
properties and vacation and second homes.
The initial Combined Loan-to-Value Ratio of a Home Equity Loan is
computed in the manner described in the related Prospectus Supplement, taking
into account the amounts of any related senior loans.
Additional Information. The selection criteria which will apply with
respect to the Home Equity Loans, including, but not limited to, the Combined
Loan-to-Value Ratios or Loan-to-Value Ratios, as applicable, original terms to
maturity and delinquency information, will be specified in the related
Prospectus Supplement.
The Home Equity 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 Home Equity Loans for a Series may include loans that do not
have a specified stated maturity.
The related Prospectus Supplement for each Series will provide
information with respect to the Home Equity 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 Home Equity Loans; (b) the range
and weighted average Loan Rate on the Home Equity Loans, and, in the case of
adjustable rate loans, the range and weighted average of the current Loan Rates
and the Lifetime Rate Caps, if any; (c) the range and average outstanding
principal balance of the Loans; (d) the weighted average original and remaining
term-to-stated maturity of the Home Equity 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 Home
Equity Loans, as applicable; (f) the percentage (by outstanding principal
balance as of the Cut-off Date) of Home Equity Loans that accrue interest at
adjustable or fixed interest rates; (g) any special hazard insurance policy or
bankruptcy bond or other Credit Enhancement relating to the Home Equity Loans;
(h) the geographic distribution of any Mortgaged Properties securing the Home
Equity Loans; (i) the percentage of Home Equity 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;
(k) year of origination of the Home Equity Loans; and (l) the delinquency status
of Home Equity Loans, including the duration and history of such delinquencies
and the percentage of the of Home Equity Loans (by principal balance as of the
Cut-off Date) that are delinquent. The related Prospectus Supplement will also
specify any other limitations on the types or characteristics of Home Equity
Loans for a Series.
28
<PAGE>
If specific information respecting the Home Equity Loans is not known
at the time the related series of Securities initially is offered, information
of the nature described above will be provided in the Prospectus Supplement, and
specific information will be set forth in a report on Form 8-K to be filed with
the Commission within fifteen days after the initial issuance of such
Securities. A copy of the Pooling and Servicing Agreement with respect to each
Series of Securities will be attached to the Form 8-K and will be available for
inspection at the corporate trust office of the Trustee specified in the related
Prospectus Supplement. A schedule of the Home Equity Loans relating to such
Series will be attached to the Pooling and Servicing Agreement delivered to the
Trustee upon delivery of the Securities.
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
Home Equity Loans (the "Underlying Loans") or (b) collateralized obligations
secured by Underlying Loans. Such pass-through certificates or collateralized
obligations will have previously been (a) offered and distributed to the public
pursuant to an effective registration statement and not purchased as part of the
original distribution or (b) acquired in a transaction not involving any public
offering from a person who is not an affiliate of the issuer of such securities
at the time of transfer (nor an affiliate thereof at any time during the three
preceding months); provided a period of three years elapsed since the later of
the date the securities were acquired from the issuer or an affiliate thereof.
Although individual Underlying Loans may be insured or guaranteed by the United
States or an agency or instrumentality thereof, they need not be, and Private
Securities themselves will not be so insured or guaranteed.
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 PS Sponsor may be
an affiliate of the Depositor. 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. Such Underlying Loans will be secured by mortgages on
Mortgaged Properties.
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 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.
29
<PAGE>
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 Depositor and the Depositor
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 Home Equity 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 Depositor at the time the Securities are
initially offered, approximate or more general information of the nature
described above will be provided in the Prospectus Supplement and the additional
information, if available, 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 of the initial issuance of such
Securities.
Collection and Distribution Accounts
A separate Collection Account will be established by the Trustee or the
Servicer, in the name of the Trustee, for each Series of Securities for receipt
of the amount of cash, if any, specified in the related Prospectus Supplement to
be initially deposited therein by the Depositor, all amounts received on or with
respect to the Primary Assets and any income earned thereon. Certain amounts on
deposit in such Collection Account and certain amounts available pursuant to any
Credit Enhancement will be deposited in a related Distribution Account, which
will also be established by the Trustee for each such Series of Securities, for
distribution to the related Holders. The Trustee may invest the funds in the
Collection and Distribution Accounts in eligible investments maturing, with
certain exceptions, not later, in the case of funds in the Collection Account,
than the day preceding the date such funds are due to be deposited in the
Distribution Account or otherwise distributed and, in the case of funds in the
Distribution Account, than the day preceding the next Distribution Date for the
related Series of Securities. "Eligible Investments" include, among other
investments, obligations of the United States and certain agencies thereof,
federal funds, certificates of deposit, commercial paper, demand and time
deposits and banker's acceptances, certain repurchase agreements of United
States government securities and certain guaranteed investment contracts, in
each case, acceptable to the Rating Agency.
Notwithstanding any of the foregoing, amounts may be deposited and
withdrawn pursuant to any Deposit Agreement or Minimum Principal Payment
Agreement as specified in the related Prospectus Supplement.
Pre-Funding Accounts
A Trust Fund may include one or more segregated trust accounts (each, a
"Pre-Funding Account") 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 (such amount, the "Pre-Funded
Amount") will be deposited in the Pre-Funding Account and may be used to acquire
additional Primary Assets during the period of time specified in the related
Prospectus Supplement (the "Pre-Funding Period"). 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.
30
<PAGE>
If a Pre-Funding Account is established, (a) the Pre-Funding Period
will not exceed 90 days from the related closing date, (b) the additional
Primary Assets to be acquired during the Pre-Funding Period will be subject to
the same representations and warranties and satisfy the same eligibility
requirements as the Primary Assets included in the related Trust Fund on the
closing date, subject to such exceptions as are expressly stated in such
Prospectus Supplement, (c) the Pre-Funding Amount will not exceed 25% of the
principal amount of the Securities issued pursuant to a particular offering and
(d) prior to the investment of the Pre-Funded Amount in additional Primary
Assets, such Pre-Funded Amount will be invested in one or more Eligible
Investments. Any Eligible Investment must mature no later than the Business Day
prior to the next Distribution Date.
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) certain fees or expenses during the
Pre-Funding Period, over the amount of interest available therefor from the
Primary Assets in the Trust Fund. 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.
If a Trust Fund includes a Pre-Funding Account and the principal
balance of additional Primary Assets delivered to the Trust Fund during the
Pre-Funding Period is less than the original Pre-Funded Amount, the Holders of
the Securities of the related Series will receive a prepayment of principal as
and to the extent described in the related Prospectus Supplement. Any such
principal prepayment may adversely affect the yield to maturity of the
applicable Securities. Since prevailing interest rates are subject to
fluctuation, there can be no assurance that investors will be able to reinvest
such a prepayment at yields equaling or exceeding the yields on the related
Securities. It is possible that the yield on any such reinvestment will be
lower, and may be significantly lower, than the yield on the related Securities.
CREDIT ENHANCEMENT
If stated in the Prospectus Supplement relating to a Series of
Securities, simultaneously with the Depositor's assignment of the Primary Assets
to the Trustee, the Depositor will obtain an irrevocable letter of credit,
surety bond or insurance policy, issue Subordinate Securities or obtain any
other form of credit enhancement or combination thereof (collectively, "Credit
Enhancement") in favor of the Trustee on behalf of the Holders of the related
Series or designated Classes of such Series from an institution or by other
means acceptable to the Rating Agency. The Credit Enhancement will support the
payment of principal and interest on the Securities, and may be applied for
certain other purposes to the extent and under the conditions set forth in such
Prospectus Supplement. Credit Enhancement for a Series may include one or more
of the following forms, or such other form as may be specified in the related
Prospectus Supplement. Credit Enhancement may be structured so as to protect
against losses relating to more than one Trust Fund, in the manner described
therein.
Subordinate Securities
Credit Enhancement for a Series may consist of one or more Classes of
Subordinate Securities. The rights of holders of such Subordinate Securities to
receive distributions on any Distribution Date will be subordinate in right and
priority to the rights of Holders of Senior Securities of the Series, but only
to the extent described in the related Prospectus Supplement.
Insurance
Credit Enhancement for a Series may consist of special hazard insurance
policies, bankruptcy bonds and other types of insurance relating to the Primary
Assets, as described below and in the related Prospectus Supplement.
Pool Insurance Policy. The related Prospectus Supplement will describe
any pool insurance policy obtained by the Depositor for the Home Equity Loans in
the related Trust Fund. The pool insurance policy will
31
<PAGE>
cover any loss (subject to the limitations described in a related Prospectus
Supplement) by reason of default. but will not cover the portion of the
principal balance of any Home Equity Loan that is required to be covered by any
primary mortgage insurance policy. The amount and terms of any such coverage
will be set forth in the related Prospectus Supplement.
Special Hazard Insurance Policy. Although the terms of such policies
vary to some degree, a special hazard insurance policy typically provides that,
where there has been damage to Mortgaged Property securing a defaulted or
foreclosed Home Equity Loan (title to which has been acquired by the insured)
and to the extent such damage is not covered by the standard hazard insurance
policy or any flood insurance policy, if applicable, required to be maintained
with respect to such Mortgaged Property, or in connection with partial loss
resulting from the application of the coinsurance clause in a standard hazard
insurance policy, the special hazard insurer will pay the lesser of (i) the cost
of repair or replacement of such Mortgaged Property or (ii) upon transfer of
such Mortgaged Property to the special hazard insurer, the unpaid principal
balance of such Home Equity Loan at the time of acquisition of such Mortgaged
Property by foreclosure or deed in lieu of foreclosure, plus accrued interest to
the date of claim settlement and certain expenses incurred by the Servicer with
respect to such Mortgaged Property. If the unpaid principal balance plus accrued
interest and certain expenses is paid by the special hazard insurer, the amount
of further coverage under the special hazard insurance policy will be reduced by
such amount less any net proceeds from the sale of such Mortgaged Property. Any
amount paid as the cost of repair of such Mortgaged Property will reduce
coverage by such amount. Special hazard insurance policies typically do not
cover losses occasioned by war, civil insurrection, certain governmental
actions, errors in design, faulty workmanship or materials (except under certain
circumstances), nuclear reaction, flood (if the Mortgaged Property is in a
federally designated flood area), chemical contamination and certain other
risks.
Restoration of the Mortgaged Property with the proceeds described under
(i) above is expected to satisfy the condition under any pool insurance policy
that such Mortgaged Property be restored before a claim under such pool
insurance policy may be validly presented with respect to the defaulted Home
Equity Loan secured by such Mortgaged Property. The payment described under (ii)
above will render unnecessary presentation of a claim in respect of such Home
Equity Loan under any pool insurance policy. Therefore, so long as such pool
insurance policy remains in effect, the payment by the special hazard insurer of
the cost of repair or of the unpaid principal balance of the related Home Equity
Loan plus accrued interest and certain expenses will not affect the total
insurance proceeds paid to Holders of the Securities, but will affect the
relative amounts of coverage remaining under the special hazard insurance policy
and pool insurance policy.
Bankruptcy Bond. In the event of a bankruptcy of a borrower, the
bankruptcy court may establish the value of the Mortgaged Property securing the
related Home Equity Loan at an amount less than the then-outstanding principal
balance of such Home Equity Loan. The amount of the secured debt could be
reduced to such value, and the holder of such Home Equity Loan thus would become
an unsecured creditor to the extent the outstanding principal balance of such
Home Equity Loan exceeds the value so assigned to the Mortgaged Property by the
bankruptcy court. In addition, certain other modifications of the terms of a
Home Equity Loan can result from a bankruptcy proceeding. See "CERTAIN LEGAL
ASPECTS OF HOME EQUITY LOANS" herein. If so provided in the related Prospectus
Supplement, the Depositor or other entity specified in the related Prospectus
Supplement will obtain a bankruptcy bond or similar insurance contract (the
"bankruptcy bond") covering losses resulting from proceedings with respect to
borrowers under the Bankruptcy Code. The bankruptcy bond will cover certain
losses resulting from a reduction by a bankruptcy court of scheduled payments of
principal of and interest on a Home Equity Loan or a reduction by such court of
the principal amount of a Home Equity Loan and will cover certain unpaid
interest on the amount of such a principal reduction from the date of the filing
of a bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount
specified in the related Prospectus Supplement for all Home Equity Loans in the
Trust Fund for such Series. Such amount will be reduced by payments made under
such bankruptcy bond in respect of such Home Equity Loans, and will not be
restored.
Reserve Funds
The Depositor may deposit into one or more funds to be established with
the Trustee as part of the Trust Fund for such Series or for the benefit of any
Credit Enhancer with respect to such Series (the "Reserve Funds")
32
<PAGE>
cash, a letter or letters of credit, cash collateral accounts, Eligible
Investments, or other instruments meeting the criteria of the Rating Agency
rating any Series of the Securities in the amount specified in such Prospectus
Supplement. In the alternative or in addition to such deposit, a Reserve Fund
for a Series may be funded over time through application of all or a portion of
the excess cash flow from the Primary Assets for such Series, to the extent
described in the related Prospectus Supplement. If applicable, the initial
amount of the Reserve Fund and the Reserve Fund maintenance requirements for a
Series of Securities will be described in the related Prospectus Supplement.
Amounts withdrawn from any Reserve Fund will be applied by the Trustee
to make payments on the Securities of a Series, to pay expenses, to reimburse
any Credit Enhancer or for any other purpose, in the manner and to the extent
specified in the related Prospectus Supplement.
Amounts deposited in a Reserve Fund will be invested by the Trustee, in
Eligible Investments maturing no later than the day specified in the related
Prospectus Supplement.
Minimum Principal Payment Agreement
If stated in the Prospectus Supplement relating to a Series of
Securities, the Depositor will enter into a Minimum Principal Payment Agreement
with an entity meeting the criteria of the Rating Agency pursuant to which such
entity will provide certain payments on the Securities of such Series in the
event that aggregate scheduled principal payments and/or prepayments on the
Primary Assets for such Series are not sufficient to make certain payments on
the Securities of such Series, as provided in the Prospectus Supplement.
Deposit Agreement
The Depositor and the Trustee for such Series of Securities will enter
into a Deposit Agreement with the entity specified in such Prospectus Supplement
on or before the sale of such Series of Securities. The purpose of a Deposit
Agreement would be to accumulate available cash for investment so that such
cash, together with income thereon, can be applied to future distributions on
one or more Classes of Securities. The Prospectus Supplement for a Series of
Securities pursuant to which a Deposit Agreement is used will contain a
description of the terms of such Deposit Agreement.
SERVICING OF HOME EQUITY LOANS
General
Customary servicing functions with respect to Home Equity Loans
comprising the Primary Assets in the Trust Fund will be provided by the Servicer
directly pursuant to the related Servicing Agreement or Pooling and Servicing
Agreement, as the case may be, with respect to a Series of Securities.
Collection Procedures; Escrow Accounts
The Servicer will make reasonable efforts to collect all payments
required to be made under the Home Equity Loans and will, consistent with the
terms of the related Agreement for a Series and any applicable Credit
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) to the
extent provided in the related Agreement arrange with an obligor a schedule for
the liquidation of delinquencies by extending the dates on which the related
payments (the "Scheduled Payments") are due (the "Due Dates") on such Home
Equity Loan.
The Servicer, to the extent permitted by law, will establish and
maintain escrow or impound accounts ("Escrow Accounts") with respect to Home
Equity Loans in which payments by obligors to pay taxes, assessments, mortgage
and hazard insurance premiums, and other comparable items will be deposited.
Home Equity Loans may not require such payments under the loan related
documents, in which case the Servicer would not be required to establish any
Escrow Account with respect to such Home Equity Loans. Withdrawals from the
33
<PAGE>
Escrow Accounts are to be made to effect timely payment of taxes, assessments
and mortgage and hazard insurance, to refund to obligors amounts determined to
be overages, to pay interest to obligors on balances in the Escrow Account to
the extent required by law, to repair or otherwise protect the Mortgaged
Property securing the related Home Equity Loan and to clear and terminate such
Escrow Account. The Servicer will be responsible for the administration of the
Escrow Accounts and generally will make advances to such accounts when a
deficiency exists therein.
Deposits to and Withdrawals from the Collection Account
The Trustee or the Servicer will establish a separate account (the
"Collection Account") in the name of the Trustee. The Collection 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 ("FDIC") or which are secured in a manner meeting requirements
established by each Rating Agency.
The funds held in the Collection 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.
The Servicer, the Depositor, the Trustee or the Originator, as
appropriate, will deposit into the Collection Account for each Series on the
Business Day following the Closing Date any amounts representing Scheduled
Payments due after the related Cut-off Date but received by the Servicer on or
before the Closing Date, and thereafter, within two business days after the date
of receipt thereof, the following payments and collections received or made by
it (other than in respect of principal of and interest on the related Primary
Assets due on or before such Cut-off Date):
(i) All payments on account of principal, including
prepayments, on such Primary Assets;
(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 in accordance
with the related Agreement, the Servicing Fee, if any, in respect of
the related Primary Asset;
(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
Mortgaged Property or released to the obligor in accordance with the
related Agreement;
(v) All amounts required to be deposited therein from any
applicable Reserve Fund for such Series pursuant to the related
Agreement;
(vi) All Advances made by the Servicer required pursuant to
the related Agreement; and
(vii) All repurchase prices of any such Primary Assets
repurchased by the Depositor, the Servicer or the Originator pursuant
to the related Agreement.
34
<PAGE>
The Servicer may be permitted, from time to time, to make withdrawals
from the Collection Account for each Series for the following purposes:
(i) to reimburse itself for Advances for such Series made by
it pursuant to the related Agreement; the Servicer's right to reimburse
itself is limited to amounts received on or in respect of particular
Home Equity Loans (including, for this purpose, Liquidation Proceeds
and amounts representing proceeds of insurance policies covering the
related Mortgaged Property) which represent late recoveries of
Scheduled Payments respecting which any such Advance was made;
(ii) to the extent provided in the related Agreement, to
reimburse itself for any Advances for such Series that the Servicer
determines in good faith it will be unable to recover from amounts
representing late recoveries of Scheduled Payments respecting which
such Advance was made or from Liquidation Proceeds or the proceeds of
insurance policies;
(iii) to reimburse itself from Liquidation Proceeds for
liquidation expenses and for amounts expended by it in good faith in
connection with the restoration of damaged Mortgaged Property and, in
the event deposited in the Collection Account and not previously
withheld, and to the extent that Liquidation Proceeds after such
reimbursement exceed the outstanding principal balance of the related
Home Equity Loan, together with accrued and unpaid interest thereon to
the Due Date for such Home Equity Loan next succeeding the date of its
receipt of such Liquidation Proceeds, to pay to itself out of such
excess the amount of any unpaid Servicing Fee and any assumption fees,
late payment charges, or other charges on the related Home Equity Loan;
(iv) in the event it has elected not to pay itself the
Servicing Fee out of the interest component of any Scheduled Payment,
late payment or other recovery with respect to a particular 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;
(v) to reimburse itself for expenses incurred by and
recoverable by or reimbursable to it pursuant to the related Agreement;
(vi) to pay to the applicable person with respect to each
Primary Asset or Mortgaged Properties acquired through or in lieu of
foreclosure (each, an "REO Property") acquired in respect thereof that
has been repurchased or removed from the Trust Fund by the Depositor,
the Servicer or the Originator pursuant to the related Agreement, all
amounts received thereon and not distributed as of the date on which
the related repurchase price was determined;
(vii) to make payments to the Trustee of such Series for
deposit into the Distribution Account, if any, or for remittance to the
Holders of such Series in the amounts and in the manner provided for in
the related Agreement; and
(viii) to clear and terminate the Collection Account pursuant
to the related Agreement.
In addition, if the Servicer deposits in the Collection Account for a
Series any amount not required to be deposited therein, it may, at any time,
withdraw such amount from such Collection Account.
Advances and Limitations Thereon
The related Prospectus Supplement will describe the circumstances, if
any, under which the Servicer will make Advances with respect to delinquent
payments on Home Equity Loans. The Servicer will be obligated to make Advances,
and such obligation may be limited in amount, or may not be activated until a
certain portion of a specified Reserve Fund is depleted. Advances are intended
to provide liquidity and, except to the extent specified in the related
Prospectus Supplement, not to guarantee or insure against losses. Accordingly,
any funds advanced are recoverable by the Servicer out of amounts received on
particular Home Equity Loans which represent late
35
<PAGE>
recoveries of principal or interest, proceeds of insurance policies or
Liquidation Proceeds respecting which any such Advance was made. If an Advance
is made and subsequently determined to be nonrecoverable from late collections,
proceeds of insurance policies, or Liquidation Proceeds from the related Home
Equity Loan, the Servicer may be entitled to reimbursement from other funds in
the Collection Account or Distribution Account, as the case may be, or from a
specified Reserve Fund as applicable, to the extent specified in the related
Prospectus Supplement.
