<PAGE>
<PAGE>
As filed with the Securities and Exchange Commission on October 14, 1998
Registration No. 333-54027
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
AMENDMENT NO. 3
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------------
CHEC ASSET RECEIVABLE CORPORATION
(Depositor)
(Exact name of Registrant as Specified in its Charter)
Nevada Applied For
(State of incorporation) (I.R.S. Employer Identification Number)
-------------------------
2728 North Harwood
Dallas, Texas 75201
(214) 981-5000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
-------------------------
Anne Duffield, Esq.
2728 North Harwood
Dallas, Texas 75201
(214) 981-5045
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
-------------------------
Copy to:
Reed D. Auerbach, Esq.
Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York 10038
--------------------------
Approximate date of commencement of proposed
sale to the public: From time to time after the
effective date of this Registration Statement.
--------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, please check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to rule 434,
please check the following box. |_|
-----------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==========================================================================================================================
Proposed maximum Proposed Amount
Title of each class of securities to be Amount to offering price per maximum aggregate of registration
registered be registered (1) unit (1) offering price (1) fee(2)
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<S> <C> <C> <C> <C>
Asset-Backed Notes.......................... $1,000,000,000 100% $1,000,000,000 $295,000.00
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Asset-Backed Certificates................... $ 500,000,000 100% $ 500,000,000 $147,500.00
==========================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Calculated pursuant to Rule 457(a) under the Securities Act of 1933.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
<PAGE>
PROSPECTUS SUPPLEMENT
(To Prospectus dated __________,1998)
$_____________
CENTEX HOME EQUITY LOAN TRUST A. __
Centex Home Equity Loan Pass-Through Certificates, Series 199_-_
$_______________ _____________% Class A-1 Certificates
$_______________ _____________% Class A-2 Certificates
$_______________ _____________% Class A-3 Certificates
$_______________ _____________% Class A-4 Certificates
$_____________ Adjustable Rate Class A-5 Certificates
CENTEX CREDIT CORPORATION d/b/a
CENTEX HOME EQUITY CORPORATION
Seller and Servicer
CHEC Asset Receivable Corporation
Depositor
The Centex Home Equity Loan Pass-Through Certificates, Series 199_-_ (the
"Certificates") will consist of (i) the Class A-1 Certificates, the Class A-2
Certificates, the Class A-3 Certificates and the Class A-4 Certificates
(collectively the "Fixed Rate Certificates"), (ii) the Class A-5 Certificates
(together with the Fixed Rate Certificates, the "Class A Certificates"), and
(iii) a residual Class of Certificates (the "Class R Certificates"). Only the
Class A Certificates are offered hereby.
For a discussion of significant matters affecting investment in the
Certificates, see "Risk Factors" beginning on page ____ herein, "Prepayment and
Yield Considerations" beginning on page ___ herein and "Risk Factors" beginning
on page __ in the Prospectus.
Each Class A Certificate represents undivided ownership interests in one
of two pools (each, a "Home Equity Loan Group") each constituting a separate
sub-trust of fixed rate and adjustable rate subprime mortgage loans (the "Home
Equity Loans"), respectively, held by Centex Home Equity Loan Trust 199_-_ (the
"Trust"). All of the Home Equity Loans are subprime mortgage loans. Subprime
mortgage loans are mortgage loans that have been made to borrowers with less
than perfect credit. The Fixed Rate Certificates will represent undivided
ownership interests in the related Home Equity Loan Group comprised of the Home
Equity Loans bearing fixed rates of interest (the "Fixed Rate Group"), which are
secured by first and second lien mortgages or deeds of trust primarily on one-
to four-family residential properties. The Class A-5 Certificates will represent
undivided ownership interests in the Home Equity Loan Group comprised of the
Home Equity Loans bearing interest at rates that are subject to periodic
adjustment (the "Adjustable Rate Group"), which are secured by first lien
mortgages or deeds of trust primarily on one- to four-family residential
properties. The Class A Certificates also represent undivided ownership
interests in all interest due and principal received under the related Home
Equity Loans on and after the Cut-Off Date or the related Subsequent Cut-Off
Date as applicable, security interests in the properties which secure the
related Home Equity Loans (the "Properties"), the Insurance Policies (as defined
below), funds on deposit in the Certificate Account, the Pre-Funding Account,
the Capitalized Interest Account (each as defined herein) and any other account
held by the Trustee for the Trust, and all of the proceeds of the foregoing. The
final Subsequent Cut-Off Date may not be later than _________ (90 days following
the date of issuance of the Class A Certificates).
Simultaneously with the issuance of the Certificates, the Seller will
obtain from _______________ (the "Certificate Insurer") two certificate guaranty
insurance policies (the "Insurance Policies") in favor of the Trustee (as
defined below). The Insurance Policies will require the Certificate Insurer to
make certain Insured Payments (as defined herein) on the Class A Certificates.
(continued on following page)
THE CLASS A CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY AND
DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, THE TRUSTEE,
THE SELLER, OR THE SERVICER, OR EXCEPT AS DESCRIBED HEREIN, THE CERTIFICATE
INSURER, OR ANY OF THEIR AFFILIATES. NEITHER THE CLASS A CERTIFICATES
NOR THE HOME EQUITY LOANS ARE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The Class A Certificates will be offered by _________________ (the
"Underwriter") from time to time to the public in negotiated transactions or
otherwise at varying prices to be determined at the time of the related sale.
The net proceeds to the Depositor from the sale of the Class A Certificates are
anticipated to be approximately $________ plus, solely with respect to the Fixed
Rate Certificates, accrued interest from ________, ___, before deducting
expenses payable by the Depositor, estimated to be $________. The Class A
Certificates are offered by the Underwriter subject to prior sale when, as and
if issued to and accepted by it and subject to approval of certain legal matters
by counsel for the Underwriter. The Underwriter reserves the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of the Class A Certificates in book-entry form will be
made through the facilities of The Depository Trust Company ("DTC") in the
United States, and Cedel Bank, societe anonyme and the Euroclear System in
Europe, on or about ________, ____ (the "Closing Date").
[ ]
-------------------
The date of this Prospectus Supplement is ________, ___
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(cover continued from previous page)
The aggregate outstanding Loan Balance of the Home Equity Loans, as of the
Cut-Off Date (the "Initial Aggregate Loan Balance"), expected to be transferred
to the Trust on the Closing Date (the "Initial Home Equity Loans") was $________
($________ represented Loan Balances of Home Equity Loans in the Fixed Rate
Group and $________ represented Loan Balances of the Home Equity Loans in the
Adjustable Rate Group, each of which is subject to be increased by up to
approximately __% on the Closing Date such that the amount initially deposited
into the Pre-Funded Account does not exceed __% of the Maximum Collateral Amount
(as defined herein)). Approximately ______% of the Home Equity Loans in the
Fixed Rate Group by principal balance are secured by first liens and the
remainder are secured by second liens and ________% of the Home Equity Loans in
the Adjustable Rate Group are secured by first liens. Additional Home Equity
Loans (the "Subsequent Home Equity Loans") may be purchased by the Trust from
time to time after the Closing Date during the Funding Period (as defined below)
from funds on deposit in the pre-funding account (the "Pre-Funding Account"). On
the Closing Date, aggregate cash amounts of approximately $________ and
approximately $________, from the proceeds of the sale of the Class A
Certificates will be deposited with the Trustee in the Pre-Funding Account to
acquire Subsequent Home Equity Loans for the Fixed Rate Group and the Adjustable
Rate Group, respectively. On the Closing Date, aggregate cash amounts of
approximately $________ and approximately $________ from the proceeds of the
sale of the Class A Certificates will be deposited with the Trustee in the
Capitalized Interest Account for the Fixed Rate Group and the Adjustable Rate
Group, respectively. The Home Equity Loans were or will be originated by Centex
Credit Corporation d/b/a Centex Home Equity Corporation (in its capacity as
seller of the Home Equity Loans, the "Seller" and, in its capacity as servicer
of the Home Equity Loans, the "Servicer") or one of its affiliates and will be
sold to CHEC Asset Receivable Corporation (the "Depositor") as of the Cut-Off
Date pursuant to the Loan Sale Agreement dated as of ________, ____ between the
Seller and the Depositor (the "Loan Sale Agreement"). All of the Home Equity
Loans will be serviced by the Servicer. The Trust will be created pursuant to a
Pooling and Servicing Agreement (the "Pooling and Servicing Agreement") to be
dated as of ________, ___ among the Seller, the Servicer, the Depositor and
Norwest Bank Minnesota, National Association, as Trustee (the "Trustee").
Distributions of principal and interest will be made to holders (the
"Owners") of the Certificates on the 25th day of each month (or, if such day is
not a business day, the next following business day) beginning _____ ___ (each,
a "Payment Date"). Interest will be passed through on each Payment Date to the
Owners of the Class A Certificates based on the related Certificate Principal
Balance (as defined herein) at the Pass-Through Rate applicable to such Class of
Certificates, subject to the limitations described herein. The Pass-Through Rate
for each Class of Fixed Rate Certificates is set out on the cover hereof and the
Pass-Through Rate for the Class A-5 Certificates is based on One-Month LIBOR and
is subject to an available funds cap as described herein. Principal will be
passed through on each Payment Date to the Owners of the Class A Certificates
first, to the Class A-4 Certificates, in an amount equal to the Class A-4
Lockout Distribution Amount (as defined herein) and then sequentially to the
Class A-1, Class A-2, Class A-3 and Class A-4 Certificates until their
respective Certificate Principal Balances are reduced to zero.
S-2
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It is a condition to issuance that the Class A Certificates be rated "___"
by _______. and "___" by ______.
The yield to investors on the Class A Certificates sold at prices other
than par may be extremely sensitive to the rate and timing of principal payments
(including prepayments, repurchases, defaults and liquidations) on the Home
Equity Loans, which may vary over time. See "Prepayment and Yield
Considerations" herein and "Risk Factors" and "Yield, Prepayment and Maturity
Considerations" in the Prospectus.
As more fully described herein, an election will be made to treat the
assets of the Trust Estate (other than certain accounts contained therein) as a
real estate mortgage investment conduit (a "REMIC") for federal income tax
purposes. The Class A Certificates will constitute "regular interests" in the
REMIC and the Class R Certificates will constitute the "residual interest" in
the REMIC. See "Certain Federal Income Tax Consequences" herein and "Federal
Income Tax Consequences" in the Prospectus.
Prior to their issuance, there has been no market for the Class A
Certificates nor can there be any assurance that one will develop, or if it does
develop, that it will provide liquidity, or that it will continue for the life
of the Class A Certificates. The Underwriter intends, but is not obligated, to
make a market in the Class A Certificates. Any such market making, if commenced,
may be discontinued at any time.
S-3
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<PAGE>
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
The Trust is subject to optional termination under the limited
circumstances described herein. See "Description of the Class A
Certificates-Optional Termination" herein. Exercise of the optional termination
by the Servicer may result in an early retirement of the Class A Certificates.
The Class A Certificates offered by this Prospectus Supplement will be
part of a separate series of Certificates being offered by the Depositor
pursuant to its Prospectus dated ________, ___, of which this Prospectus
Supplement is a part and which accompanies this Prospectus Supplement. The
Prospectus contains important information regarding this offering which is not
contained herein, and prospective investors are urged to read the Prospectus and
this Prospectus Supplement in full.
As provided herein under "The Insurance Policies and the Certificate
Insurer" the Certificate Insurer will provide without charge to any person to
whom this Prospectus Supplement is delivered, upon oral or written request of
such person, a copy of any or all financial statements incorporated herein by
reference. Requests for such copies should be directed as provided under "The
Insurance Policies and the Certificate Insurer" herein.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE CLASS A
CERTIFICATES OFFERED HEREBY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING AND THE
PURCHASE OF CERTIFICATES TO COVER SHORT POSITIONS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING" HEREIN.
S-4
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SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Reference is made to the "Index of Defined Terms" for
the location of the definitions of certain capitalized terms.
Issuer .................................Centex Home Equity Loan Trust 199_-_
(the "Trust").
Certificates Offered ...................$__________ Centex Home Equity Loan
Pass-Through Certificates, Series
199_-_, to be issued in the following
Classes (each, a "Class"):
Initial Certificate Pass-Through
Principal Balance Rate Class
------------------- ------------ -----
$__________ _____% Class A-1 Certificates
$__________ _____% Class A-2 Certificates
$__________ _____% Class A-3 Certificates
$__________ _____% Class A-4 Certificates
$__________ (1) Class A-5 Certificates
-----------------
(1) For each Accrual Period, the "Class
A-5 Pass-Through Rate" will be equal to
the lesser of (x) with respect to any
Payment Date which occurs on or prior to
the Clean-Up Call Date (as defined
herein), One-Month LIBOR plus _____% per
annum and for any Payment Date
thereafter, One-Month LIBOR plus _____%
per annum and (y) the Class A-5
Available Funds Cap (as defined herein).
Depositor...............................CHEC Asset Receivable Corporation (the
"Depositor"), a Nevada corporation.
Seller and Servicer.....................Centex Credit Corporation d/b/a Centex
Home Equity Corporation (in its capacity
as seller of the Home Equity Loans, the
"Seller," and in its capacity as
servicer of the Home Equity Loans, the
"Servicer"), a Nevada corporation. The
Seller's and Servicer's principal
executive offices are located at 2728 N.
Harwood Street, Dallas, Texas 75201.
Trustee.................................[ ] as trustee (the "Trustee"). The
Trustee shall receive a fee (the
"Trustee Fee") payable monthly, equal to
one-twelfth of the product of 0.01% and
the sum of the aggregate Loan Balance of
the Home Equity Loans and the amount on
deposit in the Pre-Funding Account, in
each case as of the first day of the
related Remittance Period.
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Cut-Off Dates ..........................With respect to (i) each Initial Home
Equity Loan, the opening of business on
_____, ___ (the "Cut-Off Date") and (ii)
with respect to each Subsequent Home
Equity Loan, the later of (x) the
opening of business of the first day of
the month in which such Subsequent Home
Equity Loan was transferred to the Trust
and (y) the date of origination of any
such Home Equity Loan which is
originated in the month of the related
Subsequent Transfer Date (the later of
clauses (x) and (y) being the
"Subsequent Cut-Off Date"). Each
reference herein to either the "related
Cut-Off Date" or the "applicable Cut-Off
Date" shall mean either the "Cut-Off
Date" and/or the "Subsequent Cut-Off
Date," as applicable.
Closing Date ...........................On or about _____,___.
Description of the
Certificates Offered ...................The Class A Certificates represent
fractional undivided interests in one of
two pools of loans each constituting a
separate sub-trust within the Trust and
have the rights described in the Pooling
and Servicing Agreement dated as of
_____, __ among the Depositor, the
Seller, the Servicer and the Trustee
(the "Pooling and Servicing Agreement").
The Trust assets will include a pool of
home equity loans transferred to the
Trust on the Closing Date (the "Initial
Home Equity Loans"), additional fixed
rate and adjustable rate home equity
loans transferred to the Trust during
the Funding Period (the "Subsequent Home
Equity Loans," and, together with the
Initial Home Equity Loans, the "Home
Equity Loans"), all interest due and
principal received under the respective
Home Equity Loans on and after the
related Cut-Off Date, security interests
in the properties securing such Home
Equity Loans (the "Properties"), amounts
on deposit in the Certificate Account,
Pre-Funding Account and Capitalized
Interest Account and all of the proceeds
of the foregoing. In addition to the
foregoing, the Seller shall cause the
Certificate Insurer to deliver the
Insurance Policies to the Trustee for
the benefit of the Owners of the Class A
Certificates. See "Formation of the
Trust and Trust Property" herein.
Other Certificates......................In addition to the Class A Certificates,
the Trust will issue, pursuant to the
Pooling and Servicing Agreement, a
residual Class of Certificates (the
"Class R Certificates") which will
represent an undivided ownership
interest in the Trust. The
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Class A Certificates and the Class R
Certificates are herein referred to as
the "Certificates" Only the Class A
Certificates are offered hereby.
Denominations ..........................The Class A Certificates are issuable in
minimum denominations of an original
principal amount of $1,000 and integral
multiples of $1 in excess thereof.
The Initial Home Equity Loans ..........The Initial Home Equity Loans consist of
_____ home equity loans, of which _____
are fixed rate home equity loans and
_____ are adjustable rate home equity
loans, and the notes relating thereto.
The Home Equity Loans will be divided
into two Home Equity Loan Groups each
constituting a separate sub-trust. The
Fixed Rate Group will consist of Home
Equity Loans that bear interest at fixed
rates. The Adjustable Rate Group will
consist of Home Equity Loans that bear
interest at rates that adjust
semi-annually based on Six-Month LIBOR
and the applicable gross margin (subject
to the limitations described herein),
with the initial rate adjustment date
being either six months after the date
of origination of the related Home
Equity Loan ("Six-Month Adjustable Rate
Loans") or two years after the date of
origination of the related Home Equity
Loan ("2/28 Adjustable Rate Loans"). The
Initial Home Equity Loans are secured by
first and second lien mortgages or deeds
of trust primarily on one- to
four-family residential properties,
located in __ states and the District of
Columbia. No Combined Loan-to-Value
Ratio relating to any Initial Home
Equity Loan in the Fixed Rate Group
exceeded _____% as of the Cut-Off Date.
No Original Loan-to-Value Ratio relating
to any Initial Home Equity Loan in the
Adjustable Rate Group exceeded _____% as
of the Cut-Off-Date. None of the Initial
Home Equity Loans are insured by primary
mortgage insurance policies. On the
Closing Date additional Home Equity
Loans will be added to each Home Equity
Loan Group in an amount equal to
approximately __% of the aggregate
initial Loan Balance presented herein of
the Home Equity Loans in such Home
Equity Loan Group such that the amount
initially deposited into the Pre-Funding
Account does not exceed ___ % of the
Maximum Collateral Amount. All
statistical information presented herein
relating to the Initial Home Equity
Loans does not include the additional
Initial Home Equity Loans to be added on
the Closing Date. The Seller does not
expect that the characteristics of the
additional Home Equity Loans to be added
on the Closing Date to materially vary
from the
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aggregate characteristics of the Initial
Home Equity Loans described herein.
All of the Home Equity Loans in the
Trust have been or will be originated by
the Seller or an affiliate of the
Seller. The Home Equity Loans are not
guaranteed by the Depositor, the Seller,
the Servicer, the Trustee or any of
their affiliates.
Fixed Rate Group. As of the Cut-Off
Date, the average Loan Balance of the
Initial Home Equity Loans in the Fixed
Rate Group was $_______. The minimum and
maximum Loan Balances of the Initial
Home Equity Loans in the Fixed Rate
Group as of the Cut-Off Date were
$_______ and $_______, respectively. As
of the Cut-Off Date, the interest rates
(the "Coupon Rates") of the Initial Home
Equity Loans in the Fixed Rate Group
ranged from _______% to _______%; the
weighted average Coupon Rate of the
Initial Home Equity Loans in the Fixed
Rate Group was approximately _______%;
the weighted average Combined
Loan-to-Value Ratio of the Initial Home
Equity Loans in the Fixed Rate Group was
approximately _______%; the weighted
average remaining term to maturity of
the Initial Home Equity Loans in the
Fixed Rate Group was approximately
_______ months; and the remaining terms
to maturity of the Initial Home Equity
Loans in the Fixed Rate Group ranged
from _______ months to _______ months.
As of the Cut-Off Date, approximately
_______% of the Initial Aggregate Loan
Balance of the Initial Home Equity Loans
in the Fixed Rate Group were secured by
first mortgages and approximately
_______% of the Initial Aggregate Loan
Balance of the Initial Home Equity Loans
in the Fixed Rate Group were secured by
second mortgages. Initial Home Equity
Loans in the Fixed Rate Group containing
balloon payments represented
approximately _______% of the Initial
Aggregate Loan Balance of the Initial
Home Equity Loans in the Fixed Rate
Group. No Initial Home Equity Loan in
the Fixed Rate Group has a final
scheduled payment date later than
_______, ____. See "The Home Equity Loan
Pools--Fixed Rate Group" herein.
Adjustable Rate Group. As of the Cut-Off
Date, the average Loan Balance of the
Initial Home Equity Loans in the
Adjustable Rate Group was $_______. The
minimum and maximum Loan Balances of the
Initial Home Equity Loans in the
Adjustable Rate Group as of the Cut-Off
Date were $_______ and $_______,
respectively. As of the Cut-Off Date,
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the weighted average Original
Loan-to-Value Ratio of the Initial Home
Equity Loans in the Adjustable Rate
Group was approximately _______%; the
weighted average remaining term to
maturity of the Initial Home Equity
Loans in the Adjustable Rate Group was
approximately _______ months; and the
remaining terms to maturity of the
Initial Home Equity Loans in the
Adjustable Rate Group ranged from
_______ months to _______ months. As of
the Cut-Off Date, approximately _______%
of the Initial Aggregate Loan Balance of
the Initial Home Equity Loans in the
Adjustable Rate Group were secured by
first mortgages. No Initial Home Equity
Loan in the Adjustable Rate Group will
mature later than _______, ____. As of
the Cut-Off Date, approximately _______%
of the Initial Aggregate Loan Balance of
the Initial Home Equity Loans in the
Adjustable Rate Group were Six-Month
Adjustable Rate Loans and _______% of
the Initial Aggregate Loan Balance of
the Initial Home Equity Loans in the
Adjustable Rate Group were 2/28
Adjustable Rate Loans. As of the Cut-Off
Date, the weighted average remaining
period to the next interest rate
adjustment date for the Six-Month
Adjustable Rate Loans was approximately
__ months; the weighted average
remaining period to the next interest
rate adjustment date for the 2/28
Adjustable Rate Loans was approximately
___ months; each Six-Month Adjustable
Rate Loan will have an initial payment
adjustment effective with the seventh
monthly payment on such loan, an initial
rate adjustment cap of _______%, a
semi-annual interest rate adjustment cap
of _______%, in each case, above the
then current interest rate for such
Six-Month Adjustable Rate Loan and a
lifetime interest rate adjustment cap of
_______% above the initial interest rate
of such loan; each 2/28 Adjustable Loan
will have an initial payment adjustment
effective with the 25th monthly payment
on such loan, an initial interest rate
adjustment cap of _______% and a
semi-annual interest rate adjustment cap
of ____%, in each case, above the then
current interest rate for such 2/28
Adjustable Loan and a lifetime interest
rate adjustment cap of _______% above
the initial interest rate of such loan.
The weighted average Coupon Rate of the
Initial Home Equity Loans in the
Adjustable Rate Group was approximately
_______% per annum. The Initial Home
Equity Loans in the Adjustable Rate
Group had a weighted average gross
margin as of the Cut-Off Date of
approximately _______%. The gross margin
for the Initial Home Equity Loans in the
Adjustable Rate Group ranged from
_______% to _______%. Coupon Rates borne
by the Initial Home Equity
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S-9
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Loans in the Adjustable Rate Group as of
the Cut-Off Date ranged from _______%
per annum to _______% per annum. As of
the Cut-Off Date, the maximum rates at
which interest may accrue on the Initial
Home Equity Loans in the Adjustable Rate
Group (the "Maximum Rates") ranged from
_______% per annum to _______% per
annum. The Initial Home Equity Loans in
the Adjustable Rate Group had a weighted
average Maximum Rate as of the Cut-Off
Date of approximately _______% per
annum. As of the Cut-Off Date, the
minimum rates at which interest may
accrue on the Initial Home Equity Loans
in the Adjustable Rate Group (the
"Minimum Rates") ranged from _______%
per annum to _______% per annum. As of
the Cut-Off Date, the weighted average
Minimum Rate on the Initial Home Equity
Loans in the Adjustable Rate Group was
approximately _______% per annum. See
"The Home Equity Loan Pools--Adjustable
Rate Group" herein.
In addition to the Initial Home Equity
Loans acquired by the Trust on the
Closing Date, the Trust may acquire up
to approximately $_______ and
approximately $_______ aggregate Loan
Balance in Subsequent Home Equity Loans
for the Home Equity Loans in the Fixed
Rate Group and the Adjustable Rate
Group, respectively. The Subsequent Home
Equity Loans, if available, will be
originated by the Seller or an affiliate
of the Seller and sold to the Depositor
and then sold by the Depositor to the
Trust. The Subsequent Home Equity Loans,
as well as all Home Equity Loans, must
conform to certain specified
characteristics. See "--Pre-Funding
Feature" below.
Pre-Funding Feature.....................On the Closing Date, approximately
$_______ (the "Original Pre-Funded
Amount") (of which approximately
$_______ will be allocated to the Fixed
Rate Group and approximately $_______
will be allocated to the Adjustable Rate
Group) will be deposited in the
Pre-Funding Account which account will
be in the name of, and maintained by,
the Trustee on behalf of the Trust for
the benefit of the Certificate Insurer
and the Owners of the Certificates. The
Original Pre-Funded Amount allocated to
a Home Equity Loan Group will be reduced
during the Funding Period for such Home
Equity Loan Group as described below.
Subsequent Home Equity Loans purchased
on any date (each, a "Subsequent
Transfer Date") must satisfy the
criteria set forth in the Pooling and
Servicing Agreement. In addition, each
Subsequent Home Equity Loan must be
acceptable to the Certificate Insurer.
The Trust may purchase the Subsequent
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Home Equity Loans only from the
Depositor and not from any other person
and the Depositor may purchase the
Subsequent Home Equity Loans only from
the Seller and not from any other
person. All interest and other
investment earnings on amounts on
deposit in the Pre-Funding Account will
be deposited in the Capitalized Interest
Account. The Pre-Funding Account will
not be an asset of the REMIC. See "The
Home Equity Loan Pools--Conveyance of
Subsequent Home Equity Loans" herein.
The "Funding Period" is the period from
the Closing Date until the earliest of
(i) the date on which the amount on
deposit in the Pre-Funding Account is
less than $_______, (ii) the date on
which a Servicer Termination Event
occurs under the Pooling and Servicing
Agreement or (iii) the Monthly
Remittance Date in _______ ___. The
Original Pre-Funded Amount, as reduced
from time to time by the amount thereof
applied to the purchase of Subsequent
Home Equity Loans is referred to herein
as the "Pre-Funded Amount." Any
Pre-Funded Amount allocated to a Home
Equity Loan Group remaining in the
Pre-Funding Account at the end of the
Funding Period will be distributed to
Owners of the related Class A
Certificates as an additional
distribution of principal on the _____
____ Payment Date.
Capitalized Interest Account............On the Closing Date, a portion of the
proceeds of the sale of the Class A
Certificates will be required to be
deposited in an account (the
"Capitalized Interest Account") in the
name of the Trustee on behalf of the
Trust. During the Funding Period, the
amount on deposit in the Capitalized
Interest Account, including reinvestment
income thereon, will be used by the
Trustee to fund the amount equal to (i)
the sum of (a) the amount of interest
accruing at the weighted average of the
Pass-Through Rates of the Fixed Rate
Certificates (in the case of the Fixed
Rate Group) or the Class A-5
Pass-Through Rate (in the case of
Adjustable Rate Group) accruing during
the related Accrual Period on the amount
by which the aggregate Certificate
Principal Balance of the related Class A
Certificates exceeds the aggregate Loan
Balance of the Home Equity Loans in the
related Home Equity Loan Group plus (b)
the related Premium Amount accruing
during the related Accrual Period on
such excess balance minus (ii) the
amount of any reinvestment income on
monies allocated to such Home Equity
Loan Group and on deposit in the
Pre-Funding Account. Any amounts
remaining in the Capitalized Interest
Account on the Payment Date which
follows the end of the Funding Period
and not used for such purpose on such
Payment Date are
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required to be paid directly to the
Seller on such Payment Date.
Final Scheduled Payment Date............The "Final Scheduled Payment Date" for
each Class of Class A Certificates is as
set forth below, although it is
anticipated that the actual final
Payment Date for each Class of Class A
Certificates will occur significantly
earlier than the related Final Scheduled
Payment Date. See "Prepayment and Yield
Considerations" herein.
Final Scheduled
Class Payment Date
----- ------------
Class A-1
Class A-2
Class A-3
Class A-4
Class A-5
Class A Distributions...................On the 25th day of each month, or if
such a day is not a Business Day, then
the next succeeding Business Day,
commencing in _______ ___ (each such day
being a "Payment Date"), the Trustee
will be required to distribute to the
Owners of the Fixed Rate Certificates of
record as of the last Business Day of
the calendar month immediately preceding
the calendar month in which such Payment
Date occurs and to the Owners of the
Class A-5 Certificates of record as of
the Business Day immediately preceding
such Payment Date (each such date, the
"Record Date"), the "Class A
Distribution Amount" which shall be the
sum of (x) the Current Interest and (y)
the Class A Principal Distribution
Amount. Such amounts shall be allocated
to the Class A Certificates in the
manner described below.
A "Business Day" is any day other than a
Saturday or Sunday, or a day on which
banking institutions in New York, New
York or Dallas, Texas, the city in which
the corporate trust office of the
Trustee is located or the city in which
the Certificate Insurer is located are
authorized or obligated by law or
executive order to be closed.
For each Payment Date, Current Interest
will be due with respect to the related
Class of Class A Certificates. "Current
Interest" with respect to each Class of
Class A Certificates
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means, with respect to any Payment Date:
(i) the aggregate amount of interest
accrued during the related Accrual
Period at the related Pass-Through Rate
on the Certificate Principal Balance of
the related Class A Certificates plus
(ii) the Preference Amount as it relates
to interest previously paid on such
Class of the Class A Certificates prior
to such Payment Date that remains unpaid
as of such Payment Date plus (iii) the
Carry Forward Amount, if any, with
respect to such Class of Class A
Certificates; provided however, that
with respect to each Class of Class A
Certificates, Current Interest will be
reduced by such Class' pro rata share of
any Civil Relief Interest Shortfalls (as
defined below) during the related
Accrual Period. A "Civil Relief Interest
Shortfall" is the difference between the
amount of interest that would have
accrued on a Home Equity Loan absent the
application of the Soldiers' and
Sailors' Relief Act of 1940 (the "Relief
Act") and interest accrued on such Home
Equity Loan at the 6% per annum rate
mandated by the Relief Act - See
"Certain Legal Aspects of the Home
Equity Loans - Soldiers' and Sailors'
Relief Act of 1940" in the Prospectus.
"Accrual Period" means for each Payment
Date and (x) with respect to the Fixed
Rate Certificates, the calendar month
immediately preceding the month in which
such Payment Date occurs and (y) with
respect to the A-5 Certificates, the
period from and including the previous
Payment Date (or the Closing Date in the
case of the first Payment Date) to and
including the day prior to such Payment
Date. All calculations of interest on
the Fixed Rate Certificates will be made
on the basis of a 360 day year assumed
to consist of twelve 30 day months. All
calculations of interest on the Class
A-5 Certificate will be made on the
basis of the actual number of days
elapsed in the related Accrual Period
and a year of 360 days.
The Class A-5 Pass-Through Rate is
subject to the Class A-5 Available Funds
Cap.
The "Class A-5 Available Funds Cap" with
respect to any Accrual Period and the
related Payment Date shall be a rate per
annum equal to the fraction, expressed
as a percentage, the numerator of which
is (i) an amount equal to (A) 1/12 of
the
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S-13
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weighted average of the Net Coupon Rates
of the Home Equity Loans in the
Adjustable Rate Group (by outstanding
principal balance), times the aggregate
Loan Balance of the Home Equity Loans in
the Adjustable Rate Group as of the
beginning of the related Remittance
Period minus (B) the Premium Amount
related to the Adjustable Rate Group for
such Payment Date, and the denominator
of which is (ii) the then outstanding
Class A-5 Certificate Principal Balance,
such rate as calculated on the basis of
a 360 day year and the actual number of
days elapsed in the related Accrual
Period.
The "Net Coupon Rate" of any Home Equity
Loan in the Adjustable Rate Group shall
be a rate per annum equal to the Coupon
Rate of such Home Equity Loan minus the
sum of (i) the rate at which the
Servicing Fee accrues, (ii) the rate at
which the Trustee Fee accrues, and (iii)
the Minimum Spread.
The "Minimum Spread" shall be a
percentage per annum equal to __% for
Payment Dates which occur prior to
_____1999 and ____% for Payment Dates
which occur in _____1999 or thereafter.
With respect to the Class A-5
Certificates and any Payment Date, to
the extent that (a) the "Accrual Rate,"
which is equal to the lesser of (i) the
amount of Current Interest that would be
payable on the Class A-5 Certificates on
such Payment Date if clause (x) of the
definition of Class A-5 Pass-Through
Rate were used to calculate such Current
Interest and (ii) the amount of Current
Interest that would be payable on the
Class A-5 Certificates on such Payment
Date if the Class A-5 Maximum
Pass-Through Rate (as defined below)
were used to calculate such Current
Interest exceeds (b) the amount payable
if clause (y) of the definition of Class
A-5 Pass-Through Rate is used to
calculate such Current Interest (such
excess, "Class A-5 Certificateholders'
Interest Index Carryover"), the holders
of the Class A-5 Certificates will be
entitled to the amount of such Class A-5
Certificateholders' Interest Index
Carryover after certain other
distributions to such holders and
certain reimbursements to the
Certificate Insurer but before the
Owners of the Class R Certificates are
entitled to any distributions.
The "Unpaid Class A-5
Certificateholders' Interest Index
Carryover" for any Payment Date shall be
equal to the aggregate of all amounts of
Class A-5 Certificateholders'
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Interest Index Carryover for any
previous Payment Date plus accrued
interest thereon at the percentage at
which the Accrual Rate accrues for the
related Accrual Period less all prior
payments made in respect of the Class
A-5 Certificateholders' Interest Index
Carryover. The Insurance Policies will
not cover Class A-5 Certificateholders'
Interest Index Carryovers or Unpaid
Class A-5 Certificateholders' Interest
Index Carryovers, and the ratings on the
Class A-5 Certificates do not address
the likelihood of receipt by the holders
of the Class A-5 Certificates of any
amounts in respect of Class A-5
Certificateholders' Interest Index
Carryovers or Unpaid Class A-5
Certificateholders' Interest Index
Carryovers.
The "Class A-5 Maximum Pass-Through
Rate" with respect to any Accrual Period
and any related Payment Date, shall be a
rate per annum equal to the fraction,
expressed as a percentage, the numerator
of which is (i) an amount equal to (A)
1/12 of the weighted average of the Net
Maximum Rates of the Home Equity Loans
in the Adjustable Rate Group (by
outstanding principal balance), times
the aggregate Loan Balance of the Home
Equity Loans in the Adjustable Rate
Group as of the beginning of the related
Remittance Period minus (B) the Premium
Amount related to the Adjustable Rate
Group for such Payment Date, and the
denominator of which is (ii) the then
outstanding Loan Balance of the Home
Equity Loans in the Adjustable Rate
Group, such rate as calculated on the
basis of a 360 day year and the actual
number of days elapsed in the related
Accrual Period.
The "Net Maximum Rate" of any Home
Equity Loan in the Adjustable Rate Group
shall be a rate per annum equal to the
Maximum Rate of such Home Equity Loan
minus the sum of (i) the rate at which
the Servicing Fee accrues, (ii) the rate
at which the Trustee Fee accrues, and
(iii) the Minimum Spread.
Allocations of Interest
and Principal...........................The Class A Distribution Amount for each
Home Equity Loan Group for each Payment
Date (to the extent funds are available
therefor) shall be allocated among the
Class A Certificates related to such
Home Equity Loan Group in the following
amounts and in the following order of
priority: (i) First, to the Owners of
the Class A Certificates related to such
Home Equity Loan Group, the related
Current Interest for such Class of Class
A Certificates on a pro rata basis
(based on each such Class A
Certificate's Current Interest) without
any priority
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S-15
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among such Class A Certificates; and
(ii) Second, with respect to each Home
Equity Loan Group, to the Owners of the
Class A Certificates related to such
Home Equity Loan Group, the Class A
Principal Distribution Amount (as
defined below under this heading). The
Class A Principal Distribution Amount
applicable to the Fixed Rate Group shall
be distributed as follows: (i) to the
Owners of the Class A-4 Certificates an
amount equal to the Class A-4 Lockout
Distribution Amount (as defined below)
and (ii) the remainder of such Class A
Distribution Amount as follows: first,
to the Owners of the Class A-1
Certificates until the Class A-1
Certificate Principal Balance is reduced
to zero; and second, to the Owners of
the Class A-2 Certificates until the
Class A-2 Certificate Principal Balance
is reduced to zero; and third, to the
Owners of the Class A-3 Certificates
until the Class A-3 Certificate
Principal Balance is reduced to zero;
and fourth, to the Owners of the Class
A-4 Certificates until the Class A-4
Certificate Principal Balance is reduced
to zero. The Class A Principal
Distribution Amount applicable to the
Adjustable Rate Group shall be
distributed to the Owners of the Class
A-5 Certificates until the Class A-5
Certificate Principal Balance is reduced
to zero.
Notwithstanding the foregoing, in the
event that a Certificate Insurer Default
has occurred, and is continuing, if
there is a Subordination Deficit (as
defined herein), the Class A Principal
Distribution Amount for the Fixed Rate
Group shall be distributed pro rata to
the Owners of all Classes of the Fixed
Rate Certificates.
The Owners of the Class A-4 Certificates
are entitled to receive payments of the
Class A-4 Lockout Distribution Amount
specified herein; provided, that if on
any Payment Date the Class A-3
Certificate Principal Balance is zero,
the Owners of the Class A-4 Certificates
will be entitled to receive the entire
Class A Principal Distribution Amount
applicable to the Fixed Rate Group for
such Payment Date.
The "Class A-4 Lockout Distribution
Amount" for any Payment Date will be the
product of (i) the applicable Class A-4
Lockout Percentage for such payment date
and (ii) the Class A-4 Lockout Pro Rata
Distribution Amount for such Payment
Date. In no event shall the Class A-4
Lockout Distribution Amount exceed the
outstanding Class A-4 Certificate
Principal Balance or the Class A
Principal Distribution Amount applicable
to the Fixed Rate Group for such Payment
Date.
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The "Class A-4 Lockout Percentage" for
each Payment Date shall be as follows:
Payment Date Lockout Percentage
------------ ------------------
The "Class A-4 Lockout Pro Rata
Distribution Amount" for any Payment
Date will be an amount equal to the
product of (x) a fraction, the numerator
of which is the Certificate Principal
Balance of the Class A-4 Certificates
immediately prior to such Payment Date
and the denominator of which is the
aggregate of the Certificate Principal
Balances of the Fixed Rate Certificates
immediately prior to such Payment Date
and (y) the Class A Principal
Distribution Amount with respect to the
Fixed Rate Group for such Payment Date.
The "Class A Principal Distribution
Amount" for each Home Equity Loan Group
and Payment Date shall be the lesser of:
(a) the Total Available Funds (as
defined herein), for the related Home
Equity Loan Group, plus any Insured
Payment with respect to the related
Class or Classes of Class A
Certificates, minus the related Current
Interest and related Expense Fees for
such Payment Date with respect to the
related Class A Certificates; and
(b) the excess, if any, of
(i) the sum (without duplication) of:
(A) the Preference Amount with
respect to principal owed to each
Owner of Class A Certificates
related to the Home
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S-17
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Equity Loan Group that remains
unpaid as of such Payment Date;
(B) the principal portion of all
scheduled monthly payments on the
Home Equity Loans in the related
Home Equity Loan Group due on or
prior to the related Due Date
thereof, received by the Servicer
during the related Remittance
Period and any Prepayments made by
the Mortgagors and actually
received by the Servicer during the
related Remittance Period to the
extent such amounts are received by
the Trustee on or prior to the
related Monthly Remittance Date;
(C) the outstanding principal
balance of each Home Equity Loan in
the related Home Equity Loan Group
that was repurchased by the Seller
or purchased by the Servicer on or
prior to the related Monthly
Remittance Date, to the extent such
outstanding principal balance is
actually received by the Trustee on
or prior to the related Monthly
Remittance Date;
(D) any Substitution Amounts (i.e.,
the excess, if any, of the
outstanding principal balance of a
Home Equity Loan in the related
Home Equity Loan Group being
replaced over the outstanding
principal balance of a replacement
Home Equity Loan plus accrued and
unpaid interest and plus the amount
of any Delinquency Advances and
Servicing Advances) delivered by
the Seller on the related Monthly
Remittance Date in connection with
a substitution of a Home Equity
Loan in the related Home Equity
Loan Group (to the extent such
Substitution Amounts relate to
principal), to the extent such
Substitution Amounts are actually
received by the Trustee on or prior
to the related Monthly Remittance
Date;
(E) all Net Liquidation Proceeds
actually collected by or on behalf
of the Servicer with respect to the
Home Equity Loans in the related
Home Equity Loan Group during the
related Remittance Period (to the
extent such Net Liquidation
Proceeds relate to principal), to
the extent such Net Liquidation
Proceeds are actually received by
the Trustee on or prior to the
related Monthly Remittance Date;
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(F) the amount of any Subordination
Deficit with respect to the related
Home Equity Loan Group for such
Payment Date;
(G) the principal portion of the
proceeds received by the Trustee
with respect to the related Home
Equity Loan Group upon termination
of the Trust (to the extent such
proceeds relate to principal);
(H) with respect to the Payment
Date immediately following the last
day of the Funding Period, all
amounts remaining on deposit in the
Pre-Funding Account and allocated
to such Home Equity Loan Group to
the extent not used to purchase
Subsequent Home Equity Loans during
such Funding Period; and
(I) the amount of any Subordination
Increase Amount (as defined herein)
with respect to the related Home
Equity Loan Group for such Payment
Date to the extent of any Net
Monthly Excess Cashflow available
for such purpose;
over
(ii) the amount of any Subordination
Reduction Amount (as defined herein)
with respect to the related Home
Equity Loan Group for such Payment
Date.
"Loan Balance": With respect to each
Home Equity Loan and as of any date of
determination, the actual outstanding
principal balance thereof on the Cut-Off
Date with respect to the Initial Home
Equity Loans or relevant Subsequent
Cut-Off Date with respect to the
Subsequent Home Equity Loans excluding
payments of principal received prior to
the Cut-Off Date or Subsequent Cut-Off
Date, as the case may be, less any
principal payments relating to such Home
Equity Loan included in previous Monthly
Remittance Amounts, provided, however,
that the Loan Balance for any Home
Equity Loan that has become a Liquidated
Loan shall be zero as of the first day
of the Remittance Period following the
Remittance Period in which such Home
Equity Loan becomes a Liquidated Loan,
and at all times thereafter.
"Liquidated Loan" means a Home Equity
Loan with respect to which a
determination has been made by the
Servicer that all recoveries have been
recovered or that the Servicer
reasonably
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believes that the cost of obtaining any
additional recoveries therefrom would
exceed the amount of such recoveries.
The "Preference Amount" is any amount
previously distributed to an Owner on
the Obligations that is recoverable and
sought to be recovered as a voidable
preference by a trustee in bankruptcy
pursuant to the United States Bankruptcy
Code (Title 11 of the United States
Code); as amended from time to time, in
accordance with a final nonappealable
order of a court having competent
jurisdiction.
The "Remittance Period" with respect to
any Monthly Remittance Date is the
calendar month immediately preceding
such Monthly Remittance Date. A "Monthly
Remittance Date" is any date on which
funds on deposit in the Principal and
Interest Account are remitted to the
Certificate Account, which is the ____
day of each month, or if such day is not
a Business Day, the preceding Business
Day, commencing in ______ ___.
A "Subordination Deficit" with respect
to a Home Equity Loan Group and a
Payment Date is the amount, if any, by
which (x) the aggregate of the
Certificate Principal Balances related
to such Home Equity Loan Group after
taking into account all distributions to
be made on such Payment Date (except for
any Insured Payment, and except for any
Subordination Deficit with respect to
such Home Equity Loan Group), exceeds
(y) the sum of (a) the aggregate Loan
Balance of the Home Equity Loans in the
related Home Equity Loan Group as of the
close of business on the last day of the
prior Remittance Period and (b) any
amounts remaining in the Pre-Funding
Account on the last day of the related
Remittance Period and allocated to such
Home Equity Loan Group.
Monthly Servicing Fee...................As to each Home Equity Loan, the
Servicer will retain a fee (the
"Servicing Fee") equal to 0.50% per
annum, payable monthly at one-twelfth of
such annual rate of the then outstanding
principal balance of such Home Equity
Loan serviced as of the first day of
each Remittance Period, provided,
however, that if a successor Servicer is
appointed in accordance with the Pooling
and Servicing Agreement, the Servicing
Fee shall be such amount as agreed upon
by the Trustee, the Certificate Insurer,
and the successor Servicer but in no
event in an amount greater than the
amount paid to the predecessor Servicer.
The Servicer will also be able to retain
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late fees, prepayment charges,
assumption fees, release fees, bad check
charges and any other servicing related
fees.
Delinquency Advances and
Compensating Interest...................Subject to the Servicer's determination,
in its reasonable business judgment,
that any proposed Delinquency Advance
will not be recoverable, the Servicer
shall be required to remit to the
Trustee for deposit to the Certificate
Account out of the Servicer's own funds
or from collections on any Home Equity
Loans that are not required to be
distributed on the Payment Date
occurring during the month in which such
advance is made (which shall be
reimbursed by the Servicer on or before
any Subsequent Monthly Remittance Dates
on which such amounts are required to be
part of the monthly remittance amount)
any delinquent payment of interest with
respect to each delinquent Home Equity
Loan, which payment was not received on
or prior to the last day of the related
Remittance Period and was not
theretofore advanced by the Servicer.
Such amounts so deposited are
"Delinquency Advances." Such Delinquency
Advances are reimbursable to the
Servicer, as provided in the Pooling and
Servicing Agreement. To the extent that
the Servicer previously has made
Delinquency Advances with respect to a
Home Equity Loan that the Servicer
subsequently determines to be
nonrecoverable, the Servicer shall be
entitled to reimbursement from
collections on any Home Equity Loan from
the Principal and Interest Account as
provided in the Pooling and Servicing
Agreement. See "Servicing of Home Equity
Loans - Servicing Compensation and
Payment of Expenses" in the Prospectus.
If a prepayment in full of a Home Equity
Loan or a Prepayment of at least six
times a Mortgagor's Monthly Payment
occurs during any calendar month, any
difference between the interest
collected from the Mortgagor in
connection with such payoff and the full
month's interest at the Coupon Rate that
would be due on the related Due Date for
such Home Equity Loan (such difference,
the "Compensating Interest") (but not in
excess of the aggregate Servicing Fee
for the related Remittance Period), will
be required to be deposited to the
Principal and Interest Account (or if
such difference is an excess, the
Servicer shall retain such excess) on
the next succeeding Monthly Remittance
Date by the Servicer and shall be
included in the Monthly Remittance
Amount to be made available to the
Trustee on the next succeeding Monthly
Remittance Date.
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Servicing Advances......................Subject to the Servicer determination,
in its reasonable business judgment,
that any proposed advance is not
recoverable from the related Home Equity
Loan, the Servicer will be required to
pay all "out of pocket" costs and
expenses incurred in the performance of
its servicing obligations, including,
but not limited to, (i) expenditures in
connection with a foreclosed Home Equity
Loan prior to the liquidation thereof,
including, without limitation,
expenditures for real estate property
taxes, hazard insurance premiums,
property restoration or preservation
("Preservation Expenses"), (ii) the cost
of any enforcement or judicial
proceedings, including foreclosures and
(iii) the cost of the management and
liquidation of Property acquired in
satisfaction of the related Mortgage.
Such costs and expenses will constitute
"Servicing Advances." The Servicer may
recover a Servicing Advance from the
Trust as provided under the Pooling and
Servicing Agreement first, from amounts
recovered on the related Home Equity
Loan and second, from amounts payable
pursuant to clause (iii) (E) under
"Description of Class A
Certificates--Distributions." See
"Servicing of Home Equity Loans -
Servicing Compensation and Payment of
Expenses" in the Prospectus.
Credit Enhancement......................The credit enhancement provided for the
benefit of the Owners of the Class A.
Certificates consists of (x) the
overcollateralization mechanics which
utilize the internal cash flows of the
Trust and (y) the related Insurance
Policy.
Overcollateralization. The credit
enhancement provisions of the Trust
result in a limited acceleration of the
amortization of the Class A Certificates
related to a Home Equity Loan Group
relative to the amortization of the Home
Equity Loans in such Home Equity Loan
Group in the early months of the
transaction. The accelerated
amortization is achieved by the
application of certain excess interest
in reduction of the applicable
Certificate Principal Balance. This
acceleration feature creates, with
respect to each Home Equity Loan Group,
overcollateralization (i.e., the excess
of the aggregate outstanding Loan
Balance of the Home Equity Loans in the
related Home Equity Loan Group over the
aggregate Certificate Principal Balances
of the Class A Certificates related to
such Home Equity Loan Group) of the
Class A Certificates related to such
Home Equity Loan Group. Once the
required level of overcollateralization
is reached, and subject to the
provisions described in the next
paragraph, the acceleration feature will
cease.
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The Pooling and Servicing Agreement
provides that, subject to certain
floors, caps and triggers, the required
level of overcollateralization with
respect to a Home Equity Loan Group may
increase or decrease over time. An
increase would result in a temporary
period of accelerated amortization of
the related Class or Classes of Class A
Certificates to increase the actual
level of overcollateralization to its
required level; a decrease would result
in a temporary period of decelerated
amortization to reduce the actual level
of overcollateralization to its required
level.
As a result of the "sequential pay"
feature of the Fixed Rate Certificates,
any such accelerated principal will be
paid to that Class or Classes of Fixed
Rate Certificates then entitled to
receive distributions of principal.
Crosscollateralization. In addition to
the foregoing, the Pooling and.
Servicing Agreement provides for limited
crosscollateralization through the
application of excess amounts generated
by one Home Equity Loan Group to fund
shortfalls in Available Funds,
reimbursement to the Certificate Insurer
and the required overcollateralization
level in the other Home Equity Loan
Group, subject to certain prior debt
service and credit enhancement
requirements of such Home Equity Loan
Group.
See "Prepayment and Yield
Considerations," "Credit
Enhancement--Overcollateralization
Provisions" herein and "Enhancement" in
the Prospectus.
Certificate Insurance Policies.
_______________, a __________ stock
insurance company (the "Certificate
Insurer") will issue ___ certificate
guaranty insurance policies (the
"Insurance Policies") with respect to
the Class A Certificates.
Pursuant to the Insurance Policies, the
Certificate Insurer will irrevocably and
unconditionally guarantee certain
payments on each Payment Date to the
Trustee for the benefit of the holders
of each Class of Class A Certificates.
The amount of the actual payment, if
any, made by the Certificate Insurer to
the Owners of the Class A Certificates
under the related Insurance Policy (the
"Insured Payment") and with respect to
any Home Equity Loan Group is (a) as of
any Payment Date, any Deficiency
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Amount and (b) any Preference Amount
(without duplication). The "Deficiency
Amount" is the sum of (a) the excess, if
any, of (i) the related Current
Interest, over (ii) the related Total
Available Funds (after applying the
crosscollateralization provisions of the
Pooling and Servicing Agreement, after
any deduction of the related Expense
Fees and without regard to any related
Insured Payment to be made with respect
to such Payment Date) and (b) the
related Subordination Deficit (after
applying the crosscollateralization
provisions of the Pooling and Servicing
Agreement and after taking into account
the portion of the related Class A
Principal Distribution Amount to be
actually distributed on such Payment
Date without regard to any related
Insured Payment to be made with respect
to such Payment Date).
Insured Payments do not guarantee the
payment to the Owners of the Class A
Certificates in respect of Realized
Losses as they are incurred but only
covers such losses to the extent that a
Subordination Deficit exists. Insured
Payments do not cover the Servicer's
failure to make Delinquency Advances,
except to the extent that a
Subordination Deficit would otherwise
result therefrom. Nevertheless, the
effect of the Insurance Policies is to
guaranty the timely payment of interest
on, and the ultimate payment of the
principal amount of, each related Class
of Class A Certificates. The Insurance
Policies do not cover Civil Relief Act
Shortfalls or any Class A-5
Certificateholders' Interest Index
Carryovers or any Unpaid Class A-5
Certificateholders' Interest Index
Carryovers.
The Insurance Policies are
noncancellable for any reason.
Except upon the occurrence and
continuance of a Certificate Insurer
Default, the Certificate Insurer shall
have the right to exercise certain
rights of the Owners of the Class A
Certificates, as specified in the
Pooling and Servicing Agreement, without
any consent of such Owners; and such
Owners may exercise such rights only
with the prior written consent of the
Certificate Insurer, except as provided
in the Pooling and Servicing Agreement.
In addition, to the extent of
unreimbursed payments under the
Insurance Policies, the Certificate
Insurer will be subrogated to the rights
of the Owners of the Class A
Certificates on which such Insured
Payments were made. In connection with
each Insured Payment on a Class A
Certificate, the Trustee, as
attorney-in-fact for the Owner thereof,
will be required to assign to the
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Certificate Insurer the rights of such
Owner with respect to the related Class
Certificate to the extent of such
Insured Payment. "Certificate Insurer
Default" is defined under the Pooling
and Servicing Agreement as the
occurrence and continuance of (x) the
failure by the Certificate Insurer to
make a required payment under either
Insurance Policy or (y) the bankruptcy
or insolvency of the Certificate
Insurer.
Book-Entry Registration of the
Class A Certificates....................Each Class of Class A Certificates will
initially be issued in book-entry form.
Persons acquiring beneficial ownership
interests in such Class A Certificates
("Certificateowners") may elect to hold
their interests through The Depository
Trust Company ("DTC") in the United
States, or Cedel Bank, societe anonyme
("Cedel") or the Euroclear System
("Euroclear") in Europe. Transfers
within DTC, Cedel or Euroclear, as the
case may be, will be in accordance with
the usual rules and operating procedures
thereof. So long as the Class A
Certificates are Book-Entry Certificates
(as defined herein), such Certificates
will be evidenced by one or more
Certificates registered in the name of
Cede & Co. ("Cede"), as the nominee of
DTC. The Class A Certificates will
initially be registered in the name of
Cede. The interests of the Owners of
such Certificates will be represented by
book-entries on the records of DTC and
participating members thereof. No
Certificateowner will be entitled to
receive a definitive certificate
representing such person's interest,
except in the event that Definitive
Certificates (as defined herein) are
issued under the limited circumstances
described herein. All references in this
Prospectus Supplement to any Class A
Certificates reflect the rights of
Certificateowners only as such rights
may be exercised through DTC and its
participating organizations for so long
as such Class A Certificates are held by
DTC. See "Description of the Class A
Certificates--Book-Entry Registration of
the Class A Certificates" herein, Annex
A hereof entitled "Global Clearance,
Settlement and Tax Documentation
Procedures" and "Description of the
Securities-Book-Entry Securities" in
the Prospectus.
Optional Termination....................The Servicer will have the right to
purchase all the Home Equity Loans on
any Monthly Remittance Date (each, a
"Clean-Up Call Date") when the aggregate
outstanding principal balance of all
Home Equity Loans as of the close of
business on the last day of the
immediately preceding Remittance Period
has declined to 10% or less of the
Initial Aggregate Loan
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Balance plus the aggregate outstanding
Loan Balance of all Subsequent Home
Equity Loans as of their respective
Subsequent Cut-Off Dates (such sum, the
"Maximum Collateral Amount"). The
purchase price for such Home Equity
Loans shall not be less than the
aggregate outstanding Class A
Certificate Principal Balance plus all
accrued and unpaid interest thereon.
Under certain circumstances, the
Certificate Insurer may exercise such
purchase rights if the Servicer does not
do so. See "Description of the Class A
Certificates" herein.
Ratings.................................It is a condition of issuance of the
Class A Certificates that the Class A
Certificates receive ratings of "___" by
________, and "___" by ________ and
__________ are referred to herein
collectively as the "Rating Agencies." A
security rating is not a recommendation
to buy, sell or hold securities, and may
be subject to revision or withdrawal at
any time by the assigning entity. No
Rating Agency is obligated to maintain
any rating on any Certificate, and,
accordingly, there can be no assurance
that the rating assigned to any Class of
Certificate upon initial issuance
thereof will not be lowered or withdrawn
at any time thereafter. The rating of
the Class A Certificates will depend
primarily on the creditworthiness of the
Certificate Insurer. Any reduction in
the rating assigned to the claims-paying
ability of the Certificate Insurer below
the rating initially given to the
related Class A Certificates would
likely result in a reduction in the
rating of the Class A Certificates. The
Rating Agencies do not evaluate, and the
ratings of the Class A-5 Certificates do
not address, the likelihood of payment
of the Class A-5 Certificateholders'
Interest Index Carryover or Unpaid Class
A-5 Certificateholders' Interest Index
Carryover.
See "Ratings" herein.
Federal Tax Aspects.....................For federal income tax purposes, an
election will be made to treat certain
assets of the Trust Estate as a "real
estate mortgage investment conduit"
("REMIC"). Qualification as a REMIC
requires ongoing compliance with certain
conditions. Stroock & Stroock & Lavan
LLP, special tax counsel to the Seller
and the Depositor, is of the opinion
that, for federal income tax purposes,
assuming (i) the appropriate REMIC
election is made, and (ii) compliance
with all of the
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provisions of the Pooling and Servicing
Agreement, the REMIC formed pursuant to
the Pooling and Servicing Agreement will
constitute a REMIC, the Class A
Certificates will be considered "regular
interests" in the REMIC, and the Class R
Certificates will be considered the sole
class of "residual interests" in the
REMIC.
Because the Class A Certificates will be
considered "regular interest" in a
REMIC, they generally will be taxable as
debt for Federal Income Tax purposes.
Owners of the Class A Certificates,
including Owners that generally report
income on the cash method of accounting,
will be required to include interest on
the Class A Certificates in income in
accordance with the accrual method of
accounting. In addition, the Class A
Certificates may be considered to have
been issued with original issue discount
or at a premium. Any such original issue
discount will be includible in the
income of the Owner as it accrues under
a method taking into account the
compounding of interest and using the
Prepayment Assumption described herein.
Premium may be deductible by the Owner
either as it accrues or when principal
is received. No representation is made
as to whether the Home Equity Loans will
prepay at the assumed rate, or any other
rate. See "Prepayment and Yield
Considerations" herein. In general, as a
result of the qualification of the Class
A Certificates as regular interests in a
REMIC, the Class A Certificates will be
treated as assets described in Section
7701(a)(19)(C) of the Internal Revenue
Code of 1986, as amended (the "Code") in
the same proportion that the assets in
the REMIC consist of qualifying assets
under such sections. In addition,
interest on the Class A Certificates
will be treated as "interest on
obligations secured by mortgages on real
property" under Section 856(c) of the
Code to the extent that such Class A
Certificates are treated as "real estate
assets" under Section 856(c) of the
Code. For further information regarding
the federal income tax consequences of
investing in the Class A Certificates,
see "Certain Federal Income Tax
Consequences" herein and in the
Prospectus.
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ERISA Considerations....................Subject to the considerations discussed
under "ERISA Considerations" herein, the
Class A Certificates may be purchased by
employee benefit or other retirement
arrangements which are subject to the
Employee Retirement Income Security Act
of 1974, as amended ("ERISA") or Section
4975 of the Code. See "ERISA
Considerations" herein and in the
Prospectus.
Legal Investment
Considerations..........................Although the Class A Certificates are
expected to be rated "___" by ______ and
"___" by ___________, the Class A
Certificates will not constitute
"mortgage related securities" for
purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA")
because the Home Equity Loans include
second liens. Accordingly, many
institutions with legal authority to
invest in comparably rated securities
based on first home equity loans may not
be legally authorized to invest in the
Class A Certificates. See "Legal
Investment Considerations" herein.
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S-28
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RISK FACTORS
Prospective investors in the Class A Certificates should consider, among
other things, the following risk factors (as well as the factors set forth under
"Risk Factors" in the Prospectus) in connection with the purchase of the Class A
Certificates.
Limited Liquidity. There is currently no secondary market for the Class A
Certificates. The Underwriter currently intends to make a market in the Class A
Certificates, but it is under no obligation to do so. There can be no assurance
that a secondary market will develop or, if a secondary market does develop,
that it will provide the holders of Class A Certificates with liquidity of
investment or that it will continue for the life of the Class A Certificates.
Limited Operating History. The Seller began originating home equity loans
in 1994. Prior to October 1997, the Seller sold substantially all of its home
equity loans in whole loan transactions on a servicing released basis and
consequently, the Servicer does not have any significant historical loss and
delinquency data relating to its home equity loan portfolio that may be referred
to for purposes of estimating the future delinquency and loss experience of home
equity loans similar to the Home Equity Loans being sold to the Trust.
Servicing Risk. The servicing of home equity loans of the type originated
by the Seller (as compared to the servicing of conforming or prime mortgage
loans) requires special skill and diligence, which includes generally more
attention to each account, earlier and more frequent contact with borrowers in
default and commencing the foreclosure process at an earlier stage of default.
The Servicer began servicing home equity loans of a type similar to the Home
Equity Loans in October 1997. Consequently, the Servicer has limited experience
servicing home equity loans similar to the Home Equity Loans being sold to the
Trust. Under the terms of the Pooling and Servicing Agreement, the Servicer will
be responsible for the servicing of all the Home Equity Loans and will directly
service all of the Home Equity Loans. The impact of the Servicer's lack of
experience in servicing home equity loans may result in greater losses on the
Home Equity Loans and result in accelerated prepayments on the Class A
Certificates. Any reinvestment risk resulting from such accelerated prepayments
will be borne by the Class A Certificateholders. For a description of the
servicing process see "The Seller and Servicer" in the Prospectus.
The Subsequent Home Equity Loans and the Pre-Funding Account. Any
conveyance of Subsequent Home Equity Loans is subject to the following
conditions, among others: (i) each such Subsequent Home Equity Loan must satisfy
the representations and warranties specified in the agreement pursuant to which
such Subsequent Home Equity Loans are transferred from the Seller to the
Depositor and from the Depositor to the Trust (each a "Subsequent Transfer
Agreement") and in the Pooling and Servicing Agreement; (ii) the Seller will not
select such Subsequent Home Equity Loans in a manner that it believes is adverse
to the interests of the Certificateholders or the Certificate Insurer; (iii) the
Seller will deliver or cause to be delivered certain opinions of counsel with
respect to the validity of the conveyance of such Subsequent
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Home Equity Loans; and (iv) as of each Subsequent Cut-Off Date applicable
thereto, the Home Equity Loans, including the Subsequent Home Equity Loans to be
conveyed by the Depositor to the Trust as of such Cut-Off Date, will satisfy the
criteria described herein under "The Home Equity Loan Pools--Conveyance of
Subsequent Home Equity Loans" herein.
To the extent that amounts on deposit in the Pre-Funding Account have not
been fully applied to the purchase of Subsequent Home Equity Loans by the Trust
Estate for inclusion in the related Home Equity Loan Group by the end of the
Funding Period, the Owners of the related Class A Certificates entitled to
receive principal on the related Payment Date will receive a prepayment of
principal in an amount equal to the Pre-Funded Amount allocated to the related
Home Equity Loan Group and remaining in the Pre-Funding Account on the March ___
Payment Date. Although no assurances can be given, the Seller has advised the
Depositor that it expects that the principal amount of Subsequent Home Equity
Loans sold to the Depositor for sale to the Trust will require the application
of substantially all amounts on deposit in the Pre-Funding Account and that
there will be no material principal prepayment to the Holders of the Class A
Certificates from the Pre-Funding Account.
Each Subsequent Home Equity Loan must satisfy the eligibility criteria
referred to above at the time of its addition. Following the transfer of
Subsequent Home Equity Loans to the Trust, the aggregate characteristics of the
Home Equity Loans then held in the related Home Equity Loan Group will not vary
materially from those of the Initial Home Equity Loans held in such Home Equity
Loan Group. See "The Home Equity Loan Pools--Conveyance of Subsequent Home
Equity Loans" herein.
Risk of Home Equity Loan Coupon Rates Reducing the Class A-5 Pass-Through
Rate. The calculation of the "Class A-5 Pass-Through Rate" is based upon (i) the
value of an index (One-Month LIBOR) which is different from the value of the
index applicable to the Home Equity Loans in the Adjustable Rate Group as
described under "The Home Equity Loan Pools--Adjustable Rate Group" and (ii) the
weighted average of the Coupon Rates of the Adjustable Rate Group Home Equity
Loans, which are subject to periodic adjustment caps, maximum rate caps and
minimum rate floors. The Home Equity Loans in the Adjustable Rate Group adjust
semi-annually based upon the London interbank offered rate for six-month United
States dollar deposits ("Six-Month LIBOR"). ____% of the Initial Home Equity
Loans in the Adjustable Rate Group by Initial Aggregate Loan Balance as of the
Cut-Off Date are 2/28 Adjustable Rate Loans and such loans first adjust two
years from the date of origination. The Pass-Through Rate on the Class A-5
Certificates adjusts monthly based upon One-Month LIBOR as described under
"Description of the Class A Certificates--Calculation of One-Month LIBOR"
herein, subject to the Class A-5 Available Funds Cap. Consequently, the interest
which becomes due on the Home Equity Loans in the Adjustable Rate Group (net of
the related Expense Fee and Servicing Fee allocable to the Adjustable Rate Group
and certain reductions required by the Certificate Insurer) during any
Remittance Period may not equal the amount of interest that would accrue at
One-Month LIBOR plus the margin on the Class A-5 Certificates during the related
Accrual Period. In particular, the Class A-5 Pass-Through Rate adjusts monthly,
while the interest rates of the Home Equity Loans in the Adjustable Rate Group
adjust less frequently with the result that the Class A-5 Available Funds Cap
may limit increases in the Class A-5 Pass-Through Rate for
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extended periods in a rising interest rate environment. In addition, One-Month
LIBOR and Six-Month LIBOR may respond to different economic and market factors,
and there is not necessarily a correlation among them. Thus, it is possible, for
example, that One-Month LIBOR may rise during periods in which Six-Month LIBOR
is stable or is falling or that, even if each of One-Month LIBOR and Six-Month
LIBOR rise during the same period, One-Month LIBOR may rise more rapidly than
Six-Month LIBOR. Furthermore, if the Class A-5 Available Funds Cap determines
the Class A-5 Pass-Through Rate for a Payment Date, the amount of Current
Interest otherwise payable to the Class A-5 Certificateholders will be reduced
and the value of the Class A-5 Certificates will be temporarily or permanently
reduced. Any Class A-5 Certificateholders' Interest Index Carryovers and any
Unpaid Class A-5 Certificateholders' Interest Index Carryovers payable to the
Owners of the Class A-5 Certificates as a result of the Class A-5 Available
Funds Cap will be payable on a subordinated basis to the extent of funds
allocated from the Adjustable Rate Group and available therefor and are not
covered by the Insurance Policies.
Yield Considerations Relating to Excess Cash. Net Monthly Excess Cashflow
for each Home Equity Loan Group will be distributed in reduction of the
Certificate Principal Balance of the Class or Classes of Certificates then
entitled to payments of principal on each Payment Date to the extent the then
Specified Subordinated Amount for such Home Equity Loan Group exceeds the
Subordinated Amount for such Home Equity Loan Group (assuming application of
100% of principal collections received during such Remittance Period but prior
to the application of any Subordination Increase Amount) for such Payment Date.
If purchased at a premium or a discount, the yield to maturity on a Class A
Certificate will be affected by the rate at which the related Net Monthly Excess
Cashflow is distributed in reduction of the applicable Certificate Principal
Balance. If the actual rate of such Net Monthly Excess Cashflow distribution is
slower than the rate anticipated by an investor who purchases a Class A
Certificate related to such Home Equity Loan Group at a discount, the actual
yield to such investor will be lower than such investor's anticipated yield. If
the actual rate of such Net Monthly Excess Cashflow distribution is faster than
the rate anticipated by an investor who purchases a related Class A Certificate
related to such Home Equity Loan Group at a premium, the actual yield to such
investor will be lower than such investor's anticipated yield. The amount of Net
Monthly Excess Cashflow with respect to a Home Equity Loan Group on any Payment
Date will be affected by the actual amount of interest received, collected or
recovered in respect of the Home Equity Loans in such Home Equity Loan Group
during the related Remittance Period and such amount will be influenced by
changes in the weighted average of the Coupon Rates of such Home Equity Loans
resulting from prepayments and liquidations of Home Equity Loans in the related
Home Equity Loan Group and, in the case of Home Equity Loans in Adjustable Rate
Group, adjustments in the related Coupon Rate. The amount of Net Monthly Excess
Cashflow distributions with respect to a Home Equity Loan Group applied in
reduction of the applicable Certificate Principal Balance on each Payment Date
will be based on the then Specified Subordinated Amount for such Home Equity
Loan Group, which may increase or decrease during the period any related Class
of Class A Certificates remains outstanding. Any increase in the Specified
Subordinated Amount for such Home Equity Loan Group may result in an accelerated
rate of amortization of the related Class A Certificates until the Subordinated
Amount for such Home Equity Loan Group equals such Specified Subordinated Amount
and any decrease in such Specified Subordinated Amount will result in a
decelerated rate of amortization of the related Class A Certificates until the
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Subordinated Amount for such Home Equity Loan Group equals the Specified
Subordinated Amount for such Home Equity Loan Group. A faster rate of
amortization will shorten the weighted average life of the related Class A
Certificates while a slower rate of amortization will extend the weighted
average life of the related Class A Certificates. In addition, in general, a
faster than anticipated rate of amortization on the related Class A Certificates
that are purchased at a premium will have an adverse affect on the yield of such
Class A Certificate. A slower than anticipated rate of amortization on the
related Class A Certificates that are purchased at a discount in general will
have an adverse affect on the yield of such Class A Certificate.
Sensitivity to Prepayments. Approximately ____% and ____% by Initial
Aggregate Loan Balance of the Initial Home Equity Loans in the Fixed Rate Group
and the Adjustable Rate Group, respectively, may be prepaid by the related
Mortgagors in whole or in part, at any time without payment of any prepayment
fee or penalty. In addition, a substantial portion of the Initial Home Equity
Loans contain due-on-sale provisions which, to the extent enforced by the
Servicer, will result in prepayment of such Home Equity Loans. See "Prepayment
and Yield Considerations" herein and "Certain Legal Aspects of the Home Equity
Loans--Enforceability of Prepayment and Late Payment Fees" in the Prospectus.
The rate of prepayments on home equity loans is sensitive to prevailing interest
rates. Generally, if prevailing interest rates fall significantly below the
interest rates on the Home Equity Loans in the Fixed Rate Group, such Home
Equity Loans are likely to be subject to higher prepayment rates than if
prevailing rates remain at or above the interest rates on the Home Equity Loans
in the Fixed Rate Group. Conversely, if prevailing interest rates rise
significantly, the rate of prepayments on Home Equity Loans in the Fixed Rate
Group is likely to decrease.
All of the Home Equity Loans in the Adjustable Rate Group are adjustable
rate Home Equity Loans. As is the case with fixed rate Home Equity Loans,
adjustable rate Home Equity Loans may be subject to a greater rate of principal
prepayments in a low interest rate environment. For example, if prevailing
interest rates were to fall, Mortgagors with adjustable rate Home Equity Loans
may be inclined to refinance such Home Equity Loans with a fixed rate loan to
"lock in" a lower interest rate. The existence of the applicable periodic rate
cap, Maximum Rate and Minimum Rate also may affect the likelihood of prepayments
resulting from refinancings. In addition, the prepayment, delinquency and loss
experience on adjustable rate Home Equity Loans may differ from that on the
fixed rate Home Equity Loans because the amount of the monthly payments on
adjustable rate Home Equity Loans are subject to adjustment on each rate
adjustment date; therefore, the prepayment experience on the Class A-5
Certificates may differ from that on the Fixed Rate Certificates.
In addition, repurchases or purchases from the Trust of Home Equity Loans
required or permitted to be made by the Seller and the Servicer under the
Pooling and Servicing Agreement and any distributions to Certificateholders of
any Pre-Funded Amount on deposit in the Pre-Funding Account at the end of the
Funding Period will have the same effect on the holders of the related Class of
Certificates as a prepayment of the related Home Equity Loans.
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The average life of each Class of Class A Certificates, and, if purchased
at a price other than par, the yields realized by Owners of the Class A
Certificates will be sensitive to levels of payment (including prepayments (the
"Prepayments"), liquidations, repurchases and purchases relating to the Home
Equity Loans) on the Home Equity Loans. In general, the yield on a Class of
Class A Certificates that is purchased at a premium from the outstanding
principal amount thereof will be adversely affected by a higher than anticipated
level of Prepayments, liquidations, repurchases and purchases of the Home Equity
Loans and enhanced by a lower than anticipated level. Conversely, the yield on a
Class of Class A Certificates that is purchased at a discount from the
outstanding principal amount thereof will be enhanced by a higher than
anticipated level of Prepayments, liquidations, repurchases and purchases and
adversely affected by a lower than anticipated level. See "Prepayment and Yield
Considerations" herein.
Prepayments, liquidations, repurchases and purchases of the Home Equity
Loans will result in distributions to Certificateholders of principal amounts
that would otherwise be distributed over the remaining terms of the Home Equity
Loans. The extent to which the yield to maturity of a Class A Certificate may
vary from the anticipated yield will depend upon the degree to which it is
purchased at a premium or discount and the degree to which the timing of payment
thereon is sensitive to Prepayments, liquidations, repurchases and purchases of
Home Equity Loans. In the case of any Certificate purchased at a discount, an
investor should consider the risk that a slower than anticipated rate of
principal payments on the Home Equity Loans could result in an actual yield to
such investor that is lower than the anticipated yield and, in the case of any
Certificate purchased at a premium, the risk that a faster than anticipated rate
of Prepayments, liquidations, repurchases and purchases could result in an
actual yield to such investor that is lower than the anticipated yield. Further,
there can be no assurance that Certificateholders will be able to reinvest
distributions in respect of prepayments, liquidations, repurchases and purchases
of the Home Equity Loans in securities or other instruments that have a yield
comparable to that of the related Class of Class A Certificates.
Nature of Collateral; Junior Liens. An overall decline in the residential
real estate market, the general condition of a Property, or other factors, could
adversely affect the values of the Properties such that the outstanding balances
of the Home Equity Loans, together with any senior liens on the Properties,
equal or exceed the value of the Properties. A decline in the value of a
Property on which the Trust has a second lien mortgage would affect the interest
of the Trust in the Property before having any effect on the interest of the
related first mortgagee, and could cause the Trust's interest in the Property to
be extinguished. If such a decline occurs, the actual rates of delinquencies,
foreclosures and losses on the Home Equity Loans could be higher than those
currently experienced in the mortgage lending industry in general. In addition,
adverse economic conditions (which may or may not affect real property values)
may affect the timely payment by borrowers of scheduled payments of principal
and interest on the Home Equity Loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the Trust and if the
Certificate Insurer is unable to meet its obligations under the applicable
Insurance Policy, then Certificateholders may incur a loss.
Because approximately ___% of the Initial Home Equity Loans of the Initial
Aggregate Loan Balance of the Initial Home Equity Loans in the Fixed Rate Group
are secured by second liens
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subordinate to the rights of the mortgagee or beneficiary under the related
first mortgage or deed of trust, the proceeds from any liquidation, insurance or
condemnation proceedings with respect to such Home Equity Loans will be
available to satisfy the outstanding balance of a junior lien Home Equity Loan
only to the extent that the claims of such first mortgagee or beneficiary have
been satisfied in full, including any related foreclosure costs. In addition, a
second mortgagee may not foreclose on the property securing a second mortgage
unless it forecloses subject to the first mortgage, in which case it must either
pay the entire amount due on the first mortgage to the first mortgagee at or
prior to the foreclosure sale or undertake the obligation to make payments on
the first mortgage in the event the mortgagor is in default thereunder. In
servicing second mortgages in its portfolio, the Servicer generally will satisfy
the first mortgage at or prior to the foreclosure sale. The Servicer may also
advance funds to keep the first mortgage current until such time as the Servicer
satisfies the first mortgage. The Trust will have no source of funds (and may
not be permitted under the REMIC provisions of the Code) to satisfy the first
mortgage or make payments due to the first mortgagee. The Servicer generally
will be required to advance such amounts in accordance with the Pooling and
Servicing Agreement. See "Servicing of Home Equity Loans - Servicing
Compensation and Payment of Expenses" in the Prospectus.
Risk of Higher Default for Home Equity Loans with Balloon Payments.
Approximately ____% of the Initial Aggregate Loan Balance of the Initial Home
Equity Loans in the Fixed Rate Group are "balloon loans" that provide for the
payment of the unamortized Loan Balance of such Home Equity Loan in a single
payment at maturity ("Balloon Loans"). The Balloon Loans provide for equal
monthly payments, consisting of principal and interest, generally based on a
30-year amortization schedule, and a single payment of the remaining balance of
the Balloon Loan up to 15 years after origination. Amortization of a Balloon
Loan based on a scheduled period that is longer than the term of the loan
results in a remaining principal balance at maturity that is substantially
larger than the regular scheduled payments. The Seller does not have any
information regarding the default history or prepayment history of payments on
Balloon Loans. Because borrowers of Balloon Loans are required to make
substantial single payments upon maturity, it is possible that the default risk
associated with the Balloon Loans is greater than that associated with
fully-amortizing Home Equity Loans.
Risk Associated with the Certificate Insurer. If the protection afforded
by overcollateralization is insufficient and if, upon the occurrence of a
Subordination Deficit, the Certificate Insurer is unable to meet its obligations
under the related Insurance Policy, then the Owners of the Class A Certificates
could experience a loss on their investment. Additionally, since
crosscollateralization of the Available Funds Shortfall for the Fixed Rate
Certificates and the Class A-5 Certificates occurs prior to the payment of any
Subordination Increase Amounts, a decrease in the amount and/or delay in the
timing of payments on the Home Equity Loans in one Home Equity Loan Group may
decrease the level of overcollateralization contained in the other Home Equity
Loan Group.
Limited Nature of Ratings. It is a condition to the issuance of the Class
A Certificates that each Class of Class A Certificates be rated "___" by _____
and "____" by_______. See "Summary of Terms--Ratings" herein. A security rating
is not a recommendation to buy, sell or hold securities and may be subject to
revision or withdrawal at any time. No person is obligated
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<PAGE>
to maintain the rating on any Class A Certificate, and, accordingly, there can
be no assurance that the ratings assigned to any Class of Class A Certificates
will not be lowered or withdrawn by a Rating Agency at any time thereafter. In
the event any rating is revised or withdrawn, the liquidity of the related Class
A Certificates may be adversely affected. The rating of the Class A Certificates
will depend primarily on the creditworthiness of the Certificate Insurer. Any
reduction in the rating assigned to the claims-paying ability of the Certificate
Insurer below the rating initially given to the related Class A Certificates
would likely result in a reduction in the rating of the Class A Certificates.
The Ratings Agencies do not evaluate, and the ratings of the Class A
Certificates do not address, the likelihood of payment of the Class A-5
Certificateholders' Interest Index Carryover and Unpaid Class A-5
Certificateholders' Interest Index Carryover. See "Ratings" herein.
THE HOME EQUITY LOAN POOLS
General
The statistical information presented in this Prospectus Supplement
concerning the pool of Home Equity Loans is based on the pool of Initial Home
Equity Loans as of the Cut-Off Date. Subsequent Home Equity Loans are intended
to be purchased by the Trust from the Depositor from time to time on or before
the Monthly Remittance Date in ______ __, ____ from funds on deposit in the
Pre-Funding Account. The Initial Home Equity Loans and the Subsequent Home
Equity Loans are referred to collectively as the Home Equity Loans. The
Subsequent Home Equity Loans to be purchased by the Trust will be sold by the
Seller to the Depositor and then by the Depositor to the Trust.
This subsection describes generally certain characteristics of the Home
Equity Loans. Unless otherwise noted, all statistical percentages in this
Prospectus Supplement are measured by the Initial Aggregate Loan Balance of the
related Initial Home Equity Loans as of the Cut-Off Date.
Each Home Equity Loan in the Trust will be assigned to one of two home
equity loan groups (each a "Home Equity Loan Group") and each constituting a
separate sub-trust comprised of Home Equity Loans which bear fixed interest
rates, in the case of the Fixed Rate Group, and Home Equity Loans which bear
interest at adjustable rates, in the case of the Adjustable Rate Group. The
Fixed Rate Certificates represent undivided ownership interests in all Home
Equity Loans contained in the Fixed Rate Group, and distributions on the Fixed
Rate Certificates will be based primarily on amounts available for distribution
in respect of Home Equity Loans in the Fixed Rate Group. The Class A-5
Certificates represent undivided ownership interests in all Home Equity Loans
contained in the Adjustable Rate Group, and distributions on the Class A-5
Certificates will be based primarily on amounts available for distribution in
respect of Home Equity Loans in the Adjustable Rate Group.
