Filed Pursuant to Rule 424(b)(3)
File Number 333-44409
Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission and has become effective. This Prospectus
shall not constitute an offer to sell or the solicitation of an offer to buy nor
shall there be any sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or qualification
under the securities laws of such State.
SUBJECT TO COMPLETION
DATED JUNE 22, 1998
PROSPECTUS SUPPLEMENT
(To Prospectus dated June 9, 1998)
$125,000,000
RBMG FUNDING CO. HOME EQUITY LOAN TRUST 1998-1
Issuer
Asset-Backed Notes, Series 1998-1
RESOURCE BANCSHARES MORTGAGE GROUP, INC.
Servicer
HOME EQUITY SECURITIZATION CORP.
Depositor
--------------------------
The RBMG Funding Co. 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 "Owner Trust Agreement") between Home Equity Securitization Corp. (the
"Depositor") and Wilmington Trust Company, as owner trustee (the "Owner
Trustee"). The Issuer is hereby offering $125,000,000 original principal amount
of its Asset-Backed Notes, Series 1998-1 (the "Notes"). The Notes will be issued
pursuant to an Indenture, to be dated as of June 1, 1998 (the "Indenture"),
between the Issuer and Bankers Trust Company, as indenture trustee (the
"Indenture Trustee"), and will be secured by a trust estate (the "Trust Estate")
consisting primarily of (i) a pool of fixed and adjustable rate, residential
one- to four-family, first lien mortgage loans (the "Home Equity Loans") to be
pledged to the Indenture Trustee for the benefit of the holders of the Notes
(the "Noteholders"), (ii) all payments in respect of principal and interest on
the Home Equity Loans (other than any principal or interest payments on the Home
Equity Loans due on or prior to the applicable Cut-Off Date), (iii) the Issuer's
rights under the Depositor Sale Agreement and the Servicing Agreement (each as
defined herein), (iv) the rights of the Indenture Trustee under the Insurance
Policy, as described herein, (v) the Pre-Funding Account (as defined herein),
and funds on deposit therein and (vi) certain other property. The Issuer also
will issue instruments evidencing the residual interest in the Trust Estate (the
"Residual Interest"). Only the Notes are offered hereby. Certain characteristics
of the Home Equity Loans are described under "Description of the Home Equity
Pool" herein.
On or before the date of issuance of the Notes, the Issuer will obtain
from MBIA Insurance Corporation (the "Note Insurer") a financial guaranty
insurance policy (the "Insurance Policy") relating to the Notes in favor of the
Indenture Trustee. The Insurance Policy will require the Note Insurer to make
certain Insured Payments (as defined herein) on the Notes. See "The Insurance
Policy and the Note Insurer" herein. (cover continued on next page)
[MBIA LOGO]
For a discussion of significant matters affecting investment in the
Notes, see "Risk Factors" beginning on page S-15 herein, "Certain Prepayment and
Yield Considerations" beginning on page S-65 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 DEPOSITOR, RBMG, 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 Notes are expected to be
approximately $______________, 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 $______________.
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 29, 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 __, 1998
<PAGE>
(continued from front cover)
The Home Equity Loans identified for inclusion in the Home Equity Pool
as of the close of business on June 1, 1998 (the "Statistical Calculation Date")
will be collectively referred to as the "Initial Home Equity Loans." The
aggregate principal balance of the Initial Home Equity Loans totaled
approximately $90,678,172.74 (the "Initial Home Equity Pool Balance"). Other
Home Equity Loans satisfying the criteria described herein (the "Supplemental
Home Equity Loans") will be included in the Home Equity Pool on or before the
Closing Date.
On the date of issuance of the Notes (the "Closing Date"), the Issuer
will pledge to the Indenture Trustee Home Equity Loans (the "Closing Date Home
Equity Loans") that will have an aggregate principal balance as of the close of
business on June 1, 1998 (the "Initial Cut-Off Date") of approximately
$100,000,000 (the actual aggregate principal balance of the Closing Date Home
Equity Loans, the "Closing Date Home Equity Pool Balance"). On the Closing Date,
the Issuer will deposit into a segregated account (the "Pre-Funding Account") in
the name of the Indenture Trustee an amount (the "Original Pre-Funding Amount")
equal to the difference between $125,000,000 and the Closing Date Home Equity
Pool Balance, to be used during the Funding Period (as defined herein) to
acquire additional Home Equity Loans satisfying the criteria described herein
(the "Additional Home Equity Loans"), which Additional Home Equity Loans will be
pledged by the Issuer to the Indenture Trustee for the benefit of the
Noteholders.
All of the Home Equity Loans will be originated or acquired by Resource
Bancshares Mortgage Group, Inc. ("RBMG"). On or prior to the Closing Date and
any date the Issuer pledges Additional Home Equity Loans to the Indenture
Trustee (an "Additional Transfer Date"), RBMG will convey the Home Equity Loans
to RBMG Asset Management Company, Inc. (the "Company"), a wholly-owned
subsidiary of RBMG, which will convey the Home Equity Loans to RBMG Funding Co.
("Funding Co."), a wholly-owned subsidiary of the Company, which will convey the
Home Equity Loans to the Depositor, which in turn will convey the Home Equity
Loans to the Issuer. The Issuer then will pledge the Home Equity Loans, without
recourse, to the Indenture Trustee pursuant to the Indenture as security for the
Notes.
Principal and interest on the Notes will be payable as described 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
Note Interest Rate with respect to each Payment Date adjusts monthly based on
One-Month LIBOR as described herein.
The Notes will constitute non-recourse obligations of the Issuer. RBMG
will have limited obligations arising in respect of certain representations and
warranties it makes in connection with the conveyance of the Home Equity Loans
pursuant to a mortgage loan contribution agreement, which representations and
warranties and remedies for a breach thereof will be assigned to the Indenture
Trustee for the benefit of the Noteholders.
RBMG will act as servicer (in such capacity, the "Servicer") of the
Home Equity Loans 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 Servicer, the Issuer and the Indenture Trustee,
including the obligation to advance delinquent payments of principal and
interest on the Home Equity Loans to the extent provided herein. RBMG has
engaged Ocwen Federal Bank FSB to act as its sub-servicer (the "Sub-Servicer")
to perform the servicing of the Home Equity Loans on its behalf.
The stated maturity for the Notes (determined on the basis of the
assumptions described herein) is the Payment Date occurring on October 25, 2029
(the "Stated Maturity").
The Notes may be redeemed, in whole but not in part, at the option of
the Servicer or the Note Insurer, on or after the Payment Date on which the
outstanding Home Equity Pool Balance (as defined herein) is less than 10% of the
sum of the Closing Date Home Equity Pool Balance and the Original Pre-Funding
Amount (the "Transaction Balance"). See "Description of the Notes--Redemption of
the Notes" herein.
<PAGE>
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.
The yield to maturity on the Notes will depend on, among other things,
the rate and timing of principal payments (including prepayments, repurchases,
defaults and liquidations) on the Home Equity Loans, which rate may vary
significantly over time, and on adjustments to the mortgage rates on the
Adjustable Rate Loans (as defined herein). The Home Equity Loans generally may
be prepaid in full or in part at any time; however, prepayment may subject the
mortgagor to a prepayment charge. The yield to investors on the Notes will be
adversely affected by any shortfalls in interest collected on the Home Equity
Loans as a result of prepayments, liquidations or otherwise to the extent that
such shortfalls are not otherwise covered as described herein. In addition, the
yield to investors on the Notes will be sensitive to fluctuations in the level
of One-Month LIBOR, which may vary significantly over time. See "Summary of
Terms--Special Prepayment Considerations" and "Special Yield Considerations,"
"Risk Factors--Prepayment of the Home Equity Loans May Affect the Yield to
Maturity of the Notes" and "Certain Prepayment and Yield Considerations" herein.
Approximately 2.55% of the Initial Home Equity Loans by Initial Home
Equity Pool Balance have been thirty days or more but less than sixty days
delinquent in their Monthly Payments and two of the Initial Home Equity Loans
representing approximately 0.14% of the Initial Home Equity Pool Balance have
been more than 59 days delinquent in their Monthly Payments as of the Initial
Cut-Off Date (such Home Equity Loans, "Delinquent Home Equity Loans"). Investors
in the Notes should be aware, however, that only approximately 49.70% of the
Initial Home Equity Loans had a first Monthly Payment due before June 1, 1998,
and therefore, the other Initial Home Equity Loans could not have been more than
thirty days delinquent in payment as of the Initial Cut-Off Date. See "Risk
Factors--As a Result of the Underwriting Standards, The Loans Are Likely to
Experience Rates of Delinquency, Foreclosure and Bankruptcy That Are Higher Than
Those Experienced by Loans Underwritten in a More Traditional Manner" herein, as
well as "Description of the Home Equity Pool--Underwriting Standards" herein.
It is a condition to the issuance of the Notes that they be rated
not lower than "Aaa" and "AAA" by Moody's Investors Service, Inc. ("Moody's")
and Standard & Poor's Ratings Services, a Division of The McGraw-Hill Companies,
Inc. ("S&P"), respectively.
The information set forth herein under "Servicing of the Home Equity
Loans--The Sub-Servicer" has been provided by the Sub-Servicer (as defined
herein) and the information set forth herein under "The Insurance Policy and the
Note Insurer" has been provided by the Note Insurer. No representation is made
by the Issuer or the Indenture Trustee or any of their affiliates as to the
accuracy or completeness of the information provided by the Servicer or the Note
Insurer, respectively.
There is currently no secondary market for the Notes. The Underwriter
intends to make a secondary market for the Notes, but has no obligation to do
so. There can be no assurance that a secondary market for the Notes will develop
or, if one does develop, that it will provide investors with a satisfactory
level of liquidity or that it will continue.
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
ii
<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, the 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, the Notes.
iii
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein. Capitalized terms used herein
and not otherwise defined herein have the meanings assigned thereto in the
Prospectus.
<TABLE>
<CAPTION>
<S> <C>
Securities Offered......................... $125,000,000 Asset-Backed Notes, Series 1998-1, due October 25, 2029.
The Notes represent non-recourse obligations of the Issuer. Proceeds
of the assets in the Trust Estate (as defined herein) will be the sole
source of payments on the Notes.
Issuer..................................... RBMG Funding Co. 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 "Owner Trust
Agreement"), between the Depositor and the Owner Trustee (as defined
herein). After the Closing Date (as defined herein), the residual
interest representing all of the beneficial ownership interest in the
Issuer (the "Residual Interest") will be held by the Funding Co. 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.
Depositor.................................. Home Equity Securitization Corp., a North Carolina corporation (the
"Depositor"). The Depositor will acquire the Home Equity Loans from
Funding Co. and sell the Home Equity Loans to the Issuer. See "The
Depositor" in the Prospectus.
Company.................................... RBMG Asset Management Company, Inc. (the "Company"), a Nevada
corporation wholly-owned by RBMG.
RBMG....................................... Resource Bancshares Mortgage Group, Inc., a Delaware corporation
("RBMG"). The Home Equity Loans were originated or acquired by RBMG.
On or prior to the date the Notes are issued, in the case of the
Closing Date Home Equity Loans (as defined herein), and on or prior to
the date each Additional Home Equity Loan (as defined herein) is
pledged by the Issuer to the Indenture Trustee, in the case of the
Additional Home Equity Loans, RBMG will convey its interest in the Home
Equity Loans to the Company, which will convey the Home Equity Loans to
RBMG Funding Co. ("Funding Co."), a wholly-owned subsidiary of the
Company, which in turn will convey its interest in the Home Equity
Loans to the Depositor, which in turn will convey its interest in the
Home Equity Loans to the Issuer.
Servicer................................... RBMG will act as Servicer (in such capacity, the "Servicer") with
respect to the Home Equity Loans. See "Servicing of the Home Equity
Loans" herein. RBMG has engaged the Sub-Servicer (as defined herein)
to perform the servicing of the Home Equity Loans on its behalf
pursuant to a sub-servicing agreement (the "Sub-Servicing Agreement").
As such, although the Servicer is described at various instances
throughout this Prospectus Supplement and the Prospectus as the entity
which will perform specified servicing functions with respect to the
Home Equity Loans, such references shall also be deemed to include the
performance of such functions by the Sub-Servicer.
<PAGE>
Sub-Servicer............................... Ocwen Federal Bank FSB (the "Sub-Servicer"). The Sub-Servicer is a
federally-chartered savings bank, with its home office in Fort Lee, New
Jersey and its servicing operations and corporate offices in West Palm
Beach, Florida. The Sub-Servicer is a wholly-owned subsidiary of Ocwen
Financial Corporation, a public financial services holding company.
Note Insurer............................... MBIA Insurance Corporation (the "Note Insurer"). See "The Insurance
Policy and the Note Insurer" herein.
The Indenture Trustee...................... Bankers Trust Company, a New York banking corporation, as indenture
trustee (the "Indenture Trustee"). The Indenture Trustee will receive
a fee (the "Indenture Trustee Fee"), payable monthly on each Payment
Date equal to one-twelfth of 0.015% of the outstanding aggregate Stated
Principal Balance of the Home Equity Loans as of the first day of the
related Due Period (the "Home Equity Pool Balance"). Upon a
termination of the Servicer, the Indenture Trustee is obligated to
succeed to the obligations of the Servicer or to appoint an eligible
successor servicer.
Owner Trustee.............................. Wilmington Trust Company, a Delaware banking corporation, as owner
trustee (the "Owner Trustee") under the Owner Trust Agreement. The
Owner Trustee will receive a fee as provided under the Owner Trust
Agreement.
Payment Date............................... The 25th day of each month, or if such day is not a Business Day, the
next Business Day (the "Payment Date"), commencing July 27, 1998.
Statistical Calculation Date............... June 1, 1998 (the "Statistical Calculation Date")
Cut-Off Dates.............................. With respect to the Closing Date Home Equity Loans, the Cut-Off Date is
June 1, 1998 (the "Initial Cut-Off Date"). With respect to the
Additional Home Equity Loans, the Cut-Off Date is the respective dates
of conveyance to the Issuer (each an "Additional Cut-Off Date;"
together with the Initial Cut-Off Date, the "Cut-Off Date").
Closing Date............................... On or about June 29, 1998 (the "Closing Date").
Due Period................................. With respect to any Payment Date, the period commencing on the second
day of the calendar month preceding the calendar month in which such
Payment Date occurs (or with respect to the first Payment Date after a
Home Equity Loan constitutes part of the Trust Estate, commencing on
the day following the applicable Cut-Off Date for each Home Equity
Loan) and ending on the first day of the calendar month in which such
Payment Date occurs (the "Due Period").
Collection Period.......................... With respect to any Payment Date and a Home Equity Loan, the calendar
month preceding the month in which such Payment Date occurs (or, in the
case of the first Payment Date after a Home Equity Loan constitutes
part of the Trust Estate, during the period beginning on the day
following the applicable Cut-Off Date for each such Home Equity Loan
through and including the last day of the month prior to the month in
which the Payment Date occurs) (the "Collection Period").
S-2
<PAGE>
Servicer Remittance Date................... With respect to each 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 next succeeding Business Day (the "Servicer Remittance Date").
Administrative Fee Amount.................. With respect to any Payment Date, the sum of the Servicing Fee (as
defined herein), the Indenture Trustee Fee and the Note Insurer Premium
(as defined herein) relating to such Payment Date (the "Administrative
Fee Amount").
Servicing Fee.............................. The primary compensation payable to the Servicer on each Payment Date
(the "Servicing Fee") will equal one-twelfth (1/12) of the product
of (a) the Servicing Fee Rate and (b) the Home Equity Pool Balance as
of the first day of the related Due Period. The Servicer shall be
entitled to retain the Servicing Fee from amounts to be deposited in
the Collection Account. The Servicer also will be entitled to
retain prepayment premiums and penalties, late fees and certain
other amounts and charges as additional servicing compensation.
See "Servicing of the Home Equity Loans--Servicing and Other
Compensation and Payments of Expenses" herein. For any Payment
Date for so long as RBMG is the Servicer, the Servicing Fee Rate is
equal to 0.44% per annum; provided, however, that if necessary to
obtain the appointment of a successor servicer or a successor
sub-servicer, the Servicing Fee Rate may increase up to 0.50% per
annum. The payment of any increased Servicing Fee would reduce the
amount of Excess Cash. See "Servicing of the Home Equity
Loans--Servicing and Other Compensation and Payment of
Expenses" herein.
Description of The Notes................... The Notes represent non-recourse obligations of the Issuer and will be
issued pursuant to the Indenture. The Notes will have an aggregate
original Note Balance of $125,000,000 (the "Original Note Balance")
equal to 100% of the sum (such sum, the "Transaction Balance") of the
Closing Date Home Equity Pool Balance (as defined herein) and the
Original Pre-Funding Amount (as defined herein). The assets included
in the trust estate (including the Insurance Policy, as defined herein)
created by the Indenture (the "Trust Estate") and pledged to secure the
Notes will be the sole source of payments on the Notes. The Notes will
be issued in a single class.
The assets of the Trust Estate will consist of (i) the Home Equity
Pool; (ii) all payments in respect of principal and interest on the
Home Equity Loans (other than any principal or interest payments due
on or prior to the applicable Cut-Off Date); (iii) a segregated
account established by the Issuer in the name of the Indenture
Trustee (the "Pre-Funding Account") and funds on deposit therein; (iv)
the Issuer's rights under the Depositor Sale Agreement and the
Servicing Agreement (each as defined herein); (v) the rights of
the Indenture Trustee under the Insurance Policy; and (vi) certain
other property.
Stated Maturity............................ The "Stated Maturity" for the Notes is October 25, 2029 (which has been
determined by adding 13 months to the last Payment Date possible for an
Additional Home Equity Loan that has a first Payment Date of October 1,
1998 and a stated final maturity of 30 years). It is anticipated that
the actual final Payment Date for the Notes will occur
S-3
<PAGE>
significantly earlier than the Stated Maturity. See "Certain Prepayment
and Yield Considerations" herein.
Denominations and Registration............. The Notes will be issued in minimum denominations of $1,000 principal
amount and in integral multiples thereof, with the exception of one
Note which may be issued in a lesser amount. 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 The Chase Manhattan Bank, 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 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 I: Global Clearance, Settlement and Tax Documentation
Procedures" hereto. Unless and until Definitive Notes are issued, it
is anticipated that the only "Noteholder" (or "holder" of a Note) 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 each Payment Date 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 banking institutions in the State of
Nevada, the State of Delaware, the State of New York, the State of
South Carolina or the city in which the corporate trust office of the
Indenture Trustee or in which the Note Insurer's principal office 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 such Payment Date, together with any payments
received under the Insurance Policy. The "Available Funds" for any
Payment Date will generally consist of the aggregate of the following
S-4
<PAGE>
amounts:
(i) the sum of (a) all scheduled payments of principal and interest
received with respect to the Home Equity Loans and due
during the related Due Period and (b) all unscheduled
principal payments or recoveries on the Home Equity
Loans, including principal prepayments, received during
the related Collection Period, minus (w) amounts received
with respect to payments due on or prior to the applicable
Cut-Off Date, (x) the Administrative Fee Amount
payable with respect to such Payment Date, (y) Payments
Ahead (as defined herein) and (z) reimbursements for certain
P&I Advances and Servicing Advances (as defined herein)
made with respect to the Home Equity Loans as described
herein (other than those included in liquidation
expenses already reimbursed from related Liquidation
Proceeds) and certain other amounts for which the
Indenture Trustee, the Servicer and the Issuer are
permitted to be reimbursed; and
(ii) the amount of any P&I Advances (as defined herein) and
Compensating Interest Payments (as defined herein) made by
the Servicer for such Payment Date, any amounts deposited in
the Note Account (as defined herein) in respect of the
repurchase, release, removal or substitution of Home Equity
Loans during the related Collection Period or amounts
deposited in the Note Account in connection with the
redemption of the Notes, all as more fully described under
"Description of the Notes--Payments on the Notes"
herein.
B. Note Interest Rate..................... The "Note Interest Rate" for the initial Interest Period will be a per
annum rate equal to One-Month LIBOR plus __%. The Note Interest Rate
for each subsequent Interest Period will be a per annum rate equal to
the lesser of (i) for each Interest Period (as defined herein) ending
prior to the Redemption Date (as defined herein), One-Month LIBOR plus
__% and, for each Interest Period ending thereafter, One-Month LIBOR
plus __% (the applicable rate described in this clause (i), the "Note
Formula Rate"), and (ii) the Available Funds Cap Rate (as defined
herein). See "Description of the Notes--Payments on the Notes" herein.
If, on any Payment Date, the Available Funds Cap Rate limits the
Note Interest Rate (i.e., the rate set by the Available Funds Cap Rate
is less than the Note Formula Rate), the amount of any such
shortfall will be carried forward and be due and payable on the
following Payment Date and shall accrue interest at the applicable
Note Interest Rate until paid (such shortfall, together with such
accrued interest, the "Available Funds Cap Carry Forward Amount").
The Insurance Policy does not cover the Available Funds Cap Carry
Forward Amount, shortfalls in interest due to application of the
Relief Act (as defined herein), or Prepayment Interest Shortfalls (as
defined herein); the payment of such amounts may be funded only
from (i) any excess interest resulting from the Available Funds
Cap Rate being in excess of the Note Formula Rate on future Payment
Dates and (ii) any Excess Cash (as defined herein) that would
otherwise be paid to the holder(s) of the Residual Interest. The
ratings assigned to the Notes do not address the payment of the
Available Funds Cap Carry Forward Amount, shortfalls in interest due
to the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the
"Relief Act"), or Prepayment Interest Shortfalls. The "Available
Funds Cap Rate" for
S-5
any Payment Date is a rate per annum equal to the fraction, expressed as a
percentage, the numerator of which is (i) an amount equal to (A) 1/12
of the aggregate scheduled principal balance of the then
outstanding Home Equity Loans and REO Properties (as defined herein)
times the weighted average of the Expense Adjusted Coupon Rates (as
defined herein) on the then outstanding Home Equity Loans and
REO Properties minus (B) the amount of the Note Insurer Premium for
such Payment Date, and the denominator of which is (ii) an amount
equal to (A) the then outstanding aggregate Note Balance (as defined
herein) multiplied by (B) the actual number of days elapsed in the
related Interest Period divided by 360.
The "Expense Adjusted Coupon Rate" on any Home Equity Loan is equal to
the then applicable Coupon Rate (as defined herein) thereon minus the
sum of (i) the Minimum Spread and (ii) the Servicing Fee Rate (as
defined herein). For any Payment Date occurring from the Closing
Date through and including the twelfth Payment Date, the Minimum
Spread is equal to 0.00% per annum. For any Payment Date occurring
after the twelfth Payment Date the Minimum Spread is equal to 0.50%
per annum.
The "Interest Period" in respect of any Payment Date will be the
period from and including the Closing Date, in the case of the
initial Payment Date, or from and including the immediately preceding
Payment Date, in the case of any subsequent Payment Date, to but
excluding the related Payment Date. All calculations of interest on the
Notes will be computed on the basis of the actual number of days
elapsed in the related Interest Period in a year of 360 days.
The "Redemption Date" is the first Payment Date on or after which the
sum of the aggregate Stated Principal Balance of the Home
Equity Loans and each REO Property and the Outstanding Pre-Funding
Amount (as defined herein) is less than ten percent of the Transaction
Balance.
C. Payments of Interest................... On each Payment Date, the Notes will be entitled to payments in
respect of interest accrued during the related Interest Period ("Note
Interest") at the Note Interest Rate on the outstanding aggregate
principal balance of the 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) less the
amount of any Prepayment Interest Shortfalls and shortfalls in interest
due to application of the Relief Act. See "Description of the
Notes--Payments on the Notes" herein.
If, with respect to any Payment Date, funds are not available from
Available Funds to pay the full amount of Note Interest due on the
Notes, the deficiency will be covered by payments made pursuant
to the Insurance Policy for such Payment Date. See "The Insurance
Policy and the Note Insurer" herein.
D. Payments of Principal.................. On each Payment Date, the Notes will be entitled to Monthly Principal
in reduction of the Note Balance. "Monthly Principal" with respect to
any Payment Date will be equal to the lesser of (a) the excess of
Available Funds over the amounts described in clauses (i) and (ii) of
the definition of Excess Cash below, and (b) the aggregate of all
scheduled
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payments of principal received or advanced with respect to
the Home Equity Loans and due during the related Due Period and all
other amounts collected, received or otherwise recovered in respect of
principal on the Home Equity Loans during or in respect of the related
Collection Period, not including Payments Ahead, subject to reduction
for any Overcollateralization Surplus (as defined herein) with respect
to the related Payment Date as described herein.
E. Payments of Excess Cash................ On each Payment Date with respect to which the Overcollateralization
Amount (as defined herein) for the Notes is less than the Required
Overcollateralization Amount (as defined herein) for such Payment
Date, Excess Cash derived from Available Funds, if any, will be paid on
the Notes in reduction of the Note Balance, up to the amount necessary
for the related Overcollateralization Amount to equal the applicable
Required Overcollateralization Amount. "Excess Cash" on any Payment
Date will be equal to Available Funds on such Payment Date, reduced by
the sum of (i) any amounts payable to the Note Insurer for Insured
Payments (as defined herein) paid on prior Payment Dates and not yet
reimbursed and for any unpaid Note Insurer Premiums for prior Payment
Dates (in each case with interest thereon at the Late Payment Rate as
defined and set forth in the Insurance Agreement to be dated as of June
29, 1998 among the Issuer, the Company, Depositor, the Servicer, the
Sub-Servicer, the Indenture Trustee and the Note Insurer), (ii) the
Note Interest for the related Payment Date and (iii) the Monthly
Principal for the related Payment Date. The Insurance Policy does not
cover the Available Funds Cap Carry Forward Amount, Prepayment Interest
Shortfalls or shortfalls in interest due to the application of the
Relief Act; the payment of such amounts may be funded only from (a) any
excess interest resulting from the Available Funds Cap Rate being in
excess of the Note Formula Rate on future Payment Dates and (b) any
Excess Cash that would otherwise be paid to the holder(s) of the
Residual Interest. Any Excess Cash remaining after making required
payments on the Notes and to the Note Insurer on any Payment Date as
described herein will be released to the holder(s) of the Residual
Interest on such Payment Date, free from the lien of the Indenture, and
such amounts will not be available to make any of the payments referred
to in clauses (i)-(iii) above on any subsequent Payment Date.
F. Mandatory Prepayment of
Principal from Excess
Moneys in the Pre-Funding
Account................................ To the extent that amounts on deposit in the Pre-Funding Account have
not been fully applied by the Issuer to the purchase of Additional Home
Equity Loans and the pledge thereof to the Indenture Trustee as
security for the Notes by the ninetieth day after the Closing Date,
such excess amounts will be applied as a prepayment of the principal of
the Notes on the October 1998 Payment Date. Although no assurance is
given, it is anticipated by the Issuer that the principal amount of
Additional Home Equity Loans purchased by the Issuer and pledged to the
Indenture Trustee will require the application of substantially all of
the Original Pre-Funding Amount and that there should be no material
amount of principal prepaid on the Notes from amounts in the
Pre-Funding Account. However, it is unlikely that the Issuer will be
able to deliver Additional Home Equity Loans with an aggregate
principal balance identical to the Original Pre-Funding Amount. See
the "Pre-
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Funding Account" herein.
G. Credit Enhancement..................... The credit enhancement provided for the benefit of the Notes consists
of the overcollateralization structural feature of the transaction and
the Insurance Policy, each as described below and herein.
Overcollateralization Feature.............. Credit enhancement with respect to the Notes will be provided in part
by overcollateralization resulting from the Home Equity Pool Balance as
of the end of each Due Period exceeding the Note Balance for the
related Payment Date. On the Closing Date, the initial
Overcollateralization Amount for the Notes will equal 0.00% of the sum
of the Closing Date Home Equity Pool Balance and the Original
Pre-Funding Amount. The Indenture requires that this
Overcollateralization Amount be increased to, and thereafter maintained
at, the Required Overcollateralization Amount. This increase and
subsequent maintenance is intended to be accomplished by the
application of monthly Excess Cash to accelerate the pay down of the
Note Balance until the Overcollateralization Amount reaches the
Required Overcollateralization Amount. Such applications of Excess
Cash, because they consist of interest collections on the Home Equity
Loans, but are distributed as principal on the Notes, will increase the
related Overcollateralization Amount.
The "Overcollateralization Amount" for the Notes on any Payment Date
will be equal to the amount by which the Aggregate Principal Balance of
the Home Equity Loans as of the end of the related Due Period plus any
amount on deposit in the Pre-Funding Account at such time (disregarding
any Pre-Funding Account Earnings) exceeds the Note Balance for such
Payment Date after taking into account payments of Monthly Principal.
"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 the Notes on any Payment Date will be
equal to the amount specified as such in the Indenture. The
"Overcollateralization Surplus" for the Notes on any Payment Date will
be the amount, if any, by which the Overcollateralization Amount on
such Payment Date exceeds the then applicable Required
Overcollateralization Amount. The "Overcollateralization Deficit" for
the Notes on any Payment Date will be the amount, if any, by which the
Note Balance on such Payment Date (after taking into account the
Monthly Principal and Excess Cash to be paid on such Payment Date in
reduction of the Note Balance) exceeds the sum of the aggregate Stated
Principal Balance (as defined herein) of the Home Equity Loans (the
"Home Equity Pool Balance") and the Outstanding Pre-Funding Amount at
the end of the related Due Period.
The Note Insurer has the right to change the Required
Overcollateralization Amount at the end of the Funding Period when all
Additional Home Equity Loans have been pledged to the Indenture
Trustee.
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
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down" based on the performance of the Home Equity Loans with
respect to certain delinquency rate tests specified in the Indenture.
In addition, Excess Cash will be applied to the payment in reduction of
principal of the Notes during the period that the Home Equity Loans are
unable to meet certain tests specified in the Insurance Agreement based
on delinquency rates. Any increase in the Required
Overcollateralization Amount may result in an accelerated amortization
of the Notes until such Required Overcollateralization Amount is
reached, and any decrease in the Required Overcollateralization Amount
will result in a decelerated amortization of the Notes until such
Required Overcollateralization Amount is reached. See "Description of
the Notes--Overcollateralization Feature" herein.
Insurance Policy........................... The "Note Insurer" will issue a financial guaranty insurance policy
(the "Insurance Policy") in favor of the Indenture Trustee for the
benefit of the Noteholders. The amount of the actual payment, if any,
required to be made by the Note Insurer to the Indenture Trustee for
the benefit of the Noteholders under the Insurance Policy (the "Insured
Payment") is (i) for any Payment Date, the sum of (a) the Note Interest
for such Payment Date minus Available Funds and (b) the then existing
Overcollateralization Deficit, if any, after application of Available
Funds to reduce the Note Balance on such Payment Date and (ii) any
shortfall in the amount required to pay a Preference Amount (as defined
herein) from any source other than the Insurance Policy. The Insurance
Policy does not insure the payment of the Available Funds Cap Carry
Forward Amount, Prepayment Interest Shortfalls, or shortfalls in
interest due to the application of the Relief Act. See "The Note
Insurer and The Insurance Policy" herein.
Insured Payments do not cover Realized Losses except to the extent that
an Overcollateralization Deficit exists. Insured Payments do not cover
the Servicer's failure to make P&I Advances pursuant to the Servicing
Agreement, except to the extent that an Overcollateralization Deficit
would otherwise result from such failure. Nevertheless, the effect of
the Insurance Policy is to guaranty the timely payment of interest on,
and the ultimate payment of the principal amount of the Notes.
The Insurance Policy is not cancelable for any reason.
Unless a Note Insurer Default (as defined herein) exists, the Note
Insurer shall have the right to exercise the rights of the Noteholders,
as specified in the Indenture, without any consent of such Noteholders;
and such Noteholders may exercise such rights only with the prior
written consent of the Note Insurer, except as provided in the
Indenture. In addition, to the extent of unreimbursed payments under
the Insurance Policy, the Note Insurer will be subrogated to the rights
of the holders of the Notes 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 holder with respect to
the Note to the extent of such Insured Payment. "Note Insurer Default"
is defined under the Indenture generally as the existence and
continuance of (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.
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The Note Insurer will be entitled to receive a monthly premium (the
"Note Insurer Premium") on each Payment Date payable from amounts on
deposit in the Note Account in the amount specified in the Insurance
Agreement.
One-Month LIBOR............................ With respect to any Payment Date, One-Month LIBOR will, except as
described herein, be the arithmetic mean, rounded up to the nearest
0.0625%, of the rates offered by the Reference Banks (as defined
herein) for one-month United States dollar deposits in the London
interbank market, as such rates appear at 11:00 a.m., London time, on
page 3750 of Telerate (as defined herein) on the second London Business
Day prior to the previous Payment Date. One-month LIBOR will be
______% with respect to the first Payment Date. See "Description of
the Notes--Calculation of One-Month LIBOR" herein.
P&I Advances............................... The Servicer is required to make advances ("P&I Advances") in respect
of certain delinquent payments of principal and interest (net of the
Servicing Fees) on the Home Equity Loans, subject to the limitations
described herein. The Indenture Trustee, to the extent it has been
appointed as successor to the Servicer, will be obligated to make any
such P&I Advance if the Servicer fails in its obligation to do so, to
the extent provided in the Servicing Agreement. As further described
herein, the credit enhancement will provide protection to the
Noteholders against any shortfalls resulting from delinquencies as to
which a P&I Advance is not made or is determined to be
non-recoverable. See "Description of the Notes--P&I Advances" herein.