Maintenance of Insurance Policies and other Servicing Procedures
Standard Hazard Insurance; Flood Insurance. The related Prospectus
Supplement will specify the extent to which the Servicer will be required to
maintain or to cause the obligor on each Home Equity Loan to maintain a standard
hazard insurance policy providing coverage of the standard form of fire
insurance with extended coverage for certain other hazards as is customary in
the state in which the related Mortgaged Property is located. The standard
hazard insurance policies will provide for coverage at least equal to the
applicable state standard form of fire insurance policy with extended coverage
for property of the type securing the related Home Equity Loans. In general, the
standard form of fire and extended coverage policy will cover physical damage to
or destruction of, the related Mortgaged Property caused by fire, lightning,
explosion, smoke, windstorm, hail, riot, strike and civil commotion, subject to
the conditions and exclusions particularized in each policy. Because the
standard hazard insurance policies relating to the Home Equity Loans will be
underwritten by different hazard insurers and will cover Mortgaged Properties
located in various states, such policies will not contain identical terms and
conditions. The basic terms, however, generally will be determined by state law
and generally will be similar. Most such policies typically will not cover any
physical damage resulting from war, revolution, governmental actions, floods and
other water-related causes, earth movement (including earthquakes, landslides
and mudflows), nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all inclusive. Uninsured risks not covered by a special hazard insurance policy
or other form of Credit Enhancement will adversely affect distributions to
Holders. When a Mortgaged Property securing a Home Equity Loan is located in a
flood area identified by HUD pursuant to the Flood Disaster Protection Act of
1973, as amended, the Servicer will be required to cause flood insurance to be
maintained with respect to such Mortgaged Property, to the extent available.
The standard hazard insurance policies covering Mortgaged Properties
securing Home Equity Loans typically will contain a "coinsurance" clause which,
in effect, will require the insured at all times to carry hazard insurance of a
specified percentage (generally 80% to 90%) of the full replacement value of the
Mortgaged Property, including the improvements on any Mortgaged Property, in
order to recover the full amount of any partial loss. If the insured's coverage
falls below this specified percentage, such clause will provide that the hazard
insurer's liability in the event of partial loss will not exceed the greater of
(i) the actual cash value (the replacement cost less physical depreciation) of
the Mortgaged Property, including the improvements, if any, damaged or destroyed
or (ii) such proportion of the loss, without deduction for depreciation, as the
amount of insurance carried bears to the specified percentage of the full
replacement cost of such Mortgaged Property and improvements. Since the amount
of hazard insurance to be maintained on the improvements securing the Home
Equity Loans declines as the principal balances owing thereon decrease, and
since the value of the Mortgaged Properties will fluctuate in value over time,
the effect of this requirement in the event of partial loss may be that hazard
insurance proceeds will be insufficient to restore fully the damage to the
affected Mortgaged Property.
Generally, 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
Home Equity Loan. The Servicer may 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 at least equal to the maximum insurable value of such REO
Property. No earthquake or other additional insurance will be required of any
obligor or will be maintained on REO Property acquired in respect of a defaulted
Home Equity Loan, other than pursuant to such applicable laws and regulations as
shall at any time be in force and shall require such additional insurance.
Any amounts collected by the Servicer under any such policies of
insurance (other than amounts to be applied to the restoration or repair of the
Mortgaged Property, released to the obligor in accordance with normal servicing
procedures or used to reimburse the Servicer for amounts to which it is entitled
to reimbursement) will be deposited in the Collection Account. In the event that
the Servicer obtains and maintains a blanket policy insuring
36
<PAGE>
against hazard losses on all of the Home Equity Loans, written by an insurer
then acceptable to each Rating Agency which assigns a rating to such Series, it
will conclusively be deemed to have satisfied its obligations to cause to be
maintained a standard hazard insurance policy for each Loan or related REO
Property. This blanket policy may contain a deductible clause, in which case the
Servicer will be required, in the event that there has been a loss that would
have been covered by such policy absent such deductible clause, to deposit in
the Collection Account the amount not otherwise payable under the blanket policy
because of the application of such deductible clause.
Realization upon Defaulted Home Equity 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 Home Equity 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 serviced by it. However, the Servicer will not be required
to expend its own funds in connection with any foreclosure or towards the
restoration of the Mortgaged 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 two 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 Depositor will be
required to do so.
The Servicer may arrange with the obligor on a defaulted Home Equity
Loan a modification of such Home Equity Loan (a "Modification") to the extent
provided in the related Prospectus Supplement. Such Modifications may only be
entered into if they meet the underwriting policies and procedures employed by
the Servicer in servicing receivables for its own account and meet the other
conditions set forth in the related Prospectus Supplement.
Enforcement of Due-On-Sale Clauses
When any Mortgaged Property is about to be conveyed by the obligor, the
Servicer may, to the extent it has knowledge of such prospective conveyance and
prior to the time of the consummation of such conveyance, exercise its rights to
accelerate the maturity of the related Home Equity Loan under the applicable
"due-on-sale" clause, if any, unless it reasonably believes that such clause is
not enforceable under applicable law or if the enforcement of such clause would
result in loss of coverage under any primary mortgage insurance policy. In such
event, the Servicer is authorized to accept from or enter into an assumption
agreement with the person to whom such Mortgaged Property has been or is about
to be conveyed, pursuant to which such person becomes liable under the Home
Equity Loan and pursuant to which the original obligor is released from
liability and such person is substituted as the obligor and becomes liable under
the Home Equity 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.
Servicing Compensation and Payment of Expenses
The Servicer will be entitled to a periodic fee as servicing
compensation (the "Servicing Fee") in an amount to be determined as specified in
the related Prospectus Supplement. The Servicing Fee may be fixed or variable,
as specified in the related Prospectus Supplement. In addition, the Servicer
will be entitled to servicing compensation in the form of assumption fees, late
payment charges and similar items, or excess proceeds following disposition of
Mortgaged Property in connection with defaulted Home Equity Loans, as will be
further specified in the related Prospectus Supplement,.
37
<PAGE>
The Servicer may pay certain expenses incurred in connection with the
servicing of the Home Equity Loans, including, without limitation, the payment
of the fees and expenses of the Trustee and independent accountants, payment of
insurance policy premiums and the cost of credit support, if any, and payment of
expenses incurred in preparation of reports to Holders.
When an obligor makes a principal prepayment in full between Due Dates
on the related Home Equity Loan, the obligor will generally be required to pay
interest on the amount prepaid only to the date of prepayment. If and to the
extent provided in the related Prospectus Supplement in order that one or more
Classes of the Holders of a Series will not be adversely affected by any
resulting shortfall in interest, the amount of the Servicing Fee may be reduced
to the extent necessary to include in the Servicer's remittance to the Trustee
for deposit into the Distribution Account an amount equal to one month's
interest on the related 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 certain expenses
incurred by it in connection with the liquidation of defaulted Home Equity
Loans. The related Holders will suffer no loss by reason of such expenses to the
extent expenses are covered under related insurance policies or from excess
Liquidation Proceeds. If claims are either not made or paid under the applicable
insurance policies or if coverage thereunder has been exhausted, the related
Holders will suffer a loss to the extent that Liquidation Proceeds, after
reimbursement of the Servicer's expenses, are less than the outstanding
principal balance of and unpaid interest on the related Home Equity Loan which
would be distributable to Holders. In addition, the Servicer will be entitled to
reimbursement of expenditures incurred by it in connection with the restoration
of property securing a defaulted Home Equity Loan, such right of reimbursement
being prior to the rights of the Holders to receive any related proceeds of
insurance policies, Liquidation Proceeds or amounts derived from other Credit
Enhancement. The Servicer is generally also entitled to reimbursement from the
Collection Account for Advances.
The rights of the Servicer to receive funds from the Collection Account
for a Series, whether as the Servicing Fee or other compensation, or for the
reimbursement of Advances, expenses or otherwise, may be subordinate to the
rights of Holders of such Series as set forth in the related Agreement.
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 Home Equity Loans by the Servicer and that, on the basis
of such examination, such firm is of the opinion that the servicing has been
conducted in compliance with such Agreement, except for (i) such exceptions as
such firm believes to be immaterial and (ii) such other exceptions as are set
forth in such statement.
The applicable Agreement for each Series will also provide for delivery
to the Trustee for such Series of an annual statement signed by an officer of
the Servicer to the effect that the Servicer has fulfilled its obligations under
such Agreement throughout the preceding calendar year.
Certain Matters Regarding the Servicer
The Servicer for each Series will be identified in the related
Prospectus Supplement. The Servicer may be an affiliate of the Depositor and may
have other business relationships with the Depositor and its affiliates.
If an event of default ("Event of Default") occurs under either a
Servicing Agreement or a Pooling and Servicing Agreement, the Servicer may be
replaced by the Trustee or a successor Servicer. 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 Events of Default--Pooling and Servicing
Agreement; Servicing Agreement" herein.
38
<PAGE>
The related Agreement will specify the circumstances under which the
Servicer may assign its rights and delegate its duties and obligations
thereunder for each Series, which generally will require that the successor
Servicer accepting such assignment or delegation (i) services similar loans in
the ordinary course of its business, (ii) is reasonably satisfactory to the
Trustee for the related Series, (iii) has a net worth of not less than the
amount specified in the related Prospectus Supplement, (iv) would not cause any
Rating Agency's rating of the Securities for such Series in effect immediately
prior to such assignment, sale or transfer to be qualified, downgraded or
withdrawn as a result of such assignment, sale or transfer and (v) executes and
delivers to the Trustee an agreement, in form and substance reasonably
satisfactory to the Trustee, which contains an assumption by such Servicer of
the due and punctual performance and observance of each covenant and condition
to be performed or observed by the Servicer under the related Agreement from and
after the date of such agreement. No such assignment will become effective until
the Trustee or a successor Servicer has assumed the servicer's obligations and
duties under the related Agreement. To the extent that the Servicer transfers
its obligations to a wholly-owned subsidiary or affiliate, such subsidiary or
affiliate need not satisfy the criteria set forth above; however, in such
instance, the assigning Servicer will remain liable for the servicing
obligations under the related Agreement. Any entity into which the Servicer is
merged or consolidated or any successor corporation resulting from any merger,
conversion or consolidation will succeed to the Servicer's obligations under the
related Agreement provided that such successor or surviving entity meets the
requirements for a successor Servicer set forth above.
Except to the extent otherwise provided therein, each Agreement will
provide that neither the Servicer, nor any director, officer, employee or agent
of the Servicer, will be under any liability to the related Trust Fund, the
Depositor or the Holders for any action taken or for failing to take any action
in good faith pursuant to the related Agreement, or for errors in judgment;
provided, however, that neither the Servicer nor any such person will be
protected against any breach of warranty or representations made under such
Agreement or the failure to perform its obligations in compliance with any
standard of care set forth in such Agreement, or liability which would otherwise
be imposed by reason of willful misfeasance, bad faith or negligence in the
performance of their duties or by reason of reckless disregard of their
obligations and duties thereunder. Each Agreement will further provide that the
Servicer and any director, officer, employee or agent of the Servicer is
entitled to indemnification from the related Trust Fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Agreement or the Securities, other than any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
negligence in the performance of duties thereunder or by reason of reckless
disregard of obligations and duties thereunder. In addition, the related
Agreement will provide that the Servicer is not under any obligation to appear
in, prosecute or defend any legal action which is not incidental to its
servicing responsibilities under such Agreement which, in its opinion, may
involve it in any expense or liability. The Servicer may, in its discretion,
undertake any such action which it may deem necessary or desirable with respect
to the related Agreement and the rights and duties of the parties thereto and
the interests of the Holders thereunder. In such event the legal expenses and
costs of such action and any liability resulting therefrom may be expenses,
costs, and liabilities of the Trust Fund and the Servicer may be entitled to be
reimbursed therefor out of the Collection Account.
THE AGREEMENTS
The following summaries describe certain provisions of the Agreements.
The summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the Agreements. Where
particular provisions or terms used in the Agreements are referred to, such
provisions or terms are as specified in the related Agreements.
Assignment of Primary Assets
General. At the time of issuance of the Securities of a Series, the
Originator will transfer, convey and assign to the Trust Fund all right, title
and interest of the Originator 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 on or with respect to the Primary Assets after the
Cut-off Date specified in the related Prospectus Supplement (except for any
interests in the Trust Fund retained by the Depositor or its affiliate
("Retained Interests")). The Trustee will, concurrently with such assignment,
execute and deliver the Securities.
39
<PAGE>
Assignment of Home Equity Loans. The Depositor will, as to each Home
Equity 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 a copy of such Mortgage will be delivered, together with a
certificate that the original of such Mortgage was delivered to such recording
office) and an assignment of the Mortgage in recordable form. The Trustee or the
Custodian will hold such documents in trust for the benefit of the Holders.
With respect to Home Equity Loans secured by Mortgages and to the
extent described in the related Prospectus Supplement, the Depositor will, at
the time of issuance of the Securities, cause assignments to the Trustee of the
Mortgages relating to the Home Equity 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 Home Equity Loans. The
Depositor will cause such assignments to be so recorded within the time after
issuance of the Securities as is specified in the related Prospectus Supplement,
in which event, the Agreement may require the Originator 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. The related Prospectus Supplement will
specify whether or not 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 "Loan Schedule"). Such Loan Schedule will
specify with respect to each Home Equity Loan: the original principal amount and
unpaid principal balance as of the Cut-off Date; the current interest rate; the
current Scheduled Payment of principal and interest; the maturity date, if any,
of the related Mortgage Note; if the Home Equity Loan is an adjustable rate Home
Equity Loan, the Lifetime Rate Cap, if any, and the current index.
Assignment of Private Securities. The Depositor 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 related Prospectus
Supplement will specify whether or not the Trustee will be in possession of or
be assignee of record of any underlying assets for a Private Security. See "THE
TRUST FUNDS--Private Securities" herein. 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 Depositor 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
Depositor 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 required to be in the file relating to the Primary Assets delivered by
the Depositor to the Trustee (or Custodian) is found by the Trustee within a
period not to exceed 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
Depositor or Originator does not cure such defect within a period not to exceed
90 days, the Depositor or Originator will, not later than a period not to exceed
90 days after the Trustee's notice to the Depositor or the Originator, as the
case may be, of the defect, repurchase the related Primary Asset or any property
acquired in respect thereof from the Trustee at a price generally equal to, (a)
the lesser of (i) the outstanding principal balance of such Primary Asset and
(ii) the Trust Fund's federal income tax basis in the Primary Asset and (b)
accrued and unpaid interest to the date of the next scheduled payment on such
Primary Asset at the rate set forth in the related Agreement, provided, however,
the purchase price shall not be limited in (i) above to the Trust Fund's federal
income tax basis if the repurchase at a price equal to the outstanding principal
balance of such Primary Asset will not result in any prohibited transaction tax
under Section 860F(a) of the Code.
The Depositor or Originator, as the case may be, may, rather than
repurchase the Primary Asset as described above, remove such Primary Asset from
the Trust Fund (the "Deleted Primary Asset") and substitute in its
40
<PAGE>
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 the interest
rate of the Deleted Primary Asset, (iii) a remaining term-to-stated maturity not
greater 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 Depositor or another entity will make representations and
warranties with respect to Primary Assets for a Series. If the Depositor or such
entity cannot cure a breach of any such representations and warranties in all
material respects within the time period specified in the related Prospectus
Supplement after notification by the Trustee of such breach, and if such breach
is of a nature that materially and adversely affects the value of such Primary
Asset, the Depositor or such entity 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.
The Depositor's only source of funds to effect any cure, repurchase or
substitution will be through the enforcement of the corresponding obligations,
if any, of the responsible originator or Originator of such Primary Assets. See
"SPECIAL CONSIDERATIONS--Limited Assets" herein.
No Holder of Securities of a Series, solely by virtue of such Holder's
status as a Holder, will have any right under the applicable Agreement for such
Series to institute any proceeding with respect to such Agreement, unless such
Holder previously has given to the Trustee for such Series written notice of
default and unless the Holders of Securities evidencing not less than 51% of the
aggregate voting rights of the Securities for such Series have made written
request upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity, and the Trustee
for 60 days has neglected or refused to institute any such proceeding.
Reports to Holders
The Trustee or other entity specified in the related Prospectus
Supplement will prepare and forward to each Holder on each Distribution Date, or
as soon thereafter as is practicable, a statement setting forth, to the extent
applicable to any Series, among other things:
(i) the amount of principal distributed to Holders of the
related Securities and the outstanding principal balance of such
Securities following such distribution;
(ii) the amount of interest distributed to Holders of the
related Securities and the current interest on such Securities;
(iii) the amounts of (a) any overdue accrued interest included
in such distribution, (b) any remaining overdue accrued interest with
respect to such Securities or (c) any current shortfall in amounts to
be distributed as accrued interest to Holders of such Securities;
41
<PAGE>
(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 Credit
Enhancement, and the remaining amount available under such Credit
Enhancement;
(vi) the amount of any delinquencies with respect to payments
on the related Primary Assets;
(vii) the book value of any REO Property acquired by the
related Trust Fund; and
(viii) 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 will furnish to each Holder of record at any time
during such calendar year (a) the aggregate of amounts reported pursuant to (i),
(ii), and (iv)(d) above for such calendar year and (b) such information
specified in the related Agreement to enable Holders to prepare their tax
returns including, without limitation, the amount of original issue discount
accrued on the Securities, if applicable. Information in the Distribution Date
and annual statements provided to the Holders will not have been examined and
reported upon by an independent public accountant. However, the Servicer will
provide to the Trustee a report by independent public accountants with respect
to the Servicer's servicing of the Home Equity Loans. See "SERVICING OF HOME
EQUITY LOANS --Evidence as to Compliance" herein.
A Series of Securities or one or more Classes of such Series may 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; Servicing Agreement. Events of Default
under the Pooling and Servicing Agreement for each Series of Certificates
relating to Home Equity Loans generally include (i) any failure by the Servicer
to deposit amounts in the Collection Account and Distribution Account to enable
the Trustee to distribute to Holders of such Series any required payment, which
failure continues unremedied for the number of days specified in the related
Prospectus Supplement after the giving of written notice of such failure to the
Servicer by the Trustee for such Series, or to the Servicer and the Trustee by
the Holders of such Series evidencing not less than 25% of the aggregate voting
rights of the Securities for such Series, (ii) any failure by the Servicer duly
to observe or perform in any material respect any other of its covenants or
agreements in the applicable Agreement which continues unremedied for the number
of days specified in the related Prospectus Supplement after the giving of
written notice of such failure to the Servicer by the Trustee, or to the
Servicer and the Trustee by the Holders of such Series evidencing not less than
25% of the aggregate voting rights of the Securities for such Series, and (iii)
certain events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings and certain actions by the Servicer
indicating its insolvency, reorganization or inability to pay its obligations.
The related Agreement will specify the circumstances under which the
Trustee of the Holders of Securities may remove the Servicer upon the occurrence
and continuance of an Event of Default thereunder relating to the servicing of
Home Equity Loans (other than its right to recovery of other expenses and
amounts advanced pursuant to the terms of such Agreement which rights the
Servicer will retain under all circumstances), whereupon the Trustee will
succeed to all the responsibilities, duties and liabilities of the Servicer
under such Agreement and will be entitled to reasonable servicing compensation
not to exceed the applicable servicing fee, together with other servicing
compensation in the form of assumption fees, late payment charges or otherwise
as provided in such Agreement.
42
<PAGE>
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 specified in
the related Prospectus Supplement to act as successor Servicer under the
provisions of the applicable Agreement. The successor Servicer would be entitled
to reasonable servicing compensation in an amount not to exceed the Servicing
Fee as set forth in the related Prospectus Supplement, together with the other
servicing compensation in the form of assumption fees, late payment charges or
otherwise, as provided in such Agreement.
During the continuance of any Event of Default of a Servicer under an
Agreement for a Series of Securities, the Trustee for such Series will have the
right to take action to enforce its rights and remedies and to protect and
enforce the rights and remedies of the Holders of such Series, and 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. Events of Default under the Indenture for each Series of
Notes generally include: (i) a default in the payment of any principal of or
interest on any Note of such Series, which continues for the period of time
specified in the related Prospectus Supplement; (ii) failure to perform any
other covenant of the Depositor or the Trust Fund in the Indenture which
continues for the period of time specified in the related Prospectus Supplement
after notice thereof is given in accordance with the procedures described in the
related Prospectus Supplement; (iii) any representation or warranty made by the
Depositor 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 the period of time specified in the
related Prospectus Supplement 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 Depositor
or the Trust Fund; or (v) any other Event of Default provided with respect to
Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the
time outstanding occurs and is continuing, either the Trustee or the Holders of
a majority of the then aggregate outstanding amount of the Notes of such Series
may declare the principal amount (or, if the Notes of that Series are Zero
Coupon Securities, such portion of the principal amount as may be specified in
the terms of that Series, as provided in the related Prospectus Supplement) of
all the Notes of such Series to be due and payable immediately. Such declaration
may, under certain circumstances, be rescinded and annulled by the Holders of a
majority in aggregate outstanding amount of the Notes of such Series.
