As filed with the Securities and Exchange Commission on May 4, 1998
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM S-3
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
----------------
Virginia CRESTAR SECURITIZATION, LLC Applied For
(State or other (Exact name of registrant as (I.R.S. Employer
jurisdiction of specified in its charter) Identification No.)
incorporation or
organization)
919 East Main Street
Richmond, Virginia 23219
(804) 782-5000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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Eugene S. Putnam Copies to: And to:
President and Chief Executive Officer Randolph F. Totten Paul F. Sefcovic
919 East Main Street Jack A. Molenkamp Kim L. Swanson
Richmond, Virginia 23219 Hunton & Williams Squire, Sanders & Dempsey L.L.P.
(804) 782-5619 951 East Byrd Street 41 South High Street, Suite 1300
(804) 782-7744 (telecopy) Richmond, Virginia 23219 Columbus, Ohio 43215
(Name, address, including zip code and (804) 788-8200 (614) 365-2700
telephone number, including area code, (804) 788-8218 (telecopy) (614) 365-2499 (telecopy)
of agent for service)
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Approximate date of commencement of proposed sale to the public:
From time to time after the effective date of this Registration Statement.
-----------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [x]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
- ----------------------------------------- -------------------- -------------------- -------------------- --------------------
Proposed
Proposed Maximum
Maximum Aggregate
Title of Securities Amount to be Offering Price Offering Amount of
Being Registered Registered(1)(2) Per Unit(1)(2) Price(1)(2) Registration Fee
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- ----------------------------------------- -------------------- -------------------- -------------------- --------------------
Student Loan
Asset Backed Notes $1,000,000 100% $1,000,000 $295.00
========================================= ==================== ==================== ==================== ====================
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(1) Estimated solely for calculating the registration fee.
(2) Also registered are secondary market sales of Notes that may be
effected by Crestar Securities Corporation, an affiliate of the
Registrant.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that the Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
SUBJECT TO COMPLETION, DATED __________ __, 1998
PROSPECTUS SUPPLEMENT
CRESTAR STUDENT LOAN TRUST 1998-__
$____________ Student Loan Asset Backed Notes
CRESTAR SECURITIZATION, LLC
Depositor
CRESTAR BANK
Transferor, Master Servicer and Administrator
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Consider carefully the risk
factors beginning on page 6 in
the Prospectus. The Trust will issue - Class A Notes Class B Notes Total
-------------------- ------------- ------------- -----
A Note is not a deposit and
neither the Notes nor the Principal Amount $__________ $__________ $___________
underlying accounts or student
loans are insured or Class Interest Rate One-Month One-Month
guaranteed by the Federal LIBOR plus [ ]%1 LIBOR plus [ ]%1
Deposit Insurance Corporation
or any other governmental Interest Paid Monthly Quarterly
agency, except as expressly
provided herein. First Interest Payment Date [_______] [_______]
The Notes will represent First Scheduled Principal
obligations of the Trust only Payment Date [_______] [_______]
and will not represent
interests in or obligations of Legal Final Maturity ____ __, 2___ ____ __, 2___
Crestar Bank or any of its
affiliates. Price to Public __________% _________% $___________
This Prospectus Supplement may Underwriting Discount __________% _________% $___________
be used to offer and sell the
Notes only if accompanied by Proceeds to Issuer __________% _________% $___________
the Prospectus.
(1) Following the initial Interest Accrual Period, subject to a cap of [18%] and
the Net Loan Rate.
Credit Enhancement:
The Notes are secured by the assets of the Trust, which consist primarily of
Financed Student Loans. The Class B Notes are subordinated to the Class A
Notes.
Neither the SEC nor any state securities commission has approved these Notes or determined
that this Prospectus Supplement or the Prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
Salomon Smith Barney Crestar Securities Corporation
____________ __, 1998
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<PAGE>
RED HERRING
The information in this Prospectus Supplement is not complete and may be
changed. The Depositor may not sell these securities unless we deliver a final
Prospectus Supplement and Prospectus to you. This Prospectus Supplement and the
attached Prospectus is not an offer to sell these securities in any state where
the offer or sale is not permitted.
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
The Issuer provides information to you about the Notes in two
separate documents that progressively provide more detail: (a) the
accompanying Prospectus, which provides general information, some of which
may not apply to your Notes and (b) this Prospectus Supplement, which
describes the specific terms of your Notes.
If the terms of your Notes vary between this Prospectus Supplement
and the accompanying Prospectus, you should rely on the information in this
Prospectus Supplement.
The Issuer includes cross-references in this Prospectus Supplement
and the accompanying Prospectus to captions in these materials where you
can find further related discussions. The following Table of Contents and
the Table of Contents included in the accompanying Prospectus provide the
pages on which these captions are located.
[The Issuer has filed preliminary information regarding the
Trust's assets and the Notes with the SEC. The information contained in
this document supersedes all of that preliminary information, which was
prepared by the Underwriters for prospective investors.]
-----------------------
Until ________, all dealers that effect transactions in the Notes,
whether or not participating in this offering, may be required to deliver a
Prospectus and Prospectus Supplement. This requirement is in addition to
the dealers' obligation to deliver a Prospectus and Prospectus Supplement
when acting as underwriters with respect to their unsold allotments or
subscriptions.
TABLE OF CONTENTS
Page
SUMMARY OF TERMS......................................S-1
Offered Securities.................................S-1
The Trust..........................................S-1
Interest...........................................S-1
Principal..........................................S-2
Credit Enhancement.................................S-3
Trust Assets.......................................S-3
Reserve Account....................................S-3
Collections........................................S-4
Priority of Payments...............................S-4
Optional Termination...............................S-4
Federal Income Tax Consequences....................S-5
Erisa Considerations...............................S-5
Registration, Clearing and Settlement..............S-5
Rating.............................................S-5
THE TRUST.............................................S-6
The Trust........................................S-6
Eligible Lender Trustee..........................S-6
Delaware Trustee.................................S-7
Indenture Trustee................................S-7
Master Servicer..................................S-7
Administrator....................................S-7
USE OF PROCEEDS.......................................S-7
THE FINANCED STUDENT LOANS............................S-7
Incentive Programs..............................S-12
MATURITY AND PREPAYMENT CONSIDERATIONS...............S-13
Maturity and Prepayment Assumptions.............S-13
Weighted Average Life of the Notes..............S-13
THE SERVICERS........................................S-14
General.........................................S-14
[Name of Servicer]..............................S-14
Servicing Compensation..........................S-14
THE GUARANTEE AGENCIES...............................S-15
General.........................................S-15
[Name of Guarantee Agency]......................S-15
DESCRIPTION OF THE NOTES.............................S-15
General.........................................S-15
Interest........................................S-15
Principal.......................................S-16
Priority of Payments............................S-17
Advances........................................S-20
Reserve Account.................................S-20
Subordination of the Class B Notes..............S-20
Termination.....................................S-20
UNDERWRITING.........................................S-21
LEGAL MATTERS........................................S-22
RATING...............................................S-22
ii
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SUMMARY OF TERMS
o This summary highlights selected information from this document and
does not contain all of the information that you need to consider in
making your investment decision. To understand all of the terms of an
offering of the Notes, read carefully this entire document and the
accompanying Prospectus.
o This summary provides an overview of certain calculations, cash flows
and other information to aid your understanding and is qualified by the
full description of these calculations, cash flows and other
information in this Prospectus Supplement and the accompanying
Prospectus.
o You can find a definition of capitalized terms used in this summary and
not otherwise defined herein under the caption "Glossary of Principal
Definitions" beginning on page I-1 of the accompanying Prospectus.
OFFERED SECURITIES
Crestar Student Loan Trust 1998-__ (the "Trust") is offering Class A LIBOR Rate
Notes (the "Class A Notes") and Class B LIBOR Rate Notes (the "Class B Notes").
The Class A and Class B Notes (the "Notes") are secured by the assets of the
Trust.
The Notes will be offered in minimum denominations of [$50,000] and integral
multiples of [$1,000] in excess thereof.
The Class B Notes are subordinated to the Class A Notes.
THE TRUST
The Trust is a statutory business trust established under the laws of the State
of Delaware. Crestar Bank, a Virginia banking corporation (the "Transferor"),
will serve as administrator (in such role, the "Administrator") of the Trust and
as master servicer (in such role, the "Master Servicer") of the Financed Student
Loans.
On the Closing Date, expected to be on or about [_________, ____], the Trust
will use proceeds of the offering of Notes to acquire the Financed Student Loans
from the Depositor, which will in turn have acquired them from the Transferor on
such date. See "Use of Proceeds" in this Prospectus Supplement.
The trustees of the Trust are [_________], a [national banking association],
which will serve as Eligible Lender Trustee, and [__________], a [________]
banking [corporation], which will serve as Delaware Trustee. See "The Trust -
Eligible Lender Trustee" and "- Delaware Trustee" in this Prospectus Supplement.
The Trust will pledge the Financed Student Loans acquired from the Depositor or
to the Indenture Trustee to secure the Notes pursuant to an Indenture between
the Trust and [________], as Indenture Trustee.
INTEREST
The Class Interest Rate on the Class A Notes for each Interest Accrual Period is
an annual rate equal to the lesser of One-Month LIBOR [plus ___%] and [18]% per
annum (the "Formula Rate"), but not in excess of the Net Loan Rate for such
period.
The Class Interest Rate on the Class B Notes for each Interest Accrual Period is
an annual rate equal to the lesser of One-Month LIBOR [plus ___%] and [18]% per
annum (the "Formula Rate"), but not in excess of the Net Loan Rate for such
period.
For the initial Interest Accrual Period only, which begins on the Closing Date,
the Class Interest Rate for the Class A Notes will be ___% per annum and for the
Class B Notes will be ___% per annum.
An Interest Accrual Period for the Class A Notes with respect to any Payment
Date begins on the preceding Payment Date and ends on the day preceding such
Payment Date, except that the first Interest Accrual Period will begin on the
Closing Date. The Interest Accrual Periods for the Class B Notes with respect to
any Quarterly Payment Date correspond to the preceding three Class A Interest
Accrual Periods for so long as the Class A Notes are outstanding. Thereafter, an
Interest Accrual Period begins on the 25th day of each month, except for the
months in which a Quarterly Payment Date occurs, in which event it begins on
such Quarterly Payment Date, and ends on the day prior to the succeeding
Interest Accrual Period.
Interest accrued during each Interest Accrual Period will be paid on the
succeeding Payment Date or Quarterly Payment Date for a Class.
A "Payment Date" is the 25th day of each month. A "Quarterly Payment Date" is
the Payment Date occurring in _______, _______, _____ and _______. If the 25th
day is not a Business Day, the Payment Date or Quarterly Payment Date will be
the following Business Day.
LIBOR is the rate for deposits in U.S. dollars for a one-month period which
appears on the Dow Jones Telerate Page 5 (or substitute page) as of 11:00 a.m.,
London time, on the related Interest Determination Date. Interest Determination
Dates are:
o ______, with respect to the first Interest Accrual Period.
o the second London, New York and Richmond Business Day prior to the first
day of each Interest Accrual Period, for each following Interest Accrual
Period.
The Net Loan Rate for an Interest Accrual Period equals the weighted average
Effective Interest Rate of the Financed Student Loans (rounded up to the next
highest .01%) as of the last day of the Collection Period immediately preceding
the commencement of such Interest Accrual Period, less the Program Operating
Expense Percentage (initially ___% per annum, which may be increased from time
to time with the approval of the Rating Agencies). The Net Loan Rate need not be
determined on an Interest Determination Date unless One-Month LIBOR exceeds the
applicable 91-day Treasury bill rate by more than 1.0% on the preceding Interest
Determination Date. The applicable 91-day Treasury bill rate is the bond
equivalent yield of 91-day Treasury bills for the most recent auction preceding
the applicable Interest Determination Date. The Effective Interest Rate of a
Financed Student Loan is the interest rate on such Loan after giving effect to
all interest subsidies, rebate fees, Special Allowance Payments and borrower
incentives.
If interest at the Formula Rate for a Class exceeds interest at the Net Loan
Rate for an Interest Accrual Period, the excess interest, together with interest
thereon at the applicable Formula Rate ("Carryover Interest"), will be paid on
subsequent Quarterly Payment Dates only to the extent funds are available after
other required payments on the Notes, and may never be paid. See "Description of
the Notes - Interest" in this Prospectus Supplement.
The following time line shows the relevant dates for the first three Interest
Accrual Periods.
(Quarterly)
Closing Payment Payment Payment
Date Date Date Date
(8/13/98) (9/25/98) (10/27/98) (11/25/98)
| | | |
- -------------------------------------------------------------------------->
| | | |
Interest Interest Interest Interest
Determination Determination Determination Determination
Date Date Date Date
(8/11/98) (9/23/98) (10/22/98) (11/20/98)
You may obtain applicable Class Interest Rates for the current and immediately
preceding Interest Accrual Periods by telephoning ________, the Indenture
Trustee, at its Corporate Trust Office at ( ) ___-____.
PRINCIPAL
Payments of principal on the Notes will not commence until ___________, 19___.
No principal will be paid on the Class B Notes until the Class A Notes have been
paid in full.
Principal on the Notes is payable on the applicable Payment Date or Quarterly
Payment Date for a Class in an amount ("Principal Distribution Amount")
generally equal to:
o the amount, if any, by which the Pool Balance as of the last day of the
second Collection Period immediately preceding a Payment Date or the last
day of the fourth Collection Period immediately preceding a Quarterly
Payment Date (or Closing Date, with respect to the first Payment Date)
exceeds the Pool Balance as of the last day of the immediately preceding
Collection Period.
In addition, accelerated principal payments ("Parity Payments") will be payable
on each Quarterly Payment Date until the Parity Percentage equals ___%.
A "Collection Period" is each calendar month, except that the first Collection
Period begins on _______, (the "Cut-off Date") and ends on ___________.
The "Pool Balance" as of the end of a Collection Period is equal to the
aggregate principal balance of the Financed Student Loans (including accrued
interest that is capitalized as of the end of the Collection Period), after
giving effect to all payments in respect of principal received by the Trust
during such Collection Period.
The Parity Percentage for any Payment Date or Quarterly Payment Date is the
percentage determined by dividing
o the Pool Balance as of the end of the preceding Collection Period, plus
accrued interest thereon, accrued Special Allowance Payments and Interest
Subsidy Payments as of the end of such Collection Period and all amounts in
the Collection Account and Reserve Account as of the end of the Collection
Period (adjusted for payments made on such Payment Date or Quarterly
Payment Date), by
o the sum of the principal balance of the Notes (after payments thereon on
such Payment Date or Quarterly Payment Date), accrued interest thereon, and
accrued and unpaid Transaction Fees and Consolidation Loan Fees.
The final payment of principal and interest will be made no later than _________
on the Class A Notes, and no later than ________ on the Class B Notes (each, a
"Legal Final Maturity"). The actual maturity of one or more Classes of Notes
could occur sooner as a result of a variety of factors. See "Maturity and
Prepayment Considerations" in the Prospectus and this Prospectus Supplement.
CREDIT ENHANCEMENT
Credit Enhancement for your Series is for your Series' benefit only, and you are
not entitled to the benefits of any credit enhancement available to other
Series.
The Class B Notes are subordinated to the Class A Notes and will not receive any
payments of principal until the Class A Notes have been paid in full.
TRUST ASSETS
The primary assets of the Trust consist of Financed Student Loans with an
aggregate principal balance of $________ as of the Cut-off Date. The Financed
Student Loans consist of certain education loans to students and parents of
students enrolled in accredited institutions of higher education. Certain of the
Financed Student Loans have been originated by the Transferor and the balance
have been acquired by the Transferor from independent third parties. [Of the
initial principal amount of the Financed Student Loans, approximately ___% are
FFELP Loans and approximately ___% are HEAL Loans.]
FFELP Loans include loans made under the Family Education Loan Program,
including PLUS Loans, Stafford Loans, Unsubsidized Stafford Loans, Supplemental
Loans for Students and Consolidation Loans. See "Description of the FFEL
Program" in the Prospectus.
________, _______ and _______ are the Guarantee Agencies that guarantee more
than 10% of the initial Financed FFELP Loans. Of the Financed FFELP Loans,
approximately ___% are guaranteed as to the payment of 100% of principal and
interest by a Guarantee Agency, and the balance are guaranteed as to [98]%. For
a description of the Guarantee Agencies and guarantee agreements, see "The
Guarantee Agencies" in this Prospectus Supplement and "Description of the
Guarantee Agencies" in the Prospectus.
The HEAL Loans are insured as to payment of 100% of principal and interest by
the United States Department of Health and Human Services. See "Description of
the HEAL Program" in the Prospectus.
Additional Financed Student Loans may be substituted for those comprising the
initial pool under certain circumstances, including loss of insurance or
guarantee with respect to such Loan or the consolidation of loans made to the
same borrower.
RESERVE ACCOUNT
The Depositor will make an initial deposit of $________ into a Reserve Account.
The initial deposit will be supplemented on each Quarterly Payment Date with all
amounts remaining after making all required distributions on such date until the
Specified Reserve Account Balance is maintained.
The "Specified Reserve Account Balance" on any Quarterly Payment Date is equal
to the greater of (i) ___% of the outstanding principal balance of the Notes on
such Payment Date, after giving effect to payments on such Payment Date, or (ii)
$_______, but not in excess of the outstanding principal amount of the Notes.
Amounts in the Reserve Account will be available to fund shortfalls in
Transaction Fees and amounts payable to the Noteholders under certain
circumstances. In addition, any amounts in the Reserve Account on the Legal
Final Maturity for a Class will be applied to reduce the principal balance of
such Class to zero. See "Description of the Notes - Reserve Account" in this
Prospectus Supplement.
COLLECTIONS
The Master Servicer will service, or arrange for the servicing of, the Financed
Student Loans. The Master Servicer may arrange for servicers to perform its
obligations, but will be obligated to repurchase any Financed Student Loans that
lose their guarantee or insurance as a consequence of the failure to service the
Financed Student Loans properly.
Each Servicer of Financed Student Loans will deposit collections on the Loans
into an account with the Indenture Trustee (the "Collection Account").
_________, ________ and ________ each service more than 10% of the initial
Financed Student Loans. See "The Servicers" in this Prospectus Supplement.
In addition, the Master Servicer may advance in any month an amount equal to the
Interest Subsidy Payments, Special Allowance Payments or Guarantee Payments that
have been applied for and not received, and which would be required to be
distributed as interest. The Master Servicer has no obligation to make such
advances and may subsequently recover any amounts advanced prior to payments on
the Notes. See "Description of the Notes - Advances" in this Prospectus
Supplement.
On the third Business Day prior to a Payment Date or Quarterly Payment Date
(each, a "Payment Determination Date"), the Administrator will calculate the
Transaction Fees and amounts to be paid on the Notes on such Payment Date or
Quarterly Payment Date. The "Transaction Fees" are payable quarterly in arrears
and include the fees payable to the Servicers (the "Servicing Fees"); to the
Administrator (the "Administration Fee"); to the Indenture Trustee (the
"Indenture Trustee Fee"); to the Delaware Trustee (the "Delaware Trustee Fee");
and to the Eligible Lender Trustee (the "Eligible Lender Trustee Fee").
PRIORITY OF PAYMENTS
Collections on the Financed Student Loans will be allocated first to pay any
Consolidation Loan Fees and Transaction Fees before being applied to pay the
Notes. On each Payment Date that is not a Quarterly Payment Date any remaining
Available Funds will be applied (i) to pay the Class Interest Amount on the
Class A Notes; and (ii) to pay the Principal Payment Amount on the Class A Notes
until the principal balance thereof has been reduced to zero. Payments on the
Notes on any Quarterly Payment Date will be applied generally in the following
priority:
o First, to pay the Class Interest Amount on the Class A Notes;
o Second, to pay the Class Interest Amount on the Class B Notes;
o Third, to pay the Principal Payment Amount on the Class A Notes until the
principal balance thereof has been reduced to zero;
o Fourth, after the principal balance of the Class A Notes has been reduced
to zero, to pay the Principal Payment Amount on the Class B Notes;
o Fifth, to the Reserve Account, the amount, if any, necessary to attain the
Specified Reserve Account Balance;
o Sixth, to pay any Parity Payments, first to the Class A Notes, and
thereafter to the Class B Notes; and
o Seventh, to pay any Carryover Interest, first on the Class A Notes and,
thereafter on the Class B Notes.
If, however, following such payments, the principal amount of the Class A Notes
would exceed the sum of the Pool Balance and amounts in Trust Accounts as of the
end of the preceding Collection Period, or if a payment Event of Default has
occurred with respect to the Notes, the Class B Notes will not receive their
Class Interest Amount pursuant to clause "Second" until after the Class A Notes
have received their Principal Distribution Amount. See "Description of the Notes
- - Priority of Payments" in this Prospectus Supplement.
Any remaining amounts will be available to pay interest on the Certificates (and
principal after the Class B Notes are paid in full) or to be distributed to the
Depositor.
OPTIONAL TERMINATION
Auction of Trust Assets
On or after __________, 20__[, if the Pool Balance is equal to ___% or less of
the Initial Pool Balance], the Indenture Trustee will offer the Financed Student
Loans for sale. If the Indenture Trustee receives at least two bids (which may
include the Transferor or its affiliates), the Indenture Trustee will accept the
higher bid if it will pay transaction costs and all amounts due the Noteholders
(other than any Carryover Interest), and the bid proceeds will be so applied. If
the bid proceeds are not sufficient to pay transaction costs and the Notes, the
Indenture Trustee will be under no obligation to continue to solicit bids,
although it may do so from time to time. See "Description of the Notes -
Termination - Auction Purchase" in this Prospectus Supplement.
Optional Purchase
At such time as the Pool Balance is equal to ___% or less of the Initial Pool
Balance, the Transferor may elect to purchase the Financed Student Loans for a
price equal to their principal amount, plus all accrued interest thereon, but
not less than an amount necessary to pay transaction costs and all amounts due
the Noteholders (other than Carryover Interest). The net proceeds of such
purchase will be applied to the payment of the Notes (other than any Carryover
Interest). See "Description of the Notes - Termination - Optional Purchase" in
this Prospectus Supplement.
FEDERAL INCOME TAX CONSEQUENCES
The Notes will evidence debt obligations under the Internal Revenue Code of
1986, as amended (the "Code"), and interest paid or accrued thereon will be
taxable to Noteholders. It is [not] expected that the Notes will be issued with
original issue discount. See "Federal Income Tax Consequences-Original Issue
Discount" in the Prospectus. By acceptance of its Note, each Noteholder will
be deemed to have agreed to treat its Note as a debt instrument for purposes
of federal and state income tax, franchise tax and any other tax measured in
whole or in part by income. See "Federal Income Tax Consequences" in the
Prospectus for additional information concerning the application of
federal income tax laws with respect to the Notes and the Trust.
ERISA CONSIDERATIONS
It is expected that the Notes will be treated as debt obligations without
significant equity features for purposes of the regulations of the Department of
Labor set forth in 29 C.F.R. 2510.3-101 (the "Plan Asset Regulations").
Accordingly, employee benefit plans and certain other retirement plans and
arrangements that are subject to ERISA or corresponding provisions of the Code,
including individual retirement accounts and annuities, Keogh plan and
collective investment funds in which such plans, accounts, annuities or
arrangements are invested (any of the foregoing, a "Plan") that acquire a Note
should not be treated as having acquired a direct interest in the assets of the
Trust for purposes of the Plan Asset Regulations. However, there can be no
complete assurance that the Notes will be treated as debt obligations without
significant equity features, and 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. See "ERISA Considerations" in the
Prospectus.
REGISTRATION, CLEARING AND SETTLEMENT
Persons acquiring beneficial ownership interests in the Notes will hold their
interests through DTC in the United States or Cedel Bank, societe anonyme
("Cedel") or the Euroclear System ("Euroclear") in Europe. The Noteholders will
not be entitled to receive definitive certificates representing their interests
in the Notes, except in certain limited circumstances. See "Description of the
Notes - Book-Entry Registration" in the Prospectus.
RATING
It is a condition to the issuance and sale of the Class A Notes that they be
rated "AAA" by [Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies ("Standard & Poor's")] and [Fitch IBCA, Inc. ("Fitch")],
and "Aaa" by [Moody's Investors Service, Inc. ("Moody's")], and it is a
condition to the issuance and sale of each of the Class B Notes that they be
rated at least "A" by [Standard & Poor's] and [Fitch] and at least "A2" by
[Moody's]. Each of Standard & Poor's, Fitch and Moody's is also referred to
herein as a "Rating Agency" and collectively as the "Rating Agencies." A
securities rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
agency. The Rating Agencies do not evaluate, and the ratings of the Notes do not
address, the likelihood of prepayments on the Notes or the likelihood of payment
of Carryover Interest. See "Risk Factors - Rating" in the Prospectus.
<PAGE>
THE TRUST
The Trust
Crestar Student Loan Trust 1998-__ is a statutory business trust that will be
formed on or prior to the Closing Date under the laws of the State of Delaware.
The Trust will not engage in any activity other than (i) acquiring, holding,
selling and managing the Financed Student Loans and the other assets of the
Trust and proceeds therefrom, (ii) issuing one or more classes of its
certificates and notes, (iii) making payments thereon and (iv) engaging in other
activities that are necessary, suitable or convenient to accomplish the
foregoing or are incidental thereto or connected therewith. For so long as the
Transferor or an affiliate of the Transferor is a Certificateholder, the Trust's
activities will be limited to activities that are part of, or incidental to, the
business of banking as well.
The Trust initially will be capitalized with equity equal to $l,000 on the date
of its formation, representing the initial principal balance of the Certificates
issued on such date. Approximately [4.9%] of such Certificates will be sold to
the Depositor and the remaining Certificates will be offered for sale in
transactions exempt from the registration requirements of the Securities Act.
The equity of the Trust, together with the proceeds from the sale of the Notes,
will be used by the Eligible Lender Trustee in connection with its acquisition,
on behalf of the Trust, of the initial Financed Student Loans from the
Transferor. A portion of the net proceeds received from the transfer of the
initial Financed Student Loans will be used by the Depositor to make a Reserve
Account Deposit in the amount of $__________. Upon the consummation of such
transactions, the assets of the Trust will consist of (a) the pool of Financed
Student Loans, legal title to which is held by the Eligible Lender Trustee on
behalf of the Trust, (b) all funds in respect thereof collected on or after the
applicable Cut-off Date, and (c) all moneys and investments on deposit in the
Collection Account, Note Payment Account, Expense Account, Advance Account,
Reserve Account and Certificate Distribution Account. All of the foregoing
accounts except the Certificate Distribution Account will be maintained with and
in the name of the Indenture Trustee ("Trust Account"). To facilitate servicing
and to minimize administrative burden and expense, the related Servicer will be
appointed custodian of the promissory notes representing the Financed FFELP
Loans by the Eligible Lender Trustee.
The Trust's principal offices are located in the offices of the Eligible Lender
Trustee, c/o [____________, ----------,-------- -----].
Eligible Lender Trustee
[_____________________________] a [national banking association] organized under
the laws of the [United States] is the Eligible Lender Trustee for the Trust
under the Trust Agreement. The office of the Eligible Lender Trustee for
purposes of administering the Trust is located at [____________,
__________,________ _____]. The Eligible Lender Trustee, on behalf of the
Depositor, will acquire the Financed Student Loans from the Transferor pursuant
to a Sales Agreement. The Eligible Lender Trustee will acquire, on behalf of the
Trust, legal title to the Financed Student Loans from the Eligible Lender
Trustee acting on behalf of the Depositor pursuant to a Transfer and Servicing
Agreement. The Eligible Lender Trustee on behalf of the Trust will enter into a
Guarantee Agreement with each of the Guarantee Agencies with respect to each
Financed FFELP Loan and a HEAL Insurance Contract with the Department of HHS
with respect to each Financed HEAL Loan. The Eligible Lender Trustee qualifies
as an eligible lender and owner of Financed Student Loans for all purposes under
the Higher Education Act and the Guarantee Agreements with respect to such
Financed FFELP Loans, and under the HEAL Act and the HEAL Insurance Contract
with respect to such Financed HEAL Loans. Failure of the Financed Student Loans
to be owned by an eligible lender would result in the loss of Guarantee
Payments, Interest Subsidy Payments and Special Allowance Payments with respect
to Financed FFELP Loans and the loss of Insurance Payments with respect to
Financed HEAL Loans. See "Description of the FFEL Program," "Description of the
HEAL Program" and "Risk Factors - Offset by Guarantee Agencies" in the
Prospectus.
The Depositor or its affiliates may maintain other banking relationships with
[_______________] and its affiliates from time to time.
Delaware Trustee
[_____________], a [________________] banking corporation, will serve as
Delaware Trustee of the Trust. Its address is [__________________]. The
Depositor or its affiliates may maintain other banking relationships with
[________________] and its affiliates from time to time.
Indenture Trustee
On the Closing Date, the Trust will pledge the Financed Student Loans to the
Indenture Trustee under an indenture dated as of [____________], as supplemented
by an indenture supplement dated as of [_______________] (collectively, the
"Indenture"). The Indenture Trustee's corporate trust office is located at
[__________], and its telephone number is [___________]. The Depositor or its
affiliates may maintain other banking relationships with [________________] and
its affiliates from time to time.
Master Servicer
Crestar Bank, in its capacity as Master Servicer, will be responsible for
servicing the Financed Student Loans. The Master Servicer may arrange for
Servicers to perform its obligations. The Master Servicer will be entitled to
the Servicing Fee, but will be obligated to pay all costs of the Servicers
without further reimbursement by the Trust. See "The Servicers" in this
Prospectus Supplement.
Administrator
Crestar Bank, in its capacity as Administrator, has entered into an
Administration Agreement with the Trust and the Indenture Trustee, pursuant to
which the Administrator will agree, to the extent provided therein, (i) to
direct the Indenture Trustee to make the required distributions from the Trust
Accounts on each Payment Date and Quarterly Payment Date, (ii) to prepare (based
on the reports received from the Master Servicer) and provide periodic and
annual statements to the Eligible Lender Trustee and the Indenture Trustee with
respect to distributions to Noteholders and Certificateholders and any related
federal income tax reporting information and (iii) to provide the notices and to
perform other administrative obligations required by the Indenture and the Trust
Agreement. As compensation for the performance of the Administrator's
obligations under the Administration Agreement and as reimbursement for its
expenses related thereto, the Administrator will be entitled to the
Administration Fee. Affiliates of the Administrator may assist it in performing
its obligations under the Administration Agreement.
USE OF PROCEEDS
The net proceeds from the sale of the Notes will be used to acquire the initial
Financed Student Loans from the Depositor on the Closing Date, which will, in
turn, use such proceeds to make the initial Reserve Account deposit and to
acquire the initial Financed Student Loans from the Transferor. The Transferor
is expected to use such proceeds for general corporate purposes.
THE FINANCED STUDENT LOANS
The initial Financed Student Loans were, and the Subsequent Financed Student
Loans will be, selected from the Transferor's portfolio of FFELP Loans and HEAL
Loans by several criteria, including the following: each Financed Student Loan
(i) was or will be originated in the United States or its territories or
possessions under and in accordance with the FFEL Program or the HEAL Program,
as the case may be, to or on behalf of a student who has graduated or is
expected to graduate from an accredited institution of higher education within
the meaning of the Higher Education Act or the HEAL Act, (ii) contains terms in
accordance with those required by the FFEL Program, the Guarantee Agreements,
the HEAL Program, the HEAL Insurance Contract and other applicable requirements,
and (iii) is not more than 90 days past due as of the Cut-off Date or, in the
case of a Subsequent Financed Student Loan, as of the subsequent cut-off date
set forth in the related transfer agreement (each, a "Subsequent Cut-Off Date").
As of the Cut-off Date, $__________ principal amount of the initial Financed
Student Loans were delinquent for up to 59 days and none of the initial Financed
Student Loans was delinquent for more than 59 days. For this purpose,
delinquency refers to the number of days for which a payment is past due.
Each Financed Student Loan is required (i) to be insured by the Department of
HHS as to principal and interest to the extent provided under the HEAL Act, or
(ii) to be guaranteed as to principal and interest by a Guarantee Agency and
reinsured by the Department of Education to the extent provided under the Higher
Education Act and eligible for Special Allowance Payments and, with respect to
each Financed Student Loan that is a Stafford Loan, Interest Subsidy Payments
paid by the Department of Education. See "Description of the FFEL Program" and
"Description of the HEAL Program" in the Prospectus.
Subsequent Financed Student Loans that may be so transferred by the Depositor
include (i) Consolidation Loans or HEAL Consolidation Loans made by the
Transferor, provided that in no event shall the aggregate amount of Subsequent
Financed Student Loans that are Consolidation Loans or HEAL Consolidation Loans
transferred into the Trust exceed $___________; and (ii) Serial Loans owned by
the Transferor that are serial (i.e., made to the same borrower under the same
loan program and guaranteed by the same Guarantee Agency or insured by the
Department of HHS) to an existing Financed Student Loan owned by the Trust,
provided that each such Subsequent Financed Student Loan entitles the holder
thereof to receive interest based on the same interest rate index as the
Financed Student Loan to which it is serial, and provided further, that in no
event shall the aggregate amount of Subsequent Financed Student Loans that are
Serial Loans transferred into the Trust exceed $_________.
Except as described above, there will be no required characteristics of the
Subsequent Financed Student Loans and no limitations on the amount of Subsequent
Financed Student Loans that may be included in the Trust. Therefore, following
the transfer of Subsequent Financed Student Loans to the Eligible Lender Trustee
on behalf of the Trust, the aggregate characteristics of the entire pool of
Financed Student Loans, including the composition of the Financed Student Loans
and of the borrowers thereof, the distribution by interest rate and the
distribution by principal balance described in the following tables, will vary
from those of the initial Financed Student Loans as described herein.
Each of the Financed Student Loans provides for the amortization of the
outstanding principal balance of such Financed Student Loan over a series of
regular payments. Each regular payment consists of an installment of interest
which is calculated on the basis of the outstanding principal balance of such
Financed Student Loan multiplied by the applicable interest rate and further
multiplied by the period elapsed (as a fraction of a calendar year) since the
preceding payment of interest was made. As payments are received in respect of
such Financed Student Loan, the amount received is applied first to outstanding
late fees, if collected, then 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 regular installment before its scheduled due date, the portion
of the payment allocable to interest for the period since the preceding payment
was made will be less than it would have been had the payment been made as
scheduled, and the portion of the payment applied to reduce the unpaid principal
balance will be correspondingly greater. Conversely, if a borrower pays a
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 portion of the payment applied to reduce the unpaid principal balance will
be correspondingly less. In either case, subject to any applicable Deferment
Periods or Forbearance Periods, the borrower pays a regular installment until
the final scheduled payment date, at which time the amount of the final
installment is increased or decreased as necessary to repay the then outstanding
principal balance of such Financed Student Loan.
Set forth below in the following tables is a description of certain additional
characteristics of the initial Financed Student Loans as of the Cut-Off Date.
<TABLE>
Composition of the Initial Financed Student Loans as of the Cut-off Date
<S> <C>
Aggregate Outstanding Principal Balance.......................................................... $
Aggregate Outstanding Accrued Interest...........................................................
Number of Borrowers..............................................................................
Average Outstanding Principal Balance Per Borrower...............................................
Number of Loans..................................................................................
Average Outstanding Principal Balance Per Loan...................................................
Weighted Average Annual Borrower Interest Rate...................................................
Weighted Average Remaining Term (months) (does not include the months
remaining for the in-school, Grace, Deferment or Forbearance periods).........................
Weighted Average Remaining Term (months) (including the months remaining for
the in-school, Grace, Deferment or Forbearance periods).......................................
Distribution of the Initial Financed Student Loans by Loan Type as of the Cut-Off Date
<CAPTION>
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
Loan Type Loans Balance Balance
- --------- ----- ------- -------
Stafford-Subsidized.....................................
Stafford-Unsubsidized...................................
Consolidation...........................................
PLUS....................................................
SLS.....................................................
HEAL....................................................
Total.............................................
Distribution of the Initial Financed Student Loans by Borrower Interest Rate as of the Cut-Off Date
<CAPTION>
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
Interest Rate (1) Loans Balance Balance
- ----------------- ----------- ------------- ------------
Less than 7.50%.........................................
7.50% to 7.99%..........................................
8.00% to 8.49%..........................................
8.50% to 8.99%..........................................
9.00% to 9.49%..........................................
9.50% or greater........................................
Total.............................................
</TABLE>
(1) Determined using the interest rates applicable to the initial Financed
Student Loans as of the Cut-off Date. However, because certain of the Initial
Financed Student Loans bear interest at variable rates per annum, the existing
interest rates are not indicative of future interest rates on the Financed
Student Loans. See "Description of the FFEL Program" and "Description of the
HEAL Program" in the Prospectus.
<TABLE>
Distribution of the Initial Financed Student Loans by Range of Outstanding Principal Balances
as of the Cut-Off Date
<CAPTION>
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
Principal Balance Loans Balance Balance
- ----------------- ----- ------- -------
<S> <C>
Less than $1,000........................................
$1,000-$1,999...........................................
$2,000-$2,999...........................................
$3,000-$3,999...........................................
$4,000-$4,999...........................................
$5,000-$5,999...........................................
$6,000-$6,999...........................................
$7,000-$7,999...........................................
$8,000-$8,999...........................................
$9,000-$9,999...........................................
$10,000-$10,999.........................................
$11,000-$11,999.........................................
$12,000-$12,999.........................................
$13,000-$13,999.........................................
$14,000-$14,999.........................................
$15,000 or greater......................................
Total.............................................
Distribution of the Initial Financed Student Loans by Borrower Payment Status as of the Cut-Off Date
<CAPTION>
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
Borrower Payment Status Loans Balance Balance
- ----------------------- ----- ------- -------
In School...............................................
Grace...................................................
Repayment...............................................
Deferment...............................................
Forbearance.............................................
Total.............................................
Distribution of the Initial Financed Student Loans by Remaining Term to Scheduled Maturity
as of the Cut-Off Date
<CAPTION>
Percent of
Loans by
Remaining Months Outstanding Outstanding
Until Scheduled Number of Principal Principal
Maturity Loans Balance Balance
- -------- ----- ------- -------
1 to 12
13 to 24
25 to 36
37 to 48
49 to 60
61 to 72
73 to 84
85 to 96
97 to 108
109 to 120
121 to 180
181 to 240
241 to 300
Over 300
Total.........................
Geographic Distribution of the Initial Financed Student Loans as of the Cut-Off Date
<CAPTION>
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
Location (1) Loans Balance Balance
- ------------- ----------- ------------- ------------
[Virginia...............................................
Pennsylvania............................................
Maryland................................................
New York................................................
North Carolina].........................................
Others(2)...............................................
Total...........................................
</TABLE>
(1) Based on the current permanent billing addresses of the borrowers of the
initial Financed Student Loans shown on the Servicer's records.
(2) Consist of locations that include [__] other states, U.S. territories,
possessions and commonwealths, foreign countries, overseas military
establishments, and unknown locations, none of the aggregate principal balance
of the Financed Student Loans relating to which exceeds ___% of the Initial Pool
Balance.
To the extent that states with a large concentration of Financed Student Loans
experience adverse economic or other conditions to a greater degree than other
areas of the country, the ability of such borrowers to repay their Financed
Student Loans may be impacted to a larger extent than if such borrowers were
dispersed more geographically.
<TABLE>
Distribution of the Initial Financed Student Loans by Insurance or Guarantee Level as of the Cut-Off Date
<CAPTION>
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
Guaranteed or Insurance Level Loans Balance Balance
- ----------------------------- ----- ------- -------
<S> <C>
FFELP Loan Guaranteed 100%..............................
FFELP Loan Guaranteed 98%...............................
HEAL Loan Insured 100%..................................
Total...........................................
Distribution of the Initial Financed Student Loans by Guarantee Agency or by HEAL as of the Cut-Off Date
<CAPTION>
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
Guarantee Agency Loans Balance Balance
- ---------------- ----------- ------------- ------------
_______________________ Corporation.....................
_______________________ Agency..........................
HEAL Loans..............................................
Other Guarantors........................................
Total.............................................
Distribution of the Initial Financed Student Loans by School Types as of the Cut-Off Date
<CAPTION>
Percent of
Loans by
Outstanding Outstanding
Number of Principal Principal
School Type Loans Balance Balance
- ----------- ----- ------- -------
4 Year Public
4 Year Private
2 Year Public
2 Year Private
Proprietary/Vocational
Other/Unknown
Total..................................
</TABLE>
Incentive Programs
The Transferor currently makes available and may hereafter make available
certain incentive programs to borrowers, including the Crestar Bank Top
Performer Program (the "TP Program"). The TP Program generally applies to all
Stafford Loans, Unsubsidized Stafford Loans and PLUS Loans with a first
disbursement made by the Transferor on or after November 1, 1996 ("TP Loans").
Under the TP Program, if the borrower makes 36 consecutive monthly payments of a
TP Loan on time, the applicable interest rate on such TP Loan is reduced by 1.0%
per annum for Stafford Loans and Unsubsidized Stafford Loans and 0.5% per annum
for PLUS Loans. Although less than [ ]% of the initial Financed Student Loans
are TP Loans, additional TP Loans may be included in the Subsequent Financed
Student Loans.
MATURITY AND PREPAYMENT CONSIDERATIONS
Maturity and Prepayment Assumptions
The rate of payment of principal of the Notes and the yield on the Notes will be
affected by (i) prepayments of the Financed Student Loans that may occur as
described below, (ii) the sale by the Trust of Financed Student Loans and (iii)
Parity Percentage Payments. All the Financed Student Loans are prepayable in
whole or in part by the borrowers at any time without penalty (including by
means of Consolidation Loans or HEAL Consolidation Loans) and may be prepaid as
a result of a borrower default, death, disability or bankruptcy and subsequent
liquidation or collection of Guarantee Payments or Insurance Payments with
respect thereto. The rate of such prepayments cannot be predicted and may be
influenced by a variety of economic, social and other factors, including those
described below. In general, the rate of prepayments may tend to increase to the
extent that alternative financing becomes available at prevailing interest rates
which fall significantly below the interest rates applicable to the Financed
Student Loans. However, because many of the Financed Student Loans bear interest
at a rate that either actually or effectively is floating, it is impossible to
determine whether changes in prevailing interest rates will be similar to or
vary from changes in the interest rates on the Financed Student Loans. To the
extent borrowers of Financed Student Loans elect to borrow Consolidation Loans
or HEAL Consolidation Loans, such Financed Student Loans will be prepaid. See
"Description of the FFEL Program - Loan Terms - Consolidation Loans" and
"Description of the HEAL Program - Consolidation of HEAL Loans" in the
Prospectus. In addition, the Depositor (and ultimately the Transferor) and
Master Servicer are obligated to repurchase any Financed Student Loan pursuant
to the Transfer and Servicing Agreement as a result of a breach of any of their
respective representations and warranties with respect to such Financed Student
Loan, which breach results in a loss of the guarantee or insurance with respect
to such Financed Student Loan and is not cured within the applicable cure
period. See "Description of the Agreements - Transfer and Servicing Agreement -
Conveyance of Financed Student Loans; Representations and Warranties" and " -
Master Servicer Covenants" in the Prospectus. See also "Description of the Notes
- - Termination" in this Prospectus Supplement regarding the Transferor's option
to purchase the Financed Student Loans when the aggregate Pool Balance is less
than or equal to __% of the Initial Pool Balance and the auction by the
Indenture Trustee of any Financed Student Loans remaining in the Trust on or
after _________ __, 20__ [if the Pool Balance is less than or equal to __% of
the Initial Pool Balance.]
Scheduled payments with respect to, and maturities of, the Financed Student
Loans may be extended, including pursuant to Grace Periods, Deferment Periods
and, under certain circumstances, Forbearance Periods. The rate of payment of
principal of the Notes and the yield on the Notes may also be affected by the
rate of defaults resulting in losses on Financed Student Loans, by the severity
of those losses and by the timing of those losses, which may affect the ability
of the Guarantee Agencies to make Guarantee Payments with respect thereto.
The rate of prepayment on the Financed Student Loans cannot be predicted, and
any reinvestment risks resulting from a faster or slower incidence of prepayment
of Financed Student Loans or a faster or slower incidence of sales by the Trust
will be borne entirely by the Noteholders. Such reinvestment risks may include
the risk that interest rates and the relevant spreads above particular interest
rate bases are lower at the time Noteholders receive payments from the Trust
than such interest rates and such spreads would otherwise have been had such
prepayments not been made or had such prepayments been made at a different time.
Weighted Average Life of the Notes
The following information is given solely to illustrate the effect of
prepayments on the Financed Student Loans on the weighted average life of the
Notes under the assumptions stated below and is not a prediction of the
prepayment rate that might actually be experienced by the Financed Student Loans
held in the Trust.
Weighted average life refers to the average amount of time from the date of
issuance of a security until each dollar of principal of such security will be
repaid to the investor. The weighted average life of the Notes will be primarily
a function of the rate at which payments are made on the Financed Student Loans
held in the Trust. Payments on such Financed Student Loans may be in the form of
scheduled amortization of principal or prepayments (including, without
limitation, Guarantee Payments and Insurance Payments).
The Constant Prepayment Rate prepayment model ("CPR") represents an assumed
constant rate of prepayment of Financed Student Loans held in the Trust
outstanding as of the beginning of each quarter expressed as a per annum
percentage. There can be no assurance that such Financed Student Loans will
experience prepayments at a constant prepayment rate or otherwise in the manner
assumed by the prepayment model.
The weighted average lives in the following table were determined assuming that
(i) scheduled payments of principal on the Financed Student Loans are received
in a timely manner and prepayments are made at the percentages of the prepayment
model set forth in the table; (ii) the initial principal balance of the Financed
Student Loans is $__________ and such Financed Student Loans have the
characteristics described under "The Financed Student Loans;" (iii) payments are
made on the Notes on the 25th day of each month commencing _____________; (iv)
the Financed Student Loans are auctioned on the _________ Payment Date; and (v)
the Notes are issued on the Closing Date. No representation is made that these
assumptions will be correct, including the assumption that the Financed Student
Loans held in the Trust will not experience delinquencies or unanticipated
losses.
In making an investment decision with respect to the Notes, investors should
consider a variety of possible prepayment scenarios, including the limited
scenarios described in the table below.
<TABLE>
Weighted Average Life of the Notes at the Respective CPRs Set Forth Below:
<CAPTION>
Weighted Average Life (years)
0% CPR 3% CPR 5% CPR 7% CPR 9% CPR 15% CPR
------ ------ ------ ------ ------ -------
<S> <C>
Class A Notes............
Class B Notes............
</TABLE>
THE SERVICERS
General
Crestar Bank will act as Master Servicer with respect to the Financed Student
Loans. The Financed Student Loans will be serviced by [ ], or such other parties
as may be approved by the Master Servicer from time to time (subject to approval
of the Rating Agencies). Pursuant to a servicing agreement, [ ] has agreed to
service, and perform all other related tasks with respect to, the Financed
Student Loans in compliance with applicable standards and procedures. See
"Description of the Agreements - Transfer and Servicing Agreements" in the
Prospectus.
[Name of Servicer]
[Description of Servicer to be inserted]
Servicing Compensation
The Master Servicer will be entitled to receive on each Quarterly Payment Date a
fee (the "Servicing Fee") with respect to each quarter in an amount equal to (i)
___% per annum of the average of the Pool Balance as of the last day of the
Collection Period preceding such Quarterly Payment Date and the last day of the
Collection Period preceding the preceding Quarterly Payment Date (or the Cut-off
Date with respect to the first quarter), or (ii) such greater amount acceptable
to the Rating Agencies. The Servicing Fee will be payable in arrears, from
Available Funds and amounts on deposit in the Reserve Account on each Quarterly
Payment Date.
The Servicing Fee will compensate the Master Servicer and each other Servicer
for performing the functions of a third party servicer of student loans as an
agent for their beneficial owner, including collecting and posting all payments,
responding to inquiries of borrowers on the Financed Student Loans,
investigating delinquencies, pursuing, filing and collecting any Guarantee
Payments and Insurance Payments, including litigation costs, accounting for
collections and furnishing monthly and annual statements to the Administrator.
The Servicing Fee also will reimburse the Master Servicer for certain taxes,
accounting fees, outside auditor fees, data processing costs and other costs
incurred in connection with administering the Financed Student Loans.
THE GUARANTEE AGENCIES
General
Of the Financed Student Loans included in the Initial Pool Balance,
approximately [ ]% are guaranteed by [ ], a non-profit corporation ("[ ]"),
approximately [ ]% are guaranteed by [ ], an agency of [ ] ("[ ]"),
approximately [ ]% are HEAL Loans, and the remaining [ ]% are guaranteed by one
of the following Guarantee Agencies: [ ] and [ ].
Information relating to the particular Guarantee Agencies set forth in this
Prospectus Supplement has been provided by the respective Guarantee Agencies,
and neither such information nor information included in the reports referred to
herein has been verified by, or is guaranteed as to accuracy or completeness by,
the Depositor, the Transferor or the Underwriters. No representation is made by
the Depositor, the Transferor or the Underwriters as to the accuracy or adequacy
of such information or the absence of material adverse changes in such
information subsequent to the dates thereof.
[Name of Guarantee Agency]
[Description of Guarantee Agency to be inserted]
DESCRIPTION OF THE NOTES
General
The Notes will be available for purchase in denominations of [$50,000] and
integral multiples of [$1,000] in excess thereof in book-entry form only. The
Notes will initially be represented by one or more Notes registered in the name
of the nominee of DTC (together with any successor depository selected by the
Administrator, the "Depository"). Unless and until Definitive Notes are issued
under the limited circumstances described under "Description of the Notes -
Definitive Notes" in the Prospectus, no Noteholder will be entitled to receive a
physical certificate representing a Note. All references herein to actions by
Noteholders refer to actions taken by DTC upon instructions from its
participating organizations (the "Participants") and all references herein to
distributions, notices, reports and statements to Noteholders refer to
distributions, notices, reports and statements to DTC or its nominee, as the
registered holder of the Notes, for distribution to Noteholders in accordance
with DTC's procedures with respect thereto. See "Description of the Notes -
Book-Entry Registration" in the Prospectus.
Interest
Interest will accrue during each Interest Accrual Period on the principal
balance of each Class of Notes at a rate per annum equal to the related Class
Interest Rate and will be payable (i) monthly on each Payment Date to the Class
A Noteholders as of the related Record Date, and (ii) quarterly on each
Quarterly Payment Date to the Class B Noteholders as of the related Record Date.
The Record Date for each Class of Notes is the second Business Day preceding a
Payment Date. Any interest not paid when due shall be payable on the succeeding
Payment Date, together with interest thereon at the applicable Class Interest
Rate. Interest will be paid pro rata to the holders of each such Class of Notes
outstanding.
The Class Interest Rate for each Class of Notes for each Interest Accrual Period
will equal the Formula Rate, subject to a cap of the Net Loan Rate for such
Interest Accrual Period to the extent it needs to be determined. The Formula
Rate for each Interest Accrual Period for the Class A Notes will equal One-Month
LIBOR as of the Interest Determination Date for such Interest Period plus [ ]%,
but in no event greater than [18.0]% per annum. The Formula Rate for each
Interest Accrual Period for the Class B Notes will equal One-Month LIBOR as of
the Interest Determination Date plus [__]%, but in no event greater than [18.0]%
per annum. See "Description of the Notes - Determination of LIBOR" in the
Prospectus. Interest on each Class of Notes will be calculated on the basis of
the actual number of days elapsed in each Interest Accrual Period divided by
360.
If, as of any Interest Determination Date, One-Month LIBOR exceeds the
applicable 91-day Treasury bill rate by more than 1.0%, the Administrator will
be required to determine the Net Loan Rate on the next Interest Determination
Date that will be applicable to the succeeding Interest Accrual Period. The
applicable 91-day Treasury bill rate is the bond equivalent yield of 91-day
Treasury bills at the most recent auction preceding the applicable Interest
Determination Date. The Net Loan Rate for any Interest Accrual Period will be
the rate per annum (rounded to the next highest .01%) equal to (i) the weighted
average Effective Interest Rate of the Financed Student Loans as of the last day
of the Collection Period immediately preceding the commencement of such Interest
Accrual Period, less (ii) the Program Operating Expense Percentage. The
"Effective Interest Rate" is the per annum interest rate borne by a Financed
Student Loan after giving effect to all applicable Interest Subsidy Payments,
Special Allowance Payments, rebate fees on Consolidation Loans and reductions
pursuant to borrower incentives. For this purpose, the Special Allowance Payment
rate will be computed based upon the average of the bond equivalent rates of
91-day U.S. T-Bills auctioned during that portion of the then current calendar
quarter that ends on the date as of which the Effective Interest Rate is
determined.
The "Program Operating Expense Percentage" is the fraction (expressed as a
percentage and calculated by the Administrator as of the end of a Collection
Period preceding a Quarterly Payment Date), the numerator of which is the
annualized operating expenses of the Trust for the calendar month then ended,
including, without limitation, the Transaction Fees, and the denominator of
which is the Pool Balance as of the last day of such Collection Period. The
initial Program Operating Expense Percentage is _____%.
If interest at the Formula Rate for any Class of Notes for any Interest Accrual
Period exceeds interest at the Net Loan Rate, the excess interest, together with
interest thereon at the applicable Formula Interest Rate ("Carryover Interest")
will be paid on the subsequent Payment Dates or Quarterly Payment Dates only to
the extent funds are available after other required payments on the Notes, and
may never be paid. See" - Priority of Payments" in this Prospectus Supplement.
Any Carryover Interest with respect to a Class of Notes remaining unpaid after
the earlier of the Distribution Date on which the outstanding principal amount
of such Class of Notes has been reduced to zero and the distribution of all
Available Funds on the Legal Final Maturity of such Class of Notes, will never
become due and payable and will be discharged as to the applicable Class of
Notes on such date. The ratings of the Notes do not address the likelihood of
payment of Carryover Interest. Any reference herein to "interest" excludes
Carryover Interest.
Principal
Payments of principal on the Notes will not commence until __________, 19__. No
principal will be paid on the Class B Notes until the Class A Notes have been
paid in full. Principal of the Class A Notes will be payable monthly on each
Payment Date, commencing [ ], 1998, and, following payment in full of the Class
A Notes, principal on the Class B Notes will be payable quarterly on each
Quarterly Payment Date. The Principal Payment Amount on any Payment Date or
Quarterly Payment Date, as the case may be, generally will equal the amount, if
any, by which the Pool Balance as of the last day of the second Collection
Period immediately preceding a Payment Date or the last day of the fourth
Collection Period immediately preceding a Quarterly Payment Date (or Closing
Date, with respect to the first Payment Date) exceeds the Pool Balance as of the
last day of the immediately preceding Collection Period. In addition,
accelerated Parity Payments will be payable on each Quarterly Payment Date until
the Parity Percentage equals ___%.
A "Collection Period" is each calendar month, except that the first Collection
Period begins on the Cut-off Date and ends on ___________.
The "Pool Balance" as of the end of a Collection Period is equal to the
aggregate principal balance of the Financed Student Loans (including accrued
interest that is capitalized as of the end of the Collection Period), after
giving effect to all payments in respect of principal received by the Trust
during such Collection Period.
The Parity Percentage for any Payment Date or Quarterly Payment Date is
determined by dividing (i) the Pool Balance as of the end of the preceding
Collection Period, plus accrued interest thereon, accrued Special Allowance
Payments and Interest Subsidy Payments as of the end of such Collection Period
and all amounts in the Collection Account and Reserve Account as of the end of
the Collection Period (adjusted for payments made on such Payment Date or
Quarterly Payment Date), by (ii) the sum of the principal balance of the Notes
(after payments thereon on such Payment Date or Quarterly Payment Date), accrued
interest thereon, and accrued and unpaid Transaction Fees and Consolidation Loan
Fees.
The Legal Final Maturity will be _________ on the Class A Notes, and ________ on
the Class B Notes. The actual maturity of one or more Classes of Notes could
occur sooner as a result of a variety of factors. See "Maturity and Prepayment
Considerations" in the Prospectus and this Prospectus Supplement. If Available
Funds are insufficient to pay the Principal Amount for a Payment Date or a
Quarterly Payment Date, such shortfall will be added to the principal payable to
the Noteholders on subsequent Payment Dates or Quarterly Payment Dates and
(except with respect to the Legal Final Maturity of a Class of Notes) such
shortfall will not constitute an Event of Default. Additionally, on the Legal
Final Maturity for a Class of Notes, amounts in the Reserve Account will be
available to reduce the principal balance of such Class of Notes to zero. See "
Priority of Payments" in this Prospectus Supplement.
All principal payments of Notes of any Class shall be made pro rata within that
Class. In connection with each principal payment of Notes of any Class, the
Administrator shall compute the Principal Factor for that Class. The "Principal
Factor" shall be a number, carried to a seven-digit decimal, indicating the
principal balance of each Note of a Class as of a Payment Date (after giving
effect to any payments made on that date) as a fraction of the original
principal amount of such Note. The Principal Factor for each Class of Notes
shall be initially 1.0000000 and will thereafter decline to reflect the
reduction in the principal balance of the Notes of that Class after any payment
of principal. The principal balance of any Note can be determined by multiplying
the original principal amount of such Note by the Principal Factor applicable to
that Class of Notes.
Priority of Payments
Deposits to Collection Account. On or before each Payment Determination Date,
the Administrator will provide the Indenture Trustee and the Eligible Lender
Trustee a report setting forth by component the Available Funds for the
immediately preceding Collection Period (or the three preceding Collection
Periods if the Class A Notes are no longer outstanding).
For purposes hereof, the term "Available Funds" means the sum, without
duplication, of the following amounts with respect to the related Collection
Period: (i) all collections received by the Master Servicer or any Servicer on
the Financed Student Loans (including any Guarantee Payments and Insurance
Payments received with respect to the Financed Student Loans during such
Collection Period); (ii) any payments, including without limitation, Interest
Subsidy Payments and Special Allowance Payments received by the Eligible Lender
Trustee during such Collection Period with respect to the Financed Student
Loans; (iii) all proceeds from any sales of Financed Student Loans by the Trust
during such Collection Period; (iv) any payments of or with respect to interest
received by the Master Servicer or a Servicer during such Collection Period with
respect to a Financed Student Loan for which a Realized Loss was previously
allocated; (v) the aggregate Purchase Amounts received for those Financed
Student Loans purchased by the Transferor or the Master Servicer during the
related Collection Period; (vi) the aggregate amounts, if any, received from the
Depositor or the Master Servicer as reimbursement of non-guaranteed or uninsured
interest amounts (which shall not include, with respect to Financed FFELP Loans,
the portion of such interest amounts (i.e., 2%) for which the Guarantee Agency
did not have an obligation to make a Guarantee Payment), or lost Interest
Subsidy Payments and Special Allowance Payments with respect to the Financed
Student Loans pursuant to the Transfer and Servicing Agreement; (vii) net
Adjustment Payments; and (viii) investment earnings during such Collection
Period; provided, however, that Available Funds will exclude all payments and
proceeds of any Financed Student Loans the Purchase Amount of which has been
included in Available Funds for a prior Collection Period (which payments and
proceeds shall be paid to the Transferor), and amounts used to reimburse the
Master Servicer for Advances pursuant to the terms of the Transfer and Servicing
Agreement.
Distributions from Collection Account. On each Payment Determination Date, the
Administrator will advise the Indenture Trustee and the Eligible Lender Trustee
in writing of the applicable Class Interest Amount and Principal Payment Amount
with respect to each Class of Notes and the Certificateholders. Further, on each
Payment Determination Date relating to a Quarterly Payment Date, the
Administrator will advise the Indenture Trustee in writing of the Transaction
Fees payable with respect to the preceding quarter.