Compensating Interest Payments............. With respect to any Home Equity Loan as to which a prepayment in whole
or in part was received during the related Collection Period, the
Servicer will be required to remit to the Indenture Trustee, up to the
amount otherwise payable to the Servicer as its Servicing Fee for the
related Payment Date, an amount generally calculated to cover
Prepayment Interest Shortfalls to ensure that a full month's interest
on each such Home Equity Loan is available for payment to the
Noteholders on the applicable Payment Date (each such amount, a
"Compensating Interest Payment"). Compensating Interest Payments are
not reimbursable to the Servicer. See "Description of the
Notes--Compensating Interest Payments" herein.
The Home Equity Pool....................... The Trust Estate will consist primarily of a pool (the "Home Equity
Pool") of fixed and adjustable rate mortgage loans (the "Home Equity
Loans") evidenced by mortgage notes (each, a "Mortgage Note") and
secured by first liens on fee simple interests in one-to four-family
residential properties (each, a "Mortgaged Property"). The proceeds of
the Home Equity Loans were used by the related borrowers to purchase
the related Mortgaged Property or to refinance existing debt secured by
the related Mortgaged Property.
The statistical information presented in this Prospectus
Supplement regarding the Home Equity Pool is based only on the
Home Equity Loans identified as of the Statistical Calculation Date
(the "Initial Home Equity Loans"). The aggregate principal balance of
the Initial Home Equity Loans totaled approximately $90,678,172.74
(the "Initial Home Equity Pool Balance"). Other Home Equity Loans
satisfying the criteria set forth herein (the "Supplemental Home Equity
Loans") will be
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included in the Home Equity Pool on or before the Closing Date.
The Home Equity Loans (the "Closing Date Home Equity Loans") included
in the Home Equity Pool as of the Closing Date (the "Closing Date
Home Equity Pool") will have an aggregate Stated Principal Balance
of approximately $100,000,000 as of the Initial Cut-Off Date (the
actual aggregate principal balance of the Closing Date Home Equity
Loans, the "Closing Date Home Equity Pool Balance"). Additional
Home Equity Loans satisfying the criteria described herein (the
"Additional Home Equity Loans") will be pledged by the Issuer to
the Indenture Trustee for the benefit of the Noteholders during
the period beginning on the Closing Date and ending on the ninetieth
day thereafter (the "Funding Period") in exchange for release of
funds from the Pre-Funding Account. The release of funds from the
Pre-Funding Account will reduce the Original Pre-Funding Amount (such
Original Pre-Funding Amount as reduced from time-to-time, the
"Outstanding Pre-Funding Amount"). The Home Equity Loans will have
original terms to maturity from the dates of their first scheduled
monthly payments of interest and principal (each such payment, a
"Monthly Payment") of not more than 30 years. The Home Equity Loans
will have Monthly Payments that are due on the first day of each month
(each, a "Due Date"), and the Noteholders will be entitled to
payments and other recoveries on the Home Equity Loans that are
received after the Cut-Off Date (other than amounts received after
the Cut-Off Date but due on a Due Date on or prior to the Cut-Off
Date). Except as otherwise indicated, all percentages of the
Initial Home Equity Loans described herein as having certain
characteristics are expressed as a percentage of the Initial Home
Equity Pool Balance.
Approximately 27.77% of the Initial Home Equity Loans were originated
by correspondents and approved brokers of RBMG, which underwrote such
Initial Home Equity Loans pursuant to RBMG's underwriting guidelines,
prior to the sale and assignment of such Initial Home Equity Loans to
RBMG.
Approximately 12.44% of the Initial Home Equity Loans have interest
rates (each, a "Coupon Rate") that are fixed at the percentages
specified in the related Mortgage Notes (each such Home Equity Loan, a
"Fixed Rate Loan"). Approximately 1.55% of the Initial Home Equity
Loans be fully-amortizing, Fixed Rate Loans with level Monthly Payments
and original terms to maturity of not more than 15 Years from the Due
Dates of their first Monthly Payments (each such Home Equity Loan, a
"Fixed Rate 15-Year Loan") and approximately 9.79% of the Initial Home
Equity Loans are fully-amortizing, Fixed Rate Loans with level Monthly
Payments and original terms to maturity of 30 years from the Due Dates
of their first Monthly Payments (each such Home Equity Loan, a "Fixed
Rate 30-Year Loan"). The remaining 1.10% of the Initial Home Equity
Loans that are Fixed Rate Loans each have an original term to maturity
of not more than 15 years from the Due Date of its first Monthly
Payment, have level Monthly Payments during the term thereof as if such
Home Equity Loans were a Fixed Rate 30-Year Loan and have a final
Monthly Payment equal to the outstanding principal balance thereof on
the related maturity date plus interest thereon at the related Coupon
Rate (each such Home Equity Loan with a balloon payment, a "Balloon
Loan").
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Approximately 87.56% of the Initial Home Equity Loans have Coupon Rates
that are subject to adjustment as described below on the Due Dates in
the months specified in the related Mortgage Note (each such day, an
"Adjustment Date") to equal, as to any such Adjustment Date, the sum
(rounded as applicable) of the related index as described below (the
"Index") and the fixed percentage amount specified in such Mortgage
Note (the "Gross Margin"), subject to any applicable periodic rate caps
and to maximum and minimum Coupon Rates as described herein (each such
Home Equity Loan, an "Adjustable Rate Loan"). All of the Adjustable
Rate Loans were originated with an initial Coupon Rate below the sum of
the related Index and the Gross Margin, rounded as described herein.
With respect to any Adjustment Date, the Index applicable to the
determination of the Coupon Rate on approximately 99.83% of the
Adjustable Rate Loans will be the average of interbank offered rates
for six-month United States dollar deposits in the London market based
on quotations of major banks ("Six-Month LIBOR"), as published in The
Wall Street Journal and most recently available 45 days prior to such
Adjustment Date. Approximately 5.68% of the Initial Home Equity Loans
will be Adjustable Rate Loans for which the related Index is Six-Month
LIBOR, for which the related Coupon Rates will be subject to adjustment
commencing approximately 6 months after their respective dates of
origination and semi-annually thereafter, and for which the original
terms to maturity are not more than 30 years from the Due Dates of
their first Monthly Payments (the "6-Month LIBOR Loans"). Approximately
81.72% of the Initial Home Equity Loans are Adjustable Rate Loans for
which the related Index is Six-Month LIBOR, for which the related
Coupon Rates will be subject to adjustment commencing approximately two
years after their respective dates of origination and semi-annually
thereafter, and for which the original terms to maturity are not more
than 30 years from the Due Dates of their first Monthly Payments (the
"2/6 LIBOR Loans"). See "Description of the Home Equity Pool" herein.
Approximately 2.55% of the Initial Home Equity Loans by Initial Home
Equity Pool Balance are thirty to fifty-nine days delinquent (i.e., one
Monthly Payment missed). Two Home Equity Loans, representing
approximately 0.14% of the Initial Home Equity Loans are more than 59
days delinquent (i.e., two or more Monthly Payments missed).
Optional Redemption........................ The Notes may be redeemed, in full but not in part, at the option of
the Servicer or the Note Insurer on or after the Payment Date on which
the Home Equity Pool Balance has declined to less than 10% of the
Transaction Balance. See "Description of the Notes--Redemption of the
Notes" herein.
Special Prepayment
Considerations............................. General: The rate of principal payments on the Notes will depend on,
among other things, the rate and timing of principal payments
(including payments by the Note Insurer, prepayments, repurchases,
defaults and liquidations) on the Home Equity Loans. As is the case
with mortgage-backed securities generally, the Notes are subject to
substantial inherent cash-flow uncertainties because the Home Equity
Loans may be prepaid at any time. Generally, when prevailing interest
rates increase, prepayment rates on mortgage loans tend to decrease in
subsequent periods, resulting in a slower return of principal to
investors at a time when reinvestment at such higher prevailing rates
would be
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desirable. Conversely, when prevailing interest rates decline,
prepayment rates on mortgage loans tend to increase in subsequent
periods, resulting in an accelerated return of principal to investors
at a time when reinvestment at comparable yields may not be possible.
Approximately 77.65% of the Initial Home Equity Loans (by Initial Home
Equity Pool Balance) provide for payment of a prepayment charge. Such
prepayment charges (which will not be distributable to holders of the
Notes) may reduce the rate of prepayment on the Home Equity Loans.
Overcollateralization: As described herein, the manner in which Excess
Cash will be distributed, will have the effect of accelerating the
amortization of the Notes relative to the amortization of the Home
Equity Loans. This will cause the Notes to be overcollateralized by the
Home Equity Loans to the extent that the sum of the Home Equity Pool
Balance and the Outstanding Pre-Funding Amount exceeds the aggregate
Note Balance, and as a result of such accelerated amortization, the
weighted average lives of the Notes may be shorter than otherwise would
be the case.
See "Description of the Notes--Principal Payments" and
"--Overcollateralization Feature" herein, and see "Certain Prepayment
and Yield Considerations" herein.
Special Yield Considerations............... The yield to maturity on the Notes will depend on, among other things,
the rate and timing of principal payments (including payments by the
Note Insurer, prepayments, repurchases, defaults and liquidations) on
the Home Equity Loans and the allocation thereof to reduce the Note
Balance. The yield to maturity on the Notes also will depend on other
factors such as the purchase price for such Notes and the related Note
Interest Rate, including any adjustments thereto resulting from
fluctuations in the level of One-Month LIBOR, which may vary
significantly over time. The yield to investors on the Notes will be
adversely affected by any allocation thereto of Prepayment Interest
Shortfalls (to the extent not covered by Compensating Interest Payments
by the Servicer as described herein), shortfalls in interest due to the
application of the Relief Act, and the extent to which on any Payment
Date the Note Formula Rate exceeds the Available Funds Cap Rate. In
addition, the yield to investors on the Notes may be adversely affected
by any allocation thereto of any other interest shortfall not covered
by the Note Insurer. However, the Noteholders will be reimbursed for
shortfalls as and to the extent described herein.
In general, if a Note is purchased at a premium and principal payments
on the Home Equity Loans occur at a rate faster than anticipated at the
time of purchase, the investor's actual yield to maturity will be lower
than that originally anticipated. Conversely, if a Note is purchased at
a discount and principal payments on the Home Equity Loans occur at a
rate lower than that anticipated at the time of purchase, the
investor's actual yield to maturity will be lower than that originally
anticipated.
See "Certain Prepayment and Yield Considerations" herein.
Certain 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
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not be characterized as an association (or a publicly traded
partnership) taxable as a corporation or as a taxable mortgage pool.
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, 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 (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. Section 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.
Any Plan fiduciary considering whether to purchase any Notes on behalf
of a Plan should consult with its counsel regarding the applicability
of the provisions of ERISA and the Code. See "ERISA Considerations"
herein.
Legal Investment
Considerations............................. The Notes will constitute "mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement Act of 1984, as amended
("SMMEA"), for so long as they are rated in one of the two highest
rating categories by one or more nationally recognized statistical
rating organizations. As such, the Notes will be legal investments for
certain entities to the extent provided in SMMEA, subject to state laws
overriding SMMEA. In addition, institutions whose investment activities
are subject to review by federal or state regulatory authorities may be
or may become subject to restrictions, which may be retroactively
imposed by such regulatory authorities, on the investment by such
institutions in certain forms of mortgage related securities.
Furthermore, certain states have enacted legislation overriding the
legal investment provisions of SMMEA. In addition, institutions whose
activities are subject to review by federal or state regulatory
authorities may be or may become subject to restrictions, which may be
retroactively imposed by such regulatory authorities, on the investment
by such institutions in certain forms of mortgage related securities.
See "Legal Investment Matters" herein.
Ratings.................................... It is a condition to the issuance of the Notes that they be rated not
lower than "Aaa" by Moody's Investors Service, Inc. ("Moody's") and
"AAA" by Standard & Poor's Ratings Services, a Division of The
McGraw-Hill
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<PAGE>
Companies, Inc. ("S&P," together with Moody's, 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 organization. A security rating does not address
the frequency of principal prepayments or the corresponding effect on
yield to investors. The ratings on the Notes do not address the payment
of the Available Funds Cap Carry Forward Amount. See "Certain
Prepayment and Yield Considerations" and "Ratings" herein.
Risk Factors............................... For a discussion of certain factors, among others, that should be
considered by prospective investors in the Notes, including Certain
Prepayment and Yield risks, see "Risk Factors" herein.
</TABLE>
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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
Initial Cut-Off Date and does not take into account the Additional Home Equity
Loans. The characteristics of the Home Equity Pool following inclusion of the
Additional Home Equity Loans in the Trust Estate may vary from the
characteristics of the Initial Home Equity Pool. In addition, because certain
Home Equity Loans may prepay in full or be removed from the Initial Home Equity
Pool prior to the Closing Date, the characteristics of the Initial Home Equity
Pool may vary from that presented below.
As a Result of the Underwriting Standards, The Loans Are Likely to
Experience Rates of Delinquency, Foreclosure and Bankruptcy That Are Higher Than
Those Experienced by Loans Underwritten in a More Traditional Manner
The underwriting standards for RBMG's "B and C" subprime credit risk
origination and acquisition programs are primarily intended to assess the value
of the related mortgaged property and to evaluate the adequacy of such property
as collateral for the mortgage loan and to assess a mortgagor's ability and
willingness to pay creditors. The Home Equity Loans included in the Trust Estate
have been made primarily to mortgagors who do not qualify for loans conforming
to Fannie Mae and the Freddie Mac guidelines but who have equity in their
property. In connection with making such assessments, RBMG also considers, among
other things, a mortgagor's credit history, repayment ability and debt
service-to-income ratio, as well as the type and use of the mortgaged property,
an appraisal of the mortgaged property and the purpose of the loan.
Furthermore, changes in the values of Mortgaged Properties may have a
greater effect on the delinquency, foreclosure, bankruptcy and loss experience
of the Home Equity Loans than on mortgage loans originated in a more traditional
manner. No assurance can be given that the values of the Mortgaged Properties
have remained or will remain at the levels in effect on the dates of origination
of the related Home Equity Loans.
If the economy in general, or the residential real estate market in
particular, experiences a decline in regions in which the Mortgaged Properties
are located after the dates of origination of the Home Equity Loans, the rates
of delinquency, foreclosure, bankruptcy and loss on the Home Equity Loans might
increase, and may increase substantially, as compared to such rates in a stable
or improving economy or real estate market and as compared to such rates on
mortgage loans underwritten in a more traditional manner. See "Description of
the Home Equity Pool-- Underwriting Standards" herein.
The Home Equity Loans primarily consist of mortgage loans underwritten
in accordance with underwriting for "B and C" subprime credit mortgage loans. A
mortgage loan made to a "B and C" subprime credit mortgagor means a mortgage
loan that is ineligible for purchase by Fannie Mae or Freddie Mac due to
mortgagor credit characteristics, property characteristics, loan documentation
guidelines or other characteristics that do not meet Fannie Mae or Freddie Mac
underwriting guidelines, including a loan made to a mortgagor whose
creditworthiness and repayment ability do not satisfy such Fannie Mae or Freddie
Mac underwriting guidelines and a mortgagor who may have a record of major
derogatory credit items such as default on a prior mortgage loan, credit
write-offs, outstanding judgments or prior bankruptcies. In addition, loans may
be made to mortgagors with higher ratios of monthly mortgage payments (or total
housing expense) to income or higher ratios of total monthly credit payments to
income. As a consequence, delinquencies, foreclosures and bankruptcies can be
expected to be more prevalent with respect to the Home Equity Loans than with
respect to mortgage loans originated in accordance with Fannie Mae or Freddie
Mac underwriting guidelines and changes in the values of the Mortgaged
Properties may have a greater effect on the loss experience of the Home Equity
Loans than on mortgage loans originated in accordance with Fannie Mae or Freddie
Mac underwriting guidelines. As a result of the underwriting standards, the Home
Equity Loans are likely to experience rates of delinquency, foreclosure and
bankruptcy that are higher, and that may be substantially higher, than those
experienced by mortgage loans underwritten in a more traditional manner.
Approximately 2.55% of the Initial Home Equity Loans by Initial Home
Equity Pool Balance are thirty to fifty-nine days delinquent (i.e., one Monthly
Payment missed). Two Home Equity Loans, representing approximately 0.14% of the
Initial Home Equity Loans are more than 59 days delinquent (i.e., two or more
Monthly
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Payments missed) in payment of principal and interest as of the Initial
Cut-Off Date. In addition, because approximately 50.50% of the Initial Home
Equity Loans (by number), representing 50.30% of the Initial Home Equity Pool
Balance, and substantially all of the Additional Home Equity Loans will have a
first Due Date occurring on or after June 1, 1998, it is not possible for such
Home Equity Loans to have had a scheduled Monthly Payment 30 days or more
delinquent as of the Initial Cut-Off Date. Substantially all of the Home Equity
Loans were originated or acquired within the last three months. Accordingly,
there can be no assurance as to the likelihood of default by the mortgagors or
as to the likelihood of delinquency. The Home Equity Loans with higher
Loan-to-Value Ratios (as defined herein) may also present a greater risk of
loss. Approximately 235 of the Initial Home Equity Loans, representing 32.23% of
the Initial Home Equity Pool Balance have Loan-to-Value Ratios at origination in
excess of 80%. Only 2.03% of the Initial Home Equity Loans by Initial Home
Equity Pool Balance with Loan-to-Value Ratios at origination in excess of 80%
are insured by a primary mortgage insurance policy. Even assuming that the
Mortgaged 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 holders of Notes ("Noteholders" or "Holders")
could occur. In the event that any Mortgaged 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 "--Delinquent Home Equity Loans in the Initial Home Equity Pool
Balance May Result in Higher Losses" herein.
Each prospective investor must make its own decision as to the effect
of "B and C" subprime credit mortgagors upon the delinquency, foreclosure, and
prepayment experience of the Home Equity Loans.
Given its Limited Operating History, RBMG Does Not Have Any
Significant Historical Loss and Delinquency Data Relating to its Home Equity
Loan Portfolio
RBMG only recently began originating mortgage loans of the type
included in the Trust Estate. Accordingly, RBMG does not have representative
historical delinquency, bankruptcy, foreclosure or default experience that may
be referred to for purposes of estimating the future delinquency and loss
experience of the Home Equity Loans. See "RBMG" herein.
Delinquent Home Equity Loans in the Initial Home Equity Pool Balance May Result
in Higher Losses
Because approximately 2.55% of the Initial Home Equity Loans by Initial
Home Equity Pool Balance are 30-59 days delinquent (i.e., one Monthly Payment
missed) and two Home Equity Loans, representing approximately 0.14% of the
Initial Home Equity Pool Balance are more than 59 days delinquent (i.e., two or
more Monthly Payments missed), the Home Equity Pool considered as an entirety
may bear more risk than a pool of mortgage loans without any delinquencies with
otherwise comparable characteristics. No assurance can be given as to whether or
when any currently delinquent Home Equity Loan will become current, or whether
the existing delinquency will be extended. Furthermore, no information can be
provided concerning whether a mortgagor that cures a delinquency is more likely
to become delinquent again as compared with a mortgagor that has never been
delinquent.
Interest Shortfalls Are Not Covered by Insurance Policy
The Note Interest Rate will be based upon, among other things, the
level of One-Month LIBOR, which bears no relationship to the Coupon Rates
applicable to the Fixed Rate Home Equity Loans and which is different from the
Index applicable to the Adjustable Rate Loans. The Coupon Rate on each Home
Equity Loan is fixed or is adjusted semi-annually (with the exception of the 2/6
Loans, for which the first Adjustment Date will not occur for approximately two
years after origination and the One-Year Treasury Rate Loan, for which the first
Adjustment Date will not occur for approximately one year after origination),
subject to any applicable periodic rate caps and to maximum and minimum Coupon
Rates as described herein. The Note Interest Rate is generally adjusted monthly
on the basis of One-Month LIBOR (with respect to the One-Year Treasury Rate
Loan, or the One-Year U.S. Treasury Rate) subject to the limitations described
herein. In addition, the Coupon Rates on the Fixed Rate Loans will not respond
to economic factors or market conditions, and the Index applicable to the
Adjustable Rate Loans
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may respond differently to economic factors and market conditions than One-Month
LIBOR. Thus, it is possible, for instance, that the level of One-Month LIBOR
may move in one direction during periods in which the level of the Index
related to the Adjustable Rate Loans is stable or moving in the opposite
direction or that, even if the levels of both One-Month LIBOR and such Index
move in the same direction during any period, the extent of the change in the
level of One-Month LIBOR may be greater or less than that of such Index during
such period.
To the extent that the Note Formula Rate would otherwise produce an
interest rate greater than the amount of available interest on the Home Equity
Loans with respect to any Payment Date, any resulting shortfall will adversely
affect the yield to maturity on the Notes. The Insurance Policy will not cover
the amount of the resulting Available Funds Cap Carry Forward Amount.
In addition, although the Servicer will be obligated to make
Compensating Interest Payments to cover any Prepayment Interest Shortfalls
resulting from a shortfall in interest accompanying a prepayment of principal,
such payment will be limited to the amount of the Servicer's Servicing Fee for
the related Collection Period. Similarly, if upon the application of the
Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the "Relief Act")
in certain circumstances as described under "Certain Legal Aspects of Home
Equity Loans--Soldiers' and Sailors' Civil Relief Act" in the Prospectus, a
mortgagor is entitled to pay only a portion of interest otherwise due under the
related Mortgage Note, an interest shortfall will result. The Insurance Policy
will not cover the amount of any interest shortfall resulting from Prepayment
Interest Shortfalls or as a result of application of the Relief Act.
Geographic Concentration of Properties May Result in Higher Losses if Particular
Regions Experience Downturns
Approximately 26.36%, 16.66%, 10.22% and 9.55% of the Initial Home
Equity Loans are secured by Mortgaged Properties located in California, Oregon,
Colorado and Washington, respectively. In general, declines in the California,
Oregon, Colorado or Washington residential real estate markets may adversely
affect the values of the Mortgaged Properties securing such Home Equity Loans
such that the aggregate Stated Principal Balance of such Home Equity Loans will
equal or exceed the value of such Mortgaged Properties. In addition, adverse
economic conditions in California, Oregon, Colorado or Washington (which may or
may not affect real property values) may affect the timely payment by mortgagors
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.
The Aggregate Pool Characteristics of the Home Equity Loans as of the End of
the Funding Period May Vary from the Statistical Distribution of Characteristics
of the Initial Home Equity Loans presented herein
The statistical information presented in this Prospectus Supplement is
based solely on the characteristics of the Initial Home Equity Loans as of the
Initial Cut-Off Date and does not take into account any Supplemental Home Equity
Loans or Additional Home Equity Loans. Moreover, certain Initial Home Equity
Loans may prepay in full or may be deemed not to meet the eligibility
requirements for the Home Equity Loans and thus may not be included as Home
Equity Loans. As a result of the foregoing, the statistical distribution of
characteristics of the Home Equity Loans as of the end of the Funding Period
will vary somewhat from the statistical distribution of such characteristics as
of the Initial Cut-Off Date with regard to the Initial Home Equity Loans as
presented in this Prospectus Supplement, although such variance will not be
material.
Pre-Funding Account May Adversely Affect Investment
To the extent that amounts on deposit in the Pre-Funding Account have
not been fully applied to the purchase of Additional Home Equity Loans by the
Issuer and pledged to the Indenture Trustee as security for the Notes by the end
of the Funding Period, the Noteholders will receive a prepayment of principal in
an amount equal to the Pre-Funding Amount remaining in the Pre-Funding Account
on the first Payment Date following the termination of the Funding Period. Such
prepayment, in general, will have the same effect on Noteholders as prepayments
on the Home Equity Loans. See "Certain Prepayment and Yield Considerations"
herein.
S-18
Adjustable Rate Loans in the Home Equity Pool May Experience a Higher Rate of
Default
Because the Home Equity Pool contains Adjustable Rate Loans, the Home
Equity Pool may experience a higher rate of default than would a comparable
mortgage pool consisting entirely of fixed rate mortgage loans. Increases in the
Monthly Payments on the Adjustable Rate Loans to amounts in excess of those
applicable at their respective dates of origination may result in a higher
default rate.
Yield to Maturity on the Notes is Sensitive to Various Factors
The yield on the Notes will be sensitive in varying degrees to the
default and loss experience on the Home Equity Loans and to the timing of any
such defaults or losses. Certain loss scenarios, including a Note Insurer
Default, could lead to the failure of investors in the Notes to recover their
initial investments.
The yield to the Noteholders also will be affected by the actual rate
of principal payments on the Home Equity Loans and the timing of such payments.
The rate of principal payments on the Home Equity Loans will in turn be affected
by the related amortization schedules (which, in the case of the Adjustable Rate
Loans, will change as described herein), the rate and timing of principal
prepayments thereon by the mortgagors, liquidations of defaulted Home Equity
Loans, and repurchases of Home Equity Loans due to breaches of representations
and warranties. For example, the prepayment of Home Equity Loans with a higher
Coupon Rate may result in a lower Available Funds Cap Rate.
In addition to the foregoing, the credit enhancement provided to the
Notes by the manner in which Excess Cash will be distributed to the Noteholders
will have the effect of accelerating the amortization of the Notes relative to
the amortization of the Home Equity Loans. This will cause the Notes to be
overcollateralized by the Home Equity Loans to the extent that the Home Equity
Pool Balance exceeds the aggregate Note Balance and as a result of such
accelerated amortization, the weighted average lives of the Notes will be
shorter than otherwise would be the case. For a description of the allocation of
Excess Cash, see "Description of the Notes--Overcollateralization Feature"
herein.
Because it is impossible accurately to predict the timing and dollar
amount of principal prepayments on the Home Equity Loans, if any, that will be
made, investors may find it difficult to analyze the effect of prepayments on
the yields and weighted average lives of the Notes.
For an additional discussion of factors affecting yield, see "Certain
Prepayment and Yield Considerations" herein.
Prepayment of the Home Equity Loans May Adversely Affect the Yield to Maturity
of the Notes
The Home Equity Loans may be prepaid by the related mortgagors in whole
or in part, at any time. However, approximately 77.65% of the Initial Home
Equity Loans require the payment of a fee in connection with certain
prepayments, which may discourage prepayments. The Home Equity Loans generally
are assumable under certain circumstances if, in the judgment of the Servicer,
the prospective purchaser of a Mortgaged Property would not fall within a lower
risk category than the original Mortgagor and such assumption would not
materially increase the risk of default or delinquency on such Home Equity Loan.
In the event the Servicer does not approve an assumption, the Home Equity Loan
will be due and payable in full upon the sale of the related Mortgaged Property,
in which case the Servicer generally will be required to enforce any due-on-sale
clause contained in any Mortgage Note or Mortgage, to the extent permitted under
applicable law and governmental regulations. The rate of prepayments of the Home
Equity Loans cannot be predicted and may be affected by a wide variety of
general economic, social, competitive and other factors, including state and
federal income tax policies, interest rates, the availability of alternative
financing and homeowner mobility. Therefore, no assurance can be given as to the
level of prepayments that the Home Equity Loans will experience. See "Certain
Prepayment and Yield Considerations" and "Certain Legal Aspects of the Home
Equity Loans" herein.
Both fixed and adjustable rate mortgage loans may be subject to a
greater rate of principal prepayments in a low interest rate environment. For
example, if prevailing interest rates were to fall, mortgagors may be inclined
to
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<PAGE>
refinance their adjustable rate Home Equity Loans with a fixed rate loan to
"lock in" a lower interest rate. The existence of the applicable Periodic Rate
Cap, Maximum Rate and Minimum Rate also may affect the likelihood of prepayments
resulting from refinancings. The delinquency and loss experience on adjustable
rate mortgage loans may differ from that on fixed rate mortgage loans because
the amount of the monthly payments on adjustable rate mortgage loans are subject
to adjustment on each Adjustment Date.
The average life of the Notes, and, if purchased at other than par, the
yields realized by Noteholders, will be sensitive to levels of payment,
including prepayments, on the Home Equity Loans. In general, the yield on Notes
purchased at a premium from the outstanding principal amount thereof will be
adversely affected by a higher than anticipated level of prepayments and
enhanced by a lower than anticipated level. Conversely, the yield on Notes
purchased at a discount from the outstanding principal amount thereof will be
enhanced by a higher than anticipated level of prepayments and adversely
affected by a lower than anticipated level. See "Certain Prepayment and Yield
Considerations" herein.
Payments of Excess Cash May Affect the Yield to Maturity on the Notes
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 Overcollateralization Amount on such Payment Date. If
purchased at a premium or a discount, the yield to maturity on a Note will be
affected by the rate at which Excess Cash is paid to Noteholders in reduction of
the 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 on any Payment Date will be affected by the actual amount
of interest received, collected or recovered in respect of the Home Equity Loans
during the related Collection 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 as well as from adjustments of Coupon
Rates. The amount of Excess Cash payments applied in reduction of the 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 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 Home Equity Loans with respect to certain delinquency rate
tests specified in the Indenture. Any increase in a Required
Overcollateralization Amount may result in an accelerated rate of amortization
of the Notes until the 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 Notes until the 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 Depositor, the Company,
RBMG, the Sub-Servicer, the Servicer, the Owner Trustee, the Indenture Trustee,
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 Depositor, the
Company, the Sub-Servicer, the Servicer, the Owner Trustee, 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
Insurance Policy and the Note Insurer" herein. The assets included in the Trust
Estate and payments under the Insurance Policy will be the sole source of
payments on the Notes, and there will be no recourse to the Issuer, the
Depositor, the Company, RBMG, the Sub-Servicer, the Servicer, the Owner Trustee,
the Indenture Trustee or any of their respective affiliates, or any other
entity, in the event that such assets are insufficient or otherwise unavailable
to make all payments provided for under the Notes.
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<PAGE>
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 and
Definitive Notes" herein and "ANNEX I: Global Clearance, Settlement and Tax
Documentation Procedures" hereto.
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.
DESCRIPTION OF THE HOME EQUITY POOL
General
The following is a brief description of certain terms of the Initial
Home Equity Loans based on the Initial Home Equity Loans as of the Initial
Cut-Off Date. The statistical information presented herein does not take into
account any Supplemental Home Equity Loans or Additional Home Equity Loans that
may be added to the Home Equity Pool. In addition, certain Home Equity Loans may
prepay in full, or be removed, prior to the Closing Date from the Home Equity
Pool and other Home Equity Loans may be substituted therefor. As a result of the
foregoing, the statistical information regarding the Initial Home Equity Loans
set forth herein may vary from comparable information based on the actual
composition of the Home Equity Pool at the end of the Funding Period, although
such variance will not be material. Except as otherwise indicated, all
percentages of the Initial Home Equity Loans described herein as having certain
characteristics are expressed as a percentage of the Initial Home Equity Pool
Balance.
The Initial Home Equity Loans have an aggregate Stated Principal
Balance as of the Initial Cut-Off Date of approximately $90,678,172.74. The Home
Equity Loans will be fixed and adjustable rate mortgage loans and are evidenced
by Mortgage Notes and secured by Mortgaged Properties. The proceeds of the Home
Equity Loans were used by the related borrowers to purchase the related
Mortgaged Property or to refinance existing debt secured by the related
Mortgaged Property. The Home Equity Loans will have original terms to maturity
from the dates of their first scheduled Monthly Payments of interest and
principal of not more than 30 years. All of the Home Equity Loans were
originated or acquired by RBMG or Meritage in accordance with the underwriting
standards for RBMG's residential "B and C" sub-prime credit lending program as
described below under "--Underwriting Standards."
RBMG will contribute the Home Equity Loans to the Company pursuant to a
mortgage loan contribution agreement between RBMG and the Company to be dated as
of June 1, 1998 (the "Contribution Agreement"), the Company will sell the Home
Equity Loans to Funding Co. pursuant to a mortgage loan sale agreement between
the Company and Funding Co. to be dated as of June 1, 1998 (the "Company Sale
Agreement"), Funding Co. will sell the Home Equity Loans to the Depositor
pursuant to a mortgage loan sale agreement between Funding Co. and the
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<PAGE>
Depositor to be dated as of June 1, 1998 (the "Funding Co. Sale Agreement"),
the Depositor will sell the Home Equity Loans to the Issuer pursuant to
a mortgage loan sale agreement between the Depositor and the Issuer to be dated
as of June 1, 1998 (the "Depositor Sale Agreement"), and the Issuer will pledge
the Home Equity Loans as security for the Notes to the Indenture Trustee
for the benefit of the Noteholders pursuant to the Indenture. The Noteholders
will be entitled to payments on the Notes from payments and other recoveries
on the Home Equity Loans that are received after the relevant Cut-Off Date
(other than amounts received after the relevant Cut-Off Date but due on or
prior to the relevant Cut-Off Date, and any prepayment charges). Insofar as it
relates to the representations and warranties made by RBMG in the Contribution
Agreement with respect to the Home Equity Loans and the remedies provided
therein for any breach of such representations and warranties, the Contribution
Agreement will be assigned by the Company to Funding Co., by Funding Co. to the
Depositor and by the Depositor to the Issuer and pledged as security for the
Notes by the Issuer to the Indenture Trustee for the benefit of the Noteholders
pursuant to the Indenture, as described herein under "Description of the
Notes--Assignment of Home Equity Loans."
Approximately 12.44% of the Initial Home Equity Loans have Coupon Rates
that are fixed at the percentages specified in the related Mortgage Notes (each
such Home Equity Loan, a "Fixed Rate Loan"). Approximately 1.55% of the Initial
Home Equity Loans are fully amortizing, Fixed Rate Loans with level Monthly
Payments and original terms to maturity of not more than 15 years from the Due
Dates of their first Monthly Payments (each such Home Equity Loan, a "Fixed Rate
15-Year Loan"), approximately 9.79% of the Initial Home Equity Loans are
fully-amortizing, Fixed Rate Loans with level Monthly Payments and original
terms to maturity of not more than 30 years from the Due Dates of their first
Monthly Payments (each such Home Equity Loan, a "Fixed Rate 30-Year Loan"). The
remaining 1.10% of the Initial Home Equity Loans that are Fixed Rate Loans each
have an original term to maturity of not more than 15 years from the Due Date of
its first Monthly Payment, have level Monthly Payments during the term thereof
as if each such Home Equity Loan were a Fixed Rate 30-Year Loan and have a final
Monthly Payment equal to the outstanding principal balance thereof on the
related maturity date plus interest thereon at the related Coupon Rate (each
such Home Equity Loan with a balloon payment (a "Balloon Loan").