If, following an Event of Default with respect to any Series of Notes,
the Notes of such Series have been declared to be due and payable, the Trustee
may, in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such Series as they would
have become due if there had not been such a declaration. In addition, the
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a Series following an Event of Default other than a default in the payment of
any principal or interest on any Note of such Series for thirty (30) days or
more, unless (a) the Holders of 100% of the then aggregate outstanding amount of
the Notes of such Series consent to such sale, (b) the proceeds of such sale or
liquidation are sufficient to pay in full the principal of and accrued interest
due and unpaid on the outstanding Notes of such Series at the date of such sale
or (c) the Trustee determines that such collateral would not be sufficient on an
ongoing basis to make all payments on such Notes as such payments would have
become due if such Notes had not been declared due and payable, and the Trustee
obtains the consent of the Holders of 66 2/3% of the then aggregate outstanding
amount of the Notes of such Series.
In the event that the Trustee liquidates the collateral in connection
with an Event of Default involving a default for thirty (30) days or more in the
payment of principal of or interest on the Notes of a Series, the Indenture
43
<PAGE>
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.
In the event the principal of the Notes of a Series is declared due and
payable, as described above, the Holders of any such Notes issued at a discount
from par may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of
the Trustee, in case an Event of Default shall occur and be continuing with
respect to a Series of Notes, the Trustee will be under no obligation to
exercise any of the rights or powers under the Indenture at the request or
direction of any of the Holders of Notes of such Series, unless such Holders
offered to the Trustee security or indemnity satisfactory to it against the
costs, expenses and liabilities which might be incurred by it in complying with
such request or direction. Subject to such provisions for indemnification and
certain limitations contained in the Indenture, the Holders of a majority of the
then aggregate outstanding amount of the Notes of such Series shall have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the Trustee or exercising any trust or power conferred on
the Trustee with respect to the Notes of such Series, and the Holders of a
majority of the then aggregate outstanding amount of the Notes of such Series
may, in certain cases, waive any default with respect thereto, except a default
in the payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all the Holders of the outstanding Notes of such Series affected thereby.
The Trustee
The identity of the commercial bank, savings and loan association or
trust company named as the Trustee for each Series of Securities will be set
forth in the related Prospectus Supplement. The entity serving as Trustee may
have normal banking relationships with the Depositor or the Servicer. In
addition, for the purpose of meeting the legal requirements of certain local
jurisdictions, the Trustee will have the power to appoint co-trustees or
separate trustees of all or any part of the 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.
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.
44
<PAGE>
Resignation of Trustee
The Trustee may, upon written notice to the Depositor, resign at any
time, in which event the Depositor will be obligated to use its best efforts to
appoint a successor Trustee. If no successor Trustee has been appointed and has
accepted the appointment within 30 days after the giving of such notice of
resignation, the resigning Trustee may petition any court of competent
jurisdiction for appointment of a successor Trustee. The Trustee may also be
removed at any time (i) if the Trustee ceases to be eligible to continue as such
under the Agreement, (ii) if the Trustee becomes insolvent or (iii) by the
Holders of Securities evidencing over 50% of the aggregate voting rights of the
Securities in the Trust Fund upon written notice to the Trustee and to the
Depositor. Any resignation or removal of the Trustee and appointment of a
successor Trustee will not become effective until acceptance of the appointment
by the successor Trustee.
Amendment of Agreement
The Agreement for each Series of Securities may be amended by the
Depositor, the Servicer (with respect to a Series relating to Home Equity
Loans), and the Trustee with respect to such Series, without notice to or
consent of the Holders (i) to cure any ambiguity, (ii) to correct any defective
provisions or to correct or supplement any provision therein, (iii) to add to
the duties of the Depositor, the Trust Fund or Servicer, (iv) to add any other
provisions with respect to matters or questions arising under such Agreement or
related Credit Enhancement, (v) to add or amend any provisions of such Agreement
as required by a Rating Agency in order to maintain or improve the rating of the
Securities (it being understood that none of the Depositor, the Originator, the
Servicer or Trustee is obligated to maintain or improve such rating), or (vi) to
comply with any requirements imposed by the Code; provided that any such
amendment except pursuant to clause (vi) above will not adversely affect in any
material respect the interests of any Holders of such Series, as evidenced by an
opinion of counsel. Any such amendment except pursuant to clause (vi) of the
preceding sentence shall be deemed not to adversely affect in any material
respect the interests of any Holder if the Trustee receives written confirmation
from each Rating Agency rating such Securities that such amendment will not
cause such Rating Agency to reduce the then current rating thereof. The
Agreement for each Series may also be amended by the Trustee, the Servicer, if
applicable, and the Depositor with respect to such Series with the consent of
the Holders possessing not less than 66 2/3% of the aggregate outstanding
principal amount of the Securities of such Series or, if only certain Classes of
such Series are affected by such amendment, 66 2/3% of the aggregate outstanding
principal amount of the Securities of each Class of such Series affected
thereby, for the purpose of adding any provisions to or changing in any manner
or eliminating any of the provisions of such Agreement or modifying in any
manner the rights of Holders of such Series; provided, however, that no such
amendment may (a) reduce the amount or delay the timing of payments on any
Security without the consent of the Holder of such Security; or (b) reduce the
aforesaid percentage of the aggregate outstanding principal amount of Securities
of each Class, the Holders of which are required to consent to any such
amendment without 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.
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.
45
<PAGE>
Form of Securities
The Securities in each Series will either be issued as physical
certificates or in uncertificated book-entry form. Physical certificates
("Physical Certificates") in fully registered form only in the denominations
specified in the related Prospectus Supplement, and will be transferable and
exchangeable at the corporate trust office of the registrar of the Securities
(the "Security Registrar") named in the related Prospectus Supplement. No
service charge will be made for any registration of exchange or transfer of
Securities, but the Trustee may require payment of a sum sufficient to cover any
tax or other government charge.
If so specified in the related Prospectus Supplement, specified classes
of a series of Securities will be issued in uncertificated book-entry form
("Book-Entry Securities"), and will be registered in the name of Cede & Co.
("Cede"), the nominee of DTC. DTC is a limited purpose trust company organized
under the laws of the State of New York, a member of the Federal Reserve System,
a "clearing corporation" within the meaning of the Uniform Commercial Code
("UCC") and a "clearing agency" registered pursuant to the provisions of Section
17A of the Securities Exchange Act of 1934, as amended. DTC was created to hold
securities for its participating organizations ("Participants") and facilitate
the clearance and settlement of securities transactions between Participants
through electronic book-entry changes in their accounts, thereby eliminating the
need for physical movement of certificates. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include certain other organizations. Indirect access to the DTC system also is
available to others such as brokers, dealers, banks and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly ("Indirect Participant").
Under a book-entry format, Holders that are not Participants or
Indirect Participants but desire to purchase, sell or otherwise transfer
ownership of the Securities registered in the name of Cede, as nominee of DTC,
may do so only through Participants and Indirect Participants. In addition, such
Holders will receive all distributions of principal of and interest on the
Securities from the Trustee through DTC and its Participants. Under a book-entry
format, Holders will receive payments after the related Payment Date because,
while payments are required to be forwarded to Cede, as nominee for DTC, on each
such date, DTC will forward such payments to its Participants, which thereafter
will be required to forward such payments to Indirect Participants or Holders.
Unless and until Physical Securities are issued, it is anticipated that the only
Holder will be Cede, as nominee of DTC, and that the beneficial holders of
Securities will not be recognized by the Trustee as Holders under the Pooling
and Servicing Agreement. The beneficial holders of such Securities will only be
permitted to exercise the rights of Holders under the Pooling and Servicing
Agreement indirectly through DTC and its Participants who in turn will exercise
their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC
and its operations, DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Securities and is
required to receive and transmit payments of principal of and interest on the
Securities. Participants and Indirect Participants with which Holders have
accounts with respect to their Securities similarly are required to make
book-entry transfers and receive and transmit such payments on behalf of their
respective Holders. Accordingly, although Holders will not process Securities,
the rules provide a mechanism by which Holders will receive distributions and
will be able to transfer their interests.
Unless and until Physical Certificates are issued, Holders who are not
Participants may transfer ownership of Securities only through Participants by
instructing such Participants to transfer Securities, by book-entry transfer,
through DTC for the account of the purchasers of such Securities, which account
is maintained with their respective Participants. Under the Rules and in
accordance with DTC's normal procedures, transfers of ownership of Securities
will be executed through DTC and the accounts of the respective Participants at
DTC will be debited and credited. Similarly, the respective Participants will
make debits or credits, as the case may be, on their records on behalf of the
selling and purchasing Holders.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Holder to
pledge Securities to persons or entities that do not participate in the DTC
system, or otherwise take actions in respect of such Securities may be limited
due to the lack of a Physical Certificate for such Securities.
46
<PAGE>
DTC in general advises that it will take any action permitted to be
taken by a Holder under a Pooling and Servicing Agreement only at the direction
of one or more Participants to whose account with DTC the related Securities are
credited. Additionally, DTC in general advises that it will take such actions
with respect to specified percentages of the Holders only at the direction of
and on behalf of Participants whose holdings include current principal amounts
of outstanding Securities that satisfy such specified percentages. DTC may take
conflicting actions with respect to other current principal amounts of
outstanding Securities to the extent that such actions are taken on behalf of
Participants whose holdings include such current principal amounts of
outstanding Securities.
Any Securities initially registered as Physical Certificates in the
name of Cede, as nominee of DTC, will be issued in fully registered,
certificated form to Holders or their nominees, rather than to DTC or its
nominee only under the events specified in the related Pooling and Servicing
Agreement and described in the related Prospectus Supplement. Upon the
occurrence of any of the events specified in the related Pooling and Servicing
Agreement and the Prospectus Supplement, DTC will be required to notify all
Participants of the availability through DTC of Physical Certificates. Upon
surrender by DTC of the securities representing the Securities and instruction
for re-registration, the Trustee will take the Securities in the form of
Physical Certificates, and thereafter the Trustee will recognize the holders of
such Physical Certificates as Holders. Thereafter, payments of principal of and
interest on the Securities will be made by the Trustee directly to Holders in
accordance with the procedures set forth herein and in the Pooling and Servicing
Agreement. The final distribution of any Security (whether Physical Certificates
or Securities registered in the name of Cede), however, will be made only upon
presentation and surrender of such Securities on the final Payment Date at such
office or agency as is specified in the notice of final payment to Holders.
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
an affiliate of the Depositor.
Termination
Pooling and Servicing Agreement; Trust Agreement. The obligations
created by the Pooling and Servicing Agreement or Trust Agreement for a Series
will terminate upon the distribution to Holders of all amounts distributable to
them pursuant to such Agreement after the earlier of (i) the later of (a) the
final payment or other liquidation of the last 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; (ii) the repurchase, as described below, by the 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; or (iii) the mandatory termination of the Trust by the Trustee, the
Servicer or certain other entities specified in the related Prospectus
Supplement by soliciting competitive bids for the purchase of the Primary Assets
of the related Trust Fund
Repurchase of the Remaining Primary Assets. The Agreement for each
Series may permit, but not require, the 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 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
47
<PAGE>
at the time of repurchase being less than a fixed percentage, to be set forth in
the related Prospectus Supplement, of the aggregate Principal Balance of the
Primary Assets as of the Cut-off Date.
Mandatory Termination; Auction Sale. The Trustee, the Servicer or the
related Originator may be required to effect early retirement of a series of
Securities by soliciting competitive bids for the purchase of the related Trust
Estate.
The mandatory termination may take the form of an auction sale. Within
a certain period following the failure of the holder of the optional termination
right to exercise such right, the required party shall solicit bids for the
purchase of all Home Equity Loans remaining in the Trust. In the event that
satisfactory bids (which would not be less than an amount necessary to pay all
principal and interest on the securities outstanding) are received as specified
in the related Agreement, the net sale proceeds will be distributed to Holders,
in the same order of priority as collections received in respect of the Home
Equity Loans. If satisfactory bids are not received, such party shall decline to
sell the Home Equity Loans and shall not be under any obligation to solicit any
further bids or otherwise negotiate any further sale of the Home Equity Loans.
Such sale and consequent termination of the Trust must constitute a "qualified
liquidation" of each REMIC established by the Trust under Section 860F of the
Internal Revenue Code of 1986, as amended, including, without limitation, the
requirement that the qualified liquidation takes place over a period not to
exceed 90 days.
In no event, however, will the trust created by the Agreement continue
beyond the expiration of 21 years from the death of the last survivor of certain
persons identified therein. For each Series, the Servicer or the Trustee, as
applicable, will give written notice of termination of the Agreement to each
Holder, and the final distribution will be made only upon surrender and
cancellation of the Securities at an office or agency specified in the notice of
termination. The Depositor 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" herein.
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 HOME EQUITY LOANS
The following discussion contains summaries of certain legal aspects of
home equity loans, which are general in nature. Because certain of such legal
aspects are governed by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor reflect the laws
of any particular state, nor encompass the laws of all states in which the
properties securing the Home Equity Loans are situated.
48
<PAGE>
General
The Home Equity Loans will be represented by a Note and an accompanying
Mortgage. Pursuant to the Note, the related borrower is personally liable to
repay the indebtedness evidenced by the Home Equity Loan; pursuant to the
Mortgage, such indebtedness is secured by a lien on the related Mortgaged
Property.
Enforcement of the Note
Pursuant to the Note, the related borrower is personally liable to
repay the indebtedness evidenced by the Home Equity Loan. In certain states, the
lender on a note secured by a lien on real property 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 related property
security. Consequently, the practical effect of the election requirement, in
those states permitting such election, is that lenders will usually proceed
against the property first rather than bringing a personal action against the
borrower on the Note.
Certain states have imposed statutory prohibitions that 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. A deficiency judgment is a personal judgment against the
former borrower equal in most cases to the difference between the amount due to
the lender and the net amount realized upon the public sales of the real
property. In the case of a Home Equity Loan secured by a property owned by a
trust where the Mortgage Note is executed on behalf of the trust, a deficiency
judgment against the trust following foreclosure or sale under a deed of trust,
even if obtainable under applicable law, may be of little value to the mortgagee
or beneficiary if there are no trust assets against which such deficiency
judgment may be executed. Other statutes require the beneficiary or mortgagee to
exhaust the security afforded under a deed of trust or mortgage by foreclosure
in an attempt to satisfy the full debt before bringing a personal action against
the borrower. Finally, in certain other states, statutory provisions limit any
deficiency judgment against the former borrower following a foreclosure to the
excess of the outstanding debt over the fair value of the property at the time
of the public sale. The purpose of these statutes is generally to prevent a
beneficiary or mortgagee from obtaining a large deficiency judgment against the
former borrower as a result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments,
numerous other federal and state statutory provisions, including the federal
bankruptcy laws and state laws affording relief to debtors, may interfere with
or affect the ability of the secured mortgage lender to realize upon collateral
or enforce a deficiency judgment. For example, with respect to federal
bankruptcy law, a court with federal bankruptcy jurisdiction may permit a debtor
through his or her Chapter 11 or Chapter 13 rehabilitative plan to cure a
monetary default in respect of 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 final judgment
of foreclosure had been entered in state court (provided no sale of the
residence had yet occurred) prior to the filing of the debtor's 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 paying arrearages over a number of years.
Court with federal bankruptcy jurisdiction also have indicated that the
terms of a loan secured by property of the debtor may be modified. These courts
have allowed modifications that include reducing the amount of each monthly
payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt 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.
Certain states have imposed general equitable principles upon judicial
foreclosure. These equitable principles are generally designed to relieve the
borrower from the legal effect of the borrower's default under the related 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 for the borrower's default and the likelihood
that the borrower will be able to reinstate the loan. In some cases, lender have
been required to reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disabilities.
In other cases, such courts have limited the right of the lender to foreclose if
the default under the loan
49
<PAGE>
is not monetary, such as the borrower failing to adequately maintain the
property or the borrower executing a second deed of trust affecting the
property.
Certain tax liens arising under the Internal Revenue Code of 1986, as
amended, may in certain circumstances provide priority over the lien of a
mortgage or deed of trust. In addition, substantive requirements are imposed
upon mortgage lenders in connection with the origination and the servicing of
loans by numerous federal and some state consumer protection laws. These laws
include, by example, the federal Truth-in-Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair
Credit Reporting Act and related statutes and state laws, such a s the
California Fair Debt Collection Practices Act. These laws and regulations impose
specific statutory liabilities upon lenders who originate loans and fail to
comply with the provisions of the law. In some cases, this liability may affect
assignees of the loans.
Security Interests
Real Estate Mortgages. The Home Equity Loans for a Series will be
secured by either mortgages or deeds of trust or deeds to secure debt depending
upon the prevailing practice in the state in which the Mortgaged Property
subject to a Home Equity Loan is located. The filing of a mortgage, deed of
trust or deed to secure debt creates a lien or title interest upon the real
property covered by such instrument and represents the security for the
repayment of an obligation that is customarily evidenced by a promissory note.
It is not prior to the lien for real estate taxes and assessments or other
charges imposed under governmental police powers and may also be subject to
other liens pursuant to the laws of the jurisdiction in which the Mortgaged
Property is located. Priority with respect to such instruments depends on their
terms, the knowledge of the parties to the mortgage and generally on the order
of recording with the applicable state, county or municipal office. There are
two parties to a mortgage, the mortgagor, who is the borrower/property owner or
the land trustee (as described below), and the mortgagee, who is the lender.
Under the mortgage instrument, the mortgagor delivers to the mortgagee a note or
bond and the mortgage. In the case of a land trust, there are three parties
because title to the Mortgaged 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 Home Equity Loan, the borrower executes a separate undertaking
to make payments on the mortgage note. A deed of trust transaction normally has
three parties: The trustor, who is the borrower/property owner; the beneficiary,
who is the lender; and the trustee, a third-party grantee. Under a deed of
trust, the trustor grants the Mortgaged Property, irrevocably until the debt is
paid, in trust, generally with a power of sale, to the trustee to secure payment
of the obligation. The mortgagee's authority under a mortgage and the trustee's
authority under a deed of trust are governed by the law of the state in which
the real property is located, the express provisions of the mortgage or deed of
trust, and, in some cases, in deed of trust transactions, the directions of the
beneficiary.
Foreclosure on Mortgages. Foreclosure of a mortgage is generally
accomplished by judicial action. Generally, the action is initiated by the
service of legal pleadings upon all parties having an interest of record in the
real property. Delays in completion of the foreclosure occasionally may result
from difficulties in locating necessary parties defendant. When the mortgagee's
right to foreclosure is contested, the legal proceedings necessary to resolve
the issue can be time-consuming and expensive. After the completion of a
judicial foreclosure proceeding, the court may issue a judgment of foreclosure
and appoint a receiver or other officer to conduct the sale of the Mortgaged
Property. In some states, mortgages may also be foreclosed by advertisement,
pursuant to a power of sale provided in the mortgage. Foreclosure of a mortgage
by advertisement is essentially similar to foreclosure of a deed of trust by
nonjudicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a
nonjudicial trustee's sale under a specific provision in the deed of trust which
authorizes the trustee to sell the Mortgaged Property upon any default by the
borrower under the terms of the note or deed of trust. In certain states, such
foreclosure also may be accomplished by judicial action in the manner provided
for foreclosure of mortgages. In some states, the trustee must record a notice
of default and send a copy to the borrower-trustor and to any person who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee in some states must provide notice to any other individual
having an interest in the real property, including any junior lienholders. If
the deed of trust is not reinstated within any applicable cure period, a notice
of sale must be posted in a public place and, in most states, published for a
specified period of time in one or more newspapers. In addition, some state laws
require that a copy of the notice of sale be posted on the Mortgaged Property
and sent to all parties having an interest of record in the Mortgaged Property.
The trustor, borrower, or any person having a junior encumbrance on the real
estate, may,
50
<PAGE>
during a reinstatement period, cure the default by paying the entire amount in
arrears plus the costs and expenses incurred in enforcing the obligation.
Generally, state law controls the amount of foreclosure expenses and costs,
including attorney's fees, which may be recovered by a lender. If the deed of
trust is not reinstated, a notice of sale must be posted in a public place and,
in most states, published for a specified period of time in one or more
newspapers. In addition, some state laws require that a copy of the notice of
sale be posted on the Mortgaged Property, recorded and sent to all parties
having an interest in the real property.
An action to foreclose a mortgage is an action to recover the mortgage
debt by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the related mortgage note and
the mortgage as made and cannot be relieved from his default if the mortgagee
has exercised his rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature, the court may exercise
equitable powers to relieve a mortgagor of a default and deny the mortgagee
foreclosure on proof that either the mortgagor's default was neither willful nor
in bad faith or the mortgagee's action established a waiver, fraud, bad faith,
or oppressive or unconscionable conduct such as to warrant a court of equity to
refuse affirmative relief to the mortgagee. Under certain circumstances a court
of equity may relieve the mortgagor from an entirely technical default where
such default was not willful.
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.
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 Mortgaged Property may have deteriorated during the
foreclosure proceedings, it is uncommon for a third party to purchase the
Mortgaged Property at a foreclosure sale. Rather, it is common for the lender to
purchase the Mortgaged Property from the trustee or referee for an amount which
may be equal to the unpaid principal amount of the mortgage note secured by the
mortgage or deed of trust plus accrued and unpaid interest and the expenses of
foreclosure, in which event the mortgagor's debt will be extinguished or the
lender may purchase for a lesser amount in order to preserve its right against a
borrower to seek a deficiency judgment in states where such a judgment is
available. Thereafter, subject to the right of the borrower in some states to
remain in possession during the redemption period, the lender will assume the
burdens of ownership, including obtaining hazard insurance, paying taxes and
making such repairs at its own expense as are necessary to render the Mortgaged
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 Mortgaged Property. Depending upon market conditions, the ultimate
proceeds of the sale of the Mortgaged Property may not equal the lender's
investment in the Mortgaged Property. Any loss may be reduced by the receipt of
any mortgage guaranty insurance proceeds.