On each Payment Date or Quarterly Payment Date (and with respect to clause
(i)(A) below on each Payment Date while the Class A Notes are outstanding, and
thereafter, on the 25th Day of each month, or if such day is not a Business Day,
the next succeeding Business Day), the Indenture Trustee will transfer from the
Collection Account the following amounts in the following priority, subject to
Available Funds for the immediately preceding Collection Period or three
Collection Periods, as applicable:
(i) to the Expense Account (A) an amount equal to accrued
and unpaid Consolidation Loan Fees as of the end of
the immediately preceding Collection Period, and (B)
an amount equal to accrued and unpaid Transaction
Fees payable on a Quarterly Payment Date;
(ii) to the Note Payment Account, an amount equal to the
Class Interest Amount for each Class of Notes due on
such Payment Date or Quarterly Payment Date;
(iii) to the Note Payment Account, an amount equal to the
Principal Payment Amount due on such Payment Date or
Quarterly Payment Date;
(iv) to the Certificate Distribution Account, an amount up
to the Class Interest Amount for the Certificates due
on such Quarterly Payment Date; and
(v) after the Notes have been paid in full, to the
Certificate Distribution Account, an amount required
to reduce the Certificate principal balance to zero.
On each Quarterly Payment Date (and with respect to clause (i) below on each
Payment Date while the Class A Notes are outstanding, and thereafter, on the
25th day of each month, or if such day is not a Business Day, the next
succeeding Business Day) following the transfer to the Expense Account described
in the preceding paragraph, the Indenture Trustee will distribute from the
Expense Account (in addition to any amounts transferred from the Reserve Account
as described herein) the following amounts in the following order of priority:
<PAGE>
(i) to the Department of Education, the Consolidation
Loan Fees for the immediately preceding Collection
Period together with any overdue Consolidation Loan
Fees for any prior Collection Periods;
(ii) to the Master Servicer, the Servicing Fee for the
preceding quarter and all overdue Servicing Fees;
(iii) to the Administrator, the Administration Fee for the
preceding quarter and all overdue Administration
Fees;
(iv) to the Indenture Trustee, the Indenture Trustee Fee
for the preceding quarter and all overdue Indenture
Trustee Fees; and
(v) to the Eligible Lender Trustee and the Delaware
Trustee, the Eligible Lender Trustee Fee and the
Delaware Trustee Fee, respectively, for the preceding
quarter and all overdue Eligible Lender Trustee Fees
and Delaware Trustee Fees.
On each Payment Date or Quarterly Payment Date, following the transfers to the
Note Payment Account described above, the Indenture Trustee will distribute to
the Noteholders as of the related Record Date the amounts transferred to the
Note Payment Account, together with any amounts transferred from the Reserve
Account and the Advance Account, in the following order of priority:
<PAGE>
(i) first, to the Class A Noteholders, the Class Interest
Amount;
(ii) second, if such Payment Date is a Quarterly Payment
Date, to the Class B Noteholders, the Class Interest
Amount;
(iii) third, to the Class A Noteholders, the Principal
Payment Amount until the outstanding amount of the
Class A Notes has been reduced to zero; and
(iv) fourth, after the principal balance of the Class A
Notes has been reduced to zero, if such Payment Date
is a Quarterly Payment Date, to the Class B
Noteholders, the remaining Principal Payment Amount
until the principal balance of the Class B Notes has
been reduced to zero.
On each Quarterly Payment Date, after making all required transfers to the
Expense Account, the Note Payment Account and, if applicable, the Certificate
Distribution Account, the Indenture Trustee will transfer any remaining
Available Funds for the preceding three Collection Periods (and with respect to
clause (ii) below, any amounts in the Reserve Account in excess of the Specified
Reserve Account Balance) in the following order of priority:
<PAGE>
(i) to the Reserve Account, the amount, if any, necessary
to increase the balance thereof to the Specified
Reserve Account Balance;
(ii) to the Note Payment Account (for payment on such
Quarterly Payment Date to the Class A Noteholders,
and upon payment in full thereof, to the Class B
Noteholders), Parity Payments to the extent then
required; and
(iii) to the Note Payment Account (for payment on such
Quarterly Payment Date to the Class A Noteholders,
and upon payment in full thereof, to the Class B
Noteholders), the amount of any Carryover Interest.
Any remaining Available Funds on a Quarterly Payment Date (other than amounts
representing payments received during such months) will be distributed to the
Depositor, and will not thereafter be available to make payments on the Notes or
Certificates.
Notwithstanding the foregoing, if on any Payment Date following all
distributions to be made on such Payment Date, the principal amount of the Class
A Notes would exceed the sum of the Pool Balance at the end of the immediately
preceding Collection Period plus the aggregate balance on deposit in the Trust
Accounts on such Payment Date following such distributions, or if a payment
Event of Default has occurred with respect to the Notes, interest will not be
paid on the Class B Notes until after payment of the Principal Payment Amount to
the Class A Noteholders.
Realized Losses. The Reserve Account is intended, among other things, to cover
Realized Losses on the Financed Student Loans that may occur from time to time.
See "Description of the Agreements - Transfer and Servicing Agreements -
Realized Losses" in the Prospectus.
Advances
If the Master Servicer has applied for an Insurance Payment from the Department
of HHS, a Guarantee Payment from a Guarantee Agency or an Interest Subsidy
Payment or a Special Allowance Payment from the Department of Education, and the
Master Servicer has not received the related payment prior to the end of the
Collection Period immediately preceding the Payment Date on which such amount
would be required to be distributed as a payment of interest, the Master
Servicer may, no later than the Payment Determination Date relating to such
Payment Date, deposit into the Advance Account an amount up to the amount of
such payments applied for but not received (such deposits by the Master Servicer
are referred to herein as "Advances"). On each related Payment Date, the
Indenture Trustee will distribute from the Advance Account to the Noteholders
the Advance for such Payment Date. Such Advances are recoverable by the Master
Servicer (i) first, from the source for which such Advance was made and (ii)
second, from payments received generally on or with respect to the Financed
Student Loans. The Master Servicer will have no obligation, legal or otherwise,
to make any Advance, and a determination by the Master Servicer to make an
Advance will not create any obligation of the Master Servicer, legal or
otherwise, to make any future Advances.
Reserve Account
On the Closing Date, the Depositor will deposit $_________ in cash or Eligible
Investments in the Reserve Account. The Reserve Account will be augmented on
each Quarterly Payment Date by deposit therein of the amount, if any, necessary
to attain or reinstate the balance of the Reserve Account to the Specified
Reserve Account Balance from the amount of Available Funds remaining after
making all prior distributions on such date as described above under "- Priority
of Payments." Also, if amounts were transferred from the Reserve Account to
cover a Realized Loss on a Financed Student Loan, any subsequent payments of
principal received on or with respect to such Financed Student Loan will be
deposited into the Reserve Account.
If on any Quarterly Payment Date (after giving effect to all deposits or
withdrawals therefrom on such Payment Date) the amount of the Reserve Account is
greater than the Specified Reserve Account Balance, the Administrator will,
subject to certain limitations, instruct the Indenture Trustee to distribute the
amount of the excess, after payment of any Parity Payments and Carryover
Interest then due, to the Depositor. Upon any distribution to the Depositor of
amounts from the Reserve Account, the Noteholders will not have any rights in,
or claims to, such amounts.
The Reserve Account is intended to enhance the likelihood of timely receipt by
the Noteholders of the full amount of interest due them, the ultimate receipt by
the Noteholders of the full amount of principal and to decrease the likelihood
that the Noteholders will experience losses. In certain circumstances, however,
the Reserve Account could be depleted. If the amount required to be withdrawn
from the Reserve Account to cover shortfalls in the amount of Available Funds
exceeds the amount of cash in the Reserve Account, a temporary shortfall in the
amount of principal and interest distributed to the Noteholders could result.
This could, in turn, increase the average life of the Notes. Moreover, amounts
on deposit in the Reserve Account (other than amounts in excess of the Specified
Reserve Account Balance) will not be available to cover any aggregate unpaid
Carryover Interest.
Subordination of the Class B Notes
The rights of the holders of the Class B Notes to receive principal and interest
payments will be subordinated to such rights of the holders of the Class A Notes
to the extent described herein. This subordination is intended to enhance the
likelihood of regular receipt of the Class Interest Rate and Principal Payment
Amount by the Class A Noteholders. See " - Priority of Payments" in this
Prospectus Supplement.
Termination
Optional Purchase. The obligations of the Master Servicer, the Transferor, the
Depositor, the Administrator, the Eligible Lender Trustee and the Indenture
Trustee pursuant to the Transfer and Servicing Agreements will terminate upon
(i) the maturity or other liquidation of the last Financed Student Loan and the
disposition of any amount received upon liquidation of any remaining Financed
Student Loans and (ii) the payment to the Noteholders and the Certificateholders
of all amounts required to be paid to them pursuant to the Transfer and
Servicing Agreements. To avoid excessive administrative expense, the Master
Servicer is permitted, at its option, to purchase from the Eligible Lender
Trustee, as of the end of any Collection Period immediately preceding a
Quarterly Payment Date, if the then outstanding Pool Balance is ___% or less of
the Initial Pool Balance, all remaining Financed Student Loans at a price equal
to the aggregate Purchase Amounts thereof as of the end of such Collection
Period, but not less than an amount necessary to pay transaction costs and all
amounts due the Noteholders (other than Carryover Interest). Upon payment and
redemption of the Notes and Certificates and the attendant termination of the
Trust, all remaining assets of the Trust will be conveyed and transferred to the
Depositor.
Auction Purchase. Any Financed Student Loans remaining in the Trust as of [ ]
will be offered for sale by the Indenture Trustee [if the then outstanding Pool
Balance is ___% or less of the Initial Pool Balance]. The Transferor, its
affiliates and unrelated third parties may offer bids to purchase such Financed
Student Loans on or prior to such Payment Date. If at least two bids are
received, the Indenture Trustee will accept the highest bid if it will pay
transaction costs and all amounts due the Noteholders (other than Carryover
Interest). If at least two bids are not received or the bid proceeds are not
sufficient to pay transaction costs and the Notes, the Indenture Trustee will
not consummate such sale. The proceeds of any such sale will be used to redeem
any outstanding Notes on such Payment Date, after which time the Trust shall be
terminated. If the sale is not consummated in accordance with the foregoing, the
Indenture Trustee may, but shall not be under any obligation to, solicit bids to
purchase the Financed Student Loans on future Payment Dates upon terms similar
to those described above. No assurance can be given as to whether the Indenture
Trustee will be successful in soliciting acceptable bids to purchase the
Financed Student Loans.
UNDERWRITING
Subject to the terms and conditions set forth in an Underwriting Agreement dated
__________ __, 1998 (the "Underwriting Agreement"), among the Depositor, the
Transferor, Salomon Brothers Inc and Crestar Securities Corporation
(collectively, the "Underwriters"), the Depositor has agreed to sell to the
Underwriters, and each Underwriter has severally agreed to purchase from the
Depositor, the principal balance of each Class of Notes set forth below its name
on the following chart:
<TABLE>
<CAPTION>
Class of Notes
Salomon Brothers Inc Crestar Securities Corporation
<S> <C>
Class A Notes.............................
Class B Notes.............................
Total............................
</TABLE>
In the Underwriting Agreement, the Underwriters have severally agreed, subject
to the terms and conditions set forth therein, to purchase all of the Notes
offered hereby, if any Notes are purchased. In the event of a default by any
Underwriter, the Underwriting Agreement provides that, in certain circumstances,
purchase commitments of the non-defaulting Underwriter may be increased or
purchase commitments of all Underwriters may be terminated. The Depositor has
been advised by the Underwriters that the Underwriters propose initially to
offer the Notes to the public at the public offering price with respect to each
Class set forth on the cover page of this Prospectus. After the initial public
offering, the public offering price may be changed.
The Underwriting Agreement provides that the Depositor and the Transferor will
indemnify the Underwriters against certain liabilities, including liabilities
under applicable securities laws, or contribute to payments the Underwriters may
be required to make in respect thereof.
After the initial distribution of the Notes by the Underwriters, the Prospectus
and Prospectus Supplement may be used by Crestar Securities Corporation, an
affiliate of the Transferor and Depositor, in connection with offers and sales
relating to market making transactions in the Notes. Crestar Securities
Corporation may act as principal or agent in such transactions. Such sales will
be made at prices related to prevailing market prices at the time of sale.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Exchange Act. Over-allotment involves syndicate sales in excess of the
offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specific maximum. Syndicate covering
transactions involve purchases of the Notes in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the Underwriters to reclaim a selling concession from a
syndicate member when the Notes originally sold by such syndicate member are
purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the Notes to be higher than it would
otherwise be in the absence of such transactions.
Crestar Securities Corporation is an affiliate of the Transferor and Depositor,
and a wholly owned indirect subsidiary of Crestar Financial Corporation.
LEGAL MATTERS
Certain legal matters relating to the Transferor, Depositor, Master Servicer and
Administrator will be passed upon by Hunton & Williams and Foley & Lardner.
Certain legal matters relating to the validity of the issuance of the Notes and
federal income tax matters will be passed upon for the Trust by Hunton &
Williams. Each of Hunton & Williams and Foley & Lardner has performed legal
services for the Transferor and it is expected that they will continue to
perform such services in the future. Certain legal matters will be passed upon
for the Underwriters by Squire, Sanders & Dempsey L.L.P.
RATING
It is a condition to the issuance and sale of each Class of the Class A Notes
that they each be rated "AAA" by [Standard & Poor's] and [Fitch] and "Aaa" by
[Moody's]. It is a condition to the issuance of the Class B Notes that they be
rated at least "A" by [Standard & Poor's] and [Fitch] and at least "A2" by
[Moody's]. A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating agency. The ratings of the Notes address the likelihood of the
ultimate payment of principal of and interest on the Notes pursuant to their
terms. The Rating Agencies do not evaluate, and the ratings on the Notes do not
address, the likelihood of prepayments on the Notes or the likelihood of payment
of the Carryover Interest.
<PAGE>
<TABLE>
PROSPECTUS
CRESTAR SECURITIZATION, LLC
Depositor
CRESTAR BANK
Transferor, Master Servicer and Administrator
Student Loan Asset Backed Notes
<S> <C>
Consider carefully the risk
factors beginning on page 6 in
this prospectus. Each Trust:
A Note is not a deposit and o may issue periodically student loan asset backed notes in one
neither the Notes nor the or more series with one or more classes; and
underlying accounts or student
loans are insured or o will own:
guaranteed by the Federal
Deposit Insurance Corporation o student loans;
or any governmental agency,
except as expressly provided o payments due on those student loans; and
herein.
o other property described in this prospectus and in the
The Notes will represent accompanying prospectus supplement.
obligations of the Trust only
and will not represent The Notes:
interests in or obligations of
Crestar Bank or any of its o will be secured by the property of the Trust and will be paid
affiliates. only from the Trust's assets;
This Prospectus may be used to o will be rated in one of the four highest rating categories by
offer and sell any series of at least one nationally recognized rating organization;
Notes only if accompanied by
the Prospectus Supplement for o may have one or more forms of credit enhancement; and
that Series.
o will be issued as part of a designated series that may include one or more
classes of notes and credit enhancement.
The Noteholders:
o will receive interest and principal payments from collections
on the student loans and the Trust's other assets; and
o are entitled to receive payments from collections on student loans and other
assets securing their series of Notes, but have no entitlement to payments
from student loans or other assets only securing other series of Notes.
Neither the SEC nor any state securities commission has approved
these Notes or determined that this Prospectus is accurate or complete.
Any representation to the contrary is a criminal offense.
May 4, 1998
</TABLE>
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS AND THE ACCOMPANYING PROSPECTUS SUPPLEMENT
The Issuer provides information to you about the Notes in two separate
documents that progressively provide more detail: (a) this Prospectus, which
provides general information, some of which may not apply to a particular Series
of Notes, including your Series, and (b) the accompanying Prospectus Supplement,
which will describe the specific terms of your Series of Notes, including:
o the timing of interest and principal payments;
o financial and other information about the Financed Student Loans;
o information about credit enhancement for each Class;
o the ratings for each Class;
o and the method for selling the Notes.
If the terms of a particular Series of Notes vary between this Prospectus and
the Prospectus Supplement, you should rely on the information in the Prospectus
Supplement.
You should rely only on the information provided in this Prospectus and
the accompanying Prospectus Supplement, including the information incorporated
by reference. The Issuer has not authorized anyone to provide you with different
information. The Notes are not offered in any state where the offer is not
permitted. The Issuer does not claim the accuracy of the information in this
Prospectus or the accompanying Prospectus Supplement as of any date other than
the dates stated on their respective covers.
The Issuer has included cross-references in this Prospectus and in the
accompanying Prospectus Supplement to captions in these materials where you can
find further related discussions. The following Table of Contents and the Table
of Contents included in the accompanying Prospectus Supplement provide the pages
on which these captions are located.
------------------
<PAGE>
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY......................................1
DEPOSITOR............................................1
ISSUER...............................................1
TRUST ASSETS.........................................1
INFORMATION ABOUT THE FINANCED STUDENT LOANS.........1
MASTER SERVICER AND SERVICERS........................2
ELIGIBLE LENDER TRUSTEE..............................2
INDENTURE TRUSTEE....................................2
ADMINISTRATOR........................................2
TRANSFEROR...........................................2
NOTES OFFERED........................................2
INTEREST PAYMENTS ON THE NOTES.......................2
PRINCIPAL PAYMENTS ON THE NOTES......................3
COLLECTION ACCOUNT, NOTE PAYMENT ACCOUNT,
EXPENSE ACCOUNT...................................3
PRE-FUNDING ACCOUNT..................................3
CREDIT ENHANCEMENT...................................3
TRANSFER AND SERVICING AGREEMENT.....................4
ADVANCES.............................................4
OPTIONAL REPURCHASE..................................4
AUCTION OF TRUST ASSETS..............................4
FEDERAL INCOME TAX CONSEQUENCES......................4
ERISA CONSIDERATIONS.................................4
REGISTRATION OF THE NOTES............................4
RATING...............................................4
RISK FACTORS............................................5
FORMATION OF THE TRUSTS................................11
The Trusts..........................................11
Eligible Lender Trustee.............................12
USE OF PROCEEDS........................................12
THE TRANSFEROR.........................................12
THE DEPOSITOR..........................................13
THE FINANCED STUDENT LOAN POOL.........................13
MATURITY AND PREPAYMENT CONSIDERATIONS.................14
DESCRIPTION OF THE FFEL PROGRAM........................15
General.............................................15
Loan Terms..........................................16
Contracts with Guarantee Agencies...................22
Federal Special Allowance Payments..................25
Federal Student Loan Insurance Fund.................26
Direct Loans........................................26
DESCRIPTION OF THE GUARANTEE AGENCIES..................26
General.............................................26
Federal Agreements..................................28
Effect of Annual Claims Rate........................28
DESCRIPTION OF THE HEAL PROGRAM........................29
Eligible Borrower...................................29
Eligible Lender.....................................29
Insurance Benefits..................................29
Authorized Amounts of HEAL Loans....................29
Terms of HEAL Loans.................................30
Interest............................................30
Insurance Premium...................................31
Consolidation of HEAL Loans.........................31
Payments by Secretary of HHS........................31
Due Diligence.......................................31
Claims..............................................31
General.............................................32
Insurance Fund......................................32
Collection/Litigation...............................32
THE PRIVATE LOAN PROGRAMS..............................32
DESCRIPTION OF THE AGREEMENTS..........................33
General.............................................33
Sales Agreements....................................33
Transfer and Servicing Agreements...................33
The Indenture.......................................37
Administration Agreements...........................42
SERVICING..............................................43
Servicing Procedures................................43
Certain Matters Regarding the Master Servicer.......44
Master Servicer Covenants...........................44
Master Servicer Default.............................45
Servicing Compensation..............................45
DESCRIPTION OF THE NOTES...............................45
General.............................................45
Payment of Available Funds..........................46
Interest............................................47
Principal...........................................48
Determination of LIBOR..............................49
T-Bill Rate.........................................49
Auction Procedures..................................49
Credit Enhancement..................................51
Termination.........................................52
Book-Entry Registration.............................52
Definitive Notes....................................55
List of Noteholders.................................56
Reports to Noteholders..............................56
FEDERAL INCOME TAX CONSEQUENCES........................56
General.............................................56
Original Issue Discount.............................57
Variable Rate Notes.................................60
Anti-Abuse Rule.....................................62
Market Discount.....................................62
Amortizable Premium.................................63
Gain or Loss on Disposition.........................64
Miscellaneous Tax Aspects...........................65
STATE TAX CONSIDERATIONS...............................65
ERISA CONSIDERATIONS...................................65
AVAILABLE INFORMATION..................................66
REPORTS TO NOTEHOLDERS.................................66
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........67
PLAN OF DISTRIBUTION...................................67
FINANCIAL INFORMATION..................................67
RATING.................................................67
GLOSSARY OF PRINCIPAL DEFINITIONS.....................I-1
<PAGE>
PROSPECTUS SUMMARY
o This summary highlights selected information from this document and does
not contain all of the information that you need to consider in making your
investment decision. To understand all of the terms of an offering of the
Notes, read carefully this entire document and the accompanying Prospectus
Supplement.
o This summary provides an overview of certain information to aid your
understanding and is qualified by the full description of this information
in the Prospectus Supplement.
o You can find the definition of the capitalized terms used in this document
under the caption "Glossary" beginning on page I-1 of this Prospectus.
DEPOSITOR
Crestar Securitization, LLC, a Virginia limited liability company (the
"Depositor"), will be the depositor to each Trust. Crestar Bank, a Virginia
banking corporation, owns a 99% membership interest in the Depositor. Crestar SP
Corporation, a Virginia corporation (the "Manager") wholly owned by Crestar
Bank, owns a 1% membership interest in the Depositor. The Manager manages the
Depositor's business activities.
ISSUER
One or more statutory business trusts to be established from time to time as set
forth in the related Prospectus Supplement (each, a "Trust") by a trust
agreement (each as amended and supplemented from time to time, a "Trust
Agreement") will issue the Notes. A Trust may be a "master trust" that issues
more than one Series of Notes. The Depositor and an Eligible Lender Trustee will
be parties to each Trust Agreement, and a Delaware Trustee also may be a party.
One or more Series of Notes may be issued under each Trust. A Trust will engage
only in the following activities:
o acquiring and holding certain assets;
o issuing and making payments on the Notes and other interests in the Trust;
o and engaging in related activities.
TRUST ASSETS
Crestar Bank, the Transferor, will transfer Financed Student Loans to the
Depositor. The Depositor will transfer those Financed Student Loans to a Trust.
A Trust also may include payments due on the Financed Student Loans and other
proceeds of the Financed Student Loans and of the related guarantee and
insurance payments. Additional Trust assets may include:
o a Pre-Funding Account;
o monies deposited in the Trust's bank accounts and investments of those
monies; and
o "Credit Enhancements," including liquidity facilities, interest rate cap
agreements, interest rate swap agreements, currency swap agreements or
other similar arrangements.
The Master Servicer or the Depositor may repurchase, subject to certain
limitations and conditions, Financed Student Loans that have been transferred to
a Trust. See "Formation of the Trusts" herein.
INFORMATION ABOUT THE FINANCED STUDENT LOANS
The Financed Student Loans will consist of education loans to students or their
parents enrolled in accredited schools. The Financed Student Loans either were
originated by the Transferor or were acquired by the Transferor.
Financed Student Loans may include:
o Loans made under the FFEL Program, such as
o PLUS Loans;
o Stafford Loans;
o Unsubsidized Stafford Loans;
o SLS Loans; and
o Consolidation Loans;
o HEAL Loans; and
o Private Loans
A Guarantee Agency will guarantee the payment of principal and interest on each
FFELP Loan to the extent provided under the FFEL Program. Each Guarantee Agency
is reinsured by the Department of Education to the extent provided under the
FFEL Program. See "Description of the FFEL Program" and "Description of the
Guarantee Agencies" herein. Each HEAL loan is insured as to payment of 100% of
principal and interest by the Department of HHS. See "Description of the HEAL
Program" herein.
Most FFELP Loans and HEAL Loans will not require the borrower to make payments
until after the borrower leaves school. The Department of Education will make
interest payments during the Deferral Phase on Stafford Loans and some
Consolidation Loans. Interest will accrue and be added to the principal balance
of other FFELP Loans (other than some PLUS Loans) and HEAL Loans. Private Loans
generally require the borrower to make payments of principal and interest
shortly after the loan is made. Some Private Loans allow the borrower to pay
interest only until withdrawal from school. See "The Private Loan Programs"
herein.
MASTER SERVICER AND SERVICERS
Crestar Bank will act as Master Servicer for the Financed Student Loans. One or
more Servicers identified in the Prospectus Supplement will service the Financed
Student Loans of a Series. In limited cases, the Master Servicer or a Servicer
may be removed or resign and another party may be appointed in its place. The
Master Servicer and each Servicer will receive a fee for their services. See
"Servicing" herein and "The Servicers" in the accompanying Prospectus
Supplement.
ELIGIBLE LENDER TRUSTEE
The Prospectus Supplement will name the Eligible Lender Trustee under the
related Trust Agreement. The Eligible Lender Trustee will hold legal title to
the Financed Student Loans on behalf of the related Trust. See "Description of
the Agreements -- Administration Agreements" herein.
INDENTURE TRUSTEE
The Prospectus Supplement will name the Indenture Trustee under the Indenture
for the Series.
ADMINISTRATOR
Crestar Bank will be the Administrator on behalf of each Trust pursuant to a
related Administration Agreement among the Administrator, the Eligible Lender
Trustee and the Indenture Trustee. See "Description of the Agreements" herein.
TRANSFEROR
Crestar Bank will contribute or sell the Financed Student Loans to the
Depositor. See "The Transferor" herein.
NOTES OFFERED
Student Loan Asset Backed Notes will be issued in one or more Series and in one
or more Classes. Each Series of Notes will be issued under an Indenture and a
related Terms Supplement between the Trust and the Indenture Trustee. A Series
of Notes may include Auction Rate Notes, Accrual Notes, planned amortization
Notes, principal only Notes, interest only Notes, senior Notes and subordinate
Notes. The Notes may be offered in book-entry form only. See "Description of the
Notes" herein.
The Notes will be secured by the assets of the related Trust. If the issuer
Trust is not a master trust, the Notes will be secured only by the assets
pledged to secure that Series. If the issuer Trust is a master trust the Notes
will be secured by all assets pledged to secure that Series and all other Series
issued by the master trust. The particular characteristics of your Trust will be
described in the Prospectus Supplement. See "Description of the Notes" herein.
INTEREST PAYMENTS ON THE NOTES
Each Class of Notes will represent the right to receive payments of interest as
described in the accompanying Prospectus Supplement. Each Class may differ in,
among other things, priority of payments, payment dates, interest rates, method
for computing interest and entitlements to Credit Enhancement. See "Description
of the Notes" herein.
Each Class of Notes may have fixed, floating, auction or any other type of
interest rate. Generally, interest will be paid monthly, quarterly,
semi-annually or on other scheduled dates over the life of the Notes, each
called a "Payment Date." See "Description of the Notes" herein.
Collections on the assets may be deposited in one or more trust accounts and
invested under guidelines established by the Rating Agencies until payment to
Noteholders. Interest payments for any Series of Notes will be funded from
collections on Financed Student Loans, any applicable Credit Enhancement, and,
if and to the extent specified in the accompanying Prospectus Supplement, monies
earned while collections are invested pending payment to Noteholders. See
"Description of the Notes" herein.
PRINCIPAL PAYMENTS ON THE NOTES
Each Note will represent the right to receive payments of principal as described
in the accompanying Prospectus Supplement. If a Series of Notes consists of one
or more Classes, each Class may differ in, among other things, the amounts
allocated for principal payments, priority of payment dates, maturity, and
rights to Credit Enhancement. See "Description of the Notes" herein.
Payment in full of a Class of Notes may occur sooner than the Legal Final
Maturity for the Class due to borrowers leaving school, principal prepayments on
the Financed Student Loans, or an optional purchase of the Financed Student
Loans by the Master Servicer. See "Description of the Notes" herein.
COLLECTION ACCOUNT, NOTE PAYMENT ACCOUNT, EXPENSE ACCOUNT
Each Servicer will forward collections on the Financed Student Loans to a
Collection Account. The Eligible Lender Trustee will forward insurance payments
and similar collections to a Collection Account. See "Description of the
Agreements -- Transfer and Servicing Agreements -- Accounts" herein.
On each Payment Determination Date, the Administrator will advise the Indenture
Trustee in writing of principal and interest payments to be made to the
Noteholders and Transaction Fees payable on the related Payment Date.
Transaction Fees may be payable to one or more of the following:
o the Master Servicer;
o each Servicer;
o the Administrator;
o the Indenture Trustee;
o the Delaware Trustee (if any); and
o the Eligible Lender Trustee.
On each Payment Date or other interval as may be provided in the related
Prospectus Supplement, the Indenture Trustee will transfer monies from the
Collection Account to the (i) Expense Account, in satisfaction of Transaction
Fees and other expenses; and (ii) Note Payment Account, to make payments of
principal and interest to Noteholders. See "Description of the Agreements --
Transfer and Servicing Agreements -- Accounts" herein.
The Collection Account, Note Payment Account, and Expense Account may be
segregated by Series.
PRE-FUNDING ACCOUNT
A portion of the net proceeds of the sale of a Series of Notes may be deposited
into a Pre-Funding Account. Monies in the Pre-Funding Account will be used to
purchase Pre-Funded Student Loans for the Trust. Each Pre-Funding Account:
o will invest monies only in Eligible Investments;
o will not exceed a percentage of the principal amount of the related
Series of Notes, as specified in the Prospectus Supplement;
o will have a limited duration, as specified in the Prospectus
Supplement; and
o will acquire Financed Student Loans with characteristics
substantially similar to those identified in the related Prospectus
Supplement.
Amounts that remain in the Pre-Funding Account at the end of the Pre-Funding
Period will be paid to the Noteholders as a prepayment of principal as set forth
in the Prospectus Supplement. See "Description of the Agreements -- Transfer and
Servicing Agreements -- Pre-Funding Account" herein.
CREDIT ENHANCEMENT
Each Class of a Series may be entitled to Credit Enhancement. Credit Enhancement
provides additional payment protection to investors in each Class of Notes that
has Credit Enhancement.
"Credit Enhancement" for a Class of Notes of any Series may take the form of one
or more of the following:
o subordination o letter of credit
o collateral interest o surety bond
o insurance policy o spread account
o cash collateral o reserve account
guarantee or account
The type, characteristics and amount of any Credit Enhancement will be:
o based on several factors, including the characteristics of the Financed
Student Loans at the Closing Date, and
o established based on the requirements of each Rating Agency rating one or
more Classes of Notes of that Series.
See "Description of the Notes -- Credit Enhancement" herein.
TRANSFER AND SERVICING AGREEMENT
The Depositor will transfer Financed Student Loans to the Trust pursuant to a
Transfer and Servicing Agreement among the Depositor, the Trust, the Eligible
Lender Trustee and the Master Servicer. The Eligible Lender Trustee will hold
legal title to all Financed Student Loans in the Trust. The Master Servicer will
be obligated to service, or arrange for the servicing of, the Financed Student
Loans. The Administrator will agree to perform administrative duties concerning
the Trust and the Financed Student Loans under the Administration Agreement.
See "Description of the Agreements" and "Servicing" herein.
The Depositor or the Master Servicer, as applicable, may be required to
repurchase Financed Student Loans affected by a breach of a covenant,
representation or warranty in the Transfer and Servicing Agreement. The
Transferor will have a corresponding obligation to repurchase Financed Student
Loans under the Sales Agreement pursuant to which it transferred the Financed
Student Loans. See "Description of the Agreements" herein.
The Master Servicer will agree to prepare and file claims with the Department of
Education, the Department of HHS and the Guarantee Agencies for insurance
benefits on the Financed Student Loans. See "Description of the Agreements" and
"Servicing" herein.
ADVANCES
The Master Servicer may advance monies due but not collected on the Financed
Student Loans. The extent and nature of any Advances will be described in the
accompanying Prospectus Supplement. See "Servicing - Servicing Procedures -
Advances" herein.
OPTIONAL REPURCHASE
The Master Servicer has the option to purchase the Financed Student Loans with
respect to a Series at such time as the Pool Balance of those Financed Student
Loans is equal to or less than a percentage specified in a Prospectus Supplement
of the Initial Pool Balance of such Financed Student Loans. The purchase price
will be used to repay the Notes. See "Description of the Notes -- Termination"
herein.
AUCTION OF TRUST ASSETS
If specified in the accompanying Prospectus Supplement, the Indenture Trustee
may be required to offer for sale all Financed Student Loans remaining in a
Trust on a certain date or when the Pool Balance reaches a certain level. The
purchase price will be used to repay the Notes. See "Description of the Notes --
Termination" herein.
FEDERAL INCOME TAX CONSEQUENCES
The Notes will evidence debt obligations under the Code, and interest paid or
accrued on the Notes will be taxable income to holders of the Notes. See
"Federal Income Tax Consequences" herein and "Summary of Terms -- Federal Income
Tax Consequences" in the Prospectus Supplement.
ERISA CONSIDERATIONS
Each Prospectus Supplement will describe the extent to which Notes may be
purchased by or on behalf of employee benefit plans and other retirement plans
subject to ERISA and related sections of the Code. See "ERISA Considerations"
herein and "Summary of Terms - ERISA Considerations" in the Prospectus
Supplement.
REGISTRATION OF THE NOTES
The Notes may be represented by global certificates registered in the name of
Cede & Co., as nominee of The Depository Trust Company ("DTC"), or another
nominee. See "Description of the Notes -- Book-Entry Registration" herein.
RATING
Any Note offered by this Prospectus and the accompanying Prospectus Supplement
will be rated in one of the four highest rating categories by at least one
nationally recognized rating organization. A rating is not a recommendation to
buy, sell or hold securities and may be revised or withdrawn at anytime by the
assigning Rating Agency. Each rating should be evaluated independently of any
other rating. See "Rating" and "Summary of Terms -- Rating" in the Prospectus
Summary.
<PAGE>
RISK FACTORS
You should consider the following risk factors in deciding whether to purchase
the Notes.
Limited Ability to
Resell Notes The underwriters may assist in resales
of the Notes but they are not required to do
so. A secondary market for any Series of
Note may not develop. If a secondary market
does develop, it might not continue or it
might not be sufficiently liquid to allow
you to resell any of your Notes.
Limited Trust Assets Your Trust will not have any significant
assets or sources of funds except for the
Financed Student Loans and related assets.
The Notes are obligations solely of the
related Trust, and will not be insured or
guaranteed by the Depositor, the Transferor,
the Master Servicer, the Guarantee Agencies,
the Eligible Lender Trustee, any of their
affiliates, the Department of HHS or the
Department of Education. Noteholders must
rely for repayment upon proceeds realized
from the Financed Student Loans, Credit
Enhancement (if any), and related Trust
assets. See "Description of the
Notes--Payment of Available Funds" and
"Description of the Notes-- Credit
Enhancement" herein.
Failure to Comply with
Student Loan Origination
and Servicing Procedures The Higher Education Act requires loan
holders and servicers to follow specified
procedures to ensure that the FFELP Loans
are properly originated and collected. The
HEAL Act requires loan holders and servicers
to follow specified procedures to ensure
that the HEAL Loans are properly originated
and collected. Generally, those procedures
require that completed loan applications be
processed, a determination of whether an
applicant is an eligible borrower attending
an eligible institution under the Higher
Education Act or the HEAL Act, the
borrower's responsibilities under the loan
be explained to him or her, the promissory
note evidencing the loan be executed by the
borrower and that the loan proceeds be
disbursed by the lender in a specified
manner. After the loan is made, the lender
must establish repayment terms with the
borrower, properly administer deferments and
forbearances and credit the borrower for
payments made. If a borrower becomes
delinquent in repaying a loan, a lender must
perform certain collection procedures
(primarily telephone calls, demand letters,
skiptracing procedures and requesting
assistance from the applicable Guarantee
Agency) that vary depending upon the length
of time a loan is delinquent. See
"Description of the FFEL Program,"
"Description of the HEAL Program" and
"Servicing -- Servicing Procedures" herein.
The Transfer and Servicing Agreement will
require that servicing and collection
procedures comply with these procedures.
Failure to follow these procedures may
result in:
(i) the Department of Education's
refusal to make reinsurance
payments to the Guarantee
Agencies or to make Interest
Subsidy Payments and Special
Allowance Payments to the
Eligible Lender Trustee with
respect to the Financed FFELP
Loans;
(ii) the Guarantee Agencies'
inability or refusal to honor
their obligations to make
Guarantee Payments with respect
to Financed FFELP Loans; and
(iii)the Department of HHS' refusal
to honor its obligations to
make Insurance Payments under
the HEAL Insurance Contract
with respect to Financed HEAL
Loans.
Loss of any such payments may adversely
affect your Trust's ability to pay principal
and interest on the Notes. See "Description
of the FFEL Program," "Description of the
HEAL Program" and "Servicing" herein.
Subordination Where one or more Classes in a Series are
subordinated, principal payments on the
subordinated Class or Classes generally will
not begin until the related senior Class or
Classes are repaid. In addition, interest
payments on a Payment Date on a subordinated
Class or Classes generally will be made only
after each senior Class has received its
interest entitlement on that Payment Date
and sometimes will be made only after each
senior Class has received its principal
entitlement on that Payment Date.
Consequently, a subordinated Class will bear
losses on the Financed Student Loans prior
to such losses being borne by the more
senior Classes. In addition, subordinated
Noteholders may be limited in the remedies
that are available to them until the more
senior Noteholders are paid in full.
Obligations to Purchase
Financed Student Loans The Depositor or the Master
Servicer may be obligated to repurchase
Financed Student Loans if a breach of any
representation, warranty or obligation of
the Depositor or the Master Servicer results
in a loss of insurance or guaranty payments.
The Transferor generally will be obligated
to repurchase any Financed Student Loan
required to be repurchased by the Depositor.
The Depositor, the Transferor or the Master
Servicer may not have the financial
resources to purchase any Financed Student
Loan. The failure of the Depositor, the
Transferor or the Master Servicer to
purchase a Financed Student Loan is a breach
of the Transfer and Servicing Agreement,
enforceable by a Trust or by the Indenture
Trustee, but is not an Event of Default
under the Indenture. See "Description of the
Agreements" herein.
Issuance of Additional
Series by a Trust A Trust identified as a master trust in the
accompanying Prospectus Supplement may issue
additional Series of Notes from time to
time. Additional Series may have terms that
are different from your Series without the
prior consent or review of any Noteholders.
It is a condition to the issuance of each
new Series from the same Trust that each
Rating Agency that originally rated an
outstanding Series at the request of the
Depositor confirm in writing that the
issuance of the new Series will not result
in a reduction or withdrawal of its rating.
However, the terms of a new Series could
affect the timing and amounts of payments on
any other outstanding Series of the same
Trust.
Offset by Guarantee
Agencies or the Department
of Education The Eligible Lender Trustee may use a
Department of Education lender
identification number that may also be used
for other student loans held by the Eligible
Lender Trustee on behalf of entities
established by the Depositor, the Transferor
or their affiliates under other indentures.
If it does, the billings submitted to the
Department of Education will be consolidated
with the billings for payments for student
loans under other indentures, and payments
on such billings would be made by the
Department of Education or the Guarantee
Agency to the Eligible Lender Trustee in
lump sum form. These payments would be
allocated by the Eligible Lender Trustee
among the various indentures using the same
lender identification number.
If the Department of Education or a
Guarantee Agency determines that the
Eligible Lender Trustee owes a liability to
the Department of Education or the Guarantee
Agency on any FFELP Loan for which the
Eligible Lender Trustee is legal
titleholder, the Department of Education or
the Guarantee Agency might seek to collect
that liability by offsetting against
payments due the Eligible Lender Trustee
under your Trust. Such offsetting or
shortfall of payments due to the Eligible
Lender Trustee with respect to your Trust
could adversely affect the amount of
Available Funds for any Collection Period
and your Trust's ability to pay interest and
principal on the Notes.
It is also possible that other trusts or
indentures using the shared lender
identification number may incur origination
fees that exceed the payments payable by the
Department of Education on the loans in such
other trusts and indentures, resulting in
the payment from the Department of Education
received by the Eligible Lender Trustee
under such shared lender identification
number equaling an amount that is less than
the amount owed by the Department of
Education on the Financed Student Loans in
your Trust.
The Trust Agreement for your Trust and the
indentures or trust agreements under which
the Eligible Lender Trustee may separately
hold student loans that share the lender
identification number to be used by your
Trust (the separate trusts created
thereunder being collectively referred to
herein as the "Transferor Trusts") may
require a Transferor Trust (including your
Trust) to indemnify the other Transferor
Trusts for a shortfall or an offset by the
Department of Education or a Guarantee
Agency arising from the Financed FFELP Loans
held by the Eligible Lender Trustee on such
Transferor Trust's behalf. To the extent
that your Trust is required to indemnify
other Transferor Trusts with respect to an
offset by the Department of Education or a
Guarantee Agency arising from Financed FFELP
Loans held by the Eligible Lender Trustee
for the Trust, such indemnification
obligation could adversely affect the amount
of Available Funds for any Collection Period
and your Trust's ability to pay principal of
and interest on the Notes. Also, to the
extent that your Trust may be entitled to
indemnification with respect to an offset by
the Department of Education or a Guarantee
Agency arising from Financed FFELP Loans
held by the Eligible Lender Trustee for a
Transferor Trust other than your Trust,
there can be no assurance that the amount of
funds available to your Trust with respect
to such right of indemnification may be
adequate to compensate your Trust and
Noteholders for any previous reduction in
the Available Funds for a Collection Period.
Although the Department of HHS does not
currently limit lender identification
numbers with respect to HEAL Loans, the
Trust Agreement will provide for the sharing
of lender identification numbers with
respect to the Financed HEAL Loans in a
similar manner to the sharing of lender
identification numbers for the Financed
FFELP Loans.
See "Description of the FFEL Program,"
"Description of the Guarantee Agencies" and
"Description of the HEAL Program" herein.
Financial Status of
Guarantee Agencies The FFELP Loans are not secured by any
collateral of the borrower. Payments of
principal and interest are guaranteed by
Guarantee Agencies to the extent described
herein pursuant to Guarantee Agreements. The
financial status of the Guarantee Agency
will determine whether Guarantee Payments
will be made to the Eligible Lender Trustee.
Borrower failures to make payments on
student loans may require the Guarantee
Agency to make payments, which could
adversely affect their ability to meet
guarantee obligations. This could affect the
timing and amount of Available Funds for any
Collection Period and your Trust's ability
to pay principal of and interest on the
Notes. If the Department of Education has
determined that a Guarantee Agency is unable
to meet its insurance obligations, a holder
of FFELP Loans could submit claims for
payment directly to the Department of
Education. There is no assurance that the
Department of Education would make such a
determination or that it would pay claims in
a timely manner. See "Description of the
FFEL Program" and "Description of the
Guarantee Agencies" herein.
Changes to HEAL Program
and FFEL Program The HEAL Act, the Higher Education Act and
other relevant federal or state laws may be
amended or modified in the future against
your interests. In particular, the level of
Guarantee Payments or Insurance Payments may
be adjusted from time to time. The FFEL
Program has been the subject of numerous
amendments and proposed amendments to the
Higher Education Act. The Issuer cannot
predict whether any changes will be adopted
or, if so, what impact such changes may have
on your Trust or the Notes.
Federal Direct Student
Loan Program The Higher Education Act provides for a
Federal Direct Student Loan Program. This
program could result in reductions in the
volume of loans made under the FFEL Program.
If so, the Master Servicer and the Servicers
may experience increased costs due to
reduced economies of scale. These cost
increases could reduce the ability of the
Master Servicer and the Servicers to satisfy
their obligations to service the Financed
Student Loans. This could also reduce
revenues received by the Guarantee Agencies
available to pay claims on defaulted FFELP
Loans. The competition currently existing in
the secondary market for loans made under
the FFEL Program and HEAL Program could be
reduced, resulting in fewer potential buyers
of the FFELP Loans and HEAL Loans and lower
prices available in the secondary market for
those loans.
The Department of Education has implemented
a direct consolidation loan program, which
may reduce the volume of loans made under
the FFEL Program and the HEAL Program and is
expected to result in prepayments of
Financed Student Loans. See "Description of
the FFEL Program."
Reinvestment Risk
and Prepayments Financed Student Loans may be prepaid by
borrowers at any time without penalty. The
rate of prepayments may be influenced by
economic and other factors, such as interest
rates, the availability of other financing,
and the general job market. Under certain
circumstances, the Depositor and the Master
Servicer will be obligated to purchase
Financed Student Loans from your Trust
pursuant to the Transfer and Servicing
Agreement as a result of breaches of the
Depositor's representations and warranties
or the Master Servicer's servicing
obligations, respectively. See "Description
of the Agreements-- Transfer and Servicing
Agreement-- Conveyance of Financed Student
Loans; Representations and Warranties" and
"Servicing" herein. To the extent borrowers
elect to borrow money through Consolidation
Loans or HEAL Consolidation Loans, the
Noteholders will receive as a prepayment of
principal the aggregate principal amount of
the loan.
If loan prepayments result in a Class of
Notes being prepaid prior to its expected
Legal Final Maturity, the holders of the
Notes may not be able to reinvest their
funds at the same yield as the yield on the
Notes. We cannot predict the prepayment rate
of any Notes, and reinvestment risks
resulting from a faster or slower prepayment
speed will be borne entirely by the holders
of the Notes. Generally, the effect of such
prepayments initially will be to increase
the rate of payment on senior Notes and,
therefore, increase the reinvestment risk
with respect to senior Notes. After the
senior Notes have been paid in full, the
amount of such prepayments will be applied
to the payment of the principal balance of
more subordinated Notes until they are paid
in full. Reinvestment risk resulting from
prepayments is expected to be borne first by
the holders of senior Classes of Notes, and
then by the holders of more subordinated
Classes of Notes.
Basis Risk The Class Interest Rate for any Class of
LIBOR Rate Notes will be based generally on
the level of LIBOR. The Class Interest Rate
for any Class of Auction Rate Notes will be
based generally on the outcome of an Auction
of Notes. The Class Interest Rate for other
Classes of Notes may be based on the index,
formula or other method, such as the T-Bill
Rate, described in the related Prospectus
Supplement. The Financed Student Loans,
however, generally bear interest at the
T-Bill Rate plus a stated margin.
The foregoing interest rates generally will
be limited by the Net Loan Rate, which will
equal the weighted average Effective
Interest Rate of the Financed Student Loans,
less the Program Operating Expense
Percentage. For a Payment Date on which the
Net Loan Rate applies, the difference
between the amount of interest at the
Formula Rate described above and the amount
of interest at the Net Loan Rate (together
with interest thereon, "Carryover
Interest"), will be paid on succeeding
Payment Dates to the extent of Available
Funds and may never be paid. See
"Description of the Notes -- Interest"
herein.
Principal Balance of
Notes May Exceed
Pool Balance The principal amount of Notes issued by your
Trust may exceed the related Pool Balance.
If an Event of Default occurs and the assets
of your Trust are liquidated, the Financed
Student Loans would have to be sold at a
premium for the subordinated Noteholders
(and possibly the senior Noteholders) to
avoid a loss. The Depositor cannot predict
the rate or timing of accelerated payments
of principal or when the aggregate principal
amount of the Notes may be reduced to the
aggregate principal amount of the Financed
Student Loans.
Indenture Trustee May
Have Difficulty Liquidating
Financed Student Loans Generally, during an Event of Default, the
Indenture Trustee is authorized (with
certain Noteholder consent) to sell the
related Financed Student Loans. However, the
Indenture Trustee may not find a purchaser
for the Financed Student Loans. Also, the
market value of the Financed Student Loans
might not equal the principal amount of
Notes plus accrued interest. In either
event, the Noteholders may suffer a loss.
The principal amount required to be paid
under the Indenture generally is limited to
amounts available for payment. Therefore,
failure to pay principal may not result in
the occurrence of an Event of Default until
the Legal Final Maturity of the Notes.
Average Life Scheduled payments on the Financed
Student Loans and the maturities of the
Financed Student Loans may be extended
without your consent, which may lengthen the
weighted average life of your investment.
Prepayments of principal on the Financed
Student Loans and Parity Payments may
shorten the life of your investment. See
"Maturity and Prepayment Considerations"
herein.
Receivership or
Conservatorship of Transferor The Transferor views the
transfer of the Financed Student Loans to
the Depositor as a valid sale. However, a
court could treat this transfer as a secured
financing.
If the Federal Deposit Insurance Corporation
(the "FDIC") is appointed receiver or
conservator of the Transferor, the FDIC's
administrative expenses may have priority
over the Eligible Lender Trustee's interest
in the Financed Student Loans. In addition,
the Federal Deposit Insurance Act ("FDIA"),
as amended by the Financial Institutions
Reform, Recovery and Enforcement Act of 1989
("FIRREA"), sets forth certain powers that
the FDIC could exercise in its capacity as a
receiver or conservator of the Transferor.
To the extent that the transfer of the
Financed Student Loans to the Depositor is
deemed to be a secured financing and the
security interest is validly perfected
before the Transferor's insolvency (and was
not taken in contemplation of insolvency or
with the intent to hinder, delay or defraud
the Transferor or its creditors), then,
based upon opinions and statements of policy
issued by the FDIC, the security interest
should not be subject to avoidance, and
payments to your Trust with respect to the
Financed Student Loans should not be subject
to recovery by the FDIC as receiver or
conservator of the Transferor. Because the
Depositor is an affiliate of the Transferor,
however, the FDIC could assert a contrary
position, and rely upon certain provisions
of the FDIA which, at the request of the
FDIC, have been applied in recent lawsuits
to avoid security interests in collateral
granted by depository institutions, to
permit the FDIC to avoid such security
interest, thereby resulting in possible
delays and reductions in payments on the
Notes. In addition, if the FDIC were to
require the Indenture Trustee or the
Eligible Lender Trustee to establish its
right to such payments by submitting to and
completing the administrative claims
procedure under the FDIA, as amended by
FIRREA, delays in payments on the Notes and
possible reductions in the amount of those
payments could occur.
Bankruptcy of Depositor The Depositor is a limited purpose finance
subsidiary of Crestar Bank. If the Depositor
becomes bankrupt, the United States
Bankruptcy Code could materially limit or
prevent the enforcement of the Depositor's
obligations, including, without limitation,
its obligations under the Notes. The
Depositor's trustee in bankruptcy (or the
Depositor itself as debtor-in-possession)
may seek to accelerate payment on the Notes
and liquidate the assets in your Trust. If
principal on the Notes is declared due and
payable, you may lose the right to future
payments and face reinvestment risks
mentioned above.
Perfected Security
Interest in Financed
Student Loans The Transferor views its transfer of the
Financed Student Loans to the Depositor as a
sale. If this transfer is viewed as a
secured financing, a security interest in
the FFELP Loans created on behalf of the
Depositor may be perfected by the filing of
UCC financing statements. Financing
statements covering the Financed Student
Loans will be filed to protect the interest
of the Depositor in the event the sale by
the Transferor is viewed as a secured
financing.
If the transfer of the Financed Student
Loans from the Depositor to the Eligible
Lender Trustee is viewed as a secured
financing, a security interest in the FFELP
Loans created on behalf of the Eligible
Lender Trustee may be perfected by the
filing of UCC financing statements.
Financing statements covering the Financed
Student Loans will be filed to protect the
interest of the Eligible Lender Trustee in
the event the sale by the Depositor is
viewed as a secured financing.
If any transfer of the Financed Student
Loans is deemed to be a secured financing,
certain transferees of Financed Student
Loans may have an interest in the loans
prior to the Eligible Lender Trustee. The
Transferor and the Depositor will represent
that the Financed Student Loans are
transferred to the Eligible Lender Trustee
free and clear of all liens and covenant
that they will not sell, pledge, assign,
transfer or grant any lien on any Financed
Student Loan (or any interest therein) other
than to the Eligible Lender Trustee.
Each Servicer will have custody of the
promissory notes related to the Financed
FFELP Loans. The Financed Student Loans may
not be physically segregated in the
Servicer's or other custodian's offices. If
any interest in the Financed Student Loans
were assigned to another party, that person
could acquire an interest in the Financed
Student Loans superior to the interest of
the Eligible Lender Trustee and the
Indenture Trustee.
Pre-Funding Account If your Trust includes a Pre-Funding
Account, the related Eligible Lender Trustee
will own the Financed Student Loans and the
Pre-Funded Amount on deposit in the
Pre-Funding Account. If the amount of
Financed Student Loans sold to your Trust
during the Pre-Funding Period is less than
the Pre-Funded Amount, your Trust will
prepay principal equal to the difference.
Each such Additional Student Loan must
satisfy the eligibility criteria specified
in the Transfer and Servicing Agreement.
See "Prospectus Summary -- Pre-Funding
Account" and "Description of the Agreements
-- Transfer and Servicing Agreements --
Pre-Funding Account" herein.
Changes in Repayment
Terms Under certain incentive programs, the
Transferor may terminate or change the terms
of the incentives with respect to any or all
of a borrower's loans. We cannot predict
which borrowers will qualify or decide to
participate in these programs. The effect of
these incentive programs may be to reduce
the yield on the Financed Student Loans.
Consumer Protection
Laws Consumer protection laws impose requirements
upon lenders and servicers. Some state laws
impose finance charge restrictions on
certain transactions and require contract
disclosures. These state laws are generally
preempted by the Higher Education Act and
the HEAL Act. However, the form of
promissory notes required by the Department
of Education for FFELP Loans provides that
holders of such promissory notes evidencing
certain loans made to borrowers attending
for-profit schools are subject to any
defenses that the borrower may have against
the school. Private Loan Programs would be
subject to applicable state laws regulating
loans to consumers.
Book-Entry Registration The Notes may be represented by one or more
certificates registered in the name of Cede
& Co., the nominee for DTC, and will not be
registered in the names of the holders of
the Notes, if specified in the accompanying
Prospectus Supplement. If so, you will not
be recognized by the Indenture Trustee or
the Eligible Lender Trustee as to
"Noteholders." Also, you will only be able
to exercise the rights of Noteholders
indirectly through DTC and its participating
organizations. See "Description of the Notes
-- Book-Entry Registration" herein.
Rating A Rating Agency will rate each Note in one
of its four highest rating categories. A
rating is not a recommendation to buy or
sell Notes or a comment concerning
suitability for any investor. A rating only
addresses the likelihood of the ultimate
payment of principal and stated interest and
does not address the likelihood of
prepayments on the Notes or the likelihood
of the payment of Carryover Interest. A
rating may not remain in effect for the life
of the Notes. See "Prospectus Summary--
Rating" and "Rating" herein and "Rating" in
the accompanying Prospectus Supplement..
FORMATION OF THE TRUSTS
The Trusts
Each Trust will be formed under the laws of the jurisdiction set forth in the
related Prospectus Supplement pursuant to a Trust Agreement for the transactions
described in this Prospectus and each Prospectus Supplement. Each Trust will be
a statutory business trust. A Trust will not engage in any activity other than
(i) acquiring, holding, selling and managing the Financed Student Loans and the
other assets of the Trust and proceeds therefrom, (ii) issuing one or more
classes of its certificates and notes, (iii) making payments thereon and (iv)
engaging in other activities that are necessary, suitable or convenient to
accomplish the foregoing or are incidental thereto or connected therewith. A
Trust may be a "master trust" that issues more than one Series of Notes if
specified in the accompanying Prospectus Supplement. For so long as the
Transferor is a Certificateholder of a Trust, the Trust's activities will be
limited to activities that are part of, or incidental to, the business of
banking as well.
A Trust will be initially capitalized with equity, excluding amounts deposited
in any Reserve Account or Pre-Funding Account, representing the initial
principal balance of the Certificates issued on the related Closing Date. A
percentage interest in the Certificates will be sold to the Transferor or such
other entity as may be named in the related Prospectus Supplement and the
remaining Certificates are expected to be offered for sale in transactions
exempt from the registration requirements of the Securities Act. The equity of
the Trust, together with the proceeds from the sale of each Series of Notes,
will be used by the related Eligible Lender Trustee in connection with its
acquisition, on behalf of the Trust, of the Financed Student Loans from the
Depositor pursuant to the Transfer and Servicing Agreement. A portion of the net
proceeds received from the transfer of the Financed Student Loans may be used by
the Depositor to make a Reserve Account Deposit or a Pre-Funding Account
Deposit. Upon the consummation of each such transaction, the property of a Trust
will consist of (a) the pool of Financed Student Loans, legal title to which is
held by the Eligible Lender Trustee on behalf of the Trust, (b) all funds
collected in respect thereof on or after the applicable Cut-off Date, (c) all
moneys and investments on deposit in the Collection Account, the Certificate
Distribution Account, the Note Payment Account, the Expense Account, the Advance
Account, the Reserve Account and the Pre-Funding Account, and (d) any other
property specified in the related Prospectus Supplement. The Notes will be
secured by certain property of the related Trust. The Collection Account, the
Note Payment Account, the Expense Account, the Reserve Account, the Pre-Funding
Account and the Advance Account will be maintained with and in the name of the
Indenture Trustee. To facilitate servicing and to minimize administrative burden
and expense, the related Servicer will be appointed custodian of the promissory
notes representing the Financed Student Loans by the Eligible Lender Trustee.
A Trust's principal offices will be located at the address of the applicable
Eligible Lender Trustee set forth in the related Prospectus Supplement.
Eligible Lender Trustee
The Eligible Lender Trustee for any Trust will be the entity named in the
applicable Prospectus Supplement and will acquire on behalf of a Trust legal
title to all the Financed Student Loans acquired by such Trust from time to time
pursuant to a Transfer and Servicing Agreement. The Eligible Lender Trustee on
behalf of a Trust will enter into a Guarantee Agreement with each of the
Guarantee Agencies with respect to such Financed FFELP Loans and a HEAL
Insurance Contract with the Department of HHS with respect to such Financed HEAL
Loans. The Eligible Lender Trustee qualifies, or prior to taking title to the
Financed Student Loans for which additional qualifications are necessary, will
qualify, as an eligible lender and owner of Financed Student Loans for all
purposes under the Higher Education Act and the Guarantee Agreements with
respect to such Financed FFELP Loans, under the HEAL Act and the HEAL Insurance
Contract with respect to such Financed HEAL Loans, and the applicable Private
Loan Programs. Failure of the Financed Student Loans to be owned by an eligible
lender would result in the loss of Guarantee Payments, Interest Subsidy Payments
and Special Allowance Payments with respect to Financed FFELP Loans and the loss
of Insurance Payments with respect to Financed HEAL Loans. See "Description of
the FFEL Program" and "Description of the HEAL Program."
The Transferor, the Depositor and their affiliates may maintain from time to
time other banking relationships with any Eligible Lender Trustee and its
affiliates.
USE OF PROCEEDS
The Trust will use the net proceeds from the sale of a Series of Notes to
acquire Financed Student Loans from the Depositor and permit the Depositor to
make various deposits with respect to the Notes. After any required funding of
accounts relating to the Notes, the Depositor will use the proceeds to acquire
such Financed Student Loans from the Transferor. The Transferor is expected to
use such proceeds for general corporate purposes, including the origination or
purchase of Financed Student Loans.
THE TRANSFEROR
Crestar Bank, the Transferor, is a Virginia banking corporation that offers a
broad range of banking services, including various types of deposit accounts and
instruments, commercial and consumer loans, trust and investment management.,
bank credit cards, and international banking to customers throughout Virginia,
Maryland and Washington, D.C. Services are also provided through non-bank
subsidiaries. Securities brokerage and investment banking services are offered
by Crestar Securities Corporation. The Transferor and its predecessors have been
originating and purchasing FFELP Loans since 1965 and HEAL Loans since 1995.
The Transferor is a wholly owned indirect subsidiary of Crestar Financial
Corporation, a bank holding company organized under the laws of the Commonwealth
of Virginia and registered under the Bank Holding Company Act of 1956, as
amended (the "BHCA"). Crestar Financial Corporation is supervised and examined
by the Board of Governors of the Federal Reserve System under the BHCA. The BHCA
requires Federal Reserve approval for bank acquisitions and regulates
non-banking activities of bank holding companies. Crestar Bank is regulated by
the State Corporation Commission of Virginia and the Federal Reserve Bank of
Richmond.