Approximately 87.56% of the Initial Home Equity Loans are Adjustable
Rate Loans the Coupon Rate of which is subject to adjustment on the Due Dates in
the months specified in the related Mortgage Note to equal, as to any such
Adjustment Date, the sum (rounded as applicable) of the related Index and the
Gross Margin specified in such Mortgage Note (such sum, the "Fully Indexed
Rate"); provided, that, except as described below, the Coupon Rate on any
Adjustable Rate Loan will not increase or decrease by more than the percentage
specified in the related Mortgage Note (the "Periodic Rate Cap") on any related
Adjustment Date, such Coupon Rate will not exceed the sum of the initial Coupon
Rate thereon and the percentage specified in such Mortgage Note (such sum, the
"Maximum Rate") and such Coupon Rate will not be less than the percentage
specified in such Mortgage Note (the "Minimum Rate"). The Index for the
Adjustable Rate Loans is Six-Month LIBOR (except with respect to one Home Equity
Loan, representing approximately 0.15% of the Initial Home Equity Pool Balance,
for which the related Index is the One-Year U.S. Treasury Rate (the "One-Year
Treasury Rate Loan")), for which the related Coupon Rates will be subject to
adjustment commencing approximately 6 months after their respective dates of
origination and semi-annually thereafter (generally with an increase in such
Coupon Rates of not more than 3% on the initial Adjustment Dates thereof and for
which the related Periodic Rate Caps will range from 1.5% to 3% on the initial
adjustment date and will be 1.5% thereafter). Approximately 5.68% of the Initial
Home Equity Loans are Adjustable Rate Loans for which the related Index is
Six-Month LIBOR, for which the related Coupon Rates will be subject to
adjustment commencing approximately 6 months after their respective dates of
origination and semiannually thereafter, and for which the original terms to
maturity are not more than 30 years from the Due Dates of their first Monthly
Payments (each such Home Equity Loan, a "6-Month LIBOR Loan"). Approximately
81.72% of the Initial Home Equity Loans are Adjustable Rate Loans, for which the
related Index is Six-Month LIBOR, for which the related Coupon Rates will be
subject to adjustment commencing approximately two years after their respective
dates of origination and semi-annually thereafter and for which the original
terms to maturity are not more than 30 years from the Due Dates of their first
Monthly Payments (the "2/6 LIBOR Loans"). Effective with the first Monthly
Payment due on an Adjustable Rate Loan after any related Adjustment Date, the
amount of the Monthly Payment thereon will be adjusted to an amount that will
fully amortize the principal balance of such Home Equity Loan over its remaining
term and pay interest at the related Coupon Rate as adjusted on such Adjustment
Date.
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The weighted average remaining term to maturity of the Initial Home
Equity Loans is approximately 353 months. All of the Home Equity Loans will have
original terms to maturity from the due date of the first monthly payment of not
more than 30 years. None of the Initial Home Equity Loans have a first payment
date prior to August 1, 1989 and none of the Initial Home Equity Loans have a
remaining term to maturity of less than approximately 13 years and 9 months. The
latest maturity date of any of the Initial Home Equity Loans is June 1, 2028.
A substantial number of Adjustable Rate Loans will have initial Coupon
Rates that are less than the related Fully Indexed Rates at their respective
dates of origination. In addition, the Coupon Rate on any Adjustable Rate Loan
may be less than the Fully Indexed Rate with respect to any related Adjustment
Date because the related Periodic Rate Cap and Maximum Rate will have the effect
of limiting any increase in such Coupon Rate.
Each Home Equity Loan will contain a customary "due-on-sale" clause.
Approximately 2.55% of the Initial Home Equity Loans by Initial Home Equity Pool
Balance are 30 to 59 days delinquent in their Monthly Payments and two Initial
Home Equity Loans representing 0.14% of the Initial Home Equity Pool Balance are
more than 59 days delinquent (such Home Equity Loans, "Delinquent Home Equity
Loans") as of the Initial Cut-Off Date. Investors in the Notes should be aware,
however, that only approximately 49.70% of the Initial Home Equity Loans had a
first Monthly Payment due before June 1, 1998, and therefore, the other Initial
Home Equity Loans could not have been more than thirty days delinquent in
payment as of the Initial Cut-Off Date. Approximately 77.65% of the Initial Home
Equity Loans provide for payment of a prepayment charge. Under the Sub-Servicing
Agreement and the Servicing Agreement, respectively, the Sub-Servicer is
entitled to all late payment charges received on the Home Equity Loans and the
Servicer is entitled to all prepayment penalties received on the Home Equity
Loans as additional servicing compensation and accordingly, such amounts will
not be available as security for, or for payment, on the Notes.
Pursuant to its terms, each Home Equity Loan is required to be covered
by a standard hazard insurance policy in an amount equal to the lesser of the
original principal balance thereof and the replacement value of the improvements
on the related Mortgaged Property, but in no event lower than the amount
necessary to avoid the application of a co-insurance clause in the related
insurance policy. In addition, the Servicing Agreement will require the Servicer
to cause to be maintained for each Mortgaged Property acquired upon foreclosure
of any Home Equity Loan, or upon deed in lieu of foreclosure, a fire insurance
policy with extended coverage in an amount equal to the replacement value of the
improvements thereon. See "Servicing of the Home Equity Loans--Standard Hazard
Insurance Policies" herein. Approximately 2.03% of the Initial Home Equity Loans
are covered by a primary mortgage insurance policy.
Not more than approximately 1.26% of the Initial Home Equity Loans are
secured by Mortgaged Properties located in any particular five digit zip code
area.
The Home Equity Loans have been originated using underwriting standards
that are less stringent than the underwriting standards applied by other first
mortgage loan purchase programs such as those administered by Fannie Mae or by
Freddie Mac. See "--Underwriting Standards" and "Risk Factors--As a Result of
the Underwriting Standards, The Loans Are Likely to Experience Rates of
Delinquency, Foreclosure and Bankruptcy That Are Higher Than Those Experienced
by The Loans Underwritten in a More Traditional Manner" herein.
The following tables set forth certain characteristics on an
approximate basis with respect to all the Initial Home Equity Loans, the Initial
Home Equity Loans constituting Fixed Rate Loans (the "Initial Fixed Rate Loans")
and the Initial Home Equity Loans constituting Adjustable Rate Loans (the
"Initial Adjustable Rate Loans"). With respect to any Home Equity Loan, as of
any date of determination, the "Loan-to-Value Ratio" or "LTV" will be the ratio,
expressed as a percentage, of (a) the principal balance of such Home Equity Loan
to (b) the Value (as defined in the Servicing Agreement) of the related
Mortgaged Property.
S-23
<PAGE>
All of the Initial Home Equity Loans
The table below sets forth as of the Initial Cut-Off Date the number,
aggregate principal balance and percentage of all the Initial Home Equity Loans
having the Coupon Rates in each given range. (The sums of amounts and
percentages in the table below may not be equal to the totals due to rounding.)
<TABLE>
<CAPTION>
Coupon Rates of all the Initial Home Equity Loans
Range of Coupon Rates Number of Aggregate Percentage of Home Equity
(%) Home Equity Loans Principal Balance Loans by Aggregate
Principal Balance
<S> <C> <C> <C>
- ----------------------------- ---------------------- --------------------- ---------------------------
6.501 - 7.000 1 $ 82,931.96 0.09%
7.001 - 7.500 8 861,465.35 0.95
7.501 - 8.000 22 2,833,809.52 3.13
8.001 - 8.500 55 7,234,473.37 7.98
8.501 - 9.000 141 18,941,194.00 20.89
9.001 - 9.500 115 13,270,474.86 14.63
9.501 - 10.000 137 17,051,338.88 18.80
10.001 - 10.500 117 12,803,047.76 14.12
10.501 - 11.000 84 8,735,721.79 9.63
11.001 - 11.500 50 4,698,050.17 5.18
11.501 - 12.000 32 2,343,909.80 2.58
12.001 - 12.500 17 978,163.61 1.08
12.501 - 13.000 11 522,441.40 0.58
13.001 - 13.500 3 159,362.19 0.18
13.501 - 14.000 2 105,538.08 0.12
14.001 - 14.500 1 56,250.00 0.06
- ----------------------------- ---------------------- --------------------- --------------------------
Totals 796 $ 90,678,172.74 100.00%
============================= ====================== ===================== ==========================
</TABLE>
The weighted average Coupon Rate, as of the Initial Cut-Off Date, of
(a) the Initial Home Equity Loans was approximately 9.71% per annum, (b) the
Initial Fixed Rate Loans, was approximately 10.27% per annum, (c) the Initial
Adjustable Rate Loans, was approximately 9.63% per annum, (d) the Fixed Rate
15-Year Loans, was approximately 10.53% per annum, (e) the Fixed Rate 30-Year
Loans, was approximately 10.13% per annum, (f) the Balloon Loans, was
approximately 11.14% per annum, (g) the 6-Month LIBOR Loans, was approximately
8.77% per annum, and (h) the 2/6-LIBOR Loans, was approximately 9.69% per annum.
S-24
<PAGE>
The table below sets forth as of the Initial Cut-Off Date the number,
aggregate principal balance and percentage of all the Initial Home Equity Loans
having principal balances in each given range. (The sums of amounts and
percentages in the table below may not equal the totals due to rounding.)
Principal Balances of all the Initial Home Equity Loans
<TABLE>
<CAPTION>
Range of Principal Balances Number of Aggregate Percentage of Home Equity
($) Home Equity Loans Principal Balance Loans by Aggregate
Principal Balance
<S> <C> <C> <C>
- ----------------------------- ------------------ --------------------- ------------------------
20,000.01 - 30,000.00 21 $ 561,612.02 0.62%
- ----------------------------- ------------------ --------------------- ------------------------
30,000.01 - 40,000.00 36 1,307,524.67 1.44
40,000.01 - 50,000.00 51 2,342,216.52 2.58
50,000.01 - 60,000.00 63 3,451,918.88 3.81
60,000.01 - 70,000.00 66 4,319,339.16 4.76
70,000.01 - 80,000.00 68 5,118,536.13 5.64
80,000.01 - 90,000.00 50 4,302,630.98 4.74
90,000.01 - 100,000.00 56 5,356,931.37 5.91
100,000.01 - 125,000.00 132 14,798,905.64 16.32
125,000.01 - 150,000.00 71 9,672,780.70 10.67
150,000.01 - 175,000.00 49 7,964,095.95 8.78
175,000.01 - 200,000.00 49 9,180,866.40 10.12
200,000.01 - 225,000.00 27 5,780,787.81 6.38
225,000.01 - 250,000.00 17 4,005,012.93 4.42
250,000.01 - 275,000.00 9 2,391,258.37 2.64
275,000.01 - 300,000.00 9 2,605,840.77 2.87
300,000.01 - 325,000.00 12 3,768,759.54 4.16
325,000.01 - 350,000.00 6 2,012,288.88 2.22
375,000.01 - 400,000.00 1 397,282.42 0.44
425,000.01 - 450,000.00 2 863,884.62 0.95
475,000.01 - 500,000.00 1 475,698.98 0.52
- ----------------------------- ---------------- --------------------- ----------------------
Totals 796 $ 90,678,172.74 100.00%
============================= ================ ===================== ======================
</TABLE>
S-25
<PAGE>
The table below sets forth as of the Initial Cut-Off Date the number,
aggregate principal balance and percentage of all the Initial Home Equity Loans
having the remaining terms to maturity in each given range. (The sums of amounts
and percentages in the table below may not equal the totals due to rounding.)
Remaining Terms to Maturity of all the Initial Home Equity Loans
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Range of Number of Aggregate Percentage of Home Equity
Remaining Term (months) Home Equity Loans Principal Balance Loans by Aggregate
Principal Balance
- ----------------------------- ------------------ ----------------------- ---------------------------
161 - 170 1 $ 157,630.41 0.17%
171 - 180 40 2,249,005.55 2.48
251 - 260 7 331,509.10 0.37
261 - 270 3 196,518.62 0.22
271 - 280 2 142,977.45 0.16
281 - 290 2 162,367.13 0.18
321 - 330 5 511,409.91 0.56
331 - 340 9 809,332.58 0.89
341 - 350 2 259,211.32 0.29
351 - 355 7 987,006.48 1.09
356 4 462,372.32 0.51
357 16 1,438,574.76 1.59
358 77 8,639,444.38 9.53
359 232 29,187,273.90 32.19
360 389 45,143,538.83 49.78
- ----------------------------- ------------------ --------------------- -------------------------
Totals 796 $ 90,678,172.74 100.00%
============================= ================== ===================== =========================
</TABLE>
S-26
<PAGE>
The table below sets forth as of the Initial Cut-Off Date the number,
aggregate principal balance and percentage of the Initial Home Equity Loans
having Loan-to-Value Ratios in each given range at origination. (The sums of
amounts and percentages in the table below may not equal the totals due to
rounding.)
Loan-to-Value Ratios of all the Initial Home Equity Loans
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Percentage of Home
Range of Loan-to-Value Equity Loans by
Ratios at Origination Number of Aggregate Aggregate Principal
(%) Home Equity Loans Principal Balance Balance Weighted Average LTV
- ----------------------- ------------------- ----------------- --------------------- -------------------
20.01 - 25.00 2 $ 89,883.72 0.10% 24.35%
25.01 - 30.00 1 29,579.64 0.03 26.54
30.01 - 35.00 4 233,460.02 0.26 32.32
35.01 - 40.00 6 416,642.43 0.46 38.46
40.01 - 45.00 6 480,140.35 0.53 43.62
45.01 - 50.00 15 1,116,038.46 1.23 48.77
50.01 - 55.00 13 1,120,753.82 1.24 53.02
55.01 - 60.00 18 1,632,440.60 1.80 58.08
60.01 - 65.00 51 5,279,035.29 5.82 63.83
65.01 - 70.00 91 8,435,760.97 9.30 69.66
70.01 - 75.00 84 8,532,974.81 9.41 74.53
75.01 - 80.00 270 34,086,722.82 37.59 79.77
80.01 - 85.00 107 12,479,353.41 13.76 84.88
85.01 - 90.00 107 15,252,363.68 16.82 89.82
90.01 - 95.00 6 420,864.40 0.46 93.05
95.01 - 100.00 9 687,266.79 0.76 97.39
100.01 - 105.00 6 384,891.53 0.42 102.37
- ------------------------ ---------------- ---------------- -------------------- -----------------
Totals 796 $ 90,678,172.74 100.00%
===================================================================================================================
</TABLE>
The weighted average Loan-to-Value Ratio, at origination, of the
Initial Home Equity Loans was approximately 78.42% per annum.
S-27
<PAGE>
The table below sets forth as of the Initial Cut-Off Date the number,
aggregate principal balance and percentage of the Initial Home Equity Loans
having each indicated risk classification under RBMG's "B and C" subprime credit
risk residential lending program. For a description of RBMG's "B and C" subprime
underwriting risk categories, see "--Underwriting Standards" herein. (The sums
of amounts and percentages in the table below may not equal the totals due to
rounding.)
<TABLE>
<CAPTION>
<S> <C>
Risk Classifications of all the Initial Home Equity Loans
Risk Classification Number of Initial Aggregate Percentage of Fixed
Home Equity Loans Principal Balance Percentage of Home Equity
Loans by Aggregate
Principal Balance
- -----------------------------
A 371 $ 46,946,504.13 51.77%
- -----------------------------
A- 186 22,706,338.96 25.04
- -----------------------------
B 160 14,804,581.04 16.33
- -----------------------------
C 51 4,161,566.02 4.59
- -----------------------------
D 11 890,748.79 0.98
- -----------------------------
N/A 17 1,168,433.80 1.29
- -----------------------------
- -----------------------------
Totals 796 $ 90,678,172.74 100.00%
- -----------------------------
===================================================================================================================
</TABLE>
The table below sets forth as of the Initial Cut-Off Date the number,
aggregate principal balance and percentage of the Initial Home Equity Loans
under each of RBMG's documentation programs.
For a description of RBMG's "B & C" subprime underwriting program
classifications, see "--Underwriting Standards" herein. (The sums of the amounts
and percentages in the table below may not equal the total amount due to
rounding.)
<TABLE>
<CAPTION>
<S> <C>
Program Classifications of all the Initial Home Equity Loans
Program Classification Number of Initial Aggregate Percentage of Home Equity
Home Equity Loans Principal Balance Loans by Aggregate
Principal Balance
- -------------------------------
Full Documentation 545 $ 62,793,015.34 69.25%
- -------------------------------
Limited Documentation 102 9,979,975.98 11.01
- -------------------------------
Stated Income Documentation 149 17,905,181.42 19.75
- -------------------------------
- -------------------------------
Totals 796 $ 90,678,172.74 100.00%
- -------------------------------
===================================================================================================================
</TABLE>
S-28
<PAGE>
The table below sets forth as of the Initial Cut-Off Date the number,
aggregate principal balance and percentage of the Initial Home Equity Loans
having Mortgaged Properties of each given type. (The sums of amounts and
percentages in the table below may not equal the totals due to rounding.)
<TABLE>
<CAPTION>
<S> <C>
Types of Mortgaged Properties of all the Initial Home Equity Loans
Property Type Number of Aggregate Percentage of Home Equity
Home Equity Loans Principal Balance Loans by Aggregate
Principal Balance
- -----------------------------
Condo 17 $ 1,498,448.70 1.65%
- -----------------------------
Multi-Family Home 29 2,983,942.10 3.29
- -----------------------------
PUD 73 9,889,876.71 10.91
- -----------------------------
Single Family Home 673 75,884,378.90 83.69
- -----------------------------
Townhouse 4 421,526.33 0.46
- -----------------------------
- -----------------------------
Totals 796 $ 90,678,172.74 100.00%
- -----------------------------
===================================================================================================================
</TABLE>
The table below sets forth as of the Initial Cut-Off Date the number,
aggregate principal balance and percentage of the Initial Home Equity Loans
having Mortgaged Properties with each given occupancy status. (The sums of
amounts and percentages in the table below may not equal the totals due to
rounding.)
<TABLE>
<CAPTION>
<S> <C>
Occupancy Status of the Mortgaged Properties of all the Initial Home Equity Loans
Occupancy Status Number of Aggregate Percentage of Home Equity
Home Equity Loans Principal Balance Loans by Aggregate
Principal Balance
- -----------------------------
Investment 31 $ 2,757,467.32 3.04%
- -----------------------------
Owner Occupied 755 87,013,257.16 95.96
- -----------------------------
Second Home 10 907,448.26 1.00
- -----------------------------
- -----------------------------
Totals 796 $ 90,678,172.74 100.00%
- -----------------------------
===================================================================================================================
</TABLE>
The table below sets forth as of the Initial Cut-Off Date the number,
aggregate principal balance and percentage of the Initial Home Equity Loans
having each indicated purpose. (The sums of amounts and percentages in the table
below may not equal the totals due to rounding.)
Use of Proceeds of all the Initial Home Equity Loans
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Use of Proceeds Number of Aggregate Percentage of Home Equity
Home Equity Loans Principal Balance Loans by Aggregate
Principal Balance
- -----------------------------
Purchase 362 $ 41,797,030.09 46.09%
- -----------------------------
Refinance (Cash Out) 348 39,275,772.40 43.31
- -----------------------------
Refinance (Rate/Term) 86 9,605,370.25 10.59
- -----------------------------
- -----------------------------
Totals 796 $ 90,678,172.74 100.00%
- -----------------------------
===================================================================================================================
</TABLE>
The table below sets forth as of the Initial Cut-Off Date the number,
aggregate principal balance and percentage of the Initial Home Equity Loans
having each indicated number of months from the date of origination to
S-29
<PAGE>
the Cut-Off Date. (The sums of amounts and percentages in the table below may
not equal the totals due to rounding.)
<TABLE>
<CAPTION>
<S> <C>
Number of Months Elapsed from the Date of Origination of all the Initial Home Equity Loans
Range of Months Number of Aggregate Percentage of Home Equity
Home Equity Loans Principal Balance Loans by Aggregate
Principal Balance
- -----------------------------
0 - 11 765 $ 88,107,216.22 97.16%
- -----------------------------
12 - 23 7 613,112.88 0.68
- -----------------------------
24 - 35 10 1,124,471.34 1.24
- -----------------------------
72 - 83 2 162,367.13 0.18
- -----------------------------
84 - 95 2 142,977.45 0.16
- -----------------------------
96 - 107 10 528,027.72 0.58
- -----------------------------
- -----------------------------
Totals 796 $ 90,678,172.74 100.00%
- -----------------------------
===================================================================================================================
</TABLE>
The weighted average number of months since the date of origination of
the Initial Home Equity Loans, as of the Initial Cut-Off Date, was approximately
3 months.
S-30
<PAGE>
The table below sets forth as of the Initial Cut-Off Date, the
geographic distribution of all the Initial Home Equity Loans by state and the
related number, aggregate principal balance and percentage of the Initial Home
Equity Loans. (The sum of amounts and percentages in the table below may not
equal the totals due to rounding.)
<TABLE>
<CAPTION>
<S> <C>
Geographic Distribution of the Mortgaged Properties of all the Initial Home Equity Loans
State Number of Aggregate Percentage of Home Equity
Home Equity Loans Principal Balance Loans by Aggregate
Principal Balance
Alabama 103 $ 7,529,541.40 8.30%
Arizona 86 7,805,622.16 8.61
Arkansas 1 44,576.54 0.05
California 134 23,904,518.38 26.36
Colorado 73 9,269,532.27 10.22
Connecticut 1 274,682.40 0.30
Florida 12 952,920.83 1.05
Georgia 15 1,185,538.59 1.31
Idaho 10 954,259.37 1.05
Illinois 40 3,860,906.35 4.26
Indiana 5 524,202.65 0.58
Kansas 3 162,183.42 0.18
Louisiana 3 267,941.29 0.30
Maryland 1 74,199.10 0.08
Michigan 3 281,318.56 0.31
Minnesota 2 245,411.98 0.27
Mississippi 2 91,438.45 0.10
Missouri 9 856,727.14 0.94
Nebraska 1 130,632.61 0.14
Nevada 5 507,123.89 0.56
New Jersey 2 72,796.69 0.08
New York 22 1,750,493.76 1.93
North Carolina 3 197,595.01 0.22
Ohio 11 657,539.85 0.73
Oklahoma 2 151,230.39 0.17
Oregon 130 15,102,741.53 16.66
Pennsylvania 2 212,763.59 0.23
South Carolina 4 209,117.93 0.23
South Dakota 1 63,561.64 0.07
Tennessee 13 930,852.01 1.03
Texas 17 1,969,808.06 2.17
Utah 10 1,485,211.90 1.64
Virginia 1 77,071.46 0.08
Washington 66 8,656,511.44 9.55
West Virginia 1 48,424.07 0.05
Wisconsin 1 67,176.03 0.07
Wyoming 1 102,000.00 0.11
Totals 796 $ 90,678,172.74 100.00%
</TABLE>
S-31
<PAGE>
The table below sets forth as of the Initial Cut-Off Date the number,
aggregate principal balance and percentage of all the Initial Home Equity Loans
having a prepayment penalty for the years indicated. (The sum of amounts and
percentages in the table below may not equal the totals due to rounding.)
<TABLE>
<CAPTION>
<S> <C>
Prepayment Penalties with Respect to all the Initial Home Equity Loans
Prepayment Penalty Number of Aggregate Percentage of Home Equity
Home Equity Loans Principal Balance Loans by Aggregate
Principal Balance
- -----------------------------
1 Year 301 $ 40,898,846.23 45.10%
- -----------------------------
2 Year 154 20,088,208.47 22.15
- -----------------------------
3 Year 104 9,422,198.76 10.39
- -----------------------------
None 237 20,268,919.28 22.35
- -----------------------------
- -----------------------------
Totals 796 $ 90,678,172.74 100.00%
- -----------------------------
===================================================================================================================
Initial Fixed Rate Loans
</TABLE>
The following table sets forth certain information with respect to all
the Initial Fixed Rate Loans.
<TABLE>
<CAPTION>
<S> <C>
Initial Fixed Rate Loans
Number of Fixed Rate Loans 151
Percentage of All Home Equity Loans 18.97%
(by number of loans)
Aggregate Principal Balance $11,283,052.50
Percentage of All Home Equity Loans 12.44%
(by aggregate principal balance)
Average Principal Balance as of the
Cut-Off Date
Average $74,722.20
Range $24,842.18 - $307,895.98
Coupon Rates
Weighted Average 10.27%
Range 7.375% - 14.250%
Remaining Term to Maturity (in months)
Weighted Average 310.84
Range 165 - 360
Loan-to-Value Ratio at Origination
Weighted Average 75.80%
Range 25.00% - 105.00%
</TABLE>
S-32
<PAGE>
The table below sets forth as of the Initial Cut-Off Date the number
aggregate principal balance and percentage of the Initial Fixed Rate Loans
having the Coupon Rates in each given range. (The sums of amounts and
percentages in the table below may not be equal to the totals due to rounding.)
Coupon Rates of the Initial Fixed Rate Loans
<TABLE>
<CAPTION>
<S> <C> <C>
Range of Coupon Rates (%) Number of Aggregate Percentage of Fixed Rate
Fixed Rate Loans Principal Balance Loans by Aggregate
Principal Balance
7.001 - 7.500 4 $ 380,484.78 3.37%
7.501 - 8.000 9 936,286.44 8.30
8.001 - 8.500 5 523,689.89 4.64
8.501 - 9.000 10 933,758.88 8.28
9.001 - 9.500 19 1,117,168.88 9.90
9.501 - 10.000 10 1,025,411.92 9.09
10.001 - 10.500 17 1,155,160.65 10.24
10.501 - 11.000 17 1,550,078.37 13.74
11.001 - 11.500 19 1,478,357.21 13.10
11.501 - 12.000 18 982,428.77 8.71
12.001 - 12.500 12 665,188.48 5.90
12.501 - 13.000 6 266,946.41 2.37
13.001 - 13.500 3 159,362.19 1.41
13.501 - 14.000 1 52,479.63 0.47
14.001 - 14.500 1 56,250.00 0.50
Totals 151 $ 11,283,052.50 100.00%
</TABLE>
S-33
<PAGE>
The table below sets forth as of the Cut-Off Date the number, aggregate
principal balance and percentage of the Initial Fixed Rate Loans having
principal balances in each given range. (The sums of amounts and percentages in
the table below may not equal the totals due to rounding.)
<TABLE>
<CAPTION>
<S> <C>
Principal Balances of the Initial Fixed Rate Loans
Range of Principal Balances Number of Aggregate Percentage of Fixed Rate
($) Fixed Rate Loans Principal Balance Loans by Aggregate
Principal Balance
20,000.01 - 30,000.00 11 $ 293,280.70 2.60%
30,000.01 - 40,000.00 23 837,217.94 7.42
40,000.01 - 50,000.00 17 782,945.51 6.94
50,000.01 - 60,000.00 25 1,355,811.60 12.02
60,000.01 - 70,000.00 19 1,226,969.62 10.87
70,000.01 - 80,000.00 10 764,375.94 6.77
80,000.01 - 90,000.00 6 515,365.54 4.57
90,000.01 - 100,000.00 7 672,453.60 5.96
100,000.01 - 125,000.00 17 1,887,879.21 16.73
125,000.01 - 150,000.00 6 828,840.94 7.35
150,000.01 - 175,000.00 4 648,710.99 5.75
175,000.01 - 200,000.00 1 194,719.74 1.73
200,000.01 - 225,000.00 2 418,407.55 3.71
250,000.01 - 275,000.00 1 269,901.07 2.39
275,000.01 - 300,000.00 1 278,276.57 2.47
300,000.01 - 325,000.00 1 307,895.98 2.73
Totals 151 $ 11,283,052.50 100.00%
</TABLE>
The table below sets forth as of the Initial Cut-Off Date the number,
aggregate principal balance and percentage of the Initial Fixed Rate Loans
having the remaining terms to maturity in each given range. (The sums of amounts
and percentages in the table below may not equal the totals due to rounding.)
<TABLE>
<CAPTION>
<S> <C>
Remaining Terms to Maturity of the Initial Fixed Rate Loans
Remaining Term (months) Number of Aggregate Percentage of Fixed Rate
Fixed Rate Loans Principal Balance Loans by Aggregate
Principal Balance
161 - 170 1 $ 157,630.41 1.40%
171 - 180 40 2,249,005.55 19.93
251 - 260 7 331,509.10 2.94
261 - 270 3 196,518.62 1.74
271 - 280 2 142,977.45 1.27
281 - 290 2 162,367.13 1.44
321 - 330 4 373,893.91 3.31
331 - 340 9 809,332.58 7.17
341 - 350 2 259,211.32 2.30
351 - 355 1 63,561.64 0.56
357 1 61,437.47 0.54
358 7 514,120.73 4.56
359 17 1,270,200.87 11.26
360 55 4,691,285.72 41.58
Totals 151 $ 11,283,052.50 100.00%
</TABLE>
S-34
<PAGE>
Initial Adjustable Rate Loans
The following table sets forth certain information with request to all
the Initial Adjustable Rate Loans.
<TABLE>
<CAPTION>
<S> <C>
Initial Adjustable Rate Loans
Number of Adjustable Rate Loans 645
Percentage of All Home Equity Loans 81.03%
(by number of loans)
Aggregate Principal Balance $79,395,120.24
Percentage of All Loans (by 87.56%
aggregate principal balance)
Average Principal Balance as of the
Cut-Off Date
Average $123,093.21
Range $22,732.79 - $475,698.98
Coupon Rates
Weighted Average 9.63%
Range 7.000% - 13.625%
Remaining Term to Maturity (in
months)
Weighted Average 359.25
Range 328 - 360
Loan-to-Value Ratio at Origination
Weighted Average 78.79%
Range 23.53% - 99.30%
</TABLE>
S-35
<PAGE>
The table below sets forth as of the Initial Cut-Off Date the number,
aggregate principal balance and percentage of the Initial Adjustable Rate Loans
having the Gross Margins in each given range. (The sums of amounts and
percentages in the table below may not equal the totals due to rounding.)
<TABLE>
<CAPTION>
<S> <C>
Gross Margins of the Initial Adjustable Rate Loans
Range of Gross Margins (%) Number of Aggregate Percentage of Adjustable
Adjustable Rate Loans Principal Balance Rate Loans by Aggregate
Principal Balance
2.501 - 3.000 1 $ 137,516.00 0.17%
4.001 - 4.500 2 153,829.83 0.19
4.501 - 5.000 5 682,810.02 0.86
5.001 - 5.500 30 3,833,276.97 4.83
5.501 - 6.000 86 11,168,283.54 14.07
6.001 - 6.500 220 27,816,607.19 35.04
6.501 - 7.000 198 24,462,670.22 30.81
7.001 - 7.500 76 8,759,299.28 11.03
7.501 - 8.000 20 1,973,419.21 2.49
8.001 - 8.500 3 224,987.33 0.28
9.001 - 9.500 2 54,808.65 0.07
9.501 - 10.000 1 74,553.55 0.09
10.001 - 10.500 1 53,058.45 0.07
Totals 645 $ 79,395,120.24 100.00%
The weighted average gross margin on the Initial Adjustable Rate Loans,
as of the Initial Cut-Off Date, was approximately 6.46% per annum.
The table below sets forth as of the Initial Cut-Off Date the number,
aggregate principal balance and percentage of the Initial Adjustable Rate Loans
having the Coupon Rates in each given range. (The sums of amounts and
percentages in the table below may not equal the totals due to rounding.)
Coupon Rates of the Initial Adjustable Rate Loans
Range of Coupon Rates (%) Number of Aggregate Percentage of Adjustable
Adjustable Rate Loans Principal Balance Rate Loans by Aggregate
Principal Balance
6.501 - 7.000 1 $ 82,931.96 0.10%
7.001 - 7.500 4 480,980.57 0.61
7.501 - 8.000 13 1,897,523.08 2.39
8.001 - 8.500 50 6,710,783.48 8.45
8.501 - 9.000 131 18,007,435.12 22.68
9.001 - 9.500 96 12,153,305.98 15.31
9.501 - 10.000 127 16,025,926.96 20.19
10.001 - 10.500 100 11,647,887.11 14.67
10.501 - 11.000 67 7,185,643.42 9.05
11.001 - 11.500 31 3,219,692.96 4.06
11.501 - 12.000 14 1,361,481.03 1.71
12.001 - 12.500 5 312,975.13 0.39
12.501 - 13.000 5 255,494.99 0.32
13.501 - 14.000 1 53,058.45 0.07
Totals 645 $ 79,395,120.24 100.00%
</TABLE>
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<PAGE>
The weighted average of the Coupon Rates on the Initial Adjustable Rate
Loans, as of the Initial Cut-Off Date, was approximately 9.63% per annum.
The table below sets forth as of the Initial Cut-Off Date the number,
aggregate principal balance and percentage of the Initial Adjustable Rate Loans
having the Maximum Rates in each given range. (The sums of amounts and
percentages in the table below may not equal the totals due to rounding.)