Rights of Redemption. In some states, after sale pursuant to a deed of
trust or foreclosure of a mortgage, the trustor or mortgagor and foreclosed
junior lienors are given a statutory period in which to redeem the Mortgaged
Property from the foreclosure sale. The right of redemption should be
distinguished from the equity of redemption, which is a non-statutory right that
must be exercised prior to the foreclosure sale. In some states, redemption may
occur only upon payment of the entire principal balance of the loan, accrued
interest and expenses of foreclosure. In other states, redemption may be
authorized if the former borrower pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed Mortgaged Property. The exercise of a right of
redemption would defeat the title of any purchaser at a foreclosure sale, or of
any purchaser from the lender subsequent to foreclosure or sale under a deed of
trust. Consequently the practical effect of a right of redemption is to force
the lender to retain the Mortgaged Property and pay the expenses of ownership
until the redemption period has run. In some states, there is no right to redeem
Mortgaged Property after a trustee's sale under a deed of trust.
51
<PAGE>
Junior Mortgages; Rights of Senior Mortgages. The Home Equity 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 second or
more junior mortgages to other mortgages 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 Mortgaged
Property securing the Home Equity 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 Mortgaged Property in foreclosure
litigation and, possibly, satisfies the defaulted senior mortgage. A junior
mortgagee may satisfy a defaulted senior loan in full and, in some states, may
cure such default and bring the senior loan current, in either event adding the
amounts expended to the balance due on the junior loan. In most states, absent a
provision in the mortgage or deed of trust, no notice of default is required to
be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage, in such order as the mortgagee may determine. Thus, in the
event improvements on the Mortgaged Property are damaged or destroyed by fire or
other casualty, or in the event the Mortgaged Property is taken by condemnation,
the mortgagee or beneficiary under underlying senior mortgages will have the
prior right to collect any insurance proceeds payable under a hazard insurance
policy and any award of damages in connection with the condemnation and to apply
the same to the indebtedness secured by the senior mortgages. Proceeds in excess
of the amount of senior mortgage indebtedness, in most cases, may be applied to
the indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed
of trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the Mortgaged Property and, when due,
all encumbrances, charges and liens on the Mortgaged Property which appear prior
to the mortgage or deed of trust, to provide and maintain fire insurance on the
Mortgaged Property, to maintain and repair the Mortgaged Property and not to
commit or permit any waste thereof, and to appear in and defend any action or
proceeding purporting to affect the Mortgaged Property or the rights of the
mortgagee under the mortgage. Upon a failure of the mortgagor to perform any of
these obligations, the mortgagee is given the right under certain mortgages to
perform the obligation itself, at its election, with the mortgagor agreeing to
reimburse the mortgagee for any sums expended by the mortgagee on behalf of the
mortgagor. All sums so expended by the mortgagee become part of the indebtedness
secured by the mortgage.
Due-On-Sale Clauses in Home Equity 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
Mortgaged 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 loans that were (i)
originated or assumed during the "window period" under the Garn-St. Germain Act
which ended in all cases not later than October 15, 1982, and (ii) originated by
lenders other than national banks, federal savings institutions and federal
credit unions. The Federal Home Loan Mortgage Corporation ("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.
52
<PAGE>
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 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 his security if the
default under the security agreement is not monetary, such as the borrower's
failure to adequately maintain the Mortgaged Property or the borrower's
execution of secondary financing affecting the Mortgaged 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 loans may be prepaid in full or in part
without penalty. The regulations of the Office of Thrift Supervision (the "OTS")
prohibit the imposition of a prepayment penalty or equivalent fee for or in
connection with the acceleration of a loan by exercise of a due-on-sale clause.
A mortgagee to whom a prepayment in full has been tendered may be compelled to
give either a release of the mortgage or an instrument assigning the existing
mortgage. The absence of a restraint on prepayment, particularly with respect to
loans having higher mortgage rates, may increase the likelihood of refinancing
or other early retirements of such loans.
Applicability of Usury Laws. Title V of the Depository Institutions
Deregulation and Monetary Control Act of 1980, enacted in March 1980 ("Title
V"), provides that state usury limitations shall not apply to certain types of
residential first loans originated by certain lenders after March 31, 1980.
Similar federal statutes were in effect with respect to loans made during the
first three months of 1980. The OTS, as successor to the Federal Home Loan Bank
Board, is authorized to issue rules and regulations and to publish
interpretations governing implementation of Tide V. Tide 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 loans covered by Title V.
Security Interests in Personal Property and Fixtures. A portion of each
Mortgaged Property may consist of property which is "personal property" or a
"fixture" under local state law. This will most commonly occur when the proceeds
of the related Home Equity Loan were applied to property improvements, although
any Mortgaged Property may have some personal property components. A financing
statement generally is not required to be filed to perfect a purchase money
security interest in consumer goods. Such purchase money security interests are
assignable. In general, a purchase money security interest grants to the holder
a security interest that has priority over a conflicting security interest in
the same collateral and the proceeds of such collateral. However, to the extent
that the collateral subject to a purchase money security interest becomes a
fixture, in order for the related purchase money security interest to take
priority over a conflicting interest in the fixture, the holder's interest in
such personal property must generally be perfected by a timely fixture filing.
In general, under the Uniform Commercial Code (the "UCC"), a security interest
does not exist under the UCC in ordinary building material incorporated into an
improvement on land. Contracts that finance lumber, bricks, other types of
ordinary building material or other
53
<PAGE>
goods that are deemed to lose such characterization, upon incorporation of such
materials into the related property, will not be secured by a purchase money
security interest in the personal property being financed.
Enforcement of Security Interest in Personal Property. So long as the
personal property has not become subject to the real estate law, a creditor can
repossess such property securing a contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or, in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a contract must give the
debtor a number of days' notice, which varies from 10 to 30 days depending on
the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit that the debtor may redeem
it at or before such resale.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgement from a debtor for any deficiency on repossession
and resale of the property securing the debtor's loan. However, some states
impose prohibitions or limitations on deficiency judgements, and in many cases
the defaulting borrower would have no assets with which to pay a judgement.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgement.
Consumer Protection Laws. The so-called "Holder-in-Due-Course" rule of
the Federal Trade Commission is intended to defeat the ability of the transferor
of a consumer credit contract which is the seller of goods which gave rise to
the transaction (and certain related lenders and assignees) to transfer such
contract free of notice of claims by the debtor thereunder. The effect of this
rule is to subject the assignee of such a contract to all claims and defenses
which the debtor could assert against the seller of goods. Liability under this
rule is limited to amounts paid under a contract; however, the obligor also may
be able to assert the rule to set off remaining amounts due as a defense against
a claim brought by the Trustee against such obligor. Numerous other federal and
state consumer protection laws impose requirements applicable to the origination
and lending pursuant to the contracts, including the Truth in Lending Act, the
Federal Trade Commission Act, the Fair Credit Billing Act, the Fair Credit
Reporting Act, the Equal Credit Opportunity Act, the Fair Debt Collection
Practices Act and the Uniform Consumer Credit Code. In the case of some of these
laws, the failure to comply with their provisions may affect the enforceability
of the related contract.
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 Home Equity Loans) incurred prior to
the commencement of military service for the duration of military service, (ii)
may be entitled to a stay of proceedings on any kind of foreclosure or
repossession action in the case of defaults on such obligations entered into
prior to military service for the duration of military service and (iii) may
have the maturity of such obligations incurred prior to military service
extended, the payments lowered and the payment schedule readjusted for a period
of time after the completion of military service. However, the benefits of (i),
(ii), or (iii) above are subject to challenge by creditors and if, in the
opinion of the court, the ability of a person to comply with such obligations is
not materially impaired by military service, the court may apply equitable
principles accordingly. If a borrower's obligation to repay amounts otherwise
due on a 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 Depositor nor the Trustee will be required to
advance such amounts, and any loss in respect thereof may reduce the amounts
available to be paid to the Holders of the Securities of such Series. Any
shortfalls in interest collections on Home Equity 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 in the manner set forth in the related Agreement.
54
<PAGE>
THE DEPOSITOR
General
The Depositor was incorporated in the State of North Carolina. in
December 1997, and is a wholly-owned subsidiary of First Union National Bank, a
national banking association with its headquarters in Charlotte, North Carolina.
The Depositor's principal executive offices are located at One First Union
Center, 301 S. College Street, Charlotte, North Carolina 28288-0630. Its
telephone number is (704) 373-6611.
The Depositor will not engage in any activities other than to
authorize, issue, sell, deliver, purchase and invest in (and enter into
agreements in connection with), and/or to engage in the establishment of one or
more trusts which will issue and sell, bonds, notes, debt or equity securities,
obligations and other securities and instruments ("Depositor Securities")
collateralized or otherwise secured or backed by, or otherwise representing an
interest in, among other things, receivables or pass-through certificates, or
participations or certificates of participation or beneficial ownership in one
or more pools of receivables, and the proceeds of the foregoing, that arise in
connection with loans secured by certain first or junior mortgages on real
estate or manufactured housing and any and all other commercial transactions and
commercial, sovereign, student or consumer loans or indebtedness and, in
connection therewith or otherwise, purchasing, acquiring, owning, holding,
transferring, conveying, servicing, selling, pledging, assigning, financing and
otherwise dealing with such receivables, pass-through certificates, or
participations or certificates of participation or beneficial ownership. Article
Third of the Depositor's Certificate of Incorporation limits the Depositor's
activities to the above activities and certain related activities, such as
credit enhancement with respect to such Depositor Securities, and to any
activities incidental to and necessary or convenient for the accomplishment of
such purposes.
USE OF PROCEEDS
The net proceeds from the sale of each Series of Securities will be
applied to one or more of the following purposes: (i) to acquire the related
Primary Assets, (ii) to repay indebtedness which has been incurred to obtain
funds to acquire such Primary Assets, (iii) to establish any Reserve Funds
described in the related Prospectus Supplement and (iv) to pay costs of
structuring and issuing such Securities, including the costs of obtaining Credit
Enhancement, if any. The acquisition of the Primary Assets for a Series may be
effected by an exchange of Securities with the Originator of such Primary
Assets.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
General
The following is a general discussion of the material anticipated
federal income tax consequences to investors of the purchase, ownership and
disposition of the Securities offered hereby. The discussion is based upon laws,
regulations, rulings and decisions now in effect, all of which are subject to
change. The discussion below does not purport to deal with all federal tax
consequences applicable to all categories of investors, some of which may be
subject to special rules. Investors are urged to consult their own tax advisors
in determining the particular federal, state and local consequences to them of
the purchase, ownership and disposition of the Securities.
The following discussion addresses securities of five general types:
(i) securities ("Grantor Trust Securities") representing interests in a trust (a
"Grantor Trust") which the Company will covenant not to elect to have treated as
a real estate mortgage investment conduit ("REMIC") or a financial asset
securitization investment trust ("FASIT"); (ii) securities ("REMIC Securities")
representing interests in a trust, or a portion thereof, which the Company will
covenant to elect to have treated as a REMIC under sections 860A through 860G of
the Internal Revenue Code of 1986, as amended (the "Code"); (iii) securities
("Debt Securities") that are intended to be treated for federal income tax
purposes as indebtedness secured by the underlying loans; (iv) securities
("Partnership
55
<PAGE>
Interests") representing interests in a trust (a "Partnership") that is intended
to be treated as a partnership under the Code; and (v) securities ("FASIT
Securities") representing interests in a trust, or portion thereof, which the
Company will covenant to elect to have treated as a FASIT under sections 860H
through 860L of the Code. The Prospectus Supplement for each series of
Securities will indicate whether a REMIC or FASIT election (or elections) will
be made for the related trust and, if a REMIC or FASIT election is to be made,
will identify all "regular interests" and "residual interests" in the REMIC or
all "regular interests," "high-yield interests" or the "ownership interest" in
the FASIT.
The Taxpayer Relief Act of 1997 adds provisions to the Code that
require the recognition of gain upon the "constructive sale of an appreciated
financial position." A constructive sale of an appreciated financial position
occurs if a taxpayer enters into certain transactions or series of such
transactions with respect to a financial instrument that have the effect of
substantially eliminating the taxpayer's risk of loss and opportunity for gain
with respect to the financial instrument. These provisions apply only to Classes
of Securities that do not have a principal balance.
Grantor Trust Securities
With respect to each series of Grantor Trust Securities, Dewey
Ballantine LLP, special tax counsel to the Company, will deliver its opinion to
the Company that the related Grantor Trust will be classified as a grantor trust
and not as a partnership or an association taxable as a corporation. Such
opinion shall be attached on Form 8-K to be filed with the Commission within
fifteen days after the initial issuance of such Securities or filed with the
Commission as a post-effective amendment to the Prospectus. Accordingly, each
beneficial owner of a Grantor Trust Security will generally be treated as the
owner of an interest in the Home Equity Loans included in the Grantor Trust.
For purposes of the following discussion, a Grantor Trust Security
representing an undivided equitable ownership interest in the principal of the
Home Equity Loans constituting the related Grantor Trust, together with interest
thereon at a pass-through rate, will be referred to as a "Grantor Trust
Fractional Interest Security." A Grantor Trust Security representing ownership
of all or a portion of the difference between interest paid on the Home Equity
Loans constituting the related Grantor Trust and interest paid to the beneficial
owners of Grantor Trust Fractional Interest Securities issued with respect to
such Grantor Trust will be referred to as a "Grantor Trust Strip Security."
Taxation of Beneficial Owners of Grantor Trust Securities
Beneficial owners of Grantor Trust Fractional Interest Securities
generally will be required to report on their federal income tax returns their
respective shares of the income from the Home Equity Loans (including amounts
used to pay reasonable servicing fees and other expenses but excluding amounts
payable to beneficial owners of any corresponding Grantor Trust Strip
Securities) and, subject to the limitations described below, will be entitled to
deduct their shares of any such reasonable servicing fees and other expenses. If
a beneficial owner acquires a Grantor Trust Fractional Interest Security for an
amount that differs from its outstanding principal amount, the amount includible
in income on a Grantor Trust Fractional
56
<PAGE>
Interest Security may differ from the amount of interest distributable thereon.
See "Discount and Premium," below. Individuals holding a Grantor Trust
Fractional Interest Security directly or through certain pass-through entities
will be allowed a deduction for such reasonable servicing fees and expenses only
to the extent that the aggregate of such beneficial owner's miscellaneous
itemized deductions exceeds 2% of such beneficial owner's adjusted gross income.
Further, beneficial owners (other than corporations) subject to the alternative
minimum tax may not deduct miscellaneous itemized deductions in determining
alternative minimum taxable income.
Beneficial owners of Grantor Trust Strip Securities generally will be
required to treat such Securities as "stripped coupons" under section 1286 of
the Code. Accordingly, such a beneficial owner will be required to treat the
excess of the total amount of payments on such a Security over the amount paid
for such Security as original issue discount and to include such discount in
income as it accrues over the life of such Security. See "--Discount and
Premium," below.
Grantor Trust Fractional Interest Securities may also be subject to the
coupon stripping rules if a class of Grantor Trust Strip Securities is issued as
part of the same series of Securities. The consequences of the application of
the coupon stripping rules would appear to be that any discount arising upon the
purchase of such a Security (and perhaps all stated interest thereon) would be
classified as original issue discount and includible in the beneficial owner's
income as it accrues (regardless of the beneficial owner's method of
accounting), as described below under "--Discount and Premium." The coupon
stripping rules will not apply, however, if (i) the pass-through rate is no more
than 100 basis points lower than the gross rate of interest payable on the
underlying Home Equity Loans and (ii) the difference between the outstanding
principal balance on the Security and the amount paid for such Security is less
than 0.25% of such principal balance times the weighted average remaining
maturity of the Security.
Sales of Grantor Trust Securities
Any gain or loss recognized on the sale of a Grantor Trust Security
(equal to the difference between the amount realized on the sale and the
adjusted basis of such Grantor Trust Security) will be capital gain or loss,
except to the extent of accrued and unrecognized market discount, which will be
treated as ordinary income, and in the case of banks and other financial
institutions except as provided under section 582(c) of the Code. The adjusted
basis of a Grantor Trust Security will generally equal its cost, increased by
any income reported by the Originator (including original issue discount and
market discount income) and reduced (but not below zero) by any previously
reported losses, any amortized premium and by any distributions of principal.
Grantor Trust Reporting
The Trustee will furnish to each beneficial owner of a Grantor Trust
Fractional Interest Security with each distribution a statement setting forth
the amount of such distribution allocable to principal on the underlying Home
Equity Loans and to interest thereon at the related interest rate. In addition,
within a reasonable time after the end of each calendar year, based on
information provided by the Master Servicer, the Trustee will furnish to each
beneficial owner during such year such customary factual information as the
Master Servicer deems necessary or desirable to enable beneficial owners of
Grantor Trust Securities to prepare their tax returns and will furnish
comparable information to the Internal Revenue Service (the "IRS") as and when
required to do so by law.
REMIC Securities
If provided in a related Prospectus Supplement, an election will be
made to treat a Trust as a REMIC under the Code. Qualification as a REMIC
requires ongoing compliance with certain conditions. With respect to each series
of Securities for which such an election is made, Dewey Ballantine LLP, special
tax counsel to the Company, will deliver its opinion to the Company that,
assuming compliance with the Pooling and Servicing Agreement, the trust will be
treated as a REMIC for federal income tax purposes. A Trust for which a REMIC
election is made will be referred to herein as a "REMIC Trust." The Securities
of each class will be designated as "regular interests" in the REMIC Trust
except that a separate class will be designated as the "residual interest" in
the REMIC Trust. The Prospectus Supplement for each series of Securities will
state whether Securities of each class will constitute a regular interest (a
REMIC Regular Security) or a residual interest (a REMIC Residual Security). Such
opinion shall be attached on Form 8-K to be filed with the Commission within
fifteen days after the initial issuance of such Securities or filed with the
Commission as a post-effective amendment to the Prospectus.
A REMIC Trust will not be subject to federal income tax except with
respect to income from prohibited transactions and in certain other instances
described below. See "--Taxes on a REMIC Trust." Generally, the total
57
<PAGE>
income from the Home Equity Loans in a REMIC Trust will be taxable to the
beneficial owners of the Securities of that series, as described below.
Regulations issued by the Treasury Department on December 23, 1992 (the
"REMIC Regulations") provide some guidance regarding the federal income tax
consequences associated with the purchase, ownership and disposition of REMIC
Securities. While certain material provisions of the REMIC Regulations are
discussed below, investors should consult their own tax advisors regarding the
possible application of the REMIC Regulations in their specific circumstances.
Special Tax Attributes
REMIC Regular Securities and REMIC Residual Securities will be "regular
or residual interests in a REMIC" within the meaning of section
7701(a)(19)(C)(xi) of the Code and "real estate assets" within the meaning of
section 856(c)(5)(A) of the Code. If at any time during a calendar year less
than 95% of the assets of a REMIC Trust consist of "qualified mortgages" (within
the meaning of section 860G(a)(3) of the Code) then the portion of the REMIC
Regular Securities and REMIC Residual Securities that are qualifying assets
under those sections during such calendar year may be limited to the portion of
the assets of such REMIC Trust that are qualified mortgages. Similarly, income
on the REMIC Regular Securities and REMIC Residual 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 same limitation as
set forth in the preceding sentence. For purposes of applying this limitation, a
REMIC Trust should be treated as owning the assets represented by the qualified
mortgages. The assets of the Trust Estate will include, in addition to the Home
Equity Loans, payments on the Home Equity Loans held pending distribution on the
REMIC Regular Securities and REMIC Residual Securities and any reinvestment
income thereon. REMIC Regular Securities and REMIC Residual Securities held by a
financial institution to which section 585, 586 or 593 of the Code applies will
be treated as evidences of indebtedness for purposes of section 582(c)(1) of the
Code. REMIC Regular Securities will also be qualified mortgages with respect to
other REMICs.
Taxation of Beneficial Owners of REMIC Regular Securities
Except as indicated below in this federal income tax discussion, the
REMIC Regular Securities will be treated for federal income tax purposes as debt
instruments issued by the REMIC Trust on the date such Securities are first sold
to the public (the "Settlement Date") and not as ownership interests in the
REMIC Trust or its assets. beneficial owners of REMIC Regular Securities that
otherwise report income under a cash method of accounting will be required to
report income with respect to such Securities under an accrual method. For
additional tax consequences relating to REMIC Regular Securities purchased at a
discount or with premium, see "--Discount and Premium," below.