The Transferor generally will be obligated to purchase Financed Student Loans to
the extent that the Depositor is obligated to do so.
The principal executive office of the Transferor is located at Crestar Center,
919 East Main Street, Richmond, Virginia 23219. Its telephone number is (804)
782-5171.
THE NOTES ARE NEITHER OBLIGATIONS OF NOR GUARANTEED BY CRESTAR FINANCIAL
CORPORATION OR ANY OF CRESTAR FINANCIAL CORPORATION'S SUBSIDIARIES (INCLUDING
THE TRANSFEROR).
THE DEPOSITOR
Crestar Securitization LLC, the Depositor, is a Virginia limited liability
company organized as a limited purpose finance company owned by the Transferor
and Crestar SP Corporation (the "Manager"), a Virginia corporation. The
Transferor owns all of the capital stock of the Manager. The Manager manages the
business operations of the Depositor, and each of the Manager's officers are
also officers of the Transferor. The Depositor and the Manager maintain their
principal executive offices at Crestar Center, 919 East Main Street, Richmond,
Virginia 23219. The Depositor and the Manager share the telephone number (804)
782-5171.
As described herein, the only obligations, if any, of the Depositor with respect
to any Series of Notes may be pursuant to certain limited representations and
warranties and limited undertakings to repurchase or substitute Financed Student
Loans under certain circumstances. The Depositor will have no ongoing servicing
obligations or responsibilities with respect to any Financed Student Loan. The
Depositor does not have, nor is it expected in the future to have, any
significant assets.
The Depositor will not insure or guarantee the Notes of any Series.
THE FINANCED STUDENT LOAN POOL
The pool of Financed Student Loans will include the Financed Student Loans
acquired by the applicable Eligible Lender Trustee on behalf of a Trust from
time to time as of the applicable Cut-off Date and, if set forth in the related
Prospectus Supplement, any Subsequent Financed Student Loans, Additional Student
Loans or other Financed Student Loans acquired by the applicable Eligible Lender
Trustee on behalf of a Trust as described in the related Prospectus Supplement.
The Financed Student Loans will be selected from the Transferor's portfolio of
FFELP Loans, HEAL Loans and Private Loans by several criteria, including the
following: each Financed Student Loan (i) was or will be originated in the
United States or its territories or possessions under and in accordance with the
FFEL Program, the HEAL Program or the applicable Private Loan Program, as the
case may be, to, or on behalf of, a student who has graduated or is expected to
graduate from an accredited institution of higher education, a for-profit
educational institution or to, or on behalf of, a student who is enrolled in
private primary or secondary schools, (ii) contains terms in accordance with
those required by the applicable program, the Guarantee Agreements and other
applicable requirements, and (iii) is not more than 90 days past due as of the
related Cut-off Date. The relative percentages of each type of Financed Student
Loan, as well as the relative percentages of Financed Student Loans originated
by the Transferor, to be included in the pool of Financed Student Loans will be
determined from time to time by the Transferor. See "Description of the FFEL
Program," "Description of the Guarantee Agencies," "Description of the HEAL
Program" and "The Private Loan Programs" herein.
In addition to the criteria described in the preceding paragraphs, an applicable
provider of Credit Enhancement may require certain other characteristics for
additional Financed Student Loans. However, following each transfer of
additional Financed Student Loans to an Eligible Lender Trustee on behalf of a
Trust, the aggregate characteristics of the entire pool of Financed Student
Loans, including the composition and type of the Financed Student Loans, the
distribution by weighted average interest rate and the distribution by principal
amount to be described in tables included in each Prospectus Supplement, may
vary significantly from those of the Financed Student Loans, if any, previously
transferred to such Trust. In addition, the distribution by weighted average
interest rate applicable to the Financed Student Loans on any date following the
related Cut-off Date may vary significantly from that set forth in the tables
included in the related Prospectus Supplement as a result of variations in the
effective rates of interest applicable to the Financed Student Loans. Moreover,
the information included in the related Prospectus Supplement with respect to
the original term to maturity and remaining term to maturity of Financed Student
Loans as of the related Cut-off Date may vary significantly from the actual term
to maturity of any of the Financed Student Loans as a result of the granting of
deferral and forbearance periods with respect thereto.
Each Prospectus Supplement will set forth, as of the related Cut-off Date,
various information with respect to the initial Financed Student Loans for such
Trust. Such information may include the composition of the Financed Student
Loans, the distribution by loan type, the distribution by interest rates, the
distribution by outstanding principal balance, the distribution by geography,
the distribution by insurance or guarantee level, the distribution by school
type, the distribution by Guarantee Agency, the distribution by remaining term
to scheduled maturity and the distribution by borrower payment status. See "The
Financed Student Loans" in the accompanying Prospectus Supplement.
Each of the FFELP Loans and HEAL Loans provides or will provide for the
amortization of the outstanding principal balance of such Financed Student Loan
over a series of regular payments. Each regular payment consists of an
installment of interest which is calculated on the basis of the outstanding
principal balance of such Financed Student Loan multiplied by the applicable
interest rate and further multiplied by the period elapsed (as a fraction of a
calendar year) since the preceding payment of interest was made. As payments are
received in respect of such Financed Student 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 regular installment before its scheduled due date, the portion of the payment
allocable to interest for the period since the preceding payment was made will
be less than it would have been had the payment been made as scheduled, and the
portion of the payment applied to reduce the unpaid principal balance will be
correspondingly greater. Conversely, if a borrower pays a 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 portion of the
payment applied to reduce the unpaid principal balance will be correspondingly
less. In either case, subject to any applicable Grace Periods, Deferment Periods
or Forbearance Periods, the borrower pays a regular installment until the final
scheduled payment date, at which time the amount of the final installment is
increased or decreased as necessary to repay the then outstanding principal
balance of such Financed Student Loan. The Private Loans may contain different
amortization provisions.
MATURITY AND PREPAYMENT CONSIDERATIONS
The rate of payment of principal of the Notes and the yield on the Notes will be
affected by (i) prepayments of the Financed Student Loans that may occur as
described below (including repurchases by the Transferor, the Depositor or the
Master Servicer), (ii) the sale by the related Trust of Financed Student Loans,
(iii) the application of additional principal payments, if any, and (iv) the
issuance by a Trust of additional Notes. All the Financed Student Loans are
prepayable in whole or in part by the borrowers at any time (including by means
of Consolidation Loans as discussed below) and may be prepaid as a result of a
borrower default, death, disability or bankruptcy and subsequent liquidation or
collection of Guarantee Payments and Insurance Payments with respect thereto.
The rate of such prepayments cannot be predicted and may be influenced by a
variety of economic, social and other factors, including those described below.
In general, the rate of prepayments may tend to increase to the extent that
alternative financing becomes available at prevailing interest rates which fall
significantly below the interest rates applicable to the Financed Student Loans.
However, because many of the Financed Student Loans bear interest at a rate that
either actually or effectively is floating, it is impossible to determine
whether changes in prevailing interest rates will be similar to or vary from
changes in the interest rates on the Financed Student Loans. The Transferor and
the Depositor are obligated to purchase any Financed Student Loan pursuant to a
Sales Agreement or Transfer and Servicing Agreement as a result of a breach of
certain of their respective representations and warranties, and the Master
Servicer is obligated to purchase any Financed Student Loan pursuant to a
Transfer and Servicing Agreement as a result of a breach of certain covenants
with respect to such Financed Student Loan, in each case where such breach
results in the failure of a Guarantee Agency (including for this purpose any
guarantor under a Private Loan Program) to make a Guarantee Payment or the
Department of HHS to make an Insurance Payment. See "Description of the
Agreements -- Transfer and Servicing Agreements -- Conveyance of Financed
Student Loans; Representations and Warranties" herein. See also "Description of
the Notes -- Termination" regarding early termination of the Notes of a Series
as a consequence of the purchase of the related Financed Student Loans.
Scheduled payments with respect to, and maturities of, the Financed Student
Loans may be extended, including pursuant to Grace Periods, Deferment Periods
and, under certain circumstances, Forbearance Periods or as a result of
refinancings through Consolidation Loans to the extent such Consolidation Loans
are sold to the applicable Eligible Lender Trustee on behalf of a Trust as
described above. In that event, the fact that such Consolidation Loans will
likely have longer maturities than the Financed Student Loans they are replacing
may lengthen the remaining term of the Financed Student Loans and the average
life of the Notes of the related Trust. The rate of payment of principal of the
Notes and the yield on the Notes may also be affected by the rate of defaults
resulting in losses on Financed Student Loans, by the severity of those losses
and by the timing of those losses.
Each Trust established as a master trust may issue, from time to time, several
Series and Classes of Notes. The payment priorities of each Series and Class
will be described in the applicable Prospectus Supplement. Such priorities may
provide that a subsequently issued Class of Notes receive payments of principal
prior to a previously issued Class of Notes, even if such previously issued
Class of Notes had been receiving payments of principal. However, each Class of
Notes will be payable in full by its Legal Final Maturity.
The rate of prepayment on the Financed Student Loans cannot be predicted, and
any reinvestment risks resulting from a faster or slower incidence of prepayment
of Financed Student Loans or a faster or slower incidence of sales by the Trust
will be borne entirely by the Noteholders. Such reinvestment risks may include
the risk that interest rates and the relevant spreads above particular interest
rate bases are lower at the time Noteholders receive payments from the related
Trust than such interest rates and such spreads would otherwise have been had
such prepayments not been made or had such prepayments been made at a different
time.
DESCRIPTION OF THE FFEL PROGRAM
General
The Higher Education Act sets forth provisions establishing the FFEL Program,
pursuant to which state agencies or private nonprofit corporations administering
student loan insurance programs (referred to as "Guarantee Agencies") are
reimbursed for losses sustained in the operation of their programs, and holders
of certain loans made under such programs are paid subsidies for owning such
loans.
The Higher Education Act currently authorizes certain student loans to be
covered under the FFEL Program if they are contracted for and paid to the
student prior to September 30, 2002, unless a student has received a loan under
the FFEL Program prior to such date, in which case that student may receive a
student loan covered by the FFEL Program until September 30, 2006. Congress has
extended similar authorization dates in prior versions of the Higher Education
Act; however, there can be no assurance that the current authorization dates
will again be extended or that the other provisions of the Higher Education Act
will be continued in their present form.
Various amendments to the Higher Education Act have revised the FFEL Program
from time to time. These amendments include, but are not limited to, the
Balanced Budget Act of 1997, the Higher Education Technical Amendments Act of
1993, the Omnibus Budget Reconciliation Act of 1993 (the "1993 Amendments"), the
Higher Education Amendments of 1992, which reauthorized the FFEL Program, the
Omnibus Budget Reconciliation Act of 1990, the Omnibus Budget Reconciliation Act
of 1989, the Omnibus Budget Reconciliation Act of 1987, the Higher Education
Technical Amendments Act of 1987, the Higher Education Amendments of 1986, which
reauthorized the FFEL Program, the Consolidated Omnibus Budget Reconciliation
Act of 1985, the Postsecondary Student Assistance Amendments of 1981 and the
Education Amendments of 1980.
There can be no assurance that relevant federal laws, including the Higher
Education Act, will not be changed in a manner that may adversely affect the
receipt of funds by the Guarantee Agencies or by the Transferor or the Eligible
Lender Trustee with respect to Financed FFELP Loans. Proposals have been made by
Congress and the Administration which, if enacted into law, would amend the
Higher Education Act and make various changes to the FFEL Program, including
changes that would reduce various payments to Guarantee Agencies and restructure
guarantee agencies' operations and programs, and revise terms of student loans
and payments to the Eligible Lender Trustee. There is no certainty that any of
the proposals will be enacted into law in their current form or at all, and the
Transferor cannot predict at this time how such legislation, if enacted, would
affect a Servicer's business or operations, or those of the Transferor.
This is only a summary of certain provisions of the Higher Education Act.
Reference is made to the text of the Higher Education Act for full and complete
statements of its provisions.
Loan Terms
General
Four types of loans are currently available under the FFEL Program: Stafford
Loans, Unsubsidized Stafford Loans, Plus Loans and Consolidation Loans. These
loan types vary as to eligibility requirements, interest rates, repayment
periods, loan limits and eligibility for interest subsidies and Special
Allowance Payments. Some of these loan types have had other names in the past.
References herein to the various loan types include, where appropriate,
predecessors to such loan types.
The primary loan under the FFEL Program is the Stafford Loan. Students who are
not eligible for Stafford Loans based on their economic circumstances may be
able to obtain Unsubsidized Stafford Loans. Parents of students may be able to
obtain Plus Loans. Consolidation Loans are available to borrowers with existing
loans made under the FFEL Program and certain other federal programs to
consolidate repayment of such existing loans. For periods of enrollment
beginning prior to July 1, 1994, SLS Loans were available to students with costs
of education that were not met by other sources and that exceeded the Stafford
or Unsubsidized Stafford Loan limits.
Eligibility
General. A student is eligible for loans made under the FFEL Program only if he
or she: (i) has been accepted for enrollment or is enrolled in good standing at
an eligible institution of higher education (which term includes certain
vocational schools), (ii) is carrying or planning to carry at least one-half the
normal full-time workload for the course of study the student is pursuing as
determined by the institution (which, in the case of a loan to cover the cost of
a period of enrollment beginning on or after July 1, 1987, must either lead to a
recognized educational credential or be necessary for enrollment in a course of
study that leads to such a credential), (iii) has agreed to notify promptly the
holder of the loan concerning any change of address, (iv) (if presently
enrolled) is maintaining satisfactory progress in the course of study he or she
is pursuing, (v) does not owe a refund on, and is not (except as specifically
permitted under the Higher Education Act) in default under, any loan or grant
made under the Higher Education Act, (vi) has filed with the eligible
institution a statement of educational purpose, (vii) meets certain citizenship
requirements, and (viii) (except in the case of a graduate or professional
student) has received a preliminary determination of eligibility or
ineligibility for a Pell Grant.
Stafford Loans. Stafford Loans generally are made only to student borrowers who
meet certain needs tests. The educational institution must provide the lender
with a statement evidencing a determination of need for a loan, and the amount
of such need, calculated by subtracting from the estimated cost of attendance
the sum of the expected family contribution with respect to the student plus the
estimated financial assistance available to such student. The amounts of the
expected family contribution, estimated available financial assistance, and
estimated costs of attendance are to be computed in accordance with standards
set forth in the Higher Education Act.
Unsubsidized Stafford Loans. A student borrower meeting the requirements set
forth under "General" above is eligible for an Unsubsidized Stafford Loan
without regard to need. Unsubsidized Stafford Loans were not available before
October 1, 1992.
Plus Loans. Plus Loans are made only to borrowers who are parents (and, under
certain circumstances, spouses of remarried parents) of dependent undergraduate
students. For Plus Loans made on or after July 1, 1993, the parent borrower must
not have an adverse credit history (as determined pursuant to criteria
established by the Department of Education). Prior to the Higher Education
Amendments of 1986, the Higher Education Act did not distinguish between Plus
Loans and SLS Loans. Student borrowers were eligible for Plus Loans; however,
parents of graduate and professional students were ineligible.
SLS Loans. Eligible borrowers for SLS Loans were limited to (a) graduate or
professional students, (b) independent undergraduate students, and (c) under
certain circumstances, dependent undergraduate students, if such students'
parents were unable to obtain a Plus Loan and were also unable to provide such
students' expected family contribution. Except as described in clause (c),
eligibility was determined without regard to need.
Consolidation Loans. To be eligible for a Consolidation Loan a borrower must (a)
have outstanding indebtedness on student loans made under the FFEL Program
and/or certain other federal student loan programs, and (b) be in repayment
status or in a Grace Period, or be a defaulted borrower who has made
arrangements to repay the defaulted loan(s) satisfactory to the holder of the
defaulted loan(s). A married couple who agree to be jointly liable on a
Consolidation Loan for which the application is received on or after January 1,
1993 may be treated as an individual for purposes of obtaining a Consolidation
Loan. For Consolidation Loans disbursed prior to July 1, 1994 the Borrower was
required to have outstanding student loan indebtedness of at least $7,500. Prior
to the adoption of the Higher Education Technical Amendments Act of 1993, Plus
Loans could not be included in the Consolidation Loan. For Consolidation Loans
for which the applications were received prior to January 1, 1993, the minimum
student loan indebtedness was $5,000 and the borrower could not be delinquent
more than 90 days in the payment of such indebtedness.
Interest Rates
The Higher Education Act establishes maximum interest rates for each of the
various types of loans. These rates vary not only among loan types, but also
within loan types depending upon when the loan was made or when the borrower
first obtained a loan under the FFEL Program. The Higher Education Act allows
lesser rates of interest to be charged. Many lenders, including the Transferor,
have offered repayment incentives or other programs that involve reduced
interest rates on certain loans made under the FFEL Program.
Stafford Loans. For a Stafford Loan made prior to July 1, 1994, the applicable
interest rate for a borrower who, on the date the promissory note was signed,
did not have an outstanding balance on a previous loan which was made, insured
or guaranteed under the FFEL Program (a "New Borrower"):
(a) is 7% per annum for a loan covering a period of
instruction beginning before January 1, 1981;
(b) is 9% per annum for a loan covering a period of
instruction beginning on or after January 1, 1981, but before September
13, 1983;
(c) is 8% per annum for a loan covering a period of
instruction beginning on or after September 13, 1983, but before July
1, 1988;
(d) for a loan made prior to October 1, 1992, covering a
period of instruction beginning on or after July 1, 1988, is 8% per
annum for the period from the disbursement of the loan to the date
which is four years after the loan enters repayment, and thereafter
shall be adjusted annually, and for any 12-month period commencing on a
July 1 shall be equal to the bond equivalent rate of 91-day U.S.
Treasury bills auctioned at the final auction prior to the preceding
June 1, plus 3.25% per annum (but not to exceed 10% per annum); or
(e) for a loan made on or after October 1, 1992 shall be
adjusted annually, and for any 12- month period commencing on a July 1
shall be equal to the bond equivalent rate of 91- day U.S. Treasury
bills auctioned at the final auction prior to the preceding June 1,
plus 3.1% per annum (but not to exceed 9% per annum).
For a Stafford Loan made prior to July 1, 1994, the applicable interest
rate for a borrower who, on the date the promissory note evidencing the
loan was signed, had an outstanding balance on a previous loan made,
insured or guaranteed under the FFEL Program (a "Repeat Borrower"):
(f) for a loan made prior to July 23, 1992 is the
applicable interest rate on the previous loan or, if such previous loan
is not a Stafford Loan, 8% per annum; or
(g) for a loan made on or after July 23, 1992 shall be
adjusted annually, and for any twelve month period commencing on a July
1 shall be equal to the bond equivalent rate of 91-day U.S. Treasury
bills auctioned at the final auction prior to the preceding June 1,
plus 3.1% per annum but not to exceed:
(i) 7% per annum in the case of a Stafford Loan
made to a borrower who has a loan described
in clause (a) above;
(ii) 8% per annum in the case of (A) a Stafford
Loan made to a borrower who has a loan
described in clause (c) above, (B) a
Stafford Loan which has not been in
repayment for four years and which was made
to a borrower who has a loan described in
clause (d) above or (C) a Stafford Loan for
which the first disbursement was made prior
to December 20, 1993 to a borrower whose
previous loans do not include a Stafford
Loan or an Unsubsidized Stafford Loan;
(iii) 9% per annum in the case of (A) a Stafford
Loan made to a borrower who has a loan
described in clauses (b) or (e) above or (B)
a Stafford Loan for which the first
disbursement was made on or after December
20, 1993 to a borrower whose previous loans
do not include a Stafford Loan or an
Unsubsidized Stafford Loan; and
(iv) 10% per annum in the case of a Stafford Loan
which has been in repayment for four years
or more and which was made to a borrower who
has a loan described in clause (d) above.
The interest rate on all Stafford Loans made on or after July 1, 1994,
regardless of whether the borrower is a New Borrower or a Repeat Borrower, is
the rate described in clause (g) above, except that such rate shall not exceed
8.25% per annum. For any Stafford Loan made on or after July 1, 1995, the
interest rate is further reduced prior to the time the loan enters repayment and
during any Deferment Periods. During such periods, the formula described in
clause (g) above is applied, except that 2.5% is substituted for 3.1%, and the
rate shall not exceed 8.25% per annum. For loans made on or after July 1, 1998,
the applicable rate will continue to be adjusted annually, but for any 12-month
period commencing on a July 1 will be equal to the bond equivalent rate of
securities with a comparable maturity (as established by the Secretary of
Education), plus 1% per annum, but not to exceed 8.25% per annum. There can be
no assurance that the interest rate provisions for such loans will not be
further amended, either before or after the rate described herein becomes
effective.
Unsubsidized Stafford Loans. Unsubsidized Stafford Loans are subject to the same
interest rate provisions as Stafford Loans.
Plus Loans. The applicable interest rate on a Plus Loan:
(a) made on or after January 1, 1981, but before October
1, 1981, is 9% per annum;
(b) made on or after October 1, 1981, but before November
1, 1982, is 14% per annum;
(c) made on or after November 1, 1982, but before July 1,
1987, is 12% per annum;
(d) made on or after July 1, 1987 and before October 1,
1992 shall be adjusted annually, and for any 12-month period beginning
on July 1 shall be equal to the bond equivalent rate of 52-week U.S.
Treasury bills auctioned at the final auction prior to the preceding
June 1, plus 3.25% per annum (but not to exceed 12% per annum); or
(e) made on or after October 1, 1992 shall be adjusted
annually, and for any 12-month period beginning on July 1 shall be
equal to the bond equivalent rate of 52-week U.S. Treasury bills
auctioned at the final auction prior to the preceding June 1, plus 3.1%
per annum (but not to exceed 10% per annum).
The applicable interest rate for Plus Loans made on or after July 1, 1994 is the
same as that described in clause (e) above, except that such rate shall not
exceed 9% per annum. For Plus Loans made on or after July 1, 1998, the
applicable rate will continue to be adjusted annually, but for any 12-month
period commencing on a July 1 will be equal to the bond equivalent rate of
securities with a comparable maturity (as established by the Secretary of
Education), plus 2.1% per annum, but not to exceed 9% per annum.
If requested by the borrower, an eligible lender may consolidate SLS or Plus
Loans of the same borrower held by the lender under a single repayment schedule.
The repayment period for each included loan shall be based on the commencement
of repayment of the most recent loan. The consolidated loan shall bear interest
at a rate equal to the weighted average of the rates of the included loans. Such
a consolidation shall not be treated as the making of a new loan. In addition,
at the request of the borrower, a lender may refinance an existing fixed rate
SLS or Plus Loan (including an SLS or Plus Loan held by a different lender who
has refused so to refinance such loan) at a variable interest rate. In such a
case, proceeds of the new loan are used to discharge the original loan.
SLS Loans. The applicable interest rates on SLS Loans made prior to October 1,
1992 are identical to the applicable interest rates on Plus Loans made at the
same time. For SLS Loans made on or after October 1, 1992, the applicable
interest rate is the same as the applicable interest rate on Plus Loans, except
that the ceiling is 11% per annum instead of 10% per annum.
Consolidation Loans. A Consolidation Loan made prior to July 1, 1994 bears
interest at a rate equal to the weighted average of the interest rates on the
loans retired, rounded to the nearest whole percent, but not less than 9% per
annum. Except as described in the next sentence, a Consolidation Loan made on or
after July 1, 1994 bears interest at a rate equal to the weighted average of the
interest rates on the loans retired, rounded upward to the nearest whole
percent, but with no minimum rate. For a Consolidation Loan for which the
application is received by an eligible lender on or after November 13, 1997 and
before October 1, 1998, the interest rate shall be adjusted annually, and for
any twelve month period commencing on a July 1 shall be equal to the bond
equivalent rate of 91-day U.S. Treasury bills auctioned at the final auction
prior to the preceding June 1, plus 3.1% per annum, but not to exceed 8.25% per
annum. Notwithstanding these general interest rates, the portion, if any, of a
Consolidation Loan that repaid a loan made under the HEAL Program has a
different variable interest rate. Such portion is adjusted on July 1 of each
year, but is the sum of the average of the T-Bill Rates auctioned for the
quarter ending on the preceding June 30, plus 3.0%, without any cap on the
interest rate. For a discussion of required payments that reduce the return on
Consolidation Loans, see "Fees -- Rebate Fees on Consolidation Loans" below.
Loan Limits
Each type of loan (other than Consolidation Loans, which are limited only by the
amount of eligible loans to be consolidated) is subject to limits as to the
maximum principal amount, both with respect to a given year and in the
aggregate. All of the loans are limited to the difference between the cost of
attendance and the other aid available to the student. Stafford Loans are also
subject to limits based upon the needs analysis as described above under
"Eligibility -- Stafford Loans" above. Additional limits are described below.
Stafford and Unsubsidized Stafford Loans. Except as described in the next
paragraph, Stafford and Unsubsidized Stafford Loans are generally treated as one
loan type for loan limit purposes. A student who has not successfully completed
the first year of a program of undergraduate education may borrow up to $2,625
in an academic year. A student who has successfully completed such first year,
but who has not successfully completed the second year may borrow up to $3,500
per academic year. An undergraduate student who has successfully completed the
first and second year, but who has not successfully completed the remainder of a
program of undergraduate education, may borrow up to $5,500 per academic year.
For students enrolled in programs of less than an academic year in length, the
limits are generally reduced in proportion to the amount by which such programs
are less than one year in length. A graduate or professional student may borrow
up to $8,500 in an academic year. The maximum aggregate amount of Stafford and
Unsubsidized Stafford Loans (including that portion of a Consolidation Loan used
to repay such loans) which an undergraduate student may have outstanding is
$23,000. The maximum aggregate amount for a graduate and professional student,
including loans for undergraduate education, is $65,500. The Secretary is
authorized to increase the limits applicable to graduate and professional
students who are pursuing programs which the Secretary determines to be
exceptionally expensive.
At the time that SLS Loans were eliminated, the loan limits for Unsubsidized
Stafford Loans to independent students, or dependent students whose parents
cannot borrow a Plus Loan, were increased by amounts equal to the prior SLS Loan
limits (as described below under "SLS Loans").
Prior to the enactment of the Higher Education Amendments of 1992, an
undergraduate student who had not successfully completed the first and second
year of a program of undergraduate education could borrow Stafford Loans in
amounts up to $2,625 in an academic year. An undergraduate student who had
successfully completed such first and second year, but who had not successfully
completed the remainder of a program of undergraduate education could borrow up
to $4,000 per academic year. The maximum for graduate and professional students
was $7,500 per academic year. The maximum aggregate amount of Stafford Loans
which a borrower could have outstanding (including that portion of a
Consolidation Loan used to repay such loans) was $17,250. The maximum aggregate
amount for a graduate or professional student, including loans for undergraduate
education, was $54,750. Prior to the 1986 changes, the annual limits were
generally lower.
Plus Loans. For Plus Loans made on or after July 1, 1993, the amounts of Plus
Loans are limited only by the student's unmet need. Prior to that time Plus
Loans were subject to limits similar to those to which SLS Loans were then
subject (see "SLS Loans" below), applied with respect to each student on behalf
of whom the parent borrowed.
SLS Loans. A student who had not successfully completed the first and second
year of a program of undergraduate education could borrow an SLS Loan in an
amount of up to $4,000. A student who had successfully completed such first and
second year, but who had not successfully completed the remainder of a program
of undergraduate education could borrow up to $5,000 per year. Graduate and
professional students could borrow up to $10,000 per year. SLS Loans were
subject to an aggregate maximum of $23,000 ($73,000 for graduate and
professional students). Prior to the 1992 changes, SLS Loans were available in
amounts of $4,000 per academic year, up to a $20,000 aggregate maximum. Prior to
the 1986 changes, a graduate or professional student could borrow $3,000 of SLS
Loans per academic year, up to a $15,000 maximum, and an independent
undergraduate student could borrow $2,500 of SLS Loans per academic year minus
the amount of all other FFEL Program loans to such student for such academic
year, up to a maximum amount of all FFEL Program loans to that student of
$12,500. In 1989, the amount of SLS Loans for students enrolled in programs of
less than an academic year in length were limited (similar to the limits
described above under "Stafford Loans").
Repayment
Loans made under the FFEL Program (other than Consolidation Loans) must provide
for repayment of principal in periodic installments over a period of not less
than five nor more than ten years. A Consolidation Loan must be repaid during a
period agreed to by the borrower and lender, subject to maximum repayment
periods which vary depending upon the principal amount of the borrower's
outstanding student loans (but no longer than 30 years). For Consolidation Loans
for which the application was received prior to January 1, 1993, the repayment
period could not exceed 25 years. The repayment period commences (a) not more
than twelve months after the borrower ceases to pursue at least a half-time
course of study with respect to Stafford Loans for which the applicable rate of
interest is 7% per annum, (b) not more than six months after the borrower ceases
to pursue at least a half-time course of study with respect to other Stafford
Loans and Unsubsidized Stafford Loans (the six month or twelve month periods are
the "Grace Periods") and (c) on the date of final disbursement of the loan in
the case of SLS, Plus and Consolidation Loans, except that the borrower of an
SLS Loan who also has a Stafford or Unsubsidized Stafford Loan may defer
repayment of the SLS Loan to coincide with the commencement of repayment of the
Stafford or Unsubsidized Stafford Loan. During periods in which repayment of
principal is required, payments of principal and interest must in general be
made at a rate of not less than the greater of $600 per year or the interest
that accrues during the year, except that a borrower and lender may agree at any
time before or during the repayment period that repayment may be at a lesser
rate. A borrower may agree, with concurrence of the lender, to repay the loan in
less than five years with the right subsequently to extend his minimum repayment
period to five years. Borrowers are entitled to accelerate, without penalty, the
repayment of all or any part of the loan.
In addition, since 1992, lenders of Consolidation Loans have been required to
establish graduated or income-sensitive repayment schedules and lenders of
Stafford and SLS Loans have been required to offer borrowers the option of
repaying in accordance with graduated or income-sensitive repayment schedules.
The Transferor may implement graduated repayment schedules and income-sensitive
repayment schedules. Use of income-sensitive repayment schedules may extend the
ten-year maximum term for up to five years. In addition, if the repayment
schedule on a loan that has been converted to a variable interest rate does not
provide for adjustments to the amount of the monthly installment payments, the
ten-year maximum term may be extended for up to three years.
No principal repayments need be made during certain periods of deferment
prescribed by the Higher Education Act ("Deferment Periods"). For loans to a
borrower who first obtained a loan which was disbursed before July 1, 1993,
deferments are available (i) during a period not exceeding three years while the
borrower is a member of the Armed Forces, an officer in the Commissioned Corps
of the Public Health Service or, with respect to a borrower who first obtained a
student loan disbursed on or after July 1, 1987, or a student loan to cover the
cost of instruction for a period of enrollment beginning on or after July 1,
1987, an active duty member of the National Oceanic and Atmospheric
Administration Corps, (ii) during a period not in excess of three years while
the borrower is a volunteer under the Peace Corps Act, (iii) during a period not
in excess of three years while the borrower is a full-time volunteer under the
Domestic Volunteer Act of 1973, (iv) during a period not exceeding three years
while the borrower is in service, comparable to the service referred to in
clauses (ii) and (iii), as a full-time volunteer for an organization which is
exempt from taxation under Section 501(c)(3) of the Code, (v) during a period
not exceeding two years while the borrower is serving an internship, the
successful completion of which is required to receive professional recognition
required to begin professional practice or service, or a qualified internship or
residency program, (vi) during a period not exceeding three years while the
borrower is temporarily totally disabled, as established by sworn affidavit of a
qualified physician, or while the borrower is unable to secure employment by
reason of the care required by a dependent who is so disabled, (vii) during a
period not to exceed twenty-four months while the borrower is seeking and unable
to find full-time employment, (viii) during any period that the borrower is
pursuing a full-time course of study at an eligible institution (or, with
respect to a borrower who first obtained a student loan disbursed on or after
July 1, 1987, or a student loan to cover the cost of instruction for a period of
enrollment beginning on or after July 1, 1987, is pursuing at least a half-time
course of study for which the borrower has obtained a loan under the FFEL
Program), or is pursuing a course of study pursuant to a graduate fellowship
program or a rehabilitation training program for disabled individuals approved
by the Secretary of Education, (ix) during a period, not in excess of 6 months,
while the borrower is on parental leave, and (x) only with respect to a borrower
who first obtained a student loan disbursed on or after July 1, 1987, or a
student loan to cover the cost of instruction for a period of enrollment
beginning on or after July 1, 1987, (A) during a period not in excess of three
years while the borrower is a full-time teacher in a public or nonprofit private
elementary or secondary school in a "teacher shortage area" (as prescribed by
the Secretary of Education), and (B) during a period not in excess of 12 months
for mothers, with preschool age children, who are entering or re-entering the
work force and who are compensated at a rate not exceeding $1 per hour in excess
of the federal minimum wage. For loans to a borrower who first obtains a loan on
or after July 1, 1993, deferments are available (a) during any period that the
borrower is pursuing at least a half-time course of study at an eligible
institution or a course of study pursuant to a graduate fellowship program or
rehabilitation training program approved by the Secretary, (b) during a period
not exceeding three years while the borrower is seeking and unable to find
full-time employment, and (c) during a period not in excess of three years for
any reason which the lender determines, in accordance with regulations under the
Higher Education Act, has caused or will cause the borrower economic hardship.
Economic hardship includes working full time and earning an amount not in excess
of the greater of the minimum wage or the poverty line for a family of two.
Additional categories of economic hardship are based on the relationship between
a borrower's educational debt burden and his or her income. Prior to the 1992
changes, only the Deferment Periods described above in clauses (vi) and (vii)
(with respect to the parent borrower) and the Deferment Period described in
clause (viii) (with respect to the parent borrower or a student on whose behalf
the parent borrowed) were available to Plus Loan borrowers, and only the
Deferment Periods described above in clauses (vi), (vii) and (viii) were
available to Consolidation Loan borrowers. Prior to the 1986 changes, Plus Loan
borrowers were not entitled to Deferment Periods. Deferment Periods extend the
ten-year maximum term.
The Higher Education Act also provides for periods of forbearance during which
the borrower, in case of temporary financial hardship, may defer any payments (a
"Forbearance Period"). A borrower is entitled to forbearance for a period not to
exceed three years while the borrower's debt burden under Title IV of the Higher
Education Act (which includes the FFEL Program) equals or exceeds 20% of the
borrower's gross income, and also is entitled to forbearance while he or she is
serving in a qualifying medical or dental internship program or in a "national
service position" under the National and Community Service Trust Act of 1993. In
addition, mandatory administrative forbearances are provided when exceptional
circumstances such as a local or national emergency or military mobilization
exist; or when the geographical area in which the borrower or endorser resides
has been designated a disaster area by the President of the United States or
Mexico, the Prime Minister of Canada, or by the governor of a state. In other
circumstances, forbearance is at the lender's option. Such forbearance also
extends the ten year maximum term.
As described under "Contracts with Guarantee Agencies -- Federal Interest
Subsidy Payments" below, the Secretary of Education makes interest payments on
behalf of the borrower of certain eligible loans while the borrower is in school
and during Grace and Deferment Periods. Interest that accrues during Forbearance
Periods and, if the loan is not eligible for Interest Subsidy Payments, while
the borrower is in school and during the Grace and Deferment Periods, may be
paid monthly or quarterly or capitalized (added to the principal balance) not
more frequently than quarterly.
Disbursement
Loans made under the FFEL Program (except Consolidation Loans) generally must be
disbursed in two or more installments, none of which may exceed 50% of the total
principal amount of the loan.
Fees
Guarantee Fee. A Guarantee Agency is authorized to charge a premium, or
guarantee fee, of up to 1% of the principal amount of the loan, which must be
deducted proportionately from each installment payment of the proceeds of the
loan to the borrower. Guarantee fees may not currently be charged to borrowers
of Consolidation Loans. However, lenders may be charged an insurance fee to
cover the costs of increased or extended liability with respect to Consolidation
Loans. For loans made prior to July 1, 1994, the maximum guarantee fee was 3% of
the principal amount of the loan, but no such guarantee fee was authorized to be
charged with respect to Unsubsidized Stafford Loans.
Origination Fee. An eligible lender is authorized to charge the borrower of a
Stafford or Plus Loan an origination fee in an amount not to exceed 3% of the
principal amount of the loan, and is required to charge the borrower of an
Unsubsidized Stafford Loan an origination fee in the amount of 3% of the
principal amount of the loan. These fees must be deducted proportionately from
each installment payment of the loan proceeds prior to payment to the borrower
and are not retained by the lender, but must be passed on to the Secretary of
Education. For loans made prior to July 1, 1994, the maximum authorized fee for
Stafford, Plus and SLS Loans was 5%, and the required fee for Unsubsidized
Stafford Loans was 6.5%, of the principal amount of the loan.
Lender Origination Fee. The lender of any loan under the FFEL Program made on or
after October 1, 1993 is required to pay to the Secretary of Education a fee
equal to 0.5% of the principal amount of such loan.
Rebate Fee on Consolidation Loans. The holder of any Consolidation Loan made on
or after October 1, 1993 is required to pay to the Secretary of Education a
monthly fee equal to .0875% (1.05% per annum) of the principal amount of, and
accrued interest on, such Consolidation Loan.
Loan Guarantees
Under the FFEL Program, Guarantee Agencies are required to guarantee the payment
of not less than 100% of the principal amount of loans made prior to October 1,
1993 and covered by their respective guarantee programs. For a description of
the requirements for loans to be covered by such guarantees, see "Description of
the Guarantee Agencies." For loans made on or after October 1, 1993, the minimum
percentage of the principal amount of loans which a Guarantee Agency must pay is
98% and the Department of Education has taken the position that a Guarantee
Agency may not pay more than 98% of the principal amount of and accrued interest
on such a loan. Under certain circumstances, guarantees may be assumed by the
Secretary of Education or another Guarantee Agency. See "-- Contracts with
Guarantee Agencies" below.
Contracts with Guarantee Agencies
Under the FFEL Program, the Secretary of Education is authorized to enter into
guaranty and interest subsidy agreements with Guarantee Agencies. The FFEL
Program provides for reimbursements to Guarantee Agencies for default claims
paid by Guarantee Agencies, support payments to Guarantee Agencies for
administrative and other expenses, advances for a Guarantee Agency's reserve
funds, and Interest Subsidy Payments and Special Allowance Payments to the
holders of qualifying student loans made pursuant to the FFEL Program.
The Secretary of Education has certain oversight powers over Guarantee Agencies.
Guarantee Agencies are required to maintain their reserves at certain levels
based on the amount of outstanding loans that they have guaranteed. If a
Guarantee Agency falls below the required level in two consecutive years, or its
claims rate exceeds 9% in any year, or if the Secretary determines that the
agency's administrative or financial condition jeopardizes its ability to meet
its obligations, the Secretary can require the Guarantee Agency to submit and
implement a plan by which it will correct such problem(s). If a Guarantee Agency
fails to timely submit an acceptable plan or fails to improve its condition, or
if the Secretary determines that the Guarantee Agency is in danger of financial
collapse, the Secretary may terminate the Guarantee Agency's reimbursement
contract. The circumstances under which the Secretary may terminate such
reimbursement contracts also includes a determination that such action is
necessary to protect the federal fiscal interest or to ensure continued
availability of student loans or a smooth transition to direct lending. See "--
Direct Loans" below.
The Secretary of Education is authorized to assume the guarantee obligations of
a Guarantee Agency. The Higher Education Act now provides that, if the Secretary
terminates a Guarantee Agency's agreements under the FFEL Program, the Secretary
shall assume responsibility for all functions of the Guarantee Agency under its
program. To that end, the Secretary is authorized to, among other options,
transfer the guarantees to another Guarantee Agency or assume the guarantees. It
also provides that in the event the Secretary has determined that a Guarantee
Agency is unable to meet its guarantee obligations, holders of loans guaranteed
by such Guarantee Agency may submit claims directly to the Secretary for
payment, unless the Secretary has provided for the assumption of such guarantees
by another Guarantee Agency.
Federal Reimbursement
A Guarantee Agency's right to receive federal reimbursements for various
guarantee claims paid by such Guarantee Agency is governed by the Higher
Education Act and various contracts entered into between Guarantee Agencies and
the Secretary of Education. See "Description of the Guarantee Agencies --
Federal Agreements" herein. Under the Higher Education Act and the Federal
Reimbursement Contracts, the Secretary of Education currently agrees to
reimburse a Guarantee Agency for the amounts expended by the Guarantee Agency in
the discharge of its guarantee obligation (i.e., the unpaid principal balance of
and accrued interest on loans guaranteed by the Guarantee Agency, which loans
are referred to herein as "guaranteed loans") as a result of the default of the
borrower. With respect to loans made prior to October 1, 1993, the Secretary of
Education currently agrees to reimburse the Guarantee Agency for up to 100% of
the amounts so expended. For loans made on or after October 1, 1993, the
Secretary currently agrees to reimburse the Guarantee Agency for a maximum of
98% of the amount expended with respect to guaranteed loans. Depending on the
claims rate experience of a Guarantee Agency, such 100% (or 98%) reimbursement
may be reduced as discussed in the formula described below. The Secretary of
Education also agrees to repay 100% of the unpaid principal plus applicable
accrued interest expended by a Guarantee Agency in discharging its guarantee
obligation as a result of the bankruptcy, death, or total and permanent
disability of a borrower (or in the case of a Plus Loan, the death of the
student on behalf of whom the loan was borrowed), or in certain circumstances,
as a result of school closures, which reimbursements are not to be included in
the calculations of the Guarantee Agency's Claims Rate experience for the
purpose of federal reimbursement under the Federal Reimbursement Contracts.
The formula for computing the percentage of federal reimbursement under the
Federal Reimbursement Contracts is not accumulated over a period of years but is
measured by the amount of federal reimbursement payments in any one federal
fiscal year as a percentage of the original principal amount of loans under the
FFEL Program guaranteed by the Guarantee Agency and in repayment at the end of
the preceding fiscal year. Under the formula, federal reimbursement payments to
a Guarantee Agency in any one fiscal year not exceeding 5% of the original
principal amount of loans in repayment at the end of the preceding fiscal year
are to be paid by the Secretary of Education at 100% (or 98% for loans made on
or after October 1, 1993). Beginning at any time during any fiscal year that
federal reimbursement payments exceed 5%, and until such time as they may exceed
9%, of the original principal amount of loans in repayment at the end of the
preceding fiscal year, then reimbursement payments on claims submitted during
that period are to be paid at 90% (or 88% for loans made on or after October 1,
1993). Beginning at any time during any fiscal year that federal reimbursement
payments exceed 9% of the original principal amount of loans in repayment at the
end of the preceding fiscal year, then such payments for the balance of that
fiscal year will be paid at 80% (or 78% for loans made on or after October 1,
1993). The original principal amount of loans in repayment for purposes of
computing reimbursement payments to a Guarantee Agency means the original
principal amount of all loans guaranteed by such Guarantee Agency less: (1)
guarantee payments on such loans, (2) the original principal amount of such
loans that have been fully repaid, and (3) the original principal amount of such
loans for which the first principal installment payment has not become due or
such first installment need not be paid because of a Deferment Period.
Under present practice, after the Secretary of Education reimburses a Guarantee
Agency for a default claim paid on a guaranteed loan, the Guarantee Agency
continues to seek repayment from the borrower. The Guarantee Agency returns to
the Secretary of Education payments that it receives from a borrower after
deducting and retaining (i) a percentage amount equal to the complement of the
reimbursement percentage in effect at the time the loan was reimbursed, and (ii)
an amount equal to 27% (or 18 1/2% in the case of a payment from the proceeds of
a Consolidation Loan) of such payments for certain administrative costs. The
Secretary of Education may, however, require the assignment to the Secretary of
defaulted guaranteed loans, in which event no further collections activity need
be undertaken by the Guarantee Agency, and no amount of any recoveries shall be
paid to the Guarantee Agency. Prior to the 1993 changes, the percentage of
collections which Guarantee Agencies could retain (as described in clause (ii)
above) was 30%.
A Guarantee Agency may enter into an addendum to its Interest Subsidy Agreement
(as hereinafter defined), which addendum provides for the Guarantee Agency to
refer to the Secretary of Education certain defaulted guaranteed loans. Such
loans are then reported to the Internal Revenue Service to "offset" any tax
refunds which may be due any defaulted borrower. To the extent that the
Guarantee Agency has originally received less than 100% reimbursement from the
Secretary of Education with respect to such a referred loan, the Guarantee
Agency will not recover any amounts subsequently collected by the federal
government which are attributable to that portion of the defaulted loan for
which the Guarantee Agency has not been reimbursed.
Rehabilitation of Defaulted Loans
Under Section 428F of the Higher Education Act, the Secretary of Education is
authorized to enter into an agreement with a Guarantee Agency pursuant to which
the Guarantee Agency shall sell defaulted loans that are eligible for
rehabilitation to an eligible lender. The Guarantee Agency shall repay the
Secretary of Education an amount equal to 81.5% of the then current principal
balance of such loan, multiplied by the reimbursement percentage in effect at
the time the loan was reimbursed. The amount of such repayment shall be deducted
from the amount of federal reimbursement payments for the fiscal year in which
such repayment occurs, for purposes of determining the reimbursement rate for
that fiscal year.
For a loan to be eligible for rehabilitation, the Guarantee Agency must have
received consecutive payments for 12 months of amounts owed on such loan. Upon
rehabilitation, a loan is eligible for all the benefits under the Higher
Education Act for which it would have been eligible had no default occurred
(except that a borrower's loan may only be rehabilitated once).
Eligibility for Federal Reimbursement
To be eligible for federal reimbursement payments, guaranteed loans must be made
by an eligible lender under the applicable Guarantee Agency's Guarantee Program,
which must meet requirements prescribed by the rules and regulations promulgated
under the Higher Education Act, including the borrower eligibility, loan amount,
disbursement, interest rate, repayment period and guarantee fee provisions
described herein and the other requirements set forth in Section 428(b) of the
Higher Education Act.
Under the Higher Education Act, a guaranteed loan must be delinquent for 180
days if it is repayable in monthly installments or 240 days if it is payable in
less frequent installments before a lender may obtain payment on a guarantee
from the Guarantee Agency. The Guarantee Agency must pay the lender for the
defaulted loan prior to submitting a claim to the Secretary of Education for
reimbursement. The Guarantee Agency must submit a reimbursement claim to the
Secretary of Education within 45 days after it has paid the lender's default
claim. As a prerequisite to entitlement to payment on the guarantee by the
Guarantee Agency, and in turn payment of reimbursement by the Secretary of
Education, the lender must have exercised reasonable care and diligence in
making, servicing and collecting the Guaranteed Loan.
Federal Interest Subsidy Payments
"Interest Subsidy Payments" are interest payments paid with respect to an
eligible loan during the period prior to the time that the loan enters repayment
and during Grace and Deferment Periods. The Secretary of Education and the
Guarantee Agencies entered into the Interest Subsidy Agreements as described in
"Description of the Guarantee Agencies -- Federal Agreements," whereby the
Secretary of Education agrees to pay Interest Subsidy Payments to the holders of
eligible guaranteed loans for the benefit of students meeting certain
requirements, subject to the holders' compliance with all requirements of the
Higher Education Act. Only Stafford Loans, and Consolidation Loans for which the
application was received on or after January 1, 1993, are eligible for Interest
Subsidy Payments. Consolidation Loans made after August 10, 1993 are eligible
for Interest Subsidy Payments only if all loans consolidated thereby are
Stafford Loans, except that Consolidation Loans for which the application is
received by an eligible lender on or after November 13, 1997 and before October
1, 1998, are eligible for Interest Subsidy Payments on that portion of the
Consolidation Loan that repays Stafford Loans or similar subsidized loans made
under the direct loan program. In addition, to be eligible for Interest Subsidy
Payments, guaranteed loans must be made by an eligible lender under the
applicable Guarantee Agency's Guarantee Program, and must meet requirements
prescribed by the rules and regulations promulgated under the Higher Education
Act, including the borrower eligibility, loan amount, disbursement, interest
rate, repayment period and guarantee fee provisions described herein and the
other requirements set forth in Section 428(b) of the Higher Education Act.
The Secretary of Education makes Interest Subsidy Payments quarterly on behalf
of the borrower to the holder of a guaranteed loan in a total amount equal to
the interest which accrues on the unpaid principal amount prior to the
commencement of the repayment period of the loan or during any Deferment Period.
A borrower may elect to forego Interest Subsidy Payments, in which case the
borrower is required to make interest payments.
Federal Administrative Expense Allowances
Prior to the adoption of the 1993 Amendments, each Guarantee Agency was entitled
to receive from the Secretary of Education an administrative cost allowance
equal to 1% of the total principal amount of the loans (other than Consolidation
Loans) guaranteed by the Guarantee Agency in any fiscal year, for the purposes
of administrative costs of pre-claims assistance for default prevention and
collection of defaulted guaranteed loans, administrative costs of promoting
commercial lender participation, administrative costs of monitoring the
enrollment and repayment status of students, and for other such costs related to
the Guarantee Agency's Guarantee Program. The 1993 Amendments repealed such
entitlement, effective October 1, 1993. The 1993 Amendments, however, authorized
payments for transition support (including administrative costs) to Guarantee
Agencies, in connection with the transition to direct lending. See "Direct
Loans" below. Budget legislation adopted since that time has provided for the
payment to Guarantee Agencies of an administrative expense allowance equal to
0.85% of the agency's annual new guarantee volume, which has been extended
through the fiscal year ending September 30, 2002. After the fiscal year ending
September 30, 1997, however, such amounts are subject to decreasing aggregate
limits. There are no assurances as to the level of such payments that can be
made within such aggregate limits, or that Congress will require such payments
or that the Secretary of Education will determine to continue to make any such
payments in future years.
Federal Advances
Pursuant to agreements entered into between the Guarantee Agencies and the
Secretary of Education under Sections 422 and 422(c) of the Higher Education
Act, the Secretary of Education was authorized to advance moneys from time to
time to the Guarantee Agencies for the purpose of establishing and strengthening
the Guarantee Agencies' reserves. Section 422(c) currently authorizes the
Secretary of Education to make advances to Guarantee Agencies in various
circumstances, on terms and conditions satisfactory to the Secretary, including
if the Secretary is seeking to terminate the Guarantee Agency's reimbursement
contract or assume the Guarantee Agency's functions, to assist the Guarantee
Agency in meeting its immediate cash needs or to ensure the uninterrupted
payment of claims.
Federal Special Allowance Payments
The Higher Education Act provides for the payment by the Secretary of Education
of additional subsidies, called Special Allowance Payments, to holders of
qualifying student loans. The amount of the Special Allowance Payments, which
are made on a quarterly basis, is computed by reference to the average of the
bond equivalent rates of the 91-day Treasury bills auctioned during the
preceding quarter (the "T-Bill Rate"). The quarterly rate for Special Allowance
Payments for Student Loans made on or after October 1, 1981, and generally
before November 16, 1986, is computed by subtracting the applicable interest
rate on such loans from the T-Bill Rate, adding 3.5% to the resulting per
centum, and dividing the resulting per centum by four. For loans disbursed on or
after November 16, 1986, or loans to cover the costs of instruction for periods
of enrollment beginning on or after November 16, 1986, 3.25% has been
substituted for 3.5% in the foregoing formula. For loans disbursed on or after
October 1, 1992, 3.1% has been substituted for 3.5% in such formula. For
Stafford and Unsubsidized Stafford Loans made on or after July 1, 1995, 2.5% has
been substituted for 3.1% in such formula prior to the time such loans enter
repayment and during any Deferment Periods. For loans made on or after July 1,
1998, the special allowance formula is to be revised similarly to the manner in
which the applicable interest rate formula is revised, as described above under
"Loan Terms -- Interest Rates -- Stafford Loans".
For Plus and SLS Loans which bear interest at rates adjusted annually, Special
Allowance Payments are made only in years during which the interest rate ceiling
on such loans operates to reduce the rate that would otherwise apply based upon
the applicable formula. See "Loan Terms -- Interest Rates -- Plus Loans" and "--
SLS Loans" above. Special Allowance Payments are paid with respect to Plus Loans
made on or after July 1, 1994 only if the rate that would otherwise apply
exceeds 10% per annum, notwithstanding that the interest rate ceiling on such
loans is 9% per annum. The portion, if any, of a Consolidation Loan that repaid
a loan made under the HEAL Program is ineligible for Special Allowance Payments.
The Balanced Budget and Deficit Control Act of 1985, as amended (known as the
"Gramm-Rudman Law") requires the President to issue a sequester order for any
federal fiscal year in which the projected budget exceeds the target for that
year. A sequester order for any fiscal year would apply to loans made on or
after October 1 of that fiscal year. The sequester order would change the
formula for calculating Special Allowance Payments for the first four Special
Allowance Payment periods relating to loans originally disbursed during that
fiscal year. The special allowance formula would be reduced to the T-Bill Rate
plus 3.0% (for loans with a special allowance formula of the T-Bill Rate plus
3.1%).
The Higher Education Act provides that if Special Allowance Payments or Interest
Subsidy Payments have not been made within 30 days after the Secretary of
Education receives an accurate, timely and complete request therefor, the
special allowance payable to such holder shall be increased by an amount equal
to the daily interest accruing on the special allowance and Interest Subsidy
Payments due the holder.
Special Allowance Payments and Interest Subsidy Payments are reduced by the
amount which the lender is authorized or required to charge as an origination
fee, as described above under "Loan Terms -- Fees -- Origination Fee." In
addition, the amount of the lender origination fee described above under "Loan
Terms -- Fees -- Lender Origination Fees" is collected by offset to Special
Allowance Payments and Interest Subsidy Payments.
Federal Student Loan Insurance Fund
The Higher Education Act authorizes the establishment of a Student Loan
Insurance Fund by the Federal government for making the federal insurance and
the federal reimbursement payments on defaulted student loans to Guarantee
Agencies. If moneys in the fund are insufficient to make the federal payments on
defaults of such loans, the Secretary of Education is authorized, to the extent
provided in advance by appropriation acts, to issue to the Secretary of the
Treasury obligations containing terms and conditions prescribed by the Secretary
of Education and approved by the Secretary of the Treasury, bearing interest at
a rate determined by the Secretary of the Treasury. The Secretary of the
Treasury is authorized and directed by the Higher Education Act to purchase such
obligations.
Direct Loans
The 1993 Amendments authorized a program of "direct loans," to be originated by
schools with funds provided by the Secretary of Education. Under the direct loan
program, the Secretary of Education is directed to enter into agreements with
schools, or origination agents in lieu of schools, to disburse loans with funds
provided by the Secretary. Participation in the program by schools is voluntary.
The goals set forth in the 1993 Amendments call for the direct loan program to
constitute 5% of the total volume of loans made under the FFEL Program and the
direct loan program for academic year 1994-1995, 40% for academic year
1995-1996, 50% for academic years 1996-1997 and 1997-1998 and 60% for academic
year 1998-1999. No provision is made for the size of the direct loan program
thereafter. Based upon information released by the General Accounting Office,
participation by schools in the direct loan program has not been sufficient to
meet the goals for the 1995-1996 or 1996-1997 academic years.
The loan terms are generally the same under the direct loan program as under the
FFEL Program, though more flexible repayment provisions are available under the
direct loan program. At the discretion of the Secretary of Education, students
attending schools that participate in the direct loan program (and their
parents) may still be eligible for participation in the FFEL Program, though no
borrower could obtain loans under both programs.
It is difficult to predict the impact of the direct lending program. There is no
way to accurately predict the number of schools that will participate in future
years, or, if the Secretary authorizes students attending participating schools
to continue to be eligible for FFEL Program loans, how many students will seek
loans under the direct loan program instead of the FFEL Program. In addition, it
is impossible to predict whether future legislation will eliminate, limit or
expand the direct loan program or the FFEL Program.
DESCRIPTION OF THE GUARANTEE AGENCIES
General
The Financed Student Loans for a Series of Notes may be guaranteed by any one or
more Guarantee Agencies identified in the related Prospectus Supplement. The
following discussion relates to Guarantee Agencies under the FFEL Program. The
particular arrangements of a guarantor with respect to a Private Loan Program
will be described in the Prospectus Supplement for a Series, as applicable.
A Guarantee Agency guarantees loans made to students or parents of students by
lending institutions such as banks, credit unions, savings and loan
associations, certain schools, pension funds and insurance companies. A
Guarantee Agency generally purchases defaulted student loans which it has
guaranteed from its cash and reserves (generally referred to herein as its
"Guarantee Fund"). A lender may submit a default claim to the Guarantee Agency
after the student loan has been delinquent for at least 180 days; however,
lenders are strongly encouraged not to file a claim until a loan is at least 210
days delinquent. The default claim package must include all information and
documentation required under the FFEL Program regulations and the Guarantee
Agency's policies and procedures. Under the Guarantee Agencies' current
procedures, assuming that the default claim package complies with the Guarantee
Agency's loan procedures manual or regulations, the Guarantee Agency pays the
lender for a default claim within 90 days of the lender's filing the claim with
the Guarantee Agency. The Guarantee Agency will pay the lender interest accrued
on the loan for up to 360 days after delinquency. The Guarantee Agency must file
a reimbursement claim with the Department of Education within 45 days after the
Guarantee Agency has paid the lender for the default claim.
In general, a Guarantee Agency's Guarantee Fund has been funded principally by
administrative cost allowances paid by the Secretary of Education, guarantee
fees paid by lenders (the cost of which may be passed on to borrowers),
investment income on moneys in the Guarantee Fund, and a portion of the moneys
collected from borrowers on Guaranteed Loans that have been reimbursed by the
Secretary of Education to cover the Guarantee Agency's administrative expenses.
Various changes to the Higher Education Act have adversely affected the receipt
of revenues by the Guarantee Agencies and their ability to maintain their
Guarantee Funds at previous levels, and may adversely affect their ability to
meet their guarantee obligations. These changes include the reduction in
reinsurance payments from the Secretary of Education because of reduced
reimbursement percentages; the reduction in maximum permitted guarantee fees
from 3% to 1% for loans made on or after July 1, 1994; the reduction and
possible elimination of administrative expense allowances from the Secretary of
Education; the reduction in supplemental preclaims assistance payments from the
Secretary of Education; and the reduction in retention by a Guarantee Agency of
collections on defaulted loans from 30% to 27%. Additionally, the adequacy of a
Guarantee Agency's Guarantee Fund to meet its guarantee obligations with respect
to existing student loans depends, in significant part, on its ability to
collect revenues generated by new loan guarantees. The Federal Direct Student
Loan Program may adversely affect the volume of new loan guarantees. Pending
legislation and future legislation may make additional changes to the Higher
Education Act that would significantly affect the revenues received by Guarantee
Agencies and the structure of the guarantee agency program. For a more complete
description of provisions of the Higher Education Act that relate to payments
described in this paragraph or affect the funding of a Guarantee Fund, see
"Description of the FFEL Program."
The Higher Education Act gives the Secretary of Education various oversight
powers over Guarantee Agencies. These include requiring a Guarantee Agency to
maintain its Guarantee Fund at a certain required level and taking various
actions relating to a Guarantee Agency if its administrative and financial
condition jeopardizes its ability to meet its obligations. These actions
include, among others, providing advances to the Guarantee Agency, terminating
the Guarantee Agency's Federal Reimbursement Contracts, assuming responsibility
for all functions of the Guarantee Agency, and transferring the Guarantee
Agency's guarantees to another guarantee agency or assuming such guarantees. The
Higher Education Act provides that a Guarantee Agency's Guarantee Fund shall be
considered to be the property of the United States to be used in the operation
of the FFEL Program or the Federal Direct Student Loan Program, and, under
certain circumstances, the Secretary of Education may demand payment of amounts
in the Guarantee Fund. The Secretary of Education is required to demand payment
on September 1, 2002 of a total of one billion dollars from all the Guarantee
Agencies participating in the FFEL Program. The amounts to be demanded of each
Guarantee Agency shall be determined in accordance with formulas included in the
Higher Education Act. Each Guarantee Agency will be required to deposit funds in
a restricted account in installments, beginning in the federal fiscal year
ending September 30, 1998, to provide for such payment. The Secretary of
Education has made the determinations, and advised the Guarantee Agencies, of
the amounts required to be so transferred by the Guarantee Agencies. There can
be no assurance that relevant federal laws, including the Higher Education Act,
will not be further changed in a manner that may adversely affect the ability of
a Guarantee Agency to meet its guarantee obligations. See "Description of the
FFEL Program."