<TABLE>
<CAPTION>
<S> <C>
Maximum Rates of the Initial Adjustable Rate Loans
Range of Maximum Rates (%) Number of Aggregate Percentage of Adjustable
Adjustable Rate Loans Principal Balance Rate Loans by Aggregate
Principal Balance
12.501 - 13.000 1 $ 137,516.00 0.17%
13.501 - 14.000 1 82,931.96 0.10
14.001 - 14.500 4 480,980.57 0.61
14.501 - 15.000 12 1,760,007.08 2.22
15.001 - 15.500 49 6,486,683.48 8.17
15.501 - 16.000 132 18,231,535.12 22.96
16.001 - 16.500 96 12,153,305.98 15.31
16.501 - 17.000 127 16,025,926.96 20.19
17.001 - 17.500 100 11,647,887.11 14.67
17.501 - 18.000 67 7,185,643.42 9.05
18.001 - 18.500 31 3,219,692.96 4.06
18.501 - 19.000 14 1,361,481.03 1.71
19.001 - 19.500 5 312,975.13 0.39
19.501 - 20.000 5 255,494.99 0.32
20.501 - 21.000 1 53,058.45 0.07
Totals 645 $ 79,395,120.24 100.00%
</TABLE>
The weighted average Maximum Rate of the Initial Adjustable Rate Loans,
as of the Initial Cut-Off Date, was 16.63% per annum.
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<PAGE>
The table below sets forth as of the Initial Cut-Off Date the number,
aggregate principal balance and percentage of the Initial Adjustable Rate Loans
having the Minimum Rates in each given range. (The sums of amounts and
percentages in the table below may not equal the totals due to rounding.)
<TABLE>
<CAPTION>
<S> <C>
Minimum Rates of the Initial Adjustable Rate Loans
Range of Minimum Rates (%) Number of Aggregate Percentage of Adjustable
Adjustable Rate Loans Principal Balance Rate Loans by Aggregate
Principal Balance
2.501 - 3.000 1 $ 137,516.00 0.17%
6.501 - 7.000 1 82,931.96 0.10
7.001 - 7.500 4 480,980.57 0.61
7.501 - 8.000 12 1,760,007.08 2.22
8.001 - 8.500 50 6,710,783.48 8.45
8.501 - 9.000 130 17,870,516.00 22.51
9.001 - 9.500 96 12,153,305.98 15.31
9.501 - 10.000 128 16,162,846.08 20.36
10.001 - 10.500 100 11,647,887.11 14.67
10.501 - 11.000 67 7,185,643.42 9.05
11.001 - 11.500 31 3,219,692.96 4.06
11.501 - 12.000 14 1,361,481.03 1.71
12.001 - 12.500 5 312,975.13 0.39
12.501 - 13.000 5 255,494.99 0.32
13.501 - 14.000 1 53,058.45 0.07
Totals 645 $ 79,395,120.24 100.00%
</TABLE>
The weighted average Minimum Rate of the Initial Adjustable Rate Loans,
as of the Initial Cut-Off Date, was 9.62% per annum.
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<PAGE>
The table below sets forth as of the Initial Cut-Off Date the number,
aggregate principal balance and percentage of the Initial Adjustable Rate Loans
having principal balances in each given range. (The sums of amounts and
percentages in the table below may not equal the totals due to rounding.)
<TABLE>
<CAPTION>
<S> <C>
Principal Balances of the Initial Adjustable Rate Loans
Range of Principal Balances Number of Aggregate Percentage of Adjustable
Adjustable Rate Loans Principal Balance Rate Loans by Aggregate
Principal Balance
20,000.01 - 30,000.00 10 $ 268,331.32 0.34%
30,000.01 - 40,000.00 13 470,306.73 0.59
40,000.01 - 50,000.00 34 1,559,271.01 1.96
50,000.01 - 60,000.00 38 2,096,107.28 2.64
60,000.01 - 70,000.00 47 3,092,369.54 3.89
70,000.01 - 80,000.00 58 4,354,160.19 5.48
80,000.01 - 90,000.00 44 3,787,265.44 4.77
90,000.01 - 100,000.00 49 4,684,477.77 5.90
100,000.01 - 125,000.00 115 12,911,026.43 16.26
125,000.01 - 150,000.00 65 8,843,939.76 11.14
150,000.01 - 175,000.00 45 7,315,384.96 9.21
175,000.01 - 200,000.00 48 8,986,146.66 11.32
200,000.01 - 225,000.00 25 5,362,380.26 6.75
225,000.01 - 250,000.00 17 4,005,012.93 5.04
250,000.01 - 275,000.00 8 2,121,357.30 2.67
275,000.01 - 300,000.00 8 2,327,564.20 2.93
300,000.01 - 325,000.00 11 3,460,863.56 4.36
325,000.01 - 350,000.00 6 2,012,288.88 2.53
375,000.01 - 400,000.00 1 397,282.42 0.50
425,000.01 - 450,000.00 2 863,884.62 1.09
475,000.01 - 500,000.00 1 475,698.98 0.60
Totals 645 $ 79,395,120.24 100.00%
The table below sets forth as of the Initial Cut-Off Date the number,
aggregate principal balance and percentage of the Initial Adjustable Rate Loans
having the remaining terms to maturity in each given range. (The sums of amounts
and percentages in the table below may not equal the totals due to rounding.)
Remaining Terms to Maturity of the Initial Adjustable Rate Loans
Remaining Terms (Months) Number of Aggregate Percentage of Adjustable
Adjustable Rate Loans Principal Balance Rate Loans by Aggregate
Principal Balance
321 - 330 1 $ 137,516.00 0.17%
351 - 355 6 923,444.84 1.16
356 4 462,372.32 0.58
357 15 1,377,137.29 1.73
358 70 8,125,323.65 10.23
359 215 27,917,073.03 35.16
360 334 40,452,253.11 50.95
Totals 645 $ 79,395,120.24 100.00%
</TABLE>
S-39
<PAGE>
The table below sets forth the next Adjustable Rate, the number of,
aggregate principal balance and percentage of the Initial Adjustable Rate Loans
having the next Adjustment Rate on each date set forth below.
<TABLE>
<CAPTION>
<S> <C>
Next Interest Adjustment Date of the Initial Adjustable Rate Loans
Next Adjustment Date Number of Aggregate Percentage of Adjustable
Adjustable Rate Loans Principal Balance Rate Loans by Aggregate
Principal Balance
06/01/98 1 $ 96,020.77 0.12%
08/01/98 2 502,901.63 0.63
09/01/98 3 326,292.16 0.41
10/01/98 11 1,473,842.66 1.86
11/01/98 11 1,429,519.52 1.80
12/01/98 8 1,325,200.00 1.67
02/01/99 1 137,516.00 0.17
09/01/99 1 34,855.53 0.04
11/01/99 1 222,128.28 0.28
12/01/99 3 570,440.26 0.72
01/01/00 4 318,516.88 0.40
02/01/00 8 1,044,568.31 1.32
03/01/00 37 4,107,650.70 5.17
04/01/00 243 30,448,374.92 38.35
05/01/00 239 28,389,792.62 35.76
06/01/00 72 8,967,500.00 11.29
Totals 645 $ 79,395,120.24 100.00%
</TABLE>
Underwriting Standards
The Home Equity Loans were originated generally in accordance with
RBMG's "B and C" subprime credit risk guidelines (the " Guidelines"). On a
case-by-case basis, exceptions to the Guidelines are made where compensating
factors exist.
The Guidelines are primarily intended to assess the value of the
related mortgaged property and to evaluate the adequacy of such property as
collateral for a mortgage loan and to assess the mortgagor's ability and
willingness to pay creditors. The "B and C" credit or "subprime" credit mortgage
loans originated or acquired by RBMG generally will have been underwritten with
a view toward the sale of such mortgage loans in the secondary market.
Generally, such mortgage loans entail a greater degree of risk for prospective
investors than mortgage loans eligible to be purchased by Fannie Mae or Freddie
Mac, and such mortgage loans generally bear higher rates of interest than
mortgage loans that are originated in accordance with the underwriting standards
of Fannie Mae or Freddie Mac. The combination of these factors is likely to
result in rates of delinquency, foreclosure, bankruptcy, and loss that are
higher, and which may be substantially higher, than those experienced by
mortgage loans underwritten in accordance with Fannie Mae and Freddie Mac
guidelines.
Each applicant completes a loan application that includes information
with respect to the applicant's liabilities, income, credit history, employment
history and personal information. The Guidelines require a credit report on each
applicant from a credit reporting company. The report typically contains
information relating to such matters as credit history with local and national
merchants and lenders, installment debt payments and any record of defaults,
bankruptcies, repossessions, judgments, charge-offs or tax liens. Mortgaged
properties that are to secure mortgage loans generally are appraised by state
licensed, qualified independent appraisers. Such appraisers inspect and appraise
the subject property and verify that it is in acceptable condition. Following
each appraisal, the appraiser prepares a report which includes a market value
analysis based on recent sales of comparable homes in the area and, when deemed
appropriate, replacement cost analysis based on the current cost of constructing
a similar home. All appraisals are required to conform to the Uniform Standards
of Professional Appraisal Practice adopted
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<PAGE>
by the Appraisal Standards Board of the Appraisal Foundation and are generally
on forms acceptable to Fannie Mae and Freddie Mac. The Guidelines require a
review of the appraisal by a qualified appraiser employed or retained by RBMG or
Meritage, as applicable. The value of a mortgaged property as determined by the
appraisal is used for purposes of establishing the maximum permissible
loan-to-value ratio of the mortgage loan. However, as part of its quality
control procedures, RBMG reviews a sample of all appraisals to confirm the
adequacy of the related mortgaged property as collateral. If the value of any
mortgaged property as determined in the review is more than 5% lower than the
appraised value, then RBMG uses such review value for purposes of establishing
the maximum permissible loan-to-value ratio of the related mortgage loan for
purposes of RBMG's quality control procedures. If such value is between 5% and
10% lower than the appraised value, then RBMG may contact the appraiser for an
explanation of the difference or may reconcile on its own. If such value is more
than 10% lower than the appraised value, then RBMG contacts the appraiser for an
explanation of the difference. RBMG generally refuses to accept appraisals from
an appraiser who does not provide a satisfactory explanation of any such
difference.
The Home Equity Loans were originated consistent with and generally
conform to the Guidelines' "Full Documentation," "Limited Documentation," or
"Stated Income Documentation" residential loan programs. Under each of the
programs, RBMG or Meritage, as applicable, reviews the 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 service-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 description of the property for program
eligibility. In determining the ability of the applicant to repay the loan, a
rate (the "Qualifying Rate") has been created under the Guidelines that, with
respect to a 6-month adjustable rate mortgage loan, generally is equal to two
percent (2%) above the initial interest rate on the loan for which the applicant
has applied; however, if the LTV is 80% or less, or if the loan for which the
applicant has applied is a "2/6 LIBOR" loan, the Guidelines allow the applicant
to qualify at the initial interest rate.
The Guidelines require that mortgage loans be underwritten in a
standardized procedure that complies with applicable federal and state laws and
regulations and requires the underwriters to be satisfied that the income of the
applicant and the value of the property being financed, as indicated by an
appraisal and review of the appraisal, currently supports the outstanding
anticipated loan balance of the mortgage loan for which the applicant has
submitted an application. In general, the maximum loan amount for mortgage loans
originated under the Guidelines is $600,000. The Guidelines permit single family
loans to have LTV's at origination of generally up to 90%, depending on, among
other things, the purpose of the mortgage loan, a mortgagor's credit history,
repayment ability and debt service-to-income ratio, as well as the type and use
of the property. The Guidelines permit all types of loans to a maximum 90% LTV
other than condominium loans, manufactured home loans and loans secured by 3-4
family properties, which are each limited to a maximum 85% LTV and non-owner
occupied loans, which are limited to a maximum 80% LTV. With respect to mortgage
loans secured by mortgaged properties acquired by a mortgagor under a "lease
option purchase," the LTV of the related mortgage loan is based on the lower of
the appraised value of such mortgaged property at the time of origination, or
the sale price of the related mortgaged property if the "lease option purchase
price" was set less than 12 months prior to origination, and is based on the
appraised value at the time of origination if the "lease option purchase price"
was set more than 12 months prior to origination.
Under the Full Documentation program, applicants generally are required
to submit two written forms of verification of stable income for the preceding
24 months. Under the Limited Documentation program, one such form of
verification is required for the preceding 12 months (6 months if the LTV is 80%
or less). Under the Stated Income Documentation program, an applicant may be
qualified based upon monthly income as stated on the mortgage loan application
if the applicant meets certain criteria. All the foregoing programs require that
with respect to each applicant, there be a telephone verification of each
applicant's employment within 24 hours prior to closing. Verification of the
source of funds (if any) required to be deposited by the applicant into escrow
in the case of a purchase money loan is generally required. On a case-by-case
basis, exceptions to the Guidelines may be made, as described below under
"--Exceptions."
The Guidelines have the following categories and criteria for grading
the potential likelihood that an applicant will satisfy the repayment
obligations of a mortgage loan:
"A" Risk. Under the "A" risk category, the applicant must have
generally repaid installment or revolving debt according to its terms.
A maximum of one 30-day late payment, and no 60-day late
S-41
<PAGE>
payments, within the last 12 months is acceptable on an existing
mortgage loan. An existing mortgage loan is not required to be current
at the time the application is submitted. Generally, no more than $500
of open charge-offs or collection accounts shall be more than 12 months
old. Charge-offs or collection accounts not affecting title may remain
open if they are over 2 years old or the LTV of the mortgage loan is
70% or less. No bankruptcy or notice of default filings may have
occurred during the preceding 24 months; provided, however, that if the
applicant's bankruptcy has been discharged during the past 24 months
and the applicant has established a credit history otherwise complying
with the credit parameters set forth in this paragraph, then the
applicant may qualify for a mortgage loan. The mortgaged property must
be in at least average condition. A maximum LTV of 90% is permitted for
a mortgage loan on a one- to two- family owner-occupied property. A
maximum LTV of 85% is permitted for a mortgage loan on an owner
occupied condominium, manufactured home or three- to four-family
residential property. The debt-to-income ratio is generally 45% or
less. The Guidelines permit a 50% debt service-to-income ratio with a
$500 disposable monthly income per family member.
"A-" Risk. Under the "A-" risk category, an applicant must
have generally repaid installment or revolving debt according to its
terms. A maximum of two 30-day late payments, and no 60-day late
payments, within the last 12 months is acceptable on an existing
mortgage loan. An existing mortgage loan is not required to be current
at the time the application is submitted. Minor derogatory items are
allowed as a non-mortgage credit, and a letter of explanation may be
required. Generally, no more than $1,000 of open charge-offs or
collection accounts shall be more than 12 months old. Charge-offs or
collection accounts not affecting title may remain open after funding
of the loan if they are over 2 years old or the LTV of the mortgage
loan is 70% or less. No bankruptcy or notice of default filings by the
applicant may have occurred during the preceding 18 months; provided,
however, that if the mortgagor's applicant's bankruptcy has been
discharged during the past 18 months and the mortgagor applicant has
established a credit history otherwise complying with the credit
parameters set forth in this paragraph, then the mortgagor applicant
may qualify for a mortgage loan. The mortgaged property must be in at
least average condition. A maximum LTV of up to 90% for mortgage loans
originated under the Full Documentation program, up to 85% for mortgage
loans originated under the Limited Documentation program, or up to 80%
for mortgage loans originated under the Stated Income Documentation
program, is permitted for a mortgage loan on a single family
owner-occupied property. A maximum LTV of 80% (or 75% and 70% for
mortgage loans originated under the Limited Documentation or Stated
Income Documentation programs, respectively) is permitted for a
mortgage loan on a non-owner-occupied property. The debt
service-to-income ratio is generally 50% or less.
"B" Risk. Under the "B" risk category, an applicant must have
generally repaid installment or revolving debt according to its terms.
A maximum of three 30-day late payments or two 30-day late payments and
one 60-day late payment, within the last 12 months is acceptable on an
existing mortgage loan. An existing mortgage loan is not required to be
current at the time the application is submitted. As to non-mortgage
credit, some prior defaults may have occurred, and a letter of
explanation may be required. Generally, no more than $2,000 of open
charge-offs or collection accounts shall be more than 12 months old.
Charge-offs or open collection accounts not affecting title may remain
open after funding of the loan if they are over 2 years old or the LTV
of the mortgage loan is 70% or less. No bankruptcy or notice of default
filing by the applicant may have occurred during the preceding 18
months; provided, however, that if the applicant's bankruptcy has been
discharged during the past 18 months and the applicant has established
a credit history otherwise complying with the credit parameters set
forth in this paragraph, then the applicant may qualify for a mortgage
loan. The mortgaged property must be in at least average condition. A
maximum LTV of 85% (or 80% and 75% for mortgage loans originated under
the Limited Documentation and Stated Income Documentation programs,
respectively), is permitted for a mortgage loan on an owner-occupied
property under the Full Documentation program. A maximum LTV of 75% (or
70% and 65% for mortgage loans originated under the Limited
Documentation or Stated Income Documentation programs, respectively),
is permitted for a mortgage loan on a non-owner-occupied property. The
debt service-to-income ratio is generally 50% or less. The Guidelines
permit a 55% debt service-to-income ratio with at least a $500 monthly
income per family member requirement.
"C" Risk. Under the "C" risk category, an applicant may have
experienced significant credit problems in the past. A maximum of six
30-day late payments, two 60-day late payments or one 90-day
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<PAGE>
late payment, within the last 12 months is acceptable on an existing
mortgage loan. An existing mortgage loan is not required to be current
at the time the application is submitted. As to non-mortgage credit,
significant prior defaults may have occurred. Generally, no more than
$4,000 of open charge-offs or collection accounts shall be more than 12
months old. Charge-offs or collection accounts not affecting title may
remain open after the funding of the loan if they are over 2 years old
or the maximum LTV of the mortgage loan is 70% or less. No bankruptcy
or notice of sale filings by the applicant may have occurred during the
preceding 12 months; provided, however, that if the applicant's
bankruptcy has been discharged during the past 12 months and the
applicant has established a credit history otherwise complying with the
credit parameters set forth in this paragraph, then the applicant may
qualify for a mortgage loan. The mortgaged property must be in average
condition. Generally, a maximum LTV of 80% for a mortgage loan on a
single family owner-occupied property under the Full Documentation
program (or 70% and 65% for a mortgage loan originated under the
Limited Documentation and Stated Income Documentation programs) is
permitted. A maximum LTV of 70% is permitted for a mortgage loan on a
non-owner-occupied property under the Full Documentation program. The
debt service-to-income ratio is generally 55% or less. The Guidelines
allow a 50% debt service-to-income ratio at 75% LTV.
"D" Risk. Under the "D" risk category, an applicant will have
experienced significant credit problems in the past. As to mortgage
credit, the applicant may have had a history of being generally 30, 60
or 90 days delinquent, and a maximum of 120 days late within the last
12 months is acceptable on an existing mortgage loan. An existing
mortgage loan is not required to be current at the time the application
is submitted. The existing mortgage loan may currently be in
foreclosure and a 5% reduction to the maximum LTV will be imposed. As
to non-mortgage credit, significant prior defaults may have occurred.
No open collection accounts or open charge-offs affecting title may
remain open after funding of the loan. Open charge-offs or collection
accounts not affecting title may remain open after the funding of the
loan. A bankruptcy, notice of default, notice of sale filing or
foreclosure may be permitted, on a case-by-case basis. The mortgaged
property must be in average condition. A maximum LTV of 70% (or 50% for
non-owner-occupied mortgage loans originated under the Stated Income
Documentation program) is permitted for a mortgage loan on an
owner-occupied property. The debt service-to-income ratio generally is
60% or less.
Exceptions. As described above, the foregoing categories and
criteria are guidelines only. On a case-by-case basis, it may be
determined that an applicant warrants a risk category upgrade, a debt
service-to-income ratio exception, a pricing exception, a loan-to-value
exception or an exception from certain requirements of a particular
risk category (collectively, called an "upgrade" or an "exception"). An
upgrade or exception may generally be allowed if the application
reflects certain compensating factors, including, among other things:
low LTV; pride of ownership; a maximum of one 30-day late payment on
all mortgage loans during the last 12 months; stable employment; or
ownership of current residence for five or more years. An upgrade or
exception may also be allowed if the applicant places a down payment
through escrow of at least 20% of the purchase price of the mortgaged
property, or if the new loan reduces the applicant's monthly aggregate
mortgage payment by 25% or more. Accordingly, certain applicants may
qualify in a more favorable risk category that, in the absence of such
compensating factors, would satisfy only the criteria of a less
favorable risk category. In no event, however, shall any applicant be
granted an upgrade into a risk category more than one level or grade
higher than the category into which the applicant, in the absence of
the compensating factor, would have qualified.
Index Applicable to the Adjustable Rate Loans
With respect to approximately 99.85% of the Adjustable Rate Loans and
as of any related Adjustment Date, the Index is Six-Month LIBOR, as published in
The Wall Street Journal and most recently available 45 days prior to such
Adjustment Date. With respect to approximately 0.15% of the Adjustable Rate
Loans and as of any related Adjustment Date, the Index is the One-Year U.S.
Treasury Rate, as published in The Wall Street Journal and most recently
available 45 days prior to such Adjustment Date (the "One-Year U.S. Treasury
Rate"). If the Index becomes unpublished or is otherwise unavailable, the
Servicer will select an alternative index that is based upon comparable
information.
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<PAGE>
Conveyance of Supplemental Home Equity Loans and Additional Home Equity Loans
The pledge of Supplemental Home Equity Loans by the Issuer on the
Closing Date and the pledge of Additional Home Equity Loans by the Issuer on or
prior to the end of the Funding Period is expected to meet the following
requirements established by the Issuer with the consent of the Note Insurer,
among others: (i) the Supplemental Home Equity Loans and the Additional Home
Equity Loans will have a weighted average Loan-to-Value Ratio of approximately
78.50%; (ii) the weighted average Coupon Rate on the Supplemental Home Equity
Loans and the Additional Home Equity Loans will be approximately 9.70%; (iii)
the weighted average Gross Margin on the Supplemental Home Equity Loans and the
Additional Adjustable Loans will be approximately 6.45%; (iv) the Supplemental
Home Equity Loans and the Additional Home Equity Loans will have a weighted
average Stated Principal Balance of approximately $114,500, and no Supplemental
Home Equity Loan or Additional Home Equity Loan will have a Stated Principal
Balance greater than $400,000; (v) the first payment on each such Supplemental
Home Equity Loans and each such Additional Home Equity Loan will be due no later
than September 1, 1998; (vi) each Home Equity Loan will have a stated maturity
of not more than 30 years; and (vii) no Supplemental Home Equity Loans or
Additional Home Equity Loan will be more than 30 days contractually delinquent.
THE ISSUER
The Issuer is a Delaware business trust established by the Depositor
pursuant to the Owner Trust Agreement. After the Closing Date, the Residual
Interest representing all of the beneficial ownership interest in the Issuer
will be held by Funding Co., a wholly-owned subsidiary of the Company. The
principal office of the Issuer is located in Wilmington, Delaware. 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.
RBMG
RBMG is a full-service residential mortgage company that originates and
purchases loans through a network of approximately 900 correspondent lenders,
3,090 brokers and six retail offices as of March 31, 1998. RBMG is a publicly
traded company whose shares trade on the NASDAQ under the symbol "RBMG." RBMG's
corporate offices are located at 7909 Parklane Road, Columbia, South Carolina
29223. RBMG pools the mortgages it originates or purchases, creating
mortgage-backed securities through Fannie Mae or FHLMC, and sells these
securities to financial institutions throughout the United States. RBMG
traditionally originates conforming loans for sale to Fannie Mae and FHLMC and
for pools issued with loans pledged to the Government National Mortgage
Association. RBMG retains in its portfolio or sells to other approved servicers
the mortgage servicing rights associated with the loans it originates or
purchases. RBMG only recently began originating mortgage loans of the type
included in the Trust Estate. RBMG originates such loans through its own "B and
C" subprime credit risk division, which was recently expanded through the
acquisition of Meritage, a "B and C " subprime credit risk lending institution
in Portland, Oregon. Meritage has traditionally been in the business of
originating or acquiring mortgage loans which have the same general
characteristics as the Home Equity Loans. Approximately 70.08% of the Initial
Home Equity Loans by Initial Home Equity Pool Balance were originated or
acquired by Meritage. RBMG operates in 48 states and the District of Columbia.
Under arrangements currently in effect, a majority of the "B and C"
credit risk subprime mortgage loans originated or acquired by RBMG are serviced
for RBMG by third parties on an interim basis pending the disposition to a
trust, or other disposition on a whole loan basis, of such mortgage loans. Upon
the disposition of such mortgage loans, the servicing for such mortgage loans
either is retained by the original third party servicer or is transferred as
part of such mortgage loans as whole loans in the secondary mortgage market or
concurrently with the securitization of the related mortgage loans.
Consequently, substantial information is not currently available as to the
delinquency, foreclosure, bankruptcy or loss experience of the entire portfolio
of mortgage loans originated or acquired by RBMG. However, see "Servicing of the
Home Equity Loans--The Sub-Servicer" below for information regarding the
delinquency, foreclosure, bankruptcy and REO property experience of the
Sub-Servicer.
The following table sets forth, for the "B and C" credit risk subprime
mortgage loans originated or acquired by RBMG and serviced by the Sub-Servicer
(which does not include all such mortgage loans originated or acquired by RBMG),
certain information relating to the delinquency experience at the end of the
indicated periods. The
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<PAGE>
indicated periods of delinquency are based on the number of days past due on a
contractual basis. No mortgage loan is considered delinquent for these purposes
until it is one month past due on a contractual basis. The information contained
in the monthly remittance reports that will be sent to investors will be
compiled using the same methodology as that used to compile the information
contained in the table below.
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<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Delinquencies and Foreclosures
(Dollars in Thousands)
As of December 31, 1997 As of March 31, 1998
Percent Percent
-------------------- ----------------- ------------------- ------------------
By By By By By By By By
Number Dollar Number Dollar Number Dollar Number Dollar
of Loans Amount of Loans Amount of Loans Amount of Loans Amount
-------- ------ -------- ------ -------- ------ -------- ------
Total Portfolio 1,590 $178,426,932 100.00% 100.00% 1,757 $197,433,095 100.00% 100.00%
Period of
Delinquency
30-59 days 28 2,630,870 1.76% 1.47% 29 2,784,295 1.65% 1.41%
60-89 days 22 1,531,538 1.38% 0.86% 22 2,424,898 1.25% 1.23%
90 days or 10 913,869 0.63% 0.51% 23 2,019,052 1.31% 1.02%
-- ------- ---- ---- -- --------- ---- ----
more
Total Delinquent 60 $ 5,076,277 3.77% 2.84% 74 $7,228,245 4.21% 3.66%
Loans
Loans in 1 $ 0.06% 0.02% 17 $1,260,345 0.97% 0.64%
foreclosure (1) 35,000
- ---------------
</TABLE>
(1) Loans in foreclosure are also included under the heading "Total Delinquent
Loans."
At March 31, 1998 and December 31, 1997, RBMG had total assets of
approximately $2.06 billion and $1.56 billion, respectively, total liabilities
of approximately $1.84 billion and $1.34 billion respectively, and total
shareholders' equity was approximately $221.5 million and $215.1 million,
respectively. For the three months ended March 31, 1998 and for the year ended
December 31, 1997, net income (after taxes) was approximately $9.58 million and
$4.47 million, respectively.
No person other than RBMG, the Company, Funding Co., the Depositor and
the Issuer is obligated with respect to the representations and warranties
respecting the Home Equity Loans and the remedies for any breach thereof.
It is anticipated that Funding Co. will be the holder of the Residual
Interest in the Issuer. Funding Co. may transfer or sell all or a part of its
interest in the Residual Interest at any time, subject to the restrictions
provided in the Owner Trust Agreement.
FUNDING CO.
Funding Co. was incorporated in the State of Nevada on September 26,
1997 and is a wholly-owned subsidiary of the Company. The principal executive
offices of Funding Co. are located at 2820 West Charleston Boulevard, Suite 17,
Las Vegas, Nevada 89102.
Funding Co. was organized, among other things, for the purposes of
establishing trusts, selling beneficial interests therein and acquiring and
selling mortgage assets to such trusts. None of Funding Co., RBMG, the Company
or any of Funding Co.'s affiliates will ensure or guarantee payments on the
Notes.
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.
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<PAGE>
DESCRIPTION OF THE NOTES
The Notes will be issued pursuant to the Indenture. The following
summaries describe certain provisions of the Indenture applicable to the Notes.
The description of the Notes and the Indenture that follows is a summary of
certain of the terms and provisions relating specifically to the Notes, and does
not purport to be complete. Such description is subject to, and is qualified in
its entirety by reference to, the actual terms and provisions of the Indenture
(including the form of the Notes). For more details regarding the terms of the
Indenture, prospective investors in the Notes are advised to review the
Indenture, a copy of which RBMG will provide (without exhibits) without charge
upon written request addressed to RBMG at 7909 Parklane Road, Columbia, South
Carolina 29223, Attention: Larry Reed.
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 will be the sole source of payments on the Notes. The
Notes will not represent an interest in or obligation of the Depositor, the
Company, the Servicer, the Indenture Trustee, the Owner Trustee, 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) the Home Equity
Pool, which is composed of fixed and adjustable rate mortgage loans secured by
first lien mortgages or deeds of trust on the Mortgaged Properties, and
including the related Mortgage Notes; (ii) all payments in respect of principal
and interest on the Home Equity Loans (other than any principal or interest
payments due thereon on or prior to the applicable Cut-Off Dates); (iii) the
Issuer's rights under the Depositor Sale Agreement and the Servicing Agreement;
(iv) the rights of the Indenture Trustee under the Insurance Policy; (v) the
Pre-Funding Account and funds on deposit therein, 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 Trustee to a Noteholder holding
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 $1,000
principal amount and in integral dollar multiples thereof, with the exception of
one Note which may be issued in a lesser amount.
The Notes in the aggregate will have an Original Note Balance of
$125,000,000. The Note Interest Rate is adjustable and is calculated as
described under "--Payment on the Notes" herein. The aggregate Original Note
Balance equals 100% of the sum of the Closing Date Home Equity Pool Balance and
the Original Pre-Funding Amount, and the primary source of funds for payment to
the Noteholders will be the Home Equity Loans as described under "--Payments on
the Notes" herein.
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
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<PAGE>
Cedel's and Euroclear's names on the books of their respective depositaries
which in turn will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank N.A. ("Citibank") will act as
depositary for Cedel, and The Chase Manhattan Bank ("Chase") will act as
depositary for Euroclear (Citibank and Chase, 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.
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 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--Backup Withholding" and " Material
Federal Income Tax Consequences--Foreign Investors" in the Prospectus and "ANNEX
I: 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
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<PAGE>
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.
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.
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<PAGE>
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. 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--Backup
Withholding" and "Material Federal Income Tax Consequences--Taxation of Certain
Foreign Investors" in the Prospectus and "ANNEX I: 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 Trust Estate 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
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.
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.
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<PAGE>
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 Home Equity Loans were originated or acquired by RBMG. On or prior
to the Closing Date, in the case of the Closing Date Home Equity Loans, and each
date of conveyance to the Issuer, in the case of the Additional Home Equity
Loans, RBMG will contribute the related Home Equity Loans to the Company, the
Company will sell the related Home Equity Loans to Funding Co., Funding Co. will
sell the related Home Equity Loans to the Depositor, the Depositor will sell the
related Home Equity Loans to the Issuer and the Issuer will pledge the related
Home Equity Loans to the Indenture Trustee as security for the Notes.
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 after the applicable
Cut-Off Date, together with its right, title and interest in and to the proceeds
of any related insurance policies received after the applicable Cut-Off Date,
without recourse, to the Indenture Trustee pursuant to the Indenture as security
for the Notes; provided, however, that RBMG, the Company or the Depositor, as
applicable, 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 the pledge of the Closing Date Home
Equity Loans to the Indenture Trustee as security for the Notes, will
authenticate and deliver the Notes at the direction of the Issuer in exchange
for, among other things, the Home Equity Loans.
The Indenture will require the Issuer to deliver to the Indenture
Trustee or a custodian on its behalf the Home Equity Loans, the related Mortgage
Notes endorsed without recourse to the Indenture Trustee, the related mortgages
or deeds of trust with evidence of recording thereon, the title policies with
respect to the related Mortgaged Properties, all intervening mortgage
assignments, if the related Home Equity Loan has been held of record at any time
by a Person not affiliated with the Issuer, and certain other documents relating
to the Home Equity Loans (the "Mortgage Files"). RBMG will be required to cause
to be prepared and recorded, at the expense of RBMG and within the time period
specified in the Indenture (or, if original recording information is
unavailable, within such later period as is permitted by the Indenture),
assignments of the mortgages from RBMG to the Indenture Trustee.
The Indenture Trustee or a custodian on its behalf will review the
Mortgage Files delivered to it and if any document required to be included in
any Mortgage File is found to be missing or to be defective in any material
respect and such defect is not cured within 60 days following notification
thereof to the Issuer, the Depositor, the Company, the Note Insurer and RBMG by
the Indenture Trustee, the Indenture Trustee will require either that the
related Home Equity Loan be removed from the Home Equity Pool or that a Home
Equity Loan conforming to the requirements of the Indenture (a "Qualified
Replacement Home Equity Loan") be substituted for the related Home Equity Loan
in the manner described below.
In connection with the transfer of the Home Equity Loans to the Company
pursuant to the Contribution Agreement, RBMG will make certain representations
and warranties as to the accuracy in all material respects of the information
set forth on a schedule identifying and describing each Home Equity Loan. In
addition, RBMG will make certain other representations and warranties regarding
the Home Equity Loans, including, for instance, that each Home Equity Loan, at
its origination, complied in all material respects with applicable state and
federal laws, that each mortgage is a valid first priority lien, that, as of the
applicable Cut-Off Date, only two Home Equity Loans representing approximately
0.14% of the Initial Home Equity Pool Balance were more than 59 days past due,
that each Mortgaged Property consists of a one- to four-family residential
property or unit in a condominium or planned unit development, that RBMG had
good title to each Home Equity Loan prior to such transfer and that the
originator was authorized to originate each Home Equity Loan. The rights of the
Company to enforce remedies for breaches of such representations and warranties
in the Contribution Agreement against RBMG will be assigned to Funding Co.
pursuant to the Company Sale Agreement, to the Depositor pursuant to the Funding
Co. Sale Agreement, to the Issuer pursuant to the Depositor Sale Agreement, and
to the Indenture Trustee pursuant to the Indenture.