The Initial Home Equity Loans to be transferred by the Seller to the
Depositor and from the Depositor to the Trust on the Closing Date will consist
of ____ home equity loans, of which _____ are fixed rate home equity loans and
_____ are adjustable rate home equity loans, evidenced by promissory notes (the
"Notes") secured by first and second lien deeds of trust,
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security deeds or mortgages, which are located in _____ states and the District
of Columbia. The aggregate outstanding Loan Balance of the Initial Home Equity
Loans in the Fixed Rate Group as of the Cut-Off Date is $_____ or _____% of the
Initial Aggregate Loan Balance of the Initial Home Equity Loans; the aggregate
outstanding Loan Balance of the Initial Home Equity Loans in the Adjustable Rate
Group as of the Cut-Off Date is $_____ or _____% of the Initial Aggregate Loan
Balance of the Initial Home Equity Loans. The Properties securing the Home
Equity Loans consist primarily of one- to four-family residential properties and
manufactured housing treated as real property under applicable state law. The
Properties may be owner-occupied and non-owner occupied investment properties
(which includes second and vacation homes). All of the Initial Home Equity Loans
were originated no earlier than _____. Initial Home Equity Loans aggregating
_____% of the Initial Aggregate Loan Balance of the Initial Home Equity Loans in
the Fixed Rate Group were secured by first liens on related properties and the
remaining _____% of the Initial Aggregate Loan Balance of Initial Home Equity
Loans in the Fixed Rate Group are secured by second liens on related properties.
No Combined Loan-to-Value Ratio relating to any Initial Home Equity Loan in the
Fixed Rate Group exceeded ___% as of the Cut-Off Date. All of the Initial
Aggregate Loan Balance of the Initial Home Equity Loans in the Adjustable Rate
Group are secured by first liens on the related properties. No Original
Loan-to-Value Ratio relating to any Initial Home Equity Loan in the Adjustable
Rate Group exceeded _____ % as of the Cut-Off Date. No State has a geographic
concentration of Home Equity Loans in excess of ___%. None of the Initial Home
Equity Loans are insured by pool mortgage insurance policies or primary mortgage
insurance policies.
On the Closing Date additional Home Equity Loans will be added to each
Home Equity Loan Group in an amount not to exceed approximately _____ % of the
aggregate initial Loan Balance presented herein of the Initial Home Equity Loans
in such Home Equity Loan Group such that the amount initially deposited into the
Pre- Funding Account does not exceed _____ % of the Maximum Collateral Amount.
All statistical information presented herein relating to the Initial Home Equity
Loans does not include the additional Home Equity Loans to be added on the
Closing Date. No more than 5% of the aggregate Home Equity Loans as they will be
constituted on the Closing Date will deviate in any respect from the Home Equity
Loan pool characteristics that are described herein or in the Prospectus. The
Seller does not expect that the characteristics of the additional Home Equity
Loans to be added on the Closing Date to materially vary from the
characteristics of the Initial Home Equity Loans described herein.
All of the Home Equity Loans in the Trust have been or will be originated
by the Seller or an affiliate of the Seller.
As of the Closing Date, the Home Equity Loans, by Initial Aggregate Loan
Balance, will contain less than 20% delinquent loans and no non-performing
loans.
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The "Original Loan-to-Value Ratios" and "Combined Loan-to-Value Ratios"
shown below were calculated based upon the lesser of the appraised values of the
Properties at the time of origination (the "Appraised Values") or the sales
price of such Property if such Property was sold within 12 months of the time of
loan origination. In a limited number of circumstances, and within the Seller's
underwriting guidelines, the Seller discounts the Appraised Value of Properties
(when calculating maximum Loan-to-Value Ratios) where the Properties are unique,
have a high value or where the comparables are not within FNMA guidelines. The
purpose for making these reductions is to value the Properties more
conservatively than would otherwise be the case if the appraisal were accepted
as written. The "Combined Loan-to-Value Ratio" of a Home Equity Loan is the
ratio, expressed as a percentage, equal to the sum of any outstanding senior
lien mortgage balance plus the original balance of the Home Equity Loan divided
by the lesser of the Appraised Value or the sales price of such Property if such
Property was sold within 12 months of the time of loan origination. In the
instance where more than one appraisal was performed on the subject property,
the lesser of the two values was used to determine the Original Loan-to-Value
Ratio and the Combined Loan-to-Value Ratio.
No assurance can be given that values of the Properties have remained or
will remain at their levels on the dates of origination of the related Home
Equity Loans. If the residential real estate market has experienced or should
experience an overall decline in property values such that the outstanding
balances of the Home Equity Loans, together with the outstanding balances of any
first mortgage, become equal to or greater than the value of the Properties, the
actual rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the mortgage lending industry.
Fixed Rate Group
As of the Cut-Off Date, the average Loan Balance of the Initial Home
Equity Loans in the Fixed Rate Group was $_____. The minimum and maximum Loan
Balances of the Initial Home Equity Loans in the Fixed Rate Group as of the
Cut-Off Date were $_____ and $_____, respectively. As of the Cut-Off Date, the
weighted average Coupon Rate of the Initial Home Equity Loans in the Fixed Rate
Group was _____ %; the Coupon Rate of the Initial Home Equity Loans in the Fixed
Rate Group ranged from _____ % to _____ %; the weighted average Combined
Loan-to-Value Ratio of the Initial Home Equity Loans in the Fixed Rate Group was
_____ %; the weighted average remaining term to maturity of the Initial Home
Equity Loans in the Fixed Rate Group was_____ months; the original terms to
maturity of the Initial Home Equity Loans in the Fixed Rate Group ranged from
_____ months to _____ months; and the remaining terms to maturity of the Initial
Home Equity Loans in the Fixed Rate Group ranged from _____ months to _____
months. As of the Cut-Off Date, _____ % of the Initial Aggregate Loan Balance of
the Initial Home Equity Loans in the Fixed Rate Group were secured by first
mortgages and _____% of the Initial Aggregate Loan Balance of the Initial Home
Equity Loans in the Fixed Rate Group were secured by second mortgages. Initial
Home Equity Loans in the Fixed Rate Group containing "balloon" payments
represented approximately _____ % of the Initial Aggregate Loan Balance of the
Initial Home Equity Loans in the Fixed Rate Group. No Initial Home Equity Loan
in the Fixed Rate Group will mature later than _____. As of the Cut-
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Off Date, _____ % of the Initial Home Equity Loans in the Fixed Rate Group were
_____ or more days past due but less than _____ days past due. However,
investors in the Class A Certificates should be aware that _____ % of the
Initial Home Equity Loans in the Fixed Rate Group by Initial Aggregate Loan
Balance had a first monthly payment due on or after _____, ____ and it was not
possible for such Initial Home Equity Loans in the Fixed Rate Group to be_____
or more days past due as of the Cut-Off Date.
Set forth below is certain approximate statistical information as of the
Cut-Off Date regarding the Initial Home Equity Loans in the Fixed Rate Group.
Prior to the Closing Date, Home Equity Loans may be removed from the Fixed Rate
Group and other fixed rate Home Equity Loans may be substituted therefor. The
Seller believes that the information set forth herein with respect to the Fixed
Rate Group as presently constituted is representative of the characteristics of
the Fixed Rate Group as it will be constituted at the Closing Date, although
certain characteristics of the Initial Home Equity Loans may vary but any such
variance will not be material. The sum of the percentage columns in the
following tables may not equal 100% due to rounding.
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FIXED RATE GROUP
GEOGRAPHIC DISTRIBUTION OF PROPERTIES
The geographic distribution of the Initial Home Equity Loans in the Fixed Rate
Group by state, as of the Cut-Off Date, was as follows:
Number of Initial % of Initial
Initial Home Aggregate Aggregate
State Equity Loans Loan Balance Loan Balance
- ----- ------------ ------------ ------------
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FIXED RATE GROUP
COMBINED LOAN-TO-VALUE RATIOS*
The Combined Loan-to-Value ratios as of the origination dates of the Initial
Home Equity Loans in the Fixed Rate Group as of the Cut-Off Date were
distributed as follows:
Number of Initial % of Initial
Initial Home Aggregate Aggregate
Range of CLTV's Equity Loans Loan Balance Loan Balance
- --------------- ------------ ------------ ------------
- ----------
* In the case of Home Equity Loans which are secured by first lien
mortgages, the Combined Loan-to-Value Ratio is the equivalent of the
Original Loan-to-Value Ratio and there can be no assurance that there are
not second lien mortgages securing loans made by originators other than
the Seller which are subordinate to such first lien mortgages.
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FIXED RATE GROUP
COUPON RATES
The Coupon Rates borne by the Notes relating to the Initial Home Equity
Loans in the Fixed Rate Group as of the Cut-Off Date were distributed as follows
as of the Cut-Off Date:
Number of Initial % of Initial
Initial Home Aggregate Aggregate
Range of CLTV's Equity Loans Loan Balance Loan Balance
- --------------- ------------ ------------ ------------
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FIXED RATE GROUP
LOAN BALANCES
The distribution of the Loan Balances of the Initial Home Equity Loans in
the Fixed Rate Group as of the Cut-Off Date was as follows:
Number of Initial % of Initial
Initial Home Aggregate Aggregate
Loan Balance Equity Loans Loan Balance Loan Balance
- ------------ ------------ ------------ ------------
FIXED RATE GROUP
TYPES OF MORTGAGED PROPERTIES
The Properties securing the Initial Home Equity Loans in the Fixed Rate
Group as of the Cut-Off Date were of the property types as follows:
Number of Initial % of Initial
Initial Home Aggregate Aggregate
Property Types Equity Loans Loan Balance Loan Balance
- -------------- ------------ ------------ ------------
Condo............................
PUD..............................
Manufactured Housing.............
Single Family....................
2-4 Family.......................
Townhouse........................
Total.......................
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FIXED RATE GROUP
ORIGINAL TERM TO MATURITY
The distribution of the original term to maturity of the Initial Home
Equity Loans in the Fixed Rate Group as of the Cut-Off Date was as follows:
Number of Initial % of Initial
Initial Home Aggregate Aggregate
Original Months to Maturity Equity Loans Loan Balance Loan Balance
- --------------------------- ------------ ------------ ------------
FIXED RATE GROUP
MONTHS SINCE ORIGINATION
The distribution of the number of months since the date of origination of
the Initial Home Equity Loans in the Fixed Rate Group as of the Cut-Off Date was
as follows:
Number of Initial % of Initial
Initial Home Aggregate Aggregate
Number of Months Since Origination Equity Loans Loan Balance Loan Balance
- ---------------------------------- ------------ ------------ ------------
Zero..............................
1 to 6............................
Total........................
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FIXED RATE GROUP
REMAINING TERM TO MATURITY
The distribution of the number of months remaining to maturity of the
Initial Home Equity Loans in the Fixed Rate Group as of the Cut-Off Date was as
follows:
Number of Initial % of Initial
Initial Home Aggregate Aggregate
Months Remaining to Maturity Equity Loans Loan Balance Loan Balance
- ---------------------------- ------------ ------------ ------------
FIXED RATE GROUP
OCCUPANCY STATUS
The occupancy status of the Properties securing the Initial Home Equity
Loans in the Fixed Rate Group as of the Cut-Off Date was as follows:
Number of Initial % of Initial
Initial Home Aggregate Aggregate
Occupancy Status Equity Loans Loan Balance Loan Balance
- ---------------- ------------ ------------ ------------
Owner Occupied...................
Investment Property..............
Second Home......................
Total.......................
FIXED RATE GROUP
LIEN POSITION
The lien position of the Initial Home Equity Loans in the Fixed Rate Group
as of the Cut-Off Date was as follows:
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Number of Initial % of Initial
Initial Home Aggregate Aggregate
Lien Position Equity Loans Loan Balance Loan Balance
- ------------- ------------ ------------ ------------
First Lien.....................
Second Lien....................
Total.....................
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FIXED RATE GROUP
DOCUMENTATION TYPE
The documentation types of the Initial Home Equity Loans in the Fixed Rate
Group as of the Cut-Off Date were as follows:
Number of Initial % of Initial
Initial Home Aggregate Aggregate
Documentation Type Equity Loans Loan Balance Loan Balance
- ------------------ ------------ ------------ ------------
Full Documentation Type..........
Limited Documentation Type.......
Stated Income Program............
Total.......................
FIXED RATE GROUP
CREDIT GRADE
The credit grades of the Initial Home Equity Loans in the Fixed Rate Group
pursuant to the Seller's underwriting guidelines as of the Cut-Off Date were as
follows:
Number of Initial % of Initial
Initial Home Aggregate Aggregate
Credit Grade Equity Loans Loan Balance Loan Balance
- ------------ ------------ ------------ ------------
A+...............................
A-1..............................
A-2..............................
B................................
C-1..............................
C-2..............................
D................................
Total.......................
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Adjustable Rate Group
As of the Cut-Off Date, the average Loan Balance of the Initial Home
Equity Loans in the Adjustable Rate Group was $_________. The minimum and
maximum Loan Balances of the Initial Home Equity Loans in the Adjustable Rate
Group as of the Cut-Off Date were $________ and $___________, respectively. As
of the Cut-Off Date, the weighted average Original Loan-to-Value Ratio of the
Initial Home Equity Loans in the Adjustable Rate Group was _____%; the weighted
average remaining term to maturity of the Initial Home Equity Loans in the
Adjustable Rate Group was ____ months; the original terms to maturity of the
Initial Home Equity Loans in the Adjustable Rate Group ranged from ____ months
to ____ months; and the remaining terms to maturity of the Initial Home Equity
Loans in the Adjustable Rate Group ranged from ___ months to ____ months. All of
the Initial Home Equity Loans in the Adjustable Rate Group were secured by first
mortgages. No Initial Home Equity Loan in the Adjustable Rate Group will mature
later than _________________. As of the Cut-Off Date, no Initial Home Equity
Loan in the Adjustable Rate Group was ___ or more days past due. However,
investors in the Class A Certificates should be aware that _______% of the
Initial Home Equity Loans in the Adjustable Rate Group by Initial Aggregate Loan
Balance had a first monthly payment due on or after __________ and it was not
possible for such Initial Home Equity Loans in the Adjustable Rate Group to be
___ or more days past due as of the Cut-Off Date.
As of the Cut-Off Date, ______% of the Initial Home Equity Loans in the
Adjustable Rate Group were Six-Month Adjustable Rate Loans and ________% of the
Initial Aggregate Loan Balance of the Initial Home Equity Loans in the
Adjustable Rate Group were 2/28 Adjustable Rate Loans. As of the Cut-Off Date,
the weighted average remaining period to the next interest rate adjustment date
for the Six-Month Adjustable Rate Loans was approximately __ months; the
weighted average remaining period to the next interest rate adjustment date for
the 2/28 Adjustable Rate Loans was approximately __ months; each Six-Month
Adjustable Rate Loan will have an initial payment adjustment effective with the
seventh monthly payment on such loan, an initial interest rate adjustment cap of
___%, a semi-annual interest rate adjustment cap of ____%, in each case, above
the then current interest rate for such Six-Month Adjustable Rate Loan and a
lifetime interest rate adjustment cap of ______% above the initial rate of such
loan; each 2/28 Adjustable Loan will have an initial payment adjustment
effective with the 25th monthly payment on such loan, an initial interest rate
adjustment cap of ____%, a semi-annual interest rate adjustment cap of _____%,
in each case, above the then current interest rate for such 2/28 Adjustable Loan
and a lifetime interest rate adjustment cap of _____% above the initial rate of
such loan. The weighted average Coupon Rate of the Initial Home Equity Loans in
the Adjustable Rate Group was approximately ______% per annum. The Initial Home
Equity Loans in the Adjustable Rate Group had a weighted average gross margin as
of the Cut-Off Date of approximately ______%. The initial gross margin for the
Initial Home Equity Loans in the Adjustable Rate Group ranged from _____% to
_____%. The Coupon Rates borne by the Initial Home Equity Loans in the
Adjustable Rate Group as of the Cut-Off Date ranged from ______% per annum to
______% per annum. As of the Cut-Off Date, the maximum rates at which interest
may accrue on the Initial Home Equity Loans in the Adjustable Rate Group (the
"Maximum Rates") ranged from _____% per annum to _____% per annum. The Initial
Home Equity Loans
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in the Adjustable Rate Group had a weighted average Maximum Rate as of the
Cut-Off Date of approximately ______% per annum. As of the Cut-Off Date, the
minimum rates at which interest may accrue on the Initial Home Equity Loans in
the Adjustable Rate Group (the "Minimum Rates") ranged from _______% per annum
to ______% per annum. As of the Cut-Off Date, the weighted average Minimum Rate
on the Initial Home Equity Loans in the Adjustable Rate Group was approximately
_______% per annum.
Set forth below is certain approximate statistical information as of the
Cut-Off Date regarding the Initial Home Equity Loans in the Adjustable Rate
Group. Prior to the Closing Date, Home Equity Loans may be removed from the
Adjustable Rate Group and other adjustable rate Home Equity Loans may be
substituted therefor. The Seller believes that the information set forth herein
with respect to the Adjustable Rate Group as presently constituted is
representative of the characteristics of the Adjustable Rate Group as it will be
constituted at the Closing Date, although certain characteristics of the Initial
Home Equity Loans may vary but any such variance will not be material. The sum
of the percentage columns in the following tables may not equal 100% due to
rounding.
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ADJUSTABLE RATE GROUP
GEOGRAPHIC DISTRIBUTION OF PROPERTIES
The geographic distribution of the Initial Home Equity Loans in the
Adjustable Rate Group by state, as of the Cut-Off Date, was as follows:
Number of Initial % of Initial
Initial Home Aggregate Aggregate
State Equity Loans Loan Balance Loan Balance
- ----- ------------ ------------ ------------
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ADJUSTABLE RATE GROUP
ORIGINAL LOAN-TO-VALUE RATIOS
The Original Loan-to-Value ratios as of the origination dates of the
Initial Home Equity Loans in the Adjustable Rate Group as of the Cut-Off Date
were distributed as follows:
Number of Initial % of Initial
Initial Home Aggregate Aggregate
Range of Original LTV's Equity Loans Loan Balance Loan Balance
- ----------------------- ------------ ------------ ------------
ADJUSTABLE RATE GROUP
LOAN BALANCES
The distribution of the Loan Balances of the Initial Home Equity Loans in
the Adjustable Rate Group as of the Cut-Off Date was as follows:
Number of Initial % of Initial
Initial Home Aggregate Aggregate
Loan Balances Equity Loans Loan Balance Loan Balance
- ------------- ------------ ------------ ------------
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ADJUSTABLE RATE GROUP
TYPES OF MORTGAGED PROPERTIES
The Properties securing the Initial Home Equity Loans in the Adjustable
Rate Group as of the Cut-Off Date were of the property types as follows:
Number of Initial % of Initial
Initial Home Aggregate Aggregate
Property Types Equity Loans Loan Balance Loan Balance
- -------------- ------------ ------------ ------------
Condo............................
PUD..............................
Manufactured Housing.............
Single Family....................
2-4 Family.......................
Townhouse........................
Total.......................
ADJUSTABLE RATE GROUP
ORIGINAL TERM TO MATURITY
The distribution of the original term to maturity of the Initial Home
Equity Loans in the Adjustable Rate Group as of the Cut-Off Date was as follows:
Number of Initial % of Initial
Initial Home Aggregate Aggregate
Original Months to Maturity Equity Loans Loan Balance Loan Balance
- --------------------------- ------------ ------------ ------------
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ADJUSTABLE RATE GROUP
MONTHS SINCE ORIGINATION
The distribution of the number of months since the date of origination of
the Initial Home Equity Loans in the Adjustable Rate Group as of the Cut-Off
Date was as follows:
Number of Initial % of Initial
Initial Home Aggregate Aggregate
Number of Months Since Origination Equity Loans Loan Balance Loan Balance
- ---------------------------------- ------------ ------------ ------------
Zero.............................
1 to 6...........................
Totals......................
ADJUSTABLE RATE GROUP
REMAINING TERM TO MATURITY
The distribution of the number of months remaining to maturity of the
Initial Home Equity Loans in the Adjustable Rate Group as of the Cut-Off Date
was as follows:
Number of Initial % of Initial
Initial Home Aggregate Aggregate
Months Remaining to Maturity Equity Loans Loan Balance Loan Balance
- ---------------------------- ------------ ------------ ------------
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ADJUSTABLE RATE GROUP
OCCUPANCY STATUS
The occupancy status of the Properties securing the Initial Home Equity
Loans in the Adjustable Rate Group as of the Cut-Off Date was as follows:
Number of Initial % of Initial
Initial Home Aggregate Aggregate
Occupancy Status Equity Loans Loan Balance Loan Balance
- ---------------- ------------ ------------ ------------
Owner Occupied...................
Investment Property..............
Second Home......................
Totals......................
ADJUSTABLE RATE GROUP
DOCUMENTATION TYPE
The documentation types of the Initial Home Equity Loans in the Adjustable
Rate Group as of the Cut-Off Date were as follows:
Number of Initial % of Initial
Initial Home Aggregate Aggregate
Documentation Type Equity Loans Loan Balance Loan Balance
- ------------------ ------------ ------------ ------------
Full Documentation Program.........
Limited Documentation Program......
Stated Income Program..............
Totals........................
ADJUSTABLE RATE GROUP
CREDIT GRADE
The credit grades of the Initial Home Equity Loans in the Adjustable Rate
Group pursuant to the Seller's underwriting guidelines as of the Cut-Off Date
were as follows:
Number of Initial % of Initial
Initial Aggregate Aggregate
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Home
Credit Grade Equity Loans Loan Balance Loan Balance
- ------------ ------------ ------------ ------------
A+..............................
A-1.............................
A-2.............................
B...............................
C-1.............................
C-2.............................
D...............................
Totals.....................
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ADJUSTABLE RATE GROUP
COUPON RATES
The Coupon Rates borne by the Notes relating to the Initial Home Equity
Loans in the Adjustable Rate Group as of the Cut-Off Date were distributed as
follows as of the Cut-Off Date:
Number of Initial % of Initial
Initial Home Aggregate Aggregate
Range of Coupon Rates Equity Loans Loan Balance Loan Balance
- --------------------- ------------ ------------ ------------
ADJUSTABLE RATE GROUP
GROSS MARGINS
The gross margins of the Initial Home Equity Loans in the Adjustable Rate
Group as of the Cut-Off Date were as follows:
Number of Initial % of Initial
Initial Home Aggregate Aggregate
Gross Margins Equity Loans Loan Balance Loan Balance
- ------------- ------------ ------------ ------------
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ADJUSTABLE RATE GROUP
MAXIMUM RATES
The Maximum Rates of the Initial Home Equity Loans in the Adjustable Rate
Group as of the Cut-Off Date were as follows:
Number of Initial % of Initial
Maximum Initial Home Aggregate Aggregate
Coupon Rate Equity Loans Loan Balance Loan Balance
- ----------- ------------ ------------ ------------
ADJUSTABLE RATE GROUP
MINIMUM RATES
The Minimum Rates of the Initial Home Equity Loans in the Adjustable Rate
Group as of the Cut-Off Date were as follows:
Number of Initial % of Initial
Minimum Initial Home Aggregate Aggregate
Coupon Rate Equity Loans Loan Balance Loan Balance
- ----------- ------------ ------------ ------------
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ADJUSTABLE RATE GROUP
NEXT COUPON RATE CHANGE
The month of the next Coupon Rate change for each of the Initial Home
Equity Loans in the Adjustable Rate Group as of the Cut-Off Date was as follows:
Number of % of
Month of Next Initial Home Aggregate Aggregate
Coupon Rate Change Equity Loans Loan Balance Loan Balance
- ------------------ ------------ ------------ ------------
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Interest Payments on the Home Equity Loans
All of the Home Equity Loans will provide that interest is charged to the
obligor (the "Mortgagor") thereunder, and payments are due from such Mortgagors
as of a scheduled day of each month which is fixed at the time of origination.
Scheduled monthly payments made by the Mortgagors on the Home Equity Loans
either earlier or later than the scheduled due dates thereof will not affect the
amortization schedule or the relative application of such payments to principal
and interest.
Conveyance of Subsequent Home Equity Loans
The Pooling and Servicing Agreement permits the Trust to acquire
approximately $__________ (approximately $__________ and approximately
$_________ of which shall be allocated to the Fixed Rate Group and the
Adjustable Rate Group, respectively) in aggregate Loan Balance of Subsequent
Home Equity Loans. Accordingly, the statistical characteristics of the Home
Equity Loans will vary as of any related Cut-Off Date upon the acquisition of
Subsequent Home Equity Loans.
The obligation of the Trust to purchase Subsequent Home Equity Loans on a
Subsequent Transfer Date is subject to the following requirements, among others,
individually or in the aggregate, as applicable, which may be waived by the
Certificate Insurer:
Fixed Rate Group
Delinquent..................................... none greater than or equal to
__ days
Remaining Term to Stated Maturity.............. no more than ____ months
Minimum Coupon Rate............................ at least ______%
Weighted Average Coupon Rate................... at least _______%
Percentage of Second Lien Home Equity Loans.... up to _______%
Weighted Average Combined Loan-to-Value Ratio.. not more than ________%
Original Loan Balance.......................... each less than $________
Balloon Loans.................................. not more than ______%
Adjustable Rate Group
Delinquent..................................... none greater than or equal to
___ days
Remaining Term to Stated Maturity.............. no more than _____ months
Lifetime Minimum Coupon Rate................... at least _____%
Minimum Coupon Rate............................ at least _____%
Weighted Average Coupon Rate................... at least _____%
Weighted Average Gross Margin.................. at least _____%
Percentage of Second Lien Home Equity Loans.... _____%
Weighted Average Original Loan-to-Value Ratio.. not more than _%
Original Loan Balance.......................... each less than $_____
Balloon Loans.................................. _____%
Percentage of Six-Month Adjustable Rate Loans.. at least _____%
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<PAGE>
<PAGE>
On or before the last day of the Funding Period, the Certificate Insurer
has the right to adjust, without limitation, the related Specified Subordinated
Amount (i) if the Subsequent Home Equity Loans individually or in the aggregate
do not conform to the conditions specified in the Insurance Agreement and the
Pooling and Servicing Agreement or (ii) to reflect any change in the credit risk
to the Certificate Insurer; provided, however, that if the owners of the Class R
Certificates object in good faith to the Certificate Insurer's determination in
clause (ii) above, any such modification shall not be made if the Rating
Agencies confirm that the risk to the Certificate Insurer in insuring the Class
A Certificates will be maintained at the level assigned on the Closing Date. The
conditions referred to in clause (i) may include weighted average coupon rate
or minimum coupon rate, first or second lien position, combined loan-to-value
ratio (which will include the outstanding amount of the first lien position
for subsequent Home Equity Loans, which are in a second lien position),
weighted average original and/or remaining term to maturity and the Certificate
Insurer's judgment regarding the credit quality of the Subsequent Home Equity
Loans.
S-59
<PAGE>
<PAGE>
PREPAYMENT AND YIELD CONSIDERATIONS
General
The weighted average life of, and, if purchased at other than par, the
yield to maturity on, a Class A Certificate will relate to the rate of payment
of principal of the Home Equity Loans in the related Home Equity Loan Group,
including, for this purpose, Prepayments, liquidations due to defaults,
casualties and condemnations, and repurchases or purchases of Home Equity Loans
by the Seller or the Servicer pursuant to the Pooling and Servicing Agreement.
At least ____% of the Initial Home Equity Loans by Initial Aggregate Loan
Balance may be prepaid by the related Mortgagors, in whole or in part, at any
time without payment of any prepayment fee or penalty. The actual rate of
principal Prepayments on pools of home equity loans is influenced by a variety
of economic, tax, geographic, demographic, social, legal and other factors and
has fluctuated considerably in recent years. In addition, the rate of principal
Prepayments may differ among pools of home equity loans at any time because of
specific factors relating to the home equity loans in the particular pool,
including, among other things, the age of the home equity loans, the geographic
locations of the properties securing the loans and the extent of the mortgagors'
equity in such properties, and changes in the mortgagors' housing needs, job
transfers and unemployment.
As with fixed rate obligations generally, the rate of Prepayment on a pool
of home equity loans with fixed rates (such as the Home Equity Loans in the
Fixed Rate Group) is affected by prevailing market rates for home equity loans
of a comparable term and risk level. When the market interest rate is below the
mortgage coupon, mortgagors may have an increased incentive to refinance their
home equity loans. Depending on prevailing market rates, the future outlook for
market rates and economic conditions generally, some mortgagors may sell or
refinance mortgaged properties in order to realize their equity in the mortgaged
properties, to meet cash flow needs or to make other investments. As is the case
with fixed rate home equity loans, adjustable rate home equity loans may be
subject to a greater rate of principal Prepayments in a declining interest rate
environment. For example, if prevailing interest rates fall appreciably,
adjustable rate home equity loans are likely to be subject to a higher
Prepayment rate than if prevailing interest rates remain constant because the
availability of fixed rate home equity loans at competitive interest rates may
encourage mortgagors to refinance their adjustable rate home equity loans to
"lock in" a lower fixed interest rate. In addition, the fact that a substantial
portion of the 2/28 Adjustable Rate Loans do not adjust for substantial periods
of time may affect the Prepayment experience on such loans.
In addition to the foregoing factors affecting the weighted average life
of the Class A Certificates, the overcollateralization provisions of the Trust
result in a limited acceleration of the Class A Certificates relative to the
amortization of the Home Equity Loans in the related Home Equity Loan Group in
the early months of the transaction. The accelerated amortization is achieved by
the application of certain excess interest to the payment of the Certificate
Principal Balances of the applicable Classes of Class A Certificates. This
acceleration feature creates overcollateralization which results from the excess
of the aggregate Loan Balance of the Home
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<PAGE>
<PAGE>
Equity Loans over the aggregate Class A Certificate Principal Balance. Once the
required level of overcollateralization is reached, the acceleration feature
will cease, unless necessary to maintain the required level of
overcollateralization. The Pooling and Servicing Agreement will provide that
based upon certain collateral performance tests, the required
overcollateralization may increase or decrease.
Mandatory Prepayment
In the event that at the end of the Funding Period, not all of the
Original Pre-Funded Amount allocated to the Fixed Rate Group or Adjustable Rate
Group has been used to acquire Subsequent Home Equity Loans, then the Holders of
the related Class or Classes of Class A Certificates then entitled to receive
principal will receive an additional prepayment in an amount equal to the
remaining related Pre-Funded Amount in the Pre-Funding Account.
Although no assurances can be given, the Seller has advised the Depositor
that it expects that the Loan Balance of Subsequent Home Equity Loans sold to
the Trust will require the application of substantially all the amount on
deposit in the Pre-Funding Account and that there should be no material
principal prepaid to the Holders of the Class A Certificates in respect to the
Original Pre-Funded Amount.
Prepayment and Yield Scenarios for Class A Certificates
As indicated above, if purchased at other than par (disregarding, for
purposes of this discussion, the effects on an investor's yield resulting from
the timing of the settlement date and those considerations discussed below under
"Payment Lag Feature of Fixed Rate Certificates"), the yield to maturity on a
Class of Class A Certificates will be affected by the rate of the payment of
principal of the Home Equity Loans. If the actual rate of payments on the Home
Equity Loans is slower than the rate anticipated by an investor who purchases a
Class of Class A Certificates at a discount, the actual yield to such investor
will be lower than such investor's anticipated yield. If the actual rate of
payments on the Home Equity Loans is faster than the rate anticipated by an
investor who purchases a Class of Class A Certificates at a premium, the actual
yield to such investor will be lower than such investor's anticipated yield.
The Final Scheduled Payment Date for each Class of Class A Certificates is
as set forth in the "Summary of Terms" hereof. With respect to the Class A-1
Certificates and the Class A-2 Certificates, these dates are the dates on which
the "Initial Certificate Principal Balance" set forth in the "Summary of Terms"
hereof for the related Class of Class A Certificates as of the Closing Date less
all amounts previously distributed to the Owners on account of principal (such
amount as to any Class of Class A Certificates and as of any time, the related
"Certificate Principal Balance" and as to the Class A Certificates collectively,
the "Class A Certificate Principal Balance") would be reduced to zero, assuming
that no Prepayments are received on the Home Equity Loans, that scheduled
monthly payments of principal and interest on the Home Equity Loans are timely
received and that no Net Monthly Excess Cashflow will be used to make
accelerated payments of principal (i.e., no Subordination Increase Amounts) to
the Owners of the related Class A Certificates. The Final Scheduled Payment Date
for the Class A-3 Certificates
S-61
<PAGE>
<PAGE>
and the Class A-4 Certificates is the Payment Date in the thirteenth month
following the Remittance Period in which the Loan Balances of all Home Equity
Loans in the Fixed Rate Group have been reduced to zero assuming that the Home
Equity Loans in such Home Equity Loan Group pay in accordance with their terms.
The Final Scheduled Payment Date for the Class A-5 Certificates is the
thirteenth month following the Remittance Period in which the Loan Balances of
all Home Equity Loans in the Adjustable Rate Group have been reduced to zero
assuming that the Home Equity Loans on such Home Equity Loan Group pay in
accordance with their terms. The weighted average lives of the Class A
Certificates are likely to be shorter than would be the case if payments
actually made on the Home Equity Loans conformed to the foregoing assumptions,
and the final Payment Dates with respect to the Class A Certificates could occur
significantly earlier than the Final Scheduled Payment Dates because (i)
Prepayments are likely to occur, (ii) the Servicer (or the Certificate Insurer)
may cause a termination of the Trust when the aggregate outstanding Loan Balance
of the Home Equity Loans is less than or equal to 10% of the Maximum Collateral
Amount thereof and (iii) Subordination Increase Amounts will likely be paid on
the Class A Certificates.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average life of the
related Class A Certificates will be influenced by the rate at which principal
of the Home Equity Loans in the related Home Equity Loan Group is paid, which
may be in the form of scheduled amortization or prepayments (for this purpose,
the term "prepayment" includes Prepayments and liquidations due to default).
Prepayments on home equity loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement is
the prepayment assumption (the "Prepayment Assumption") which represents an
assumed rate of prepayment each month relative to the then outstanding principal
balance of a pool of home equity loans for the life of such home equity loans. A
100% Prepayment Assumption assumes constant prepayment rates ("CPR") of _____%
per annum of the then outstanding principal balance of the Home Equity Loans in
the Fixed Rate Group in the first month of the life of such Home Equity Loans
and an additional _____% (precisely _____%) per annum in each month thereafter
until the twelfth month. Beginning in the twelfth month and in each month
thereafter during the life of such Home Equity Loans, a 100% Prepayment
Assumption assumes a CPR of _____% per annum of the outstanding principal
balance of the Home Equity Loans each month. A 100% Prepayment Assumption
assumes a CPR of _____% per annum of the then outstanding principal balance of
the Home Equity Loans in the Adjustable Rate Group. As used in the table below,
0% Prepayment Assumption assumes prepayment rates equal to 0% of the Prepayment
Assumption; i.e., no prepayments. Correspondingly, 100% Prepayment Assumption
assumes prepayment rates equal to 100% of the Prepayment Assumption, and so
forth. The Prepayment Assumption does not purport to be a historical description
of prepayment experience or a prediction of the anticipated rate of prepayment
of any pool of home equity loans, including the Home Equity Loans. The Seller
believes that no existing statistics of which it is aware provide a reliable
basis for Owners of Class A Certificates to predict the amount or the timing of
receipt of prepayments on the Home Equity Loans.
S-62
<PAGE>
<PAGE>
Since the tables were prepared on the basis of the assumptions in the
following paragraph, there are discrepancies between the characteristics of the
actual Home Equity Loans and the characteristics of the Home Equity Loans
assumed in preparing the tables. Any such discrepancy may have an effect upon
the actual percentages of the Certificate Principal Balances outstanding and
weighted average lives of the Class A Certificates in contrast to those set
forth in the tables. In addition, since the actual Home Equity Loans in the
Trust have characteristics which differ from those assumed in preparing the
tables set forth below, the distributions of principal on the Class A
Certificates may be made earlier or later than as indicated in the tables.
For the purpose of the tables below, it is assumed that: (i) the Home
Equity Loans consist of pools of loans with level-pay and balloon
characteristics, as set forth below, (ii) the Closing Date for the Certificates
occurs on _____ _____, ____, (iii) distributions on the Certificates are made on
the 25th day of each month regardless of the day on which the Payment Date
actually occurs, commencing in _____ ___ in accordance with the priorities
described herein, (iv) the Premium Amount for the Fixed Rate Certificates and
for the Class A-5 Certificates is incurred at a constant rate of _____% per
annum and _____% per annum, respectively, in each case on the aggregate
outstanding Certificate Principal Balances of the related Class or Classes of
Class A Certificates, the Servicing Fee is incurred at a constant rate of _____%
per annum on the aggregate outstanding principal balance of the Home Equity
Loans and the Trustee Fee is incurred at a constant rate of _____% per annum on
the aggregate outstanding principal balance of the Home Equity Loans, (v) the
Home Equity Loans prepay at the indicated percentage of the applicable
Prepayment Assumption, (vi) prepayments include 30 days interest thereon, (vii)
the optional termination is not exercised except as indicated, (viii) the
"Specified Subordinated Amount" (as defined under "Credit
Enhancement--Overcollateralization Provisions") for each Home Equity Loan Group
is set initially as specified in the Pooling and Servicing Agreement and
thereafter decreases in accordance with the provisions of the Pooling and
Servicing Agreement, (ix) all of the Home Equity Loans are sold to the Trust as
of the Closing Date; (x) the scheduled monthly payments of principal and
interest on the Home Equity Loans will be timely delivered on the first day of
each Remittance Period (with no defaults) commencing on __________,___; (xi)
each Class of Class A Certificates has the respective Pass-Through Rate and
Initial Certificate Principal Balance as set forth herein; (xii) the Coupon Rate
for each Home Equity Loan in the Adjustable Rate Group is adjusted on its next
adjustment date and on subsequent adjustment dates which occur on six month
intervals following the initial adjustment date to equal the sum of the
applicable gross margin and Six-Month LIBOR (such sum being subject to the
applicable periodic rate adjustment caps and floors and lifetime rate caps and
floors); and (xiii) Six-Month LIBOR remains constant at _____% per annum and
One-Month LIBOR remains constant at _____% per annum.
S-63
<PAGE>
<PAGE>
Fixed Rate Group
<TABLE>
<CAPTION>
Remaining Original Amortization
Amortization Principal Coupon Remaining Term to Amortization Term Term
Method Balance Rate Maturity (Months) (Months) (Months)
------ ------- ---- ----------------- -------- --------
<S> <C> <C> <C> <C> <C>
</TABLE>
Adjustable Rate Group(1)
<TABLE>
<CAPTION>
Number of Remaining Remaining Original
Months to Term to Amortization Amortization Initial Subsequent
Next Rate Principal Coupon Maturity Term Term Gross Maximum Minimum Rate Periodic
Change Balance Rate (Months) (Months) (Months) Margin Rate Rate Cap Rate Cap
- ------ ------- ---- -------- -------- -------- ------ ---- ---- --- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
- ----------
(1) Method of amortization is level pay.
The following tables set forth the percentages of the Initial Certificate
Principal Balances of the Class A Certificates that would be outstanding after
each of the dates shown, based on the indicated percentages of the Prepayment
Assumption. The percentages of the Initial Certificate Principal Balance of the
Class A Certificates that would be outstanding have been rounded to the nearest
1%.
S-64
<PAGE>
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE(1)
<TABLE>
<CAPTION>
Class A-1 Class A-2
Payment ------------------------------------------- ----------------------------------------------
Date 0% 50% 75% 120%(4) 150% 175% 200% 0% 50% 75% 120%(4) 150% 175% 200%
- ---- -- --- --- ------- ---- ---- ---- -- --- --- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage
February 25, 1999.............
February 25, 2000.............
February 25, 2001.............
February 25, 2002.............
February 25, 2003.............
February 25, 2004.............
February 25, 2005.............
February 25, 2006.............
February 25, 2007.............
February 25, 2008.............
February 25, 2009.............
February 25, 2010.............
February 25, 2011.............
February 25, 2012.............
February 25, 2013.............
February 25, 2014.............
February 25, 2015.............
February 25, 2016.............
February 25, 2017.............
February 25, 2018.............
February 25, 2019.............
February 25, 2020.............
February 25, 2021.............
February 25, 2022.............
February 25, 2023.............
February 25, 2024.............
February 25, 2025.............
February 25, 2026.............
February 25, 2027.............
February 25, 2028.............
Weighted Average
Life (years)
To Maturity(2).............
To Call(3).................
</TABLE>
- ----------
(1) The percentages in the tables have been rounded to the nearest 1%.
(2) The weighted average life of a Class of Class A Certificates is determined
by (i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related Payment Date, (ii) adding
the results, and (iii) dividing the sum by the initial respective
Certificate Principal Balance for such Class of Class A Certificates.
(3) Calculated pursuant to footnote two but assumes that the Servicer
exercises its option to purchase the Home Equity Loans. See "Description
of the Class A Certificates-Optional Termination" herein.
(4) Assumes 120% of the Fixed Rate Group Prepayment Assumption and 100% of the
Adjustable Rate Group Prepayment Assumption.
S-65
<PAGE>
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE(1)
<TABLE>
<CAPTION>
Class A-3 Class A-4
Payment ------------------------------------------- ----------------------------------------------
Date 0% 50% 75% 120%(4) 150% 175% 200% 0% 50% 75% 120%(4) 150% 175% 200%
- ---- -- --- --- ------- ---- ---- ---- -- --- --- ------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage
February 25, 1999.............
February 25, 2000.............
February 25, 2001.............
February 25, 2002.............
February 25, 2003.............
February 25, 2004.............
February 25, 2005.............
February 25, 2006.............
February 25, 2007.............
February 25, 2008.............
February 25, 2009.............
February 25, 2010.............
February 25, 2011.............
February 25, 2012.............
February 25, 2013.............
February 25, 2014.............
February 25, 2015.............
February 25, 2016.............
February 25, 2017.............
February 25, 2018.............
February 25, 2019.............
February 25, 2020.............
February 25, 2021.............
February 25, 2022.............
February 25, 2023.............
February 25, 2024.............
February 25, 2025.............
February 25, 2026.............
February 25, 2027.............
February 25, 2028.............
Weighted Average
Life (years)
To Maturity(2).............
To Call(3).................
</TABLE>
- ----------
(1) The percentages in the tables have been rounded to the nearest 1%.
(2) The weighted average life of a Class of Class A Certificates is determined
by (i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related Payment Date, (ii) adding
the results, and (iii) dividing the sum by the initial respective
Certificate Principal Balance for such Class of Class A Certificates.
(3) Calculated pursuant to footnote two but assumes that the Servicer
exercises its option to purchase the Home Equity Loans. See "Description
of the Class A Certificates --Optional Termination" herein.
(4) Assumes 120% of the Fixed Rate Group Prepayment Assumption and 100% of the
Adjustable Rate Group Prepayment Assumption.
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<PAGE>
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE(1)
Class A-5
Payment ---------------------------------------------
Date 0% 50% 75% 120%(4) 150% 175% 200%
- ---- -- --- --- ------- ---- ---- ----
Initial Percentage
February 25, 1999..............
February 25, 2000..............
February 25, 2001..............
February 25, 2002..............
February 25, 2003..............
February 25, 2004..............
February 25, 2005..............
February 25, 2006..............
February 25, 2007..............
February 25, 2008..............
February 25, 2009..............
February 25, 2010..............
February 25, 2011..............
February 25, 2012..............
February 25, 2013..............
February 25, 2014..............
February 25, 2015..............
February 25, 2016..............
February 25, 2017..............
February 25, 2018..............
February 25, 2019..............
February 25, 2020..............
February 25, 2021..............
February 25, 2022..............
February 25, 2023..............
February 25, 2024..............
February 25, 2025..............
February 25, 2026..............
February 25, 2027..............
February 25, 2028..............
Weighted Average
Life (years)
To Maturity(2)..............
To Call(3)..................
- ----------
(1) The percentages in the tables have been rounded to the nearest 1%.
(2) The weighted average life of a Class of Class A Certificates is determined
by (i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related Payment Date, (ii) adding
the results, and (iii) dividing the sum by the initial respective
Certificate Principal Balance for such Class of Class A Certificates.
(3) Calculated pursuant to footnote two but assumes that the Servicer
exercises its option to purchase the Home Equity Loans. See "Description
of the Class A Certificates--Optional Termination" herein.
(4) Assumes 120% of the Fixed Rate Group Prepayment Assumption and 100% of the
Adjustable Rate Group Prepayment Assumption.
S-67
<PAGE>
<PAGE>
Payment Lag Feature of the Fixed Rate Certificates
Pursuant to the Pooling and Servicing Agreement, an amount equal to
Mortgagor payments with respect to each Home Equity Loan (net of the Servicing
Fee) received or deemed to be received by the Servicer during each Remittance
Period is to be remitted to the Trustee on or prior to the related Monthly
Remittance Date; the Trustee will not be required to distribute any such amounts
to the Owners until the next succeeding Payment Date. As a result, the monthly
distributions to the Owners generally reflect Mortgagor payments during the
prior Remittance Period (which Mortgagor payments reflect interest in arrears),
and the first Payment Date will not occur until __________,___. Thus, the
effective yield to the Owners of the Fixed Rate Certificates will be below that
otherwise produced by the related Pass-Through Rate because the distribution of
the Class A Distribution Amount in respect of any given month will not be made
until on or about the 25th day of the following month.
FORMATION OF THE TRUST AND TRUST PROPERTY
The Trust will be created and established pursuant to the Pooling and
Servicing Agreement. On the Closing Date, the Seller will transfer without
recourse the Initial Home Equity Loans to the Depositor, the Depositor will
convey without recourse the Home Equity Loans to the Trust and the Trust will
issue the Class A Certificates and the Class R Certificates at the direction of
the Depositor.
The property of the Trust shall include all (a) the Home Equity Loans
together with the related Home Equity Loan documents and the Seller's interest
in any Property which secures a Home Equity Loan and all payments thereon and
proceeds of the conversion, voluntary or involuntary, of the foregoing (other
than principal received and interest due before the Cut-Off Date), (b) such
amounts as may be held by the Trustee in the Certificate Account, Pre-Funding
Account, Capitalized Interest Account and any other accounts held by the Trustee
for the Trust together with investment earnings on such amounts and such amounts
as may be held by the Servicer in the Principal and Interest Account, if any,
exclusive of investment earnings thereon (except as otherwise provided) whether
in the form of cash, instruments, securities or other properties and (c)
proceeds of all the foregoing (including, but not by way of limitation, all
proceeds of any mortgage insurance, hazard insurance and title insurance policy
relating to the Home Equity Loans, cash proceeds, accounts, accounts receivable,
notes, drafts, acceptances, chattel paper, checks, deposit accounts, rights to
payment of any and every kind, and other forms of obligations and receivables
which at any time constitute all or part of or are included in the proceeds of
any of the foregoing) to pay the Certificates as specified in the Pooling and
Servicing Agreement (collectively, the "Trust Estate"). In addition to the
foregoing, the Seller shall cause the Certificate Insurer to deliver two
Insurance Policies to the Trustee for the benefit of the Owners of the Class A
Certificates.
The Class A Certificates will not represent an interest in or an
obligation of, nor will the Home Equity Loans be guaranteed by, the Depositor,
the Seller, the Servicer, the Trustee or any
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<PAGE>
<PAGE>
of their affiliates; however, certain distributions due to the Owners of the
Class A Certificates are insured by the Certificate Insurer.
Prior to its formation the Trust will have had no assets or obligations.
Upon formation, the Trust will not engage in any business activity other than
acquiring, holding and collecting payments on the Home Equity Loans, issuing the
Certificates and distributing payments thereon. The Trust will not acquire any
receivables or assets other than the Home Equity Loans and the proceeds thereof
and rights appurtenant thereto. To the extent that borrowers make scheduled
payments under the Home Equity Loans, the Trust will have sufficient liquidity
to make distributions on the Certificates. As the Trust does not have any
operating history and will not engage in any business activity other than
issuing the Certificates and making distributions thereon, there has not been
included any historical or pro forma ratio of earnings to fixed charges with
respect to the Trust.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Initial Home Equity
Loans and the Properties is based upon each Home Equity Loan Group as
constituted at the opening of business on the Cut-Off Date. Prior to the
issuance of the Class A Certificates, Initial Home Equity Loans may be removed
from either Home Equity Loan Group as a result of incomplete documentation or
non-compliance with representations and warranties set forth in the Pooling and
Servicing Agreement, if the Seller deems such removal necessary or appropriate
and other Initial
Home Equity Loans may be added to a Home Equity Loan Group prior to the
issuance of the Class A Certificates.
A current report on Form 8-K will be available to purchasers of the Class
A Certificates and will be filed, and incorporated by reference to the
Registration Statement together with the Pooling and Servicing Agreement and
information regarding each Home Equity Loan Group, with the Securities and
Exchange Commission within fifteen days after the initial issuance of the Class
A Certificates and within fifteen days of the addition of any Subsequent Home
Equity Loans. In the event Initial Home Equity Loans are removed from or added
to, or Subsequent Home Equity Loans are removed from or added to a Home Equity
Loan Groups set forth in the preceding paragraph, such removal or addition will
be noted in a current report on Form 8-K.
DESCRIPTION OF THE CLASS A CERTIFICATES
General
Each Class A Certificate will represent certain undivided, fractional
ownership interests in the Trust Estate created and held pursuant to the Pooling
and Servicing Agreement, subject to the limits and the priority of distribution
described therein.
The Home Equity Loan pool is divided into two Home Equity Loan Groups, the
Fixed Rate Group, which contains fixed rate Home Equity Loans, and the
Adjustable Rate Group, which
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<PAGE>
<PAGE>
contains adjustable rate Home Equity Loans. For each Home Equity Loan Group, the
related Class of Class A Certificates will evidence the right to receive on each
Payment Date the Class A Distribution Amount for such Class of Class A
Certificates, in each case until the related Certificate Principal Balance has
been reduced to zero.
Payment Dates
On each Payment Date, the Owners of the Classes of Class A Certificates
will be entitled to receive, from amounts then on deposit in the certificate
account established and maintained by the Trustee in accordance with the Pooling
and Servicing Agreement (the "Certificate Account") and until the related
Certificate Principal Balance of such Class of Class A Certificates is reduced
to zero, the aggregate Class A Distribution Amount as of such Payment Date
allocated among each Class of Class A Certificates as described below.
Distributions will be made in immediately available funds to Owners of Class A
Certificates by wire transfer or otherwise, to the account of such Owner at a
domestic bank or other entity having appropriate facilities therefor, if such
Owner is DTC or has so notified the Trustee at least five Business Days prior to
the Record Date, or by check mailed to the address of the person entitled
thereto as it appears on the register (the "Register") maintained by the Trustee
as registrar (the "Registrar"). Certificate owners may experience some delay in
the receipt of their payments due to the operations of DTC. See "Description of
the Class A Certificates--Book Entry Registration of the Class A Certificates"
herein and "Description of the Certificates--Book Entry Registration" in the
Prospectus.
The Pooling and Servicing Agreement will provide that an Owner, upon
receiving the final distribution on such Owner's Certificate, will be required
to send such Certificate to the Trustee. The Pooling and Servicing Agreement
additionally will provide that, in any event, any Certificate as to which the
final distribution thereon has been made shall be deemed canceled for all
purposes of the Pooling and Servicing Agreement and the related Insurance
Policy.
Each Owner of record of the related Class of Class A Certificates will be
entitled to receive such Owner's Percentage Interest in the amounts due such
Class on such Payment Date. The "Percentage Interest" of a Class A Certificate
as of any date of determination will be equal to the percentage obtained by
dividing the principal balance of such Class A Certificate as of the Cut-Off
Date by the Certificate Principal Balance for the related Class of the Class A
Certificates as of the Cut-Off Date.
Distributions
Upon receipt, the Trustee will be required to deposit into the Certificate
Account, (i) any Insured Payments, (ii) the proceeds of any liquidation of the
assets of the Trust and (iii) all remittances made to the Trustee by or on
behalf of the Servicer.
The Pooling and Servicing Agreement establishes a pass-through rate on
each Class of Class A Certificates (each, a "Pass-Through Rate") as set forth in
the Summary herein under "Certificates Offered". The "Expense
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Fee" for any Payment Date will equal the sum of the Trustee Fee and the amounts
payable to the Certificate Insurer as premium on the Insurance Policies (the
"Premium Amount") on such Payment Date.
On each Payment Date, the Trustee is required to make the following
disbursements and transfers from monies then on deposit in the Certificate
Account as specified below in the following order of priority of each such
transfer and disbursement:
(i) first, on each Payment Date from amounts then on deposit in the
Certificate Account, (A) to the Trustee, the Trustee Fee and (B)
provided that no Certificate Insurer Default as defined in clause
(x) of the definition thereof has occurred and is continuing, the
Premium Amount for such Payment Date to the Certificate Insurer;
(ii) second, on each Payment Date, the Trustee shall allocate an
amount equal to the sum of (x) the Total Monthly Excess Spread with
respect to the related Home Equity Loan Group with respect to such
Payment Date plus (y) any Subordination Reduction Amount with
respect to the related Home Equity Loan Group with respect to such
Payment Date (such sum being the "Total Monthly Excess Cashflow"
with respect to such Home Equity Loan Group and Payment Date) to the
applicable Home Equity Loan Group in the following order of
priority:
(A) first, such Total Monthly Excess Cashflow with respect to
such Home Equity Loan Group shall be allocated to the payment
of the related Class A Distribution Amount (excluding any
related Subordination Increase Amount) pursuant to clause
(iii) below in an amount equal to the amount, if any, by which
(x) such Class A Distribution Amount (excluding any related
Subordination Increase Amount) exceeds (y) the Available Funds
with respect to such Home Equity Loan Group (net of the
related Expense Fees) (the amount of such difference with
respect to a Home Equity Loan Group being an "Available Funds
Shortfall" for such Home Equity Loan Group.
(B) second, any portion of the Total Monthly Excess Cashflow
with respect to such Home Equity Loan Group remaining after
the application described in clause (ii) (A) above shall be
allocated against any Available Funds Shortfall with respect
to the other Home Equity Loan Group;
(C) third, provided that no Certificate Insurer Default as
defined in clause (x) of the definition thereof has occurred
and is continuing, any portion of the Total Monthly Excess
Cashflow with respect to such Home Equity Loan Group remaining
after the allocation described in clauses (ii) (A) and (B)
above shall be paid to the Certificate Insurer in respect of
amounts owed on account of any Reimbursement Amount (as
defined in the Pooling and Servicing Agreement) with respect
to the related Home Equity Loan Group; provided further that
if a Certificate Insurer Default as defined in clause (x) of
the definition thereof has
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occurred and is continuing, then the priority of this
allocation shall follow immediately after clause (ii)(E)
below;
(D) fourth, provided that no Certificate Insurer Default as
defined in clause (x) of the definition thereof has occurred
and is continuing; any portion of the Total Monthly Excess
Cashflow remaining after the allocation described in clauses
(ii) (A), (B) and (C) above shall be paid to the Certificate
Insurer in respect of any Reimbursement Amount (as defined in
the Pooling and Servicing Agreement) owed to the Certificate
Insurer with respect to the other Home Equity Loan Group;
provided further that if a Certificate Insurer Default as
defined in clause (x) of the definition thereof has occurred
and is continuing, then the priority of this allocation shall
follow immediately after clause (ii)(F) below;
(E) fifth, any portion of the Total Monthly Excess Cashflow
with respect to such Home Equity Loan Group remaining after
the application described in clauses (ii) (A) through (D)
shall be used to reduce to zero, through the payment to the
Owners of the related Class or Classes of Class A Certificates
of a Subordination Increase Amount included in the related
Class A Principal Distribution Amount which shall be paid
pursuant to clause (iii) (B) or (C) below, an amount, if any,
equal to the excess of the Specified Subordinated Amount with
respect to such Home Equity Loan Group over the Subordinated
Amount with respect to such Home Equity Loan Group (assuming
application of 100% of principal collections received during
such Remittance Period but prior to the application of any
Subordination Increase Amount) (the "Subordination Deficiency
Amount") as of such Payment Date;
(F) sixth, any portion of the Total Monthly Excess Cashflow
with respect to such Home Equity Loan Group remaining after
the application described in clauses (ii) (A), (B), (C), (D)
and (E) above shall be used to reduce to zero, through the
payment of a Subordination Increase Amount to the Owners of
the Class A Certificates related to the other Home Equity Loan
Group pursuant to clause (iii)(B) or (C) below, any
Subordination Deficiency Amount with respect to the other Home
Equity Loan Group as of such Payment Date following
applications of all Total Monthly Excess Cashflow with respect
to such other Home Equity Loan Group;
(G) seventh, any portion of Total Monthly Excess Cashflow with
respect to the Adjustable Rate Group remaining after the
applications described in clauses (ii) (A), (B), (C), (D), (E)
and (F) above shall be paid to the Owners of the Class A-5
Certificates pursuant to clause (iii)(E) below, to the extent
of Unpaid Class A-5 Certificateholders' Interest Index
Carryover; and
(H) eighth, any Total Monthly Excess Cashflow remaining after
the applications described in clauses (ii) (A), (B), (C), (D),
(E), (F) and (G) above shall be paid to the Servicer pursuant
to clause (iii)(F) below, to the extent of any
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unreimbursed Delinquency Advances, unreimbursed Servicing
Advances and unreimbursed Compensating Interest;
(iii) third, following the making by the Trustee of all allocations,
transfers and disbursements described above from amounts (including
any related Insured Payment which shall be paid only to the Owners
of the related Class A Certificates) then on deposit in the
Certificate Account with respect to the related Home Equity Loan
Group (after giving effect to the allocations provided in clause
(ii) above), the Trustee shall distribute:
(A) to the Owners of the Class A Certificates, the related
Current Interest for each Class (including the proceeds of any
Insured Payments made by the Certificate Insurer) on a pro
rata basis based on each such Class A Certificate's Current
Interest without priority among the Class A Certificates;
(B) to the Owners of Class A Certificates, the Class A
Principal Distribution Amount applicable to the Fixed Rate
Group shall be distributed as follows: (i) to the Owners of
the Class A-4 Certificates, an amount equal to the Class A-4
Lockout Distribution Amount and (ii) the remainder as follows:
first, to the Owners of the Class A-1 Certificates until the
Class A-1 Certificate Principal Balance is reduced to zero;
second, to the Owners of the Class A-2 Certificates until the
Class A-2 Certificate Principal Balance is reduced to zero;
third, to the Owners of the Class A-3 Certificates until the
Class A-3 Certificate Principal Balance is reduced to zero;
and fourth, to the Owners of the Class A-4 Certificates until
the Class A-4 Certificate Principal Balance is reduced to
zero; provided, however, during the continuance of a
Certificate Insurer Default, if there is a Subordination
Deficit, then the Class A Principal Distribution Amount shall
be distributed pro rata to the Owners of the Fixed Rate
Certificates.
(C) The Class A Principal Distribution Amount applicable to
the Adjustable Rate Group shall be distributed to the Owners
of the Class A-5 Certificates until the Class A-5 Certificate
Principal balance is reduced to zero;
(D) to the Certificate Insurer the amounts described in
clauses (ii)(C) and (D) above;
(E) to the Owners of the Class A-5 Certificates, the amounts
described in clause (ii) (G) above in respect of the aggregate
Unpaid Class A-5 Certificateholders' Interest Index Carryover;
(F) to the Servicer the amounts described in clause (ii)(H)
above; and
(G) to the Trustee, as reimbursement for all reimbursable
expenses incurred in connection with duties and obligations
under the Pooling and Servicing Agreement.
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(iv) fourth, following the making by the Trustee of all allocations,
transfers and disbursements described above, from amounts then on
deposit in the Certificate Account, the Trustee shall distribute to
the Owners of the Class R Certificates, the remaining distributable
amounts as specified in the Pooling and Servicing Agreement, for
such Payment Date.
The Premium Amount as of each Payment Date will be as set out in the
Pooling and Servicing Agreement.
"Net Monthly Excess Cashflow" with respect to each Home Equity Loan
Group and Payment Date, means the excess, if any, of the Total
Monthly Excess Cashflow for such Home Equity Loan Group over the
amounts allocated pursuant to clauses (ii)(A) through (ii)(D) above
for such Payment Date.
"Current Interest" with respect to each Class of Class A Certificates
means, with respect to any Payment Date: (i) the aggregate amount of interest
accrued at the related Pass-Through Rate on the Certificate Principal Balance of
the related Class A Certificates plus (ii) the Preference Amount as it relates
to interest previously paid on such Class of the Class A Certificates prior to
such Payment Date that remains unpaid as of such Payment Date plus (iii) the
Carry-Forward Amount, if any, with respect to such Class of Class A
Certificates; provided however, that with respect to each Class of Class A
Certificates, Current Interest will be reduced by such Class" pro rata share of
any Civil Relief Interest Shortfalls (as defined herein) during the related
Accrual Period.
The Class A-5 Pass-Through Rate is subject to the Class A-5 Available
Funds Cap. For a description of the calculation of the Class A-5 Pass-Through
Rate and the Class A-5 Available Funds Cap see "The Summary-- Certificates
Offered," and "--Class A Distributions."
The "Class A Principal Distribution Amount" for each Home Equity Loan
Group and Payment Date shall be the lesser of: (a) the related Total Available
Funds, minus the related Expense Fee, plus any Insured Payment with respect to
the related Class A Certificates, minus the Current Interest for such Payment
Date with respect to the related Class A Certificates; and (b) the excess, if
any, of (i) the sum of (without duplication): (A) the Preference Amount with
respect to principal owed to each Owner of Class A Certificates related to such
Home Equity Loan Group that remains unpaid as of such Payment Date; (B) the
principal portion of all scheduled monthly payments on the Home Equity Loans
related to such Home Equity Loan Group due on or prior to the related Due Date
thereof, received by the Servicer during the related Remittance Period and any
Prepayments on such Home Equity Loans made by the Mortgagors and actually
received by the Servicer during the related Remittance Period to the extent such
amounts are received by the Trustee on or prior to the related Monthly
Remittance Date; (C) the outstanding principal balance of each Home Equity Loan
in the related Home Equity Loan Group that was repurchased by the Seller or
purchased by the Servicer on or prior to the related Monthly Remittance Date, to
the extent such outstanding principal balance is actually received by the
Trustee on or prior to the related Monthly Remittance Date; (D) any Substitution
Amounts (i.e.
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the excess, if any, of the outstanding principal balance of a Home Equity Loan
in the related Home Equity Loan Group being replaced over the outstanding
principal balance of a replacement Home Equity Loan plus accrued and unpaid
interest plus the amount of any Delinquency Advances and Servicing Advances)
delivered by the Seller on the related Monthly Remittance Date in connection
with a substitution of a Home Equity Loan in the related Home Equity Loan Group
(to the extent such Substitution Amounts relate to principal), to the extent
such Substitution Amounts are actually received by the Trustee on or prior to
the related Monthly Remittance Date; (E) all Net Liquidation Proceeds actually
collected by or on behalf of the Servicer with respect to the Home Equity Loans
in the related Home Equity Loan Group during the related Remittance Period (to
the extent such Net Liquidation Proceeds relate to principal), to the extent
such Net Liquidation Proceeds are actually received by the Trustee on or prior
to the related Monthly Remittance Date; (F) the amount of any Subordination
Deficit with respect to the related Home Equity Loan Group for such Payment
Date; (G) the principal portion of the proceeds received by the Trustee with
respect to the related Home Equity Loan Group upon termination of the Trust (to
the extent such proceeds relate to principal); (H) with respect to the Payment
Date immediately following the last day of the Funding Period, all amounts
remaining on deposit in the Pre-Funding Account and allocate to such Home Equity
Loan Group to the extent not used to purchase Subsequent Home Equity Loans
during such Funding Period; and (I) the amount of any Subordination Increase
Amount (as defined herein) with respect to the related Home Equity Loan Group
for such Payment Date to the extent of any Net Monthly Excess Cashflow available
for such purpose; over (ii) the amount of any Subordination Reduction Amount (as
defined herein) with respect to the related Home Equity Loan Group for such
Payment Date.
The "Carry-Forward Amount" with respect to any Class of Class A
Certificates is the amount as of any Payment Date, equal to the sum of (i) the
amount, if any, by which (x) the Current Interest for such Class for the
immediately preceding Payment Date exceeded (y) the amount of the actual
distribution in respect to interest on such Class of Class A Certificates, made
to the Owners of such Class of Class A Certificates on such immediately
preceding Payment Date and (ii) 30 days interest on such excess at the related
Pass-Through Rate for such Class of Class A Certificates.
"Available Funds" as to each Home Equity Loan Group and Payment Date is
the amount on deposit in the Certificate Account with respect to the related
Home Equity Loan Group on such Payment Date net of Total Monthly Excess Cashflow
with respect to such Home Equity Loan Group and disregarding the amounts of any
Insured Payments to be made on such Payment Date and any amounts from the
Pre-Funding Account and the Capitalized Interest Account.
"Total Available Funds" as to each Payment Date and a Home Equity Loan
Group is the sum of (x) the amount on deposit in the Certificate Account with
respect to such Home Equity Loan Group (net of Total Monthly Excess Cashflow)
and inclusive of amounts deposited into the Certificate Account from the
Pre-Funding Account and Capitalized Interest Account on such Payment Date and
(y) any amounts of Total Monthly Excess Cashflow with respect to either
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Home Equity Loan Group to be applied on such Payment Date (disregarding the
amount of any Insured Payment to be made on such Payment Date).
The Trustee or Paying Agent shall (i) receive as attorney-in-fact of each
Owner of Class A Certificates any Insured Payment from the Certificate Insurer
and deposit such amounts into the Certificate Account and (ii) disburse the same
to each Owner of Class A Certificates. The Pooling and Servicing Agreement will
provide that to the extent the Certificate Insurer makes Insured Payments,
either directly or indirectly (as by paying through the Trustee or Paying
Agent), to the Owners of such Class A Certificates the Certificate Insurer will
be subrogated to the rights of such Owners of Class A Certificates with respect
to such Insured Payments, and shall receive reimbursement for such Insured
Payment as provided in the Pooling and Servicing Agreement, but only from the
sources and in the manner provided in the Pooling and Servicing Agreement; such
subrogation and reimbursement to have no effect on the Certificate Insurer's
obligations under the Insurance Policies.
The Pooling and Servicing Agreement provides that the term "Available
Funds" does not include Insured Payments and does not include any amounts that
cannot be distributed to the Owners of Class A Certificates, if any, by the
Trustee as a result of proceedings under the United States Bankruptcy Code.
Each Owner of a Class A Certificate will be required promptly to notify
the Trustee in writing upon the receipt of a court order relating to a
Preference Amount and will be required to enclose a copy of such order with such
notice to the Trustee.
Pre-Funding Account
On the Closing Date, approximately $_____ (the "Original Pre-Funded
Amount") (of which approximately $_____ will be allocated to the Fixed Rate
Group and approximately $__________ will be allocated to the Adjustable Rate
Group) will be deposited in the Pre-Funding Account which account will be in the
name of, and maintained by, the Trustee on behalf of the Trust and shall be part
of the Trust Estate. The Original Pre-Funded Amount allocated to a Home Equity
Loan Group will be reduced during the Funding Period for such Home Equity Loan
Group as described herein. Subsequent Home Equity Loans purchased on any date
(each, a "Subsequent Transfer Date") must satisfy the criteria set forth in the
Pooling and Servicing Agreement. In addition, each Subsequent Home Equity Loan
must be acceptable to the Certificate Insurer. The Trust may purchase the
Subsequent Home Equity Loans only from the Depositor and not from any other
person and the Depositor may purchase the Subsequent Home Equity Loans only from
the Seller or an affiliate of the Seller and not from any other person. See "The
Home Equity Loan Pools--Conveyance of Subsequent Home Equity Loans" herein. All
interest and other investment earnings on amounts on deposit in the Pre-Funding
Account will be deposited in the Capitalized Interest Account. The Pre-Funding
Account will not be an asset of the REMIC.
The "Funding Period" is the period from the Closing Date until the
earliest of (i) the date on which the amount on deposit in the Pre-Funding
Account is less than $_____, (ii) the date on
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which a Servicer Termination Event occurs under the Pooling and Servicing
Agreement or (iii) the Monthly Remittance Date in _____ ___. The Original
Pre-Funded Amount, as reduced from time to time by the amount thereof applied to
the purchase of Subsequent Home Equity Loans is referred to herein as the
"Pre-Funded Amount." Any Pre-Funded Amount allocated to a Home Equity Loan Group
remaining in the Pre-Funding Account at the end of the Funding Period will be
distributed to Owners of the related Class A Certificates as an additional
distribution of principal on the _____ ____ Payment Date.
Capitalized Interest Account
On the Closing Date cash will be deposited in the Capitalized Interest
Account, which account shall be in the name of and maintained by the Trustee and
shall be part of the Trust Estate. The amount on deposit in the Capitalized
Interest Account, including reinvestment income, and amounts deposited thereto
from the Pre-Funding Account, will be used by the Trustee to fund the amount
equal to (i) the sum of (a) the amount of interest accruing at the weighted
average applicable Pass-Through Rates of the Fixed Rate Certificates (in the
case of the Fixed Rate Group) or the Class A-5 Pass-Through Rate (in the case of
the Adjustable Rate Group) accruing during the related Accrual Period on the
amount by which the aggregate Certificate Principal Balance of the related Class
A Certificates exceeds the aggregate Loan Balance of the Home Equity Loans plus
(b) the related Premium Amount accruing during the related Accrual Period on
such excess balance minus (ii) the amount of any reinvestment income on monies
allocated to such Home Equity Loan Group on deposit in the Pre-Funding Account;
such amounts on deposit will be so applied by the Trustee on the _____ ____
Payment Date to fund such excess, if any. Any amounts remaining in the
Capitalized Interest Account at the end of the Funding Period (net of the amount
of funds to be applied by the Trustee on the Payment Date following the end of
the Funding Period) and not needed for such purpose will be paid to the Seller
and will not thereafter be available for distribution to the holders of the
Class A Certificates. The Capitalized Interest Account will not be an asset of
the REMIC.
Calculation of One-Month LIBOR
On each LIBOR Determination Date (as defined below), the Trustee will
determine One-Month LIBOR for the next Accrual Period for the Class A-5
Certificates.
"One-Month LIBOR" means, as of any LIBOR Determination Date, the London
interbank offered rate for one-month United States dollar deposits which appears
in the Telerate Page 3750 as of 11:00 a.m., London time, on such date. If such
rate does not appear on Telerate Page 3750, the rate for that day will be
determined on the basis of the rates at which deposits in United States dollars
are offered by the Reference Banks at approximately 11:00 a.m. (London time), on
that day to prime banks in the London interbank market. The Trustee will request
the principal London office of each of the Reference Banks to provide a
quotation of its rate. If at least two such quotations are provided, the rate
for that day will be the arithmetic mean of the quotations (rounded upwards if
necessary to the nearest whole multiple of 1/16%). If fewer than two quotations
are provided as requested, the rate for that day will be the arithmetic mean of
the rates
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quoted by major banks in New York City, selected by the Servicer, at
approximately 11:00 a.m. (New York City time) on that day for loans in United
States dollars to leading European banks.
"LIBOR Determination Date" means, with respect to any Accrual Period, the
second London business day preceding the commencement of such Accrual Period.
For purposes of determining One-Month LIBOR, a "London business day" is any day
on which dealings in deposits of United States dollars are transacted in the
London interbank market.
"Telerate Page 3750" means the display page currently so designated on the
Dow Jones Telerate Capital Markets Report (or such other page as may replace
that page on that service for the purpose of displaying comparable rates or
prices) and "Reference Banks" means leading banks selected by the Seller and
engaged in transactions in Eurodollar deposits in the international Eurocurrency
market.
Book Entry Registration of Class A Certificates
The Class A Certificates initially will be book-entry Certificates (the
"Book-Entry Certificates"). Persons acquiring Certificateownership interests in
the Class A Certificates ("Certificateowners") will hold such Certificates
through the Depository Trust Company ("DTC"), in the United States, or Cedel
Bank, societe anonyme ("Cedel") or the Euroclear System ("Euroclear"), in
Europe, if such Certificateowners are participants of such systems, or
indirectly through organizations that are participants in such systems. The
Book-Entry Certificates will be issued in one or more certificates per Class,
representing the aggregate principal balance of each such Class of Class A
Certificates, and will initially be registered in the name of Cede & Co.
("Cede"), the nominee of DTC. Cedel and Euroclear will hold omnibus positions on
behalf of their participants through customers' securities accounts in Cedel's
and Euroclear's names on the books of their respective depositaries which in
turn will hold such positions in customers' securities accounts in the
depositaries names on the books of DTC. Citibank N.A. ("Citibank") will act as
depositary for Cedel and Morgan Guaranty Trust Company of New York ("Morgan")
will act as depositary for Euroclear (Citibank and Morgan, in such capacities,
individually the "Relevant Depositary" and, collectively, the "European
Depositaries"). Investors may hold such beneficial interests in the Book-Entry
Certificates in minimum denominations representing Certificate Principal
Balances of $1,000 and in integral multiples of $1 in excess thereof. Except as
described below, no person acquiring a Book-Entry Certificate will be entitled
to receive a physical certificate representing such Certificate (a "Definitive
Certificate"). Unless and until Definitive Certificates are issued, it is
anticipated that the only "Certificateholder" of the Class A Certificates will
be Cede, as nominee of DTC. Certificateowners will not be Certificateholders as
that term is used in the Pooling and Servicing Agreement. Certificateowners are
permitted to exercise their rights only indirectly through DTC and its
Participants (including Cedel and Euroclear).
Servicing Compensation
As to each Home Equity Loan, the Servicer will retain a fee (the
"Servicing Fee") equal to 0.50% per annum, payable monthly at one-twelfth of
such annual rate of the then outstanding
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principal balance of such Home Equity Loan serviced as of the first day of each
Remittance Period, provided, however, that if a successor Servicer is appointed
in accordance with the Pooling and Servicing Agreement, the Servicing Fee shall
be such amount agreed upon by the Trustee, the Certificate Insurer, and the
successor Servicer but in no event in an amount greater than the amount paid to
the predecessor Servicer. The Servicer will also be able to retain late fees,
prepayment charges, assumption fees, release fees, bad check charges and any
other servicing related charges.
Optional Termination
By Servicer or Certificate Insurer. At its option, the Servicer (or the
Certificate Insurer, if the Servicer fails to exercise such option) may on any
Monthly Remittance Date when the aggregate outstanding Loan Balance of the Home
Equity Loans is 10% or less of the Maximum Collateral Amount purchase from the
Trust all (but not fewer than all) remaining Home Equity Loans, in whole only,
and other property acquired by foreclosure, deed in lieu of foreclosure, or
otherwise then constituting the Trust Estate, and pay to the Owners of each
Class of Class A Certificates the portion of the purchase price allocable to
each such class of Class A Certificates, which will equal an amount up to the
sum of (i) 100% of the then outstanding Class A Certificate Principal Balance
thereof, plus (ii) one month's interest on the then outstanding Class A
Certificate Principal Balance thereof at the then applicable Pass-Through Rate
for such class, plus any previously accrued but unpaid interest thereon, and
with respect to the Class A-5 Certificates, together with the amount of any
Unpaid Class A-5 Certificateholders' Interest Index Carryover, to the extent of
funds available therefor, such sum payable in accordance with the priorities
described under "Description of the Certificates--Distributions" herein and
thereby effect early retirement of the Certificates.
Termination Upon Loss of REMIC Status. Following a final determination by
the Internal Revenue Service or by a court of competent jurisdiction, in either
case from which no appeal is taken within the permitted time for such appeal, or
if any appeal is taken, following a final determination of such appeal from
which no further appeal can be taken, to the effect that the REMIC does not and
will no longer qualify as a "REMIC" pursuant to Section 860D of the Code (the
"Final Determination"), at any time on or after the date which is 30 calendar
days following such Final Determination the Certificate Insurer or the Owners of
a majority in Percentage Interests represented by the Class A Certificates then
outstanding with the consent of the Certificate Insurer may direct the Trustee
on behalf of the Trust to adopt a plan of complete liquidation, as contemplated
by Section 860F(a)(4) of the Code.
The Trustee
____________ will be named as Trustee under the Pooling and Servicing
Agreement.
Year 2000 Issue
The "Year 2000 Issue" relates to the fact that many existing computer
programs and applications use only two digits to identify a year in the date
field.
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The ongoing process of identification, evaluation and implementation of changes
to computer systems and software necessary for the year 2000 conversion has been
underway since the Servicer's fiscal year 1997. Potential software failures due
to processing errors potentially arising from calculations using the year 2000
date are not believed to be a significant risk. The total costs of compliance
and the effect on the Servicer's future results of operations are not believed
to be material and are expected to be accomplished within the normal process of
upgrading hardware and software.
THE INSURANCE POLICIES AND THE CERTIFICATE INSURER
The following information has been supplied by the Certificate Insurer for
inclusion in this Prospectus Supplement.
The Certificate Insurer, in consideration of the payment of the premium
and subject to the terms of the Insurance Policies, thereby unconditionally and
irrevocably guarantees to any Owner that an amount equal to each full and
complete Insured Payment will be received by the Trustee or its successor, as
trustee for the Owners, on behalf of the Owners from the Certificate Insurer,
for distribution by the Trustee to each Owner of each Owner's proportionate
share of the Insured Payment. The Certificate Insurer's obligations under the
Insurance Policies with respect to a particular Insured Payment shall be
discharged to the extent funds equal to the applicable Insured Payment are
received by the Trustee, whether or not such funds are properly applied by the
Trustee. Insured Payments shall be made only at the time set forth in the
Insurance Policies and no accelerated Insured Payments shall be made regardless
of any acceleration of the Obligations unless such acceleration is at the sole
option of the Certificate Insurer.
Notwithstanding the foregoing paragraph, the Insurance Policies do not
cover shortfalls, if any, attributable to the liability of the Trust, any REMIC
or the Trustee for withholding taxes, if any (including interest and penalties
in respect of any such liability). The Insurance Policies do not cover, and
Insured Payments shall not include, any Civil Relief Interest Shortfalls, any
Class A-5 Certificateholders' Interest Index Carryovers or any Unpaid Class A-5
Certificateholders' Interest Index Carryovers.
The Certificate Insurer will pay any Insured Payment that is a Preference
Amount on the Business Day following receipt on a Business Day by the Fiscal
Agent (as described below) of (i) a certified copy of the order requiring the
return of a preference payment, (ii) an opinion of counsel satisfactory to the
Certificate Insurer that such order is final and not subject to appeal, (iii) an
assignment in such form as is reasonably required by the Certificate Insurer,
irrevocably assigning to the Certificate Insurer all rights and claims of the
Owner relating to or arising under the Obligations against the debtor which made
such preference payment or otherwise with respect to such preference payment and
(iv) appropriate instruments to effect the appointment of the Certificate
Insurer as agent for such Owner in any legal proceeding related to such
preference
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payment, such instruments being in a form satisfactory to the Certificate
Insurer, provided that if such documents are received after 12:00 noon, New York
City time, on such Business Day, they will be deemed to be received on the
following Business Day. Such payments shall be disbursed to the receiver or
trustee in bankruptcy named in the final order of the court exercising
jurisdiction on behalf of the Owner and not to any Owner directly unless such
Owner has returned principal or interest paid on the Obligations to such
receiver or trustee in bankruptcy, in which case such payment shall be disbursed
to such Owner.
The Certificate Insurer will pay any other amount payable under an
Insurance Policy no later than 12:00 noon, New York City time, on the later of
the Payment Date on which the related Deficiency Amount is due or the third
Business Day following receipt in New York, New York on a Business Day by State
Street Bank and Trust Company, N.A., as Fiscal Agent for the Certificate Insurer
or any successor fiscal agent appointed by the Certificate Insurer (the "Fiscal
Agent") of a Notice (as described below); provided that if such Notice is
received after 12:00 noon, New York City time, on such Business Day, it will be
deemed to be received on the following Business Day. If any such Notice received
by the Fiscal Agent is not in proper form or is otherwise insufficient for the
purpose of making claim under an Insurance Policy, such Notice shall be deemed
not to have been received by the Fiscal Agent for purposes of this paragraph,
and the Certificate Insurer or the Fiscal Agent, as the case may be, shall
promptly so advise the Trustee and the Trustee may submit an amended Notice.
Insured Payments due under an Insurance Policy unless otherwise stated
therein will be disbursed by the Fiscal Agent to the Trustee on behalf of the
Owners by wire transfer of immediately available funds in the amount of the
Insured Payment less, in respect of Insured Payments related to Preference
Amounts, any amount held by the Trustee for the payment of such Insured Payment
and legally available therefor.
The Fiscal Agent is the agent of the Certificate Insurer only and the
Fiscal Agent shall in no event be liable to Owners for any acts of the Fiscal
Agent or any failure of the Certificate Insurer to deposit, or cause to be
deposited, sufficient funds to make payments due under the related Insurance
Policy.
As used in the Insurance Policies, the following terms shall have the
following meanings:
"Agreement" means the Pooling and Servicing Agreement, dated as of _____,
___ among CHEC Asset Receivable Corporation, as Depositor, Centex Credit
Corporation d/b/a Centex Home Equity Corporation, as Seller and as Servicer, and
the Trustee, as trustee, without regard to any amendment or supplement thereto
unless such amendment or supplement has been approved in writing by the
Certificate Insurer.