There are no assurances as to the Secretary of Education's actions if a
Guarantee Agency encounters administrative or financial difficulties or that the
Secretary of Education will not demand that a Guarantee Agency transfer
additional portions or all of its Guarantee Fund to the Secretary of Education.
Information relating to the particular Guarantee Agencies guaranteeing the
Financed Student Loans will be set forth in the Prospectus Supplement. Such
information will be provided by the respective Guarantee Agencies, and neither
such information nor information included in the reports referred to therein has
been verified by, or is guaranteed as to accuracy or completeness by, the
Depositor, the Transferor or the Underwriters. No representation is made by the
Depositor, the Transferor or the Underwriters as to the accuracy or adequacy of
such information or the absence of material adverse changes in such information
subsequent to the dates thereof.
Federal Agreements
Each Guarantee Agency and the Secretary of Education have entered into Federal
Reimbursement Contracts pursuant to Section 428(c) of the Higher Education Act
(which include, for older Guarantee Agencies, a supplemental contract pursuant
to former Section 428A of the Higher Education Act), which provide for the
Guarantee Agency to receive 80% to 100% reimbursement of insurance payments that
the Guarantee Agency makes to eligible lenders with respect to loans guaranteed
by the Guarantee Agency prior to the termination of the Federal Reimbursement
Contracts or the expiration of the authority of the Higher Education Act. The
1993 Amendments reduced the reimbursement percentages referred to above with
respect to claims on most loans made on or after October 1, 1993. See "-- Effect
of Annual Claims Rate" below. The Federal Reimbursement Contracts provide for
termination under certain circumstances and also provide for certain actions
short of termination by the Secretary of Education to protect the federal
interest. See "Description of the FFEL Program -- Contracts with Guarantee
Agencies -- Federal Reimbursement."
In addition to guarantee benefits, qualified Student Loans acquired under the
FFEL Program benefit from certain federal subsidies. Each Guarantee Agency and
the Secretary of Education have entered into an interest subsidy agreement under
Section 428(b) of the Higher Education Act (as amended, an "Interest Subsidy
Agreement"), which entitles the holders of eligible loans guaranteed by the
Guarantee Agency to receive Interest Subsidy Payments from the Secretary of
Education on behalf of certain students while the student is in school, during a
six to twelve month Grace Period after the student leaves school, and during
certain Deferment Periods, subject to the holders' compliance with all
requirements of the Higher Education Act. See "Description of the FFEL Program
- -- Contracts with Guarantee Agencies -- Federal Interest Subsidy Payments" for a
more detailed description of the Interest Subsidy Payments.
United States Courts of Appeals have held that the federal government, through
subsequent legislation, has the right unilaterally to amend the contracts
between the Secretary of Education and the Guarantee Agencies described herein.
Amendments to the Higher Education Act in 1986, 1987, 1992 and 1993,
respectively (i) abrogated certain rights of guarantee agencies under contracts
with the Secretary of Education relating to the repayment of certain advances
from the Secretary of Education, (ii) authorized the Secretary of Education to
withhold reimbursement payments otherwise due to certain guarantee agencies
until specified amounts of such guarantee agencies' reserves had been
eliminated, (iii) added new reserve level requirements for guarantee agencies
and authorized the Secretary of Education to terminate the Federal Reimbursement
Contracts under circumstances that did not previously warrant such termination,
and (iv) expanded the Secretary of Education's authority to terminate such
contracts and to seize guarantee agencies' reserves. There can be no assurance
that future legislation will not further adversely affect the rights of the
Guarantee Agencies, or holders of loans guaranteed by a Guarantee Agency under
such contracts.
Effect of Annual Claims Rate
A Guarantee Agency's ability to meet its obligation to pay default claims on
Financed Eligible Loans will depend on the adequacy of its Guarantee Fund and,
under the current federal reinsurance arrangement, the default experience of all
lenders under the Guarantee Agency's Guarantee Program. A high default
experience among lenders participating in a Guarantee Agency's Guarantee Program
may cause the Guarantee Agency's Claims Rate (as defined below) for its
Guarantee Program to exceed the 5% and 9% levels described below, and result in
the Secretary of Education reimbursing the Guarantee Agency at lower percentages
of default claims payments made by the Guarantee Agency.
In general, Guarantee Agencies are currently entitled to receive reimbursement
payments under the Federal Reimbursement Contracts in amounts that vary
depending on the Claims Rate experience of the Guarantee Agency. The "Claims
Rate" is computed by dividing total default claims since the previous September
30 by the total original principal amount of the Guarantee Agency's guaranteed
loans in repayment on such September 30. On October 1 of each year the Claims
Rate begins at zero, regardless of the experience in preceding years. For loans
made prior to October 1, 1993, if the Claims Rate remains equal to or below 5%
within a given federal fiscal year (October 1 through September 30), the
Secretary of Education is currently obligated to provide 100% reimbursement; if
and when the Claims Rate exceeds 5% and until such time, if any, as it exceeds
9% during the fiscal year, the reimbursement rate is at 90%; if and when the
Claims Rate exceeds 9% during the fiscal year, the reimbursement rate for the
remainder of the fiscal year is at 80%. For loans made prior to October 1, 1993,
each Guarantee Agency is currently entitled to at least 80% reimbursement from
the Secretary of Education on default claims that it purchases, regardless of
its Claims Rate. The reimbursement percentages for loans made on or after
October 1, 1993 are reduced from 100%, 90% and 80% to 98%, 88% and 78%,
respectively. See "Description of the FFEL Program."
DESCRIPTION OF THE HEAL PROGRAM
Eligible Borrower
An eligible borrower under the HEAL Program is a student who (i) meets certain
citizen, national or resident requirements, (ii) has been accepted for
enrollment at a school of medicine, osteopathy, dentistry, veterinary medicine,
optometry, podiatry, pharmacy, public health or chiropractic, or a graduate
program in health administration or clinical psychology (an "eligible
institution") or, if attending an eligible institution, is in good standing at
that institution, but, in the case of a medical, dental or osteopathic student,
including only the last four years of an accelerated, integrated program of
study, (iii) is or will be a full-time student at the eligible institution, (iv)
has agreed that all funds received under the loan will be used solely for
tuition and other reasonable educational expenses and the insurance premium
charged on the loan, (v) requires the loan to pursue the course of study at the
institution, and (vi) if a pharmacy student, has satisfactorily completed three
years of training. Certain individuals who meet the same citizen, national or
resident requirements and have previously received a loan insured under the HEAL
Program while a full-time student at an eligible institution may also receive a
loan during the period before principal must be paid on the loan to repay
interest due on the previous loans under the HEAL Program.
Eligible Lender
An eligible institution may apply to the Secretary of HHS to become a lender
under the HEAL Program. Various types of organizations may qualify to be
eligible lenders or holders of HEAL loans. Eligible lenders include an agency or
instrumentality of a state; a bank, savings and loan association, credit union
or insurance company which is subject to examination and supervision in its
capacity as a lender by an agency of the United States or of the state in which
it has its principal place of business; a pension fund approved by the Secretary
of HHS; and certain other entities specified in the HEAL Act. If the Secretary
of HHS approves the lender's application, the Secretary of HHS and the lender
enter into an insurance contract whereby the Secretary of HHS agrees to insure
each eligible HEAL Loan held by the lender against the borrower's default,
death, total and permanent disability, or bankruptcy.
An approved eligible lender can have either a standard insurance contract or a
comprehensive insurance contract with the Secretary of HHS. A lender with a
standard insurance contract must submit to the Secretary of HHS a borrower's
application for each loan that the lender determines to be eligible for
insurance. The Secretary of HHS notifies the lender whether or not the loan is
insurable, the amount of the insurance and the expiration of the loan
commitment. A lender with a comprehensive insurance contract may disburse a loan
without submitting an individual borrower's application to the Secretary of HHS
for initial approval. All eligible loans made by a lender with a comprehensive
insurance contract before a specified date are automatically insured up to the
aggregate amount stated in the insurance contract. The Secretary of HHS may
limit, suspend or terminate the lender's eligibility under the HEAL Program if
the lender violates any provision of the HEAL Act or agreements with the
Secretary of HHS concerning the HEAL Program. The Transferor and the Eligible
Lender Trustee are each a currently approved holder of a Comprehensive Insurance
Contract with the Secretary of HHS.
Insurance Benefits
The insurance provided by the Secretary of HHS covers 100% of the lender's
losses on both unpaid principal and interest except to the extent that a
borrower may have a defense on the loan (other than infancy). HEAL insurance is
not unconditional. The Secretary of HHS insures HEAL Loans on the implied
representation of the lender that all the requirements for the initial
insurability have been met. HEAL insurance is further conditioned upon
compliance by all holders of the loan with all laws, regulations and other
requirements. The insurance coverage on a loan under the HEAL Program ceases to
be effective after a 60-day default by the lender in the payment of the
insurance premium charged by the Secretary of HHS.
Payment on an approved insurance claim generally covers interest that accrues
through the date the claim is paid, except that the Secretary of HHS does not
pay interest that accrues between the end of the period that a claim is required
to be filed and the date the Secretary of HHS receives the claim, and, if a
claim is returned to the lender for additional documentation necessary for
approval of the claim, interest is only paid for the first 30 days following the
return of the claim to the lender.
Authorized Amounts of HEAL Loans
An eligible student borrower may borrow an amount for an academic year equal to
the difference between the student's estimated cost of education for that period
and the amount of other financial aid the student will receive for that period.
An eligible non-student borrower may borrow in an amount that is no greater than
the sum of the HEAL insurance premium plus the interest that is expected to
accrue and must be paid on the borrower's HEAL Loan during the period for which
the new loan is intended. The total amount of HEAL Loans made to any borrower
which may be covered by federal insurance may not exceed $20,000 in any academic
year for a student enrolled in a school of, or in the field of, medicine,
osteopathy, dentistry, veterinary medicine, optometry or podiatry, up to a
maximum aggregate of $80,000, and $12,500 in any academic year for a borrower
enrolled in a school of, or in the field, of pharmacy, public health, or
chiropractic, or a graduate program in health administration or clinical
psychology, up to an aggregate maximum of $50,000.
Terms of HEAL Loans
A loan made under the HEAL Program must be made without security, except that in
certain limited instances an endorsement may be required. The borrower may
prepay the whole or any part of the loan at any time without penalty.
The principal amount of the HEAL Loan must be repaid in installments over a
period of not less than 10 years or more than 25 years, beginning not earlier
than nine months nor later than twelve months (the "Grace Period") after the
date on which (i) the borrower ceases to be a participant in an accredited
internship or residency program of not more than four years in duration, or the
borrower completes the fourth year of an accredited internship or residency
program of more than four years in duration (for loans made on or after October
22, 1985), or the borrower ceases to carry, at an eligible institution, the
normal full-time academic workload, or (ii) the borrower, who is a graduate
student of an eligible institution, ceases to be a participant in a fellowship
training program not in excess of two years or a participant in a full-time
educational activity not in excess of two years, which is directly related to
the health profession for which the borrower prepared at an eligible
institution, as determined by the Secretary of HHS, and which may be engaged in
by the borrower during such a two-year period which begins within twelve months
after the completion of the borrower's participation in a program described in
clause (i) of this sentence or prior to the completion of the borrower's
participation in such program (for loans made on or after October 22, 1985),
except during periods of deferment (described below). The repayment period of
the loan may not exceed 33 years from the date of execution of the note or
written agreement evidencing it. Principal and interest need not be paid, but
interest accrues, during any period (i) during which the borrower is pursuing a
full-time course of study at an eligible institution (or at an eligible
institution under the FFEL Program), (ii) not in excess of four years during
which the borrower is a participant in an accredited internship or residency
program, (iii) not in excess of three years during which the borrower is a
member of the Armed Forces of the United States, (iv) not in excess of three
years during which the borrower is in service as a volunteer under the Peace
Corps Act (22 USCA ss.2501 et seq.) or is a member of the National Health
Service Corps, (v) not in excess of three years during which the borrower is in
service as a full-time volunteer under Title I of the Domestic Volunteer Service
Act of 1973, (vi) not in excess of three years for a borrower who has completed
an accredited internship or residency training program in osteopathic general
practice, family medicine, general internal practice, preventive medicine or
general pediatrics and who is practicing primary care, (vii) not in excess of
one year, for borrowers who are graduates of schools of chiropractic, (viii) not
in excess of two years which is described in clause (ii) of the first sentence
of this paragraph, and (ix) in addition to all other deferments for which the
borrower is eligible under clauses (i) through (viii) of this sentence during
which the borrower is a member of the Armed Forces on active duty during the
Persian Gulf conflict. The periods described in (i) through (ix) are "Deferment
Periods." In certain circumstances a Deferment Period may not be included in
determining the 25- and 33-year maximum repayment periods referred to above.
At least 30 and not more than 60 days before the commencement of the repayment
period, the borrower must contact the lender to establish the precise term of
repayment. The note must offer, in accordance with criteria prescribed by
regulation of the Secretary of HHS, a graduated repayment schedule. The borrower
may choose to repay under the graduated repayment schedule or a repayment
schedule which provides for substantially equal installment payments. The
Secretary of HHS has not promulgated regulations which set the criteria for a
graduated repayment schedule.
Unless agreed otherwise, in writing, the total of the payments by a borrower
during any year of the repayment period with respect to all loans of the
borrower under the HEAL Program should be at least equal to the annual interest
on the outstanding principal, except during Deferment Periods.
Interest
At the lender's option, the interest rate on the HEAL Loan may be calculated on
a fixed rate or on a variable rate basis. Whichever method is selected, that
method must continue over the life of the loan, except where the loan is
consolidated with another HEAL Loan. Interest that is calculated on a fixed rate
basis is determined for the life of the loan during the calendar quarter in
which the loan is disbursed. It may not exceed the maximum rate determined for
that quarter by the Secretary of HHS. Interest that is calculated on a variable
rate basis varies every calendar quarter throughout the life of the loan as the
market price of U.S. Treasury bills changes. For any quarter, it may not exceed
the maximum rate determined by the Secretary of HHS. For each calendar quarter,
the Secretary of HHS determines the general maximum annual HEAL interest rate by
(i) determining the average of the bond equivalent rates reported for the 91-day
U.S. Treasury bills auctioned for the preceding calendar quarter, (ii) adding 3
percentage points, and (iii) rounding that figure to the next higher one-eighth
of one percent. The HEAL Loans may bear interest at less than the statutory
rates to the extent specified in the related Prospectus Supplement.
As a general rule, unpaid accrued interest may be compounded semi-annually and
added to principal. However, if a borrower postpones payment of interest before
the beginning of the repayment period or during Deferment Periods or the lender
permits postponement during forbearance, the lender may refrain from semi-annual
compounding of interest and add accrued interest to principal only at the time
repayment of principal begins or resumes. A lender may do so only if this
practice does not result in interest being compounded more frequently than
semi-annually. Interest begins to accrue when a loan is disbursed. However, a
borrower may postpone payment of interest before the beginning of the repayment
period or during the Deferment Periods or a lender may permit postponement
during the forbearance. In these cases, payment of interest must begin or resume
on the date on which repayment of principal begins or resumes. If payment of
interest is postponed, it may be added to the principal for purposes of
calculating a repayment schedule.
Insurance Premium
The Secretary of HHS charges each lender an insurance premium to provide the
insurance on HEAL Loans at the time of disbursement. The HEAL Act authorizes the
Secretary of HHS to charge an insurance premium payable in advance based on the
default rate of the educational institution and whether only the borrower
executes the loan or obtains a co-signer. Presently, the insurance premium
varies between 3% and 8%. The lender may pass along the cost of the insurance
premium to the borrower by billing for it separately or deducting the amount
from disbursed loan proceeds. Premiums are not refundable by the Secretary of
HHS and need not be refunded by the lender to the borrower. Eligible lenders and
eligible institutions may also be assessed additional risk based premiums based
on the eligible entity's default rate. The risk-based premium to be assessed
shall range from 6 percent of the principal amount of the loan to 10 percent of
the principal amount of the loan.
Consolidation of HEAL Loans
If a lender or holder holds two or more HEAL Loans made to the same borrower,
the lender or holder and the borrower may agree to consolidate the loans into a
single HEAL Loan obligation evidenced by one promissory note if the
consolidation will not result in terms less favorable to the borrower than if no
consolidation had occurred and certain other requirements are satisfied.
Payments by Secretary of HHS
The Secretary of HHS insures each lender for the losses which the lender may
incur on insured loans in the event that a borrower dies, becomes permanently
and totally disabled, files for bankruptcy or defaults on the loans. If a
borrower dies or becomes disabled, the Secretary of HHS discharges the
borrower's liability on the loan by repaying the amount owed. If the borrower
defaults after a substantial collection effort, the Secretary of HHS pays the
amount of the loss to the lender, and the borrower's loan is assigned to the
Secretary of HHS.
Due Diligence
A lender must follow certain procedures in making HEAL Loans, and must exercise
due diligence in the collection of a HEAL Loan with respect to both a borrower
and any endorser, in accordance with regulations of the Secretary of HHS. If
these procedures are not followed or such due diligence is not exercised, the
lender's ability to realize the benefits of the insurance described above may be
adversely affected.
Claims
"Default" means the persistent failure of the borrower to make a payment when
due, or to comply with other terms of the note or other written agreement
evidencing a loan under circumstances where the Secretary of HHS finds it
reasonable to conclude that the borrower no longer intends to honor the
obligation to repay. In the case of a loan repayable (or on which interest is
payable) in monthly installments, this failure must have persisted for 120 days.
In the case of a loan repayable (or on which interest is payable) in less
frequent installments, this failure must have persisted for 180 days. Upon the
occurrence of a default, the Secretary of HHS shall require the eligible lender
or holder to commence and prosecute an action for default. If, for a particular
loan, an automatic stay is imposed on collection activities by a Bankruptcy
Court, and the lender receives written notification of the automatic stay prior
to initiating legal proceedings against the borrower, the 120 or 180-day period
does not include any period prior to the end of the automatic stay. Unless a
lender has notified the Secretary of HHS that it has filed suit against a
defaulted borrower, it must file a default claim with the Secretary of HHS
within 30 days after a loan has been determined to be in default. Under various
circumstances, a lender must commence and prosecute an action for default
against a borrower before filing a default claim. A lender must file a death
claim with the Secretary of HHS within 30 days after the lender determines that
a borrower is dead. A lender must file a disability claim with the Secretary of
HHS within 30 days after it is notified that the Secretary of HHS had determined
a borrower to be totally and permanently disabled. A lender must file a
bankruptcy claim with the Secretary of HHS within 10 days of the initial date of
receipt of court notice or written notice from the borrower's attorney that the
borrower has filed for bankruptcy under chapters 11 or 13 of the Bankruptcy
Code, or has filed a complaint to determine the dischargeability of the HEAL
Loan under chapter 7 of the Bankruptcy Code.
General
The Secretary of HHS may enter into a special contract with a borrower who has
obtained a degree from an eligible institution. Under the contract, the borrower
agrees to serve for a continuous period of (i) not less than 12 months for each
12-month period the Secretary of HHS assumes such obligations, or (ii) 24
months, whichever is greater in a health manpower shortage area as a member of
the National Health Service Corps or as a private practitioner. In return, the
Secretary of HHS will pay an amount, not to exceed $10,000 per 12-month period,
to the holder of the borrower's HEAL Loan to be applied toward interest and
principal.
Insurance Fund
The federal government has established pursuant to the HEAL Act a student loan
insurance fund which is available without fiscal year limitation to the
Secretary of HHS for making payments in connection with the collection or
default of loans insured under the HEAL Program. If moneys in the fund are
insufficient to make the payments on collection or default of insured loans, the
Secretary of the Treasury may lend the fund such amounts as may be necessary to
make the payments involved, subject to the Federal Credit Reform Act of 1990 (42
USC ss.ss. 661 et seq.)
Collection/Litigation
The use of litigation by the lender could affect the cost of collection on
defaulted HEAL Loans.
THE PRIVATE LOAN PROGRAMS
To the extent described in the Prospectus Supplement for a Series, the assets
securing the Notes of a Series may include Financed Private Loans issued under
one or more Private Loan Programs. The Private Loan Programs will be
specifically identified in the Prospectus Supplement with respect to such
Series. The Prospectus Supplement for a Series secured by Financed Private Loans
may specify a maximum percentage of Financed Private Loans that may comprise
part of the Financed Student Loans securing one or more Series of Notes. This
summary identifies characteristics common to most Private Loan Programs but is
qualified by the specific disclosure set forth in the related Prospectus
Supplement.
Private Loans made under most Private Loan Programs are based on the credit of
the Obligor or his or her parents or co-borrowers. In general, applicants are
required to have a minimum annual income and a monthly debt burden, including
the Financed Student Loan, of no greater than a specified percentage of their
monthly income. In determining whether a student or co-borrower is creditworthy,
a credit bureau report is obtained for each applicant, including the student.
The various Private Loan Programs have different standards as to what
constitutes a satisfactory credit history.
Eligible post-secondary borrowers of a Private Loan often are required to be
engaged in a course of study at a qualifying educational institution, which may
include two-year colleges, four-year colleges and for-profit schools. Certain
Private Loan Programs are specifically designed for graduate or professional
students, or for students attending elementary or secondary private schools. The
institutions generally must be located in the United States or Canada. Often,
the borrower (or a co-applicant) must be a citizen or resident of the United
States. Some Private Loans may be a consolidation of existing Private Loans.
The amount that may be borrowed under a Private Loan Program varies based upon
the Private Loan Program. Typically, borrowers must borrow at least a minimum
amount with respect to any academic year, and may not borrow more than a maximum
amount per academic year, or a maximum amount under the Private Loan Program.
However, the amount of the Private Loan plus other financial aid received by a
student, normally may not exceed the cost of education, as determined by the
school.
A guarantee fee typically is deducted from the Private Loan proceeds. All or a
portion of this fee is paid to the agency that has established the Private Loan
Program and that guarantees the repayment of all or a substantial portion of the
Private Loan under certain specified circumstances. The obligation to guarantee
is typically dependent upon the proper servicing of such Private Loan by the
Servicer thereof.
The interest rate on a Private Loan varies based upon the Private Loan Program
and can either be fixed or variable. Floating rates may be based upon the prime
rate or the T-Bill Rate, or some other objective standard. Interest typically
accrues at a rate equal to the index plus a margin, but subject to a maximum
rate per annum, with the interest rate being adjusted periodically.
Repayment of a Private Loan usually is required to commence within 45 to 90 days
following the borrowing. However, certain Private Loan Programs permit a
borrower to defer the repayment of principal while the student is in school
(often up to a maximum number of years). In such event, principal repayments
typically begin promptly following graduation. Most Private Loan Programs permit
prepayment of the Private Loan at any time without penalty. Borrowers typically
may schedule repayment over a 10- to 25-year period, subject to a minimum
monthly payment obligation.
DESCRIPTION OF THE AGREEMENTS
General
The following is a summary of the material terms of each Sales Agreement,
pursuant to which the Transferor will transfer the Financed Student Loans to an
eligible lender trustee on behalf of the Depositor; each Transfer and Servicing
Agreement, pursuant to which the Depositor will cause the eligible lender
trustee to transfer the Financed Student Loans to the Trust in the name of the
Eligible Lender Trustee and the Master Servicer will service the Financed
Students Loans; the Indenture, as supplemented from time to time, pursuant to
which each Series of Notes is issued; and each Administration Agreement,
pursuant to which the Administrator will undertake certain administrative duties
with respect to the Trust and the Financed Student Loans under the Transfer and
Servicing Agreement and the Indenture (collectively, the "Agreements"). The
summary does not purport to be complete and is qualified in its entirety by
reference to the provisions of the Agreements. Each of such Agreements will be
substantially in the form filed as an exhibit to the Registration Statement of
which this Prospectus is a part.
Sales Agreements
On the Closing Date for any Series of Notes, the Transferor will convey the
related Financed Student Loans to an eligible lender trustee on behalf of the
Depositor pursuant to the terms of a Sales Agreement between the Transferor and
the Depositor. The Sales Agreement will contain representations substantially
similar to those contained in the Transfer and Servicing Agreement.
Consequently, any obligation of the Depositor to repurchase Financed Student
Loans will likewise be an obligation of the Transferor. See "The Transferor" and
"-- Transfer and Servicing Agreements -- Conveyance of Financed Student Loans;
Representations and Warranties" herein.
Transfer and Servicing Agreements
On the Closing Date for any Series of Notes, the Depositor will cause its
eligible lender trustee to contribute and assign to the Eligible Lender Trustee
on behalf of the related Trust, without recourse, its entire interest in the
Financed Student Loans described in the Transfer and Servicing Agreement, all
collections received and to be received with respect thereto for the period on
or after the Cut-off Date and all rights under the Sales Agreement. Each
Financed Student Loan will be identified in schedules appearing as an exhibit to
the Transfer and Servicing Agreement.
Conveyance of Financed Student Loans; Representations and Warranties. The
Depositor will make certain representations and warranties with respect to the
Financed Student Loans to the related Trust, including, among other things, that
(i) each Financed Student Loan, at the time of transfer to the Trust, is free
and clear of all security interests, liens, charges and encumbrances, and no
offsets, defenses or counterclaims have been asserted or, to the Depositor's
knowledge, threatened; (ii) the information provided with respect to the
Financed Student Loans is true and correct in all material respects as of the
Cut-off Date; and (iii) each Financed Student Loan, at the time it was
originated, complied and, at the Closing Date, complies in all material respects
with applicable federal and state laws (including, without limitation, the
Higher Education Act, the HEAL Act, consumer credit, truth-in-lending, equal
credit opportunity and disclosure laws) and applicable restrictions imposed by
(A) the FFEL Program or under any Guarantee Agreement with respect to FFELP
Loans, (B) the HEAL Program or under the HEAL Insurance Contract with respect to
HEAL Loans, and (C) any related Private Loan Program with respect to Private
Loans.
Following the discovery by or notice to the Depositor of a breach of any such
representation or warranty with respect to any Financed Student Loan that
results in the failure of a Guarantee Agency (including for this purpose any
guarantor under a Private Loan Program) to make a Guarantee Payment or the
Department of HHS to make an Insurance Payment to the Eligible Lender Trustee,
the Depositor will, unless such breach is cured within 120 days, purchase such
Financed Student Loan from the Eligible Lender Trustee as of the first day
following the end of such 120-day period that is the last day of a Collection
Period, at a price equal to the applicable Purchase Amount; provided, however,
that in the case of any representation or warranty the breach of which may be
cured by reinstatement of the Guarantee Agency's obligation to guarantee payment
or the Department of HHS' obligation to insure payment, such cure period shall
be 360 days, in each case following the earlier of the date on which such breach
is discovered by the Depositor and the date of the Servicer's receipt of the
Guarantee Agency or Department of HHS reject transmittal form with respect to
such Financed Student Loan. Notwithstanding the foregoing, unless otherwise
provided in the Prospectus Supplement for a Series, if as of the last day of any
Collection Period the aggregate principal amount of Financed Student Loans with
respect to which claims have been filed with and rejected by a Guarantee Agency
or the Department of HHS as a result of a breach of a representation or warranty
of the Depositor or a breach of the obligations of the Master Servicer or with
respect to which the Master Servicer determines that claims cannot be filed
pursuant to the Higher Education Act or the HEAL Act, as the case may be, as a
result of such a breach exceeds the lesser of $250,000 or 0.25% of the Pool
Balance as of such date, the Depositor shall repurchase within 120 days of a
written request by the Eligible Lender Trustee or the Indenture Trustee,
affected Financed Student Loans in an aggregate principal amount such that after
such repurchases (or purchases by the Master Servicer as described below under
"Master Servicer Covenants") the aggregate principal amount of affected Financed
Student Loans is equal to or less than the lesser of $250,000 or 0.25% of the
Pool Balance. The Financed Student Loans to be repurchased by the Depositor or
the Transferor or purchased by the Master Servicer will be based on the date of
claim rejection, with the Financed Student Loans with the earliest such dates to
be repurchased or purchased first. The Prospectus Supplement for a Series may
specify shorter or longer cure periods, and establish different dollar or
percentage thresholds, to the extent set forth therein.
In addition, the Depositor or the Transferor will be obligated to reimburse the
related Trust (i) for any accrued interest amounts that the Department of HHS
refuses to pay with respect to Financed HEAL Loans, and (ii) for any accrued
interest amounts that a Guarantee Agency (including for this purpose any
guarantor under a Private Loan Program) refuses to pay pursuant to its Guarantee
Agreement, and for any Interest Subsidy Payments and Special Allowance Payments
that are lost or that must be repaid to the Department of Education with respect
to Financed FFELP Loans, as a result of a breach of any such representation or
warranty by the Depositor. Under certain circumstances, the Depositor also has
the right to repurchase, or transfer a Subsequent Financed Student Loan in
exchange for, a Financed Student Loan for which it has a reimbursement
obligation as described in the preceding sentence. The repurchase and
reimbursement obligations of the Depositor or the Transferor will constitute,
together with the right to receive certain amounts from Credit Enhancement, if
any, the sole remedy available to or on behalf of such Trust, the
Certificateholders or the Noteholders for any such uncured breach. The
Transferor's and the Depositor's repurchase and reimbursement obligations are
contractual obligations pursuant to the Transfer and Servicing Agreement that
may be enforced against the Transferor and the Depositor, but the breach of
which will not constitute an Event of Default under the Notes.
Pre-Funding Account. If a Pre-Funding Account has been established with respect
to a Trust and a Pre-Funded Amount has been deposited therein with respect to a
Series of Notes, the Trust will use such amounts to acquire additional Financed
Student Loans ("Additional Student Loans") from the Depositor from time to time
during the applicable Pre-Funding Period. The amount on deposit in any
Pre-Funding Account may not exceed a specified percentage of the initial Pool
Balance of the related Trust as set forth in the related Prospectus Supplement.
Additional Student Loans may include FFELP Loans, HEAL Loans and/or Private
Loans in such amounts as may be determined by the Depositor and satisfying any
conditions imposed by the Rating Agencies and any provider of Credit
Enhancement, if applicable.
The Trust may acquire from the Depositor during a Pre-Funding Period Additional
Student Loans having an aggregate principal balance up to the amount then on
deposit in the Pre-Funding Account. Monies in the Pre-Funding Account will be
invested exclusively in Eligible Investments. The obligation to accept any
Additional Student Loan by the Eligible Lender Trustee on behalf of the Trust is
subject to the condition, among others as may be set forth in the related
Prospectus Supplement, that such Additional Student Loan must satisfy all
applicable origination requirements and all other requirements specified in the
Transfer and Servicing Agreement. On such dates as may from time to time be
designated by the Depositor during a Pre-Funding Period, the Depositor may sell
and assign, without recourse, to the Eligible Lender Trustee on behalf of the
Trust, its entire interest in Additional Student Loans. Each agreement of
transfer will include as an exhibit a schedule identifying each Additional
Student Loan transferred. Upon such conveyance of Additional Student Loans to
the Eligible Lender Trustee on behalf of the Trust, the Pool Balance will be
adjusted.
Any amounts remaining in the Pre-Funding Account at the end of the related
Pre-Funding Period will be paid to the Noteholders as a prepayment of principal,
as set forth in the related Prospectus Supplement.
Subsequent Finance Period and Subsequent Financed Student Loans. During a period
from the Closing Date for a Series to a subsequent date identified in the
related Prospectus Supplement (the "Subsequent Finance Period"), the Depositor
may, at its option but subject to the conditions set forth in the Transfer and
Servicing Agreement, transfer to the Eligible Lender Trustee on behalf of the
related Trust, Subsequent Financed Student Loans, and direct the Eligible Lender
Trustee and the Indenture Trustee to apply Consolidation prepayments on deposit
in the Collection Account to pay the Purchase Price for such Subsequent Financed
Student Loans. Subsequent Financed Student Loans that may be so transferred by
the Depositor include (i) Consolidation Loans or HEAL Consolidation Loans made
by the Transferor, provided, however, that in no event shall the aggregate
amount of Subsequent Financed Student Loans that are Consolidation Loans or HEAL
Consolidation Loans transferred into the related Trust exceed any maximum amount
identified in the Prospectus Supplement; (ii) Serial Loans owned by the
Depositor that are serial (i.e., made to the same borrower under the same loan
program and guaranteed by the same Guarantee Agency or insured by the Department
of HHS) to an existing Financed Student Loan owned by the related Trust,
provided that each such Subsequent Financed Student Loan entitles the holder
thereof to receive interest based on the same interest rate index as the
Financed Student Loan to which it is serial, and provided further, that in no
event shall the aggregate amount of Subsequent Financed Student Loans that are
Serial Loans transferred into the related Trust exceed any maximum amount
identified in the Prospectus Supplement; and (iii) similar consolidation or
serial loans under applicable Private Loan Programs.
In addition, during the Subsequent Finance Period for any Series, subject to the
conditions set forth in the related Transfer and Servicing Agreement, the
Depositor may, at its option, in lieu of reimbursing certain lost interest
payments and Special Allowance Payments or depositing into the Collection
Account the Purchase Amount of a Financed Student Loan which has become
ineligible for lost interest payments or Special Allowance Payments (see
"Description of the Agreements -- Transfer and Servicing Agreements --
Conveyance of Financed Student Loans; Representations and Warranties" and
"Servicing -- Master Servicer Covenants"), the Depositor may transfer to the
Eligible Lender Trustee on behalf of the related Trust, a Subsequent Financed
Student Loan which satisfies the following criteria (or such other criteria as
may be set forth in the Prospectus Supplement for a Series): (A) the Subsequent
Financed Student Loan was originated under the same loan program as the Financed
Student Loan for which it is being exchanged and entitles the holder thereof to
receive interest based on the same interest rate index as the Financed Student
Loan for which it is being exchanged, (B) the Subsequent Financed Student Loan
will not, at any level of such interest rate index, have an interest rate that
is less than the Financed Student Loan for which it is being exchanged and (C)
the average principal balance per Obligor of the Subsequent Financed Student
Loans that are being transferred into the related Trust and the existing
Financed Student Loans for which they are being exchanged is within 10% (plus or
minus) of the average principal balance per Obligor of the Financed Student
Loans being transferred to the Depositor. If the aggregate outstanding principal
balance of the Subsequent Financed Student Loans is less than that of the
Financed Student Loans for which they are being exchanged, the Depositor shall
deposit the difference in the Collection Account concurrently with such
transfer. If the aggregate outstanding principal balance of the Subsequent
Financed Student Loans is greater than that of the Financed Student Loans for
which they are being exchanged, the Depositor shall be entitled to the
difference from amounts on deposit in the Collection Account. In either case,
such payments are referred to herein as "Adjustment Payments."
The Trust may not acquire Subsequent Financed Student Loans at any time that an
Event of Default under the Indenture, a Master Servicer Default under the
Transfer and Servicing Agreement or an Administrator Default under the
Administration Agreement has occurred and is continuing.
Accounts. The Indenture Trustee will establish and maintain the Collection
Account, Note Payment Account, Expense Account, Advance Account and, if set
forth in the related Prospectus Supplement, a Reserve Account and Pre-Funding
Account. The Eligible Lender Trustee will establish and maintain the Certificate
Distribution Account and Certificate Advance Account in the name of the Eligible
Lender Trustee on behalf of the Certificateholders. The foregoing accounts are
referred to collectively as the "Trust Accounts."
Funds in the Trust Accounts will be invested as provided in the Transfer and
Servicing Agreement in Eligible Investments. "Eligible Investments" include the
following:
(i) cash (insured at all times by the FDIC);
(ii) direct obligations of (including obligations issued
or held in book entry form on the books of) the
Department of the Treasury of the United States of
America;
(iii) obligations of any of the following federal agencies
which obligations represent the full faith and credit
of the United States of America, including:
- Export-Import Bank
- Farm Credit System Financial Assistance
Corporation
- Farmers Home Administration
- General Services Administration
- U.S. Maritime Administration
- Small Business Administration
- Government National Mortgage Association
(GNMA)
- U.S. Department of Housing & Urban
Development (PHA's)
- Federal Housing Administration;
(iv) senior debt obligations rated "AAA" or "Aaa" by each
Rating Agency and issued by the Federal National
Mortgage Association or the Federal Home Loan
Mortgage Corporation
(v) U.S. dollar denominated deposit accounts, federal
funds and banker's acceptances with domestic
commercial banks which have a rating on their short
term certificates of deposit on the date of purchase
of "A-1+" or "P-1" by each Rating Agency and maturing
no more than 360 days after the date of purchase
(ratings on holding companies not being considered
the rating of the bank);
(vi) commercial paper which is rated at the time of
purchase in the single highest classification, "A-
1+" or "P-1" by each Rating Agency and which matures
not more than 270 days after the date of purchase;
(vii) investments in money market funds (including, but not
limited to, money market mutual funds) rated "AAAm"
or "AAAm-G" or better by each Rating Agency;
(viii) investment agreements acceptable to each Rating
Agency, written confirmation of which shall be
furnished to the Indenture Trustee prior to any such
investment; and
(ix) other forms of investments acceptable to each Rating
Agency, written confirmation of which shall be
furnished to the Indenture Trustee prior to any such
investment.
Notwithstanding anything in the Transfer and Servicing Agreement to the
contrary, for so long as the Transferor or any of its affiliates is a
Certificateholder, all investments of the related Trust shall be made in
investments permissible for a national bank. Investment earnings on funds
deposited in the Trust Accounts, net of losses and investment expenses, will be
deposited in the Collection Account.
The Trust Accounts will be maintained as Eligible Deposit Accounts. "Eligible
Deposit Account" means either (a) a segregated account with an Eligible
Institution or (b) a segregated trust account with the corporate trust
department of a depository institution organized under the laws of the United
States of America or any one of the states thereof or the District of Columbia
(or any domestic branch of a foreign bank), having corporate trust powers and
acting as trustee for funds deposited in such account, so long as any of the
securities of such depository institution have a credit rating from each Rating
Agency in one of its generic rating categories which signifies investment grade.
An "Eligible Institution" is generally a depository institution organized under
the federal or any state banking laws whose deposits are insured by the Federal
Deposit Insurance Corporation and whose unsecured long-term debt obligations or
short-term debt ratings are acceptable to each Rating Agency rating the related
Series of Notes.
Amendment. Each Transfer and Servicing Agreement may be amended by the parties
thereto, with the consent of the Indenture Trustee, for the purpose of adding
any provisions to or changing in any manner or eliminating any of the provisions
of a Transfer and Servicing Agreement or of modifying in any manner the rights
of Noteholders or Certificateholders; provided, however, that no such amendment
may (i) increase or reduce in any manner the amount of, or accelerate or delay
the timing of, collections of payments with respect to the Financed Student
Loans or distributions that are required to be made for the benefit of the
Noteholders or the Certificateholders, or (ii) reduce the percentage of the
Notes which are required to consent to any such amendment, without the consent
of the holders of all the outstanding Notes affected thereby.
Evidence as to Compliance . Each Transfer and Servicing Agreement with respect
to any Series of Notes will provide that a firm of independent public
accountants will furnish to the Eligible Lender Trustee and the Indenture
Trustee annually a statement (based on the examination of certain documents and
records and on such accounting and auditing procedures considered appropriate
under the circumstances) as to compliance by the Master Servicer during the
preceding calendar year with certain provisions of the Transfer and Servicing
Agreement relating to the servicing of the Financed Student Loans.
Each Transfer and Servicing Agreement will further provide that a firm of
independent public accountants (which may be the same firm referred to in the
immediately preceding paragraph) will furnish to the Eligible Lender Trustee and
the Indenture Trustee annually a statement (based on the examination of certain
documents and records and on such accounting and auditing procedures considered
appropriate under the circumstances) as to compliance by the Administrator
during the preceding calendar year with certain provisions of the Transfer and
Servicing Agreement and the Administration Agreement relating to the
administration of the Trust and the Financed Student Loans.
Each Transfer and Servicing Agreement will also provide for delivery to the
Eligible Lender Trustee and the Indenture Trustee, concurrently with the
delivery of each statement of compliance referred to above, of a certificate
signed by an officer of the Master Servicer or the Administrator, as the case
may be, stating that, to his knowledge, the Master Servicer or the
Administrator, as the case may be, has fulfilled in all material respects all
its obligations under the Transfer and Servicing Agreement and the
Administration Agreement, respectively, throughout the preceding calendar year
or, if there has been a default in the fulfillment of any such obligation,
specifying each such default known to such officer and the nature and status
thereof. Each of the Master Servicer and the Administrator has agreed to give
the Indenture Trustee and the Eligible Lender Trustee notice of certain Master
Servicer Defaults and Administrator Defaults, respectively, under the Transfer
and Servicing Agreement.
Copies of such statements and certificates may be obtained by Noteholders by a
request in writing addressed to the Indenture Trustee at the address identified
in the related Prospectus Supplement.
The Indenture
General. The Notes will be issued pursuant to an Indenture by and between the
applicable Trust and Indenture Trustee, as supplemented from time to time by a
Terms Supplement. The Administrator, pursuant to the Administration Agreement,
will perform certain obligations of the Trust under the Indenture for any
Series.
The Indenture Trustee. The Indenture Trustee with respect to a Series of Notes
will be the entity named in the related Prospectus Supplement. An Indenture
Trustee may serve from time to time as trustee under indentures or trust
agreements with the Transferor or its affiliates relating to other issues of
their securities. In addition, the Transferor or its affiliates may have other
banking relationships with the Indenture Trustee and its affiliates.
Modification of Indenture; Supplemental Indentures. With the consent of the
holders of a majority of the aggregate principal amount of Directing Notes of a
Trust then outstanding (or, with respect to any change affecting only certain
Series or Classes of Notes, the holders of a majority of the aggregate principal
amount of Notes of such Series or Class) and the consent of any applicable
provider of Credit Enhancement, the applicable Indenture Trustee and the related
Trust may execute a supplemental indenture to add provisions to, or change in
any manner or eliminate any provisions of, the Indenture with respect to one or
more Series of Notes, or to modify (except as provided below) in any manner the
rights of the Noteholders.
Without the consent of the holder of each outstanding Note of a Series affected
thereby, however, no supplemental indenture will (i) change the date of payment
of any installment of principal of or interest on any Note of such Series or
reduce the principal amount thereof or the interest rate thereon, change the
provisions of the Indenture relating to the application of collections on, or
the proceeds of the sale of, the assets of the related Trust to payment of
principal of or interest on the Notes, or change any place of payment where, or
the coin or currency in which, any Note or any interest thereon is payable, (ii)
impair the right to institute suit for the enforcement of certain provisions of
the Indenture regarding payment, (iii) reduce the percentage of the aggregate
amount of the outstanding Notes of any Series or Class the consent of the
holders of which is required for any such supplemental indenture or the consent
of the holders of which is required for any waiver of compliance with certain
provisions of the Indenture or certain defaults thereunder and their
consequences as provided for in the Indenture, (iv) modify or alter certain
provisions of the Indenture regarding the determination of Notes that are
considered "outstanding" for consent, waivers and other matters, (v) reduce the
percentage of the aggregate outstanding amount of the Notes the consent of the
holders of which is required to direct the Indenture Trustee to direct the
related Trust to sell or liquidate the Financed Student Loans, (vi) decrease the
percentage of the aggregate principal amount of the Notes required to amend the
sections of the Indenture which specify the applicable percentage of aggregate
principal amount of the Notes necessary to amend the Indenture or certain other
related agreements, (vii) modify any of the provisions of the Indenture in such
manner as to affect the calculation of the amount of any payment of interest on
any Note, or (viii) except as otherwise permitted or contemplated in the
Indenture, terminate the lien of the Indenture on any such collateral or deprive
the holder of any Note of the security afforded by the lien of the Indenture.
Generally, a Trust and the related Indenture Trustee may also enter into
supplemental indentures, but without obtaining the consent of Noteholders, for
the purpose of adding any provisions to or changing in any manner or eliminating
any of the provisions of the Indenture or modifying in any manner the rights of
Noteholders so long as such action will not, in the opinion of counsel
satisfactory to the Indenture Trustee, materially and adversely affect the
interest of any Noteholder. Any such amendment or supplemental indenture shall
be deemed not to materially and adversely affect any Noteholder if there is
delivered to the Indenture Trustee written notification from each Rating Agency
to the effect that such amendment or supplement will not cause that Rating
Agency to reduce the then current rating assigned to such Notes.
Events of Default; Rights Upon Event of Default. Generally, an "Event of
Default" with respect to the Notes of a Series is defined in the Indenture as
consisting of the following: (i) a default for five business days or more in the
payment of any Principal Payment Amount (subject to the caveat noted below) or
Class Interest Rate on the Notes after the same becomes due and payable; (ii) a
default in the observance or performance of any covenant or agreement of the
applicable Trust made in the Indenture or the Transfer and Servicing Agreement
and the continuation of any such default for a period of 30 days after notice
thereof is given to such Trust by the Indenture Trustee or to such Trust and the
Indenture Trustee by the holders of at least 25% in aggregate principal amount
of the Directing Notes then outstanding; (iii) any representation or warranty
made by a Trust in the Indenture or in any certificate delivered pursuant
thereto or in connection therewith having been incorrect in a material respect
as of the time made, and such breach not having been cured within 30 days after
notice thereof is given to the Trust by the Indenture Trustee or to the Trust
and the Indenture Trustee by the holders of at least 25% in aggregate principal
amount of the Directing Notes then outstanding; or (iv) certain events of
bankruptcy, insolvency, receivership or liquidation of a Trust. Because the
amount of principal required to be distributed to Noteholders on any Payment
Date may be limited to the amount of Available Funds after payment of
Transaction Fees, Consolidation Loan Fees and the aggregate Class Interest Rate,
any difference between the Principal Payment Amount and the remaining Available
Funds will be carried over to be paid on succeeding Payment Dates. Therefore,
the failure to pay principal on any Class of Notes may not result in the
occurrence of an Event of Default until the Legal Final Maturity of such Class
of Notes. In addition, the failure to pay the aggregate amount of Carryover
Interest as a result of insufficient Available Funds will not result in the
occurrence of an Event of Default.
If an Event of Default should occur and be continuing with respect to any Class
or Series of Notes, the Indenture Trustee or holders of a majority in aggregate
principal amount of the Directing Notes then outstanding may declare all
outstanding Notes to be immediately due and payable, by notice to the related
Trust or notice to the Indenture Trustee if given by the Noteholders. Such
declaration may be rescinded by the holders of a majority in aggregate principal
amount of the Directing Notes then outstanding at any time prior to the entry of
judgment in a court of competent jurisdiction for the payment of such amount if
(i) such Trust has paid to the Indenture Trustee a sum equal to all amounts then
due with respect to the Notes (without giving effect to such acceleration) and
due to the Indenture Trustee and (ii) all Events of Default (other than
nonpayment of amounts due solely as a result of such acceleration) have been
cured or waived.
If the Notes of any Series have been declared to be due and payable following an
Event of Default with respect thereto, the Indenture Trustee may, in its
discretion, require the Eligible Lender Trustee to sell the Financed Student
Loans or elect to have the Eligible Lender Trustee maintain possession of the
Financed Student Loans and continue to apply collections with respect to such
Financed Student Loans as if there had been no declaration of acceleration. The
Indenture Trustee, however, is prohibited from directing the Eligible Lender
Trustee to sell the Financed Student Loans following an Event of Default, other
than a default for five days or more in the payment of any principal or a
default for five days or more in the payment of any interest on any Note, unless
(i) the Noteholders of 100% of the aggregate amount of such Series of Notes
outstanding consent to such sale, (ii) the proceeds of such sale are sufficient
to pay in full the principal of and the accrued interest on the Notes
outstanding at the date of such sale or (iii) the Indenture Trustee determines
that the collections on the Financed Student Loans and other assets of the
related Trust would not be sufficient on an ongoing basis to make all payments
on the Notes as such payments would have become due if such obligations had not
been declared due and payable, and the Indenture Trustee obtains the consent of
the Noteholders of at least 66-2/3% of the aggregate principal amount of the
Notes then outstanding. In addition, the Indenture Trustee may not sell or
otherwise liquidate the Financed Student Loans following an Event of Default,
other than a default for five days or more in the payment of any principal or a
default for five days or more in the payment of any interest on any Note, unless
(i) the proceeds of such sale or liquidation payable to any Class of
subordinated Notes are sufficient to pay such Notes in full or (ii) following
notice that the proceeds of such sale or liquidation of Notes would be
insufficient to pay amounts due on such Notes at least a majority of the
aggregate outstanding amount of such Class of subordinated Notes consent
thereto.
The Indenture Trustee may not become the owner or holder of the Financed Student
Loans without entering into guarantee agreements with the applicable Guarantor
of each Financed FFELP Loan and with the Secretary of HHS with respect to the
Financed HEAL Loans. The Indenture Trustee has not entered into any such
agreements. As a result, if the Indenture Trustee determined to take title to or
hold the loans itself, it would not be permitted to do so without meeting the
criteria for an eligible lender under the Higher Education Act and the HEAL Act
at the time and entering into such agreements or retaining an eligible lender
trustee to do it on its behalf. See "Description of the FFEL Program" and
"Description of the HEAL Program" herein.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, if an Event of Default should occur and be continuing with
respect to a Series of Notes, the Indenture 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 a Series of Notes, if the Indenture Trustee
reasonably believes it will not be adequately indemnified against the costs,
expenses and liabilities which might be incurred by it in complying with such
request. Subject to such provisions for indemnification and certain limitations
contained in the Indenture, the holders of a majority in aggregate principal
amount of the outstanding Directing Notes will have the right to direct the
time, method and place of conducting any proceeding or any remedy available to
the Indenture Trustee and the holders of a majority in aggregate principal
amount of the Directing Notes then outstanding, 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 Directing Notes.
No holder of any Series of Note will have the right to institute any proceeding
with respect to the Indenture, unless (i) such holder previously has given to
the Indenture Trustee written notice of a continuing Event of Default, (ii) the
holders of not less than 25% in principal amount of the outstanding Directing
Notes have requested in writing that the Indenture Trustee institute such
proceeding in its own name as Indenture Trustee, (iii) such holder or holders
have offered the Indenture Trustee reasonable indemnity, (iv) the Indenture
Trustee has for 60 days after notice failed to institute such proceeding and (v)
no direction inconsistent with such written request has been given to the
Indenture Trustee during such 60-day period by the holders of a majority in
aggregate principal amount of the outstanding Directing Notes.
None of the Indenture Trustee, the Transferor, the Depositor, the Administrator,
the Master Servicer, any Servicer or the Eligible Lender Trustee in its
individual capacity, nor any holder of a Certificate, nor any of their
respective owners, beneficiaries, agents, officers, directors, employees,
successors or assigns will, in the absence of an express agreement to the
contrary, be personally liable for the payment of the principal of or interest
on the Notes or for the agreements of the related Trust contained in the related
Indenture.
Certain Covenants. A Trust may not consolidate with or merge into any other
entity unless (i) the entity formed by or surviving such consolidation or merger
is organized under the laws of the United States, or any state thereof, and such
entity expressly assumes the Trust's obligation to make due and punctual
payments upon the Notes and the performance or observance of every agreement and
covenant of the Trust under the Indenture and any supplemental indenture, (ii)
no Event of Default has occurred and is continuing immediately after such merger
or consolidation, (iii) the Trust has received an opinion of counsel to the
effect that such consolidation or merger would have no material adverse federal
or applicable state tax consequence to the Trust or to any Certificateholder or
Noteholder, (iv) any action as is necessary to maintain the lien and security
interest created by the Indenture shall have been taken and (v) the Trust shall
have delivered to the Indenture Trustee an officer's certificate of the
Administrator and an opinion of counsel each stating that such consolidation or
merger and any supplemental indenture relating thereto comply with the terms of
the Indenture and that all conditions precedent provided for in the Indenture to
such transaction have been complied with (including any Exchange Act filings) in
all material respects.
Except as otherwise permitted by the Agreements, a Trust may not convey or
transfer all or substantially all its properties or assets, including the assets
securing the Notes, unless the conditions specified in (i) through (v) above
with respect to a permitted merger or consolidation are substantially met, plus
the acquiror must agree (a) that all right, title and interest in the property
and assets so conveyed or transferred are subordinate to the rights of the
Noteholders, (b) to indemnify the Trust (unless otherwise provided in a
supplemental indenture) and (c) to make all filings with the Commission required
by the Exchange Act in connection with the Notes.
A Trust will not, among other things, (i) except as expressly permitted by the
Agreements, sell, transfer, exchange or otherwise dispose of any of the assets
of the Trust, (ii) claim any credit on or make any deduction from the principal
and interest payable in respect of any Notes (other than amounts withheld under
the Code or applicable state law) or assert any claim against any present or
former holder of Notes because of the payment of taxes levied or assessed upon
the Trust, (iii) except as contemplated by the Agreements, dissolve or liquidate
in whole or in part, (iv) permit the validity or effectiveness of the Indenture
or any supplemental indenture to be impaired, or permit the lien of the
Indenture and any supplemental indenture to be amended, hypothecated,
subordinated, terminated or discharged, or permit any person to be released from
any covenants or obligations with respect to any Notes under the Indenture
except as may be expressly permitted thereby, (v) permit any lien, charge,
excise, claim, security interest, mortgage or other encumbrance (other than the
lien of the Indenture and any supplemental indenture) to be created on or extend
to or otherwise arise upon or burden the assets of the Trust or any part
thereof, or any interest therein or the proceeds thereof (other than certain tax
and other liens arising by operation of law, except as expressly permitted by
the Agreements) or (vi) permit the lien of the Indenture and any supplemental
indenture not to constitute a valid first priority (other than with respect to
such tax or other lien) security interest in the assets securing the Notes.
No Trust may engage in any activity other than financing, purchasing, owning,
selling, servicing and managing the Financed Student Loans and activities
incidental thereto.
No Trust will issue, incur, assume or guarantee or otherwise become liable for
any indebtedness other than the Series of Notes or otherwise in accordance with
the Agreements.
Annual Compliance Statement and Other Notices. The Administrator, on behalf of
each Trust, will be required to file annually with the Indenture Trustee a
written statement as to the fulfillment of the Trust's obligations under the
Indenture. Each Trust is required to give the Indenture Trustee written notice
of each Event of Default among other notices. The Indenture Trustee is obligated
to notify Noteholders of known defaults under the Indenture within 90 days after
their occurrence.
Satisfaction and Discharge of Indenture. The Indenture will be discharged with
respect to the collateral securing the Series of Notes upon the delivery to the
Indenture Trustee for cancellation of all the Notes of such Series or, with
certain limitations, upon deposit with the Indenture Trustee of funds sufficient
for the payment in full of all the Notes of such Series.
Statements to Indenture Trustee. On each Payment Determination Date immediately
preceding a Payment Date, the Master Servicer or the Administrator will provide
to the Indenture Trustee, and the Indenture Trustee will forward to each
Noteholder (other than a Noteholder of Auction Rate Notes, which may obtain the
following statement to the extent available upon written request to the
Indenture Trustee) a statement which will include the following information with
respect to such Payment Date or for the preceding Collection Period or
Collection Periods, to the extent applicable:
(i) the Principal Factor for each Class of Notes;
(ii) the amount of the payment allocable to principal of
each Class of Notes;
(iii) the amount of the payment allocable to interest on
each Class of Notes, together with the interest rates
applicable with respect thereto (indicating whether
such interest rates are based on the Class Interest
Rate or on the Net Loan Rate with respect to each
Class of Notes, and specifying what each such
interest rate would have been if it had been
calculated using the alternate;
(iv) the amount of the payment, if any, allocable to any
Carryover Interest together with the outstanding
amount, if any, thereof after giving effect to any
such distribution;
(v) the Pool Balance as of the close of business on the
last day of the preceding Collection Period;
(vi) the aggregate outstanding principal balance of each
Class of Notes as of such Payment Date, after giving
effect to payments allocated to principal reported
under clause (ii) above;
(vii) the amount of the Servicing Fee to be allocated to
the Master Servicer, the amount of the Administration
Fee to be allocated to the Administrator, the amount
of the Indenture Trustee Fee to be allocated to the
Indenture Trustee, the amount of the Eligible Lender
Trustee Fee to be allocated to the Eligible Lender
Trustee, and the amount of fees paid to any other
entity described in the related Prospectus
Supplement, respectively, with respect to the
upcoming Payment Date;
(viii) the amount of the aggregate Realized Losses, if any,
for the preceding Collection Period and the aggregate
amount, if any, received (stated separately for
interest and principal) with respect to Financed
Student Loans for which Realized Losses were
allocated previously;
(ix) the amount of the distribution attributable to
amounts in any Reserve Account, Pre-Funding Account,
or other account identified in the related Prospectus
Supplement, the amount of any other withdrawals from
such accounts for such Payment Date, the balance of
such accounts on such Payment Date, after giving
effect to changes therein on such Payment Date, the
then applicable Parity Percentage and the amount of
the distribution, if any, attributable to Parity
Percentage Payments;
(x) the aggregate amount, if any, paid for Financed
Student Loans purchased from the related Trust during
the preceding Collection Period;
(xi) during the Subsequent Finance Period only, the
Adjustment Payments, stated separately, for the
preceding Collection Period;
(xii) the number and principal amount of Financed Student
Loans, as of the preceding Collection Period, that
are (A) 31 to 60 days delinquent, (B) 61 to 90 days
delinquent, (C) 91 to 120 days delinquent, (D) more
than 120 days delinquent and (E) for which claims
have been filed with the appropriate Guarantee
Agency, guarantor or the Department of HHS and which
are awaiting payment;
(xiii) any other information specified in the related
Prospectus Supplement.
Rights Upon Servicer Default or Administrator Default. As long as a Servicer
Default under a Transfer and Servicing Agreement or an Administrator Default
under a Transfer and Servicing Agreement or an Administration Agreement remains
unremedied, the Indenture Trustee or holders of Directing Notes evidencing not
less than 25% in principal amount of then outstanding Directing Notes may
terminate all the rights and obligations of the Master Servicer under such
Transfer and Servicing Agreement, or the Administrator under such Transfer and
Servicing Agreement and the Administration Agreement, as the case may be,
whereupon a successor servicer or administrator appointed by the Indenture
Trustee or the Indenture Trustee will succeed to all the responsibilities,
duties and liabilities of the Master Servicer under the Transfer and Servicing
Agreement, or the Administrator under the Transfer and Servicing Agreement and
the Administration Agreement, as the case may be, and will be entitled to
similar compensation arrangements. If a successor Master Servicer or
Administrator, as the case may be, has not been appointed at the time when the
predecessor Master Servicer or Administrator has ceased to act as Master
Servicer or Administrator, then the Indenture Trustee shall automatically be
appointed successor Master Servicer or Administrator. Notwithstanding the above,
the Indenture Trustee shall, if it shall be unwilling or legally unable so to
act, appoint or petition a court of competent jurisdiction to appoint, any
established institution whose regular business shall include the servicing of
student loans, as the successor to the Master Servicer or Administrator, as the
case may be, under this Agreement. If a successor Master Servicer or
Administrator, as the case may be, has not been appointed at the time when the
predecessor Master Servicer or Administrator has ceased to act as Master
Servicer or Administrator, then the Indenture Trustee shall automatically be
appointed as successor Master Servicer or Administrator.
Waiver of Past Defaults. The holders of Directing Notes evidencing at least a
majority in principal amount of the then outstanding Directing Notes may, on
behalf of all Noteholders, waive any default by the Master Servicer in the
performance of its obligations under the related Transfer and Servicing
Agreement, or any default by the Administrator of its obligations under the
related Transfer and Servicing Agreement and Administration Agreement, as the
case may be, and their respective consequences, except a default in making any
required payments from any of the Trust Accounts or giving instructions
regarding the same in accordance with such Transfer and Servicing Agreement. No
such waiver will impair the Noteholders' rights with respect to subsequent
defaults.