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<PAGE>
If with respect to any Home Equity Loan (1) a defect in any document
constituting a part of the related Mortgage File remains uncured within the
period specified above and materially and adversely affects the value of any
such Home Equity Loan or materially and adversely affects the interest of the
Indenture Trustee therein, the Noteholders or the Note Insurer or (2) a breach
of any representation or warranty made by RBMG relating to such Home Equity Loan
occurs and such breach materially and adversely affects the value of any such
Home Equity Loan or materially and adversely affects the interests of the
Indenture Trustee, the Noteholders or the Note Insurer therein, the Indenture
Trustee will enforce the remedies for such defects or breaches against RBMG by
requiring RBMG to remove the related Home Equity Loan (any such Home Equity
Loan, a "Defective Home Equity Loan") from the Trust Estate by remitting to the
Indenture Trustee an amount equal to the Stated Principal Balance of such
Defective Home Equity Loan (plus certain Realized Losses) together with interest
accruing at the Coupon Rate (net of the applicable Servicing Fee Rate) on such
Defective Home Equity Loan from the date interest was last paid by the related
mortgagor to the end of the Collection Period immediately preceding the related
Servicer Remittance Date, less any payments received during the related
Collection Period in respect of such Defective Home Equity Loan (the "Purchase
Price"). RBMG will also have the option, but not the obligation, to substitute
for such Defective Home Equity Loan a Qualified Replacement Home Equity Loan.
Upon delivery of a Qualified Replacement Home Equity Loan and deposit of certain
amounts in the Note Account as set forth in the Indenture, or deposit of the
Purchase Price in the Note Account (as hereinafter defined) and receipt by the
Indenture Trustee and the Note Insurer of written notification of any such
substitution or removal, as the case may be, the Indenture Trustee shall execute
and deliver an instrument of transfer or assignment necessary to vest legal and
beneficial ownership of such Defective Home Equity Loan (including any property
acquired in respect thereof or proceeds of any insurance policy with respect
thereto) in RBMG and release such Defective Home Equity Loan from the Trust
Estate.
The obligation of RBMG to cure, remove or substitute any Home Equity
Loan as described above will constitute the sole remedy available to
Noteholders, the Note Insurer (with certain exceptions) or the Indenture Trustee
for a Defective Home Equity Loan.
Payments on the Notes
Payments on the Notes will be made by the Indenture Trustee (in such
capacity, the "Paying Agent") on each Payment Date, commencing with the Payment
Date in July 1998, to Noteholders as of the related Record Date in an amount
equal to the product of such Noteholders' Percentage Interest and the amount
paid in respect of the Notes. 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 Note Balance.
On each Payment Date, the Paying Agent will be required to pay the
following amounts, in the following order of priority, out of Available Funds:
(a) to the Note Insurer, 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 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 to be dated as of June 29,
1998, among the Issuer, the Depositor, the Company, RBMG, the Servicer,
the Indenture Trustee and the Note Insurer (the "Insurance Agreement");
provided, however, that the Note Insurer shall be paid unreimbursed
Insured Payments and unpaid Note Insurer Premiums (and any interest
thereon) only after Noteholders have received Note Interest and any
Overcollateralization Deficit with respect to such Payment Date;
(b) to the Noteholders, Note Interest with respect to such
Payment Date;
(c) to the Noteholders, the amount of the Monthly Principal
for the Notes with respect to such Payment Date, in reduction of the
Note Balance until such Note Balance is reduced to zero;
(d) to the Note Insurer, any amounts due and owing under the
Insurance Agreement that are not described in clause (a) above;
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(e) to the Noteholders, in reduction of the Note Balance, the
amount, if any, equal to the lesser of (A) Excess Cash with respect to
such Payment Date, and (B) the lesser of (1) the amount necessary for
the Overcollateralization Amount to equal the Required
Overcollateralization Amount on such Payment Date (after giving effect
to application of the Monthly Principal for such Payment Date) and (2)
the amount necessary to reduce the Note Balance to zero;
(f) to the Noteholders, any amounts due them as a result of
Prepayment Interest Shortfalls and shortfalls in interest resulting
from application of the Relief Act;
(g) to the Noteholders, the Available Funds Cap Carry Forward
Amount with respect to such Payment Date; and
(h) to the Indenture Trustee, the Owner Trustee, the Servicer
and the Issuer, certain amounts reimbursable to them pursuant to the
Indenture, the Owner Trust Agreement, or the Servicing Agreement.
Any Available Funds 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, and such amounts will not be
available to make payments on the Notes or payments to the Note Insurer on any
subsequent Payment Date.
In the event that, with respect to a particular Payment Date, Available
Funds on such date are not sufficient to pay any portion of Note Interest, 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 on a Payment Date (after taking into account
payments in respect of 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 the Notes to make up any Overcollateralization Deficit shall be paid
to the Noteholders, in reduction of the Note Balance, until such Note Balance is
reduced to zero.
In no event will the aggregate payments of principal to Noteholders
exceed the Original Note Balance. All calculations of interest on the Notes will
be computed on the basis of the actual number of days elapsed in the related
Interest Period and in a year of 360 days.
"Note Interest" for any Payment Date will be an amount equal to
interest accrued during the related Interest Period at the Note Interest Rate on
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), less the amount of any Prepayment Interest Shortfalls and
shortfalls in interest due to application of the Relief Act.
The "Note Interest Rate" (a) for the initial Interest Period will be a
per annum, rate equal to One-Month LIBOR plus __%, and (b) for each subsequent
Interest Period will be a per annum rate equal to the lesser of (i) for each
Interest Period ending prior to the Redemption Date, One-Month LIBOR plus __%,
and for each Interest Period thereafter, One-Month LIBOR plus __% (the
applicable rate described in this clause (i), the "Note Formula Rate") and (ii)
the "Available Funds Cap Rate".
The "Available Funds Cap Rate" for any Payment Date is a rate per annum
equal to the fraction, expressed as a percentage, the numerator of which is (i)
an amount equal to (A) 1/12 of the aggregate scheduled principal balance of the
then outstanding Home Equity Loans and REO Properties times the weighted average
of the Expense Adjusted Coupon Rates on the then outstanding Home Equity Loans
and REO Properties minus (B) the amount of the Note Insurer Premium for such
Payment Date, and the denominator of which is (ii) an amount equal to (A) the
then outstanding aggregate Note Balance multiplied by (B) the actual number of
days elapsed in the related Interest Period divided by 360.
The "Expense Adjusted Coupon Rate" on any Home Equity Loan is equal to
the then applicable Coupon Rate thereon minus the sum of (i) the Minimum Spread
and (ii) the Servicing Fee Rate. For any Payment Date
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occurring from the Closing Date through and including the twelfth Payment Date,
the Minimum Spread is equal to 0.00% per annum. For any Payment Date occurring
after the twelfth Payment Date the Minimum Spread is equal to 0.50% per annum.
For any Payment Date, the Servicing Fee Rate is equal to 0.44% per annum;
provided, however, that if necessary to obtain the appointment of a successor
servicer or sucessor sub-servicers, the Servicing Fee Rate may increase up to
0.50% per annum. The payment of any increased Servicing Fee would reduce the
amount of Excess Cash. See "Servicing of the Home Equity Loans--Servicing and
Other Compensation and Payment of Expenses" herein.
If, on any Payment Date, the Available Funds Cap Rate limits the Note
Interest Rate (i.e., the rate set by the Available Funds Cap Rate is less than
the Note Formula Rate), the amount of any such shortfall will be carried forward
and be due and payable on the following Payment Date and shall accrue interest
at the applicable Note Interest Rate, until paid (such shortfall, together with
such accrued interest, the "Available Funds Cap Carry Forward Amount"). The
Insurance Policy does not cover the Available Funds Cap Carry Forward Amount;
the payment of such amount may be funded only from any Excess Cash that would
otherwise be paid to the holder(s) of the Residual Interest. The ratings
assigned to the Notes do not address the payment of the Available Funds Cap
Carry Forward Amount.
The "Note Balance" will equal, as of any Payment Date, the Original
Note Balance less all Monthly Principal and Excess Cash paid to the Noteholders
on previous Payment Dates in reduction of the 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 under
the Insurance Policy, except to the extent reimbursed to the Note Insurer
pursuant to the Indenture).
"Monthly Principal" for any Payment Date will be an amount equal to the
lesser of (a) the excess of Available Funds over the amounts described in
clauses (i) and (ii) of the definition of Excess Cash, and (b) the aggregate of
(i) all scheduled payments of principal received or advanced with respect to the
Home Equity Loans and due during the related Due Period and all other amounts
collected, received or otherwise recovered in respect of principal on the Home
Equity Loans (including Principal Prepayments, but not including Payments Ahead
(as defined herein) during or in respect of the related Collection Period, and
(ii) the aggregate of the amounts allocable to principal paid to the Indenture
Trustee for deposit in the Note Account on the related Servicer Remittance Date
by the Issuer, the Depositor, the Company, RBMG, the Servicer or the Note
Insurer in connection with a repurchase, release, removal or substitution of any
Home Equity Loans pursuant to the Indenture, reduced by (c) the amount of any
Overcollateralization Surplus with respect to such Payment Date.
"Determination Date" means, as to any Payment Date, the fifteenth
(15th) day of the month in which such Payment Date occurs, or if such fifteenth
day is not a Business Day, then the preceding Business Day.
"Payments Ahead" means any payment of one or more scheduled Monthly
Payments remitted by a mortgagor with respect to a Mortgage Note in excess of
the scheduled Monthly Payment due during the related Due Period with respect to
such Mortgage Note, which sums the related mortgagor has instructed the Servicer
to apply to scheduled Monthly Payments due in one or more subsequent Due
Periods. Payments Ahead will be deemed received in the Due Period in which they
would have become due had they not been paid in advance.
"Principal Prepayment" means any mortgagor payment or other recovery in
respect of principal on a Home Equity Loan (including Net Liquidation Proceeds
(as defined herein) and Insurance Proceeds (as defined herein) allocable to
principal) which, in the case of a mortgagor payment, is received in advance of
its scheduled due date and is not accompanied by an amount as to interest
representing scheduled interest for any month subsequent to the month of such
payment, or that is accompanied by instructions from the related mortgagor
directing the Servicer to apply such payment to the principal balance of such
Home Equity Loan currently.
"Liquidated Home Equity Loan" means, as to any Payment Date, any Home
Equity Loan as to which the Servicer has determined during the related
Collection Period, in accordance with its customary servicing procedures, that
all Liquidation Proceeds (as defined herein) which it expects to recover from or
on account of such Home Equity Loan have been recovered.
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"Available Funds" with respect to any Payment Date will consist of the
sum of the amounts described in clauses (a) through (h) below, less (i) the
Administrative Fee Amount in respect of such Payment Date, (ii) P&I Advances and
Servicing Advances (as defined herein) previously made that are reimbursable to
the Servicer (other than those included in liquidation expenses for any
Liquidated Home Equity Loan and already reimbursed from the related Liquidation
Proceeds) in such Collection Period to the extent permitted by the Servicing
Agreement and certain other amounts for which the Indenture Trustee, the
Servicer and the Issuer are permitted to be reimbursed and (iii) the aggregate
amounts (A) deposited into the Collection Account or 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 (11 U.S.C.) (the "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 and due during the related Due Period and all
other interest payments on or in respect of the Home Equity Loans
received by or on behalf of the Servicer during the related Collection
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 made by the Servicer in
respect of the related Home Equity Loans and any net income from
related REO Properties for such Collection Period;
(b) all scheduled payments of principal received with respect
to the Home Equity Loans and due during the related Due Period and all
other principal payments (including Principal Prepayments, but
excluding amounts described elsewhere in this definition) received or
deemed to be received during the related Collection Period in respect
of the 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 Collection Period and applied by the Servicer to
reduce the Stated Principal Balance of the related Home Equity Loan
("Insurance Proceeds") (which proceeds will not include any amounts
applied to the restoration or repair of the related Mortgaged Property
or released to the related mortgagor in accordance with applicable law,
the Servicer's customary servicing procedures or the terms of the
related Home Equity Loan);
(d) the aggregate of any other proceeds received by the
Servicer during the related Collection Period in connection with the
liquidation of any Mortgaged Property securing a Home Equity Loan,
whether through trustee's sale, foreclosure, condemnation, taking by
eminent domain or otherwise (including any Insurance Proceeds to the
extent not duplicative of amounts in clause (c) above) ("Liquidation
Proceeds"), less unreimbursed P&I Advances, Servicing Advances and
expenses incurred by the Servicer 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 that are required or permitted to be repurchased,
released, removed or substituted by any of RBMG, the Company, the
Depositor or the Issuer during the related Collection Period as
described in "--Assignment of Home Equity Loans" and "Servicing of the
Home Equity Loans" herein, to the extent such amounts are received by
the Indenture Trustee on or before the related Servicer Remittance
Date;
(f) the amount of any P&I Advances made for such Payment Date;
(g) the aggregate of amounts deposited in the Note Account by
the Issuer, the Servicer or the Note Insurer, as the case may be,
during such Collection Period in connection with redemption of the
Notes as described under "--Redemption of the Notes" herein; and
(h) the amount applied by the Indenture Trustee from funds on
deposit in the Interest Coverage Account to cover shortfalls in
interest in the Notes attributable to the pre-funding feature.
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The "Stated Principal Balance" of any Home Equity Loan as of any date
of determination is equal to the scheduled principal balance thereof as of the
applicable Cut-Off Date, after application of all scheduled principal payments
due on or before such Cut-Off Date, reduced by the sum of the principal portion
of each Monthly Payment due on a Home Equity Loan subsequent to such Cut-Off
Date received by the Indenture Trustee or advanced to the Indenture Trustee,
reduced by all other amounts allocable to principal that have been received by
the Indenture Trustee with respect to such Home Equity Loan on or before such
date, and as further reduced to the extent that any Realized Loss thereon has
been allocated to such Home Equity Loan on or before the date of determination.
Calculation of One-Month LIBOR
On the second business day preceding each Payment Date (each such date,
an "Interest Determination Date"), the Indenture Trustee will determine the
London interbank offered rate for one-month U.S. dollar deposits ("One-Month
LIBOR") for the next Interest Period on the basis of the offered rates of the
Reference Banks for one-month U.S. dollar deposits, as such rates appear on page
3750 of Telerate, as of 11:00 a.m. (London time) on such Interest Determination
Date. As used in this section, "Business Day" means a day on which banks are
open for dealing in foreign currency and exchange in London and New York City;
"page 3750 of Telerate" means the display designated as page 3750 on the Dow
Jones Telerate Service (or such other page as may replace page 3750 on that
service for the purpose of displaying London interbank offered rates of major
banks); and "Reference Banks" means leading banks selected by the Indenture
Trustee and engaged in transactions in Eurodollar deposits in the international
Eurocurrency market (i) with an established place of business in London, (ii)
whose quotations appear on page 3750 of Telerate on the Interest Determination
Date in question, (iii) which have been designated as such by the Indenture
Trustee and (iv) not controlling, controlled by, or under common control with,
the Issuer or RBMG.
On each Interest Determination Date, One-Month LIBOR for the related
Interest Period will be established by the Indenture Trustee as follows:
(a) If on such Interest Determination Date two or more
Reference Banks provide such offered quotations, One-Month LIBOR for
the related Interest Period shall be the arithmetic mean of such
offered quotations (rounded upwards if necessary to the nearest whole
multiple of 0.0625%).
(b) If on such Interest Determination Date fewer than two
Reference Banks provide such offered quotations, One-Month LIBOR for
the related Interest Period shall be the higher of (x) One-Month LIBOR
as determined on the previous Interest Determination Date and (y) the
Reserve Interest Rate. The "Reserve Interest Rate" shall be the rate
per annum that the Indenture Trustee determines to be either (i) the
arithmetic mean (rounded upwards if necessary to the nearest whole
multiple of 0.0625%) of the one-month U.S. dollar lending rates which
New York City banks selected by the Indenture Trustee are quoting on
the relevant Interest Determination Date to the principal London
offices of leading banks in the London interbank market or, in the
event that the Indenture Trustee can determine no such arithmetic mean,
(ii) the lowest one-month U.S. dollar lending rate which New York City
banks selected by the Indenture Trustee are quoting on such Interest
Determination Date to leading European banks or (iii) in the event the
New York City banks are not offering quotes, One-Month LIBOR for the
Interest Period in which such Interest Determination Date occurs.
The establishment of One-Month LIBOR on each Interest Determination
Date by the Indenture Trustee and the Indenture Trustee's calculation of the
rate of interest applicable to the Notes for the related Interest Period shall
(in the absence of manifest error) be final and binding.
Pre-Funding Account
The Issuer will establish with the Indenture Trustee for the benefit of
the Noteholders a segregated account (the "Pre-Funding Account") into which it
will deposit upon receipt from the Issuer approximately $25,000,000 (the actual
amount deposited by the Issuer in the Pre-Funding Account, "Original Pre-Funding
Amount") to be used to purchase Additional Home Equity Loans. The Original
Pre-Funding Amount will be reduced during the Funding Period by the amount
thereof used to purchase Additional Home Equity Loans in accordance with the
Indenture (on any date of determination, the Original Pre-Funding Amount as so
reduced (the "Pre-Funding Amount").
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Interest Coverage Account
The Issuer will establish with the Indenture Trustee for the benefit of
the Noteholders a segregated account (the "Interest Coverage Account"). On the
Closing Date, the Issuer will deposit in such account a cash amount as required
by the Note Insurer and specified in the Indenture (the "Interest Coverage
Amount"). Funds on deposit in the Interest Coverage Account will be applied by
the Indenture Trustee to cover shortfalls in the Note Interest attributable to
the pre-funding feature during the Funding Period. Such shortfall initially will
exist during the Funding Period because while the Noteholders are entitled to
receive interest accruing on the Note Balance, the Note Balance during the
Funding Period will be greater than the aggregate Stated Principal Balance of
the Closing Date Home Equity Loans in the Home Equity Pool on the Closing Date.
Upon purchase by the Issuer and the pledge thereof to the Indenture Trustee of
Additional Home Equity Loans, funds on deposit in the Interest Coverage Account
will be released by the Indenture Trustee to the Issuer to the extent not
necessary to cover such shortfalls.
Mandatory Prepayments On The Notes from Excess Funds in the Pre-Funding Account
The Notes will be prepaid on the October 1998 Payment Date to the
extent that any amount remains on deposit in the Pre-Funding Account at the end
of the Funding Period. The Note Balance will be reduced by an amount equal to
the lesser of (i) the amount then on deposit in the Pre-Funding Account and (ii)
the outstanding Note Balance. Although no assurance can be given, it is
anticipated by the Issuer that the principal amount of Additional Home Equity
Loans purchased by the Issuer and pledged to the Indenture Trustee as security
for the Notes will require the application of substantially all of the Original
Pre-Funding Amount and that there should be no material amount of principal
prepaid to the Noteholders from amounts in the Pre-Funding Account. However, it
is unlikely that the Issuer will be able to deliver Additional Home Equity Loans
with an aggregate principal balance identical to the Original Pre-Funding
Amount.
Note Account
Pursuant to the Indenture, the Indenture Trustee shall establish and
maintain an account (the "Note Account") from which all payments with respect to
the Notes will be made. As described below, not later than the Servicer
Remittance Date, the Servicer will be required pursuant to the Servicing
Agreement to wire transfer to the Indenture Trustee for deposit in the Note
Account the sum (without duplication) of all amounts on deposit in the
Collection Account (as defined herein) that constitute any portion of Available
Funds for the related Payment Date.
All or a portion of the Note Account may be invested and reinvested by
the Indenture Trustee in one or more Permitted Investments (as defined herein)
bearing interest or sold at a discount. The Indenture Trustee or any affiliate
thereof may be the obligor on any investment in the Note Account which otherwise
qualifies as a Permitted Investment. No investment in the Note Account may
mature later than the Business Day preceding the Payment Date.
The Indenture Trustee will not in any way be held liable by reason of
any insufficiency in any Note Account resulting from any loss on any Permitted
Investment included therein (except to the extent the Indenture Trustee is the
obligor thereon).
All income or other gain from investments in the Note Account will not
be available to Noteholders or otherwise subject to any claims or rights of the
Noteholders and will be held in the Note Account for the benefit of the Issuer,
subject to withdrawal from time to time as permitted by the Indenture. Any loss
resulting from such investments will be for the account of the Issuer. The
Issuer will be required to deposit the amount of any such loss immediately upon
the realization of such loss to the extent such loss will not be offset by other
income or gain from investments in the Note Account and then available for such
application.
Permitted Investments. The Indenture will define "Permitted
Investments" generally as follows:
(a) direct obligations of, and obligations fully guaranteed
by, the United States of America, Fannie Mae, Freddie Mac, the Federal
Home Loan Banks or any agency or instrumentality of the United
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States of America, the obligations of which are backed by the full
faith and credit of the United States of America;
(b) (i) demand and time deposits in, certificates of deposit
of, banker's acceptances issued by or federal funds sold by any
depository institution or trust company (including the Indenture
Trustee or its agent acting in their respective commercial capacities)
incorporated under the laws of the United States of America or any
state thereof and subject to supervision and examination by federal
and/or state authorities, so long as, at the time of such investment or
contractual commitment providing for such investment, such depository
institution or trust company or its ultimate parent has a short-term
unsecured debt rating in one of the two highest available rating
categories of S&P and the highest available rating category of Moody's
and provided that each such investment has an original maturity of no
more than 365 days, and (ii) any other demand or time deposit or
deposit which is fully insured by the Federal Deposit Insurance
Corporation;
(c) repurchase obligations with a term not to exceed 30 days
with respect to any security described in clause (a) above and entered
into with a depository institution or trust company (acting as a
principal) rated "A" or higher by "S&P" and rated "A2" or higher by
Moody's; provided, however, that collateral transferred pursuant to
such repurchase obligation must be of the type described in clause (a)
above and must (i) be valued daily at current market price plus accrued
interest, (ii) pursuant to such valuation, be equal, at all times, to
105% of the cash transferred by the Indenture Trustee in exchange for
such collateral and (iii) be delivered to the Indenture Trustee or, if
the Indenture Trustee is supplying the collateral, an agent for the
Indenture Trustee, in such a manner as to accomplish perfection of a
security interest in the collateral by possession of certificated
securities;
(d) securities bearing interest or sold at a discount issued
by any corporation incorporated under the laws of the United States of
America or any state thereof which has a long-term unsecured debt
rating in the highest available rating category of each of the Rating
Agencies at the time of such investment;
(e) commercial paper having an original maturity of less than
365 days and issued by an institution having a short-term unsecured
debt rating in the highest available rating category of each of the
Rating Agencies at the time of such investment;
(f) a guaranteed investment contract approved by each of the
Rating Agencies and the Note Insurer and issued by an insurance company
or other corporation having a long-term unsecured debt rating in the
highest available rating category of each of the Rating Agencies at the
time of such investment;
(g) money market funds having ratings in one of the two
highest available rating categories of S&P and Moody's at the time of
such investment which invest only in other Permitted Investments (any
such money market funds which provide for demand withdrawals being
conclusively deemed to satisfy any maturity requirements for Permitted
Investments set forth herein), including money market funds of the
Indenture Trustee and any such funds that are managed by the Indenture
Trustee or its affiliates or for which the Indenture Trustee or any
affiliate acts as advisor as long as such money market funds satisfy
the criteria of this subparagraph (g); and
(h) any investment approved in writing by the Note Insurer and
written evidence that any such investment will not result in a
downgrading or withdrawal of the rating by each Rating Agency on the
Notes.
The Indenture Trustee may purchase from or sell to itself or an
affiliate, as principal or agent, the Permitted Investments listed above. All
Permitted 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.
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Overcollateralization Feature
Credit enhancement with respect to the Notes will be provided in part
by overcollateralization resulting from the Home Equity Pool Balance as of the
end of each Due Period exceeding the Note Balance for the related Payment Date.
On the Closing Date, the initial Overcollateralization Amount for the Notes will
equal 0.00% of the sum of the Closing Date Home Equity Pool Balance and the
Original Pre-Funding Amount. The Indenture requires that this
Overcollateralization Amount be increased to, and thereafter maintained at, the
Required Overcollateralization Amount. This increase and subsequent maintenance
is intended to be accomplished by the application of monthly Excess Cash to
accelerate the pay down of the Note Balance until the Overcollateralization
Amount reaches the Required Overcollateralization Amount. Such applications of
Excess Cash, because they consist of interest collections on the Home Equity
Loans, but are distributed as principal on the Notes, will increase the related
Overcollateralization Amount.
The "Excess Cash" on any Payment Date will be equal to Available Funds
for such Payment Date, reduced by the sum of (i) any amounts payable to the Note
Insurer for Insured Payments paid on prior Payment Dates and not yet reimbursed
and for any unpaid Note Insurer Premiums for prior Payment Dates (in each case
with interest thereon at the Late Payment Rate set forth in the Insurance
Agreement), (ii) the Note Interest for the related Payment Date, and (iii) the
Monthly Principal for the related Payment Date.
The "Overcollateralization Amount" with respect to any Payment Date is
the amount, if any, by which (x) the aggregate Stated Principal Balance of the
Home Equity Loans as of the end of the related Due Period plus any amount on
deposit in the Pre-Funding Account at such time disregarding any Pre-Funding
Account Earnings exceeds (y) the Note Balance as of such Payment Date after
taking into account payments of Monthly Principal (disregarding any permitted
reduction in Monthly Principal due to an Overcollateralization Surplus) made on
such Payment Date. "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 level of the Overcollateralization Amount
with respect to 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 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 of the Home Equity Loans
with respect to certain delinquency rate tests specified in the Indenture. In
addition, Excess Cash will be applied to the payment in reduction of principal
of the Notes during the period that the Home Equity Loans 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 Notes until such Required
Overcollateralization Amount is reached. Conversely, any decrease in the
Required Overcollateralization Amount will result in a decelerated amortization
of the Notes until such Required Overcollateralization Amount is reached.
The application of Excess Cash to reduce the Note Balance on any
Payment Date will have the effect of accelerating the amortization of the Notes
relative to the amortization of the Home Equity Loans in the Trust Estate.
In the event that the Required Overcollateralization Amount 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 that would
otherwise be paid to the Notes on any such Payment Date in reduction of the Note
Balance will be released to the holder(s) of the Residual Interest.
With respect to any Payment Date, an Overcollateralization Surplus
means, the amount, if any, by which (x) the Overcollateralization Amount for
such Payment Date exceeds (y) the then applicable Required Overcollateralization
Amount for such Payment Date. In the absence of Realized Losses, as Excess Cash
is applied to accelerate amortization of the Notes and the Required
Overcollateralization Amount is reached and maintained, because the Note Balance
will be less than the aggregate Stated Principal Balance of the Home Equity
Loans, cashflow from the Home Equity Loans will be available to be paid to the
holders of the Residual Interest. Such amounts if not paid would otherwise cause
an Overcollateralization Surplus.
The Indenture will provide that, on any Payment Date, all amounts
collected on the Home Equity Loans in respect of principal to be applied on such
Payment Date will be paid to Noteholders in reduction of the Note Balance
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on such Payment Date, except as provided above with respect to any Payment Date
for which there exists or would otherwise exist an Overcollateralization
Surplus. If any Home Equity Loan became a Liquidated Home Equity Loan during
such prior Collection Period, the Net Liquidation Proceeds related thereto and
allocated to principal may be less than the Stated Principal Balance of the
related Home Equity Loan; the amount of any such deficiency is a "Realized
Loss." In addition, the Indenture will provide that the Stated Principal Balance
of any Home Equity Loan that becomes a Liquidated Home Equity Loan shall equal
zero. The Indenture will not require that the amount of any Realized Loss be
paid to Noteholders on the Payment Date following the event of loss. However,
the occurrence of a Realized Loss will reduce the Overcollateralization Amount
for the Notes, and will result in more Excess Cash, if any, being paid on the
Notes in reduction of the 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 will
occur. With respect to any Payment Date, an "Overcollateralization Deficit" will
mean the amount, if any, by which (x) the Note Balance, after taking into
account all payments to be made on such Payment Date in reduction thereof,
including any Excess Cash payments, exceeds (y) the sum of the aggregate Stated
Principal Balance of the Home Equity Loans as of the end of the applicable Due
Period. Accordingly, the Insurance Policy is similar to the provisions described
above with respect to the overcollateralization provisions insofar as the
Insurance Policy guarantees ultimate payment of the full amount of the Original
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 Note Balance.
Reports to Noteholders
Concurrently with each payment to the Noteholders, the Indenture
Trustee will mail a statement to each Noteholder, the Note Insurer, the Issuer
and the Underwriter in the form required by the Indenture and setting forth the
following information available to the Indenture Trustee:
(a) the amount of such payment to the Noteholders on the
related Payment Date allocable to (i) Monthly Principal (separately
setting forth Principal Prepayments) and (ii) any Excess Cash payment;
(b) the amount of such payment to the Noteholders on such
Payment Date allocable to (i) Note Interest and (ii) the Available
Funds Cap Carry Forward Amount;
(c) the Note Balance 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 Stated Principal Balance of the Home Equity
Loans as of the end of the related Due Period;
(e) the amount of P&I Advances made with respect to such
Payment Date and the aggregate amount of unreimbursed P&I Advances and
Servicing Advances, if any;
(f) the number and the aggregate of the Stated Principal
Balances of the Home Equity Loans delinquent (i) one month, (ii) two
months and (iii) three or more months as of the end of the related
Collection Period;
(g) the aggregate of the Stated Principal Balances of the Home
Equity Loans in foreclosure or other similar proceedings or in which
the mortgagor is in bankruptcy and the book value of any real estate
acquired through foreclosure or grant of a deed in lieu of foreclosure
during the related Collection Period;
(h) the aggregate of the Stated Principal Balances of the Home
Equity Loans repurchased by RBMG, the Company, the Depositor, the
Servicer or the Note Insurer, separately setting forth the aggregate
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of the Stated Principal Balances of Home Equity Loans delinquent for
three consecutive monthly installments purchased by the holder of the
majority of the Residual Interest, the Servicer or the Note Insurer at
their option pursuant to the Servicing Agreement;
(i) the Insured Payment, if any, for such Payment Date;
(j) the amount of the aggregate Servicing Fee paid to or
retained by the Servicer with respect to such Payment Date; and
(k) the Overcollateralization Amount, the then applicable
Required Overcollateralization Amount, the Overcollateralization
Surplus, if any, and the Overcollateralization Deficit, if any, with
respect to such Payment Date.
In the case of information furnished pursuant to clauses (a) and (b)
above, the amounts will be expressed as a dollar amount per Note with a $1,000
principal denomination.
Within 90 days after the end of each calendar year, the Indenture
Trustee will mail to each person who at any time during such calendar year was a
Noteholder and to the Issuer and the Underwriter, if requested in writing by any
such person, a statement containing the information set forth in clauses (a) and
(b) above, aggregated for such calendar year or, in the case of each person who
was a Noteholder for a portion of such calendar year, setting forth such
information for each month thereof. Such obligation of the Indenture Trustee
shall be deemed to have been satisfied to the extent that substantially
comparable information shall be prepared and furnished by the Indenture Trustee
to Noteholders pursuant to any requirements of the Code as are in force from
time to time.
Note factor information may be obtained from the Indenture Trustee by
placing a telephone call to (800) 735-7777. In addition, if the Issuer so
directs the Indenture Trustee on terms acceptable to the Indenture Trustee, the
Indenture Trustee will make available through its electronic bulletin board
system, on a confidential basis, certain information related to the Home Equity
Loans.
Redemption of the Notes
The Notes will be subject to redemption, in whole but not in part, at
the option of the Servicer or the Note Insurer, on or after the Payment Date on
which the Home Equity Pool Balance has declined to less than 10% of the
Transaction Balance (the "Redemption Date").
The Notes will be redeemed at a redemption price of 100% of the then
outstanding Note Balance, plus accrued but unpaid interest thereon (including
any Available Funds Cap Carry Forward Amount) 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 due 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.
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 remaining after
making payments of interest and principal due on the Notes and other payments
required on such Payment Date will be released to the holder(s) of the Residual
Interest, free of the lien of the Indenture. Such amounts will not be available
to make payments on the Notes or payments to the Note Insurer on any subsequent
Payment Date.
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Example of Payments
The following chart sets forth an example of payments on the Notes for
the first month of the Trust Estate's existence.
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------------------------------------
June 1, 1998 Initial Cut-Off The initial principal balance of the Closing Date Home Equity Pool will be
Date the aggregate Stated Principal Balance of the Closing Date Home Equity Loans
as of June 1, 1998, after deducting any principal payments due on or before
such date. Any principal and interest
payments due on or before June 1, 1998
will not be part of the Home Equity Pool.
- -----------------------------------------------------------------------------------------------------------------------
June 1 through Collection Partial principal prepayments and prepayments in full with interest thereon
June 30 Period up to, but not including, the date of such prepayment in full, received at
any time during this period will be deposited into the Collection Account for
payment to Noteholders on July 27, 1998
(the first Business Day after July 25).
- -----------------------------------------------------------------------------------------------------------------------
June 22, 1998 Interest The initial Interest is on or about June 22, 1998, on Determination which the
Determination Note Interest Rate for the initial July 27, 1998 Payment Date will Date be
Date determined. The Interest Determination Date for subsequent periods is the second
Business Day preceding each Payment Date with respect to the next Interest
Period (e.g. July 23, 1998 for the August 25, 1998 Payment Date.)