Taxation of Beneficial Owners of REMIC Residual Securities
Daily Portions. Except as indicated below, a beneficial owner of a
REMIC Residual Security for a REMIC Trust generally will be required to report
its daily portion of the taxable income or net loss of the REMIC Trust for each
day during a calendar quarter that the beneficial owner owned such REMIC
Residual Security. For this purpose, the daily portion shall be determined by
allocating to each day in the calendar quarter its ratable portion of the
taxable income or net loss of the REMIC Trust for such quarter and by allocating
the amount so allocated among the Residual beneficial owners (on such day) in
accordance with their percentage interests on such day. Any amount included in
the gross income or allowed as a loss of any Residual beneficial owner by virtue
of this paragraph will be treated as ordinary income or loss.
The requirement that each beneficial owner of a REMIC Residual Security
report its daily portion of the taxable income or net loss of the REMIC Trust
will continue until there are no Securities of any class outstanding, even
though the beneficial owner of the REMIC Residual Security may have received
full payment of the stated interest and principal on its REMIC Residual
Security.
The Trustee will provide to beneficial owners of REMIC Residual
Securities of each series of Securities (i) such information as is necessary to
enable them to prepare their federal income tax returns and (ii) any reports
regarding the Securities of such series that may be required under the Code.
Taxable Income or Net Loss of a REMIC Trust. The taxable income or net
loss of a REMIC Trust will be the income from the qualified mortgages it holds
and any reinvestment earnings less deductions allowed to the
58
<PAGE>
REMIC Trust. Such taxable income or net loss for a given calendar quarter will
be determined in the same manner as for an individual having the calendar year
as the taxable year and using the accrual method of accounting, with certain
modifications. The first modification is that a deduction will be allowed for
accruals of interest (including any original issue discount, but without regard
to the investment interest limitation in section 163(d) of the Code) on the
REMIC Regular Securities (but not the REMIC Residual Securities), even though
REMIC Regular Securities are for non-tax purposes evidences of beneficial
ownership rather than indebtedness of a REMIC Trust. Second, market discount or
premium equal to the difference between the total stated principal balances of
the qualified mortgages and the basis to the REMIC Trust therein generally will
be included in income (in the case of discount) or deductible (in the case of
premium) by the REMIC Trust as it accrues under a constant yield method, taking
into account the "Prepayment Assumption" (as defined in the Related Prospectus
Supplement, see "--Discount and Premium--Original Issue Discount," below). The
basis to a REMIC Trust in the qualified mortgages is the aggregate of the issue
prices of all the REMIC Regular Securities and REMIC Residual Securities in the
REMIC Trust on the Settlement Date. If, however, a substantial amount of a class
of REMIC Regular Securities or REMIC Residual Securities has not been sold to
the public, then the fair market value of all the REMIC Regular Securities or
REMIC Residual Securities in that class as of the date of the Prospectus
Supplement should be substituted for the issue price.
Third, no item of income, gain, loss or deduction allocable to a
prohibited transaction (see "--Taxes on a REMIC Trust--Prohibited Transactions"
below) will be taken into account. Fourth, a REMIC Trust generally may not
deduct any item that would not be allowed in calculating the taxable income of a
partnership by virtue of section 703(a)(2) of the Code. Finally, the limitation
on miscellaneous itemized deductions imposed on individuals by section 67 of the
Code will not be applied at the REMIC Trust level to any servicing and guaranty
fees. (See, however, "--Pass-Through of Servicing and Guaranty Fees to
Individuals" below.) In addition, under the REMIC Regulations, any expenses that
are incurred in connection with the formation of a REMIC Trust and the issuance
of the REMIC Regular Securities and REMIC Residual Securities are not treated as
expenses of the REMIC Trust for which a deduction is allowed. If the deductions
allowed to a REMIC Trust exceed its gross income for a calendar quarter, such
excess will be a net loss for the REMIC Trust for that calendar quarter. The
REMIC Regulations also provide that any gain or loss to a REMIC Trust from the
disposition of any asset, including a qualified mortgage or "permitted
investment" (as defined in section 860G(a)(5) of the Code) will be treated as
ordinary gain or loss.
A beneficial owner of a REMIC Residual Security may be required to
recognize taxable income without being entitled to receive a corresponding
amount of cash. This could occur, for example, if the qualified mortgages are
considered to be purchased by the REMIC Trust at a discount, some or all of the
REMIC Regular Securities are issued at a discount, and the discount included as
a result of a prepayment on a Home Equity Loan that is used to pay principal on
the REMIC Regular Securities exceeds the REMIC Trust's deduction for unaccrued
original issue discount relating to such REMIC Regular Securities. Taxable
income may also be greater in earlier years because interest expense deductions,
expressed as a percentage of the outstanding principal amount of the REMIC
Regular Securities, may increase over time as the earlier classes of REMIC
Regular Securities are paid, whereas interest income with respect to any given
Home Equity Loan expressed as a percentage of the outstanding principal amount
of that Home Equity Loan, will remain constant over time.
Basis Rules and Distributions. A beneficial owner of a REMIC Residual
Security has an initial basis in its Security equal to the amount paid for such
REMIC Residual Security. Such basis is increased by amounts included in the
income of the beneficial owner and decreased by distributions and by any net
loss taken into account with respect to such REMIC Residual Security. A
distribution on a REMIC Residual Security to a beneficial owner is not included
in gross income to the extent it does not exceed such beneficial owner's basis
in the REMIC Residual Security (adjusted as described above) and, to the extent
it exceeds the adjusted basis of the REMIC Residual Security, shall be treated
as gain from the sale of the REMIC Residual Security.
A beneficial owner of a REMIC Residual Security is not allowed to take
into account any net loss for any calendar quarter to the extent such net loss
exceeds such beneficial owner's adjusted basis in its REMIC Residual Security as
of the close of such calendar quarter (determined without regard to such net
loss). Any loss disallowed by reason of this limitation may be carried forward
indefinitely to future calendar quarters and, subject to the same limitation,
may be used only to offset income from the REMIC Residual Security.
Excess Inclusions. Any excess inclusions with respect to a REMIC
Residual Security are subject to certain special tax rules. With respect to a
beneficial owner of a REMIC Residual Security, the excess inclusion for any
59
<PAGE>
calendar quarter is defined as the excess (if any) of the daily portions of
taxable income over the sum of the "daily accruals" for each day during such
quarter that such REMIC Residual Security was held by such beneficial owner. The
daily accruals are determined by allocating to each day during a calendar
quarter its ratable portion of the product of the "adjusted issue price" of the
REMIC Residual Security at the beginning of the calendar quarter and 120% of the
"federal long-term rate" in effect on the Settlement Date, based on quarterly
compounding, and properly adjusted for the length of such quarter. For this
purpose, the adjusted issue price of a REMIC Residual Security as of the
beginning of any calendar quarter is equal to the issue price of the REMIC
Residual Security, increased by the amount of daily accruals for all prior
quarters and decreased by any distributions made with respect to such REMIC
Residual Security before the beginning of such quarter. The issue price of a
REMIC Residual Security is the initial offering price to the public (excluding
bond houses and brokers) at which a substantial number of the REMIC Residual
Securities was sold. The federal long-term rate is a blend of current yields on
Treasury securities having a maturity of more than nine years, computed and
published monthly by the IRS.
In general, beneficial owners of REMIC Residual Securities with excess
inclusion income cannot offset such income by losses from other activities. For
beneficial owners that are subject to tax only on unrelated business taxable
income (as defined in section 511 of the Code), an excess inclusion of such
beneficial owner is treated as unrelated business taxable income. With respect
to variable contracts (within the meaning of section 817 of the Code), a life
insurance company cannot adjust its reserve to the extent of any excess
inclusion, except as provided in regulations. The REMIC Regulations indicate
that if a beneficial owner of a REMIC Residual Security is a member of an
affiliated group filing a consolidated income tax return, the taxable income of
the affiliated group cannot be less than the sum of the excess inclusions
attributable to all residual interests in REMICs held by members of the
affiliated group. For a discussion of the effect of excess inclusions on certain
foreign investors that own REMIC Residual Securities, see "--Foreign Investors"
below.
The Treasury Department also has the authority to issue regulations
that would treat all taxable income of a REMIC Trust as excess inclusions if the
REMIC Residual Security does not have "significant value." Although the Treasury
Department did not exercise this authority in the REMIC Regulations, future
regulations may contain such a rule. If such a rule were adopted, it is unclear
how significant value would be determined for these purposes. If no such rule is
applicable, excess inclusions should be calculated as discussed above.
In the case of any REMIC Residual Securities that are held by a real
estate investment trust, the aggregate excess inclusions with respect to such
REMIC Residual Securities reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of section 857(b)(2) of the
Code, excluding any net capital gain) will be allocated among the shareholders
of such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Security as if held directly by such
shareholder. Similar rules will apply in the case of regulated investment
companies, common trust funds and certain cooperatives that hold a REMIC
Residual Security.
Pass-Through of Servicing and Guaranty Fees to Individuals. A
beneficial owner of a REMIC Residual Security who is an individual will be
required to include in income a share of any servicing and guaranty fees. A
deduction for such fees will be allowed to such beneficial owner only to the
extent that such fees, along with certain of such beneficial owner's other
miscellaneous itemized deductions exceed 2% of such beneficial owner's adjusted
gross income. In addition, a beneficial owner of a REMIC Residual Security may
not be able to deduct any portion of such fees in computing such beneficial
owner's alternative minimum tax liability. A beneficial owner's share of such
fees will generally be determined by (i) allocating the amount of such expenses
for each calendar quarter on a pro rata basis to each day in the calendar
quarter, and (ii) allocating the daily amount among the beneficial owners in
proportion to their respective holdings on such day.
Taxes on a REMIC Trust
Prohibited Transactions. The Code imposes a tax on a REMIC equal to
100% of the net income derived from "prohibited transactions." In general, a
prohibited transaction means the disposition of a qualified mortgage other than
pursuant to certain specified exceptions, the receipt of investment income from
a source other than a Home Equity Loan or certain other permitted investments,
the receipt of compensation for services, or the disposition of an asset
purchased with the payments on the qualified mortgages for temporary investment
pending distribution on the regular and residual interests.
60
<PAGE>
Contributions to a REMIC after the Startup Day. The Code imposes a tax
on a REMIC equal to 100% of the value of any property contributed to the REMIC
after the "startup day" (generally the same as the Settlement Date). Exceptions
are provided for cash contributions to a REMIC (i) during the three month period
beginning on the startup day, (ii) made to a qualified reserve fund by a
beneficial owner of a residual interest, (iii) in the nature of a guarantee,
(iv) made to facilitate a qualified liquidation or clean-up call, and (v) as
otherwise permitted by Treasury regulations.
Net Income from Foreclosure Property. The Code imposes a tax on a REMIC
equal to the highest corporate rate on "net income from foreclosure property."
The terms "foreclosure property" (which includes property acquired by deed in
lieu of foreclosure) and "net income from foreclosure property" are defined by
reference to the rules applicable to real estate investment trusts. Generally,
foreclosure property would be treated as such for a period of three years, with
a possible extension. Net income from foreclosure property generally means gain
from the sale of foreclosure property that is inventory property and gross
income from foreclosure property other than qualifying rents and other
qualifying income for a real estate investment trust.
Sales of REMIC Securities
General. Except as provided below, if a Regular or REMIC Residual
Security is sold, the seller will recognize gain or loss equal to the difference
between the amount realized in the sale and its adjusted basis in the Security.
The adjusted basis of a REMIC Regular Security generally will equal the cost of
such Security to the seller, increased by any original issue discount or market
discount included in the seller's gross income with respect to such Security and
reduced by distributions on such Security previously received by the seller of
amounts included in the stated redemption price at maturity and by any premium
that has reduced the seller's interest income with respect to such Security. See
"--Discount and Premium." The adjusted basis of a REMIC Residual Security is
determined as described above under "--Taxation of Beneficial Owners of REMIC
Residual Securities--Basis Rules and Distributions." Except as provided in the
following paragraph or under section 582(c) of the Code, any such gain or loss
will be capital gain or loss, provided such Security is held as a "capital
asset" (generally, property held for investment) within the meaning of section
1221 of the Code.
Gain from the sale of a REMIC Regular Security that might otherwise be
capital gain will be treated as ordinary income to the extent that such gain
does not exceed the excess, if any, of (i) the amount that would have been
includible in the income of the beneficial owner of a REMIC Regular Security had
income accrued at a rate equal to 110% of the "applicable federal rate"
(generally, an average of current yields on Treasury securities) as of the date
of purchase over (ii) the amount actually includible in such beneficial owner's
income. In addition, gain recognized on such a sale by a beneficial owner of a
REMIC Regular Security who purchased such a Security at a market discount would
also be taxable as ordinary income in an amount not exceeding the portion of
such discount that accrued during the period such Security was held by such
beneficial owner, reduced by any market discount includible in income under the
rules described below under "--Discount and Premium."
If a beneficial owner of a REMIC Residual Security sells its REMIC
Residual Security at a loss, the loss will not be recognized if, within six
months before or after the sale of the REMIC Residual Security, such beneficial
owner purchases another residual interest in any REMIC or any interest in a
taxable mortgage pool (as defined in section 7701(i) of the Code) comparable to
a residual interest in a REMIC. Such disallowed loss would be allowed upon the
sale of the other residual interest (or comparable interest) if the rule
referred to in the preceding sentence does not apply to that sale. While this
rule may be modified by Treasury regulations, no such regulations have yet been
published.
Transfers of REMIC Residual Securities. Section 860E(e) of the Code
imposes a substantial tax, payable by the transferor (or, if a transfer is
through a broker, nominee, or other middleman as the transferee's agent, payable
by that agent) upon any transfer of a REMIC Residual Security to a disqualified
organization and upon a pass-through entity (including regulated investment
companies, real estate investment trusts, common trust funds, partnerships,
trusts, estates, certain cooperatives, and nominees) that owns a REMIC Residual
Security if such pass-through entity has a disqualified organization as a
record-holder. For purposes of the preceding sentence, a transfer includes any
transfer of record or beneficial ownership, whether pursuant to a purchase, a
default under a secured lending agreement or otherwise.
61
<PAGE>
The term "disqualified organization" includes the United States, any
state or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(other than certain taxable instrumentalities), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas, or any organization (other than a farmers' cooperative) that is exempt
from federal income tax, unless such organization is subject to the tax on
unrelated business income. Moreover, an entity will not qualify as a REMIC
unless there are reasonable arrangements designed to ensure that (i) residual
interests in such entity are not held by disqualified organizations and (ii)
information necessary for the application of the tax described herein will be
made available. Restrictions on the transfer of a REMIC Residual Security and
certain other provisions that are intended to meet this requirement are
described in the Pooling and Servicing Agreement, and will be discussed more
fully in the related Prospectus Supplement relating to the offering of any REMIC
Residual Security. In addition, a pass-through entity (including a nominee) that
holds a REMIC Residual Security may be subject to additional taxes if a
disqualified organization is a record-holder therein. A transferor of a REMIC
Residual Security (or an agent of a transferee of a REMIC Residual Security, as
the case may be) will be relieved of such tax liability if (i) the transferee
furnishes to the transferor (or the transferee's agent) an affidavit that the
transferee is not a disqualified organization, and (ii) the transferor (or the
transferee's agent) does not have actual knowledge that the affidavit is false
at the time of the transfer. Similarly, no such tax will be imposed on a
pass-through entity for a period with respect to an interest therein owned by a
disqualified organization if (i) the record-holder of such interest furnishes to
the pass-through entity an affidavit that it is not a disqualified organization,
and (ii) during such period, the pass-through entity has no actual knowledge
that the affidavit is false.
The Taxpayer Relief Act of 1997 adds provisions to the Code that will
apply to an "electing large partnership." If an electing large partnership holds
a Residual Certificate, all interests in the electing large partnership are
treated as held by disqualified organizations for purposes of the tax imposed
upon a pass-through entity by section 860E(e) of the Code. An exception to this
tax, otherwise available to a pass-through entity that is furnished certain
affidavits by record holders of interests in the entity and that does not know
such affidavits are false, is not available to an electing large partnership.
Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" to a U.S. Person (as defined below in "--Foreign Investors--Grantor
Trust Securities and REMIC Regular Securities") will be disregarded for all
federal tax purposes unless no significant purpose of the transfer is to impede
the assessment or collection of tax. A REMIC Residual Security would be treated
as constituting a noneconomic residual interest unless, at the time of the
transfer, (i) the present value of the expected future distributions on the
REMIC Residual Security is no less than the product of the present value of the
"anticipated excess inclusions" with respect to such Security and the highest
corporate rate of tax for the year in which the transfer occurs, and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the applicable REMIC Trust in an amount sufficient to satisfy the liability
for income tax on any "excess inclusions" at or after the time when such
liability accrues. Anticipated excess inclusions are the excess inclusions that
are anticipated to be allocated to each calendar quarter (or portion thereof)
following the transfer of a REMIC Residual Security, determined as of the date
such Security is transferred and based on events that have occurred as of that
date and on the Prepayment Assumption. See "--Discount and Premium" and
"--Taxation of Beneficial Owners of REMIC Residual Securities--Excess
Inclusions."
The REMIC Regulations provide that a significant purpose to impede the
assessment or collection of tax exists if, at the time of the transfer, a
transferor of a REMIC Residual Security has "improper knowledge" (i.e., either
knew, or should have known, that the transferee would be unwilling or unable to
pay taxes due on its share of the taxable income of the REMIC Trust). A
transferor is presumed not to have improper knowledge if (i) the transferor
conducts, at the time of a 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
come 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 makes certain representations to the transferor in the affidavit
relating to disqualified organizations discussed above. Transferors of a REMIC
Residual Security should consult with their own tax advisors for further
information regarding such transfers.
Reporting and Other Administrative Matters. For purposes of the
administrative provisions of the Code, each REMIC Trust will be treated as a
partnership and the beneficial owners of REMIC Residual Securities will be
treated as partners. The Trustee will prepare, sign and file federal income tax
returns for each REMIC Trust, which returns are subject to audit by the IRS.
Moreover, within a reasonable time after the end of each calendar year, the
62
<PAGE>
Trustee will furnish to each beneficial owner that received a distribution
during such year a statement setting forth the portions of any such
distributions that constitute interest distributions, original issue discount,
and such other information as is required by Treasury regulations and, with
respect to beneficial owners of REMIC Residual Securities in a REMIC Trust,
information necessary to compute the daily portions of the taxable income (or
net loss) of such REMIC Trust for each day during such year. The Trustee will
also act as the tax matters partner for each REMIC Trust, either in its capacity
as a beneficial owner of a REMIC Residual Security or in a fiduciary capacity.
Each beneficial owner of a REMIC Residual Security, by the acceptance of its
REMIC Residual Security, agrees that the Trustee will act as its fiduciary in
the performance of any duties required of it in the event that it is the tax
matters partner.
Each beneficial owner of a REMIC Residual Security is required to treat
items on its return consistently with the treatment on the return of the REMIC
Trust, unless the beneficial owner either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC Trust. The IRS may assert a deficiency
resulting from a failure to comply with the consistency requirement without
instituting an administrative proceeding at the REMIC Trust level.
Termination
In general, no special tax consequences will apply to a beneficial
owner of a REMIC Regular Security upon the termination of a REMIC Trust by
virtue of the final payment or liquidation of the last Home Equity Loan
remaining in the Trust Estate. If a beneficial owner of a REMIC Residual
Security's adjusted basis in its REMIC Residual Security at the time such
termination occurs exceeds the amount of cash distributed to such beneficial
owner in liquidation of its interest, although the matter is not entirely free
from doubt, it would appear that the beneficial owner of the REMIC Residual
Security is entitled to a loss equal to the amount of such excess.
Debt Securities
General
With respect to each series of Debt Securities, Dewey
Ballantine LLP, special tax counsel to the Company, will deliver its opinion to
the Company that the Securities will be classified as debt secured by the
related Home Equity Loans. Consequently, the Debt Securities will not be treated
as ownership interests in the Home Equity Loans or the Trust. Beneficial owners
will be required to report income received with respect to the Debt Securities
in accordance with their normal method of accounting. For additional tax
consequences relating to Debt Securities purchased at a discount or with
premium, see "--Discount and Premium," below.
Special Tax Attributes
As described above, REMIC Securities will possess certain special
tax attributes by virtue of the REMIC provisions of the Code. In general, Debt
Securities will not possess such special tax attributes. Investors to whom such
attributes are important should consult their own tax advisors regarding
investment in Debt Securities.
Sale or Exchange
If a beneficial owner of a Debt Security sells or exchanges such
Security, the beneficial owner will recognize gain or loss equal to the
difference, if any, between the amount received and the beneficial owner's
adjusted basis in the Security. The adjusted basis in the Security generally
will equal its initial cost, increased by any original issue discount or market
discount previously included in the seller's gross income with respect to the
Security and reduced by the payments previously received on the Security, other
than payments of qualified stated interest, and by any amortized premium.
In general (except as described in "--Discount and Premium--Market
Discount," below), except for certain financial institutions subject to section
582(c) of the Code, any gain or loss on the sale or exchange of a Debt Security
recognized by an investor who holds the Security as a capital asset (within the
meaning of section 1221 of the Code), will be capital gain or loss and will be
long-term or short-term depending on whether the Security has been held for more
than one year.