Termination. With respect to any Series, the obligations of the Master Servicer,
the Transferor, the Depositor, the Administrator, the Eligible Lender Trustee
and the Indenture Trustee pursuant to each Transfer and Servicing Agreement will
terminate upon (i) the maturity or other liquidation of the last Financed
Student Loan and the disposition of any amount received upon liquidation of any
remaining Financed Student Loans and (ii) the payment to the related Noteholders
and the Certificateholders of all amounts required to be paid to them pursuant
to the related Transfer and Servicing Agreement. See "Description of the
Notes--Termination" herein.
Administration Agreements
Crestar Bank, in its capacity as Administrator, will enter into Administration
Agreements with each Trust and Indenture Trustee, pursuant to which the
Administrator will agree, to the extent provided therein, (i) to direct the
Indenture Trustee to make the required distributions from the Trust Accounts on
each Payment Date, (ii) to prepare (based on the reports received from the
Master Servicer) and provide periodic and annual statements to the Eligible
Lender Trustee and the Indenture Trustee with respect to distributions to
Noteholders and Certificateholders and any related Federal income tax reporting
information and (iii) to provide the notices and to perform other administrative
obligations required by the Indenture and the Trust Agreement. As compensation
for the performance of the Administrator's obligations under the Administration
Agreement and as reimbursement for its expenses related thereto, the
Administrator will be entitled to the Administration Fee. Affiliates of the
Administrator may assist it in performing its obligations under the
Administration Agreement.
An "Administrator Default" under each Administration Agreement will consist of
(i) any failure by the Administrator to direct the Indenture Trustee or the
Eligible Lender Trustee, as applicable, to make any required distributions from
any of the Trust Accounts, which failure continues unremedied for three Business
Days after written notice from the Indenture Trustee or the Eligible Lender
Trustee is received by the Administrator or after discovery of such failure by
the Administrator; (ii) any failure by the Administrator duly to observe or
perform in any material respect any other covenant or agreement in an
Administration Agreement or a Transfer and Servicing Agreement which failure
materially and adversely affects the rights of Noteholders, and which continues
unremedied for 60 days after the giving of written notice of such failure (A) to
the Administrator by the Indenture Trustee or the Eligible Lender Trustee or (B)
to the Administrator and to the Indenture Trustee and the Eligible Lender
Trustee by holders of Directing Notes evidencing not less than 25% in principal
amount of the outstanding Directing Notes; and (iii) certain events of
insolvency, readjustment of debt, marshaling of assets and liabilities, or
similar proceedings with respect to the Administrator and certain actions by the
Administrator indicating its insolvency or inability to pay its obligations.
SERVICING
Servicing Procedures
Pursuant to the Transfer and Servicing Agreement for each Series, the Master
Servicer will agree to service, and perform all other related tasks with respect
to, the Financed Student Loans. The Master Servicer is obligated to perform all
services and duties customary to the servicing of Financed Student Loans
(including all collection practices), and to do so with reasonable care and in
compliance with all standards and procedures provided for in the Higher
Education Act, the Guarantee Agreements, the Heal Act, the HEAL Insurance
Contract, all regulations and agreements respecting Private Loans and all other
applicable federal and state laws.
Without limiting the foregoing, the duties of the Master Servicer include, but
are not limited to, collecting and depositing into the Collection Account all
payments with respect to the Financed Student Loans, including claiming and
obtaining any Insurance Payments with respect to Financed HEAL Loans, and, with
respect to Financed FFELP Loans, any Guarantee Payments, Interest Subsidy
Payments and Special Allowance Payments and guarantee payments with respect to
Private Loans; responding to inquiries from borrowers on the Financed Student
Loans; and investigating delinquencies and sending out statements, payment
coupons and tax reporting information to borrowers. In addition, the Master
Servicer will keep ongoing records with respect to such Financed Student Loans
and collections thereon and will furnish monthly and annual statements to the
Administrator with respect to such information, in accordance with the customary
standards and as otherwise required in the Transfer and Servicing Agreement.
The Master Servicer may enter into servicing agreements with Servicers pursuant
to which some or all of the Financed Student Loans may be serviced on behalf of
the Master Servicer. No such servicing arrangement will relieve the Master
Servicer of its duties and obligations under any Transfer and Servicing
Agreement. The initial Servicers for a particular pool of Financed Student Loans
will be set forth in the related Prospectus Supplement.
The Master Servicer shall cause each Servicer to deposit in the Collection
Account, no less frequently than bi-weekly, all payments on Financed Student
Loans for which such Servicer is acting as primary servicer (from whatever
source) and all proceeds of such Financed Student Loans collected by it during
each Collection Period.
Advances. If the Master Servicer has applied for an Insurance Payment from the
Department of HHS, a Guarantee Payment from a Guarantee Agency or an Interest
Subsidy Payment or a Special Allowance Payment from the Department of Education
or a guarantee payment from a guarantor of a Private Loan, and the Master
Servicer has not received the related payment prior to the end of the Collection
Period immediately preceding the Payment Date on which such amount would be
required to be distributed as a payment of interest, the Master Servicer may, no
later than the Payment Determination Date relating to such Payment Date, deposit
into the Advance Account an amount up to the amount of such payments applied for
but not received (such deposits by the Master Servicer are referred to herein as
"Advances"). On each related Payment Date for a Series, the Indenture Trustee
will distribute from the Advance Account to the Noteholders the Advance for such
Payment Date. Such Advances are recoverable by the Master Servicer (i) first,
from the source for which such Advance was made and (ii) second, from payments
received generally on or with respect to the Financed Student Loans. The Master
Servicer will have no obligation, legal or otherwise, to make any Advance, and a
determination by the Master Servicer to make an Advance will not create any
obligation of the Master Servicer, legal or otherwise, to make any future
Advances.
Year 2000 Information Systems Procedures. The Master Servicer currently is
implementing its information systems so that they will be fully operable for
date recognition and information processing when the year 2000 begins. An
assessment of needed changes was completed by a corporate-wide task force, led
by the Master Servicer's Technology and Operations Group, with representation
from all major internal business segments. This task force continues to monitor
the Master Servicer's progress, in addition to communicating with external
service providers and selected customers to ensure they are taking appropriate
actions to address date recognition issues. A combination of internal and
external resources are being used by the Master Servicer to implement the needed
changes to its many different information systems. Some of the necessary changes
in the Master Servicer's computer code have been made during the course of
normal maintenance. Other changes will necessitate re-writing of the computer
code, which is expected to be completed at some point in 1998.
Information with respect to the Master Servicer's year 2000 date recognition and
information processing program is contained in Crestar Financial Corporation's
Exchange Act reports, which may be obtained from the Commission at the sources
identified herein under "Available Information."
The Master Servicer expects to require each Servicer to represent and warrant,
among other things, that the information systems used by such Servicers in
connection with the servicing of the Financed Student Loans will be fully
operable for date recognition and information processing when the year 2000
begins.
Certain Matters Regarding the Master Servicer
Each Transfer and Servicing Agreement will provide that the Master Servicer may
not resign from its obligations and duties as Master Servicer thereunder, except
upon determination that the Master Servicer's performance of such duties is no
longer permissible under applicable law or will violate any final order of a
court or administrative agency with jurisdiction over the Master Servicer or its
properties. Generally, no such resignation will become effective until the
Indenture Trustee or a successor servicer has assumed the Master Servicer's
servicing obligations and duties under the Transfer and Servicing Agreement.
Each Transfer and Servicing Agreement will further provide that neither the
Transferor, the Depositor, the Master Servicer nor any of their directors,
officers, employees or agents will be under any liability to the related Trust,
the Noteholders, the Certificateholders, the Indenture Trustee or the Eligible
Lender Trustee, except as provided under the Transfer and Servicing Agreement or
the Administration Agreement for taking any action or for refraining from taking
any action pursuant to the Transfer and Servicing Agreement, or for errors in
judgment; provided however, that neither the Transferor, the Depositor, the
Master Servicer nor any such person will be protected against any liability that
would otherwise be imposed by reason of willful misfeasance, bad faith or
negligence in the performance of their respective duties thereunder. In
addition, each Transfer and Servicing Agreement will provide that the Transferor
and the Master Servicer shall not be under any obligation to appear in,
prosecute, or defend any legal action that is not incidental to its duties in
accordance with the Transfer and Servicing Agreement and that, in its opinion,
may cause it to incur any expense or liability.
Each Transfer and Servicing Agreement will provide that the Master Servicer will
be permitted to perform its services thereunder through any of its affiliates,
provided that the Master Servicer shall continue to be responsible for all
performance of such services.
Under the circumstances and subject to conditions specified in each Transfer and
Servicing Agreement, any entity into which the Master Servicer may be merged or
consolidated, or any entity resulting from any merger or consolidation to which
the Master Servicer is a party, or any entity succeeding to the business of the
Master Servicer will be the successor of the Master Servicer under the Transfer
and Servicing Agreement. Successors (other than Crestar Financial Corporation or
a Crestar Subsidiary (as defined below)) must execute an agreement expressly
assuming the Master Servicer's obligations under the related Transfer and
Servicing Agreement. Nothing in any Agreement prohibits or restricts the merger
of Crestar Bank with Crestar Financial Corporation or certain subsidiaries of
Crestar Financial Corporation (each a "Crestar Subsidiary"), the consolidation
of Crestar Bank and Crestar Financial Corporation or any Crestar Subsidiary, or
the sale of all or substantially all of the assets of Crestar Bank to Crestar
Financial Corporation or another Crestar Subsidiary.
Master Servicer Covenants
In each Transfer and Servicing Agreement, the Master Servicer covenants that:
(a) it will duly satisfy or cause to be duly satisfied all obligations on its
part to be fulfilled under or in connection with the Financed Student Loans,
maintain in effect all qualifications required to service the Financed Student
Loans and comply in all material respects with all requirements of law and
program requirements for Private Loans in connection with servicing the Financed
Student Loans, the failure to comply with which would have a materially adverse
effect on the Noteholders; (b) it will not permit any rescission or cancellation
of a Financed Student Loan except as ordered by a court of competent
jurisdiction or other government authority or as otherwise consented to by the
Eligible Lender Trustee and the Indenture Trustee; (c) it will do nothing to
impair in any material respect the rights of the Noteholders in the Financed
Student Loans; and (d) it will not reschedule, revise, defer or otherwise
compromise with respect to payments due on any Financed Student Loan except
pursuant to any applicable Deferment or Forbearance Periods or otherwise in
accordance with its guidelines with respect to the servicing of the Financed
Student Loans; provided, however, that the Master Servicer may not agree to any
decrease of the interest rate on, or the principal amount payable with respect
to, any Financed Student Loan except as otherwise permitted by the applicable
student loan program. Notwithstanding the foregoing, the Master Servicer may, in
its sole discretion, without having to obtain the consent or approval of any
other party, (i) not collect late charges that may be due on Financed Student
Loans, and (ii) waive remaining amounts owing under a Financed Student Loan up
to and including $250 (or such other amount as may be specified in a Prospectus
Supplement for a Series).
Following the discovery by or notice to the Master Servicer of a breach of any
such obligations with respect to any Financed Student Loan that results in the
failure of a Guarantee Agency (including for this purpose a guarantor under a
Private Loan Program) to make a Guarantee Payment or the Department of HHS to
make an Insurance Payment, the Master Servicer is obligated to purchase such
Financed Student Loan and reimburse the Trust for certain payments, all on terms
corresponding to those for the Depositor. See "Description of the
Agreements--Transfer and Servicing Agreements--Conveyance of Financed Student
Loans; Representations and Warranties" herein. The purchase and reimbursement
obligations of the Master Servicer will constitute, together with any rights to
receive certain amounts from Credit Enhancement, the sole remedy available to or
on behalf of the related Trust, the Certificateholders or the Noteholders for
any such uncured breach. The Master Servicer's purchase and reimbursement
obligations are contractual obligations pursuant to the Transfer and Servicing
Agreement that may be enforced against the Master Servicer, but the breach
thereof will not constitute an Event of Default under the Notes.
Master Servicer Default
A "Master Servicer Default" under a Transfer and Servicing Agreement will
consist of: (i) any failure by the Master Servicer to deliver to the Indenture
Trustee for deposit in any of the Trust Accounts at the time required for such
deposit any collections, Guarantee Payments, Insurance Payments, any payments by
a guarantor under a guarantee agreement for a Private Loan or other amounts
received by the Master Servicer with respect to the Financed Student Loans,
which failure continues unremedied for three Business Days after written notice
from the Indenture Trustee, the Administrator or the Eligible Lender Trustee is
received by the Master Servicer or after discovery by the Master Servicer; (ii)
any failure by the Master Servicer duly to observe or perform in any material
respect any other covenant or agreement of the Master Servicer in the Transfer
and Servicing Agreement which failure materially and adversely affects the
rights of Noteholders and which continues unremedied for 60 days after the
giving of written notice of such failure (A) to the Master Servicer by the
Indenture Trustee, the Eligible Lender Trustee or the Administrator or (B) to
the Master Servicer and to the Indenture Trustee and the Eligible Lender Trustee
by holders of Directing Notes evidencing not less than 25% in principal amount
of the outstanding Directing Notes; (iii) certain events of insolvency,
readjustment of debt, marshaling of assets and liabilities, or similar
proceedings with respect to the Master Servicer and certain actions by the
Master Servicer indicating its Insolvency, reorganization pursuant to bankruptcy
proceedings or inability to pay its obligations; and (iv) any limitation,
suspension or termination by the Department of Education or the Department of
HHS or by a guarantor of Financed Private Loans of the Master Servicer's
eligibility to service Student Loans which materially and adversely affects the
Master Servicer's ability to service Financed Student Loans.
Servicing Compensation
The Master Servicer will be entitled to receive a fee (the "Servicing Fee") with
respect to each Series of Notes in an amount identified in the related
Prospectus Supplement. The Servicing Fee may be payable in advance or arrears,
out of Available Funds on each Payment Date or Quarterly Payment Date (or in the
case of the initial Servicing Fee payable in advance, on the Closing Date).
The Servicing Fee is intended to compensate the Master Servicer and each other
Servicer for performing the functions of a third party servicer of student loans
as an agent for their beneficial owner, including collecting and posting all
payments, responding to inquiries of borrowers on the Financed Student Loans,
investigating delinquencies, pursuing, filing and collecting any Guarantee
Payments, Insurance Payments and guarantee payments by guarantors of Financed
Private Loans, including litigation costs, accounting for collections and
furnishing monthly and annual statements to the Administrator. The Servicing Fee
also will reimburse the Master Servicer for certain taxes, accounting fees,
outside auditor fees, data processing costs and other costs incurred in
connection with administering the Financed Student Loans.
The amount of the Servicing Fee and method of calculating the same with respect
to the Financed Student Loans for a Series will be as set forth in the
Prospectus Supplement for such Series.
DESCRIPTION OF THE NOTES
General
The Notes of any Series will be issued pursuant to the terms of the Indenture,
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The following summary describes the material terms of the
Notes and the Indenture. The summary does not purport to be complete and is
qualified in its entirety by reference to the provisions of the Notes, the
Indenture and the Terms Supplement, which provisions are incorporated by
reference herein.
It is expected that each Class of the Notes of a Series will initially be
represented by one or more Notes registered in the name of the nominee of DTC
(together with any successor depository selected by the Administrator, the
"Depository"). Notes generally will be available for purchase in denominations
of $50,000 and integral multiples of $1,000 in excess thereof in book-entry
form. The Depositor has been informed by DTC that DTC's nominee will be Cede &
Co. Accordingly, Cede & Co. is expected to be the holder of record of the Notes.
Unless and until Definitive Notes are issued under the limited circumstances
described herein or in the accompanying Prospectus Supplement, no Noteholder
will be entitled to receive a physical certificate representing his Note. All
references herein to actions by Noteholders refer to actions taken by DTC upon
instructions from its participating organizations (the "Participants") and all
references herein to distributions, notices, reports and statements to
Noteholders refer to distributions, notices, reports and statements to DTC or
Cede & Co., as the registered holder of the Notes, for distribution to
Noteholders in accordance with DTC's procedures with respect thereto. See "--
Book-Entry Registration" and "-- Definitive Notes" herein.
Each Class of Notes of a Series will evidence the interests specified in the
related Prospectus Supplement, which may (i) include the right to receive
payments allocable only to principal, only to interest or to any combination
thereof; (ii) include the right to receive payments only of prepayments of
principal throughout the lives of the Notes or during specified periods; (iii)
be subordinated in its right to receive distributions of scheduled payments of
principal, prepayments or principal, interest or any combination thereof to one
or more other Classes of Notes of the related Trust throughout the lives of the
Notes or during specified periods or may be subordinated with respect to certain
losses or delinquencies; (iv) include the right to receive such payments only
after the occurrence of events specified in the Prospectus Supplement; (v)
include the right to receive payments in accordance with a schedule or formula
or on the basis of collections from designated portions of the assets in the
related Trust; (vi) include, as to Notes entitled to payments allocable to
interest, the right to receive interest at a fixed rate or an adjustable rate;
(vii) include the right to have interest accrue but not be paid until the
occurrence of a specified event or the passing of time; and (viii) include, as
to Notes entitled to payments allocable to interest, the right to payments
allocable to interest only after the occurrence of events specified in the
related Prospectus Supplement.
Payment of Available Funds
On or before each Payment Determination Date with respect to each Series of
Notes, the Administrator will provide the Indenture Trustee and the Eligible
Lender Trustee a report setting forth by component the Available Funds for the
immediately preceding Collection Period. "Available Funds" means the sum,
without duplication, of the following amounts with respect to the related
Collection Period: (i) all collections received by the Master Servicer or any
Servicer on the Financed Student Loans (and any Guarantee Payments and any
payments by any guarantor under any Private Loan Program) and Insurance Payments
received with respect to the Financed Student Loans during such Collection
Period); (ii) any payments, including without limitation, Interest Subsidy
Payments and Special Allowance Payments received by the Eligible Lender Trustee
during such Collection Period with respect to the Financed Student Loans; (iii)
all proceeds from any sales of Financed Student Loans by the Trust during such
Collection Period; (iv) any payments of or with respect to interest received by
the Master Servicer or a Servicer during such Collection Period with respect to
a Financed Student Loan for which a Realized Loss was previously allocated; (v)
the aggregate Purchase Amounts received for those Financed Student Loans
purchased by the Depositor or the Master Servicer during the related Collection
Period; (vi) the aggregate amounts, if any, received from the Depositor or the
Master Servicer as reimbursement of non-guaranteed or uninsured interest amounts
(which shall not include, with respect to Financed FFELP Loans, the portion of
such interest amounts (i.e., 2%) for which the Guarantee Agency did not have an
obligation to make a Guarantee Payment), or lost Interest Subsidy Payments and
Special Allowance Payments with respect to the Financed Student Loans pursuant
to the Transfer and Servicing Agreement; (vii) net Adjustment Payments, if any,
during such Collection Period; (viii) investment earnings for such Collection
Period; and (ix) any other sums identified in the related Prospectus Supplement;
provided, however, that Available Funds will exclude all payments and proceeds
of any Financed Student Loans the Purchase Amount of which has been included in
Available Funds for a prior Collection Period (which payments and proceeds shall
be paid to the Depositor), and amounts used to reimburse the Master Servicer for
Advances pursuant to the terms of the applicable Transfer and Servicing
Agreement.
On each Payment Determination Date described in the Prospectus Supplement, the
Administrator will advise the Indenture Trustee and the Eligible Lender Trustee
in writing of the applicable Class Interest Rate payable on each Class of Notes
(and the Certificates) and the applicable Principal Payment Amount payable on
the Notes (or, after all the Notes have been paid in full, the Certificates) on
such Payment Date or Quarterly Payment Date. In addition, on each Payment
Determination Date the Administrator will advise the Indenture Trustee in
writing of the estimated Transaction Fees payable on such Payment Date or
Quarterly Payment Date.
Prior to making payments to the Note Payment Account, the Indenture Trustee
will, if so provided in the Prospectus Supplement for a Series, transfer from
the applicable Collection Account to the Expense Account an amount sufficient to
pay Transaction Fees. On each Payment Date or Quarterly Payment Date (other than
those relating to Accrual Notes during the related Accrual Period), the
Indenture Trustee will, subject to the amount of Available Funds, transfer from
the Collection Account to the Note Payment Account an amount equal to the Class
Interest Rate on each Class of the Notes, as described in the related Prospectus
Supplement. For each Payment Date during the related Accrual Period relating to
a Class of Accrual Notes, the related Class Interest Rate will be added to the
principal amount of such Class of Notes. On each Payment Date or Quarterly
Payment Date on which principal is payable on the Notes, the Indenture Trustee
will, subject to the amount of Available Funds, transfer from the Collection
Account to the Note Payment Account an amount equal to the Principal Payment
Amount, as described in the related Prospectus Supplement. On each Payment Date
or Quarterly Payment Date, the Indenture Trustee will pay to the Noteholders of
the applicable Class as of the related Record Date all amounts transferred to
the Note Payment Account as set forth above and in the related Prospectus
Supplement.
Following the payment of all required amounts due on the Notes on any Payment
Date or Quarterly Payment Date (and deposit of any required amounts in any
Reserve Account), the Indenture Trustee will, to the extent of Available Funds,
transfer from the Collection Account to the Certificate Distribution Account, an
amount equal to the related Interest Distribution Amount on the Certificates on
such Payment Date, and after payment in full of the Notes of a Series, the
amount required to reduce the Certificate principal balance to zero.
On each Payment Date or Quarterly Payment Date, as specified in the related
Prospectus Supplement, the Indenture Trustee will, after making all required
transfers to the Note Payment Account, Expense Account, Reserve Account and
Certificate Distribution Account, transfer any remaining available funds to the
Depositor. Payments made to the Depositor will not thereafter be available to
make payments on the Notes.
Notwithstanding the foregoing, if there has been an Event of Default with
respect to payment of the Notes issued by a Trust, the Certificateholders of
such Trust will not be entitled to any payments of principal or interest until
each outstanding Class of Notes of such Trust has been paid in full.
Interest
Interest will accrue on the principal balance of each Class of Notes of a Series
at a rate per annum (calculated as provided below or in the related Prospectus
Supplement) equal to the related Class Interest Rate. Interest is expected to
accrue initially from and including the Closing Date on which the related Series
was issued through and including the date set forth in the related Prospectus
Supplement and, thereafter, except as otherwise set forth in the related
Prospectus Supplement, for periods (each, an "Interest Accrual Period")
consisting of (i) with respect to LIBOR Rate Notes, generally a one-month or
three-month period beginning and ending on the dates set forth in the related
Prospectus Supplement, (ii) with respect to T-Bill Rate Notes, generally a
three-month period beginning and ending on the dates set forth in the related
Prospectus Supplement, (iii) with respect to Auction Rate Notes, as set forth in
the related Prospectus Supplement, or (iv) with respect to Notes accruing
interest based on some other method, the period set forth in the related
Prospectus Supplement. Interest on each Class of Notes will be payable (or with
respect to Accrual Notes during the related Accrual Period, added to the
principal amount thereof) on the Payment Dates described in the applicable
Prospectus Supplement.
Generally, the Class Interest Rate on each Class of Notes will equal the lesser
of (i) the interest rate and applicable margin, if any, and (ii) a cap specified
in the related Prospectus Supplement (the "Formula Rate"); provided that it will
not exceed the Net Loan Rate when it is required to be determined. The Net Loan
Rate will not need to be determined unless the applicable Formula Rate (without
regard to the cap) exceeds the auction note for 91-day Treasury bills for the
immediately preceding Interest Determination Date by more than 1.0% on the
Interest Determination Date preceding the related Interest Accrual Period.
If on any Interest Determination Date, an Auction for a Class of Notes is not
held for any reason, then the Class Interest Rate for such Class of Notes will
be the Net Loan Rate or such other rate as may be described in a Prospectus
Supplement. The Class Interest Rate on each Class of Notes bearing interest
based upon a method other than LIBOR, T-Bill or Auction Rate will be described
in the related Prospectus Supplement.
With respect to Auction Rate Notes, the Administrator may, from time to time,
change the length of one or more Auction Periods to conform with then current
market practice or accommodate other economic or financial factors that may
affect or be relevant to the length of the Auction Period or any Class Interest
Rate (an "Auction Period Adjustment"). An Auction Period Adjustment will not
cause an Auction Period to be less than 7 days nor more than one year and will
not be allowed unless certain conditions described in the Auction Procedures in
Appendix I to the related Prospectus Supplement are satisfied. If an Auction
Period Adjustment is made, the intervals between Payment Dates will be adjusted
accordingly.
Payment of Interest. Payments of interest will be made on each Payment Date or
Quarterly Payment Date, as specified in the accompanying Prospectus Supplement.
Interest payments may include interest accrued on the assets of the related
Trust during one or more Interest Accrual Periods. Interest payments on the
Notes will generally be funded from Available Funds and Advances (and, when
applicable, amounts on deposit in any Reserve Account, Pre-Funding Account or
such other account as may be set forth in a Prospectus Supplement) remaining
after the deposit of the Transaction Fees in the Expense Account. If
insufficient funds are available to pay the applicable Class Interest Rate on a
Payment Date or Quarterly Payment Date, such shortfall will be paid from draws
on the applicable forms of Credit Enhancement to the extent described in the
related Prospectus Supplement.
Carryover Interest. If set forth in a Prospectus Supplement, with respect to any
Class of Notes of a Series for any Interest Accrual Period the LIBOR Rate,
T-Bill Rate, Auction Rate or other applicable interest rate plus the applicable
margin exceeds the Net Loan Rate, the applicable Class Interest Rate for such
Interest Accrual Period will be the Net Loan Rate, and the excess of the amount
of interest on such Class of Notes that would have accrued at a rate equal to
the LIBOR Rate, T-Bill Rate, Auction Rate or other applicable interest rate plus
any applicable margin, over the amount of interest on such Class actually
accrued at the Net Loan Rate will accrue as the Carryover Interest with respect
to such Class of Notes. Such determination of the Carryover Interest will be
made separately for each Class of Notes. The Carryover Interest on any Class of
Notes will bear interest at a rate equal to the Formula Rate, or the rate set
forth in the related Prospectus Supplement, from the Payment Date for the
Interest Accrual Period for which the Carryover Interest was calculated until
paid.
Carryover Interest will be paid as described in the related Prospectus
Supplement.
Principal
All payments of principal of Notes of a Series 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 Notes of such
Series in the order and amounts, all as specified in the related Prospectus
Supplement. Principal may be paid pro rata to the Noteholders of any Class, or
may be repaid by lot, in either case as described in the related Prospectus
Supplement.
As described herein, each Trust that is a master trust may issue, from time to
time, several Series and Classes of Notes. A Series of Notes may contain one or
more Classes of Notes with a higher payment priority than one or more Classes of
Notes of a previously issued or subsequently issued Series. In such event, the
Classes of Notes with the lower payment priority will receive limited or no
payments of principal until each of the Classes of Notes with a higher payment
priority, regardless of when issued, have been paid to the extent set forth in a
Prospectus Supplement.
The aggregate outstanding principal amount of each Class of Notes of a Series
will be payable in full on the Payment Date identified in the related Prospectus
Supplement (the "Legal Final Maturity"). The actual date on which the aggregate
outstanding principal and accrued interest of any Class of Notes are paid may be
earlier than its respective Legal Final Maturity, based on a variety of factors,
including those described under "Maturity and Prepayment Considerations" herein.
Realized Losses. The Trust may experience losses with respect to the Financed
Student Loans. If such Realized Losses are not absorbed by the equity of the
Trust, they may result in the inability to pay the Notes of a Series in full.
With respect to each Financed FFELP Loan submitted to a Guarantee Agency for a
Guarantee Payment, a "Realized Loss" means the excess, if any, of (i) the unpaid
principal balance of such Financed FFELP Loan on the date it was first submitted
to a Guarantee Agency for a Guarantee Payment over (ii) all amounts received on
or with respect to principal on such Financed FFELP Loan up through the earlier
to occur of (A) the date a related Guarantee Payment is made or (B) the last day
of the Collection Period occurring 12 months after the date the claim for such
Guarantee Payment is first denied.
With respect to each Financed HEAL Loan submitted to the Department of HHS for
an Insurance Payment, a "Realized Loss" means the excess, if any, of (i) the
unpaid principal balance of such Financed HEAL Loan on the date it was first
submitted to the Department of HHS for an Insurance Payment over (ii) all
amounts received on or with respect to principal on such Financed HEAL Loan up
through the earlier to occur of (A) the date a related Insurance Payment is made
or (B) the last day of the Collection Period occurring 12 months after the date
the claim for such Insurance Payment is first denied.
With respect to each Private Loan, a "Realized Loss" generally will mean the
excess, if any, of (i) the unpaid principal balance of such Private Loan at the
time of default, plus accrued and unpaid interest thereon, if any, at such time
over (ii) all amounts received on or with respect to the liquidation of such
Private Loan. The Prospectus Supplement for any Series of Notes containing
Private Loans will describe the particular procedures with respect to the
realization of Realized Losses on the Private Loans of such Series.
Determination of LIBOR
Pursuant to each Transfer and Servicing Agreement and each Prospectus
Supplement, for each Interest Accrual Period after the initial Interest Accrual
Period, the Master Servicer will determine the applicable LIBOR rate for
purposes of calculating the Class Interest Rate on the LIBOR Rate Notes for each
given Interest Accrual Period on the date which is both two Business Days (in
New York and Virginia) and two London Banking Days preceding the commencement of
each Interest Accrual Period (each, an "Interest Determination Date"). "London
Banking Day" means a business day on which dealings in deposits in United States
dollars are transacted in the London interbank market.
"LIBOR" means the rate of interest per annum equal to the London interbank
offered rate for deposits in U.S. dollars having the applicable maturity (i.e.,
one month or three months) commencing on the related Interest Determination Date
(the "Index Maturity") which appears on Telerate Page 5 as of 11:00 a.m., London
time, on such Interest Determination Date. If such rate does not appear on
Telerate Page 5, the rate for that day will be determined by reference to the
Reuters Screen LIBOR Page. If such rate does not appear on Telerate Page 5 or
the Reuters Screen LIBOR Page, the rate for that day will be determined on the
basis of the rates at which deposits in U.S. dollars, having the Index Maturity
and in a principal amount of not less than U.S. $1,000,000, are offered at
approximately 11:00 a.m., London time, on such Interest Determination Date to
prime banks in the London interbank market by the Reference Banks. The Master
Servicer will request the principal London office of each of such Reference
Banks to provide a quotation of its rate. If at least two such quotations are
provided, LIBOR for that day will be the arithmetic mean (rounded upwards, if
necessary, to the nearest .01%) of the quotations. If fewer than two quotations
are provided, LIBOR for that day will be the arithmetic mean (rounded upwards,
if necessary, to the nearest .01%) of the rates quoted by three major banks in
New York City, selected by the Master Servicer, or by the Trustee, as
applicable, at approximately 11:00 a.m., New York City time, on such Interest
Determination Date for loans in U.S. dollars to leading European banks having
the Index Maturity and in a principal amount equal to an amount of not less than
U.S. $1,000,000; provided, however, that if the banks selected as aforesaid are
not quoting as mentioned in this sentence, LIBOR in effect for the applicable
Interest Accrual Period will be LIBOR in effect for the previous Interest
Accrual Period.
T-Bill Rate
Pursuant to each Transfer and Servicing Agreement and the accompanying
Prospectus Supplement, for each Interest Accrual Period after the initial
Interest Accrual Period, the Master Servicer will determine the T-Bill Rate for
purposes of calculating the Class Interest Rate on each Class of T-Bill Rate
Notes of the related Series for each given Interest Accrual Period on the
related Interest Determination Date. The T-Bill Rate means the rate of interest
per annum equal to the average of the bond equivalent yields of the 91-day
Treasury bills auctioned during the preceding quarter (the "T-Bill Rate").
Auction Procedures
A Series of Notes may contain one or more Classes of Auction Rate Notes. The
following discussion summarizes certain procedures that will be used in
determining the interest rates on the Auction Rate Notes. If any Auction Rate
Notes are included in a Series, the Prospectus Supplement will contain a more
detailed description of these procedures in an Appendix. Prospective investors
in the Auction Rate Notes should read carefully the following summary, along
with the more detailed description in the Prospectus Supplement.
The interest rate on each Class of Auction Rate Notes will be determined
periodically (generally, for periods ranging from 7 days to one year) by means
of a "Dutch Auction." In this Dutch Auction, investors and potential investors
submit orders through an eligible broker/dealer as to the principal amount of
Auction Rate Notes such investors wish to buy, hold or sell at various interest
rates. The broker/dealers submit their clients' orders to the auction agent, who
processes all orders submitted by all eligible broker/dealers and determines the
interest rate for the upcoming interest period. The broker/dealers are notified
by the auction agent of the interest rate for the upcoming interest period and
are provided with settlement instructions relating to purchases and sales of
Auction Rate Notes.
In the auction procedures, the following types of orders may be submitted:
(i) Bid/Hold Orders - the minimum interest rate that a
current investor is willing to accept in order to
continue to HOLD some or all of its Auction Rate
Notes for the upcoming interest period;
(ii) Sell Orders - an order by a current investor to SELL
a specified principal amount of Auction Rate Notes,
regardless of the upcoming interest rate; and
(iii) Potential Bid Orders - the minimum interest rate that
a potential investor (or a current investor wishing
to purchase additional Auction Rate Notes) is willing
to accept in order to BUY a specified principal
amount of Auction Rate Notes.
If an existing investor does not submit orders with respect to all its Auction
Rate Notes of the applicable Class, the investor will be deemed to have
submitted a Hold Order at the new interest rate for that portion of the Auction
Rate Notes for which no order was received.
In connection with each auction, Auction Rate Notes will be purchased and sold
between investors and potential investors at a price equal to their then
outstanding principal balance (i.e., par) plus any accrued interest. The
following example helps illustrate how the above-described procedures are used
in determining the interest rate on the Auction Rate Notes.
(a) Assumptions:
1. Denominations (Units) = $100,000
2. Interest Period = 28 Days
3. Principal Amount Outstanding = $50 Million (500 Units)
(b) Summary of All Orders Received For The Auction
<TABLE>
<CAPTION>
BID/HOLD ORDERS SELL ORDERS POTENTIAL BID ORDERS
<S> <C>
10 Units at 2.90% 50 Units Sell 20 Units at 2.95%
30 Units at 3.02% 50 Units Sell 30 Units at 3.00%
60 Units at 3.05% 100 Units Sell 50 Units at 3.05%
100 Units at 3.10% 50 Units at 3.10%
100 Units at 3.12% 50 Units at 3.11%
50 Units at 3.14%
100 Units at 3.15%
Total units under existing Bid/Hold Orders and Sell Orders must always equal
issue size (in this case 500 Units).
(c) Auction Agent Organizes Orders In Ascending Order
Order Number Cumulative Order Number Cumulative
Number of Units Total (Units) % Number of Units Total (Units) %
1 10(W) 10 2.90% 7 100(W) 300 3.10%
2 20(W) 30 2.95% 8 50(W) 350 3.10%
3 30(W) 60 3.00% 9 50(W) 400 3.11%
4 30(W) 90 3.02% 10 100(W) 500 3.12%
5 50(W) 140 3.05% 11 50(L) 3.14%
6 60(W) 200 3.05% 12 100(L) 3.15%
- ------------------------
</TABLE>
(W) Winning Order (L) Losing Order
Order #10 is the order that clears the market of all available units. All
winning orders are awarded the winning rate (in this case, 3.12%) as the
interest rate for the next Interest Accrual Period. Multiple orders at the
winning rate are allocated units on a pro rata basis. Notwithstanding the
foregoing, in no event will the interest rate exceed the lesser of the Net Loan
Rate or the Maximum Auction Rate.
The above example assumes that a successful auction has occurred (i.e., all Sell
Orders and all Bid/Hold Orders below the new interest rate were fulfilled). In
certain circumstances, there may be insufficient Potential Bid Orders to
purchase all the Auction Rate Notes offered for sale. In such circumstances, the
interest rate for the upcoming Interest Accrual Period will equal the lesser of
the Net Loan Rate and the Maximum Auction Rate. Also, if all the Auction Rate
Notes are subject to Hold Orders (i.e., each holder of Auction Rate Notes wishes
to continue holding its Auction Rate Notes, regardless of the interest rate) the
interest rate for the upcoming Interest Accrual Period will equal the lesser of
the Net Loan Rate and the rate at which all investors are willing to hold the
Notes.
Credit Enhancement
The amounts and types of Credit Enhancement arrangements and the provider
thereof, if applicable, with respect to a Series or any Class of Notes will be
set forth in the related Prospectus Supplement. If specified in the applicable
Prospectus Supplement, Credit Enhancement for any Series of Notes may cover one
or more Classes of Notes or Certificates, and, accordingly, may be exhausted for
the benefit of a particular Class of Notes or Certificates and thereafter be
unavailable to such other Classes of Notes or Certificates. Further information
regarding any provider of Credit Enhancement, including financial information
when material, will be included or incorporated by reference in the related
Prospectus Supplement. If and to the extent provided in the related Prospectus
Supplement, Credit Enhancement may include one or more of the following or any
combination thereof:
Reserve Account. A Reserve Account may be created with respect to any Series of
Notes, and on each Closing Date the Depositor may deposit cash or Eligible
Investments in an amount, if any, equal to the Reserve Account Deposit
identified in the related Prospectus Supplement. The Reserve Account may be
augmented on certain Payment Dates, as set forth in the related Prospectus
Supplement, by deposit therein of the amount, if any, necessary to cause the
balance of the Reserve Account to equal the Specified Reserve Account Balance
from the amount of Available Funds remaining after making all prior
distributions on such date as described in the related Prospectus Supplement;
provided, however, that, if and as set forth in the related Prospectus
Supplement, such Available Funds may be applied as an additional principal
payment. Also, if amounts were transferred from the Reserve Account to cover a
Realized Loss on a Financed Student Loan, any subsequent payments of principal
received on or with respect to such Financed Student Loan will be deposited into
the Reserve Account or, if so provided in the related Prospectus Supplement,
applied as an additional Principal Payment. Amounts on deposit in the Reserve
Account exceeding the Specified Reserve Account Balance will be distributed as
set forth in the related Prospectus Supplement.
A Reserve Account is intended to enhance the likelihood of timely receipt by the
Noteholders of the full amount of principal and interest due them and to
decrease the likelihood that the Noteholders will experience losses. In certain
circumstances, however, a Reserve Account could be depleted. Further, as
described above, amounts otherwise required to be deposited into the Reserve
Account may, with the consent of any provider of Credit Enhancement, if any, be
applied as additional Principal Payments. If the amount required to be withdrawn
from the Reserve Account to cover shortfalls in the amount of Available Funds
exceeds the amount of cash in the Reserve Account, a temporary shortfall in the
amount of principal and interest distributed to the Noteholders could result.
This shortfall could, in turn, increase the average life of the Notes. Moreover,
amounts on deposit in the Reserve Account (other than amounts in excess of the
Specified Reserve Account Balance) will not be available to cover any aggregate
unpaid Carryover Interest.
Subordination. The rights of the holders of a Class of Notes may be subordinated
to the rights of more senior Noteholders to the extent described herein and in
the related Prospectus Supplement.
Surety Bonds. A Surety Bond with respect to one or more Classes of a Series of
Notes may be obtained by the Depositor in favor of the Eligible Lender Trustee
solely on behalf of the Noteholders of the related Series. Except as provided
below or in a Prospectus Supplement, a Surety Bond will provide for coverage of
timely payment of all interest and ultimate payment of all principal due on the
related Series of Notes; provided, however, that Surety Bonds will not ensure
payment of any Carryover Interest.
The amount required to be paid to the issuer of each Surety Bond will be
described in the applicable Prospectus Supplement.
Other Forms of Credit Enhancement. If and to the extent specified in the related
Prospectus Supplement, Credit Enhancement with respect to a Series or any Class
of Notes may also include overcollateralization, letters of credit, liquidity
facilities, insurance policies, spread accounts, one or more Classes of
subordinate securities, derivative products or other forms of credit enhancement
including but not limited to third party guarantees (collectively, "Credit
Enhancement"). The Credit Enhancement with respect to any Series or Class of
Notes may be structured to provide protection against delinquencies and/or
losses on the Financed Student Loans, against changes in interest rates, or
other risks, to the extent and under the conditions specified in the related
Prospectus Supplement. Any form of Credit Enhancement will have certain
limitations and exclusions from coverage thereunder, which will be described in
the related Prospectus Supplement.
Termination
To avoid excessive administrative expense, the Master Servicer is permitted at
its option to purchase from the Eligible Lender Trustee, as of the end of any
Collection Period immediately preceding a Payment Date if the then outstanding
Pool Balance with respect to the related Trust is equal to or less than a
percentage specified in a Prospectus Supplement of the Initial Pool Balance, all
remaining Financed Student Loans at a price equal to the aggregate Purchase
Amounts thereof as of the end of such Collection Period, but not less than an
amount necessary to pay transaction costs and all amounts due the Noteholders
(other than Carryover Interest). The net proceeds of such purchase will be used
to retire the Notes of such Series. Upon termination of a Trust, remaining
assets will be conveyed and transferred to the Depositor after giving effect to
any final distributions to Noteholders and Certificateholders.
If specified in the Prospectus Supplement for any Series, as of a date specified
therein or as of a date when the Pool Balance is reduced to a specified
percentage of the Initial Pool Balance, any Financed Student Loans remaining in
the related Trust will be offered for sale by the Indenture Trustee. The
Transferor, the Depositor, their affiliates and unrelated third parties may
offer bids to purchase the related Financed Student Loans on or prior to such
Payment Date. If at least two bids are received, the Indenture Trustee will
accept the highest bid equal to or in excess of the greater of (a) the aggregate
Purchase Amounts of such Financed Student Loans as of the end of the Collection
Period immediately preceding such Payment Date or (b) an amount sufficient to
pay transaction costs and all amounts due the Noteholders (other than Carryover
Interest). If at least two bids are not received or the highest bid is not equal
to or in excess of the foregoing minimum, the Indenture Trustee will not
consummate such sale. The net proceeds of any such sale will be used to retire
the Notes of such Series. If the sale is not consummated in accordance with the
foregoing, the Indenture Trustee may, but shall not be under any obligation to,
solicit bids to purchase the Financed Student Loans on future Payment Dates upon
terms similar to those described above. No assurance can be given as to whether
the Indenture Trustee will be successful in soliciting acceptable bids to
purchase the Financed Student Loans on either such Payment Date or any
subsequent Payment Date.
Book-Entry Registration
The description which follows of the procedures and record keeping with respect
to beneficial ownership interests in a Series of Notes, payment of principal of
and interest on the Notes to DTC Participants, Cedel Participants and Euroclear
Participants or to purchasers of the Notes, confirmation and transfer of
beneficial ownership interests in the Notes, and other securities-related
transactions by and between DTC, Cedel, Euroclear, DTC Participants, Cedel
Participants, Euroclear Participants and Note Owners, is based solely on
information furnished by DTC, Cedel and Euroclear and has not been independently
verified by the Depositor, the Transferor or the Underwriters.
If specified in the accompanying Prospectus Supplement, Noteholders may hold
their certificates 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.
DTC will hold the global Notes. Cedel and Euroclear will hold omnibus positions
on behalf of the Cedel Participants and the Euroclear Participants,
respectively, through customers securities accounts in Cedel's and Euroclear's
names on the books of their respective depositories (collectively, the
"Depositories") which in turn will hold such positions in customers' securities
accounts in the Depositories' names on the books of DTC.
DTC is a limited-purpose trust company organized under the New York Banking Law,
a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities for its Participants ("DTC Participants") and facilitates the
clearance and settlement among DTC Participants of securities transactions, such
as transfers and pledges, in deposited securities through electronic book-entry
changes in DTC Participants' accounts, thereby eliminating the need for physical
movement of securities certificates. DTC Participants include securities brokers
and dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to the DTC system is also available to others
such as securities brokers and dealers, banks, and trust companies that clear
through or maintain a custodial relationship with a DTC Participant, either
directly or indirectly ("Indirect Participants"). The rules applicable to DTC
and its DTC Participants are on file with the Commission.
Transfers between DTC Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
the ordinary way in accordance with their applicable 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
its Depository; 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 its Depository 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 Depositories.
Because of time-zone differences, credits of securities in Cedel or Euroclear as
a result of a transaction with a DTC Participant will be made during the
subsequent securities settlement processing, dated the business day following
the DTC settlement date, and such credits or any transactions in such securities
settled during such processing will be reported to the relevant Cedel
Participant or Euroclear Participant on such business day. Cash received in
Cedel or Euroclear as a result of sales of securities by or through a Cedel
Participant or a Euroclear Participant to a DTC Participant will be received
with value on the DTC settlement date but will be available in the relevant
Cedel or Euroclear cash account only as of the business day following settlement
in DTC.
Day traders that use Cedel or Euroclear and that purchase the globally offered
Notes from DTC Participants for delivery to Cedel Participants or Euroclear
Participants should note that these trades may fail on the sale side unless
affirmative actions are taken. Participants should consult with their clearing
system to confirm that adequate steps have been taken to assure settlement.
Purchases of Notes under the DTC system must be made by or through DTC
Participants, which will receive a credit for the Notes on DTC's records. The
ownership interest of each actual owner of a Note (a "Note Owner") is in turn to
be recorded on the DTC Participants' and Indirect Participants' records. Note
Owners will not receive written confirmation from DTC of their purchase, but
Note Owners are expected to receive written confirmations providing details of
the transaction, as well as periodic statements of their holdings, from the DTC
Participant or Indirect Participant through which the Note Owner entered into
the transaction. Transfers of ownership interests in the Notes are to be
accomplished by entries made on the books of DTC Participants acting on behalf
of Note Owners. Note Owners will not receive certificates representing their
ownership interest in Notes, except in the event that use of the book-entry
system for the Notes is discontinued.
To facilitate subsequent transfers, all Notes deposited by DTC Participants with
DTC are registered in the name of DTC's nominee, Cede & Co. The deposit of Notes
with DTC and their registration in the name of Cede & Co. effects no change in
beneficial ownership. DTC has no knowledge of the actual Note Owners of the
Notes; DTC's records reflect only the identity of the DTC Participants to whose
accounts such Notes are credited, which may or may not be the Note Owners. The
DTC Participants will remain responsible for keeping account of their holdings
on behalf of their customers.
Conveyance of notices and other communications by DTC to DTC Participants, by
DTC Participants to Indirect Participants, and by DTC Participants and Indirect
Participants to Note Owners will be governed by arrangements among them, subject
to any statutory or regulatory requirements as may be in effect from time to
time.
Neither DTC nor Cede & Co. will consent or vote with respect to the Notes. Under
its usual procedures, DTC mails an omnibus proxy to the issuer as soon as
possible after the record date, which assigns Cede's consenting or voting rights
to those DTC Participants to whose accounts the Notes are credited on the record
date (identified in a listing attached thereto).
Principal and interest payments on the Notes will be made to DTC. DTC's practice
is to credit DTC Participants' accounts on the applicable Payment Date in
accordance with their respective holdings shown on DTC's records unless DTC has
reason to believe that it will not receive payment on such Payment Date.
Payments by DTC Participants to Note Owners will be governed by standing
instructions and customary practices, as is the case with securities held for
the accounts of customers in bearer form or registered in "street name" and will
be the responsibility of such DTC Participant and not of DTC, the Indenture
Trustee or the Transferor, subject to any statutory or regulatory requirements
as may be in effect from time to time. Payment of principal and interest to DTC
is the responsibility of the Indenture Trustee, disbursement of such payments to
DTC Participants shall be the responsibility of DTC, and disbursement of such
payments to Note Owners shall be the responsibility of DTC Participants and
Indirect Participants.
DTC may discontinue providing its services as securities depository with respect
to the Notes at any time by giving reasonable notice to the Transferor or the
Indenture Trustee. Under such circumstances, in the event that a successor
securities depository is not obtained, Definitive Notes are required to be
printed and delivered. The Administrator may decide to discontinue use of the
system of book-entry transfers through DTC (or a successor securities
depository). In that event, Definitive Notes will be delivered to Noteholders.
See "-- Definitive Notes" herein.
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 32
currencies, including United States dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depository, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations and may include the underwriters of any Series of Notes. 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.
The Euroclear System was created in 1968 to hold securities for participants of
the Euroclear System ("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 now be settled in any of 32 currencies,
including United States dollars. The Euroclear System includes various other
services, including securities lending and borrowing and interfaces with
domestic markets in 25 countries generally similar to the arrangements for
cross-market transfers with DTC described above. The Euroclear System is
operated by Morgan Guaranty Trust Company of New York, Brussels, Belgium office
(the "Euroclear Operator" or "Euroclear"), under contract with Euroclear
Clearance System, Societe Cooperative, 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 Board
establishes policy for the Euroclear System. Euroclear Participants include
banks (including central banks), securities brokers and dealers and other
professional financial intermediaries and may include the underwriters of any
Series of Notes. Indirect access to the Euroclear System is also available to
other firms that maintain a custodial relationship with a Euroclear Participant,
either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking corporation
which is a member bank of the Federal Reserve System. As such, it is regulated
and examined by the Board of Governors of the Federal Reserve System and the New
York State Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator are
governed by the Terms and Conditions Governing Use of Euroclear and the related
Operating Procedures of the Euroclear System (collectively, the "Terms and
Conditions"). The Terms and Conditions govern transfers of securities and cash
within the Euroclear System, withdrawal of securities and cash from the
Euroclear System, and receipts of payments with respect to securities in the
Euroclear System. All securities in the Euroclear System are held on a fundable
basis without attribution of specific certificates to specific securities
clearance accounts. The Euroclear Operator acts under the Terms and Conditions
only on behalf of Euroclear Participants and has no record of or relationship
with persons holding through Euroclear Participants.
The Euroclear Operator has advised as follows: Under Belgian law, investors that
are credited with securities on the records of the Euroclear Operator have a
co-property right in the fungible pool of interests in securities on deposit
with the Euroclear Operator in an amount equal to the amount of interests in
securities credited to their accounts. In the event of the insolvency of the
Euroclear Operator, Euroclear Participants would have a right under Belgian law
to the return of the amount and type of interests in securities credited to
their accounts with the Euroclear Operator. If the Euroclear Operator did not
have a sufficient amount of interests in securities on deposit of a particular
type to cover the claims of all Euroclear Participants credited with such
interests in securities on the Euroclear Operator's records, all Euroclear
Participants having an amount of interests in securities of such type credited
to their accounts with the Euroclear Operator would have the right under Belgian
law to the return of their pro-rata share of the amount of interests in
securities actually on deposit. Under Belgian law, the Euroclear Operator is
required to pass on the benefits of ownership in any interests in securities on
deposit with it (such as dividends, voting rights and other entitlements) to any
person credited with such interests in securities on its records.
Distributions 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 its Depository. Such distributions will be subject to tax reporting
in accordance with relevant United States tax laws and regulations. See "Federal
Income Tax Consequences" herein. Cedel or the Euroclear Operator, as the case
may be, will take any other action permitted to be taken by a Noteholder under
the Agreement on behalf of a Cedel Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to its
Depository's ability to effect such actions on its behalf through DTC.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers 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.
Definitive Notes
If set forth in the accompanying Prospectus Supplement, Notes of any Series will
be issued in fully registered, certificated form (the "Definitive Notes") to
Note owners or their nominees rather than to DTC or its nominee, if (i) the
Administrator advises the Indenture Trustee for such Series in writing that DTC
is no longer willing or able to discharge properly its responsibilities as
Depository with respect to such Series of Notes, and the Administrator is unable
to locate a qualified successor, (ii) the Administrator, at its option, advises
the Trustee in writing that it elects to terminate the book-entry system through
DTC or successor securities depository or (iii) after the occurrence of an Event
of Default, Master Servicer Default or Administrator Default Noteholders
representing not less than 50% of the outstanding principal balance of the
Directing Notes advise the Indenture Trustee and DTC through DTC Participants in
writing that the continuation of a book-entry system through DTC (or a successor
thereto) is no longer in the best interest of the Noteholders.
Upon the occurrence of any of the events described in the immediately preceding
paragraph, the Indenture Trustee will cause DTC to notify all DTC Participants
of the availability through DTC of Definitive Notes. Upon surrender by DTC of
the definitive certificate representing the Notes and instructions for
registration, the Indenture Trustee will issue the Notes as Definitive Notes,
and thereafter the Indenture Trustee will recognize the holders of such
Definitive Notes as Noteholders under the Indenture.
Distribution of principal of and interest on the Notes will be made by the
Indenture Trustee directly to Noteholders of Definitive Notes in accordance with
the procedures set forth herein and in the Transfer and Servicing Agreement.
Interest payments and any principal payments on each Payment Date will be made
to Noteholders in whose names the Definitive Notes were registered at the close
of business on the related Record Date. The final payment on any Note (whether
Definitive Notes or the Notes registered in the name of Cede & Co. representing
the Notes), will he made only upon presentation and surrender of such Note at
the office or agency specified in the notice of final distribution to
Noteholders. The Indenture Trustee will provide such notice to registered
Noteholders prior to the Payment Date on which it expects such final
distributions to occur.
Definitive Notes will be transferable and exchangeable at the offices of the
transfer agent and registrar for the Notes, which shall initially be the
Indenture Trustee. No service charges will be imposed for any registration of
transfer or exchange, but the Transfer Agent and Registrar may require payment
of a sum sufficient to cover any tax or other governmental charge imposed in
connection therewith.
List of Noteholders
A Noteholder may, by written request to the Indenture Trustee, obtain access to
the list of all Noteholders of the related Trust maintained by the Indenture
Trustee for the purpose of communicating with other Noteholders with respect to
their rights under the Indenture or the Notes. 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 and at the expense
of the requesting Noteholders, to all Noteholders.
Reports to Noteholders
On each Payment Date, the Indenture Trustee will provide to the applicable
Noteholders of record as of the related Record Date, a statement setting forth
substantially the same information as is required to be provided on the report
provided to the Indenture Trustee and the Trust described under "Description of
Agreements -- Statements to Indenture Trustee" herein.
Within the prescribed period of time for tax reporting purposes after the end of
each calendar year during the term of the Indenture, the Indenture Trustee will
mail to each person who at any time during such calendar year was a Noteholder
and received any payment thereon, a statement containing certain information for
the purposes of such Noteholder's preparation of federal income tax returns. See
"Federal Income Tax Consequences" herein.
FEDERAL INCOME TAX CONSEQUENCES
General
The following is a summary of the anticipated material federal income tax
consequences of the purchase, ownership, and disposition of the Notes. Hunton &
Williams, special tax counsel to the Trust ("Special Tax Counsel"), has reviewed
this summary and is of the opinion that the descriptions of the law and legal
conclusions contained herein are correct in all material respects and the
discussions hereunder fairly summarize the federal income tax considerations
that are likely to be material to Noteholders. The summary is based upon the
provisions of the Code, the regulations promulgated thereunder, and the judicial
and administrative rulings and decisions now in effect, all of which are subject
to change or possible differing interpretations. The statutory provisions,
regulations, and interpretations on which this summary is based are subject to
change, and such a change could apply retroactively.
The summary does not purport to deal with all aspects of federal income taxation
that may affect particular investors in light of their individual circumstances,
nor with certain categories of investors subject to special treatment under the
federal income tax laws. This summary focuses primarily on investors who will
hold Notes as "capital assets" (generally held for investment) within the
meaning of Section 1221 of the Code, but much of the discussion is applicable to
other investors as well. The summary does not purport to address the anticipated
state income tax consequences to investors of owning and disposing of the Notes.
Consequently, potential purchasers of Notes are advised to consult their own tax
advisors concerning the federal, state or local tax consequences to them of the
purchase, holding, and disposition of the Notes.
For each Series of Notes, Special Tax Counsel will advise the Issuer that, based
upon the facts as they exist, in Special Tax Counsel's opinion, the Notes will
be treated for federal income tax purposes as indebtedness, and not as an
ownership interest in the Financed Student Loans or an equity interest in a
separate association taxable as a corporation. However, 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. Accordingly, although that opinion will be
based on existing law, there can be no assurance that the law will not change or
that contrary positions will not be taken by the Internal Revenue Service (the
"Service"). If the Service were to make and prevail upon the contention that the
Notes did not constitute indebtedness for federal income tax purposes, the Notes
could be treated as equity interests in the Trust. In that event, the Trust
should be treated as a partnership that is not a publicly traded partnership.
The Issuer may redeem a Class or Classes of Notes at any time upon a
determination by the Issuer, based upon an opinion of counsel, that a
substantial risk exists that the Notes of the Class to be redeemed will not be
treated for federal income tax purposes as evidences of indebtedness. Such
redemption could occur when a Noteholder could not reinvest the proceeds at an
interest rate at least equal to the applicable Class Interest Rate.
Payments received by Noteholders on the Notes generally should be accorded the
same tax treatment under the Code as payments received on other taxable debt
instruments. Except as described below for Notes issued with original issue
discount, acquired with market discount, or issued or acquired at a premium,
interest paid or accrued on a Note will be treated as ordinary income to the
Noteholder and a principal payment on a Note will be treated as a return of
capital. In general, interest paid to Noteholders who report their income on the
cash receipts and disbursements method should be taxable to them when received.
Interest earned by Noteholders who report their income on the accrual method
will be taxable when accrued, regardless of when it is actually received. The
Trustee will report annually to the Service and to Noteholders of record with
respect to interest paid or accrued, and original issue discount and market
discount, if any, accrued, on the Notes.
One or more Classes of Notes may be subordinated to one or more other Classes of
Notes of the same Series. In general, such subordination should not affect the
federal income tax treatment of either the subordinated or the senior Notes.
Employee benefit plans subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), should consult their tax advisors before purchasing
any subordinated Note. See "ERISA Considerations" herein and in the accompanying
Prospectus Supplement.
Original Issue Discount
Notes issued at a price less than their stated principal amount ("Discount
Notes"), Notes upon which interest is accrued and is compounded and added to the
principal balance thereof periodically ("Accretion Notes"), and certain other
Classes of Notes will be issued with "original issue discount" within the
meaning of Section 1273(a) of the Code. In general such original issue discount
will equal the difference between the "stated redemption price at maturity" of
the Note (generally, its principal amount) and its issue price. Original issue
discount is treated as ordinary interest income, and Holders of Notes with
original issue discount generally must include the amount of original issue
discount in income on an accrual basis in advance of the receipt of the cash to
which it relates.
The amount of original issue discount required to be included in a Noteholder's
income in any taxable year will be computed in accordance with Section
1272(a)(6) of the Code, which provides rules for the accrual of original issue
discount under a constant yield method for certain debt instruments, such as the
Notes, that are subject to prepayment by reason of prepayments of underlying
debt obligations. Under Section 1272(a)(6), the amount and rate of accrual of
original issue discount on a Note generally is to be calculated based on (i) a
single constant yield to maturity and (ii) the prepayment rate of the Financed
Student Loans and the reinvestment rate on amounts held pending distribution
that were assumed in pricing the Note (the "Pricing Prepayment Assumptions"). No
regulatory guidance currently exists under Code Section 1272(a)(6). Accordingly,
until the Treasury issues guidance to the contrary, the Master Servicer or other
person responsible for computing the amount of original issue discount to be
reported to a Noteholder each taxable year (the "Tax Administrator"), except as
otherwise provided herein, expects to base its computations on Code Section
1272(a)(6) and final regulations governing the accrual of original issue
discount on debt instruments (the "OID Regulations"). Investors should be aware,
however, that the OID regulations do not address directly the treatment of
instruments that are subject to Code Section 1272(a)(6), and, accordingly, there
can be no assurance that such methodology, which is described below, represents
the correct manner of calculating original issue discount on the Notes. The Tax
Administrator intends to account for income on certain Notes that provide for
one or more contingent payments as described in "-- Variable Rate Notes" herein.