- -----------------------------------------------------------------------------------------------------------------------
June 29, 1998 Interest The Interest Period in respect of any Payment Date will be the period from and
July 27, 1998 Period including the Closing Date, in the case of the Initial Payment Date, or from and
including the immediately preceding Payment Date, in the case of any subsequent
Payment Date, to but excluding the related Payment Date.
- -----------------------------------------------------------------------------------------------------------------------
July 24, 1998 Record Date Payments on July 27, 1998 will be made to Noteholders of record at the close of
business on July 24, 1998 (the Business Day prior to the Payment Date).
- -----------------------------------------------------------------------------------------------------------------------
June 2 through Due Period Payments due during the related Due Period (June 2, 1998 through July 1, July 1,
July 1, 1998 1998 1998) from mortgagors will be deposited in the Collection Account as
received, and will include scheduled principal payments plus interest on the
related principal balances.
- -----------------------------------------------------------------------------------------------------------------------
July 15, 1998 Determination The Determination Date is, as to any Payment Date, the fifteenth day of the
Date month in which such Payment Date occurs, or if such fifteenth day is not a
Business Day, then the preceding Business Day. On the second Business Day
following the Determination Date, the amounts of principal and interest that
will be distributed on the July 27, 1998
Payment Date will be determined by the
Indenture Trustee.
- -----------------------------------------------------------------------------------------------------------------------
July 20, 1998 Servicer On the eighteenth of each month (or the first Business Day thereafter), the
Remittance Servicer will remit to the Indenture Trustee for deposit into the Note Account,
the amount of principal and interest to be distributed to the Noteholders on the
next Payment Date from amounts on deposit in the Collection Account, together
with any P&I Advances required to be made by the Servicer for such Payment Date.
- -----------------------------------------------------------------------------------------------------------------------
July 27, 1998 Payment Date On the twenty-fifth day of each month (or the first Business Day thereafter),
the Indenture Trustee will pay or cause to be paid to the Noteholders the
amounts determined on the eighteenth day of July. If a Monthly Payment due
during the related Due Period is not received from a mortgagor by July 15, 1998,
the Servicer will make a P&I Advance with respect to such late payment.
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Each succeeding month will follow the same pattern except for the
Initial Cut-Off Date, initial Interest Period and initial Interest Determination
Date.
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Optional Purchase of Delinquent Home Equity Loans
The Servicer will have the option to purchase any Home Equity Loan that
is 90 days or more delinquent (i.e., any Home Equity Loan on which the related
mortgagor has failed to make three or more consecutive Monthly Payments) upon a
determination by, and notice by, the Servicer that such Home Equity Loan will
otherwise become subject to foreclosure proceedings. The purchase price to be
paid to the Indenture Trustee to release any such Home Equity Loan from the
Trust Estate will equal the Stated Principal Balance of such Home Equity Loan,
plus accrued and unpaid interest thereon to the Due Date related to the Payment
Date on which the amount of such purchase price will be paid to the Noteholders
plus unreimbursed P&I Advances and Servicing Advances.
P&I Advances
Subject to the following limitations, the Servicer will be obligated to
advance or cause to be advanced on or before each Servicer Remittance Date from
its own funds, or funds in the Collection Account that are Payments Ahead, in an
amount equal to the aggregate of all payments of principal and interest, net of
the Servicing Fee, that were due during the related Due Period on the Home
Equity Loans and that were delinquent on the related Determination Date, plus
certain amounts representing assumed payments not covered by any current net
income on the Mortgaged Properties acquired by foreclosure or deed in lieu of
foreclosure (a "REO Property" and any such advance, a "P&I Advance").
Notwithstanding the foregoing, with respect to a delinquent balloon payment, the
Servicer is not required to make an advance of such delinquent balloon payment.
The Servicer will, however, make monthly P&I Advances with respect to Balloon
Loans with delinquent balloon payments, in each case in an amount equal to the
assumed monthly principal and interest payment that would have been due on the
related Due Date based on the original assumed hypothetical principal
amortization schedule for the applicable Balloon Loan.
P&I Advances are required to be made only to the extent they are deemed
by the Servicer to be recoverable from related late collections, Insurance
Proceeds or Liquidation Proceeds. The purpose of making such P&I Advances is to
maintain a regular cashflow to the Noteholders, rather than to guarantee or
insure against losses. The Servicer will not be required to make any P&I
Advances with respect to reductions in the amount of the Monthly Payments on the
Home Equity Loans due to bankruptcy proceedings or the application of the Relief
Act.
All P&I Advances will be reimbursable to the Servicer from late
collections, Insurance Proceeds and Liquidation Proceeds from the Home Equity
Loan as to which such unreimbursed P&I Advance was made. In addition, any P&I
Advances previously made in respect of any Home Equity Loan that are deemed by
the Servicer to be nonrecoverable from related late collections, Insurance
Proceeds or Liquidation Proceeds may be reimbursed to the Servicer out of any
funds in the Collection Account prior to the payments on the Notes. In the event
the Servicer fails in its obligation to make any such P&I Advance, the Indenture
Trustee, to the extent it has been appointed as successor to the Servicer, will
be obligated to make any such P&I Advance to the extent required in the
Servicing Agreement. In such event, the Indenture Trustee will be reimbursed for
P&I Advances in the same manner described above with respect to the Servicer.
Compensating Interest Payments
With respect to each Home Equity Loan as to which a prepayment in whole
or in part was received, the Servicer will be required with respect to such
Payment Date to remit to the Note Account, no later than the related Servicer
Remittance Date, from amounts otherwise payable to the Servicer as its Servicing
Fee for the related Collection Period, an amount equal to the excess, if any, of
(a) 30 days' interest on the Stated Principal Balance of each such Home Equity
Loan (immediately prior to such payment) at the related Coupon Rate, less (b)
the amount of interest actually received on such Home Equity Loan during the
related Due Period (each such amount, a "Compensating Interest Payment") for
payment on the Notes on such Payment Date to insure that the Noteholders do not
incur a shortfall in interest as a result of such prepayment (such shortfall, a
"Prepayment Interest Shortfall"). The Servicer will not be entitled to be
reimbursed from collections on the Home Equity Loans or any assets of the Trust
Estate for any Compensating Interest Payments made.
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Note Events of Default
An Event of Default with respect to the Notes shall occur: (a) if, on
any Payment Date, after taking into account all Issuer payments made in respect
of the 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; (b) if certain negative covenants in the Indenture or certain
covenants relating to redemptions of Notes are not observed; (c) if any other
covenant of the Issuer set forth in the Indenture, the Servicing Agreement, the
Depositor Sale Agreement, or the Insurance Agreement is not observed and such
failure continues for a period of sixty days after notice to the Issuer by the
Indenture Trustee or to the Issuer and the Indenture Trustee by the Noteholders
evidencing at least 25% in aggregate Note Balance; (d) if the lien of the
Indenture fails to constitute a valid first priority security interest in the
Trust Estate; (e) if any representation or warranty made by the Issuer in the
Indenture, the Servicing Agreement, the Depositor Sale Agreement, or the
Insurance Agreement or in any certificate delivered pursuant thereto is
incorrect in a material respect as of the time made, and the circumstance in
respect of which such representation or warranty is incorrect is not cured
within thirty days after notice thereof is given to the Issuer by the Indenture
Trustee or by the Noteholders evidencing at least 25% in aggregate Note Balance;
or (f) upon the occurrence of certain events of bankruptcy, insolvency,
receivership or reorganization of the Issuer. The failure to pay the Available
Funds Cap Carry Forward Amount on any Payment Date will only constitute an Event
of Default to the extent funds are available to make such payment as described
under "Description of the Notes-Payments on the Notes." In the absence of a
failure by the Note Insurer to pay Insured Payments, no acceleration of the
maturity of the Notes shall be permitted without the consent of the Note
Insurer.
Rights Upon Event of Default
In case an Event of Default should occur and be continuing, the
Indenture Trustee may, and on request of Noteholders evidencing more than 50% in
aggregate Note Balance shall, declare the principal of the Notes to be due and
payable. Such declaration may under certain circumstances be rescinded by the
Noteholders evidencing a majority in Note Balance.
If, following an Event of Default, the Notes have been declared to be
due and payable, the Indenture Trustee may in its discretion, with the consent
of the Note Insurer, (provided that the Noteholders have not directed the
Indenture Trustee to sell the Home Equity Loans included in the Trust Estate),
refrain from selling such Home Equity Loans and continue to apply all amounts
received on such Home Equity Loans to payments due on the Notes in accordance
with their terms, notwithstanding the acceleration of the maturity of the Notes.
In addition, upon an Event of Default the Indenture Trustee may, with the
consent of the Note Insurer, in its discretion (provided that, unless the Event
of Default relates to a default in payment of principal or interest, the
Indenture Trustee must receive the consent of all Noteholders, and certain other
conditions must be met), sell the Home Equity Loans included in the Trust
Estate, in which event the Notes will be payable, without regard to their Stated
Maturity, out of the collections on, or the proceeds from the sale of, the Home
Equity Loans and any overdue installments of interest on the Notes will, to the
extent permitted by applicable law, bear interest at the highest stated interest
rate borne by any Note.
Subject to the provisions of the Indenture relating to the duties of
the Indenture Trustee, in case an Event of Default shall occur and be
continuing, the Indenture Trustee shall be under no obligation to exercise any
of the rights and powers under the Indenture at the request or direction of any
of the Noteholders, unless such Noteholders have offered to the Indenture
Trustee reasonable security or indemnity satisfactory to it against the costs,
expenses and liabilities which might be incurred by it in compliance with such
request or direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, the Noteholders evidencing at least a
majority in Note Balance will have the right to direct the time, method, and
place of conducting any proceeding or any remedy available to the Indenture
Trustee or exercising any trust or power conferred on the Indenture Trustee with
respect to the Notes; and the Noteholders evidencing a majority in Note Balance
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 each Noteholder affected thereby; provided, however, that in the absence of a
failure by the Note Insurer to pay Insured Payments, the Note Insurer has all
rights of the Noteholders, including the right to consent to actions.
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<PAGE>
List of Noteholders
Three or more Noteholders (each of whom has owned a Note for at least
six months) may, by written request to the Indenture Trustee, obtain access to
the list of all Noteholders maintained by the Indenture Trustee for the purpose
of communicating with other Noteholders with respect to their rights under the
Indenture. The Indenture Trustee may elect not to afford the requesting
Noteholders access to the list of Noteholders if it agrees to mail the desired
communication or proxy, on behalf of the requesting Noteholders, to all
Noteholders.
The Indenture Trustee
Bankers Trust Company, a New York chartered banking corporation, will
act as Indenture Trustee for the Notes pursuant to the Indenture. The Indenture
Trustee's offices for notices under the Indenture are located at 3 Park Plaza,
Irvine, California 92614, Attention: Corporate Trust Administration, RBMG
Funding Co. Home Equity Loan Trust 1998-1.
The Indenture will provide that the Indenture Trustee is entitled to
the Indenture Trustee's Fee and reimbursement of certain expenses. In addition,
the Indenture Trustee is entitled to any earnings from investment of funds in
the Note Account. The Indenture Trustee will, upon termination of the Servicer
under the Servicing Agreement, be obligated to succeed to the obligations of the
Servicer or to appoint an eligible successor servicer.
The Indenture will provide that the Indenture Trustee and any director,
officer, employee or agent of the Indenture Trustee will be indemnified by the
Trust Estate and will be held harmless against any loss, liability or expense
(not including expenses, incurred in the ordinary course of the Indenture
Trustee's performance in accordance with the provisions of the Indenture)
incurred by the Indenture Trustee arising out of or in connection with the
acceptance or administration of its obligations and duties under the Indenture,
other than any loss, liability or expense (i) resulting from the Servicer's
actions or omissions in connection with the Servicing Agreement and the Home
Equity Loans, (ii) that constitutes a specific liability of Indenture Trustee
under the Indenture or (iii) incurred by reason of willful misfeasance, bad
faith or gross negligence in the performance of the Indenture Trustee's duties
under the Indenture as a result of a breach, or by reason of reckless disregard,
of the Indenture Trustee's obligations and duties under the Indenture.
The Indenture Trustee is eligible to serve as such under the Indenture
only if it is a corporation or banking association organized and doing business
under the laws of the United States or any state thereof, authorized under such
laws to exercise corporate trust powers and subject to supervision or
examination by federal or state authority and has combined capital and surplus
of at least $50,000,000.
The Indenture Trustee may, upon written notice to the Servicer, the
Issuer and all Noteholders, resign at any time, in which event the Servicer will
be obligated to appoint a successor Indenture Trustee. If no successor Indenture
Trustee has been appointed and has accepted appointment within 30 days after
giving such notice of resignation, the resigning Indenture Trustee may petition
any court of competent jurisdiction for appointment of a successor Indenture
Trustee. Any such successor Indenture Trustee must be approved by the Note
Insurer and each Rating Agency. The Indenture Trustee may also be removed at any
time (i) by the Issuer or the Note Insurer, if the Indenture Trustee ceases to
be eligible to continue as such as described above or if the Indenture Trustee
shall be adjudged bankrupt or insolvent or a receiver with respect to it or its
property is appointed, (ii) by Noteholders evidencing at least 51% of the
aggregate Note Balance with the consent of the Note Insurer or (iii) by the Note
Insurer. Any removal or resignation of the Indenture Trustee and appointment of
a successor Indenture Trustee as described above will not become effective until
acceptance of appointment by the successor Indenture Trustee.
CERTAIN PREPAYMENT AND YIELD CONSIDERATIONS
General
The yield to maturity and the aggregate amount of payments on the Notes
will be affected by, among other things, the rate and timing of principal
payments on the Home Equity Loans, and the amount and timing of mortgagor
defaults resulting in Realized Losses. Such yield may be adversely affected by a
higher or lower than
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anticipated rate of principal payments on the Home Equity Loans. The rate of
principal payments on such Home Equity Loans will in turn be affected by the
amortization schedules of the Home Equity Loans, the rate and timing of
principal prepayments thereon by the mortgagors, liquidations of defaulted Home
Equity Loans and repurchases of Home Equity Loans due to certain breaches of
representations and warranties, and purchases by the Note Insurer or the
Servicer. The timing of changes in the rate of prepayments, liquidations,
repurchases and purchases of the Home Equity Loans may, and the timing of
Realized Losses will, 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. Certain loss scenarios could lead to the failure of
Noteholders to fully recover their initial investments. 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 as to the timing of principal
prepayments on the Notes.
The Home Equity Loans may be prepaid by the mortgagors at any time;
however, in certain circumstances, the Home Equity Loans will be subject to a
prepayment charge. See "Description of the Home Equity Pool" herein. All of the
Home Equity Loans contain due-on-sale clauses. Prepayments, liquidations,
repurchases and purchases of the Home Equity Loans by the Note Insurer or the
Servicer will result in payments to Noteholders of principal amounts that
otherwise would be paid over the remaining terms of the Home Equity Loans.
Factors affecting prepayment (including defaults and liquidations) of mortgage
loans include changes in mortgagors' housing needs, job transfers, unemployment,
mortgagors' net equity in the mortgaged properties, changes in the value of the
mortgaged properties, mortgage market interest rates and servicing decisions.
The Home Equity Pool consists of Fixed Rate Loans and Adjustable Rate Loans. If
prevailing mortgage rates fell significantly below the Coupon Rates on the Fixed
Rate Loans, the rate of prepayments (including from refinancing) on such Home
Equity Loans would be expected to increase. Conversely, if prevailing mortgage
rates rose significantly above the Coupon Rates, the rate of prepayments on such
Home Equity Loans would be expected to decrease. Although the Coupon Rates on
the Adjustable Rate Loans may change from time to time, such Coupon Rates might
not be consistent with prevailing rates because of the manner in which such
Coupon Rates are computed. In addition, the Index on such Home Equity Loans may
not rise and fall consistently with mortgage interest rates generally.
Accordingly, the Coupon Rates on the Adjustable Rate Loans may be higher than
mortgage rates generally, resulting in prepayments when the Coupon Rates on such
Home Equity Loans are increasing.
In addition to the foregoing, the allocation of Excess Cash in respect
of principal will have the effect of accelerating the amortization of the Notes
relative to the amortization of the Home Equity Loans. This will cause the Notes
to be overcollateralized by the Home Equity Loans to the extent that the
aggregate Stated Principal Balance of the Home Equity Loans exceeds the
outstanding Note Balance of the Notes, and as a result of such accelerated
amortization, the weighted average lives of the Notes will be shorter than
otherwise would be the case. The yield to maturity on the Notes will depend on
the availability of the Excess Cash and, consequently, will be sensitive to the
rate and timing of principal payments (including prepayments, repurchases,
purchases, defaults and liquidations) on the Home Equity Loans and to
fluctuations in the level of One-Month LIBOR, which may vary significantly over
time. To the extent that any modification of a Home Equity Loan permitted to be
made by the Servicer pursuant to the Servicing Agreement provides the related
mortgagor with a lower Coupon Rate, Maximum Rate or Monthly Payment than
otherwise would be the case, such modification could cause a corresponding
reduction in the amount of the Excess Cash available, because the respective
amounts of interest and principal to be distributed on the Notes will be
calculated without regard to such modification and, further, because the
Servicer will not be required to disregard such modification for purposes of
making P&I Advances. Any such reduction in the availability of the Excess Cash
will cause the amount by which the Notes are overcollateralized to increase more
slowly than otherwise would be the case.
To the extent that the Original Pre-Funding Amount has not been fully
applied to the purchase of Additional Home Equity Loans by the Issuer and the
pledge thereof to the Indenture Trustee as security for the Notes by the end of
the Funding Period, the Noteholders will receive a prepayment of principal in an
amount equal to (a) the lesser of (i) the Pre-Funding Amount remaining in the
Pre-Funding Account on the first Payment Date following the termination of the
Funding Period and (ii) the outstanding Note Balance. Although no assurance can
be given, it is anticipated by the Issuer that the principal amount of
Additional Home Equity Loans purchased by the Issuer and pledged to the
Indenture Trustee will require the application of substantially all of the
Original Pre-Funding Amount and that there should be no material amount of
principal prepaid to the Noteholders from the Pre-Funding Account. However, it
is unlikely that the Issuer will be able to deliver Additional Home Equity Loans
with
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<PAGE>
an aggregate principal balance identical to the Original Pre-Funding
Amount, with the result that some prepayment of the Notes will occur on the
October 1998 Payment Date.
Because it is impossible to accurately predict the timing and dollar
amount of principal prepayments on the Home Equity Loans, if any, that will be
made, the Noteholders may find it difficult to analyze the effect of principal
prepayments on the yields and weighted average lives of the Notes.
The yield to maturity on the Notes will be affected by the level of
One-Month LIBOR, which bears no relationship to the Coupon Rates applicable to
the Fixed Rate Loans and which is different than the Index applicable to the
Adjustable Rate Loans. To the extent that the amount of interest otherwise
payable in respect of the Notes is greater than the amount of available interest
on the Home Equity Loans with respect to any Payment Date, shortfalls may occur
in respect of the Notes. Although the Noteholders will be entitled to be
reimbursed for any such shortfalls as and to the extent described herein, the
yield to Noteholders may be adversely affected by the occurrence of such
shortfalls. See "Risk Factors--Prepayment of the Home Equity Loans May Affect
the Yield to Maturity of the Notes" herein.
The rate of defaults on the Home Equity Loans also will affect the rate
and timing of principal payments on the Home Equity Loans. In general, defaults
on mortgage loans are expected to occur with greater frequency in their early
years. Increases in the Monthly Payments on the Adjustable Rate Loans to an
amount in excess of the Monthly Payment required at their respective dates of
origination may result in a default rate higher than that on level payment
mortgage loans, and the repayment of the Adjustable Rate Loans will be dependent
on the ability of the related mortgagors to make larger Monthly Payments as a
result of increases in the related Coupon Rates. In addition, there is a risk
that the Balloon Loans may default at maturity because the ability of a
mortgagor to make a balloon payment typically will depend upon the mortgagor's
ability either to refinance the related Balloon Loan or to sell the related
Mortgaged Property. Furthermore, the rate of default on Home Equity Loans that
are refinancings or that were not originated under RBMG's Full Documentation
program also may be higher than for other types of Home Equity Loans. See "Risk
Factors" herein. As a consequence of the underwriting standards for RBMG's "B
and C" subprime credit risk residential lending program, 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 guidelines of Fannie Mae
and FHLMC. See "Description of the Home Equity Pool--Underwriting Standards"
herein. 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 be serviced in a manner intended to result in
a faster exercise of remedies, including foreclosure, in the event Home Equity
Loan delinquencies and defaults occur than would be the case if the Home Equity
Loans were serviced in a more conventional manner. 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 Mortgaged Properties are located. The risk of delinquencies and loss is
greater and prepayments are less likely in regions where a weak or deteriorating
economy or real estate market exists, as may be evidenced by, among other
factors, increasing unemployment or falling property values.
When a principal prepayment in full is made on a Home Equity Loan, the
mortgagor is charged interest only for the period from the Due Date of the
immediately preceding Monthly Payment up to, but not including, the date of such
prepayment, instead of for a full month. Partial principal prepayments are
applied as of the Due Date on or prior to the date of receipt, with a resulting
reduction in interest payable on the succeeding Due Date. Full or partial
prepayments (or other liquidations) received in any calendar month will be
distributed to Noteholders on the Payment Date in the month following the month
of receipt. With respect to such full or partial prepayments (or other
liquidations), the Servicer is obligated to fund shortfalls in collection of one
full month's interest (adjusted to the related Net Coupon Rate) but only to the
extent of the Servicing Fee otherwise payable to the Servicer for the related
Due Period. Accordingly, to the extent any such shortfall in interest
collections exceeds the amount that the Servicer is obligated to fund, the
effect of any such principal prepayment will be to reduce the aggregate amount
of interest that is available for payment to the Noteholders. "Net Coupon Rate"
means, with respect to any Home Equity Loan, a per annum rate of interest equal
to the applicable Coupon Rate minus the Servicing Fee Rate.
In addition, the yield to maturity of the Notes will depend on the
prices paid by the Noteholders 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.
S-67
<PAGE>
Weighted Average Life of the Notes
Weighted average life refers to the average amount of time that will
elapse from the date of issuance of a security to the date of payment to the
investor of each dollar paid in reduction of principal of such security
(assuming no losses). The weighted average life of the Notes will be influenced
by, among other things, the rate at which principal of the Home Equity Loans is
paid, which may be in the form of scheduled amortization, prepayments or
liquidations.
The model used in this Prospectus Supplement with respect to Fixed Rate
Loans is the Home Equity Prepayment ("HEP") assumption. HEP assumes that a pool
of loans prepays in the first month of the life of such loan at a constant
prepayment rate that corresponds in CPR (as defined below) to one-fifth the
given HEP percentage, and increases by an additional one-fifteenth the given HEP
percentage each month thereafter until the twelfth month, thereafter remaining
at a CPR equal to the given HEP percentage. The model used in this Prospectus
Supplement with respect to Adjustable Rate Loans is the Constant Prepayment Rate
("CPR") assumption. The CPR represents an assumed constant rate of prepayment
each month, expressed as an annual rate, relative to the then outstanding
principal balance on a pool of new mortgage loans for the life of such Home
Equity Loans. Each of CPR and HEP does not purport to be either an historical
description of the prepayment experience of any pool of mortgage loans or a
prediction of the anticipated rate of prepayment of any mortgage loans,
including the Home Equity Loans.
The table below entitled "Percentage of Initial Note Balance
Outstanding at the Prepayment Assumption" has been prepared on the basis of
certain assumptions, as described below, regarding the characteristics of the
Home Equity Loans and the Home Equity Loans that are expected to be included in
the Trust Estate, as described herein under "Description of the Home Equity
Pool," and the performance thereof. The table assumes, among other things, that:
(A) the Closing Date Home Equity Loans are divided into three types of Fixed
Rate Loans and four types of Adjustable Rate Loans and (B) the Home Equity Loans
have the following aggregate initial characteristics:
<TABLE>
<CAPTION>
<S> <C>
Initial Fixed Rate Loans: Assumed Collateral Characteristics
Loan Type Aggregate Weighted Weighted Average Weighted Average Original
Principal Average Remaining Term Amortization Term in
Balance Coupon in Months Months
- -------------------- ------------------- ------------------ ------------------------- -------------------------------
30 Yr Fixed $ 9,776,416.54 10.130% 347 360
15 Yr Balloon $ 1,097,091.71 11.143% 178 360
15 Yr Fixed $ 1,559,544.25 10.531% 178 180
Additional Fixed Rate Loans: Assumed Collateral Characteristics
Loan Type Aggregate Weighted Weighted Average Weighted Average Original
Principal Average Remaining Term Amortization Term in
Balance Coupon in Months Months
- --------------------- ------------------- -------------------- --------------------- --------------------------------
30 Yr Fixed $ 2,450,000.00 10.174% 358 360
15 Yr Balloon $ 250,000.00 11.096% 178 360
15 Yr Fixed $ 450,000.00 10.365% 178 180
</TABLE>
S-68
<PAGE>
It is assumed that 80% of the Additional Fixed Rate Loans will be
delivered 60 days from the Closing Date, and that the remaining 20% of the
Additional Fixed Rate Loans will be delivered 90 days from the Closing Date.
<TABLE>
<CAPTION>
<S> <C>
Initial Adjustable Rate Loans: Assumed Collateral Characteristics
Loan Aggregate Weighted Weighted Weighted Weighted Weighted Weighted Weighted Weighted Weighted Frequency
Type Principal Average Average Average Average Average Average Average Average Average of Rate
Balance Coupon Remaining Original Gross Periodic Periodic Maximum Minimum Number Adjustment
Term to Amortization Margin Rate Cap Rate Cap Rate Cap Rate of Due
Maturity Term in for the for the Dates
in Months Months First Next from
Adjustment Adjustment Delivery
Date Date to Next
Interest
Rate
Adjustment
- ------------------------------------------------------------------------------------------------------------------------------
2 Yr/6Mth $67,743,095.76 9.674% 359 360 6.502% 3.0% 1.5% 16.674% 9.674% 22 6
6 Mth LIB $4,022,382.85 8.573% 359 360 5.591% 1.5% 1.5% 15.573% 8.612% 4 6
6 Mth LIB $15,663,952.89 9.712% 359 360 6.544% 2.8% 1.5% 16.712% 9.712% 20 6
1 Yr T-Bill $137,516.00 8.000% 328 360 2.750% 1.0% 1.0% 13.000% 3.000% 8 12
Additional Adjustable Rate Loans: Assumed Collateral Characteristics
Loan Aggregate Weighted Weighted Weighted Weighted Weighted Weighted Weighted Weighted Weighted Frequency
Type Principal Average Average Average Average Average Average Average Average Average of Rate
Balance Coupon Remaining Original Gross Periodic Periodic Maximum Minimum Number Adjustment
Term to Amortization Margin Rate Cap Rate Cap Rate Cap Rate of Due
Maturity Term in for the for the Dates
in Months Months First Next from
Adjustment Adjustment Delivery
Date Date to Next
Interest
Rate
Adjustment
- ------------------------------------------------------------------------------------------------------------------------------
2 Yr/6 Mth $20,450,000.00 9.674% 358 360 6.502% 3.0% 1.5% 16.674% 9.674% 22 6
6 Mth/LIB $1,400,000.00 8.573% 358 360 5.591% 1.5% 1.5% 15.573% 8.612% 4 6
</TABLE>
It is assumed that 80% of the Additional Adjustable Rate Loans will be
delivered 60 days from the Closing Date, and that the remaining 20% of the
Additional Adjustable Rate Loans will be delivered 90 days from the Closing
Date.
In addition, it is assumed that (i) the Coupon Rates on the Adjustable
Rate Loans in each type are adjusted on the respective Due Dates specified above
in the columns entitled " Weighted Average Number of Due Dates from Delivery to
Next Interest Rate Adjustment Date", and thereafter with the frequency indicated
above in the columns entitled "Frequency of Rate Adjustment", to equal the sum
of the related Index and Gross Margin, subject to the related Periodic Rate Caps
(ranging from 1.0% to 3.0%), Maximum Rates and Minimum Rates, (ii) One-Month
LIBOR for the first Payment Date is 5.65234%, (iii) Six-Month LIBOR for the
First Payment Date is 5.71875%, (iv) the One-Year U.S. Treasury Rate for the
first Payment Date is 5.41%; (v) each of the Home Equity Loans has a Servicing
Fee Rate equal to 0.44% per annum, (vi) all of the Adjustable Rate Loans prepay
for life at the indicated CPR, (vii) all of the Fixed Rate Loans prepay for life
at the indicated HEP, (viii) no defaults or delinquencies in the payment by
mortgagors of principal of and interest on the Home Equity Loans are
experienced, (ix) none of the Servicer or the Note Insurer exercises its option
to purchase the Home Equity Loans as described under "Servicing of the Home
Equity Loans-Termination" herein, (x) prepayments representing payment in full
of individual Home Equity Loans are received on the last day of each month and
include 30 days of interest thereon, commencing in June 1998, (xi) the scheduled
monthly payment for each Home Equity Loan is received on the first day of each
month commencing in July 1998 and has been calculated based on its unpaid
principal balance, Coupon Rate and remaining amortizing term such that the Home
Equity Loan will amortize in amounts sufficient to repay such balance by the end
of such term, except that the scheduled Monthly Payment on the maturity date for
each of the Home Equity Loans in the first group of Fixed Rate Loans will be a
balloon payment equal to the outstanding principal balance thereof on such
maturity date plus interest thereon at the related Coupon Rate, (xii) the
payments in respect of the Notes are received in cash on the 25th day of each
month commencing in July 1998, (xiii) the Notes
S-69
<PAGE>
are purchased on June 29, 1998, (xiv) the number of days between the date the
Notes are purchased and the first Payment Date is 29 days, (xv) the aggregate
Original Note Balance is $125,000,000, and (xvi) the Original Pre-Funding Amount
will be used in full to acquire Additional Home Equity Loans (such assumptions,
collectively, the "Structuring Assumptions").
The actual characteristics and performance of the Home Equity Loans
will differ from the assumptions used in constructing the tables set forth
below, which are hypothetical in nature and are provided only to give a general
sense of how the principal cashflows might behave under varying prepayment
scenarios. For example, the Servicer might exercise its option to purchase the
Home Equity Loans as described under "Servicing of the Home Equity
Loans--Termination" herein, and it is very unlikely that the Home Equity Loans
will prepay at a constant CPR percentage or at the indicated HEP percentage
until maturity or that all of the Home Equity Loans will prepay at the same CPR
percentage or at the indicated HEP percentage. Moreover, the diverse remaining
terms to maturity of the Home Equity Loans could produce slower or faster
principal payments than indicated in the tables at the various CPR percentages
specified, even if the various weighted average remaining terms to maturity of
the Home Equity Loans are as assumed. Any difference between such assumptions
and the actual characteristics and performance of the Home Equity Loans, or the
actual prepayment or loss experience, will affect the percentages of Original
Note Balance outstanding over time and the weighted average lives of the Notes.
Subject to the foregoing discussion and assumptions, the table below
indicates the weighted average lives of the Notes and sets forth the percentages
of the Original Note Balance that would be outstanding after each of the Payment
Dates shown at various CPR percentages and HEP percentages.
S-70
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Percentage of Original Note Balance
Outstanding at the Following Prepayment Assumptions
Payment Date CPR 0% 15% 20% 27% 30%
- ------------
HEP 0 15 20 25 30
----------- ---------- ----------- ---------- ----------
June 29, 1998 100 100 100 100 100
June 25, 1999 96 82 77 71 68
June 25, 2000 94 67 59 49 45
June 25, 2001 94 56 46 36 31
June 25, 2002 93 47 37 26 22
June 25, 2003 92 39 29 19 15
June 25, 2004 92 33 23 14 10
June 25, 2005 91 28 18 10 7
June 25, 2006 90 24 15 7 5
June 25, 2007 89 20 12 5 3
June 25, 2008 88 17 9 3 2
June 25, 2009 86 14 7 2 1
June 25, 2010 85 12 5 1 1
June 25, 2011 83 10 4 1 0
June 25, 2012 81 8 3 0 0
June 25, 2013 78 7 2 0 0
June 25, 2014 76 5 2 0 0
June 25, 2015 74 4 1 0 0
June 25, 2016 71 3 1 0 0
June 25, 2017 68 3 0 0 0
June 25, 2018 64 2 0 0 0
June 25, 2019 60 1 0 0 0
June 25, 2020 56 1 0 0 0
June 25, 2021 51 1 0 0 0
June 25, 2022 46 0 0 0 0
June 25, 2023 40 0 0 0 0
June 25, 2024 33 0 0 0 0
June 25, 2025 26 0 0 0 0
June 25, 2026 18 0 0 0 0
June 25, 2027 9 0 0 0 0
June 25, 2028 0 0 0 0 0
Weighted Average Life to Maturity 20.78 5.36 4.03 2.96 2.60
in Years (1)
Weighted Average Life To Call in 20.74 4.99 3.73 2.73 2.40
Years (1)
- ---------------------------
</TABLE>
(1) The weighted average life of a Note is determined by (i) multiplying the
amount of each payment in reduction of the Note Balance by the number of
years from the date of issuance of the Note to the related Payment Date,
(ii) adding the results and (iii) dividing the sum by the Original Note
Balance of the Note.
S-71
<PAGE>
SERVICING OF THE HOME EQUITY LOANS
General
Reference is made to the Servicing Agreement for important information
in addition to that set forth herein regarding the terms and conditions of the
Servicing Agreement.