"Business Day" means any day other than a Saturday, a Sunday, or a day on
which banking institutions in New York City or Dallas, Texas, in the city in
which the corporate trust office of the Trustee under the Pooling and Servicing
Agreement is located or the city in which the Certificate Insurer is located are
authorized or obligated by law or executive order to be closed.
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"Deficiency Amount" means, with respect to any Payment Date, the sum of
(a) the excess, if any, of (i) the related Current Interest over (ii) the
related Total Available Funds (after applying the crosscollateralization
provisions of the Agreement, after any deduction for the related Premium Amount
and the related Trustee Fee and without regard to any related Insured Payment to
be made with respect to such Payment Date) and (b) the related Subordination
Deficit (after applying the crosscollateralization provisions of the Agreement
and after taking into account the portion of the related Class A Principal
Distribution Amount to be actually distributed on such Payment Date without
regard to any related Insured Payment to be made with respect to such Payment
Date).
"Insured Payment" means (a) as of any Payment Date, any Deficiency Amount
and (b) any Preference Amount (without duplication).
"Notice" means the telephonic or telegraphic notice, promptly confirmed in
writing by fax substantially in the form of Exhibit A attached to the related
Insurance Policy, the original of which is subsequently delivered by registered
or certified mail, from the Trustee specifying the Insured Payment which shall
be due and owing on the applicable Payment Date.
"Obligations" means $__________ Centex Home Equity Loan Pass-Through
Certificates, Series 199_-_, Class A-1, Class A-2, Class A-3, Class A-4, and
Class A-5, as applicable under the related Insurance Policy.
"Owner" means such Owner (as defined in the Agreement) of an Obligation
(other than the Trustee, the Depositor or the Servicer) who, on the applicable
Payment Date, is entitled under the terms of the applicable Class A Certificate
to payment thereunder.
"Preference Amount" means any amount previously distributed to an Owner on
the Obligations that is recoverable and sought to be recovered as a voidable
preference by a trustee in bankruptcy pursuant to the United States Bankruptcy
Code (11 U.S.C.), as amended from time to time, in accordance with a final
nonappealable order of a court having competent jurisdiction.
Capitalized terms used in the Insurance Policies and not otherwise defined
therein shall have the respective meanings set forth in the Agreement as of the
date of execution of the Insurance Policies, without giving effect to any
subsequent amendment or modification to the Agreement unless such amendment or
modification has been approved in writing by the Certificate Insurer.
Any notice under an Insurance Policy or service of process on the Fiscal
Agent may be made at the address listed below for the Fiscal Agent or such other
address as the Certificate Insurer shall specify in writing to the Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, New
York, New York 10006 Attention: Municipal Registrar and Paying Agency, or such
other address as the Fiscal Agent shall specify to the Trustee in writing.
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EACH INSURANCE POLICY IS BEING ISSUED UNDER AND PURSUANT TO, AND SHALL BE
CONSTRUED UNDER, THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE
CONFLICT OF LAWS PRINCIPLES THEREOF. THE INSURANCE PROVIDED BY EACH INSURANCE
POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED
IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
The Insurance Policies are not cancellable for any reason. The premiums on
each Insurance Policy are not refundable for any reason including payment, or
provision being made for payment, prior to maturity of the Obligations.
[Certificate Insurer Specific Disclosure]
CREDIT ENHANCEMENT
Insurance Policies
See "The Insurance Policies and The Certificate Insurer" herein for a
description of the Insurance Policies.
Overcollateralization Provisions
Overcollateralization Resulting from Cash Flow Structure. The Pooling and
Servicing Agreement requires that, on each Payment Date, Net Monthly Excess
Cashflow with respect to a Home Equity Loan Group be applied on such Payment
Date as an accelerated payment of principal on the related Class(es) of Class A
Certificates, but only to the limited extent hereafter described. Net Monthly
Excess Cashflow equals the excess of (i) the sum of (A) the excess, if any of
(x) the interest which is collected on the Home Equity Loans in such Home Equity
Loan Group during a Remittance Period (net of the Servicing Fee and Trustee Fee
with respect to such Home Equity Loan Group and any reimbursement of
nonrecoverable Delinquency Advances with respect to such Home Equity Loan Group)
plus any Delinquency Advances and Compensating Interest with respect to such
Home Equity Loan Group over (y) the sum of the related Current Interest and the
Premium Amount with respect to such Home Equity Loan Group (the difference
between (x) and (y) is the "Total Monthly Excess Spread" with respect to such
Home Equity Loan Group), and (B) the related Subordinated Reduction Amount over
(ii) the portion of the Total Monthly Excess Cashflow that is used to cover
shortfalls in Available Funds on such Payment Date in the related Home Equity
Loan Group or in the other Home Equity Loan Group, or used to reimburse the
Certificate Insurer.
The application of Net Monthly Excess Cashflow has the effect of
accelerating the amortization of the Class A Certificates relative to the
amortization of the Home Equity Loans in the related Home Equity Loan Group. To
the extent that any Net Monthly Excess Cashflow is not so used, the Pooling and
Servicing Agreement provides that it will be used to pay the Owners of the Class
A-5 Certificates any Class A-5 Certificateholders' Interest Index Carryovers and
any Unpaid Class A-5 Certificateholders' Interest Index Carryovers, to reimburse
the Servicer and the
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Trustee with respect to any amounts owing to it, and, thereafter, paid to the
Owners of the Class R Certificates.
Pursuant to the Pooling and Servicing Agreement, each Home Equity Loan
Group's Net Monthly Excess Cashflow will be applied as an accelerated payment of
principal on the Class A Certificates until the related Subordinated Amount has
increased to the level required. "Subordinated Amount" means, with respect to
each Home Equity Loan Group and Payment Date, the excess, if any, of (x) the sum
of (i) the aggregate Loan Balances of the Home Equity Loans in such Home Equity
Loan Group as of the close of business on the last day of the preceding
Remittance Period and (ii) any amount with respect to such Home Equity Loan
Group on deposit in the Pre-Funding Account at such time exclusive of any
Pre-Funding Account Earnings (as defined in the Pooling and Servicing Agreement)
over (y) the aggregate outstanding Certificate Principal Balance of the related
Class A Certificates as of such Payment Date (after taking into account the
payment of the Class A Principal Distribution Amount related to such Home Equity
Loan Group (except for any Subordination Reduction Amount or Subordination
Increase Amount related to such Home Equity Loan Group) on such Payment Date).
With respect to each Home Equity Loan Group and Payment Date, the lesser of (i)
the related Subordination Deficiency Amount as of such Payment Date (after
taking into account the payment of the related Class A Distribution Amount on
such Payment Date (except for any such Subordinate Increase Amount for such Home
Equity Loan Group)) and (ii) the aggregate amount of Net Monthly Excess Cashflow
actually applied as an accelerated payment of principal is a "Subordination
Increase Amount." The required level of the Subordinated Amount for each Home
Equity Loan Group with respect to a Payment Date is the "Specified Subordinated
Amount." The Pooling and Servicing Agreement generally provides that the related
Specified Subordinated Amount may, over time, decrease, or increase, subject to
certain floors, caps and triggers including triggers that allow the related
Specified Subordinated Amount to decrease or "step down" based on the
performance on the Home Equity Loans in the related Home Equity Loan Group with
respect to certain tests specified in the Pooling and Servicing Agreement based
on delinquency rates and cumulative losses. In addition, Net Monthly Excess
Cashflow for each Home Equity Loan Group will be applied to the payment in
reduction of principal of the Class A Certificates during the period that the
Home Equity Loans in such Home Equity Loan Group are unable to meet certain
tests specified in the Pooling and Servicing Agreement based on delinquency
rates and cumulative losses.
In the event that the Specified Subordinated Amount with respect to a Home
Equity Loan Group is permitted to decrease or "step down" on a Payment Date in
the future, the Pooling and Servicing Agreement provides that a portion of the
principal which would otherwise be distributed to the Owners of the related
Class A Certificates on such Payment Date shall be distributed to the Owners of
the Class R Certificates (to the extent available therefor) over the period
specified in the Pooling and Servicing Agreement. This has the effect of
decelerating the amortization of Class A Certificates relative to the
amortization of the Home Equity Loans and of reducing the related Subordinated
Amount. With respect to any Home Equity Loan Group and Payment Date, the excess,
if any, of (x) the related Subordinated Amount on such Payment Date after taking
into account all distributions to be made on such Payment Date (except for any
distributions of related Subordination Reduction Amounts as described in this
sentence) over (y)
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the related Specified Subordinated Amount is the "Excess Subordinated Amount"
for such Home Equity Loan Group and Payment Date. If, on any Payment Date, the
Excess Subordinated Amount is, or, after taking into account all other
distributions to be made on such Payment Date, would be, greater than zero
(i.e., the Subordinated Amount is or would be greater than the related Specified
Subordinated Amount), then any amounts relating to principal which would
otherwise be distributed to the Owners of the related Class or Classes of Class
A Certificates on such Payment Date shall instead be distributed to the Owners
of the Class R Certificates (to the extent available therefor) in an amount
equal to the lesser of (x) the related Excess Subordinated Amount for such Home
Equity Loan Group and Payment Date and (y) the amount available for distribution
on account of principal with respect to such Class A Certificates on such
Payment Date; such amount being the "Subordination Reduction Amount" with
respect to the related Home Equity Loan Group and Payment Date.
The Pooling and Servicing Agreement provides generally that, on any
Payment Date all amounts collected on account of principal (other than any such
amount applied to the payment of a Subordination Reduction Amount) during the
prior Remittance Period will be distributed to the Owners of the related Class A
Certificates on such Payment Date. If any Home Equity Loan became a Liquidated
Loan during such prior Remittance Period, the Net Liquidation Proceeds related
thereto and allocated to principal may be less than the principal balance of the
related Home Equity Loan; the amount of any such insufficiency is a "Realized
Loss." In addition, the Pooling and Servicing Agreement provides that the
principal balance of any Home Equity Loan which becomes a Liquidated Loan shall
thenceforth equal zero. The Pooling and Servicing Agreement does not contain any
requirement that the amount of any Realized Loss be distributed to the Owners of
the related Class A Certificates on the Payment Date which immediately follows
the event of loss; i.e., the Pooling and Servicing Agreement does not require
the current recovery of losses. However, the occurrence of a Realized Loss will
reduce the Subordinated Amount with respect to a Home Equity Loan Group, which
to the extent that such reduction causes the Subordinated Amount to be less than
the Specified Subordinated Amount applicable to the related Payment Date, will
require the payment of a Subordination Increase Amount on such Payment Date (or,
if insufficient funds are available on such Payment Date, on subsequent Payment
Dates, until the Subordinated Amount equals the Specified Subordinated Amount).
The effect of the foregoing is to allocate losses to the Owners of the Class R
Certificates by reducing, or eliminating entirely, payments of Total Monthly
Excess Spread and Subordination Reduction Amounts which such Owners would
otherwise receive.
Overcollateralization and the Insurance Policies. The Pooling and
Servicing Agreement defines a "Subordination Deficit" with respect to a Home
Equity Loan Group and Payment Date to be the amount, if any, by which (x) the
related aggregate Class A Certificate Principal Balance with respect to such
Payment Date, after taking into account all distributions to be made on such
Payment Date (except for any Insured Payment or any Subordination Deficit),
exceeds (y) the sum of (a) the aggregate Loan Balances of the Home Equity Loans
as of the close of business on the last day of the related Remittance Period and
(b) the amount, if any, on deposit and allocated to such Home Equity Loan Group
in the Pre-Funding Account as of the last day of the related Remittance Period.
The Pooling and Servicing Agreement requires the Trustee to make a claim for an
Insured Payment under the related Insurance Policy not later than the third
Business Day
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prior to any Payment Date as to which the Trustee has determined that a
Subordination Deficit will occur for the purpose of applying the proceeds of
such Insured Payment as a payment of principal to the Owners of the related
Class A Certificates on such Payment Date. Each Insurance Policy is thus similar
to the subordination provisions described above insofar as such Insurance Policy
guarantees ultimate, rather than current, payment of the amounts of any Realized
Losses to the Owners of the Class A Certificates. Investors in the Class A
Certificates should realize that, under extreme loss or delinquency scenarios
applicable to the related Home Equity Loan Group, they may temporarily receive
no distributions of principal when they would otherwise be entitled thereto
under the principal allocation provisions described herein. Nevertheless, the
exposure to risk of loss of principal of the Owners of the Class A Certificates
depends in part on the ability of the Certificate Insurer to satisfy its
obligations under the Insurance Policies. In that respect and to the extent that
the Certificate Insurer satisfies such obligations, the Owners of the Class A
Certificates are insulated from shortfalls in Available Funds that may arise.
Crosscollateralization Provisions
In addition to the use of Total Monthly Excess Spread and Net Monthly
Excess Cashflow with respect to a Home Equity Loan Group to cover related
Available Funds Shortfalls, Subordination Increase Amounts, Reimbursement
Amounts and Subordination Deficits, such Total Monthly Excess Spread and Net
Monthly Excess Cashflow will be available to cover such requirements for the
other Home Equity Loan Group as described under the caption "Description of the
Class A Certificates--Distributions" herein. Additionally, since
crosscollateralization of the Available Funds Shortfall for the Fixed Rate
Certificates and the Class A-5 Certificates occurs prior to the payment of any
Subordination Increase Amounts, the amount and timing of payments on the Home
Equity Loans in one Home Equity Loan Group may affect the level of
overcollateralization provided by the other Home Equity Loan Group.
FEDERAL INCOME TAX CONSEQUENCES
The following section in conjunction with the section in the Prospectus
captioned "Federal Income Tax Consequences" discusses the material federal
income tax consequences of the purchase, ownership and disposition of the Class
A Certificates. This section must be considered only in connection with "Federal
Income Tax Consequences" in the Prospectus. The discussion herein and in the
Prospectus is based upon laws, regulations, rulings and decisions now in effect,
all of which are subject to change. The discussion below and in the Prospectus
does not purport to deal with all federal tax consequences applicable to all
categories of investors, some of which may be subject to special rules.
Investors should consult their own tax advisors in determining the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of the Class A Certificates. No portion of the "Federal
Income Tax Consequences" section of the Prospectus or Prospectus Supplement
constitutes an opinion of counsel, other than the opinion set forth in the
second paragraph of "--REMIC Elections" and in clause (i) of "Federal
Income Tax Consequences--Opinions" in the Prospectus.
REMIC Elections
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An election will be made to treat certain assets of the Trust as a REMIC
for federal income tax purposes. The Class A Certificates will be designated as
regular interests in the REMIC (the "Regular Certificates" or the "REMIC Regular
Certificates"), and the Class R Certificates will be designated as the residual
interest in the REMIC (the "Residual Certificates" or the "REMIC Residual
Certificates").
Qualification as a REMIC requires ongoing compliance with certain
conditions. Stroock & Stroock & Lavan LLP, special tax counsel to the Seller and
the Depositor, is of the opinion that, for federal income tax purposes, assuming
(i) the appropriate REMIC election is made, and (ii) compliance with all of the
provisions of the Pooling and Servicing Agreement, the REMIC formed pursuant to
the Pooling and Servicing Agreement will constitute a REMIC, the Class A
Certificates will be considered "regular interests" in the REMIC, and the Class
R Certificates will be considered the sole class of "residual interests" in the
REMIC.
Because the REMIC Regular Certificates will be considered REMIC regular
interests, they generally will be taxable as debt obligations under the Internal
Revenue Code of 1986, as amended (the "Code"), and interest paid or accrued on
the Regular Certificates, including original issue discount with respect to any
Regular Certificates issued with original issue discount, will be taxable to
Certificateholders in accordance with the accrual method of accounting. Some or
all of the Classes of Regular Certificates may be subject to the original issue
discount provisions. See "Federal Income Tax Consequences" in the Prospectus. In
addition, certain Classes of Regular Certificates may be treated as issued with
a premium. See "Federal Income Tax Consequences" in the Prospectus.
The prepayment assumption that will be used in determining the rate of
accrual of original issue discount is 100% Prepayment Assumption with respect to
the Adjustable Rate Group and 120% Prepayment Assumption with respect to the
Fixed Rate Group. See "Prepayment and Yield Considerations" herein for a
description of the prepayment assumption model. However, no representation is
made as to the rate at which prepayments actually will occur.
The Class A Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code for domestic building and loan associations, and
"real estate assets" for real estate investment trusts (REITs), subject to the
limitations described in "Federal Income Tax Consequences" in the Prospectus.
Similarly, interest on such Class A Certificates will be considered "interest on
obligations secured by mortgages on real property" for REITs, subject to the
limitations described in "Federal Income Tax Consequences" in the Prospectus.
CERTAIN STATE TAX CONSIDERATIONS
Because the income tax laws of the states vary, it is impractical to
predict the income tax consequences to the Certificateholders in all of the
state taxing jurisdictions in which they are subject to tax. Certificateholders
are urged to consult their own tax advisors with respect to state and local
income and franchise taxes.
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ERISA CONSIDERATIONS
A fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan subject to Title I of ERISA, should consider the fiduciary
standards under ERISA in the context of the plan's particular circumstances
before authorizing an investment of a portion of such plan's assets in the Class
A Certificates. Accordingly, pursuant to Section 404 of ERISA, such fiduciary
should consider among other factors: (i) whether the investment is for the
exclusive benefit of plan participants and their beneficiaries; (ii) whether the
investment satisfies the applicable diversification requirements; (iii) whether
the investment is in accordance with the documents and instruments governing the
plan; and (iv) whether the investment is prudent, considering the nature of the
investment. Fiduciaries of plans also should consider ERISA's prohibition on
improper delegation of control over, or responsibility for, plan assets.
In addition, benefit plans subject to ERISA, as well as individual
retirement accounts or certain types of Keogh plans not subject to ERISA but
subject to Section 4975 of the Code and any entity whose source of funds for the
purchase of Class A Certificates includes plan assets by reason of a plan or
account investing in such entity (each, a "Plan"), are prohibited from engaging
in a broad range of transactions involving Plan assets and persons having
certain specified relationships to a Plan ("parties in interest" and
"disqualified persons"). Such transactions are treated as "prohibited
transactions" under Sections 406 and 407 of ERISA and excise taxes are imposed
upon such persons by Section 4975 of the Code.
An investment in Class A Certificates by a Plan might result in the assets
of the Trust being deemed to constitute Plan assets, which in turn might mean
that certain aspects of such investment, including the operation of the Trust,
might be prohibited transactions under ERISA and the Code. Neither ERISA nor the
Code defines the term "plan assets." Under Section 2510.3- 101 of the United
States Department of Labor ("DOL") regulations (the "Regulation"), a Plan's
assets may include an interest in the underlying assets of an entity (such as a
trust) for certain purposes, including the prohibited transaction provisions of
ERISA and the Code, if the Plan acquires an "equity interest" in such entity,
unless certain exceptions apply. The Depositor believes that the Class A
Certificates will give Certificateholders an equity interest in the Trust for
purposes of the Regulation and can give no assurance that the Class A
Certificates will qualify for any of the exceptions under the Regulation. As a
result, the assets of the Trust may be considered the assets of any Plan which
acquires a Class A Certificate.
The DOL has issued an individual exemption, Prohibited Transaction
Exemption ("PTE") 90-83, Exemption Application No. D-8346, 55 Fed. Reg. 50250
(1990) (the "Exemption"), to Donaldson, Lufkin and Jenrette Securities
Corporation. The Exemption generally exempts from the application of the
prohibited transaction provisions of Section 406 of ERISA and the excise taxes
imposed on such prohibited transactions pursuant to Section 4975(a) and (b) of
the Code and Section 502(i) of ERISA certain transactions relating to the
initial purchase, holding and subsequent resale by Plans of certificates in
pass-through trusts that consist of certain receivables, loans and other
obligations that meet the conditions and requirements set forth in the
Exemption.
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The assets covered by the Exemption include home equity loans such as the Home
Equity Loans. The Depositor believes that the Exemption will apply to the
acquisition, holding and resale of the Class A Certificates by a Plan and that
all conditions of the Exemption other than those within the control of the
investors have been or will be met. See "ERISA Considerations" in the
Prospectus.
Before purchasing a Class A Certificate, a fiduciary of a Plan should
itself confirm (a) that the Class A Certificates constitute "certificates" for
purposes of the Exemption and (b) that the specific conditions set forth in the
Exemption and the other requirements set forth in the Exemption will be
satisfied.
Any Plan fiduciary considering whether to purchase a Class A Certificate
on behalf of a Plan should consult with its counsel regarding the applicability
of the fiduciary responsibility and prohibited transaction provisions of ERISA
and the Code to such investment.
RATINGS
It is a condition of the issuance of the Class A Certificates that the
Class A Certificates receive ratings of "___" by ___________ and "__" by_____.
The ratings assigned to the Class A Certificates will be based primarily on the
claims-paying ability of the Certificate Insurer. The Rating Agencies do not
evaluate, and the ratings of the Class A Certificates do not address, the
likelihood of payment to the Class A-5 Certificateholders of any Class A-5
Certificateholders' Interest Index Carryovers or Unpaid Class A-5
Certificateholders' Interest Index Carryovers. Explanations of the significance
of such ratings may be obtained from _____________ and __________. Such ratings
will be the views only of such Rating Agencies. There is no assurance that any
such ratings will continue for any period of time or that such ratings will not
be revised or withdrawn. Any such revision or withdrawal of such ratings may
have an adverse effect on the market price of the Class A Certificates. A
security rating is not a recommendation to buy, sell or hold securities. See
"Risk Factors--Limited Nature of Ratings" herein.
LEGAL INVESTMENT CONSIDERATIONS
Although the Class A Certificates are expected to be rated "___" by
_______and "___" by_____, the Class A Certificates will not constitute "mortgage
related securities" for purposes of SMMEA because a portion of the Home Equity
Loans represent second liens. Accordingly, many institutions with legal
authority to invest in comparably rated securities based on first home equity
loans may not be legally authorized to invest in the Class A Certificates.
UNDERWRITING
Subject to the terms of the Underwriting Agreement dated _________, ____
(the "Underwriting Agreement") between the Underwriter and the Depositor, the
Depositor will agree to sell to the Underwriter and the Underwriter will agree
to purchase the Class A Certificates upon issuance, subject to the satisfaction
of certain conditions precedent. The Class A Certificates will be offered by the
Underwriter when as and if issued and sold by the Depositor to
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the Underwriter, subject to the prior sale or withdrawal, cancellation or
modification of the offer without notice, and the right of the Underwriter to
reject any subscription, in whole or in part.
The Underwriter has informed the Depositor that it proposes to offer the
Class A Certificates for sale from time to time in one or more negotiated
transactions, or otherwise, at varying prices to be determined, in each case, at
the time of the related sale. The Underwriter may effect such transactions by
selling the Class A Certificates to or through dealers, and such dealers may
receive compensation in the form of underwriting discounts, concessions or
commissions from the Underwriter. In connection with the sale of the Class A
Certificates, the Underwriter may be deemed to have received compensation from
the Depositor in the form of underwriting compensation. The Underwriter and any
dealers that participate with the Underwriter in the distribution of the Class A
Certificates may be deemed to be underwriters and any commissions received by
them and any profit on the resale of the Class A Certificates by them may be
deemed to be underwriting discounts and commissions under the Securities Act.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter against certain liabilities, including liabilities under applicable
securities laws, or contribute to payments the Underwriter may be required to
make in respect thereof. The Underwriter is an affiliate of the Depositor.
No Class A Certificate will have an established trading market when
issued. The Underwriter may, from time to time, act as a broker or purchase and
sell Class A Certificates in the secondary market, but the Underwriter is under
no obligation to do so and there can be no assurance that there will be a
secondary market for the Class A Certificates or liquidity in the secondary
market if one does develop.
In connection with the offering, the Underwriter may engage in
transactions that stabilize, maintain or otherwise affect the price of the Class
A Certificates. Specifically, the Underwriter may overallot the offering,
creating a short position in the Class A Certificates for its own account. The
Underwriter may bid for and purchase Class A Certificates in the open market to
cover such short positions. In addition, the Underwriter may bid for and
purchase Class A Certificates in the open market to stabilize the price of the
Class A Certificates. These activities may stabilize or maintain the market
price of the Class A Certificates above independent market levels. The
Underwriter is not required to engage in these activities, and may end these
activities at any time.
REPORT OF EXPERTS
The consolidated financial statements of _______________ and its
subsidiaries as of December 31, 1997 and December 31, 1996 and for each of the
three years in the period ended December 31, 1997, incorporated by reference
into this Prospectus Supplement, have been audited by _______________,
independent accountants, as set forth in their report thereon incorporated by
reference herein and reliance upon the authority of that firm as experts in
accounting and auditing.
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CERTAIN LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Depositor by Stroock & Stroock & Lavan
LLP. Certain legal matters relating to the validity of the issuance of the
Certificates and certain legal matters relating to insolvency issues and certain
federal income tax matters concerning the Certificates will be passed upon for
the Seller and the Depositor by Stroock & Stroock & Lavan LLP, New York, New
York. Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Underwriter by ____________________.
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INDEX OF DEFINED TERMS
2/28 Adjustable Rate Loans, 8
Accrual Period, 13
Accrual Rate, 13
Adjustable Rate Group, 2
applicable Cut-Off Date, 8
Appraised Values, 29
Available Funds, 62
Available Funds Shortfall, 58
balloon loans, 27
Book-Entry Certificates, 63
Business Day, 12
Capitalized Interest Account, 11
Carry-Forward Amount, 61
Cede, 22
Cedel, 21
Certificate Account, 57
Certificate Insurer, 2
Certificate Insurer Default, 21
Certificate Principal Balance, 50
Certificateholder, 63
Certificateowners, 21
Certificates, 2
Certificates Offered, 58
Citibank, 63
Civil Relief Interest Shortfall, 13
Class, 7
Class A Certificate Principal Balance, 50
Class A Certificates, 2
Class A Distribution Amount, 12
Class A Principal Distribution Amount, 16
Class A-4 Lockout Distribution Amount, 15
Class A-4 Lockout Percentage, 15
Class A-4 Lockout Pro Rata Distribution Amount, 16
Class A-5 Available Funds Cap, 13
Class A-5 Certificateholders' Interest Index Carryover, 14
Class A-5 Maximum Pass-Through Rate, 14
Class A-5 Pass-Through Rate, 7
Class R Certificates, 2
Clean-Up Call Date, 22
Closing Date, 2
Code, 23
Combined Loan-to-Value Ratios, 29
Compensating Interest, 19
Coupon Rates, 9
CPR, 50
Current Interest, 12
Cut-Off Date, 8
Deficiency Amount, 20
Definitive Certificate, 63
Delinquency Advances, 19
Depositor, 2
disqualified persons, 70
DOL, 71
DTC, 2
equity interest, 71
Equity Loan Group, 28
ERISA, 23
Euroclear, 21
European Depositaries, 63
Excess Subordinated Amount, 68
Exemption, 71
Final Determination, 64
Final Scheduled Payment Date, 12
Fiscal Agent, 65
Fixed Rate Certificates, 2
Fixed Rate Group, 2
Funding Period, 11
Home Equity Loan Group, 2
Home Equity Loans, 2
INDEX OF DEFINED TERMS, 74
Initial Aggregate Loan Balance, 2
Initial Certificate Principal Balance, 50
Initial Home Equity Loans, 2
S-92
<PAGE>
<PAGE>
Insurance Policies, 2
Insured Payment, 20
LIBOR Determination Date, 63
Liquidated Loan, 18
Loan Balance, 17
Loan Sale Agreement, 2
Maximum Collateral Amount, 22
Maximum Rates, 38
Minimum Rates, 10
Minimum Spread, 13
Monthly Remittance Date, 18
Morgan, 63
mortgage related securities, 23
Mortgagor, 47
Net Coupon Rate, 13
Net Maximum Rate, 14
Net Monthly Excess Cashflow, 60
Notes, 28
Notice, 66
Obligations, 66
One-Month LIBOR, 63
Original Loan-to-Value Ratios, 29
Original Pre-Funded Amount, 11
out of pocket, 19
Owner, 66
Owners, 2
parties in interest, 70
Pass-Through Rate, 58
Payment Date, 2
Plan, 70
plan assets, 71
Pooling and Servicing Agreement, 2
Pre- Funding Account, 2
Preference Amount, 18
Pre-Funded Amount, 11
prepayment, 50
Prepayment Assumption, 50
Prepayments, 26
Preservation Expenses, 19
prohibited transactions, 70
Properties, 2
PTE, 71
Rating Agencies, 22
Ratings, 22
real estate assets, 23
real estate mortgage investment conduit, 22
Realized Loss, 68
Record Date, 12
Register, 57
Registrar, 57
Regular Certificates, 69
regular interests, 2
Regulation, 71
related Cut-Off Date, 7
Relevant Depositary, 63
Relief Act, 13
REMIC, 2
REMIC Regular Certificates, 69
Remittance Period, 18
Residual Certificates, 69
residual interest, 2
Seller, 2
sequential pay, 20
Servicer, 2
Servicing Advances, 19
Servicing Fee, 18
Six-Month Adjustable Rate Loans, 8
Six-Month LIBOR, 25
SMMEA, 23
Specified Subordinated Amount, 68
step down, 68
Subordinated Amount, 67
Subordination Deficiency Amount, 59
Subordination Deficit, 18
Subordination Increase Amount, 68
Subordination Reduction Amount, 68
Subsequent Cut-Off Date, 8
Subsequent Home Equity Loans, 2
Subsequent Transfer Agreement, 24
Subsequent Transfer Date, 11
Telerate Page 3750, 63
The Insurance Policies and the Certificate Insurer, 4
Total Available Funds, 61
Total Monthly Excess Cashflow, 58
Total Monthly Excess Spread, 67
Trust, 2
Trust Estate, 56
Trustee, 2
Trustee Fee, 7
Underwriter, 2
Underwriting Agreement, 72
Unpaid Class A-5 Certificateholders' Interest Index Carryover, 14
Weighted average life, 50
S-93
<PAGE>
<PAGE>
No dealer, salesperson or other person has been authorized to give any
information or to make any representation not contained in this Prospectus
Supplement or the Prospectus and, if given or made, such information or
representation must not be relied upon as having been authorized by the
Depositor or by the Underwriters. This Prospectus Supplement and the Prospectus
do not constitute an offer to sell, or a solicitation of an offer to buy any of
the securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer in such jurisdiction. Neither the delivery of this
Prospectus Supplement or the Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that information herein is correct as
of any time subsequent to the date hereof or that there has been no change in
the affairs of the Depositor since such date.
------------
TABLE OF CONTENTS
Prospectus Supplement Page
----
SUMMARY OF TERMS
RISK FACTORS
THE HOME EQUITY LOAN POOL
PREPAYMENT AND YIELD
CONSIDERATIONS
REPRESENTATIVE LOAN POOLS
ADDITIONAL INFORMATION
DESCRIPTION OF THE NOTES
THE INSURANCE POLICIES AND THE NOTE
INSURER
THE NOTE INSURER
CREDIT ENHANCEMENT
FEDERAL INCOME TAX CONSEQUENCES
STATE TAX CONSEQUENCES
ERISA CONSIDERATIONS
RATINGS
LEGAL INVESTMENT CONSIDERATIONS
UNDERWRITING
REPORT OF EXPERTS
CERTAIN LEGAL MATTERS
Prospectus
Prospectus Supplement
Reports to Holders
Available Information
Incorporation of Certain Documents by Reference
Summary of Terms
Risk Factors
The Depositor
The Seller and Servicer
Use of Proceeds
Description of the Securities
The Trust Funds
Enhancement
Servicing of Home Equity Loans
The Agreements
Certain Legal Aspects of the Home Equity Loans
Use of Proceeds
Federal Income Tax Consequences
---------------------------
CENTEX HOME EQUITY LOAN
OWNER TRUST A
CENTEX HOME EQUITY LOAN
PASS-THROUGH CERTIFICATES, SERIES 199__-__
CENTEX CREDIT CORPORATION
D/B/A CENTEX HOME EQUITY
CORPORATION
Seller and Servicer
CHEC ASSET RECEIVABLE
CORPORATION
Depositor
-----
PROSPECTUS SUPPLEMENT
-----
[ ]
_____ __, ___
---------------------------
<PAGE>
<PAGE>
PROSPECTUS SUPPLEMENT
(To Prospectus dated ______ __, 1998)
CENTEX HOME EQUITY LOAN OWNER TRUST A
$_________ ADJUSTABLE RATE HOME EQUITY LOAN
ASSET BACKED NOTES, SERIES 199_-_
DUE ______ __, __
CENTEX CREDIT CORPORATION
d/b/a
CENTEX HOME EQUITY CORPORATION
Seller and Servicer
CHEC Asset Receivable Corporation
Depositor
The Centex Home Equity Loan Owner Trust A (the "Issuer") will be formed
pursuant to a trust agreement to be dated as of _____ ___, __ (the "Trust
Agreement") between CHEC Asset Receivable Corporation, as depositor (the
"Depositor") and _________________, as owner trustee (the "Owner Trustee"). The
Issuer is hereby offering $_________ aggregate principal amount of its
Adjustable Rate Home Equity Loan Asset Backed Notes, Series A (the "Notes"). The
Notes will be issued pursuant to an indenture, dated as of _____ __, ___ (the
"Indenture"), between the Issuer and ________________, as indenture trustee (the
"Indenture Trustee"), and will be secured by a trust estate (the "Trust Estate")
consisting primarily of (i) a pool (the "Pool") of adjustable rate subprime
loans secured by liens on one-to-four family residential properties (the "Home
Equity Loans"), (ii) all payments in respect of principal and interest on the
Home Equity Loans (other than any principal interest payments due herein on or
prior to the Cut-Off Date or not received; (iii) security interest in the
Properties; (iv) the Issuer's rights under the Sale and Servicing Agreement (as
defined herein), (v) the Note Insurance Policy, as described herein, (iv) funds
on deposit in the Certificate Account, the Pre-Funding Account (each as defined
herein) and (vi) all of the proceeds of the foregoing. All of the Home Equity
Loans are subprime mortgage loans. Subprime mortgage loans are mortgage loans
that have been made to borrowers with less than perfect credit. The Issuer also
will issue instruments evidencing the residual interest in the Trust Estate (the
"Residual Interest"). The Residual Interest and the Notes are collectively
referred to as the "Securities." Only the Notes are offered hereby. The final
Subsequent Cut-Off Date may not be later than ___ (90 days following the date of
issuance of the Notes).
Simultaneously with the issuance of the Notes, the Seller will obtain from
______________(the "Note Insurer") a financial guaranty note insurance policy
relating to the Notes (the "Note Insurance Policy") in favor of the Indenture
Trustee. The Note Insurance Policy will require the Note Insurer to make certain
Insured Payments (as defined herein) on the Notes.
(continued on following page)
For a discussion of significant matters affecting investment in the Notes,
see "Risk Factors" beginning on page S-__ herein, "Prepayment and Yield
Considerations" beginning on page S-__ herein and "Risk Factors" beginning on
page __ in the Prospectus.
THE NOTES REPRESENT NON-RECOURSE OBLIGATIONS OF THE ISSUER ONLY AND DO NOT
REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, THE SELLER, THE
SERVICER, THE INDENTURE TRUSTEE, THE OWNER TRUSTEE, THE NOTE
INSURER OR ANY OF THEIR AFFILIATES, EXCEPT AS DESCRIBED
HEREIN. NEITHER THE NOTES NOR THE HOME EQUITY
LOANS ARE INSURED OR GUARANTEED BY
ANY GOVERNMENTAL AGENCY.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
------------------
The Notes will be offered by ________________ (the "Underwriter") from
time to time to the public in negotiated transactions or otherwise at varying
prices to be determined at the time of the related sale. The net proceeds to the
Depositor from the sale of the Notes are anticipated to be approximately
$________, ___, before deducting expenses payable by the Depositor, estimated to
be $________. The Notes are offered by the Underwriter subject to prior sale
when, as and if issued to and accepted by it and subject to approval of certain
legal matters by counsel for the Underwriter. The Underwriter reserves the
right to withdraw, cancel or modify such offer and to reject orders in whole or
in part. It is expected that delivery of the Notes in book-entry form will be
made through the facilities of The Depository Trust Company ("DTC") in the
United States, and Cedel Bank, societe anonyme and the Euroclear System in
Europe, on or about ________, ___ (the "Closing Date").
[ ]
-------------------
The date of this Prospectus Supplement is ________, ___
<PAGE>
<PAGE>
(cover continued from previous page)
The aggregate Loan Balance of the Home Equity Loans as of the Statistical
Calculation Date was $_______ (of which __% are first liens and the remainder
are second liens). The Home Equity Loans were originated or purchased by Centex
Credit Corporation d/b/a Centex Home Equity Corporation (the "Seller" and
"Servicer").
In addition to the Home Equity Loans as of the Cut-Off Date, additional
Home Equity Loans will be purchased by the Trust from the Depositor on the
Closing Date. All of the Home Equity Loans in the Trust as of the Closing Date
(the "Initial Home Equity Loans") will have a Cut-Off Date of _____ __, __ and
the Seller expects that the Initial Home Equity Loans will total at least
$_______ as of the Closing Date (as defined below). The Home Equity Loans as of
the Statistical Calculation Date consist of adjustable rate home equity loans
and all of the additional Home Equity Loans to be delivered on the Closing Date
and all of the Subsequent Home Equity Loans will be adjustable rate home equity
loans. See "The Home Equity Loan Pool" herein.
The Sale and Servicing Agreement provides that additional Home Equity
Loans (the "Subsequent Home Equity Loans") may be purchased by the Issuer from
the Depositor from time to time on or before ____ __, __ from funds on deposit
in the Pre-Funding Account. On the Closing Date an aggregate cash amount of not
more than $_______ (the "Pre-Funded Amount") will be deposited with the
Indenture Trustee in the Pre-Funding Account to be used by the Issuer to acquire
Subsequent Home Equity Loans.
Payments of principal and interest will be made to the owners (the
"Owners") of the Notes on the 25th day of each month (or, if such day is not a
business day, the next following business day) beginning _____ __, ___ (each, a
"Payment Date"). Interest will be paid on each Payment Date to the Owners of the
Notes based on the Note Principal Balance (as defined herein) at the Note Rate
subject to the limitations described herein.
The Notes will constitute non-recourse obligations of the Issuer. The
Seller will have limited obligations arising in respect of certain
representations and warranties on the Home Equity Loans. The Servicer will have
limited obligations that arise pursuant to certain representations and
warranties and to its contractual servicing obligations under that certain
agreement to be entered into among the Depositor, the Servicer, the Seller, the
Indenture Trustee and the Issuer (the "Sale and Servicing Agreement"), including
any obligation it may have to advance delinquent interest payments on the Home
Equity Loans.
The Notes will be unconditionally and irrevocably guaranteed as to timely
payment of interest due to Owners and as to ultimate payment of the Note
Principal Balance, in each case pursuant to the terms of the Note Insurance
Policy issued by the Note Insurer. See "The Note Insurer" herein.
The stated maturity for the Notes is the Payment Date occurring on _____
___, __ (the "Final Payment Date").
The yield to maturity on the Notes will be affected by, among other
things, the rate of payment of principal (including by reason of prepayments,
defaults and liquidations) of the Home Equity Loans and the timing and receipt
of such payments as described herein and in the Prospectus. See "Risk Factors"
in the Prospectus and "Prepayment and Yield Considerations" herein.
The Notes are subject to optional redemption in full by the holder(s) of a
majority of the Residual Interest at any time after the aggregate Loan Balance
of the Home Equity Loans has declined to less than 10% of the sum of (x) the
Original Aggregate Loan Balance and (y) the Pre-Funded Amount. In addition, the
Note Insurer will have rights, under the limited circumstances described in the
Sale and Servicing Agreement, to acquire all of the Home Equity Loans from the
Issuer and thereby effect a redemption of the Notes. See "Administration --
Redemption of the Notes" herein.
It is a condition to the issuance of the Notes that they be rated "___" by
_______________ and "____" by _______________.
S-2
<PAGE>
<PAGE>
No election will be made to treat the Trust as a "real estate mortgage
investment conduit" (a "REMIC") for federal income tax purposes.
There is currently no secondary market for the Notes. The Underwriters
intend to make a secondary market for the Notes, but have no obligation to do
so. There can be no assurance that a secondary market for the Notes will develop
or, if one does develop, that it will provide investors with a satisfactory
level of liquidity or that it will continue.
-----------------
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE NOTES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
The Notes offered by this Prospectus Supplement will be a separate series
of Asset Backed Notes being offered by the Depositor pursuant to its Prospectus
dated _______ __, __ of which this Prospectus Supplement is a part and which
accompanies this Prospectus Supplement. The Prospectus contains important
information regarding this offering which is not contained herein, and
prospective investors are urged to read the Prospectus and this Prospectus
Supplement in full.
As provided herein under "The Note Insurer -- Incorporation of Certain
Documents by Reference," the Seller will provide without charge to any person to
whom this Prospectus Supplement is delivered, upon oral or written request of
such person, a copy of any or all financial statements incorporated herein by
reference. Requests for such copies should be directed as provided under "The
Note Insurer -- Incorporation of Certain Documents by Reference" herein.
----------------
To the extent statements contained herein do not relate to historical or
current information, this Prospectus Supplement may be deemed to consist of
forward looking statements that involve risks and uncertainties that may
adversely affect the distributions to be made on, or the yield of, the Notes,
which risks and uncertainties are discussed under "Risk Factors" and "Prepayment
and Yield Considerations" herein. As a consequence, no assurance can be given as
to the actual distributions on, or the yield of, the Notes.
------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE NOTES OFFERED HEREBY,
INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING
TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING" HEREIN.
S-3
<PAGE>
<PAGE>
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SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Reference is made to the "Index to Location of
Principal Defined Terms" for the location of the definitions of certain
capitalized terms.
Securities Offered...... $_________ Adjustable Rate Home Equity Loan Asset
Backed Notes, Series 199_-_ (the "Notes"). The
Notes represent non-recourse obligations of the
Issuer. Proceeds of the assets in the Trust Estate
will be the sole source of payments on the Notes.
Note Issuer............. Centex Home Equity Loan Owner Trust A (the
"Issuer" or the "Trust"), a Delaware business
trust established by the Depositor pursuant to a
trust agreement, dated as of ______ __, ___(the
"Trust Agreement"), between the Depositor and the
Owner Trustee. The Issuer does not have, nor is it
expected in the future to have, any significant
assets, other than the assets included in the
Trust Estate. See "The Issuer" herein.
Depositor............... CHEC Asset Receivable Corporation (the
"Depositor"), a Nevada corporation.
Seller and Servicer..... Centex Credit Corporation d/b/a Centex Home
Equity Corporation (the "Seller" and the
"Servicer"), a Florida corporation. The Seller's
and Servicer's principal executive offices are
located at 2727 N. Harwood Street, Dallas, Texas
75201.
Indenture Trustee....... ___________________, as Indenture Trustee (the
"Indenture Trustee"). The Indenture Trustee shall
receive a fee (the "Indenture Trustee Fee") equal
to ______% per annum, payable monthly at
one-twelfth the annual rate of the aggregate
outstanding Loan Balance of the Home Equity Loans.
Owner Trustee........... ______________________, as owner trustee under
the Trust Agreement (the "Owner Trustee"). The
Owner Trustee shall receive a fee (the "Owner
Trustee Fee") as provided under the Trust
Agreement.
Cut-Off Dates........... With respect to (i) each Initial Home Equity
Loan, the opening of business on _____, ___ (the
"Cut-Off Date") and (ii) with respect to each
Subsequent Home Equity Loan, the later of (x) the
opening of business of the first day of the month
in which such Subsequent Home Equity Loan was
transferred to the Trust and (y) the date of
origination of any such Home Equity Loan which is
originated in the month of the related Subsequent
Transfer Date (the later of clauses (x) and (y)
being the "Subsequent Cut-Off Date"). Each
reference herein to either the "related Cut-Off
Date" or the "applicable Cut-Off Date" shall mean
either the "Cut-Off Date" and/or the "Subsequent
Cut-Off Date," as applicable.
Statistical Calculation Date As of the close of business on _____ __, __(the
"Statistical Calculation Date").
S-4
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
Closing Date............ On or about ______ __, ___.
Description of the Notes The Notes represent non-recourse obligations of
the Issuer and will be issued pursuant to an
indenture to be dated as of ____ __, __(the
"Indenture"), entered into between the Issuer and
the Indenture Trustee. The assets included in the
trust estate created by the Indenture (the "Trust
Estate") will be the sole source of payments on
the Notes. The Notes will be issued in a single
class.
The assets of the Trust Estate will consist of (i)
a pool (the "Pool") of adjustable rate home equity
loans (the "Home Equity Loans") secured by first
or second lien mortgages or deeds of trust on
one-to-four family residential properties,
including units in condominiums, planned unit
developments, townhouses and manufactured housing
units (the "Properties"), and including any note
or other instrument of indebtedness (each, a
"Mortgage Note"); (ii) all payments in respect of
principal and interest on the Home Equity Loans
(other than any principal or interest payments due
thereon on or prior to the Cut-Off Date whether or
not received); (iii) security interests in the
Properties; (iv) the Issuer's rights under the
Sale and Servicing Agreement; (v) the Note
Insurance Policy, (vi) amounts on deposit in the
Certificate Account, Pre-Funding Account and
Capitalized Interest Account and (vii) all of the
proceeds of the foregoing.
On the Closing Date, the Pre-Funded Amount (as
defined herein) will be deposited in a trust
account held by the Indenture Trustee in the name
of the Indenture Trustee for the benefit of the
Owners of the Notes and the Note Insurer (the
"Pre-Funding Account"). It is intended that
additional Home Equity Loans satisfying the
criteria specified in the Sale and Servicing
Agreement (the "Subsequent Home Equity Loans")
will be purchased by the Issuer from the Depositor
from time to time on or before _____ __, ___ from
funds on deposit in the Pre-Funding Account. As a
result, the aggregate principal balance of the
Home Equity Loans will increase by an amount equal
to the aggregate principal balance of the
Subsequent Home Equity Loans so purchased and the
amount in the Pre-Funding Account will decrease
proportionately.
As described below, on the Closing Date, cash will
be deposited in the name of the Indenture Trustee
in the Capitalized Interest Account (as defined
herein). Funds in the Capitalized Interest Account
will be applied by the Indenture Trustee to cover
shortfalls in interest during the Funding Period
(as described herein under "Pre-Funding Account")
on the Notes attributable to the provisions
allowing for purchase of Subsequent Home Equity
Loans after the Cut-Off Date.
Other Securities........ In addition to the Notes, pursuant to the Trust
Agreement the Trust will issue a class of
securities (the "Residual Interest") which will
represent the residual interest in the Trust. The
Notes and the Residual Interest are herein
referred to as the "Securities." Only the Notes
are offered hereby.
S-5
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<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
Denominations........... The Notes are issuable in minimum denominations of
an original principal amount of $1,000 and
multiples of $1 in excess thereof.
The Home Equity Loans... The Initial Home Equity Loans consist of _____
adjustable rate home equity loan and the notes
relating thereto. The Home Equity Loans that bear
interest at rates that adjust semi-annually based
on Six-Month LIBOR and the applicable gross margin
(subject to the limitations described herein),
with the initial rate adjustment date being either
six months after the date of origination of the
related Home Equity Loan ("Six-Month Adjustable
Rate Loans") or two years after the date of
origination of the related Home Equity Loan ("2/28
Adjustable Rate Loans"). The Initial Home Equity
Loans are secured by first and second lien
mortgages or deeds of trust primarily on one- to
four-family residential properties, located in __
states and the District of Columbia. No Combined
Loan-to-Value Ratio relating to any Initial Home
Equity Loan in the Fixed Rate Group exceeded
_____% as of the Cut-Off Date. No Original
Loan-to-Value Ratio relating to any Initial Home
Equity Loan in the Adjustable Rate Group exceeded
_____% as of the Cut-Off-Date. None of the Initial
Home Equity Loans are insured by primary mortgage
insurance policies. On the Closing Date additional
Home Equity Loans will be added to the Trust in an
amount equal to approximately __% of the aggregate
initial Loan Balance presented herein of the Home
Equity Loans such that the amount initially
deposited into the Pre-Funding Account does not
exceed ___ % of the Maximum Collateral Amount. All
statistical information presented herein relating
to the Initial Home Equity Loans does not include
the additional Initial Home Equity Loans to be
added on the Closing Date. The Seller does not
expect that the characteristics of the additional
Home Equity Loans to be added on the Closing Date
to materially vary from the aggregate
characteristics of the Initial Home Equity Loans
described herein.
All of the Home Equity Loans in the Trust have
been or will be originated by the Seller or an
affiliate of the Seller. The Home Equity Loans are
not guaranteed by the Depositor, the Seller, the
Servicer, the Trustee or any of their affiliates.
As of the Cut-Off Date, the average Loan Balance
of the Initial Home Equity Loans was $_______. The
minimum and maximum Loan Balances of the Initial
Home Equity Loans as of the Cut-Off Date were
$_______ and $_______, respectively. As of the
Cut-Off Date, the weighted average Original
Loan-to-Value Ratio of the Initial Home Equity
Loans was approximately _______%; the weighted
average remaining term to maturity of the Initial
Home Equity Loans was approximately _______
months; and the remaining terms to maturity of the
Initial Home Equity Loans ranged from _______
months to _______ months. As of the Cut-Off Date,
approximately _______% of the Initial Aggregate
Loan Balance of the Initial Home Equity Loans were
secured by first mortgages. No Initial Home Equity
Loan in the Adjustable Rate Group will mature
later than _______, ____. As of the Cut-Off Date,
approximately _______% of the Initial Aggregate
Loan
S-6
- --------------------------------------------------------------------------------
<PAGE>
<PAGE>
- --------------------------------------------------------------------------------
Balance of the Initial Home Equity Loans were
Six-Month Adjustable Rate Loans and _______% of
the Initial Aggregate Loan Balance of the Initial
Home Equity Loans were 2/28 Adjustable Rate Loans.
As of the Cut-Off Date, the weighted average
remaining period to the next interest rate
adjustment date for the Six-Month Adjustable Rate
Loans was approximately __ months; the weighted
average remaining period to the next interest rate
adjustment date for the 2/28 Adjustable Rate Loans
was approximately ___ months; each Six-Month
Adjustable Rate Loan will have an initial payment
adjustment effective with the seventh monthly
payment on such loan, an initial rate adjustment
cap of _______%, a semi-annual interest rate
adjustment cap of _______%, in each case, above
the then current interest rate for such Six-Month
Adjustable Rate Loan and a lifetime interest rate
adjustment cap of _______% above the initial
interest rate of such loan; each 2/28 Adjustable
Loan will have an initial payment adjustment
effective with the 25th monthly payment on such
loan, an initial interest rate adjustment cap of
_______% and a semi-annual interest rate
adjustment cap of ____%, in each case, above the
then current interest rate for such 2/28
Adjustable Loan and a lifetime interest rate
adjustment cap of _______% above the initial
interest rate of such loan. The weighted average
Coupon Rate of the Initial Home Equity Loans was
approximately _______% per annum. The Initial Home
Equity Loans had a weighted average gross margin
as of the Cut-Off Date of approximately _______%.
The gross margin for the Initial Home Equity Loans
ranged from _______% to _______%. Coupon Rates
borne by the Initial Home Equity Loans as of the
Cut-Off Date ranged from _______% per annum to
_______% per annum. As of the Cut-Off Date, the
maximum rates at which interest may accrue on the
Initial Home Equity Loans (the "Maximum Rates")
ranged from _______% per annum to _______% per
annum. The Initial Home Equity Loans had a
weighted average Maximum Rate as of the Cut-Off
Date of approximately _______% per annum. As of
the Cut-Off Date, the minimum rates at which
interest may accrue on the Initial Home Equity
Loans (the "Minimum Rates") ranged from _______%
per annum to _______% per annum. As of the Cut-Off
Date, the weighted average Minimum Rate on the
Initial Home Equity Loans was approximately
_______% per annum. See "The Home Equity Loan
Pools--Adjustable Rate Group" herein.
In addition to the Initial Home Equity Loans
acquired by the Trust on the Closing Date, the
Trust may acquire up to approximately $_______
aggregate Loan Balance in Subsequent Home Equity
Loans. The Subsequent Home Equity Loans, if
available, will be originated by the Seller or an
affiliate of the Seller and sold to the Depositor
and then sold by the Depositor to the Trust. The
Subsequent Home Equity Loans, as well as all Home
Equity Loans, must conform to certain specified
characteristics. See "--Pre-Funding Account"
below.
Final Payment Date...... The Final Payment Date for the Notes is _____ __,
___, although it is anticipated that the actual
final Payment Date for the Notes will occur
significantly earlier than the Final Payment Date.
See "Prepayment and Yield Considerations" herein.
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Payments--General........ On the 25th day of each month, or if such a day is
not a Business Day, then the next succeeding
Business Day, commencing ____ __, ___ (each such
day being a "Payment Date"), the Indenture Trustee
will be required, subject to the availability of
amounts therefor, pursuant to the cash flow
priorities hereinafter described, to make payments
on the Notes to the Owners thereof of record as of
the last Business Day preceding such Payment Date
(the "Record Date"). A "Business Day" is any day
other than a Saturday or Sunday or a day on which
banking institutions in The City of New York,
Dallas, Texas, the city in which the corporate
trust office of the Indenture Trustee is located
or the city in which the Note Insurer is located
are authorized or obligated by law or executive
order to be closed.
Interest................ On each Payment Date, the Notes will be entitled
to payments in respect of Current Interest.
"Current Interest" means, with respect to any
Payment Date the sum of (i) the aggregate amount
of interest accrued from and including the
preceding Payment Date (or from the Closing Date
in the case of the first Payment Date) to and
including the day prior to the current Payment
Date (the "Accrual Period") at the Note Rate on
the outstanding principal balance of the Notes
(the "Note Principal Balance"), (ii) any Interest
Carry Forward Amount and (iii) the Preference
Amount as it relates to interest previously paid
on such Note prior to such Payment Date (in
accordance with the Note Insurance Policy);
provided, however, that Current Interest will be
reduced by the amount of any shortfalls in
interest collections on Home Equity Loans included
in the Trust resulting from the application of the
Civil Relief Interest Shortfalls (as defined
below). All calculations of interest on the Notes
will be made on the basis of the actual number of
days elapsed in the related Accrual Period and a
year of 360 days. A "Civil Relief Interest
Shortfall" is the difference between the amount of
interest that would have accrued on a Home Equity
Loan absent the application of the Soldiers' and
Sailors' Relief Act of 1940 (the "Relief Act") and
interest accrued on such Home Equity Loan at the
6% per annum rate mandated by the Relief Act. See
"Certain Legal Aspects of the Home Equity
Loans--Soldiers' and Sailors' Relief Act of 1940"
in the Prospectus.
The "Interest Carry Forward Amount" for any
Payment Date is the sum of (x) the amount, if any,
by which (i) the Current Interest as of the
immediately preceding Payment Date exceeded (ii)
the amount of the actual payments of interest made
on such immediately preceding Payment Date plus
(y) 30 days' interest on the amount in clause (x)
above, calculated at the Note Rate.
On each Payment Date, the "Note Rate" will be
equal to the lesser of (x) the Formula Note Rate
and (y) the Available Funds Cap.
The "Formula Note Rate" for any Payment Date will
equal the lesser of (x)(i) with respect to any
Payment Date which occurs on or prior to the
Redemption Date (as defined herein), One-Month
LIBOR plus ___%
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per annum and (ii) with respect to any Payment
Date thereafter, One-Month LIBOR plus ___% per
annum, and (y) ___% per annum.
The "Available Funds Cap" for any Payment Date
will equal the weighted average of the Coupon
Rates on the Home Equity Loans, less (i) prior to
the Payment Date in _______ ____, ___% per annum,
and (ii) on or after the Payment Date in _______
___, ____% per annum.
If, on any Payment Date, the Available Funds Cap
limits the Note Rate (i.e., the rate as determined
by the Available Funds Cap is less than the
Formula Note Rate), the amount of any such
shortfall will be carried forward and be due and
payable on future Payment Dates and shall accrue
interest at the Formula Note Rate, until paid
(such shortfall, together with such accrued
interest, the "Available Funds Cap Carry Forward
Amount"). The Note Insurance Policy does not cover
the Available Funds Cap Carry Forward Amount; the
payment of such amount may be funded only from (i)
any excess interest resulting from the Available
Funds Cap being in excess of the Formula Note Rate
on future Payment Dates and (ii) any Net Monthly
Excess Cashflow which would otherwise be paid to
the Servicer or the Indenture Trustee on account
of certain reimbursable amounts described in the
Sale and Servicing Agreement, or to the Owners of
the Residual Interests.
The "Redemption Date" is the first Monthly
Remittance Date on which the aggregate Loan
Balance of the Home Equity Loans has declined to
less than 10% of the sum of (x) the aggregate Loan
Balance of the Initial Home Equity Loans as of the
Cut-Off Date (the "Original Aggregate Loan
Balance") plus (y) the original Pre-Funded Amount
(such sum, the "Maximum Collateral Amount").
Principal............... On each Payment Date, payments in reduction of the
Note Principal Balance will be made in the amounts
described herein. The "Principal Payment Amount"
for each Payment Date shall be the lesser of:
(a) the Total Available Funds (as defined herein)
plus any Insured Payment minus the Current
Interest and the Trust Fees and Expenses for such
Payment Date; and
(b) the excess, if any, of
(i) the sum of (without duplication):
(A) the Preference Amount with respect
to principal owed to each Owner of a
Note that remains unpaid as of such
Payment Date;
(B) the principal portion of all
scheduled monthly payments on the Home
Equity Loans due on or prior to the
related Due Date thereof, to the
extent actually received by the
Servicer during the related Remittance
Period and any Prepayments made by the
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Mortgagors and actually received by
the Servicer during the related
Remittance Period;
(C) the balance of each Home Equity
Loan (the "Loan Balance") that was
repurchased by the Seller or purchased
by the Servicer on or prior to the
related Monthly Remittance Date, to
the extent such Loan Balance is
actually received by the Servicer
during the related Remittance Period;
(D) any Substitution Amounts (i.e.,
the excess, if any, of the Loan
Balance of a Home Equity Loan being
replaced over the outstanding
principal balance of a replacement
Home Equity Loan plus accrued and
unpaid interest) delivered by the
Seller on the related Monthly
Remittance Date in connection with a
substitution of a Home Equity Loan (to
the extent such Substitution Amounts
relate to principal), to the extent
such Substitution Amounts are actually
received by the Servicer on the
related Remittance Date;
(E) all Net Liquidation Proceeds
actually collected by the Servicer
with respect to the Home Equity Loans
during the related Remittance Period
(to the extent such Net Liquidation
Proceeds relate to principal);
(F) the amount of any
Overcollateralization Deficit for such
Payment Date;
(G) the principal portion of the
proceeds received by the Indenture
Trustee upon termination of the Trust
Estate (to the extent such proceeds
relate to principal);
(H) on the Payment Date immediately
following the end of the Funding
Period, all amounts remaining on
deposit in the Pre-Funding Account to
the extent not used to purchase
Subsequent Home Equity Loans during
the Funding Period; and
(I) the amount of any
Overcollateralization Increase Amount
for such Payment Date to the extent of
any Net Monthly Excess Cashflow
available for such purpose;
over
(ii) the amount of any
Overcollateralization Reduction Amount
for such Payment Date.
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The "Remittance Period" with respect to any
Monthly Remittance Date is the period from the
second day of the month immediately preceding such
Monthly Remittance Date to the first day of the
month in which such Monthly Remittance Date
occurs. A "Monthly Remittance Date" is any date on
which funds on deposit in the Principal and
Interest Account are remitted to the Note Account,
which is the 18th day of each month, or if such
day is not a Business Day, the next preceding
Business Day, commencing in _____ ___.
The "Preference Amount" is any amount (other than
amounts in respect of the Available Funds Cap
Carry Forward Amount) previously distributed to an
Owner on a Note that is recoverable and sought to
be recovered as a voidable preference by a trustee
in bankruptcy pursuant to the United States
Bankruptcy Code (Title 11 of the United States
Code), as amended from time to time, in accordance
with a final nonappealable order of a court having
competent jurisdiction.
The "Premium Amount" is the amount payable to the
Note Insurer as premium for the Note Insurance
Policy.
Monthly Servicing Fee... As to each Home Equity Loan, the Servicer will
retain a fee (the "Servicing Fee") equal to 0.50%
per annum, payable monthly at one-twelfth of such
annual rate of the then outstanding principal
balance of such Home Equity Loan serviced as of
the first day of each Remittance Period, provided,
however, that if a successor Servicer is appointed
in accordance with the Pooling and Servicing
Agreement, the Servicing Fee shall be such amount
as agreed upon by the Trustee, the Note Insurer,
and the successor Servicer but in no event in an
amount greater than the amount paid to the
predecessor Servicer. The Servicer will also be
able to retain late fees, prepayment charges,
assumption fees, release fees, bad check charges
and any other servicing related fees.
Credit Enhancement...... The credit enhancement provided for the benefit of
the Notes consists of (x) the
overcollateralization which utilizes the excess
interest created by the internal cash flows of the
Pool and (y) the Note Insurance Policy.
Overcollateralization. The required application of
the cash flow from the Pool results in a limited
acceleration of the Notes relative to the
amortization of the Home Equity Loans in the early
months of the transaction. The accelerated
amortization is achieved by the application of
certain excess interest to the payment in
reduction of the Note Principal Balance. This
acceleration feature creates overcollateralization
(i.e., the excess of the aggregate outstanding
Loan Balance of the Home Equity Loans over the
Note Principal Balance). Once the required level
of overcollateralization is reached, and subject
to the provisions described in the next paragraph,
the acceleration feature will cease unless
necessary to maintain the required level of
overcollateralization.
The Sale and Servicing Agreement provides that,
subject to certain floors, caps and triggers, the
required level of overcollateralization may
increase or decrease over time. An increase would
result in a temporary
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period of accelerated amortization of the Notes to
increase the actual level of overcollateralization
to its required level; a decrease would result in
a temporary period of decelerated amortization to
reduce the actual level of overcollateralization
to its required level. See "Prepayment and Yield
Considerations", "Credit Enhancement --
Overcollateralization Provisions" herein and
"Credit Enhancement" in the Prospectus.
Financial Guaranty Note Insurance Policy.
___________ (the "Note Insurer"), will issue a
financial guaranty note insurance policy (the
"Note Insurance Policy") with respect to the
Notes.
Pursuant to the provisions of the Note Insurance
Policy, the Note Insurer will irrevocably and
unconditionally guarantee certain payments to the
Indenture Trustee for the benefit of the Owners of
the Notes. The amount of the actual payment, if
any, made by the Note Insurer to the Indenture
Trustee for the benefit of the Owners of the Notes
under the Note Insurance Policy on each Payment
Date (the "Insured Payment") is the excess, if
any, of (i) the sum of (a) the Current Interest,
(b) the Overcollateralization Deficit and (c) the
Preference Amount (without duplication) over (ii)
the Total Available Funds (after any deduction for
the Trust Fees and Expenses) and after taking into
account the portion of the Principal Payment
Amount to be actually distributed on such Payment
Date (without regard to any Insured Payment to be
made with respect to such Payment Date). The Note
Insurance Policy does not insure the payment of
Available Funds Cap Carry Forward Amounts.
Insured Payments do not cover Realized Losses
except to the extent that an Overcollateralization
Deficit exists. Insured Payments do not cover the
Servicer's failure to make Delinquency Advances
pursuant to the Sale and Servicing Agreement,
except to the extent that an Overcollateralization
Deficit would otherwise result therefrom.
Nevertheless, the effect of the Note Insurance
Policy is to guaranty the timely payment of
interest on, and the ultimate payment of the
principal amount of, the Notes.
The Note Insurance Policy is noncancellable for
any reason.
Unless a Note Insurer Default exists, the Note
Insurer shall have the right to exercise certain
rights of the Owners of the Notes, as specified in
the Indenture, without any consent of such Owners;
and such Owners may exercise such rights only with
the prior written consent of the Note Insurer,
except as provided in the Indenture. In addition,
to the extent of unreimbursed payments under the
Note Insurance Policy, the Note Insurer will be
subrogated to the rights of the Owners of the
Notes on which such Insured Payments were made. In
connection with each Insured Payment on a Note,
the Indenture Trustee, as attorney-in-fact for the
Owner thereof, will be required to assign to the
Note Insurer the rights of such Owner with respect
to the Note to the extent of such Insured Payment.
"Note Insurer Default" is defined under the Sale
and Servicing Agreement as the existence and
continuance of (x) the failure by the Note Insurer
to make a required payment under the Note
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Insurance Policy or (y) the bankruptcy or
insolvency of the Note Insurer.
The "Trust Fees and Expenses" are the Premium
Amount, the Indenture Trustee Fee and any Trustee
Reimbursable Expenses (each as defined herein).
Pre-Funding Account..... On the Closing Date, an aggregate cash amount (the
"Pre-Funded Amount") of no more than $______ will
be deposited in the Pre-Funding Account. During
the period (the "Funding Period") from the Closing
Date until the earliest to occur of (i) the date
on which the Pre-Funded Amount is reduced to
$_____ or less, (ii) the occurrence of a "Servicer
Termination Event" (as defined in the Sale and
Servicing Agreement) or an "Event of Default" (as
defined herein) or (iii) ______ __, ___, the
Pre-Funded Amount will be maintained in the
Pre-Funding Account. The Pre-Funded Amount will be
reduced during the Funding Period by the amount
thereof used to purchase Subsequent Home Equity
Loans in accordance with the Sale and Servicing
Agreement. Subsequent Home Equity Loans purchased
on any date (each, a "Subsequent Transfer Date")
must satisfy the criteria set forth in the Sale
and Servicing Agreement. See "The Home Equity Loan
Pool-- Conveyance of Subsequent Home Equity Loans"
herein. Any Pre-Funded Amount remaining at the end
of the Funding Period will be distributed to the
Owners of the Notes on the Payment Date
immediately following the end of the Funding
Period, thus resulting in a partial principal
prepayment of the Notes as specified herein under
"Description of the Notes -- Payments." All
interest and other investment earnings on amounts
on deposit in the Pre-Funding Account will be
deposited in the Capitalized Interest Account.
Capitalized Interest
Account............... On the Closing Date, cash in an amount
satisfactory to the Note Insurer will be deposited
in a trust account (the "Capitalized Interest
Account") in the name of, and maintained by, the
Indenture Trustee in trust for the Owners of the
Notes. The amount on deposit in the Capitalized
Interest Account, including reinvestment income
thereon, will be used by the Indenture Trustee on
each Payment Date during and immediately after the
Funding Period to fund the excess, if any, of (i)
the amount of interest accruing on the outstanding
Pre-Funded Amount at a rate equal to the Note Rate
over (ii) the amount of any reinvestment income on
monies on deposit in the Pre-Funding Account. Such
amounts on deposit will be so applied by the
Indenture Trustee on the Payment Dates during and
immediately after the Funding Period to fund any
such excess. Any amounts remaining in the
Capitalized Interest Account not needed for such
purpose will be paid to the Seller or its designee
at the end of the Funding Period.
Mandatory Prepayment of
Notes................. It is intended that the principal amount of
Subsequent Home Equity Loans sold to the Issuer
will require application of substantially all of
the original Pre-Funded Amount and it is not
intended that there will be any material amount of
principal prepaid to the Owners of the Notes from
the Pre-Funding Account. In the event that the
Depositor is unable
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to sell Subsequent Home Equity Loans to the Issuer
during the Funding Period in an amount equal to
the Pre-Funded Amount, principal prepayments to
Owners of the Notes will occur on the Payment Date
immediately following the end of the Funding
Period in an amount equal to the Pre-Funded Amount
remaining at the end of the Funding Period.
Book Entry Registration
of the Notes............ The Note will initially be issued in book-entry
form. Persons acquiring beneficial ownership
interests in the Notes ("Noteowners") may elect to
hold their interests through The Depository Trust
Company ("DTC") in the United States, or Cedel
Bank, societe anonyme ("Cedel") or the Euroclear
System ("Euroclear") in Europe. Transfers within
DTC, Cedel or Euroclear, as the case may be, will
be in accordance with the usual rules and
operating procedures thereof. So long as the Notes
are Book-Entry Notes (as defined herein), such
Notes will be evidenced by one or more Notes
registered in the name of Cede & Co. ("Cede"), as
the nominee of DTC. The Notes will initially be
registered in the name of Cede. The interests of
the Owners of the Notes will be represented by
book-entries on the records of DTC and
participating members thereof. No Noteowner will
be entitled to receive a definitive note
representing such person's interest, except in the
event that Definitive Notes (as defined herein)
are issued under the limited circumstances
described herein. All references in this
Prospectus Supplement to any Notes reflect the
rights of Noteowners only as such rights may be
exercised through DTC and its participating
organizations for so long as the Notes are held by
DTC. See "Description of the Notes--Book-Entry
Registration of the Notes" herein, Annex A hereof
entitled "Global Clearance, Settlement and Tax
Documentation Procedures" and "Description of the
Securities--Book-Entry Securities" in the
Prospectus.
Optional Redemption -
Clean-Up Call........... The holders of Residual Interests exceeding in the
aggregate a 50% percentage interest (the "Majority
Residualholders") may, at their option, effect an
early redemption of the Notes and terminate the
Trust on any Payment Date on or after the
Redemption Date by purchasing all of the Home
Equity Loans at a price equal to or greater than
the Redemption Price (as defined under
"Administration--Redemption of Notes" herein). The
proceeds from any such purchase of the Home Equity
Loans will be used by the Issuer to redeem the
Notes and terminate the Indenture. In addition,
the Note Insurer will have rights, under the
limited circumstances described in the Sale and
Servicing Agreement, to acquire all of the Home
Equity Loans from the Issuer and thereby effect a
redemption of the Notes and terminate the
Indenture. The purchase price for such Home Equity
Loans shall not be less than the aggregate
outstanding Note Principal Balance plus all
accrued and unpaid interest thereon. See
"Administration -- Redemption of the Notes"
herein.
Ratings................. It is a condition of issuance of the Notes that
they be rated "___" by
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_______________ and "___" by _________.
________________ and _____________ are referred to
herein collectively as the "Rating Agencies". The
ratings issued by the Rating Agencies on the
payment of principal and interest on the Notes do
not cover the payment of any Available Funds Cap
Carry Forward Amounts. A security rating is not a
recommendation to buy, sell or hold securities,
and may be subject to revision or withdrawal at
any time by the assigning entity. No Rating Agency
is obligated to maintain any rating on the Notes
and, accordingly, there can be no assurance that
the rating assigned to Notes upon initial issuance
thereof will not be lowered or withdrawn at any
time thereafter. See "Ratings" herein.
Federal Tax Aspects..... No election will be made to treat the Trust Estate
or any portion thereof as a "real estate mortgage
investment conduit" (a "REMIC") for federal income
tax purposes.
Upon the issuance of the Notes, Stroock & Stroock
& Lavan LLP, counsel to the Seller and the
Depositor, will deliver its opinion that, assuming
compliance with the Trust Agreement, the Notes
will be treated as debt obligations for federal
income tax purposes, and for federal income tax
purposes, the Issuer will not be (i) classified as
an association taxable as a corporation, (ii) a
taxable mortgage pool or (iii) a "publicly traded
partnership" taxable as a corporation. An Owner of
a Note, by its acceptance of a Note, will be
deemed to have agreed to treat the Note as
indebtedness. An Owner will not be required to
report income with respect to the Note under an
accrual method unless the Owner otherwise uses the
accrual method or purchases a Note which has
original issue discount. Counsel to the Seller and
the Depositor will also render an opinion to the
extent that the discussion under "--Federal Tax
Aspects" and under "Certain Federal Income Tax
Consequences" constitutes matters of Federal law
or legal conclusions, such discussions are true
and correct in all material respects.
The Notes will not represent "real estate assets"
for purposes of Section 856(c)(4)(A) of the
Internal Revenue Code of 1986, as amended (the
"Code"), or "[l]oans . . . principally secured by
an interest in real property" within the meaning
of Section 7701(a)(19)(C)(v) of the Code.
Investors are advised to consult their tax
advisors and to review "Federal Income Tax
Consequences" herein and ^ in the Prospectus.
ERISA Considerations.... Subject to the considerations discussed under
"ERISA Considerations" herein and in the
Prospectus, the Notes may be purchased by employee
benefit plans that are subject to the Employee
Retirement Income Security Act of 1974, as amended
("ERISA"). See "ERISA Considerations" herein and
in the Prospectus.
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Legal Investment
Considerations.......... The Notes will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA").
Accordingly, many institutions with legal
authority to invest in comparably rated securities
based on qualifying first lien mortgage loans may
not be legally authorized to invest in the Notes.
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RISK FACTORS
Prospective investors in the Notes should consider, among other things,
the following risk factors (as well as the factors set forth under "Risk
Factors" in the Prospectus) in connection with the purchase of the Notes.
Limited Liquidity. There is currently no secondary market for the Notes.
The Underwriter currently intends to make a market in the Notes, but it is under
no obligation to do so. There can be no assurance that a secondary market will
develop or, if a secondary market does develop, that it will provide the holders
of the Notes with liquidity of investment or that it will continue for the life
of the Notes.
Limited Operating History. The Seller began originating home equity loans
in 1994. Prior to October 1997, the Seller sold substantially all of its home
equity loans in whole loan transactions on a servicing released basis and
consequently, the Servicer does not have any significant historical loss and
delinquency data relating to its home equity loan portfolio that may be referred
to for purposes of estimating the future delinquency and loss experience of home
equity loans similar to the Home Equity Loans being sold to the Trust.
Servicing Risk. The servicing of home equity loans of the type originated
by the Seller (as compared to the servicing of conforming or prime mortgage
loans) requires special skill and diligence, which includes generally more
attention to each account, earlier and more frequent contact with borrowers in
default and commencing the foreclosure process at an earlier stage of default.
The Servicer began servicing home equity loans of a type similar to the Home
Equity Loans in October 1997. Consequently, the Servicer has limited experience
servicing home equity loans similar to the Home Equity Loans being sold to the
Trust. Under the terms of the Pooling and Servicing Agreement, the Servicer will
be responsible for the servicing of all the Home Equity Loans and will directly
service all of the Home Equity Loans. The impact of the Servicer's lack of
experience in servicing home equity loans may result in greater losses on the
Home Equity Loans and result in accelerated prepayments on the Notes. Any
reinvestment risk resulting from such accelerated prepayments will be borne by
the Noteholders. For a description of the servicing process see "The Seller and
Servicer" in the Prospectus.
The Subsequent Home Equity Loans and the Pre-Funding Account. Any
conveyance of Subsequent Home Equity Loans is subject to the following
conditions, among others: (i) each such Subsequent Home Equity Loan must satisfy
the representations and warranties specified in the agreement pursuant to which
such Subsequent Home Equity Loans are transferred from the Seller to the
Depositor and from the Depositor to the Trust (each a "Subsequent Transfer
Agreement") and in the Sale and Servicing Agreement; (ii) the Seller will not
select such Subsequent Home Equity Loans in a manner that it believes is adverse
to the interests of the Noteholders or the Note Insurer; (iii) the Seller will
deliver or cause to be delivered certain opinions of counsel with respect to the
validity of the conveyance of such Subsequent Home Equity Loans; and (iv) as of
each Subsequent Cut-Off Date applicable thereto, the Home Equity Loans,
including the Subsequent Home Equity Loans to be conveyed by the Depositor to
the Trust as of such Cut-Off Date, will satisfy the criteria described herein
under "The Home Equity Loan Pools--Conveyance of Subsequent Home Equity Loans"
herein.
To the extent that amounts on deposit in the Pre-Funding Account have not
been fully applied to the purchase of Subsequent Home Equity Loans by the Trust
Estate by the end of the Funding Period, the Owners of the Notes entitled to
receive principal on the related Payment Date will receive a prepayment of
principal in an amount equal to the Pre-Funded Amount and remaining in the
Pre-Funding Account on the _____ ___ Payment Date. Although no assurances can be
given, the Seller has advised the Depositor that it expects that the principal
amount of Subsequent Home Equity Loans sold to the Depositor for sale to the
Trust will require the application of substantially all amounts on deposit in
the Pre-Funding Account and that there will be no material principal prepayment
to the Holders of the Notes from the Pre-Funding Account.
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Each Subsequent Home Equity Loan must satisfy the eligibility criteria
referred to above at the time of its addition. Following the transfer of
Subsequent Home Equity Loans to the Trust, the aggregate characteristics of the
Home Equity Loans will not vary materially from those of the Initial Home Equity
Loans. See "The Home Equity Loan Pools--Conveyance of Subsequent Home Equity
Loans" herein.
Risk of Home Equity Loan Coupon Rates Reducing the Note Rate. The
calculation of the "Note Rate" is based upon (i) the value of an index
(One-Month LIBOR) which is different from the value of the index applicable to
the Home Equity Loans as described under "The Home Equity Loan Pools " and (ii)
the weighted average of the Coupon Rates of the Home Equity Loans, which are
subject to periodic adjustment caps, maximum rate caps and minimum rate floors.
The Home Equity Loans adjust semi-annually based upon the London interbank
offered rate for six-month United States dollar deposits ("Six-Month LIBOR").
____% of the Initial Home Equity Loans by Loan Balance as of the Cut-Off Date
are 2/28 Adjustable Rate Loans and such loans first adjust two years from the
date of origination. The Pass-Through Rate on the Notes adjusts monthly based
upon One-Month LIBOR as described under "Description of the Notes--Calculation
of One-Month LIBOR" herein, subject to the Available Funds Cap. Consequently,
the interest which becomes due on the Home Equity Loans (net of the Servicing
Fee and the Trust Fees and Expenses during any Remittance Period may not equal
the amount of interest that would accrue at One-Month LIBOR plus the margin on
the Notes during the related Accrual Period. In particular, the Note Rate
adjusts monthly, while the interest rates of the Home Equity Loans adjust less
frequently with the result that the Funds Cap may limit increases in the Note
Rate for extended periods in a rising interest rate environment. In addition,
One-Month LIBOR and Six-Month LIBOR may respond to different economic and market
factors, and there is not necessarily a correlation among them. Thus, it is
possible, for example, that One-Month LIBOR may rise during periods in which
Six-Month LIBOR is stable or is falling or that, even if each of One-Month LIBOR
and Six-Month LIBOR rise during the same period, One-Month LIBOR may rise more
rapidly than Six-Month LIBOR. Furthermore, if the Available Funds Cap determines
the Note Rate for a Payment Date, the amount of Current Interest otherwise
payable to the Noteholders will be reduced and the value of the Notes will be
temporarily or permanently reduced. Any Available Funds Cap Carry Forward
Amounts payable to the Owners of the Notes as a result of the Available Funds
Cap will be payable on a subordinated basis to the extent of funds available
therefor and are not covered by the Note Insurance Policy.
Sensitivity to Prepayments. Approximately ____% by Loan Balance of the
Initial Home Equity Loans may be prepaid by the related Mortgagors in whole or
in part, at any time without payment of any prepayment fee or penalty. In
addition, a substantial portion of the Initial Home Equity Loans contain
due-on-sale provisions which, to the extent enforced by the Servicer, will
result in prepayment of such Home Equity Loans. See "Prepayment and Yield
Considerations" herein and "Certain Legal Aspects of the Home Equity
Loans--Enforceability of Prepayment and Late Payment Fees" in the Prospectus.
The rate of prepayments on home equity loans is sensitive to prevailing interest
rates. Adjustable rate Home Equity Loans may be subject to a greater rate of
principal prepayments in a low interest rate environment. For example, if
prevailing interest rates were to fall, Mortgagors with adjustable rate Home
Equity Loans may be inclined to refinance such Home Equity Loans with a fixed
rate loan to "lock in" a lower interest rate. The existence of the applicable
periodic rate cap, Maximum Rate and Minimum Rate also may affect the likelihood
of prepayments resulting from refinancings. In addition, the prepayment,
delinquency and loss experience on adjustable rate Home Equity Loans may differ
from that on the fixed rate Home Equity Loans because the amount of the monthly
payments on adjustable rate Home Equity Loans are subject to adjustment on each
rate adjustment date. Any change in the rate of amortization of the Notes may
affect the yield and weighted average life of the Notes.
In addition, repurchases or purchases from the Trust of Home Equity Loans
required or permitted to be made by the Seller and the Servicer under the Sale
and Servicing Agreement and any distributions to Note holders of any Pre-Funded
Amount on deposit in the Pre-Funding Account at the end of the Funding Period
will have the same effect on the holders of the Notes as a prepayment of the
Home Equity Loans.
The average life of the Notes, and, if purchased at a price other than
par, the yields realized by Owners of the Note, will be sensitive to levels of
payment (including prepayments (the "Prepayments"), liquidations,
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repurchases and purchases relating to the Home Equity Loans) on the Home Equity
Loans. In general, the yield on the Notes that is purchased at a premium from
the outstanding principal amount thereof will be adversely affected by a higher
than anticipated level of Prepayments, liquidations, repurchases and purchases
of the Home Equity Loans and enhanced by a lower than anticipated level.