The amount of original issue discount on a Note equals the excess, if any, of
the Note's "stated redemption price at maturity" over its "issue price." Under
the OID Regulations, a debt instrument's stated redemption price at maturity is
the sum of all payments provided by the instrument other than "qualified stated
interest" ("Deemed Principal Payments"). Qualified stated interest, in general,
is stated interest that is unconditionally payable in cash or property (other
than debt instruments of the Issuer) at least annually at (i) a single fixed
rate or (ii) a variable rate that meets certain requirements set out in the OID
Regulations. See "-- Variable Rate Notes" herein. Thus, in the case of any Note
providing for such stated interest other than an Accretion Note, the stated
redemption price at maturity generally will equal the total amount of all Deemed
Principal Payments due on that Note. Because an Accretion Note generally does
not require unconditional payments of interest at least annually, the stated
redemption price at maturity of such a Note will equal the aggregate of all
payments due, whether designated as principal, accrued interest, or current
interest. The issue price of a Note generally will equal the initial price at
which a substantial amount of such Notes is sold to the public.
Under a de minimis rule, a Note will be considered to have no original issue
discount if the amount of original issue discount is less than 0.25% of the
Note's stated redemption price at maturity multiplied by the weighted average
maturity ("WAM") of the Note. For that purpose, the WAM of a Note is the sum of
the amounts obtained by multiplying the amount of each Deemed Principal Payment
by a fraction, the numerator of which is the number of complete years from the
Note `s issue date until the payment is made, and the denominator of which is
the Note's stated redemption price at maturity. Although no Treasury regulations
have been issued with respect to computing the WAM of instruments like a Note,
it is expected that the WAM of a Note will be computed using the Pricing
Prepayment Assumptions. A Noteholder will include de minimis original issue
discount in income on a pro rata basis as stated principal payments on the Note
are received or, if earlier, upon disposition of the Note, unless the Noteholder
makes an "All OID Election" (as defined below).
Notes of certain Series may bear interest under terms that provide for a teaser
rate period, interest holiday, or other period during which the rate of interest
payable on the Notes is lower than the rate payable during the remainder of the
life of the Notes ("Teaser Notes"). The OID Regulations provide a more expansive
test under which a Teaser Note may be considered to have a de minimis amount of
original issue discount even though the amount of the original issue discount on
the Note would be more than de minimis as determined under the regular test. The
expanded test applies to a Teaser Note only if the stated interest on such Note
would be qualified stated interest but for the fact that during one or more
accrual periods its interest rate is below the rate applicable for the remainder
of its term. Under the expanded test, the amount of original issue discount on a
Teaser Note that is measured against the de minimis amount of original issue
discount allowable on the Note is the greater of (i) the excess of the stated
principal amount of the Note over its issue price ("True Discount") and (ii) the
amount of interest that would be necessary to be payable on the Note in order
for all stated interest to be qualified stated interest (the "Additional
Interest Amount").
The holder of a Note generally must include in gross income the sum, for all
days during his taxable year on which he holds the Note, of the "daily portions"
of the original issue discount on such Note. In the case of an original holder
of a Note, the daily portions of original issue discount with respect to such
Note generally will be determined by allocating to each day in any accrual
period the Note's ratable portion of the excess, if any, of (i) the sum of (a)
the present value of all payments under the Note yet to be received as of the
close of such period and (b) the amount of any Deemed Principal Payments
received on the Note during such period over (ii) the Note's "adjusted issue
price" at the beginning of such period. The present value of payments yet to be
received on a Note is computed by using the Pricing Prepayment Assumptions and
the Note's original yield to maturity (adjusted to take into account the length
of the particular accrual period), and taking into account Deemed Principal
Payments actually received on the Note prior to the close of the accrual period.
The adjusted issue price of a Note at the beginning of the first accrual period
is its issue price. The adjusted issue price at the beginning of each subsequent
period is the adjusted issue price of the Note at the beginning of the preceding
period increased by the amount of original issue discount allocable to that
period and decreased by the amount of any Deemed Principal Payments received
during that period. Thus, an increased (or decreased) rate of prepayments
received with respect to a Note will be accompanied by a correspondingly
increased (or decreased) rate of recognition of original issue discount by the
holder of such Note.
The yield to maturity of a Note is calculated based on (i) the Pricing
Prepayment Assumptions and (ii) any contingencies not already taken into account
under the Pricing Prepayment Assumptions that, considering all the facts and
circumstances as of the issue date, are more likely than not to occur.
Contingencies, such as the exercise of "mandatory redemptions," that are taken
into account by the parties in pricing the Note typically will be subsumed in
the Pricing Prepayment Assumptions and thus will be reflected in the Note's
yield to maturity. The Tax Administrator's determination of whether a
contingency relating to a Class of Notes is more likely than not to occur is
binding on each holder of a Note of such Class unless the holder explicitly
discloses on its federal income tax return that its determination of the yield
and maturity of the Note is different from that of the Tax Administrator.
The Notes of a Series may be subject to optional redemption by the Issuer before
their stated maturity dates. Under the OID Regulations, the Issuer will be
presumed to exercise its option to redeem for purposes of computing the accrual
of original issue discount if, and only if, by using the optional redemption
date as the maturity date and the optional redemption price as the stated
redemption price at maturity, the yield to maturity of the Notes is lower than
it would be if the Notes were not redeemed early. If the Issuer is presumed to
exercise its option to redeem the Notes, original issue discount on such Notes
will be calculated as if the redemption date were the maturity date and the
optional redemption price were the stated redemption price at maturity. In cases
in which all of the Notes of a particular Series are issued at par or at a
discount, the Issuer will not be presumed to exercise its option to redeem the
Notes because a redemption by the Issuer would not lower the yield to maturity
of the Notes. If, however, some Notes of a particular Series are issued at a
premium, the Issuer may be able to lower the yield to maturity of the Notes by
exercising its redemption option. In determining whether the Issuer will be
presumed to exercise its option to redeem Notes when one or more Classes of the
Notes are issued at a premium, the Tax Administrator will take into account all
Classes of Notes that are subject to the optional redemption to the extent that
they are expected to remain outstanding as of the optional redemption date,
based on the Pricing Prepayment Assumptions. If, determined on a combined
weighted average basis, the Notes of such Classes were issued at a premium, the
Tax Administrator will presume that the Issuer will exercise its option.
However, the OID Regulations are unclear as to how the redemption presumption
rules should apply to instruments such as the Notes, and there can be no
assurance that the Service will agree with the Tax Administrator's position.
The OID Regulations provide that a Noteholder generally may make an election (an
"All OID Election") to include in gross income all stated interest, original
issue discount, de minimis original issue discount, market discount (as
described below under "-- Market Discount"), and de minimis market discount that
accrues on the Note (as reduced by any amortizable premium, as described below
under "Amortizable Premium," or acquisition premium, as described below) under
the constant yield method used to account for original issue discount. To make
an All OID Election, the holder of the Note must attach a statement to its
timely filed federal income tax return for the taxable year in which the holder
acquired the Note. The statement must identify the instruments to which the
election applies. An All OID Election is irrevocable unless the holder obtains
the consent of the Service. If an All OID Election is made for a debt instrument
with market discount, the holder is deemed to have made an election to include
in income currently the market discount on all of the holder's other debt
instruments with market discount, as described in "-- Market Discount" below. In
addition, if an All OID Election is made for a debt instrument with amortizable
premium, the holder is deemed to have made an election to amortize the premium
on all of the holder's other debt instruments with amortizable premium under the
constant yield method. See "-- Amortizable Premium." Noteholders should be aware
that the law is unclear as to whether an All OID Election is effective for a
Note that is subject to the contingent payment rules. See "-- Variable Rate
Notes" herein.
A Note having original issue discount may be acquired in a transaction
subsequent to its issuance for more than its adjusted issue price. If the
subsequent holder's adjusted basis in such a Note, immediately after its
acquisition, exceeds the sum of all Deemed Principal Payments to be received on
the Note after the acquisition date, the Note will no longer have original issue
discount, and the holder may be entitled to reduce the amount of interest income
recognized on the Note by the amount of amortizable premium. See "-- Amortizable
Premium" herein. If the subsequent holder's adjusted basis in the Note
immediately after the acquisition exceeds the adjusted issue price of the Note,
but is less than or equal to the sum of the Deemed Principal Payments to be
received under the Note after the acquisition date, the amount of original issue
discount on the Note will be reduced by a fraction, the numerator of which is
the excess of the Note's adjusted basis immediately after its acquisition over
the adjusted issue price of the Note and the denominator of which is the excess
of the sum of all Deemed Principal Payments to be received on the Note after the
acquisition date over the adjusted issue price of the Note. For that purpose,
the adjusted basis of a Note generally is reduced by the amount of any qualified
stated interest that is accrued but unpaid as of the acquisition date.
Alternately, the subsequent purchaser of a Note having original issue discount
may make an All OID Election with respect to the Note.
If the interval between the issue date of a Note that pays interest at the Class
Interest Rate on a current basis (a "Current Interest Note") and the first
Distribution Date (the "First Distribution Period") contains more days than the
number of days of stated interest that are payable on the first Distribution
Date, the effective interest rate received by the Noteholder during the first
Distribution Period will be less than the Note's stated interest rate making
such Note a Teaser Note. If the amount of original issue discount on the Note
measured under the expanded de minimis test exceeds the de minimis amount of
original issue discount allowable on the Note, the amount by which the stated
interest on the Note exceeds the interest that would be payable on the Note at
the effective rate of interest for the First Distribution Period (the
"Nonqualified Interest Amount") would be treated as part of the Note's stated
redemption price at maturity. Accordingly, the holder of a Teaser Note may be
required to recognize ordinary income arising from original issue discount
attributable to the First Distribution Period in addition to any qualified
stated interest that accrues in that period.
Similarly, if the First Distribution Period is shorter than the interval between
subsequent Distribution Dates, the effective rate of interest payable on a Note
during the First Distribution Period will be higher than the stated rate of
interest if a Noteholder receives interest on the first Distribution Date based
on a full accrual period. Unless the "Pre-Issuance Accrued Interest Rule"
described below applies, such Note (a "Rate Bubble Note") would be issued with
original issue discount unless the amount of original issue discount is de
minimis. The amount of original issue discount on a Rate Bubble Note
attributable to the First Distribution Period would be the amount by which the
interest payment due on the first Distribution Date exceeds the amount that
would have been payable had the effective rate for that Period been equal to the
stated interest rate. However, under the Pre-Issuance Accrued Interest Rule, if
(i) a portion of the initial purchase price of a Rate Bubble Note is allocable
to interest that has accrued under the terms of the Note prior to its issue date
("Pre-Issuance Accrued Interest") and (ii) the Note provides for a payment of
stated interest on the first payment date within one year of the issue date that
equals or exceeds the amount of the Pre-Issuance Accrued Interest, the Note's
issue price may be computed by subtracting from the issue price the amount of
Pre-Issuance Accrued Interest. If the Noteholder opts to apply the Pre-Issuance
Accrued Interest Rule, the portion of the interest received on the first
Distribution Date equal to the Pre-Issuance Accrued Interest would be treated as
a return of such interest and would not be treated as a payment on the Note.
Thus, where the Pre-Issuance Accrued Interest Rule applies, a Rate Bubble Note
will not have original issue discount attributable to the First Distribution
Period, provided that the increased effective interest rate for that Period is
attributable solely to Pre-Issuance Accrued Interest, as typically will be the
case. The Tax Administrator intends to apply the Pre-Issuance Accrued Interest
Rule to each Rate Bubble Note for which it is available if the Note `s stated
interest otherwise would be qualified stated interest. If, however, the First
Distribution Period of a Rate Bubble Note is longer than subsequent Distribution
Periods, the application of the Pre-Issuance Accrued Interest Rule typically
will not prevent disqualification of the Note's stated interest because its
effective interest rate during the First Distribution Period typically will be
less than its stated interest rate. Thus, a Note with a long First Distribution
Period typically will be a Teaser Note, as discussed above. The Pre-Issuance
Accrued Interest Rule will not apply to any amount paid at issuance for such a
Teaser Note that is normally allocable to interest accrued under the terms of
such Note before its issue date. All amounts paid for such a Teaser Note at
issuance, regardless of how designated, will be included in the issue price of
such Note for federal income tax accounting purposes.
In view of the complexities and current uncertainties as to the manner of
inclusion in income of original issue discount on the Notes, each investor
should consult his own tax advisor to determine the appropriate amount and
method of inclusion in income of original issue discount on the Notes for
federal income tax purposes.
Variable Rate Notes
A Note may pay interest at a variable rate (a "Variable Rate Note"). A Variable
Rate Note that qualifies as a "variable rate debt instrument" as that term is
defined in the OID Regulations (a "VRDI") will be governed by the rules
applicable to VRDIs in the OID Regulations, which are described below. A
Variable Rate Note qualifies as a VRDI under the OID Regulations if (i) the Note
is not issued at a premium to its noncontingent principal amount in excess of
the lesser of (a) .015 multiplied by the product of such noncontingent principal
amount and the WAM (as that term is defined above in the discussion of the de
minimis rule) of the Note or (b) 15 percent of such noncontingent principal
amount (an "Excess Premium"); (ii) stated interest on the Note compounds or is
payable unconditionally at least annually at (a) one or more qualified floating
rates, (b) a single fixed rate and one or more qualified floating rates, (c) a
single "objective rate," or (d) a single fixed rate and a single objective rate
that is a "qualified inverse floating rate," and (iii) the qualified floating
rate or the objective rate in effect during an accrual period is set at a
current value of that rate (i.e., the value of the rate on any day occurring
during the interval that begins three months prior to the first day on which
that value is in effect under the Note and ends one year following that day).
However, if the Variable Rate Note provides for any contingent payments (which
do not include qualified stated interest), the Tax Administrator intends to
account for the income thereon as described below.
Under the OID Regulations, a rate is a qualified floating rate if variations in
the rate reasonably can be expected to measure contemporaneous variations in the
cost of newly borrowed funds in the currency in which the debt instrument is
denominated. A qualified floating rate may measure contemporaneous variations in
borrowing costs for the Issuer of the debt instrument or for Depositors in
general. A multiple of a qualified floating rate is considered a qualified
floating rate only if the rate is equal to either (a) the product of a qualified
floating rate and a fixed multiple that is greater than 0.65 but not more than
1.35 or (b) the product of a qualified floating rate and a fixed multiple that
is greater than 0.65 but not more than 1.35, increased or decreased by a fixed
rate. If a Note provides for two or more qualified floating rates that
reasonably can be expected to have approximately the same values throughout the
term of the Note, the qualified floating rates together will constitute a single
qualified floating rate. Two or more qualified floating rates conclusively will
be presumed to have approximately the same values throughout the term of a Note,
if the values of all such rates on the issue date of the Note are within 25
basis points of each other.
A variable rate will be considered a qualified floating rate if it is subject to
a restriction or restrictions on the maximum stated interest rate (a "Cap"), a
restriction or restrictions on the minimum stated interest rate (a "Floor"), a
restriction or restrictions on the amount of increase or decrease in the stated
interest rate (a "Governor"), or other similar restriction only if: (a) the Cap,
Floor, or Governor is fixed throughout the term of the related Note or (b) the
Cap, Floor, Governor, or similar restriction is not reasonably expected, as of
the issue date, to cause the yield on the Note to be significantly less or
significantly more than the expected yield on the Note determined without such
Cap, Floor, Governor, or similar restriction, as the case may be. Although the
OID Regulations are unclear, it appears that a VRDI, the principal rate on which
is subject to a Cap, Floor, or Governor that itself is a qualified floating
rate, bears interest at an objective rate.
Under the OID Regulations, an objective rate is a rate (other than a qualified
floating rate) that (i) is determined using a single fixed formula, (ii) is
based on objective financial or economic information, and (iii) is not based on
information that either is within the control of the Issuer (or a related party)
or is unique to the circumstances of the Issuer (or related party), such as
dividends, profits, or the value of the Issuer's (or related party's) stock.
That definition would include a rate that is based on changes in a general
inflation index. In addition, a rate would not fail to be an objective rate
merely because it is based on the credit quality of the Issuer.
Under the OID Regulations if interest on a Variable Rate Note is stated at a
fixed rate for an initial period of less than one year followed by a variable
rate that is either a qualified floating rate or an objective rate for a
subsequent period, and the value of the variable rate on the issue date is
intended to approximate the fixed rate, the fixed rate and the variable rate
together constitute a single qualified floating rate or objective rate. A
variable rate conclusively will be presumed to approximate an initial fixed rate
if the value of the variable rate on the issue date does not differ from the
value of the fixed rate by more than 25 basis points.
Under the OID Regulations, all interest payable on a Variable Rate Note that
qualifies as a VRDI and provides for stated interest unconditionally payable in
cash or property at least annually at a single qualified floating rate or a
single objective rate (a "Single Rate VRDI Note") is treated as qualified stated
interest. The amount and accrual of OID on a Single Rate VRDI Note is
determined, in general, by converting such Note into a hypothetical fixed rate
Note and applying the rules applicable to fixed rate Notes described under
"Original Issue Discount" above to such hypothetical fixed rate Note. Qualified
stated interest or original issue discount allocable to an accrual period with
respect to a Single Rate VRDI Note also must be increased (or decreased) if the
interest actually accrued or paid during such accrual period exceeds (or is less
than) the interest assumed to be accrued or paid during such accrual period
under the related hypothetical fixed rate Note.
Except as provided below, the amount and accrual of OID on a Variable Rate Note
that qualifies as a VRDI but is not a Single Rate VRDI Note (a "Multiple Rate
VRDI Note") is determined by converting such Note into a hypothetical equivalent
fixed rate Note that has terms that are identical to those provided under the
Multiple Rate VRDI Note, except that such hypothetical equivalent fixed rate
Note will provide for fixed rate substitutes in lieu of the qualified floating
rates or objective rates provided for under the Multiple Rate VRDI Note. A
Multiple Rate VRDI Note that provides for a qualified floating rate or rates or
a qualified inverse floating rate is converted to a hypothetical equivalent
fixed rate Note by assuming that each qualified floating rate or the qualified
inverse floating rate will remain at its value as of the issue date. A Multiple
Rate VRDI Note that provides for an objective rate or rates is converted to a
hypothetical equivalent fixed rate Note by assuming that each objective rate
will equal a fixed rate that reflects the yield that reasonably is expected for
the Multiple Rate VRDI Note. Qualified stated interest or original issue
discount allocable to an accrual period with respect to a Multiple Rate VRDI
Note must be increased (or decreased) if the interest actually accrued or paid
during such accrual period exceeds (or is less than) the interest assumed to be
accrued or paid during such accrual period under the hypothetical equivalent
fixed rate Note.
Under the OID Regulations, the amount and accrual of OID on a Multiple Rate VRDI
Note that provides for stated interest at either one or more qualified floating
rates or at a qualified inverse floating rate and in addition provides for
stated interest at a single fixed rate (other than an initial fixed rate that is
intended to approximate the subsequent variable rate) is determined using the
method described above for all other Multiple Rate VRDI Notes except that prior
to its conversion to a hypothetical equivalent fixed rate Note, such Multiple
Rate VRDI Note is treated as if it provided for a qualified floating rate (or a
qualified inverse floating rate), rather than the fixed rate. The qualified
floating rate (or qualified inverse floating rate) replacing the fixed rate must
be such that the fair market value of the Multiple Rate VRDI Note as of its
issue date would be approximately the same as the fair market value of an
otherwise identical debt instrument that provides for the qualified floating
rate (or qualified inverse floating rate), rather than the fixed rate.
Notes of certain Series may provide for the payment of interest at a rate
determined as the difference between two interest rate parameters, one of which
is a variable rate and the other of which is a fixed rate or a different
variable rate ("Inverse Floater Notes"). Under the OID Regulations, Inverse
Floater Notes generally bear interest at objective rates because their rates
either constitute "qualified inverse floating rates" under those Regulations or,
although not qualified floating rates themselves, are based on one or more
qualified floating rates. Consequently, if such Notes are not issued at an
Excess Premium and their interest rates otherwise meet the test for qualified
stated interest, the income on such Notes will be accounted for under the rules
applicable to VRDIs described above.
The OID Regulations contain provisions (the "Contingent Payment Regulations")
that address the federal income tax treatment of debt obligations with one or
more contingent payments ("Contingent Payment Obligations"). Under the
Contingent Payment Regulations, any variable rate debt instrument that is not a
VRDI is classified as a Contingent Payment Obligation. However, the Contingent
Payment Regulations, by their terms, do not apply to debt instruments that are
subject to Section 1272(a)(6) of the Code. In the absence of further guidance,
the Tax Administrator will account for Notes that are Contingent Payment
Obligations in accordance with Code Section 1272(a)(6). Income will be accrued
on such Notes based on a constant yield that is derived from a projected payment
schedule as of the Closing Date. The projected payment schedule will take into
account the Pricing Payment Assumptions and the interest payments that are
expected to be made based on the value of any relevant indices on the issue
date. To the extent that actual payments differ from projected payments for a
particular taxable year, appropriate adjustments to interest income and expense
accruals will be made for that year.
The method described in the foregoing paragraph for accounting for Notes that
are Contingent Payment Obligations is consistent with Code section 1272(a)(6)
and the legislative history thereto. Because of the uncertainty with respect to
the treatment of such Notes under the OID Regulations, however, there can be no
assurance that the Service will not assert successfully that a method less
favorable to Noteholders will apply. In view of the complexities and the current
uncertainties as to income inclusions with respect to Notes that are Contingent
Payment Obligations, each investor should consult his own tax advisor to
determine the appropriate amount and method of income inclusion on such Notes
for federal income tax purposes.
Anti-Abuse Rule
Concerned that taxpayers might be able to structure debt instruments or
transactions, or to apply the bright-line or mechanical rules of the OID
Regulations in a way that produces unreasonable tax results, the Treasury issued
regulations containing an anti-abuse rule. Those regulations provide that if a
principal purpose in structuring a debt instrument, engaging in a transaction,
or applying the OID Regulations is to achieve a result that is unreasonable in
light of the purposes of the applicable statutes, the Service can apply or
depart from the OID Regulations as necessary or appropriate to achieve a
reasonable result. A result is not considered unreasonable under regulations,
however, in the absence of a substantial effect on the present value of a
taxpayer's tax liability.
Market Discount
A subsequent purchaser of a Note at a discount from its outstanding principal
amount (or, in the case of a Note having original issue discount, its "adjusted
issue price") will acquire such Note with market discount. The purchaser
generally will be required to recognize the market discount (in addition to any
original issue discount remaining with respect to the Note) as ordinary income.
A person who purchases a Note at a price lower than the Note's outstanding
principal amount but higher than its adjusted issue price does not acquire the
Note with market discount, but will be required to report original issue
discount, appropriately adjusted to reflect the excess of the price paid over
the adjusted issue price. See "Original Issue Discount." A Note will not be
considered to have market discount if the amount of such market discount is de
minimis, i.e., less than the product of (i) 0.25% of the remaining principal
amount (or, in the case of a Note having original issue discount, the adjusted
issue price of such Note), multiplied by (ii) the WAM of the Note (determined as
for original issue discount) remaining after the date of purchase. Regardless of
whether the subsequent purchaser of a Note with more than a de minimis amount of
market discount is a cash-basis or accrual-basis taxpayer, market discount
generally will be taken into income as principal payments (including, in the
case of a Note having original issue discount, any Deemed Principal Payments)
are received, in an amount equal to the lesser of (i) the amount of the
principal payment received or (ii) the amount of market discount that has
"accrued" (as described below), but that has not yet been included in income.
The purchaser may make a special election, which generally applies to all market
discount instruments held or acquired by the purchaser in the taxable year of
election or thereafter, to recognize market discount currently on an uncapped
accrual basis (the "Current Recognition Election"). In addition, the purchaser
may make an All OID Election with respect to a Note purchased with market
discount. See "-- Original Issue Discount" herein.
Until the Treasury promulgates applicable regulations, the purchaser of a Note
with market discount generally may elect to accrue the market discount either:
(i) on the basis of a constant interest rate; (ii) in the case of a Note not
issued with original issue discount, in the ratio of stated interest payable in
the relevant period to the total stated interest remaining to be paid from the
beginning of such period; or (iii) in the case of a Note issued with original
issue discount, in the ratio of original issue discount accrued for the relevant
period to the total remaining original issue discount at the beginning of such
period. Regardless of which computation method is elected, the Pricing
Prepayment Assumptions must be used to calculate the accrual of market discount.
A Noteholder who has acquired any Note with market discount generally will be
required to treat a portion of any gain on a sale or exchange of the Note as
ordinary income to the extent of the market discount accrued to the date of
disposition under one of the foregoing methods, less any accrued market discount
previously reported as ordinary income as partial principal payments were
received. Moreover, such Noteholder generally must defer interest deductions
attributable to any indebtedness incurred or continued to purchase or carry the
Note to the extent they exceed income on the Note. Any such deferred interest
expense, in general, is allowed as a deduction not later than the year in which
the related market discount income is recognized. If a Noteholder makes a
Current Recognition Election or an All OID Election, the interest deferral rule
will not apply. Under the Contingent Payment Regulations, a secondary market
purchaser of a Contingent Payment Obligation at a discount generally would
continue to accrue interest and determine adjustments on such Note based on the
original projected payment schedule devised by the Issuer of such Note. See "--
Original Issue Discount" herein. The holder of such a Note would be required,
however, to allocate the difference between the adjusted issue price of the Note
and its basis in the Note as positive adjustments to the accruals or projected
payments on the Note over the remaining term of the Note in a manner that is
reasonable (e.g., based on a constant yield to maturity).
Treasury regulations implementing the market discount rules have not yet been
issued, and uncertainty exists with respect to many aspects of those rules. For
example, the treatment of a Note subject to redemption at the option of the
Issuer that is acquired at a market discount is unclear. It appears likely,
however, that the market discount rules applicable in such a case would be
similar to the rules pertaining to original issue discount. Due to the
substantial lack of regulatory guidance with respect to the market discount
rules, it is unclear how those rules will affect any secondary market that
develops for a given Class of Notes. Prospective investors should consult their
own tax advisors regarding the application of the market discount rules to the
Notes.
Amortizable Premium
A purchaser of a Note who purchases the Note at a premium over the total of its
Deemed Principal Payments may elect to amortize such premium under a constant
yield method that reflects compounding based on the interval between payments on
the Notes. The legislative history of the 1986 Act indicates that premium is to
be accrued in the same manner as market discount. Accordingly, it appears that
the accrual of premium on a Note will be calculated using the Pricing Prepayment
Assumptions. Amortized premium generally would be treated as an offset to
interest income on a Note and not as a separate deduction item. If a holder
makes an election to amortize premium on a Note, such election will apply to all
taxable debt instruments (including all Notes) held by the holder at the
beginning of the taxable year in which the election is made, and to all taxable
debt instruments acquired thereafter by such holder, and will be irrevocable
without the consent of the Service. Purchasers who pay a premium for the Notes
should consult their tax advisors regarding the election to amortize premium and
the method to be employed.
Amortizable premium on a Note that is subject to redemption at the option of the
Issuer generally must be amortized as if the optional redemption price and date
were the Note's principal amount and maturity date if doing so would result in a
smaller amount of premium amortization during the period ending with the
optional redemption date. Thus, a Noteholder would not be able to amortize any
premium on a Note that is subject to optional redemption at a price equal to or
greater than the Noteholder's acquisition price unless and until the redemption
option expires. In cases where premium must be amortized on the basis of the
price and date of an optional redemption, the Note will be treated as having
matured on the redemption date for the redemption price and then having been
reissued on that date for that price. Any premium remaining on the Note at the
time of the deemed reissuance will be amortized on the basis of (i) the original
principal amount and maturity date or (ii) the price and date of any succeeding
optional redemption, under the principles described above.
Under the Contingent Payment Regulations, a secondary market purchaser of a
Contingent Payment Obligation at a premium generally would continue to accrue
interest and determine adjustments on such Note based on the original projected
payment schedule devised by the Issuer of such Note. See "-- Original Issue
Discount" herein. The holder of such a Note would allocate the difference
between its basis in the Note and the adjusted issue price of the Note as
negative adjustments to the accruals or projected payments on the Note over the
remaining term of the Note in a manner that is reasonable (e.g., based on a
constant yield to maturity).
Gain or Loss on Disposition
If a Note is sold, the Noteholder will recognize gain or loss equal to the
difference between the amount realized on the sale and his adjusted basis in the
Note. The adjusted basis of a Note generally will equal the cost of the Note to
the Noteholder, increased by any original issue discount or market discount
previously includible in the Noteholder's gross income with respect to the Note
and reduced by the portion of the basis of the Note allocable to payments on the
Note (other than qualified stated interest) previously received by the
Noteholder and by any amortized premium. Similarly, a Noteholder who receives a
scheduled or prepaid principal payment with respect to a Note will recognize
gain or loss equal to the difference between the amount of the payment and the
allocable portion of his adjusted basis in the Note. Except to the extent that
the market discount rules apply and except as provided below, any gain or loss
on the sale or other disposition of a Note generally will be capital gain or
loss. Such gain or loss will be long-term gain or loss if the Note is held as a
capital asset for the applicable long term holding period.
If the holder of a Note is a bank, thrift, or similar institution described in
Section 582 of the Code, any gain or loss on the sale or exchange of the Note
will be treated as ordinary income or loss. In addition, a portion of any
gain from the sale of a Note that might otherwise be capital gain may be
treated as ordinary income to the extent that such Note is held as part of a
"conversion transaction" within the meaning of Section 1258 of the Code. A
conversion transaction generally is one in which the taxpayer has taken two or
more positions in Notes or similar property that reduce or eliminate market
risk, if substantially all of the taxpayer's return is attributable to the
time value of the taxpayer's net investment in such transaction. The amount of
gain realized in a conversion transaction that is recharacterized as ordinary
income generally will not exceed the amount of interest that would have accrued
on the taxpayer's net investment at 120% of the appropriate "applicable federal
rate" (which rate is computed and published monthly by the Service) at the time
the taxpayer entered into the conversion transaction, subject to appropriate
reduction for prior inclusion of interest and other ordinary income from the
transaction.
The highest marginal individual income tax bracket is 39.6%. The alternative
minimum tax rate for individuals is 26% with respect to alternative minimum tax
income up to $175,000 and 28% with respect to alternative minimum tax income
over $175,000. The recently enacted Taxpayer Relief Act of 1997 (the "Relief
Act") established a three-tier rate structure with respect to the net capital
gain of individuals. Under the Relief Act, the highest marginal federal tax rate
on net capital gains for individuals with respect to assets held for more than
one year but not more than 18 months is 28%. However, the Relief Act reduces the
highest marginal federal tax rate with respect to net capital gain on assets
held by individuals for more than 18 months from 28% to 20%, and, for taxable
years beginning after, and for assets acquired after, December 31, 2000 and with
respect to assets held for more than 5 years, to 18%. Accordingly, there can be
a significant marginal tax rate differential between net capital gains and
ordinary income for individuals. The highest marginal corporate tax rate is 35%
for corporate taxable income over $10 million, and the marginal tax rate on
corporate net capital gains is 35%, although the distinction between capital
gains and ordinary income remains relevant for other purposes. Investors should
note that the deductibility of capital losses is subject to certain limitations.
Miscellaneous Tax Aspects
Backup Withholding. A Note may, under certain circumstances, be subject to
"backup withholding" at the rate of 31% with respect to "reportable payments,"
which include interest payments and principal payments to the extent of accrued
original issue discount as well as distributions of proceeds from a sale of
Notes. This withholding generally applies if the Noteholder of a Note (i) fails
to furnish the Trustee with its taxpayer identification number ("TIN"); (ii)
furnishes the Trustee or the Issuer an incorrect TIN; (iii) fails to report
properly interest, dividends or other "reportable payments" as defined in the
Code; or (iv) under certain circumstances, fails to provide the Trustee or the
Issuer or such Noteholder's securities broker with a certified statement, signed
under penalty of perjury, that the TIN is its correct number and that the
Noteholder is not subject to backup withholding. Backup withholding will not
apply, however, with respect to certain payments made to Noteholders, including
payments to certain exempt recipients (such as exempt organizations) and to
certain Nonresidents (as defined below) complying with requisite certification
procedures. Noteholders should consult their tax advisors as to their
qualification for exemption from backup withholding and the procedure for
obtaining the exemption.
The Trustee will report to the Noteholders and to the Internal Revenue Service
each calendar year the amount of any "reportable payments" during such year and
the amount of tax withheld, if any, with respect to payments on the Notes within
a reasonable time after the end of each calendar year.
Foreign Noteholders. Under the Code, interest and original issue discount income
(including accrued interest or original issue discount recognized on sale or
exchange) paid or accrued with respect to Notes held by Noteholders who are
nonresident alien individuals, foreign corporations, foreign partnerships or
certain foreign estates and trusts ("Nonresidents") or Noteholders holding on
behalf of a Nonresident generally will be treated as "portfolio interest" and
therefore will not be subject to any United States tax provided that (i) such
interest is not effectively connected with a trade or business in the United
States of the Noteholder and (ii) the Issuer (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 a Note is a Nonresident.
Interest (including original issue discount) paid on Notes to Noteholders who
are foreign persons will not be subject to withholding if such interest is
effectively connected with a United States business conducted by the Noteholder.
Such interest (including original issue discount) will, however, generally be
subject to the regular United States income tax. Effective January 1, 2000, any
foreign investor that seeks the protection of an income tax treaty with respect
to the imposition of United States withholding tax will generally be required to
obtain a TIN from the Service in advance and provide verification that such
investor is entitled to the protection of the relevant income tax treaty. In
addition, foreign tax-exempt investors will generally be required to provide
verification of their tax-exempt status. Foreign investors are urged to consult
with their tax advisors with respect to these new withholding rules.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO NOTEHOLDERS
AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO MANY ASPECTS OF
THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING
THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND DISPOSITION OF THE NOTES.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Certain Federal
Income Tax Consequences," potential investors should consider the state income
tax consequences of the acquisition, ownership, and disposition of the Notes.
State income tax law may differ substantially from the corresponding federal
law, and this discussion does not purport to describe any aspect of the income
tax laws of any state. Therefore, potential investors should consult their own
tax advisors with respect to the various state tax consequences of an investment
in the Notes.
ERISA CONSIDERATIONS
Fiduciaries of employee benefit plans and certain other retirement plans and
arrangements that are subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA") or corresponding provisions of the Code, including
individual retirement accounts and annuities, Keogh plans and collective
investment funds in which such plans, accounts, annuities or arrangements are
invested (any of the foregoing, a "Plan"), persons acting on behalf of a Plan,
or persons using the assets of a Plan ("Plan Investors"), should review
carefully with their legal advisors whether the purchase or holding of a Series
of Notes could either give rise to a transaction that is prohibited under ERISA
or the Code or cause the assets of the Trust to be treated as plan assets for
purposes of regulations of the Department of Labor set forth in 29 C.F.R.
2510.3-101 (the "Plan Asset Regulations"). Prospective investors should be aware
that, although certain exceptions from the application of the prohibited
transaction rules and the Plan Asset Regulations exist, there can be no
assurance that any such exception will apply with respect to the acquisition of
a Note.
Under the Plan Asset Regulations, if the Notes of a Series are treated as having
substantial equity features, the purchaser of a Note could be treated as having
acquired a direct interest in the Trust assets 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. It is expected that each
Series of 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 Trust assets. However, there can be no complete assurance that the Notes of
a Series will be treated as debt obligations without significant equity features
for purposes of the Plan Asset Regulations. The Prospectus Supplement for a
Series of Notes will indicate whether, and to what extent a Class or Classes of
Notes of a Series would be treated as debt obligations with significant equity
features for purposes of the Plan Asset Regulations. The Prospectus Supplement
for any Class or Classes of Notes so treated will indicate whether any such
Class or Classes will be restricted in their availability to Plan Investors.
Regardless whether the Notes are treated as debt or equity for purposes of
ERISA, however, the acquisition or holding of the Notes by or on behalf of a
Plan could still be considered to give rise to a prohibited transaction if the
parties to the issuance transaction, or any of their respective affiliates is
or becomes a party in interest or a disqualified person with respect to such
Plan. However, one or more exemptions may be available with respect to
certain prohibited transaction rules of ERISA and might apply in connection
with the initial purchase, holding and resale of the Notes, depending in
part upon the type of Plan fiduciary making the decision to acquire Notes and
the circumstances under which such decision is made. Those exemptions include,
but are not limited to: (i) Prohibited Transaction Class Exemption ("PTCE")
95-60, regarding investments by insurance company pooled accounts; (ii) PTCE
91-38, regarding investments by bank collective investment funds; (iii) PTCE
90-1, regarding investments by insurance company pooled separate accounts;
or (iv) PTCE 84-14, regarding transactions negotiated by qualified
professional asset managers. Before purchasing Notes, a Plan subject to the
fiduciary responsibility provisions of ERISA or described in Section
4975(e)(1) (and not exempt under Section 4975(g)) of the Code should consult
with its counsel to determine whether the conditions of any exemption would be
met. A purchaser of a Note should be aware, however, that even if the
conditions specified in one or more exemptions are met, the scope of the
relief provided by an exemption might not cover all acts that might be construed
as prohibited transactions.
AVAILABLE INFORMATION
The Depositor has filed with the Commission a registration statement (together
with all amendments and exhibits thereto, the "Registration Statement") under
the Securities Act with respect to the Notes offered hereby. This Prospectus and
the accompanying Prospectus Supplement, which forms part of the Registration
Statement, does not contain all the information contained therein. For further
information, reference is made to the Registration Statement which may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington D.C. 20549; and at the
Commission's regional offices at Seven World Trade Center, Suite 1300, New York,
New York 10048; and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661, and copies of all or any part thereof may be obtained from the Public
Reference Branch of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549 upon the payment of certain fees prescribed by the Commission. In
addition, the Registration Statement may be accessed electronically through the
Commission's Electronic Data Gathering, Analysis and Retrieval system at the
Commission's site on the World Wide Web located at http:/ /www.sec.gov.
REPORTS TO NOTEHOLDERS
Unless Definitive Notes are issued for any Series of Notes, monthly unaudited
reports and annual unaudited reports containing information concerning the
Financed Student Loans will be prepared by the Administrator and sent on behalf
of each Trust only to Cede, as nominee of DTC and registered holder of the Notes
but will not be sent to any beneficial holder of the Notes. Such reports will
not constitute financial statements prepared in accordance with generally
accepted accounting principles. See "Description of the Notes -- Book-Entry
Registration" and "-- Reports to Noteholders" herein Each Trust will file with
the Commission such periodic reports as are required under the Exchange, and the
rules and regulations of the Commission thereunder. Each Trust intends to
suspend the filing of such reports under the Exchange Act when and if the filing
of such reports is no longer statutorily required.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All reports and other documents filed by the Administrator, on behalf of the
Trust, pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
subsequent to the date of this Prospectus and prior to the termination of the
offering of any Series of Notes shall be deemed to be incorporated by reference
into this Prospectus and the accompanying Prospectus Supplement and to be a part
hereof. After the initial distribution of the Notes by the Underwriters and in
connection with market making transactions by Crestar Securities Corporation,
this Prospectus will be distributed together with, and should be read in
conjunction with, an accompanying supplement to the Prospectus. Such supplement
will contain the reports described above and generally will include the
information contained in the quarterly statements furnished to Noteholders. See
"Description of the Notes -- Reports to Noteholders" and "Description of the
Agreements -- Statements to Indenture Trustee" herein. Any statement contained
herein or in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus and the accompanying Prospectus Supplement to the extent that a
statement contained herein or therein or in any subsequently filed document that
also is or is deemed to be incorporated by reference herein or therein modifies
or supersedes 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 and the accompanying Prospectus Supplement.
The Administrator will provide without charge to each person to whom a copy of
this Prospectus and the accompanying Prospectus Supplement are delivered, on the
written or oral request of any such person, a copy of any or all of the
documents incorporated herein by reference, except the exhibits to such
documents (unless such exhibits are specifically incorporated by reference in
such documents). Written requests for such copies should be directed to Mr.
Eugene S. Putnam, Jr., Senior Vice President - Investor Relations, Crestar
Financial Corporation, 919 East Main Street, P.O. Box 26665, Richmond, VA
23261-6665 or "[email protected]" on the Internet. Telephone requests
for such copies should be directed to (804) 782-7821.
PLAN OF DISTRIBUTION
The Notes will be offered in one or more Series and one or more Classes through
one or more underwriters or underwriting syndicates ("Underwriters"), which may
include Crestar Securities Corporation, an affiliate of the Transferor. The
Prospectus Supplement for each Series of Notes will set forth the terms of the
offering of such Series and of each Class within such Series, including the name
or names of the Underwriters, the proceeds to the Depositor, and either the
initial public offering price, the discounts and commissions to the Underwriters
and any discounts or concessions allowed or reallowed to certain dealers, or the
method by which the price at which the Underwriters will sell the Notes will be
determined.
The Notes may be acquired by Underwriters for their own account and may be
resold from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices determined
at the time of sale. The obligations of any Underwriters will be subject to
certain conditions precedent, and such Underwriters will be severally obligated
to purchase all of a Series of Notes described in the related Prospectus
Supplement, if any are purchased. If Notes of a Series are offered other than
through Underwriters, the related Prospectus Supplement will contain information
regarding the nature of such offering and any agreements to be entered into
between the seller and purchasers of Notes of such Series.
The time of delivery for the Notes of a Series in respect of which this
Prospectus is delivered will be set forth in the related Prospectus Supplement.
FINANCIAL INFORMATION
The Depositor has determined that its financial statements are not material to
the offering made hereby. A Trust will engage in no activities other than as
described herein. Accordingly, no financial statements with respect to any Trust
are included in this Prospectus.
RATING
It is a condition to the issuance and sale of each Series and Class of Notes
that they each be rated by at least one nationally recognized statistical rating
organization in one its four highest applicable rating categories. A securities
rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal at any time by the assigning Rating Agency.
See "Rating" in the accompanying Prospectus Supplement.
<PAGE>
APPENDIX I
GLOSSARY OF PRINCIPAL DEFINITIONS
Set forth below is a glossary of the principal defined terms used in this
Prospectus.
"Additional Student Loans" means additional Financed Student Loans
conveyed by the Depositor to the related Trust during the Pre-Funding Period.
"Adjustment Payment" means an amount equal to the difference between
the aggregate principal balance of any Subsequent Financed Student Loans that
are being exchanged into the related Trust and the aggregate principal balance
of the Financed Student Loans they are replacing.
"Administration Agreement" means the agreement among the Administrator,
the Eligible Lender Trustee and the Indenture Trustee.
"Administration Fee" means the fee to be payable to the Administrator.
"Administrator" means one who performs administrative duties concerning
the Trust and the Financed Student Loans under the Administration Agreement.
"Administrator Default" means any failure by the Administrator to
perform in any material respect its duties under an Administration Agreement.
"Accrual Notes" means any Class of Notes on which all or a portion of
the interest thereon accrues and is capitalized and not payable until a date
certain or until one or more other Classes are paid in full.
"Accrual Period" means the period of time during which interest accrues
but is not payable with respect to a Class of Accrual Notes.
"Advance Account" means the account maintained by the Indenture Trustee
into which Advances from the Master Servicer are to be deposited.
"Advances" means deposits made by the Master Servicer with respect to
anticipated future collections on the Financed Student Loans.
"Auction Agent" is the party identified as such in the Prospectus
Supplement.
"Auction Period" means, with respect to each Note, the Interest Accrual
Period applicable to such Note during which time the applicable Class Interest
Rate is determined pursuant to the related Indenture.
"Auction Period Adjustment" means, with respect to the Auction Rate
Notes, the ability of the Administrator to change the length of one or more
Auction Periods to conform with then current market practice or accommodate
other economic or financial factors that may affect or be relevant to the length
of the Auction Period or any Class Interest Rate.
"Auction Procedures" shall mean the auction procedures that will be
used in determining the interest rates on the Auction Rate Notes, as set forth
in this Prospectus and in an Appendix to any Prospectus Supplement relating to a
Class of Auction Rate Notes.
"Auction Rate Notes" means any Class of Notes bearing interest at an
Auction Rate, as identified in the Prospectus Supplement.
"Available Funds" means the sum, without duplication, of the following
amounts with respect to the related Collection Period: (i) all collections
received by the Master Servicer or any Servicer on the Financed Student Loans
(including any Guarantee Payments (including payments received from any
guarantor under any Private Loan Program) and Insurance Payments received with
respect to the Financed Student Loans during such Collection Period); (ii) any
payments, including without limitation, Interest Subsidy Payments and Special
Allowance Payments received by the Eligible Lender Trustee during such
Collection Period with respect to the Financed Student Loans; (iii) all proceeds
from any sales of Financed Student Loans by the Trust during such Collection
Period; (iv) any payments of or with respect to interest received by the Master
Servicer or a Servicer during such Collection Period with respect to a Financed
Student Loan for which a Realized Loss was previously allocated; (v) the
aggregate Purchase Amounts received for those Financed Student Loans purchased
by the Depositor or the Master Servicer during the related Collection Period;
(vi) the aggregate amounts, if any, received from the Depositor or the Master
Servicer as reimbursement of non-guaranteed or uninsured interest amounts (which
shall not include, with respect to Financed FFELP Loans, the portion of such
interest amounts (i.e., 2%) for which the Guarantee Agency did not have an
obligation to make a Guarantee Payment), or lost Interest Subsidy Payments and
Special Allowance Payments with respect to the Financed Student Loans pursuant
to the Transfer and Servicing Agreement; (vii) net Adjustment Payments, if any,
during such Collection Period; (viii) investment earnings for such Collection
Period; and (ix) any other sums identified in the related Prospectus Supplement;
provided, however, that Available Funds will exclude all payments and proceeds
of any Financed Student Loans the Purchase Amount of which has been included in
Available Funds for a prior Collection Period (which payments and proceeds shall
be paid to the Depositor), and amounts used to reimburse the Master Servicer for
Advances pursuant to the terms of the applicable Transfer and Servicing
Agreement.
"BHCA" means the Bank Holding Company Act of 1956, as amended.
"Carryover Interest" means the difference between the interest that
would accrue on any Class of Notes or Certificates at the Formula Rate and the
interest that accrues at the Net Loan Rate, together with interest thereon from
the Payment Date or Quarterly Payment Date on which it is due until paid at the
Formula Rate.
"Cede" means Cede & Co., the Depository Trust Company's nominee with
respect to book-entry Notes.
"Cedel" means a professional depository incorporated under the laws of
Luxembourg which holds securities for its participating organizations and
facilitates the clearance and settlement of securities transactions between
Cedel Participants through electronic book-entry.
"Cedel Participants" means recognized financial institutions around the
world that utilize the services of Cedel, including underwriters, securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations and may include the underwriters of any Series of Notes.
"Certificates" means the certificated equity interest in any Trust.
"Claims Rates" means those rates determined by dividing total default
claims since the previous September 30 by the total original principal amount of
the Guarantee Agency's guaranteed loans in repayment on such September 30.
"Class" means any class of the Notes of a Series as specified in the
related Prospectus Supplement.
"Class Interest Rate" means with respect to any Class of Notes the
annual rate at which interest accrues on the Notes of such Class, as specified
in the related Prospectus Supplement.
"Closing Date" means, for any Series, the date on which such Series is
issued, which will be specified in the related Prospectus Supplement.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collection Account" means the account maintained by the Indenture
Trustee into which all collections on the Financed Student Loans are to be
deposited.
"Collection Period" means, unless otherwise provided in a related
Prospectus Supplement, any calendar month.
"Commission" means the United States Securities and Exchange
Commission.
"Consolidation Loan Fees" means, as to any Collection Period, an amount
equal to the per annum rate identified in the related Prospectus Supplement of
the outstanding principal balances of and accrued interest on the Consolidation
Loans owned by the related Trust as of the last day of such Collection Period.
"Cooperative" means Societe Cooperative, a Belgian cooperative
corporation.
"Credit Enhancement" means the credit support available to one or more
Classes of a Series of Notes, including overcollateralization, letters of
credit, liquidity facilities, insurance policies, spread accounts, one or more
Classes of subordinate securities, derivative products or other forms of credit
enhancement including but not limited to third party guarantees.
"Crestar Subsidiary" means Crestar Bank and certain other subsidiaries
of Crestar Financial Corporation.
"Cut-off Date" means, for any Series, the date specified in the related
Prospectus Supplement as the date on or after which principal and interest
payments on the related Financed Student Loans are to be included in the related
Trust Estate.
"Default" means with respect to a HEAL Loan, the persistent failure of
the borrower of a HEAL Loan to make a payment when due, or to comply with other
terms of the note or other written agreement evidencing a loan under
circumstances where the Secretary of HHS finds it reasonable to conclude that
the borrower no longer intends to honor the obligation to repay. In the case of
a loan repayable (or on which interest is payable) in monthly installments, this
failure must have persisted for 120 days. In the case of a loan repayable (or on
which interest is payable) in less frequent installments, this failure must have
persisted for 180 days.
"Deferment Period" means certain periods when no principal repayments
need be made on certain Financed Student Loans.
"Definitive Notes" means Notes to be issued in fully registered,
certificated form to Note Owners or their nominees rather than to DTC or its
nominee.
"Delaware Trustee" means the entity so specified in the related
Prospectus Supplement serving as Delaware Trustee of the Trust offering the
Notes.
"Delaware Trustee Fee" means the fees payable to the Delaware Trustee.
"Department of Education" means the U.S. Department of Education.
"Department of HHS" means the U.S. Department of Health and Human
Services.
"Depositor" means Crestar Securitization, LLC, a Virginia limited
liability company.
"Depositories" means DTC, Cedel and Euroclear, collectively.
"Depository" means DTC or any successor or other Clearing Agency
selected by the Company as depository for any Book-Entry Certificates.
"Directing Notes" means those Notes entitled to direct the action of
the Indenture Trustee under certain specified conditions.
"DTC" means the Depository Trust Company.
"DTC Participants" means the participating organizations that utilize
the services of DTC, including securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations.
"Effective Interest Rate" means, with respect to any Financed Student
Loan, the interest rate on such Loan after giving effect to all applicable
Interest Subsidy Payments, Special Allowance Payments, rebate fees on
Consolidation Loans and reductions pursuant to borrower incentives. For this
purpose, the Special Allowance Payment rate will be computed based upon the
average of the bond equivalent rates of 91-day Treasury bills auctioned during
that portion of the current calendar quarter that ends on the date as of which
the Effective Interest Rate is determined, or some other method as described in
the Prospectus Supplement.
"Eligible Deposit Account" means either (a) a segregated account with
an Eligible Institution or (b) a segregated trust account with the corporate
trust department of a depository institution organized under the laws of the
United States of America or any one of the states thereof or the District of
Columbia (or any domestic branch of a foreign bank), having corporate trust
powers and acting as trustee for funds deposited in such account, so long as any
of the securities of such depository institution have a credit rating from each
Rating Agency in one of its generic rating categories which signifies investment
grade.
"Eligible Institution" is generally a depository institution organized
under the federal or any state banking laws whose deposits are insured by the
Federal Deposit Insurance Corporation and whose unsecured long-term debt
obligations or short-term debt ratings are acceptable to the Rating Agencies.
"Eligible Investments" means one or more of the investments specified
in the Transfer and Servicing Agreement in which moneys in the related Payment
Account and certain other accounts are permitted to be invested.
"Eligible Lender Trustee" means the trustee under the related Trust
Agreement, so specified in the related Prospectus Supplement serving as eligible
lender trustee of the Trust offering the Notes.
"Eligible Lender Trustee Fee" means the fee payable to the Eligible
Lender Trustee.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Euroclear Operator" means Morgan Guaranty Trust Company of New York,
Brussels, Belgium office.
"Euroclear Participants" means the participating organizations that
utilize the services of Euroclear, including banks, securities brokers and
dealers and other professional financial intermediaries and may include the
underwriters of any Series of Notes.
"Event of Default" with respect to the Notes of a Series, as defined in
the Indenture, consists of: (i) a default for five business days or more in the
payment of any Class Interest Rate or Principal Payment Amount on the Notes
after the same becomes due and payable; (ii) a default in the observance or
performance of any covenant or agreement of the applicable Trust made in the
Indenture or the Transfer and Servicing Agreement and the continuation of any
such default for a period of 30 days after notice thereof is given to such Trust
by the Indenture Trustee or to such Trust and the Indenture Trustee by the
holders of at least 25% in aggregate principal amount of the Directing Notes
then outstanding; (iii) any representation or warranty made by a Trust in the
Indenture or in any certificate delivered pursuant thereto or in connection
therewith having been incorrect in a material respect as of the time made, and
such breach not having been cured within 30 days after notice thereof is given
to the Trust by the Indenture Trustee or to the Trust and the Indenture Trustee
by the holders of at least 25% in aggregate principal amount of the Directing
Notes then outstanding; or (iv) certain events of bankruptcy, insolvency,
receivership or liquidation of a Trust.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Expense Account" means an account established and maintained by the
Indenture Trustee to pay Consolidation Loan Fees and Transaction Fees.
"FDIA" means the Federal Deposit Insurance Act, as amended.
"FDIC" means the Federal Deposit Insurance Corporation.
"FFEL Program" means the Federal Family Education Loan Program
established by the Higher Education Act pursuant to which loans are made to
borrowers pursuant to certain guidelines, and the repayment of such loans is
guaranteed by a Guarantee Agency, and any predecessor or successor program.
"FFELP Loans" means student loans made under the FFEL Program.
"Financed FFELP Loans" means those FFELP Loans that secure one or more
Series of Notes.
"Financed HEAL Loans" means those HEAL Loans that secure one or more
Series of Notes.
"Financed Private Loans" means those Private Loans that secure one or
more Series of Notes.
"Financed Student Loans" means Financed FFELP Loans, Financed HEAL
Loans and Financed Private Loans, as applicable.
"FIRREA" means Financial Institutions Reform, Recovery and Enforcement
Act of 1989, as amended.
"Fitch" means Fitch IBCA, Inc.
"Forbearance Period" means a period of time during which a borrower, in
case of temporary financial hardship, may defer the repayment of principal.
"Formula Rate" means, with respect to any Class of a Series of Notes,
the lesser of (a) the rate established pursuant to an index or market (LIBOR,
T-Bill or Auction), and (b) a cap, if any, all as specified in the related
Prospectus Supplement for such Series.
"Grace Period" means a period of time, following a borrower's ceasing
to pursue at least a half-time course of study and prior to the commencement of
a repayment period, during which principal need not be paid on certain Financed
Student Loans.
"Guarantee Agency" means a state agency or private nonprofit
corporation which guarantees certain payments of principal and interest on
Financed FFELP Loans pursuant to a Guarantee Agreement.
"Guarantee Agreements" means agreements between a Guarantee Agency and
a financial institution.
"Guarantee Fund" means cash and reserves used for the purchase of
defaulted student loans by a Guarantee Agency.
"Guarantee Payments" means those payments made by a Guarantee Agency
with respect to a Financed Student Loan.
"HEAL Act" means the Public Health Service Act, Title VII, Sections
701-720, as amended, together with all rules and regulations promulgated
thereunder.
"HEAL Consolidation Loan" means a loan that combines two or more HEAL
Loans made to the same borrower.
"HEAL Insurance Contract" means an insurance contract with the
Department of HHS with respect to Financed HEAL Loans.
"HEAL Loans" means loans made under the HEAL Program.
"HEAL Program" is a loan program established under the HEAL Act.
"Higher Education Act" means the Higher Education Act of 1965, as
amended.
"Indenture" means the indenture between the Issuer and the Indenture
Trustee, pursuant to which a Series of Notes is issued, as such indenture may be
supplemented or amended from time to time by a Series Supplement.
"Indenture Trustee" means the trustee under the related Indenture.
"Indenture Trustee Fee" means the amount allocated to the Indenture
Trustee, as specified in the related Indenture.
"Index Maturity" means, with respect to a LIBOR Rate Class of Notes,
the offered rate for deposits having a maturity equal to the related Interest
Accrual Period.
"Indirect Participants" means organizations which have indirect access
to a Clearing Agency, such as securities brokers and dealers, banks, and trust
companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly.
"Initial Pool Balance" generally will mean the Pool Balance of the
Financed Student Loans as of the Cut-off Date.
"Insurance Payments" means with respect to any Financed HEAL Loans,
payments of insurance with respect thereto.
"Interest Accrual Period" means, with respect to a Class of Notes, the
period of time in which Interest may accrue, as set forth in the related
Prospectus Supplement.
"Interest Determination Date" means the date preceding the commencement
of each Interest Accrual Period on which the Class Interest Rate is determined.
"Interest Payment Period" means, with respect to any Class of Notes,
the period set forth in the related Prospectus Supplement.
"Interest Subsidy Agreement" means, with respect to any Financed
Student Loans, the agreement between a Guarantee Agency and the Secretary of
Education pursuant to Section 428(b) of the Higher Education Act, as amended,
which entitles the holders of eligible loans guaranteed by the Guarantee Agency
to receive Interest Subsidy Payments from the Secretary of Education on behalf
of certain students while the student is in school, during a six to twelve month
Grace Period after the student leaves school, and during certain Deferment
Periods, subject to the holders' compliance with all requirements of the Higher
Education Act.
"Interest Subsidy Payments" are interest payments paid with respect to
an eligible loan during the period prior to the time that the loan enters
repayment and during Grace and Deferment Periods.
"Issuer" means the particular Trust issuing the Notes.
"Legal Final Maturity" means the Payment Date on which the aggregate
outstanding principal amount of each Class of Notes will be payable in full, as
identified in the related Prospectus Supplement.
"LIBOR" means the London Interbank Offered Rate that the most
creditworthy international banks dealing in Eurodollars charge each other for
large loans.
"LIBOR Rate Notes" means any Class of Notes the Class Interest Rate of
which is based upon LIBOR.
"London Banking Day" means a business day on which dealings in deposits
in United States dollars are transacted in the London interbank market.
"Manager" means Crestar SP Corporation, a Virginia corporation.
"Master Servicer" means Crestar Bank or the entity specified in the
Prospectus Supplement for a Series that will administer and supervise the
performance by the Servicers of their duties and responsibilities under
Servicing Agreements in respect to Notes securing a Series.
"Master Servicer Default" under a Transfer and Servicing Agreement will
consist of: (i) any failure by the Master Servicer to deliver to the Indenture
Trustee for deposit in any of the Trust Accounts at the time required for such
deposit any collections, Guarantee Payments, Insurance Payments, any payments by
a guarantor under a guarantee agreement for a Private Loan or other amounts
received by the Master Servicer with respect to the Financed Student Loans,
which failure continues unremedied for three Business Days after written notice
from the Indenture Trustee, the Administrator or the Eligible Lender Trustee is
received by the Master Servicer or after discovery by the Master Servicer; (ii)
any failure by the Master Servicer duly to observe or perform in any material
respect any other covenant or agreement of the Master Servicer in the Transfer
and Servicing Agreement which failure materially and adversely affects the
rights of Noteholders and which continues unremedied for 60 days after the
giving of written notice of such failure (A) to the Master Servicer by the
Indenture Trustee, the Eligible Lender Trustee or the Administrator or (B) to
the Master Servicer and to the Indenture Trustee and the Eligible Lender Trustee
by holders of Directing Notes evidencing not less than 25% in principal amount
of the outstanding Directing Notes; (iii) certain events of insolvency,
readjustment of debt, marshaling of assets and liabilities, or similar
proceedings with respect to the Master Servicer and certain actions by the
Master Servicer indicating its Insolvency, reorganization pursuant to bankruptcy
proceedings or inability to pay its obligations; and (iv) any limitation,
suspension or termination by the Department of Education or the Department of
HHS or by a guarantor of Financed Private Loans of the Master Servicer's
eligibility to service Student Loans which materially and adversely affects the
Master Servicer's ability to service Financed Student Loans.
"Net Loan Rate" for any Interest Accrual Period will equal the weighted
average Effective Interest Rate as of the last day of the Collection Period
immediately preceding such Interest Accrual Period less the Operating Expense
Percentage.