Under the terms of the Servicing Agreement, the Servicer is to service
and administer the Home Equity Loans in accordance with the policies, procedures
and practices customarily employed by the Servicer in servicing other comparable
mortgage loans and pursuant to the provisions of the Servicing Agreement. The
Servicer plans to effect the servicing of the Home Equity Loans through the
engagement of the Sub-Servicer pursuant to a sub-servicing agreement (the
"Sub-Servicing Agreement"). Under the Sub-Servicing Agreement, the Sub-Servicer
shall perform most of the tasks specified to be performed by the Servicer in
this Prospectus Supplement and in the Prospectus and shall be entitled to
certain of the same rights of the Servicer set forth in the Servicing Agreement.
As such, references herein and in the Prospectus to certain actions to be
performed by the Servicer shall be deemed to include those actions performed by
the Sub-Servicer as well. Accordingly, the standards to be observed by the
Servicer in the performance of its duties under the Servicing Agreement shall
also include the standards customarily observed by the Sub-Servicer in the
performance of its servicing functions with respect to Home Equity Loans for its
own account. Moreover, the servicing performance history of the Sub-Servicer may
be of relevance to an assessment of the performance of the Home Equity Loans in
the Trust Estate.
Generally, servicing includes, but is not limited to, post-origination
loan processing, customer service, remittance handling, collections and
liquidations. Consistent with the servicing standard described in the foregoing
paragraph, the Servicer in its own name may (a) waive any assumption fees, late
payment charges, charges for checks returned for insufficient funds or other
fees that may be collected in the ordinary course of servicing a Home Equity
Loan, (b) arrange a schedule for the payment of delinquent payments on the
related Home Equity Loan, subject to conditions set forth in the Servicing
Agreement, if a mortgagor is in default or about to be in default because of
such mortgagor's financial condition or (c) modify Monthly Payments on Home
Equity Loans in accordance with the Servicer's general policy on Home Equity
Loans subject to the Relief Act; provided, however, the Servicer may not,
without the prior consent of the Note Insurer, permit any waiver, modification
or variance of a Home Equity Loan which would (i) change the Coupon Rate, (ii)
forgive the payment of any principal or interest, (iii) lessen the lien priority
or (iv) extend the final maturity date on a Home Equity Loan past twelve months
prior to the maturity date of the Notes, in any case except to the extent
required under the Relief Act. The Servicer, acting as agent for the Indenture
Trustee, will not consent to the subsequent placement of a deed of trust or
mortgage, as applicable, on any Mortgaged Property that is of equal or higher
priority to that of the lien securing the related Home Equity Loan unless such
Home Equity Loan is prepaid in full and thereby removed from the Home Equity
Pool.
Customary Servicing Procedures
The procedures of the Servicer with respect to day to day servicing of
the Home Equity Loans may vary considerably depending on the particular Home
Equity Loan, the Mortgaged Property, the mortgagor, the availability of an
acceptable party to assume a Home Equity Loan and the laws of the jurisdiction
in which the Mortgaged Property is located. Although mortgagors generally make
loan payments within ten to fifteen days after the due date, if a mortgagor
fails to pay the Monthly Payment within such time period, the Servicer will
commence collection efforts by notifying the mortgagor of the delinquency. Under
the terms of each Home Equity Loan, the mortgagor agrees to pay a late charge
(which the Servicer is entitled to retain as additional servicing compensation
under the Servicing Agreement) if a Monthly Payment on a Home Equity Loan is not
received within the number of days specified in the Mortgage Note after its Due
Date. If the Home Equity Loan remains delinquent, the Servicer will attempt to
contact the mortgagor to determine the cause of the delinquency and to obtain a
commitment to cure the delinquency at the earliest possible time.
As a general matter, if efforts to obtain payment have not been
successful shortly after the Due Date of the next subsequently scheduled
installment, a pre-foreclosure notice will be sent to the mortgagor providing 30
days' notice of impending foreclosure action. During the 30-day notice period,
collection efforts continue. However, if no substantial progress has been made
in obtaining delinquent monies from the mortgagor, foreclosure proceedings will
be commenced.
S-72
<PAGE>
Regulations and practices regarding foreclosure vary greatly from state
to state. Generally, the Servicer will have commenced foreclosure proceedings
prior to the time when a loan is 90 days delinquent. If the Servicer determines
that purchasing a Mortgaged Property securing a Home Equity Loan will minimize
the loss associated with such defaulted loan, the Servicer may bid at the
foreclosure sale for such Mortgaged Property or accept a deed in lieu of
foreclosure. After the Servicer converts title to a Mortgaged Property into the
name of the Indenture Trustee on behalf of the Noteholders and the Note Insurer
by foreclosure or deed in lieu of foreclosure, a real estate broker will be
selected to market the Mortgaged Property.
Generally, the Servicer in its own name will be authorized and
empowered pursuant to the Servicing Agreement (i) to execute and deliver on
behalf or in the name of the Indenture Trustee (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
Mortgaged 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.
The Sub-Servicer
The information set forth in the following paragraphs has been provided
by Ocwen Federal Bank FSB. None of the Issuer, RBMG, the Company, the Depositor,
the Indenture Trustee, the Owner Trustee, the Note Insurer or any of their
respective affiliates have made or will make any representation as to the
accuracy or completeness of such information.
The Sub-Servicer is a federally-chartered savings bank, with its home
office in Fort Lee, New Jersey and its servicing operations and corporate
offices in West Palm Beach, Florida. The Sub-Servicer is a wholly-owned
subsidiary of Ocwen Financial Corporation, a public financial services holding
company. At March 31, 1998, the Sub-Servicer had approximately $2.488 billion in
assets, approximately $2.234 billion in liabilities and approximately $254
million in equity. At March 31, 1998, the Sub-Servicer's tangible and leveraged
capital ratio was approximately 10.24% and its risk-based capital ratio was
approximately 12.82%. For the three months ended March 31, 1998, the
Sub-Servicer's net income from continuing operations was approximately $19
million.
The major business of the Sub-Servicer has been the resolution of
non-performing single-family, multi-family and commercial mortgage loan
portfolios acquired from the Resolution Trust Corporation, from private
investors, and most recently, from the Department of Housing and Urban
Development ("HUD") through HUD's auction of defaulted Federal Housing
Administration loans.
The following table sets forth, for the non-conforming credit mortgage
loans (the "BCD Mortgage Loan Servicing Portfolio") serviced by the
Sub-Servicer, certain information relating to the delinquency experience
(including loans in foreclosure included in the Sub-Servicer's servicing
portfolio (which portfolio does not include mortgage loans that are sub-serviced
by others)) at the end of the indicated periods. The indicated periods of
delinquency are based on the number of days past due on a contractual basis. No
mortgage loan is considered delinquent for these purposes until it is one month
past due on a contractual basis. The information contained in the monthly
remittance reports that will be sent to investors will be compiled using the
same methodology as that used to compile the information contained in the table
below.
S-73
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Delinquencies and Foreclosures
(Dollars in Thousands)
As of December 31, 1997 As of March 31, 1998
------------------------- ---------------------
Percent Percent
--------- ---------
By By By By By By By By
Number Dollar Number Dollar Number Dollar Number Dollar
of Loans Amount of Loans Amount of Loans Amount of Loans Amount
-------- ------- -------- -------- --------- ------- -------- ------
Total Portfolio
21,827 $2,318,261 100.00% 100.00% 34,425 $3,494,243 100.00% 100.00%
Period of Delinquency
30-59 days 437 41,429 2.00 1.79 527 49,571 1.53 1.42
60-89 days 171 17,803 0.73 0.77 416 40,327 1.21 1.15
90 days or more 302 36,878 1.38 1.59 643 65,543 1.87 1.88
--- ------ ---- ----- --- ------ ---- ----
Total Delinquent Loans 910 $ 96,110 4.17% 4.15% 1,586 $ 155,441 4.61% 4.45%
--- -------- ----- ----- ----- ------- ---- ----
Loans in foreclosure 281 $ 34,663 1.29% 1.50% 498 $ 58,884 1.45% 1.63%
--- ------ ---- ---- --- ------ ---- ----
</TABLE>
- ------------------------
(1) Loans in foreclosure are also included under the heading "Total Delinquent
Loans."
The following tables set forth, for the BCD Mortgage Loan servicing
portfolio serviced by the Sub-Servicer, certain information relating to the
foreclosure experience of the mortgage loans included therein (which portfolio
does not include mortgage loans that are serviced by others) at the end of the
indicated periods.
<TABLE>
<CAPTION>
<S> <C>
Real Estate Owned
(Dollars in Thousands)
At December 31, 1997 At March 31, 1998
-------------------- -----------------
By Number of By Dollar By Number of By Dollar
Loans Amount Loans Amount
----- ------ ----- ------
Total Portfolio 21,827 $ 2,318,261 34,425 $ 3,494,243
Foreclosed Loans (1) 66 $ 7,387 92 $ 11,185
Foreclosure Ratio (2) 0.30% 0.32% 0.27% 0.32%
</TABLE>
- -------------------------
(1) For the purposes of these tables, Foreclosed Loans means the aggregate
principal balance of mortgage loans secured by mortgaged properties the
title to which has been acquired by the Sub-Servicer.
(2) The Foreclosure Ratio is equal to the aggregate principal balance or
number of Foreclosed Loans divided by the aggregate principal balance, or
number, as applicable, of mortgage loans in the Total Portfolio at the end
of the indicated period.
S-74
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Loan Gain/(Loss) Experience
(Dollars in Thousands)
Year Ended Three Months Ended
December 31, 1997 March 31, 1998
----------------- -----------------
Total Portfolio (1) $2,318,261 $3,494,243
Net Gain/(Losses) (2) (1,209) (387)
Net Gain/(Losses) as a Percentage of Total (0.05)%
Portfolio (3) (0.01)%
</TABLE>
- ------------------------
(1) "Total Portfolio" on the date stated above is the aggregate principal
balance of the mortgage loans outstanding on the last day of the period.
(2) "Net Gain/(Losses)" are actual gains (losses) incurred on liquidated
properties and shortfall payoffs for each respective period. Gains (losses)
are calculated after repayment of all principal, prepayment penalties,
foreclosure costs and accrued interest to date of liquidation. However,
premiums paid to purchase the loans and other direct origination costs are
not included in the calculation.
(3) March 31, 1998 percentage has been based on annualized net gains/losses.
It is unlikely that the delinquency experience of the Home Equity Loans
will correspond to the delinquency experience of the Sub-Servicer's BCD Mortgage
Loan Portfolio set forth in the foregoing tables. It should be noted that if the
residential real estate market should experience an overall decline in property
values, the actual rates of delinquencies and foreclosures could be higher than
those previously experienced by the Sub-Servicer. In addition, adverse economic
conditions may affect the timely payment by Mortgagors of scheduled payments of
principal and interest and payments of arrearages on the Home Equity Loans and,
accordingly, the actual rates of delinquencies and foreclosures with respect to
the Home Equity Pool.
Servicing and Other Compensation and Payment of Expenses
The primary compensation payable to the Servicer on each Payment Date
(the "Servicing Fee") will equal one-twelfth (1/12) of the product of (a) the
Servicing Fee Rate and (b) the Home Equity Pool Balance as of the first day of
the related Due Period. The Servicer shall be entitled to retain the Servicing
Fee from amounts to be deposited in the Collection Account. As additional
servicing compensation, the Servicer will be entitled to retain all assumption
fees, prepayment penalties and late payment charges and certain other amounts
and charges, to the extent collected from mortgagors, together with any interest
or other income earned on funds held in the Collection Account and any escrow
accounts. The Sub-Servicing Agreement shall provide for the compensation of the
Sub-Servicer.
For any Payment Date for so long as RBMG is the Servicer, the Servicing
Fee Rate is equal to 0.44% per annum; provided, however, that if necessary to
obtain the appointment of a successor servicer or successor sub-servicer, the
Servicing Fee Rate may increase up to 0.50% per annum. The payment of any
increased Servicing Fee would reduce the amount of Excess Cash.
With respect to any full or partial prepayments (or other
liquidations), the Servicer is obligated on any Payment Date to fund shortfalls
in collection of one full month's interest (adjusted to the related Net Coupon
Rate) but only to the extent of the Servicing Fee otherwise payable to the
Servicer for the related Due Period.
Subject to its right to refuse to make Nonrecoverable Advances as
described herein, the Servicer will be required to pay all reasonable and
customary "out-of-pocket" costs and expenses incurred in the performance of its
servicing obligations, including, but not limited to, the payment of fees for
any sub-servicer, including the Sub-Servicer, and the cost of (i) any
enforcement or judicial proceedings relating to the mortgagors, including
foreclosures, and (ii) the management and liquidation of Mortgaged Properties
acquired in satisfaction of the related Home Equity Loans. Such expenditures
(each, a "Servicing Advance") may include costs of collection efforts,
reappraisals, forced placement of hazard insurance if a mortgagor allows his
hazard policy to lapse, legal fees in connection with foreclosure actions,
advancing delinquent property taxes and upkeep and maintenance of the Mortgaged
Property if it is acquired through foreclosure, and similar types of expenses.
S-75
<PAGE>
The Servicing Agreement provides that the Servicer may pay all or a
portion of any Servicing Advance out of amounts on deposit in the Collection
Account that are being held for payment on a subsequent Payment Date relating to
such Collection Period; any such amounts so used are required to be replaced by
the Servicer by deposit to the Collection Account on or before the Servicer
Remittance Date relating to such subsequent Payment Date.
The Servicer may recover Servicing Advances, if not theretofore
recovered from the mortgagor on whose behalf such Servicing Advance was made,
from subsequent collections on the related Home Equity Loan, including
Liquidation Proceeds, Insurance Proceeds and such other amounts as may be
collected by the Servicer from the mortgagor or otherwise relating to the Home
Equity Loan. To the extent the Servicer, in its good faith business judgment
determines that any Servicing Advance will be or has become a Nonrecoverable
Advance, the Servicer may reimburse itself for such advance from the Collection
Account.
The Servicer will not be required to make any Servicing Advance that it
determines would be a Nonrecoverable Advance if made.
Sub-servicers
The Servicer is permitted under the Servicing Agreement to enter into
servicing arrangements with sub-servicers meeting the requirements of the
Servicing Agreement. Notwithstanding any sub-servicing arrangements, the
Servicer will not be relieved of its obligations to the Indenture Trustee and
the Noteholders under the Servicing Agreement and the Servicer shall 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. On the Closing
Date, the Servicer shall enter into the Sub-Servicing Agreement with the
Sub-Servicer described above under "--General."
Standard Hazard Insurance Policies
The terms of the Home Equity Loans require each mortgagor to maintain a
hazard insurance policy. Additionally, the Servicing Agreement will require the
Servicer to cause to be maintained on property acquired upon foreclosure, or in
deed-in-lieu of foreclosure, of any Home Equity Loan, fire insurance with
extended coverage in an amount at least equal to the lesser of the unpaid
principal balance of the Home Equity Loan and the replacement value of the
improvements securing the Home Equity Loan, but in no event lower than the
amount necessary to avoid the application of a co-insurance clause in the
related insurance policy.
As set forth in the Servicing Agreement, all amounts collected by the
Servicer under any insurance policy (except for amounts to be applied to the
restoration or repair of the Mortgaged Property or released to the mortgagor in
accordance with the Servicer's normal servicing procedures) will be deposited
initially in the Collection Account, subject to withdrawal in accordance with
the Servicing Agreement. The Servicing Agreement provides that the Servicer may
satisfy its obligation to cause hazard policies to be maintained by maintaining
a blanket policy insuring against losses on the Home Equity Loans. If such
blanket policy contains a deductible clause the Servicer will deposit in the
Collection Account all sums that would have been deposited therein but for such
clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm, hail, riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Home Equity Loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from the
following: war, revolution, government actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mudflows), nuclear
reactions, wet or dry rot, vermin, rodents, insects or domestic animals, theft,
mortgagor waste 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. Whenever the improvements securing a Home Equity Loan are located
in a federally designated special flood hazard area, the Servicing Agreement
requires the Servicer to cause to be maintained for each such Home Equity Loan
serviced, flood insurance (to the extent available) in an amount equal in
general to the lesser of the amount required to compensate for any loss on a
replacement cost basis or the maximum insurance available under the federal
flood insurance program.
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Pursuant to the terms of the Home Equity Loans, mortgagors generally
are required to present claims to insurers under hazard insurance policies
maintained on the Mortgaged Properties. The Servicer, on behalf of the Indenture
Trustee and Noteholders, is obligated to present claims under any blanket
insurance policy insuring against hazard losses on the Mortgaged Properties.
However, the ability of the Servicer to present such claims is dependent upon
the extent to which information in this regard is furnished to the Servicer or
any sub-servicer by mortgagors.
Payments on Home Equity Loans; Collection Account
The Servicer will establish and maintain one or more accounts
(collectively, the "Collection Account") in which the Servicer will deposit or
cause to be deposited on a daily basis, or as and when received from
sub-servicers or deposited directly by sub-servicers, the following payments and
collections received or made by or on behalf of it subsequent to the applicable
Cut-Off Date, or received by it prior to the applicable Cut-Off Date but
allocable to a period subsequent thereto (other than in respect of principal and
interest on the Home Equity Loans due on or before the applicable Cut-Off Date):
(i) all payments on account of principal, including
principal prepayments, on the Home Equity Loans;
(ii) all payments on account of interest on the Home
Equity Loans, net of the related Servicing Fee;
(iii) all Insurance Proceeds and Liquidation Proceeds,
other than proceeds that represent reimbursement
of costs and expenses incurred by the Servicer
in connection with presenting claims under the
related Insurance Policies, Liquidation Proceeds
and REO Proceeds;
(iv) all proceeds of any Home Equity Loan or REO
Property repurchased or purchased in accordance
with the Servicing Agreement;
(v) any amounts required to be deposited pursuant to
the Servicing Agreement; and
(vi) all amounts transferred from the Note Account to
the Collection Account in accordance with the
Servicing Agreement.
Notwithstanding the foregoing, the Servicer may make withdrawals from
the Collection Account (or net amounts prior to making deposits in the
Collection Account) only for the following purposes: (a) to make deposits into
the Note Account on each Servicer Remittance Date as described in the Servicing
Agreement; (b) to pay itself any monthly Servicing Fees and other items of
servicing compensation and investment income on Permitted Investments to the
extent permitted by the Servicing Agreement; (c) to make any Servicing Advance
to the extent permitted by the Servicing Agreement or to reimburse itself for
any Servicing Advance or P&I Advance previously made to the extent permitted by
the Servicing Agreement; (d) to withdraw amounts that have been deposited into
the Collection Account in error; (e) to clear and terminate the Collection
Account and (f) to reimburse the Indenture Trustee, the Servicer and the Issuer
for certain amounts to the extent permitted under the Servicing Agreement or the
Indenture.
All or a portion of the Collection Account may be invested and
reinvested in one or more Permitted Investments bearing interest or sold at a
discount, at the Servicer's direction. The Indenture Trustee, the Servicer or
any affiliate thereof may be the obligor on any investment in any Collection
Account that otherwise qualifies as a Permitted Investment. No investment in the
Collection Account may mature later than the Servicer Remittance Date next
succeeding the date of investment.
The Indenture Trustee will not in any way be held liable by reason of
any insufficiency in the Collection Account resulting from any loss on any
Permitted Investment included therein (except to the extent the Indenture
Trustee is the obligor thereon).
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All income or other gain from investments in the Collection Account
will be held in the Collection Account for the benefit of the Servicer and will
be subject to withdrawal from time to time as permitted by the Servicing
Agreement. Any loss resulting from such investments will be for the account of
the Servicer. The Servicer will be required to deposit the amount of any such
loss immediately upon the realization of such loss to the extent such loss will
not be offset by other income or gain from investments in the Collection Account
and then available for such application.
Each of the Collection Account and the Note Account must meet the
following criteria (an "Eligible Account"): (i) an account maintained with a
federal or state chartered depository institution or trust company, the
short-term obligations of which are rated by each Rating Agency in its highest
rating category and the long-term unsecured obligations of which are rated in at
least the second highest category at the time of any deposit therein, (ii) an
account or accounts, the deposits of which are fully insured by the FDIC (to the
limits established by such corporation), the uninsured deposits in which account
are otherwise secured such that the Noteholders will have a claim with respect
to the funds in such account and a perfected first priority security interest
against any collateral (which will be limited to Permitted Investments),
securing such funds that is superior to claims of any other depositors or
general creditors of the depositary institution with which such account is
maintained or (iii) a trust account or accounts maintained with a federal or
state chartered depositary institution or trust company with trust powers acting
in its fiduciary capacity acceptable to each Rating Agency and the Note Insurer
and having capital and surplus of not less than $100,000,000. The collateral
that is eligible to secure amounts in an Eligible Account is limited to
Permitted Investments.
Realization upon Defaulted Home Equity Loans
The Servicing Agreement will require the Servicer, acting as agent of
the Indenture Trustee, to foreclose upon or otherwise comparably convert to
ownership in the name of the Indenture Trustee, on behalf of the Noteholders and
the Note Insurer, Mortgaged Properties securing such of the Home Equity Loans as
come into default, as to which no satisfactory arrangements can be made for the
collection of delinquent payments and which the Servicer has not reacquired
pursuant to the option described below; provided, however, that if the Servicer
has actual knowledge or cause to believe that any Mortgaged Property is
contaminated by hazardous or toxic wastes or substances, the Servicer will cause
an environmental inspection of the Mortgaged Property that complies with Fannie
Mae's selling and servicing guide applicable to single family homes and its
servicing procedures to be conducted. If the environmental inspection reveals
any potentially hazardous substances, the Servicer will notify the Note Insurer,
and the Servicer will not foreclose or accept a deed in lieu of foreclosure on
the Mortgaged Property without the consent of the Note Insurer. In connection
with such foreclosure or other conversion, the Servicer will follow such
practices as it deems necessary or advisable and as are in keeping with its
general mortgage loan servicing activities; provided, however, that the Servicer
will not be required to expend its own funds in connection with foreclosure or
other conversion, correction of a default or restoration of any Mortgaged
Property unless the Servicer determines that such foreclosure, correction or
restoration will increase Net Liquidation Proceeds.
In servicing the Home Equity Loans, the Servicer will be required to
determine, with respect to each defaulted Home Equity Loan, when it has
recovered, whether through trustee's sale, foreclosure sale or otherwise, all
amounts, if any, it expects to recover from or on account of such defaulted Home
Equity Loan, whereupon such Home Equity Loan will be charged off and will become
a Liquidated Home Equity Loan.
Enforcement of Due-on-Sale Clauses
In any case in which the Servicer becomes aware that a Mortgaged
Property has been or is about to be voluntarily conveyed by the related
mortgagor, the Servicer may enter into an assumption agreement with the person
to whom such property has been or is about to be conveyed, pursuant to which
such person becomes liable under the related promissory note and, to the extent
permitted by applicable law or the mortgage documents, the mortgagor remains
liable thereon. In addition, the Servicer may enter into a substitution of
liability agreement with such person, pursuant to which the original mortgagor
is released from liability and such person is substituted as mortgagor and
becomes liable under the Mortgage Note. The Servicing Agreement will prohibit
the Servicer from entering into an assumption or substitution of liability
agreement unless permitted by applicable law and unless the Servicer determines
that the assuming party would not fall within a lower RBMG risk category than
the original mortgagor and such assumption or substitution of liability
agreement would not materially increase the risk of
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default or delinquency on, or materially decrease the security for, such Home
Equity Loan. Notwithstanding any of the foregoing, the Servicer will not enter
into any assumption agreement unless such assumption agreement is pursuant to
its standard servicing procedure and the Servicer would enter into such
assumption agreement with respect to a mortgage loan in its own portfolio. Any
fees collected by the Servicer for entering into an assumption or substitution
of liability agreement will be retained by the Servicer as additional servicing
compensation. In the event the Servicer does not approve an assumption, the
Servicing Agreement will require the Servicer to enforce the rights of the
Indenture Trustee as the mortgagee of record to accelerate the maturity of the
related Home Equity Loan under any due-on-sale clause contained in the related
Mortgage or Mortgage Note to the extent permitted by the related Mortgage Note
and Mortgage and applicable law or regulation, but only to the extent the
Servicer does not believe that such enforcement will (i) adversely affect or
jeopardize coverage under any related insurance policy, (ii) result in legal
action by the mortgagor or (iii) materially increase the risk of default or
delinquency on, or materially impair the security for, such Home Equity Loan.
Evidence as to Compliance
The Servicing Agreement will provide that on or before a specified date
in each year, a firm of independent public accountants will furnish to the
Servicer a report to the effect that (i) on the basis of an examination by such
firm conducted substantially in compliance with the Uniform Single Attestation
Program for Mortgage Bankers ("USAP") or the Audit Program for Mortgages
serviced by FHLMC, the Servicer has complied with certain minimum residential
mortgage loan servicing standards identified therein, and such examination
disclosed no significant exceptions or errors which, in the opinion of such
firm, such firm is required to report under USAP or the Audit Program, except
for such exceptions as will be referred to in the report, and (ii) on the basis
of an examination conducted by such firm in accordance with standards
established by the American Institute of Certified Public Accountants, such
representation is fairly stated in all material respects subject to such
exceptions and other qualifications that may be appropriate. The Servicing
Agreement will provide that the Servicer will be required to deliver such report
to the Indenture Trustee, the Rating Agencies and the Note Insurer on or before
a specified date in each year.
Certain Matters Regarding Servicer's Servicing Obligations
The Servicing Agreement will also provide that neither the Servicer,
nor any of its directors, officers, employees or agents, will be liable to the
Indenture Trustee, the Trust Estate or the Noteholders for any action taken or
for refraining from the taking of any action by the Servicer pursuant to the
Servicing Agreement, or for errors in judgment; provided, however, that neither
the Servicer nor any such person will be protected against any liability that
would otherwise be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of duties of the Servicer, or by reason of
reckless disregard of obligations and duties of the Servicer, thereunder.
In addition, the Servicing Agreement will provide that the Servicer
will not be under any obligation to appear in, prosecute or defend any legal
action that is not incidental to its duties to service the Home Equity Loans
under the Servicing Agreement and which in its opinion may involve it in any
expense or liability.
The Servicing Agreement will provide that any corporation or other
entity (a) into which the Servicer may be merged or consolidated, (b) that may
result from any merger, conversion or consolidation to which the Servicer shall
be a party or (c) that may succeed to all or substantially all of the business
of the Servicer, will, in any case where an assumption is not effected by
operation of law, execute an agreement of assumption to perform every obligation
of the Servicer, respectively, under the Servicing Agreement, and will be the
successor to the Servicer, respectively, thereunder without the execution or
filing of any document or any further act by any of the parties to the Servicing
Agreement; provided, however, that if the Servicer in any of the foregoing cases
is not the surviving entity, the surviving entity shall execute an agreement of
assumption to perform every obligation of the Servicer thereunder and the
corporation or other entity shall satisfy the eligibility requirements for a
successor to the Servicer.
Amendment of the Servicing Agreement
The Servicing Agreement may be amended from time to time by the Issuer,
the Servicer and the Indenture Trustee without the consent of any of the
Noteholders but with the prior written consent of the Note Insurer, (i) to
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cure any ambiguity, or (ii) to correct, modify or supplement any provisions
therein; provided that such action will not, as evidenced by an opinion of
counsel delivered to the Indenture Trustee and the Note Insurer, adversely
affect in any material respect the interests of any Noteholders or the Note
Insurer.
The Servicing Agreement may also be amended from time to time by the
Issuer, the Servicer and the Indenture Trustee with the consent of the Note
Insurer and of the holders of the Notes evidencing at least 66% of the aggregate
Note Balance for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of the Servicing Agreement or of
modifying in any manner the rights of the Noteholders; provided, however, that
no such amendment will (i) reduce in any manner the amount of, or delay the
timing of, payments received on Notes that are required to be paid on any Note
without the consent of the holder of such Note, (ii) adversely affect in any
material respect the interests of the Noteholders in a manner other than as
described in clause (i), without the consent of the holders of Notes evidencing
at least 66% of the aggregate Note Balance, or (iii) modify the aforesaid
percentage of Notes the holders of which are required to consent to any such
amendment, without the consent of the Note Insurer and the holders of all Notes
then outstanding.
Servicer Events of Default and Termination Event
Events of default ("Servicer Events of Default") under the Servicing
Agreement will consist of (i) any failure by the Servicer to remit to the
Indenture Trustee for payment to the Noteholders any required payment that
continues unremedied for one Business Day after the giving of written notice of
such failure to the Servicer by the Indenture Trustee, the Issuer, or the Note
Insurer, or to the Servicer, the Issuer, the Note Insurer and the Indenture
Trustee by the holders of Notes evidencing not less than 25% of the aggregate
Note Balance; (ii) any failure by the Servicer duly to observe or perform in any
material respect any of its other covenants or agreements in the Servicing
Agreement which continues unremedied for thirty days after the giving of written
notice of such failure to the Servicer by the Indenture Trustee, the Issuer or
the Note Insurer or to the Servicer, the Issuer, the Note Insurer and the
Indenture Trustee by the holders of Notes evidencing not less than 25% of the
aggregate Note Balance; (iii) certain events of insolvency, readjustment of
debt, marshalling of assets and liabilities or similar proceedings and certain
actions by or on behalf of the Servicer indicating its insolvency or inability
to pay its obligations; and (iv) any failure of the Servicer to make any P&I
Advance as required that is not remedied one Business Day after the related
Servicer Remittance Date. Unless a Note Insurer Default (as defined in the
Indenture) exists, the Note Insurer will have all voting rights otherwise
allocated to the Noteholders, including the rights upon the occurrence of a
Servicer Event of Default.
A termination event ("Termination Event") under the Servicing Agreement
will be deemed to occur if the delinquency or loss experience of the Home Equity
Pool exceeds certain levels specified in the Servicing Agreement.
Rights Upon Event of Default or Termination Event
So long as a Servicer Event of Default under the Servicing Agreement as
described in clauses (i), (ii) or (iii) of the second preceding paragraph
remains unremedied, the Note Insurer or the Indenture Trustee, with the consent
of the Note Insurer, may, and at the direction of holders of Notes evidencing at
least 51% of the aggregate Note Balance shall, by notice in writing to the
Servicer (and to the Issuer, and the Note Insurer if given by the Indenture
Trustee or to the Indenture Trustee if given by the Issuer or the Note Insurer)
terminate all of the rights and obligations of the Servicer under the Servicing
Agreement and in and to the Trust Estate. If a Servicer Event of Default under
the Servicing Agreement as described in clause (iv) of the second preceding
paragraph shall occur, the Indenture Trustee will, by notice to the Servicer,
the Note Insurer and the Issuer, terminate all of the rights and obligations of
the Servicer under the Servicing Agreement and in and to the Trust Estate. If a
Termination Event under the Servicing Agreement as described in the preceding
paragraph shall occur, the Note Insurer may require the Indenture Trustee to
terminate all rights and obligations of the Servicer under the Servicing
Agreement and in and to the Trust Estate. Upon receipt by the Servicer of notice
of termination, the Indenture Trustee will succeed to all the responsibilities,
duties and liabilities of the Servicer under the Servicing Agreement. In the
event that the Indenture Trustee is unwilling, it may, or if it is unable or if
prohibited by law from making P&I Advances regarding delinquent Home Equity
Loans, or if the Holders of Notes evidencing at least 51% of the aggregate Note
Balance request in writing, it shall, appoint with the written consent of the
Note Insurer or petition a court of competent jurisdiction for the appointment
of a mortgage loan servicing institution with a net worth of at least
$15,000,000 to
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act as successor to the Servicer under the Servicing Agreement. Pending such
appointment, the Indenture Trustee is obligated to act in such capacity. The
Indenture Trustee and such successor may agree upon the servicing compensation
to be paid, which in no event may be greater than the compensation permitted to
the Servicer under the Servicing Agreement. In addition, holders of Notes
evidencing at least 66% of the aggregate Note Balance of Notes affected by a
Servicer Event of Default may waive such Servicer Event of Default; provided,
however, that a Servicer Event of Default with respect to the Servicer's
obligation to make P&I Advances or to remit to the Indenture Trustee for payment
to the Noteholders any payment required to be made may be waived only by all of
the holders of Notes affected by such Event of Default with the written consent
of the Note Insurer.
Servicing Obligations; Limitation on Resignation of the Servicer
For a detailed description of the obligations of the Servicer in
respect of the Home Equity Loans as well as for information regarding the
circumstances under which the Servicer may resign or be removed, reference is
made to the Servicing Agreement. The Servicer may resign from its obligations
and duties under the Servicing Agreement only upon a determination that its
duties under the Servicing Agreement are no longer permissible under applicable
law or with the prior written consent of the Note Insurer. In the event the
rights and obligations of the Servicer in its capacity as Servicer under the
Servicing Agreement are terminated by the Indenture Trustee due to a Servicer
Event of Default, the Indenture Trustee shall become the Servicer under the
Servicing Agreement. If the Indenture Trustee is unwilling or unable to so act,
or if the Note Insurer or the Noteholders evidencing at least 51% of the
aggregate Note Balance so request, the Indenture Trustee will appoint a
successor, which proposed successor must be an established mortgage loan
servicing institution acceptable to the Note Insurer and each Rating Agency. No
such resignation or appointment of successor will become effective until the
Indenture Trustee or a successor servicer has assumed the Servicer's
responsibilities.
Termination
The obligations created by the Servicing Agreement will terminate upon
payment to the Noteholders of all amounts held in the Note Account required to
be paid to the Noteholders pursuant to the Indenture, following the earlier of
(i) the final payment or other liquidation of the last Home Equity Loan
remaining in the Trust Estate or the disposition of all REO Properties and (ii)
the purchase of all of the assets of the Trust Estate by the Servicer or the
Note Insurer when the sum of the Home Equity Pool Balance and the Pre-Funding
Amount is 10% or less of the Transaction Balance, pursuant to a provision of the
Indenture. The exercise of the right to purchase the assets of the Trust Estate
as set forth in clause (ii) will effect early retirement of the Notes. The Note
Insurer will have the right to consent to any Optional Redemption, if such event
would result in a draw under the Insurance Policy.