Conversely, the yield on the Notes that is purchased at a discount from the
outstanding principal amount thereof will be enhanced by a higher than
anticipated level of Prepayments, liquidations, repurchases and purchases and
adversely affected by a lower than anticipated level. See "Prepayment and Yield
Considerations" herein.
Prepayments, liquidations, repurchases and purchases of the Home Equity
Loans will result in distributions to Noteholders of principal amounts that
would otherwise be distributed over the remaining terms of the Home Equity
Loans. The extent to which the yield to maturity of the Notes may vary from the
anticipated yield will depend upon the degree to which it is purchased at a
premium or discount and the degree to which the timing of payment thereon is
sensitive to Prepayments, liquidations, repurchases and purchases of Home Equity
Loans. In the case of any Note purchased at a discount, an investor should
consider the risk that a slower than anticipated rate of principal payments on
the Home Equity Loans could result in an actual yield to such investor that is
lower than the anticipated yield and, in the case of any Note purchased at a
premium, the risk that a faster than anticipated rate of Prepayments,
liquidations, repurchases and purchases could result in an actual yield to such
investor that is lower than the anticipated yield. Further, there can be no
assurance that Note holders will be able to reinvest distributions in respect of
prepayments, liquidations, repurchases and purchases of the Home Equity Loans in
securities or other instruments that have a yield comparable to that of the
Notes.
Nature of Collateral; Junior Liens. An overall decline in the residential
real estate market, the general condition of a Property, or other factors, could
adversely affect the values of the Properties such that the outstanding balances
of the Home Equity Loans, together with any senior liens on the Properties,
equal or exceed the value of the Properties. A decline in the value of a
Property on which the Trust has a second lien mortgage would affect the interest
of the Trust in the Property before having any effect on the interest of the
related first mortgagee, and could cause the Trust's interest in the Property to
be extinguished. If such a decline occurs, the actual rates of delinquencies,
foreclosures and losses on the Home Equity Loans could be higher than those
currently experienced in the mortgage lending industry in general. In addition,
adverse economic conditions (which may or may not affect real property values)
may affect the timely payment by borrowers of scheduled payments of principal
and interest on the Home Equity Loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the Trust and if the Note
Insurer is unable to meet its obligations under the Note Insurance Policy, then
Note holders may incur a loss.
Risk Associated with the Note Insurer. If the protection afforded by
overcollateralization is insufficient and if, upon the occurrence of an
overcollateralization deficit, the Insurer is unable to meet its obligations
under the related Insurance Policy, then the Owners of the Notes could
experience a loss on their investment.
Limited Nature of Ratings. It is a condition to the issuance of the Notes
that the Notes be rated ______ by ________ and ________ by _______________. See
"Summary of Terms--Ratings" herein. A security rating is not a recommendation to
buy, sell or hold securities and may be subject to revision or withdrawal at any
time. No person is obligated to maintain the rating on any Note, and,
accordingly, there can be no assurance that the ratings assigned to any Notes
will not be lowered or withdrawn by a Rating Agency at any time thereafter. In
the event any rating is revised or withdrawn, the liquidity of the related Notes
may be adversely affected. The rating of the Notes will depend primarily on the
creditworthiness of the Note Insurer. Any reduction in the rating assigned to
the claims-paying ability of the Note Insurer below the rating initially given
to the Notes would likely result in a reduction in the rating of the Notes. The
Ratings Agencies do not evaluate, and the ratings of the Notes do not address,
the likelihood of payment of the any Available Funds Cap Carry Forward Amounts.
See "Ratings" herein.
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THE HOME EQUITY LOAN POOL
General
The statistical information presented in this Prospectus Supplement
concerning the pool of Home Equity Loans is based on the pool of Initial Home
Equity Loans as of the Cut-Off Date. Subsequent Home Equity Loans are intended
to be purchased by the Trust from the Depositor from time to time on or before
the Monthly Remittance Date in ______ __, ___ from funds on deposit in the
Pre-Funding Account. The Initial Home Equity Loans and the Subsequent Home
Equity Loans are referred to collectively as the Home Equity Loans. The
Subsequent Home Equity Loans to be purchased by the Trust will be sold by the
Seller to the Depositor and then by the Depositor to the Trust.
This subsection describes generally certain characteristics of the Home
Equity Loans. Unless otherwise noted, all statistical percentages in this
Prospectus Supplement are measured by Loan Balance of the Initial Home Equity
Loans as of the Cut-Off Date.
Each Home Equity Loan in the Trust will bear interest at adjustable rates.
The Notes will be secured by the Home Equity Loans and the payments on the Notes
will be based primarily on amounts available for distribution in respect of the
Home Equity Loans.
The Initial Home Equity Loans to be transferred by the Seller to the
Depositor and from the Depositor to the Trust on the Closing Date will consist
of ____ home equity loans, of which _____ are fixed rate home equity loans and
_____ are adjustable rate home equity loans, evidenced by promissory notes (the
"Notes") secured by first and second lien deeds of trust, security deeds or
mortgages, which are located in _____ states and the District of Columbia. The
aggregate outstanding Loan Balance of the Initial Home Equity Loans in the Fixed
Rate Group as of the Cut-Off Date is $_____ or _____% of the Initial Aggregate
Loan Balance of the Initial Home Equity Loans; the aggregate outstanding Loan
Balance of the Initial Home Equity Loans in the Adjustable Rate Group as of the
Cut-Off Date is $_____ or _____% of the Initial Aggregate Loan Balance of the
Initial Home Equity Loans. The Properties securing the Home Equity Loans consist
primarily of one- to four-family residential properties and manufactured housing
treated as real property under applicable state law. The Properties may be
owner-occupied and non-owner occupied investment properties (which includes
second and vacation homes). All of the Initial Home Equity Loans were originated
no earlier than _____. Initial Home Equity Loans aggregating _____% of the
Initial Aggregate Loan Balance of the Initial Home Equity Loans in the Fixed
Rate Group were secured by first liens on related properties and the remaining
_____% of the Initial Aggregate Loan Balance of Initial Home Equity Loans in the
Fixed Rate Group are secured by second liens on related properties. No Combined
Loan-to-Value Ratio relating to any Initial Home Equity Loan in the Fixed Rate
Group exceeded ___% as of the Cut-Off Date. All of the Initial Aggregate Loan
Balance of the Initial Home Equity Loans in the Adjustable Rate Group are
secured by first liens on the related properties. No Original Loan-to-Value
Ratio relating to any Initial Home Equity Loan in the Adjustable Rate Group
exceeded _____ % as of the Cut-Off Date. No State has a geographic concentration
of Home Equity Loans in excess of ___%. None of the Initial Home Equity Loans
are insured by pool mortgage insurance policies or primary mortgage insurance
policies.
On the Closing Date additional Home Equity Loans will be added to the
Trust in an amount not to exceed approximately _____ % of the aggregate initial
Loan Balance presented herein of the Initial Home Equity Loans such that the
amount initially deposited into the Pre- Funding Account does not exceed _____ %
of the Maximum Collateral Amount. All statistical information presented herein
relating to the Initial Home Equity Loans does not include the additional Home
Equity Loans to be added on the Closing Date. No more than 5% of the aggregate
Home Equity Loans as they will be constituted on the Closing Date will deviate
in any respect from the Home Equity Loan pool characteristics that are
described herein or in the Prospectus. The Seller does not expect that the
characteristics of the additional Home Equity Loans to be added on the Closing
Date to materially vary from the characteristics of the Initial Home Equity
Loans described herein.
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All of the Home Equity Loans in the Trust have been or will be originated
by the Seller or an affiliate of the Seller.
As of the Closing Date, the Home Equity Loans, by Initial Aggregate Loan
Balance, will contain less than 20% delinquent loans and no non-performing
loans.
The "Original Loan-to-Value Ratios" and "Combined Loan-to-Value Ratios"
shown below were calculated based upon the lesser of the appraised values of the
Properties at the time of origination (the "Appraised Values") or the sales
price of such Property if such Property was sold within 12 months of the time of
loan origination. In a limited number of circumstances, and within the Seller's
underwriting guidelines, the Seller discounts the Appraised Value of Properties
(when calculating maximum Loan-to-Value Ratios) where the Properties are unique,
have a high value or where the comparables are not within FNMA guidelines. The
purpose for making these reductions is to value the Properties more
conservatively than would otherwise be the case if the appraisal were accepted
as written. The "Combined Loan-to-Value Ratio" of a Home Equity Loan is the
ratio, expressed as a percentage, equal to the sum of any outstanding senior
lien mortgage balance plus the original balance of the Home Equity Loan divided
by the lesser of the Appraised Value or the sales price of such Property if such
Property was sold within 12 months of the time of loan origination. In the
instance where more than one appraisal was performed on the subject property,
the lesser of the two values was used to determine the Original Loan-to-Value
Ratio and the Combined Loan-to-Value Ratio.
No assurance can be given that values of the Properties have remained or
will remain at their levels on the dates of origination of the related Home
Equity Loans. If the residential real estate market has experienced or should
experience an overall decline in property values such that the outstanding
balances of the Home Equity Loans, together with the outstanding balances of any
first mortgage, become equal to or greater than the value of the Properties, the
actual rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the mortgage lending industry.
As of the Cut-Off Date, the average Loan Balance of the Initial Home
Equity Loans was $_________. The minimum and maximum Loan Balances of the
Initial Home Equity Loans in the Adjustable Rate Group as of the Cut-Off Date
were $________ and $___________, respectively. As of the Cut-Off Date, the
weighted average Original Loan-to-Value Ratio of the Initial Home Equity Loans
was _____%; the weighted average remaining term to maturity of the Initial Home
Equity Loans was ____ months; the original terms to maturity of the Initial Home
Equity Loans ranged from ____ months to ____ months; and the remaining terms to
maturity of the Initial Home Equity Loans ranged from ___ months to ____ months.
All of the Initial Home Equity Loans were secured by first mortgages. No Initial
Home Equity Loan will mature later than _________________. As of the Cut-Off
Date, no Initial Home Equity Loan was ___ or more days past due. However,
investors in the Notes should be aware that _______% of the Initial Home Equity
Loans by Initial Aggregate Loan Balance had a first monthly payment due on or
after __________ and it was not possible for such Initial Home Equity Loans to
be ___ or more days past due as of the Cut-Off Date.
As of the Cut-Off Date, ______% of the Initial Home Equity Loans were
Six-Month Adjustable Rate Loans and ________% of the Initial Aggregate Loan
Balance of the Loans were 2/28 Adjustable Rate Loans. As of the Cut-Off Date,
the weighted average remaining period to the next interest rate adjustment date
for the Six-Month Adjustable Rate Loans was approximately __ months; the
weighted average remaining period to the next interest rate adjustment date for
the 2/28 Adjustable Rate Loans was approximately __ months; each Six-Month
Adjustable Rate Loan will have an initial payment adjustment effective with the
seventh monthly payment on such loan, an initial interest rate adjustment cap of
___%, a semi-annual interest rate adjustment cap of ____%, in each case, above
the then current interest rate for such Six-Month Adjustable Rate Loan and a
lifetime interest rate adjustment cap of ______% above the initial rate of such
loan; each 2/28 Adjustable Loan will have an initial payment adjustment
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effective with the 25th monthly payment on such loan, an initial interest rate
adjustment cap of ____%, a semi-annual interest rate adjustment cap of _____%,
in each case, above the then current interest rate for such 2/28 Adjustable Loan
and a lifetime interest rate adjustment cap of _____% above the initial rate of
such loan. The weighted average Coupon Rate of the Initial Home Equity Loans was
approximately ______% per annum. The Initial Home Equity Loans had a weighted
average gross margin as of the Cut-Off Date of approximately ______%. The
initial gross margin for the Initial Home Equity Loans ranged from _____% to
_____%. The Coupon Rates borne by the Initial Home Equity Loans as of the
Cut-Off Date ranged from ______% per annum to ______% per annum. As of the
Cut-Off Date, the maximum rates at which interest may accrue on the Initial Home
Equity Loans (the "Maximum Rates") ranged from _____% per annum to _____% per
annum. The Initial Home Equity Loans had a weighted average Maximum Rate as of
the Cut-Off Date of approximately ______% per annum. As of the Cut-Off Date, the
minimum rates at which interest may accrue on the Initial Home Equity Loans (the
"Minimum Rates") ranged from _______% per annum to ______% per annum. As of the
Cut-Off Date, the weighted average Minimum Rate on the Initial Home Equity Loans
was approximately _______% per annum.
Set forth below is certain approximate statistical information as of the
Cut-Off Date regarding the Initial Home Equity Loans. Prior to the Closing Date,
Home Equity Loans may be removed from the Trust and other adjustable rate Home
Equity Loans may be substituted therefor. The Seller believes that the
information set forth herein with respect to the Home Equity Loans as presently
constituted is representative of the characteristics of the Home Equity Loans as
it will be constituted at the Closing Date, although certain characteristics of
the Initial Home Equity Loans may vary but any such variance will not be
material. The sum of the percentage columns in the following tables may not
equal 100% due to rounding.
GEOGRAPHIC DISTRIBUTION OF PROPERTIES
The geographic distribution of the Initial Home Equity Loans by state, as
of the Cut-Off Date, was as follows:
Number of % of Initial
Initial Home Initial Aggregate Aggregate
State Equity Loans Loan Balance Loan Balance
- ----- ------------ ------------ ------------
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ORIGINAL LOAN-TO-VALUE RATIOS
The Original Loan-to-Value ratios as of the origination dates of the
Initial Home Equity Loans as of the Cut-Off Date were distributed as follows:
Number of % of Initial
Initial Home Initial Aggregate Aggregate
Range of Original LTV's Equity Loans Loan Balance Loan Balance
- ----------------------- ------------ ------------ ------------
LOAN BALANCES
The distribution of the Loan Balances of the Initial Home Equity Loans as
of the Cut-Off Date was as follows:
Number of % of Initial
Initial Home Initial Aggregate Aggregate
Loan Balances Equity Loans Loan Balance Loan Balance
- ------------- ------------ ------------ ------------
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TYPES OF MORTGAGED PROPERTIES
The Properties securing the Initial Home Equity Loans as of the Cut-Off
Date were of the property types as follows:
Number of % of Initial
Initial Home Initial Aggregate Aggregate
Property Types Equity Loans Loan Balance Loan Balance
- -------------- ------------ ------------ ------------
ORIGINAL TERM TO MATURITY
The distribution of the original term to maturity of the Initial Home
Equity Loans as of the Cut-Off Date was as follows:
Number of % of Initial
Initial Home Initial Aggregate Aggregate
Original Months to Maturity Equity Loans Loan Balance Loan Balance
- --------------------------- ------------ ------------ ------------
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MONTHS SINCE ORIGINATION
The distribution of the number of months since the date of origination of
the Initial Home Equity Loans as of the Cut-Off Date was as follows:
Number of % of Initial
Number of Months Initial Home Initial Aggregate Aggregate
Since Origination Equity Loans Loan Balance Loan Balance
- ----------------- ------------ ------------ ------------
REMAINING TERM TO MATURITY
The distribution of the number of months remaining to maturity of the
Initial Home Equity Loans as of the Cut-Off Date was as follows:
Number of % of Initial
Initial Home Initial Aggregate Aggregate
Months Remaining to Maturity Equity Loans Loan Balance Loan Balance
- ---------------------------- ------------ ------------ ------------
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OCCUPANCY STATUS
The occupancy status of the Properties securing the Initial Home Equity Loans
as of the Cut-Off Date was as follows:
Number of % of Initial
Initial Home Initial Aggregate Aggregate
Occupancy Status Equity Loans Loan Balance Loan Balance
- ---------------- ------------ ------------ ------------
DOCUMENTATION TYPE
The documentation types of the Initial Home Equity Loans as of the Cut-Off
Date were as follows:
Number of % of Initial
Initial Home Initial Aggregate Aggregate
Documentation Type Equity Loans Loan Balance Loan Balance
- ------------------ ------------ ------------ ------------
CREDIT GRADE
The credit grades of the Initial Home Equity Loans pursuant to the
Seller's underwriting guidelines as of the Cut-Off Date were as follows:
Number of % of Initial
Initial Home Initial Aggregate Aggregate
Credit Grade Equity Loans Loan Balance Loan Balance
- ------------ ------------ ------------ ------------
A+............................
A-1...........................
A-2...........................
B.............................
C-1...........................
C-2...........................
D.............................
Totals...................
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COUPON RATES
The Coupon Rates borne by the Notes relating to the Initial Home Equity
Loans as of the Cut-Off Date were distributed as follows as of the Cut-Off Date:
Number of % of Initial
Initial Home Initial Aggregate Aggregate
Range of Coupon Rates Equity Loans Loan Balance Loan Balance
- --------------------- ------------ ------------ ------------
GROSS MARGINS
The gross margins of the Initial Home Equity Loans as of the Cut-Off Date
were as follows:
Number of % of Initial
Initial Home Initial Aggregate Aggregate
Gross Margins Equity Loans Loan Balance Loan Balance
- ------------- ------------ ------------ ------------
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MAXIMUM RATES
The Maximum Rates of the Initial Home Equity Loans as of the Cut-Off Date
were as follows:
Number of % of Initial
Maximum Initial Home Initial Aggregate Aggregate
Coupon Rate Equity Loans Loan Balance Loan Balance
- ----------- ------------ ------------ ------------
MINIMUM RATES
The Minimum Rates of the Initial Home Equity Loans as of the Cut-Off Date
were as follows:
Number of % of Initial
Minimum Initial Home Initial Aggregate Aggregate
Coupon Rate Equity Loans Loan Balance Loan Balance
- ----------- ------------ ------------ ------------
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NEXT COUPON RATE CHANGE
The month of the next Coupon Rate change for each of the Initial Home Equity
Loans as of the Cut-Off Date was as follows:
Number of
Month of Next Initial Home Aggregate % of Aggregate
Coupon Rate Change Equity Loans Loan Balance Loan Balance
- ------------------ ------------ ------------ ------------
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Interest Payments on the Home Equity Loans
All of the Home Equity Loans will provide that interest is charged to the
obligor (the "Mortgagor") thereunder, and payments are due from such Mortgagors
as of a scheduled day of each month which is fixed at the time of origination.
Scheduled monthly payments made by the Mortgagors on the Home Equity Loans
either earlier or later than the scheduled due dates thereof will not affect the
amortization schedule or the relative application of such payments to principal
and interest.
Conveyance of Subsequent Home Equity Loans
The Pooling and Servicing Agreement permits the Trust to acquire
approximately $__________ in aggregate Loan Balance of Subsequent Home Equity
Loans. Accordingly, the statistical characteristics of the Home Equity Loans
will vary as of any related Cut-Off Date upon the acquisition of Subsequent Home
Equity Loans.
The obligation of the Trust to purchase Subsequent Home Equity Loans on a
Subsequent Transfer Date is subject to the following requirements, among others,
individually or in the aggregate, as applicable, which may be waived by the Note
Insurer:
Delinquent................................. none greater than or equal to ___
days
Remaining Term to Stated Maturity.......... no more than _____ months
Lifetime Minimum Coupon Rate............... at least _____%
Minimum Coupon Rate........................ at least _____%
Weighted Average Coupon Rate............... at least _____%
Weighted Average Gross Margin.............. at least _____%
Percentage of Second Lien Home
Equity Loans ............................ _____%
Weighted Average Original
Loan-to-Value Ratio ..................... not more than _%
Original Loan Balance...................... each less than $_____
Balloon Loans.............................. _____%
Percentage of Six-Month
Adjustable Rate Loans ................... at least _____%
On or before the last day of the Funding Period, the Note Insurer has the
right to adjust, without limitation, the related Specified Subordinated Amount
(i) if the Subsequent Home Equity Loans individually or in the aggregate do not
conform to the conditions specified in the Insurance Agreement and the Pooling
and Servicing Agreement or (ii) to reflect any change in the credit risk to the
Note Insurer; provided, however, that if the owners of the Class R Notes object
in good faith to the Note Insurer's determination in clause (ii) above, any such
modification shall not be made if the Rating Agencies confirm that the risk to
the Note Insurer in insuring the Notes will be maintained at the level assigned
on the Closing Date. The conditions referred to in clause (i) may include
weighted average coupon rate or minimum coupon rate, first or second lien
position, combined loan-to-value ratio, (which will include the outstanding
amount of the first lien position for Subsequent Home Equity Loans, which
are in a second lien position) weighted average original and/or remaining term
to maturity and the Certificate Insurer's judgment regarding the credit quality
of the Subsequent Home Equity Loans.
PREPAYMENT AND YIELD CONSIDERATIONS
General
The weighted average life of, and, if purchased at other than par, the
yield to maturity on, a Note will relate to the rate of payment of principal of
the Home Equity Loans, including, for this purpose, Prepayments, liquidations
due to defaults, casualties and condemnations, and repurchases or purchases of
Home Equity Loans by the Seller or the Servicer pursuant to the Sale and
Servicing Agreement. At least ____% of the Initial Home Equity Loans by Initial
Aggregate Loan Balance may be prepaid by the related Mortgagors, in whole or in
part, at any time without payment of any prepayment fee or penalty. The actual
rate of principal Prepayments on pools of home equity loans
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is influenced by a variety of economic, tax, geographic, demographic, social,
legal and other factors and has fluctuated considerably in recent years. In
addition, the rate of principal Prepayments may differ among pools of home
equity loans at any time because of specific factors relating to the home equity
loans in the particular pool, including, among other things, the age of the home
equity loans, the geographic locations of the properties securing the loans and
the extent of the mortgagors' equity in such properties, and changes in the
mortgagors' housing needs, job transfers and unemployment.
Adjustable rate home equity loans may be subject to a greater rate of
principal Prepayments in a declining interest rate environment. For example, if
prevailing interest rates fall appreciably, adjustable rate home equity loans
are likely to be subject to a higher Prepayment rate than if prevailing interest
rates remain constant because the availability of fixed rate home equity loans
at competitive interest rates may encourage mortgagors to refinance their
adjustable rate home equity loans to "lock in" a lower fixed interest rate. In
addition, the fact that a substantial portion of the 2/28 Adjustable Rate Loans
do not adjust for substantial periods of time may affect the Prepayment
experience on such loans.
In addition to the foregoing factors affecting the weighted average life
of the Notes, the overcollateralization provisions of the Trust result in a
limited acceleration of the Notes relative to the amortization of the Home
Equity Loans in the early months of the transaction. The accelerated
amortization is achieved by the application of certain excess interest to the
payment of the principal balance of the Notes. This acceleration feature creates
overcollateralization which results from the excess of the aggregate Loan
Balance of the Home Equity Loans over the aggregate principal balance of the
Notes. Once the required level of overcollateralization is reached, the
acceleration feature will cease, unless necessary to maintain the required level
of overcollateralization. The Sale and Servicing Agreement will provide that
based upon certain collateral performance tests, the required
overcollateralization may increase or decrease.
Mandatory Prepayment
In the event that prior to the end of the Funding Period the Depositor is
unable to sell Subsequent Home Equity Loans to the Issuer in an amount equal to
the Pre-Funded Amount, the Owners of the Notes will receive a partial prepayment
on the Payment Date immediately following the end of the Funding Period in an
amount equal to the Pre-Funded Amount remaining at the end of the Funding
Period.
The Depositor intends to use substantially all of the amount on deposit in
the Pre-Funding Account to purchase Subsequent Home Equity Loans such that no
material amount of principal is expected to be prepaid at the end of the Funding
Period.
Prepayment and Yield Scenarios for Notes
As indicated above, if purchased at other than par, the yield to maturity
on a the Notes will be affected by the rate of the payment of principal of the
Home Equity Loans. If the actual rate of payments on the Home Equity Loans is
slower than the rate anticipated by an investor who purchases the Notes at a
discount, the actual yield to such investor will be lower than such investor's
anticipated yield. If the actual rate of payments on the Home Equity Loans is
faster than the rate anticipated by an investor who purchases the at a premium,
the actual yield to such investor will be lower than such investor's anticipated
yield.
The Final Payment Date for the Notes is ________ __, ____. This date is
the Payment Date in the twelfth month after the date on which the initial Note
Principal Balance as of the Closing Date would be reduced to zero, assuming that
no Prepayments are received on the Home Equity Loans, that scheduled monthly
payments of principal and interest on the Home Equity Loans are timely received
and that the overcollateralization mechanics of the transaction are not used to
make accelerated payments of principal to the Owners of the Notes. The weighted
average life of the Notes is likely to be shorter than would be the case if
payments actually made on the Home Equity Loans conformed to the foregoing
assumptions, and the actual final Payment Date with respect to the Notes could
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occur significantly earlier than the Final Payment Date because (i) Prepayments
are likely to occur and (ii) the Majority Residualholders may cause a redemption
of the Notes on or after the Redemption Date.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average life of the
Notes will be influenced by the rate at which principal of the Home Equity Loans
is paid, which may be in the form of scheduled amortization or prepayments (for
this purpose, the term "prepayment" includes Prepayments and liquidations due to
default). Prepayments on home equity loans are commonly measured relative to a
prepayment standard or model.
The model used in this Prospectus Supplement is the constant prepayment
rate ("CPR") which represents an assumed rate of prepayment each month relative
to the then outstanding principal balance of a pool of home equity loans for the
life of such home equity loans. CPR does not purport to be a historical
description of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of home equity loans, including the Home Equity Loans.
The Seller believes that no existing statistics of which it is aware provide a
reliable basis for Owners of the Notes to predict the amount or the timing of
receipt of prepayments on the Home Equity Loans.
Since the tables were prepared on the basis of the assumptions in the
following paragraph, there are discrepancies between the characteristics of the
actual Home Equity Loans and the characteristics of the Home Equity Loans
assumed in preparing the tables. Any such discrepancy may have an effect upon
the percentages of the Note Principal Balance outstanding and weighted average
life of the Notes set forth in the tables. In addition, since the actual Home
Equity Loans have characteristics which differ from those assumed in preparing
the tables set forth below, the payments of principal on the Notes may be made
earlier or later than as indicated in the tables.
For the purpose of the tables below, it is assumed that: (i) the Home
Equity Loans consist of pools of loans having the approximate characteristics as
set forth in the "Representative Loan Pools" table below, (ii) the Closing Date
for the Notes occurs on ______ __, ____, (iii) payments on the Notes are made on
the 25th day of each month regardless of the day on which the Payment Date
actually occurs, commencing in ______ __, ____ in accordance with the priorities
described herein, (iv) the difference between the gross Coupon Rate and the net
Coupon Rate is equal to the Servicing Fee and the net Coupon Rate is further
reduced by the Trust Fees and Expenses, (v) the prepayment rate of the Home
Equity Loans occurs at the CPR rates set forth in the table, (vi) prepayments
include 30 days' interest thereon, (vii) no reinvestment income from any Trust
account is available for payment to the Owners of the Notes other than the
Pre-Funding Account, which accrues on the funds therein based on a rate of ____%
per annum; (viii) the scheduled monthly payments of principal and interest on
the Home Equity Loans will be timely delivered on the first day of the
Remittance Period (with no defaults), (ix) the level of Six-Month LIBOR remains
constant at approximately ____%, (x) the level of One-Month LIBOR remains
constant at approximately ____%, (xi) all Home Equity Loans are considered
Six-Month LIBOR Loans, (xii) the Coupon Rate for each Home Equity Loan is
adjusted on its next rate change date (and on subsequent rate change dates, if
necessary) to equal the sum of (a) the applicable index and (b) the respective
gross margin (subject to applicable interest rate caps and floors), (xiii) the
overcollateralization levels are set as specified in the Sale and Servicing
Agreement; (xiv) no optional redemption is exercised (except in the case of the
"Weighted Average Life to Call" set forth below) and (xv) all Home Equity Loans
accrue interest based on a 360-day year assumed to consist of twelve 30-day
months.
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REPRESENTATIVE LOAN POOLS
<TABLE>
<CAPTION>
Gross Net Months to Initial
Pool Loan Coupon Coupon Rate Rate Reset Periodic Rate
Number Balance Rate Rate Change Frequency Margin Cap
=======================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
<CAPTION>
Periodic Remaining Term
Pool Rate Maximum Minimum of Maturity Amortization
Number Cap Coupon Rate Coupon Rate (in months) Method
===============================================================================
<S> <C> <C> <C> <C> <C>
</TABLE>
- ----------
(1) Home Equity Loans in the pool will be Subsequent Home Equity Loans.
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The following table sets forth the percentages of the initial principal amount
of the Notes that would be outstanding after each of the dates shown, based on a
rate equal to ___%, ___%, ___%, ___%, ___% and ___% of the CPR (as defined
above).
PERCENTAGE OF INITIAL NOTE PRINCIPAL BALANCE(1)
Payment
Date 0.0% 15.0% 22.5% 30.0% 37.5% 45.0%
---- ----- ----- ----- ----- -----
- ----------
(1) The percentages in the above table have been rounded to the nearest whole
number.
(2) The weighted average life of the Notes is determined by (i) multiplying the
amount of each principal payment by the number of years from the date of
issuance to the related Payment Date, (ii) adding the results, and (iii)
dividing by the initial Note Principal Balance and rounding to one decimal
place.
* Indicates that the cash flows are contingent on the optional termination
provision not being exercised. Otherwise, the percentage would equal zero.
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ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Home Equity Loans and
the Properties is based upon the pool as constituted at the close of business on
the Statistical Calculation Date. Prior to the issuance of the Notes, Home
Equity Loans may be removed from the pool as a result of incomplete
documentation or non-compliance with representations and warranties set forth in
the Sale and Servicing Agreement, if the Seller deems such removal necessary or
appropriate. An aggregate amount of at least $__________ of additional Home
Equity Loans will also be included in the pool prior to the issuance of the
Notes and the Subsequent Home Equity Loans will be added to the pool after the
issuance of the Notes.
A current report on Form 8-K will be available to purchasers of the Notes
and will be filed, and incorporated by reference to the Registration Statement
together with the Indenture, the Trust Agreement and the Sale and Servicing
Agreement, with the Securities and Exchange Commission within fifteen days after
the initial issuance of the Notes and within fifteen days of the addition of any
Subsequent Home Equity Loans. In the event Initial Home Equity Loans are removed
from, added to, or Subsequent Home Equity Loans are added to the pool as set
forth in the preceding paragraph, such removal or addition will be noted in a
current report on Form 8-K. A description of the pool of Initial Home Equity
Loans, as of the Closing Date including such additional Home Equity Loans, will
be filed in a current report on Form 8-K within fifteen days after the initial
issuance of the Notes.
DESCRIPTION OF THE NOTES
General
The Issuer will issue the Notes pursuant to the Indenture. The Issuer will
also issue the Residual Interest pursuant to the Trust Agreement, which
represents the residual interest in the Trust Estate. The summaries of certain
provisions of the Indenture, the Sale and Servicing Agreement and the Trust
Agreement (collectively, the "Agreements") set forth below, under the caption
"Administration" herein, while complete in material respects, do not purport to
be exhaustive. For more details regarding the terms of the Agreements,
prospective investors in the Notes are advised to review the Agreements, a copy
of each of which the Depositor will provide (without exhibits) without charge
upon written request addressed to the Depositor.
The Notes will be secured by the Trust Estate created by the Indenture.
The Notes represent non-recourse obligations of the Issuer and proceeds of the
assets in the Trust Estate will be the sole source of payments of the Notes. The
Notes will not represent an interest in or obligation of the Depositor, the
Servicer, the Note Insurer, the Owner Trustee, the Indenture Trustee, the
Underwriters, any of their respective affiliates or any other entity.
Payment Dates
On each Payment Date, the Owners of the Notes will be entitled to receive,
from amounts then on deposit in a trust account established and maintained by
the Indenture Trustee in accordance with the Sale and Servicing Agreement (the
"Note Account") and until the Note Principal Balance is reduced to zero, the
aggregate payment amount as of such Payment Date as described below. Payments
will be made in immediately available funds to Owners of Notes by wire transfer
or otherwise, to the account of such Owner at a domestic bank or other entity
having appropriate facilities therefor, if such Owner has so notified the
Indenture Trustee at least five Business Days prior to the Record Date, or by
check mailed to the address of the person entitled thereto as it appears on the
register (the "Register") maintained by the Indenture Trustee as registrar (the
"Registrar"). Beneficial Owners may experience some delay in the receipt of
their payments due to the operations of DTC. See "Risk Factors -- Book Entry
Registration" and "Description of the Notes -- Book Entry Registration of the
Notes" herein and "Description of the Securities -- Book Entry Securities" in
the Prospectus.
The Indenture will provide that an Owner, upon receiving the final payment
on such Owner's Notes, will be required to send such Note to the Indenture
Trustee. The Indenture additionally will provide that, in any event, any
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Note as to which the final payment thereon has been made shall be deemed
canceled for all purposes of the Indenture and the Note Insurance Policy.
Each Owner of record of the Notes will be entitled to receive such Owner's
Percentage Interest in the amounts due on such Payment Date. The "Percentage
Interest" as of any date of determination will be equal to the percentage
obtained by dividing the principal balance of such Note as of the Cut-Off Date
by the Note Principal Balance as of the Cut-Off Date.
Payments
Upon receipt, the Indenture Trustee will be required to deposit into the
Note Account, (i) any Insured Payments, (ii) the proceeds of any liquidation of
the assets of the Trust Estate, (iii) all remittances made to the Indenture
Trustee by the Servicer, (iv) on the Payment Dates in _____ and ____ ___, the
Capitalized Interest Requirement (as defined in the Sale and Servicing
Agreement) and (v) on the Payment Date immediately following the end of the
Funding Period any portion of the Pre-Funding Amount remaining unused.
On each Payment Date, the Indenture Trustee is required to make the
following payments and transfers from monies then on deposit in the Note Account
as specified below in the following order of priority of each such transfer and
payment:
(i) first, on each Payment Date from amounts then on deposit in the Note
Account the Indenture Trustee shall distribute (A) to itself, the
Indenture Trustee Fee and the Indenture Trustee Reimbursable
Expenses and (B) provided that no Note Insurer Default has occurred
and is continuing, the Premium Amount for such Payment Date to the
Note Insurer;
(ii) second, on each Payment Date, the Indenture Trustee shall allocate
an amount equal to the sum of (x) the Total Monthly Excess Spread
(as defined herein) with respect to such Payment Date plus (y) any
Overcollateralization Reduction Amount with respect to such Payment
Date (such sum being the "Total Monthly Excess Cashflow" with
respect to such Payment Date) in the following order of priority:
(A) first, such Total Monthly Excess Cashflow shall be allocated
to the payment of the Principal Payment Amount (excluding any
Overcollateralization Increase Amount) pursuant to clause
(iv)(C) below in an amount equal to the amount, if any, by
which (x) the Principal Payment Amount (excluding any
Overcollateralization Increase Amount) exceeds (y) the
Available Funds for such Payment Date (net of the related
Current Interest and the Trust Fees and Expenses) (the amount
of such difference being an "Available Funds Shortfall"); and
(B) second, any portion of the Total Monthly Excess Cashflow
remaining after the allocation described in clause (A) above
shall be paid to the Note Insurer in respect of amounts owed
on account of any Reimbursement Amount (as defined in the Sale
and Servicing Agreement) owed to the Note Insurer;
(iii) third, the amount, if any, of the Total Monthly Excess Cashflow on a
Payment Date remaining after the allocations and payments described
in clause (ii) above is the "Net Monthly Excess Cashflow" with
respect to such Payment Date and is required to be applied in the
following order or priority:
(A) first, such Net Monthly Excess Cashflow shall be used to
reduce to zero, through the payment of an
Overcollateralization Increase Amount to the Owners of the
Notes pursuant to clause (iv)(C) below, any
Overcollateralization Deficiency Amount (as defined in the
Sale and Servicing Agreement) as of such Payment Date;
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(B) second, any portion of the Net Monthly Excess Cashflow
remaining after the application described in clause (A) above
shall be used to pay any Available Funds Cap Carry Forward
Amount to the Owners of the Notes; and
(C) third, any Net Monthly Excess Cashflow remaining after the
applications and payments described in clauses (A) and (B)
above shall be paid to the Servicer to the extent of any
unreimbursed Delinquency Advances and unreimbursed Servicing
Advances;
(iv) fourth, following the making by the Indenture Trustee of all
allocations, transfers and disbursements described above from
amounts (including any related Insured Payment) then on deposit in
the Note Account, the Indenture Trustee shall distribute:
(A) (x) to the Note Insurer, the amounts described in clause
(ii)(B) above and (y) to the Servicer the amounts described in
clause (iii)(C) above;
(B) to the Owners of the Notes, the Current Interest (including
the proceeds of any Insured Payments made by the Note Insurer)
on a pro rata basis without any priority among the Notes;
(C) to the Owners of the Notes, the Principal Payment Amount until
the Note Principal Balance is reduced to zero;
(D) to the Indenture Trustee, as reimbursement of expenses of the
Indenture Trustee not reimbursed pursuant to (i) above and
incurred in connection with duties and obligations under the
Indenture; and
(v) fifth, following the making by the Indenture Trustee of all
allocations, transfers and disbursements described above, from
amounts then on deposit in the Note Account, the Indenture Trustee
shall distribute to the holders of the Residual Interest, the
remaining distributable amounts as specified in the Sale and
Servicing Agreement, for such Payment Date.
"Available Funds" as to each Payment Date is the amount on deposit in the
Note Account on such Payment Date (net of Total Monthly Excess Cashflow and
disregarding the amounts of any Insured Payments to be made on such Payment Date
and inclusive of any investment earnings on eligible investments therein).
"Total Available Funds" as to each Payment Date is the sum of (x) the
amount on deposit in the Note Account on such Payment Date (net of Total Monthly
Excess Cashflow) on such Payment Date, (y) any amounts of Total Monthly Excess
Cashflow to be applied on such Payment Date and (z) any deposit to the Note
Account from the Pre-Funding Account or Capitalized Interest Account expected to
be made in accordance with the Sale and Servicing Agreement (disregarding the
amount of any Insured Payment to be made on such Payment Date).
The Indenture Trustee or Paying Agent (as defined in the Indenture) shall
(i) receive as attorney-in-fact of each Owner of Notes any Insured Payment from
the Note Insurer and deposit such amounts into the Note Account and (ii)
disburse the same to each Owner of Notes. The Sale and Servicing Agreement will
provide that to the extent the Note Insurer makes Insured Payments, either
directly or indirectly (as by paying through the Indenture Trustee), to the
Owners of such Notes, the Note Insurer will be subrogated to the rights of such
Owners of Notes with respect to such Insured Payments and shall receive
reimbursement for such Insured Payment as provided in the Sale and Servicing
Agreement, but only from the sources and in the manner provided in the Sale and
Servicing Agreement, such subrogation and reimbursement to have no effect on the
Note Insurer's obligations under the Note Insurance Policy.
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Each Owner of a Note will be required promptly to notify the Indenture
Trustee in writing upon the receipt of a court order relating to a Preference
Amount and will be required to enclose a copy of such order with such notice to
the Indenture Trustee.
Calculation of One-Month LIBOR
On each LIBOR Determination Date (as defined below), the Indenture Trustee
will determine LIBOR for the next Accrual Period for the Notes.
"One-Month LIBOR" means, as of any LIBOR Determination Date, the London
interbank offered rate for one-month United States dollar deposits which appears
in the Telerate Page 3750 as of 11:00 a.m., London time, on such date. If such
rate does not appear on Telerate Page 3750, the rate for that day will be
determined on the basis of the rates at which deposits in United States dollars
are offered by the Reference Banks at approximately 11:00 a.m., London time, on
that day to prime banks in the London interbank market for a period equal to one
month. The Indenture Trustee will request the principal London office of each of
the Reference Banks to provide a quotation of its rate. If at least two such
quotations are provided, the rate for that day will be the arithmetic mean of
the quotations (rounded upwards if necessary to the nearest whole multiple of
___%). If fewer than two quotations are provided as requested, the rate for that
day will be the arithmetic mean of the rates quoted by major banks in New York
City, selected by the Servicer, at approximately 11:00 a.m., New York City time,
on that day for loans in United States dollars to leading European banks for a
period equal to one month.
"LIBOR Determination Date" means, for the Accrual Period related to the
___ __ Payment Date, One-Month LIBOR on the second London business day preceding
the Closing Date, and for any Accrual Period thereafter, the second London
business day preceding the commencement of such Accrual Period. For purposes of
determining One-Month LIBOR, a "London business day" is any day on which
dealings in deposits of United States dollars are transacted in the London
interbank market.
"Telerate Page 3750" means the display page currently 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).
"Reference Banks" means leading banks selected by the Indenture Trustee
and engaged in transactions in Eurodollar deposits in the international
Eurocurrency market.
Pre-Funding Account
On the Closing Date, the Pre-Funded Amount will be deposited in the
Pre-Funding Account, which account shall be in the name of and maintained by the
Indenture Trustee in trust for the Owners of the Notes. During the Funding
Period, the Pre-Funded Amount will be maintained in the Pre-Funding Account. The
Pre-Funded Amount will be reduced during the Funding Period by the amount
thereof used to purchase Subsequent Home Equity Loans in accordance with the
Sale and Servicing Agreement. Any Pre-Funded Amount remaining at the end of the
Funding Period will be distributed to the Owners of the Notes on the Payment
Date immediately following the end of the Funding Period in reduction of the
Note Principal Balance of such Owner's Notes, thus resulting in a partial
principal prepayment of such Notes.
Amounts on deposit in the Pre-Funding Account will be invested in Eligible
Investments. All interest and any other investment earnings on amounts on
deposit in the Pre-Funding Account will be deposited in the Capitalized Interest
Account prior to each Payment Date during the Funding Period.
Capitalized Interest Account
On the Closing Date cash will be deposited in the Capitalized Interest Account,
which account shall be in the name of and maintained by the Indenture Trustee in
trust for the Owners of the Notes. The amount on deposit in the
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Capitalized Interest Account, including reinvestment income thereon, will be
used by the Indenture Trustee on each Payment Date during and immediately after
the Funding Period to fund the excess, if any, of (i) the amount of interest
accruing on the outstanding Pre-Funded Amount at a rate equal to the Note Rate
over (ii) the amount of any reinvestment income on monies on deposit in the
Pre-Funding Account; such amounts on deposit will be so applied by the Indenture
Trustee on the each Payment Date during and immediately after the Funding Period
to fund any such excess. Any amounts remaining in the Capitalized Interest
Account at the end of the Funding Period and not needed for such purpose will be
paid to the Seller and will not thereafter be available for distribution to the
Owners of the Notes. Amounts on deposit in the Capitalized Interest Account will
be invested in Eligible Investments.
Book Entry Registration of the Notes
The Notes initially will be book-entry Notes (the "Book-Entry Notes").
Persons acquiring Noteownership interests in the Notes ("Notes") will hold such
Notes through the Depository Trust Company ("DTC"), in the United States, or
Cedel Bank, societe anonyme ("Cedel") or the Euroclear System ("Euroclear"), in
Europe, if such Noteowners are participants of such systems, or indirectly
through organizations that are participants in such systems. The Book-Entry Note
will be issued in one or more notes, representing the aggregate principal
balance of the Notes , and will initially be registered in the name of Cede &
Co. ("Cede"), the nominee of DTC. Cedel and Euroclear will hold omnibus
positions on behalf of their participants through customers' securities accounts
in Cedel's and Euroclear's names on the books of their respective depositaries
which in turn will hold such positions in customers' securities accounts in the
depositaries names on the books of DTC. Citibank N.A. ("Citibank") will act as
depositary for Cedel and Morgan Guaranty Trust Company of New York ("Morgan")
will act as depositary for Euroclear (Citibank and Morgan, in such capacities,
individually the "Relevant Depositary" and, collectively, the "European
Depositaries"). Investors may hold such beneficial interests in the Book-Entry
Notes in minimum denominations representing principal amount of $1,000 and in
integral multiples of $1 in excess thereof. Except as described below, no person
acquiring a Book-Entry Note will be entitled to receive a physical note
representing such Note (a "Definitive Note"). Unless and until Definitive Notes
are issued, it is anticipated that the only "Noteholder" of the Note will be
Cede, as nominee of DTC. Noteowners will not be Noteholders as that term is used
in the Sale and Servicing Agreement. Noteowners are permitted to exercise their
rights only indirectly through DTC and its Participants (including Cedel and
Euroclear).
Servicing Compensation
As to each Home Equity Loan, the Servicer will retain a fee (the
"Servicing Fee") equal to 0.50% per annum, payable monthly at one-twelfth of
such annual rate of the then outstanding principal balance of such Home Equity
Loan serviced as of the first day of each Remittance Period, provided, however,
that if a successor Servicer is appointed in accordance with the Sale and
Servicing Agreement, the Servicing Fee shall be such amount agreed upon by the
Trustee, the Note Insurer, and the successor Servicer but in no event in an
amount greater than the amount paid to the predecessor Servicer. The Servicer
will also be able to retain late fees, prepayment charges, assumption fees,
release fees, bad check charges and any other servicing related charges.
Optional Termination
By Servicer or Note Insurer. At its option, the Servicer (or the Note
Insurer, if the Servicer fails to exercise such option) may on any Monthly
Remittance Date when the aggregate outstanding Loan Balance of the Home Equity
Loans is 10% or less of the Maximum Collateral Amount purchase from the Trust
all (but not fewer than all) remaining Home Equity Loans, in whole only, and
other property acquired by foreclosure, deed in lieu of foreclosure, or
otherwise then constituting the Trust Estate, and pay to the Owners of the Note
an amount up to the sum of (i) 100% of the then outstanding principal balance of
the Notes, plus (ii) one month's interest on the then outstanding principal
balance of the Notes at the then Pass-Through Rate, plus any previously accrued
but unpaid interest thereon, together with the amount of any Unpaid Interest
Index Carryover, to the extent of funds available therefor, such sum payable in
accordance with the priorities described under "Description of the
Notes--Distributions" herein and thereby effect early retirement of the Notes.
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Termination Upon Loss of REMIC Status. Following a final determination by
the Internal Revenue Service or by a court of competent jurisdiction, in either
case from which no appeal is taken within the permitted time for such appeal, or
if any appeal is taken, following a final determination of such appeal from
which no further appeal can be taken, to the effect that the REMIC does not and
will no longer qualify as a "REMIC" pursuant to Section 860D of the Code (the
"Final Determination"), at any time on or after the date which is 30 calendar
days following such Final Determination the Note Insurer or the Owners of a
majority in Percentage Interests represented by the Notes then outstanding with
the consent of the Note Insurer may direct the Trustee on behalf of the Trust to
adopt a plan of complete liquidation, as contemplated by Section 860F(a)(4) of
the Code.
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Indenture Trustee
_________________ will be named as Indenture Trustee under the Indenture.
Year 2000 Issue
The "Year 2000 Issue" relates to the fact that many existing computer
programs and applications use only two digits to identify a year in the date
field. The ongoing process of identification, evaluation and implementation of
changes to computer systems and software necessary for the year 2000 conversion
has been underway since the Servicer's fiscal year 1997. Potential software
failures due to processing errors potentially arising from calculations using
the year 2000 date are not believed to be a significant risk. The total costs of
compliance and the effect on the Servicer's future results of operations are not
believed to be material and are expected to be accomplished within the normal
process of upgrading hardware and software.
THE INSURANCE POLICIES AND THE NOTE INSURER
THE NOTE INSURER
The information set forth in this section has been provided by the Note
Insurer. No representation is made by the Underwriters, the Issuer, the Seller,
the Servicer, the Depositor or any of their affiliates as to the accuracy or
completeness of such information or any information related to the Note Insurer
incorporated by reference herein.
The Note Insurer, in consideration of the payment of the premium and
subject to the terms of the Note Insurance Policy, will unconditionally and
irrevocably guarantee to any Owner that an amount equal to each full and
complete Insured Payment will be received by the Indenture Trustee or its
successor, as trustee for the Owners, on behalf of the Owners from the Note
Insurer, for distribution by the Indenture Trustee to each Owner of each Owner's
proportionate share of the Insured Payment. The Note Insurer's obligations under
the Note Insurance Policy with respect to a particular Insured Payment shall be
discharged to the extent funds equal to the applicable Insured Payment are
received by the Indenture Trustee, whether or not such funds are properly
applied by the Indenture Trustee. Insured Payments shall be made only at the
time set forth in the Note Insurance Policy and no accelerated Insured Payments
shall be made regardless of any acceleration of the Notes, unless such
acceleration is at the sole option of the Note Insurer.
Notwithstanding the foregoing paragraph, the Note Insurance Policy does
not cover shortfalls, if any, attributable to the liability of the Issuer or the
Indenture Trustee for withholding taxes, if any (including interest and
penalties in respect of any such liability).
The Note Insurer will pay any Insured Payment that is a Preference Amount
no later than 12:00 noon, New York City time, on the later of the Payment Date
on which the related Preference Amount is due or the third Business Day
following receipt on a Business Day by the Fiscal Agent (as described below) of
(i) a certified copy of the order requiring the return of such preference
payment, (ii) an opinion of counsel satisfactory to the Note Insurer that such
order is final and not subject to appeal, (iii) an assignment in such form as is
reasonably required by the Note Insurer, irrevocably assigning to the Note
Insurer all rights and claims of the Owner relating to or arising under the
Notes against the debtor which made such preference payment or otherwise with
respect to such preference payment and (iv) appropriate instruments to effect
the appointment of the Note Insurer as agent for such Owner in any legal
proceeding related to such preference payment, such instruments being in a form
satisfactory to the Note Insurer;
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provided, that if such documents are received after 12:00 noon, New York City
time on such Business Day, they will be deemed to be received on the following
Business Day. Such payments shall be disbursed to the receiver or trustee in
bankruptcy named in the final order of the court exercising jurisdiction on
behalf of the Owner and not to any Owner directly unless such Owner has returned
principal or interest paid on the Notes to such receiver or trustee in
bankruptcy, in which case such payment shall be disbursed to such Owner.
The Note Insurer will pay any other amount payable under the Note
Insurance Policy no later than 12:00 noon New York City time, on the later of
the Payment Date on which the Insured Payment is due or the second Business Day
following receipt in New York, New York, on a Business Day by State Street Bank
and Trust Company, N.A., as Fiscal Agent for the Note Insurer or any successor
fiscal agent appointed by the Note Insurer (the "Fiscal Agent") of a Notice (as
described below); provided that if such Notice is received after 12:00 noon New
York City time on such Business Day, it will be deemed to be received on the
following Business Day. If any such Notice received by the Fiscal Agent is not
in proper form or is otherwise insufficient for the purpose of making a claim
under the Note Insurance Policy, it shall be deemed not to have been received by
the Fiscal Agent for purposes of this paragraph, and the Note Insurer or the
Fiscal Agent, as the case may be, shall promptly so advise the Indenture Trustee
and the Indenture Trustee may submit an amended Notice.
Insured Payments due under the Note Insurance Policy, unless otherwise
stated therein, will be disbursed by the Fiscal Agent to the Indenture Trustee
on behalf of Owners by wire transfer of immediately available funds in the
amount of the Insured Payment less, in respect of Insured Payments related to
Preference Amounts, any amount held by the Indenture Trustee for the payment of
such Insured Payment and legally available therefor.
The Fiscal Agent is the agent of the Note Insurer only and the Fiscal
Agent shall in no event be liable to Owners for any acts of the Fiscal Agent or
any failure of the Note Insurer to deposit or cause to be deposited, sufficient
funds to make payments due under the Note Insurance Policy.
Subject to the terms of the Sale and Servicing Agreement, the Note Insurer
shall be subrogated to the rights of each Owner to receive payments under the
Notes to the extent of any payment by the Note Insurer under the Note Insurance
Policy.
As used in the Note Insurance Policy, the following terms shall have the
following meanings:
"Agreement" means the Sale and Servicing Agreement dated as of
______ __, ____ among CHEC Asset Receivable Corporation, as Depositor,
Centex Credit Corporation d/b/a Centex Home Equity Corporation, as Seller
and Servicer, Centex Home Equity Loan Owner Trust A, as Issuer, and The
Chase Manhattan Bank, as Indenture Trustee, without regard to any
amendment or supplement thereto, unless the Note Insurer shall have
consented in writing thereto.
"Business Day" means any day other than a Saturday, a Sunday or a
day on which banking institutions in New York City, Tampa, Florida, the
city in which the corporate trust office of the Indenture Trustee under
the Indenture is located or the city in which the principal office of the
Note Insurer is located are authorized or obligated by law or executive
order to close.
"Insured Payment" means for any Payment Date, the excess, if any, of
(i) the sum of (a) the Current Interest, (b) the Overcollateralization
Deficit and (c) the Preference Amount (without duplication) over (ii) the
Total Available Funds (after any deduction for the Trust Fees and Expenses
and after taking into account the portion of the Principal Payment Amount
to be actually paid on such Payment Date without regard to any related
Insured Payment to be made with respect to such Payment Date). Insured
Payments do not include the payment of any Available Funds Cap Carry
Forward Amounts.
"Notice" means the telephonic or telegraphic notice, promptly
confirmed in writing by telecopy
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substantially in the form of Exhibit A attached to the Note Insurance
Policy, the original of which is subsequently delivered by registered or
certified mail, from the Indenture Trustee specifying the Insured Payment
which shall be due and owing on the applicable Payment Date.
"Owner" means each Owner (as defined in the Indenture) who, on the
applicable Payment Date, is entitled under the terms of the applicable
Note to payment thereunder.
"Preference Amount" means any amount previously distributed to an
Owner on a Note that is recoverable and sought to be recovered as a
voidable preference by a trustee in bankruptcy pursuant to the United
States Bankruptcy Code (11 U.S.C.) as amended from time to time, in
accordance with a final nonappealable order of a court having competent
jurisdiction.
Capitalized terms used in the Note Insurance Policy and not otherwise
defined therein will have the respective meanings set forth in the Agreement as
of the date of execution of the Note Insurance Policy, without giving effect to
any subsequent amendment to or modification of the Agreement unless such
amendment or modification has been approved in writing by the Note Insurer.
Any notice under the Note Insurance Policy or service of process on the
Fiscal Agent of the Note Insurer may be made at the address listed below for the
Fiscal Agent of the Note Insurer or such other address as the Note Insurer shall
specify in writing to the Indenture Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, New
York, New York, 10006, Attention: Municipal Registrar and Paying Agency, or such
other address as the Fiscal Agent shall specify to the Indenture Trustee in
writing.
The Note Insurance Policy is being issued under and pursuant to, and shall
be construed under, the laws of the State of New York, without giving effect to
the conflict of laws principles thereof.
THE INSURANCE PROVIDED BY THE NOTE INSURANCE POLICY IS NOT COVERED BY THE
PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW
YORK INSURANCE LAW.
The Note Insurance Policy is not cancelable for any reason. The premium on
the Note Insurance Policy is not refundable for any reason including payment, or
provision being made for payment, prior to the maturity of the Notes.
CREDIT ENHANCEMENT
Note Insurance Policy
See "The Note Insurer" herein for a description of the Note Insurance
Policy.
Overcollateralization Provisions
Overcollateralization Resulting from Cash Flow Structure. The Sale and
Servicing Agreement requires that, on each Payment Date, Net Monthly Excess
Cashflow be applied on such Payment Date as an accelerated payment of principal
on the Notes, but only to the limited extent hereafter described. Net Monthly
Excess Cashflow equals the excess of (i) the excess, if any of (x) the interest
which is collected on the Home Equity Loans during a Remittance Period (net of
the Servicing Fee and of certain miscellaneous administrative amounts) plus any
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Delinquency Advances and Compensating Interest plus any amounts required to be
transferred from the Capitalized Interest Account and Pre-Funding Account
pursuant to the terms of the Sale and Servicing Agreement over (y) the sum of
the Current Interest and the Trust Fees and Expenses (the difference between (x)
and (y) is the "Total Monthly Excess Spread"), over (ii) the portion of the
Total Monthly Excess Cashflow that is used to cover shortfalls in Available
Funds on such Payment Date or used to reimburse the Note Insurer.
The application of Net Monthly Excess Cashflow has the effect of
accelerating the amortization of the Notes relative to the amortization of the
Home Equity Loans. To the extent that any Net Monthly Excess Cashflow is not so
used, the Sale and Servicing Agreement provides that it will be used to
reimburse the Owners of the Notes with respect to any Available Funds Cap Carry
Forward Amount and then to reimburse the Servicer with respect to any amounts
owing to it, and, thereafter, paid to the Owners of the Residual Interest.
Pursuant to the Sale and Servicing Agreement, Net Monthly Excess Cashflow
will be applied as an accelerated payment of principal on the Notes until the
Overcollateralization Amount has increased to the level required.
"Overcollateralization Amount" means, the excess, if any, of (x) the sum of (i)
the aggregate Loan Balances of the Home Equity Loans as of the close of business
on the last day of the preceding Remittance Period and (ii) any amount on
deposit in the Pre-Funding Account at such time exclusive of Pre-Funding Account
Earnings (as defined in the Sale and Servicing Agreement) over (y) the aggregate
Note Principal Balance as of such Payment Date (after taking into account the
payment of the Principal Payment Amount (except for any Overcollateralization
Reduction Amount or Overcollateralization Increase Amount) on such Payment
Date). Any amount of Net Monthly Excess Cashflow actually applied as an
accelerated payment of principal is an "Overcollateralization Increase Amount."
The required level of the Overcollateralization Amount with respect to a Payment
Date is the "Specified Overcollateralization Amount." The Sale and Servicing
Agreement generally provides that the Specified Overcollateralization Amount
may, over time, decrease, or increase, subject to certain floors, caps and
triggers including triggers that allow the related Specified
Overcollateralization Amount to decrease or "step down" based on the performance
on the Home Equity Loans with respect to certain tests specified in the Sale and
Servicing Agreement based on delinquency rates and cumulative losses. In
addition, Net Monthly Excess Cashflow will be applied to the payment in
reduction of principal of the Notes during the period that the Home Equity Loans
are unable to meet certain tests specified in the Sale and Servicing Agreement
based on delinquency rates and cumulative losses.
In the event that the Specified Overcollateralization Amount is permitted
to decrease or "step down" on a Payment Date in the future, the Sale and
Servicing Agreement provides that a portion of the principal which would
otherwise be distributed to the Owners of the Notes on such Payment Date shall
be distributed to the Owners of the Residual Interest over the period specified
in the Sale and Servicing Agreement. This has the effect of decelerating the
amortization of the Notes relative to the amortization of the Home Equity Loans
and of reducing the Overcollateralization Amount. With respect to any Payment
Date, the excess, if any, of (x) the Overcollateralization Amount on such
Payment Date after taking into account all distributions to be made on such
Payment Date (except for any distributions of the Overcollateralization
Reduction Amount as described in this sentence) over (y) the Specified
Overcollateralization Amount is the "Excess Overcollateralization Amount" for
such Payment Date. If, on any Payment Date, the Excess Overcollateralization
Amount is, or, after taking into account all other distributions to be made on
such Payment Date would be, greater than zero (i.e., the Overcollateralization
Amount is or would be greater than the Specified Overcollateralization Amount),
then any amounts relating to principal which would otherwise be distributed to
the Owners of the Notes on such Payment Date shall instead be distributed to the
Owners of the Residual Interest (to the extent available therefor) in an amount
equal to the lesser of (x) the Excess Overcollateralization Amount and (y) the
amount available for distribution on account of principal with respect to the
Notes on such Payment Date; such amount being the "Overcollateralization
Reduction Amount" with respect to the related Payment Date.
The Sale and Servicing Agreement provides generally that, on any Payment
Date all amounts collected on account of principal (other than any such amount
applied to the payment of an Overcollateralization Reduction Amount) during the
prior Remittance Period will be distributed to the Owners of the Notes on such
Payment Date. If
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any Home Equity Loan became a Liquidated Loan during such prior Remittance
Period, the Net Liquidation Proceeds related thereto and allocated to principal
may be less than the principal balance of the related Home Equity Loan; the
amount of any such insufficiency is a "Realized Loss." In addition, the Sale and
Servicing Agreement provides that the principal balance of any Home Equity Loan
which becomes a Liquidated Loan shall thenceforth equal zero. The Sale and
Servicing Agreement does not contain any requirement that the amount of any
Realized Loss be distributed to the Owners of the Notes on the Payment Date
which immediately follows the event of loss; i.e., the Sale and Servicing
Agreement does not require the current recovery of losses. However, the
occurrence of a Realized Loss will reduce the Overcollateralization Amount,
which to the extent that such reduction causes the Overcollateralization Amount
to be less than the related Specified Overcollateralization Amount applicable to
the related Payment Date, will require the payment of an Overcollateralization
Increase Amount on such Payment Date (or, if insufficient funds are available on
such Payment Date, on subsequent Payment Dates, until the Overcollateralization
Amount equals the Specified Overcollateralization Amount).
Overcollateralization and the Note Insurance Policy. The Sale and
Servicing Agreement defines a "Overcollateralization Deficit" with respect to a
Payment Date to be the amount, if any, by which (x) the Note Principal Balance
with respect to such Payment Date, after taking into account all distributions
to be made on such Payment Date (without regard to any Insured Payment to be
made on such Payment Date and except for any Overcollateralization Deficit),
exceeds (y) the sum of (i) the aggregate Loan Balances of the Home Equity Loans
as of the close of business on the last day of the prior Remittance Period and
(ii) the amount, if any, on deposit in the Pre-Funding Account as of the close
of business on the last day of the prior Remittance Period (exclusive of
Pre-Funding Account Earnings). The Sale and Servicing Agreement requires the
Indenture Trustee to make a claim for an Insured Payment under the Note
Insurance Policy not later than the second Business Day prior to any Payment
Date as to which the Indenture Trustee has determined that an
Overcollateralization Deficit will occur for the purpose of applying the
proceeds of such Insured Payment as a payment of principal to the Owners of the
Notes on such Payment Date. The Note Insurance Policy is thus similar to the
overcollateralization provisions described above insofar as the Note Insurance
Policy guarantees ultimate, rather than current, payment of the amounts of any
Realized Losses to the Owners of the Notes. Investors in the Notes should
realize that, under extreme loss or delinquency scenarios, they may temporarily
receive no distributions of principal when they would otherwise be entitled
thereto under the principal allocation provisions described herein.
Nevertheless, the exposure to risk of loss of principal of the Owners of the
Notes depends in part on the ability of the Note Insurer to satisfy its
obligations under the Note Insurance Policy. In that respect and to the extent
that the Note Insurer satisfies such obligations, the Owners of the Notes are
insulated from shortfalls in Available Funds that may arise.
FEDERAL INCOME TAX CONSEQUENCES
The following section in conjunction with the Section in the Prospectus
captioned "Federal Income Tax Consequences" discusses certain of the material
anticipated federal income tax consequences of the purchase, ownership and
disposition of the Notes. This section must be considered only in connection
with "Federal Income Tax Consequences" in the Prospectus. The discussion herein
and in the Prospectus is based upon laws, regulations, rulings and decisions now
in effect, all of which are subject to change. The discussion below and in the
Prospectus does not purport to deal with all federal tax consequences applicable
to all categories of investors, some of which may be subject to special rules.
Investors should consult their own tax advisors in determining the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of the Notes.
No election will be made to treat the Trust or the Trust Estate or any
portion thereof as a REMIC for federal income tax purposes.
Upon issuance of the Notes, Stroock & Stroock & Lavan LLP, special tax
counsel, will deliver its opinion that, assuming compliance with the Trust
Agreement, the Notes will be treated as
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debt obligations for federal income tax purposes, and for federal income tax
purposes, the Issuer will not be classified as (i) an association taxable as a
corporation, (ii) a taxable mortgage pool or (iii) a "publicly traded
partnership" taxable as a corporation. Each Owner of a Note, by its acceptance
of a Note, will agree to treat the Notes as indebtedness. It is anticipated that
the Notes will be issued without original issue discount for federal income tax
purposes. However, it is possible that the Internal Revenue Service could treat
a portion of the additional interest which would become payable on the Notes
after the Redemption Date as original issue discount. Owners are urged to
consult their tax advisor with respect to the tax consequences of holding the
Notes.
The prepayment assumption that is to be used in determining whether the
Notes are issued with original issue discount and the rate of accrual of
original issue discount is a CPR of __%. No representation is made as to the
actual rate at which the Home Equity Loans will prepay. See "Certain Federal
Income Tax Considerations" in the Prospectus.
The Notes will not represent "real estate assets" for purposes of Section
856(c)(4)(A) of the Code or "[l]oans . .. principally secured by an interest in
real property" within the meaning of Section 7701(a)(19)(C)(v) of the Code. The
Notes will also not be treated as "qualified mortgages" under Section
860G(a)(3)(C) of the Code.
STATE TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences" herein, 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 tax 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 tax consequences of
investments in the Notes.
ERISA CONSIDERATIONS
ERISA and the Code impose certain restrictions on (a) employee benefit
plans (as defined in Section 3(3) of ERISA) and plans described in Code section
4975(e)(1), including individual retirement accounts (the "Plans") and
(b)persons who have certain specified relationships to such Plans or who
constitute "disqualified persons" under Code section 4975(e)(2) with respect to
such Plans ("parties in interest"). Certain employee benefit plans, such as
governmental plans and church plans (if no election has been made under section
410(d) of the Code), are not subject to the restrictions of ERISA, and assets of
such plans may be invested in the Notes without regard to the ERISA
considerations described below, subject to other applicable federal and state
law. However, any such governmental or church plan which is qualified under
section 401(a) of the Code and exempt from taxation under section 501(a) of the
Code is subject to the prohibited transaction rules set forth in section 503 of
the Code. Any Plan fiduciary which proposes to cause a Plan to acquire any of
the Notes should consult with its counsel with respect to the potential
consequences under ERISA, and the Code, of the Plan's acquisition and ownership
of the Notes. See "ERISA Considerations" in the Prospectus. Investments by Plans
are also subject to ERISA's general fiduciary requirements, including the
requirement of investment prudence and diversification and the requirement that
a Plan's investments be made in accordance with the documents governing the
Plan.
Investments by Plans are subject to ERISA's general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan.
Section 406 of ERISA prohibits parties in interest with respect to a Plan
from engaging in certain transactions("prohibited transactions") involving a
Plan and its assets unless a statutory or administrative exemption
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applies to the S-60 transaction. Section 4975 of the Code imposes certain excise
taxes (or, in some cases, a civil penalty may be assessed pursuant to section
502(i) of ERISA) on parties in interest which engage in non-exempt prohibited
transactions.
The United States Department of Labor ("DOL") has issued a final
regulation (29 C.F.R. Section 2510.3-101)concerning the definition of what
constitutes the assets of a Plan for purposes of ERISA and the prohibited
transaction provisions of the Code (the "Plan Asset Regulation"). The Plan Asset
Regulation describes the circumstances under which the assets of an entity in
which a Plan invests will be considered to be "plan assets" such that any person
who exercises control over such assets would be subject to ERISA's fiduciary
standards. Under the Plan Asset Regulation, generally when a Plan invests in
another entity, the Plan's assets do not include, solely by reason of such
investment, any of the underlying assets of the entity. However, the Plan Asset
Regulation provides that, if a Plan acquires an "equity interest" in any entity
that is neither a "publicly-offered security" (as defined therein) nor a
security issued by an investment company registered under the Investment Company
Act of 1940, the assets of the entity will be treated as assets of the Plan
investor unless certain exceptions apply. If the Notes were deemed to be equity
interests and no statutory, regulatory or administrative exemption applies, the
Issuer could be considered to hold plan assets by reason of a Plan's investment
in the Notes. Such plan assets would include an undivided interest in any assets
held by the Issuer. In such an event, the Servicer and other persons, in
providing services with respect to the Issuer's assets, may be parties in
interest with respect to such Plans, subject to fiduciary responsibility
provisions of Title I of ERISA, including the general fiduciary duties of
Section 404 of ERISA, the prohibited transaction provisions of Section 406 of
ERISA, and to Section 4975 of the Code with respect to transactions involving
the Trust's assets. Under the Plan Asset Regulation, the term "equity interest"
is defined as any interest in an entity other than an instrument that is treated
as indebtedness under "applicable local law" and which has no "substantial
equity features." Although the Plan Asset Regulation is silent with respect to
the question of which law constitutes "applicable local law" for this purpose,
the DOL has stated that these determinations should be made under the state law
governing interpretation of the instrument in question. In the preamble to the
Plan Asset Regulation, the DOL declined to provide a precise definition of what
features are equity features or the circumstances under which such features
would be considered "substantial," noting that the question of whether a plan's
interest has substantial equity features is an inherently factual one, but that
in making a determination it would be appropriate to take into account whether
the equity features are such that a Plan's investment would be a practical
vehicle for the indirect provision of investment management services.
Without regard to whether the Notes are treated as an equity interest
under the Plan Asset Regulation, the acquisition or holding of the Notes by or
on behalf of a Plan could be considered to give rise to a prohibited transaction
if such acquisition or holding is deemed to be a prohibited loan to a party in
interest with respect to such Plan. Certain exemptions from the prohibited
transaction rules could be applicable to the purchase and holding of the Notes
by a Plan depending on the type and circumstances of the plan fiduciary making
the decision to acquire the Notes. Included among these exemptions are:
Prohibited Transaction Class Exemption ("PTCE") 90-1, regarding certain
transactions entered into by insurance company pooled separate accounts; PTCE
95-60, regarding certain transactions entered into by insurance company general
accounts; PTCE 96-23, regarding certain transactions effected by "in-house asset
managers"; PTCE 91-38, regarding certain transactions entered into by bank
collective investment funds; and PTCE 84-14, regarding certain transactions
effected by "qualified professional asset managers."
Any Plan fiduciary considering whether to purchase any Notes on behalf of
a Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to such investment. Among other things, before purchasing any Notes, a
fiduciary of a Plan should make its own determination as to whether the Trust,
as obligor on the Notes, is a party in interest with respect to the Plan, the
availability of the exemptive relief provided in the Plan Asset Regulations and
the availability of any other prohibited transaction exemptions. Investors
should analyze whether the decision may have an impact with respect to purchases
of the Notes.
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In addition to the matters described above, purchasers of an Notes that
are insurance companies should consult with their counsel with respect to the
United States Supreme Court case interpreting the fiduciary responsibility rules
of ERISA, John Hancock Mutual Life Insurance Co. v. Harris Trust and Savings
Bank 114 S. Ct. 517 (1993). In John Hancock, the Supreme Court ruled that assets
held in an insurance company's general account may be deemed to be "plan assets"
for ERISA purposes under certain circumstances. Prospective purchasers using
insurance company general account assets should determine whether the decision
affects their ability to make purchases of the Notes.
RATINGS
It is a condition of the issuance of the Notes that the Notes receive
ratings of "____" by ______ and "AAA" by _______________. Explanations of the
significance of such ratings may be obtained from _______, ____________________
and ____________________. Such ratings will be the views only of such rating
agencies. There is no assurance that such ratings will continue for any period
of time or that such ratings will not be revised or withdrawn. Any such revision
or withdrawal of such ratings may have an adverse effect on the market price of
the Notes. A security rating is not a recommendation to buy, sell or hold
securities.
The ratings issued by ______ and __________ on the payment of principal
and interest on the Notes do not cover the payment of the Available Funds Cap
Carry Forward Amount. The ratings of _______ and __________ do not address the
possibility that, as a result of principal prepayments, Owners of the Notes may
receive a lower than anticipated yield.
The ratings of the Notes should be evaluated independently from similar
ratings on other types of securities. A security rating is not a recommendation
to buy, sell or hold securities and may be subject to revision or withdrawal at
any time by the assigning rating agency.
The Depositor has not requested a rating of the Notes offered hereby by
any rating agency other than _______ and __________ and the Depositor has not
provided information relating to the Notes offered hereby or the Home Equity
Loans to any rating agency other than ______ and __________. However, there can
be no assurance as to whether any other rating agency will rate the Notes
offered hereby or, if another rating agency rates such Notes, what rating would
be assigned to such Notes by such rating agency. Any such unsolicited rating
assigned by another rating agency to the Notes offered hereby may be lower than
the rating assigned to such Notes by either or both of ______ and __________.
LEGAL INVESTMENT CONSIDERATIONS
The Notes will not constitute "mortgage related securities" for purposes
of SMMEA. Accordingly, many institutions with legal authority to invest in
comparably rated securities based on qualifying first mortgage loans may not be
legally authorized to invest in the Notes.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement relating to the Notes (the "Underwriting Agreement"), the Underwriters
named below (the "Underwriters"), has severally agreed to purchase, the
principal amount of the Notes set forth opposite its name below:
Underwriters Principal Amount
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The Depositor and the Seller have agreed to indemnify the Underwriters
against certain liabilities, including civil liabilities under the Securities
Act, or to contribute to payments which the Underwriters may be required to make
in respect thereof.
In the Underwriting Agreement, the Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all of the Notes offered
hereby, if any are purchased. The Depositor has been advised by the Underwriters
that they propose initially to offer the Notes to the public at the offering
price set forth on the cover page hereof and to certain dealers at such price
less a concession not in excess of ____% (expressed as a percentage of the Note
Principal Balance). The Underwriters may allow and such dealers may reallow a
discount not in excess of ___%.
After the initial public offering, such prices and discounts may be
changed.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934 (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. These transactions,
if commenced, may be discontinued at any time.
REPORT OF EXPERTS
The consolidated balance sheets of _______________ as of ______ __, ____
and ____ and the related consolidated statements of income, changes in
shareholder's equity, and cash flows for each of the three years in the period
ended December 31, 1997, incorporated by reference in this Prospectus
Supplement, have been incorporated herein in reliance on the report of
_______________, independent accountants, given on the authority of that firm as
experts in accounting and auditing.
CERTAIN LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Notes will be passed upon for the Depositor by Stroock & Stroock & Lavan LLP.
Certain legal matters relating to the validity of the issuance of the Notes and
certain legal matters relating to insolvency issues and certain federal income
tax matters concerning the Notes will be passed upon for the Seller and the
Depositor by Stroock & Stroock & Lavan LLP, New York, New York. Certain legal
matters relating to the validity of the issuance of the Notes will be passed
upon for the Underwriter by ____________________.
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INDEX OF DEFINED TERMS
Page
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Accrual Period......................................4
Agreements.........................................29
applicable Cut-Off Date.............................1
Appraised Values...................................15
Available Funds Cap................................30
Available Funds Cap Carry Forward Amounts..........35
Available Funds Shortfall..........................30
Book-Entry Notes...................................33
Cede...............................................10
Cedel..............................................10
Citibank...........................................33
Closing Date........................................1
CMT Index...........................................3
CMT Loans...........................................3
Compensating Interest..............................36
CPR................................................26
Current Interest....................................4
Cut-Off Date........................................1
Date-of-Payment Loans..............................24
Definitive Note....................................33
Depositor...........................................1
DOL................................................39
DTC.................................................1
ERISA..............................................11
Euroclear..........................................10
European Depositaries..............................33
Event of Default....................................9
Excess Overcollateralization Amount................37
Exchange Act.......................................41
Final Determination................................33
Fiscal Agent.......................................35
Formula Note Rate...................................5
Funding Period......................................9
Home Equity Loans...................................1
Indenture...........................................2
Indenture Trustee...................................1
Indenture Trustee Fee...............................1
Initial Home Equity Loans...........................2
Insured Payment.....................................8
Interest Carry Forward Amount.......................4
Issuer..............................................1
LIBOR Determination Date...........................32
Loan Balance........................................2
Loan-to-Value Ratios...............................16
Majority Residualholders...........................10
Maximum Collateral Amount...........................5
Monthly Remittance Date.............................7
Morgan.............................................33
Mortgage Note.......................................2
Mortgagor..........................................24
Net Monthly Excess Cashflow........................30
Note Account.......................................29
Note Insurance Policy...............................1
Note Insurer........................................1
Note Insurer Default................................8
Note Principal Balance..............................4
Note Rate...........................................5
Noteholder.........................................33
Notes...............................................1
One-Month LIBOR....................................32
Original Aggregate Loan Balance.....................5
Overcollateralization Amount.......................36
Overcollateralization Deficit......................37
Overcollateralization Increase Amount..............37
Overcollateralization Reduction Amount.............37
Owner Trustee Fee...................................1
Owners..............................................3
Payment Date........................................2
Percentage Interest................................30
Plan Asset Regulation..............................39
Plans..............................................39
Pool................................................1
Preference Amount...................................7
Pre-Funded Amount...................................2
Pre-Funding Account.................................2
Premium Amount......................................7
Prepayments........................................13
Principal Payment Amount............................5
Properties..........................................2
Rating Agencies....................................11
Realized Loss......................................37
Record Date.........................................4
Redemption Date.....................................5
Reference Banks....................................32
Register...........................................29
Registrar..........................................29
related Cut-Off Date................................1
Relevant Depositary................................33
REMIC..............................................11
Remittance Period...................................7
Residual Interest...................................1
Sale and Servicing Agreement........................2
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Securities..........................................1
Seller..............................................2
Servicer............................................2
Servicing Fee.......................................7
Six-Month LIBOR Loans...............................3
SMMEA..............................................11
Specified Overcollateralization Amount.............37
Statistical Calculation Date........................2
Subsequent Cut-Off Date.............................1
Subsequent Home Equity Loans........................2
Subsequent Transfer Agreement......................12
Subsequent Transfer Date............................9
Telerate Page 3750.................................32
Total Available Funds..............................31
Total Monthly Excess Cashflow......................30
Total Monthly Excess Spread........................36
Trust...............................................1
Trust Agreement.....................................1
Trust Estate........................................1
Trust Fees and Expenses.............................9
Underwriter.........................................1
Underwriters.......................................41
Underwriting Agreement.............................41
Weighted average life..............................25
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No dealer, salesperson or other person has been authorized to give any
information or to make any representation not contained in this Prospectus
Supplement or the Prospectus and, if given or made, such information or
representation must not be relied upon as having been authorized by the
Depositor or by the Underwriters. This Prospectus Supplement and the Prospectus
do not constitute an offer to sell, or a solicitation of an offer to buy any of
the securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer in such jurisdiction. Neither the delivery of this
Prospectus Supplement or the Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that information herein is correct as
of any time subsequent to the date hereof or that there has been no change in
the affairs of the Depositor since such date.
------------
TABLE OF CONTENTS
Prospectus Supplement Page
----
SUMMARY OF TERMS
RISK FACTORS
THE HOME EQUITY LOAN POOL
PREPAYMENT AND YIELD
CONSIDERATIONS
REPRESENTATIVE LOAN POOLS
ADDITIONAL INFORMATION
DESCRIPTION OF THE NOTES
THE INSURANCE POLICIES AND THE NOTE
INSURER
THE NOTE INSURER
CREDIT ENHANCEMENT
FEDERAL INCOME TAX CONSEQUENCES
STATE TAX CONSEQUENCES
ERISA CONSIDERATIONS
RATINGS
LEGAL INVESTMENT CONSIDERATIONS
UNDERWRITING
REPORT OF EXPERTS
CERTAIN LEGAL MATTERS
Prospectus
Prospectus Supplement
Reports to Holders
Available Information
Incorporation of Certain Documents by Reference
Summary of Terms
Risk Factors
The Depositor
The Seller and Servicer
Use of Proceeds
Description of the Securities
The Trust Funds
Enhancement
Servicing of Home Equity Loans
The Agreements
Certain Legal Aspects of the Home Equity Loans
Use of Proceeds
Federal Income Tax Consequences
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CENTEX HOME EQUITY LOAN
OWNER TRUST A
$_________ ADJUSTABLE RATE
HOME EQUITY LOAN ASSET
BACKED NOTES, SERIES 199_-_
DUE _________ __, ____
CENTEX CREDIT CORPORATION
D/B/A CENTEX HOME EQUITY
CORPORATION
Seller and Servicer
CHEC ASSET RECEIVABLE
CORPORATION
Depositor
-----
PROSPECTUS SUPPLEMENT
-----
[ ]
----- --, ---
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<PAGE>
<PAGE>
PROSPECTUS
Asset-Backed Certificates
Asset-Backed Notes
(Issuable in Series)
------------------------
CHEC Asset Receivable Corporation
(Depositor)
Centex Credit Corporation
d/b/a
Centex Home Equity Corporation
(Seller and Servicer)
------------------------
The Asset-Backed Certificates (the "Certificates") and the Asset-Backed
Notes (the "Notes" and, collectively with the Certificates, the "Securities")
described herein may be sold from time to time in one or more series (each, a
"Series") in amounts, at prices and on terms to be determined at the time of
sale and to be set forth in a supplement to this Prospectus (a "Prospectus
Supplement"). Each series (each a "Series") of Securities will include either
one or more classes of Certificates or, if Notes are issued as part of a Series,
one or more Classes of Notes and one or more Classes of Certificates, as set
forth in the related Prospectus Supplement. Certain capitalized terms used
herein are defined in "INDEX OF DEFINED TERMS" beginning on page __.