"New Borrower" means a borrower who, on the date the promissory note
was signed, did not have an outstanding balance on a previous loan which was
made, insured or guaranteed under the FFEL Program.
"Nonresidents" means holders who are nonresident alien individuals,
foreign corporations, foreign partnerships or certain foreign estates and
trusts.
"Noteholder" means a holder of a Note.
"Notes" means a manually executed written instrument evidencing the
Borrower's promise to repay a stated sum of money, plus interest, to the
Noteholder by a specific date.
"Note Owner" means the registered owner of a Note.
"Note Payment Account" means the account maintained by the Indenture
Trustee from which distributions of principal and interest are made to the
Noteholders.
"Obligor" means a person who is indebted under a Financed Student Loan.
"Parity Percentage" means with respect to any Series of Notes, the
percentage set forth in the related Prospectus Supplement, which percentage for
any Payment Date or Quarterly Payment Date is determined by dividing (i) the
applicable Pool Balance as of the end of the preceding Collection Period, plus
accrued interest thereon, accrued Special Allowance Payments and Interest
Subsidy Payments as of the end of such Collection Period and all amounts in the
Collection Account and Reserve Account as of the end of the Collection Period
(adjusted for payments made on such Payment Date or Quarterly Payment), by (ii)
the sum of the principal balance of the Notes (after payment thereon on such
Payment Date or Quarterly Payment Date), accrued interest thereon, and accrued
and unpaid Transaction Fees and Consolidation Loan Fees.
"Parity Payment" means those principal amounts required to be paid on
the Notes until the Parity Percentage is achieved, as specified in the
Prospectus Supplement.
"Participants" means the participating organizations that utilize the
services of the Depository.
"Payment Date" means with respect to any Class of Notes of a Series,
the date specified in the related Prospectus Supplement for payment on the Notes
of such Series.
"Payment Determination Date" means with respect to any Payment Date,
the date set forth in the related Prospectus Supplement when the Administrator
is obligated to determine the amounts to be distributed to the Noteholders on
such Payment Date.
"Plan" means any employee benefit plan or retirement arrangement,
including individual retirement accounts and annuities, Keogh plans, and
collective investment funds in which such plans, accounts, annuities or
arrangements are invested, that are described in or subject to the Plan Asset
Regulations, ERISA, or corresponding provisions of the Code.
"Plan Asset Regulations" means the Department of Labor regulations set
forth in 29 C.F.R. ss. 2510.3-101, as amended from time to time.
"Plan Investors" are persons acting on behalf of a Plan, or persons
using the assets of a Plan.
"PLUS Loans" are loans made only to borrowers who are parents (and,
under certain circumstances, spouses of remarried parents) of dependent
undergraduate students.
"Pool Balance" means, with respect to the end of any Collection Period
with respect to Financed Student Loans, an amount equal to the aggregate
principal balance of the Financed Student Loans (including accrued interest
thereon capitalized through such date) as of the end of the Collection Period,
after giving effect to all payments in respect of principal received by the
Trust during such Collection Period.
"Pre-Funding Account" means an account established for the purpose of
enabling a Trust to purchase Additional Student Loans during the Pre-Funding
Period.
"Pre-Funding Period" means any period specified as such in a Prospectus
Supplement during which the related Trust may acquire Pre-Funded Assets using
funds on deposit in the related Pre-Funding Account.
"Pre-Funding Account Deposit" means for any Series of Notes, the amount
specified in the related Prospectus Supplement.
"Principal Factor" means the seven digit number that, when multiplied
by the initial principal amount of a Note, produces its outstanding principal
balance.
"Principal Payment Amount" means the amount required to be paid on a
Series of Notes on any Payment Date, as set forth in the related Prospectus
Supplement.
"Principal Shortfall" means with respect to any Payment Date, the
difference between the Principal Payment Amount for such Payment Date and the
amount of Available Funds remaining after payment of prior obligations.
"Private Loans" means loans that are originated under Private Loan
Programs.
"Private Loan Programs" mean one or more of the Private Loan Programs
that are identified in the related Prospectus Supplement.
"Purchase Amount" means, as of the end of any Collection Period, the
principal amount of a Financed Student Loan (including any interest required to
be capitalized through such date), together with accrued and unpaid interest
thereon.
"Quarterly Payment Date" means every fourth Payment Date as provided in
the related Prospectus Supplement.
"Rating Agency" means a nationally recognized statistical rating
organization identified in the related Prospectus Supplement that has been
requested by the Depositor to provide a credit rating with respect to one or
more Classes of a Series of Notes as of the Closing Date for such Series.
"Realized Loss" means the excess, if any, of (i) the unpaid principal
balance of such Financed FFELP Loan on the date it was first submitted to a
Guarantee Agency for a Guarantee Payment over (ii) all amounts received on or
with respect to principal on such Financed FFELP Loan up through the earlier to
occur of (A) the date a related Guarantee Payment is made or (B) the last day of
the Collection Period occurring 12 months after the date the claim for such
Guarantee Payment is first denied. With respect to any Private Loan, "Realized
Loss" shall have the definition assigned thereto in the Prospectus Supplement.
"Record Date" means, for any Payment Date, the date on which the
identities of the Noteholders entitled to distributions on the related Notes on
such Payment Date are fixed, as specified in the related Prospectus Supplement.
"Reference Bank" means four leading banks, selected by the Master
Servicer, or by the Trustee, as applicable, (i) engaged in transactions in
Eurodollar deposits in the international Eurocurrency market, (ii) not
controlling, controlled by or under common control with the Administrator or the
Transferor and (iii) having an established place of business in London.
"Registration Statement" means a registration statement (together with
all amendments and exhibits thereto) filed by the Depositor with the Commission
under the Securities Act with respect to the Notes offered hereby.
"Relief Act" means the Taxpayer Relief Act of 1997, as amended.
"Repayment Phase" means, with respect to any Financed Student Loan,
that period of time during which principal is repayable.
"Repeat Borrower" means a borrower who, on the date the promissory
note evidencing the loan was signed, had an outstanding balance on a previous
loan made, insured or guaranteed under the FFEL Program.
"Reserve Account" means an Eligible Account established with the
Indenture Trustee for a Series, the balance of which may be used to fund certain
payments by the Trust.
"Reserve Account Deposit" means the Initial deposit into the Reserve
Fund on the Closing Date for a Series.
"Reuters Screen LIBOR Page" means the display designated as page
"LIBOR" on the Reuters Monitor Money Rates Service (or such other page as may
replace the LIBOR page for the purposes of displaying London interbank offered
rates of major banks).
"Sales Agreement" means any sales agreement among the Transferor, the
Depositor and the Eligible Lender Trustee, whereby the Transferor will transfer
Financed Student Loans for the benefit of the Depositor.
"Securities Act" means the Securities Act of 1933, as amended.
"Serial Loan" means a loan made to the same borrower under the same
loan program and guaranteed by the same Guarantee Agency (or a successor) or
insured by the Department of HHS.
"Service" means the Internal Revenue Service.
"Servicer" means any servicer of Financed Student Loans, as specified
in a related Prospectus Supplement.
"Servicing Fee" means the fee payable to the Master Servicer or
Servicer in respect of a Series, as specified in the related Prospectus
Supplement.
"SLS Loans" are loans that were limited to (a) graduate or professional
students, (b) independent undergraduate students, and (c) under certain
circumstances, dependent undergraduate students, if such students' parents were
unable to obtain a Plus Loan and were also unable to provide such students'
expected family contribution.
"Special Allowance Payments" means payments designated as such made by
the Department of Education with respect to certain FFELP Loans pursuant to
Section 438 of the Higher Education Act.
"Special Tax Counsel" means Hunton & Williams, in its capacity as
special tax counsel to a Trust.
"Specified Reserve Account Balance" means, with respect to any Trust or
Series of Notes, the required amount of the Reserve Fund Account.
"Stafford Loans" means loans that are generally made only to student
borrowers who meet certain needs tests, as set forth in the Higher Education
Act.
"Subsequent Cut-off Date" means the date specified in a transfer
agreement with respect to Subsequent Financed Student Loans as the date on and
after which payments on Subsequent Financed Student Loans will belong to the
Trust.
"Subsequent Finance Period" means the period from the Closing Date for
any Series to a subsequent date identified in the accompanying Prospectus
Supplement, if any, when Subsequent Financed Student Loans may be conveyed to a
Trust.
"Subsequent Financed Student Loans" means those Financed Student Loans
that are conveyed to a Trust after the Closing Date with respect to a Series of
Notes in exchange for Financed Student Loans, and do not include Additional
Student Loans.
"Surety Bond" means a bond that insures the timely payment of all
interest and ultimate payment of all principal due on a Series of Notes;
provided, however, that a Surety Bond will not insure payment of any Carryover
Interest.
"T-Bill Rate" means the average of the bond equivalent rates of the
91-day Treasury bills auctioned during the calendar quarter immediately
preceding any date of determination.
"Telerate Page 5" means the display page so designated on the Dow Jones
Telerate Service (or such other page as may replace that page on that service
for the purpose of displaying comparable rates or prices).
"Terms and Conditions" means the Terms and Conditions Governing Use of
Euroclear and the related Operating Procedures of the Euroclear System.
"TIN" means taxpayer identification number assigned by the Internal
Revenue Service.
"TP Program" means the Crestar Bank Top Performer Program whereby
borrowers with satisfactory payment records receive a reduced interest rate.
"TP Loans" means those Financed Student Loans covered by the TP
Program.
"Transaction Fees" means the Servicing Fee, Administration Fee,
Eligible Lender Trustee Fee, Indenture Trustee Fee and Delaware Trustee Fee.
"Transfer Agreement" means an agreement between the Depositor and the
Eligible Lender Trustee whereby the Depositor conveys the Additional Student
Loans to the Eligible Lender Trustee on behalf of the Trust.
"Transfer and Servicing Agreement" means any transfer and servicing
agreement among the Depositor, the Trust, the Eligible Lender Trustee, and the
Master Servicer, pursuant to which the Depositor will transfer Financed Student
Loans to the Trust.
"Transferor" means Crestar Bank, a Virginia banking corporation.
"Transferor Trusts" means the separate trusts created under the Trust
Agreement and the indentures or trust agreements under which the Eligible Lender
Trustee may separately hold student loans that share the lender identification
number.
"Trust" means a trust that issues one or more Series of Notes.
"Trust Accounts" means the Collection Account, Note Payment Account,
Expense Account, Reserve Account Advance Account and Pre-Funding Account, each
established and maintained by the Indenture Trustee on behalf of the
Noteholders, and the Certificate Distribution Account and the Certificate
Advance Account, each established and maintained by the Eligible Lender Trustee
on behalf of the Certificateholders.
"Trust Agreement" means the agreement pursuant to which a trust is
formed, by and among the Depositor, Eligible Lender Trustee and Delaware
Trustee.
"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 the income of which
is includable in gross income for United States tax purposes, regardless of its
source, or (iv) a trust if a court within the United States is able to exercise
primary jurisdiction over the administration of the trust and one or more U.S.
fiduciaries have the authority to control all substantial decisions of the
trust.
"UCC" means the Uniform Commercial Code, as amended.
"Underwriters" means any firm that agrees to purchase one or more
Classes of Notes of a Series from the Depositor.
"Underwriting Agreement" means an agreement among the Transferor, the
Depositor and the Underwriter(s) for purchase of the Notes of a Series.
<PAGE>
NO DEALER, SALESMAN OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRANSFEROR, THE DEPOSITOR OR THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE NOTES OFFERED
HEREBY NOR AN OFFER OF SUCH NOTES 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.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
SUMMARY OF TERMS....................................S-1
THE TRUST...........................................S-7
USE OF PROCEEDS.....................................S-7
THE FINANCED STUDENT LOANS..........................S-7
MATURITY AND PREPAYMENT
CONSIDERATIONS...................................S-13
THE SERVICERS......................................S-14
THE GUARANTEE AGENCIES.............................S-15
DESCRIPTION OF THE NOTES...........................S-15
UNDERWRITING.......................................S-21
LEGAL MATTERS......................................S-22
RATING.............................................S-22
PROSPECTUS
PROSPECTUS SUMMARY....................................1
RISK FACTORS..........................................5
FORMATION OF THE TRUSTS..............................11
USE OF PROCEEDS......................................12
THE TRANSFEROR.......................................12
THE DEPOSITOR........................................13
THE FINANCED STUDENT LOAN POOL.......................13
MATURITY AND PREPAYMENT
CONSIDERATIONS.....................................14
DESCRIPTION OF THE FFEL PROGRAM......................15
DESCRIPTION OF THE GUARANTEE AGENCIES................26
DESCRIPTION OF THE HEAL PROGRAM......................29
THE PRIVATE LOAN PROGRAMS............................32
DESCRIPTION OF THE AGREEMENTS........................33
SERVICING............................................44
DESCRIPTION OF THE NOTES.............................47
FEDERAL INCOME TAX CONSEQUENCES......................56
STATE TAX CONSIDERATIONS.............................65
ERISA CONSIDERATIONS.................................65
AVAILABLE INFORMATION................................66
REPORTS TO NOTEHOLDERS...............................66
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE......67
PLAN OF DISTRIBUTION.................................67
FINANCIAL INFORMATION................................68
RATING...............................................68
GLOSSARY OF PRINCIPAL TERMS.........................I-1
$-----------
CRESTAR STUDENT LOAN
TRUST 1998-__
STUDENT LOAN
ASSET BACKED NOTES
SENIOR LIBOR RATE
CLASS A NOTES
SUBORDINATE LIBOR RATE
CLASS B NOTES
--------------
PROSPECTUS
--------------
SALOMON SMITH BARNEY
CRESTAR SECURITIES CORPORATION
____________ __, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses in connection with
the offering of $1,000,000 of the Student Loan Asset Backed Notes being
registered under this Registration Statement, other than underwriting discounts
and commission:
SEC Registration......................................$ 295.00
Printing and Engraving.........................................*
Legal Fees and Expenses........................................*
Accounting Fees and Expenses...................................*
Trustee Fees and Expenses......................................*
Blue Sky Fees and Expenses.....................................*
Rating Agency Fees.............................................*
Miscellaneous..................................................*
TOTAL..........................................$*
* To be provided by amendment
Item 15. Indemnification of Directors and Officers.
The Registrant's Operating Agreement implements the provisions of the
Virginia Limited Liability Company Act ("VLLCA"), which permit the limitation of
liability of the Registrant's Manager (as defined below) and Members in a
variety of circumstances, which may include liabilities under the Securities Act
of 1933. Under Section 13.1-1025 of the VLLCA, a Virginia limited liability
company generally is authorized to limit the liability of its Members and
Manager if specified in writing in its Articles of Organization or Operating
Agreement. The Registrant's Operating Agreement limits the liability of its
Members and Manager to the fullest extent permitted under the VLLCA. The
liability of the Registrant's Members or Manager shall not be limited if such
persons engage in willful misconduct or a knowing violation of the criminal law
or any federal or state securities law.
The Articles of Incorporation of Crestar SP Corporation, the Registrant's
manager (the "Manager") implement the provisions of the Virginia State
Corporation Act ("VSCA"), which provide for the indemnification of the Manager's
directors and officers in a variety of circumstances, which may include
indemnification for liabilities under the Securities Act of 1933. Under Sections
13.1-697 and 13.1-702 of the VSCA, a Virginia corporation generally is
authorized to indemnify its directors and officers in civil and criminal actions
if they acted in good faith and believed their conduct to be in the best
interests of the corporation and, in the case of criminal actions, had no
reasonable cause to believe that their conduct was unlawful. The Manager's
Articles of Incorporation require indemnification of directors and officers with
respect to certain liabilities, expenses and other amounts imposed upon them by
reason of having been a director or officer, except in the case of willful
misconduct or a knowing violation of criminal law. In addition, the VSCA and the
Manager's Articles of Incorporation eliminate the liability of a director or
officer in a stockholder or derivative proceeding. This elimination of liability
will not apply in the event of willful misconduct or a knowing violation of the
criminal law or any federal or state securities law.
Reference is made to the Underwriting Agreement filed as an exhibit hereto
for provisions relating to the indemnification of directors, officers and
controlling persons of the Registrant and the Manager against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
Crestar Financial Corporation, the parent of the Registrant and the Manager,
carries an insurance policy providing directors' and officers' liability
insurance for any liability its directors or officers or the directors or
officers of any of its subsidiaries, including the Registrant and the Manager,
may incur in their capacities as such.
Item 16. Exhibits.
All financial statements, schedules and historical financial information
have been omitted as they are not applicable.
1.1 Form of Underwriting Agreement*
3.1 Articles of Organization of Registrant
3.2 Operating Agreement of Registrant
3.3 Form of Trust Agreement among the Registrant, the Eligible Lender
Trustee and the Delaware Trustee*
4.1 Form of Indenture between the Trust and the Indenture Trustee*
4.2 Form of First Terms Supplement to Indenture between the Trust and the
Indenture Trustee*
4.4 Form of Transfer and Servicing Agreement among the Trust, the Master
Servicer and the Eligible Lender Trustee*
4.5 Form of Administration Agreement among the Administrator, the Eligible
Lender Trustee and the Indenture Trustee*
5.1 Opinion of Hunton & Williams*
8.1 Opinion of Hunton & Williams with respect to tax matters*
23.1 Consent of Hunton & Williams is contained in their opinions filed as
Exhibits 5.1 and 8.1*
24.1 Power of Attorney (contained on the signature page hereof)
99.1 Form of Auction Procedures Appendices
* To be filed by amendment
Item 17. Undertakings.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events
arising after the effective date of the Registration Statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change in
the information set forth in the Registration Statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
Registration Statement or any material change of such information
in the Registration Statement;
<PAGE>
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the information required to be included in the
post-effective amendment by those paragraphs is contained in
periodic reports filed by the Registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are
included by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering;
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) The undersigned Registrant hereby undertakes to file an application
for the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act in accordance with the
rules and regulations prescribed by the Commission under Section 305(b)(2) of
the Act.
(d) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements (including, without limitation, the security rating requirement at
time of sale) for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Richmond, Commonwealth of Virginia, on May 1, 1998.
CRESTAR SECURITIZATION, LLC
(Registrant)
By: CRESTAR SP CORPORATION, as
Manager
By: /s/ Eugene S. Putnam
----------------------
Eugene S. Putnam, President and
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Eugene
S. Putnam, Linda F. Rigsby, Jack A. Molenkamp and Randolph F. Totten his true
and lawful attorneys-in-fact and agents, each acting alone, with full powers of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, each acting alone, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- -----
<S> <C>
/s/ Eugene S. Putnam
- ---------------- Director, Chief Executive May 1, 1998
Eugene S. Putnam Officer and President
(Principal Executive Officer)
/s/ Mark Smith
- ---------------- Chief Financial/Accounting Officer May 1, 1998
Mark Smith (Principal Financial Officer
and Principal Accounting Officer)
/s/ Richard F. Katchuk
- ------------------ Director May 1, 1998
Richard F. Katchuk
/s/ James D. Barr
- ------------------ Director May 1, 1998
James D. Barr
</TABLE>
EXHIBIT 3.1
COMMONWEALTH OF VIRGINIA
STATE CORPORATION COMMISSION
ARTICLES OF ORGANIZATION
Pursuant to Chapter 12 of Title 13.1 of the Code of Virginia the undersigned
states as follows:
1. The name of the limited liability company is Crestar Securitization,
LLC (hereinafter referred to as the "Company").
2. The address of the initial registered office in Virginia is 919 East
Main Street, Richmond, Virginia 23219, located in the City of Richmond.
3. A. The registered agent's name is Linda F. Rigsby, Esq., whose business
address is identical with the registered office.
B. The registered agent is (mark appropriate box)
(1) an INDIVIDUAL who is a resident of Virginia and
[ ] a member/manager of the limited liability
company
[X] an officer/director of a corporate
member/manager of the limited liability
company
[ ] a general partner of a general or limited
partnership member/manager of the limited
liability company
[X] a member of the Virginia State Bar
OR
(2) [ ] a professional corporation or a
professional limited liability company of
attorneys registered under Virginia Code ss.
54.1-3902
4. The post office address of the principal office where the records will
be maintained pursuant to Virginia Code ss. 13.1-1028 is 919 East Main
Street, Richmond, Virginia 23219, located in the City of Richmond.
5. The purpose of the Company shall be strictly limited to the issuance of
Securities (as defined in the Company's Operating Agreement) secured
primarily by Collateral (as defined in the Company's Operating
Agreement) and in connection therewith to acquire, own, hold, sell,
transfer, assign, pledge, finance, refinance and otherwise deal with
Collateral; to engage in the establishment of one or more trusts to
hold pools of Collateral deposited by the Company in such trusts and in
consideration of such deposits, to deliver to the Company Securities
evidencing ownership interests in such pools of Collateral; to acquire,
own, hold, sell, transfer, assign, pledge, finance, refinance and
otherwise deal in or with Securities; to acquire, own, hold, sell,
transfer, assign, pledge and otherwise deal in or with Collateral; and
to acquire, own, hold, sell, transfer, assign, pledge and otherwise
deal in or with any or all of the ownership interests in trusts
established
<PAGE>
by other entities, institutions or individuals. Subsequent to the
issuance of any series of Securities, the Company may sell the
Collateral securing Securities to a limited-purpose trust, partnership
or corporation, subject to the lien in favor of such Securities.
Subject to the limitations contained herein and in the Company's
Operating Agreement, as amended from time to time, the Company may
engage in any activity that is incidental to or that renders convenient
the accomplishment of any or all of the foregoing and that is not
prohibited by law or required to be set forth specifically herein or in
the Company's Operating Agreement. The Company shall not engage in any
other business. In addition, the Company shall not incur any
indebtedness other than (a) indebtedness evidenced by Securities, (b)
expenses incidental to the issuance of Securities, and (c) indebtedness
that (i) carries a rating equal to or higher than the lowest rating
assigned to any outstanding Securities by a nationally recognized
statistical credit rating agency, (ii) is fully subordinate to any
outstanding Securities and does not constitute a claim against the
Company for any purpose, including without limitation for purposes of
commencing an involuntary petition against the Company under any
Chapter of the United States Bankruptcy Code, for so long as the
Securities are outstanding or (iii) is nonrecourse, payable only from
cash in excess of that required to make payments on the Securities, and
does not constitute a claim against the Company for any purpose to the
extent such excess cash flow is insufficient to pay the additional
debt. In the event of any dissolution of the Company pursuant to
Article 9 of the Virginia Limited Liability Company Act, the Company
shall not liquidate any Collateral without the consent of the holders
of any then-outstanding Securities, and such holders of Securities
shall retain all rights with respect to such Collateral under any
related security agreement.
6. Signature:
By: /s/ David B. Rich, III
----------------------
David B. Rich, III, Esq.
Organizer
EXHIBIT 3.2
OPERATING AGREEMENT
OF
CRESTAR SECURITIZATION, LLC
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
SECTION I DEFINITIONS.......................................................................... 1
SECTION II NAME AND TERM........................................................................ 4
SECTION III BUSINESS OF COMPANY.................................................................. 6
SECTION IV RIGHTS AND OBLIGATIONS OF THE MANAGER AND THE
MEMBERS.............................................................................. 6
SECTION V CAPITAL CONTRIBUTIONS AND FINANCIAL OBLIGATIONS OF
MEMBERS.............................................................................. 10
SECTION VI ALLOCATIONS; DISTRIBUTIONS........................................................... 11
SECTION VII RESTRICTIONS ON TRANSFERS............................................................ 14
SECTION VIII INDEMNIFICATION...................................................................... 14
SECTION IX MEMBER REPRESENTATIONS, WARRANTIES AND
COVENANTS............................................................................ 16
SECTION X MISCELLANEOUS PROVISIONS............................................................. 18
</TABLE>
-i-
<PAGE>
LIMITED LIABILITY COMPANY OPERATING AGREEMENT
OF
CRESTAR SECURITIZATION, LLC
a Virginia limited liability company
THIS LIMITED LIABILITY COMPANY OPERATING AGREEMENT (this
"Agreement"), dated as of the 30th day of April, 1998, between Crestar Bank, a
Virginia banking corporation (the "Bank"), and Crestar SP Corporation, a
Virginia corporation (the "Manager"), for the regulation of the affairs and the
conduct of the business of Crestar Securitization LLC, a Virginia limited
liability company (the "Company"), recites and provides as follows:
RECITALS:
1. The Company is being formed as a special purpose limited
liability company under the laws of the Commonwealth of Virginia pursuant to
articles of organization filed with the Virginia State Corporation Commission on
April 30th, 1998.
2. The Members desire to enter into this Agreement for the purpose
of setting forth the terms upon which the Company will be operated.
NOW, THEREFORE, in consideration of the mutual promises of the
parties hereto, and of other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
AGREEMENT:
SECTION I
DEFINITIONS
1.01 Act shall mean the Virginia Limited Liability Company Act,
Chapter 12 of Title 13.1 of the Code of Virginia, as amended from time to time.
1.02 Affiliate shall mean any Person that directly, or
indirectly through one or more intermediaries, controls, or is controlled by, or
is under common control with, the Person specified. The term "control"
(including the terms "controlling", "controlled by" and "under common control
with") means the possession, direct or indirect, of the power to direct or cause
the direction of the management and policies of a Person, whether through the
ownership of at least 50% of the voting securities, by contract or otherwise.
1.03 Agreement shall mean this Operating Agreement of the
Company, as it may be amended from time to time.
1.04 Annual Tax Reports shall have the meaning set forth in
Section 10.03 hereof.
1.05 Bankruptcy Code shall mean the United States Bankruptcy
Code, 11 U.S.C. ss.ss. 101-1330, as amended from time to time.
1.06 Capital Account shall have the meaning set forth in Section
5.03 hereof.
1.07 Capital Contribution shall mean the amount of money or the
fair market value of other property contributed to the Company by each Member,
pursuant to the terms of this Agreement.
1.08 Capital Transaction shall mean the sale, exchange or other
disposition outside the ordinary course of business of all or any substantial
part of the assets of the Company, except for any Terminating Capital
Transaction.
1.09 Cash Available for Distribution shall mean, for any period,
the excess, if any, of (i) the cash receipts of the Company (other than from a
Capital Transaction or a Terminating Capital Transaction), over (ii)
disbursements of cash by the Company (other than distributions to Members, and
amounts paid with receipts from a Capital Transaction or a Terminating Capital
Transaction), including the payment of operating expenses, debt service on loans
from both Members and third parties, and capital expenditures, and amounts
deposited in reserves.
1.010 Code shall mean the Internal Revenue Code of 1986, as
amended, or any successor provision of law.
1.10 Collateral shall mean one or more financial assets,
including, without limitation, student loans, residential mortgage loans,
commercial mortgage loans, home equity loans, consumer finance loans,
manufactured housing installment sales contracts, credit card receivables,
automobile loans, notes, securities, leases, and pass-through certificates or
debt securities collateralized by any of the preceding.
1.11 Company shall mean Crestar Securitization, LLC, a Virginia
limited liability company.
1.12 Company Minimum Gain shall have the meaning set forth in
Treasury Regulations Section 1.704-2(d). In accordance with Treasury
Regulations Section 1.704-2(d), the amount of Company Minimum Gain is determined
by first computing, for each nonrecourse liability of the Company, any gain the
Company would realize if it disposed of the property subject to that liability
for no consideration other than full satisfaction of the liability, and then by
aggregating the separately computed gains. A Member's share of Company Minimum
Gain shall be determined in accordance with Treasury Regulations Section
1.704-2(g)(1).
1.13 Fiscal Year shall have the meaning provided in Section
10.01 hereof.
1.14 Fee shall have the meaning provided in Section 5.07 hereof.
1.15 Independent Director shall have the meaning provided in the
Manager's Articles of Incorporation.
-2-
<PAGE>
1.16 IRS shall mean the Internal Revenue Service.
1.17 Majority in Interest shall mean a majority of Membership
Interests in Company capital and profits as determined applying the principles
of Rev. Proc. 94-46, 1994-28 I.R.B. 129.
1.18 Manager shall mean Crestar SP Corporation, or any successor
thereto.
1.19 Member or Members shall mean any and all of those Persons
listed as Members in Exhibit A hereto or any Persons who replace them as
substitute Members as provided herein, in each such Person's capacity as a
Member of the Company.
1.20 Membership Interest shall mean a Member's ownership
interest in the Company, which includes (i) such Member's interest in the
income, gains, profits, deductions, losses, credits or distributions of the
Company, (ii) all benefits to which such Member may be entitled hereunder, and
(iii) all obligations of such Member to comply with the terms and provisions of
this Agreement. The Members' Membership Interests shall be as set forth in
Exhibit A.
1.21 Member Nonrecourse Debt Minimum Gain shall have the meaning
set forth in Treasury Regulations Section 1.704-2(i). A Member's share of Member
Nonrecourse Debt Minimum Gain shall be determined in accordance with Treasury
Regulations Section 1.704-2(i)(5).
1.22 Person shall mean and include an individual,
proprietorship, trust, estate, partnership, joint venture, association, company,
corporation, limited liability company or other entity.
1.23 Sale Proceeds shall mean the proceeds from a Capital
Transaction net of expenses related thereto after payment, or adequate provision
for, debts of the Company and any Company reserves; provided, however, that Sale
Proceeds shall not include proceeds from any Terminating Capital Transaction.
1.24 Securities shall mean either (i) bonds, notes, or other
debt instruments issued by the Company secured primarily by Collateral or (ii)
pass-through certificates evidencing ownership interests in one or more trusts
established by the Company, into which trusts the Company has deposited one or
more pools of Collateral.
1.25 State shall mean the Commonwealth of Virginia.
1.26 Taxable Year shall have the meaning set forth in Section
10.01 hereof.
1.27 Terminating Capital Transaction shall mean the sale,
exchange or other disposition of all or substantially all of the assets of the
Company, after which transaction the Company is dissolved and terminated.
-3-
<PAGE>
1.28 Treasury Regulations shall mean the Treasury regulations
issued under the Code, as amended and as hereafter amended from time to time.
Reference to any particular provision of the Treasury Regulations shall mean
that provision of the Treasury Regulations on the date hereof and any successor
provision of the Treasury Regulations.
SECTION II
NAME AND TERM
2.01 Name, Office and Registered Agent.
(a) The name of the Company shall be "Crestar Securitization,
LLC". The principal office and place of business of the Company shall be 919
East Main Street, Richmond, Virginia 23219. The Manager may at any time change
the location of such office to another location, provided that the Manager gives
notice of any such change to the registered agent of the Company.
(b) The initial registered office of the Company for purposes
of the Act shall be 919 East Main Street, Richmond, Virginia 23219. The initial
registered agent of the Company for purposes of the Act shall be Linda F.
Rigsby, Esq., whose business office is identical with the Company's registered
office. The registered office and registered agent may be changed by the Members
or the Manager at any time in accordance with the Act. The registered agent's
sole duty as such is to forward to the Company at its principal office and place
of business any notice that is served on him as registered agent.
2.02 Governing Law. This Agreement and all questions with
respect to the rights and obligations of the Members and the Manager, the
construction, enforcement and interpretation hereof, and the formation,
administration and termination of the Company shall be governed by the
provisions of the Act and other applicable laws of the State.
2.03 Term.
(a) The Company shall have perpetual existence, except that,
subject to the restrictions of Subsection 4.04, the Company shall be dissolved
and terminated upon the first to occur of any of the following events:
(i) The determination in writing of all of the
Members to dissolve and terminate the Company; or
(ii) The entry of a decree of judicial
dissolution under ss. 13.1-1047 of the Act or the automatic
cancellation of its certificate pursuant to ss. 13.1-1064 of the
Act.
(b) Upon the dissolution of the Company for any reason, the
Manager and Members shall proceed promptly to wind up the affairs of and
liquidate the Company; provided, however, that if any Securities are
outstanding, the Manager and Members shall not liquidate the assets of the
Company securing the Securities, except as permitted by the security agreement
pursuant to which such assets were pledged, without the consent of the secured
party under such agreement, which may continue to exercise all of its rights
under such security agreement and shall have complete and independent ability to
retain such assets until the Securities have been paid in full or otherwise
completely discharged. Subject to the foregoing, the Manager and Members shall
have reasonable discretion to determine the time, manner and terms of any sale
or sales of the Company's property pursuant to such liquidation.
-4-
<PAGE>
SECTION III
BUSINESS OF COMPANY
To issue securities secured primarily by Collateral and in
connection therewith to acquire, own, hold, sell, transfer, assign, pledge,
finance, refinance and otherwise deal with Collateral; to engage in the
establishment of one or more trusts to hold pools of Collateral deposited by the
Company in such trusts and in consideration of such deposits, to deliver to the
Company securities evidencing ownership interests in such pools of Collateral;
to acquire, own, hold, sell, transfer, assign, pledge, finance, refinance and
otherwise deal in or with the Securities; to acquire, own, hold, sell, transfer,
assign, pledge and otherwise deal in or with Collateral; and to acquire, own,
hold, sell, transfer, assign, pledge and otherwise deal in or with any or all of
the ownership interests in trusts established by other entities, institutions or
individuals. Subsequent to the issuance of any series of bonds, the Company may
sell the Collateral securing such bonds to a limited-purpose trust, partnership
or corporation, subject to the lien in favor of such bonds. Subject to the
limitations contained in the Company's Articles of Organization, as amended from
time to time, and this Section III, the Company may engage in any activity that
is incidental to or that renders convenient the accomplishment of any or all of
the foregoing and that is not prohibited by law or required to be set forth
specifically in this Agreement. The Company shall not engage in any other
business. In addition, the Company shall not incur any indebtedness other than
(a) indebtedness evidenced by Securities, (b) expenses incidental to the
issuance of Securities, and (c) indebtedness that (i) carries a rating equal to
or higher than the lowest rating assigned to any outstanding Securities by a
nationally recognized statistical credit rating agency, (ii) is fully
subordinate to any outstanding Securities and does not constitute a claim
against the Company for any purpose, including without limitation for purposes
of commencing an involuntary petition against the Company under any Chapter of
the Bankruptcy Code, for so long as the Securities are outstanding or (iii) is
nonrecourse, payable only from cash in excess of that required to make payments
on the Securities, and does not constitute a claim against the Company for any
purpose to the extent such excess cash flow is insufficient to pay the
additional debt.
SECTION IV
RIGHTS AND OBLIGATIONS OF THE MANAGER AND THE MEMBERS
4.01 Members. The Members of the Company are the Bank and the
Manager, and the business and notice address, telephone number and facsimile
number of each such Member are set forth opposite each Member's name on exhibit
A attached hereto.
-5-
<PAGE>
4.02 Management Rights.
(a) The management of the Company is vested in the Manager
exclusively, and the decisions of the Manager are controlling. Except as
otherwise provided herein, the Manager shall have no duty or obligation to
consult with or seek advice of the Members in connection with the conduct of the
business of the Company.
(b) The Manager may transact business for the Company, and
shall have the power to sign for and to bind the Company.
(c) No management rights are vested in any Member solely
because of such person's status as a Member.
4.03 Other Activities. Any Member or the Manager may engage in
or possess any interest in another business or venture of any nature and
description, independently or with others.
4.04 Major Decisions. For so long as any Securities are
outstanding, without the express prior written consent of 100% of the Members
and each Independent Director thereof, the Company shall not, and no Member
shall have any right, power or authority to cause the Company to, do any of the
following:
(a) commit any act in contravention of this Agreement;
(b) amend, modify or waive any of the terms or conditions of
this Agreement;
(c) admit any Person to the Company as a Member;
(d) authorize, issue, sell, redeem or otherwise purchase any
Membership Interests;
(e) declare or make a distribution other than as required or
specifically permitted in this Agreement;
(f) settle on behalf of the Company any suit, proceeding or
arbitration before any court or arbitrator or any governmental agency, authority
or official where the terms of such settlement could reasonably be expected to
affect materially and adversely the business, financial position, results of
operations, properties or prospects of the Company; or
(g) file or otherwise initiate on behalf of the Company (i) a
voluntary or involuntary petition for relief under any Chapter of the Bankruptcy
Code, (ii) a receivership, conservatorship or custodianship, (iii) an assignment
for the benefit of creditors or (iv) any other bankruptcy or insolvency related
proceeding;
(h) dissolve or liquidate, in whole or in part, consolidate or
merge with or into any other entity, or convey, sell or transfer all or
substantially all of the Company's assets; or
(i) consent to or acquiesce in (i) the filing or other
initiation of an involuntary petition for relief against the Company under any
Chapter of the Bankruptcy Code or (ii) the appointment of any trustee, receiver,
conservator, assignee, sequestrator, custodian, liquidator (or other similar
official) for the Company or all or substantially all of its assets.
-6-
<PAGE>
4.05 No Right to Withdraw. No Member shall have any right to
voluntarily resign or otherwise withdraw from the Company, or to receive any
distribution to which such Member is otherwise entitled to receive upon
withdrawal, without the written consent of all remaining Members of the Company.
4.06 Places of Meetings. All meetings of the Members shall be
held at such place within or without the State as from time to time may be fixed
by the Members. Meetings of the Members may be held telephonically or by video
conference provided that all of the Members participating in such meetings can
hear and, in the case of a video conference, see each other at the same time. In
addition, notwithstanding any provision hereof, the Members may act by unanimous
written consent in the absence of a meeting.
<PAGE>
4.07 Annual Meetings. The annual meeting of the Members shall be
held on the first Monday in March of each year commencing in 1999 or on such
other date as may be selected by the Members.
4.08 Special Meetings. A special meeting of the Members for any
purpose or purposes may be called at any time by any Member. At a special
meeting no business shall be transacted and no action shall be taken other than
that stated in the notice of the meeting, except with the unanimous consent of
the Members present or represented by proxy.
4.09 Notice of Meetings. Notice of every meeting of the Members
shall be given by letter, telegraph, telephone or facsimile and shall be sent
not less than 48 hours nor more than 30 days before the date of such meeting to
each Member entitled to vote at such meeting at its address, telephone number or
facsimile number on Exhibit A hereto or such other address, telephone number or
facsimile number as a Member may have provided in writing to the other Members.
Notice of every meeting of the Members shall state the place, day and hour of
the meeting and, in case of a special meeting, the purpose or purposes for which
the meeting is called. Such further notice shall be given as may be required by
law, but meetings may be held without notice if all the Members entitled to vote
at the meeting are present in person or by proxy or if notice is waived in
writing by those not present, either before or after the meeting.
4.10 Quorum. Any number of Members together holding at least a
majority of the Membership Interests entitled to vote with respect to the
business to be transacted, who shall be present in person or represented by
proxy at any meeting duly called, shall constitute a quorum for the transaction
of business. If less than a quorum shall be in attendance at the time for which
a meeting shall have been called, the meeting may be adjourned from time to time
by a majority of the Members present or represented by proxy without notice
other than by announcement at the meeting.
4.11 Voting. At any meeting of the Members, each Member entitled
to vote on any matter coming before the meeting shall, as to such matter, have a
vote, in person or by proxy, equal to its Membership Interest in its name on the
date, not more than 35 days prior to such meeting, fixed by the Members as the
record date for the purpose of determining Members entitled to vote. If the
Members do not fix a record date, the record date shall be deemed to be the date
that notice of the meeting is sent. Every proxy shall be in writing, dated and
signed by the Member entitled to vote or its duly authorized attorney-in-fact.
-7-
<PAGE>
4.12 Transactions with Members and Affiliates. Subject to
obtaining any consent expressly required hereunder, the Members may appoint,
employ, contract or otherwise deal with any Person, including Affiliates of a
Member, individuals with whom a Member is related, and with Persons that have a
financial interest in a Member or in which a Member has a financial interest,
for transacting the Company's business provided that (i) the terms of each such
agreement are no less favorable than the terms obtainable by the Company from a
comparable unaffiliated third party, and (ii) notice of each such agreement,
including the identity of such Person and the terms thereof, is given to the
other Members.
4.13 Personal Services. No Member shall be required to perform
services for the Company solely by virtue of being a Member. Unless approved by
the Members, no Member shall perform services for the Company or be entitled to
compensation for services performed for the Company.
When voting on the matters subject to a vote of the Members,
including without limitation the matters set forth in this Section IV, the
Members, and each Independent Director thereof, shall take into account the
interests of the holders of any outstanding Securities, regardless of whether
the Company is insolvent on either a balance sheet or equitable basis.
SECTION V
CAPITAL CONTRIBUTIONS AND
FINANCIAL OBLIGATIONS OF MEMBERS
5.01 Initial Capital Contributions. Each of the Bank and the
Manager shall contribute cash to the capital of the Company in the amount set
forth opposite its name on Exhibit A hereto.
5.02 Additional Capital Contributions. Except as otherwise
required herein, no additional Capital Contributions shall be required unless
all of the Members consent thereto in writing. The Membership Interest of each
Member shall be adjusted on Exhibit A hereto upon any additional Capital
Contribution made by a Member, with the written consent of all Members, to
reflect the aggregate amount of Capital Contributions made by each Member.
5.03 Capital Accounts. A separate capital account (each, a
"Capital Account") shall be established and maintained for each Member in
accordance with Treasury Regulations Sections 1.704-1(b)(2)(iv) and 1.704-2.
5.04 No Interest on Contributions. No Member shall be entitled
to interest on its Capital Contribution.
5.05 Return of Capital Contributions. No Member shall be
entitled to withdraw any part of its Capital Contribution or its Capital Account
or to receive any distribution from the Company, except as specifically provided
in this Agreement. Except as otherwise provided herein, there shall be no
obligation to return to any Member or withdrawn Member any part of such Member's
Capital Contribution to the Company for so long as the Company continues in
existence.
-8-
<PAGE>
SECTION VI
ALLOCATIONS; DISTRIBUTIONS
6.01 Allocations.
( )(a) Except as otherwise provided in this Section 6.01, profit
or loss of the Company that is not attributable to a Capital Transaction or a
Terminating Capital Transaction for each Fiscal Year shall be allocated to the
Members in accordance with their Membership Interests.
( )(b) Except as otherwise provided in this Section 6.01, profit
or loss of the Company that is attributable to a Capital Transaction or a
Terminating Capital Transaction for each Fiscal Year shall be allocated to the
Members in accordance with their Membership Interests.
(c) Except as otherwise provided in this Section 6.01,
depreciation and amortization deductions of the Company for each Fiscal Year
shall be allocated to the Members in accordance with their Membership Interests.
(d) Except as otherwise provided in this Section 6.01, credits
of the Company for each Fiscal Year shall be allocated to the Members in
accordance with their Membership Interests.
(e)( ) Notwithstanding any provision to the contrary, (i) any
expense of the Company that is a "nonrecourse deduction" within the meaning of
Treasury Regulations Section 1.704-2(b)(1) shall be allocated to the Members in
accordance with their Membership Interests, (ii) any expense of the Company that
is a "partner nonrecourse deduction" within the meaning of Treasury Regulations
Section 1.704-2(i)(2) shall be allocated in accordance with Treasury Regulations
Section 1.704-2(i)(1), (iii) if there is a net decrease in Company Minimum Gain
within the meaning of Treasury Regulations Section 1.704-2(f)(1) for any Taxable
Year, items of gain and income shall be allocated among the Members in
accordance with Treasury Regulations Section 1.704-2(f) and the ordering rules
contained in Treasury Regulations Section 1.704-2(j), and (iv) if there is a net
decrease in Member Nonrecourse Debt Minimum Gain within the meaning of Treasury
Regulations Section 1.704-2(i)(4) for any Taxable Year, items of gain and income
shall be allocated among the Members in accordance with Treasury Regulations
Section 1.704-2(i)(4) and the ordering rules contained in Treasury Regulations
Section 1.704-2(j). A Member's "interest in partnership profits" for purposes of
determining its share of the nonrecourse liabilities of the Company within the
meaning of Treasury Regulations Section 1.752-3(a)(3) shall be based on its
respective Membership Interest.
-9-
<PAGE>
(f) Notwithstanding any provision to the contrary, if a Member
receives in any Taxable Year an adjustment, allocation, or distribution
described in subparagraphs (4), (5), or (6) of Treasury Regulations Section
1.704-1(b)(2)(ii)(d) that causes or increases a negative balance in such
Member's Capital Account that exceeds the sum of (i) such Member's shares of
Company Minimum Gain and Member Nonrecourse Debt Minimum Gain, as determined in
accordance with Treasury Regulations Sections 1.704-2(g) and 1.704-2(i) and (ii)
any amounts that such Member is obligated to contribute to the Company pursuant
to Section 5.02 hereof, such Member shall be allocated specially for such
Taxable Year (and, if necessary, later Taxable Years) items of income and gain
in an amount and manner sufficient to eliminate such negative Capital Account
balance as quickly as possible as provided in Treasury Regulations Section
1.704-1(b)(2)(ii)(d). After the occurrence of an allocation of income or gain to
a Member in accordance with this Section 6.01(f), to the extent permitted by
Regulations Section 1.704-1(b), items of expense or loss shall be allocated to
such Member in an amount necessary to offset the income or gain previously
allocated to such Member under this Section 6.01(f).
(g) Loss, expense or deduction shall not be allocated to a
Member to the extent that such allocation would cause a deficit in such Member's
Capital Account (after reduction to reflect the items described in Treasury
Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6)) to exceed the sum of
(i) such Member's shares of Company Minimum Gain and Member Nonrecourse Debt
Minimum Gain and (ii) any amounts that such Member is obligated to contribute to
the Company pursuant to Section 5.02 hereof. Any loss, expense or deduction in
excess of that limitation shall be allocated to the other Member. After the
occurrence of an allocation of loss, expense or deduction to a Member in
accordance with this Section 6.01(g), to the extent permitted by Treasury
Regulations Section 1.704-1(b), profit or income shall be allocated to such
Member in an amount necessary to offset the loss, expense or deduction
previously allocated to such Member under this Section 6.01(g).
(h) If a Member transfers part or all of its Membership
Interest and the transferee is admitted as provided herein (a "Transferee
Member"), the distributive shares of the various items of profit and loss
allocable among the Members during such Fiscal Year shall be allocated between
the transferor and the Transferee Member (at the election of the Manager) either
(i) as if the Fiscal Year had ended on the date of the transfer or (ii) based on
the number of days of such Fiscal Year that each was a Member without regard to
the results of Company activities in the respective portions of such Fiscal Year
in which the transferor and Transferee Member were Members.
(i) The interest of each of the Bank and the Manager in each
material item of Partnership income, gain, loss, deduction, or credit shall be
equal to at least 1% of each such item at all times. The Bank and the Manager
shall each at all times maintain Capital Account balances at least equal in the
aggregate to 1% of the total positive Capital Account balances of the Members.
Whenever a capital contribution is made by Members to the Company, such
contribution shall be made by the Members that will result in the Bank and the
Manager each maintaining Capital Account balances at least equal in the
aggregate to 1% of the total positive Capital Account balances of the Members.
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(j) "Profit" and "loss" and any items of income, gain, expense
or loss referred to in this Section 6.01 shall be determined in accordance with
federal income tax accounting principles as modified by Treasury Regulations
Section 1.704-1(b)(2)(iv), except that profit and loss shall not include items
of income, gain, and expense that are specially allocated pursuant to Sections
6.01(e), 6.01(f) or 6.01(g) hereof. All allocations of income, profits, gains,
expenses, and losses (and all items contained therein) for federal income tax
purposes shall be identical to all allocations of such items set forth in this
Section 6.01, except as otherwise required by Section 704(c) of the Code and
Section 1.704-1(b)(4) of the Treasury Regulations.
6.02 Distribution of Cash Available for Distribution. Within 30
days after the end of each calendar quarter during a Fiscal Year, Cash Available
for Distribution shall be distributed to the Members in accordance with their
Membership Interests.
6.03 Distribution of Sale Proceeds. The Members may, within 90
days after a Capital Transaction, make a special distribution to the Members in
accordance with their Membership Interests in an aggregate amount not to exceed
the cash portion of the Sale Proceeds from such Capital Transaction.
6.04 Distribution of Proceeds from a Terminating Capital
Transaction. The net proceeds of a Terminating Capital Transaction shall be
distributed in the following order of priority:
(a) First, toward satisfaction of all outstanding debts and
other obligations of the Company other than those specified in Section 6.04(b)
hereof;
(b) Second, toward satisfaction of outstanding loans, if any,
made by Members to the Company; and
(c) Thereafter, the balance, if any, to the Members in
accordance with their respective positive Capital Account balances.
For purposes of Section 6.04(c), the Capital Account of each Member shall be
determined after all adjustments made in accordance with Sections 6.01, 6.02,
6.03, and 6.04 hereof resulting from the Company's operations and from all the
Company's operations and all sales and dispositions of all or any part of the
Company's assets. Any distributions pursuant to this Section 6.04 should be made
by the end of the Taxable Year in which the liquidation occurs (or, if later,
within 90 days after the date of the liquidation). To the extent deemed
advisable by the Members, appropriate arrangements (including the use of a
liquidating trust) may be made to assure that adequate funds are available to
pay any contingent debts or obligations.
6.05 Substantial Economic Effect. It is the intent of the
Members that the allocations of profit and loss under this Agreement have
substantial economic effect (or be consistent with the Members' interests in the
Company in the case of the allocation of losses attributable to nonrecourse
debt) within the meaning of Section 704(b) of the Code as interpreted by the
Treasury Regulations promulgated pursuant thereto. Article VI and other relevant
provisions of this Agreement shall be interpreted in a manner consistent with
such intent.
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6.06 Liability of Members. Notwithstanding any provision to the
contrary, the liability of each Member for Company losses shall in no event
exceed the aggregate amount of the Capital Contributions that such Member is
required hereunder to make to the Company, plus such Member's share of
undistributed Company profits, and in no event shall each Member be obligated
under any circumstances to make any additional Capital Contributions for the
purpose of restoring a negative balance in a Capital Account, or for any other
purpose whatsoever, except as expressly provided in Section 5.02.
SECTION VII
RESTRICTIONS ON TRANSFERS
7.01 Prohibition Against Transfer.
(a) No Member shall sell, assign, encumber,
transfer or otherwise dispose of all, or any part of, its Membership Interest
(or take or omit to take any action, filing, election or other action that could
result in a deemed sale, assignment, encumbrance, transfer or other disposition)
without the prior written consent of the other Member, which consent may be
withheld in its sole discretion. Any attempted transfer not in accordance with
this Agreement shall be void.
(b) Upon consent to a transfer and admission of an
additional Member, this Agreement shall be amended to reflect the admission of
the substitute Member, and the Members shall take any action required of record
to reflect such admission.
SECTION VIII
INDEMNIFICATION
8.01 Indemnification of Members and Manager. Unless otherwise
prohibited by law, the Company shall indemnify and hold harmless the Members and
the Manager, the respective officers, directors, and employees of the Members
and the Manager, and their respective successors (individually, an "Indemnitee")
from any claim, loss, expense, liability, action or damage resulting from any
act or omission performed by or on behalf of or omitted by the Indemnitee in its
capacity as Manager or a Member, including, without limitation, reasonable costs
and expenses of its attorneys engaged in defense of any such act or omission;
provided, however, that the Indemnitees shall not be indemnified or held
harmless for any act or omission that is in violation of any of the provisions
of this Agreement or that constitutes fraud, gross negligence, willful
misconduct, a knowing violation of the criminal law, or a knowing violation of
any federal or state securities law. Any indemnification pursuant to this
Section 8.01 shall be made only out of the assets of the Company.
Notwithstanding the foregoing or any other Section, subsection or provision
herein or in applicable law to the contrary, for so long as any Securities are
outstanding, any obligation of the Company to indemnify and/or hold harmless its
Members or Manager and/or their respective officers, directors and employees
shall be fully subordinate to all outstanding Securities and shall not
constitute a claim against the Company for any purpose, including without
limitation for purposes of commencing an involuntary petition against the
Company under any Chapter of the Bankruptcy Code.
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8.02 Expenses. To the fullest extent permitted by law, expenses
(including legal fees) incurred by an Indemnitee in defending any claim, demand,
action, suit or proceeding with respect to which such Indemnitee is entitled to
indemnification under Section 8.01 hereof shall, from time to time, be advanced
by the Company prior to the final disposition of such claim, demand, action,
suit or proceeding upon receipt by the Company of an undertaking by or on behalf
of the Indemnitee, secured by adequate collateral, to repay such amount if it
shall be determined that the Indemnitee is not entitled to be indemnified as
authorized in this Section VIII.
8.03 Insurance. The Company may purchase and maintain insurance
coverage to the extent and in such amounts as the Manager shall, in its sole
discretion, deem reasonable, on behalf of Indemnitees against any liability that
may be asserted against or expense that may be incurred by any Indemnitees in
connection with activities of the Company or such Indemnitees with respect to
which the Company would have the power to indemnity such Indemnitee against such
liability under the provisions of this Agreement.
8.04 Miscellaneous. In no event may an Indemnitee subject a
Member or Manager to personal liability by reason of these indemnification
provisions. An Indemnitee shall not be denied indemnification in whole or in
part under this Section VIII because the Indemnitee had an interest in the
transaction with respect to which the indemnification applies if the transaction
was otherwise permitted by the terms of this Agreement. The provisions of this
Section VIII are for the benefit of the Indemnitees and their heirs, successors,
assigns, administrators and personal representatives and shall not be deemed to
create any rights for the benefit of any other Persons.
8.05 Notice of Claims. With respect to any claim made or
threatened against a Member, the Manager or any of their officers, directors or
employees, or their respective successors for which such Indemnitee is or may be
entitled to indemnification under this Section VIII, the Company shall, or shall
cause such Indemnitee to:
(a) give written notice to the other potential Indemnitees of
such claim promptly after such claim is made or threatened, which notice shall
specify in reasonable detail the nature of the claim and the amount (or an
estimate of the amount) of the claim;
(b) provide the other potential Indemnitees with such
information and cooperation with respect to such claim as the other potential
Indemnitees may require, including, without limitation, making appropriate
personnel available at such times as the other potential Indemnitees shall
request;
(c) cooperate and take all such steps as the other potential
Indemnitees may request to preserve and protect any defense to such claim;
(d) in the event suit is brought with respect to such claim,
upon prior notice, afford the other potential Indemnitees the right, which the
other potential Indemnitees may exercise in their sole discretion and at their
expense, to participate in the investigation, defense and settlement of such
claim; and
(e) neither incur any material expense to defend against nor
release or settle such claim or make any admission with respect thereto without
the prior written consent of the other potential Indemnitees.
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<PAGE>
SECTION IX
MEMBER REPRESENTATIONS, WARRANTIES AND COVENANTS
9.01 Representations and Warranties. Each Member represents and
warrants to the Company and each other Member that, on the date of this
Agreement (or such later date as such Member shall become admitted as a Member
of the Company):
(a) Organization and Existence. Such Member is duly organized,
validly existing and in good standing under the laws of the state of its
organization.
(b) Power and Authority. Such Member has the full power and
authority to execute, to deliver and to perform this Agreement, and to own and
to lease its properties and to carry on its business as now conducted and to
carry out the transactions contemplated hereby.
(c) Authorization and Enforceability. The execution and
delivery of this Agreement by such Member and the carrying out by such Member of
the transactions contemplated hereby have been duly authorized by all requisite
action on the part of such Member, and this Agreement has been duly executed and
delivered by such Member and constitutes the legal, valid and binding obligation
of such Member, enforceable against it in accordance with the terms hereof,
subject, as to enforceability of remedies, to limitations imposed by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting the enforcement of creditors' rights generally and to general
principles of equity.
(d) No Consents. No authorization, consent, approval or order
of, notice to or registration, qualification, declaration or filing with, any
governmental authority or other third parties is required for the execution,
delivery and performance by such Member of this Agreement or the carrying out by
such Member of the transactions contemplated hereby, except those previously
obtained.
(e) No Conflict or Breach. None of the execution, delivery and
performance by such Member of this Agreement, the compliance with the terms and
provisions hereof and the carrying out of the transactions contemplated hereby,
conflicts or will conflict with or will result in a breach or violation of any
of the terms, conditions or provisions of any law, governmental rule or
regulation or the charter documents or bylaws of such Member or any applicable
order, writ, injunction, judgment or decree of any court or governmental
authority against such Member or by which it or any of its properties (other
than its Membership Interest in the Company), is bound, or any loan agreement,
indenture, mortgage, bond, note, resolution, contract or other agreement or
instrument to which such Member is a party or by which it or any of its
properties is bound, or constitutes or will constitute a default thereunder or
will result in the imposition of any lien upon any of its properties.
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<PAGE>
(f) No Proceedings. There is no suit, action, hearing, inquiry,
investigation or proceeding, at law or in equity, pending, or, to the knowledge
of such Member, threatened, before, by, or in any court or before any regulatory
commission, board or other governmental administrative agency against or
affecting such Member which could have a material adverse effect on the
business, affairs, financial position, results of operations, property or
assets, or condition, financial or otherwise, of such Member or on its ability
to fulfill its obligations hereunder.
(g) Investment Representation. Such Member has acquired its
Membership Interest in the Company for its own account, for investment, and not
with (i) a view to, or for sale in connection with, any distribution thereof or
(ii) any present intention of distributing or selling such interest.
9.02 Survival. All representations and warranties contained in
this Section IX shall survive the execution and delivery of this Agreement.
9.03 Separateness Covenants.
(a) Affirmative Covenants. For so long as any Securities are
outstanding, the Company shall, and the Manager shall cause the Company to, at
all times (i) observe all organizational, corporate and other applicable
formalities, (ii) maintain separate books, records and bank accounts, (iii)
maintain separate financial statements and cause its financial statements to be
prepared and maintained in accordance with generally accepted accounting
principles in a manner that indicates the separate existence of the Company and
its assets and liabilities, (iv) pay all of its liabilities out of its own funds
(including the salaries of its own employees) and allocate fairly and reasonably
pursuant to written agreement(s) any shared overhead expenses, such as office
space, (v) maintain and use its own separate stationary, invoices and checks,
(vi) in all dealings with the public identify itself and conduct its own
business under its own name as a separate and distinct legal entity, (vi) deal
with its affiliates only on arm's length bases and on commercially reasonable
terms, and (vii) independently make decisions with respect to its business and
daily operations.
(b) Negative Covenants. For so long as any Rated Securities are
outstanding, the Company shall not, and the Manager shall not cause the Company
to, at any time (i) pledge its assets for the benefit of any other person, (ii)
commingle its assets with those of any other person, (iii) assume or guarantee
the liabilities or obligations of any other person or otherwise hold out its
credit as being available or able to satisfy the liabilities or obligations of
any other person, (iv) acquire obligations or securities of, or make loans or
advances to, any affiliate, or (v) incur any indebtedness, liabilities or
obligations except as expressly permitted in Section III of this Agreement.
SECTION X
MISCELLANEOUS PROVISIONS
10.01 Fiscal and Taxable Year. The Fiscal Year and Taxable Year
of the Company shall be the calendar year or such other taxable year as may be
required by Section 706(b) of the Code.
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<PAGE>
10.02 Accounting Method. For Company accounting purposes and for
federal income tax accounting purposes, the Company shall use the accrual method
of accounting.
10.03 Reports. At the Company's expense, the Manager shall
prepare or cause to be prepared, no later than 75 days after the close of each
Fiscal Year, a Schedule K-1, a copy of the Company's informational tax return
(IRS Form 1065), and such other reports (collectively, the "Annual Tax Reports")
setting forth in sufficient detail all such information and data with respect to
the transactions effected by or involving the Company during such Fiscal Year as
shall enable the Company and each Manager to prepare its federal, state, and
local income tax returns in accordance with the laws, rules, and regulations
then prevailing.
10.04 Bank Accounts; Checks, Notes and Drafts.
(a) Funds of the Company shall be deposited in an account or
accounts of a type, in form and name and in a bank(s) or other financial
institution(s) which are participants in federal insurance programs as selected
by the Manager. The Manager shall arrange for the appropriate conduct of such
accounts. Company funds shall be deposited and held in accounts which are
separate from all other accounts maintained by the Manager and the Members, and
the Company's funds shall not be commingled with any other funds of the Manager,
any Member or any Affiliate (other than the Company itself) of a Member. Funds
may be withdrawn from such accounts only for bona fide and legitimate Company
purposes.