Partnership Interests
63
<PAGE>
With respect to each series of Partnership Interests, Dewey Ballantine
LLP, special tax counsel to the Company, will deliver its opinion to the Company
that the trust will be treated as a partnership and not an association taxable
as a corporation for federal income tax purposes. Such opinion shall be attached
on Form 8-K to be filed with the Commission within fifteen days after the
initial issuance of such Securities or filed with the Commission as a
post-effective amendment to the Prospectus. Accordingly, each beneficial owner
of a Partnership Interest will generally be treated as the owner of an interest
in the Home Equity Loans.
Special Tax Attributes
As described above, REMIC Securities will possess certain special
tax attributes by virtue of the REMIC provisions of the Code. In general,
Partnership Interests will not possess such special tax attributes. Investors
to whom such attributes are important should consult their own tax advisors
regarding investment in Partnership Interests.
Taxation of Beneficial Owners of Partnership Interests
If the Trust is treated as a partnership for Federal Income Tax
Purposes, the Trust will not be subject to federal income tax. Instead, each
beneficial owner of a Partnership Interest will be required to separately take
into account an allocable share of income, gains, losses, deductions, credits
and other tax items of the Trust. These partnership allocations are made in
accordance with the Code, Treasury regulations and the partnership agreement
(here, the Trust Agreement and related documents).
The Trust's assets will be the assets of the partnership. The Trust's
income will consist primarily of interest and finance charges earned on the
underlying Home Equity Loans. The Trust's deductions will consist primarily of
interest accruing with respect to any indebtedness issued by the Trust,
servicing and other fees, and losses or deductions upon collection or
disposition of the Trust's assets.
In certain instances, the Trust could have an obligation to make
payments of withholding tax on behalf of a beneficial owner of a Partnership
Interest. (See "Backup Withholding" and "Foreign Investors" below).
Substantially all of the taxable income allocated to a beneficial owner
of a Partnership Interest 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.
Under section 708 of the Code, the Trust will be deemed to terminate
for federal income tax purposes if 50% or more of the capital and profits
interests in the Trust are sold or exchanged within a 12-month period. Under the
final regulations issued on May 9, 1997 if such a termination occurs, the Trust
is deemed to contribute all of its assets and liabilities to a newly formed
partnership in exchange for a partnership interest. Immediately thereafter, the
terminated partnership distributes interests in the new partnership to the
purchasing partner and remaining partners in proportion to their interests in
liquidation of the terminated partnership.
Sale or Exchange of Partnership Interests
Generally, capital gain or loss will be recognized on a sale or
exchange of Partnership Interests in an amount equal to the difference between
the amount realized and the seller's tax basis in the Partnership Interests
sold. A beneficial owner of a Partnership Interest's tax basis in a Partnership
Interest will generally equal the beneficial owner's cost increased by the
beneficial owner's share of Trust income (includible in income) and decreased by
any distributions received with respect to such Partnership Interest. In
addition, both the tax basis in the Partnership Interest and the amount realized
on a sale of a Partnership Interest would take into account the beneficial
owner's share of any indebtedness of the Trust. A beneficial owner acquiring
Partnership Interests at different prices may be required to maintain a single
aggregate adjusted tax basis in such Partnership Interest, and upon sale or
other disposition of some of the Partnership Interests, allocate a portion of
such aggregate tax basis to the Partnership Interests sold (rather than
maintaining a separate tax basis in each Partnership Interest for purposes of
computing gain or loss on a sale of that Partnership Interest).
Any gain on the sale of a Partnership Interest attributable to the
beneficial owner's share of unrecognized accrued market discount on the assets
of the Trust would generally be treated as ordinary income to
64
<PAGE>
the holder and would give rise to special tax reporting requirements. If a
beneficial owner of a Partnership Interest is required to recognize an aggregate
amount of income over the life of the Partnership Interest that exceeds the
aggregate cash distributions with respect thereto, such excess will generally
give rise to a capital loss upon the retirement of the Partnership Interest. If
a beneficial owner sells its Partnership Interest at a profit or loss, the
transferee will have a higher or lower basis in the Partnership Interests than
the transferor had. The tax basis of the Trust's assets will not be adjusted to
reflect that higher or lower basis unless the Trust files an election under
section 754 of the Code.
Partnership Reporting Matters
The Owner Trustee is required to (i) keep complete and accurate books
of the Trust, (ii) file a partnership information return (IRS Form 1065) with
the IRS for each taxable year of the Trust and (iii) report each beneficial
owner of a Partnership Interest's allocable share of items of Trust income and
expense to beneficial owners and the IRS on Schedule K-1. The Trust will provide
the Schedule K-1 information to nominees that fail to provide the Trust with the
information statement described below and such nominees will be required to
forward such information to the beneficial owners of the Partnership Interests.
Generally, beneficial owners of a Partnership Interests must file tax returns
that are consistent with the information return filed by the Trust or be subject
to penalties unless the beneficial owner of a Partnership Interest notifies the
IRS of all such inconsistencies.
Under section 6031 of the Code, any person that holds Partnership
Interests as a nominee at any time during a calendar year is required to furnish
the Trust with a statement containing certain information on the nominee, the
beneficial owners and the Partnership Interests 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, and international organization, or
any wholly owned agency or instrumentality of either of the foregoing, and (z)
certain information on Partnership Interests that were held, bought or sold on
behalf of such person throughout the year. In addition, brokers and financial
institutions that hold Partnership Interests through a nominee are required to
furnish directly to the Trust information as to themselves and their ownership
of Partnership Interests. A clearing agency registered under section 17A of the
Exchange Act is not required to furnish any such information statement to the
Trust. Nominees, brokers and financial institutions that fail to provide the
Trust with the information described above may be subject to penalties.
The Code provides for administrative examination of a partnership as if
the partnership were a separate and distinct taxpayer. Generally, the statute of
limitations for partnership items does not expire before three years after the
date on which the partnership information return is filed. Any adverse
determination following an audit of the return of the Trust by the appropriate
taxing authorities could result in an adjustment of the returns of the
beneficial owner of a Partnership Interests, and, under certain circumstances, a
beneficial owner of a Partnership Interest may be precluded from separately
litigating a proposed adjustment to the items of the Trust. An adjustment could
also result in an audit of the beneficial owner of a Partnership Interest's
returns and adjustments of items note related to the income and losses of the
Trust.
FASIT Securities
If provided in a related Prospectus Supplement, an election will be
made to treat the Trust as a FASIT within the meaning of Code Section 860L(a).
Qualification as a FASIT requires ongoing compliance with certain conditions.
With respect to each series of Securities for which an election is made, Dewey
Ballantine LLP, special tax counsel to the Company, will deliver its opinion to
the Company that, assuming compliance with the Pooling and Servicing Agreement,
the trust will be treated as a FASIT for federal income tax purposes. A Trust
for which a FASIT election is made will be referred to herein as a "FASIT
Trust." The Securities of each class will be designated as "regular interests"
or "high-yield regular interests" in the FASIT Trust except that one separate
class will be designated as the "ownership interest" in the FASIT Trust. The
Prospectus Supplement for each series of Securities will state whether
Securities of each class will constitute either a regular interest or a
high-yield regular interest (a FASIT Regular Security) or an ownership interest
(a FASIT Ownership Security). Such opinion shall be attached on Form 8-K to be
filed with the Commission within fifteen days after the initial issuance of such
Securities or filed with the Commission as a post-effective amendment to the
Prospectus.
Special Tax Attributes
65
<PAGE>
FASIT Securities held by a real estate investment trust will constitute
"real estate assets" within the meaning of Code Sections 856(c)(5)(A) and
856(c)(6) and interest on the FASIT Regular Securities will be considered
"interest on obligations secured by mortgages on real property or on interests
in real property" within the meaning of Code Section 856(c)(3)(B) in the same
proportion that, for both purposes, the assets of the FASIT Trust and the income
thereon would be so treated. FASIT Regular Securities held by a domestic
building and loan association will be treated as "regular interest[s] in a
FASIT" under Code Section 7701(a)(19)(C)(xi), but only in the proportion that
the FASIT Trust holds "loans . . . secured by an interest in real property which
is . . . residential real property" within the meaning of Code Section
7701(a)(19)(C)(v). If at all times 95% or more of the assets of the FASIT Trust
or the income thereon qualify for the foregoing treatments, the FASIT Regular
Securities will qualify for the corresponding status in their entirety. For
purposes of Code Section 856(c)(5)(A), payments of principal and interest on a
Home Equity Loan that are reinvested pending distribution to holders of FASIT
Regular Securities should qualify for such treatment. FASIT Regular Securities
held by a regulated investment company will not constitute "government
securities" within the meaning of Code Section 851(b)(4)(A)(i). FASIT Regular
Securities held by certain financial institutions will constitute an "evidence
of indebtedness" within the meaning of Code Section 582(c)(1).
Taxation of Beneficial Owners of FASIT Regular Securities
A FASIT Trust will not be subject to federal income tax except with
respect to income from prohibited transactions and in certain other instances as
described below. The FASIT Regular Securities generally will be treated for
federal income tax purposes as newly-originated debt instruments. In general,
interest, original issue discount ("OID") and market discount on a FASIT Regular
Security will be treated as ordinary income to the beneficial owner, and
principal payments (other than principal payments that do not exceed accrued
market discount) on an FASIT Regular Security will be treated as a return of
capital to the extent of the beneficial owner's basis allocable thereto.
Beneficial owners must use the accrual method of accounting with respect to
FASIT Regular Securities, regardless of the method of accounting otherwise used
by such beneficial owners. See discussion of "Discount and Premium" below.
In order for the FASIT Trust to qualify as a FASIT, there must be
ongoing compliance with the requirements set forth in the Code. The FASIT must
fulfill an asset test, which requires that substantially all the assets of the
FASIT, as of the close of the third calendar month beginning after the "Startup
Day" (which for purposes of this discussion is the date of the initial issuance
of the FASIT Securities) and at all times thereafter, must consist of cash or
cash equivalents, certain debt instruments (other than debt instruments issued
by the owner of the FASIT or a related party) and hedges (and contracts to
acquire the same), foreclosure property and regular interests in another FASIT
or in a REMIC. Based on identical statutory language applicable to REMICs, it
appears that the "substantially all" requirement should be met if at all times
the aggregate adjusted basis of the nonqualified assets is less than one percent
of the aggregate adjusted basis of all the FASIT's assets. The FASIT provisions
of the Code (sections 860H through 860L) also require the FASIT ownership
interest and certain "high-yield regular interests" (described below) to be held
only by certain fully taxable domestic corporations.
Permitted debt instruments must bear interest, if any, at a fixed or
qualified variable rate. Permitted hedges include interest rate or foreign
currency notional principal contracts, letters of credit, insurance, guarantees
of payment default and similar instruments to be provided in regulations, and
which are reasonably required to guarantee or hedge against the FASIT's risks
associated with being the obligor on interests issued by the FASIT. Foreclosure
property is real property acquired by the FASIT in connection with the default
or imminent default of a qualified mortgage, provided the Depositor had no
knowledge or reason to know as of the date such asset was acquired by the FASIT
that such a default had occurred or would occur.
In addition to the foregoing requirements, the various interests in a
FASIT also must meet certain requirements. All of the interests in a FASIT must
be either of the following: (a) one or more classes of regular interests or (b)
a single class of ownership interest. A regular interest is an interest in a
FASIT that is issued on or after the Startup Day with fixed terms, is designated
as a regular interest, and (i) unconditionally entitles the holder to receive a
specified principal amount (or other similar amount), (ii) provides that
interest payments (or other similar amounts), if any, at or before maturity
either are payable based on a fixed rate or a qualified variable rate, (iii) has
a stated maturity of not longer than 30 years, (iv) has an issue price not
greater than 125% of its stated principal amount, and (v) has a yield to
maturity not greater than 5 percentage points higher than the related applicable
Federal rate (as defined in Code section 1274(d)). In order to meet the 30 year
maturity requirement, the
66
<PAGE>
FASIT Regular Securities will be retired and replaced, to the extent
then-outstanding, with new regular interests on the 30th anniversary of the date
of issuance of the FASIT Regular Securities. A regular interest that is
described in the preceding sentence except that if fails to meet one or more of
requirements (i), (ii) (iv) or (v) is a "high-yield regular interest." A
high-yield regular interest that fails requirement (ii) must consist of a
specified, nonvarying portion of the interest payments on the permitted assets,
by reference to the REMIC rules. An ownership interest is an interest in a FASIT
other than a regular interest that is issued on the Startup Day, is designated
an ownership interest and is held by a single, fully-taxable, domestic
corporation. An interest in a FASIT may be treated as a regular interest even if
payments of principal with respect to such interest are subordinated to payments
on other regular interests or the ownership interest in the FASIT, and are
dependent on the absence of defaults or delinquencies on permitted assets lower
than reasonably expected returns on permitted assets, unanticipated expenses
incurred by the FASIT or prepayment interest shortfalls.
If an entity fails to comply with one or more of the ongoing
requirements of the Code for status as a FASIT during any taxable year, the Code
provides that the entity or applicable potion thereof will not be treated as a
FASIT thereafter. In this event, any entity that holds home equity loans and is
the obligor with respect to debt obligations with two or more maturities, such
as the Trust Fund, may be treated as a separate association taxable as a
corporation, and the FASIT Regular Securities may be treated as equity interests
therein. The legislative history to the FASIT Provisions indicates, however,
that an entity can continue to be a FASIT if loss of its status was inadvertent,
it takes prompt steps to requalify and other requirements that may be provided
in Treasury regulations are met. Loss of FASIT status results in retirement of
all regular interests and their reissuance. If the resulting instruments would
be treated as equity under general tax principles, cancellation of debt income
may result.
Taxes on a FASIT Trust
Income from certain transactions by a FASIT, called prohibited
transactions, are taxable to the holder of the ownership interest in a FASIT at
a 100% rate. Prohibited transactions generally include (i) the disposition of a
permitted asset other than for (a) foreclosure, default, or imminent default of
a qualified mortgage, (b) bankruptcy or insolvency of the FASIT, (c) a qualified
(complete) liquidation, (d) substitution for another permitted debt instrument
or distribution of the debt instrument to the holder of the ownership interest
to reduce overcollateralization, but only if a principal purpose of acquiring
the debt instrument which is disposed of was not the recognition of gain (or the
reduction of a loss) on the withdrawn asset as a result of an increase in the
market value of the asset after its acquisition by the FASIT or (e) the
retirement of a Class of FASIT regular interests; (ii) the receipt of income
from nonpermitted assets; (iii) the receipt of compensation for services; or
(iv) the receipt of any income derived from a loan originated by the FASIT. It
is unclear the extent to which tax on such transactions could be collected from
the FASIT Trust directly under the applicable statutes rather than from the
holder of the FASIT Residual Security.
DUE TO THE COMPLEXITY OF THESE RULES, THE ABSENCE OF TREASURY
REGULATIONS AND THE CURRENT UNCERTAINTY AS TO THE MANNER TO THEIR APPLICATION TO
THE TRUST AND TO HOLDERS OF FASIT SECURITIES, IT IS PARTICULARLY IMPORTANT THAT
POTENTIAL INVESTORS CONSULT THEIR OWN TAX ADVISORS REGARDING THE TAX TREATMENT
OF THEIR ACQUISITION OWNERSHIP AND DISPOSITION OF THE FASIT REGULAR SECURITIES.
Discount and Premium
A Security purchased for an amount other than its outstanding principal
amount will be subject to the rules governing original issue discount, market
discount or premium. In addition, all Grantor Trust Strip Securities and certain
Grantor Trust Fractional Interest Securities will be treated as having original
issue discount by virtue of the coupon stripping rules in section 1286 of the
Code. In very general terms, (i) original issue discount is treated as a form of
interest and must be included in a beneficial owner's income as it accrues
(regardless of the beneficial owner's regular method of accounting) using a
constant yield method; (ii) market discount is treated as ordinary income and
must be included in a beneficial owner's income as principal payments are made
on the Security (or upon a sale of a Security); and (iii) if a beneficial owner
so elects, premium may be amortized over the life of the Security and offset
against inclusions of interest income. These tax consequences are discussed in
greater detail below.
67
<PAGE>
Original Issue Discount
In general, a Security will be considered to be issued with original
issue discount equal to the excess, if any, of its "stated redemption price at
maturity" over its "issue price." The issue price of a Security is the initial
offering price to the public (excluding bond houses and brokers) at which a
substantial number of the Securities was sold. The issue price also includes any
accrued interest attributable to the period between the beginning of the first
Remittance Period and the Settlement Date. The stated redemption price at
maturity of a Security that has a notional principal amount or receives
principal only or that is or may be an Accrual Security is equal to the sum of
all distributions to be made under such Security. The stated redemption price at
maturity of any other Security is its stated principal amount, plus an amount
equal to the excess (if any) of the interest payable on the first Payment Date
over the interest that accrues for the period from the Settlement Date to the
first Payment Date.
Notwithstanding the general definition, original issue discount will be
treated as zero if such discount is less than 0.25% of the stated redemption
price at maturity multiplied by its weighted average life. The weighted average
life of a Security is apparently computed for this purpose as the sum, for all
distributions included in the stated redemption price at maturity of the amounts
determined by multiplying (i) the number of complete years (rounding down for
partial years) from the Settlement Date until the date on which each such
distribution is expected to be made under the assumption that the Home Equity
Loans prepay at the rate specified in the related Prospectus Supplement (the
"Prepayment Assumption") by (ii) a fraction, the numerator of which is the
amount of such distribution and the denominator of which is the Security's
stated redemption price at maturity. If original issue discount is treated as
zero under this rule, the actual amount of original issue discount must be
allocated to the principal distributions on the Security and, when each such
distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
Section 1272(a)(6) of the Code contains special original issue discount
rules directly applicable to REMIC Securities and Debt Securities. The Taxpayer
Relief Act of 1997 extends application of Section 1272(a)(6) to the Grantor
Trust Securities for tax years beginning after August 5, 1997. Under these rules
(described in greater detail below), (i) the amount and rate of accrual of
original issue discount on each series of Securities will be based on (x) the
Prepayment Assumption, and (y) in the case of a Security calling for a variable
rate of interest, an assumption that the value of the index upon which such
variable rate is based remains equal to the value of that rate on the Settlement
Date, and (ii) adjustments will be made in the amount of discount accruing in
each taxable year in which the actual prepayment rate differs from the
Prepayment Assumption.
Section 1272(a)(6)(B)(iii) of the Code requires that the prepayment
assumption used to calculate original issue discount be determined in the manner
prescribed in Treasury regulations. To date, no such regulations have been
promulgated. The legislative history of this Code provision indicates that the
assumed prepayment rate must be the rate used by the parties in pricing the
particular transaction. The Depositor anticipates that the Prepayment Assumption
for each series of Securities will be consistent with this standard. The
Depositor makes no representation, however, that the Home Equity Loans for a
given series will prepay at the rate reflected in the Prepayment Assumption for
that series or at any other rate. Each investor must make its own decision as to
the appropriate prepayment assumption to be used in deciding whether or not to
purchase any of the Securities.
Each beneficial owner must include in gross income the sum of the
"daily portions" of original issue discount on its Security for each day during
its taxable year on which it held such Security. For this purpose, in the case
of an original beneficial owner, the daily portions of original issue discount
will be determined as follows. A calculation will first be made of the portion
of the original issue discount that accrued during each "accrual period." The
Trustee will supply, at the time and in the manner required by the IRS, to
beneficial owners, brokers and middlemen information with respect to the
original issue discount accruing on the Securities. The Trustee will report
original issue discount based on accrual periods of no longer than one year
either (i) beginning on a payment date (or, in the case of the first such
period, the Settlement Date) and ending on the day before the next payment date
or (ii) beginning on the next day following a payment date and ending on the
next payment date.
Under section 1272(a)(6) of the Code, the portion of original issue
discount treated as accruing for any accrual period will equal the excess, if
any, of (i) the sum of (A) the present values of all the distributions remaining
to be made on the Security, if any, as of the end of the accrual period and (B)
the distribution made on such Security during the accrual period of amounts
included in the stated redemption price at maturity, over (ii) the adjusted
issue price of such Security at the beginning of the accrual period. The present
value of the remaining distributions
68
<PAGE>
referred to in the preceding sentence will be calculated based on (i) the yield
to maturity of the Security, calculated as of the Settlement Date, giving effect
to the Prepayment Assumption, (ii) events (including actual prepayments) that
have occurred prior to the end of the accrual period, (iii) the Prepayment
Assumption, and (iv) in the case of a Security calling for a variable rate of
interest, an assumption that the value of the index upon which such variable
rate is based remains the same as its value on the Settlement Date over the
entire life of such Security. The adjusted issue price of a Security at any time
will equal the issue price of such Security, increased by the aggregate amount
of previously accrued original issue discount with respect to such Security, and
reduced by the amount of any distributions made on such Security as of that time
of amounts included in the stated redemption price at maturity. The original
issue discount accruing during any accrual period will then be allocated ratably
to each day during the period to determine the daily portion of original issue
discount.