In general, any such purchase of Home Equity Loans and property
acquired in respect of the Home Equity Loans will be made at a price equal to
the sum of the Stated Principal Balance of each outstanding Home Equity Loan as
of the day of such repurchase, plus accrued interest thereon at the Coupon Rate,
to the first day of the month of such purchase, plus any unreimbursed P&I
Advances and Servicing Advances.
THE INSURANCE POLICY AND THE NOTE INSURER
The following information has been supplied by the Note Insurer.
The Note Insurer, in consideration of the payment of the premium and
subject to the terms of the Insurance Policy, thereby unconditionally and
irrevocably guarantees to any Owner (as defined below) that an amount equal to
each full and complete Insured Payment (as defined below) will be received by
the Indenture Trustee or its successor as trustee for the Owners from the Note
Insurer, on behalf of the Owners from the Note Insurer for payment by the
Indenture Trustee to each Owner of each Owner's proportionate share of the
Insured Payment. The Note Insurer's obligations under the Insurance Policy with
respect to a particular Insured Payment shall be discharged to the extent funds
equal to the applicable Insured Payment are received by the Indenture Trustee,
whether or not such funds are properly applied by the Indenture Trustee. Insured
Payments shall be made only at the time set forth in the Insurance Policy and no
accelerated Insured Payments shall be made regardless of any acceleration of the
Notes, unless such acceleration is at the sole option of the Note Insurer.
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Notwithstanding the foregoing paragraph, the Insurance Policy does not
cover shortfalls, if any, attributable to the liability of the Trust Estate or
the Indenture Trustee for withholding taxes, if any (including interest and
penalties in respect of any such liability).
The Note Insurer will pay any Insured Payment that is a Preference
Amount on the Business Day following receipt on a Business Day by the fiscal
agent for the Note Insurer (as described below) of (i) a certified copy of the
order requiring the return of a preference payment, (ii) an opinion of counsel
satisfactory to the Note Insurer that such order is final and not subject to
appeal, (iii) an assignment in such form as is reasonably required by the Note
Insurer, irrevocably assigning to the Note Insurer all rights and claims of the
Owner relating to, or arising under the Notes against the debtor which made such
preference payment or otherwise with respect to such preference payment and (iv)
appropriate instruments to effect the appointment of the Note Insurer as agent
for such Owner in any legal proceeding related to such preference payment, such
instruments being in a form satisfactory to the Note Insurer, provided that if
such documents are received after 12:00 noon New York City time on such Business
Day, they will be deemed to be received on the following Business Day. Such
payments will be disbursed to the receiver or trustee in bankruptcy named in the
final order to the court exercising jurisdiction on behalf of the Owner and not
such Owner directly unless such Owner has returned principal or interest paid on
the Notes to such receiver or trustee in bankruptcy, in which case such payment
shall be disbursed to such Owner.
The Note Insurer will pay any other amount payable under the Insurance
Policy no later than 12:00 noon New York City time on the later of the Payment
Date on which the related Deficiency Amount is due or the third Business Day
following receipt in New York, New York on a Business Day by State Street Bank
and Trust Company, N.A., as fiscal agent for the Note Insurer or any successor
fiscal agent appointed by the Note Insurer of a Notice (as described below);
provided that if such Notice is received after 12:00 noon New York City time on
such Business Day, it will be deemed to be received on the following Business
Day. If any such Notice received by the fiscal agent for the Note Insurer is not
in proper form or is otherwise insufficient for the purpose of making a claim
under the Insurance Policy, it shall be deemed not to have been received by the
fiscal agent for the Note Insurer for purposes of this paragraph, and the Note
Insurer or the fiscal agent for the Note Insurer, as the case may be, shall
promptly so advise the Indenture Trustee and the Indenture Trustee may submit an
amended Notice.
Insured Payments due under the Insurance Policy, unless otherwise
stated in the Insurance Policy, will be disbursed by the fiscal agent for the
Note Insurer to the Indenture Trustee on behalf of the Owners by wire transfer
of immediately available funds in the amount of the Insured Payment less, in
respect of Insured Payments related to Preference Amounts, any amount held by
the Indenture Trustee for the payment of such Insured Payment and legally
available therefor.
The fiscal agent for the Note Insurer is the agent of the Note Insurer
only and the fiscal agent for the Note Insurer shall in no event be liable to
Owners for any acts of the fiscal agent for the Note Insurer or any failure of
the Note Insurer to deposit, or cause to be deposited, sufficient funds to make
payments due under the Insurance Policy.
As used in the Insurance Policy, the following terms shall have the
following meanings:
"Agreement" means the Indenture dated as of June 1, 1998,
among RBMG Funding Co. Home Equity Loan Trust 1998-1, as Issuer and
Bankers Trust Company, as Indenture Trustee, without regard to any
amendment or supplement thereto unless the Note Insurer shall have
consented in writing thereto.
"Business Day" means any day other than a Saturday, a Sunday
or a day on which the Note Insurer or banking institutions in New
Jersey, New York City, Las Vegas, Nevada, Wilmington, Delaware, or in
the city in which the corporate trust office of the Indenture Trustee
under the Indenture is located are authorized or obligated by law or
executive order to close.
"Deficiency Amount" means with respect to any Payment Date the
sum of (a) the Note Interest minus Available Funds, and (b) the then
existing Overcollateralization Deficit, if any, after application of
Available Funds to reduce the Note Balance on such Payment Date.
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"Insured Payment" means (i) as of any Payment Date, any
Deficiency Amount and (ii) any Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly
confirmed in writing by telecopy, substantially in the form of Exhibit
A attached to the Insurance Policy, the original of which is
subsequently delivered by registered or certified mail, from the
Indenture Trustee specifying the Insured Payment which shall be due and
owing on the applicable Payment Date.
"Owner" means each "Holder" as defined in the Indenture (other
than the Indenture Trustee, RBMG, the Issuer, Funding Co., the
Depositor, the Company, the Sub-Servicer or the Servicer), who on the
applicable Payment Date, is entitled under the terms of the Notes to
payment thereunder.
"Preference Amount" means any amount previously distributed to
an Owner of a Note that is recoverable and sought to be recovered as a
voidable preference by a trustee in bankruptcy pursuant to the
Bankruptcy Code, as amended from time to time, in accordance with a
final nonappealable order of a court having competent jurisdiction.
Capitalized terms used in the Insurance Policy and not otherwise
defined in the Insurance Policy shall have the respective meanings set forth in
the Agreement as of the date of execution of the Insurance Policy, without
giving effect to any subsequent amendment or modification to the Indenture
unless such amendment or modification has been approved in writing by the Note
Insurer.
Any notice under the Insurance Policy or service of process on the
fiscal agent for the Note Insurer may be made at the address listed below for
the fiscal agent for the Note Insurer or such other address as the Note Insurer
shall specify in writing to the Indenture Trustee.
The notice address of the fiscal agent for the Note Insurer is 61
Broadway, 15th Floor, New York, New York 10006, Attention: Municipal Registrar
and Paying Agency, or such other address as the fiscal agent for the Note
Insurer shall specify to the Indenture Trustee in writing.
The Insurance Policy is being issued under and pursuant to, and shall
be construed under, the laws of the State of New York, without giving effect to
the conflict of laws principles thereof.
THE INSURANCE PROVIDED BY THE 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 cancelable for any reason. The premium on
the Insurance Policy is not refundable for any reason including payment, or
provision being made for payment, prior to the maturity of the Notes.
The Note Insurer is the principal operating subsidiary of MBIA Inc., a
New York Stock Exchange listed company ("MBIA Inc."). MBIA Inc. is not obligated
to pay the debts of or claims against the Note Insurer. The Note Insurer is
domiciled in the State of New York and licensed to do business in, and is
subject to regulation under the laws of all 50 states, the District of Columbia,
the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana
Islands, the Virgin Islands of the United States and the Territory of Guam. The
Note Insurer has two European branches, one in the Republic of France and the
other in the Kingdom of Spain. New York has laws prescribing minimum capital
requirements, limiting classes and concentrations of investments and requiring
the approval of policy rates and forms. State laws also regulate the amount of
both the aggregate and individual risks that may be insured, the payment of
dividends by the Note Insurer, changes in control and transactions among
affiliates. Additionally, the Note Insurer is required to maintain contingency
reserves on its liabilities in amounts and for certain periods of time.
Effective February 17, 1998, MBIA Inc. acquired all of the outstanding
stock of Capital Markets Assurance Corporation ("CMAC") through a merger with
its parent CapMAC Holdings Inc. Pursuant to a reinsurance
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agreement, CMAC has ceded all of its net insured risks (including any amounts
due but unpaid from third party reinsurers), as well as its unearned premiums
and contingency reserves, to the Note Insurer. MBIA Inc. is not obligated to pay
the debts of or claims against CMAC.
The consolidated financial statements of the Note Insurer, a wholly
owned subsidiary of MBIA Inc., and it subsidiaries as of December 31, 1997 and
December 31, 1996 and for the three years ended December 31, 1997, prepared in
accordance with generally accepted accounting principles, included in the Annual
Report on Form 10-K of MBIA Inc. for the year ended December 31, 1997 and the
consolidated financial statements of the Note Insurer and its subsidiaries for
the three months ended March 31, 1998 and for the periods ending March 31, 1998
and March 31, 1997 included in the Quarterly Report on Form 10-Q of MBIA Inc.
for the period ending March 31, 1998 are hereby incorporated by reference into
this Prospectus Supplement and shall be deemed to be a part hereof. Any
statement contained in a document incorporated by reference herein shall be
modified or superseded for purposes of this Prospectus Supplement to the extent
that a statement contained herein or in any other subsequently filed document
which also is incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus
Supplement.
All financial statements of the Note Insurer and its subsidiaries
included in documents filed by MBIA Inc. pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, subsequent to the date
of this Prospectus 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.
The tables below present selected financial information of the Note
Insurer determined in accordance with statutory accounting practices prescribed
or permitted by insurance regulatory authorities ("SAP") and generally accepted
accounting principles ("GAAP"):
<TABLE>
<CAPTION>
<S> <C>
SAP
----------------------------------------------
December 31, 1997 March 31, 1998
(Audited) (Unaudited)
----------------- --------------
(In millions)
Admitted Assets........................................ $5,256 $5,475
Liabilities............................................ 3,496 3,658
Capital and Surplus.................................... 1,760 1,817
GAAP
----------------------------------------------
December 31, 1997 March 31, 1998
(Audited) (Unaudited)
-----------------;- --------------
(In millions)
Assets................................................. $5,988 $6,196
Liabilities............................................ 2,624 2,725
Shareholder's Equity................................... 3,364 3,471
</TABLE>
Copies of the financial statements of the Note Insurer, incorporated by
reference herein and copies of the Note Insurer's 1997 year-end audited
financial statements prepared in accordance with statutory accounting practices
are available, without charge, from the Note Insurer. The address of the Note
Insurer is 113 King Street, Armonk, New York 10504. The telephone number of the
Note Insurer is (914) 273-4545.
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 the information regarding the Insurance Policy and the Note Insurer set forth
under the heading "THE INSURANCE POLICY AND THE NOTE INSURER." Additionally, the
Note Insurer makes no representations regarding the Notes or the advisability of
investing in the Notes.
Moody's rates the claims paying ability of the Note Insurer "Aaa."
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S&P rates the claims paying ability of the Note Insurer "AAA."
Fitch IBCA, Inc. (formerly known as Fitch Investors Service, L.P.)
rates the claims paying ability of the Note Insurer "AAA."
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.
Credit Enhancement 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 ERISA and Section 4975 of 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
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
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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 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 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 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 RBMG 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.
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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.
The Underwriter, or affiliates of the Underwriter provide warehouse
financing facilities to RBMG.
All of the Home Equity Loans included in the Trust Estate will have
been acquired in a privately negotiated transaction with RBMG.
REPORT OF EXPERTS
The consolidated financial statements of MBIA Insurance Corporation and
subsidiaries, as of December 31, 1997 and December 31, 1996 and for each of the
three years in the period ended December 31, 1997, have been audited by Coopers
& Lybrand L.L.P., independent accountants, as set forth in their report thereon
and are included in reliance upon the authority of such firm as experts in
accounting and auditing.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion, when read in conjunction with
the discussion of "Material Federal Income Tax Consequences" in the Prospectus,
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. RBMG, the Depositor 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 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.
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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 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.
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
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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 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 Servicer by Graham &
James LLP, New York, New York. Dewey Ballantine LLP, New York, New York or Dewey
Ballantine LLP, Washington, D.C., will act as counsel for the Underwriter, the
Depositor and the Issuer 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 Kutak Rock, Omaha,
Nebraska.
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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 from 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.
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<TABLE>
<CAPTION>
<S> <C>
INDEX OF SIGNIFICANT TERMS
Definitions Page
- ----------- ----
2/6 LIBOR........................................................................................................41
2/6 LIBOR Loans..............................................................................................12, 22
6-Month LIBOR Loan...............................................................................................22
6-Month LIBOR Loans..............................................................................................12
Additional Home Equity Loans..................................................................................i, 11
Additional Transfer Date..........................................................................................i
Adjustable Rate Loan.............................................................................................12
Adjustment Date..................................................................................................12
Administrative Fee Amount.........................................................................................3
Agreement........................................................................................................82
Available Funds...............................................................................................4, 55
Available Funds Cap Carry Forward Amount......................................................................5, 54
Available Funds Cap Rate......................................................................................5, 53
Balloon Loan.................................................................................................11, 22
Bankruptcy Code..................................................................................................55
BCD Mortgage Loan Servicing Portfolio............................................................................73
Beneficial Owner..................................................................................................4
Book-Entry Notes.................................................................................................47
Business Day..............................................................................................4, 56, 82
Cedel.............................................................................................................4
Cedel Participants...............................................................................................49
Chase............................................................................................................48
Citibank.........................................................................................................48
Closing Date...................................................................................................i, 2
Closing Date Home Equity Loans................................................................................i, 11
Closing Date Home Equity Pool....................................................................................11
Closing Date Home Equity Pool Balance.........................................................................i, 11
Code.............................................................................................................88
Collection Account...............................................................................................77
Collection Period.................................................................................................2
Company...........................................................................................................i
Company Sale Agreement...........................................................................................21
Compensating Interest Payment................................................................................10, 63
Contribution Agreement...........................................................................................21
Cooperative......................................................................................................49
Coupon Rate......................................................................................................11
CPR..............................................................................................................68
Cut-Off Date......................................................................................................2
Defective Home Equity Loan.......................................................................................52
Deficiency Amount................................................................................................82
Definitive Note...................................................................................................4
Delinquent Home Equity Loans.................................................................................ii, 23
Depositor.........................................................................................................i
Depositor Sale Agreement.........................................................................................22
Determination Date...............................................................................................54
DTC...............................................................................................................4
Due Date.........................................................................................................11
Due Period........................................................................................................2
Eligible Account.................................................................................................78
ERISA............................................................................................................14
Euroclear.........................................................................................................4
Euroclear Operator...............................................................................................49
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Euroclear Participants...........................................................................................49
European Depositaries............................................................................................48
Excess Cash.......................................................................................................7
Expense Adjusted Coupon Rate..................................................................................6, 53
Federal Reserve Board............................................................................................49
Financial Intermediary...........................................................................................48
Fixed Rate 15-Year Loan......................................................................................11, 22
Fixed Rate 30-Year Loan......................................................................................11, 22
Fixed Rate Loan..............................................................................................11, 22
Fully Indexed Rate...............................................................................................22
Funding Co. Sale Agreement.......................................................................................22
Funding Period...................................................................................................11
GAAP.............................................................................................................84
Global Securities................................................................................................95
Gross Margin.....................................................................................................12
HEP..............................................................................................................68
Holders..........................................................................................................17
Home Equity Loans.............................................................................................i, 10
Home Equity Pool.................................................................................................10
Home Equity Pool Balance.......................................................................................2, 8
HUD..............................................................................................................73
Indenture.........................................................................................................i
Indenture Trustee..........................................................................................i, 2, 65
Indenture Trustee Fee.............................................................................................2
Index............................................................................................................12
Initial Adjustable Rate Loans....................................................................................23
Initial Cut-Off Date...........................................................................................i, 2
Initial Fixed Rate Loans.........................................................................................23
Initial Home Equity Loans.....................................................................................i, 10
Initial Home Equity Pool Balance..............................................................................i, 10
Insurance Agreement..............................................................................................52
Insurance Policy...............................................................................................i, 9
Insurance Proceeds...............................................................................................55
Insured Payment...............................................................................................9, 83
Interest Coverage Account........................................................................................57
Interest Coverage Amount.........................................................................................57
Interest Determination Date......................................................................................56
Interest Period...................................................................................................6
Issuer............................................................................................................i
Liquidated Home Equity Loan......................................................................................54
Liquidation Proceeds.............................................................................................55
Loan-to-Value Ratio..............................................................................................23
LTV..............................................................................................................23
Maximum Rate.....................................................................................................22
Minimum Rate.....................................................................................................22
Monthly Payment..................................................................................................11
Monthly Principal.............................................................................................6, 54
Mortgage Files...................................................................................................51
Mortgage Note....................................................................................................10
Mortgaged Property...............................................................................................10
Net Coupon Rate..................................................................................................67
Net Liquidation Proceeds.........................................................................................55
Non-U.S. Person..................................................................................................98
Note Account.....................................................................................................57
Note Balance..................................................................................................6, 54
Note Formula Rate.............................................................................................5, 53
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Note Insurer...................................................................................................i, 2
Note Insurer Default..............................................................................................9
Note Insurer Premium.............................................................................................10
Note Interest.................................................................................................6, 53
Note Interest Rate............................................................................................5, 53
Noteholder....................................................................................................4, 48
Noteholders......................................................................................................17
Notes.............................................................................................................i
Notice...........................................................................................................83
One-Month LIBOR..................................................................................................56
One-Year U.S. Treasury Rate......................................................................................43
Original Note Balance.............................................................................................3
Original Pre-Funding Amount......................................................................................56
Outstanding Pre-Funding Amount...................................................................................11
Overcollateralization Amount.....................................................................................59
Overcollateralization Deficit.................................................................................8, 60
Overcollateralization Surplus.....................................................................................8
Owner............................................................................................................83
Owner Trust Agreement.............................................................................................i
Owner Trustee..................................................................................................i, 2
P&I Advances.....................................................................................................10
Participants.....................................................................................................49
Paying Agent.....................................................................................................52
Payment Date...................................................................................................i, 2
Payments Ahead...................................................................................................54
Percentage Interest..............................................................................................52
Periodic Rate Cap................................................................................................22
Plan.............................................................................................................14
Preference Amount................................................................................................83
Pre-Funding Account.....................................................................................i, 3, 7, 56
Pre-Funding Amount...............................................................................................56
Prepayment Interest Shortfall....................................................................................63
Principal Prepayment.............................................................................................54
Purchase Price...................................................................................................52
Qualified Replacement Home Equity Loan...........................................................................51
Qualifying Rate..................................................................................................41
RBMG..............................................................................................................i
RBMG Guidelines..................................................................................................40
Record Date.......................................................................................................4
Redemption Date...............................................................................................6, 61
Relevant Depositary..............................................................................................48
Relief Act....................................................................................................5, 18
REMIC............................................................................................................ii
REO Property.....................................................................................................63
Required Overcollateralization Amount.........................................................................8, 59
Reserve Interest Rate............................................................................................56
Residual Interest.................................................................................................i
Rules............................................................................................................48
S&P..........................................................................................................ii, 58
SAP..............................................................................................................84
Servicer..........................................................................................................i
Servicer..........................................................................................................1
Servicer Events of Default.......................................................................................80
Servicer Remittance Date..........................................................................................3
Servicing Advance................................................................................................75
Servicing Agreement...............................................................................................i
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Servicing Fee.....................................................................................................3
Servicing Fee Rate................................................................................................3
Six-Month LIBOR..................................................................................................12
SMMEA............................................................................................................14
Stated Maturity................................................................................................i, 3
Stated Principal Balance.........................................................................................56
Statistical Calculation Date...................................................................................i, 2
Structuring Assumptions..........................................................................................70
Sub-Servicer...................................................................................................i, 2
Sub-Servicing Agreement.......................................................................................1, 72
Supplemental Home Equity Loans................................................................................i, 10
Termination Event................................................................................................80
Terms and Conditions.............................................................................................49
Transaction Balance............................................................................................i, 3
Trust Estate...................................................................................................i, 3
Underwriter.......................................................................................................i
Underwriting Agreement...........................................................................................86
USAP.............................................................................................................79
</TABLE>
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<PAGE>
ANNEX I
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
tradable 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 the normal rules and operating procedures and in accordance with
conventional eurobond practice (I.E., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between 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
delivery 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 to their holdings against payment in same-day funds on the settlement
date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to
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 dated 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 issued on same-day funds.
TRADING BETWEEN CEDEL AND/OR EUROCLEAR PARTICIPANTS. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the Procedures applicable to conventional eurobonds in same-day funds.
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TRADING BETWEEN DTC SELLER AND CEDEL OR EUROCLEAR 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 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 day 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 the 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 line 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, of Cedel or Euroclear has extended a line of credit to
the, 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 cover 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 incurred during
that one-day period pay substantially reduce or offset the amount of such
overdraft charges, although the result will depend on each Cedel Participant's
or Euroclear Participant's particular cost of funds.
Because the settlement is taking place during the 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 day 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 from
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 for 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
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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 sales 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 discounts 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 on 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 can bank
with a U.S. branch, for which the interest income is effectively connected
with its conduct of a type 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 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
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<PAGE>
to United States federal income tax, regardless of the source of its income or
(iv) a trust(a)a court in the United 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 definitions
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
advisers for specific tax advice concerning their holding and disposing of
Global Securities.
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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
17.
--------------------
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 9, 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>
<CAPTION>
<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
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"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 Scheduled Distribution Date as a result of the
application of
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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 on 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.
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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 (such loans,
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 generally consist of what are
commonly referred to as "home equity" loans, as distinguished
from "purchase money" loans, although the Home Equity Loans
held by a particular Trust may also be "purchase money" loans.
Both "home equity" and "purchase money" 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. 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. "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.
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 with
their terms and require a balloon payment of the
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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
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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.
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<PAGE>
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 degree of
skill and care that it
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<PAGE>
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 Certificates. If the Securities
offered are Notes which are
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<PAGE>
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.
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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>
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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.
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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.
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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 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
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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.
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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
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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.
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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 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
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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.
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.
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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.
The Home Equity Loans will generally consist of what are commonly
referred to as "home equity" loans, as distinguished from "purchase money"
loans, although the Home Equity Loans held by a particular Trust may also be
"purchase money" loans. Both "home equity" and "purchase money" 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
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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
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.
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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.
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
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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.
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.
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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.
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
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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.
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
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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 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.
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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") 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.
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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
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
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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.
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
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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 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
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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 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.
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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,.
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.
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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.
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
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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.
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
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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 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.
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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;
(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.
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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.
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.
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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
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
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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.
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
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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.
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
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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.
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.
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Termination
Pooling and Servicing Agreement; Trust Agreement. The obligations
created by the Pooling and Servicing Agreement or Trust Agreement for a Series
will terminate upon the distribution to Holders of all amounts distributable to
them pursuant to such Agreement after the earlier of (i) the later of (a) the
final payment or other liquidation of the last Primary Asset remaining in the
Trust Fund for such Series and (b) the disposition of all property acquired upon
foreclosure or deed in lieu of foreclosure or repossession in respect of any
Primary Asset; (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 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.
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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.
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.
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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 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
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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, 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
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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.
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
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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.
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
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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 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 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
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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.
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.
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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 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."
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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 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
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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 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,
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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 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.
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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
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.
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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.
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
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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.
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
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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
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
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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
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
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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 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
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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
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
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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 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
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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.
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.
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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 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.
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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 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.
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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.
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
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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.
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
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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:
(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
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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) 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.
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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 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.
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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.
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"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.
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"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.
77
<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.
78
<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.
79
<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.
80
<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.
81
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<TABLE>
<CAPTION>
<S> <C>
TABLE OF CONTENTS
Page Page
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
OPTIONAL REDEMPTION, PURCHASE OR TERMINATION..................................................................23
WEIGHTED AVERAGE LIFE OF THE SECURITIES.......................................................................23
THE TRUST FUNDS..................................................................................................24
GENERAL.......................................................................................................24
THE HOME EQUITY LOANS.........................................................................................25
PRIVATE SECURITIES............................................................................................28
COLLECTION AND DISTRIBUTION ACCOUNTS..........................................................................30
PRE-FUNDING ACCOUNTS..........................................................................................30
CREDIT ENHANCEMENT...............................................................................................31
SUBORDINATE SECURITIES........................................................................................31
INSURANCE.....................................................................................................31
RESERVE FUNDS.................................................................................................32
MINIMUM PRINCIPAL PAYMENT AGREEMENT...........................................................................32
DEPOSIT AGREEMENT.............................................................................................33
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C>
SERVICING OF HOME EQUITY LOANS...................................................................................33
GENERAL.......................................................................................................33
COLLECTION PROCEDURES; ESCROW ACCOUNTS........................................................................33
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT.......................................................33
ADVANCES AND LIMITATIONS THEREON..............................................................................35
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES..............................................35
REALIZATION UPON DEFAULTED HOME EQUITY LOANS..................................................................36
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...................................................................................................43
DUTIES OF THE TRUSTEE.........................................................................................44
RESIGNATION OF TRUSTEE........................................................................................44
AMENDMENT OF AGREEMENT........................................................................................44
VOTING RIGHTS.................................................................................................45
LIST OF HOLDERS...............................................................................................45
FORM OF SECURITIES............................................................................................45
REMIC ADMINISTRATOR...........................................................................................46
TERMINATION...................................................................................................47
CERTAIN LEGAL ASPECTS OF HOME EQUITY LOANS.......................................................................48
GENERAL.......................................................................................................48
ENFORCEMENT OF THE NOTE.......................................................................................48
SECURITY INTERESTS............................................................................................49
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940...............................................................54
THE DEPOSITOR....................................................................................................54
GENERAL.......................................................................................................54
USE OF PROCEEDS..................................................................................................54
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.........................................................................55
GENERAL.......................................................................................................55
GRANTOR TRUST SECURITIES......................................................................................55
REMIC SECURITIES..............................................................................................56
DEBT SECURITIES...............................................................................................62
DISCOUNT AND PREMIUM..........................................................................................66
BACKUP WITHHOLDING............................................................................................69
FOREIGN INVESTORS.............................................................................................70
STATE TAX CONSIDERATIONS.........................................................................................71
ERISA CONSIDERATIONS.............................................................................................71
LEGAL INVESTMENT.................................................................................................73
PLAN OF DISTRIBUTION.............................................................................................74
LEGAL MATTERS....................................................................................................74
FINANCIAL INFORMATION............................................................................................74
GLOSSARY OF TERMS................................................................................................75
</TABLE>
ii
<PAGE>
INDEX OF PRINCIPAL TERMS
Unless the context indicates otherwise, the following terms shall have
the meanings set forth on the page indicated below:
<TABLE>
<CAPTION>
<S> <C>
Actuarial Mortgage Loan..........................................................................................26
Agreement.........................................................................................................5
ARM Loans........................................................................................................18
Balloon Loan......................................................................................................9
bankruptcy bond..................................................................................................32
Book-Entry Securities............................................................................................45
Business Day.....................................................................................................12
Capitalized Interest Account.....................................................................................12
Cede.............................................................................................................45
CERCLA...........................................................................................................20
Certificate Schedule.............................................................................................40
Certificates...................................................................................................1, 5
Class.............................................................................................................2
Code.............................................................................................................55
Collection Account...............................................................................................10
Combined Loan-to-Value Ratio......................................................................................9
Commission........................................................................................................3
Condominium Units................................................................................................25
Cooperative Dwellings............................................................................................25
Credit Enhancement...............................................................................................12
Credit Enhancer..................................................................................................11
Current Interest Rates............................................................................................9
Custodian........................................................................................................39
Cut-Off Date......................................................................................................8
D&P..............................................................................................................72
Debt Securities..............................................................................................14, 55
Deleted Primary Asset............................................................................................40
Deposit Agreement................................................................................................13
Depositor.........................................................................................................1
Depositor Securities.............................................................................................54
Distribution Account.............................................................................................11
Distribution Date.................................................................................................2
DOL..............................................................................................................71
Eligible Investments.........................................................................................11, 30
ERISA............................................................................................................14
Escrow Accounts..................................................................................................33
Event of Default.................................................................................................38
Exchange Act......................................................................................................4
FASIT........................................................................................................14, 55
FASIT High-Yield Securities......................................................................................14
FASIT Ownership Security.........................................................................................14
FASIT Regular Securities.........................................................................................14
FASIT Securities.................................................................................................55
FDIC.............................................................................................................33
FHA..............................................................................................................25
FHLMC............................................................................................................52
Final Scheduled Distribution Date.................................................................................6
First Union......................................................................................................74
fully taxable bonds..............................................................................................69
Garn-St. Germain Act.............................................................................................52
i
<PAGE>
Grantor Trust....................................................................................................55
Grantor Trust Securities.........................................................................................14
Holders...........................................................................................................3
Indenture........................................................................................................21
Indirect Participant.............................................................................................45
IRS..............................................................................................................56
Issuer............................................................................................................5
Lifetime Rate Caps................................................................................................9
Liquidation Proceeds.............................................................................................34
Loan Rate.........................................................................................................9
Loan Schedule....................................................................................................39
Loan-to-Value Ratio...............................................................................................9
Minimum Principal Payment Agreement..............................................................................13
Modification.....................................................................................................37
Mortgage Loans.............................................................................................1, 8, 25
Notes..........................................................................................................1, 5
Notional Amount...................................................................................................6
Originator........................................................................................................1
OTS..............................................................................................................52
Owner Trust.......................................................................................................5
Owner Trustee.....................................................................................................6
PAC...............................................................................................................5
Participants.....................................................................................................45
Partnership......................................................................................................55
Partnership Interests........................................................................................14, 55
Physical Certificates............................................................................................45
Plan.............................................................................................................71
Plan Assets Regulation...........................................................................................71
Pool..............................................................................................................1
Pooling and Servicing Agreement..................................................................................22
Pre-Funded Amount................................................................................................11
Pre-Funding Account..............................................................................................11
Pre-Funding Period...............................................................................................11
Premium Security.................................................................................................69
Prepayment Assumption............................................................................................67
Primary Assets....................................................................................................1
Prospectus Supplements............................................................................................1
PS Agreement.....................................................................................................29
PS Servicer......................................................................................................10
PS Sponsor.......................................................................................................10
PS Trustee.......................................................................................................10
PTCE.............................................................................................................73
Qualifying Substitute Primary Asset..............................................................................40
Rating Agency....................................................................................................12
REMIC........................................................................................................14, 55
REMIC Regular Securities.........................................................................................14
REMIC Regulations................................................................................................57
REMIC Residual Securities........................................................................................14
REMIC Securities.................................................................................................55
REO Property.....................................................................................................35
Reserve Fund.....................................................................................................13
Restricted Group.................................................................................................73
Retained Interests...............................................................................................39
Rule of 78s Mortgage Loan........................................................................................26
Securities........................................................................................................1
Security Registrar...............................................................................................45
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<PAGE>
Series............................................................................................................1
Servicer..........................................................................................................1
Servicing Agreement..............................................................................................25
Servicing Fee....................................................................................................14
Settlement Date..................................................................................................57
Simple Interest Mortgage Loan....................................................................................26
Single Family Properties.........................................................................................25
SMMEA............................................................................................................15
Title I Program..................................................................................................27
Title V..........................................................................................................53
Trust Agreement...................................................................................................5
Trust Fund........................................................................................................1
Trustee...........................................................................................................5
UCC..............................................................................................................45
Underlying Loans..................................................................................................9
Underwriter Exemptions...........................................................................................71
</TABLE>
iii
<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, RBMG or the Underwriter. Neither this Prospectus
Supplement nor the accompanying Prospectus constitutes an offer to sell or a
solicitation or 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 Suppplement 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
Prospectus Supplement
SUMMARY OF TERMS...............................................1
RISK FACTORS..................................................16
DESCRIPTION OF THE HOME EQUITY POOL...........................21
THE ISSUER....................................................44
RBMG..........................................................44
FUNDING CO. ..................................................46
THE DEPOSITOR.................................................46
DESCRIPTION OF THE NOTES......................................47
CERTAIN PREPAYMENT AND YIELD CONSIDERATIONS...................65
SERVICING OF THE HOME EQUITY LOANS............................72
THE INSURANCE POLICY AND THE NOTE INSURER.....................81
ERISA CONSIDERATIONS..........................................85
USE OF PROCEEDS...............................................86
LEGAL INVESTMENT CONSIDERATIONS...............................86
UNDERWRITING..................................................86
REPORT OF EXPERTS.............................................87
MATERIAL FEDERAL INCOME TAX CONSEQUENCES......................87
STATE TAX CONSIDERATIONS......................................87
LEGAL MATTERS.................................................89
RATING OF THE NOTES...........................................90
INDEX OF SIGNIFICANT TERMS....................................91
ANNEX I.......................................................95
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
$125,000,000
RBMG Funding Co.
Home Equity Loan
Trust 1998-1
Issuer
Asset-Backed Notes,
Series 1998-1
RESOURCE BANCSHARES
MORTGAGE GROUP, INC.
Servicer
HOME EQUITY SECURITIZATION CORP.
Depositor
Prospectus Supplement
FIRST UNION CAPITAL
MARKETS
June --, 1998