(b) Company funds may be maintained in accounts, money market
funds, certificates of deposit, other liquid assets in excess of the insurance
provided by the Federal Deposit Insurance Corporation, or other depository
insurance institutions.
(c) Checks, notes, drafts and other orders for the payment of
money shall be signed by such persons as the Manager from time to time may
authorize. When the Manager so authorizes, the signature of any such person may
be a facsimile.
10.05 Books and Records.
(a) The Manager shall keep, or cause to be kept, full and
accurate books of account, financial records and supporting documents, which
shall reflect, completely, accurately and in reasonable detail, each transaction
of the Company, which books of account, financial records and supporting
documents shall be kept and maintained at the principal office of the Company.
The Manager shall keep, or cause to be kept, all other documents and writings of
the Company, which documents and writings shall be kept and maintained at the
principal office of the Company. The Manager or its designated representative
shall have access to such books, records and documents during reasonable
business hours and may inspect and make copies of any of them at its own
expense.
(b) The Manager shall also keep, or cause to be kept, at the
principal office of the Company the following:
(i) true and full information regarding the
status of the business and financial condition of the Company;
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(ii) promptly after becoming available, a copy
of the Company's federal, state, and local income tax returns for
each year;
(iii) a current list of the name and last known
business, residence or mailing address of each Member;
(iv) a copy of this Agreement and the Company's
certificate of formation, and all amendments thereto, together with
executed copies of any written powers of attorney pursuant to which
this Agreement and such certificate of formation and all amendments
thereto have been executed;
(v) true and full information regarding the
amount of cash and a description and statement of the agreed value
of any other property or services contributed by each Member and
which each Member has agreed to contribute in the future, and the
date on which each became a Member; and
(vi) other information regarding the affairs of
the Company as is just and reasonable.
10.06 Tax Matters Partner. The Bank shall be the Tax Matters
Partner for the Company within the meaning of Section 6231(a)(7) of the Code.
The Tax Matters Partner shall have the right and obligation to take all actions
authorized and required, respectively, by the Code for the Tax Matters Partner.
In the event the Tax Matters Partner receives notice of a final partnership
adjustment under Section 6223(a)(2) of the Code, the Tax Matters Partner shall
either (i) file a court petition for judicial review of such final adjustment
within the period provided under Section 6226(a) of the Code, a copy of which
petition shall be mailed to all other Members on the date such petition is
filed, or (ii) mail a written notice to all other Members, which such period,
that describes the Tax Matters Partner's reasons for determining not to file
such a petition.
10.07 Tax Elections.
(a) The Tax Matters Partner shall make any available elections
under the Code or any applicable state or local tax law on behalf of the
Company.
(b) If requested by a Member, the Tax Matters Partner shall
cause the Company to make an election under Section 754 of the Code in
connection with any transfer by the Member of all or any part of its Membership
Interest.
(c) No election shall be made by the Company or any Member for
the Company to be excluded from the application of any of the provisions of
Subchapter K, Chapter 1 of Subtitle A of the Code or from any similar provisions
of any state or local tax laws.
(d) Each Member hereby grants the Tax Matters Partner an
irrevocable power of attorney to make any federal income tax election as may be
required or appropriate to cause the Company to be classified as a "partnership"
for federal income tax purposes, or to maintain such classification. If
requested by a Member, the Tax Matters Partner shall make any such election on
behalf of all the Members pursuant to the power of attorney, or shall cause the
Company to make any such election on its own behalf. The Tax Matters Partner
shall not make any affirmative election to have the Company treated as an
association taxable as a corporation for federal income tax purposes.
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<PAGE>
10.08 Notices. Unless otherwise provided herein, any offer,
acceptance, election, approval, consent, certification, request, waiver, notice
or other communication required or permitted to be given hereunder (hereinafter
collectively referred to as a "Notice"), shall be given by delivering the same
by facsimile or reliable courier or by enclosing the same in an envelope
addressed to the Manager or the Member to whom the Notice is to be given at the
appropriate address set forth on Exhibit A hereto or at such other address as
any Member hereafter may designate to the others in accordance with the
provisions of this Section 10.08, and deposited in the U.S. Mail postage
prepaid. In addition, the other Members shall be sent a copy of all such
Notices, by registered or certified mail, return receipt requested. The date at
which notice shall be deemed received shall be the last date of the receipt of
the copy of such notice by the other Members.
10.09 Entire Agreement. This Agreement, including the Exhibits
attached hereto or incorporated herein by reference, constitutes the entire
agreement of the Members with respect to the matters covered herein. This
Agreement supersedes all prior and contemporaneous agreements and oral
understandings among the Members with respect to such matters. In the event
there is any litigation between the Members over the interpretation of any
provision of this Agreement, the prevailing Member in such litigation shall be
entitled to recover reasonable attorney's fees from the nonprevailing Member in
such litigation.
10.10 Amendment. Except as provided by law, in the Company's
certificate of formation or otherwise set forth herein, this Agreement may be
amended or altered only by the unanimous vote of the Members.
10.11 Interpretation. Wherever the context may require, any noun
or pronoun used herein shall include the corresponding masculine, feminine or
neuter forms. The singular form of nouns, pronouns and verbs shall include the
plural and vice versa.
10.12 Severability. Each provision of this Agreement shall be
considered severable and if for any reason any provision or provisions hereof
are determined to be invalid and contrary to existing or future law, such
invalidity shall not impair the operation or affect those portions of this
Agreement which are valid, and this Agreement shall remain in full force and
effect and shall be construed and enforced in all respects, and such invalid or
unenforceable provision or provisions shall be replaced with alternative valid
and enforceable provision or provisions which otherwise give effect to the
original intent of such invalid or unenforceable provision or provisions as
agreed upon by the Members pursuant to Section 10.10 hereof.
10.13 Successors. Except as expressly otherwise provided herein,
this Agreement is binding upon, and inures to the benefit of, the parties hereto
and their respective heirs, executors, administrators, personal and legal
representatives, successors and assigns.
10.14 Further Assurances. Each Member hereby agrees that it shall
hereafter execute and deliver such further instruments, provide all information
and take or forbear such further acts and things as may be reasonably required
or useful to carry out the intent and purpose of this Agreement and as are not
inconsistent with the terms hereof.
10.15 Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be an original but all of which together
will constitute one instrument, binding upon all parties hereto, notwithstanding
that all of such parties may not have executed the same counterpart.
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[Signatures Appear on Next Page;
Remainder of This Page Intentionally Left Blank]
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date and year first above written.
MEMBERS:
CRESTAR BANK
By: /s/ Eugene S. Putnam
---------------------
Name: Eugene S. Putnam
Title: Senior Vice President
CRESTAR SP CORPORATION
By: /s/ Eugene S. Putnam
----------------------
Name: Eugene S. Putnam
Title: President
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EXHIBIT A
MEMBERS, INTERESTS AND INITIAL CONTRIBUTIONS
Initial
Membership Capital
Members Interests Contributions
------- ---------- -------------
[S] [C]
CRESTAR BANK 99% $ 9,900
919 East Main Street
Richmond, Virginia 23219
Telephone number: (804) 782-5000
Facsimile number: (804) 287-9428
CRESTAR SP CORPORATION 1% $ 100
919 East Main Street
Richmond, Virginia 23219
Telephone number: (804) 782-5000
Facsimile number: (804) 287-9428
TOTALS 100% $ 10,000
==== ========
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[Only for transactions with Auction Rate Notes]
APPENDIX I
General
The following description of the Auction Procedures applies to each Class of
Auction Rate Notes (to the extent set forth in the Prospectus Supplement). The
term "Note," as used in this Appendix, refers to each Class of Auction Rate
Notes, and the term "Noteholder" refers to Noteholders holding Auction Rate
Notes.
Definitions
Capitalized terms used herein and not otherwise defined have the meanings
ascribed in the accompanying Prospectus and Prospectus Supplement. Additionally,
the following terms have the meanings ascribed to them:
"All Hold Rate" means 90% of One-Month LIBOR.
"Auction" means the implementation of the Auction Procedures on an Auction Date.
"Auction Agent" means the initial auction agent under the initial Auction Agent
Agreement unless and until a substitute Auction Agent Agreement becomes
effective, after which "Auction Agent" shall mean the substitute auction agent.
"Auction Agent Agreement" means the initial Auction Agent Agreement unless and
until a substitute Auction Agent Agreement is entered into, after which "Auction
Agent Agreement" shall mean such substitute Auction Agent Agreement.
"Auction Agent Fee" has the meaning set forth in the Auction Agent Agreement.
"Auction Agent Fee Rate" has the meaning set forth in the Auction Agent
Agreement.
"Auction Date" means, with respect to the Initial Period for each Class of
Notes, the date set forth in the related Prospectus Supplement, and thereafter,
the Business Day immediately preceding the first day of each Auction Period for
each Note, other than:
(i) each Auction Period commencing after the ownership of the
Notes is no longer maintained in book-entry form by the Depository;
(ii) each Auction Period commencing after and during the
continuance of an Event of Default; or
(iii) each Auction Period commencing less than two Business
Days after the cure or waiver of an Event of Default.
Notwithstanding the foregoing, the Auction Date for one or more Auction Periods
may be changed pursuant to the Indenture, as described herein.
"Auction Period" means, with respect to each Note, the Interest Accrual Period
applicable to such Note during which time the applicable Class Interest Rate is
determined pursuant to the related Indenture, which Auction Period (after the
Initial Period for such Note) initially shall consist of between seven days and
one year (as set forth in the related Prospectus Supplement), as the same may be
adjusted pursuant to such Indenture.
"Auction Period Adjustment" means an adjustment to the Auction Period as
provided in the related Indenture, as described herein.
"Auction Procedures" means the procedures set forth in the related Indenture,
and described herein by which the Auction Rate applicable to a Note is
determined.
"Auction Rate" means, with respect to any Note, the rate of interest per annum
that results from the implementation of the Auction Procedures and is determined
as described in the Indenture and this Appendix I.
"Authorized Denominations" means, with respect to any Note, [$50,000] and any
integral multiple in excess thereof.
"Broker-Dealer" means the initial broker-dealer under the initial Broker-Dealer
Agreement or any other broker or dealer (each as defined in the Notes Exchange
Act of 1934, as amended), commercial bank or other entity permitted by law to
perform the functions required of a Broker-Dealer set forth in the Auction
Procedures that (a) is a Participant (or an affiliate of a Participant), (b) has
been appointed as such by the Trust pursuant to the Indenture or the
Administrator on behalf of the Eligible Lender Trustee pursuant to the Trust
Agreement and (c) has entered into a Broker-Dealer Agreement that is in effect
on the date of reference.
"Broker-Dealer Agreement" means each agreement between the Auction Agent and a
Broker- Dealer, and approved by the Trust, pursuant to which the Broker-Dealer
agrees to participate in Auctions as set forth in the Auction Procedures, as
from time to time amended or supplemented.
"Broker-Dealer Fee" has the meaning set forth in the Auction Agent Agreement.
"Broker-Dealer Fee Rate" has the meaning set forth in the Auction Agent
Agreement.
"Effective Interest Rate" means, for any Financed Student Loan and any
Collection Period, the per annum rate at which such Financed Student Loan
accrues interest during such Collection Period and, in the case of a FFELP Loan,
after giving effect to all applicable Interest Subsidy Payments and Special
Allowance Payments due with respect to such FFELP Loan.
"Existing Noteholder" means (i) with respect to and for the purpose of dealing
with the Auction Agent in connection with an Auction, a Person who is a
Broker-Dealer listed in the Existing Noteholder Registry at the close of
business on the Business Day immediately preceding such Auction and (ii) with
respect to and for the purpose of dealing with the Broker-Dealer in connection
with an Auction, a Person who is a beneficial owner of any Note.
"Existing Noteholder Registry" means the registry of Persons who are owners of
the Notes, maintained by the Auction Agent as provided in the Auction Agent
Agreement.
"Federal Funds Rate" means, for any date of determination, the federal funds
(effective) rate as published on page [118] of the Dow Jones Telerate Service
(or such other page as may replace that page on that service for the purpose of
displaying comparable rates or prices) on the immediately preceding Business
Day. If no such rate is published on such page on such date, "Federal Funds
Rate" shall mean for any date of determination, the Federal funds (effective)
rate as published by the Federal Reserve Board in the most recent edition of
Federal Reserve Statistical Release No. H.15 (519) that is available on the
Business Day immediately preceding such date.
"Initial Period" means, as to any Note, the period commencing on the Closing
Date of such Note and continuing through the day immediately preceding the Note
Initial Interest Adjustment Date for such Note.
"Initial Rate" means, with respect to any Class of Notes, the rate identified as
such in the related Prospectus Supplement.
"Initial Rate Adjustment Date" means, with respect to any Class of Notes, the
date identified as such in the related Prospectus Supplement.
"Interest Adjustment Date" means, with respect to each Note, the date on which
the applicable Class Interest Rate is effective and means, with respect to each
such Note, the date of commencement of each Auction Period.
"Interest Determination Date" means, with respect to any Note, the Auction Date,
or if no Auction Date is applicable to such Series, the Business Day immediately
preceding the date of commencement of an Auction Period.
"Interest Accrual Period" means, with respect to a Note, the Initial Period for
such Note and each period commencing on the Interest Adjustment Date for such
Note and ending on the day before (i) the next Interest Adjustment Date for such
Note or (ii) the Legal Final Maturity of such Note, as applicable.
"Market Agent" means the entity named as market agent under the Indenture, or
any successor to it in such capacity thereunder.
"Maximum Auction Rate" generally means (i) for Auction Periods of 34 days or
less, either (A) the greater of (1) One-Month LIBOR plus [0.60]% or (2) the
Federal Funds Rate plus [0.60]% (if both ratings assigned by the Rating Agencies
to the applicable Note are "Aa3" or "AA-" or better) or (B) One-Month LIBOR plus
[1.50]% (if any one of the ratings assigned by the Rating Agencies to the Note
is less than "Aa3" or "AA-") or (ii) for Auction Periods of greater than or
equal to 35 days, either (A) the greater of One-Month LIBOR or Three-Month
LIBOR, plus in either case, [0.60]% (if both of the ratings assigned by the
Rating Agencies to the applicable Note are "Aa3" or "AA-" or better) or (B) the
greater of One-Month LIBOR or Three-Month LIBOR, plus in either case, [1.50]%
(if any one of the ratings assigned by the Rating Agencies to the applicable
Note is less than "Aa3" or "AA-") or such other rate as may be set forth in the
related Prospectus Supplement. For purposes of the Auction Agent and the Auction
Procedures, the ratings referred to in this definition shall be the last ratings
of which the Auction Agent has been given notice pursuant to the Auction Agent
Agreement.
"Net Loan Rate" for any Interest Accrual Period will equal the weighted average
Effective Interest Rate for the Collection Period immediately preceding such
Interest Accrual Period less the amount set forth in the related Prospectus
Supplement.
"Non-Payment Rate" means One-Month LIBOR plus [1.50]%, as the same may be
adjusted pursuant to an Indenture or a Trust Agreement.
"Person" means any individual, corporation, estate, partnership, joint venture,
association, joint stock company, trust (including any beneficiary thereof),
unincorporated organization or government or any agency or political subdivision
thereof.
"Potential Noteholder" means any Person (including an Existing Noteholder that
is (i) a Broker-Dealer when dealing with the Auction Agent and (ii) a potential
beneficial owner when dealing with a Broker-Dealer) who may be interested in
acquiring Notes (or, in the case of an Existing Noteholder thereof, an
additional principal amount of Notes).
"Three-Month LIBOR" means the London interbank offered rate for deposits in U.S.
dollars having a maturity of three months commencing on the related LIBOR
Determination Date (the "Three- Month Index Maturity") which appears on Telerate
Page 5 as of 11:00 a.m., London time, on such LIBOR Determination Date. If such
rate does not appear on Telerate Page 5, the rate for that day will be
determined on the basis of the rates at which deposits in U.S. dollars, having
the Three Month Index Maturity and in a principal amount of not less than U.S.
$1,000,000, are offered at approximately 11:00 a.m., London time, on such LIBOR
Determination Date to prime banks in the London interbank market by the
Reference Banks. The Auction Agent will request the principal London office of
each of such Reference Banks to provide a quotation of its rate. If at least two
such quotations are provided, the rate for that day will be the arithmetic mean
of the quotations. If fewer than two quotations are provided, the rate for that
day will be the arithmetic mean of the rates quoted by major banks in New York
City, selected by the Auction Agent, at approximately 11:00 a.m., New York City
time, on such LIBOR Determination Date for loans in U.S. dollars to leading
European banks having the Three Month Index Maturity and in a principal amount
equal to an amount of not less than U.S. $1,000,000; provided that if the banks
selected as aforesaid are not quoting as mentioned in this sentence, Three-Month
LIBOR in effect for the applicable Interest Accrual Period will be Three-Month
LIBOR in effect for the previous Interest Accrual Period.
Existing Noteholders and Potential Noteholders
Participants in each Auction will include: (1) "Existing Noteholders," which
shall mean any Noteholder according to the records of the Auction Agent at the
close of business on the Business Day preceding each Auction Date; and (ii)
"Potential Noteholders," which shall mean any Person, including any Existing
Noteholder or a Broker/Dealer, who may be interested in acquiring Notes (or, in
the case of an Existing Noteholder, an additional principal amount of the Notes
such Noteholder then holds). See "- Broker-Dealer" herein.
By purchasing a Note, whether in an Auction or otherwise, each prospective
purchaser of Notes or its Broker-Dealer must agree and will be deemed to have
agreed: (i) to participate in Auctions on the terms described herein; (ii) so
long as the beneficial ownership of the Notes is maintained in book-entry form
to sell, transfer or otherwise dispose of the Notes only pursuant to a Bid (as
defined below) or a Sell Order (as defined below) in an Auction, or to or
through a Broker-Dealer, provided that in the case of all transfers other than
those pursuant to an Auction, the Existing Noteholder of the Notes so
transferred, its Participant or Broker-Dealer advises the Auction Agent of such
transfer; (iii) to have its beneficial ownership of Notes maintained at all
times in book-entry form for the account of its Participant, which in turn will
maintain records of such beneficial ownership, and to authorize such Participant
to disclose to the Auction Agent such information with respect to such
beneficial ownership as the Auction Agent may request; (iv) that a Sell Order
placed by an Existing Noteholder will constitute an irrevocable offer to sell
the principal amount of the Note specified in such Sell Order; (v) that a Bid
placed by an Existing Noteholder will constitute an irrevocable offer to sell
the principal amount of the Note specified in such Bid if the rate specified in
such Bid is greater than, or in some cases equal to, the Class Interest Rate of
such Note, determined as described herein; and (vi) that a Bid placed by a
Potential Noteholder will constitute an irrevocable offer to purchase the
amount, or a lesser principal amount, of the Note specified in such Bid if the
rate specified in such Bid is, respectively, less than or equal to the Class
Interest Rate of the specified Note, determined as described herein.
The principal amount of the Notes purchased or sold may be subject to probation
procedures on the Auction Date. Each purchase or sale of Notes on the Auction
Date will be made for settlement on the first day of the Interest Accrual Period
immediately following such Auction Date at a price equal to 100% of the
principal amount thereof, plus accrued but unpaid interest thereon. The Auction
Agent is entitled to rely upon the terms of any Order submitted to it by a
Broker-Dealer.
Auction Agent
An entity named in the related Prospectus Supplement will be appointed as
Auction Agent to serve as agent for a Trust in connection with Auctions. The
Indenture Trustee and the Trust will enter into the Auction Agreement with the
Auction Agent. Any Auction Agent or Substitute Auction Agent will be (i) a bank,
national banking association or trust company duly organized under the laws of
the United States of America or any state or territory thereof having its
principal place of business in the Borough of Manhattan, New York, or such other
location as approved by the Indenture Trustee and the Market Agent in writing
and having a combined capital stock or surplus of at least $50,000,000, or (ii)
a member of the National Association of Notes Dealers, Inc. having a
capitalization of at least $50,000,000, and, in either case, authorized by law
to perform all the duties imposed upon it under the Indenture and under the
Auction Agent Agreement. The Auction Agent may at any time resign and be
discharged of the duties and obligations created by the Indenture by giving at
least 90 days notice to the Indenture Trustee, the Trust and the Market Agent.
The Auction Agent may be removed at any time by the Indenture Trustee upon the
written direction of any provider of Credit Enhancement, if applicable, or, with
the consent of the providers of Credit Enhancement, if applicable, the
Noteholders of 66-2/3% of the aggregate principal amount of the Notes then
outstanding, by an instrument signed by the providers of Credit Enhancement, if
applicable, or such Noteholders or their attorneys and filed with the Auction
Agent, the Trust, the Indenture Trustee and the Market Agent upon at least 90
days' notice. Neither resignation nor removal of the Auction Agent pursuant to
the preceding two sentences will be effective until and unless a Substitute
Auction Agent has been appointed and has accepted such appointment. If required
by the Trust or by the Market Agent, with the Trust's consent, a Substitute
Auction Agent Agreement shall be entered into with a Substitute Auction Agent.
Notwithstanding the foregoing, the Auction Agent may terminate the Auction Agent
Agreement if, within 25 days after notifying the Indenture Trustee, the Trust,
the providers of Credit Enhancement, if applicable, and the Market Agent in
writing that it has not received payment of any Auction Agent Fee due it in
accordance with the terms of the Auction Agent Agreement, the Auction Agent does
not receive such payment.
If the Auction Agent should resign or be removed or be dissolved, or if the
property or affairs of the Auction Agent shall be taken under the control of any
state or federal court or administrative body because of bankruptcy or
insolvency, or for any other reason, the Indenture Trustee, at the direction of
the related Trust (after receipt of a certificate from the Market Agent
confirming that any proposed Substitute Auction Agent meets the requirements
described in the immediately preceding paragraph above), shall use its best
efforts to appoint a Substitute Auction Agent.
The Auction Agent is acting as agent for the Trust in connection with Auctions.
In the absence of bad, faith, negligent failure to act or negligence on its
part, the Auction Agent will not be liable for any action taken, suffered or
omitted or any error of judgment made by it in the performance of its duties
under the Auction Agent Agreement and will not be liable for any error of
judgment made in good faith unless the Auction Agent will have been negligent in
ascertaining (or failing to ascertain) the pertinent facts.
The Indenture Trustee will pay the Auction Agent the Auction Agent Fee on the
Payment Date set forth in the related Prospectus Supplement, and will reimburse
the Auction Agent upon its request for all reasonable expenses, disbursements
and advances incurred or made by the Auction Agent in accordance with any
provision of the Auction Agent Agreement or the Broker-Dealer Agreements
(including the reasonable compensation and the expenses and disbursements of its
agents and counsel). The Trust will indemnify and hold harmless the Auction
Agent for and against any loss, liability or expense incurred without negligence
or bad faith on the Auction Agent's part, arising out of or in connection with
the acceptance or administration of its agency under the Auction Agent Agreement
and the Broker-Dealer Agreements including the reasonable costs and expenses
(including the reasonable fees and expenses of its counsel) of defending itself
against any such claim or liability in connection with its exercise or
performance of any of its respective duties thereunder and of enforcing this
indemnification provision; provided that the Trust will not indemnify the
Auction Agent as described in this paragraph for any fees and expenses incurred
by the Auction Agent in the normal course of performing its duties under the
Auction Agent Agreement and under the Broker-Dealer Agreements, such fees and
expenses being payable as described above.
Broker-Dealer
Existing Noteholders and Potential Noteholders may participate in Auctions only
by submitting orders (in the manner described below) through a "Broker-Dealer,"
including the Broker-Dealer, as the sole Broker-Dealer or any other broker or
dealer (each as defined in the Notes Exchange Act of 1934, as amended),
commercial bank or other entity permitted by law to perform the functions
required of a Broker-Dealer set forth below which (i) is a Participant or an
affiliate of a Participant, (ii) has been selected by the Trust and (iii) has
entered into a Broker-Dealer Agreement with the Auction Agent that remains
effective, in which the Broker-Dealer agrees to participate in Auctions as
described in the Auction Procedures, as from time to time amended or
supplemented.
The Broker-Dealers are entitled to a Broker-Dealer Fee, which is payable by the
Auction Agent from monies received from the Indenture Trustee, on the Payment
Date set forth in the related Prospectus Supplement.
Market Agent
In connection with each Series of Notes, the "Market Agent," will act solely as
agent of the Trust and will not assume any obligation or relationship of agency
or trust for or with any of the Noteholders.
AUCTION PROCEDURES
General
Pursuant to the related Indenture, Auctions to establish the Auction Rate for
each Auction Rate Note will be held on each applicable Auction Date, except as
described below, by application of the Auction Procedures described herein.
Such procedures are to be applicable separately to each Class of Notes.
The Auction Agent will calculate the Maximum Auction Rate, the All Hold Rate and
One-Month LIBOR or Three-Month LIBOR, as the case may be, on each Auction Date.
The Administrator will calculate and, no later than the Business Day preceding
each Auction Date, will report to the Auction Agent in writing, the Net Loan
Rate. If the ownership of a Note is no longer maintained in book-entry form, the
Indenture Trustee will calculate the Maximum Auction Rate, and Administrator
will report to the Indenture Trustee in writing the Net Loan Rate, on the
Business Day immediately preceding the first day of each Interest Accrual Period
commencing after delivery of such Note. If an Event of Default has occurred, the
Indenture Trustee will calculate the Non-Payment Rate on the Interest
Determination Date for (i) each Interest Accrual Period commencing after the
occurrence and during the continuance of such Payment Default and (ii) any
Interest Accrual Period commencing less than two Business Days after the cure of
any Event of Default. The Auction Agent will determine One-Month LIBOR or the
Three-Month LIBOR, as applicable, for each Interest Accrual Period other than
the Initial Period for a Note; provided, that if the ownership of the Notes is
no longer maintained in book-entry form, or if an Event of Default has occurred,
then the Indenture Trustee will determine the One-Month LIBOR or the Three-Month
LIBOR, as applicable, for each such Interest Accrual Period. The determination
by the Indenture Trustee or the Auction Agent, as the case may be, of the
One-Month LIBOR or the Three-Month LIBOR, as applicable, will (in the absence of
manifest error) be final and binding upon the Noteholders and all other parties.
If calculated or determined by the Auction Agent, the Auction Agent will
promptly advise the Indenture Trustee of the One- Month LIBOR or the Three-Month
LIBOR, as applicable.
Submission of Orders
As long as the ownership of the Notes is maintained in book-entry form, an
Existing Noteholder may sell, transfer or otherwise dispose of Notes only
pursuant to a Bid or Sell Order (as hereinafter defined) placed in an Auction or
through a Broker-Dealer, provided that, in the case of all transfers other than
pursuant to Auctions, such Existing Noteholder, its Broker-Dealer or its
Participant advises the Auction Agent of such transfer. Auctions for each Class
of Notes will be conducted on each applicable Auction Date, if there is an
Auction Agent on such Auction Date, in the following manner (such procedures to
be applicable separately to each Class of Notes).
Prior to the Submission Deadline (defined as 1:00 P.M., eastern time, on any
Auction Date or such other time on any Auction Date by which Broker-Dealers are
required to submit Orders to the Auction Agent as specified by the Auction Agent
from time to time) on each Auction Date relating to a Note:
(a) each Existing Noteholder of the applicable Notes may submit to a
Broker-Dealer by telephone or otherwise information as to: (i) the principal
amount and class of outstanding Notes, if any, held by such Existing Noteholder
that such Existing Noteholder desires to continue to hold without regard to the
Class Interest Rate for such Notes for the next succeeding Auction Period (a
"Hold Order"); (ii) the principal amount and class of outstanding Notes, if any,
which such Existing Noteholder offers to sell if the Class Interest Rate for
such Notes for the next succeeding Auction Period will be less than the rate per
annum specified by such Existing Noteholder (a "Bid"); and/or (iii) the
principal amount and class of outstanding Notes, if any, held by such Existing
Noteholder which such Existing Noteholder offers to sell without regard to the
Class Interest Rate for such Notes for the next succeeding Auction Period (a
"Sell Order"); and
(b) one or more Broker-Dealers may contact Potential Noteholders to
determine the principal amount and class of Notes which each such Potential
Noteholder offers to purchase, if the Class Interest Rate for such Notes for the
next succeeding Auction Period will not be less than the rate per annum
specified by such Potential Noteholder (also a "Bid").
Each Hold Order, Bid and Sell Order will be an "Order." Each Existing Noteholder
and each Potential Noteholder placing an Order is referred to as a "Bidder."
Subject to the provisions described below under "Validity of Orders," a Bid by
an Existing Noteholder will constitute an irrevocable offer to sell: (i) the
principal amount and class of the outstanding Notes specified in such Bid if the
Class Interest Rate for such Notes will be less than the rate specified in such
Bid, (ii) such principal amount or a lesser principal amount and class of the
outstanding Notes to be determined as described below in "Acceptance and
Rejection of Orders," if the Class Interest Rate for such Notes will be equal to
the rate specified in such Bid or (iii) such principal amount or a lesser
principal amount of the then outstanding Notes to be determined as described
below under "Acceptance and Rejection of Orders," if the rate specified therein
will be higher than the Class Interest Rate for such Notes and Sufficient Bids
(as defined below) have not been made.
Subject to the provisions described below under "Validity of Orders," a Sell
Order by an Existing Noteholder will constitute an irrevocable offer to sell:
(i) the principal amount of the Note specified in such Sell Order or (ii) such
principal amount or a lesser principal amount of outstanding Notes of the
specified Note as described below under "Acceptance and Rejection of Orders," if
Sufficient Bids have not been made.
Subject to the provisions described below under "Validity of Orders," a Bid by a
Potential Noteholder will constitute an irrevocable offer to purchase: (i) the
principal amount of the Note specified in such Bid if the Class Interest Rate
for such Notes will be higher than the rate specified in such Bid or (ii) such
principal amount or a lesser principal amount of such Notes as described below
in "Acceptance and Rejection of Orders," if the Class Interest Rate is equal to
the rate specified in such Bid.
Each Broker-Dealer will submit in writing to the Auction Agent prior to the
Submission Deadline on each Auction Date all Orders obtained by such
Broker-Dealer and will specify with respect to each such Order: (i) the name of
the Bidder placing such Order; (ii) the aggregate principal amount and class of
Note that are the subject of such Order; (iii) to the extent that such Bidder is
an Existing Noteholder: (a) the principal amount and class of Notes, if any,
subject to any Hold Order placed by such Existing Noteholder; (b) the principal
amount, and class of Notes, if any, subject to any Bid placed by such Existing
Noteholder and the rate specified in such Bid; and (c) the principal amount, and
class of Notes, if any, subject to any Sell Order placed by such Existing
Noteholder, and (iv) to the extent such Bidder is a Potential Noteholder, the
rate specified in such Potential Noteholder's Bid.
If any rate specified in any Bid contains more than three figures to the right
of the decimal point, the Auction Agent will round such rate up to the next
highest one-thousandth (.001) of one percent.
If an Order or Orders covering all Notes of the applicable class held by any
Existing Noteholder are not submitted to the Auction Agent prior to the
Submission Deadline, the Auction Agent will deem a Hold Order to have been
submitted on behalf of such Existing Noteholder covering the principal amount of
Notes held by such Existing Noteholder and not subject to an Order submitted to
the Auction Agent.
Neither the Trust, the Eligible Lender Trustee, the Indenture Trustee nor the
Auction Agent will be responsible for any failure of a Broker-Dealer to submit
an Order to the Auction Agent on behalf of any Existing Noteholder or Potential
Noteholder.
An Existing Noteholder may submit multiple Orders, of different types and
specifying different rates, in an Auction with respect to Notes then held by
such Existing Noteholder. An Existing Noteholder that offers to purchase
additional Notes is, for purposes of such offer, treated as a Potential
Noteholder.
Any Bid specifying a rate higher than the Maximum Auction Rate will (i) be
treated as a Sell Order if submitted by a Existing Noteholder and (ii) not be
accepted if submitted by a Potential Noteholder.
Validity of Orders
If any Existing Noteholder submits through a Broker-Dealer to the Auction Agent
one or more Orders covering in the aggregate more than the principal amount of
the class of Notes held by such Existing Noteholder, such Orders will be
considered valid as follows and in the order of priority described below.
Hold Orders. All Hold Orders will be considered valid, but only up to the
aggregate principal amount of the class of Notes held by such Existing
Noteholder, and if the aggregate principal amount of the class of Notes subject
to such Hold Orders exceeds the aggregate principal amount of the class of Notes
held by such Existing Noteholder, the aggregate principal amount of the class of
Notes subject to each such Hold Order will be reduced pro rata so that the
aggregate principal amount of the class of Notes subject to all such Hold Orders
equals the aggregate principal amount of the class of Notes held by such
Existing Noteholder.
Bids. Any Bid will be considered valid up to an amount equal to the excess of
the principal amount of the class of Notes held by such Existing Noteholder over
the aggregate principal amount of such Note, subject to any Hold Orders referred
to above. Subject to the preceding sentence, if multiple Bids with the same rate
are submitted on behalf of such Existing Noteholder and the aggregate principal
amount of Notes subject to such Bids is greater than such excess, such Bids will
be considered valid up to an amount equal to such excess. Subject to the two
preceding sentences, if more than one Bid with different rates are submitted on
behalf of such Existing Noteholder, such Bids will be considered valid first in
the ascending order of their respective rates until the highest rate is reached
at which such excess exists and then at such rate up to the amount of such
excess. In any event, the aggregate principal amount of Notes, if any, subject
to Bids not valid under the provisions described above will be treated as the
subject of a Bid by a Potential Noteholder at the rate therein specified.
Sell Orders. All Sell Orders will be considered valid up to an amount equal to
the excess of the principal amount of Notes of the class held by such Existing
Noteholder over the aggregate principal amount of Notes subject to valid Hold
Orders and valid Bids as referred to above.
If more than one Bid for a class of Note is submitted on behalf of any Potential
Noteholder, each Bid submitted will be a separate Bid with the rate and
principal amount therein specified. Any Bid or Sell Order submitted by an
Existing Noteholder covering an aggregate principal amount of Notes not equal to
an Authorized Denomination or an integral multiple thereof will be rejected and
will be deemed a Hold Order. Any Bid submitted by a Potential Noteholder
covering an aggregate principal amount of Notes not equal to an Authorized
Denomination or an integral multiple thereof will be rejected. Any Order
submitted in an Auction by a Broker-Dealer to the Auction Agent prior to the
Submission Deadline on any Auction Date will be irrevocable.
A Hold Order, a Bid or a Sell Order that has been determined valid pursuant to
the procedures described above is referred to as a "Submitted Hold Order," a
"Submitted Bid" and a "Submitted Sell Order," respectively (collectively,
"Submitted Orders").
Determination of Sufficient Bid and Bid Auction Rate
Not earlier than the Submission Deadline on each Auction Date, the Auction Agent
will assemble all valid Submitted Orders and will determine:
(a) for the applicable Note, the excess of the total principal
amount of such Notes over the sum of the aggregate principal
amount of such Notes subject to Submitted Hold Orders (such
excess being hereinafter referred to as the "Available
Notes"); and
(b) from such Submitted Orders whether the aggregate principal
amount of Notes of such class subject to Submitted Bids by
Potential Noteholders specifying one or more rates equal to or
lower than the Maximum Auction Rate exceeds or is equal to the
sum of (i) the aggregate principal amount of Notes of such
class subject to Submitted Bids by Existing Noteholders
specifying one or more rates higher than the Maximum Auction
Rate and (ii) the aggregate principal amount of Notes of such
class subject to Submitted Sell Orders (in the event such
excess or such equality exists other than because all of the
Notes are subject to Submitted Hold Orders, such Submitted
Bids by Potential Noteholders above will be hereinafter
referred to collectively as "Sufficient Bids"); and
(c) if Sufficient Bids exist, the "Bid Auction Rate," which will
be the lowest rate specified in such Submitted Bids such that
if:
(i) each such Submitted Bid from Existing Noteholders of
such Note specifying such lowest rate and all other
Submitted Bids from Existing Noteholders of such Note
specifying lower rates were rejected (thus entitling
such Existing Noteholders to continue to hold the
principal amount of Notes subject to such Submitted
Bids); and
(ii) each such Submitted Bid from Potential Noteholders of
such Note specifying such lowest rate and all other
Submitted Bids from Potential Noteholders specifying
lower rates, were accepted, the result would be that
such Existing Noteholders described in subparagraph
(c)(i) above would continue to hold an aggregate
principal amount of Notes which, when added to the
aggregate principal amount of Notes to be purchased
by such Potential Noteholders described in this
subparagraph (ii) would equal not less than the
Available Notes.
Determination of Auction Rate and Class Interest Rate; Notice
Promptly after the Auction Agent has made the determinations described above,
the Auction Agent is to advise the Indenture Trustee of the Net Loan Rate, the
Maximum Auction Rate, the All Hold Rate and the components thereof on the
Auction Date, and based on such determinations, the Auction Rate for the next
succeeding Interest Accrual Period for the applicable Note as follows:
(a) if Sufficient Bids exist, that the Auction Rate for the next
succeeding Interest Accrual Period will be equal to the Bid
Auction Rate so determined;
(b) if Sufficient Bids do not exist (other than because all of the
Notes of the applicable Note are subject to Submitted Hold
Orders), that the Auction Rate for the next succeeding
Interest Accrual Period will be equal to the Maximum Auction
Rate; or
(c) if all Notes of the applicable Note are subject to Submitted
Hold Orders, that the Auction Rate for the next succeeding
Interest Accrual Period will be equal to the All Hold Rate.
Promptly after the Auction Agent has determined the Auction Rate, the Auction
Agent will determine and advise the Indenture Trustee of the Class Interest Rate
for each applicable Note, which rate will be the lesser of (a) the Formula Rate
for each such Note and (b) the Net Loan Rate.
Acceptance and Rejection of Orders
Existing Noteholders of the applicable Note will continue to hold the principal
amount of Notes of such class that are subject to Submitted Hold Orders. If,
with respect to a Note, the Net Loan Rate is equal to or greater than the Bid
Auction Rate and if Sufficient Bids, as described above under "Determination of
Sufficient Bids and Bid Auction Rate," have been received by the Auction Agent,
the Bid Auction Rate will be the Class Interest Rate, and Submitted Bids and
Submitted Sell Orders will be accepted or rejected and the Auction Agent will
take such other action as provided in the Indenture and described below under
"Sufficient Bids."
If the Net Loan Rate is less than the Auction Rate, the Class Interest Rate will
be the Net Loan Rate. If the Auction Rate and the Net Loan Rate are both greater
than the Class Interest Rate Limitation, the Class Interest Rate for each series
shall be equal to the Class Interest Rate Limitation. If the Auction Agent has
not received Sufficient Bids as described above under "Determination of
Sufficient Bids and Bid Auction Rate" (other than because all of the Notes are
subject to Submitted Holds Orders), the Class Interest Rate will be the lesser
of the Maximum Auction Rate or the Net Loan Rate. In any of the cases described
above in this paragraph, Submitted Orders will be accepted or rejected and the
Auction Agent will take such other action as described below under "Insufficient
Bids."
Sufficient Bids. If Sufficient Bids have been made with a respect to a Note and
the Net Loan Rate is equal to or greater than the Bid Auction Rate (in which
case the Class Interest Rate shall be the Bid Auction Rate), all Submitted Sell
Orders will be accepted and, subject to the denomination requirements described
below, Submitted Bids will be accepted or rejected as follows in the following
order of priority and all other Submitted Bids will be rejected:
(a) Existing Noteholders' Submitted Bids specifying any rate that
is higher than the Class Interest Rate will be accepted, thus
requiring each such Existing Noteholder to sell the aggregate
principal amount of Notes subject to such Submitted Bids;
(b) Existing Noteholders' Submitted Bids specifying any rate that
is lower than the Class Interest Rate will be rejected, thus
entitling each such Existing Noteholder to continue to hold
the aggregate principal amount of Notes subject to such
Submitted Bids;
(c) Potential Noteholders' Submitted Bids specifying any rate that
is lower than the Class Interest Rate will be accepted;
(d) Each Existing Noteholder's Submitted Bid specifying a rate
that is equal to the Class Interest Rate will be rejected,
thus entitling such Existing Noteholder to continue to hold
the aggregate principal amount of Notes subject to such
Submitted Bid, unless the aggregate principal amount of Notes
subject to such Submitted Bids will be greater than the
principal amount of Notes (the "remaining principal amount")
equal to the excess of the Available Notes over the aggregate
principal amount of Notes subject to Submitted Bids described
in subparagraphs (b) and (c) above, in which event such
Submitted Bid of such Existing Noteholder will be rejected in
part and such Existing Noteholder will be entitled to continue
to hold the principal amount of Notes subject to such
Submitted Bid, but only in an amount equal to the aggregate
principal amount of Notes obtained by multiplying the
remaining principal amount by a fraction, the numerator of
which will be the principal amount of Notes held by such
Existing Noteholder subject to such Submitted Bid and the
denominator of which will be the sum of the principal amount
of Notes subject to such Submitted Bids made by all such
Existing Noteholders that specified a rate equal to the Class
Interest Rate; and
(e) Each Potential Noteholder's Submitted Bid specifying a rate
that is equal to the Class Interest Rate will be accepted, but
only in an amount equal to the principal amount of Notes
obtained by multiplying the excess of the aggregate principal
amount of Available Notes over the aggregate principal amount
of Notes subject to Submitted Bids described in subparagraphs
(b), (c) and (d) above by a fraction, the numerator of which
will be the aggregate principal amount of Notes subject to
such Submitted Bid and the denominator of which will be the
sum of the principal amount of Notes subject to Submitted Bids
made by all such Potential Noteholders that specified a rate
equal to the Class Interest Rate.
Insufficient Bids. If Sufficient Bids have not been made with respect to a Note
(other than because all of the Notes of such class are subject to Submitted Hold
Orders) or if the Net Loan Rate is less than the Bid Auction Rate (in which case
the Class Interest Rate shall be the Net Loan Rate) or if the Class Interest
Rate Limitation applies, subject to the denomination requirements described
below, Submitted Orders will be accepted or rejected as follows in the following
order of priority and all other Submitted Bids will be rejected:
(a) Existing Noteholders' Submitted Bids specifying any rate that
is equal to or lower than the Class Interest Rate will be
rejected, thus entitling such Existing Noteholders to continue
to hold the aggregate principal amount of Notes subject to
such Submitted Bids;
(b) Potential Noteholders' Submitted Bids specifying any rate that
is equal to or lower than the Class Interest Rate will be
accepted, and specifying any rate that is higher than the
Class Interest Rate will be rejected; and
(c) each Existing Noteholder's Submitted Bid specifying any rate
that is higher than the Class Interest Rate and the Submitted
Sell Order of each Existing Noteholder will be accepted, thus
entitling each Existing Noteholder that submitted any such
Submitted Bid or Submitted Sell Order to sell the Notes
subject to such Submitted Bid or Submitted Sell Order, but in
both cases only in an amount equal to the aggregate principal
amount of Notes obtained by multiplying the aggregate
principal amount of Notes subject to Submitted Bids described
in subparagraph (b) above by a fraction, the numerator of
which will be the aggregate principal amount of Notes held by
such Existing Noteholder subject to such Submitted Bid or
Submitted Sell Order and the denominator of which will be the
aggregate principal amount of Notes subject to all such
Submitted Bids and Submitted Sell Orders.
All Hold Orders. If all Notes of a class are subject to Submitted Hold Orders,
all Submitted Bids will be rejected.
Authorized Denominations Requirement. If, as a result of the procedures
described above regarding Sufficient Bids and Insufficient Bids, any Existing
Noteholder would be entitled or required to sell, or any Potential Noteholder
would be entitled or required to purchase, a principal amount of Notes that is
not equal to an Authorized Denomination or an integral multiple thereof, the
Auction Agent will, in such manner as in its sole discretion it will determine,
round up or down the principal amount of Notes to be purchased or sold by any
Existing Noteholder or Potential Noteholder so that the principal amount of
Notes purchased or sold by each Existing Noteholder or Potential Noteholder will
be equal to an Authorized Denomination or an integral multiple in excess
thereof. If, as a result of the procedures described above regarding
Insufficient Bids, any Potential Noteholder would be entitled or required to
purchase less than a principal amount of Notes equal to an Authorized
Denomination or any integral multiple thereof, the Auction Agent will, in such
manner as in its sole discretion it will determine, allocate Notes for purchase
among Potential Noteholders so that only Notes in an Authorized Denomination or
any integral multiples in excess thereof are purchased by any Potential
Noteholder, even if such allocation results in one or more of such Potential
Noteholders not purchasing any Notes.
Based on the results of each Auction, the Auction Agent is to determine the
aggregate principal amount of Notes of each class to be purchased and the
aggregate principal amount of Notes of each class to be sold by Potential
Noteholders and Existing Noteholders on whose behalf each Broker-Dealer
submitted Bids or Sell Orders and, with respect to each Broker-Dealer, to the
extent that such aggregate principal amount of Notes to be sold differs from
such aggregate principal amount of Notes to be purchased, determine to which
other Broker-Dealer or Broker-Dealers acting for one or more purchasers such
Broker-Dealer will deliver, or from which Broker-Dealers acting for one or more
sellers such Broker-Dealer will receive, as the case may be, Notes.
Any calculation by the Auction Agent (or the Indenture Trustee, if applicable)
of the Class Interest Rate, One-Month LIBOR, Three-Month LIBOR, the Maximum
Auction Rate, the All Hold Rate, the Net Loan Rate and the Non-Payment Rate
will, in the absence of manifest error, be binding on all other parties.
Notwithstanding anything in the Indenture to the contrary, no Auction is to be
held on any Auction Date on which there are insufficient moneys held by the
Indenture Trustee under the Indenture and available to pay the principal of and
interest due on the applicable Note on the Payment Date immediately following
such Auction Date.
Settlement Procedures
The Auction Agent is required to advise each Broker-Dealer that submitted an
Order in an Auction of the Class Interest Rate for a Note for the next Interest
Accrual Period and, if such Order was a Bid or Sell Order, whether such Bid or
Sell Order was accepted or rejected, in whole or in part, by telephone not later
than 3:00 p.m., eastern time, on the Auction Date if the Class Interest Rate is
the Auction Rate and not later than 4:00 p.m. eastern time on the Auction Date
if the Class Interest Rate is the Net Loan Rate. Each Broker-Dealer that
submitted an Order on behalf of a Bidder is required to then advise such Bidder
of the applicable Class Interest Rate for the next Interest Accrual Period and,
if such Order was a Bid or a Sell Order, whether such Bid or Sell Order was
accepted or rejected, in whole or in part, confirm purchases and sales with each
Bidder purchasing or selling Notes as a result of the Auction and advise each
Bidder purchasing or selling Notes as a result of the Auction to give
instructions to its Participant to pay the purchase price against delivery of
such Notes or to deliver such Notes against payment therefor, as appropriate.
Pursuant to the Auction Agent Agreement, the Auction Agent is to record each
transfer of Notes on the Existing Noteholders Registry to be maintained by the
Auction Agent.
In accordance with DTC's normal procedures, on the Business Day after the
Auction Date, the transactions described above will be executed through DTC, so
long as DTC is the Depository, and the accounts of the respective Participants
at DTC will be debited and credited and Notes delivered as necessary to effect
the purchases and sales of Notes as determined in the Auction. Purchasers are
required to make payment through their Participants in same-day funds to DTC
against delivery through their Participants. DTC will make payment in accordance
with its normal procedures, which now provide for payment against delivery by
its Participants in immediately available funds.
If any Existing Noteholder selling Notes in an Auction fails to deliver such
Notes, the Broker-Dealer of any Person that was to have purchased Notes in such
Auction may deliver to such Person a principal amount of Notes that is less than
the principal amount of Notes that otherwise was to be purchased by such Person
but in any event equal to an Authorized Denomination or any integral multiple
thereof. In such event, the principal amount of Notes to be delivered will be
determined by such Broker-Dealer. Delivery of such lesser principal amount of
Notes will constitute good delivery. Neither the Indenture Trustee nor the
Auction Agent will have any responsibility or liability with respect to the
failure of a Potential Noteholder, Existing Noteholder or their respective
Broker-Dealer or Participant to deliver the principal amount of Notes or to pay
for the Notes purchased or sold pursuant to an Auction or otherwise. See
"Appendix II - Settlement Procedures" herein.
INDENTURE TRUSTEE NOT RESPONSIBLE FOR
AUCTION AGENT, MARKET AGENT AND
BROKER-DEALERS
The Indenture Trustee shall not be liable or responsible for the actions of or
failure to act by the Auction Agent, Market Agent or any Broker-Dealer under the
Indenture or under the Auction Agent Agreement, the Market Agent Agreement or
any Broker-Dealer Agreement. The Indenture Trustee may conclusively rely upon
any information required to be furnished by the Auction Agent, the Market Agent
or any Broker-Dealer without undertaking any independent review or investigation
of the truth or accuracy of such information.
CHANGES IN AUCTION TERMS
Changes in Auction Period or Periods
While any of the Notes are outstanding, the Administrator, may, from time to
time, change the length of the one or more Auction Periods in order to conform
with then current market practice with respect to similar Notes or to
accommodate economic and financial factors that may affect or be relevant to the
length of the Auction Period and the interest rate borne by the Notes (an
"Auction Period Adjustment"). The Administrator will not initiate such change in
the length of the Auction Period unless it shall have received the written
consent from the Market Agent, which consent will not be unreasonably withheld,
not less than three days nor more than 20 days prior to the effective date of an
Auction Period Adjustment. The Administrator will initiate an Auction Period
Adjustment by giving written notice to the Indenture Trustee, the Auction Agent,
the Market Agent, any provider of Credit Enhancement and the Depository in
substantially the form of, or containing substantially the information contained
in, the Indenture at least 10 days prior to the Auction Date for such Auction
Period.
Any such Auction Period Adjustment shall not result in an Auction Period of less
than 7 days nor more than 91 days. If any such Auction Period Adjustment will
result in an Auction Period of less than the number of days in the then current
Auction Period, the notice described above will be effective only if it is
accompanied by a written statement of the Indenture Trustee, the Eligible Lender
Trustee, the Auction Agent and the Depository to the effect that they are
capable of performing their duties, if any, under the Indenture, the Auction
Agent Agreement and any Broker-Dealer Agreement with respect to such changed
Auction Period.
An Auction Period Adjustment will take effect only if (A) the Indenture Trustee
and the Auction Agent receive, by 11:00 A.M., eastern time, on the Business Day
before the Auction Date for the first such Auction Period, a certificate from
the Trust authorizing an Auction Period Adjustment specified in such
certificate, the certificate of the Market Agent described above and the written
statement of the Indenture Trustee, the Eligible Lender Trustee, the Auction
Agent and the Depository described above and (B) Sufficient Bids exist at the
Auction on the Auction Date for such first Auction Period. If the condition
referred to in (A) is not met, the Class Interest Rate applicable for the next
Auction Period will be determined pursuant to the Auction Procedures and the
Auction Period will be the Auction Period determined without reference to the
proposed change. If the condition referred to in (A) is met, but the condition
referred to in (B) above is not met, the Class Interest Rate applicable for the
next Auction Period will be the lesser of the Maximum Auction Rate and the Net
Loan Rate and the Auction Period will be the Auction Period determined without
reference to the proposed change.
Changes in the Auction Date
The Market Agent, at the written direction of the Trust, may specify an earlier
Auction Date (but in no event more than five Business Days earlier) than the
Auction Date that would otherwise be determined in accordance with the
definition of "Auction Date" with respect to one or more specified Auction
Periods in order to conform with then current market practice with respect to
similar Notes or to accommodate economic and financial factors that may affect
or be relevant to the day of the week constituting an Auction Date and the
interest rate borne on the Notes. The Trust will not consent to such change in
the Auction Date unless the Trust will have received from the Market Agent not
less than three days nor more than 20 days prior to the effective date of such
change a written request for consent together with a certificate demonstrating
the need for change in reliance on such factors. The Market Agent will provide
notice of its determination to specify an earlier Auction Date for one or more
Auction Periods by means of a written notice delivered at least 10 days prior to
the proposed changed Auction Date to the Indenture Trustee, the Auction Agent,
the Trust and the Depository.
The changes in Auction terms described above may be made with respect to any
class of the Notes. In connection with any change in Auction Terms described
above, the Auction Agent is to provide such further notice to such parties as is
specified in the Auction Agent Agreement.
[Only for transactions with Auction Rate Notes]
APPENDIX II
SETTLEMENT PROCEDURES
These Settlement Procedures apply separately to each class of Notes.
(a) Not later than (i) 3:00 P.M. if the Class Interest Rate is the
Auction Rate or (2) 4:00 p.m. if the Class Interest Rate is
the Net Loan Rate, the Auction Agent is to notify by telephone
each Broker- Dealer that participated in the Auction held on
such Auction Date and submitted an Order on behalf of an
Existing Noteholder or Potential Noteholder of:
(i) the Class Interest Rate fixed for the next Interest
Accrual Period;
(ii) whether there were Sufficient Bids in such Auction;
(iii) if such Broker-Dealer (a "Seller's Broker-Dealer")
submitted Bids or Sell Orders on behalf of an
Existing Noteholder, whether such Bid or Sell Order
was accepted or rejected, in whole or in part, and
the principal amount of Notes, if any, to be sold by
such Existing Noteholder;
(iv) if such Broker-Dealer (a "Buyer's Broker-Dealer")
submitted a Bid on behalf of a Potential Noteholder,
whether such Bid was accepted or rejected, in whole
or in part, and the principal amount of Notes, if
any, to be purchased by such Potential Noteholder;
(v) if the aggregate amount of Notes to be sold by all
Existing Noteholders on whose behalf such Seller's
Broker-Dealer submitted Bids or Sell Orders exceeds
the aggregate principal amount of Notes to be
purchased by all Potential Noteholders on whose
behalf such Buyer's Broker-Dealer submitted a Bid,
the name or names of one or more Buyer's
Broker-Dealers and the name of the Participant, if
any, of each such Buyer's Broker-Dealer (an
"Participant") acting for one or more purchasers of
such excess principal amount of Notes and the
principal amount of Notes to be purchased from one or
more Existing Noteholders on whose behalf such
Seller's Broker-Dealer acted by one or more Potential
Noteholders on whose behalf each of such Buyer's
Broker-Dealers acted;
(vi) if the principal amount of Notes to be purchased by
all Potential Noteholders on whose behalf such
Buyer's Broker-Dealer submitted a Bid exceeds the
amount of Notes to be sold by all Existing
Noteholders on whose behalf such Seller's
Broker-Dealer submitted a Bid or a Sell Order, the
name or names of one or more Seller's Broker-Dealers
(and the name of the Participant, if any, of each
such Seller's Broker-Dealer) acting for one or more
sellers of such excess principal amount of Notes and
the principal amount of Notes to be sold to one or
more Potential Noteholders on whose behalf such
Buyer's Broker-Dealer acted by one or more Existing
Noteholder on whose behalf each of such Seller's
Broker-Dealers acted; and
(vii) the Auction Date for the next succeeding Auction.
(b) On each Auction Date, each Broker-Dealer that submitted an
Order on behalf of any Existing Noteholder or Potential
Noteholder is to:
(i) advise each Existing Noteholder and Potential
Noteholder on whose behalf such Broker-Dealer
submitted a Bid or Sell Order in the Auction on such
Auction Date whether such Bid or Sell Order was
accepted or rejected, in whole or in part;
(ii) in the case of a Broker-Dealer that is a Buyer's
Broker-Dealer, advise each Potential Noteholder on
whose behalf such Buyer's Broker-Dealer submitted a
Bid that was accepted, in whole or in part, to
instruct such Potential Noteholder's Participant to
pay to such Buyer's Broker-Dealer (or its
Participant) through the Depository the amount
necessary to purchase the principal amount of the
Notes to be purchased pursuant to such Bid against
receipt of such Notes together with accrued interest;
(iii) in the case of a Broker-Dealer that is a Seller's
Broker-Dealer, instruct each Existing Noteholder on
whose behalf such Seller's Broker-Dealer submitted a
Sell Order that was accepted, in whole or in part, or
a Bid that was accepted, in whole or in part, to
instruct such Existing Noteholder's Participant to
deliver to such Seller's Broker-Dealer (or its
Participant) through the Depository the principal
amount of the Notes to be sold pursuant to such Order
against payment therefor;
(iv) advise each Existing Noteholder on whose behalf such
Broker-Dealer submitted an Order and each Potential
Noteholder on whose behalf such Broker-Dealer
submitted a Bid of the Class Interest Rate for the
next Interest Accrual Period;
(v) advise each Existing Noteholder on whose behalf such
Broker-Dealer submitted an Order of the next Auction
Date; and
(vi) advise each Potential Noteholder on whose behalf such
Broker-Dealer submitted a Bid that was accepted, in
whole or in part, of the next Auction Date.
(c) On the basis of the information provided to it pursuant to
paragraph (a) above, each Broker-Dealer that submitted a Bid
or Sell Order in an Auction is required to allocate any funds
received by it in connection with such Auction pursuant to
paragraph (b)(ii) above, and any Notes received by it in
connection with such Auction pursuant to paragraph (b)(iii)
above, among the Potential Noteholders, if any, on whose
behalf such Broker-Dealer submitted Bids, the Existing
Noteholder, if any, on whose behalf such Broker-Dealer
submitted Bids or Sell Orders in such Auction, and any
Broker-Dealers identified to it by the Auction Agent following
such Auction pursuant to paragraph (a)(v) or (a)(vi) above.
(d) On each Auction Date:
(i) each Potential Noteholder and Existing Noteholder
with an Order in the Auction on such Auction Date
will instruct its Participant as provided in (b)(ii)
or (b)(iii) above, as the case may be:
(ii) each Seller's Broker-Dealer that is not a Participant
of the Depository will instruct its Participant to
deliver such Notes through the Depository to a
Buyer's Broker-Dealer (or its Participant) identified
to such Seller's Broker-Dealer pursuant to (a)(v)
above against payment therefor; and
(iii) each Buyer's Broker-Dealer that is not a Participant
in the Depository will instruct its Participant to
pay through the Depository to Seller's Broker-Dealer
(or its Participant) identified following such
Auction pursuant to (a)(vi) above the amount
necessary to purchase the Notes to be purchased
pursuant to (b)(ii) above against receipt of such
Notes.
(e) On the Business Day following each Auction Date;
(i) each Participant for a Bidder in the Auction on such
Auction Date referred to in (d)(i) above will
instruct the Depository to execute the transactions
described under (b)(ii) or (b)(iii) above for such
Auction, and the Depository will execute such
transactions;
(ii) each Seller's Broker-Dealer or its Participant will
instruct the Depository to execute the transactions
described in (d)(ii) above for such Auction, and the
Depository will execute such transactions; and
(iii) each Buyer's Broker-Dealer or its Participant will
instruct the Depository to execute the transactions
described in (d)(iii) above for such Auction, and the
Depository will execute such transactions.
(f) If an Existing Noteholder selling Notes in an Auction fails to
deliver such Notes (by authorized book-entry), a Broker-Dealer
may deliver to the Potential Noteholder on behalf of which it
submitted a Bid that was accepted a principal amount of Notes
that is less than the principal amount of Notes that otherwise
was to be purchased by such Potential Noteholder. In such
event, the principal amount of Notes to be so delivered will
be determined solely by such Broker-Dealer (but only in
Authorized Denominations). Delivery of such lesser principal
amount of Notes will constitute good delivery. Notwithstanding
the foregoing terms of this paragraph (f), any delivery or
nondelivery of Notes which will represent any departure from
the results of an Auction, as determined by the Auction Agent,
will be of no effect unless and until the Auction Agent will
have been notified of such delivery or nondelivery in
accordance with the provisions of the Auction Agent Agreement
and the Broker-Dealer Agreements. Neither the Indenture
Trustee nor the Auction Agent will have any responsibility or
liability with respect to the failure of a Potential
Noteholder, Existing Noteholder or their Respective
Broker-Dealer or Participant to take delivery of or deliver,
as the case may be, the principal amount of the Notes
purchased or sold pursuant to an Auction or otherwise.
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