For a discussion of significant matters affecting investment in the
Securities, see "Risk Factors" beginning on page 17 in the Prospectus. The
Certificates of a Series will evidence undivided interests in certain assets
deposited into a trust (each, a "Trust Fund") by CHEC Asset Receivable
Corporation (the "Depositor") pursuant to a Pooling and Servicing Agreement or a
Trust Agreement, as described herein. The Notes of a Series will be issued and
secured pursuant to an Indenture and will represent indebtedness of the related
Trust Fund. The Trust Fund for a Series of Securities will include (a) Home
Equity Loans, which may include one or more pools of closed-end home equity
loans (the "Home Equity Loans"), secured by first or second mortgages on one-to
four-family residential or mixed use properties, (b) certain monies received or
due thereunder on or after the date specified in the related Prospectus
Supplement (the "Cut-off Date") net of certain amounts payable to Centex Credit
Corporation d/b/a Centex Home Equity Corporation, as servicer (the "Servicer" or
in its capacity as seller, the "Seller") of the Home Equity Loans, (c) if
specified in the related Prospectus Supplement, funds on deposit in one or more
pre-funding accounts and/or capitalized interest accounts and (d) reserve funds,
letters of credit, surety bonds, insurance policies or other forms of credit
support as described herein and in the related Prospectus Supplement. Amounts on
deposit in a pre-funding account for any Series will be used to purchase
additional Home Equity Loans during the funding period specified in the related
Prospectus Supplement in the manner specified therein. The amount initially
deposited in a pre-funding account for a Series of Securities will not exceed
fifty percent of the aggregate principal amount of such Series of Securities.
Each Series of Securities will be issued in one or more classes (each, a
"Class"). Interest on and principal of the Securities of a Series will be
payable on the date or dates specified in the related Prospectus Supplement
(each, a "Distribution Date"), at the times, at the rates, in the amounts and in
the order of priority set forth in the related Prospectus Supplement.
If a Series includes multiple Classes, such Classes may vary with respect
to the amount, percentage (which may be 0%) and timing of distributions of
principal, interest or both and one or more Classes may be subordinated to other
Classes with respect to distributions of principal, interest or both as
described herein and in the related Prospectus Supplement. The Home Equity Loans
and other assets comprising the Trust Fund may be divided into one or more Asset
Groups and each Class of the related Series will evidence beneficial ownership
of the corresponding Asset Group, as applicable.
See "RISK FACTORS" beginning on page 17 for material risks to be
considered in purchasing the Securities.
The Seller, the Servicer, or such other entity that is specified in the
related Prospectus Supplement, may, at its option, cause an early termination of
one or more Classes of Securities by purchasing all or part of the Home Equity
Loans remaining in the Trust Fund on or after a specified date, or on or after
such time as the aggregate principal balance of the Securities of the Series or
the Home Equity Loans relating to such Series, as specified in the related
Prospectus Supplement, is less than the amount or percentage, not more than 25%,
specified in the related Prospectus Supplement. See "DESCRIPTION OF THE
SECURITIES--Optional Redemption, Purchase or Termination."
The rate of reduction of the aggregate principal balance of each Class of
a Series may depend principally upon the rate of payment (including prepayments)
with respect to the Home Equity Loans. A rate of prepayment lower or higher than
anticipated will affect the yield on the Securities of a Series in the manner
described herein and in the related Prospectus Supplement. Under certain limited
circumstances described herein and in the related Prospectus Supplement, a
Series of Securities may be subject to termination or redemption.
If specified in the related Prospectus Supplement, one or more elections
may be made to treat certain assets comprising the Trust Fund for a Series as a
"real estate mortgage investment conduit" (a "REMIC") for federal income tax
purposes. See "FEDERAL INCOME TAX CONSEQUENCES."
There currently is no secondary market for the Securities. There can be no
assurance that any such market will develop or, if it does develop, that it will
continue.
---------------------------------------
NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS OF, AND CERTIFICATES OF A SERIES
EVIDENCE BENEFICIAL INTERESTS IN, THE RELATED TRUST FUND ONLY AND ARE NOT
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR BY THE DEPOSITOR, THE TRUSTEE,
THE SERVICER, THE SELLER OR BY ANY OF THEIR RESPECTIVE
AFFILIATES. THE ONLY OBLIGATIONS
OF THE SELLER OR THE DEPOSITOR WITH RESPECT TO ANY
SERIES OF SECURITIES WILL BE PURSUANT TO CERTAIN
REPRESENTATIONS AND WARRANTIES SET FORTH
IN THE RELATED AGREEMENT AS DESCRIBED
HEREIN OR IN THE RELATED PROSPECTUS
SUPPLEMENT.
---------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR THE PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------------------------
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of securities offered hereby unless accompanied by a
Prospectus Supplement.
The date of this Prospectus is ____________, 199__.
<PAGE>
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Securities to be offered
hereunder will, among other things, set forth with respect to such Series of
Securities: (i) the aggregate principal amount, interest rate, and authorized
denominations of each Class of such Securities; (ii) certain information
concerning the Home Equity Loans; (iii) the terms of any Enhancement (as defined
herein) with respect to such Series; (iv) the terms of any insurance related to
the Home Equity Loans; (v) information concerning any other assets in the
related Trust Fund, including any Reserve Fund; (vi) the Final Scheduled
Distribution Date (as defined herein) of each Class of such Securities; (vii)
the method to be used to calculate the amount of interest and principal required
to be applied to the Securities of each Class of such Series on each
Distribution Date, the timing of the application of interest and principal and
the order of priority of the application of such interest and principal to the
respective Classes and the allocation of interest and principal to be so
applied; (viii) the Distribution Dates and any Assumed Reinvestment Rate (as
defined herein); (ix) the amount, if any, deposited in the Pre-Funding Account
(as defined herein) available to purchase additional Home Equity Loans, the
length of the Pre-Funding Period (as defined herein) and the criteria for
determining which additional Home Equity Loans may become part of the Trust
Fund; (x) additional information with respect to the plan of distribution of
such Securities; and (xi) whether one or more REMIC elections will be made with
respect to some or all of the Trust Fund for such Series and if so, the
designation of the Securities offered hereunder as regular interests or residual
interests in a REMIC.
REPORTS TO HOLDERS
Periodic and annual reports concerning the related Trust Fund for a Series
of Securities are required under the related Agreements to be forwarded to
Holders. Unless otherwise specified in the related Prospectus Supplement, such
reports will not be examined and reported on by an independent public
accountant. If so specified in the Prospectus Supplement for a Series of
Securities, such Series or one or more Classes of such Series will be issued in
book-entry form. In such event, (i) owners of beneficial interests in such
Securities will not be considered "Holders" under the Agreements and will not
receive such reports directly from the related Trust Fund; rather, such reports
will be furnished to such owners through the participants and indirect
participants of the applicable book-entry system and (ii) references herein to
the rights of "Holders" shall refer to the rights of such owners as they may be
exercised indirectly through such participants. See "THE AGREEMENTS--Reports to
Holders."
AVAILABLE INFORMATION
The Seller has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Securities. This Prospectus, which forms a part of
the Registration Statement, and the Prospectus Supplement relating to each
Series of Securities contain summaries of the material terms of the documents
referred to herein and therein, but do not contain all of the information set
forth in the Registration Statement pursuant to the Rules and Regulations of the
Commission. For further information, reference is made to such Registration
Statement and the exhibits thereto. Such Registration Statement and exhibits can
be inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at its Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at its Regional Office located as follows,
Midwest Regional Office, 500 West Madison Street, Chicago, Illinois 60661; and
Northeast Regional Office, Seven World Trade Center, New York, New York 10048.
The Commission maintains an Internet Web site that contains reports, proxy and
information statements and other information regarding the registrants that file
electronically with the Commission, including the Seller. The address of such
Internet Web site is (http://www.sec.gov).
Each Trust Fund will be required to file certain reports with the
Commission pursuant to the requirements of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). The Depositor and the Seller intend to cause
each Trust Fund to suspend filing such reports if and when such reports are no
longer required under the Exchange Act.
2
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No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Securities offered
hereby and thereby nor an offer of the Securities to any person in any state or
other jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus at any time does not imply that information herein is correct as of
any time subsequent to its date.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the Trust Fund
referred to in the accompanying Prospectus Supplement with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, after the
date of this Prospectus and prior to the termination of any offering of the
Securities issued by such Trust Fund shall be deemed to be incorporated by
reference in this Prospectus and to be a part of this Prospectus from the date
of the filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for all purposes of this Prospectus to the extent that
a statement contained herein (or in the accompanying Prospectus Supplement) or
in any other subsequently filed document which also is or is deemed to be
incorporated by reference modifies or replaces such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Seller on behalf of any Trust Fund will provide without charge to each
person to whom this Prospectus is delivered, on the written or oral request of
such person, a copy of any or all of the documents referred to above that have
been or may be incorporated by reference in this Prospectus (not including
exhibits to the information that is incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
this Prospectus incorporates).
3
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SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each Series of Securities contained in the
Prospectus Supplement to be prepared and delivered in connection with the
offering of Securities of such Series. Capitalized terms used and not otherwise
defined herein or in the related Prospectus Supplement shall have the meanings
set forth in the "INDEX OF DEFINED TERMS" beginning on page __.
Securities Offered.................... Asset-Backed Certificates (the
"Certificates") and Asset-Backed Notes
(the "Notes"). Certificates are issuable
from time to time in Series pursuant to
a Pooling and Servicing Agreement or
Trust Agreement. Each Certificate of a
Series will evidence an interest in the
Trust Fund for such Series, or in an
Asset Group specified in the related
Prospectus Supplement. Notes are
issuable from time to time in a Series
pursuant to an Indenture. Each Series of
Securities will consist of one or more
Classes, one or more of which may be
Classes of Compound Interest Securities,
Planned Amortization Class ("PAC")
Securities, Variable Interest
Securities, Zero Coupon Securities,
Principal Only Securities, Interest Only
Securities, Senior Securities or
Subordinate Securities (each of which is
generally described in the "INDEX OF
DEFINED TERMS"). Each Class may differ
in, among other things, the amounts
allocated to and the priority of
principal and interest payments, Final
Scheduled Distribution Dates,
Distribution Dates and interest rates.
The Securities of each Class will be
issued in fully registered form in the
denominations specified in the related
Prospectus Supplement. If so specified
in the related Prospectus Supplement,
the Securities or certain Classes of
such Securities offered thereby may be
available in book-entry form only. The
related Prospectus Supplement will set
forth whether there will be an
application to list any Class of
Securities on an exchange or to quote
the securities in the automated
quotation system of a registered
securities association.
Issuer................................ The Trust Fund created pursuant to the
applicable Pooling and Servicing
Agreement or Trust Agreement, as
applicable.
Depositor............................. CHEC Asset Receivable Corporation, a
Delaware corporation, with its principal
executive offices located at 2728 N.
Harwood Street, Dallas, Texas 75201 and
a telephone number of (214) 981-5000.
See "THE DEPOSITOR."
Servicer and Seller................... Centex Credit Corporation d/b/a Centex
Home Equity Corporation (in its capacity
as seller of the Home Equity Loans, the
"Seller" and in its capacity as servicer
of the Home Equity Loans, the
"Servicer", a Nevada corporation with
its principal executive offices located
at 2728 N. Harwood Street, Dallas Texas
75201 and a telephone number of (214)
981-5000. See "SELLER AND SERVICER."
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Interest Payments..................... Interest payments on the Securities of a
Series entitled by their terms to
receive interest will be made on each
Distribution Date, to the extent set
forth in, and at the applicable rate
specified in (or determined in the
manner set forth in), the related
Prospectus Supplement. The interest rate
on Securities of a Series may be
variable or change with changes in the
rates of interest on the related Home
Equity Loans and/or as prepayments occur
with respect to such Home Equity Loans.
Interest Only Securities may be assigned
a "Notional Amount" which is used solely
for convenience in expressing the
calculation of interest and for certain
other purposes and does not represent
the right to receive any distributions
allocable to principal. Principal Only
Securities may not be entitled to
receive any interest payments or may be
entitled to receive only nominal
interest payments. Interest payable on
the Securities of a Series on a
Distribution Date will include all
interest accrued during the period
specified in the related Prospectus
Supplement. See "DESCRIPTION OF THE
SECURITIES--Payments of Interest."
Principal Payments.................... All payments of principal of a Series of
Securities will be made in an aggregate
amount determined as set forth in the
related Prospectus Supplement and will
be paid at the times and will be
allocated among the Classes of such
Series in the order and amounts, and
will be applied either on a pro rata or
a random lot basis among all Securities
of any such Class, all as specified in
the related Prospectus Supplement.
Final Scheduled
Distribution Date
of the Securities.................... The Final Scheduled Distribution Date
with respect to each Class of Notes is
the date no later than the date on which
principal thereof will be fully paid and
with respect to each Class of
Certificates is the date after which no
Certificates of such Class are expected
to remain outstanding, in each case
calculated on the basis of the
assumptions applicable to such Series
described in the related Prospectus
Supplement. The Final Scheduled
Distribution Date of a Class may equal
the maturity date of the Home Equity
Loan in the related Trust Fund which has
the latest stated maturity or will be
determined as described herein and in
the related Prospectus Supplement.
The actual final Distribution Date of
the Securities of a Series will depend
primarily upon the rate of payment
(including prepayments, liquidations due
to default, the receipt of proceeds from
casualty insurance policies and
repurchases) of the Home Equity Loans in
the related Trust Fund. In general, the
actual final Distribution Date of any
Security is likely to occur earlier and
may occur substantially earlier or, with
respect to a Class of Certificates, may
occur later than its Final
5
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Scheduled Distribution Date as a result
of the application of prepayments to the
reduction of the principal balances of
the Securities and as a result of
defaults on the Home Equity Loans. The
rate of payments on the Home Equity
Loans, in the Trust Fund for a Series
will depend on a variety of factors,
including certain characteristics of
such Home Equity Loans and the
prevailing level of interest rates from
time to time, economic, demographic, tax
and legal factors and servicing
decisions. No assurance can be given as
to the actual prepayment experience with
respect to a Series. See "RISK
FACTORS--Yield May Vary" and
"DESCRIPTION OF THE SECURITIES--Weighted
Average Life of the Securities."
Optional Termination.................. The Seller, the Servicer, or such other
entity that is specified in the related
Prospectus Supplement, may, at its
option, cause an early termination of
one or more Classes of Securities by
purchasing all or part of the Home
Equity Loans remaining in the Trust Fund
on or after a specified date, or on or
after such time as the aggregate
principal balance of the Securities of
the Series or the Home Equity Loans
relating to such Series, as specified in
the related Prospectus Supplement, is
less than the amount or percentage, not
more than 25%, specified in the related
Prospectus Supplement. See "DESCRIPTION
OF THE SECURITIES--Optional Redemption,
Purchase or Termination."
Securities Involve
Risks................................ An investment in the Securities of any
Series involves material risks and
should only be considered by investors
which, either alone or together with
their investment advisors, have the
ability to understand such risks. See
"RISK FACTORS" beginning on page __
herein.
The Trust Fund........................ The Trust Fund for a Series of
Securities will consist of one or more
of the assets described below, as
described in the related Prospectus
Supplement.
A. Home Equity Loans................ The Home Equity Loans for a Series may
consist of any combination of the
following assets, to the extent and as
specified in the related Prospectus
Supplement.
Home Equity
Loans............................. Home Equity Loans for a Series will
consist, in whole or in part, of
"closed-end" home equity loans secured
by first or second mortgages (the "Home
Equity Loans"). The Home Equity Loans
may, as specified in the related
Prospectus Supplement, have various
payment characteristics, including
balloon or other irregular payment
features, and may accrue interest at a
fixed rate or an adjustable rate. Some
Home Equity Loans may be delinquent or
non-performing as specified in the
related Prospectus Supplement. The Home
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Equity Loans will be originated by the
Seller in the ordinary course of its
business. The Home Equity Loans will be
nonconventional loans. Additional Home
Equity Loans may be periodically added
to the Trust Fund, or may be removed
from time to time if certain asset tests
are met, all as described herein under
"THE TRUST FUNDS" and in the related
Prospectus Supplement.
The Home Equity Loans will be secured by
mortgages or deeds of trust or other
similar security instruments creating a
lien on a Mortgaged Property, which may
be subordinated to one or more senior
liens on such Mortgaged Property, as
described herein under "THE TRUST FUNDS"
and in the related Prospectus
Supplement.
The related Prospectus Supplement will
describe certain characteristics of the
Home Equity Loans for a Series,
including, without limitation, and to
the extent relevant: (a) the aggregate
unpaid principal balance of the Home
Equity Loans; (b) the range and weighted
average Home Equity Loan Rate on the
Home Equity Loans and in the case of
adjustable rate Home Equity Loans, the
range and weighted average of the
Current Home Equity Loan Rates and the
Lifetime Rate Caps, if any; (c) the
range and the average outstanding
principal balance of the Home Equity
Loans; (d) the weighted average original
and remaining term-to-stated maturity of
the Home Equity Loans and the range of
original and remaining terms-to-stated
maturity, if applicable; (e) the range
of Combined Loan-to-Value Ratios of the
Home Equity Loans, computed in the
manner described in the related
Prospectus Supplement; (f) the
percentage (by principal balance as of
the Cut-off Date) of Home Equity Loans
that accrue interest at adjustable or
fixed interest rates; (g) any
enhancement relating to the Home Equity
Loans; (h) the geographic distribution
of the Mortgaged Properties securing the
Home Equity Loans; (i) the use and type
of each Mortgaged Property securing a
Home Equity Loan; (j) the lien priority
of the Home Equity Loans; and (k) the
delinquency status and year of
origination of the Home Equity Loans.
B. Collection, Certificate
and Distribution Accounts....... All payments on or with respect to the
Home Equity Loans for a Series, net of
amounts permitted to be retained by the
Servicer pursuant to the Agreement, will
be remitted by the Servicer directly to
an account (the "Collection Account" or
the "Certificate Account") to be
established for such Series. The Trustee
will be required to apply a portion of
the amount in the Collection Account or
the Certificate Account, to the payment
of certain amounts payable to the
Servicer under the related Agreement and
any other person specified in the
Prospectus Supplement, and to deposit a
portion of the amount
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in the Collection Account into one or
more separate accounts (each, a
"Distribution Account") to be
established for such Series, each in the
manner and at the times established in
the related Prospectus Supplement. All
amounts deposited in such Distribution
Account (or, if there is no Distribution
Account, amounts remaining in the
Certificate Account) will be available
for (i) application to the payment of
principal of and interest on such Series
of Securities (or such Class or Classes
specified in the related Prospectus
Supplement) on the next Distribution
Date, (ii) the making of adequate
provision for future payments on certain
Classes of Securities and (iii) any
other purpose specified in the related
Prospectus Supplement. After applying
the funds in the Collection Account or
the Certificate Account as described
above, any funds remaining in such
Accounts may be paid over to the
Servicer, the Seller, any provider of
Enhancement with respect to such Series
(an "Enhancer") or any other person
entitled thereto in the manner and at
the times established in the related
Prospectus Supplement.
C. Pre-Funding and Capitalized
Interest Accounts............... A Trust Fund may include one or more
segregated trust accounts (each, a
"Pre-Funding Account") for the related
Series. On the closing date for such a
Series, a portion of the proceeds of the
sale of the Securities of such Series
(such amount, the "Pre-Funded Amount")
will be deposited in the Pre-Funding
Account and may be used to purchase
additional Home Equity Loans during the
period of time, not to exceed six
months, specified in the Agreement and
described in the related Prospectus
Supplement (the "Pre-Funding Period").
The Home Equity Loans to be so purchased
will be required to have certain
characteristics specified in the related
Prospectus Supplement. If any Pre-Funded
Amount remains on deposit in the
Pre-Funding Account at the end of the
Pre-Funding Period, such amount will be
applied in the manner specified in the
related Prospectus Supplement to prepay
the Classes of Notes and/or the
Certificates of the applicable Series
specified in the related Prospectus
Supplement. The amount initially
deposited in a Pre-Funding Account for a
Series of Securities will not exceed
fifty percent of the aggregate principal
amount of such Series of Securities. If
a Pre-Funding Account is established,
one or more segregated trust accounts
(each, a "Capitalized Interest Account")
may be established for the related
Series. On the closing date for such
Series, a portion of the proceeds of the
sale of the Securities of such Series
may be deposited in the Capitalized
Interest Account and used to fund the
excess, if any, of (x) the sum of (i)
the amount of interest accrued on the
Classes of Securities of such Series
specified in the related Prospectus
Supplement and (ii) if specified in the
related Prospectus Supplement, certain
fees or expenses during the Pre-Funding
Period such as Trustee fees
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and credit enhancement fees, over (y)
the amount of interest available
therefor from the Home Equity Loans in
the Trust Fund. If so specified in the
related Prospectus Supplement, amounts
on deposit in the Capitalized Interest
Account may be released to the Seller
prior to the end of the Pre-Funding
Period subject to the satisfaction of
certain tests specified in the related
Prospectus Supplement. Any amounts on
deposit in the Capitalized Interest
Account at the end of the Pre-Funding
Period that are not necessary for such
purposes will be distributed to the
person specified in the related
Prospectus Supplement.
Special Payment Features.............. A portion of the aggregate principal
balance of the Home Equity Loans at any
time may be "balloon loans" that provide
for the payment of the unamortized
principal balance of such Home Equity
Loan in a single payment at maturity
("Balloon Loans"). Such Balloon Loans
provide for equal monthly payments,
consisting of principal and interest,
generally based on a 30-year
amortization schedule, and a single
payment of the remaining balance of the
Balloon Loan generally 5, 7, 10, or 15
years after origination. See "RISK
FACTORS--Risk of Higher Default Rates
for Home Equity Loans with Balloon
Loans."
Revolving Period and
Amortization Period;
Retained Interest.................... If the related Prospectus Supplement so
provides, there may be a period
commencing on the date of issuance of a
Class or Classes of Notes and/or
Certificates of a Series and ending on
the date set forth in the related
Prospectus Supplement (each, a
"Revolving Period") during which limited
or no principal payments will be made to
one or more Classes of Notes and/or
Certificates of the related Series as
are identified in such Prospectus
Supplement. Some or all collections of
principal otherwise allocated to such
Classes of Notes or Certificates may be
(i) utilized during the Revolving Period
to acquire additional Home Equity Loans
which satisfy the criteria described
under "THE TRUST FUNDS" and the criteria
set forth in the Agreement and described
in the related Prospectus Supplement,
(ii) held in an account and invested in
Eligible Investments for later
distribution to Securityholders, (iii)
applied to those Notes or Certificates
for such Series, if any, specified in
the related Prospectus Supplement as
then are in amortization, or (iv)
otherwise applied to another Series if
specified in the related Prospectus
Supplement.
An "Amortization Period" is the period
during which an amount of principal is
payable to Holders of Securities which,
during the Revolving Period, were not
otherwise entitled to such payments. If
so specified in the related Prospectus
Supplement, during an Amortization
Period all or a portion of principal
collections on
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the Home Equity Loans may be applied as
specified above for a Revolving Period
and, to the extent not so applied, will
be distributed to the Classes of Notes
and/or Certificates for such Series
specified in the related Prospectus
Supplement as then being entitled to
payments of principal. In addition, if
so specified in the related Prospectus
Supplement, amounts deposited in certain
accounts for the benefit of one or more
Classes of Notes or Certificates for
such Series may be released from time to
time or on a specified date and applied
as a payment of principal on such
Classes of Notes and/or Certificates.
The related Prospectus Supplement will
set forth the circumstances which will
result in the commencement of an
Amortization Period.
Each Series which has a Revolving Period
may also issue to the Seller or one of
its affiliates a certificate evidencing
an undivided beneficial interest (a
"Retained Interest") in such Series not
represented by the other Securities
issued by the related Trusts, the value
of such Retained Interest will fluctuate
as the amount of Notes and Certificates
of the related Series of Securities
outstanding is reduced.
Enhancement........................... If and to the extent specified in the
related Prospectus Supplement,
enhancement with respect to a Series or
any Class of Securities may include any
one or more of the following: a
financial guaranty insurance policy,
overcollateralization, a letter of
credit, a cash reserve fund, insurance
policies, one or more Classes of
Subordinate Securities, derivative
products or other forms of credit
enhancement, or any combination thereof
(collectively, "Enhancement"). The
Enhancement with respect to any Series
or any Class of Securities may be
structured to provide protection against
delinquencies and/or losses on the Home
Equity Loans, against changes in
interest rates, or other risks, to the
extent and under the conditions
specified in the related Prospectus
Supplement. Forms of Enhancement may
provide for one or more Classes of
Securities to be paid in foreign
currencies. Any form of Enhancement will
have certain limitations and exclusions
from coverage thereunder, which will be
described in the related Prospectus
Supplement. Further information
regarding any Enhancer, including
financial information when material,
will be included in the related
Prospectus Supplement. See
"ENHANCEMENT." With respect to any
Series of Securities including one or
more Classes of Notes, distributions in
respect of the Certificates may be
subordinated in priority of payment to
payments on the Notes, to the extent
specified in the related Prospectus
Supplement.
Enhancement for a Series may include one
or more of the following types of
Enhancement or such other type of
Enhancement specified in the related
Prospectus Supplement.
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A. Financial Guaranty
Insurance Policy................. Issued by a monoline insurance company
and which, subject to the terms of such
policy, will guarantee timely payment of
interest on, and ultimate (as opposed to
timely) payment of principal, of the
applicable Class or Classes of
Securities.
B. Overcollateralization............. Overcollateralization equals the excess
of the aggregate principal balance of
the Home Equity Loans over the aggregate
principal balance of the Securities.
Overcollateralization may take the form
of the initial or subsequent deposit of
Home Equity Loans to create such excess
or may build over time from the
application of certain excess cash
amounts generated by the Home Equity
Loans to accelerate the amortization of
the applicable Class or Classes of
Securities.
C. Letter of Credit.................. Issued by a bank or other financial
institution in a maximum amount which
may be permanently reduced as draws are
made or may be replenished as previous
draws are repaid from certain excess
cash amounts generated by the Home
Equity Loans. Draws may be made to cover
shortfalls generally in collections,
with respect to particular types of
shortfalls such as those due to
particular types of losses or with
respect to specific situations such as
shortfalls in amounts necessary to pay
current interest.
D. Cash Reserve Fund................. Partially or fully funded on the date of
issuance or may be funded over time from
certain excess cash amounts generated by
the Home Equity Loans. Withdrawals may
be made in circumstances similar to
those for which draws may be made on a
letter of credit.
E. Insurance Policies................ Insure a portion of the Home Equity
Loans against credit losses, bankruptcy
losses, fraud losses or special hazard
losses not covered by typical homeowners
insurance policies
F. Subordinate Securities............ Securities may be subordinated in the
right to receive distributions to one or
more other Classes of Securities of the
same Series, some or all of which may
themselves be subordinated to other
Classes of such Series. Subordination
may be with respect to distributions of
interest, principal or both. In
addition, all or portions of certain
types of losses on the Home Equity Loans
may be allocated to one or more Classes
of the Subordinate Securities prior to
the allocation thereof to other Classes
of Subordinate Certificates and/or the
Senior Securities of the applicable
Series. As a result, holders of
Subordinate Securities have a greater
risk of loss and consequently a
diminution in yield.
G. Derivative Products............... May include a swap to convert floating
or fixed rate payments, as applicable,
on the Home Equity Loans into fixed or
floating
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rate payments, as applicable, on the
Securities or a cap or floor agreement
intended to provide protection against
changes in floating rates of interest
payable on the Home Equity Loans and/or
the Securities.
Credit Quality of Home Equity Loans... [Throughout its operating history, the
Seller has focused on lending to
individuals who have substantial equity
in their homes but have impaired or
limited credit histories See "RISK
FACTORS-- Underwriting Standards May
Affect Performance" and "THE SELLER AND
MASTER SERVICER" herein. The Sellers
have in the past and will in the future
change their underwriting guidelines and
procedures when, in their business
judgment, competition or other
conditions in their market so warrant.
As a result, Home Equity Loans
originated at different times may
reflect different underwriting
guidelines and be of different credit
quality. However, any such differences
will be reflected in the levels of
Enhancement for the related Series of
Securities.
Servicing...............................The Servicer will be responsible for
servicing, managing and making
collections on the Home Equity Loans for
a Series. The Servicer may enter into
sub-servicing agreements with such
entities that meet the requirements set
forth in the related Agreement. Such
sub-servicing arrangements will not
relieve the Servicer of any liability it
might otherwise have, had the
sub-servicing arrangement not been
entered into. Advances with respect to
delinquent payments of principal and/or
interest on a Home Equity Loan
("Delinquency Advances") will be made by
the Servicer or a sub-servicer if and
only to the extent described in the
related Prospectus Supplement. Such
advances will be intended to provide
liquidity only and will be reimbursable
to the extent specified in the related
Prospectus Supplement, from scheduled
payments of principal and/or interest,
late collections, or from the proceeds
of liquidation of the related Home
Equity Loans or from other recoveries
relating to such Home Equity Loans
(including any insurance proceeds or
payments from other credit support) or,
to the extent specified in the related
Prospectus Supplement, from payments or
proceeds from other Home Equity Loans.
If and to the extent specified in the
related Prospectus Supplement, the
Servicer or a sub-servicer will be
entitled to advance its own funds to pay
for any related expenses of foreclosure
and disposition of any liquidated Home
Equity Loan or related Mortgaged
Property (the "Servicer Advances"). See
"SERVICING OF HOME EQUITY
LOANS--Advances and Limitations
Thereon." The Servicer or such
sub-servicer will be entitled to be
reimbursed for any such Servicer
Advances as specified in the related
Prospectus Supplement. In performing
these functions, the Servicer will
exercise the same degree of skill and
care that it customarily exercises with
respect to similar Home Equity Loans
owned or
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serviced by it. Under certain limited
circumstances, the Servicer may resign
or be removed, in which event either the
Trustee or a third-party servicer will
be appointed as successor servicer. The
Servicer will receive a periodic fee as
servicing compensation (the "Servicing
Fee") and may, as specified in the
related Prospectus Supplement, receive
certain additional compensation. The
Servicer will pay any fees due the
sub-servicers from the Servicing Fee.
See "SERVICING OF HOME EQUITY
LOANS--Servicing Compensation and
Payment of Expenses."
Federal Income Tax Consequences
A. Debt Securities and REMIC
Residual Securities............. The federal income tax consequences to
Securityholders will vary depending upon
whether one or more elections are made
to treat the Trust Fund or specified
portions thereof as a REMIC under the
provisions of the Internal Revenue Code
of 1986, as amended (the "Code"). The
Prospectus Supplement for each Series of
Securities will specify whether such an
election will be made. If a REMIC
election is made, Securities
representing regular interests in a
REMIC (a "Regular Interest") will
generally be taxable to holders in the
same manner as evidences of indebtedness
issued by the REMIC. Stated interest on
such regular interests will be taxable
as ordinary income and taken into
account using the accrual method of
accounting, regardless of the holder's
normal accounting method.
Securities that are Compound Interest
Securities, Zero Coupon Securities or
Interest Only Securities will, and
certain other Classes of Securities may,
be issued with original issue discount
that is not de minimis. In such cases,
the Holder will be required to include
original issue discount in gross income
as it accrues, which may be prior to the
receipt of cash attributable to such
income. If a Security is issued at a
premium, the Holder may be entitled to
make an election to amortize such
premium on a constant yield method.
If a Prospectus Supplement indicates
that one or more REMIC elections will be
made with respect to the related Trust
Fund or certain assets of the related
Trust Fund, assuming that such elections
are timely made and all of the
provisions of the applicable Agreement
are complied with, Stroock & Stroock &
Lavan LLP, special tax counsel to the
Seller ("Federal Tax Counsel") is of the
opinion that (a) each segregated pool of
assets specified as a REMIC in such
Agreement will constitute a REMIC for
federal income tax purposes, (b) the
Class or Classes of Securities of the
related Series which are designated as
"regular interests" in such Prospectus
Supplement will be considered "regular
interests" in a REMIC for federal income
tax purposes and (c) the Class of
Securities of the related
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Series which is designated as the
"residual interest" in such Prospectus
Supplement will be considered the sole
class of "residual interests" in the
applicable REMIC for federal income tax
purposes. A REMIC will not be subject to
entity-level tax. Rather, the taxable
income or net loss of a REMIC will be
taken into account by the holders of
residual interests (a "Residual
Interest"). In certain circumstances,
the Holder of a Residual Interest may
have REMIC taxable income or tax
liability attributable to REMIC taxable
income for a particular period in excess
of cash distributions for such period or
have an after-tax return that is less
than the after-tax return on comparable
debt instruments. In addition, a portion
(or, in some cases, all) of the income
from a Residual Interest (i) may not be
subject to offset by losses from other
activities or investments, (ii) for a
Holder that is subject to tax under the
Code on unrelated business taxable
income, may be treated as unrelated
business taxable income and (iii) for a
foreign holder, may not qualify for
exemption from or reduction of
withholding. In addition, (i) Residual
Interests are subject to transfer
restrictions and (ii) certain transfers
of Residual Interests will not be
recognized for federal income tax
purposes. Further, individual holders
are subject to limitations on the
deductibility of expenses of the REMIC.
See "FEDERAL INCOME TAX CONSEQUENCES."
To the extent the material federal
income tax consequences differ from
those disclosed herein, Federal Tax
Counsel will file a tax opinion and
related consent with the Commission.
B. Non-REMIC Pass-Through
Securities....................... If a Prospectus Supplement indicates
that a Trust Fund will be treated as a
grantor trust for federal income tax
purposes, assuming compliance with all
of the provisions of the applicable
Agreement, Federal Tax Counsel is of the
opinion that (a) the Trust Fund will be
considered to be a grantor trust under
Subpart E, Part I of Subchapter J of the
Code and will not be considered to be an
association taxable as a corporation and
(b) a Holder of the related Certificates
will be treated for federal income tax
purposes as the owner of an undivided
interest in the Home Equity Loans
included in the Trust Fund. If so
provided in the Prospectus Supplement,
holders of Securities of such Series
("Pass-Through Securities") will be
treated as owning directly rights to
receive certain payments of interest or
principal, or both, on the Home Equity
Loans held in the Trust Fund for such
Series. All income with respect to a
Stripped Security (as defined herein)
will be accounted for as original issue
discount and, unless otherwise specified
in the related Prospectus Supplement,
will be reported by the Trustee on an
accrual basis, which may be prior to the
receipt of cash associated with such
income.
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C. Owner Trust Securities............ If a Prospectus Supplement indicates
that one or more Classes of non- REMIC
Securities of the related Series are to
be treated as indebtedness for federal
income tax purposes, assuming that all
of the provisions of the applicable
Agreement are complied with, Federal Tax
Counsel is of the opinion that the
Securities so designated will be
considered indebtedness for federal
income tax purposes, and that for
federal income tax purposes the Trust
Fund will not be treated as an
association, taxable mortgage pool, or a
publicly traded partnership taxable as a
corporation. Each Noteholder, by the
acceptance of a Note of a given Series,
will agree to treat such Note as
indebtedness, and each
Certificateholder, by the acceptance of
a Certificate of a given Series, will
agree to treat the related Trust Fund
for Federal tax purposes as a
partnership in which such
Certificateholder is a partner if there
is more than one Certificateholder for
federal income tax purposes, or to
disregard the Trust as an entity
separate from the Certificateholder if
there is only one Certificateholder for
federal income tax purposes. Alternative
characterizations of such Trust Fund and
such Certificates are possible, but
would not result in materially adverse
tax consequences to Certificateholders.
See "FEDERAL INCOME TAX CONSEQUENCES."
Generally, gain or loss will be
recognized on a sale of Securities in
the amount equal to the difference
between the amount realized and the
seller's tax basis in the Securities
sold. The material federal income tax
consequences for investors associated
with the purchase, ownership and
disposition of the Securities are set
forth herein under "FEDERAL INCOME TAX
CONSEQUENCES." The material federal
income tax consequences for investors
associated with the purchase, ownership
and disposition of Securities of any
particular Series will be set forth
under the heading "FEDERAL INCOME TAX
CONSEQUENCES" in the related Prospectus
Supplement. See "FEDERAL INCOME TAX
CONSEQUENCES."
ERISA Considerations.................. Subject to the considerations discussed
under "ERISA CONSIDERATIONS" herein and
in the related Prospectus Supplement,
the Notes may be eligible for purchase
by employee benefit plans subject to the
Employee Retirement Income Security Act
of 1974, as amended ("ERISA"). See
"ERISA CONSIDERATIONS" herein and in the
related Prospectus Supplement.
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Legal Investment...................... Securities of each Series offered by
this Prospectus and the related
Prospectus Supplement will not
constitute "mortgage related securities"
under the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"). See
"LEGAL INVESTMENT."
Ratings............................... It will be a requirement for issuance of
any Series that each Class of Securities
offered by this Prospectus and the
related Prospectus Supplement be rated
by at least one Rating Agency in one of
its four highest applicable rating
categories. The rating or ratings
applicable to Securities of each Series
offered hereby and by the related
Prospectus Supplement will be as set
forth in the related Prospectus
Supplement. A securities rating should
be evaluated independently of similar
ratings on different types of
securities. In general, a securities
rating addresses the likelihood that
Holders will receive the distributions
to which they are entitled. A securities
rating is not a recommendation to buy,
hold or sell securities and does not
address the effect that the rate of
prepayments on the Home Equity Loans for
a Series may have on the yield to
investors in the Securities of such
Series. There is no assurance that the
rating initially assigned to such
Securities will not be subsequently
lowered or withdrawn by the Rating
Agency. In the event the rating
initially assigned to any Securities is
subsequently lowered for any reason, no
person or entity will be obligated to
provide any credit enhancement in
addition to the Enhancement, if any,
specified in the related Prospectus
Supplement. See "RISK FACTORS--Ratings
Are Not Recommendations."
Registration of Securities............ Securities may be represented by global
certificates and notes registered in the
name of Cede & Co. ("Cede"), as nominee
of the Depository Trust Company ("DTC")
or another nominee. In such case,
Securityholders will not be entitled to
receive definitive certificates and/or
notes representing such interests,
except in certain circumstances
described in the related Prospectus
Supplement. See "DESCRIPTION OF THE
SECURITIES--BOOK-ENTRY SECURITIES"
herein.
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RISK FACTORS
Investors should consider, among other things, the following risk factors
in connection with the purchase of the Securities.
Lack of Secondary Market Limits Liquidity. There will be no market for the
Securities of any Series prior to the issuance thereof, and there can be no
assurance that a secondary market will develop or, if it does develop, that it
will provide Holders with liquidity of investment or will continue for the life
of the Securities of such Series. Further, if the Securities of a Series are not
listed on an exchange or quoted in the automated quotation system of a
registered securities association, investors may have limited liquidity. See
"PLAN OF DISTRIBUTION."
Home Equity Loans Are Only Source of Repayment. The Securities of a Series
will be payable solely from the assets of the Trust Fund for such Securities and
any related Enhancement. There will be no recourse to the Depositor, the Seller,
the Servicer or any other person for any default on the Notes or any failure to
receive distributions on the Certificates. Further, certain Home Equity Loans
and/or any balance remaining in the Collection Account, Certificate Account or
Distribution Account immediately after making all payments due on the Securities
of such Series and other payments specified in the related Prospectus
Supplement, may be promptly released or remitted to the Depositor, the Seller,
the Servicer, the Enhancer or any other person entitled thereto and will no
longer be available for making payments to Holders. Consequently, Holders of
Securities of each Series must rely solely upon payments with respect to the
Home Equity Loans and the other assets constituting the Trust Fund for a Series
of Securities, including, if applicable, any amounts available pursuant to any
Enhancement for such Series, for the payment of principal of and interest on the
Securities of such Series.
Holders of Notes will be required under the Indenture to proceed only
against the Home Equity Loans and other assets constituting the related Trust
Fund in the case of a default with respect to such Notes and may not proceed
against any assets of the Depositor, the Seller, the Servicer. There is no
assurance that the market value of the Home Equity Loans or any other assets for
a Series will at any time be equal to or greater than the aggregate principal
amount of the Securities of such Series then outstanding, plus accrued interest
thereon. Moreover, upon an event of default under the Indenture for a Series of
Notes and a sale of the assets in the Trust Fund or upon a sale of the assets of
a Trust Fund for a Series of Certificates, the Trustee, the Servicer, the
Enhancer, if any, and any other service provider specified in the related
Prospectus Supplement generally will be entitled to receive the proceeds of any
such sale to the extent of unpaid fees and other amounts owing to such persons
under the related Agreement prior to distributions to Holders of Securities.
Upon any such sale, the proceeds thereof may be insufficient to pay in full the
principal of and interest on the Securities of such Series.
Limited Protection Against Losses. Although any Enhancement is intended to
reduce the risk of delinquent payments or losses to Holders entitled to the
benefit thereof, the amount of such Enhancement will be limited, as set forth in
the related Prospectus Supplement, and will decline and could be depleted under
certain circumstances prior to the payment in full of the related Series of
Securities. As a result Holders may suffer losses. See "ENHANCEMENT."
Underwriting Standards May Affect Performance. As described herein under
"THE SELLER AND SERVICER--Underwriting Guidelines Applicable to the Home Equity
Loans," the Seller's underwriting standards generally are less stringent than
those of traditional Fannie Mae or Freddie Mac with respect to a borrower's
credit history and in certain other respects. A borrower's past credit history
may not preclude the Seller from making a loan; however, it generally will
reduce the size (and consequently the Combined Loan-to-Value Ratio) of the loan
that the Seller is willing to make. As a result of this approach to
underwriting, the Home Equity Loans may experience higher rates of
delinquencies, defaults and foreclosures than mortgage loans underwritten in a
more traditional manner.
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Subordination. The rights of holders of the Subordinate Securities, if
any, of a Series to receive distributions with respect to collections on the
Home Equity Loans will be subordinate to the rights of the holders of certain
more senior Classes of Securities. Accordingly, the yields to maturity of the
Subordinate Securities, if any, will be sensitive, in varying degrees, to
defaults on the Home Equity Loans (and the timing thereof). Investors should
fully consider the risks associated with an investment in the Subordinate
Securities, if any, including the possibility that such investors may not fully
recover their initial investment as a result of Realized Losses on the related
Home Equity Loans. The Subordinate Securities may not be entitled to any
principal distributions until the date specified in the related Prospectus
Supplement. As a result, the weighted average lives of the Subordinate
Securities will be longer than would be the case if distributions of principal
were to be allocated on a pro rata basis among the Senior and Subordinate
Securities. As a result of the longer weighted average lives of the Subordinate
Securities, the Subordinate Securities have a greater risk of suffering a loss
on their investments.
Junior Liens Create Additional Risk of Loss. If the Home Equity Loans in a
Trust Fund are secured primarily by junior liens subordinate to the rights of
the mortgagee under the related senior mortgage(s) or deed(s) of trust, the
proceeds from any liquidation, insurance or condemnation proceedings will be
available to satisfy the outstanding balance of such Home Equity Loans only to
the extent that the claims of such senior mortgagees or beneficiaries have been
satisfied in full, including any related foreclosure costs. In addition, a
junior mortgagee may not foreclose on the Mortgaged Property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees at or prior to the foreclosure sale or undertake the obligation to
make payments on the senior mortgages in the event the mortgagor is in default
thereunder. The Trust Fund will not have any source of funds to satisfy the
senior mortgages or deeds of trust or make payments due to the senior mortgagees
or beneficiaries.
Property Values May Be Insufficient. There are several factors that could
adversely affect the value of the Mortgaged Properties such that the outstanding
balance of the related Home Equity Loan, together with any senior financing on
the Mortgaged Properties, would equal or exceed the value of the Mortgaged
Properties. Among the factors that could adversely affect the value of the
Mortgaged Properties are an overall decline in the residential real estate
market in the areas in which the Mortgaged Properties are located or a decline
in the general condition of the Mortgaged Properties as a result of failure of
borrowers to maintain adequately the Mortgaged Properties or of natural
disasters that are not necessarily covered by insurance, such as earthquakes and
floods. Any such decline could extinguish the value of a junior interest in a
Property before having any effect on the related senior interest therein. If
such a decline occurs, the actual rates of delinquencies, foreclosure and losses
on the junior Home Equity Loans could be higher than those currently experienced
in the mortgage and home improvement lending industry in general.
Yield May Vary. The yield to maturity experienced by a Holder of
Securities may be affected by the rate of payment of principal of the Home
Equity Loans. The timing of principal payments of the Securities of a Series
will be affected by a number of factors, including the following: (i) the extent
of prepayments of the Home Equity Loans; (ii) the manner of allocating principal
payments among the Classes of Securities of a Series as specified in the related
Prospectus Supplement; and (iii) the exercise by the party entitled thereto of
any right of optional termination. See "DESCRIPTION OF THE SECURITIES--Weighted
Average Life of the Securities." The rate of prepayments may be affected by the
characteristics of the Home Equity Loans, such as the loans-to-value ratios,
interest rates and purposes of such loans, the prevailing level of interest
rates, demographic, tax, and legal factors and servicing decisions. Prepayments
may also result from repurchases of Home Equity Loans, due to material breaches
of the Seller's representations and warranties and amounts on deposit in the
Pre-Funding Account at the end of the Pre-Funding Period.
Interest payable on the Securities of a Series on a Distribution Date will
include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues during the calendar month
prior to a Distribution Date, the effective yield to Holders will be reduced
from the yield that would otherwise be obtainable if interest payable on the
Security were to accrue through the day immediately preceding each
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Distribution Date, and the effective yield (at par) to Holders will be less than
the indicated coupon rate. See "DESCRIPTION OF THE SECURITIES--Payments of
Interest."
Prepayments From Pre-Funding Account May Adversely Affect Yield. The
ability of a Trust Fund to invest in additional Home Equity Loans during the
related Pre-Funding Period will be dependent on the ability of the Sellers to
originate Home Equity Loans that satisfy the requirements for transfer to the
Trust Fund specified in the related Prospectus Supplement. The ability of the
Seller to originate such Loans will be affected by a variety of factors,
including the prevailing level of market interest rates, unemployment levels and
consumer perceptions of general economic conditions. If the principal balance of
additional Home Equity Loans delivered to the Trust Fund during the Pre-Funding
Period is less than the Pre-Funded Amount, the Holders of the Securities of the
related Series will receive a prepayment of principal as and to the extent
described in the related Prospectus Supplement. Any such principal prepayment
will shorten the average life and may adversely affect the yield to maturity of
the applicable Securities. Since prevailing interest rates are subject to
fluctuation, there can be no assurance that investors will be able to reinvest
such a prepayment at yields equaling or exceeding the yields on the related
Securities. It is possible that the yield on any such reinvestment will be
lower, and may be significantly lower, than the yield on the related Securities.
Potential Liability for Environmental Conditions. Real property pledged as
security to a lender may be subject to certain environmental risks. Under the
laws of certain states, contamination of a property may give rise to a lien on
the property to assure the costs of clean-up. In several states, such a lien has
priority over the lien of an existing mortgage or owner's interest against such
property. In addition, under the laws of some states and under the federal
Comprehensive Environmental Response, Compensation, and Liability Act of 1980
("CERCLA"), a lender may be liable, as an "owner" or "operator," for costs of
addressing releases or threatened releases of hazardous substances that require
remedy at a property, if agents or employees of the lender have become
sufficiently involved in the operations of the borrower, regardless of whether
or not the environmental damage or threat was caused by a prior owner. A lender
also risks such liability on foreclosure of the Mortgaged Property.
Consumer Protection Laws May Affect Home Equity Loans. Applicable state
laws generally regulate interest rates and other charges and require certain
disclosures. In addition, other state laws, public policy and general principles
of equity relating to the protection of consumers, unfair and deceptive
practices and debt collection practices may apply to the origination, servicing
and collection of the Home Equity Loans. Depending on the provisions of the
applicable law and the specific facts and circumstances involved, violations of
these laws, policies and principles may limit the ability of the Servicer to
collect all or part of the principal of or interest on the Home Equity Loans,
may entitle the borrower to a refund of amounts previously paid and, in
addition, could subject the owner of the Home Equity Loan to damages and
administrative enforcement.
The Home Equity Loans are also subject to federal laws, including:
(i) the federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding
the terms of the Home Equity Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race,
color, sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit
Protection Act, in the extension of credit;
(iii) the Americans with Disabilities Act, which, among other
things, prohibits discrimination on the basis of disability in the full
and equal enjoyment of the goods, services, facilities, privileges,
advantages or accommodations of any place of public accommodation; and
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(iv) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience.
Violations of certain provisions of these federal laws may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Home Equity Loans and in addition could subject the Trust Fund to damages
and administrative enforcement. The Home Equity Loans may be subject to the Home
Ownership and Equity Protection Act of 1994 (the "Act") which amended the Truth
in Lending Act as it applies to mortgages subject to the Act. The Act requires
certain additional disclosures, specifies the timing of such disclosures and
limits or prohibits inclusion of certain provisions in mortgages subject to the
Act. The Act also provides that any purchaser or assignee of a mortgage covered
by the Act is subject to all of the claims and defenses which the borrower could
assert against the original lender. The maximum damages that may be recovered
under the Act from an assignee is the remaining amount of indebtedness plus the
total amount paid by the borrower in connection with the Home Equity Loan. If
the Trust Fund includes Home Equity Loans subject to the Act, it will be subject
to all of the claims and defenses which the borrower could assert against the
Seller. Any violation of the Act which would result in such liability would be a
breach of the Seller's representations and warranties and the Seller would be
obligated to cure, repurchase or, if permitted by the Agreement, substitute for
the Home Equity Loan in question. In addition, numerous other federal and state
statutory provisions, including the federal bankruptcy laws, the Soldiers' and
Sailors' Civil Relief Act of 1940 and state debtor relief laws, may also
adversely affect the Servicer's ability to collect the principal of or interest
on the Home Equity Loans and also would affect the interests of the
Securityholders in such Home Equity Loans if such laws result in the Home Equity
Loans being uncollectible. See "CERTAIN LEGAL ASPECTS OF THE HOME EQUITY LOANS."
Risk of Higher Default Rates for Home Equity Loans with Balloon Loans. A
portion of the aggregate principal balance of the Home Equity Loans at any time
may be "balloon loans" that provide for the payment of the unamortized principal
balance of such Home Equity Loan in a single payment at maturity ("Balloon
Loans"). Such Balloon Loans provide for equal monthly payments, consisting of
principal and interest, generally based on a 30-year amortization schedule, and
a single payment of the remaining balance of the Balloon Loan generally 5, 7,
10, or 15 years after origination. Amortization of a Balloon Loan based on a
scheduled period that is longer than the term of the loan results in a remaining
principal balance at maturity that is substantially larger than the regular
scheduled payments. The Seller does not have any information regarding the
default history or prepayment history of payments on Balloon Loans. Because
borrowers of Balloon Loans are required to make substantial single payments upon
maturity, it is possible that the default risk associated with the Balloon Loans
is greater than that associated with fully-amortizing Home Equity Loans.
Insolvency of Seller May Cause Losses. The Seller intends that its
transfer of the Home Equity Loans to the Depositor and the Depositor intends
that its subsequent transfer of the Home Equity Loans to a Trust Fund will each
constitute a sale, and the Depositor, the Seller and the Trust Fund will agree
to treat each such transfer as a sale. In the event of the insolvency of Seller,
the trustee in bankruptcy or the Seller (as applicable), as
debtor-in-possession, may attempt to recharacterize such a sale as a loan by the
Trust Fund to the Depositor or the Seller, as applicable, secured by the pledge
of the related Home Equity Loans. If such an attempt were to be successful,
Holders of Securities could receive a prepayment of all or part of their
Securities. Any such prepayment would adversely affect the yield on such
Securities and could result in a loss. Even if such an attempt were to be
unsuccessful, Holders of Securities could experience delays in distributions
which would adversely affect the yield on the related Securities.
Ratings Are Not Recommendations. It will be a condition to the issuance of
a Series of Securities that each Class be rated in one of the four highest
rating categories by the Rating Agency identified in the related Prospectus
Supplement. Any such rating would be based on, among other things, the adequacy
of the value of the Home Equity Loans and any Enhancement with respect to such
Series. In general, a securities rating addresses the likelihood that Holders
will receive the distributions to which they are entitled. Such rating should
not be deemed a recommendation to purchase, hold or sell Securities, inasmuch as
it does not address market price or suitability for a
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particular investor and does not address the likelihood of prepayments or the
possibility that investors may receive a lower than anticipated yield. There is
also no assurance that any such rating will remain in effect for any given
period of time or may not be lowered or withdrawn entirely by the Rating Agency
if in its judgment circumstances in the future so warrant. In addition to being
lowered or withdrawn due to any erosion in the adequacy of the value of the Home
Equity Loans, such rating might also be lowered or withdrawn, among other
reasons, because of an adverse change in the financial or other condition of an
Enhancer or a change in the rating of such Enhancer's long term debt. Any such
reduction or withdrawal in the rating assigned to the Securities may adversely
affect the liquidity of and yield on such Securities.
Book Entry Registration. Because transfers and pledges of the Securities may be
effected only through book entries at a clearing agency through clearing agency
participants, the liquidity of the secondary market for Securities may be
reduced to the extent that some investors are unwilling to hold Securities in
book entry form in the name of clearing agency participants and the ability to
pledge Securities may be limited due to lack of a physical certificate. Holders,
in certain cases, experience delay in the receipt of payments of principal and
interest because such payments will be forwarded by the Trustee to the clearing
agency who will then forward payment to the clearing agency participants who
will thereafter forward payment to Holders. In the event of the insolvency of
the clearing agency or of a clearing agency participant in whose name Securities
are recorded, the ability of Holders to obtain timely payment and (if the limits
of applicable insurance coverage by the Securities Investor Protection
Corporation are exceeded, or if such coverage is otherwise unavailable) ultimate
payment of principal and interest on Securities may be impaired.
THE DEPOSITOR
CHEC Asset Receivable Corporation (the "Depositor") was incorporated in
the State of Nevada on May 28, 1998, and is a wholly-owned subsidiary of the
Seller. The Depositor maintains its principal offices at 2728 N. Harwood Street,
Dallas, Texas 75201. Its telephone number is (214) 981-5000.
The Seller does not have, nor is it expected in the future to have, any
significant assets.
USE OF PROCEEDS
Net proceeds from the sale of the Securities of each Series may be applied by
the Depositor to the purchase of Home Equity Loans from the Seller and to make
the initial deposits, if any, into the Pre-Funding Account and Capitalized
Interest Account. Such net proceeds (net of any such deposits to such accounts)
will (together with the Class R Certificates) represent the purchase price to be
paid by the Depositor to the Seller for such Home Equity Loans.
THE SELLER
AND SERVICER
General
The Seller and Servicer, Centex Credit Corporation d/b/a Centex Home
Equity Corporation, a Nevada corporation is a sub-prime mortgage lender formed
in 1994 that engages in originating primarily non-conforming home equity loans,
directly through four major origination sources. The Seller was originally named
Nova Credit Corporation and was headquartered in Denver, Colorado. In January of
1997, the Seller's operations were moved to Dallas, Texas and the Seller
underwent a reorganization and the hiring of a new management team. In April of
1997, the Seller's name was changed to Centex Credit Corporation d/b/a Centex
Home Equity Corporation. The Seller is a unit of Centex Financial Services, a
financial services subsidiary of Centex Corporation, headquartered in Dallas.
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Centex Corporation is a publicly traded, diversified company with a market
capitalization of approximately $1.7 billion and is primarily engaged in the
home building, financial services, contracting and construction services
industries. The Seller is also affiliated with CTX Mortgage Company, a Nevada
corporation ("CTX Mortgage"), which originates home equity loans conforming to
Fannie Mae and/or Freddie Mac guidelines. Since inception, the Seller has
focused on lending to individuals who have substantial equity in their homes but
have impaired or limited credit histories. The Seller's home equity loans to
these borrowers are made for such purposes as debt consolidation, refinancing,
home improvement or educational expenses. Substantially all of the Seller's home
equity loans are secured by first or second mortgage liens on one-to four-family
residences, and have amortization schedules ranging from five years to 30 years.
_____ % of the Seller's home equity loans bear interest at fixed rates and
_____% of the Seller's home equity loans bear interest at adjustable rates.
The Seller is currently licensed to do business in 47 states plus the
District of Columbia and employs approximately 550 people located in 45 offices
in 35 states. The Seller originates home equity loans through its retail branch
network of 27 branch offices located in 20 states. In addition, the Seller
originates home equity loans through a broker referral network from five
division offices with a total of 11 regions. A third production source for the
Seller is referral of home equity loans from its affiliate conforming mortgage
company, CTX Mortgage. The final source of origination of home equity loans is
the Seller's direct sales unit which sources loans through telemarketing and
direct mail efforts. All home equity loans are originated in the name of Centex
Home Equity Corporation or in the name of an affiliate of Centex Home Equity
Corporation. The Seller's strategy is to utilize these origination channels to
generate growth in the volume of the home equity loans originated while
diversifying sources of the home equity loans and maintaining emphasis on its
underwriting standards.
The Seller has centralized its underwriting, servicing and quality control
functions in its Dallas headquarters.
The Seller's headquarters are located at 2728 North Harwood Street,
Dallas, Texas, 75201 and its telephone number is (214) 981-5600.
Underwriting Guidelines Applicable to the Home Equity Loans
The Pre-Underwriting Process. The Seller's home equity loan application
process is conducted by the Seller's branch officers and approved mortgage
brokers who compile information necessary for the Seller's underwriting
department to evaluate the home equity loan. The approval process is generally
coordinated over the telephone with applications and credit reports obtained by
branch processors or brokers usually sent by facsimile transmission to the
processing department at one of the Seller's offices. Branch personnel
communicate with the Seller's centralized underwriting staff, located in Dallas,
Texas, which consists of approximately 23 underwriters. Branch operation
personnel review the applicant's credit history, based on the information
contained in the application as well as reports available from credit reporting
bureaus, to see if the credit history is acceptable given the Seller's
underwriting guidelines. A credit report from one approved repository is
required for pre-approval and at least two reports are required prior to
underwriting review. These credit reports are the primary means utilized to
verify each borrower's mortgage and other debt payment histories. Based on this
review, the proposed terms of the home equity loan are then communicated to the
branch officer or broker responsible for the application who in turn discusses
the proposal with the home equity loan applicant. If the applicant accepts the
proposed terms, a branch officer or broker will gather additional information
necessary for the underwriting, closing, and funding of the loan.
The Standard Non-Conforming Program. The Home Equity Loans were originated
under the Seller's Standard Non-Conforming Program. The Standard Non-Conforming
Program is applicable to residential loans, which, for credit reasons do not
conform to traditional lenders' underwriting guidelines such as those employed
by savings and loans and commercial banks. The Seller began underwriting home
equity loans in accordance with such standards in May, 1997.
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The Seller's underwriting standards under the Standard Non-Conforming
Program are primarily intended to assess creditworthiness of the mortgagor, the
value of the mortgaged property and to evaluate the adequacy of such property as
collateral for the home equity loan. While the Seller's primary consideration in
underwriting a home equity loan is the borrower's employment stability and
debt-to-income ratio, the condition of the collateral and value of the mortgaged
property relative to the amount of the home equity loan is another critical
factor. In addition, it also considers, among other things, a mortgagor's credit
history and repayment ability, as well as the type and use of the mortgaged
property.
The Seller currently employs approximately 23 underwriters and has its
underwriting functions centralized in its Dallas, Texas headquarters. The Seller
does not delegate underwriting authority to any broker or correspondent. The
Seller's underwriting department functions independently of its mortgage
origination departments. Underwriters are compensated on a salary basis, and are
not compensated on commission.
The Seller's policy is that every home equity loan is reviewed and
approved by an underwriter with assigned approval authorities. Home equity loans
exceeding those authorities require a second approval, generally from a manager
of underwriting or an underwriting supervisor.
The Seller has established classifications with respect to the credit
profile of the applicant, and each loan is placed into one of seven ratings "A+"
through "D". Terms of loans made by the Seller as well as maximum loan-to-value
ratios and debt-to-income ratios vary depending on the classification of the
applicant. Home equity loan applicants with less favorable credit ratings are
generally offered home equity loans with higher interest rates and lower
loan-to-value ratios than applicants with more favorable credit ratings.
The home equity loans underwritten under the Seller's Non-Conforming
Programs are adjustable and fixed rate loans. Except for Balloon Loans, the
fixed rate home equity loans originated by the Seller have amortization
schedules ranging from 5 years to 30 years, generally require equal monthly
payments which are due as of a scheduled day of each month which is fixed at the
time of origination. The fixed rate Balloon Loans, originated by the Seller,
generally provide for scheduled amortization over 30 years, with a maturity date
and a balloon payment at the end of the fifteenth year. The Seller originates
adjustable rate loan products that bear interest at rates which adjust based on
Six-Month LIBOR, with the initial rate adjustment date being either six months
after the date of origination of such Loan ("Six-Month ARMs") or 24 months after
the date of origination of such loan ("2/28 ARMs," and together with the
Six-Month ARMs, "ARMs"). The Six-Month ARMs amortize over 15 or 30 years, adjust
every six months and allow for a maximum periodic rate adjustment of __%. The
maximum adjustment over the life of a Six-Month ARM is capped at 7% and the
minimum interest rate is the initial rate of such Six-Month ARM. The 2/28 ARMs
amortize over 30 years, have an initial interest rate adjustment date which is
24 months after the date of origination and allow for a maximum rate adjustment
on the initial interest rate adjustment date of ____%. After the initial rate
adjustment date, the 2/28 ARMs adjust every six months, allow for a maximum
periodic interest rate adjustment of ____%, have a lifetime cap on interest rate
adjustments of 7% and allow for a minimum rate [equal to the initial interest
rate of such loan]. The Seller does not currently originate ARMs with a balloon
feature. The principal amounts of the home equity loans originated by the Seller
generally range from a minimum of $5,000 to a maximum of $500,000. The
collateral securing loans originated by the Seller are generally one-to
four-family residences, including condominiums, townhomes and manufactured
housing treated as real property under applicable state law, and such properties
may or may not be occupied by the owner. It is the Seller's policy not to accept
commercial properties, mixed-use properties or unimproved land as collateral.
Rural property requires a 5% reduction in loan-to-value ratio. Second mortgages
require a 5% reduction on owner occupied property. The Seller does not originate
second mortgage lien home equity loans where any senior mortgage lien allows for
open-end advances or negative amortization, is a private party mortgage or has
shared appreciation provisions.
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The home equity loans underwritten under the Standard Non-Conforming
Program are underwritten pursuant to the "Full Documentation" residential loan
program (the "Full Documentation Program"), the "Limited Documentation"
residential loan program (the "Limited Documentation Program") or the "Stated
Income" residential loan program (the "State Income Program"). Under each of
these programs, the Seller reviews the home equity loan applicant's source of
income, calculates the amount of income from sources indicated on the loan
application or similar documentation, reviews the credit history of the
applicant, calculates the debt-to-income ratio to determine the applicant's
ability to repay the home equity loan, reviews the type and use of the property
being financed and reviews the property for compliance with the Seller's
standards. In determining an applicants ability to repay a (i) Six-Month ARM,
the Seller uses a rate equal to Six-Month LIBOR plus a margin and (ii) 2/28 ARM,
the Seller uses a rate equal to ______ (each of the rates referred to in Classes
(i) and (ii) being a "Qualifying Rate"). It is the policy of the Seller for its
underwriting process to consist of a thorough credit review and a thorough
appraisal review on each home equity loan by its underwriting department and (i)
a separate appraisal review by the Seller's appraisal review department on home
equity loans with a 85% loan-to-value ratio or greater, and, (ii) a full
compliance review, to ensure that all documents have been properly prepared, all
applicable disclosures given in a timely fashion, and proper compliance with all
federal and state regulations. Appraisals are performed by third party
independent, fee-based, state licensed appraisers approved by the Seller's staff
appraiser and generally conform to current FNMA/FHLMC secondary market
requirements for residential property appraisals. Each such appraisal includes,
among other things, an inspection of the interior and exterior of the subject
property and data from sales within the same general location as the subject
property where available.
The Seller's underwriting criteria require it to verify the income of each
borrower and the source of funds (if applicable). It is the policy of the Seller
that home equity loans to borrowers who are salaried employees be supported by
current employment information in addition to employment history. This
information for salaried borrowers is verified based on written confirmation
from employers, one or more pay-stubs, recent W-2 tax forms or recent tax
returns. A telephone confirmation of employment is made regardless of the
origination program. Under the Stated Income Program borrowers are qualified
based upon monthly income as stated on the home equity loan application and
telephone confirmation of employment. Self-employed borrowers under the Stated
Income Program are required to submit a business license, current bank
statements, and verification with directory assistance to ensure existence of
the business. Under the Limited Documentation Program self employed borrowers
are qualified based upon monthly income stated on the home equity loan
application. Current tax return or six months of current bank statements and a
signed profit and loss statement are obtained to verify existence of business
and acceptable cash flow. Verification of the source of funds (if any) required
by the applicant is generally required under purchase money programs in the form
of a standard verification of deposit, current bank statement or other
acceptable documentation. Twelve months of mortgage payments or rental history
must be verified by lender or landlord. If appropriate compensating factors
exist, the Seller may waive certain documentation requirements for individual
borrowers. All documentation should be no more than 60 days old at underwriting
and no more than 90 days old at the time of the funding of the related loan.
Upon completion of a home equity loan's underwriting and processing, the closing
of the loan is scheduled with a closing attorney or agent approved by the
Seller. The closing attorney or agent is responsible for completing the loan
closing transaction in accordance with applicable law and the Seller's operating
procedures. Title insurance that insures the Seller's interest as mortgagee and
evidence of adequate homeowner's insurance naming the Seller [and its assignees]
as an additional insured party are required on all loans. The general criteria
used by the Seller's Underwriting staff in classifying loan applicants are set
forth below:
Underwriting Criteria of the Seller
"A+" Risk. Under the "A+" risk category, the prospective borrower must
have repaid installment or revolving consumer debt according to its terms with
no 30-day late payments within the last 12 months and within the prior 12 month
period no 30-day late payments are permitted on an existing home equity loan. No
collection accounts, unpaid charge-offs, judgments or a derogatory public record
is permitted within the past two years (medical collections under $500.00 are
excluded, but must be explained by the borrower). No bankruptcy,
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foreclosure or repossession may have occurred during the proceeding seven years
commencing from the date of discharge or the date the foreclosure was filed. No
State or Federal Tax liens (paid or unpaid) and no delinquent property taxes are
permitted. A maximum Loan-to-Value Ratio of 90% for home equity loans originated
under the Full Documentation Program (85% for Limited Documentation Program or
80% if the home equity loan is originated under the Stated Income Program) is
permitted for a home equity loan less than $500,000 on an owner-occupied
property. A maximum Loan-to-Value Ratio of 85% for a home equity loan originated
under the Full Documentation Program (75% for Limited Documentation Program or
70% if the home equity loan is originated under the Stated Income Program) is
permitted for a home equity loan less than $500,000 on non-owner occupied
property. The maximum debt service-to-income ratio is 45%.
"A-1" Risk. Under the "A-1" risk category, the prospective borrower must
have generally repaid installment or revolving debt according to its terms with
no 60-day late payments within the last 24 months. A maximum of one 30-day late
payment is acceptable in the last 12 months on an existing home equity loan.
Consecutive 30-day delinquencies may be considered as a single late. This is
limited to 30-day lates only. Minor derogatory items are allowed as to
non-mortgage credit. No collection accounts, charge-offs or judgments over $500
within the last two years are allowed. No bankruptcy or notice of default
filings by the borrower may have occurred during the preceding five years. A
maximum Loan-to-Value Ratio of up to 90% (85% for Limited Documentation Program
or 80% for home equity loans originated under the Stated Income Program) is
permitted for a home equity loan on a 1-4 family owner-occupied property. A
maximum Loan-to-Value Ratio of up to 85% (75% for Limited Documentation Program
or 65% for home equity loan originating under the Stated Income Program) is
permitted for a home equity loan on a non-owner occupied property. The debt
service-to-income ratio generally is 50% or less based on the Qualifying Rate.
The maximum loan amount is $500,000 for a 1-4 family property under the Full
Documentation Program. Exceptions to the maximum loan amount for a single-family
owner occupied property are considered by the Seller on a limited basis. The
maximum loan amount is $250,000 for a home equity loan on a 1-4 family property
under the Limited Documentation Program or Stated Income Program.
"A-2" Risk. Under the "A-2" risk category, the prospective borrower must
have generally repaid installment or revolving debt according to its terms with
no 90-day late payments on such obligations within the last 12 months. A maximum
of two 30-day late payments and no 60-day late payments within the last 12
months is acceptable on an existing home equity loan. Minor derogatory items are
allowed as to non-mortgage credit. No collection accounts, charge-offs or
judgments over $1,000 within the last two years are allowed. No bankruptcy or
notice of default filings by the borrower may have occurred during the preceding
three years. A maximum Loan-to-Value Ratio of up to 90% (80% for Limited
Documentation Program or 75% for home equity loans originated under the Stated
Income Program.) is permitted for a home equity loan on a non-owner occupied
property. The debt service-to-income ratio generally is 50% or less based on the
Qualifying Rate. The maximum loan amount is $500,000 for a 1-4 family property
under the Full Documentation Program. Exceptions to the maximum loan amount for
a single-family, owner occupied property are considered by the Seller on a
limited basis. The maximum loan amount is $250,000 for a home equity loan on a
1-4 family property under the Limited Documentation Program or Stated Income
Program.
"B" Risk. Under the "B" risk category the prospective borrower must have
generally repaid consumer debt according to its terms with no 120-day late
payments on such obligations within the last 12 months. A maximum of three
30-day late payments within the last 12 months is acceptable on an existing home
equity loan on the subject property. As to non-mortgage credit, some prior
defaults may have occurred. Isolated and insignificant collections and/or
charge-offs and judgments within the last 24 months less than $2,500 are
acceptable. Collection accounts, unpaid charge-offs or judgments are not
required to be paid from the proceeds of the home equity loan if less than
$2,500. No bankruptcy or notice of default filings by the borrower may have
occurred during the preceding 24 months. A maximum Loan-to-Value Ratio of 85%
(80% for Limited Documentation Program or 75% Stated Income Program) is
permitted for a home equity loan on a 1-4 family owner occupied property. A
maximum Loan-to-Value Ratio of 75% (70% for Limited Documentation Program or 65%
for home equity loans originated under the Stated Income Program) is permitted
for a home equity loan on a non-owner occupied property. The debt
service-to-
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income ratio generally is 50% or less based on the Qualifying Rate. The maximum
loan amount is $500,000 for a 1-4 family property, under the Full Documentation
Program. The maximum loan amount is $250,000 for home equity loans originated
under the Limited Documentation Program or Stated Income Program.
"C-1" Risk. Under the "C-1" risk category, the prospective borrower may
have experienced significant credit problems in the past. A maximum of 120 days
delinquency on installment debt within the last twelve months is acceptable. A
maximum of four 30-day late payments and one 60-day late payment within the last
12 months is acceptable on an existing home equity loan. The existing home
equity obligation can be up to 60 days past due at the funding of the loan. As
to non-mortgage credit, significant prior defaults may have occurred. There may
be open collections or charge-offs not to exceed $2,500 and up to $5,000 in
isolated circumstances. However, collection accounts, unpaid charge-offs or
judgments are not required to be paid from the proceeds of the home equity loan
if less than $2,500. No bankruptcy or notice of default filings by the borrower
may have occurred during the preceding 12 months. A maximum Loan-to-Value Ratio
of 80% (75% on Limited Documentation Program or 70% for home equity loans
originated under the Stated Income Program) is permitted for a home equity loan
on a 1-4 family owner-occupied property. A maximum Loan-to-Value Ratio of 70%
(65% on Limited Documentation Program) is permitted for a home equity loan on a
non-owner-occupied property. The debt service-to-income ratio is generally 50%
or less based on the Qualifying Rate. The maximum loan amount is $350,000 for a
home equity loan on a 1-4 family owner-occupied or non-owner occupied property.
The maximum loan is $250,000 on the Limited Documentation Program.
"C-2" Risk. Under the "C-2" risk category, the prospective borrower may
have experienced significant credit problems in the past. A maximum of 120 days
late payments on installment debt within the last twelve months is acceptable. A
maximum of two 60-day late payments or one 90-day late payment with 12 months is
acceptable on an existing home equity loan on the subject property. The existing
home equity obligation can be up to 60 days past due at the funding of the loan.
As to non-mortgage credit, significant prior defaults may have occurred. There
may be open collections or charge-offs not to exceed $5,000. However, collection
accounts, unpaid charge-offs or judgments are not required to be paid from the
proceeds of the home equity loan, provided balance is less than $5,000. No
bankruptcy or notice of default filings by the borrower may have occurred during
the preceding 6 months. A maximum Loan-to-Value Ratio of 75% is permitted for a
home equity loan on a 1-4 family owner-occupied property. A maximum
Loan-to-Value Ratio of 65% is permitted for a home equity loan on a
non-owner-occupied property. The debt service-to-income ratio is generally 50%
or less based on the Qualifying Rate. The maximum loan amount is $350,000.
"D" Risk. Under the "D" risk category, the prospective borrower may have
experienced significant credit problems in the past. As to non-mortgage credit,
significant prior defaults may have occurred. The borrower is sporadic in some
or all areas with a disregard for timely payment or credit standing. With
respect to an existing home equity loan on the subject property, such home
equity loan may be no more than one time 120-day late and may be in foreclosure
proceedings. Such existing home equity loan is not required to be current at the
time the application is submitted. The borrower may have open collections,
charge-offs and judgments, all of which must be paid through the loan proceeds
if amount exceeds $5,000. Bankruptcy or notice of default filings by the
borrower may be present at the time of the loan. A maximum Loan-to-Value Ratio
of 70% is permitted for a home equity loan on a 1-4 family owner-occupied
property. A maximum Loan to Value ratio of 50% is permitted for a home equity
loan on non-owner occupied 1-2 family property. The maximum loan amount is
$350,000. The debt service-to-income ratio generally is 50% or less based on the
Qualifying Rate.
Exceptions. As described above, the Seller uses the foregoing categories
and characteristics as underwriting guidelines only. On a case-by-case basis, it
may determine that the prospective borrower warrants a risk category upgrade, a
debt service-to-income ratio exception, a pricing exception, a loan-to-value
exception or an exception from certain requirements of a particular risk
category (collectively called an "upgrade" or an "exception"). An upgrade or
exception may generally be allowed if the application reflects certain
compensating factors, among
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others: Reduced loan-to-value ratio; good property maintenance; a maximum of two
30-day late payments on all home equity loans during the last 12 months; stable
employment; disposable income and the length of residence in the subject
property. Accordingly, the Seller may classify certain home equity loan
applications in a more favorable risk category than other home equity loan
applications that, in the absence of such compensating factors, would satisfy
only the criteria of a less favorable risk category.
Servicing
The Servicer has been servicing loans since March 1997, when it assumed
the default management cycle of loans previously handled by CTX Mortgage, which
is primarily a conforming seller/servicer. The Servicer or one of its affiliates
originates all of the loans it services. Servicing encompasses, among other
activities, the following processes: billing and collection of payments when
due, movement and reporting of cash to the payment clearing bank accounts,
investor reporting, customer help, reconveyance, recovery of delinquent
installments, instituting foreclosure, and liquidation of the underlying
collateral. As of December 1997, the Servicer was servicing a portfolio of
approximately $200 million.
The Servicer services all loans in its Dallas, Texas headquarters facility
using a mid-range AS400 based servicing platform ("LSAMS") for which the
Servicer purchased a separate user license in August of 1997. The LSAMS system
is also employed by other large, nonconforming servicers in the subprime
industry. At the time the new LSAMS license was obtained by the Servicer, the
company purchased an additional servicing system from CheckFree Corporation
("TPLS"), an event-tracking system with separate modules for foreclosure,
bankruptcy, and REO Property. TPLS has generally increased the Servicer's
ability to track and monitor loans in the default process.
The Servicer's operating and compliance policies and procedures are
published and updated to comply with state and federal, legal and regulatory
requirements.
The Servicer's default management policy has been designed to identify
collection problems so as to facilitate a prompt response to the delinquent
borrower's situation. Early identification of a significant collection problem
is especially critical in the subprime mortgage environment.
Borrowers are mailed a 12 month payment coupon book within 14 days of
their loan's activation on to the LSAMS servicing system. Collection activity on
an account begins as soon as five (5) days after the scheduled due date if a
payment is not made. A "First Notice" (friendly reminder) is generated by LSAMS
and mailed to the mortgagor generally on the 5th day after the due date. Loans
on which one of the initial three (3) payments on a new loan have not been
received will generally be called on the first day of default to ensure that all
terms of the new loan are understood by the borrower(s) and to determine if any
serious problems exist which will affect prompt repayment of the loan.
The collection strategy is to determine the facts surrounding the
delinquency, obtain customer agreement for the solution, and to attempt to
preclude future delinquency on the part of the borrower. Generally, when a
promise for payment is obtained from the borrower by the collector, LSAMS will
target the loan in the "queue" for the date of the promised payment. If the
payment is made, the account is removed from the collection queue. If the
arrangement for payment was not kept, the loan is placed back in the call route
for the collector to contact and follow up on the previous arrangements for
payment. If the payment is received per the arrangements and no future promise
or target dates are noted on LSAMS, the loan will be removed from the collection
cycle unless the account becomes delinquent in the future.
Generally, when a loan appears in the LSAMS default management auto queue,
the collector will telephone the borrower(s) to discuss the past due payment
situation. Standard collection form letters, approved by the
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Servicer's Legal department, are generally utilized in conjunction with
telephone calling, in order to reach the delinquent borrower(s). Documentation
of collection activity is critically important in the default management
process. Collectors have access on LSAMS to borrower demographics, telephone
numbers, loan payment history, and all previous collection notes, to assist in
the collection of a past due account. The policy of the Servicer is that
managers in the collection department are required to monitor collectors' work
on LSAMS and to offer guidance and training to their employees.
It is the policy of the Seller to send out a notice of demand at the 45th
day of delinquencies. This may be done sooner if the circumstances of a
particular account indicate that legal action appears likely. This letter will
give the customer 30 days notice of the Seller's intent to initiate foreclosure
action on the loan. If an alternative to foreclosure is appropriate, a
recommended course of action will be prescribed by senior servicing management.
Servicing and collection practices regarding the liquidation of properties
(e.g., foreclosure) and the right of the borrower vary from state to state.
Prior to any foreclosure action, and intermittently updated throughout the
process, the Servicer performs an in-depth market value analysis on all
defaulted loans. This analysis includes a current appraisal or broker price
opinion ("BPO") conducted by an independent vendor from the Servicer's approved
network of appraisers or real estate brokers. In addition, all property
evaluations are reviewed by an internal staff appraiser in order to ensure that
the most accurate value is known. It is this value which will determine it's
strategy for bidding, repairs, and sale of the property.
If the Servicer acquires title to a property at a foreclosure sale or
through other means, the REO Property department immediately begins working on
the file by obtaining at least two local real estate brokers to inspect the
property and provide an estimate of repairs needed and a recommended list price.
Repairs are performed if it is determined that they will increase the net
liquidation proceeds and speed of disposal.
If the property is not vacated when it is acquired, a local attorney will
be hired to commence eviction proceedings. Once it has listed a foreclosed
property, the REO Property department will follow up closely with the listing
agent to ensure that the collateral is secure and that it is being aggressively
marketed.
The Servicer outsources the tracking and follow up on homeowner's
insurance and property taxes. Expiration lists on homeowner insurance are
provided on a biweekly basis to the Servicer by the service provider. When
insurance policies lapse, a letter is mailed to the borrower, advising that
coverage has lapsed and in the absence of a new policy, that the Servicer will
obtain a force-placed insurance policy at the borrower's expense. The Servicer
has a master policy with the force-placed provider which protects against errors
and omissions with a blanket policy covering the Servicer's balance on the loan.
Notwithstanding any of the foregoing, the Servicer will be required to
service the Home Equity Loans in accordance with the servicing standard and
other terms set forth in the Agreement.
DESCRIPTION OF THE SECURITIES
General
Each Series of Notes will be issued pursuant to an indenture (the
"Indenture") between the related Trust Fund and the entity named in the related
Prospectus Supplement as trustee (the "Trustee") with respect to such Series. A
form of Indenture has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part. The Certificates will also be issued in
Series pursuant to separate agreements (each, a "Pooling and Servicing
Agreement" or a "Trust Agreement") among the Depositor, the Seller, the Servicer
and the Trustee. A form of
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Pooling and Servicing Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part. A Series may consist of both
Notes and Certificates.
The following summaries describe the material provisions in the Agreements
common to each Series of Securities. The summaries do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, the
provisions of the Agreements and the Prospectus Supplement relating to each
Series of Securities. Where particular provisions or terms used in the
Agreements are referred to, the actual provisions (including definitions of
terms) are incorporated herein by reference as part of such summaries.
Each Series of Securities will consist of one or more Classes of
Securities, one or more of which may be Compound Interest Securities, Variable
Interest Securities, PAC Securities, Zero Coupon Securities, Principal Only
Securities or Interest Only Securities (each of which is generally described in
the "INDEX OF DEFINED TERMS"). A Series may also include one or more Classes of
Subordinate Securities. The Securities of each Series will be issued only in
fully registered form, without coupons, in the authorized denominations for each
Class specified in the related Prospectus Supplement. Upon satisfaction of the
conditions, if any, applicable to a Class of a Series, as described in the
related Prospectus Supplement, the transfer of the Securities may be registered
and the Securities may be exchanged at the office of the Trustee specified in
the Prospectus Supplement without the payment of any service charge other than
any tax or governmental charge payable in connection with such registration of
transfer or exchange. If specified in the related Prospectus Supplement, one or
more Classes of a Series may be available in book-entry form only.