In the case of Grantor Trust Strip Securities and certain REMIC
Securities, the calculation described in the preceding paragraph may produce a
negative amount of original issue discount for one or more accrual periods. No
definitive guidance has been issued regarding the treatment of such negative
amounts. The legislative history to section 1272(a)(6) indicates that such
negative amounts may be used to offset subsequent positive accruals but may not
offset prior accruals and may not be allowed as a deduction item in a taxable
year in which negative accruals exceed positive accruals. Beneficial owners of
such Securities should consult their own tax advisors concerning the treatment
of such negative accruals.
A subsequent purchaser of a Security that purchases such Security at a
cost less than its remaining stated redemption price at maturity also will be
required to include in gross income for each day on which it holds such
Security, the daily portion of original issue discount with respect to such
Security (but reduced, if the cost of such Security to such purchaser exceeds
its adjusted issue price, by an amount equal to the product of (i) such daily
portion and (ii) a constant fraction, the numerator of which is such excess and
the denominator of which is the sum of the daily portions of original issue
discount on such Security for all days on or after the day of purchase).
Market Discount
A beneficial owner that purchases a Security at a market discount, that
is, at a purchase price less than the remaining stated redemption price at
maturity of such Security (or, in the case of a Security with original issue
discount, its adjusted issue price), will be required to allocate each principal
distribution first to accrued market discount on the Security, and recognize
ordinary income to the extent such distribution does not exceed the aggregate
amount of accrued market discount on such Security not previously included in
income. With respect to Securities that have unaccrued original issue discount,
such market discount must be included in income in addition to any original
issue discount. A beneficial owner that incurs or continues indebtedness to
acquire a Security at a market discount may also be required to defer the
deduction of all or a portion of the interest on such indebtedness until the
corresponding amount of market discount is included in income. In general terms,
market discount on a Security may be treated as accruing either (i) under a
constant yield method or (ii) in proportion to remaining accruals of original
issue discount, if any, or if none, in proportion to remaining distributions of
interest on the Security, in any case taking into account the Prepayment
Assumption. The Trustee will make available, as required by the IRS, to
beneficial owners of Securities information necessary to compute the accrual of
market discount.
Notwithstanding the above rules, market discount on a Security will be
considered to be zero if such discount is less than 0.25% of the remaining
stated redemption price at maturity of such Security multiplied by its weighted
average remaining life. Weighted average remaining life presumably would be
calculated in a manner similar to weighted average life, taking into account
payments (including prepayments) prior to the date of acquisition of the
Security by the subsequent purchaser. If market discount on a Security is
treated as zero under this rule, the actual amount of market discount must be
allocated to the remaining principal distributions on the Security and, when
each such distribution is received, gain equal to the discount allocated to such
distribution will be recognized.
Securities Purchased at a Premium
A purchaser of a Security that purchases such Security at a cost
greater than its remaining stated redemption price at maturity will be
considered to have purchased such Security (a "Premium Security") at a premium.
Such a purchaser need not include in income any remaining original issue
discount and may elect, under section 171(c)(2) of the Code, to treat such
premium as "amortizable bond premium." If a beneficial owner makes such an
election, the amount of any interest payment that must be included in such
beneficial owner's income for
69
<PAGE>
each period ending on a Payment Date will be reduced by the portion of the
premium allocable to such period based on the Premium Security's yield to
maturity. Such premium amortization should be made using constant yield
principles. If such election is made by the beneficial owner, the election will
also apply to all bonds the interest on which is not excludible from gross
income ("fully taxable bonds") held by the beneficial owner at the beginning of
the first taxable year to which the election applies and to all such fully
taxable bonds thereafter acquired by it, and is irrevocable without the consent
of the IRS. If such an election is not made, (i) such a beneficial owner must
include the full amount of each interest payment in income as it accrues, and
(ii) the premium must be allocated to the principal distributions on the Premium
Security and, when each such distribution is received, a loss equal to the
premium allocated to such distribution will be recognized. Any tax benefit from
the premium not previously recognized will be taken into account in computing
gain or loss upon the sale or disposition of the Premium Security.
Some Securities may provide for only nominal distributions of principal
in comparison to the distributions of interest thereon. It is possible that the
IRS or the Treasury Department may issue guidance excluding such Securities from
the rules generally applicable to debt instruments issued at a premium. In
particular, it is possible that such a Security will be treated as having
original issue discount equal to the excess of the total payments to be received
thereon over its issue price. In such event, section 1272(a)(6) of the Code
would govern the accrual of such original issue discount, but a beneficial owner
would recognize substantially the same income in any given period as would be
recognized if an election were made under section 171(c)(2) of the Code. Unless
and until the Treasury Department or the IRS publishes specific guidance
relating to the tax treatment of such Securities, the Trustee intends to furnish
tax information to beneficial owners of such Securities in accordance with the
rules described in the preceding paragraph.
Special Election
For any Security acquired on or after April 4, 1994, a beneficial owner
may elect to include in gross income all "interest" that accrues on the Security
by using a constant yield method. For purposes of the election, the term
"interest" includes stated interest, acquisition discount, original issue
discount, de minimis original issue discount, market discount, de minimis market
discount and unstated interest as adjusted by any amortizable bond premium or
acquisition premium. A beneficial owner should consult its own tax advisor
regarding the time and manner of making and the scope of the election and the
implementation of the constant yield method.
Backup Withholding
Distributions of interest and principal, as well as distributions of
proceeds from the sale of Securities, may be subject to the "backup withholding
tax" under section 3406 of the Code at a rate of 31% if recipients of such
distributions fail to furnish to the payor certain information, including their
taxpayer identification numbers, or otherwise fail to establish an exemption
from such tax. Any amounts deducted and withheld from a distribution to a
recipient would be allowed as a credit against such recipient's federal income
tax. Furthermore, certain penalties may be imposed by the IRS on a recipient of
distributions that is required to supply information but that does not do so in
the proper manner.
The Internal Revenue Service recently issued final regulations (the
"Withholding Regulations"), which change certain of the rules relating to
certain presumptions currently available relating to information reporting and
backup withholding. The Withholding Regulations would provide alternative
methods of satisfying the beneficial ownership certification requirement. The
Withholding Regulations are effective January 1, 1999, although valid
withholding certificates that are held on December 31, 1998 remain valid until
the earlier of December 31, 1999 or the due date of expiration of the
certificate under the rules as currently in effect.
Foreign Investors
The Withholding Regulations would require, in the case of Securities
held by a foreign partnership, that (x) the certification described above be
provided by the partners rather than by the foreign partnership and (y) the
partnership provide certain information, including a United States taxpayer
identification number. See "--Backup Withholding" above. A look-through rule
would apply in the case of tiered partnerships. Non-U.S. Persons should consult
their own tax advisors regarding the application to them of the Withholding
Regulations.
70
<PAGE>
Grantor Trust Securities and REMIC Regular Securities
Distributions made on a Grantor Trust Security, Debt Security or a
REMIC Regular Security to, or on behalf of, a beneficial owner that is not a
U.S. Person generally will be exempt from U.S. federal income and withholding
taxes. The term "U.S. Person" means a citizen or resident of the United States,
a corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, an estate that
is subject to U.S. federal income tax regardless of the source of its income, or
a trust if a court within the United States can exercise primary supervision
over its administration and at least one United States fiduciary has the
authority to control all substantial decisions of the trust. This exemption is
applicable provided (a) the beneficial owner is not subject to U.S. tax as a
result of a connection to the United States other than ownership of the
Security, (b) the beneficial owner signs a statement under penalties of perjury
that certifies that such beneficial owner is not a U.S. Person, and provides the
name and address of such beneficial owner, and (c) the last U.S. Person in the
chain of payment to the beneficial owner receives such statement from such
beneficial owner or a financial institution holding on its behalf and does not
have actual knowledge that such statement is false. Beneficial owners should be
aware that the IRS might take the position that this exemption does not apply to
a beneficial owner that also owns 10% or more of the REMIC Residual Securities
of any REMIC trust, or to a beneficial owner that is a "controlled foreign
corporation" described in section 881(c)(3)(C) of the Code.
REMIC Residual Securities and FASIT Ownership Securities
Amounts distributed to a beneficial owner of a REMIC Residual Security
that is a not a U.S. Person generally will be treated as interest for purposes
of applying the 30% (or lower treaty rate) withholding tax on income that is not
effectively connected with a U.S. trade or business. Temporary Treasury
Regulations clarify that amounts not constituting excess inclusions that are
distributed on a REMIC Residual Security or a FASIT Ownership Security to a
beneficial owner that is not a U.S. Person generally will be exempt from U.S.
federal income and withholding tax, subject to the same conditions applicable to
distributions on Grantor Trust Securities, Debt Securities and REMIC Regular
Securities, as described above, but only to the extent that the obligations
directly underlying the REMIC or FASIT Trust that issued the REMIC Residual
Security or FASIT Ownership Security (e.g., Home Equity Loans or regular
interests in another REMIC or FASIT) were issued after July 18, 1984. In no case
will any portion of REMIC or FASIT income that constitutes an excess inclusion
be entitled to any exemption from the withholding tax or a reduced treaty rate
for withholding. See "--REMIC Securities--Taxation of Beneficial Owners of REMIC
Residual Securities--Excess Inclusions" herein.
Partnership Interests
Depending upon the particular terms of the Trust Agreement and Sale and
Servicing Agreement, a Trust may be considered to be engaged in a trade or
business in the United States for purposes of federal withholding taxes with
respect to non-U.S. persons. If the Trust is considered to be engaged in a trade
or business in the United States for such purposes and the Trust is treated as a
partnership, the income of the Trust distributable to a non-U.S. person would be
subject to federal withholding tax. Also, in such cases, a non-U.S. beneficial
owner of a Partnership Interest that is a corporation may be subject to the
branch profits tax. If the Trust is notified that a beneficial owner of a
Partnership Interest is a foreign person, the Trust may withhold as if it were
engaged in a trade or business in the United States in order to protect the
Trust from possible adverse consequences of a failure to withhold. A foreign
holder generally would be entitled to file with the IRS a claim for refund with
respect to withheld taxes, taking the position that no taxes were due because
the Trust was not in a U.S. trade or business.
FASIT Regular Securities
Certain "high-yield" FASIT Regular Securities may not be sold to or
beneficially owned by Non-U.S. Persons. Any such purported transfer will be null
and void and, upon the Trustee's discovery of any purported transfer in
violation of this requirement, the last preceding owner of such high-yield FASIT
Regular Securities will be restored to ownership thereof as completely as
possible. Such last preceding owner will, in any event, be taxable on all income
with respect to such high-yield FASIT Regular Securities for federal income tax
purposes. The Pooling and Servicing Agreement will provide that, as a condition
to transfer of a high-yield FASIT Regular Security, the proposed transferee must
furnish an affidavit as to its status as a U.S. Person and otherwise as a
permitted transferee.
71
<PAGE>
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in
"Material Federal Income Tax Consequences," potential investors should consider
the state and local income tax consequences of the acquisition, ownership, and
disposition of the Securities. State and local income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state or locality.
Therefore, potential investors should consult their own tax advisors with
respect to the various state and local tax consequences of an investment in the
Securities.
ERISA CONSIDERATIONS
GENERAL
Section 406 of ERISA and Section 4975 of the Code prohibit a pension,
profit sharing or other employee benefit plan (a "Plan") and certain individual
retirement arrangements 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, unless a statutory or
administrative exemption applies to the transaction. ERISA and the Code also
prohibit generally certain actions involving conflicts of interest by persons
who are fiduciaries of such Plans or arrangements. A violation of these
"prohibited transaction" rules may generate excise tax and other liabilities
under ERISA and the Code for such persons. In addition, investments by Plans are
subject to ERISA's general fiduciary requirements, including the requirement of
investment prudence and diversification and the requirement that a Plan's
investments be made in accordance with the documents governing the Plan.
Employee benefit plans that are governmental plans (as defined in Section 3(32)
of ERISA) and certain church plans (as defined in Section 3(33) of ERISA) are
not subject to ERISA requirements. Accordingly, assets of such plans may be
invested in Securities without regard to the ERISA considerations discussed
below, subject to the provisions of other applicable federal, state and local
law. Any such plan which is qualified and exempt from taxation under Section
401(a) and 501(a) of the Code, however, is subject to the prohibited transaction
rules set forth in Section 503 of the Code.
Certain transactions involving the Trust might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Plan
(including an individual retirement arrangement) that purchased Securities, if
the assets of the Trust were deemed to be assets of the Plan. Under a regulation
(the "Plan Assets Regulation") issued by the United States Department of Labor
(the "DOL"), the assets of the Trust would be treated as plan assets of a Plan
for the purposes of ERISA and the Code only if the Plan acquired an equity
interest in the Trust and none of the exceptions contained in the Plan Assets
Regulation were 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. In addition, in John Hancock Mutual Life Insurance Co. v. Harris Trust
and Savings Bank, 510 U.S. 86 (1993), the United States Supreme Court ruled that
assets held in an insurance company's general account may be deemed to be "plan
assets" for ERISA purposes under certain circumstances. Therefore, in the
absence of an exemption, the purchase, sale or holding of a Security by a Plan
(including certain individual retirement arrangements) subject to Section 406 of
ERISA or Section 4975 of the Code might result in prohibited transactions and
the imposition of excise taxes and civil penalties.
CERTIFICATES
The DOL has issued to various underwriters individual prohibited
transaction exemptions (the "Underwriter Exemptions"), which generally exempt
from the application of the prohibited transaction provisions of Section 406(a),
Section 406(b)(1), Section 406(b)(2) and Section 407(a) of ERISA and the excise
taxes imposed pursuant to Sections 4975(a) and (b) of the Code, certain
transactions with respect to the initial purchase, the holding and the
subsequent resale by Plans of certificates in pass-through trusts that consist
of secured receivables, secured loans and other secured obligations that meet
the conditions and requirements of the Underwriter Exemptions. The Underwriter
Exemptions will only be available for Securities that are Certificates.
Among the conditions that must be satisfied in order for the
Underwriter Exemptions to apply to offered certificates are the following:
72
<PAGE>
(1) the acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least
as favorable to the Plan as they would be in an arm's-length
transaction with an unrelated party;
(2) the rights and interests evidenced by the certificates
acquired by the Plan are not subordinated to the rights and
interests evidenced by other certificates of the trust;
(3) the certificates acquired by the Plan have received a rating
at the time of such acquisition that is one of the three
highest generic rating categories from Standard & Poor's,
Moody's, Duff & Phelps Credit Rating Co. ("D&P") or Fitch;
(4) the Trustee is not an affiliate of any other member of the
Restricted Group (as defined below);
(5) the sum of all payments made to and retained by the
underwriters in connection with the distribution of the
certificates represents not more than reasonable compensation
for underwriting the certificates; the sum of all payments
made to and retained by the originators and the sponsor
pursuant to the assignment of the loans to the trust estate
represents not more than the fair market value of such loans;
the sum of all payments made to and retained by any servicer
represents not more than reasonable compensation for such
person's services under the pooling and servicing agreement
and reimbursement of such person's reasonable expenses in
connection therewith;
(6) the Plan investing in the certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the
Commission under the Securities Act of 1933; and
(7) in the event that all of the obligations used to fund the
trust have not been transferred to the trust on the closing
date, additional obligations of the types specified in the
prospectus supplement and/or pooling and servicing agreement
having an aggregate value equal to no more than 25% of the
total principal amount of the certificates being offered by
the trust may be transferred to the trust, in exchange for
amounts credited to the account funding the additional
obligations, within a funding period of no longer than 90 days
or 3 months following the closing date.
The trust estate must also meet the following requirements:
(i) the corpus of the trust estate must consist solely of assets
of the type that have been included in other investment pools;
(ii) certificates in such other investment pools must have been
rated in one of the three highest rating categories of
Standard & Poor's, Moody's, Fitch or D&P for at least one year
prior to the Plan's acquisition of certificates; and
(iii) certificates evidencing interests in such other investment
pools must have been purchased by investors other than Plans
for at least one year prior to the Plan's acquisition of
certificates.
Moreover, the Underwriter Exemptions provide relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when
the Plan fiduciary causes a Plan to acquire certificates in a trust in which the
fiduciary (or its affiliate) is an obligor on the receivables held in the trust;
provided that, among other requirements, (i) in the case of an acquisition in
connection with the initial issuance of certificates, at least fifty percent of
each class of certificates in which Plans have invested is acquired by persons
independent of the Restricted Group and at least fifty percent of the aggregate
interest in the trust is acquired by persons independent of the Restricted
Group; (ii) such fiduciary (or its affiliate) is an obligor with respect to five
percent or less of the fair market value of the obligations contained in the
trust; (iii) the Plan's investment in certificates of any class does not exceed
twenty-five percent of all of the certificates of that class outstanding at the
time of the acquisition; and (iv)
73
<PAGE>
immediately after the acquisition, no more than twenty-five percent of the
assets of the Plan with respect to which such person is a fiduciary are invested
in certificates representing an interest in one or more trusts containing assets
sold or serviced by the same entity. The Underwriter Exemptions do not apply to
Plans sponsored by the Depositor, the Underwriters, the Trustee, the Master
Servicer, any other servicer, any obligor with respect to Home Equity Loans
included in the Trust Estate constituting more than five percent of the
aggregate unamortized principal balance of the assets in the Trust Estate, or
any affiliate of such parties (the "Restricted Group").
In addition to the Underwriter Exemptions, the DOL has issued
Prohibited Transaction Class Exemption ("PTCE") 83-1 which provides an exemption
for certain transactions involving the sale or exchange of certain residential
mortgage pool pass-through certificates by Plans and for transactions in
connection with the servicing and operation of the mortgage pool.
NOTES
The Underwriter Exemptions will not be available for Securities which
are Notes. However, if the Notes are treated as indebtedness without substantial
equity features, the Trust's assets would not be deemed assets of a Plan. If the
Notes are treated as having substantial equity features, the purchase, holding
and resale of the Notes could result in a transaction that is prohibited under
ERISA or the Code. The acquisition or holding of the Notes by or on behalf of a
Plan could nevertheless give rise to a prohibited transaction, if such
acquisition and holding of Notes by or on behalf of a Plan were deemed to be a
prohibited loan to a party in interest with respect to such Plan. Certain
exemptions from such prohibited transaction rules could be applicable to the
purchase and holding of Notes by a Plan, depending on the type and circumstances
of the plan fiduciary making the decision to acquire such Notes. Included among
these exemptions are: PTCE 84-14, regarding certain transactions effected by
"qualified professional asset managers"; PTCE 90-1, regarding certain
transactions entered into by insurance company pooled separate accounts; PTCE
91-38, regarding certain transactions entered into by bank collective investment
funds; PTCE 95-60, regarding certain transactions entered into by insurance
company general accounts; and PTCE 96-23, regarding certain transactions
effected by "in-house asset managers". Each purchaser and each transferee of a
Note that is treated as debt for purposes of the Plan Assets Regulation may be
required to represent and warrant that its purchase and holding of such Note
will be covered by one of the exemptions listed above or by another Department
of Labor Class Exemption.
CONSULTATION WITH COUNSEL
The Prospectus Supplement for each series of Securities will provide
further information which Plans should consider before purchasing the offered
Securities. A Plan fiduciary considering the purchase of Securities should
consult its tax and/or legal advisors regarding whether the assets of the Trust
would be considered plan assets, the possibility of exemptive relief from the
prohibited transaction rules and other ERISA issues and their potential
consequences. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment prudence and diversification, an
investment in the Securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio. The sale of Securities to a Plan is in no respect a
representation by the Sponsor or the Underwriters that this investment meets all
relevant requirements with respect to investments by Plans generally or any
particular Plan or that this investment is appropriate for Plans generally or
any particular Plan.
LEGAL INVESTMENT
The related Prospectus Supplement will describe whether or not the
Securities will constitute "mortgage-related securities" within the meaning of
SMMEA. Accordingly, investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether and to
what extent the Securities constitute legal investments for them.
PLAN OF DISTRIBUTION
The Depositor may offer each Series of Securities through First Union
Capital Markets Corp. ("First Union") or one or more other firms that may be
designated at the time of each offering of such Securities. The participation of
First Union in any offering will comply with Schedule E to the bylaws of the
National Association
74
<PAGE>
of Securities Dealers, Inc. The Prospectus Supplement relating to each
Series of Securities will set forth the specific terms of the offering of such
Series of Securities and of each Class within such Series, the names of the
underwriters, the purchase price of the Securities, the proceeds to the
Depositor from such sale, any securities exchange on which the Securities may be
listed, and, if applicable, the initial public offering prices, the discounts
and commissions to the underwriters and any discounts and concessions allowed or
reallowed to certain dealers. The place and time of delivery of each Series of
Securities will also be set forth in the Prospectus Supplement relating to such
Series. First Union is an affiliate of the Depositor.
LEGAL MATTERS
Certain legal matters in connection with the Securities will be passed
upon for the Depositor by Dewey Ballantine LLP, New York, New York or such other
counsel identified in the related Prospectus Supplement.
FINANCIAL INFORMATION
The Depositor has determined that its financial statements are not
material to the offering made hereby.
A new Trust will be formed to own the Primary Assets and to issue each
Series of Securities. Each such Trust will have no assets or obligations prior
to the issuance of the Securities and will not engage in any activities other
than those described herein. Accordingly, no financial statements with respect
to such Trusts will be included in this Prospectus or any Prospectus Supplement.
A Prospectus Supplement and the related Form 8-K (which will be
incorporated by reference to the Registration Statement) may contain financial
statements of the related Credit Enhancer, if any.
75
<PAGE>
GLOSSARY OF TERMS
The following are abbreviated definitions of certain capitalized terms
used in this Prospectus. 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 compete definition of such terms.
"Accrual Termination Date" means, with respect to a Class of Compound
Interest Securities, the Distribution Date specified in the related Prospectus
Supplement.
"Advance" means cash advanced by the Servicer in respect of delinquent
payments of principal of and interest on a Home Equity Loan and for any other
purposes in servicing such Home Equity Loan.
"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 Servicing Agreement, as the context
requires.
"Appraised Value" means, with respect to property securing a Home
Equity 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.
"Certificate" means the Asset-Backed Certificates.
"Class" means a Class of Securities of a Series.
"Closing Date" means, with respect to a Series, the date specified in
the related Prospectus Supplement as the date on which Securities of such Series
are first issued.
"Code" means the Internal Revenue Code of 1986, as amended, and
regulations (including proposed regulations) or other pronouncements of the
Internal Revenue Service promulgated thereunder.
"Collection Account" means, with respect to a Series, the account
established in the name of the Servicer for the deposit by the Servicer of
payments received from the Primary Assets.
76
<PAGE>
"Combined Loan-to-Value Ratio" means, with respect to a Home Equity
Loan, the ratio determined as set forth in the related Prospectus Supplement
taking into account the amounts of any related senior loans on the related
Mortgaged Property.
"Commission" means the Securities and Exchange Commission.
"Compound Interest Security" means any Security of a Series on which
all or a portion of the interest accrued thereon is added to the principal
balance of such Security on each Distribution Date, through the Accrual
Termination Date, and with respect to which no interest shall be payable until
such Accrual Termination Date, after which interest payments will be made on the
Compound Value thereof.
"Compound Value" means, with respect to a Class of Compound Interest
Securities, the original principal balance of such Class, plus all accrued and
unpaid interest, if any, previously added to the principal balance thereof and
reduced by any payments of principal previously made on such Class of Compound
Interest Securities.
"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.
"Credit Enhancement" means the credit enhancement for a Series, if any,
specified in the related Prospectus Supplement.
"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.
"Deposit Agreement" means a guaranteed investment contract or
reinvestment agreement providing for the investment of funds held in a fund or
account, guaranteeing a minimum or a fixed rate of return on the investment of
moneys deposited therein.
77
<PAGE>
"Depositor" means Home Equity Securitization Corp.
"Disqualified Organization" means the United States, any State or
political subdivision thereof, any possession of the United States, any foreign
government, any international organization, or any agency or instrumentality of
any of the foregoing, a rural electric or telephone cooperative described in
section 1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by
sections 1-1399 of the Code, if such entity is not subject to tax on its
unrelated business income.
"Distribution Account" means, with respect to a Series, the account
established in the name of the Trustee for the deposit of remittances received
from the Servicer with respect to the Primary Assets.
"Distribution Date" means, with respect to a Series or Class of
Securities, each date specified as a distribution date for such Series or Class
in the related Prospectus Supplement.
"Due Date" means each date, as specified in the related Prospectus
Supplement for a Series, on which any payment of principal or interest is due
and payable by the obligor on any Primary Asset pursuant to the terms thereof.
"Eligible Investments" means any one or more of the obligations or
securities described as such in the related Agreement.
"Credit Enhancer" means the provider of the Credit 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 Home Equity Loan, into which payments by borrowers to pay taxes,
assessments, mortgage and hazard insurance premiums and other comparable items
required to be paid to the mortgagee are deposited.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"Final Scheduled Distribution Date" means, with respect to a Class of
Notes of a Series, the date no later than which principal thereof will be fully
paid and with respect to a Class of Certificates of a Series, the date after
which no Certificates of such Class will remain outstanding, in each case based
on the assumptions set forth in the related Prospectus Supplement.
"FNMA" means the Federal National Mortgage Association.
"Holder" means the person or entity in whose name a Security is
registered.
"Home Improvements" means the home improvements financed by a Home
Equity 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 Home
Equity 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.
78
<PAGE>
"IRS" means the Internal Revenue Service.
"Lifetime Rate Cap" means the lifetime limit if any, on the Loan Rate
during the life of each adjustable rate Home Equity Loan.
"Liquidation Proceeds" means amounts received by the Servicer in
connection with the liquidation of a Home Equity Loan, net of liquidation
expenses.
"Loan Rate" means the interest rate borne by a Home Equity Loan.
"Loan-to-Value Ratio" means, with respect to a Home Equity Loan, the
ratio determined as set forth in the related Prospectus Supplement.
"Minimum Rate" means the lifetime minimum Loan Rate during the life of
each adjustable rate Loan.
"Minimum Principal Payment Agreement" means a minimum principal payment
agreement with an entity meeting the criteria of the Rating Agencies.
"Modification" means a change in any term of a Home Equity Loan.
"Mortgage" means the mortgage, deed of trust or other similar security
instrument securing a Mortgage Note.
"Mortgaged Property" means residential properties securing a Home
Equity Loan.
"Home Equity Loan" means a loan secured by a Mortgaged Property.
"Mortgage Note" means the note or other evidence of indebtedness of a
Mortgagor under the Home Equity Loan.
"Mortgagor" means the obligor on a Mortgage Note.
"1986 Act" means the Tax Reform Act of 1986.
"Notes" means the Asset-Backed Notes.
"Notional Amount" means the amount set forth in the related Prospectus
Supplement for a Class of Interest Only Securities.
"PAC" ("Planned Amortization Class Securities") means a Class of
Securities of a Series on which payments of principal are made in accordance
with a schedule specified in the related Prospectus Supplement, based on certain
assumptions stated therein.
"Participating Securities" means Securities entitled to receive
payments of principal and interest and an additional return on investment as
described in the related Prospectus Supplement.
"Pass-Through Security" means a security representing an undivided
beneficial interest in a pool of assets, including the right to receive a
portion of all principal and interest payments relating to those assets.
"Pay Through Security" means Regular Interest Securities and certain
Debt Securities that are subject to acceleration due to prepayment on the
underlying 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.
79
<PAGE>
"Pooling and Servicing Agreement" means the pooling and servicing
agreement relating to a Series of Certificates among the Depositor, the Servicer
(if such Series relates to Home Equity Loans) and the Trustee.
"Primary Assets" means the Private Securities, the Home Equity 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 Home Equity 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.
"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 Depositor
to rate the Securities upon the original issuance thereof.
"Regular Interest" means a regular interest in a REMIC.
"REMIC" means a real estate mortgage investment conduit.
"REMIC Administrator" means the Person, if any, specified in the
related Prospectus Supplement for a Series for which a REMIC election is made,
to serve as administrator of the Series.
"REMIC Provisions" means the provisions of the federal income tax law
relating to real estate mortgage investment conduits, which appear at sections
860A through 860G of Subchapter M of Chapter 1 of the Code, and related
provisions, and regulations, including proposed regulations and rulings, and
administrative pronouncements promulgated thereunder, as the foregoing may be in
effect from time to time.
"REO Property" means real property which secured a defaulted Home
Equity Loan, beneficial ownership of which has been acquired upon foreclosure,
deed in lieu of foreclosure, repossession or otherwise.
"Reserve Fund" means, with respect to a Series, any Reserve Fund
established pursuant to the related Agreement.
"Residual Interest" means a residual interest in a REMIC.
80
<PAGE>
"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.
"Originator" means the originator or acquiror of the Primary Assets to
the Depositor identified in the related Prospectus Supplement for a Series.
"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.
"Servicer" means, with respect to a Series relating to Home Equity
Loans, the Person if any, designated in the related Prospectus Supplement to
service Home Equity Loans for that Series, or the successors or assigns of such
Person.
"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.
"Subordinate Securityholder" means a Holder of a Subordinate Security.
"Subordinated Securities" means a Class of Securities as to which the
rights of holders to receive distributions of principal, interest or both is
subordinated to the rights of holders of Senior Securities, and may be allocated
losses and shortfalls prior to the allocation thereof to other Classes of
Securities, to the extent and under the circumstances specified in the related
Prospectus Supplement.
"Trustee" means the trustee under the applicable Agreement and its
successors.
"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), all amounts in
the Distribution Account Collection Account or Reserve Funds, distributions on
the Primary Assets (net of servicing fees), and reinvestment earnings on such
net distributions and any Credit 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 Home Equity
Loans underlying or securing Private Securities.
81
<PAGE>
"Variable Interest Security" means a Security on which interest accrues
at a rate that is adjusted, based upon a predetermined index, at fixed periodic
intervals, all as set forth in the related Prospectus Supplement.
"Zero Coupon Security" means a Security entitled to receive payments of
principal only.
82
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
TABLE OF CONTENTS
Page Page
---- ----
SUMMARY OF PROSPECTUS ............................................................................................5
RISK FACTORS
ASSET BACKED NOTES AND ASSET BACKED CERTIFICATES, ISSUABLE IN SERIES..............................................1
PROSPECTUS SUPPLEMENT.............................................................................................3
REPORTS TO HOLDERS................................................................................................3
AVAILABLE INFORMATION.............................................................................................3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...................................................................4
SUMMARY OF PROSPECTUS.............................................................................................5
RISK FACTORS.....................................................................................................17
AN INVESTMENT IN ANY SECURITY MAY BE AN ILLIQUID INVESTMENT, WHICH MAY RESULT IN THE HOLDER HOLDING SUCH
INVESTMENT TO MATURITY........................................................................................17
THE ASSETS OF THE TRUST FUND, AS WELL AS ANY APPLICABLE CREDIT ENHANCEMENT, WILL BE LIMITED AND, IF SUCH
ASSETS AND/OR CREDIT ENHANCEMENT BECOME INSUFFICIENT TO SERVICE THE RELATED SECURITIES, LOSSES MAY RESULT.....17
CREDIT ENHANCEMENT WILL BE LIMITED IN AMOUNT AND SCOPE OF COVERAGE AND MAY NOT BE SUFFICIENT TO COVER LOSSES..17
THE TIMING OF PRINCIPAL PAYMENTS MAY ADVERSELY AFFECT THE YIELD TO MATURITY OF THE SECURITIES.................18
PREPAYMENTS MAY ADVERSELY AFFECT THE YIELD TO MATURITY OF THE SECURITIES......................................18
AS A RESULT OF OPTIONAL REDEMPTION OR REPURCHASE OR AUCTION SALE, HOLDERS COULD BE FULLY PAID SIGNIFICANTLY
EARLIER THAN WOULD OTHERWISE BE THE CASE......................................................................19
HOME EQUITY LOANS WITH BALLOON AND NON-TRADITIONAL PAYMENT METHODS MAY CREATE GREATER DEFAULT RISK...........19
JUNIOR LIENS MAY EXPERIENCE HIGHER RATES OF DELINQUENCIES AND LOSSES..........................................19
PROPERTY VALUES MAY DECLINE, LEADING TO HIGHER LOSSES.........................................................19
GEOGRAPHIC CONCENTRATION OF MORTGAGED PROPERTIES MAY RESULT IN HIGHER LOSSES, IF PARTICULAR REGIONS EXPERIENCE
DOWNTURNS.....................................................................................................20
PRE-FUNDING MAY ADVERSELY AFFECT INVESTMENT...................................................................20
ENVIRONMENTAL CONDITIONS ON THE MORTGAGED PROPERTY MAY GIVE RISE TO LIABILITY.................................20
STATE AND FEDERAL CREDIT PROTECTION LAWS MAY LIMIT COLLECTION OF PRINCIPAL AND INTEREST ON THE HOME EQUITY
LOANS.........................................................................................................21
RATINGS ARE NOT RECOMMENDATIONS. A REDUCTION IN THE RATING OF ANY CREDIT ENHANCER WOULD LIKELY ADVERSELY
IMPACT THE RATING OF THE SECURITIES...........................................................................21
A REDUCTION IN THE RATING OF ANY CREDIT ENHANCER WOULD LIKELY ADVERSELY IMPACT THE RATING OF THE SECURITIES...21
ERISA MAY RESTRICT THE ACQUISITION, OWNERSHIP AND DISPOSITION OF SECURITIES...................................21
DESCRIPTION OF THE SECURITIES....................................................................................21
GENERAL.......................................................................................................21
PAYMENTS OF INTEREST..........................................................................................22
PAYMENTS OF PRINCIPAL.........................................................................................23
FINAL SCHEDULED DISTRIBUTION DATE.............................................................................23
SPECIAL REDEMPTION............................................................................................23
OPTIONAL REDEMPTION, PURCHASE OR TERMINATION..................................................................23
WEIGHTED AVERAGE LIFE OF THE SECURITIES.......................................................................24
THE TRUST FUNDS..................................................................................................25
GENERAL.......................................................................................................25
THE HOME EQUITY LOANS........................................................................................25
PRIVATE SECURITIES............................................................................................29
COLLECTION AND DISTRIBUTION ACCOUNTS..........................................................................30
PRE-FUNDING ACCOUNTS..........................................................................................30
CREDIT ENHANCEMENT...............................................................................................31
SUBORDINATE SECURITIES........................................................................................31
INSURANCE.....................................................................................................31
RESERVE FUNDS.................................................................................................32
MINIMUM PRINCIPAL PAYMENT AGREEMENT...........................................................................33
DEPOSIT AGREEMENT.............................................................................................33
SERVICING OF HOME EQUITY LOANS..................................................................................33
GENERAL.......................................................................................................33
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
COLLECTION PROCEDURES; ESCROW ACCOUNTS...........................................................................33
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT.......................................................34
ADVANCES AND LIMITATIONS THEREON..............................................................................35
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES..............................................36
REALIZATION UPON DEFAULTED HOME EQUITY LOANS.................................................................37
ENFORCEMENT OF DUE-ON-SALE CLAUSES............................................................................37
SERVICING COMPENSATION AND PAYMENT OF EXPENSES................................................................37
EVIDENCE AS TO COMPLIANCE.....................................................................................38
CERTAIN MATTERS REGARDING THE SERVICER........................................................................38
THE AGREEMENTS...................................................................................................39
ASSIGNMENT OF PRIMARY ASSETS..................................................................................39
REPORTS TO HOLDERS............................................................................................41
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT...............................................................42
THE TRUSTEE...................................................................................................44
DUTIES OF THE TRUSTEE.........................................................................................44
RESIGNATION OF TRUSTEE........................................................................................45
AMENDMENT OF AGREEMENT........................................................................................45
VOTING RIGHTS.................................................................................................45
LIST OF HOLDERS...............................................................................................45
FORM OF SECURITIES............................................................................................46
REMIC ADMINISTRATOR...........................................................................................47
TERMINATION...................................................................................................47
CERTAIN LEGAL ASPECTS OF HOME EQUITY LOANS......................................................................48
GENERAL.......................................................................................................49
ENFORCEMENT OF THE NOTE.......................................................................................49
SECURITY INTERESTS...........................................................................................50
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940...............................................................54
THE DEPOSITOR....................................................................................................55
GENERAL.......................................................................................................55
USE OF PROCEEDS..................................................................................................55
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.........................................................................55
GENERAL.......................................................................................................55
GRANTOR TRUST SECURITIES......................................................................................56
REMIC SECURITIES..............................................................................................57
DEBT SECURITIES...............................................................................................63
DISCOUNT AND PREMIUM..........................................................................................67
BACKUP WITHHOLDING............................................................................................70
FOREIGN INVESTORS.............................................................................................70
STATE TAX CONSIDERATIONS.........................................................................................72
ERISA CONSIDERATIONS.............................................................................................72
LEGAL INVESTMENT.................................................................................................74
PLAN OF DISTRIBUTION.............................................................................................74
LEGAL MATTERS....................................................................................................75
FINANCIAL INFORMATION............................................................................................75
GLOSSARY OF TERMS................................................................................................76
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
INDEX OF PRINCIPAL TERMS
Unless the context indicates otherwise, the following terms shall have
the meanings set forth on the page indicated below:
Actuarial Home Equity Loan......................................................................................27
Agreement.........................................................................................................5
ARM Loans........................................................................................................18
Available Interest Amount........................................................................................23
Balloon Loan......................................................................................................9
bankruptcy bond..................................................................................................32
Book-Entry Securities............................................................................................46
Business Day.....................................................................................................12
Capitalized Interest Account.....................................................................................12
Cede.............................................................................................................46
CERCLA...........................................................................................................20
Certificate Schedule.............................................................................................40
Certificates...................................................................................................1, 5
Class.............................................................................................................2
Code.............................................................................................................56
Collection Account...............................................................................................10
Combined Loan-to-Value Ratio......................................................................................9
Commission........................................................................................................3
Condominium Units................................................................................................26
Cooperative Dwellings............................................................................................26
Credit Enhancement...............................................................................................12
Credit Enhancer..................................................................................................11
Current Interest Rates............................................................................................9
Custodian........................................................................................................40
Cut-Off Date......................................................................................................8
D&P..............................................................................................................73
Debt Securities..............................................................................................14, 56
Deleted Primary Asset............................................................................................41
Deposit Agreement................................................................................................13
Depositor.........................................................................................................1
Depositor Securities.............................................................................................55
Distribution Account.............................................................................................11
Distribution Date.................................................................................................2
DOL..............................................................................................................73
Eligible Investments.........................................................................................12, 30
ERISA............................................................................................................15
Escrow Accounts..................................................................................................34
Event of Default.................................................................................................39
Exchange Act......................................................................................................4
FASIT........................................................................................................14, 56
FASIT High-Yield Securities......................................................................................14
FASIT Ownership Security.........................................................................................14
FASIT Regular Securities.........................................................................................14
FASIT Securities.................................................................................................56
FDIC.............................................................................................................34
FHA..............................................................................................................26
FHLMC............................................................................................................53
Final Scheduled Distribution Date.................................................................................6
First Union......................................................................................................75
fully taxable bonds..............................................................................................70
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Garn-St. Germain Act.............................................................................................53
Grantor Trust....................................................................................................56
Grantor Trust Securities.........................................................................................14
Holders...........................................................................................................3
Indenture........................................................................................................22
Indirect Participant.............................................................................................46
IRS..............................................................................................................58
Issuer............................................................................................................5
Lifetime Rate Caps................................................................................................9
Liquidation Proceeds.............................................................................................34
Loan Rate.........................................................................................................9
Loan Schedule....................................................................................................40
Loan-to-Value Ratio...............................................................................................9
Minimum Principal Payment Agreement..............................................................................13
Modification.....................................................................................................37
Home Equity Loans.........................................................................................1, 8, 26
Mortgaged Property...............................................................................................35
Notes..........................................................................................................1, 5
Notional Amount...................................................................................................6
Originator........................................................................................................1
OTS..............................................................................................................53
Owner Trust.......................................................................................................5
Owner Trustee.....................................................................................................6
PAC...............................................................................................................5
Participants.....................................................................................................46
Partnership......................................................................................................56
Partnership Interests........................................................................................14, 56
Physical Certificates............................................................................................46
Plan.............................................................................................................73
Plan Assets Regulation...........................................................................................73
Pool..............................................................................................................1
Pooling and Servicing Agreement..................................................................................22
Pre-Funded Amount................................................................................................11
Pre-Funding Account..............................................................................................11
Pre-Funding Period...............................................................................................11
Premium Security.................................................................................................70
Prepayment Assumption............................................................................................69
Primary Assets....................................................................................................1
Prospectus Supplements............................................................................................1
PS Agreement.....................................................................................................29
PS Servicer......................................................................................................10
PS Sponsor.......................................................................................................10
PS Trustee.......................................................................................................10
PTCE.............................................................................................................74
Qualifying Substitute Primary Asset..............................................................................41
Rating Agency....................................................................................................12
REMIC........................................................................................................14, 56
REMIC Regular Securities.........................................................................................14
REMIC Regulations................................................................................................58
REMIC Residual Securities........................................................................................14
REMIC Securities.................................................................................................56
Reserve Fund.....................................................................................................13
Restricted Group.................................................................................................74
Retained Interests...............................................................................................40
Rule of 78s Home Equity Loan....................................................................................27
Securities........................................................................................................1
ii
<PAGE>
<CAPTION>
<S> <C>
Security Registrar...............................................................................................46
Series............................................................................................................1
Servicer..........................................................................................................1
Servicing Agreement..............................................................................................25
Servicing Fee....................................................................................................14
Settlement Date..................................................................................................59
Simple Interest Home Equity Loan................................................................................27
Single Family Mortgaged Properties...............................................................................26
SMMEA............................................................................................................15
Special Redemption Date..........................................................................................23
Title I Program..................................................................................................28
Title V..........................................................................................................54
Trust Agreement...................................................................................................5
Trust Fund........................................................................................................1
Trustee........................................................................................................5, 6
UCC..............................................................................................................46
Underlying Loans..................................................................................................9
Underwriter Exemptions...........................................................................................73
</TABLE>
iii