Payments of principal of and interest on a Series of Securities will be
made on the Distribution Dates specified in the related Prospectus Supplement
(which may be different for each Class or for the payment of principal and
interest) by check mailed to Holders of such Series, registered as such at the
close of business on the record date specified in the related Prospectus
Supplement applicable to such Distribution Dates at their addresses appearing on
the security register, except that (a) payments may be made by wire transfer
(which, unless otherwise specified in the related Prospectus Supplement, shall
be at the expense of the Holder requesting payment by wire transfer) in certain
circumstances described in the related Prospectus Supplement and (b) final
payments of principal in retirement of each Security will be made only upon
presentation and surrender of such Security at the office of the Trustee
specified in the Prospectus Supplement. Notice of the final payment on a
Security will be mailed to the Holder of such Security before the Distribution
Date on which the final principal payment on any Security is expected to be made
to the holder of such Security.
Payments of principal of and interest on the Securities will be made by
the Trustee, or a paying agent on behalf of the Trustee, as specified in the
related Prospectus Supplement. All payments with respect to the Home Equity
Loans for a Series, together with reinvestment income thereon, amounts withdrawn
from any Reserve Fund, and amounts available pursuant to any other Enhancement
will be deposited into the Collection Account or the Certificate Account as
specified in the related Agreement. If provided in the related Prospectus
Supplement, such amounts may be net of certain amounts payable to the Servicer
and any other person specified in the Prospectus Supplement. Such amounts
thereafter may be deposited into the Distribution Account and will be available
to make payments on the Securities of such Series on the next applicable
Distribution Date. See "THE TRUST FUNDS--Collection, Certificate and
Distribution Accounts."
Book-Entry Securities
If specified in the related Prospectus Supplement, one or more Classes of
Securities may be issued in book-entry form (the "Book-Entry Securities").
Persons acquiring beneficial ownership interests in the Book-Entry Securities
("Owners") will hold their Securities through the Depository Trust Company
("DTC") in the United States, or Cedel Bank, societe anonyme, ("Cedel") or the
Euroclear System ("Euroclear") (in Europe) if they are participants of such
systems, or indirectly through organizations which are participants in such
systems. The Book-Entry Securities will be issued in one or more certificates
which equal the aggregate principal balance of the
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applicable Class or Classes of Securities and will initially be registered in
the name of Cede & Co., the nominee of DTC. Cedel and Euroclear will hold
omnibus positions on behalf of their participants through customers" securities
accounts in Cedel's and Euroclear's names on the books of their respective
depositaries which in turn will hold such positions in customers" securities
accounts in the depositaries" names on the books of DTC. [Citibank N.A.
("Citibank") will act as depositary for Cedel and The Chase Manhattan Bank
("Chase") will act as depository for Euroclear (in such capacities, individually
the "Relevant Depositary" and collectively the "European Depositaries").] Except
as described below, no person acquiring a Book-Entry Security will be entitled
to receive a physical certificate representing such Security (a "Definitive
Security"). Unless and until Definitive Securities are issued, it is anticipated
that the only "Certificateholder" or Noteholder, as applicable, will be Cede &
Co., as nominee of DTC. Owners are only permitted to exercise their rights
indirectly through Participants and DTC.
The Owner's ownership of a Book-Entry Security will be recorded on the
records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the beneficial
owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such Book-Entry Security will be recorded on the records of DTC (or
of a participating firm that acts as agent for the Financial Intermediary, whose
interest will in turn he recorded on the records of DTC, if the beneficial
owner's Financial Intermediary is not a DTC participant and on the records of
Cedel or Euroclear, as appropriate).
Owners will receive all distributions of principal of, and interest on,
the Book-Entry Securities from the Trustee through DTC and DTC participants.
While the Book-Entry Securities are outstanding (except under the circumstances
described below), under the rules, regulations and procedures creating and
affecting DTC and its operations (the "Rules"), DTC is required to make
book-entry transfers among Participants on whose behalf it acts with respect to
the Securities and is required to receive and transmit distributions of
principal of, and interest on, the Securities. Participants and indirect
participants with whom Certificate Owners have accounts with respect to
Securities are similarly required to make book-entry transfers and receive and
transmit such distributions on behalf of their respective Owners. Accordingly,
although Owners will not possess certificates, the Rules provide a mechanism by
which Owners will receive distributions and will be able to transfer their
interest.
Owners will not receive or be entitled to receive certificates
representing their respective interests in the Securities, except under the
limited circumstances described below. Unless and until Definitive Securities
are issued, Owners who are not Participants may transfer ownership of Securities
only through Participants and indirect participants by instructing such
Participants and indirect participants to transfer Securities, by book-entry
transfer, through DTC for the account of the purchasers of such Securities,
which account is maintained with their respective Participants. Under the Rules
and in accordance with DTC's normal procedures, transfers of ownership of
Securities will be executed through DTC and the accounts of the respective
Participants at DTC will be debited and credited. Similarly, the Participants
and indirect participants will make debits or credits, as the case may be, on
their records on behalf of the selling and purchasing Owners.
Because of time zone differences, credits of securities received in Cedel
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
Cedel Participants on such business day. Cash received in Cedel or Euroclear as
a result of sales of securities by or through a Cedel Participant (as defined
below) or Euroclear Participant (as defined below) to a DTC Participant will be
received with value on the DTC settlement date but will be available in the
relevant Cedel or Euroclear cash account only as of the business day following
settlement in DTC.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedel
Participants or Euroclear Participants, on the other, will be effected in DTC in
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accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedel Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the Book-Entry Certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Certificates will be subject to the rules,
regulations and procedures governing DTC and DTC participants as in effect from
time to time.
Cedel is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its participating organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book-entry changes in
accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Cedel in any of 28
currencies, including United States dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depository, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to Cedel is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Cedel Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments
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with respect to securities in Euroclear. All securities in Euroclear are held on
a fungible basis without attribution of specific certificates to specific
securities clearance accounts. The Euroclear Operator acts under the Terms and
Conditions only on behalf of Euroclear Participants, and has no record of or
relationship with persons holding through Euroclear Participants.
Distributions on the Book-Entry Securities will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC Participant will be
responsible for disbursing such payments to the Owners that it represents and to
each Financial Intermediary for which it acts as agent. Each such Financial
Intermediary will be responsible for disbursing funds to the Owners that it
represents.
Under a book-entry format, Owners may experience some delay in their
receipt of payments, since such payments will be forwarded by the Trustee to
Cede. Distributions with respect to Securities held through Cedel or Euroclear
will be credited to the cash accounts of Cedel Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by the Relevant Depositary. Such distributions will be
subject to tax reporting in accordance with relevant United States tax laws and
regulations. Because DTC can only act on behalf of Financial Intermediaries, the
ability of an Owner to pledge Book-Entry Securities to persons or entities that
do not participate in the Depository system, or otherwise take actions in
respect of such Book-Entry Securities, may be limited due to the lack of
physical certificates for such Book-Entry Securities. In addition, issuance of
the Book-Entry Securities in book-entry form may reduce the liquidity of such
Securities in the secondary market since certain potential investors may be
unwilling to purchase Securities for which they cannot obtain physical
certificates.
Monthly and annual reports on the applicable Trust Fund will be provided
to Cede, as nominee of DTC, and may be made available by Cede to Owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Securities of such Owners are credited.
DTC has advised the Trustee that, unless and until Definitive Securities
are issued, DTC will take any action permitted to be taken by the holders of the
Book-Entry Securities under the Agreement only at the direction of one or more
Financial Intermediaries to whose DTC accounts the Book-Entry Securities are
credited, to the extent that such actions are taken on behalf of Financial
Intermediaries whose holdings include such Book-Entry Securities. Cedel or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by a Holder under the Agreement on behalf of a Cedel Participant or
Euroclear Participant only in accordance with its relevant rules and procedures
and subject to the ability of the Relevant Depositary to effect such actions on
its behalf through DTC. DTC may take actions, at the direction of the related
Participants, with respect to some Securities which conflict with actions taken
with respect to other Securities.
Definitive Securities will be issued to Owners, or their nominees, rather
than to DTC, only if (a) DTC or the Seller advises the Trustee in writing that
DTC is no longer willing, qualified or able to discharge properly its
responsibilities as nominee and depository with respect to the Book-Entry
Securities and the Seller or the Trustee is unable to locate a qualified
successor, (b) the Seller, at its sole option, elects to terminate a book-entry
system through DTC or (c) after the occurrence of an Event of Default (as
defined herein), Owners owning a majority in principal amount of the applicable
Securities advise the Trustee and DTC through the Financial Intermediaries and
the DTC participants in writing that the continuation of a book-entry system
through DTC (or a successor thereto) is no longer in the best interests of
Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all applicable
Owners of the occurrence of such event and the availability through DTC of
Definitive Securities. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Securities and instructions for
re-registration, the Trustee will issue Definitive Securities, and thereafter
the Trustee
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will recognize the holders of such Definitive Securities as Certificateholders
or Noteholders, as applicable, under the Agreement.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Securities among participants of DTC, Cedel
and Euroclear, they are under no obligation to perform or continue to perform
such procedures and such procedures may be discontinued at any time.
Neither the Depositor, the Seller, the Servicer nor the Trustee will have
any responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Securities held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
Valuation of the Home Equity Loans
If specified in the related Prospectus Supplement for a Series of Notes,
each Home Equity Loan included in the related Trust Fund for a Series will be
assigned an initial "Asset Value." Generally, the related Agreement will specify
that at any time the Asset Value of the Home Equity Loans will be equal to the
product of the Asset Value Percentage as set forth in the Indenture and the
lesser of (a) the stream of remaining regularly scheduled payments on the Home
Equity Loans, net, of certain amounts payable as expenses, together with income
earned on each such scheduled payment received through the day preceding the
next Distribution Date at the Assumed Reinvestment Rate, if any, discounted to
present value at the highest interest rate on the Notes of such Series over
periods equal to the interval between payments on the Notes, and (b) the then
principal balance of the Home Equity Loans. Generally, the related Agreement
will specify that, the initial Asset Value of the Home Equity Loans will be at
least equal to the principal amount of the Notes of the related Series at the
date of issuance thereof.
The "Assumed Reinvestment Rate," if any, for a Series will be the highest
rate permitted by the Rating Agency or a rate insured by means of a surety bond,
guaranteed investment contract, or other arrangement satisfactory to the Rating
Agency. If the Assumed Reinvestment Rate is so insured, the related Prospectus
Supplement will set forth the terms of such arrangement.
Payments of Interest
The Securities of each Class by their terms entitled to receive interest
will bear interest (which is generally calculated, on the basis of a 360 day
year of twelve 30-day months) from the date and at the rate per annum specified,
or calculated in the method described, in the related Prospectus Supplement.
Interest on such Securities of a Series will be payable on the Distribution Date
specified in the related Prospectus Supplement. If so specified in the related
Prospectus Supplement, the Distribution Date for the payment of interest of a
Class may be different from, or occur more or less frequently than, the
Distribution Date for the payment of principal of such Class. The rate of
interest on Securities of a Series may be variable or may change with changes in
the annual percentage rates of the Home Equity Loans included in the related
Trust Fund and/or as prepayments occur with respect to such Home Equity Loans.
Principal Only Securities may not be entitled to receive any interest
distributions or may be entitled to receive only nominal interest distributions.
Any interest on Zero Coupon Securities that is not paid on the related
Distribution Date will accrue and be added to the principal thereof on such
Distribution Date.
Interest payable on the Securities on a Distribution Date will include all
interest accrued during the period specified in the related Prospectus
Supplement. In the event interest accrues during the calendar month preceding a
Distribution Date, the effective yield to Holders will be reduced from the yield
that would otherwise be obtainable if interest payable on the Securities were to
accrue through the day immediately preceding such Distribution Date.
Payments of Principal
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On each Distribution Date for a Series, principal payments will be made to
the Holders of the Securities of such Series on which principal is then payable,
to the extent set forth in the related Prospectus Supplement. Such payments will
be made in an aggregate amount determined as specified in the related Prospectus
Supplement and will be allocated among the respective Classes of a Series in the
manner, at the times and in the priority set forth in the related Prospectus
Supplement. The Holders of one or more Classes of Securities may have the right
to request that principal distributions allocable to such Holder's Class of
Securities be distributed to such Holder. If the requests of Holders exceed the
amount of principal to be distributed, the requests generally will be filled in
the order in which they were received. If the amount of principal to be
distributed exceeds the amount of requests, the Trustee will select random lots
of $1,000 each to receive such principal distribution. Thus, some Holders of the
applicable Class of Securities may receive no principal distributions or a
disproportionate amount of such principal distributions. If so specified in the
related Prospectus Supplement, the Distribution Date for the payment of
principal of a Class may be different from, or occur more or less frequently
than, the Distribution Date for the payment of interest for such Class.
Final Scheduled Distribution Date
The Final Scheduled Distribution Date with respect to each Class of Notes
is the date no later than the date on which the principal thereof will be fully
paid and with respect to each Class of Certificates will be the date on which
the entire aggregate principal balance of such Class is expected to be reduced
to zero, in each case calculated on the basis of the assumptions applicable to
such Series described in the related Prospectus Supplement. The Final Scheduled
Distribution Date for each Class of a Series will be specified in the related
Prospectus Supplement. Since payments on the Home Equity Loans will be used to
make distributions in reduction of the outstanding principal amount of the
Securities, it is likely that the actual final Distribution Date of any such
Class will occur earlier, and may occur substantially earlier, than its Final
Scheduled Distribution Date. Furthermore, with respect to a Series of
Certificates, as a result of delinquencies, defaults and liquidations of the
Home Equity Loans in the Trust Fund, the actual final Distribution Date of any
Certificate may occur later than its Final Scheduled Distribution Date. No
assurance can be given as to the actual prepayment experience with respect to a
Series. See "--Weighted Average Life of the Securities" below.
Special Redemption
If so specified in the Prospectus Supplement relating to a Series of
Securities having other than monthly Distribution Dates, one or more Classes of
Securities of such Series may be subject to special redemption, in whole or in
part, on the day specified in the related Prospectus Supplement (a "Special
Redemption Date") if, as a consequence of prepayments on the Home Equity Loans
relating to such Securities or low yields then available for reinvestment the
entity specified in the related Prospectus Supplement determines, based on
assumptions specified in the applicable Agreement, that the amount available for
the payment of interest that will have accrued on such Securities (the
"Available Interest Amount") through the designated interest accrual date
specified in the related Prospectus Supplement is less than the amount of
interest that will have accrued on such Securities to such date. In such event
and as further described in the related Prospectus Supplement, the Trustee will
redeem a principal amount of outstanding Securities of such Series as will cause
the Available Interest Amount to equal the amount of interest that will have
accrued through such designated interest accrual date for such Series of
Securities outstanding immediately after such redemption.
Optional Redemption, Purchase or Termination
The Seller, the Servicer, or another entity designated in the related
Prospectus Supplement may, at its option, cause an early termination of one or
more Classes of Securities by purchasing all or part of the Home Equity Loans
from such Trust Fund on or after a date specified in the related Prospectus
Supplement, or on or after such time as the aggregate outstanding principal
amount of the Securities or Home Equity Loans, as specified in the related
Prospectus Supplement is less than the amount or percentage, not more than 25%,
specified in the related
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Prospectus Supplement) at a price equal to the sum of the outstanding Pool
Balance (subject to reduction of the purchase price based in part on the
appraised value of any REO Property included in the Trust if such appraised
value is less than the Principal Balance of the related Home Equity Loan, as
provided in the Agreement) and accrued and unpaid interest thereon at the
weighted average of the Home Equity Loan Rates through the end of the related
Due Period together with all amounts due and owing to the Enhancer, if any.
There will be sufficient proceeds to pay off the then current principal balance
of any Securities of such Series outstanding. In addition, if so specified in
the related Prospectus Supplement upon certain events of insolvency or
receivership of the Seller or another affiliated entity specified in the related
Prospectus Supplement, the related Home Equity Loans of the Trust Fund will be
liquidated and the Trust Fund will be terminated, subject to the conditions set
forth in the related Prospectus Supplement. In each such event, the Securities
of the related Series will experience a prepayment. If specified in the related
Prospectus Supplement, in the event that a REMIC election has been made, the
Trustee will receive a satisfactory opinion of counsel that the optional
redemption, purchase or termination will be conducted so as to constitute a
"qualified liquidation" under Section 860F of the Code. Following the sale of
the Home Equity Loans, neither the Trust, nor the holders of Securities will
have any continuing direct of indirect liability as sellers of the Home Equity
Loans.
If so specified in the related Prospectus Supplement, the Servicer may
have the option to purchase from the Trust Fund any Home Equity Loan 90 days or
more delinquent at a purchase price equal to the outstanding Principal Balance
of such Home Equity Loan as of the date of purchase, plus all accrued and unpaid
interest thereon computed at the Home Equity Loan Rate through the end of the
related Due Period, together with all unreimbursed amounts owing to the Enhancer
with respect to such Home Equity Loan, if any.
Weighted Average Life of the Securities
Weighted average life refers to the average amount of time that will
elapse from the date of issue of a security until each dollar of principal of
such security will be repaid to the investor. Generally, the weighted average
life of a Class of the Securities will be influenced by the rate at which the
amount financed under the Home Equity Loans included in the Trust Fund for a
Series is paid, which may be in the form of scheduled amortization or
prepayments.
Prepayments on loans and other receivables can be measured relative to a
prepayment standard or model. The Prospectus Supplement for a Series of
Securities will describe the prepayment standard or model, if any, used and may
contain tables setting forth the weighted average life of each Class of
Securities of such Series, and the percentage of the original principal amount
of each Class of Securities of such Series that would be outstanding on
specified Distribution Dates for such Series, in each case based on the
assumptions stated in such Prospectus Supplement, including assumptions that
prepayments on the Home Equity Loans included in the related Trust Fund are made
at rates corresponding to various percentages of the prepayment standard or
model specified in such Prospectus Supplement.
There is, however, no assurance that prepayment of the Home Equity Loans
included in the related Trust Fund will conform to any level of any prepayment
standard or model specified in the related Prospectus Supplement. The rate of
principal prepayments on pools of loans may be influenced by a variety of
factors, including job related factors such as transfers, layoffs or promotions
and personal factors such as divorce, disability or prolonged illness. Economic
conditions, either generally or within a particular geographic area or industry,
also may affect the rate of principal prepayments. Demographic and social
factors may influence the rate of principal prepayments in that some borrowers
have greater financial flexibility to move or refinance than do other borrowers.
The deductibility of mortgage interest payments, and servicing decisions also
affect the rate of principal prepayments. As a result, there can be no assurance
as to the rate or timing of principal prepayments of the Home Equity Loans
either from time to time or over the lives of such Home Equity Loans.
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The rate of prepayments of conventional housing loans and other
receivables has fluctuated significantly in recent years. In general, however,
if prevailing interest rates fall significantly below the interest rates on the
Home Equity Loans for a Series, such loans are likely to prepay at rates higher
than if prevailing interest rates remain at or above the interest rates borne by
such loans. In this regard, [it should be noted that the Home Equity Loans for a
Series may have different interest rates. In addition, the weighted average life
of the Securities may be affected by the varying maturities of the Home Equity
Loans. If any Home Equity Loans for a Series have actual terms-to-stated
maturity of less than those assumed in calculating the Final Scheduled
Distribution Date of the related Securities, one or more Classes or the Series
may be fully paid prior to their respective Final Scheduled Distribution Date,
even in the absence of prepayments and a reinvestment return higher than the
Assumed Reinvestment Rate.]
THE TRUST FUNDS
General
The Notes of each Series will be secured by the pledge of the assets of
the related Trust Fund, and the Certificates of each Series will represent
interests in the assets of the related Trust Fund. The Trust Fund of each Series
will include (i) the Home Equity Loans, (ii) amounts available from the
reinvestment of payments on such Home Equity Loans at the Assumed Reinvestment
Rate, if any, specified in the related Prospectus Supplement, (iii) any
Enhancement or the rights thereto, (iv) any Mortgaged Property that secured a
Home Equity Loan but which is acquired by foreclosure or deed in lieu of
foreclosure or repossession and (v) the amount, if any, initially deposited in
the Pre-Funding Account, Capitalized Interest Account, Collection Account,
Certificate Account or Distribution Account for a Series as specified in the
related Prospectus Supplement.
The Securities will be non-recourse obligations of the related Trust Fund.
The assets of the Trust Fund specified in the related Prospectus Supplement for
a Series of Securities, will serve as collateral only for that Series of
Securities unless the related Prospectus Supplement specifies that such assets
will serve as collateral for another Series. Holders of a Series of Notes may
only proceed against such collateral securing such Series of Notes in the case
of a default with respect to such Series of Notes and may not proceed against
any assets of the Depositor, Seller or the related Trust Fund not pledged to
secure such Notes.
The Home Equity Loans for a Series will be transferred by the Seller to
the Depositor and from the Depositor to the Trust Fund. Home Equity Loans
relating to a Series will be master serviced by the Servicer pursuant to a
Pooling and Servicing Agreement, with respect to a Series consisting of only
Certificates or a Sale and Servicing Agreement (each, a "Sale and Servicing
Agreement") between the Depositor, the Seller, the Trust Fund, the and the
Servicer, with respect to a Series that includes Notes.
As used herein, "Agreement" means, with respect to a Series of
Certificates, the Pooling and Servicing Agreement or Trust Agreement, and with
respect to a Series that includes Notes, the Indenture and the Sale and
Servicing Agreement, as the context requires.
If so specified in the related Prospectus Supplement, a Trust Fund
relating to a Series of Securities may be a business trust formed under the laws
of the state specified in the related Prospectus Supplement pursuant to a trust
agreement (each, a "Trust Agreement") between the Seller and the Trustee of such
Trust Fund specified in the related Prospectus Supplement.
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or liabilities.
No Trust Fund is expected to engage in any activities other than acquiring,
managing and holding the related Home Equity Loans and other assets contemplated
herein and in the related Prospectus Supplement and the proceeds thereof,
issuing Securities and making payments and distributions thereon and certain
related activities. No Trust Fund is expected to have any source of capital
other than its assets and any related Enhancement.
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An Agreement may provide that additional Home Equity Loans may be added to
the Trust Fund if such Home Equity Loans were originated by the Seller in the
ordinary course of its business, the inclusion of such Home Equity Loans will
maintain or increase the level of overcollateralization and the inclusion of
such Home Equity Loans will not result in the withdrawal or downgrading of the
ratings then assigned to the Securities of the related Series. In addition, an
Agreement may provide that Home Equity Loans may be removed from a Trust Fund
from time to time if the actual level of overcollateralization exceeds the
amount of overcollateralization required to be maintained and such removal will
not result in the withdrawal or downgrading of the ratings then assigned to the
Securities of the related Series.
The Home Equity Loans
The Home Equity Loans for a Series may consist, in whole or in part, of
closed-end home equity loans (the "Home Equity Loans") secured by first or
second mortgages primarily on Single Family Mortgaged Properties which may be
subordinated to other mortgages on the same Mortgaged Property. The Home Equity
Loans may have fixed interest rates or adjustable interest rates and may provide
for other payment characteristics as described below.
The full principal amount of a Home Equity Loan is advanced at origination
of the loan and generally is repayable in equal (or substantially equal)
installments of an amount sufficient to fully amortize such loan at its stated
maturity. As more fully described in the related Prospectus Supplement, interest
on each Home Equity Loan is calculated on the basis of the outstanding principal
balance of such loan multiplied by the Home Equity Loan Rate thereon and, in the
case of simple interest loans, further multiplied by a fraction, the numerator
of which is the number of days in the period elapsed since the preceding payment
of interest was made and the denominator is the number of days in the annual
period for which interest accrues on such loan. Interest on Home Equity Loans
also may be calculated on the actuarial basis, in which case each monthly
payment consists of a decreasing amount of interest and an increasing amount of
principal, and the payment either earlier or later then the due date therefor
will not affect the relative applications of principal and interest. The Home
Equity Loans for a Series may include Home Equity Loans that do not amortize
their entire principal balance by their stated maturity in accordance with their
terms and require a balloon payment of the remaining principal balance at
maturity, as specified in the related Prospectus Supplement. The original terms
to stated maturity of Home Equity Loans will generally not exceed 360 months.
The Mortgaged Properties will include Single Family Property (i.e., one-
to four-family residential housing, including Condominium Units and Cooperative
Dwellings) and may include mixed-use property. Mixed-use properties will consist
of structures of no more than three stories, which include one to four
residential dwelling units and space used for retail, professional or other
commercial uses. Such uses, which will not involve more than 50% of the space in
the structure, may include doctor, dentist or law offices, real estate agencies,
boutiques, newsstands, convenience stores or other similar types of uses
intended to cater to individual customers as specified in the related Prospectus
Supplement. The properties may be located in suburban or metropolitan districts.
Any such non-residential use will be in compliance with local zoning laws and
regulations. The Mortgaged Properties may consist of detached individual
dwellings, individual condominiums, townhouses, duplexes, row houses, individual
units in planned unit developments and other attached dwelling units. The
Mortgaged Properties also may include module or manufactured homes which are
treated as real estate under local law. Except for Condominium Units and
Cooperative Dwellings, each Single Family Property will be located on land owned
in fee simple by the borrower or on land leased by the borrower for a term at
least as long as the term of the related Home Equity Loan. Attached dwellings
may include owner-occupied structures where each borrower owns the land upon
which the unit is built, with the remaining adjacent land owned in common or
dwelling units subject to a proprietary lease or occupancy agreement in a
cooperatively owned apartment building. Mortgages on Cooperative Dwellings
consist of a lien on the shares issued by such Cooperative Dwelling and the
proprietary lease or occupancy agreement relating to such Cooperative Dwelling.
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The aggregate principal balance of Home Equity Loans secured by Mortgaged
Properties that are owner-occupied will be disclosed in the related Prospectus
Supplement. The sole basis for determining that a given percentage of the Home
Equity Loans are secured by Single Family Property that is owner-occupied will
be either (i) the making of an oral representation by the Mortgagor at
origination of the Home Equity Loan either that the underlying Mortgaged
Property will be used by the Mortgagor for a period of at least six months every
year or that the Mortgagor intends to use the Mortgaged Property as a primary
residence, or (ii) a finding that the address of the underlying Mortgaged
Property is the Mortgagor's mailing address as reflected in the Servicer's or
the applicable Sub-Servicer's records. The Mortgaged Properties also may include
non-owner occupied investment properties and vacation and second homes.
Additional Information. The related Prospectus Supplement for each Series
will provide information with respect to the Home Equity Loans that are Home
Equity Loans as of the Cut-off Date, including, among other things, and to the
extent relevant: (a) the aggregate unpaid principal balance of the Home Equity
Loans (b) the range and weighted average Home Equity Loan Rate on the Home
Equity Loans, and, in the case of adjustable rate Home Equity Loans, the range
and weighted average of the current Home Equity Loan Rates and the Lifetime Rate
Caps, if any; (c) the range and average outstanding principal balance of the
Home Equity Loans; (d) the weighted average original and remaining
term-to-stated maturity of the Home Equity Loans and the range of original and
remaining terms-to-stated maturity, if applicable; (e) the range and weighted
average of Combined Loan-to-Value Ratios for the Home Equity Loans; (f) the
percentage (by outstanding principal balance as of the Cut-off Date) of Home
Equity Loans that accrue interest at adjustable or fixed interest rates; (g) any
special hazard insurance policy or bankruptcy bond or other enhancement relating
to the Home Equity Loans; (h) the geographic distribution of the Mortgaged
Properties securing the Home Equity Loans; (i) the percentage of Home Equity
Loans (by principal balance as of the Cut-off Date) that are secured by Single
Family Mortgaged Properties, shares relating to Cooperative Dwellings,
Condominium Units, investment property and vacation or second homes; (j) the
lien priority of the Home Equity Loans; and (k) the delinquency status and year
of origination of the Home Equity Loans. The related Prospectus Supplement will
also specify any other limitations on the types or characteristics of Home
Equity Loans for a Series. No more than 5% of the aggregate Home Equity Loans,
as they will be constituted on the Closing Date will deviate in any respect from
the Home Equity. Loan pool characteristics that are described herein in the
Prospectus Supplement.
If information of the nature described above respecting the Home Equity
Loans is not known to the Seller at the time the Securities are initially
offered, approximate or more general information of the nature described above
will be provided in the Prospectus Supplement and additional information will be
set forth in a Current Report on Form 8-K to be available to investors on the
date of issuance of the related Series and to be filed with the Commission
within 15 days after the initial issuance of such Securities.
Collection, Certificate and Distribution Accounts
A separate Collection Account or Certificate Account will be established
for each Series of Securities for receipt of all amounts received on or with
respect to the Home Equity Loans. Certain amounts on deposit in such Collection
Account and certain amounts available pursuant to any Enhancement, as provided
in the related Prospectus Supplement, may be deposited in one or more
Distribution Accounts. Funds in the Collection, Certificate and Distribution
Accounts generally will be invested in Eligible Investments maturing, with
certain exceptions, not later, in the case of funds in the Collection Account,
than the day preceding the date such funds are due to be deposited in the
Distribution Account or otherwise distributed and, in the case of funds in the
Distribution Account and the Certificate Account, than the day preceding the
next Distribution Date for the related Series of Securities. See "--Eligible
Investments" below.
Pre-Funding and Capitalized Interest Accounts
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If specified in the related Prospectus Supplement, a Trust Fund will
include one or more segregated trust accounts (each, a "Pre-Funding Account")
established and maintained with the Trustee for the related Series. If so
specified, on the closing date for such Series, a portion of the proceeds of the
sale of the Securities of such Series not to exceed fifty percent of the
aggregate principal amount of such Series (such amount, the "Pre-Funded Amount")
may be deposited in the Pre-Funding Account and may be used to purchase
additional Home Equity Loans during the period of time not to exceed six months
specified in the related Prospectus Supplement (the "Pre-Funding Period").
Pending the purchase of such additional Home Equity Loans, funds deposited in
the Pre-Funding Account will be invested in Eligible Investments. If any
Pre-Funded Amount remains on deposit in the Pre-Funding Account at the end of
the Pre-Funding Period, such amount will be applied in the manner specified in
the related Prospectus Supplement to prepay the Notes and/or the Certificates of
the applicable Series.
Each additional Home Equity Loan must satisfy the eligibility criteria
specified in the related Prospectus Supplement and related Agreements. Such
eligibility criteria will be determined in consultation with each Rating Agency
(and/or any Enhancer) prior to the issuance of the related Series and are
designed to ensure that if such additional Home Equity Loans were included as
part of the initial Home Equity Loans, the credit quality of such assets would
be consistent with the initial rating of the Securities of such Series. The
eligibility criteria will apply to the pool of Home Equity Loans, including the
subsequent Home Equity Loans, and will include a minimum weighted average
interest rate, a maximum weighted average remaining term to maturity and a
maximum weighted average Combined Loan-to-Value Ratio. Depending on the
composition of the original Home Equity Loans and the type of Enhancement,
additional eligibility criteria such as a minimum interest rate, a maximum
principal balance, a limitation on geographic concentration and a limit on
certain types of Home Equity Loans such as Balloon Loans or loans secured by
other than primary residences. The Seller will certify to the Trustee that all
conditions precedent to the transfer of the additional Home Equity Loans,
including the satisfaction of the eligibility criteria to the Trust Fund, have
been satisfied. It is a condition to the transfer of any additional Home Equity
Loans to the Trust Fund that each Rating Agency, after receiving prior notice of
the proposed transfer of the additional Home Equity Loans to the Trust Fund,
shall not have advised the Seller or the Trustee or any Enhancer that the
conveyance of such additional Home Equity Loans will result in a qualification,
modification or withdrawal of its then current rating of any Class of Notes or
Certificates of such Series. Following the transfer of additional Home Equity
Loans to the Trust Fund, the aggregate characteristics of the Home Equity Loans
then held in the Trust Fund may vary from those of the initial Home Equity Loans
of such Trust Fund. As a result, the additional Home Equity Loans may adversely
affect the performance of the related Securities.
If a Pre-Funding Account is established, one or more segregated trust
accounts (each, a "Capitalized Interest Account") may be established and
maintained with the Trustee for the related Series. On the closing date for such
Series, a portion of the proceeds of the sale of the Securities of such Series
will be deposited in the Capitalized Interest Account and used to fund the
excess, if any, of the sum of (i) the amount of interest accrued on the
Securities of such Series and (ii) if specified in the related Prospectus
Supplement, certain fees or expenses during the Pre-Funding Period such as
Trustee fees and credit enhancement fees, over the amount of interest available
therefor from the Home Equity Loans in the Trust Fund. If so specified in the
related Prospectus Supplement, amounts on deposit in the Capitalized Interest
Account may be released to the Seller prior to the end of the Pre-Funding Period
subject to the satisfaction of certain tests specified in the related Prospectus
Supplement. Any amounts on deposit in the Capitalized Interest Account at the
end of the Pre-Funding Period that are not necessary for such purposes will be
distributed to the person specified in the related Prospectus Supplement.
Eligible Investments
Each Agreement generally will define Eligible Investments to include the
following:
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(i) direct obligations of, or obligations fully guaranteed as to
timely payment of principal and interest by, the United States or any
agency or instrumentality thereof, provided that such obligations are
backed by the full faith and credit of the United States;
(ii) repurchase agreements on obligations specified in clause (i)
maturing not more than three months from the date of acquisition thereof,
provided that the short-term unsecured debt obligations of the party
agreeing to repurchase such obligations are at the time rated by each
Rating Agency in its highest short-term rating category;
(iii) certificates of deposit, time deposits and bankers"
acceptances of any U.S. depository institution or trust company
incorporated under the laws of the United States or any state thereof and
subject to supervision and examination by federal and/or state banking
authorities, provided that the unsecured short-term debt obligations of
such depository institution or trust company at the date of acquisition
thereof have been rated by each Rating Agency in its highest unsecured
short-term debt rating category;
(iv) commercial paper (having original maturities of not more than
90 days) of any corporation incorporated under the laws of the United
States or any state thereof which on the date of acquisition has been
rated by each Rating Agency in their highest short-term rating categories;
(v) short-term investment funds ("STIFS") sponsored by any trust
company or national banking association incorporated under the laws of the
United States or any state thereof which on the date of acquisition has
been rated by each Rating Agency in their respective highest rating
category of long-term unsecured debt; and
(vi) interests in any money market fund which at the date of
acquisition of the interests in such fund and throughout the time as the
interest is held in such fund has a rating of "Aaa" by Moody's Investors
Service, Inc., and either "AAAm" or "AAAm-G" by Standard & Poor's Ratings
Group, a division of The McGraw-Hill Companies, Inc.;
provided that no instrument described above may evidence either the right to
receive (a) only interest with respect to the obligations underlying such
instrument or (b) both principal and interest payments derived from obligations
underlying such instrument and the interest and principal payments with respect
to such instrument provided a yield to maturity at par greater than 120% of the
yield to maturity at par of the underlying obligations; and provided, further,
that no instrument described above may be purchased at a price greater than par
if such instrument may be prepaid or called at a price less than its purchase
price prior to its stated maturity.
To the extent any such investment would require registration of the Trust
Fund as an investment company, such investment will not constitute an Eligible
Investment.
Revolving Period and Amortization Period; Retained Interest
If the related Prospectus Supplement so provides, there may be a period
commencing on the date of issuance of a Class or Classes of Notes and/or
Certificates of a Series and ending on the date set forth in the related
Prospectus Supplement (each, a "Revolving Period") during which limited or no
principal payments will be made to one or more Classes of Notes or Certificates
of the related Series as are identified in such Prospectus Supplement. Some or
all collections of principal otherwise allocated to such Classes of Notes or
Certificates may be (i) utilized during the Revolving Period to acquire
additional Home Equity Loans which satisfy the criteria specified above and the
criteria set forth in the related Prospectus Supplement, (ii) held in an account
and invested in Eligible Investments for later distribution to Securityholders,
(iii) applied to those Notes or Certificates for such Series, if any, specified
in the related Prospectus Supplement as then are in amortization, or (iv)
otherwise applied as specified in the related Prospectus Supplement.
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An "Amortization Period" is the period during which an amount of principal
is payable to Holders of a Series which, during the Revolving Period, were not
otherwise entitled to such payments. If so specified in the related Prospectus
Supplement, during an Amortization Period all or a portion of principal
collections on the Home Equity Loans may be applied as specified above for a
Revolving Period and, to the extent not so applied, will be distributed to the
Classes of Notes or Certificates for such Series specified in the related
Prospectus Supplement as then being entitled to payments of principal. In
addition, if so specified in the related Prospectus Supplement, amounts
deposited in certain accounts for the benefit of one or more Classes of Notes or
Certificates for such Series may be released from time to time or on a specified
date and applied as a payment of principal on such Classes of Notes or
Certificates. The related Prospectus Supplement will set forth the circumstances
which will result in the commencement of an Amortization Period.
Each Series which has a Revolving Period may also issue to the Depositor
or one of its affiliates a certificate evidencing an undivided beneficial
interest (a "Retained Interest") in such Series not represented by the other
Securities issued by the Depositor. As further described in the related
Prospectus Supplement, the value of such Retained Interest will fluctuate as the
amount of Notes and Certificates of the related Series of Securities outstanding
is reduced.
ENHANCEMENT
The amounts and types of credit enhancement ("Enhancement") arrangements
and the provider thereof, if applicable, with respect to a Series or any Class
of Securities will be set forth in the related Prospectus Supplement. If
specified in the applicable Prospectus Supplement, Enhancement for any Series of
Securities may cover one or more Classes of Notes or Certificates, and
accordingly may be exhausted for the benefit of a particular Class of Notes or
Certificates and thereafter be unavailable to such other Classes of Notes or
Certificates. Further information regarding any provider of credit enhancement,
including financial information when material, will be included in the related
Prospectus Supplement.
If and to the extent provided in the related Prospectus Supplement,
Enhancement may include one or more of the following or any combination thereof:
A Financial Guaranty Insurance Policy, which will be issued by a monoline
insurance company and which, subject to the terms of such policy, will guarantee
timely payment of interest on, and ultimate (as opposed to timely) payment of
principal of, the applicable Class or Classes of Securities;
Overcollateralization, which will equal the excess of the aggregate
principal balance of the Home Equity Loans over the aggregate principal balance
of the Securities. Overcollateralization may take the form of the initial or
subsequent deposit of Home Equity Loans to create such excess or may build over
time from the application of certain excess cash amounts generated by the Home
Equity Loans to accelerate the amortization of the applicable Class or Classes
of Securities;
A Letter of Credit, which will be issued by a bank or other financial
institution in a maximum amount which may be permanently reduced as draws are
made or may be replenished as previous draws are repaid from certain excess cash
amounts generated by the Home Equity Loans. Draws may be made to cover
shortfalls generally in collections, with respect to particular types of
shortfalls such as those due to particular types of losses or with respect to
specific situations such as shortfalls in amounts necessary to pay current
interest;
Cash Reserve Fund which may be partially or fully funded on the date of
issuance or may be funded over time from certain excess cash amounts generated
by the Home Equity Loans. Withdrawals may be made in circumstances similar to
those for which draws may be made on a letter of credit;
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Insurance Policies, which may insure a portion of the Home Equity Loans
against credit losses, bankruptcy losses, fraud losses or special hazard losses
not covered by typical homeowners insurance policies;
Subordinate Securities, which will be subordinated in the right to receive
distributions to one or more other Classes of Securities of the same Series,
some or all of which may themselves be subordinated to other Classes of such
Series. Subordination may be with respect to distributions of interest,
principal or both. In addition, all or portions of certain types of losses on
the Home Equity Loans may be allocated to one or more Classes of the Subordinate
Securities prior to the allocation thereof to other Classes of Subordinate
Certificates and/or the Senior Securities of the applicable Series; or
Derivative Products which may include a swap to convert floating or fixed
rate payments, as applicable, on the Home Equity Loans into fixed or floating
rate payments, as applicable, on the Securities or a cap or floor agreement
intended to provide protection against changes in floating rates of interest
payable on the Home Equity Loans and/or the Securities.
The presence of Enhancement is intended to increase the likelihood of
receipt by the Certificateholders and the Noteholders of the full amount of
principal and interest due thereon and to decrease the likelihood that the
Certificateholders and the Noteholders will experience losses, or may be
structured to provide protection against changes in interest rates or against
other risks, to the extent and under the conditions specified in the related
Prospectus Supplement. Forms of Enhancement may provide for one or more Classes
of Securities to be paid in foreign currencies. The Enhancement for a Class of
Securities generally will not provide protection against all risks of loss and
may not guarantee repayment of the entire principal and interest thereon. If
losses occur which exceed the amount covered by any Enhancement or which are not
covered by any Enhancement, Securityholders will bear their allocable share of
deficiencies. In addition, if a form of Enhancement covers more than one Class
of Securities of a Series, Securityholders of any such Class will be subject to
the risk that such Enhancement will be exhausted by the claims of
Securityholders of other Classes.
SERVICING OF HOME EQUITY LOANS
General
The Home Equity Loans comprising the Home Equity Loans in the Trust Fund
will be serviced by the Servicer pursuant to the related Sale and Servicing
Agreement or Pooling and Servicing Agreement, as the case may be, with respect
to a Series of Securities. Although it is expected that the Servicer shall
service the Home Equity Loans, the related Sale and Servicing Agreement or
Pooling and Servicing Agreement shall permit the Servicer to enter into
sub-servicing agreements with other parties who meet certain criteria pursuant
to which each such party will act as sub-servicer with respect to the Home
Equity Loans sold by the Seller to the Depositor. No such sub-servicing
agreement will relieve the Servicer of any liability it might otherwise have,
had the sub-servicing arrangement not been entered into.
Collection Procedures; Escrow Accounts
The Servicer will make reasonable efforts to collect all payments required
to be made under the Home Equity Loans and will, consistent with the terms of
the related Agreement for a Series and any applicable Enhancement, follow such
collection procedures as it follows with respect to comparable loans held in its
own portfolio. Consistent with the above, the Servicer may, in its discretion,
(i) waive any assumption fee, late payment charge, or other charge in connection
with a Home Equity Loan and (ii) arrange with an obligor a schedule for the
liquidation of delinquencies by extending the Due Dates for Scheduled Payments
on such Home Equity Loan.
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The Servicer will not establish or maintain escrow or impound accounts
("Escrow Accounts") with respect to Home Equity Loans for any purpose.
Deposits to and Withdrawals from the Collection Account or the Certificate
Account
The Trustee or the Servicer will establish a separate account (the
"Collection Account" or the "Certificate Account") in the name or for the
benefit of the Trustee. The Collection Account and/or Certificate Account will
be an account maintained (i) at a depository institution, the long-term
unsecured debt obligations of which at the time of any deposit therein are rated
by each Rating Agency rating the Securities of such Series at levels
satisfactory to each Rating Agency or (ii) in an account or accounts the
deposits in which are insured to the maximum extent available by the Federal
Deposit Insurance Corporation (the "FDIC") or which are secured in a manner
meeting requirements established by each Rating Agency.
The funds held in the Collection Account or the Certificate Account may be
invested, pending remittance to the Trustee, in Eligible Investments. The
Servicer will be entitled to receive as additional compensation any interest or
other income earned on funds in the Collection Account or Certificate Account.
The Servicer, the Seller or the Trustee will deposit into the Collection
Account for each Series, within the period specified in the related Prospectus
Supplement, the following payments and collections received or made by it (other
than, in respect of principal of and interest on the related Home Equity Loans
due or, in the case of simple interest Home Equity Loans, received, on or before
such Cut-off Date):
(i) all payments on account of principal, including prepayments, on
such Home Equity Loans;
(ii) all payments on account of interest on such Home Equity Loans
after deducting therefrom, at the discretion of the Servicer but only to
the extent of the amount permitted to be withdrawn or withheld from the
Collection Account in accordance with the related Agreement, the Servicing
Fee in respect of such Home Equity Loans;
(iii) all amounts received by the Servicer in connection with the
liquidation of Home Equity Loans or property acquired in respect thereof,
whether through foreclosure sale, repossession or otherwise, including
payments in connection with such Home Equity Loans received from the
obligor, other than amounts required to be paid or refunded to the obligor
pursuant to the terms of the applicable loan documents or otherwise
pursuant to law ("Liquidation Proceeds"), exclusive of, in the discretion
of the Servicer, but only to the extent of the amount permitted to be
withdrawn from the Collection Account or the Certificate Account in
accordance with the related Agreement, the Servicing Fee, if any, in
respect of the related Home Equity Loan and, to the extent specified in
the related Prospectus Supplement, net of reimbursements for related
Delinquency Advances and Servicer Advances;
(iv) all proceeds under any title insurance, hazard insurance or
other insurance policy covering any such Home Equity Loan, other than
proceeds to be applied to the restoration or repair of the related
Property or released to the obligor in accordance with the related
Agreement;
(v) all amounts required to be deposited therein from any applicable
Reserve Fund for such Series pursuant to the related Agreement;
(vi) all Delinquency Advances made by the Servicer required pursuant
to the related Agreement; and
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(vii) all repurchase prices of any such Home Equity Loans
repurchased by the Servicer or the Seller pursuant to the related
Agreement.
The Servicer is permitted, from time to time, to make withdrawals from the
Collection Account or the Certificate Account for each Series for the following
purposes:
(i) to reimburse itself for Delinquency Advances and Servicing
Advances for such Series made by it pursuant to the related Agreement; the
Servicer's right to reimburse itself for Delinquency Advances and
Servicing Advances is limited to amounts received on or in respect of
particular Home Equity Loans (including, for this purpose, Liquidation
Proceeds and amounts representing proceeds of insurance policies covering
the related Property) which represent late recoveries of Scheduled
Payments respecting which any such advance was made;
[(ii) to reimburse itself for any Delinquency Advances for such
Series that the Servicer determines in good faith it will be unable to
recover from amounts representing late recoveries of Scheduled Payments
respecting which such Advance was made or from Liquidation Proceeds or the
proceeds of insurance policies;]
(iii) in the event it has elected not to pay itself the Servicing
Fee out of the interest component of any Scheduled Payment, late payment
or other recovery with respect to a particular Home Equity Loan prior to
the deposit of such Scheduled Payment, late payment or recovery into the
Collection Account, to pay to itself the Servicing Fee, as adjusted
pursuant to the related Agreement, from any such Scheduled Payment, late
payment or such other recovery, to the extent permitted by the related
Agreement;
(iv) to reimburse itself or the Seller for expenses incurred by and
recoverable by or reimbursable to it pursuant to the related Agreement;
(v) to pay to the applicable person with respect to each Home Equity
Loan or REO Property acquired in respect thereof that has been repurchased
or removed from the Trust Fund by the Seller or the Servicer pursuant to
the related Agreement, all amounts received thereon and not distributed as
of the date on which the related repurchase price was determined;
(vi) to make payments to the Trustee of such Series for deposit into
the Distribution Account, if any, or for remittance to the Holders of such
Series in the amounts and in the manner provided for in the related
Agreement;
(vii) to withdraw amounts that have been deposited therein in error;
(viii) to withdraw investment earnings on amounts on deposit
therein; and
(ix) to clear and terminate the Collection Account pursuant to the
related Agreement.
In addition, if the Servicer deposits in the Collection Account for a
Series any amount not required to be deposited therein, it may, at any time,
withdraw such amount from such Collection Account.
Advances and Limitations Thereon
The related Prospectus Supplement will describe the circumstances, if any,
under which the Servicer will make advances with respect to delinquent payments
of principal and/or interest on Home Equity Loans ("Delinquency Advances"). If
specified in the related Prospectus Supplement, the Servicer will be obligated
to make Delinquency Advances, either form its own funds or from collections on
any Home Equity Loans that are not
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required to be distributed on the Distribution Date occurring during the month
in which such advance is made and such obligation may be limited in amount, or
may not be activated until a certain portion of a specified Reserve Fund is
depleted. Such advances are intended to provide liquidity and, except to the
extent specified in the related Prospectus Supplement, not to guarantee or
insure against losses. Accordingly, to the extent specified in the related
Prospectus Supplement, any funds advanced are recoverable by the Servicer out of
amounts received on particular Home Equity Loans which represent late recoveries
of principal or interest, proceeds of insurance policies or Liquidation Proceeds
respecting which any such Delinquency Advance was made or, to the extent
provided in the Prospectus Supplement, from payments or proceeds from other Home
Equity Loans. If and to the extent specified in the related Prospectus
Supplement, the Servicer will advance its own funds to pay for any related
expenses of foreclosure and disposition of any liquidated Mortgage Home Equity
Loan or related Property (the "Servicing Advances"). The Servicer will be
entitled to be reimbursed for any such Servicing Advances to the extent provided
in the Prospectus Supplement. If a Servicing Advance is made and subsequently
determined to be nonrecoverable from late collections, proceeds of insurance
policies, or Liquidation Proceeds from the related Home Equity Loan, the
Servicer may be entitled to reimbursement from other funds in the Collection
Account, Certificate Account or Distribution Account, as the case may be, or
from a specified Reserve Fund as applicable, to the extent specified in the
related Prospectus Supplement.
Maintenance of Insurance Policies and Other Servicing Procedures
Except as otherwise specified in the related Prospectus Supplement, all
Mortgages will contain provisions requiring the obligor on each Home Equity Loan
to maintain a hazard insurance policy naming the Servicer as loss payee
thereunder and providing for extended coverage of the standard form of fire
insurance with extended coverage for certain other hazards as is customary in
the state in which the related Mortgaged Property is located. Except as
specified in the related Prospectus Supplement, the Servicer will not be
required to maintain or to cause the obligor on each Home Equity Loan to
maintain a hazard insurance policy. The standard hazard insurance policies will
provide for coverage at least equal to the applicable state standard form of
fire insurance policy with extended coverage for property of the type securing
the related Home Equity Loans.
In general, the standard form of fire and extended coverage insurance
policy covers physical damage to or destruction of the improvements on the
Mortgaged Property by fire, lightning, explosion, smoke, windstorm and hail, and
riot, strike and civil commotion, subject to the conditions and exclusions
specified in each policy. Although the policies relating to the Home Equity
Loans will be underwritten by different insurers under different state laws in
accordance with different applicable state forms and therefore will not contain
identical terms and conditions, the basic terms thereof are dictated by
respective state laws, and most such policies typically do not cover any
physical damage resulting from any of the following: war, revolution,
governmental actions, floods and other water-related causes, earth movement
(including earthquakes, landslides and mudflows), nuclear reactions, wet or dry
rot, vermin, rodents, insects or domestic animals, theft and, in certain cases,
vandalism. The foregoing list is merely indicative of certain kinds of uninsured
risks and is not intended to be all-inclusive.
The hazard insurance policies initially covering the Mortgaged Properties
typically contain a co-insurance clause that in effect requires the insured at
all times to carry insurance of a specified percentage (generally 80% to 90% of
the full replacement value of the improvements on the property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, such clause generally provides that the
insurer's liability in the event of partial loss does not exceed the greater of
(i) the replacement cost of the improvements less physical depreciation or (ii)
such proportion of the loss as the amount of insurance carried bears to the
specified percentage of the full replacement cost of such improvements.
Coverage will be in an amount at least equal to the greater of (i) the
amount necessary to avoid the enforcement of any co-insurance clause contained
in the policy or (ii) the outstanding principal balance of the related loan plus
the balance of any senior mortgage. The Servicer will also maintain on REO
Property that secured a defaulted Home Equity Loan and that has been acquired
upon foreclosure, deed in lieu of foreclosure, or
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repossession, a standard hazard insurance policy in an amount that is equal to
the maximum insurable value of such REO Property. No earthquake or other
additional insurance will be required of any obligor or will be maintained on
REO Property acquired in respect of a default Home Equity Loan, other than
pursuant to such applicable laws and regulations as shall at any time be in
force and shall require such additional insurance.
The ability of the Servicer to assure that hazard insurance proceeds are
appropriately applied may depend on its being named as an additional insured
under any hazard insurance policy and under any flood insurance policy, or upon
the extent to which information in this regard is furnished to the Servicer by a
borrower. Except as described below, all amounts collected by the Servicer under
any hazard policy (except for amounts applied or expected to be applied to the
restoration or repair of the Mortgaged Property or released to the borrower in
accordance with the Servicer's normal servicing procedures), will be deposited
in the Collection Account.
Realization Upon Defaulted Home Equity Loans
The Servicer will use its reasonable best efforts to foreclose upon,
repossess or otherwise comparably convert the ownership of the Mortgaged
Properties securing the related Home Equity Loans as come into and continue in
default and as to which no satisfactory arrangements can be made for collection
of delinquent payments. In connection with such foreclosure or other conversion,
the Servicer will follow such practices and procedures as it deems necessary or
advisable and as are normal and usual in its servicing activities with respect
to comparable loans owned by it. However, the Servicer will not be required to
expend its own funds in connection with any foreclosure or towards the
restoration of the Property unless it determines that (i) such restoration or
foreclosure will increase the Liquidation Proceeds in respect of the related
Home Equity Loan available to the Holders after reimbursement to itself for such
expenses and (ii) such expenses will be recoverable by it either through
Liquidation Proceeds or the proceeds of insurance. Notwithstanding anything to
the contrary herein, in the case of a Trust Fund for which a REMIC election has
been made, the Servicer will be required to liquidate any Mortgaged Property
acquired through foreclosure within three years after the acquisition of the
beneficial ownership of such Mortgaged Property. While the holder of a Mortgaged
Property acquired through foreclosure can often maximize its recovery by
providing financing to a new purchaser, the Trust Fund, if applicable, will have
no ability to do so and neither the Servicer nor the Seller will be required to
do so.
Enforcement of Due-On-Sale Clauses
When a Borrower on a Home Equity Loan notifies the Servicer that the
Mortgaged Property is being conveyed by the obligor, the Servicer will be
obligated to exercise its rights to accelerate the maturity of the related Home
Equity Loan under the applicable "due-on-sale" clause, if any, unless such
exercise is not permitted under applicable law or if the enforcement of such
clause would result in loss of coverage under any primary mortgage insurance
policy. In such event, the Servicer is authorized to accept from or enter into
an assumption agreement with the person to whom such property has been or is
about to be conveyed, pursuant to which such person becomes liable under the
Home Equity Loan. To the extent permitted by applicable law, such assumption
will not release the original borrower from its obligation under the Home Equity
Loan. Any fee collected in connection with an assumption will be retained by the
Servicer as additional servicing compensation. The terms of a Home Equity Loan
may not be changed in connection with an assumption except to the extent
specified in the related Prospectus Supplement.
Servicing Compensation and Payment of Expenses
The Servicer will be entitled to a periodic fee as servicing compensation
(the "Servicing Fee") in an amount to be determined as specified in the related
Prospectus Supplement. The Servicing Fee may be fixed or variable, as specified
in the related Prospectus Supplement. In addition, the Servicer will be entitled
to servicing compensation in the form of assumption fees, late payment charges
and similar items, or excess proceeds following disposition of
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Property in connection with defaulted Home Equity Loans. The Servicer will pay
any fees due to a sub-servicer from the Servicing Fee.
Except to the extent otherwise specified in the related Prospectus
Supplement, the Servicer will pay certain expenses incurred in connection with
the servicing of the Home Equity Loans, including, without limitation, the
payment of the fees and expenses of the Trustee and independent accountants, and
the cost of credit support, if any, and payment of expenses incurred in
preparation of reports to Holders.
When an obligor makes a principal prepayment in full between Due Dates on
the related Home Equity Loan, the obligor will generally be required to pay
interest on the amount prepaid only to the date of prepayment. If and to the
extent provided in the related Prospectus Supplement in order that one or more
Classes of the Holders of a Series will not be adversely affected by any
resulting shortfall in interest, the amount of the Servicing Fee may be reduced
to the extent necessary to include in the Servicer's remittance to the Trustee
for distribution to Securityholders an amount equal to one month's interest on
the related Home Equity Loan (less the Servicing Fee). If the aggregate amount
of such shortfalls in a month exceeds the Servicing Fee for such month, a
shortfall to Holders may occur.
The Servicer will be entitled to reimbursement for Servicing Advances. The
related Holders will suffer no loss by reason of such Servicing Advances to the
extent expenses are covered under related insurance policies or from excess
Liquidation Proceeds. If claims are either not made or paid under the applicable
insurance policies or if coverage thereunder has been exhausted, the related
Holders will suffer a loss to the extent that Liquidation Proceeds, after
reimbursement of the Servicing Advances, are less than the outstanding principal
balance of and unpaid interest on the related Home Equity Loan which would be
distributable to Holders. The Servicer is generally also entitled to
reimbursement from the Collection Account for Servicing Advances. In addition,
the Servicer will be entitled to reimbursement for Delinquency Advances as
described above under "--Advances and Limitations Thereon."
The rights of the Servicer to receive funds from the Collection Account
for a Series, whether as the Servicing Fee or other compensation, or for the
reimbursement of Delinquency Advances and Servicing Advances, expenses or
otherwise, are not subordinate to the rights of Holders of such Series.
Evidence as to Compliance
The applicable Agreement for each Series will provide that each year, a
firm of independent public accountants will furnish a statement to the Trustee
to the effect that such firm has examined certain documents and records relating
to the servicing of the Home Equity Loans by the Servicer and that such
examination, which has been conducted substantially in compliance with either
(i) the audit guide for audits of non-supervised mortgagees approved by the
Department of Housing and Urban Development or (ii) the requirements of the
Uniform Single Attestation Program for Mortgage Bankers, has disclosed no items
of non-compliance with the provisions of the applicable Agreement that, in the
opinion of the firm, are material, except for such items of non-compliance as
shall be referred in the report.
The applicable Agreement for each Series will also provide for delivery to
the Trustee for such Series of an annual statement signed by an officer of the
Servicer to the effect that the Servicer has fulfilled its material obligations
under such Agreement throughout the preceding calendar year.
Certain Matters Regarding the Servicer
If an Event of Default occurs under either a Sale and Servicing Agreement
or a Pooling and Servicing Agreement, the Servicer may be replaced by the
Trustee or a successor Servicer. Such Events of Default and the rights of the
Trustee upon such a default under the Agreement for the related Series will be
substantially similar to
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those described under "THE AGREEMENTS--Events of Default; Rights Upon Event of
Default--Pooling and Servicing Agreement; Sale and Servicing Agreement."
The Servicer may assign its rights and delegate its duties and obligations
under the related Agreement for each Series if the successor Servicer accepting
such assignment or delegation (i) services or services similar loans in the
ordinary course of its business, (ii) is reasonably satisfactory to the Trustee
and the Enhancer, if any, for the related Series, (iii) would not cause any
Rating Agency's rating of the Securities for such Series in effect immediately
prior to such assignment, sale or transfer to be qualified, downgraded or
withdrawn as a result of such assignment, sale or transfer and (iv) executes and
delivers to the Trustee and the Enhancer, if any, an agreement, in form and
substance reasonably satisfactory to the Trustee, and the Enhancer, if any,
which contains an assumption by such Servicer of the due and punctual
performance and observance of each covenant and condition to be performed or
observed by the Servicer under the related Agreement from and after the date of
such agreement. No such assignment will become effective until the Trustee or a
successor Servicer has assumed the servicer's obligations and duties under the
related Agreement. To the extent that the Servicer transfers its obligations to
a wholly-owned subsidiary or affiliate, such subsidiary or affiliate need not
satisfy the criteria set forth above; however, in such instance, the assigning
Servicer will remain liable for the servicing obligations under the related
Agreement. Any entity into which the Servicer is merged or consolidated or any
successor corporation resulting from any merger, conversion or consolidation
will succeed to the Servicer's obligations under the related Agreement provided
that such successor or surviving entity meets the requirements for a successor
Servicer set forth above.
The Servicer will not be under any liability to the Trust Fund or the
Securityholders for taking any action or for refraining from taking any action
in good faith pursuant to the Agreement, or for errors in judgment; provided,
however, that the Servicer will not be protected against any liability that
otherwise would be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of duties or by reason of its reckless disregard
of its obligations and duties thereunder. Except to the extent otherwise
provided therein, each Agreement further will provide that the Servicer and any
director, officer, employee or agent of the Servicer will be entitled to
indemnification by the Trust Fund and will be held harmless to the extent
provided in the Agreement against any loss, liability or expense incurred in
connection with any legal action relating to the Agreement or the Securities,
other than any loss, liability or expense related to any specific Home Equity
Loan or Loans (except any such loss, liability or expense otherwise reimbursable
pursuant to the Agreement) and any loss, liability or expense incurred by the
Servicer by reason of its willful misfeasance, bad faith or gross negligence in
the performance of its duties thereunder or by reason of the Servicer's reckless
disregard of its obligations and duties thereunder.
Each Agreement will provide that the Servicer will not be under any
obligation to appear in, prosecute or defend any legal action that is not
incidental to its duties under the Agreement and that in its opinion may involve
it in any expense or liability. The Servicer, however, in its discretion, may
undertake any such action that it may deem necessary or desirable with respect
to the Agreement and the rights and duties of the parties thereto and the
interest of the Securityholders and the Enhancer, if any, thereunder. In such
event, the legal expenses and costs of such action and any liability resulting
therefrom will be expenses, costs and liabilities of the Trust Fund and the
Servicer will be entitled to be reimbursed therefor to the extent provided in
the Agreement. The Servicer's right to such indemnity or reimbursement will
survive any resignation or termination of the Servicer with respect to any
losses, expenses, costs or liabilities arising prior to such resignation or
termination (or arising from events that occurred prior to such resignation or
termination). Any claims by or on behalf of the Securityholders or the Trust
Fund will be made only against the Servicer, who will be liable with respect to
its own acts and omissions as well as the acts and omissions of its directors,
officer, employees and agents.
THE AGREEMENTS
The following summaries describe the material provisions of the Agreements
common to each Series of Securities. The summaries do not purport to be complete
and are subject to, and qualified in their entirety by
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reference to, the provisions of the Agreements. Where particular provisions or
terms used in the Agreements are referred to, such provisions or terms are as
specified in the related Agreements.
General
At the time of issuance of the Securities of a Series, the Seller will
transfer, convey and assign to the Depositor and the Depositor will transfer,
convey and assign to the Trust Fund all right, title and interest of the Seller
and the Depositor, respective in the Home Equity Loans and other property to be
transferred to the Depositor and Trust Fund, respectively, for a Series. Such
assignment will include all principal and interest due or received on or with
respect to the Home Equity Loans after the Cut-off Date to the extent specified
in the related Prospectus Supplement (except for any Retained Interests). The
Trustee will, concurrently with such assignment, execute and deliver the
Securities.
Repurchase and Substitution of Non-Conforming Home Equity Loans
Pursuant to the related Pooling and Servicing Agreement or Sale and Servicing
Agreement, upon the discovery by the Depositor, the Seller, the Enhancer, if
any, the Servicer, any Sub-Servicer, any Holder, the Custodian (as defined
below) or the Trustee that the representations and warranties are untrue in any
material respect as of the Closing Date with the result that the interests of
the Holders or of the Enhancer are materially and adversely affected, the party
discovering such breach is required to give prompt written notice to the other
parties.
Upon the earliest to occur of the Seller's discovery or receipt of notice of
breach of a representation or warranty made by it with respect to a Home Equity
Loan from any of the other parties or such time as a situation resulting from an
existing statement which is untrue materially and adversely affects the
interests of the Holders or the Enhancer, if any, in such Home Equity Loan, the
Seller will be required promptly to cure such breach in all material respects or
the Seller shall on or prior to the second Monthly Remittance Date (as defined
below) next succeeding such discovery, such receipt of notice or such time (i)
substitute in lieu of each Home Equity Loan which has given rise to the
requirement for action by the Seller a "Qualified Replacement Mortgage" (as such
is defined in the related Pooling and Servicing Agreement or Sale and Servicing
Agreement) and deliver an amount equal to the excess, if any, of the outstanding
principal balance of the Home Equity Loan being replaced over the outstanding
principal balance of the replacement Home Equity Loan plus accrued and unpaid
interest and plus the amount of any Delinquency Advance and Servicing Advance
(the "Substitution Amount"), to the Trustee (to be deemed part of the
collections remitted by the Servicer on such Monthly Remittance Date) or (ii)
purchase such Home Equity Loan from the Trust at a purchase price equal to the
Loan Purchase Price (as defined below) thereof. Notwithstanding any provision of
the related Pooling and Servicing Agreement or Sale and Servicing Agreement to
the contrary, with respect to any Home Equity Loan which is not in default or as
to which no default is reasonably foreseeable, no such repurchase or
substitution will be made unless the Seller obtains for the Trustee and any
Enhancer, if any, an opinion of counsel experienced in federal income tax
matters and acceptable to the Trustee and the Enhancer, if any, to the effect
that such a repurchase or substitution would not constitute a Prohibited
Transaction for the REMIC or otherwise subject the REMIC to tax and would not
jeopardize the status of the REMIC as such (a "REMIC Opinion"), addressed to the
Trustee and any Enhancer and acceptable to the Trustee and any Enhancer. The
Seller shall also deliver an Officer's Certificate to the Trustee and any
Enhancer concurrently with the delivery of a Qualified Replacement Mortgage
stating that such Home Equity Loan meets the requirements of a Qualified
Replacement Mortgage and that all other conditions to the substitution thereof
have been satisfied. Any Home Equity Loan as to which repurchase or substitution
was delayed pursuant to the related Pooling and Servicing Agreement or Sale and
Servicing Agreement shall be repurchased or substituted for (subject to
compliance with the provisions of the related Pooling and Servicing Agreement or
Sale and Servicing Agreement) upon the earlier of (a) the occurrence of a
default or reasonably foreseeable default with respect to such Home Equity Loan
and (b) receipt by the Trustee and the Enhancer, if any, of a REMIC Opinion. In
connection with any breach of a representation, warranty or covenant or defect
in documentation giving rise to such repurchase or substitution obligation, the
Seller agrees that it shall, at its expense, furnish the Trustee and the
Enhancer, if any, either a REMIC Opinion or an opinion of counsel
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rendered by independent counsel that the effects described in a REMIC Opinion
will not occur as a result of any such repurchase or substitution. The
obligation of the Seller to so substitute or repurchase any Home Equity Loan as
to which a representation of warranty is untrue in any material respect and has
not been remedied constitutes the sole remedy available to the Holders and the
Trustee.
"Loan Purchase Price" means an amount equal to the aggregate principal balance
of such Home Equity Loan as of the date of purchase (assuming that the Monthly
Remittance Amount remitted by the Servicer on such Monthly Remittance Date has
already been remitted), plus all accrued and unpaid interest on such Home Equity
Loan at the coupon rate to but not including the Monthly Remittance Date in the
Remittance Period of such purchase together with (without duplication) the
aggregate amount of (i) all unreimbursed Delinquency Advances and Servicing
Advances theretofore made with respect to such Home Equity Loan, (ii) all
Delinquency Advances which the Servicer has theretofore failed to remit with
respect to such Home Equity Loan and (iii) all reimbursed Delinquency Advances
and Servicing Advances to the extent that such reimbursement is not made from
the Mortgagor.
"Monthly Remittance Date" means the date specified in the related Prospectus
Supplement on which funds on deposit in the Principal and Interest Account are
remitted to the Certificate Account.
"Remittance Period" means with respect to any Monthly Remittance Date, the
calendar month preceding such Monthly Remittance Date.
Assignment of Home Equity Loans
The Seller will transfer, assign, set over and otherwise convey without recourse
to the Depositor and the Depositor will transfer, assign, set over and otherwise
convey without recourse to the Trustee in trust for the benefit of the Holders
all right, title and interest of the Seller in and to each such Home Equity Loan
and all its right, title and interest in and to principal received and interest
due on each such Home Equity Loan on and after the Cut-Off Date; provided,
however, that the Seller will reserve and retain all its right, title and
interest in and to principal received (including Prepayments) and interest due
on each Home Equity Loan prior to the Cut-Off Date. Purely as a protective
measure and not to be construed as contrary to the parties intent that the
transfer of the Home Equity Loans, is a sale, the Seller will also be deemed to
have granted to the Depositor and the Depositor will also be deemed to have
granted to the Trustee a security interest in the Trust Fund in the event that
the transfer of the Home Equity Loans is deemed to be a loan and not a sale.
In connection with the transfer and assignment of the Home Equity Loans, the
Seller will be required to:
(i) deliver without recourse to the Trustee or an affiliate or agent
of the Trustee (the "Custodian") on behalf of the Trustee on the
date such Home Equity Loans are assigned to the Trust Fund,
identified in the Schedule of Home Equity Loans (A) the original
Notes, endorsed in blank or to the order of the Trustee, (B) (1) if
the original title insurance policy is not available, the original
title insurance commitment or a copy thereof certified as a true
copy by the closing agent or the Seller, or if available, the
original title insurance policy or a copy certified by the issuer of
the title insurance policy or (2) if title insurance is not
available in the applicable state, the attorney's opinion of title,
(C) subject to clause (ii) below, originals or copies of all
intervening assignments, if any, certified as true copies by the
closing agent or the Seller, showing a complete chain of title from
origination to the Trustee, including warehousing assignments, if
recorded, (D) originals of all assumption and modification
agreements, if any, (E) either: (1) the original Mortgage, with
evidence of recording thereon (if such original Mortgage has been
returned to Seller from the applicable recording office) or a copy
(if such original Mortgage has not been returned to Seller from the
applicable recording office) of the Mortgage certified as a true
copy by the closing attorney or officer of the Seller or (2) a copy
of the Mortgage certified by the public recording office in those
instances where the original recorded Mortgage has been lost or
retained by the recording office, and (F) the original assignments
of Mortgages in recordable form;
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(ii) cause, within 60 days following the date such Home Equity Loans
are assigned to the Trust Fund, assignments of the Mortgages to the
Trustee to be submitted for recording in the appropriate
jurisdictions; provided, however, that the Seller shall not be
required to prepare any assignment of Mortgage for a Mortgage with
respect to which the original recording information has not been
received, until such time as such information has been received from
the recording office; provided, further, that (except as provided in
the related Pooling and Servicing Agreement or Sale and Servicing
Agreement) the Seller shall not be required to record an assignment
of a Mortgage if the Seller furnishes to the Trustee, any Enhancer
and the Rating Agencies, on or before the date such Home Equity
Loans are assigned to the Trust Fund, at the Seller's expense, an
opinion of counsel with respect to the relevant jurisdiction that
such recording is not required to perfect the Trustee's interests in
the related Mortgages Loans (in form satisfactory to the Trustee,
any Enhancer and the Rating Agencies); and
(iii) deliver the title insurance policy, the original Mortgages and
such recorded assignments, together with originals or duly certified
copies of any and all prior assignments (other than unrecorded
warehouse assignments), to the Custodian on behalf of the Trustee
within 15 days of receipt thereof by the Seller (but in any event,
with respect to any Mortgage as to which original recording
information has been made available to the Seller, within one year
after the date such Home Equity Loans are assigned to the Trust
Fund).
The Trustee will agree, for the benefit of the Holders, to cause the
Custodian to review each File within 45 days after the date such Home
Equity Loans are assigned to the Trust Fund (or the date of receipt of any
documents delivered to the Trustee after the Closing Date), to ascertain
that all required documents (or certified copies of documents) have been
executed and received.
If the Custodian on behalf of the Trustee during such 45-day period finds
any document constituting a part of a File which is not properly executed,
has not been received, is unrelated to the Home Equity Loans or that any
Home Equity Loan does not conform in a material respect to the description
thereof as set forth in the Schedule of Home Equity Loans, the Custodian
shall promptly notify the Trustee, and, concurrently with such notice
shall on behalf of the Trustee notify the Depositor, the Seller, the
Holders and the Enhancer, if any. The Seller will agree in the related
Pooling and Servicing Agreement or Sale and Servicing Agreement to use
reasonable efforts to remedy a material defect in a document constituting
part of a File of which it is so notified by the Custodian on behalf of
the Trustee. If, however, within 90 days after such notice to it
respecting such defect the Seller shall not have remedied the defect and
the defect materially and adversely affects the interest in the related
Home Equity Loan of the Holders or any Enhancer, the Seller will be
required on the next succeeding Monthly Remittance Date to (or will cause
an affiliate of the Seller to) (i) substitute in lieu of such Home Equity
Loan a Qualified Replacement Mortgage and deliver the Substitution Amount
to the Trustee (to be deemed part of the collections remitted by the
Servicer on such Monthly Remittance Date) or (ii) purchase such Home
Equity Loan at a purchase price equal to the Loan Purchase Price thereof,
which purchase price shall be delivered to the Trust along with the
Monthly Remittance remitted by the Servicer on such Monthly Remittance
Date. However, such substitution or purchase must occur within 90 days of
the notice of defect if the defect would prevent the Home Equity Loan from
being a Qualified Mortgage (as such term is defined in the Pooling and
Servicing Agreement), and no substitution or purchase of a Home Equity
Loan that is not in default or as to which no default is reasonably
foreseeable shall be made unless the Seller obtains for the Trustee and
any Enhancer a REMIC Opinion, addressed to and acceptable to the Trustee
and any Enhancer.
In addition to the foregoing, the Custodian on behalf of the Trustee has
agreed to make a review during the 12th month after the Closing Date
indicating the current status of the exceptions previously indicated on
the Pool Certification (the "Final Certification"). After delivery of the
Final Certification, the Custodian, on behalf
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of the Trustee and the Servicer shall provide to Enhancer, if any, no less
frequently than monthly updated certifications indicating the then current
status of exceptions, until all such exceptions have been eliminated.
Servicing and Sub-Servicing
Unless otherwise set forth in the related Prospectus Supplement, the
Seller will also serve as the Servicer of each Home Equity Loan. The
Servicer may not assign its obligations under the Pooling and Servicing
Agreement, in whole or in part, unless it shall have first obtained the
written consent of the Trustee and any Enhancer, which consent is required
not to be unreasonably withheld; provided, however, that any assignee must
meet the eligibility requirements for a successor Servicer set forth in
the related Pooling and Servicing Agreement or Sale and Servicing
Agreement.
The Securities will not represent an interest in or obligation of, nor are
the Home Equity Loans guaranteed by, the Depositor, the Trustee, the
Seller, the Servicer except as described herein, or any of their
affiliates.
The Servicer (other than the Servicer as successor Servicer) will be
required to service the Home Equity Loans in accordance with the related
Pooling and Servicing Agreement or Sale and Servicing Agreement and the
terms of the respective Home Equity Loans.
The Servicer may retain from the interest portion of each monthly payment,
the related Servicing Fee. In addition, the Servicer will be entitled to
retain additional servicing compensation in the form of prepayment
charges, release fees, bad check charges, assumption fees, late payment
charges, prepayment penalties, or any other servicing-related fees, Net
Liquidation Proceeds not required to be deposited in the Principal and
Interest Account pursuant to the related Pooling and Servicing Agreement
or Sale and Servicing Agreement, and similar items.
When a borrower prepays all of a Home Equity Loan, the borrower pays interest on
the amount prepaid only to the date of prepayment and accordingly, an interest
shortfall (a "Prepayment Interest Shortfall") may result. In order to mitigate
the effect of any such shortfall in interest distributions to Holders on any
Payment Date, the aggregate Servicing Fee otherwise payable to the Servicer for
such month shall, to the extent of the aggregate of such shortfalls, be
deposited by the Servicer in the Principal and Interest Account for distribution
to Holders on such Payment Date. Any such deposit by the Servicer will be
reflected in the distributions to the Holders made on the related Payment Date.
The Servicer will be required to make reasonable efforts to collect all payments
called for under the terms and provisions of the Home Equity Loans, and, to the
extent such procedures are consistent with the related Pooling and Servicing
Agreement or Sale and Servicing Agreement and the terms and provisions of any
applicable insurance policy, to follow collection procedures for all Home Equity
Loans at least as rigorous as those described in FNMA's Servicing Guide (the
"FNMA Guide"). Consistent with the foregoing, the Servicer may in its discretion
waive or permit to be waived (if such waiver or permission is occasioned by the
default or reasonable foreseeable default of a Home Equity Loan or is consistent
with the continued treatment of the Homes Equity Loan as a Qualified Mortgage
(as such term is defined in the Pooling and Servicing Agreement)) any late
payment charge, prepayment charge, assumption fee or any penalty interest in
connection with the prepayment of a Home Equity Loan or any other fee or charge
which the Servicer would be entitled to retain as additional servicing
compensation. In the event the Servicer consents to the deferment of the due
dates for payments due on a Note, the Servicer will nonetheless be required to
make payment of any required Delinquency Advances with respect to the interest
payments so extended to the same extent as if the interest portion of such
installment were due, owing and delinquent and had not been deferred.
The Servicer will be required to create, or cause to be created, in the name of
the Trustee, at one or more depository institutions, which institutions may be
affiliates of the Servicer, a principal and interest account maintained as a
trust account in the trust department of such institution (the "Principal and
Interest Account"). All funds in the Principal
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and Interest Account are required to be held (i) uninvested, or (ii) invested in
Eligible Investments (as defined in the related Pooling and Servicing Agreement
or Sale and Servicing Agreement). Any investment of funds in the Principal and
Interest Account must mature or be withdrawable at par on or prior to the
immediately succeeding Monthly Remittance Date. Any investment earnings on funds
held in the Principal and Interest Account are for the account of, and any
losses therein are also for the account of, and must be promptly replenished by,
the Servicer.
The Servicer will be required to deposit, or cause to be deposited, to the
Principal and Interest Account, within one business day following receipt, all
principal received and interest due on the Home Equity Loans on and after the
related Cut-Off Date, including any Prepayments, the proceeds of any liquidation
of a Home Equity Loan net of expenses and unreimbursed Delinquency Advances
("Net Liquidation Proceeds") and, any income from REO Properties and Delinquency
Advances, but net of (i) Net Liquidation Proceeds to the extent that such Net
Liquidation Proceeds exceed the sum of (a) the Loan Balance of the related Home
Equity Loan immediately prior to liquidation, (b) accrued and unpaid interest on
such Home Equity Loan (net of the Servicing Fee) to the date of such
liquidation, (c) any Realized Losses during the related Remittance Period, and
(d) other reimbursements to the Servicer (i.e. unreimbursed servicing advances),
(ii) principal (including Prepayments) collected and interest due on the Home
Equity Loans prior to the Cut-Off Date, (iii) reimbursements for Delinquency
Advances and Servicing Advances to the extent provided below, and (iv)
reimbursement for amounts deposited in the Principal and Interest Account
representing payments of principal and/or interest on a Note by a Mortgagor
which are subsequently returned by a depository institution as unpaid (all such
net amounts being referred to herein as the "Daily Collections").
The Servicer may make withdrawals for its own account from the Principal and
Interest Account for the following purposes:
(i) on each Monthly Remittance Date, to pay itself the Servicing Fee
to the extent not otherwise retained;
(ii) to withdraw investment earnings on amounts on deposit in the
Principal and Interest Account;
(iii) to withdraw amounts that have been deposited to the Principal
and Interest Account in error;
(iv) to reimburse itself for unrecovered Delinquency Advances and
Servicing Advances (in each case, solely from amounts recovered on
the related Home Equity Loan) and for any excess interest collected
from a Mortgagor; and
(v) to clear and terminate the Principal and Interest Account
following the termination of the Trust;
The Servicer will remit to the Trustee for deposit in the
Certificate Account the Daily Collections allocable to a Remittance
Period, the Loan Purchase Price and Substitution Amounts not later
than the related Monthly Remittance Date.
On each Monthly Remittance Date, the Servicer shall be required to
remit to the Trustee for deposit to the Certificate Account out of
the Servicer's own funds or from collections on any Home Equity
Loans that are not required to be distributed on the Payment Date
occurring during the month in which such advance is made (which
shall be reimbursed by the Servicer on or before any subsequent
Monthly Remittance Dates on which such amounts are required to be
part of the monthly remittance amount) any delinquent payment of
interest with respect to each delinquent Home Equity Loan, which
payment was not received on or prior to the related Monthly
Remittance Date and was not theretofore advanced by the Servicer.
Such amounts of the Servicer's own funds so deposited are
"Delinquency Advances." The Servicer may reimburse itself on any
Business Day for any Delinquency Advances paid from the Servicer's
own funds, amounts recovered on the related Home Equity Loan or from
the Certificate Account as provided in the related Pooling and
Servicing Agreement or Sale and Servicing Agreement.
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Notwithstanding the foregoing, in the event that the Servicer
determines in its reasonable business judgment in accordance with
the servicing standards of the related Pooling and Servicing
Agreement or the Sale and Servicing Agreement that any proposed
Delinquency Advance if made would not be recoverable, the Servicer
shall not be required to make such Delinquency Advances with respect
to such Home Equity Loan. To the extent that the Servicer previously
has made Delinquency Advances with respect to a Home Equity Loan
that the Servicer subsequently determines to be nonrecoverable, the
Servicer shall be entitled to reimbursement for such aggregate
unreimbursed Delinquency Advances as provided above or may withdraw
such amounts from the Principal and Interest Account. The Servicer
shall give written notice of such determination as to why such
amount is or would be nonrecoverable to the Trustee and the
Enhancer, if any, and may withdraw such amounts from the Principal
and Interest Account.
The Servicer will be required to pay all "out of pocket" costs and
expenses incurred in the performance of its servicing obligations,
including, but not limited to, (i) expenditures in connection with a
foreclosed Home Equity Loan prior to the liquidation thereof,
including, without limitation, expenditures for real estate property
taxes, hazard insurance premiums, property restoration or
preservation ("Preservation Expenses"), (ii) the cost of any
enforcement or judicial proceedings, including foreclosures and
(iii) the cost of the management and liquidation of Property
(including broker's fees) acquired in satisfaction of the related
Mortgage, except to the extent that the Servicer in its reasonable
business judgment determines that any such proposed amount would not
be recoverable. Such costs and expenses will constitute "Servicing
Advances." The Servicer may recover a Servicing Advance to the
extent permitted by the Home Equity Loans or, if not theretofore
recovered from the Mortgagor on whose behalf such Servicing Advance
was made, from Liquidation Proceeds realized upon the liquidation of
the related Home Equity Loan or from certain amounts on deposit in
the Certificate Account as provided in the related Pooling and
Servicing Agreement or the Sale and Servicing Agreement. Except as
provided above, in no case may the Servicer recover Servicing
Advances from the principal and interest payments on any other Home
Equity Loan.
A full month's interest at the coupon rate will be due on the
outstanding Loan Balance of each Home Equity Loan as of the
beginning of each Remittance Period. If a prepayment in full of a
Home Equity Loan or a partial prepayment of at least six times a
Mortgagor's Monthly Payment occurs during any calendar month, any
difference between the interest collected from the Mortgagor in
connection with such payoff and the full month's interest at the
Coupon Rate that would be due on the related due date for such Home
Equity Loan (such difference, the "Compensating Interest") (but not
in excess of the aggregate Servicing Fee for the related Remittance
Period), will be required to be deposited to the Principal and
Interest Account on the next succeeding Monthly Remittance Date by
the Servicer and shall be included in the monthly remittance amount
to be made available to the Trustee on the next succeeding Monthly
Remittance Date.
The Servicer will have the right and the option, but not the obligation, to
purchase for its own account any Home Equity Loan which becomes delinquent as to
three consecutive monthly installments or any Home Equity Loan as to which
enforcement proceedings have been brought by the Servicer; provided, however,
that the Servicer may not purchase any such Home Equity Loan unless the Servicer
has delivered to any Enhancer and the Trustee, at the Servicer's expense a REMIC
Opinion. The purchase price for any such Home Equity Loan is equal to the Loan
Purchase Price thereof, which purchase price shall be deposited in the Principal
and Interest Account.
The Servicer is required to cause to be liquidated any Home Equity Loan relating
to a Property as to which ownership has been effected in the name of the
Servicer on behalf of the Trust and which has not been liquidated within 35
months of such effecting of ownership at such price as the Servicer deems
necessary to comply with this requirement, or within such period of time as may,
in the opinion of counsel nationally recognized in federal income tax matters,
be permitted under the Code.
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The Servicer will be required to cause hazard insurance to be maintained with
respect to the related Property and to advance sums on account of the premiums
therefor if not paid by the Mortgagor if permitted by the terms of such Home
Equity Loan.
The Servicer will have the right under the related Pooling and Servicing
Agreement or Sale and Servicing Agreement (upon receiving the prior written
consent of the Enhancer, if any) to accept applications of Mortgagors for
consent to (i) partial releases of Mortgages, (ii) alterations and (iii)
removal, demolition or division of Properties. No application for approval may
be considered by the Servicer unless: (i) the provisions of the related Note and
Mortgage have been complied with; (ii) the loan-to-value ratio and
debt-to-income ratio after any release does not exceed the loan-to-value ratio
and debt-to-income ratio of such Note on the Cut-Off Date and any increase in
the loan-to-value ratio shall not exceed 5% unless approved in writing by the
Enhancer, if any; and (iii) the lien priority of the related Mortgage is not
affected.
The Servicer shall not agree to any modification, waiver or amendment of any
provision of any Home Equity Loan unless, in the Servicer's good faith judgment,
such modification, waiver or amendment would minimize the loss that might
otherwise be experienced with respect to such Home Equity Loan and only in the
event of a payment default with respect to such Home Equity Loan or in the event
that a payment default with respect to such Home Equity Loan is reasonably
foreseeable by the Servicer; provided, however, that no such modification,
waiver or amendment shall extend the maturity date of such Home Equity Loan
beyond the last scheduled payment date of the Home Equity Loans in the related
Trust Fund. Notwithstanding anything set forth in the related Pooling and
Servicing Agreement or Sale and Servicing Agreement to the contrary, the
Servicer shall be permitted to modify, waive or amend any provision of a Home
Equity Loan if required by statute or a court of competent jurisdiction to do
so.
The Servicer, with the prior written consent of any Enhancer will be permitted
under the related Pooling and Servicing Agreement or Sale and Servicing
Agreement to enter into servicing agreements (the "Sub-Servicing Agreements")
with other qualified servicers (the "Sub-Servicers") for any servicing and
administration of Home Equity Loans with any institution that (x) is in
compliance with the laws of each state necessary to enable it to perform its
obligations under such Sub-Servicing Agreement, (y) has experience servicing
home equity loans that are similar to the Home Equity Loans and (z) has equity
of not less than $5,000,000 (as determined in accordance with generally accepted
accounting principles).
With the consent of the Enhancer, if any, the Servicer may enter into
Sub-Servicing Agreements with Sub-Servicers with respect to the servicing of the
Home Equity Loans. Notwithstanding any Sub-Servicing Agreement, the Servicer
will not be relieved of its obligations under the related Pooling and Servicing
Agreement pr Sale and Servicing Agreement and the Servicer will be obligated to
the same extent and under the same terms and conditions as if it alone were
servicing and administering the Home Equity Loans. The Servicer shall be
entitled to enter into any agreement with a Sub-Servicer for indemnification of
the Servicer by such Sub-Servicer and nothing contained in such Sub-Servicing
Agreement shall be deemed to limit or modify the related Pooling and Servicing
Agreement or Sale and Servicing Agreement.
The Servicer has agreed to indemnify and hold the Trustee and any Enhancer
harmless against any and all claims, losses, penalties, fines, forfeitures,
legal fees and related costs, judgments, and any other costs, fees and expenses
that the Trustee and any Enhancer may sustain in any way related to the failure
of the Servicer to perform its duties and service the Home Equity Loans in
compliance with the terms of the related Pooling and Servicing Agreement or the
Sale and Servicing Agreement except as may be limited in the related related
Pooling and Servicing Agreement or the Sale and Servicing Agreement. The
Servicer shall immediately notify the Trustee and any Enhancer if a claim is
made by a third party with respect to the related Pooling and Servicing
Agreement or the Sale and Servicing Agreement, and the Servicer shall assume the
defense of any such claim and pay all expenses in connection therewith,
including reasonable counsel fees, and promptly pay, discharge and satisfy any
judgment or decree which may be entered against the Servicer, the Trustee and/or
the Enhancer, if any, in respect of such claim. The Trustee
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shall reimburse the Servicer from amounts otherwise distributable on the
Residual Interest Securities for the related Series for all amounts advanced by
it pursuant to the preceding sentence, except when a final nonappealable
adjudication determines that the claim relates directly to the failure of the
Servicer to perform its duties in compliance with the related Pooling and
Servicing Agreement or the Sale and Servicing Agreement. The indemnification
provisions shall survive the termination of the related Pooling and Servicing
Agreement or the Sale and Servicing Agreement and the payment of the outstanding
Certificates.
The Servicer will be required to deliver to the Trustee, the Enhancer, if any,
and the Rating Agencies on or before July 31 of each year: (1) an officers'
certificate stating, as to each signer thereof, that (i) a review of the
activities of the Servicer during such preceding calendar year and of
performance under the related Pooling and Servicing Agreement or the Sale and
Servicing Agreement has been made under such officers' supervision, and (ii) to
the best of such officers' knowledge, based on such review, the Servicer has
fulfilled all its obligations under the related Pooling and Servicing Agreement
or the Sale and Servicing Agreement for such year, or, if there has been a
default in the fulfillment of all such obligation, specifying each such default
known to such officers and the nature and status thereof including the steps
being taken by the Servicer to remedy such default and (2) a letter or letters
of a firm of independent, nationally recognized certified public accountants
reasonably acceptable to the Enhancer, if any, stating that such firm has
examined the Servicer's overall servicing operations in accordance with the
requirements of the Uniform Single Attestation Program for Mortgage Bankers, and
stating such firm's conclusions relating thereto.
Removal and Resignation of Servicer
The Enhancer, if any, (or, the Holders, with the consent of the Enhancer,
if any) will have the right, pursuant to the related Pooling and Servicing
Agreement or the Sale and Servicing Agreement, to remove the Servicer upon the
occurrence of certain events (collectively, the "Servicer Termination Events")
including, without limitation: (a) certain acts of bankruptcy or insolvency on
the part of the Servicer; (b) certain failures on the part of the Servicer to
perform its obligations under the related Pooling and Servicing Agreement or the
Sale and Servicing Agreement (including certain performance tests related to the
delinquency rate and cumulative losses of the Home Equity Loans); or (c) the
failure to cure material breaches of the Servicer's representations in the
related Pooling and Servicing Agreement or the Sale and Servicing Agreement or
(d) certain other events specified in the related Pooling and Servicing
Agreement or the Sale and Servicing Agreement.
The Servicer is not permitted to resign from the obligations and duties
imposed on it under the related Pooling and Servicing Agreement or the Sale and
Servicing Agreement except upon determination that its duties thereunder are no
longer permissible under applicable law or are in material conflict by reason of
applicable law with any other activities carried on by it, the other activities
of the Servicer so causing such conflict being of a type and nature carried on
by the Servicer on the date of the related Pooling and Servicing Agreement or
the Sale and Servicing Agreement. Any such determination permitting the
resignation of the Servicer is required to be evidenced by an opinion of counsel
to such effect which shall be delivered, and reasonably acceptable, to the
Trustee and any Enhancer.
Upon removal or resignation of the Servicer, the Trustee (A) may solicit
bids for a successor servicer as described in the related Pooling and Servicing
Agreement or the Sale and Servicing Agreement and (B) until such time as a
successor servicer is appointed pursuant to the terms of the related Pooling and
Servicing Agreement or the Sale and Servicing Agreement, shall serve in the
capacity of successor Servicer. The Enhancer, if any, may appoint a successor
Servicer other than the Trustee. If an Enhancer does not appoint a successor
Servicer, the Trustee, if it is unable to obtain a qualifying bid and is
prevented by law from acting as servicer, will be required to appoint, or
petition a court of competent jurisdiction to appoint, any housing and home
finance institution, bank or mortgage servicing institution designated as an
approved seller-servicer by FHLMC or FNMA, having net equity of not less than
$5,000,000, and acceptable to any Enhancer, as the successor to the Servicer in
the assumption of all or any part of the responsibilities, duties or liabilities
of the Servicer.
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No removal or resignation of the Servicer will become effective until the
Trustee or another successor Servicer shall have assumed the Servicer's
responsibilities and obligations in accordance with the related Pooling and
Servicing Agreement or the Sale and Servicing Agreement.
The Trustee
Unless otherwise specified in the related Prospectus Supplement,
___________________________ having its principal corporate trust office at
_________________________________, will be named as Trustee under the related
Pooling and Servicing Agreement or the Sale and Servicing Agreement.
Reporting Requirements
On each Payment Date the Trustee will be required to report in writing
(based on information provided to the Trustee by the Servicer) to each Holder,
the Rating Agencies and the Enhancer, if any:
(i) the amount of the principal and interest distribution with
respect to each Class of Securities (based on a Security in the
original principal amount of $1,000);
(ii) the amount of such distributions allocable to principal on the
Home Equity Loans, separately identifying the aggregate amount of
any prepayments in full or partial prepayments or other recoveries
of principal included therein (based on a Security in the original
principal amount of $1,000) and any Subordination Increase Amount
(as defined in the related Pooling and Servicing Agreement or the
Sale and Servicing Agreement);
(iii) the amount of such distribution allocable to interest on the
Home Equity Loans (based on a Security in the original principal
amount of $1,000);
(iv) if the distribution (net of any payment by any Enhancer) to the
Holders of any Class of Securities on such Payment Date was less
than the amounts distributable to such Holders on such Payment Date,
the related Carry-Forward Amount resulting therefrom;
(v) the amount of any payment by any Enhancer included in the
amounts distributed to the Holders of Class of Securities on such
Payment Date;
(vi) the Principal Balance of each Class of Securities (based on a
Certificate in the original principal amount of $1,000) which will
be outstanding after giving effect to any payment of principal on
such Payment Date;
(vii) the amount of any Subordinated Amount, Specified Subordinated
Amount and Subordination Deficit, if any, remaining after giving
effect to all distributions and transfers on such Payment Date;
(viii) the aggregate loan balance of all Home Equity Loans and the
aggregate loan balance of the Home Equity Loans in each Home Equity
Loan Pool, in each case after giving effect to any payment of
principal on such Payment Date;
(ix) the total of any Substitution Amounts or Loan Purchase Price
amounts included in such distribution;
(x) the weighted average Coupon Rate of the Home Equity Loans in
each Home Equity Loan Group and in the aggregate;
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(xi) such other information as the Certificate Insurer or any Owner
may reasonably request with respect to delinquent Home Equity Loans;
(xii) the largest Home Equity Loan Balance in each Home Equity Loan
Group;
(xiii) the Pass-Through Rate on any Securities subject to an
available funds or weighted average coupon limitation ;
(xiv) during any Funding Period, the Loan Balance of the Subsequent
Home Equity Loans added to the Trust during the related Due Period;
and
(xv) during the Funding Period, the remaining Pre-Funded Amount as
of the last day of the Due Period and
(xvi) and other information specified in the related Prospectus
Supplement and/or related Pooling and Servicing Agreement or Sale
and Servicing Agreement.
Certain obligations of the Trustee to provide information to the Holders
are conditioned upon such information being received from the Servicer.
In addition, on each Payment Date the Trustee will be required to
distribute to each Holder, the Enhancer, if any, and the Rating Agencies,
together with the information described above, the following information
prepared by the Servicer and furnished to the Trustee for such purpose:
(a) the number and aggregate principal balances of Home Equity Loans
(i) 30-59 days delinquent, (ii) 60-89 days delinquent, (iii) 90 or
more days delinquent, as of the close of business on the last day of
the Remittance Period immediately preceding the Payment Date, (iv)
the number and aggregate Loan Balances of all Home Equity Loans as
of such Payment Date, after giving effect to any payment of
principal on such Payment Date, as of the close of business on the
last day of the Remittance Period immediately preceding the Payment
Date, and (v) the percentage that each of the amounts represented by
clauses (i), (ii) and (iii) represent as a percentage of the
respective amounts in clause (iv);
(b) the status and the number and dollar amounts of all Home Equity
Loans in foreclosure proceedings as of the close of business on the
last day of the Remittance Period immediately preceding such Payment
Date;
(c) the number of mortgagors and the loan balances of (i) the
related Mortgages involved in bankruptcy proceedings as of the close
of business on the last day of the Remittance Period immediately
preceding such Payment Date and (ii) Home Equity Loans that are
"balloon" loans;
(d) the existence and status of any Mortgaged Properties as to which
title has been taken in the name of, or on behalf of the Trustee, as
of the close of business of the last day of the Remittance Period
immediately preceding the Payment Date;
(e) the book value of any real estate acquired through foreclosure
or grant of a deed in lieu of foreclosure as of the close of
business on the last day of the Remittance Period immediately
preceding the Payment Date;
(f) the realized losses incurred on Home Equity Loans for related
Remittance Period and the cumulative realized losses incurred on the
Home Equity Loans from the Closing Date to and including the
Remittance Period immediately preceding the Payment Date; and
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(g) the amount of net liquidation proceeds realized on the Home
Equity Loans during the Remittance Period immediately preceding the
Payment Date.
Removal of Trustee for Cause
The Trustee may be removed upon the occurrence of any one of the following
events (whatever the reason for such event and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body) on the part of the Trustee: (1) failure to
make distributions of available amounts; (2) breaches of covenants and
representations by the Trustee; (3) certain acts of bankruptcy or insolvency on
the part of the Trustee; or (4) failure to meet the standards of Trustee
eligibility as set forth in the related Pooling and Servicing Agreement or Sale
and Servicing Agreement.
If any such event occurs and is continuing, then and in every such case
(i) the Enhancer, if any, or (ii) with the prior written consent of any Enhancer
(which is required not to be unreasonably withheld), the Depositor and the
Holders or, if there are no Securities then outstanding, by the Residual
Interest Securities may appoint a successor trustee.
Governing Law
The Agreements and each Security will be construed in accordance with and
governed by the laws of the State of New York applicable to agreements made and
to be performed therein.
Amendments
The Trustee, the Depositor, the Seller and the Servicer with the consent
of the Enhancer may, at any time and from time to time and without notice to or
the consent of the Holders, amend the Pooling and Servicing Agreement, and the
Trustee will be required to consent to such amendment, for the purposes of (i)
if accompanied by an approving REMIC Opinion of counsel experienced in federal
income tax matters, removing the restriction against the transfer of a Residual
Interest Security to a Disqualified Organization (as such term is defined in the
Code), (ii) complying with the requirements of the Code including any amendments
necessary to maintain REMIC status, (iii) curing any ambiguity, (iv) correcting
or supplementing any provisions therein which are inconsistent with any other
provisions therein, or (v) for any other purpose, provided that in the case of
clause (v), (A) the Seller delivers an opinion of counsel acceptable to the
Trustee that such amendment will not adversely affect in any material respect
the interest of the Holders and (B) such amendment will not result in a
withdrawal or reduction of the rating of the Securities of a Series without
regard to any Financial Guaranty Insurance Policy. Notwithstanding anything to
the contrary, no such amendment shall (a) change in any manner the amount of, or
delay the timing of, payments which are required to be distributed to any Holder
without the consent of the Holder, (b) change the percentages which are required
to consent to any such amendments, without the consent of the Holders of all
Securities of the Class or Classes affected then Outstanding or (c) which
affects in any manner the terms or provisions of any Financial Guaranty
Insurance Policy.
The Trustee will be required to furnish written notification of the
substance of any such amendment to each Holder in the manner set forth in the
related Pooling and Servicing Agreement or Sale and Servicing Agreement.
Termination of the Trust Fund
Unless otherwise specified in the related Prospectus supplement, the
related Pooling and Servicing Agreement or Sale and Servicing Agreement will
provide that the Trust will terminate upon the payment to the Holder from
amounts other than those available under any Financial Guaranty Insurance Policy
of all amounts
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required to be paid to such Holders upon the later to occur of (a) the final
payment or other liquidation (or any advance made with respect thereto) of the
last Home Equity Loan, (b) the disposition of all property acquired in respect
of any Home Equity Loan remaining in the Trust Estate and (c) at any time if a
Qualified Liquidation of the Trust Estate is effected as described below under
"--Optional Termination." To effect a termination pursuant to clause (c) above,
the Holders will be required to furnish to the Trustee an opinion of counsel
experienced in federal income tax matters acceptable to the Enhancer, if any,
and the Trustee to the effect that such liquidation constitutes a Qualified
Liquidation.
Optional Termination
By Servicer or Enhancer. At its option, the Servicer (or the Enhancer, if
any, if the Servicer fails to exercise such option) may on any Monthly
Remittance Date when the aggregate outstanding loan balance of the Home Equity
Loans is 10% or less of the sum of the loan balances if all the Home Equity in
the Trust as of the date such Home Equity Loans were transferred to the Trust,
purchase from the Trust Fund all (but not fewer than all) remaining Home Equity
Loans, in whole only, and other property acquired by foreclosure, deed in lieu
of foreclosure, or otherwise then constituting the Trust Fund, and pay to the
Holders the portion of the purchase price allocable to each such class of
Securities, which will equal an amount up to the sum of (i) 100% of the then
outstanding principal balance of the related Securities thereof, plus (ii) one
month's interest on the then outstanding principal balance of the related
Securities thereof at the then applicable Pass-Through Rate for such class, plus
any previously accrued but unpaid interest thereon, such sum payable in
accordance with the priorities described under "Description of the
Certificates--Distributions" in the related Prospectus Supplement and thereby
effect early retirement of the Securities.
Termination Upon Loss of REMIC Status. Following a final determination by
the Internal Revenue Service or by a court of competent jurisdiction, in either
case from which no appeal is taken within the permitted time for such appeal, or
if any appeal is taken, following a final determination of such appeal from
which no further appeal can be taken, to the effect that the REMIC does not and
will no longer qualify as a "REMIC" pursuant to Section 860D of the Code (the
"Final Determination"), at any time on or after the date which is 30 calendar
days following such Final Determination the Enhancer, if any, or the Holders
with the consent of the Enhancer, if any, may direct the Trustee on behalf of
the Trust Fund to adopt a plan of complete liquidation, as contemplated by
Section 860F(a)(4) of the Code.
Events of Default; Termination Under Indenture. Events of Default under
the Indenture for each Series of Notes include: (i) a default for 30 days or
more in the payment of any principal of or interest on any Note of such Series;
(ii) failure to perform any other covenant of the Trust Fund in the Indenture
which continues for a period of 60 days after notice thereof is given in
accordance with the procedures described in the related Prospectus Supplement;
(iii) any representation or warranty made by the Seller or the Trust Fund in the
Indenture or in any certificate or other writing delivered pursuant thereto or
in connection therewith with respect to or affecting such Series having been
incorrect in a material respect as of the time made, and such breach is not
cured within 60 days after notice thereof is given in accordance with the
procedures described in the related Prospectus Supplement; (iv) certain events
of bankruptcy, insolvency, receivership or liquidation of the Seller or the
Trust Fund; or (v) any other Event of Default provided with respect to Notes of
that Series.
If an Event of Default with respect to the Notes of any Series at the time
outstanding occurs and is continuing, either the Trustee or the Holders of a
majority of the then aggregate outstanding amount of the Notes of such Series
with, if specified in the related Prospectus Supplement, the consent of the
Enhancer, may declare the principal amount (or, if the Notes of that Series are
Zero Coupon Securities, such portion of the principal amount as may be specified
in the terms of that Series, as provided in the related Prospectus Supplement)
of all the Notes of such Series to be due and payable immediately. Such
declaration may, under certain circumstances, be rescinded and annulled by the
Holders of a majority in aggregate outstanding amount of the Notes of such
Series.
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If, following an Event of Default with respect to any Series of Notes, the
Notes of such Series have been declared to be due and payable, the Trustee may,
in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such Series as they would
have become due if there had not been such a declaration. In addition, the
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a Series following an Event of Default other than a default in the payment of
any principal or interest on any Note of such Series for 30 days or more, unless
(a) the Holders of 100% of the then aggregate outstanding amount of the Notes of
such Series consent to such sale, (b) the proceeds of such sale or liquidation
are sufficient to pay in full the principal of and accrued interest due and
unpaid on the outstanding Notes of such Series at the date of such sale or (c)
the Trustee determines that such collateral would not be sufficient on an
ongoing basis to make all payments on such Notes as such payments would have
become due if such Notes had not been declared due and payable, and the Trustee
obtains the consent of the Holders of 66 2/3% of the then aggregate outstanding
amount of the Notes of such Series.
In the event that the Trustee liquidates the collateral in connection with
an Event of Default involving a default for 30 days or more in the payment of
principal of or interest on the Notes of a Series, the Indenture provides that
the Trustee will have a prior lien on the proceeds of any such liquidation for
unpaid fees and expenses. As a result, upon the occurrence of such an Event of
Default, the amount available for distribution to the Noteholders may be less
than would otherwise be the case. However, the Trustee may not institute a
proceeding for the enforcement of its lien except in connection with a
proceeding for the enforcement of the lien of the Indenture for the benefit of
the Noteholders after the occurrence of such an Event of Default.
In the event the principal of the Notes of a Series is declared due and
payable, as described above, the Holders of any such Notes issued at a discount
from par may be entitled to receive no more than an amount equal to the unpaid
principal amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing with respect
to a Series of Notes, the Trustee will be under no obligation to exercise any of
the rights or powers under the Indenture at the request or direction of any of
the Holders of Notes of such Series, unless such Holders offered to the Trustee
security or indemnity satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in complying with such request or
direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, the Holders of a majority of the then
aggregate outstanding amount of the Notes of such Series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee with respect to the Notes of such Series, and the Holders of a majority
of the then aggregate outstanding amount of the Notes of such Series may, in
certain cases, waive any default with respect thereto, except a default in the
payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all the Holders of the outstanding Notes of such Series affected thereby.
The Indenture will be discharged with respect to a Series of Notes
(except with respect to certain continuing rights specified in the Indenture)
upon the delivery to the Trustee for cancellation of all the Notes of such
Series or, with certain limitations, upon deposit with the Trustee of funds
sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such Series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such Series, to replace stolen, lost or mutilated Notes of such Series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Trustee, in trust, of
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money and/or direct obligations of or obligations guaranteed by the United
States of America which, through the payment of interest and principal in
respect thereof in accordance with their terms, will provide money in an amount
sufficient to pay the principal of and each installment of interest on the Notes
of such Series on the Final Scheduled Distribution Date for such Notes and any
installment of interest on such Notes in accordance with the terms of the
Indenture and the Notes of such Series. In the event of any such defeasance and
discharge of Notes of such Series, holders of Notes of such Series would be able
to look only to such money and/or direct obligations for payment of principal
and interest, if any, on their Notes until maturity.
REMIC Administrator
For any Series with respect to which a REMIC election is made, preparation
of certain reports and certain other administrative duties with respect to the
Trust Fund may be performed by a REMIC administrator, who may be the Seller or
an affiliate of the Seller.
CERTAIN LEGAL ASPECTS OF THE HOME EQUITY LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans which are general in nature. Because certain of such legal
aspects are governed by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete or to reflect the
laws of any particular state, or to encompass the laws of all states in which
the properties securing the Home Equity Loans are situated.
Mortgages
The Home Equity Loans for a Series will be secured by either mortgages,
deeds of trust, deeds to secure debt or similar security instruments (such Home
Equity Loans are hereinafter referred to in this section as "mortgage loans"),
depending upon the prevailing practice in the state in which the property
subject to a mortgage loan is located. The filing of a mortgage, deed of trust,
deed to secure debt or similar security instrument creates a lien or title
interest upon the real property covered by such instrument and represents the
security for the repayment of an obligation that is customarily evidenced by a
promissory note. The priority of the liens is important because, among other
things, the foreclosure of a senior lien will extinguish a junior lien, and
because the holder of a senior lien generally will have a right to receive
insurance, condemnation or other proceeds before the holder of a junior lien.
Priority between mortgages and deeds of trust (or other instruments of
record) generally depends in the first instance on the order of filing with the
appropriate government records office. Priority also may be affected by the
express terms of the mortgage or the deed of trust and any subordination
agreement among the lenders.
Although priority among liens on the same property generally depends in
the first instance on the order of filing, there are a number of ways in which a
lien that is a senior lien when it is filed can become subordinate to a lien
filed at a later date. A deed of trust or mortgage generally is not prior to any
liens for real estate taxes and assessments, certain federal liens (including
certain federal criminal liens, environmental liens and tax liens), certain
mechanics and materialmen's liens, and other liens given priority by applicable
law.
There are two parties to a mortgage, the mortgagor, who is the
borrower/property owner or the land trustee (as described below), and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. In the case of a land
trust, there are three parties because title to the property is held by a land
trustee under a land trust agreement of which the borrower/property owner is the
beneficiary; at origination of a mortgage loan, the borrower executes a separate
undertaking to make payments on the mortgage note. Under a deed of trust or
similar security instrument, the homeowner or borrower, called the "grantor,"
grants the security property to a third-party grantee, called the "trustee," for
the benefit of the lender, called the "beneficiary." The deed of trust gives the
trustee the authority, if the borrower defaults and upon the
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instructions of the beneficiary, to sell the security property in a
"foreclosure" or "trustee's sale" and to apply the sale proceeds to the secured
debt. The mortgagee's authority under a mortgage and the trustee's authority
under a deed of trust are governed by the law of the state in which the real
property is located, the express provisions of the mortgage or deed of trust,
and, in some cases, particularly in deed of trust transactions, the directions
of the beneficiary.
Foreclosure
Foreclosure of a mortgage is generally accomplished by judicial action,
and foreclosure of a deed of trust may be accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure occasionally may result from difficulties in effecting
service on necessary parties defendant. When the mortgagee's right to
foreclosure is contested, the legal proceedings necessary to resolve the issue
can be time-consuming and expensive. After the completion of a judicial
foreclosure proceeding, the court may issue a judgment of foreclosure and
appoint a receiver or other officer to conduct the sale of the property. In some
states, mortgages may also be foreclosed by advertisement or pursuant to a power
of sale provided in the mortgage. Foreclosure of a mortgage by advertisement is
essentially similar to foreclosure of a deed of trust by nonjudicial power of
sale.
If a borrower defaults under a loan secured by a deed of trust, the lender
generally may bring suit against the borrower. The lender generally also may
attempt to collect the loan by causing the deed of trust to be enforced against
the property it encumbers. Enforcement of a deed of trust is accomplished in
most cases by a trustee's sale in which the trustee, upon default of the
grantor, and subject to the expiration of applicable cure periods, sells the
security property at a public sale under the terms of the loan documents and
subject to the applicable procedural provisions of state law. In certain states,
the lender must exhaust the security through foreclosure (either judicially or
non-judicially) prior to other efforts to collect the balance of the promissory
note. Whether a lender may thereafter collect on the unpaid balance of the loan
is governed by the anti-deficiency statute in the applicable state governing the
collectibility of deficiency balances.
The trustee's sale generally must be conducted by public auction in the
county or city in which all or some part of the security property is located. At
the sale, the trustee generally requires a bidder to deposit with the trustee a
set amount or a percentage of the full amount of the bidder's final bid in cash
(or an equivalent thereto satisfactory to the trustee) prior to and as a
condition to recognizing such bid, and may conditionally accept and hold these
amounts for the duration of the sale. The beneficiary of the deed of trust
generally need not bid cash at the sale, but may instead make a "credit bid" up
to the extent of the total amount due under the deed of trust, including costs
and expenses actually incurred in enforcing the deed of trust, as well as the
trustee's fees and expenses. The trustee will sell the security property to the
highest proper bidder at the sale.
A sale conducted in accordance with the terms of the power of sale
contained in the deed of trust generally is presumed to be conducted regularly
and fairly, and, on a conveyance of the property by trustee's deed, confers
absolute legal title to the property to the purchaser, free of all junior deeds
of trust and free of all other liens and claims subordinate to the deed of trust
under which the sale is made. The purchaser's title, however, is subject to all
senior liens and other senior claims. Thus, if the deed of trust being enforced
is a junior deed of trust, the trustee will convey title to the property to the
purchaser subject to the first deed of trust and any other prior liens and
claims. A trustee's sale or judicial foreclosure under a junior deed of trust
generally has no effect on the first deed of trust, with the possible exception
of the right of a senior beneficiary to accelerate its indebtedness under a
default clause or a "due-on-sale" clause contained in the senior deed of trust.
See "--Due-on-Sale Clauses in Home Equity Loans" below.
Because a potential buyer at the sale may find it difficult to determine
the exact status of title and other facts about the security property, and
because the physical condition of the security property may have deteriorated,
it generally is more common for the lender, rather than an unrelated third
party, to purchase the security property at a trustee's sale or judicial
foreclosure sale. The lender (or other purchaser at the judicial foreclosure or
trustee's sale)
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will be subject to the burdens of ownership, including the obligations to
service any senior mortgage or deed of trust, to obtain hazard insurance and to
make such repairs at its own expense as are necessary to render the security
property suitable for resale. The lender commonly will attempt to resell the
security property and obtain the services of a real estate broker and agree to
pay the broker a commission in connection with the resale. Depending upon market
conditions, the ultimate proceeds of the resale of the security property may not
be high enough to equal the lender's investment.
The proceeds received by the trustee from the sale generally are applied
first to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the deed of trust under which the sale was conducted.
Any remaining proceeds generally are payable to the holders of junior deeds of
trust and other liens and claims in order of their priority. Any balance
remaining generally is payable to the grantor. Following the sale, if there are
insufficient proceeds to repay the secured debt, the beneficiary under the
foreclosed lien generally may obtain a deficiency judgment against the grantor.
See "--Deficiency Judgments" below.
Some courts have been faced with the issue of whether federal or state
constitutional due process requires that borrowers under deeds of trust receive
notices in addition to the statutorily prescribed minimum. For the most part,
the courts in these cases have upheld the notice provisions and procedures
described above.
An action to foreclose a mortgage is an action to recover the mortgage
debt by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the related mortgage note and
the mortgage as made and cannot be relieved from his default if the mortgagee
has exercised his rights in a commercially reasonable manner. However, since a
foreclosure action is equitable in nature, the court may exercise equitable
powers to relieve a mortgagor of a default and deny the mortgagee foreclosure on
proof that either the mortgagor's default was excusable or the mortgagee's
action established a waiver, fraud, bad faith, or oppressive or unconscionable
conduct such as to warrant a court of equity to refuse affirmative relief to the
mortgagee. Under certain circumstances a court of equity may relieve the
mortgagor from an entirely technical default where such default was not willful.
A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses or counterclaims are interposed, sometimes requiring
up to several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of the
parties' intent, if a court determines that the sale was for less than fair
consideration and such sale occurred while the mortgagor was insolvent and
within one year (or within the state statute of limitations if the trustee in
bankruptcy elects to proceed under state fraudulent conveyance law) of the
filing of bankruptcy. Similarly, a suit against the debtor on the related
mortgage note may take several years and, generally, is a remedy alternative to
foreclosure, the mortgagee being precluded from pursuing both at the same time.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty potential third party purchasers at the
sale have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is relatively uncommon for a third party to purchase the
property at a foreclosure sale. Rather, it is more common for the lender to
purchase the property from the trustee or referee for an amount which may be
equal to the unpaid principal amount of the mortgage note secured by the
mortgage or deed of trust plus accrued and unpaid interest and the expenses of
foreclosure, in which event the mortgagor's debt will be extinguished or the
lender may purchase for a lesser amount in order to preserve its right against a
borrower to seek a deficiency judgment in states where such a judgment can be
obtained. Thereafter, subject to the right of the borrower in some states to
remain in possession during the redemption period, the lender will assume the
burdens of ownership, including obtaining hazard insurance, paying taxes and
making such repairs at its own expense as are necessary to render the property
suitable for sale. The lender will commonly obtain the services of a real estate
broker and pay the broker's commission in connection with the sale of the
property.
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Depending upon market conditions, the ultimate proceeds of the sale of the
property may not equal the lender's investment in the property. Any loss may be
reduced by the receipt of any mortgage guaranty insurance proceeds.
Rights of Redemption
In some states, after foreclosure of a mortgage, the mortgagor and
foreclosed junior lienors are given a statutory period in which to redeem the
property from the foreclosure sale. The right of redemption should be
distinguished from the equity of redemption, which is a statutory or
non-statutory right that must be exercised prior to the foreclosure sale. In
some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest, expenses of foreclosure and reasonable
expenses incurred in maintaining the property. In other states, redemption may
be authorized if the former borrower pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
will defeat the title of any purchaser at a foreclosure sale, or of any
purchaser from the lender subsequent to foreclosure. Consequently the practical
effect of a right of redemption is to force the lender to retain the property
and pay the expenses of ownership until the redemption period has run. In many
states, there is no right to redeem property after a trustee's sale under a deed
of trust, unless a deficiency judgment is sought by the lender.
When the lender under a junior mortgage or deed of trust cures the default
and reinstates or redeems the senior mortgage or deed of trust, the amount paid
by the lender for such cure generally becomes a part of the indebtedness secured
by the junior deed of trust.
Junior Mortgages; Rights of Senior Mortgages
The mortgage loans comprising or underlying the Home Equity Loans included
in the Trust Fund for a Series will be secured by mortgages or deeds of trust
which may be junior to one or more other mortgages or deeds of trust held by
other lenders or institutional investors. The rights of the Trust Fund (and
therefore the Holders), as mortgagee under a junior mortgage, are subordinate to
those of the mortgagee under the senior mortgage, including the prior rights of
the senior mortgagee to receive hazard insurance and condemnation proceeds and
to cause the property securing the mortgage loan to be sold upon default of the
mortgagor, thereby extinguishing the junior mortgagee's lien unless the junior
mortgagee asserts its subordinate interest in the property in foreclosure
litigation and, possibly, satisfies the defaulted senior mortgage. A junior
mortgagee may satisfy a defaulted senior loan in full and, in some states, may
cure such default and bring the senior loan current, in either event adding the
amounts expended to the balance due on the junior loan. In some states, absent a
provision in the mortgage or deed of trust, no notice of default is required to
be given to a junior mortgagee. In addition, as described above, the rights of
the Trust Fund may be or become subject to liens for real estate taxes and other
obligations. Although the Seller generally does not cure defaults under a senior
deed of trust or other lien, it is the Seller's standard practice to protect its
interest by monitoring any such sale of which it is aware and bidding for
property if it determines that it is in the Seller's best interests to do so.
The standard form of the mortgage or deed of trust used by most
institutional lenders, like that used by the Seller, confers on the mortgagee or
beneficiary the right both to receive all proceeds collected under any hazard
insurance policy required to be maintained by the borrower and all awards made
in connection with condemnation proceedings. The lender generally has the right,
subject to the specific provisions of the mortgage or deed of trust securing its
loan, to apply such proceeds and awards to repair of any damage to the security
property or to payment of any indebtedness secured by the mortgage or deed of
trust, in such order as the mortgagee or beneficiary may determine. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages or deeds of trust. If
available, proceeds in excess of the amount of senior mortgage indebtedness, in
most cases, will be applied to the junior indebtedness.
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Another provision typically found in the form of the mortgage or deed of
trust used by institutional lenders obligates the grantor or mortgagor to pay
before delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee or beneficiary under the
mortgage. Upon a failure of the grantor or mortgagor to perform any of these
obligations, the mortgagee or beneficiary is given the right to perform the
obligation itself, at its election, with the mortgagor or grantor agreeing to
reimburse the mortgagee or beneficiary for any sums expended by the mortgagee or
beneficiary on behalf of the mortgagor or grantor. The mortgage or deed of trust
typically provides that all sums so expended by the mortgagee or beneficiary
become part of the indebtedness secured by the mortgage or deed of trust.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory prohibitions which limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage.
In some states, statutes limit the right of the beneficiary or mortgagee to
obtain a deficiency judgment against the borrower following foreclosure or sale
under a deed of trust. A deficiency judgment is a personal judgment against the
former borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. However, some states calculate the deficiency as the difference between
the outstanding indebtedness and the greater of the fair market value of the
property and the sales price of the property. Other states require the
beneficiary or mortgagee to exhaust the security afforded under a deed of trust
or mortgage by foreclosure in an attempt to satisfy the full debt before
bringing a personal action against the borrower. In certain other states, the
lender has the option of bringing a personal action against the borrower on the
debt without first exhausting such security; however, in some of these states,
the lender, following judgment on such personal action, may be deemed to have
elected a remedy and may be precluded from exercising remedies with respect to
the security. Consequently, the practical effect of the election requirement,
when applicable, is that lenders will usually proceed first against the security
rather than bringing a personal action against the borrower. Finally, other
statutory provisions limit any deficiency judgment against the former borrower
following a foreclosure sale to the excess of the outstanding debt over the fair
market value of the property at the time of the public sale. The purpose of
these statutes is generally to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result of
low or no bids at the foreclosure sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws, the Federal
Soldiers' and Sailors' Civil Relief Act and state laws affording relief to
debtors, may interfere with or affect the ability of the secured lender to
realize upon collateral and/or enforce a deficiency judgment. For example, with
respect to federal bankruptcy law, the filing of a petition acts as a stay
against the enforcement of remedies for collection of a debt. Foreclosure is
permitted during the pendency of this proceeding only with court permission
Moreover, a court with federal bankruptcy jurisdiction may permit a debtor
through a Chapter 13 Bankruptcy Code rehabilitative plan to cure a monetary
default with respect to a loan on a debtor's residence by paying arrearages
within a reasonable time period and reinstating the original loan payment
schedule even though the lender accelerated the loan and the lender has taken
all steps to realize upon its security (provided no sale of the property has yet
occurred) prior to the filing of the debtor's Chapter 13 petition. Some courts
with federal bankruptcy jurisdiction have approved plans, based on the
particular facts of the reorganization case, that effected the curing of a loan
default by permitting the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan may be modified if the borrower has filed a petition
under Chapter 13. These courts have suggested that such modifications may
include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
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unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Federal bankruptcy law and limited case law
indicate that the foregoing modifications cannot be applied to the terms of a
loan secured by property that is the principal residence of the debtor. In all
cases, the secured creditor is entitled to the value of its security plus
post-petition interest, attorney's fees and costs to the extent the value of the
security exceeds the debt.
In a Chapter 11 case under the Bankruptcy Code, the lender is precluded
from foreclosing without authorization from the bankruptcy court. The lender's
lien may be transferred to other collateral and/or be limited in amount to the
value of the lender's interest in the collateral as of the date of the
bankruptcy. The loan term may be extended, the interest rate may be adjusted to
market rates and the priority of the loan may be subordinated to bankruptcy
court-approved financing. The bankruptcy court can, in effect, invalidate
due-on-sale clauses through confirmed Chapter 11 plans of reorganization.
The Bankruptcy Code provides priority to certain tax liens over the
lender's security. This may delay or interfere with the enforcement of rights in
respect of a defaulted Home Equity Loan. In addition, substantive requirements
are imposed upon lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws. The
laws include the federal Truth-in-Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Reporting Act and related
statutes and regulations. These federal laws impose specific statutory
liabilities upon lenders who originate loans and who fail to comply with the
provisions of the law. In most cases, this liability will affect assignees of
the loans.
Due-on-Sale Clauses in Home Equity Loans
Due-on-sale clauses permit the lender to accelerate the maturity of the
loan if the borrower sells or transfers, whether voluntarily or involuntarily,
all or part of the real property securing the loan without the lender's prior
written consent. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases, typically involving
single family residential mortgage transactions, their enforceability has been
limited or denied. In any event, the Garn-St Germain Depository Institutions Act
of 1982 (the "Garn-St Germain Act") preempts state constitutional, statutory and
case law that prohibits the enforcement of due-on-sale clauses and permits
lenders to enforce these clauses in accordance with their terms, subject to
certain exceptions. As a result, due-on-sale clauses have become generally
enforceable except in those states whose legislatures exercised their authority
to regulate the enforceability of such clauses with respect to mortgage loans
that were (i) originated or assumed during the "window period" under the Garn-St
Germain Act which ended in all cases not later than October 15, 1982, and (ii)
originated by lenders other than national banks, federal savings institutions
and federal credit unions. FHLMC has taken the position in its published
mortgage servicing standards that, out of a total of eleven "window period
states," five states (Arizona, Michigan, Minnesota, New Mexico and Utah) have
enacted statutes extending, on various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to certain
categories of window period loans. Also, the Garn-St Germain Act does
"encourage" lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from such bankruptcy proceeding.
Enforceability of Prepayment and Late Payment Fees
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations, upon the late charges which a lender may
collect from a borrower for delinquent payments. Certain
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states also limit the amounts that a lender may collect from a borrower as an
additional charge if the loan is prepaid. Late charges and prepayment fees are
typically retained by servicers as additional servicing compensation.
Equitable Limitations on Remedies
In connection with lenders' attempts to realize upon their security,
courts have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his defaults
under the loan documents. Examples of judicial remedies that have been fashioned
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon its
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in cases involving the
sale by a trustee under a deed of trust or by a mortgagee under a mortgage
having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
Most conventional single-family mortgage loans may be prepaid in full or
in part without penalty. A mortgagee to whom a prepayment in full has been
tendered may be compelled to give either a release of the mortgage or an
instrument assigning the existing mortgage. The absence of a restraint on
prepayment, particularly with respect to mortgage loans having higher mortgage
rates, may increase the likelihood of refinancing or other early retirements of
such mortgage loans.
Applicability of Usury Laws
Many states have usury laws which limit the interest and other amounts
that may be charged under certain loans. Title V of the Depository Institutions
Deregulation and Monetary Control Act of 1980, enacted in March 1980 ("Title
V"), provides that state usury limitations shall not apply to certain types of
residential first mortgage loans originated by certain lenders after March 31,
1980. Similar federal statutes were in effect with respect to mortgage loans
made during the first three months of 1980. Title V authorizes any state to
reimpose interest rate limits by adopting, before April 1, 1983, a state law, or
by certifying that the voters of such state have voted in favor of any
provision, constitutional or otherwise, which expressly rejects an application
of the federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V is not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V. State laws apply to residential
second mortgages; however, some state usury limitations do not apply to
residential second mortgages.
Environmental Legislation
A federal statute, the Comprehensive Environmental Response, Compensation,
and Liability Act, and a growing number of state laws impose a statutory lien
for associated costs on property that is the subject of a cleanup action on
account of hazardous wastes or hazardous substances released or disposed of on
the property. Such a lien generally will have priority over all subsequent liens
on the property and, in certain of these states, will have priority over prior
recorded liens, including the lien of a mortgage or deed of trust. The priority
of the environmental lien under federal law depends on the time of perfection of
the federal lien compared to the time of perfection of any competing liens under
applicable state law. In addition, under federal environmental legislation and
possibly under state law in a number of states, a secured party that takes a
deed in lieu of foreclosure or acquires a property at a
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foreclosure sale may be liable for the costs of cleaning up a contaminated site.
Although such costs could be substantial, they would probably not be imposed on
a secured lender (such as the applicable Trust Fund) if it promptly marketed the
foreclosed property for resale. In the event that a Trust Fund acquired title to
a property securing a Mortgage Home Equity Loan and cleanup costs were incurred
in respect of the property, the holders of the Securities might incur a delay in
the payment if such costs were required to be paid by such Trust Fund.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service, (i) are entitled to have interest rates reduced and capped at
6% per annum, on obligations (including Home Equity Loans) incurred prior to the
commencement of military service for the duration of military service, (ii) may
be entitled to a stay of proceedings on any kind of foreclosure or repossession
action in the case of defaults on such obligations entered into prior to
military service for the duration of military service and (iii) may have the
maturity of such obligations incurred prior to military service extended, the
payments lowered and the payment schedule readjusted for a period of time after
the completion of military service. However, the benefits of (i), (ii), or (iii)
above are subject to challenge by creditors and if, in the opinion of the court,
the ability of a person to comply with such obligations has not been materially
impaired by military service, the court may apply equitable principles
accordingly. If a borrower's obligation to repay amounts otherwise due on a Home
Equity Loan included in a Trust Fund for a Series is relieved pursuant to the
Soldiers' and Sailors' Civil Relief Act of 1940, none of the Trust Fund, the
Servicer, the Seller nor the Trustee will be required to advance such amounts,
and any loss in respect thereof may reduce the amounts available to be paid to
the Holders of the Securities of such Series. Any shortfalls in interest
collections on Home Equity Loans included in a Trust Fund for a Series resulting
from application of the Soldiers' and Sailors' Civil Relief Act of 1940 will be
allocated to each Class of Securities of such Series that is entitled to receive
interest in respect of such Home Equity Loans in proportion to the interest that
each such Class of Securities would have otherwise been entitled to receive in
respect of such Home Equity Loans had such interest shortfall not occurred
unless the related Prospectus Supplement allocates such shortfalls to particular
Classes.
USE OF PROCEEDS
The Depositor will apply all or substantially all of the net proceeds from
the sale of each Series of Securities for one or more of the following purposes:
(i) to establish any Reserve Fund, Pre-Funding Account or Capitalized Interest
Account, (ii) to pay costs of structuring and issuing such Securities, including
the costs of obtaining Enhancement, and (iii) to acquire the Home Equity Loans
from the Seller, who in turn will use such proceeds for general corporate
purposes.
FEDERAL INCOME TAX CONSEQUENCES
General
This section sets forth (i) certain federal income tax opinions of Stroock
& Stroock & Lavan LLP, special counsel to the Seller ("Federal Tax Counsel"),
and (ii) a summary, based on the advice of Federal Tax Counsel, of the material
federal income tax consequences of the purchase, ownership and disposition of
Securities. The summary focuses primarily upon investors who will hold
Securities as "capital assets" (generally, property held for investment) within
the meaning of Section 1221 of the of the Internal Revenue Code of 1986, as
amended (the "Code"), but much of the discussion is applicable to other
investors as well. Because tax consequences may vary based on the status or tax
attributes of the owner of a Security, prospective investors are advised to
consult their own tax advisers concerning the federal, state, local and any
other tax consequences to them of the purchase, ownership and disposition of the
Securities. For purposes of this tax discussion (except with respect to
information reporting, or where the context indicates otherwise), any reference
to the "Holder" means the beneficial owner of a Security.
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The summary is based upon the provisions of the Code, the regulations
promulgated thereunder, including, where applicable, proposed regulations, and
the judicial and administrative rulings and decisions now in effect, all of
which are subject to change or possible differing interpretations. The statutory
provisions, regulations, and interpretations on which this interpretation is
based are subject to change, and such a change could apply retroactively.
The federal income tax consequences to Holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness for
federal income tax purposes; (ii) an election is made to treat the Trust Fund
(or certain assets of the Trust Fund) relating to a particular Series of
Securities as a real estate mortgage investment conduit ("REMIC") under the
Code; (iii) the Securities represent an ownership interest for federal income
tax purposes in some or all of the assets included in the Trust Fund for a
Series; or (iv) for federal income tax purposes the Trust Fund relating to a
particular Series of Certificates is classified as a partnership or is
disregarded as an entity separate from its owner. The Prospectus Supplement for
each Series of Securities will specify how the Securities will be treated for
federal income tax purposes and will discuss whether a REMIC election, if any,
will be made with respect to such Series.
Opinions
Federal Tax Counsel is of the opinion that:
(i) If a Prospectus Supplement indicates that one or more Classes of
non-REMIC Securities of the related Series are to be treated as
indebtedness for federal income tax purposes, assuming that all of the
provisions of the applicable Agreement are complied with, the Securities
so designated will be considered indebtedness for federal income tax
purposes and, for federal income tax purposes, the related Trust Fund will
not be an association, publicly traded partnership, or taxable mortgage
pool taxable as a corporation;
(ii) If a Prospectus Supplement indicates that one or more REMIC
elections will be made with respect to the related Trust Fund, assuming
that such elections are timely made and all of the provisions of the
applicable Agreement are complied with (a) each segregated pool of assets
specified as a REMIC in such Agreement will constitute a REMIC for federal
income tax purposes, (b) the Class or Classes of Securities of the related
Series which are designated as "regular interests" in such Prospectus
Supplement will be considered "regular interests" in a REMIC for federal
income tax purposes and (c) the Class of Securities of the related Series
which is designated as the "residual interest" in such Prospectus
Supplement will be considered the sole class of "residual interests" in
the applicable REMIC for federal income tax purposes;
(iii) If a Prospectus Supplement indicates that a Trust Fund will be
treated as a grantor trust for federal income tax purposes, assuming
compliance with all of the provisions of the applicable Agreement, (a) the
Trust Fund will be a grantor trust under Subpart E, Part I of Subchapter J
of the Code and will not be an association taxable as a corporation and
(b) a Holder of the related Certificates will be treated for federal
income tax purposes as the owner of an undivided interest in the Home
Equity Loans included in the Trust Fund; and
Each such opinion is an expression of an opinion only, is not a guarantee
of results and is not binding on the Internal Revenue Service ("IRS") or any
third-party.
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Taxation of Debt Securities (Including Regular Interest Securities)
Interest and Acquisition Discount. Securities representing regular
interest in a REMIC ("Regular Interest Securities") are generally taxable to
Holders in the same manner as evidences of indebtedness issued by the REMIC.
Stated interest on the Regular Interest Securities will be taxable as ordinary
income and taken into account using the accrual method of accounting, regardless
of the Holder's normal accounting method. Interest (other than original issue
discount ("OID")) on Securities (other than Regular Interest Securities) that
are characterized as indebtedness for federal income tax purposes will be
includible in income by Holders thereof in accordance with their usual methods
of accounting. Securities characterized as debt for federal income tax purposes
and Regular Interest Securities will be referred to hereinafter collectively as
"Debt Securities."
Debt Securities that are Compound Interest Securities will, and certain of
the other Debt Securities may, be issued with OID. The following discussion is
based in part on the rules governing OID which are set forth in Sections
1271-1275 of the Code and the Treasury regulations issued thereunder (the "OID
Regulations"). A Holder should be aware, however, that the OID Regulations do
not adequately address certain issues relevant to prepayable securities, such as
the Debt Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. A Holder of
a Debt Security must include such OID in gross income as ordinary interest
income as it accrues under a prescribed method which takes into account an
economic accrual of the discount. In general, OID must be included in income in
advance of the receipt of the cash representing that income. The amount of OID
on a Debt Security will be considered to be zero if it is less than a de minimis
amount determined under the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of Debt Securities is sold for cash on
or prior to the Closing Date, the issue price for such class will be treated as
the fair market value of such class on the Closing Date. The stated redemption
price at maturity of a Debt Security includes the original principal amount of
the Debt Security, but generally will not include distributions of interest if
such distributions constitute "qualified stated interest."
Under the OID Regulations, interest payments will not be qualified stated
interest unless the interest payments are "unconditionally payable." The OID
Regulations state that interest is unconditionally payable if reasonable legal
remedies exist to compel timely payment or the debt instrument otherwise
provides terms and conditions that make the likelihood of late payment of
interest (other than late payment that occurs within a reasonable grace period)
or nonpayment of interest a remote contingency. It is unclear whether the terms
and conditions of the debt instruments underlying the Debt Securities or of the
Debt Securities themselves are determinative of whether the likelihood of late
payment or non-payment is a remote contingency. Accordingly, Federal Tax Counsel
is unable to opine whether the interest with respect to a Debt Security is
qualified stated interest, and consequently whether a Debt Security has OID as a
result of the failure of such interest to be treated as qualified stated
interest.
Certain Debt Securities will provide for distributions of interest based
on a period that is the same length as the interval between Distribution Dates
but ends prior to each Distribution Date. Any interest that accrues prior to the
Closing Date may be treated under the OID Regulations either (i) as part of the
issue price and the stated redemption price at maturity of the Debt Securities
or (ii) as not included in the issue price or stated redemption price. The OID
Regulations provide a special application of the de minimis rule for debt
instruments with long first accrual periods where the interest payable for the
first period is at a rate which is effectively less than that which applies in
all other periods. In such cases, for the sole purpose of determining whether
OID is de minimis, the OID Regulations provide that the stated redemption price
is equal to the instrument's issue price plus the greater of the amount of
foregone interest or the excess (if any) of the instrument's stated principal
amount over its issue price.
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Under the de minimis rule, OID on a Debt Security will be considered to be
zero if such OID is less than 0.25% of the stated redemption price at maturity
of the Debt Security multiplied by the weighted average maturity of the Debt
Security. For this purpose, the weighted average maturity of the Debt Security
is computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the Debt Security and the
denominator of which is the stated redemption price at maturity of the Debt
Security. Holders generally must report de minimis OID pro rata as principal
payments are received, and such income will be capital gain if the Debt Security
is held as a capital asset. However, accrual method Holders may elect to accrue
all de minimis OID as well as market discount under a constant interest method.
See "--Election to Treat All Interest as Original Issue Discount."
The Holder of a Debt Security issued with OID must include in gross
income, for all days during its taxable year on which it holds such Debt
Security, the sum of the "daily portions" of such OID. The amount of OID
includible in income by a Holder will be computed by allocating to each day
during a taxable year a pro rata portion of the OID that accrued during the
relevant accrual period. In the case of a Debt Security that is not a Regular
Interest Security and the principal payments on which are not subject to
acceleration resulting from prepayments on the Home Equity Loans, the amount of
OID includible in income of a Holder for an accrual period (generally the period
over which interest accrues on the debt instrument) will equal the product of
the yield to maturity of the Debt Security and the adjusted issue price of the
Debt Security, reduced by any payments of qualified stated interest. The
adjusted issue price is the sum of its issue price plus prior accruals of OID,
reduced by the total payments made with respect to such Debt Security in all
prior periods, other than qualified stated interest payments.
The amount of OID to be included in income by a Holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a "Pay-Through Security"), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
"Prepayment Assumption"). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and (b) the payments during the accrual
period of amounts included in the stated redemption price of the Pay-Through
Security, over the adjusted issue price of the Pay-Through Security at the
beginning of the accrual period. The present value of the remaining payments is
to be determined on the basis of three factors: (i) the original yield to
maturity of the Pay-Through Security (determined on the basis of compounding at
the end of each accrual period and properly adjusted for the length of the
accrual period), (ii) events which have occurred before the end of the accrual
period and (iii) the assumption that the remaining payments will be made in
accordance with the original Prepayment Assumption. The effect of this method is
to increase the portions of OID required to be included in income by a Holder to
take into account prepayments with respect to the Home Equity Loans at a rate
that exceeds the Prepayment Assumption, and to decrease (but not below zero for
any period) the portions of OID required to be included in income by a Holder of
a Pay-Through Security to take into account prepayments with respect to the Home
Equity Loans at a rate that is slower than the Prepayment Assumption. Although
OID will be reported to Holders of Pay-Through Securities based on the
Prepayment Assumption, no representation is made to Holders that Home Equity
Loans will be prepaid at that rate or at any other rate.
The Seller may adjust the accrual of OID on a Class of Regular Interest
Securities (or other regular interests in a REMIC) in a manner that it believes
to be appropriate, to take account of realized losses on the Home Equity Loans,
although the OID Regulations do not provide for such adjustments. If the IRS
were to require that OID be accrued without such adjustments, the rate of
accrual of OID for a Class of Regular Interest Securities could increase.
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Certain classes of Regular Interest Securities may represent more than one
class of REMIC regular interests. Unless the applicable Prospectus Supplement
specifies otherwise, the Trustee intends, based on the OID Regulations, to
calculate OID on such Securities as if, solely for the purposes of computing
OID, the separate regular interests were a single debt instrument.
A subsequent Holder of a Debt Security will also be required to include
OID in gross income, but such a Holder who purchases such Debt Security for an
amount that exceeds its adjusted issue price will be entitled (as will an
initial Holder who pays more than a Debt Security's issue price) to offset such
OID by comparable economic accruals of portions of such excess.
Effects of Defaults and Delinquencies. Holders will be required to report
income with respect to the related Securities under an accrual method without
giving effect to delays and reductions in distributions attributable to a
default or delinquency on the Home Equity Loans, except possibly to the extent
that it can be established that such amounts are uncollectible. As a result, the
amount of income (including OID) reported by a Holder of such a Security in any
period could significantly exceed the amount of cash distributed to such Holder
in that period. The Holder will eventually be allowed a loss (or will be allowed
to report a lesser amount of income) to the extent that the aggregate amount of
distributions on the Securities is reduced as a result of a Home Equity Loan
default. However, the timing and character of such losses or reductions in
income are uncertain and, accordingly, Holders of Securities should consult
their own tax advisors on this point.
Interest Weighted Securities. It is not clear how income should be accrued
on Debt Securities the payments on which consist solely or primarily of a
specified portion of the interest payments on qualified mortgages held by the
REMIC or on Home Equity Loans underlying Pass-Through Securities ("Interest
Weighted Securities"). The Trust Fund intends to take the position that all of
the income derived from an Interest Weighted Security should be treated as OID
and that the amount and rate of accrual of such OID should be calculated by
treating the Interest Weighted Security as a Compound Interest Security.
However, in the case of Interest Weighted Securities that are entitled to some
payments of principal and that are Regular Interest Securities the IRS could
assert that income derived from an Interest Weighted Security should be
calculated as if the Security were purchased at a premium equal to the excess of
the price paid by such holder for such Security over its stated principal
amount, if any. Under this approach, a holder would be entitled to amortize such
premium amount, if any. Under this approach, a holder would be entitled to
amortize such premium only if it has in effect an election under Section 171 of
the Code with respect to all taxable debt instruments held by such holder, as
described below.
Variable Rate Debt Securities. Under the OID Regulations, Debt Securities
paying interest at a variable rate (a "Variable Rate Debt Security") are subject
to special rules. A Variable Rate Debt Security will qualify as a "variable rate
debt instrument" if (i) its issue price does not exceed the total noncontingent
principal payments due under the Variable Rate Debt Security by more than a
specified de minimis amount, (ii) it provides for stated interest, paid or
compounded at least annually, at (a) one or more qualified floating rates, (b) a
single fixed rate and one or more qualified floating rates, (c) a single
objective rate or (d) a single fixed rate and a single objective rate that is a
qualified inverse floating rate, and (iii) it does not provide for any principal
payments that are contingent, as defined in the OID Regulations, except as
provided in clause (i) above.
A "qualified floating rate" is any variable rate where variations in the
value of such rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Variable Rate Debt Security is denominated. A multiple of a qualified floating
rate will generally not itself constitute a qualified floating rate for purposes
of the OID Regulations. However, a variable rate equal to (i) the product of a
qualified floating rate and a fixed multiple that is greater than 0.65 but not
more than 1.35 or (ii) the product of a qualified floating rate and a fixed
multiple that is greater than 0.65 but not more than 1.35, increased or
decreased by a fixed rate will constitute a qualified floating rate for purposes
of the OID Regulations. In addition, under the OID Regulations, two or more
qualified floating rates that can reasonably be expected to have approximately
the same values throughout the term of the Variable Rate Debt Security will be
treated as a single
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qualified floating rate (a "Presumed Single Qualified Floating Rate"). Two or
more qualified floating rates with values within 25 basis points of each other
as determined on the Variable Rate Debt Security's issue date will be
conclusively presumed to be a Presumed Single Qualified Floating Rate.
Notwithstanding the foregoing, a variable rate that would otherwise constitute a
qualified floating rate but which is subject to one or more restrictions such as
a cap or floor, will not be a qualified floating rate for purposes of the OID
Regulations unless the restriction is fixed throughout the term of the Variable
Rate Debt Security or the restriction will not significantly affect the yield of
the Variable Rate Debt Security.
An "objective rate" is a rate that is not itself a qualified floating rate
but which is determined using a single fixed formula and which is based upon
objective financial or economic information. The OID Regulations also provide
that other variable rates may be treated as objective rates if so designated by
the IRS in the future. Despite the foregoing, a variable rate of interest on a
Variable Rate Debt Security will not constitute an objective rate if it is
reasonably expected that the average value of such rate during the first half of
the Variable Rate Debt Security's term will be either significantly less than or
significantly greater than the average value of the rate during the final half
of the Variable Rate Debt Security's term. Further, an objective rate does not
include a rate that is based on information that is within the control of or
unique to the circumstances of the issuer or a party related to the issuer. An
objective rate will qualify as a "qualified inverse floating rate" if such rate
is equal to a fixed rate minus a qualified floating rate and variations in the
rate can reasonably be expected to inversely reflect contemporaneous variations
in the qualified floating rate. The OID Regulations also provide that if a
Variable Rate Debt Security provides for stated interest at a fixed rate for an
initial period of less than one year followed by a variable rate that is either
a qualified floating rate or an objective rate and if the variable rate on the
Variable Rate Debt Security's issue date is intended to approximate the fixed
rate, then the fixed rate and the variable rate together will constitute either
a single qualified floating rate or objective rate, as the case may be (a
"Presumed Single Variable Rate"). If the value of the variable rate and the
initial fixed rate are within 25 basis points of each other as determined on the
Variable Rate Debt Security's issue date, the variable rate will be conclusively
presumed to approximate the fixed rate.
For Variable Rate Debt Securities that qualify as a "variable rate debt
instrument" under the OID Regulations and provide for interest at either a
single qualified floating rate, a single objective rate, a Presumed Single
Qualified Floating Rate or a Presumed Single Variable Rate throughout the term
(a "Single Variable Rate Debt Security"), OID is computed as described above
based on the following: (i) stated interest on the Single Variable Rate Debt
Security which is unconditionally payable in cash or property (other than debt
instruments of the issuer) at least annually will constitute qualified stated
interest; (ii) by assuming that the variable rate on the Single Variable Debt
Security is a fixed rate equal to: (a) in the case of a Single Variable Rate
Debt Security with a qualified floating rate or a qualified inverse floating
rate, the value, as of the issue date, of the qualified floating rate or the
qualified inverse floating rate or (b) in the case of a Single Variable Rate
Debt Security with an objective rate (other than a qualified inverse floating
rate), a fixed rate which reflects the reasonably expected yield for such Single
Variable Debt Security; and (iii) the qualified stated interest allocable to an
accrual period is increased (or decreased) if the interest actually paid during
an accrual period exceeds (or is less than) the interest assumed to be paid
under the assumed fixed rate described in clause (ii) above.
In general, any Variable Rate Debt Security other than a Single Variable
Rate Debt Security (a "Multiple Variable Rate Debt Security") that qualifies as
a "variable rate debt instrument" will be converted into an "equivalent" fixed
rate debt instrument for purposes of determining the amount and accrual of OID
and qualified stated interest on the Multiple Variable Rate Debt Security. The
OID Regulations generally require that such a Multiple Variable Rate Debt
Security be converted into an "equivalent" fixed rate debt instrument by
substituting any qualified floating rate or qualified inverse floating rate
provided for under the terms of the Multiple Variable Rate Debt Security with a
fixed rate equal to the value of the qualified floating rate or qualified
inverse floating rate, as the case may be, as of the Multiple Variable Rate Debt
Security's issue date. Any objective rate (other than a qualified inverse
floating rate) provided for under the terms of the Multiple Variable Rate Debt
Security is converted into a fixed rate that reflects the yield that is
reasonably expected for the Multiple Variable Rate Debt Security. In the case of
a Multiple Variable Rate Debt Security that qualifies as a "variable rate debt
instrument" and provides for
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stated interest at a fixed rate in addition to either one or more qualified
floating rates or a qualified inverse floating rate, the fixed rate is initially
converted into a qualified floating rate (or a qualified inverse floating rate,
if the Multiple Variable Rate Debt Security provides for a qualified inverse
floating rate). Under such circumstances, the qualified floating rate or
qualified inverse floating rate that replaces the fixed rate must be such that
the fair market value of the Multiple Variable Rate Debt Security as of the
Multiple Variable Rate Debt Security's issue date is approximately the same as
the fair market value of an otherwise identical debt instrument that provides
for either the qualified floating rate or qualified inverse floating rate rather
than the fixed rate. Subsequent to converting the fixed rate into either a
qualified floating rate or a qualified inverse floating rate, the Multiple
Variable Rate Debt Security is then converted into an "equivalent" fixed rate
debt instrument in the manner described above.
Once the Multiple Variable Rate Debt Security is converted into an
"equivalent" fixed rate debt instrument pursuant to the foregoing rules, the
amount of OID and qualified stated interest, if any, are determined for the
"equivalent" fixed rate debt instrument by applying the OID rules to the
"equivalent" fixed rate debt instrument in the manner described above. A Holder
of the Multiple Variable Rate Debt Security will account for such OID and
qualified stated interest as if the Holder held the "equivalent" fixed rate debt
instrument. Each accrual period appropriate adjustments will be made to the
amount of qualified stated interest or OID assumed to have been accrued or paid
with respect to the "equivalent" fixed rate debt instrument in the event that
such amounts differ from the accrual amount of interest accrued or paid on the
Multiple Variable Rate Debt Security during the accrual period.
If a Variable Rate Debt Security does not qualify as a "variable rate debt
instrument" under the OID Regulations, then the Variable Rate Debt Security
would be treated as a contingent payment debt obligation. It is not clear under
current law how a Variable Rate Debt Security would be taxed if such Debt
Security were treated as a contingent payment debt obligation.
The IRS has issued final regulations (the "Contingent Regulations")
governing the calculation of OID on instruments having contingent interest
payments. The Contingent Regulations specifically do not apply however to debt
instruments to which Code Section 1272(a)(6) is applicable, such as a
Pay-Through Security. Additionally, the OID Regulations do not contain
provisions specifically interpreting Code Section 1272(a)(6). Until the Treasury
issues guidelines to the contrary, the Trustee intends to base its computation
of OID on Pay-Through Securities as described in this Prospectus. However,
because no regulatory guidance exists under Code Section 1272(a)(6), there can
be no assurance that such methodology represents the correct manner of
calculating OID.
Market Discount. A purchaser of a Security may be subject to the market
discount rules of Sections 1276-1278 of the Code. A Holder that acquires a Debt
Security with more than a prescribed de minimis amount of "market discount"
(generally, the excess of the principal amount of the Debt Security over the
purchaser's purchase price) will be required to include accrued market discount
in income as ordinary income in each month, but limited to an amount not
exceeding the principal payments on the Debt Security received in that month
and, if the Securities are sold, the gain realized. Such market discount would
accrue in a manner to be provided in Treasury regulations but, until such
regulations are issued, such market discount would in general accrue either (i)
on the basis of a constant yield (in the case of a Pay-Through Security, taking
into account a prepayment assumption) or (ii) in the ratio of (a) in the case of
Securities (or in the case of a Pass-Through Security, as set forth below, the
Home Equity Loans underlying such Security) not originally issued with OID,
stated interest payable in the relevant period to total stated interest
remaining to be paid at the beginning of the period or (b) in the case of
Securities (or, in the case of a Pass-Through Security, as described below, the
Home Equity Loans underlying such Security) originally issued at a discount, OID
in the relevant period to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination date
of the Debt Security (or, in the case of a Pass-Through Security, the Home
Equity Loans), the excess of interest paid or accrued to purchase or carry a
Security (or, in the case of a Pass-Through Security, as described below, the
underlying Home Equity Loans) with market discount over interest received on
such Security is allowed as a current deduction only to the extent such excess
is greater than the market discount that accrued during the taxable year in
which such interest expense was
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incurred. In general, the deferred portion of any interest expense will be
deductible when such market discount is included in income, including upon the
sale, disposition, or repayment of the Security (or in the case of a
Pass-Through Security, an underlying Home Equity Loan). A Holder may elect to
include market discount in income currently as it accrues, on all market
discount obligations acquired by such Holder during the taxable year such
election is made and thereafter, in which case the interest deferral rule will
not apply.
Premium. A Holder who purchases a Debt Security (other than an Interest
Weighted Security to the extent described above) at a cost greater than its
stated redemption price at maturity, generally will be considered to have
purchased the Security at a premium, which it may elect to amortize as an offset
to interest income on such Security (and not as a separate deduction item) on a
constant yield method. Although no regulations addressing the computation of
premium accrual on securities similar to the Securities have been issued, the
legislative history of the 1986 Act indicates that premium is to be accrued in
the same manner as market discount. Accordingly, it appears that the accrual of
premium on a Class of Pay-Through Securities will be calculated using the
prepayment assumption used in pricing such Class. If a Holder makes an election
to amortize premium on a Debt Security, such election will apply to all taxable
debt instruments (including all REMIC regular interests and all pass-through
certificates representing ownership interests in a trust holding debt
obligations) held by the Holder at the beginning of the taxable year in which
the election is made, and to all taxable debt instruments acquired thereafter by
such Holder, and will be irrevocable without the consent of the IRS. Purchasers
who pay a premium for the Securities should consult their tax advisers regarding
the election to amortize premium and the method to be employed.
On June 27, 1996 the IRS issued proposed regulations (the "Amortizable
Bond Premium Regulations") dealing with amortizable bond premium. These
regulations specifically do not apply to prepayable debt instruments subject to
Code Section 1272(a)(6) such as the Pay-Through Securities. Absent further
guidance from the IRS, the Trustee intends to account for amortizable bond
premium in the manner described above. Prospective purchasers of the Securities
should consult their tax advisors regarding the possible application of the
proposed Amortizable Bond Premium Regulations.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a Holder of a Debt Security to elect to accrue all interest,
discount (including de minimis market or OID) and premium in income as interest,
based on a constant yield method for Debt Securities acquired on or after April
4, 1994. If such an election were to be made with respect to a Debt Security
with market discount, the Holder of the Debt Security would be deemed to have
made an election to include in income currently market discount with respect to
all other debt instruments having market discount that such Holder of the Debt
Security acquires during the year of the election or thereafter. Similarly, a
Holder of a Debt Security that makes this election for a Debt Security that is
acquired at a premium will be deemed to have made an election to amortize bond
premium with respect to all debt instruments having amortizable bond premium
that such Holder owns or acquires. The election to accrue interest, discount and
premium on a constant yield method with respect to a Debt Security is
irrevocable.
Sale or Exchange. A Holder's tax basis in its Debt Security is the price
such Holder pays for a Debt Security, plus amounts of OID or market discount
included in income and reduced by any payments received (other than qualified
stated interest payments) and any amortized premium. Gain or loss recognized on
a sale, exchange, or redemption of a Debt Security, measured by the difference
between the amount realized and the Debt Security's basis as so adjusted, will
generally be capital gain or loss, assuming that the Debt Security is held as a
capital asset. In the case of a Debt Security held by a bank, thrift, or similar
institution described in Section 582 of the Code, however, gain or loss realized
on the sale or exchange of a Debt Security will be taxable as ordinary income or
loss. In addition, gain from the disposition of a Regular Interest Security that
might otherwise be capital gain will be treated as ordinary income to the extent
of the excess, if any, of (i) the amount that would have been includible in the
Holder's income if the yield on such Regular Interest Security had equaled 110%
of the applicable federal rate as of the beginning of such Holder's holding
period, over the amount of ordinary income actually recognized by the Holder
with respect to such Regular Interest Security.
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Taxation of the REMIC and its Holders
Status of Regular Interest Securities. Regular Interest Securities and
Securities representing a residual interest in a REMIC (both types of securities
collectively referred to as "REMIC Securities") will be "real estate assets" for
purposes of Section 856(c)(4)(A) of the Code and assets described in Section
7701(a)(19)(C) of the Code (assets qualifying under one or more of those
sections, applying each section separately, "qualifying assets") to the extent
that the REMIC's assets are qualifying assets. However, if at least 95 percent
of the REMIC's assets are qualifying assets, then 100 percent of the REMIC
Securities will be qualifying assets. Similarly, income on the REMIC Securities
will be treated as "interest on obligations secured by mortgages on real
property" within the meaning of Section 856(c)(3)(B) of the Code, subject to the
limitations of the preceding two sentences. In addition to Home Equity Loans,
the REMIC's assets will include payments on Home Equity Loans held pending
distribution to Holders of REMIC Securities, amounts in reserve accounts (if
any), other credit enhancements (if any) and possibly buydown funds ("Buydown
Funds"). The Home Equity Loans generally will be qualifying assets under all
three of the foregoing sections of the Code. However, Home Equity Loans that are
not secured by residential real property or real property used primarily for
church purposes may not constitute qualifying assets under Section
7701(a)(19)(C)(v) of the Code. In addition, to the extent that the principal
amount of a Home Equity Loan exceeds the value of the property securing the Home
Equity Loan, it is unclear and Federal Tax Counsel is unable to opine whether
the Home Equity Loans will be qualifying assets. The regulations under Sections
860A through 860G of the Code (the "REMIC Regulations") treat credit
enhancements as part of the mortgage or pool of mortgages to which they relate,
and therefore credit enhancements generally should be qualifying assets.
Regulations issued in conjunction with the REMIC Regulations provide that
amounts paid on loans and held pending distribution to Holders of Regular
Interest Securities ("cash flow investments") will be treated as qualifying
assets. It is unclear whether reserve funds or Buydown Funds would also
constitute qualifying assets under any of those provisions.
REMIC Expenses; Single Class REMICs
As a general rule, all of the expenses of a REMIC will be taken into
account by Holders of the Residual Interest Securities. In the case of a "single
class REMIC," however, the expenses will be allocated, under Treasury
regulations, among the Holders of the Regular Interest Securities and the
Holders of the Residual Interest Securities on a daily basis in proportion to
the relative amounts of income accruing to each Holder on that day. In the case
of a Holder of a Regular Interest Security who is an individual or a
"pass-through interest Holder" (including certain pass-through entities but not
including real estate investment trusts), such expenses will be deductible only
to the extent that such expenses, plus other "miscellaneous itemized deductions"
of the Holder, exceed 2% of such Holder's adjusted gross income and such Holder
may not be able to deduct such fees and expenses to any extent in computing such
Holder's alternative minimum tax liability. In addition, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the applicable amount will be reduced by the
lesser of (i) 3% of the excess of adjusted gross income over the applicable
amount, or (ii) 80% of the amount of itemized deductions otherwise allowable for
such taxable year. For taxable years beginning after December 31, 1997, in the
case of a partnership that has 100 or more partners and elects to be treated as
an "electing large partnership," 70% of such partnership's miscellaneous
itemized deductions will be disallowed, although the remaining deductions will
generally be allowed at the partnership level and will not be subject to the 2%
floor that would otherwise be applicable to individual partners. The reduction
or disallowance of this deduction may have a significant impact on the yield of
the Regular Interest Security to such a Holder. In general terms, a single class
REMIC is one that either (i) would qualify, under existing Treasury regulations,
as a grantor trust if it were not a REMIC (treating all interests as ownership
interests, even if they would be classified as debt for federal income tax
purposes) or (ii) is similar to such a trust and which is structured with the
principal purpose of avoiding the single class REMIC rules. Unless otherwise
stated in the applicable Prospectus Supplement, the expenses of the REMIC will
be allocated to Holders of the related Residual Interest Securities.
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Taxation of the REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the Holders of
residual interests. As described above, the regular interests are generally
taxable as debt of the REMIC.
Tiered REMIC Structures. For certain Series of Securities, two or more
separate elections may be made to treat designated portions of the related Trust
Fund as REMICs ("Tiered REMICs") for federal income tax purposes. Solely for
purposes of determining whether the REMIC Certificates will be "real estate
assets" within the meaning of Section 856(c)(4)(A) of the Code, and "loans
secured by an interest in real property" under Section 7701(a)(19)(C) of the
Code, and whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
Calculation of REMIC Income. The taxable income or net loss of a REMIC is
determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between (i) the gross income produced
by the REMIC's assets, including stated interest and any OID or market discount
on loans and other assets, and (ii) deductions, including stated interest and
OID accrued on Regular Interest Securities, amortization of any premium with
respect to Home Equity Loans, and servicing fees and other expenses of the
REMIC. A Holder of a Residual Interest Security that is an individual or a
"pass-through interest Holder" (including certain pass-through entities, but not
including real estate investment trusts) will be unable to deduct servicing fees
payable on the Home Equity Loans or other administrative expenses of the REMIC
for a given taxable year, to the extent that such expenses, when aggregated with
such Holder's other miscellaneous itemized deductions for that year, do not
exceed 2% of such Holder's adjusted gross income and such Holder may not be able
to deduct such fees and expenses to any extent in computing such holders
alternative minimum tax liability. For taxable years beginning after December
31, 1997, in the case of a partnership that has 100 or more partners and elects
to be treated as an "electing large partnership," 70% of such partnership's
miscellaneous itemized deductions will be disallowed, although the remaining
deductions will generally be allowed at the partnership level and will not be
subject to the 2% floor that would otherwise be applicable to individual
partners.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the Startup
Day (generally, the day that the interests are issued). Such aggregate basis
will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated on
or after March 2, 1984. Subject to possible application of the de minimis rules,
the method of accrual by the REMIC of OID income on such loans will be
equivalent to the method under which Holders of Pay-Through Securities accrue
original issue discount (i.e., under the constant yield method taking into
account the Prepayment Assumption). The REMIC will deduct OID on the Regular
Interest Securities in the same manner that the Holders of the Regular Interest
Securities include such discount in income, but without regard to the de minimis
rules. See "Taxation of Debt Securities (Including Regular Interest Securities)"
above. A REMIC that acquires loans at a market discount must include such market
discount in income currently, as it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (presumably taking into account the Prepayment Assumption) on a
constant yield method. Although the law is somewhat unclear regarding recovery
of premium attributable to loans originated on or before such date, it is
possible that such premium may be recovered in proportion to payments of loan
principal.
Prohibited Transactions and Contributions Tax. The REMIC will be subject
to a 100% tax on any net income derived from a "prohibited transaction." For
this purpose, net income will be calculated without taking into account any
losses from prohibited transactions or any deductions attributable to any
prohibited transaction that
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resulted in a loss. In general, prohibited transactions include: (i) subject to
limited exceptions, the sale or other disposition of any qualified mortgage
transferred to the REMIC; (ii) subject to a limited exception, the sale or other
disposition of a cash flow investment; (iii) the receipt of any income from
assets not permitted to be held by the REMIC pursuant to the Code; or (iv) the
receipt of any fees or other compensation for services rendered by the REMIC. It
is anticipated that a REMIC will not engage in any prohibited transactions in
which it would recognize a material amount of net income. In addition, subject
to a number of exceptions, a tax is imposed at the rate of 100% on amounts
contributed to a REMIC after the Startup Day. The Holders of Residual Interest
Securities will generally be responsible for the payment of any such taxes
imposed on the REMIC. To the extent not paid by such Holders or otherwise,
however, such taxes will be paid out of the Trust Fund and will be allocated pro
rata to all outstanding Classes of Securities of such REMIC.
Taxation of Holders of Residual Interest Securities
The Holder of a Security representing a residual interest (a "Residual
Interest Security") will take into account the "daily portion" of the taxable
income or net loss of the REMIC for each day during the taxable year on which
such Holder held the Residual Interest Security. The daily portion is determined
by allocating to each day in any calendar quarter its ratable portion of the
taxable income or net loss of the REMIC for such quarter, and by allocating that
amount among the Holders (on such day) of the Residual Interest Securities in
proportion to their respective holdings on such day.
The Holder of a Residual Interest Security must report its proportionate
share of the taxable income of the REMIC whether or not it receives cash
distributions from the REMIC attributable to such income or loss. The reporting
of taxable income without corresponding distributions could occur, for example,
in certain REMIC issues in which the Home Equity Loans held by the REMIC were
issued or acquired at a discount, since mortgage prepayments cause recognition
of discount income, while the corresponding portion of the prepayment could be
used in whole or in part to make principal payments on REMIC Regular Interests
issued without any discount or at an insubstantial discount. (If this occurs, it
is likely that cash distributions will exceed taxable income in later years.)
Taxable income may also be greater in earlier years of certain REMIC issues as a
result of the fact that interest expense deductions, as a percentage of
outstanding principal on REMIC Regular Interest Securities, will typically
increase over time as lower yielding Securities are paid, whereas interest
income with respect to loans will generally remain constant over time as a
percentage of loan principal.
In any event, because the Holder of a residual interest is taxed on the
net income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond or
instrument.
Limitation on Losses. The amount of the REMIC's net loss that a Holder may
take into account currently is limited to the Holder's adjusted basis at the end
of the calendar quarter in which such loss arises. A Holder's basis in a
Residual Interest Security will initially equal such Holder's purchase price,
and will subsequently be increased by the amount of the REMIC's taxable income
allocated to the Holder, and decreased (but not below zero) by the amount of
distributions made and the amount of the REMIC's net loss allocated to the
Holder. Any disallowed loss may be carried forward indefinitely, but may be used
only to offset income of the REMIC generated by the same REMIC. The ability of
Holders of Residual Interest Securities to deduct net losses may be subject to
additional limitations under the Code, as to which such Holders should consult
their tax advisers.
Distributions. Distributions on a Residual Interest Security (whether at
their scheduled times or as a result of prepayments) will generally not result
in any additional taxable income or loss to a Holder of a Residual Interest
Security. If the amount of such payment exceeds a Holder's adjusted basis in the
Residual Interest Security,
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however, the Holder will recognize gain (treated as gain from the sale of the
Residual Interest Security) to the extent of such excess.
Sale or Exchange. A Holder of a Residual Interest Security will recognize
gain or loss on the sale or exchange of a Residual Interest Security equal to
the difference, if any, between the amount realized and such Holder's adjusted
basis in the Residual Interest Security at the time of such sale or exchange.
Except to the extent provided in regulations, which have not yet been issued,
any loss upon disposition of a Residual Interest Security will be disallowed if
the selling Holder acquires any residual interest in a REMIC or similar mortgage
pool within six months before or after such disposition.
Excess Inclusions. The portion of the REMIC taxable income of a Holder of
a Residual Interest Security consisting of "excess inclusion" income may not be
offset by other deductions or losses, including net operating losses, on such
Holder's federal income tax return. Further, if the Holder of a Residual
Interest Security is an organization subject to the tax on unrelated business
income imposed by Code Section 511, such Holder's excess inclusion income will
be treated as unrelated business taxable income of such Holder. In addition,
under Treasury regulations yet to be issued, if a real estate investment trust,
a regulated investment company, a common trust fund, or certain cooperatives
were to own a Residual Interest Security, a portion of dividends (or other
distributions) paid by the real estate investment trust (or other entity) would
be treated as excess inclusion income. If a Residual Security is owned by a
foreign person, excess inclusion income is subject to tax at a rate of 30% which
may not be reduced by treaty, is not eligible for treatment as "portfolio
interest" and is subject to certain additional limitations. See "Tax Treatment
of Foreign Investors."
The Small Business Job Protection Act of 1996 eliminated the special rule
permitting Section 593 institutions ("thrift institutions") to use net operating
losses and other allowable deductions to offset their excess inclusion income
from REMIC residual certificates that have "significant value" within the
meaning of the REMIC Regulations, effective for taxable years beginning after
December 31, 1995, except with respect to residual certificates held by thrift
institutions since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect on excess inclusions on the alternative minimum
taxable income of a residual holder. First, alternative minimum taxable income
for such residual holder is determined without regard to the special rule that
taxable income cannot be less than excess inclusions. Second, a residual
holder's alternative minimum income for a tax year cannot be less than excess
inclusions for the year. Third, the amount of any alternative minimum tax net
operating loss deductions must be computed without regard to any excess
inclusions. These rules are effective for tax years beginning after December 31,
1986, unless a residual holder elects to have such rules apply only to tax years
beginning after August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to a
Residual Interest Security, over the daily accruals for such quarterly period of
(i) 120% of the long term applicable federal rate on the Startup Date multiplied
by (ii) the adjusted issue price of such Residual Interest Security at the
beginning of such quarterly period. The adjusted issue price of a Residual
Interest Security at the beginning of each calendar quarter will equal its issue
price (calculated in a manner analogous to the determination of the issue price
of a Regular Interest Security), increased by the aggregate of the daily
accruals for prior calendar quarters, and decreased (but not below zero) by the
amount of loss allocated to a Holder and the amount of distributions made on the
Residual Interest Security before the beginning of the quarter. The long-term
federal rate, which is announced monthly by the Treasury Department, is an
interest rate that is based on the average market yield of outstanding
marketable obligations of the United States government having remaining
maturities in excess of nine years.
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Under the REMIC Regulations, in certain circumstances, transfers of
Residual Interest Securities may be disregarded. See "--Restrictions on
Ownership and Transfer of Residual Interest Securities" and "Tax Treatment of
Foreign Investors" below.
Restrictions on Ownership and Transfer of Residual Interest Securities. As
a condition to qualification as a REMIC, reasonable arrangements must be made to
prevent the ownership of a REMIC residual interest by any "Disqualified
Organization." Disqualified Organizations include the United States, any State
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing, a rural
electric or telephone cooperative described in Section 1381(a)(2)(C) of the
Code, or any entity exempt from the tax imposed by Sections 1-1399 of the Code,
if such entity is not subject to tax on its unrelated business income.
Accordingly, the applicable Agreement will prohibit Disqualified Organizations
from owning a Residual Interest Security. In addition, no transfer of a Residual
Interest Security will be permitted unless the proposed transferee shall have
furnished to the Trustee an affidavit representing and warranting that it is
neither a Disqualified Organization nor an agent or nominee acing on behalf of a
Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization (in violation of the restrictions set forth above), a substantial
tax will be imposed on the transferor of such Residual Interest Security at the
time of the transfer. In addition, if a Disqualified Organization holds an
interest in a pass-through entity (including, among others, a partnership,
trust, real estate investment trust, regulated investment company, or any person
holding as nominee an interest in a pass-through entity), that owns a Residual
Interest Security, the pass-through entity will be required to pay an annual tax
on its allocable share of the excess inclusion income of the REMIC. For taxable
years beginning after December 31, 1997, all partners of certain electing
partnerships having 100 or more partners ("electing large partnerships") will be
treated as disqualified organizations for purposes of the tax imposed on
pass-through entities if such electing large partnerships hold residual
interests in a REMIC. However, the electing large partnership would be entitled
to exclude the excess inclusion income from gross income for purposes of
determining the taxable income of the partners.
The REMIC Regulations provide that a transfer of a "noneconomic residual
interest" will be disregarded for all federal income tax purposes unless
impeding the assessment or collection of tax was not a significant purpose of
the transfer. A residual interest will be treated as a "noneconomic residual
interest" unless, at the time of the transfer (1) the present value of the
expected future distributions on the residual interest at least equals the
product of (x) the present value of all anticipated excess inclusions with
respect to the residual interest and (y) the highest corporate tax rate,
currently 35 percent, and (2) the transferor reasonably expects that for each
anticipated excess inclusion, the transferee will receive distributions from the
REMIC, at or after the time at which taxes on such excess inclusion accrue,
sufficient to pay the taxes thereon. A significant purpose to impede the
assessment or collection of tax exists if the transferor, at the time of the
transfer, either knew or should have known (had "improper knowledge") that the
transferee would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. A transferor will be presumed not to have improper
knowledge if (i) the transferor conducts, at the time of the transfer, a
reasonable investigation of the financial condition of the transferee and, as a
result of the investigation, the transferor finds that the transferee has
historically paid its debts as they came due and finds no significant evidence
to indicate that the transferee will not continue to pay its debts as they come
due in the future, and (ii) the transferee represents to the transferor that (A)
the transferee understands that it might incur tax liabilities in excess of any
cash received with respect to the residual interest and (B) the transferee
intends to pay the taxes associated with owning the residual interest as they
come due. A different formulation of this rule applies to transfers of Residual
Interest Security by or to foreign transferees. See "Tax Treatment to Foreign
Investors".
Mark to Market Rules. Treasury regulations provide that any REMIC Residual
Interest acquired after January 3, 1995 is not a security and cannot be marked
to market under Section 475.
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Administrative Matters
The REMIC's books must be maintained on a calendar year basis and the
REMIC must file an annual federal income tax return. The REMIC will also be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit, by the IRS in a
unified administrative proceeding.
Tax Status as a Grantor Trust
General. As further described below, each Holder of a Security issued by a
grantor trust (a "Pass-Through Security") must report on its federal income tax
return the gross income from the portion of the Home Equity Loans that is
allocable to such Pass-Through Security and may deduct the portion of the
expenses incurred or accrued by the Trust Fund that is allocable to such
Pass-Through Security, at the same time and to the same extent as such items
would be reported by such Holder if it had purchased and held directly such
interest in the Home Equity Loans and received or accrued directly its share of
the payments on the Home Equity Loans and incurred or accrued directly its share
of expenses incurred or accrued by the Trust Fund when those amounts are
received, incurred or accrued by the Trust Fund.
A Holder of a Pass-Through Security that is an individual, estate, or
trust will be allowed deductions for such expenses only to the extent that the
sum of those expenses and the Holder's other miscellaneous itemized deductions
exceeds 2% of such Holder's adjusted gross income. Further, the amount of
itemized deductions otherwise allowable for the taxable year for an individual
whose adjusted gross income exceeds a prescribed amount will be reduced by the
lesser of (i) 3% of the excess of adjusted gross income over the prescribed
amount, or (ii) 80% of the amount of itemized deductions otherwise allowable for
such taxable year. For taxable years beginning after December 31, 1997, in the
case of a partnership that has 100 or more partners and elects to be treated as
an "electing large partnership," 70% of such partnership's miscellaneous
itemized deductions will be disallowed, although the remaining deductions will
generally be allowed at the partnership level and will not be subject to the 2%
floor that would otherwise be applicable to individual partners. Moreover, a
Holder of a Pass-Through Security that is not a corporation cannot deduct such
expenses for purposes of the alternative minimum tax (if applicable). Such
deductions will include servicing, guarantee and administrative fees paid to the
servicer of the Mortgage Home Equity Loans. As a result, the Trust Fund will
report additional taxable income to Holders of Pass-Through Securities in an
amount equal to their allocable share of such deductions, and certain holders of
Pass-Through Securities may have taxable income in excess of the cash received.
Status of the Pass-Through Securities. The Pass-Through Securities will be
"real estate assets" for purposes of Section 856(c)(4)(A) of the Code and "loans
secured by an interest in real property" within the meaning of Section
7701(a)(19)(C)(v) of the Code (assets qualifying under one or both of those
sections, applying each section separately, "qualifying assets") to the extent
that the Trust Fund's assets are qualifying assets. The Pass-Through Securities
may not be qualifying assets under any of the foregoing sections of the Code to
the extent that the Trust Fund's assets include Buydown Funds, reserve funds, or
payments on mortgages held pending distribution to Certificateholders. Further,
the Pass-Through Securities may not be "real estate assets" to the extent loans
held by the trust are not secured by real property, and may not be "loans
secured by an interest in real property" to the extent loans held by the trust
are not secured by residential real property or real property used primarily for
church purposes. In addition, to the extent that the principal amount of a loan
exceeds the value of the property securing the loan, it is unclear and Federal
Tax Counsel is unable to opine whether the loans will be qualifying assets.
Taxation of Pass-Through Securities Under Stripped Bond Rules. The federal
income tax treatment of the Pass-Through Securities will depend on whether they
are Securities ("Stripped Securities") subject to the "stripped bond" rules of
section 1286 of the Code. The Pass-Through Securities will be Stripped
Securities if stripped interest-only Certificates are issued. In addition,
whether or not stripped interest-only Certificates are issued, the IRS may
contend that the stripped bond rules apply on the ground that the Servicer's
servicing fee, or other amounts, if any, paid to (or retained by) the Servicer
or its affiliates, as specified in the applicable Prospectus Supplement,
represent greater than an arm's length consideration for servicing the Home
Equity Loans and should be
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characterized for federal income tax purposes as an ownership interest in the
Home Equity Loans. The IRS has taken the position in Revenue Ruling 91-46 that a
retained interest in excess of reasonable compensation for servicing is treated
as a "stripped coupon" under the rules of Code Section 1286.
If interest retained for the Servicer's servicing fee or other interest is
treated as a "stripped coupon," the Pass-Through Securities will either be
subject to the OID rules or the market discount rules. A Holder of a Pass-
Through Security will account for any discount on the Pass-Through Security as
market discount rather than OID if either (i) the amount of OID with respect to
the Pass-Through Security was treated as zero under the OID de minimis rule when
the Pass-Through Security was stripped or (ii) no more than 100 basis points
(including any amount of servicing in excess of reasonable servicing) is
stripped off from the Home Equity Loans. If neither of the above exceptions
applies, the OID rules will apply to the Pass-Through Securities.
If the OID rules apply, the Holder of a Pass-Through Security (whether a
cash or accrual method taxpayer) will be required to report interest income from
the Pass-Through Security in each taxable year equal to the income that accrues
on the Pass-Through Security in that year calculated under a constant yield
method based on the yield of the Pass-Through Security (or, possibly, the yield
of each Mortgage underlying such Pass-Through Security) to such Holder. Such
yield would be computed at the rate (assuming monthly compounding) that, if used
in discounting the Holder's share of the payments on the Mortgages, would cause
the present value of those payments to equal the price at which the Holder
purchased the Pass-Through Security. With respect to certain categories of debt
instruments including "any pool of debt instruments the yield on which may be
affected by reason of prepayments (or to the extent provided in regulations, by
reason of other events)," Section 1272(a)(6) of the Code requires that OID be
accrued based on a prepayment assumption determined in a manner prescribed by
forthcoming regulations. If required to report interest income on the
Pass-Through Securities to the IRS under the stripped bond rules, it is
anticipated that the Trustee will calculate the yield of the Pass-Through
Securities based on a representative initial offering price of the Pass-Through
Securities and a reasonable assumed rate of prepayment of the Home Equity Loans
(although such yield may differ from the yield to any particular Holder that
would be used in calculating the interest income of such Holder). The Prospectus
Supplement for each series of Pass-Through Securities will describe the
prepayment assumption that will be used for this purpose, but no representation
is made that the Home Equity Loans will prepay at that rate or at any other
rate.
If a Home Equity Loan is prepaid in full, the Holder of a Pass-Through
Security acquired at a discount or premium generally will recognize ordinary
income or loss equal to the difference between the portion of the prepaid
principal amount of the Home Equity Loan that is allocable to the Pass-Through
Security and the portion of the adjusted basis of the Pass-Through Security (see
"Sales of Pass-Through Securities" below) that is allocable to the Home Equity
Loan. It is not clear whether any other adjustments would be required to reflect
differences between the prepayment rate that was assumed in calculating yield
and the actual rate of prepayments.
Taxation of Pass-Through Securities If Stripped Bond Rules Do Not Apply.
If the stripped bond rules do not apply to a Pass-Through Security, then the
Holder will be required to include in income its share of the interest payments
on the Home Equity Loans in accordance with its tax accounting method. In
addition, if the Holder purchased the Pass-Through Security at a discount or
premium, the Holder will be required to account for such discount or premium in
the manner described below. The treatment of any discount will depend on whether
the discount is OID as defined in the Code and, in the case of discount other
than OID, whether such other discount exceeds a de minimis amount. In the case
of OID, the Holder (whether a cash or accrual method taxpayer) will be required
to report as additional interest income in each month the portion of such
discount that accrues in that month, calculated based on a constant yield
method. In general it is not anticipated that the amount of OID to be accrued in
each month, if any, will be significant relative to the interest paid currently
on the Home Equity Loans. However, OID could arise with respect to a Home Equity
Loan ("ARM") that provides for interest at a rate equal to the sum of an index
of market interest rates and a fixed number. The OID for ARMs generally will be
determined under the principles discussed in "Taxation of Debt Securities
(Including Regular Interest Securities)--Variable Rate Debt Securities."
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The Taxpayer Relief Act of 1997 amended the OID provisions of the Code to
provide that for "any pool of debt instruments, the yield on which may be
affected by reason of prepayments," OID is to be accrued based on a prepayment
assumption determined in a manner prescribed by forthcoming regulations. The
Prospectus Supplement for each series of Pass-Through Securities will describe
the prepayment assumption that will be used for this purpose, but no
representation is made regarding the actual rate at which prepayments will
occur.
If discount other than OID exceeds a de minimis amount (described below),
the Holder will also generally be required to include in income in each month
the amount of such discount accrued through such month and not previously
included in income, but limited, with respect to the portion of such discount
allocable to any Home Equity Loan, to the amount of principal on such Home
Equity Loan received by the Trust Fund in that month. Because the Home Equity
Loans will provide for monthly principal payments, such discount may be required
to be included in income at a rate that is not significantly slower than the
rate at which such discount accrues (and therefore at a rate not significantly
slower than the rate at which such discount would be included in income if it
were OID). The Holder may elect to accrue such discount under a constant yield
method based on the yield of the Pass-Through Security to such Holder (or
possibly based on the yields of each Home Equity Loan). In the absence of such
an election, it may be necessary to accrue such discount under a more rapid
straight-line method. Under the de minimis rule, market discount with respect to
a Pass-Through Security will be considered to be zero if it is less than the
product of (i) 0.25% of the principal amount of the Home Equity Loans allocable
to the Pass-Through Security and (ii) the weighted average life (in complete
years) of the Home Equity Loans remaining at the time of purchase of the
Pass-Through Security.
If a Holder purchases a Pass-Through Security at a premium, such Holder
may elect under Section 171 of the Code to amortize the portion of such premium
that is allocable to a Home Equity Loan under a constant yield method based on
the yield of the Home Equity Loan to such Holder, provided that such Home Equity
Loan was originated after September 27, 1985. Premium allocable to a Home Equity
Loan originated on or before that date should be allocated among the principal
payments on the Home Equity Loan and allowed as an ordinary deduction as
principal payments are made or, perhaps, upon termination.
It is not clear whether the foregoing adjustments for market discount or
premium would be made based on the scheduled payments on the Home Equity Home
Equity Loans or taking account of a reasonable prepayment assumption, and
Federal Tax Counsel is unable to opine on this issue.
If a Home Equity Loan is prepaid in full, the Holder of a Pass-Through
Security acquired at a discount or premium will recognize ordinary income or
loss equal to the difference between the portion of the prepaid principal amount
of the Home Equity Loan that is allocable to the Pass-Through Security and the
portion of the adjusted basis of the Pass-Through Security (see "Sales of
Pass-Through Securities" below) that is allocable to the Home Equity Loan.
Adjustments might be required to reflect differences between the prepayment rate
that was assumed in accounting for discount or premium and the actual rate of
prepayments.
Miscellaneous Tax Aspects
Backup Withholding. A Holder, other than a Holder of a Residual Interest
Security, may, under certain circumstances, be subject to "backup withholding"
at a rate of 31% with respect to distributions or the proceeds of a sale of
Securities to or through brokers that represent interest or OID on the
Securities. This withholding generally applies if the Holder of a Security (i)
fails to furnish the Trustee with its taxpayer identification number ("TIN");
(ii) furnishes the Trustee an incorrect TIN; (iii) fails to report properly
interest, dividends or other "reportable payments" as defined in the Code; or
(iv) under certain circumstances, fails to provide the Trustee or such Holder's
securities broker with a certified statement, signed under penalty of perjury,
that the TIN provided is its correct number and that the Holder is not subject
to backup withholding. Backup withholding will not apply, however, with respect
to certain payments made to Holders, including payments to certain exempt
recipients (such as exempt organizations)
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and to certain Foreign Investors (as defined below). Holders should consult
their tax advisers as to their qualification for exemption from backup
withholding and the procedure for obtaining the exemption.
Treasury regulations (the "Final Withholding Regulations"), which are
generally effective with respect to payments made after December 31, 1999,
consolidate and modify the current certification requirements and means by which
a holder may claim exemption from United States federal income tax withholding
and provide certain presumptions regarding the status of holders when payments
to the holders cannot be reliably associated with appropriate documentation
provided to the payor. All holders should consult their tax advisers regarding
the application of the Final Withholding Regulations.
The Trustee will report to the Holders and to the Servicer for each
calendar year the amount of any "reportable payments" during such year and the
amount of tax withheld, if any, with respect to payments on the Securities.
Tax Treatment of Foreign Investors
Subject to the discussion below with respect to Trust Funds which are
treated as partnerships for federal income tax purposes unless interest
(including OID) paid on a Security (other than a Residual Interest Security) is
considered to be "effectively connected" with a trade or business conducted in
the United States by a Foreign Investor, such interest will normally qualify as
portfolio interest (except where (i) the recipient is a Holder, directly or by
attribution, of 10% or more of the capital or profits interest in the issuer, or
(ii) the recipient is a controlled foreign corporation to which the issuer is a
related person) and will be exempt from federal income tax. For this purpose, a
Foreign Investor is any Holder that is not (i) a citizen or resident of the
United States; (ii) a corporation or partnership organized in or under the laws
of the United States (unless, in the case of a partnership, future Treasury
regulations provide otherwise); (iii) an estate the income of which is
includible in gross income regardless of its source; or (iv) a trust other than
a "foreign trust," as defined in Section 7701(a)(31) of the Code. See "--Tax
Consequences to Holders of the Certificates Issued by a Partnership--Tax
Consequences to Foreign Certificateholders". Upon receipt of appropriate
ownership statements, the issuer normally will be relieved of obligations to
withhold tax from such interest payments. These provisions supersede the
generally applicable provisions of United States law that would otherwise
require the issuer to withhold at a 30% rate (unless such rate were reduced or
eliminated by an applicable tax treaty) on, among other things, interest and
other fixed or determinable, annual or periodic income paid to Foreign
Investors. Holders of Pass- Through Securities however, may be subject to
withholding to the extent that the Home Equity Loans were originated on or
before July 18, 1984.
Interest and OID of a Foreign Investor are not subject to withholding if
they are effectively connected with a United States business conducted by the
Holder and the Holder timely provides an IRS Form 4224. They will, however,
generally be subject to the regular United States income tax.
The Final Withholding Regulations consolidate and modify the current
certification requirements and means by which a non-United States person may
claim exemption from United States federal income tax withholding. All Foreign
Investors should consult their tax advisors regarding the application of the
Final Withholding Regulations, which are generally effective with respect to
payments made after December 31, 1999.
Payments to Holders of Residual Interest Securities who are Foreign
Investors will generally be treated as interest for purposes of the 30% (or
lower treaty rate) United States withholding tax. Holders should assume that
such income does not qualify for exemption from United States withholding tax as
"portfolio interest." It is clear that, to the extent that a payment represents
a portion of REMIC taxable income that constitutes excess inclusion income, a
Holder of a Residual Interest Security will not be entitled to an exemption from
or reduction of the 30% (or lower treaty rate) withholding tax rule. If the
payments are subject to United States withholding tax, they generally will be
taken into account for withholding tax purposes only when paid or distributed
(or when the
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Residual Interest Security is disposed of). The Treasury has statutory
authority, however, to promulgate regulations which would require such amounts
to be taken into account at an earlier time in order to prevent the avoidance of
tax. Such regulations could, for example, require withholding prior to the
distribution of cash in the case of Residual Interest Securities that do not
have significant value. Under the REMIC Regulations, if a Residual Interest
Security has tax avoidance potential, a transfer of a Residual Interest Security
to a Foreign Investor will be disregarded for all federal tax purposes. A
Residual Interest Security has tax avoidance potential unless, at the time of
the transfer the transferor reasonably expects that the REMIC will distribute to
the transferee residual interest Holder amounts that will equal at least 30% of
each excess inclusion, and that such amounts will be distributed at or after the
time at which the excess inclusions accrue and not later than the calendar year
following the calendar year of accrual. If a Foreign Investor transfers a
Residual Interest Security to a United States person (that is, a person that is
not a Foreign Investor), and if the transfer has the effect of allowing the
transferor to avoid tax on accrued excess inclusions, then the transfer is
disregarded and the transferor continues to be treated as the owner of the
Residual Interest Security for purposes of the withholding tax provisions of the
Code. See "Taxation of Holders of Residual Interest Securities--Excess
Inclusions."
Subject to the discussion in the previous paragraph, any capital gain
realized on the sale, redemption, retirement or other taxable disposition of a
Security by a foreign person will be exempt from United States federal income
and withholding tax, provided that (i) such gain is not effectively connected
with the conduct of a trade or business in the United States by the foreign
person and (ii) in the case of an individual foreign person, the foreign person
is not present in the United States for 183 days or more in the taxable year.
Tax Characterization of the Trust as a Partnership or Division
If a Trust Fund is intended to be a partnership for federal income tax
purposes the applicable Agreements will provide that the nature of the income of
the Trust Fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the Certificates
will be structured as a private placement under an IRS safe harbor, so that the
Trust Fund will not be characterized as a publicly traded partnership taxable as
a corporation, and that no action will be taken that is inconsistent with the
treatment of the Trust Fund as a partnership (such as election to treat the
Trust Fund as a corporation for federal income tax purposes). If, however, the
Trust Fund has a single owner for federal income tax purposes, it will be
treated as a division of its owner and as such will be disregarded as an entity
separate from its owner for federal income tax purposes, assuming no election
will be made to treat the Trust Fund as a corporation for federal income tax
purposes.
Certain entities classified as "taxable mortgage pools" are subject to
corporate level tax on their net income. A "taxable mortgage pool" is generally
defined as an entity that meets the following requirements: (i) the entity is
not a REMIC (or, after September 1, 1997, a FASIT), (ii) substantially all of
the assets of the entity are debt obligations, and more than 50 percent of such
debt obligations consists of real estate mortgages (or interests therein), (iii)
the entity is the obligor under debt obligations with two or more maturities,
and (iv) payments on the debt obligations on which the entity is the obligor
bear a relationship to the payments on the debt obligations which the entity
holds as assets. With respect to requirement (iii), the Code authorizes the IRS
to provide by regulations that equity interests may be treated as debt for
purposes of determining whether there are two or more maturities. If the Trust
Fund were treated as a taxable mortgage pool, it would be ineligible to file
consolidated returns with any other corporation and could be liable for
corporate tax. Treasury regulations do not provide for the recharacterization of
equity as debt for purposes of determining whether an entity has issued debt
with two maturities, except in the case of transactions structured to avoid the
taxable mortgage pool rules. Federal Tax Counsel will deliver its opinion for a
Trust Fund which is intended to be a partnership for federal income tax
purposes, as specified in the related Prospectus Supplement, generally to the
effect that the Trust Fund will not be a taxable mortgage pool. This opinion
will be based on the assumption that the terms of the Agreements and related
documents will be complied with, and on Federal Tax Counsel's conclusion that
either the number of classes of debt obligations issued be the Trust Fund, or
the nature of the assets held by the Trust Fund will exempt the Trust Fund from
treatment as a taxable mortgage pool.
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Tax Consequences to Holders of the Notes Issued by a Partnership or Division
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Except as otherwise provided in the related
Prospectus Supplement, Federal Tax Counsel will advise the Seller that the Notes
will be classified as debt for federal income tax purposes. Consequently,
Holders of Notes will be subject to taxation as described in "Taxation of Debt
Securities (Including Regular Interest Securities)" above for Debt Securities
which are not Regular Interest Securities.
Possible Alternative Treatment of the Notes. If, contrary to the opinion
of Federal Tax Counsel, the IRS successfully asserted that one or more of the
Notes did not represent debt for federal income tax purposes, the Notes might be
treated as equity interests in the Trust Fund. If so treated, the Trust Fund
would likely be treated as a publicly traded partnership that would not be
taxable as a corporation because it would meet certain qualifying income tests.
Nonetheless, treatment of the Notes as equity interests in such a publicly
traded partnership could have adverse tax consequences to certain Holders. For
example, income to Foreign Investors generally would be subject to U.S. federal
income tax and U.S. federal income tax return filing and withholding
requirements, income to certain tax-exempt entities would be "unrelated business
taxable income," and individual Holders might be subject to certain limitations
on their ability to deduct their share of the Trust Fund's expenses.
Tax Consequences to Holders of the Certificates Issued by a Partnership
Treatment of the Trust Fund as a Partnership. In the case of a Trust Fund
intended to qualify as a partnership for federal income tax purposes, the Trust
Fund and the Seller will agree, and the Certificateholders will agree by their
purchase of Certificates, to treat the Trust Fund as a partnership for purposes
of federal and state income tax, franchise tax and any other tax measured in
whole or in part by income, with the assets of the partnership being the assets
held by the Trust Fund, the partners of the partnership being the
Certificateholders, and the Notes, if any, being debt of the partnership, or if
there is a single Certificateholder for federal income tax purposes, to
disregard the Trust Fund as an entity separate from the Certificateholder.
However, the proper characterization of the arrangement involving the
Certificates, the Notes, the Trust Fund and the Servicer is not clear because
there is no authority on transactions closely comparable to that contemplated
herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Generally, provided
such Certificates are issued at or close to face value, any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership. The following discussion also assumes that all payments on the
Certificates are denominated in U.S. dollars, none of the Certificates have
interest rates which would qualify as contingent interest under the OID
regulations, and that a Series of Securities includes a single Class of
Certificates. If these conditions are not satisfied with respect to any given
Series of Certificates, additional tax considerations with respect to such
Certificates will be disclosed in the applicable Prospectus Supplement.
Partnership Taxation. As a partnership, the Trust Fund will not be subject
to federal income tax. Rather, each Certificateholder will be required to
separately take into account such Holder's allocated share of income, gains,
losses, deductions and credits of the Trust Fund. The Trust Fund's income will
consist primarily of interest and finance charges earned on the Home Equity
Loans (including appropriate adjustments for market discount, OID and bond
premium) and any gain upon collection or disposition of Home Equity Loans. The
Trust Fund's deductions will consist primarily of interest and OID accruing with
respect to the Notes, servicing and other fees, and losses or deductions upon
collection or disposition of Home Equity Loans.
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The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust Fund for each month equal to the sum of (i) the interest that accrues on
the Certificates in accordance with their terms for such month, including
interest accruing at the Pass-Through Rate for such month and interest on
amounts previously due on the Certificates but not yet distributed; (ii) any
Trust Fund income attributable to discount on the Home Equity Loans that
corresponds to any excess of the principal amount of the Certificates over their
initial issue price; (iii) prepayment premium payable to the Certificateholders
for such month; and (iv) any other amounts of income payable to the
Certificateholders for such month. Such allocation will be reduced by any
amortization by the Trust Fund of premium on Home Equity Loans that corresponds
to any excess of the issue price of Certificates over their principal amount.
All remaining taxable income of the Trust Fund will be allocated to the Seller.
Based on the economic arrangement of the parties, this approach for allocating
Trust Fund income should be permissible under applicable Treasury regulations,
although no assurance can be given that the IRS would not require a greater
amount of income to be allocated to Certificateholders. Moreover, even under the
foregoing method of allocation, Certificateholders may be allocated income equal
to the entire Pass-Through Rate plus the other items described above even though
the Trust Fund might not have sufficient cash to make current cash distributions
of such amount. Thus, cash basis Holders will in effect be required to report
income from the Certificates on the accrual basis and Certificateholders may
become liable for taxes on Trust Fund income even if they have not received cash
from the Trust Fund to pay such taxes. In addition, because tax allocations and
tax reporting will be done on a uniform basis for all Certificateholders but
Certificateholders may be purchasing Certificates at different times and at
different prices, Certificateholders may be required to report on their tax
returns taxable income that is greater or less than the amount reported to them
by the Trust Fund.
If Notes are also issued, all of the taxable income allocated to a
Certificateholder that is a pension, profit sharing or employee benefit plan or
other tax-exempt entity (including an individual retirement account) will
constitute "unrelated business taxable income" generally taxable to such a
Holder under the Code.
An individual taxpayer's share of expenses of the Trust Fund (including
fees to the Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual in whole or in
part and might result in such Holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to such Holder over the life of
the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Home Equity Loan, the
Trust Fund might be required to incur additional expense but it is believed that
there would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Home Equity Loans will not
have been issued with OID and, therefore, the Trust should not have OID income.
However, the purchase price paid by the Trust Fund for the Home Equity Loans may
be greater or less than the remaining principal balance of the Home Equity Loans
at the time of purchase. If so, the Home Equity Loan will have been acquired at
a premium or discount, as the case may be. (As indicated above, the Trust Fund
will make this calculation on an aggregate basis, but might be required to
recompute it on a Home Equity Loan by Home Equity Loan basis.)
If the Trust Fund acquires the Home Equity Loans at a market discount or
premium, the Trust Fund will elect to include any such discount in income
currently as it accrues over the life of the Home Equity Loans or to offset any
such premium against interest income on the Home Equity Loans. As indicated
above, a portion of such market discount income or premium deduction may be
allocated to Certificateholders.
Section 708 Termination. Under Section 708 of the Code, the Trust Fund
will be deemed to terminate for federal income tax purposes if 50% or more of
the capital and profits interests in the Trust Fund are sold or
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exchanged within a 12-month period. If such a termination occurs, the Trust Fund
will be considered to distribute its assets to the partners, who would then be
treated as recontributing those assets to the Trust Fund as a new partnership.
The Trust Fund will not comply with certain technical requirements that might
apply when such a constructive termination occurs. As a result, the Trust Fund
may be subject to certain tax penalties and may incur additional expenses if it
is required to comply with those requirements. Furthermore, the Trust Fund might
not be able to comply due to lack of data.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
Holder's cost increased by the Holder's share of Trust Fund income (includible
in income) and decreased by any distributions received with respect to such
Certificate. In addition, both the tax basis in the Certificates and the amount
realized on a sale of a Certificate would include the Holder's share of the
Notes and other liabilities of the Trust Fund. A Holder acquiring Certificates
at different prices may be required to maintain a single aggregate adjusted tax
basis in such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the Certificates
sold (rather than maintaining a separate tax basis in each Certificate for
purposes of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the Holder's share
of unrecognized accrued market discount on the Home Equity Loans would generally
be treated as ordinary income to the Holder and would give rise to special tax
reporting requirements. The Trust Fund does not expect to have any other assets
that would give rise to such special reporting requirements. Thus, to avoid
those special reporting requirements, the Trust Fund will elect to include
market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Sellers and Transferees. In general, the Trust Fund's
taxable income and losses will be determined monthly and the tax items for a
particular calendar month will be apportioned among the Certificateholders in
proportion to the principal amount of Certificates owned by them as of the close
of the last day of such month. As a result, a Holder purchasing Certificates may
be allocated tax items (which will affect its tax liability and tax basis)
attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the Certificateholders. The Trust
Fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust Fund" s assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust Fund were to file an election under
Section 754 of the Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the Trust Fund currently does not
intend to make such election. As a result, Certificateholders might be allocated
a greater or lesser amount of Trust Fund income than would be appropriate based
on their own purchase price for Certificates.
Administrative Matters. The Owner Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained for
financial reporting and tax purposes on an accrual basis
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and the fiscal year of the Trust Fund will be the calendar year. The Trustee
will file a partnership information return (IRS Form 1065) with the IRS for each
taxable year of the Trust Fund and will report each Certificateholder's
allocable share of items of Trust Fund income and expense to Holders and the IRS
on Schedule K-1. The Trust Fund will provide the Schedule K-1 information to
nominees that fail to provide the Trust Fund with the information statement
described below and such nominees will be required to forward such information
to the beneficial owners of the Certificates. Generally, Holders must file tax
returns that are consistent with the information return filed by the Trust Fund
or be subject to penalties unless the Holder notifies the IRS of all such
inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust Fund
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of such person,
(y) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust Fund information
as to themselves and their ownership of Certificates. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such information statement to the Trust Fund. The information referred to above
for any calendar year must be furnished to the Trust Fund on or before the
following January 31. Nominees, brokers and financial institutions that fail to
provide the Trust Fund with the information described above may be subject to
penalties.
The Seller will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust Fund by the appropriate taxing authorities
could result in an adjustment of the returns of the Certificateholders, and,
under certain circumstances, a Certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the Trust Fund. An
adjustment could also result in an audit of a Certificateholder's returns and
adjustments of items not related to the income and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust Fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to Foreign
Investors because there is no clear authority dealing with that issue under
facts substantially similar to those described herein. Although it is not
expected that the Trust Fund would be engaged in a trade or business in the
United States for such purposes, the Trust Fund will withhold as if it were so
engaged in order to protect the Trust Fund from possible adverse consequences of
a failure to withhold. The Trust Fund expects to withhold pursuant to Section
1446 of the Code on the portion of its taxable income that is allocable to
Certificateholders that are Foreign Investors, as if such income were
effectively connected to a U.S. trade or business, at a rate of 35% for foreign
Holders that are taxable as corporations and 39.6% for all other foreign
Holders. Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the Trust Fund to change its
withholding procedures.
Each Certificateholder that is a Foreign Investor might be required to
file a U.S. individual or corporate income tax return (including, in the case of
a corporation, the branch profits tax) on its share of the Trust Fund's income.
A foreign Holder generally would be entitled to file with the IRS a claim for
refund with respect to taxes withheld by the Trust Fund taking the position that
no taxes were due because the Trust Fund was not engaged in a U.S. trade or
business. However, interest payments made (or accrued) to a Certificateholder
who is a Foreign Investor generally will be considered guaranteed payments to
the extent such payments are determined without regard to the income of the
Trust Fund. If these interest payments are properly characterized as guaranteed
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payments, then the interest probably will not be considered "portfolio
interest." As a result, Certificateholders will be subject to United States
federal income tax and withholding tax at a rate of 30%, unless reduced or
eliminated pursuant to an applicable treaty. In such case, a Foreign Investor
would only be entitled to claim a refund for that portion of the taxes, if any,
in excess of the taxes that should be withheld with respect to the guaranteed
payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a "backup" withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the Holder is an exempt recipient under
applicable provisions of the Code and, if necessary, adequately demonstrates
such status.
STATE TAX CONSEQUENCES
In addition to the federal income tax consequences described in "FEDERAL
INCOME TAX CONSEQUENCES," potential investors should consider the state and
local income tax consequences of the acquisition, ownership, and disposition of
the Securities. State and local income tax law may differ substantially from the
corresponding federal law, and this discussion does not purport to describe any
aspect of the income tax laws of any state or locality. Therefore, potential
investors should consult their own tax advisors with respect to the various
state and local tax consequences of an investment in the Securities.
ERISA CONSIDERATIONS
A fiduciary of an employee benefit plan subject to Title I of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), should consider
the fiduciary standards under ERISA in the context of the plan's particular
circumstances before authorizing an investment of a portion of such plan's
assets in the Securities. Accordingly, among other factors, such fiduciary
should consider (i) whether the investment is for the exclusive benefit of plan
participants and their beneficiaries; (ii) whether the investment satisfies the
diversification requirements of Section 404 of ERISA; (iii) whether the
investment is in accordance with the documents and instruments governing the
plan; and (iv) whether the investment is prudent, considering the nature of the
investment. Fiduciaries of such plans also should consider ERISA's prohibition
on improper delegation of control over, or responsibility for, plan assets.
In addition, fiduciaries of employee benefit plans subject to Title I of
ERISA, as well as certain plans or other retirement arrangements not subject to
ERISA, but which are subject to Section 4975 of the Code (such as individual
retirement accounts and Keogh plans covering only a sole proprietor or
partners), or any entity (including an insurance company general account) whose
underlying assets include plan assets by reason of a plan or account investing
in such entity (collectively, "Plans(s)") are prohibited from engaging in a
broad range of transactions involving Plan assets and persons having certain
specified relationships to a Plan ("parties in interest" and "disqualified
persons"). Such transactions are treated as "prohibited transactions" under
Sections 406 and 407 of ERISA and excise taxes are imposed upon such persons by
Section 4975 of the Code. The Seller, the related Trustee and any underwriter of
the offered Securities and certain of their affiliates might be considered
"parties in interest" or "disqualified persons" with respect to a Plan. If so,
the acquisition, holding or transfer of Securities by, or on behalf of, such
Plan could be considered to give rise to a "prohibited transaction" within the
meaning of ERISA and the Code unless a regulatory exception or administrative
exemption is available. In addition, the Department of Labor ("DOL") has issued
a regulation (29 C.F.R. Section 2510.3-101) (the "Plan Assets Regulation")
concerning the definition of what constitutes the assets of a Plan, which
provides that, as a general rule, the underlying assets and properties of
corporations, partnerships, trusts and certain other entities in which a Plan
makes an "equity" investment will be deemed for purposes of ERISA to be assets
of the investing Plan unless certain exceptions apply. If an investing Plan's
assets were deemed to include an interest in the Trust Fund and not merely an
interest in the Securities, transactions occurring in connection with the
servicing, management and operation of the Trust Fund between the Seller, the
related Trustee, the Servicer (or any other servicer), any insurer or any of
their respective
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affiliates might constitute prohibited transactions, and the assets of the Trust
Fund would become subject to the fiduciary investment standards of ERISA, unless
a regulatory exception or administrative exemption applies.
With respect to offered Securities which are Certificates, the DOL has
issued to a number of underwriters of pass-through certificates, similar to the
Certificates, administrative exemptions (collectively, the "Exemption"), which
generally exempt from the application of the prohibited transaction provisions
of Section 406(a), Section 406(b)(1) and Section 406(b)(2) of ERISA, and the
excise taxes imposed pursuant to Section 4975(a) and (b) of the Code, the
initial purchase, holding and subsequent resale of mortgage-backed or
asset-backed pass-through certificates representing a beneficial undivided
interest in certain fixed pools of assets held in a trust (as defined in
paragraph III. B of Section III of the Exemption), along with certain
transactions relating to the servicing and operation of such asset pools,
provided that certain conditions set forth in the Exemption are satisfied.
Paragraph III. B of Section III of the Exemption provides in part that a trust
means an investment pool the corpus of which is held in trust and consists
solely of: (1) secured consumer receivables, (2) secured credit instruments, (3)
obligations secured by residential or commercial real property, (4) obligations
secured by motor vehicles or equipment or qualified motor vehicle leases, (5)
guaranteed governmental mortgage pool certificates or (6) an undivided
fractional interest in any of the obligations listed in clauses (1)--(5) above.
If the general conditions of Section II of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a) and 407(a) of ERISA (as well as the excise taxes imposed by Section
4975(a) and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of
the Code) in connection with the direct or indirect sale, exchange or transfer
of Certificates by Plans in the initial issue of Certificates, the holding of
Certificates by Plans or the direct or indirect acquisition or disposition in
the secondary market of Certificates by Plans. However, no exemption is provided
from the restrictions of Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for
the acquisition or holding of a Certificate on behalf of an "Excluded Plan" by
any person who has discretionary authority or renders investment advice with
respect to the assets of such Excluded Plan. For purposes of the Certificates,
an Excluded Plan is a Plan sponsored by (1) an underwriter which has been
granted an Exemption (or certain specified entities affiliated or associated
with such underwriter) ("Underwriter"), (2) the Seller, (3) the Servicer (or any
other servicer), (4) the related Trustee, (5) any obligor with respect to Home
Equity Loans constituting more than 5 percent of the aggregate unamortized
principal balance of the Home Equity Loans as of the date of initial issuance,
(6) any insurer and (7) any affiliate or successor of a person described in (1)
to (6) above (the "Restricted Group").
If the specific conditions of paragraph I.B of Section I of the Exemption
are also satisfied, the Exemption may provide an exemption from the restrictions
imposed by Sections 406(b)(1) and (b)(2) of ERISA and the taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c)(I)(E) of the
Code in connection with (1) the direct or indirect sale, exchange or transfer of
Certificates in the initial issuance of Certificates between the Seller or
Underwriter and a Plan when the person who has discretionary authority or
renders investment advice with respect to the investment of Plan assets in
Certificates is (a) an obligor with respect to 5 percent or less of the fair
market value of the Home Equity Loans or (b) an affiliate of such a person, (2)
the direct or indirect acquisition or disposition in the secondary market of
Certificates by Plans and (3) the holding of Certificates by Plans.
If the specified conditions of paragraph I.C of Section I of the Exemption
are satisfied, the Exemption may provide an exemption from the restrictions
imposed by Sections 406(a), 406(b) and 407(a) of ERISA, and the taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c) of the Code
for transactions in connection with the servicing, management and operation of
the Trust Fund and the assets of the Trust Fund.
The Exemption may provide an exemption from the restrictions imposed by
Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of the Code
if such restrictions are deemed to otherwise apply merely because a person is
deemed to be a "party in interest" or a "disqualified person" with respect to an
investing Plan by virtue of providing services to the Plan (or by virtue of
having certain specified relationships to such a person) solely as a result of
such Plan's ownership of Certificates.
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The Exemption sets forth the following seven general conditions which must
be satisfied for a transaction to be eligible for exemptive relief thereunder.
(1) The acquisition of the Certificates by a Plan is on terms (including
the price for the Certificates) that are at least as favorable to
the Plan as they would be in an arm's length transaction with an
unrelated party;
(2) The rights and interests evidenced by the Certificates acquired by
the Plan are not subordinated to the rights and interests evidenced
by other Securities issued by the Trust Fund;
(3) The Certificates acquired by the Plan have received a rating at the
time of such acquisition that is one of the three highest generic
rating categories from either Standard & Poor's Ratings Group, a
division of the McGraw Hill Companies, Inc., Moody's Investors
Service, Inc., Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc.
("National Credit Rating Agencies");
(4) The Trustee is not an affiliate of any other member of the
Restricted Group (as defined above);
(5) The sum of all payments made to and retained by the Underwriter in
connection with the distribution of Certificates represents not more
than reasonable compensation for underwriting the Certificates. The
sum of all payments made and retained by the Seller pursuant to the
assignment of the loans to the Trust Fund represents not more than
the fair market value of such loans. The sum of all payments made to
and retained by the Servicer or any other servicer represents not
more than reasonable compensation for such person's services under
the pooling and servicing agreement and reimbursement of such
person's reasonable expenses in connection therewith; and
(6) The Plan investing in the certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D under the Securities
Act of 1933. The Seller assumes that only Plans which are accredited
investors under the federal securities laws will be permitted to
purchase the Certificates.
(7) The Trust Fund must also meet the following requirements:
(i) the corpus of the Trust Fund must consist solely of assets of
the type that have been included in other investment pools;
(ii) certificates in such other investment pools must have been
rated in one of the three highest rating categories of one of
the National Credit Rating Agencies for at least one year
prior to the Plan's acquisition of Certificates; and
(iii) certificates evidencing interests in such other investment
pools must have been purchased by investors other than Plans
for at least one year prior to any Plan's acquisition of
certificates.
On July 21, 1997, the DOL published in the Federal Register a final
amendment to the Exemption which extends exemptive relief to certain
mortgage-backed and asset-backed securities transactions using pre-funding
accounts for trusts issuing pass-through certificates. With respect to the
Certificates, the amendment generally allows a portion of the mortgages or
receivables ("Loans") supporting payments to Certificateholders and having a
principal amount equal to no more than 25% of the total principal amount of the
Certificates to be transferred to the Trust within a 90-day or three-month
period following the Closing Date ("Pre-Funding Period"), instead of requiring
that all such Loans be either identified or transferred on or before the Closing
Date. The relief is effective for transactions occurring on or after May 23,
1997, provided that the following conditions are met:
(1) The ratio of the amount allocated to the Pre-Funding Account to the
total principal amount of the Certificates being offered
("Pre-Funding Limit") must not exceed twenty-five percent (25%).
(2) All Loans transferred after the Closing Date ("Additional Loans")
must meet the same terms and conditions for eligibility as the
original Loans used to create the Trust Fund, which terms and
conditions have been approved by each Rating Agency.
(3) The transfer of such Additional Loans to the Trust Fund during the
Pre-Funding Period must not result in the Certificates receiving a
lower credit rating from any Rating Agency upon termination of the
Pre-Funding Period than the ratings that were obtained at the time
of the initial issuance of the Certificates by the Trust Fund.
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(4) Solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate (the "average interest rate") for
all of the Loans in the Trust Fund at the end of the Pre-Funding
Period must not be more than 100 basis points lower than the average
interest rate for the Loans which were transferred to the Trust Fund
on the Closing Date.
(5) Either: (i) the characteristics of the Additional Loans must be
monitored by an insurer or other credit support provider which is
independent of the Seller; or (ii) an independent accountant
retained by the Seller must provide the Seller with a letter (with
copies provided to each Rating Agency, the Underwriter and the
Trustee) stating whether or not the characteristics of the
Additional Loans conform to the characteristics described in the
Prospectus, Prospectus Supplement, Private Placement Memorandum
("Offering Documents") and/or Pooling and Servicing Agreement
("Pooling Agreement"). In preparing such letter, the independent
accountant must use the same type of procedures as were applicable
to the Loans which were transferred as of the Closing Date.
(6) The Pre-Funding Period must end no later than three months or 90
days after the Closing Date or earlier, in certain circumstances, if
the amount on deposit in the Pre-Funding Account is reduced below
the minimum level specified in the Pooling Agreement or an event of
default occurs under the Pooling Agreement.
(7) Amounts transferred to any Pre-Funding Account and/or Capitalized
Interest Account used in connection with the pre-funding may be
invested only in investments which are permitted by each Rating
Agency and (i) are direct obligations of, or obligations fully
guaranteed as to timely payment of principal and interest by, the
United States or any agency or instrumentality thereof (provided
that such obligations are backed by the full faith and credit of the
United States); or (ii) have been rated (or the obligor has been
rated) in one of the three highest generic rating categories by each
Rating Agency ("Permitted Investments").
(8) The Offering Documents must describe: (i) any Pre-Funding Account
and/or Capitalized Interest Account used in connection with a
Pre-Funding Account; (ii) the duration of the Pre-Funding Period;
(iii) the percentage and/or dollar amount of the Pre-Funding Limit
for the Trust Fund; and (iv) that the amounts remaining in the
Pre-Funding Account at the end of the Pre-Funding Period will be
remitted to Certificateholders as repayments of principal.
(9) The Pooling and Servicing Agreement must describe the Permitted
Investments for the Pre-Funding Account and Capitalized Interest
Account and, if not disclosed in the Offering Documents, the terms
and conditions for eligibility of the Additional Loans.
The Exemption may apply to a Plan's purchase, holding and transfer of
Certificates and the operation, management and servicing of the Trust Fund and
the assets of the Trust Fund as specified in the related Prospectus Supplement.
In addition, in the event the Exemption is not available, certain exemptions
from the prohibited transaction rules may be applicable depending on the type
and circumstances of the plan fiduciary making the decision to acquire a
Certificate. Included among these exemptions are: Prohibited Transaction Class
Exemption ("PTCE") 90-1, regarding investments by insurance company pooled
separate accounts; PTCE 91-38 regarding investments by bank collective
investment funds PTCE 95-60, regarding investments by insurance company general
accounts; PTCE 96-23, regarding transactions affected by in-house asset
managers; and PTCE 84-14, regarding transactions effected by "qualified
professional asset managers".
Certain transactions involving the purchase of Securities which are Notes
might be deemed to constitute prohibited transactions under ERISA and the Code
if the assets of the Trust Fund were deemed to be assets of a Plan. Under the
Plan Assets Regulation, the assets of the Trust Fund would be treated as plan
assets of a Plan for the purposes of ERISA and the Code only if the Plan
acquires an "Equity Interest" in the Trust Fund and none of the exceptions
contained in the Plan Assets Regulation is applicable. An equity interest is
defined under the Plan Assets Regulation as an interest other than an instrument
which is treated as indebtedness under applicable local law and which has no
substantial equity features. The Seller believes that the Notes should be
treated as indebtedness without substantial equity features for purposes of the
Plan Assets Regulation. In addition, even in the event that the Notes are deemed
to be an Equity Interest in the Trust Fund, the Exemption may be applicable to
both a Plan's purchase,
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holding and transfer of Notes (which in this situation are considered
Certificates for purposes of the Exemption) and the operation, management and
servicing of the Trust Fund and the assets of the Trust Fund, if so specified in
the related Prospectus Supplement.
Without regard to whether the Notes are characterized as Equity Interests,
the acquisition, transfer or holding of Notes by or on behalf of a Plan could be
considered to give rise to a prohibited transaction if the Trust Fund, the
related Trustee or any of their respective affiliates is or becomes a party in
interest or a disqualified person with respect to such Plan or in the event that
a Note is purchased in the secondary market and such purchase constitutes a sale
or exchange between a Plan and a party in interest or disqualified person with
respect to such Plan. In such case, PTCE 90-1, PTCE 91-38, PTCE 95-60, PTCE
96-23 and PTCE 84-14 may be applicable depending on the type and circumstances
of the plan fiduciary making the decision to acquire a Note.
Any Plan fiduciary considering the purchase of Securities should consult
with its counsel with respect to the potential applicability of the fiduciary
responsibility and prohibited transaction provisions of ERISA and the Code to
such investment.
LEGAL INVESTMENT
The Securities will not constitute "mortgage-related securities" within
the meaning of SMMEA unless the related Prospectus Supplement specifies that the
Securities will constitute "mortgage related Securities." Accordingly, investors
whose investment authority is subject to legal restrictions should consult their
own legal advisors to determine whether and the extent to which the Securities
constitute legal investments for them.
PLAN OF DISTRIBUTION
On the terms and conditions set forth in an underwriting agreement (the
"Underwriting Agreement") with respect to each Trust Fund, the Depositor will
agree to sell to each of the underwriters named therein and in the related
Prospectus Supplement, and each of such underwriters will severally agree to
purchase from the Depositor, the principal amount of each Class of Securities of
the related Series set forth therein and in the related Prospectus Supplement.
In each Underwriting Agreement, the several underwriters will agree,
subject to the terms and conditions set forth therein, to purchase all of the
Securities described therein which are offered hereby and by the related
Prospectus Supplement if any of such Securities are purchased. In the event of a
default by any such underwriter, each Underwriting Agreement will provide that,
in certain circumstances, purchase commitments of the nondefaulting underwriters
may be increased, or the Underwriting Agreement may be terminated.
Each Prospectus Supplement will either (i) set forth the price at which
each Class of Securities being offered thereby will be offered to the public and
any concessions that may be offered to certain dealers participating in the
offering of such Securities or (ii) specify that the related Securities are to
be resold by the underwriters in negotiated transactions at varying prices to be
determined at the time of such sale. After the initial public offering of any
Securities, the public offering price and such concessions may be changed.
Each Underwriting Agreement will provide that the [Depositor] [Seller]
will indemnify underwriters against certain liabilities, including liabilities
under the Securities Act.
Under each Underwriting Agreement, the closing of the sale of any Class of
Securities subject thereto will be conditioned on the closing of the sale of all
other such Classes.
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The place and time of delivery for the Securities in respect of which this
Prospectus is delivered will be set forth in the related Prospectus Supplement.
LEGAL MATTERS
Unless otherwise specified in the related Prospectus Supplement, certain
legal matters in connection with the Securities will be passed upon for the
Seller by Stroock & Stroock & Lavan LLP, New York, New York.
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INDEX OF DEFINED TERMS
The following are abbreviated definitions of certain capitalized terms
used in this Prospectus. Unless otherwise provided in a "Supplemental Glossary"
or "Index of Defined Terms" in the Prospectus Supplement for a Series, such
definitions will apply to capitalized terms used in such Prospectus Supplement.
The definitions may vary from those in the related Agreement for a Series and
the related Agreement for a Series generally provides a more complete definition
of certain of the terms; however the definitions included herein are materially
correct. Reference should be made to the related Agreement for a Series for a
more complete definition of such terms.
"Accrual Termination Date" means, with respect to a Class of Compound
Interest Securities, the Distribution Date on which accrued interest on such
Securities becomes payable currently.
"Agreement" means, with respect to a Series of Certificates, the Pooling
and Servicing Agreement or Trust Agreement, and, with respect to a Series of
Notes, the Indenture and the Sale and Servicing Agreement, as the context
requires and with respect to a Series of Notes and Certificates, the relevant
combination of Agreements for such Series.
"Appraised Value" means, with respect to property securing a Home Equity
Loan, the lesser of the appraised value determined in an appraisal obtained at
origination of the Home Equity Loan or sales price of such property at such
time.
"Asset Group" means, with respect to the Home Equity Loans and other
assets comprising the Trust Fund of a Series, a group of such Home Equity Loans
and other assets having the characteristics described in the related Prospectus
Supplement.
"Assumed Reinvestment Rate" means, with respect to a Series, the per annum
rate or rates specified in the related Prospectus Supplement for a particular
period or periods as the "Assumed Reinvestment Rate" for funds held in any fund
or account for the Series.
"Available Distribution Amount" means the amount in the Distribution
Account (including amounts deposited therein from any reserve fund or other fund
or account) eligible for distribution to Holders on a Distribution Date.
"Bankruptcy Code" means the federal bankruptcy code, 11 United States Code
101 et seq., and related rules and regulations promulgated thereunder.
"Business Day" means a day that, in the City of New York or in the city or
cities in which the corporate trust office of the Trustee are located, is
neither a legal holiday nor a day on which banking institutions are authorized
or obligated by law, regulations or executive order to be closed.
"Certificates" means the Asset-Backed Certificates.
"Certificate Account" or "Collection Account" means, with respect to a
Series, the account established for the deposit by the Servicer of payments
received from the Home Equity Loans.
"Class" means a Class of Securities of a Series.
"Closing Date" means, with respect to a Series, the date specified in the
related Prospectus Supplement as the date on which Securities of such Series are
first issued.
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"Code" means the Internal Revenue Code of 1986, as amended, and
regulations (including proposed regulations) or other pronouncements of the
Internal Revenue Service promulgated thereunder.
"Combined Home Equity Loan-to-Value Ratio" or "CLTV" means, with respect
to a Home Equity Loan, the percentage equivalent of a fraction, the numerator of
which is the sum of (i) the original principal amount of such Home Equity Loan
at the date of origination thereof and (ii) the outstanding principal amount of
any senior loan on the Mortgaged Property at the time of origination of such
Home Equity Loan, and the denominator of which is the Appraised Value of such
Mortgaged Property at such date of origination.
"Commission" means the Securities and Exchange Commission.
"Compound Interest Security" means any Security of a Series on which all
or a portion of the interest accrued thereon is added to the principal balance
of such Security on each Distribution Date, through the Accrual Termination
Date, and with respect to which no interest shall be payable until such Accrual
Termination Date, after which interest payments will be made on the Compound
Value thereof.
"Compound Value" means, with respect to a Class of Compound Interest
Securities, the original principal balance of such Class, plus all accrued and
unpaid interest, if any, previously added to the principal balance thereof and
reduced by any payments of principal previously made on such Class of Compound
Interest Securities.
"Condominium" means a form of ownership of real property wherein each
owner is entitled to the exclusive ownership and possession of his or her
individual Condominium Unit and also owns a proportionate undivided interest in
all parts of the Condominium Building (other than the individual Condominium
Units) and all areas or facilities, if any, for the common use of the
Condominium Units.
"Condominium Association" means the person(s) appointed or elected by the
Condominium Unit owners to govern the affairs of the Condominium.
"Condominium Building" means a multi-unit building or buildings, or a
group of buildings whether or not attached to each other, located on property
subject to Condominium ownership.
"Condominium Home Equity Loan" means a Home Equity Loan secured by a
Mortgage on a Condominium Unit (together with its appurtenant interest in the
common elements).
"Condominium Unit" means an individual housing unit in a Condominium
Building.
"Cooperative" means a corporation owned by tenant-stockholders who,
through the ownership of stock, shares or membership securities in the
corporation, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy specific units and which is described in Section 216
of the Code.
"Cooperative Dwelling" means an individual housing unit in a building
owned by a Cooperative.
"Cooperative Home Equity Loan" means a housing loan made with respect to a
Cooperative Dwelling and secured by an assignment by the borrower
(tenant-stockholder) or security interest in shares issued by the applicable
Cooperative.
"Cut-off Date" means the date designated as such in the related Prospectus
Supplement for a Series.
"Debt Securities" means Securities characterized as indebtedness for
federal income tax purposes, and Regular Interest Securities.
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"Deferred Interest" means the excess of the interest accrued on the
outstanding principal balance of a Home Equity Loan during a specified period
over the amount of interest required to be paid by an obligor on such Home
Equity Loan on the related Due Date.
"Delinquency Advance" means cash advanced by the Servicer in respect of
delinquent payments of principal of and/or interest on a Home Equity Loan to the
extent specified in the related Prospectus Supplement.
"Depositor" means CHEC Asset Receivable Corporation.
"Disqualified Organization" means the United States, any State or
political subdivision thereof, any possession of the United States, any foreign
government, any international organization, or any agency or instrumentality of
any of the foregoing, a rural electric or telephone cooperative described in
section 1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by
sections 1-1399 of the Code, if such entity is not subject to tax on its
unrelated business income.
"Distribution Account" means, with respect to a Series, the account or
accounts established for the deposit of remittances from the Collection Account
for distribution to Securityholders.
"Distribution Date" means, with respect to a Series or Class of
Securities, each date specified as a distribution date for such Series or Class
in the related Prospectus Supplement.
"Due Date" means each date, as specified in the related Prospectus
Supplement for a Series, on which any payment of principal or interest is due
and payable by the obligor on any Home Equity Loan pursuant to the terms
thereof.
"Eligible Investments" means any one or more of the obligations or
securities described herein under "THE TRUST FUNDS--Eligible Investments."
"Enhancement" means a mechanism or instrument which is intended to provide
limited protection to Holders of the applicable Class or Classes of Securities
against losses on the related Home Equity Loans or other shortfalls in funds
necessary to make required distributions on such Class or Classes of Securities.
"Enhancer" means the provider of the Enhancement for a Series specified in
the related Prospectus Supplement.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Account" means an account, established and maintained by the
Servicer for a Home Equity Loan, into which payments by borrowers to pay taxes,
assessments, mortgage and hazard insurance premiums and other comparable items
required to be paid to the mortgagee are deposited.
"Event of Default" means any one or more of the events described as Events
of Default under "The Agreements--Servicer Termination Events; Events of
Default."
"FDIC" means the Federal Deposit Insurance Corporation.
"FHLMC" or "Freddie Mac" means the Federal Home Equity Loan Mortgage
Corporation.
"Final Scheduled Distribution Date" means, with respect to a Class of
Notes of a Series, the date no later than which principal thereof will be fully
paid and with respect to a Class of Certificates of a Series, the date after
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which no Certificates of such Class will remain outstanding, in each case based
on the assumptions set forth in the related Prospectus Supplement.
"FNMA" or "Fannie Mae" means the Federal National Mortgage Association.
"Holder" or "Securityholder" means the person or entity in whose name a
Security is registered.
"Home Equity Loan" means a closed-end home equity loan secured by a
Mortgaged Property.
"Home Equity Loan Rate" means, the interest rate borne by a Home Equity
Loan.
"HUD" means the United States Department of Housing and Urban Development.
"Indenture" means the indenture relating to a Series of Notes between the
Trust Fund and the Trustee.
"Insurance Policies" means certain mortgage insurance, hazard insurance
and other insurance policies required to be maintained with respect to Home
Equity Loans.
"Insurance Proceeds" means amount paid by the insurer under any of the
Insurance Policies covering any Home Equity Loan or Mortgaged Property.
"Interest Only Securities" means a Class of Securities entitled solely or
primarily to distributions of interest and which is identified as such in the
related Prospectus Supplement.
"IRS" means the Internal Revenue Service.
"Lifetime Rate Cap" means the lifetime limit if any, on the Home Equity
Loan Rate during the life of each adjustable rate Home Equity Loan.
"Liquidation Proceeds" means amounts received by the Servicer in
connection with the liquidation of a Home Equity Loan, net of liquidation
expenses.
"Minimum Rate" means the lifetime minimum Home Equity Loan Rate during the
life of each adjustable rate Home Equity Loan.
"Mixed-Use Properties" means structures of no more than three stories,
which include one to four residential dwelling units and 50% or less of the
space in which is used for retail, professional or other commercial uses
including doctor, dentist or law offices, real estate agencies, boutiques,
newsstands, convenience stores or other uses intended to cater to individual
customers.
"Mortgage" means the mortgage, deed of trust or other similar security
instrument securing a Mortgage Note.
"Mortgaged Property" means the real property and improvements thereon
securing a Home Equity Loan.
"Mortgage Note" means the note or other evidence of indebtedness of a
Mortgagor under the Home Equity Loan.
"Mortgagor" means the obligor on a Mortgage Note.
"1986 Act" means the Tax Reform Act of 1986.
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"Notes" means the Asset-Backed Notes.
"Notional Amount" means the amount set forth in the related Prospectus
Supplement for a Class of Interest Only Securities.
"OTS" means the Office of Thrift Supervision.
"PAC" ("Planned Amortization Class Securities") means a Class of
Securities of a Series on which payments of principal are made in accordance
with a schedule specified in the related Prospectus Supplement, based on certain
assumptions stated therein.
"Pay Through Security" means Regular Interest Securities and certain Debt
Securities that are subject to acceleration due to prepayment on the underlying
Home Equity Loans.
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust (including any beneficiary thereof),
unincorporated organization, or government or any agency or political
subdivision thereof.
"Pooling and Servicing Agreement" means the pooling and servicing
agreement relating to a Series of Certificates among the Depositor, the Seller,
the Servicer and the Trustee.
"Principal Balance" means, with respect to a Home Equity Loan and as of a
Due Date, the original principal amount of the Home Equity Loan, plus the amount
of any Deferred Interest added to such principal amount, reduced by all
payments, both scheduled or otherwise, received on such Home Equity Loan prior
to such Due Date and applied to principal in accordance with the terms of the
Home Equity Loan.
"Principal Only Securities" means a Class of Securities entitled solely or
primarily to distributions of principal and identified as such in the Prospectus
Supplement.
"Qualified Insurer" means a mortgage guarantee or insurance company duly
qualified as such under the laws of the states in which the Mortgaged Properties
are located duly authorized and licensed in such states to transact the
applicable insurance business and to write the insurance provided.
"Rating Agency" means the nationally recognized statistical rating
organization (or organizations) which was (or were) requested by the Seller to
rate the Securities upon the original issuance thereof.
"Regular Interest" means a regular interest in a REMIC.
"REMIC" means a real estate mortgage investment conduit.
"REMIC Administrator" means the Person, if any, specified in the related
Prospectus Supplement for a Series for which a REMIC election is made, to serve
as administrator of the Series.
"REMIC Provisions" means the provisions of the federal income tax law
relating to real estate mortgage investment conduits, which appear at sections
860A through 860G of Subchapter M of Chapter 1 of the Code, and related
provisions, and regulations, including proposed regulations and rulings, and
administrative pronouncements promulgated thereunder, as the foregoing may be in
effect from time to time.
"REO Property" means real property which secured a defaulted Home Equity
Loan, beneficial ownership of which has been acquired upon foreclosure, deed in
lieu of foreclosure, repossession or otherwise.
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"Reserve Fund" means, with respect to a Series, a segregated trust account
into which funds may be deposited on the Closing Date and/or over time in order
to provide a source of funds to provide limited protection to the Holders of one
or more Classes of Securities against losses on the related Home Equity Loans or
other shortfalls in amounts necessary to make required distributions to such
Holders.
"Residual Interest" means a residual interest in a REMIC.
"Retained Interest" means, with respect to a Home Equity Loan, the amount
or percentage specified in the related Prospectus Supplement which is not
included in the Trust Fund for the related Series.
"Scheduled Payments" means the scheduled payments of principal and
interest to be made by the borrower on a Home Equity Loan.
"Securities" means the Notes or the Certificates.
"Seller" means Centex Credit Corporation d/b/a Centex Home Equity
Corporation.
"Senior Securityholder" means a holder of a Senior Security.
"Senior Securities" means a Class of Securities as to which the holders"
rights to receive distributions of principal and interest are senior to the
rights of holders of Subordinate Securities, to the extent specified in the
related Prospectus Supplement.
"Series" means a separate series of Securities sold pursuant to this
Prospectus and the related Prospectus Supplement.
"Servicer" means Centex Credit Corporation d/b/a Centex Home Equity
Corporation.
"Servicer Termination Event" means any one or more of the events described
as Servicer Termination Events under "The Agreements--Servicer Termination
Events; Events of Default."
"Servicing Fee" means the fee payable to the Servicer on a periodic basis
for servicing and administering the Home Equity Loans in a Trust Fund and
calculated at the rate and on the basis set forth in the related Prospectus
Supplement.
"Single Family Property" means property securing a Home Equity Loan
consisting of one- to four-family attached or detached residential housing,
including Cooperative Dwellings.
"Stripped Securities" means Pass-Through Securities representing interests
in Home Equity Loans with respect to which all or a portion of the principal
payments have been separated from all or a portion of the interest payments.
"Subordinated Securities" means a Class of Securities as to which the
rights of holders to receive distributions of principal, interest or both is
subordinated to the rights of holders of Senior Securities or other Classes of
securities which are themselves subordinate to other Classes, and may be
allocated losses and shortfalls prior to the allocation thereof to other Classes
of Securities, to the extent and under the circumstances specified in the
related Prospectus Supplement.
"Trustee" means the trustee under the applicable Agreement and its
successors.
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"Trust Fund" means, with respect to any Series of Securities, the trust
holding all money, instruments, securities and other property, including all
proceeds thereof, which are, with respect to a Series of Certificates, held for
the benefit of the Holders by the Trustee under the Pooling and Servicing
Agreement or Trust Agreement or, with respect to a Series of Notes, pledged to
the Trustee under the Indenture as a security for such Notes, including, without
limitation, the Home Equity Loans (except any Retained Interests), rights to all
amounts in the Distribution Account Collection Account, Certificate Account,
Pre-Funding Account, Capitalized Interest Account or Reserve Funds, if any,
distributions on the Home Equity Loans (net of servicing fees), and reinvestment
earnings on such net distributions and rights to any Enhancement and all other
property and interest held by or pledged to the Trustee pursuant to the related
Agreement for such Series.
"UCC" means the Uniform Commercial Code.
"Variable Interest Security" means a Security on which interest accrues at
a rate that is adjusted, based upon a predetermined index, at fixed periodic
intervals, all as set forth in the related Prospectus Supplement.
"Variable Interest Securities" means a Class of Securities on which
interest will accrue at a per annum rate that will vary from Distribution Date
to Distribution Date based on changes in the weighted average of the interest
rates borne by the related Home Equity Loans or changes in the level of an index
used to calculate such per annum rate of interest.
"Zero Coupon Security" means a Security entitled to receive payments of
principal only.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following is an itemized list of the estimated expenses to be incurred in
connection with the offering of the securities being offered hereunder other
than underwriting discounts and commissions.
SEC Registration Fee ......................... 88,500.00
Printing and Engraving ....................... 50,000.00
Trustee's Fees ............................... 20,000.00
Legal Fees and Expenses ...................... 125,000.00
Blue Sky Fees and Expenses ................... 15,000.00
Accountant's Fees and Expenses ............... 15,000.00
Rating Agency Fees ........................... 25,000.00
Miscellaneous Fees and Expenses .............. 10,000.00
--------------
Total Expenses ........................... 348,500.00
==============
* To be filed by Amendment.
Item 15. Indemnification of Directors and Officers
Article 12 of the Articles of Incorporation of the Seller provides for the
indemnification of any person who is or was an officer or director of the Seller
with respect to actions taken or omitted by such person in any capacity in which
such person serves or served the Issuer, to the full extent authorized or
permitted by the Nevada Private Corporation Law. Reference is made to the
Articles of Incorporation filed as an exhibit to this Registration Statement for
the complete text of Article 12 of the Articles of Incorporation.
The Registrant maintains liability insurance policies such that each of the
directors and officers of the Registrant is insured against certain liabilities
which they might incur in their capacity as a director or officer.
The Underwriting Agreement filed as Exhibit 1.1 hereto provides for
indemnification by the Underwriters of the Registrant and its directors,
officers and controlling persons for certain liabilities arising under the
Securities Act of 1933 or otherwise.
The general effect of any statute, charter provision, by-law, contract or other
arrangement under which any controlling person, director or officer of the
Registrant is insured or indemnified against liability when acting on behalf of
the Registrant is to reduce the deterrent effect for such indemnified
individuals for violating the Securities Act of 1933.
The Registrant is aware that the Securities and Exchange Commission takes the
position that indemnification of directors and officers is against public policy
and is therefore unenforceable.
Item 16. Exhibits
1.1. Form of Underwriting Agreement*
3.1. Articles of Incorporation of CHEC Asset Receivable Corporation*
3.2. By-laws of CHEC Asset Receivable Corporation*
4.1. Form of Pooling and Servicing Agreement*
4.2. Form of Certificate (included as part of Exhibit 4.1) *
4.3 Form of Indenture*
4.4 Form of Trust Agreement*
II-1
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<PAGE>
5.1. Opinion of Stroock & Stroock & Lavan LLP with respect to legality*
8.1. Opinion of Stroock & Stroock & Lavan LLP with respect to federal income
tax matters (contained in Exhibit 5.1) *
10.1 Form of Sale and Servicing Agreement*
23.1. Consent of Stroock & Stroock & Lavan LLP (contained in Exhibit 5.1) *
24.1. Powers of Attorney (included as part of signature page)*
25.1 Statement of Eligibility and Qualification of Indenture Trustee
(Form T-1) **
- -------------------------
* Previously filed.
** To be filed.
Item 17. Undertakings
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, as amended (the "Securities Act"), the information
omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed
to be part of this registration statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at the time shall be deemed to be the initial bona fide
offering thereof.
(3) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy
as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(4) For purposes of determining any liability under the Securities
Act, each filing of the Registrant's annual report pursuant to
section 13(a) or section 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act") that is incorporated by
reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(5) To provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit
prompt delivery to each purchaser.
(6) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement;
(i) To include any prospectus required by Section 10(a) (3) of
the Securities Act of 1933;
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(ii) To reflect in the Prospectus any facts or events arising
after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement.
(7) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(8) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
II-3
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, CHEC Asset
Receivable Corporation certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form S-3, it believes that the
securities rating requirement for use of Form S-3 will be met by the time of
sale of the securities and it has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the State
of Texas on October 14, 1998.
CHEC Asset Receivable Corporation
By: *
------------------------------
Name: Anthony H. Barone
Title: President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
* President and Director October 14, 1998
- ------------------------- (principal executive officer)
Anthony H. Barone
* Executive Vice President October 14, 1998
- ------------------------- (principal financial officer
Bill Cukr and principal accounting
officer)
* Director October 14, 1998
- -------------------------
Stephen Janowsky
/s/ Anne E. Duffield Director October 14, 1998
- -------------------------
Anne E. Duffield
*By: /s/ Anne E. Duffield
---------------------
Anne E. Duffield
Attorney-in-fact
October 14, 1998
II-4
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INDEX TO EXHIBITS
Exhibit
Number Exhibit Page
- ------ ------- ----
1.1. Form of Underwriting Agreement*
3.1. Articles of Incorporation of CHEC Asset
Receivable Corporation*
3.2. By-laws of CHEC Asset Receivable Corporation*
4.1. Form of Pooling and Servicing Agreement*
4.2. Form of Certificate (included as part of
Exhibit 4.1)*
4.3. Form of Indenture*
4.4 Form of Trust Agreement*
5.1. Opinion of Stroock & Stroock & Lavan LLP with
respect to legality*
8.1 Opinion of Stroock & Stroock & Lavan LLP with
respect to federal income tax matters (contained
in Exhibit 5.1)*
10.1 Form of Sale and Servicing Agreement*
23.1. Consent of Stroock & Stroock & Lavan LLP
(contained in Exhibit 5.1)*
24.1. Powers of Attorney (included as part of
signature page)*
25.1. Statement of Eligibility and Qualification
of Indenture Trustee (Form T-1)**
- ----------
* Previously filed.
** To be filed.
<PAGE>
<PAGE>
EXHIBIT 5.1
July 30, 1998
CHEC Asset Receivable Corporation
2728 N. Harwood Street
Dallas, Texas 75201
Ladies and Gentlemen:
We have acted as counsel to CHEC Asset Receivable Corporation, a Nevada
corporation (the "Company"), in connection with the preparation of a
registration statement on Form S-3 (the "Registration Statement") relating to
the proposed offering from time to time in one or more series (each, a "Series")
by one or more trusts of Asset-Backed Notes (the "Notes") and Asset-Backed
Certificates (the "Certificates," and, together with the Notes, the
"Securities"). The Registration Statement (File No. 333-54027) was initially
filed with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Act") on May 29, 1998. As set
forth in the Registration Statement, each Series of Securities is to be issued
under and pursuant to the terms of a separate pooling and servicing agreement,
or sale and servicing agreement, trust agreement and indenture (each, an
"Agreement") among two or more of the Company, Centex Credit Corporation
d/b/a Centex Home Equity Corporation, as seller and servicer (the "Seller"
or "Servicer," as applicable), the issuer of a Series of Securities and
one or more independent trustees (each, a "Trustee") to be identified in the
prospectus supplement for such Series of Securities.
As such counsel, we have examined copies of the Certificate of Incorporation and
By-Laws of the Company, the Registration Statement, the base Prospectus and form
of Prospectus Supplement included therein, the form of each Agreement, and
originals or copies of such other corporate minutes, records, agreements and
other instruments of the Company, certificates of public officials and other
documents and have made such examinations of law, as we have deemed necessary to
form the basis for the opinions hereinafter expressed. In our examination of
such materials, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals and the conformity to
original documents of all copies submitted to us. As to various questions of
fact material to such opinion, we have relied, to the extent we deemed
appropriate, upon representations, statements and certificates of officers and
representatives of the Company, the Representative and others.
<PAGE>
<PAGE>
Avco ABS Receivables Corp.
July 30, 1998
Page 2
Attorneys involved in the preparation of this opinion are admitted to practice
law in the State of New York and we do not express any opinion herein concerning
any law other than the federal laws of the United States of America, the laws of
the State of New York and the General Corporation Law of the State of New York.
Based upon and subject to the foregoing, we are of the opinion that:
1. When the issuance, execution and delivery of each Series of Notes
have been authorized by all necessary corporate action of the Company in
accordance with the provisions of the related indenture, and when such Notes
have been duly executed and delivered, authenticated by the Trustee and sold as
described in the Registration Statement, assuming that the terms of such Notes
are otherwise in compliance with applicable law at such time, such Notes will
constitute valid and binding obligations of the issuer thereof in accordance
with their terms and the terms of such indenture. This opinion is subject to the
effect of bankruptcy, insolvency, moratorium, fraudulent conveyance and similar
laws relating to or affecting creditors' rights generally and court decisions
with respect thereto and we express no opinion with respect to the application
of equitable principles or remedies in any proceeding, whether at law or in
equity.
2. When the issuance, execution and delivery of each Series of
Certificates have been authorized by all necessary corporate action of the
Company in accordance with the provisions of the related Agreement or
Agreements, and when such Certificates have been duly executed and delivered,
authenticated by the Trustee and sold as described in the Registration
Statement, assuming that the terms of such Certificates are otherwise in
compliance with applicable law at such time, such Certificates will be legally
issued, fully paid and non-assessable.
3. For federal income tax purposes, assuming (i) the appropriate
election is made, and (ii) compliance with all of the provisions of the
Agreements, the REMIC formed pursuant to an Agreement will constitute a REMIC,
the Class A Certificates will be considered "regular interests" in the REMIC,
and the Class R Certificates will be considered the sole class of "residual
interests" in the REMIC. This opinion confirms and adopts the opinion set
forth in the prospectus and prospectus supplement, which form a part of the
Registration Statement.
<PAGE>
<PAGE>
Avco ABS Receivables Corp.
July 30, 1998
Page 3
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to this firm under the caption
"Federal Income Tax Consequences" and "Legal Matters" in the prospectus which
forms a part of the Registration Statement. In giving such consent, we do not
admit hereby that we come within the category of persons whose consent is
required under Section 7 of the Act or the Rules and Regulations of the
Commission thereunder.
Very truly yours,
/s/ Stroock & Stroock & Lavan LLP
STROOCK & STROOCK & LAVAN LLP
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